What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-25 compared with 2020-03-24 · 535 added, 350 removed, 594 unchanged (60% of the section changed)

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Energy Focus, Inc.

(the “Company”) as of December 31, 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of Energy Focus, Inc.

(the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Continuation as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.

As discussed in Note 3 to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 3.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Method Related to Leases

As discussed in Notes 2 and 4 to the consolidated financial statements, the Company has changed its method for accounting for leases as of January 1, 2019 due to the adoption of ASU No.

2016-02 , Leases , as amended.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Reserves for Excess, Obsolete and Slow-Moving Inventories

Description of the Matter

As described in Notes 2 and 5 to the consolidated financial statements, the Company assesses the valuation of inventories each reporting period based on the lower of cost or net realizable value.

The Company establishes reserves for excess, obsolete and slow-moving inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles and

current inventory levels.

The assessment is both quantitative and qualitative.

As of December 31, 2020, the Company had inventories of $5.6 million, net of reserves for excess, obsolete and slow-moving inventories.

Auditing management's estimates for excess, obsolete and slow-moving inventories required subjective auditor judgment and evaluation of the reasonableness of significant assumptions used in developing the reserves as detailed above, as well as the inputs and related calculations related to historical sales and on-hand inventories.

How We Addressed the Matter in Our Audit

We obtained an understanding and evaluated the design of internal controls over the Company's reserves for excess, obsolete and slow-moving inventories, including management's assessment of the assumptions and data underlying the reserve calculation.

Our substantive audit procedures included, among others, testing the logic and integrity of calculations within management’s analysis;

testing the completeness and accuracy of underlying data used, including inventory quantities, carrying costs and the estimate of net realizable value by product;

and evaluating the reasonableness of management’s assumptions related to demand forecasts, estimated reserve percentages and qualitative considerations involving, among others, the implications of the COVID-19 pandemic and new or revised operational strategies.

Evaluating the reasonableness of management’s assumptions involved (i) comparing historical sales by product, used as a basis for future demand, to audited sales subledgers on a sample basis, (ii) performing sensitivity analyses on reserve percentages applied to categories of projected demand to evaluate the changes in the reserve that would result from changes in the assumption, (iii) holding discussions with senior management to determine whether strategic or operational changes in the business were consistent with the projections of future demand that were utilized as basis for the reserves recorded, (iv) corroborating management’s qualitative considerations through review of recent sales transactions, including those subsequent to year-end, and order backlog and deferrals on a sample basis, and (v) testing declines in the reserve and evaluating whether such declines were the result of the sale or write-off of inventory or the result of changes in the significant assumptions used to the develop the reserve.

/s/ GBQ Partners, LLC

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March 25, 2021

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Energy Focus, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheet of Energy Focus, Inc.

and subsidiaries (the “Company”) as of December 31, 2018, the related statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes and schedule appearing under Schedule II (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Continuation as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 3.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

The Company's management is responsible for these financial statements.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We served as the Company’s auditor from 2009 to 2019 .

/s/ Plante & Moran, PLLC

Cleveland, Ohio

April 1, 2019

ENERGY FOCUS, INC.

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Current assets:

Cash $ 1,836 $ 350

Trade accounts receivable, less allowances of $ 8 and $ 28 , respectively

Inventories, net 5,641 6,168

Short-term deposits 796 126

Prepaid and other current assets 782 353

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Restructured lease, right-of-use asset 107 322

Other assets — 405

Total assets $ 12,397 $ 11,739

Current liabilities:

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Accrued sales commissions 95 32

Accrued severance

Accrued restructuring 11 24

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Restructured lease liabilities 168 319

Finance lease liabilities, net of current portion

Credit line borrowings

Finance lease liabilities 3 3

Convertible notes — 1,700

Iliad note, net of discount and loan origination fees — 885

PPP loan 529 —

Credit line borrowings, net of loan origination fees 2,298 715

Total current liabilities 7,557 6,542

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The accompanying notes are an integral part of these consolidated financial statements.

ENERGY FOCUS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31,

(amounts in thousands except share data)

Other liabilities — 14

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Restructured lease liabilities, net of current portion — 168

Finance lease liabilities

Finance lease liabilities, net of current portion 1 4

PPP loan, net of current maturities 266 —

Iliad note, net of current maturities — 109

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Preferred stock, par value $ 0.0001 per share:

2,000,000 shares in 2019 and 2018

5,000,000 shares ( 3,300,000 shares designated as Series A Convertible Preferred Stock) at December 31, 2020 and 2,000,000 shares ( no shares designated as Series A Convertible Preferred Stock) at December 31, 2019

Issued and outstanding:

no shares in 2019 and 2018

2,597,470 at December 31, 2020 and no shares outstanding at December 31, 2019

Common stock, par value $ 0.0001 per share:

30,000,000 shares in 2019 and 2018

50,000,000 shares at December 31, 2020 and 30,000,000 shares at December 31, 2019

Issued and outstanding:

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Total liabilities and stockholders' equity $ 12,397 $ 11,739

*Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.

The accompanying notes are an integral part of these consolidated financial statements.

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(amounts in thousands except per share data)

Net sales $ 16,828 $ 12,705

Cost of sales 11,643 10,731

Gross profit 5,185 1,974

Operating expenses:

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Selling, general, and administrative 7,900 7,449

Loss on impairment

Restructuring ( 60 ) 196

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Interest expense 481 317

Loss on extinguishment of debt 276 —

Loss from change in fair value of warrants 1,086 —

Other expenses 73 91

Loss from operations before income taxes ( 5,986 ) ( 7,363 )

Provision for (benefit from) income taxes

Net loss per share - basic and diluted:

Weighted average common shares outstanding:

(Benefit from) provision for income taxes ( 5 ) 10

Net loss $ ( 5,981 ) $ ( 7,373 )

Net loss per common share - basic and diluted:

Net loss $ ( 1.83 ) $ ( 2.99 )

Weighted average shares of common shares outstanding:

Basic and diluted* 3,270 2,462

*Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.

The accompanying notes are an integral part of these consolidated financial statements.

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(amounts in thousands)

Other comprehensive (loss) income:

Net loss $ ( 5,981 ) $ ( 7,373 )

Other comprehensive loss:

Foreign currency translation adjustments — ( 2 )

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(amounts in thousands)

Capital Accumulated

Comprehensive

(Loss) Income

Balance at December 31, 2016

Issuance of common stock under employee stock option and stock purchase plans

Common stock withheld in lieu of income tax withholding on vesting of restricted stock units

Stock-based compensation

Stock-based compensation reversal

Foreign currency translation adjustment

Preferred Stock Common Stock Accumulated

Shares Amount Shares* Amount Total

Balance at December 31, 2018 — $ — 2,418 $ — $ 128,368 $ ( 1 ) $ ( 117,315 ) $ 11,052

Adjustment to beginning accumulated deficit upon adoption of Topic 842

— — — — — — ( 186 ) ( 186 )

Issuance of common stock under employee stock option and stock purchase plans — — 78 — 5 — — 5

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Foreign currency translation adjustment — — — — — ( 2 ) — ( 2 )

Net loss — — — — — — ( 7,373 ) ( 7,373 )

Balance at December 31, 2019 — $ — 2,486 $ — $ 128,873 $ ( 3 ) $ ( 124,874 ) $ 3,996

Adjustment to beginning accumulated deficit upon adoption of Topic 842

Issuance of common stock under employee stock option and stock purchase plans — — 60 — 100 — — 100

Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — — — — ( 3 ) — — ( 3 )

Issuance of common stock and warrants — — 688 — 2,749 — — 2,749

Offering costs on issuance of common stock and warrants — — — — ( 510 ) — — ( 510 )

Issuance of common stock upon the exercise of warrants — — 269 — 2,235 — — 2,235

Warrant liability - issuance — — — — ( 1,636 ) — — ( 1,636 )

Warrant liability - modification — — — — 1,405 — — 1,405

Conversion of notes to preferred stock 2,709 — — — 1,769 — — 1,769

Issuance of common stock upon the conversion from preferred stock ( 112 ) — 22 — — — — —

Stock-based compensation — — — — 131 — — 131

Foreign currency translation adjustment

Net loss — — — — — — ( 5,981 ) ( 5,981 )

Balance at December 31, 2020 2,597 $ — 3,525 $ — $ 135,113 $ ( 3 ) $ ( 130,855 ) $ 4,255

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Cash flows from operating activities:

Net loss $ ( 5,981 ) $ ( 7,373 )

Adjustments to reconcile net loss to net cash used in operating activities:

Loss on impairment

Depreciation 184 326

Stock-based compensation 131 616

Stock-based compensation reversal

Change in fair value of warrant liabilities 1,086 —

Provision for doubtful accounts receivable ( 20 ) ( 5 )

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Provision for warranties 31 78

Amortization of discounts on the Iliad Note

Amortization of loan origination fees

Amortization of loan discounts and origination fees 395 108

Loss on dispositions of property and equipment 8 24

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Accounts receivable 377 ( 131 )

Inventories 1,137 1,876

Short-term deposits ( 670 ) 699

Prepaid and other assets ( 18 ) ( 88 )

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Proceeds from the sale of property and equipment — 3

Net cash (used in) provided by investing activities

Net cash used in investing activities ( 223 ) ( 129 )

Cash flows from financing activities:

Proceeds from the issuance of common stock and warrants 2,749 —

Proceeds from the exercise of warrants 918 —

Offering costs paid on the issuance of common stock and warrants ( 510 ) —

Proceeds from PPP loan 795 —

Proceeds from exercise of stock options and purchases through employee stock purchase plan 100 —

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Common stock withheld in lieu of income tax withholding on vesting of restricted stock units ( 3 ) ( 110 )

Loan origination fees

Payments for deferred financing costs & termination fees ( 320 ) ( 208 )

Proceeds from the Iliad Note — 1,115

Payments on the Iliad Note ( 1,306 ) —

Proceeds from convertible notes — 1,700

Net (payments on) proceeds from credit line borrowings

Net payments from credit line borrowings - Austin Facility ( 719 ) ( 1,400 )

Net proceeds from credit line borrowings - Credit Facilities 2,459 —

Net cash provided by financing activities 4,160 1,094

Effect of exchange rate changes on cash

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(amounts in thousands)

Net decrease in cash and restricted cash

Effect of exchange rate changes on cash — 16

Net increase (decrease) in cash and restricted cash 1,486 ( 5,643 )

Cash and restricted cash, beginning of year 692 6,335

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Classification of cash and restricted cash:

Cash $ 1,836 $ 350

Restricted cash held in other assets 342 342

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Energy Focus, Inc.

engages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls.

