What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-17 compared with 2021-03-25 · 390 added, 369 removed, 760 unchanged (50% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reports of Independent Registered Public Accounting Firms 41

Reports of Independent Registered Public Accounting Firm (PCAOB ID 1808 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

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Restructured lease, right-of-use asset — 107

Other assets — 405

Total assets $ 14,391 $ 12,397

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Finance lease liabilities 1 3

Convertible notes — 1,700

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

Streeterville note, net of discount and loan origination fees 1,719 —

PPP loan — 529

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(amounts in thousands except share data)

Other liabilities — 14

Operating lease liabilities, net of current portion 26 318

Restructured lease liabilities, net of current portion — 168

Finance lease liabilities, net of current portion — 1

PPP loan, net of current maturities — 266

Iliad note, net of current maturities — 109

Total liabilities 8,182 8,142

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Preferred stock, par value $ 0.0001 per share:

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

5,000,000 shares ( 3,300,000 shares designated as Series A Convertible Preferred Stock) at December 31, 2021 and December 31, 2020

Issued and outstanding:

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

Common stock, par value $ 0.0001 per share:

876,447 shares at December 31, 2021 and 2,597,470 shares at December 31, 2020

Common stock, par value $ 0.0001 per share:

50,000,000 shares at December 31, 2021 and December 31, 2020

Issued and outstanding:

3,525,374 at December 31, 2020 and 2,485,684 * at December 31, 2019

6,368,549 shares at December 31, 2021 and 3,525,374 shares at December 31, 2020

Additional paid-in capital 144,953 135,113

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Total liabilities and stockholders' equity $ 14,391 $ 12,397

*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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Interest expense 792 481

Gain on forgiveness of PPP loan ( 801 ) —

Loss on extinguishment of debt — 276

Other income - employee retention tax credit ( 876 ) —

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

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Loss from operations before income taxes ( 7,887 ) ( 5,986 )

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

Benefit from income taxes ( 1 ) ( 5 )

Net loss $ ( 7,886 ) $ ( 5,981 )

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

Adjustment to beginning accumulated deficit upon adoption of Topic 842

— — — — — — ( 186 ) ( 186 )

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 — — — — — ( 2 ) — ( 2 )

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

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Issuance of common stock upon the exercise of warrants — — 237 — 801 — — 801

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 — — — — —

Issuance of common stock upon conversion from preferred stock ( 1,721 ) — 344 — — — — —

Stock-based compensation — — — — 429 — — 429

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Balance at December 31, 2021 876 $ — 6,368 $ — $ 144,953 $ ( 3 ) $ ( 138,741 ) $ 6,209

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

Other income - employee retention tax credit ( 876 ) —

Gain on forgiveness of PPP loan ( 801 ) —

Depreciation 188 184

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Acquisitions of property and equipment ( 443 ) ( 223 )

Proceeds from the sale of property and equipment — 3

Net cash used in investing activities ( 443 ) ( 223 )

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Payments for deferred financing costs & termination fees ( 30 ) ( 320 )

Proceeds from the Iliad Note — 1,115

Payments on the Iliad Note — ( 1,306 )

Proceeds from convertible notes — 1,700

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

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

Proceeds from the Streeterville Note 1,515 —

Net payments on credit line borrowings - Austin Facility — ( 719 )

Net (payments on) proceeds from credit line borrowings - Credit Facilities ( 181 ) 2,459

Net cash provided by financing activities 10,712 4,160

(continued on the following page)

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

ENERGY FOCUS, INC.

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(amounts in thousands)

Effect of exchange rate changes on cash — 16

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

Net increase in cash and restricted cash 504 1,486

Cash and restricted cash, beginning of year 2,178 692

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Energy Focus, Inc.

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.

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

We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products and