We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military maritime markets (“MMM”).

Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions.

Our goal is to be the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount.

We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products and controls.

engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls and recently announced development of ultraviolet light disinfection (“UVCD”) products.

We develop, market and sell high quality light-emitting diode (“LED”) lighting products and UVCD products and controls in the commercial and military maritime markets (“MMM”).

Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and human health through advanced LED retrofit and UVCD solutions.

Our goal is to be the LED and human-centric lighting (“HCL”) technology and market leader for the most demanding applications where performance, quality, value (high quality at an affordable price), environmental impact and health are considered paramount.

We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”), as well as other LED and lighting control products.

On October 14, 2020, we also announced the launch of our UVCD product portfolio.

The LED lighting industry has changed dramatically over the past several years due to increasing commoditization, competition and price erosion.

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These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business.

In addition to continuous, scheduled cost reductions, our strategy to combat these trends it to move up the value chain, with more innovative and differentiated products and solutions that offer greater, distinct value to our customers.

Two specific examples of these more innovated and differentiated products we have recently developed include the RedCap™, our emergency backup battery integrated TLED, and EnFocus™, our new dimmable/tunable lighting and control platform that we are launching in 2020.

We do believe our revamped go-to-market strategy that focuses more on direct-sales and listens to the voice of the customer has led to better and more impactful product development efforts and will eventually translate into larger addressable market and greater sales growth for us.

In addition to continuous, scheduled cost reductions, our strategy to combat these trends is to move up the value chain, with more innovative and differentiated products and solutions that offer greater, distinct value to our customers.

Two specific examples of these products we have recently developed include the RedCap ® , our emergency backup battery integrated TLED, and EnFocus™, our new dimmable/tunable lighting and control platform that we launched in 2020.

We believe our revamped go-to-market strategy that focuses more on direct-sales and additional sales representatives and listens to the voice of the customer has led to better and more impactful product development efforts and will eventually translate into larger addressable market and greater sales growth for us.

During 2020, we continued to see the benefits from the relaunch efforts (described below) undertaken by the new, current management team, in addition to a number of strategic sourcing projects completed during 2020.

It is our belief that the continued momentum of the efforts undertaken in 2019 and into 2020, along with the development and launch of new and innovative products, will over time result in improved sales and bottom-line performance for the Company.

We launched our EnFocus™ platform during the second quarter of 2020 and continued to receive positive feedback from existing, new, and prospective customers.

The EnFocus™ platform offers two immediately available product lines:

EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution.

EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring any wireless communications, through a relatively simple upgrade with EnFocus™ switches and tubular LEDs, a more environmentally sustainable solution compared with replacing each lighting fixture.

In addition, in response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we started developing advanced UVCD products for both consumer as well as the commercial and industrial markets in the first quarter of 2020.

We announced the following three UVCD products in October 2020:

abUV™ circadian lighting and UVCD air disinfection integrated troffers controlled by the EnFocus™ platform technology;

the nUVo™ portable disinfection device for offices and homes;

and the mUVe™ autonomous robot designed for surface disinfection.

Since April 2019, we experienced significant change at the Company.

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Tu returning to the Company, significant additional restructuring efforts were undertaken.

The Company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the company was purchasing, dramatically changed the composition of our board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July.

The Company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July 2019 and James R.

Warren as Senior Vice President, General Counsel and Corporate Secretary in September 2020, in addition to recruiting new departmental leaders across the Company.

The cost savings efforts undertaken included the Company implementing phased actions to reduce costs to minimize cash usage.

Our initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing.

In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the three months ended March 31, 2019 and $0.1 million during the second quarter of 2019.

These additional restructuring charges primarily related to severance and related benefits charges as a result of eliminating three positions during the first quarter of 2019 and nine positions during the second quarter of 2019, as well as costs associated with closing our offices in San Jose, California and Taipei, Taiwan in the second quarter of 2019.

With quarterly sales for the Company leveling off at its low point in the third quarter of 2019 at $2.9 million , we began to see the impact for our relaunch efforts and restructuring of our sales organization in the fourth quarter achieving sales of $3.5 million , or a quarter-over-quarter growth rate of 21.1% .

In addition, losses were mitigated through the better cost management and a sharp focus on better managing pricing and inventory decisions for the last half of 2019.

The restructuring initiative implemented in the first quarter of 2017 included a new management team, an organizational consolidation of management functions and a hybrid sales model, combining our existing historical direct sales model with sales agencies to expand our market presence throughout the United States.

We closed our New York, New York, Arlington, Virginia and Rochester, Minnesota offices, reduced full-time equivalent headcount by 51% and significantly decreased operating expenses from 2016 levels (a net reduction of $8.4 million , which includes $1.8 million in offsetting restructuring and impairment charges).

As of December 31, 2017, we expanded our sales coverage to the entire United States through six geographic regions and at the time had 50 sales agencies, each of which had, on average, 10 agents representing Energy Focus products.

During 2017, we also implemented a strategic sales initiative to sell certain excess inventory that had previously been written-down, as required by U.S.

This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017.

Our initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2018, we made significant strides in expanding and diversifying our new product portfolio.

We introduced six new product families, including our commercial fixture family, our double-ended ballast bypass T8 and T5 high-output TLEDs, our Navy retrofit kit, the Invisitube ultra-low EMI TLED and our dimmable industrial downlight.

Our new products, including the RedCap™ emergency battery backup tube, introduced in the fourth quarter of 2017, have gained traction, with sales of new products introduced in the past two years growing from less than one percent of total revenue in the fourth quarter of 2017 to 17% in the fourth quarter of 2018, the highest new product revenue in the last two years.

Our legacy luminaire product line, including our floods, waterline security lights, globes and berth lights, grew by over 90% from 2017 to 2018 and we saw some return of our military Intellitube ® sales as we achieved more competitive pricing through our cost reductions.

team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing.

On June 11, 2020, in accordance with previous stockholder approval, our Board of Directors effected a 1-for-5 (the “Split Ratio”) reverse stock split of the Company’s common stock, par value $ 0.0001 per share.

The reverse stock split became effective immediately upon the filing of the Certificate of Amendment to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), with the Delaware Secretary of State (the “Effective Time”).

At the Effective Time, every five shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock.

No fractional shares were issued as a result of the reverse stock split.

The $ 0.0001 par value per share of common stock and other terms of the common stock were not affected by the reverse stock split.

The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at 50,000,000 shares.

Proportional adjustments were made to the conversion and exercise prices of our outstanding warrants and stock options, and to the number of shares issued and issuable under our stock incentive plans in connection with the reverse stock split.

The information presented in the financial statements for all prior periods have been retroactively adjusted to reflect the reverse stock split.

Preferred shares outstanding were not affected by the reverse stock split and, as such, those shares have not been adjusted.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Cash and restricted cash

At December 31, 2019 and 2018 , we had cash and restricted cash of $0.7 million and $6.3 million , respectively, on deposit with financial institutions located in the United States.

The $0.7 million of cash includes restricted cash of $0.3 million which is presented within Other assets in the accompanying Consolidated Balance Sheets at December 31, 2019 .

Please refer to Note 3, “Restructuring,” for additional information.

We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value.

We establish provisions for excess and obsolete inventories after evaluation of historical sales,

At December 31, 2020 and 2019, we had cash and restricted cash of $ 2.2 million and $ 0.7 million, respectively, on deposit with

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

current economic trends, forecasted sales, product lifecycles, and current inventory levels.

During 2017, we implemented a strategic sales initiative to sell certain excess inventory that had previously been written-down in conjunction with our excess inventory reserve analysis in prior years, as required by U.S.

This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017.

During 2018, due to the introduction of new products and technological advancements, we charged $17 thousand to cost of sales for excess and obsolete inventories.

During 2019, due to efforts to sell excess and obsolete inventory and better management of inventory orders, we realized a net reduction of $567 thousand of our excess and obsolete reserves.

financial institutions located in the United States.

The $ 2.2 million of cash includes restricted cash of $ 0.3 million which is presented within prepaid and other current assets and other assets in the accompanying Consolidated Balance Sheets at December 31, 2020 and 2019, respectively.

Please refer to Note 3, “Restructuring,” for additional information.

We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value.

We establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and current inventory levels.

The assessment is both quantitative and qualitative and currently includes a COVID-19 impact analysis.

During 2019, due to efforts to sell excess and obsolete inventory and better management of inventory orders, we realized a net reduction of $ 0.6 million of our excess and obsolete reserves.

During 2020, we continued to apply discipline in manufacturing and supply chain management, focusing on a reduction of lead time and inventory on hand which resulted in a net reduction of our gross inventory levels of $ 1.2 million and excess inventory reserves of $ 0.6 million compared to 2019.

Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position.

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We continue to evaluate the need for a valuation allowance on a quarterly basis.

At December 31, 2019, we had net operating loss carry-forwards of approximately $108.8 million for U.S.

federal tax purposes ( $64.5 million for state, and local income tax purposes).

However, due to changes in our capital structure, approximately $54.5 million of the $108.8 million is available to offset future taxable income after the application of the limitations found under Section 382 of the IRC.

As a result of this limitation, in 2019, we expect to have approximately $54.5 million of the net operating loss carry-forward available for use.

As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely.

The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018, respectively, will be subject to the new limitations under the Act.

If not utilized, the carry-forwards

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes.

Please refer to Note 12, “Income Taxes,” included in Item 8 for further information.

The IRC imposes restrictions on the utilization of various carry-forward tax attributes in the event of a change in ownership, as defined by IRC Section 382.

During 2015, we completed an IRC Section 382 review and the results of this review indicate ownership changes have occurred which would cause a limitation on the utilization of carry-forward attributes.

Our net operating loss carry-forwards and research and development credits are all subject to limitation.

Under these tax provisions, the limitation is applied first to any capital losses, next to any net operating losses, and then to any general business credits.

The Section 382 limitation is currently estimated to result in the expiration of $54.5 million of net operating loss carry-forwards and $0.3 million of research and development credits.

A valuation allowance has been established to reserve for the potential benefits of the remaining net operating loss carry-forwards in the consolidated financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carry-forwards.

At December 31, 2020, we had net operating loss carry-forwards of approximately $ 115.9 million for federal income tax purposes ($ 72.3 million for state and local income tax purposes).

However, due to changes in our capital structure, approximately $ 61.5 million of the $ 115.9 million is available to offset future taxable income after the application of the limitations found under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”).

As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely.

The $ 7.1 million and $ 8.3 million in net operating losses generated in 2020 and 2019, respectively, will be subject to the new limitations under the Tax Act.

If not utilized, the carry-forwards generated prior to December 31, 2017 of $ 37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes.

Please refer to Note 12, “Income Taxes,” for further information.

Financial Instruments

In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $ 3.37 per share.

We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an exercise price of $ 3.37 per share in a concurrent private placement for a purchase price of $ 0.6250 per warrant.

We paid the placement agent commissions of $ 193 thousand plus $ 50 thousand in expenses in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $ 231 thousand related to the offering.

Total offering costs of $ 510 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Consolidated Balance Sheet as of December 31, 2020.

In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of $ 4.99 per share.

Net proceeds to us from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $ 2.3 million.

In accordance with the terms of the Iliad Note (as defined below in Note 9, “Debt”), 10 % of the gross proceeds from the January 2020 Equity Offering ($ 275 thousand) were used to make payments on the Iliad Note, of which $ 226 thousand went towards the outstanding principal amount and the balance to interest.

Warrants to purchase an aggregate of 467,306 shares remain outstanding at December 31, 2020 with a weighted average exercise price of $ 3.51 per share.

During the twelve months ended December 31, 2020, 269,240 warrants were exercised resulting in total proceeds of $ 918 thousand.

The exercise of the remaining warrants outstanding could provide us with cash proceeds of up to $ 1.6 million in the aggregate.

Due to a potential cash settlement upon occurrence of a fundamental transaction within the warrant agreement, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date.

During December 2020, the warrant holders agreed to a modification of the terms of their warrants which removed the potential cash settlement option upon the occurrence of a fundamental transaction.

As such, during the fourth quarter of 2020, the remaining 467,306 warrants were fair-valued through the modification date with the offsetting adjustment recorded in income.

The $ 1.4 million warrant liability was then reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date.

Please also refer to Note 11, “Stockholders’ Equity”.

Fair value measurements

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We assess the inputs used to measure fair value using a three-tier hierarchy.

The hierarchy indicates the extent to which pricing inputs used in measuring fair value are observable in the market.

Level 1 inputs include unadjusted quoted prices for identical assets or liabilities and are the most observable.

Level 2 inputs include unadjusted quoted prices for similar assets and liabilities that are either directly or indirectly observable, or other observable inputs such as interest rates, foreign currency exchange rates, commodity rates, and yield curves.

Level 3 inputs are not observable in the market and include our own judgments about the assumptions market participants would use in pricing the asset or liability.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The three levels of the fair value hierarchy are described below.

We classify the inputs used to measure fair value into the following hierarchy:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3 Unobservable inputs for the asset or liability.

The carrying amounts of certain financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities.

Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our revolving credit facility and convertible note also approximates fair value.

Due to the proximity of issuance to December 31, 2019 the fair value of the Iliad Note approximates carrying value.

Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our revolving credit facilities also approximates fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis.

We review and reassess the fair value hierarchy classifications on a quarterly basis.

Changes from one quarter to the next related to the observability of inputs in a fair value measurement may result in a reclassification between fair value hierarchy levels.

There were no reclassifications for all periods presented.

A roll-forward of fair value measurements using significant unobservable inputs (Level 3) for the warrants is as follows (in thousands):

Twelve months ended December 31, 2020

Balance January 1, 2020 $ —

Issuance of warrants, January 2020 1,636

Settlements from exercise ( 1,317 )

Loss from change in fair value of warrants 1,086

Reclassification to equity upon modification $ ( 1,405 )

Balance December 31, 2020 $ —

Long-lived assets

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Expenditures for repairs and maintenance are charged to operations as incurred.

We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally 2 to 15 years) for financial reporting purposes.

We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to 15 years) for financial reporting purposes.

Accelerated methods of depreciation are used for federal income tax purposes.

When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement of Operations.

When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statements of Operations.

Refer to Note 6, “Property and Equipment,” for additional information.

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Historically our products were sold through a direct sales model, which included a combination of direct sales employees, electrical and lighting contractors, and distributors.

Up until December of 2019, we performed ongoing credit evaluations of our customers, but in December 2019 converted to the use of a third-party accounts receivable insurance and credit assessment company.

Although we maintain allowances for potential credit losses that we believe to be adequate, a payment default on a significant sale could materially and adversely affect our operating results and financial condition, although we have mitigated this risk somewhat through the accounts receivable insurance program we now have.

Up until December 2019, we performed ongoing credit evaluations of our customers, but in December 2019 converted to the use of a third-party accounts receivable insurance and credit assessment company.

ENERGY FOCUS, INC.

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We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable, as follows:

• In 2020, two customers accounted for 62 % of net sales, with sales to our primary distributor for the U.S.

Navy accounting for approximately 49 % and sales to a regional commercial lighting retrofit company accounting for approximately 12 % of net sales.

When sales to our primary distributor for the U.S.

Navy are combined with sales to shipbuilders for the U.S.

Navy, total net sales of products for the U.S.

Navy comprised approximately 53 % of net sales for the same period.

In 2019, two customers accounted for 45 % of net sales and total sales to distributors to the U.S.

Navy represented 23 % of net sales.

In 2018, one customer, a distributor to the U.S.

Navy, accounted for 42% of net sales.

In 2017, two commercial customers, a major northeastern Ohio hospital system and a large regional retrofit company located in Texas, accounted for 18% and 13% of net sales, respectively, while sales to a distributor to the U.S.

Navy accounted for 17% of net sales.

Total sales to distributors to the U.S.

Navy represented 22% of net sales in 2017.

• At December 31, 2020, a distributor to the U.S.

Navy accounted for 9.8% of our net trade accounts receivable and a large regional retrofit company located in Texas accounted for 41.0% of our net trade accounts receivable.

At December 31, 2018, a distributor to the U.S.

Navy accounted for 28 % of our net trade accounts receivable and a shipbuilder for the U.S.

Navy accounted for 21 % of our net trade accounts receivable.

At December 31, 2019, a distributor to the U.S.

Navy accounted for 10 % of our net trade accounts receivable and a large regional retrofit company accounted for 41 % of our net trade accounts receivable.

We require substantial amounts of purchased materials from selected vendors.

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Substantially all of the materials we require are in adequate supply.

However, the availability and costs of materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation to other purchasers, interruptions in production by suppliers, global health issues such as the corona-virus outbreak, and changes in exchange rates and worldwide price and demand levels.

However, the availability and costs of materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation to other purchasers, interruptions in production by suppliers, global health issues such as the COVID-19 pandemic, and changes in exchange rates and worldwide price and demand levels.

Our inability to obtain adequate supplies of materials for our products at favorable prices could have a material adverse effect on our business, financial position, or results of operations by decreasing our profit margins and by hindering our ability to deliver products to our customers on a timely basis.

Additionally, certain vendors require advance deposits prior to the fulfillment of orders.

Deposits paid on unfulfilled orders totaled $ 0.8 million and $ 0.1 million at December 31, 2020 and 2019, respectively.

We have certain vendors who individually represented 10% or more of our total expenditures, or whose net trade accounts payable balance individually represented 10% or more of our total net trade accounts payable, as follows:

• One offshore supplier and one domestic supplier accounted for approximately 21 % and 12 %, respectively, of our total expenditures for the twelve months ended December 31, 2020.

At December 31, 2020, this same offshore supplier accounted for approximately 44 % of our trade accounts payable balance.

• For the twelve months ended December 31, 2019, one offshore supplier accounted for approximately 21 % of our total purchases.

This same offshore supplier accounted for approximately 54 % of our trade accounts payable balance at December 31, 2019.

Product development

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Net loss per share

Basic loss per share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding the effects of any potentially dilutive securities.

Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period.

Dilutive potential common shares consist of incremental shares upon exercise of stock options and warrants, unless the effect would be anti-dilutive.

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities.

Diluted loss per share gives effect to all dilutive potential shares of common stock outstanding during the period.

Dilutive potential shares of common stock consist of incremental shares upon the exercise of stock options, warrants and convertible securities, unless the effect would be anti-dilutive.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a reconciliation of basic and diluted loss per share computations (in thousands, except per share amounts):

For the years ended December 31,

Net loss $ ( 5,981 ) $ ( 7,373 )

Basic and diluted weighted average common shares outstanding* 3,270 2,462

As a result of the net loss we incurred for the years ended December 31, 2019 , 2018 and 2017 , options, warrants and convertible securities representing 27,883 , 59,180 and 60,434 shares of common stock were excluded from the loss per share calculation, respectively, because their inclusion would have been anti-dilutive.

*Shares outstanding for prior periods have been restated for the 1-for-5 stock split effective June 11, 2020.

As a result of the net loss we incurred for the year ended December 31, 2020, options, restricted share units, warrants and convertible preferred stock representing approximately 69 thousand, 4 thousand, 174 thousand and 506 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation, because their inclusion would have been anti-dilutive.

As a result of the net loss we incurred for the year ended December 31, 2019, options and restricted share units representing approximately 1 thousand and 27 thousand shares of common stock, respectively, and convertible preferred stock representing approximately 507 thousand shares of common stock, were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive.

Stock-based compensation

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Compensation expense is generally amortized on a straight-line basis over the requisite service period, which is generally the vesting period.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

“Stockholders’ Equity,” for additional information.

Common stock, stock options, and warrants issued to non-employees that are not part of an equity offering are accounted for under the applicable guidance under Accounting Standards Codification 505-50, “Equity-Based Payments to Non-Employees,” and are generally re-measured at each reporting date until the awards vest.

See Note 11, “Stockholders’ Equity,” for additional information.

Common stock, stock options, and warrants issued to non-employees that are not part of an equity offering are accounted for under the applicable guidance under Accounting Standards Codification (“ASC”) 505-50, “Equity-Based Payments to Non-Employees,” and are generally re-measured at each reporting date until the awards vest.

Foreign currency translation

Our product development center in Taiwan uses local currency as its functional currency.

Our product development center in Taiwan, which was shut down in 2019, used local currency as its functional currency.

Included within “Accumulated other comprehensive loss” within the Consolidated Statements of Stockholders’ Equity is the effect of foreign currency translation related to our Taiwan operations.

This operation was shut down in 2019, the effect of which was not material to the Consolidated Financial Statements.

The 2019 shut down did not have a material effect on the Consolidated Financial Statements.

Advertising expenses

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They consist of costs for the placement of our advertisements in various media and the costs of demos provided to potential distributors of our products.

Advertising expenses were $0.2 million , $0.3 million and $0.5 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Advertising expenses were $ 0.1 million and $ 0.2 million for the years ended December 31, 2020 and 2019, respectively.

Product warranties

Through March 31, 2016, we warranted finished goods against defects in material and workmanship under normal use and service for periods generally between one and five years .

Beginning April 1, 2016 , we warrant our commercial LEDFL Tubular LED Lamps (excluding Battery Backup TLED), the troffer luminaires, and certain Globe Lights for a period of ten years and all other LED Products for five years .

Beginning in October 2019, LEDFL Tubular LED Lamps (excluding RedCap™) are warranted for ten years and the warranty for all of our other products is five years .

Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products provided to our customers.

Beginning April 1, 2016, we warrant our commercial TLEDs, the troffer luminaires, and certain Globe Lights for a period of ten years (excluding RedCap ® and our Battery Backup TLEDs), and all other LED products for five years per the Terms and Conditions outlined on our website.

Beginning in October 2019, TLEDs (excluding RedCap ® ) are primarily warranted for ten years , certain D-Series lamps are warranted for either ten years or five years based on the customer’s choice at time of purchase, and the warranty for all of our other products is five years .

Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

products provided to our customers.

A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims.

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Settlements made during the year (in kind) ( 20 ) ( 50 )

Accrued warranty expense

Accrued warranty reserve at the end of the period $ 227 $ 195

Recently issued accounting pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license.

This standard will be effective for interim and annual periods starting after December 15, 2019.

We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU No.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which significantly changes the accounting for credit losses on instruments within its scope.

The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

rather than incurred losses.

This standard will be effective for interim and annual periods starting after December 15, 2022 and will generally require adoption on a modified retrospective basis.

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Adoption of recent accounting pronouncements

In August 2018, the FASB issued ASU No.

2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40):

This standard was effective for interim and annual periods starting after December 15, 2019.

The adoption of this guidance did not have a significant impact on our financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU No.

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The results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On adoption, we recognized additional operating lease liabilities of approximately $ 2.9 million on January 1, 2019, with corresponding right-of-use assets based on the present value of the remaining minimum rental payments for our existing operating leases.

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RESTRUCTURING

Due to our financial performance in 2017, 2018, and 2019, including net losses of $11.3 million , $9.1 million , and $7.4 million , respectively, and total cash used of $5.9 million , $4.4 million , and $5.6 million , respectively, we believe that substantial doubt about our ability to continue as a going concern existed at December 31, 2019.

As a result of such determination, as of December 31, 2016, we evaluated actions to mitigate the substantial doubt about our ability to continue as a going concern.

Our evaluation considered both quantitative and qualitative information, including our current financial position and liquid resources, and obligations due or anticipated within the next year.

With $16.6 million in cash and no debt obligations as of December 31, 2016, we focused our efforts on reducing our overall operating expenses in an effort to return to profitability.

Consequently, in February 2017, we announced a corporate restructuring initiative with a goal of significantly reducing annual operating costs from 2016 levels.

The initiative included an organizational consolidation of management and oversight functions in order to streamline and better align the organization into more focused, efficient, and cost-effective reporting relationships, and involved closing our offices in Rochester, Minnesota, New York, New York, and Arlington, Virginia and reducing our staff by 20 employees, primarily located in these offices.

During the second quarter of 2017, we fully exited the New York and Arlington facilities and took additional actions to improve our operating efficiencies.

These actions reduced our staff by an additional 17 production and administrative employees in our Solon location.

These restructuring actions resulted in a net decrease in operating expenses through December 31, 2017 of $8.4 million , including restructuring and asset impairment charges of $1.8 million , consisting of approximately $0.8 million for severance and related benefits, approximately $0.7 million related to the facility closings, approximately $0.1 million primarily related to fixed asset and prepaid expenses write-offs and approximately $0.2 million in asset impairment charges.

During the year ended December 31, 2018, we recorded restructuring charges totaling approximately $0.1 million , related to the revision of our initial estimates of the costs and offsetting sublease income and accretion expense for the remaining lease

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

obligation for our former New York, New York and Arlington, Virginia offices.

Our continued cost control initiatives in 2018 resulted in an additional net decrease in operating expenses of $3.6 million , which includes restructuring and asset impairment charges of $0.1 million .

Due to our financial performance in 2019 and 2020, including net losses of $ 7.4 million, and $ 6.0 million, respectively, and total cash used in operating activities of $ 6.6 million and $ 2.5 million, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2020.

Since April 2019, we experienced significant change at the Company.

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Tu returning to the Company, significant additional restructuring efforts were undertaken.

The company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the company was purchasing, dramatically changed the composition of our board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July.

Warren as Senior Vice President, General Counsel and Corporate Secretary in September 2020, in addition to recruiting new departmental leaders across the Company.

The cost savings efforts undertaken included the Company implementing phased actions to reduce costs to minimize cash usage.

In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the three months ended March 31, 2019 and $0.1 million during the second quarter of 2019.

In connection with these actions, we recorded severance and related benefits charges of $ 0.2 million during 2019.

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In addition, losses were mitigated through the better cost management and a sharp focus on better managing pricing and inventory decisions for the last half of 2019.

For the twelve months ended December 31, 2020, we recorded net restructuring credits of approximately $ 60 thousand related to the costs and offsetting sub-lease income and accretion expense for the remaining lease obligation for our former New York, New York office.

Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations, which the Company has exited.

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Please also refer to Note 4, “Leases” as certain amounts formerly included below in the restructuring reserve as of December 31, 2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842.

The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the 2017 restructuring plan (in thousands):

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the Company’s restructuring plans (in thousands):

Restructuring Liability

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Accretion of lease obligations 4

Adjustment of lease obligations

Reclassification upon adoption of Topic 842 ( 273 )

Payments ( 43 )

Balance at December 31, 2019 $ 38

Accretion of lease obligations 2

Reclassification upon adoption of Topic 842

Payments ( 29 )

Balance at December 31, 2020 $ 11

The following is a reconciliation of the ending balance of our restructuring liability at December 31, 2019 to the balance sheet:

Restructuring Liability

The following is a reconciliation of the ending balance of our restructuring liability at December 31, 2020 and December 31, 2019 (in thousands):

Balance at December 31 $ 11 $ 38

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Long-term restructuring liability, included in other liabilities $ — $ 14

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes, however, we continue to incur losses and have a substantial accumulated deficit, and

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Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve profitability.

We plan to achieve profitability through growing our sales by continuing to execute on our direct sales strategy, complemented by our marketing outreach campaigns, channel partnerships, and new sales from an e-commerce platform, which we plan to launch in the first half of 2020, as well as continuing to apply rigorous and economical discipline in our organization, business processes and policies, supply chain and organizational structure.

The restructuring and cost cutting initiatives implemented during 2019 were designed to allow us to effectively execute these strategies;

however, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, and potential volatility given our customer concentration, among other factors.

We plan to achieve profitability through growing our sales by continuing to execute on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education, and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships.

We also plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products such as EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020.

In addition, during the third quarter of 2020, we announced newly developed UVCD products for both consumer, as well as commercial and industrial, markets.

As described in Note 11, “Stockholders’ Equity,” we also raised approximately $ 2.3 million of net proceeds upon the issuance of common stock and warrants in connection with the January 2020 Equity Offering.

Additionally, we have entered into two new revolving credit facilities as described in Note 9, “Debt,” which allow for expanded borrowing capacity.

The restructuring and cost cutting initiatives implemented during 2019, as well as the January 2020 Equity Offering that significantly strengthened our balance sheet, and our enhanced debt capacity due to the debt refinancing in August 2020, were designed to allow us to effectively execute these strategies.

However, our efforts may not occur as quickly as we envision or be successful due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, and the recent and lingering economic impact from the COVID-19 pandemic, among other factors.

As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:

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Obtaining additional funding contains risks, including:

additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;

• additional equity financing may not be available to us on satisfactory terms, and any equity we are able to

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;

• loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors;

the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.

If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition.

• the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.

If we fail to obtain additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition.

A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.

Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementation of an excess inventory plan, and implementation of our product development and sales channel/go-to-market strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue as a going concern.

On May 15, 2019, we received a letter from the NASDAQ Stock Market (“NASDAQ”) advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on NASDAQ pursuant to listing rules.

Therefore, we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an extension.

On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 and is evaluating options to regain compliance.

Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to ensure adequate external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, application and successful acquisition of a Paycheck Protection Program (“PPP”) loan during April 2020, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, will provide us with an ability to finance our operations through the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.

In January 2019, we received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”) notifying us that, for the prior 30 consecutive trading days, the closing bid price for our common stock was below the minimum $1.00 per share required pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), our common stock traded above $1.00 for the required number of days within the 180-calendar day period immediately following our receipt of the notice to regain compliance with the Bid Price Rule.

On May 15, 2019, we received a letter from the Staff notifying us that our common stock had again fallen out of compliance with the Bid Price Rule.

On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 to regain compliance.

On April 16, 2020, the Nasdaq Stock Market (“Nasdaq”) announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it had provided temporary relief through June 30, 2020 from compliance with, among other rules, the Bid Price Rule.

As a result, we had until July 24, 2020 to regain compliance with the Bid Price Rule, which we accomplished by effecting a 1-for-5 reverse stock split on June 11, 2020, increasing the per share trading price of our common stock.

Our common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 12, 2020.

On August 17, 2020, we received a letter from the Staff notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2,500,000 if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”).

Our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, reflected that our stockholders’ equity as of June 30, 2020 was $ 1,714,000 .

In addition, as of August 13, 2020, we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.

On October 5, 2020, based on our timely submission of our plan to regain compliance, Nasdaq granted us an extension through February 15, 2021 to regain compliance with the Minimum Stockholders’ Equity Rule, subject to our compliance with certain terms of the extension.

In accordance with one part of the plan submitted to the Staff, we have successfully modified our outstanding warrants and are able to now classify the warrants within equity.

In December 2020, we reclassified $ 1.4 million from warrant liability into equity.

At December 31, 2020, our stockholders’ equity was $ 4,255,000 .

On January 20, 2021, we received a letter from the Staff notifying us that, on a conditional basis, Nasdaq has determined that we have regained compliance with the Minimum Stockholders’ Equity Rule.

The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2024 under which it is responsible for related maintenance, taxes and insurance.

As of January 21, 2021, the terms of one of these equipment operating leases has been extended through 2026.

In accordance with Topic 842, the related right-of-use asset and lease liability will be updated at the time of modification in January 2021.

The Company has one finance lease containing a bargain purchase option upon expiration of lease in 2022.

The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise

The lease term consists of the non-cancellable

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option.

period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option.

The present value of the remaining lease obligation for these leases was calculated using an incremental borrowing rate (“IBR”) of 7.25 %, which was the Company’s borrowing rate on the revolving credit agreement signed on December 11, 2018.

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In adopting Topic 842, the carrying value of the aforementioned net liabilities has been reclassified as a reduction of the restructured lease, right-of-use asset, which totaled $ 0.3 million as of January 1, 2019.

As part of the lease agreement for the New York, New York office, there is $0.3 million in restricted cash in other long-term assets on the accompanying Consolidated Balance Sheets as of December 31, 2019 which represents collateral against the related Letter of Credit issued as part of this agreement.

As of December 31, 2018, the $0.3 million in restricted cash is included in cash on the Consolidated Balance Sheet.

The restructured leases and sub-leases were not scoped out of the requirements of Topic 842 and were evaluated for impairment in accordance with the asset impairment provisions of ASC 360, Property, Plant and Equipment (“Topic 360”).

As part of the lease agreement for the New York, New York office, there is $ 0.3 million in restricted cash in prepaid and other current assets on the accompanying Consolidated Balance Sheets as of December 31, 2020 which represents collateral against the related Letter of Credit issued as part of this agreement.

As of December 31, 2019, the $ 0.3 million in restricted cash is included in other long-term assets on the Consolidated Balance Sheet.

The restructured lease and sub-lease were deemed to be in-scope and thus subject to the requirements of Topic 842 and were evaluated for impairment in accordance with the asset impairment provisions of ASC 360, Property, Plant and Equipment (“Topic 360”).

The Company concluded its net right-of-use assets were not impaired and the carrying amount approximates expected sublease income in future years as of December 31, 2020.

The Company continues to carry certain immaterial operating expenses associated with these leases as restructuring liabilities and will continue to accrete those liabilities in accordance with Topic 420, as has been done since the cease use date in 2017.

The Company continues to carry certain immaterial operating expenses associated with this lease as restructuring liabilities and will continue to accrete those liabilities in accordance with Topic 420, as has been done since the cease use date in 2017.

Due to the continued net losses, going concern, and restructuring actions discussed in Note 3, “Restructuring,” the Company also evaluated its Solon, Ohio operating lease right-of-use asset for potential impairment under Topic 360.

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Therefore, the Company recorded an impairment of this right-of-use asset of approximately $ 0.2 million, with a corresponding offset to accumulated deficit as of January 1, 2019.

Components of the operating, restructured and finance lease costs recognized in net loss during the year ended December 31, 2019 , were as follows (in thousands):

For the year ended December 31,

Components of the operating, restructured and finance lease costs recognized in net loss were as follows (in thousands):

For the years ended December 31,

Operating lease cost (income)

Sublease income

Sub-lease income $ ( 105 ) $ ( 100 )

Lease cost 597 628

Operating lease cost, net 492 528

Restructured lease cost (income)

Sublease income

Sub-lease income ( 272 ) ( 403 )

Lease cost 237 385

Restructured lease income, net ( 35 ) ( 18 )

Finance lease cost

Interest on lease liabilities

Interest of lease liabilities — 1

Finance lease cost, net — 1

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Consolidated Balance Sheet information related to the Company’s operating and finance leases as of December 31, 2019 are as follows (in thousands):

Supplemental Consolidated Balance Sheet information related to the Company’s operating and finance leases are as follows (in thousands):

At December 31,

Operating Leases

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Future minimum lease payments required under operating, restructured and finance leases for each of the years 2021 through 2025 are as follows (in thousands):

Operating Leases

Restructured Leases

Restructured Leases Sublease Payments

Finance Lease

Operating Leases Restructured Leases Restructured Leases Sublease Payments Finance Lease

2021 $ 622 $ 170 $ ( 136 ) $ 3

2022 329 — — 1

2023 16 — — —

Total future undiscounted lease payments 968 170 ( 136 ) 4

1 unchanged sentence

Total lease obligations $ 916 $ 168 $ ( 134 ) $ 4

Supplemental cash flow information related to leases for the year ended December 31, 2019 , was as follows (in thousands):

Year ended December 31,

Supplemental cash flow information related to leases was as follows (in thousands):

Years ended December 31,

Supplemental Cash Flow Information:

3 unchanged sentences

Financing cash flows from finance leases $ 3 $ 3

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value and consists of the following (in thousands):

4 unchanged sentences

Inventories, net $ 5,641 $ 6,168

The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands):

At December 31,

Beginning balance $ ( 3,518 ) $ ( 4,085 )

Accrual 281 ( 814 )

Reduction due to sold inventory 343 845

Write-off for disposed inventory — 536

Reserves for excess, obsolete, and slow-moving inventories $ ( 2,894 ) $ ( 3,518 )

During 2020, we continued to apply discipline in manufacturing and supply chain management, focusing on a reduction of lead time and inventory on hand which resulted in a net reduction of our gross inventory levels and excess inventory reserves of $ 0.6 million compared to 2019.

During 2019, management implemented a purchasing freeze and cost-cutting measures resulting in lower procurement in the first half of 2019, with only selective and necessary purchases done in the second half of 2019.

5 unchanged sentences

Equipment (useful life 3 - 15 years)

$ 1,281 $ 1,297

Tooling (useful life 2 - 5 years)

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Property and equipment, net $ 420 $ 389

Depreciation expense was $0.3 million , $0.5 million , and $0.7 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Due to the specialized nature of the equipment and software previously used to manufacture MMM products prior to 2017 we were not able to find a buyer for this equipment in 2017.

As a result, we re-evaluated the carrying of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million during 2017.

We completed the sale of this equipment in the first quarter of 2018, recognizing net proceeds of approximately $0.2 million and a gain of approximately $15 thousand on the sale.

The gain on the sale is classified on our Consolidated Statements of Operations under the caption, “Other expenses.”

Depreciation expense was $ 0.2 million and $ 0.3 million for the years ended December 31, 2020 and 2019, respectively.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2019, the Company ceased operations of the Taiwan affiliate and closed the Taiwan office.

6 unchanged sentences

Prepaid expenses 233 133

Short-term deposits

Prepaid rent 80 70

Restricted cash 342 —

Total prepaid and other current assets $ 782 353

Short-term deposits represent down payment amounts paid to suppliers for material purchases.

Certain Asian suppliers require us to pay a deposit equal to a certain percentage of the product ordered prior to manufacturing and/or shipping products to us.

The short-term debt acquisition costs for 2019 have been netted with Debt.

ACCRUED LIABILITIES

4 unchanged sentences

Accrued sales commissions 95 32

Accrued severance

Accrued restructuring 11 24

3 unchanged sentences

Credit facilities

On December 11, 2018, we entered into a three -year $5.0 million revolving line of credit (“Credit Facility”) with Austin.

The total loan amount available to us under the Credit Facility from time to time is based on the amount of our (i) qualified accounts receivable, which is equal to the lesser of 85% of our net eligible receivables of, or $4.5 million , plus (ii) available inventory, which is the lesser of 20% of the net realizable value of eligible inventory of, or $500 thousand .

The Credit Facility charges interest deeming a minimum borrowing requirement of $1.0 million .

The Credit Facility is secured by a lien on our assets.

Interest on advances under the line is due monthly at the “Prime Rate,” as published by the Wall Street Journal from time to time, plus a margin of 2% .

The borrowing rate as of December 31, 2019 and 2018 was 6.75% and 7.75% , respectively.

Overdrafts are subject to a 2% fee.

Additionally, an annual facility fee of 1% on the entire $5.0 million amount of the Credit Facility is due at the beginning of each of the three years and a 0.5% collateral management fee on the average outstanding loan balance is payable monthly.

We paid Austin the first year’s fee when the Credit Facility was signed and the second year’s fee in December of 2019.

On August 11, 2020, we entered into two debt financing arrangements (together, the “Credit Facilities”).

The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (the “IF Lender”).

Borrowings under the Inventory Facility are permitted up to the lower of (i) $ 3.0 million and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75 % of inventory costs or 85 % of the inventory net orderly liquidation value, less the availability reserves.

The outstanding indebtedness under the Inventory Facility accrues at an annual rate equal to the greater of (i) 5.75 % and (ii) 4.00 % plus the three-month LIBOR rate and is also subject to a service fee of 1 % per month.

The annualized interest rate at December 31, 2020 was 23.6 %.

The Inventory Facility’s interest and service fees combined amount is subject to a minimum monthly fee of $ 18 thousand.

There would be no breakage fee for the Company for the Inventory Facility if the Company were to refinance it with an American Bankers Association (“ABA”) equivalent institution after August 11, 2021.

The Inventory Facility is secured by substantially all of the present and future assets of the Company and is also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender (defined below).

The Inventory Facility matures on August 11, 2022, subject to early termination upon 90 days’ notice and otherwise in accordance with the terms of the Inventory Loan Agreement.

The term is automatically extended in successive one year increments unless terminated by either party in accordance with the Inventory Loan Agreement.

The second arrangement is a receivables financing facility (the “Receivables Facility”) pursuant to the Loan and Security Agreement (the “Receivables Loan Agreement”) between the Company and Factors Southwest L.L.C.

(d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”).

Borrowings under the Receivables Facility are permitted up to the lower

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The repayment of outstanding advances and interest under the Credit Facility may be accelerated upon an event of default including, but not limited to, failure to make timely payments or breach of any terms set forth in the Credit Facility.

The Credit Facility has no financial covenants, but is subject to customary affirmative and negative operating covenants and defaults and restricting indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others.

The Credit Facility may be terminated by us or by Austin with 90 days written notice.

We have not provided such notice to Austin or received such notice from Austin.

There are liquidated damages if the Credit Facility is terminated prior to December 10, 2021, as follows:

3% in the first year, 2% in the second year, and 1% in the third year.

Borrowings under the revolving line of credit were $0.7 million and $2.2 million at December 31, 2019 and 2018 , respectively, are recorded in the Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $0.1 million at December 31, 2019.

The balance at December 31, 2018 did not include unamortized net issuance costs.

of (i) $ 2.5 million or (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at 90 % of the face value of such accounts receivable, less availability reserves, if any.

Interest on outstanding indebtedness under the Receivables Facility accrues at an annual rate equal to (i) the highest prime rate announced from time to time by the Wall Street Journal plus (ii) 2 %.

At December 31, 2020, the annualized interest rate was 7.9 % and the annualized interest rate on the collateral management fee was 5.9 %.

The Receivables Facility is also secured by substantially all of the present and future assets of the Borrower and is also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender.

A $ 25 thousand, or 1 %, facility fee was charged at closing.

There would be no breakage fee for the Company for the Receivables Facility if the Company were to refinance it with an ABA equivalent institution.

The Receivables Facility matures on August 11, 2022, subject to early termination in accordance with the terms of the Receivables Loan Agreement;

provided that the term is automatically extended in successive one year increments unless terminated by either party in accordance with the Receivables Loan Agreement.

Borrowings under the Inventory Facility were $ 1.3 million and borrowings under the Receivables Facility were $ 1.0 million at December 31, 2020.

These facilities are recorded in the Consolidated Balance Sheet as of December 31, 2020 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $ 0.1 million for the Inventory Facility and $ 40 thousand for the Receivables Facility as of December 31, 2020.

The Credit Facilities replaced the Austin Credit Facility (“Austin Facility”) that was entered into on December 11, 2018 and was secured by a lien on our assets.

The Austin Facility was a three year, $ 5.0 million revolving line of credit.

The total loan amount available to us under the Austin Facility from time to time was based on the amount of our (i) qualified accounts receivable, which is equal to the lesser of 85 % of our net eligible receivables of, or $ 4.5 million, plus (ii) available inventory, which is the lesser of 20 % of the net realizable value of eligible inventory of, or $ 500 thousand.

The Austin Facility charges interest deeming a minimum borrowing requirement of $ 1.0 million.

Interest on advances under the line was due monthly at the “Prime Rate,” as published by the Wall Street Journal from time to time, plus a margin of 2 %.

The borrowing rate as of December 31, 2019 was 6.75 %.

Overdrafts were subject to a 2 % fee.

Additionally, an annual facility fee of 1 % on the entire $ 5.0 million amount of the Austin Facility was due at the beginning of each of the three years that the Austin Facility was outstanding and a 0.50 % collateral management fee on the average outstanding loan balance was payable monthly.

We paid the first year’s fee when the Austin Facility was signed and the second year’s fee in December of 2019.

Borrowings under the Austin Facility were $ 0.7 million at December 31, 2019.

On August 11, 2020, we paid $ 1.4 million to close the Austin Facility which included a $ 100 thousand termination fee.

Additionally, we wrote off $ 59 thousand of the remaining related debt acquisition costs.

The termination fee and the write-off of debt acquisition costs are reflected as a loss on extinguishment of debt in our Consolidated Statements of Operations for the twelve months ended December 31, 2020.

Convertible Notes

On March 29, 2019, we raised $1.7 million (before transaction expenses) from the issuance of $1.7 million in principal amount of subordinated convertible promissory notes to certain investors (the “Convertible Notes”).

On March 29, 2019, we issued $ 1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain investors in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended.

The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5 % per annum until June 30, 2019 and at a rate of 10.0 % thereafter.

Accrued unpaid interest totaled $0.1 million at December 31, 2019 and is included within accrued liabilities in the accompanying Consolidated Balance Sheets.

Pursuant to their terms, on January 16, 2020 following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $1,815,041 converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-one basis into shares of our common stock.

The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29, 2019, which authorized 2,000,000 shares of Series A Preferred Stock (“Original Series A Certificate of Designation”).

Pursuant to their terms, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the Convertible Notes, and the accumulated interest thereon ($ 0.1 million), which totaled $ 1.8 million, were converted at a conversion price of $ 0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $ 0.0001 per share (the “Series A Preferred Stock”), which is convertible on a one-for-five basis into shares of our common stock.

During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock.

The Original Series A Certificate of Designation was amended on January 15, 2020 following Stockholder Approval to increase the number of authorized shares of Series A Preferred to 3,300,000 (the Original Series A Certificate of Designation as so amended, the “Series A Certificate of Designation”).

Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration, except as provided by law.

In any such vote, each share of Series A Preferred Stock shall be entitled to a number of votes equal to 55.37% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.

The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-one basis.

We also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of preferred stock available for designation as the Series A Preferred Stock.

The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.

On November 25, 2019, we entered into the Iliad Note Purchase Agreement with Iliad pursuant to which the Company sold and issued the Iliad Note in the principal amount of $1.3 million .

The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad transaction expenses.

The Iliad Note has a maturity date of November 24, 2021 and accrues interest at 8% per annum, compounded daily, on the outstanding balance.

The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year and 10% during the second year.

Beginning in May 2020, Iliad may require the Company to redeem up to

In any such vote,

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$150 thousand of the Iliad Note in any calendar month.

The Company has the right on three occasions to defer all redemptions that Iliad could otherwise require the Company to make during any calendar month.

Each exercise of this deferral right by the Company will increase the amount outstanding under the Iliad Note by 1.5%.

In the event our common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting.

Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:

10% of gross proceeds the Company receives from the sale of our common stock or other equity must be paid to Iliad and will be applied to reduce the outstanding balance of the Iliad Note (the failure to make such a prepayment is not an event of default under the Iliad Note, but will increase the amount then outstanding under the Iliad Note by 10% );

unless agreed to by Iliad, we will not engage in certain financings that involve the issuance of securities that include a conversion rights in which the number of shares of common stock that may be issued pursuant to such conversion right varies with the market price of our common stock (a “Restricted Issuance”);

provided, however, if Iliad does not agree to a Restricted Issuance, the Company may on up to three occasions make the Restricted Issuance anyway, but the outstanding balance of the Iliad Note will increase 3% on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.

Upon the occurrence of an event of default under the Iliad Note, Iliad may accelerate the date for the repayment of the amount outstanding under the Iliad Note and increase the amount outstanding by an amount ranging from 5% to 15% , depending on the nature of the default.

Certain insolvency and bankruptcy related events of default will result in the automatic acceleration of the amount outstanding under the Iliad Note and the outstanding amount due will be automatically increased by 5% .

After the occurrence of an event of default, Iliad may elect to have interest accrue on the Iliad Note at a rate per annum of 22% , or such lesser rate as permitted under applicable law.

The total liability for the Note Purchase Agreement, excluding financing fees, were $1.3 million at December 31, 2019.

each share of Series A Preferred Stock shall be entitled to a number of votes equal to 11.07 % of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.

The Series A Preferred Stock (a) has a preference upon liquidation equal to $ 0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis.

We also filed a Certificate of Elimination with respect to the authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of preferred stock available for designation as the Series A Preferred Stock.

The purchase agreement related to the Convertible Notes contained customary representations and warranties and provided for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.

On November 25, 2019, we entered into a note purchase agreement (the “Iliad Note Purchase Agreement”) with Iliad Research and Trading, L.P.

(“Iliad”) pursuant to which the Company sold and issued to Iliad a promissory note in the principal amount of $ 1.3 million (the “Iliad Note”).

The Iliad Note was issued with an original issue discount of $ 142 thousand and Iliad paid a purchase price of $ 1.1 million for the issuance of the Iliad Note, after deduction of $ 15 thousand of Iliad transaction expenses.

On December 1, 2020, we repaid the $ 30 thousand remaining outstanding balance on the Iliad Note in full prior to its maturity date of November 24, 2021.

Remaining debt and original issue discount costs of $ 117 thousand were written off at that time and are reflected as a loss on extinguishment of debt in our Consolidated Statements of Operations for the twelve months ended December 31, 2020.

The Iliad Note accrued interest at 8 % per annum, compounded daily, on the outstanding balance.

We were able to prepay the amounts outstanding under the Iliad Note at a premium, which was 15 % during the first year and 10 % during the second year.

Beginning in May 2020, Iliad could have required us to redeem up to $ 150 thousand of the Iliad Note in any calendar month.

We had the right on three occasions to defer all redemptions that Iliad could otherwise require us to make during any calendar month.

No such deferrals were exercised.

Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we had, among other things, agreed that, until the Iliad Note was repaid 10 % of gross proceeds the Company received from the sale of our common stock or other equity must be paid to Iliad and applied to reduce the outstanding balance of the Iliad Note.

In accordance with the terms of the Iliad Note, 10 % of the gross proceeds from the January 2020 Equity Offering ($ 275 thousand) were used to make payments on the Iliad Note, of which $ 226 thousand went towards the outstanding principal amount.

The total liability for the Note Purchase Agreement, excluding financing fees, was $ 1.3 million at December 31, 2019.

Unamortized loan discount and debt issuance costs were $ 0.2 million at December 31, 2019.

On April 17, 2020, the Company was granted a loan from KeyBank National Association (“KeyBank”) in the amount of approximately $ 795 thousand, pursuant to the Paycheck Protection Program (“PPP”) under Division A of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which was enacted on March 27, 2020.

The funds were received on April 20, 2020.

At December 31, 2020, $ 529 thousand is classified as short-term debt and $ 266 thousand is classified as long-term debt on the Company’s Consolidated Balance Sheets.

The loan accrues interest at a rate of 1 % per annum and matures on April 17, 2022.

Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

The Company believes it has used the loan for qualifying expenses.

On October 20, 2020, we submitted a loan forgiveness application for the full amount of the loan to KeyBank and on October 21, 2020, KeyBank accepted the application and forwarded it to the Small Business Administration (“SBA”) for approval.

The entire principal balance and interest were forgiven on February 11, 2021.

The forgiveness income will be recorded as other income in the Consolidated Statements of Operations during 2021.

See also Note 16, “Subsequent Events”.

COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of December 31, 2019, we had approximately $0.7 million in outstanding purchase commitments for inventory, of which $0.5 million is expected to ship in the first quarter of 2020 and $0.2 million is expected to ship in the second quarter of 2020.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2020, we had approximately $ 8.0 million in outstanding purchase commitments for inventory, of which $ 4.8 million is expected to ship in the first quarter of 2021 and thereafter.

STOCKHOLDERS’ EQUITY

In the past, we have issued warrants in conjunction with various equity issuances, debt financing arrangements and sales incentives.

During 2017 all outstanding warrants totaling 6,750 were canceled or otherwise forfeited.

Accordingly, there were no warrants issued and outstanding at December 31, 2019 and 2018.

In January of 2020, we offered and sold 3,441,803 shares of our common stock to certain institutional investors, at a purchase price of $0.674 per share in a registered direct offering.

We also sold to the same institutional investors unregistered warrants to purchase up to 3,441,803 shares of our common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant.

Refer to Note 16 “Subsequent Events” for further information.

1-for-5 Reverse Stock Split

On June 11, 2020, in accordance with previous stockholder approval, our Board of Directors effected a 1-for-5 reverse stock split of the Company’s common stock, par value $ 0.0001 per share.

The reverse stock split became effective immediately (the “Effective Time”) upon the filing of the Certificate of Amendment to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), with the Delaware Secretary of State.

At the Effective Time, every five shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock.

No fractional shares were issued as a result of the reverse stock split.

The fractional shares were settled in cash in an amount not material to the Company.

The $ 0.0001 par value per share of common stock and other terms of the common stock were not affected by the reverse stock split.

The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at 50,000,000 shares.

The current financial statements, as well as prior period financial statements, have been retroactively adjusted to reflect the reverse stock split.

The current financial statements as well as prior period financial statements have been retroactively adjusted to reflect the reverse stock split.

Preferred shares outstanding were not affected by the reverse stock split and, as such, those shares have not been adjusted.

The reverse stock split was effected solely to increase the per share trading price of the common stock to satisfy the $1.00

minimum bid price requirement pursuant to Nasdaq Listing Rule 5550(a)(2) for continued listing on Nasdaq.

The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 12, 2020.

Preferred Stock

Pursuant to the terms of the Convertible Notes, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon at the date of conversion (totaling $ 1.8 million) were converted at a conversion price of $ 0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Preferred Stock, which is convertible on a one-for-five basis into shares of our common stock.

During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock.

The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29, 2019, which designated 2,000,000 shares of the Company’s preferred stock, par value $ 0.0001 per share, as Series A Preferred Stock (the “Original Series A Certificate of Designation”).

On January 15, 2020 with prior stockholder approval, the Company amended the Certificate of Incorporation to increase the number of authorized shares of preferred stock to 5,000,000 .

The Original Series A Certificate of Designation was also amended on January 15, 2020, to increase the number of shares of preferred stock designated as Series A Preferred Stock to 3,300,000 (the Original Series A Certificate of Designation, as so amended, the “Series A Certificate of Designation”).

In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes equal to 11.07 % of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.

The Series A Preferred Stock (a) has a preference upon liquidation equal to $ 0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis.

On March 29, 2019, the Company also filed a Certificate of Elimination with respect to

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of undesignated preferred stock available for designation as Series A Preferred Stock.

January 2020 Equity Offering

Issuance of Common Stock and Warrants

In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $ 3.37 per share.

Total offering costs of $ 0.5 million have been presented as a reduction of additional paid-in capital and have been netted within equity in the Consolidated Balance Sheet as of December 31, 2020.

In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of $ 4.99 per share.

Net proceeds to us from the sale of common stock and warrants were approximately $ 2.3 million.

Warrants to purchase an aggregate of 467,306 shares remain outstanding at December 31, 2020 with a weighted average exercise price of $ 3.51 per share.

The exercise of warrants could provide us with cash proceeds of up to $ 1.6 million in the aggregate if all warrants are exercised.

During the twelve months ended December 31, 2020, 269,240 warrants were exercised resulting in total proceeds of $ 918 thousand.

As of December 31, 2020, we had the following outstanding warrants to purchase shares of common stock:

Number of Underlying Shares Exercise Price Expiration

Investor Warrants 425,626 $ 3.3700 January 13, 2025

Placement Agent Warrants 41,680 $ 4.9940 January 13, 2025

Warrant Classification

We account for common stock warrants as either liabilities or equity instruments depending on the specific terms of the warrant agreement.

Common stock warrants that could require cash settlement are accounted for as liabilities and are revalued at fair value at each balance sheet date subsequent to the initial issuance.

Changes in the fair market value of the warrant are reflected in the consolidated statement of operations as income (expense) based upon the change in fair value of warrants.

Common stock warrants without cash settlement provisions are accounted for as equity and re-measurement at each balance sheet date is not required.

The warrants we issued in the January 2020 Equity Offering contained a provision for net cash settlement in the event that there is a fundamental transaction involving the Company (e.g., merger, sale of substantially all assets, tender offer, or share exchange).

Due to this provision, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date with fair value adjustments recognized as a component of earnings.

During December 2020, the warrant holders agreed to a modification of the terms of their warrants which removed the potential cash settlement option upon the occurrence of a fundamental transaction.

As such, during the fourth quarter of 2020, the liability relating to the remaining 467,306 warrants was fair-valued through the modification date with the offsetting adjustment recorded in income.

The $ 1.4 million warrant liability was then reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation

On May 6, 2014, our board of directors approved the Energy Focus, Inc.

On March 18, 2020, our board of directors approved the Energy Focus, Inc.

2020 Stock Incentive Plan (the “2020 Plan”).

The 2020 Plan was approved by the stockholders at our annual meeting on September 17, 2020, after which no further awards could be issued under the Energy Focus, Inc.

2014 Stock Incentive Plan (“the 2014 Plan”).

The 2020 Plan initially allows for awards up to 350,000 shares of common stock and expires on September 17, 2030.

At December 31, 2020, 331,150 shares remain available to grant under the 2020 Plan.

On May 6, 2014, our board of directors approved the 2014 Plan.

The 2014 Plan was approved by the stockholders at our annual meeting on July 15, 2014, after which no further awards could be issued under the Energy Focus, Inc.

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On July 22, 2015, the stockholders approved an amendment to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 120,000 shares.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2017, the stockholders approved an amendment to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 1,300,000 .

We have two other equity-based compensation plans under which options are currently outstanding;

however, no new awards may be granted under these plans.

On June 21, 2017, the stockholders approved an amendment to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 260,000 .

No awards may be granted under this plan.

We have one other historical equity-based compensation plan under which options are currently outstanding;

however, no new awards may be granted under this plan.

Generally, stock options are granted at fair market value and expire ten years from the grant date.

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The specific terms of each grant are determined by our board of directors.

At December 31, 2019 , 851,160 shares remain available to grant under the 2014 Plan.

Stock-based compensation expense is attributed to the granting of stock options, restricted stock, and restricted stock unit awards.

Stock-based compensation expense is attributable to stock options and restricted stock unit awards.

For all stock-based awards, we recognize compensation expense using a straight-line amortization method.

The impact on our results for stock-based compensation was as follows (in thousands):

The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands):

For the year ended December 31,

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Under ASC 718-10, the expected stock option life is based on the midpoint between the vesting date and the end of the contractual term of the stock option award.

The use of this simplified method in place of using the actual historical exercise data is allowed when a stock option award meets all of the following criteria:

The use of this simplified method in place of using the actual historical exercise data is allowed when a stock

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

option award meets all of the following criteria:

the exercise price of the stock option equals the stock price on the date of grant;

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We have not paid dividends in the past, and do not expect to pay dividends over the corresponding expected term as of the grant date.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options outstanding under all plans at December 31, 2020 have a contractual life of ten years , and vesting periods between one and four years .

A summary of option activity under all plans was as follows:

Options Weighted

Exercise Price

Outstanding at December 31, 2018 58,574 $ 18.90

Outstanding at December 31, 2017

Granted 137,860 2.20

Cancelled ( 35,499 ) 12.75

Expired ( 5,505 ) 26.65

Outstanding at December 31, 2019 155,031 $ 5.23

Granted 112,350 2.68

Cancelled ( 33,774 ) 9.56

Exercised ( 12,157 ) 2.11

Outstanding at December 31, 2020 221,450 $ 3.45

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The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options.

No options were exercised during 2019 .

The total intrinsic value of options outstanding and options exercisable at December 31, 2019 was zero dollars each, which was calculated using the closing stock price at the end of the year of $0.46 per share less the option price of the in-the-money grants.

12,157 options were exercised during 2020, and no options were exercised during 2019.

The total intrinsic value of options outstanding and options exercisable at December 31, 2020 was $ 403 thousand and $ 54 thousand, respectively, which was calculated using the closing stock price at the end of the year of $ 4.03 per share less the option price of the in-the-money grants.

The options outstanding at December 31, 2020 have been segregated into ranges for additional disclosure as follows:

OPTIONS OUTSTANDING

OPTIONS EXERCISABLE

OPTIONS OUTSTANDING OPTIONS EXERCISABLE

Range of Exercise Prices

Number of Shares Outstanding

Weighted Average Remaining Contractual Life (in years)

Weighted Average Exercise Price

Number of Shares Exercisable

Weighted Average Remaining Contractual Life (in years)

Weighted Average Exercise Price

Restricted stock and restricted stock units

In 2015, we began issuing restricted stock units to employees and non-employee Directors under the 2014 Plan with vesting periods ranging from 1 to 3 years from the grant date.

Number of Shares Outstanding Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price Number of Shares Exercisable Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price

$ 1.45 — $ 1.48 27,525 9.2 $ 1.45 425 9.2 $ 1.45

$ 1.49 — $ 1.68 50,000 9.2 1.50 — 9.2 1.50

$ 1.69 — $ 2.25 80,975 8.6 2.10 21,250 8.5 2.10

$ 2.26 — $ 5.79 31,380 8.8 2.55 7,420 8.7 2.40

$ 5.80 — $ 53.50 31,570 8.1 12.64 9,370 4.3 25.61

221,450 8.8 $ 3.45 38,465 7.6 $ 7.88

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows a summary of restricted stock and restricted stock unit activity:

Restricted Stock Units Outstanding

At December 31, 2016

Restricted Stock Units

In 2015, we began issuing restricted stock units to certain employees and non-employee Directors under the 2014 Plan with vesting periods ranging from one to four years from the grant date.

In 2020, we began issuing restricted stock units to certain employees and non-employee Directors under the 2020 Plan with vesting periods ranging from one to four years.

The following table shows a summary of restricted stock unit activity:

Restricted Stock Units Outstanding Weighted

At December 31, 2018 109,371 $ 12.70

Granted 17,115 3.10

Vested ( 87,256 ) 11.15

Forfeited ( 32,627 ) 11.65

At December 31, 2019 6,603 $ 13.17

Granted 19,200 2.44

Vested ( 20,068 ) 3.96

Forfeited ( 1,255 ) 12.40

At December 31, 2020 4,480 $ 8.64

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For the year ended December 31,

Provision for (benefit from) income taxes

State $ ( 5 ) $ 10

(Benefit from) provision for income taxes $ ( 5 ) $ 10

ENERGY FOCUS, INC.

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The principal items accounting for the difference between income taxes computed at the U.S.

statutory rate and the provision for income taxes reflected in our Consolidated Statements of Operations are as follows:

statutory rate and the (benefit from) provision for income taxes reflected in our Consolidated Statements of Operations are as follows:

For the year ended December 31,

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Valuation allowance ( 26.0 ) ( 20.7 )

Deferred rate change due to changes in tax laws

Other ( 0.5 ) ( 2.4 )

0.1 % ( 0.1 ) %

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):

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In 2019, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $ 8.3 million additional federal net operating loss we recognized for the year.

In 2017, our effective tax rate was lower than the statutory rate due to the remeasurement of our deferred tax assets resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”) and decrease in the valuation allowance.

On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code (“IRC”).

Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, repeal of the corporate Alternative Minimum Tax, elimination of certain deductions, and changes to the carryforward period and utilization of Net Operating Losses generated after December 31, 2017.

We have calculated the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing.

As a result of the Act, we have recorded $0.1 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted.

The amount related to the release of the valuation allowance on the Alternative Minimum Tax Credit carry-forward which is expected to be fully refunded by 2021.

We remeasured the deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future.

The impact of the remeasurement was $5.9 million of additional tax expense which was offset by a $5.9 million reduction of the valuation allowance resulting in a net zero impact to the financial statements.

Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation.

We may make adjustments to amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.

At December 31, 2020, we had net operating loss carry-forwards of approximately $ 115.9 million for federal income tax purposes ($ 72.3 million for state and local income tax purposes).

However, due to changes in our capital structure, approximately $ 61.5 million of the $ 115.9 million is available after the application of IRC Section 382 limitations.

As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

As a result of the Tax Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely.

The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018 will be subject to the new limitations under the Act.

The $ 7.1 million and $ 8.3 million in federal net operating losses generated in 2020 and 2019 will be subject to the new limitations under the Tax Act.

If not utilized, the carry-forwards generated prior to December 31, 2017 of $ 37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Since we believe it is more likely than not that the benefit from net operating loss carry-forwards will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 2020 and 2019, respectively.

We had no net deferred tax liabilities at December 31, 2020 or 2019, respectively.

In 2019, we recognized various states tax expense as a result of the adjustment from the 2018 provision to the actual tax on the 2018 returns that were filed in 2019.

In 2020, we recognized various states tax benefits as a result of the adjustment from the 2019 provision to the actual tax on the 2019 returns that were filed in 2019.

In 2019, we recognized various states tax expense as a result of the adjustment from the 2018 provision to the actual tax on the 2018 returns that were filed in 2019.

In 2017, we recognized U.S.

federal and various states income tax benefit of $0.1 million as a result of the reduction in the valuation allowance on the portion of Alternative Minimum Tax Credits that are expected to be refunded.

PRODUCT AND GEOGRAPHIC INFORMATION

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We currently operate in a single industry segment, developing and selling our LED lighting products and controls into the MMM and commercial markets.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a breakdown of product net sales for the years indicated (in thousands):

1 unchanged sentence

Commercial products $ 5,404 $ 7,877

MMM products 11,424 4,828

Total net sales $ 16,828 $ 12,705

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Total net sales $ 16,828 $ 12,705

At December 31, 2019 and 2018 , approximately 100% and 98% , respectively, of our long-lived assets, which consist of property and equipment, were located in the United States.

At December 31, 2020 and 2019, approximately 100 % of our long-lived assets, which consist of property and equipment, were located in the United States.

RELATED PARTY TRANSACTIONS

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On November 30, 2018, each of Gina Huang, Brilliant Start Enterprise, Inc.

(“Brilliant Start”), Jag International Ltd., Jiangang Luo, Cleantech Global Ltd., James Tu, 5 Elements Global Fund L.P., Yeh-Mei Hui Cheng, Communal International, Ltd., and 5 Elements Energy Efficiency Limited (the “Former Schedule 13D Parties”) filed a Schedule 13D with the SEC, indicating that they may have been deemed to be a “group” under Section 13(d)(3) of the Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder, and that such group beneficially owned 17.6% of our common stock.

(“Brilliant Start”), Jag International Ltd., Jiangang Quo, Cleantech Global Ltd., James Tu, 5 Elements Global Fund L.P., Schema Hui Cheng, Communal International, Ltd., and 5 Elements Energy Efficiency Limited (the “Former Schedule 13D Parties”) filed a Schedule 13D with the SEC, indicating that they may have been deemed to be a “group” under Section 13(d)(3) of the Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder, and that such group beneficially owned 17.6 % of our common stock.

The Schedule 13D was amended on February 26, 2019 and April 3, 2019.

On February 21, 2019, the Former Schedule 13D Parties entered into a settlement with the Company providing for the appointment of two directors (Geraldine McManus and Jennifer Cheng) and the nomination of those two director for election at the Company’s 2019 annual meeting of stockholders.

controlled by Gina Huang, a current member of our board of directors), for the purchase of an aggregate of $1.7 million of Convertible Notes.

On February 21, 2019, the Former Schedule 13D Parties entered into a settlement with the Company providing for the appointment of two directors (Geraldine McManus and Jennifer Cheng) and the nomination of those two directors for election at the Company’s 2019 annual meeting of stockholders.

On March 29, 2019, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with certain investors, including Fusion Park LLC (of which James Tu is the sole member) (“Fusion Park”) and Brilliant Start (which is controlled by Gina Huang, a current member of our board of directors), for the purchase of an aggregate of $ 1.7 million of Convertible Notes.

Pursuant to the Note Purchase Agreement, Fusion Park and Brilliant Start purchased $ 580 thousand and $ 500 thousand, respectively, in principal amount of Convertible Notes.

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Communal has a 50.0 % ownership interest in 5 Elements Energy Efficiencies (BVI) Ltd., a beneficial owner of approximately 1.6 % of our common stock.

Yeh-Mei Cheng controls 5 Elements Energy Efficiencies (BVI) Ltd.

Schema Cheng controls 5 Elements Energy Efficiencies (BVI) Ltd.

and owns the other 50.0 %.

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Tu and the mother of Simon Cheng.

Cheng was a member of our board of directors through February 19, 2017 and an employee of the Company through June 30, 2018 and rejoined the Company on August 5, 2019.

Yeh-Mei Cheng is also the mother of Jennifer Cheng, a current member of our board of directors.

Cheng was a member of our board of directors through February 19,

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2017 and an employee of the Company through June 30, 2018 and rejoined the Company on August 5, 2019.

Schema Cheng is also the mother of Jennifer Cheng, a current member of our board of directors.

LEGAL MATTERS

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SUBSEQUENT EVENTS

January 2020 Equity Offering

In January 2020, we retained H.C.

Wainwright & Co., LLC to act as our exclusive placement agent in connection with the sale of 3,441,803 shares of the Company’s common stock to certain institutional investors, at a purchase price of $0.674 per share, in a registered direct offering.

We also sold the same institutional investors unregistered warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant.

We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement, and we also paid clearing fees of $13 thousand .

Proceeds to us, before expenses, from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $2.5 million .

In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ( $275 thousand ) was primarily used to reduce the outstanding principal amount of the Iliad Note.

Conversion of Convertible Notes into Series A Preferred Stock

Pursuant to their terms, on January 16, 2020, following approval of certain amendments to our certificate of incorporation by our stockholders, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $1.8 million converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of Series A Preferred Stock, which is convertible on a one-for-one basis into shares of our common stock.

Recent Global Developments

In December 2019, a novel strain of corona-virus began to impact the population of Wuhan, China, where several of our suppliers are located.

We rely upon these facilities to support our business in China, as well as to export components for use in products in other parts of the world.

While the closures and limitations on movement in the region are expected to be

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

temporary, the duration of the production and supply chain disruption, and related financial impact, cannot be estimated at this time.

Should the production and distribution closures continue for an extended period of time, the impact on our supply chain in China and globally could have a material adverse effect on our results of operations and cash flows.

On April 17, 2020, the Company was granted a loan from KeyBank National Association (“KeyBank”) in the amount of approximately $ 795 thousand, pursuant to the PPP under Division A of the CARES Act, which was enacted on March 27, 2020.

The funds were received on April 20, 2020.

Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

The Company believes it has used the loan for qualifying expenses.

The entire principal balance and interest were forgiven on February 11, 2021.

The forgiveness income will be recorded as other income in the Consolidated Statements of Operations during 2021.

SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8.

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( amounts in thousands, except per share amounts )

Net loss per share (basic and diluted)

Quarter Third

Quarter Second

Quarter First

Net sales $ 3,746 $ 5,964 $ 3,335 $ 3,783

Gross profit 1,434 1,376 1,343 1,032

Net income (loss) 65 ( 1,165 ) ( 4,340 ) ( 541 )

Net income (loss) per common share attributable to common stockholders - basic 1 :

$ 0.01 $ ( 0.35 ) $ ( 1.36 ) $ ( 0.18 )

Net income (loss) per common share attributable to common stockholders - diluted 1 :

$ 0.01 $ ( 0.35 ) $ ( 1.36 ) $ ( 0.18 )

Weighted average shares used in computing net income (loss) per common share 2 :

Basic 3,491 3,308 3,192 3,086

Diluted 4,307 3,308 3,192 3,086

Quarter Third

Quarter Second

Quarter First

Net sales $ 3,531 $ 2,915 $ 3,082 $ 3,177

Gross profit 957 1,028 ( 109 ) 98

Net loss ( 1,308 ) ( 946 ) ( 2,254 ) ( 2,865 )

Net loss per common share (basic and diluted) 1

$ ( 0.53 ) $ ( 0.38 ) $ ( 0.91 ) $ ( 1.18 )

Shares outstanding (basic and diluted) 2

2,480 2,474 2,467 2,425

1 In accordance with Topic 260 "Earnings Per Share" , net income has been allocated to holders of common shares and participating securities including preferred shares and warrants, accordingly.

Earnings per share disclosed above utilizes income attributable to common shareholders after this required allocation.

2 Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data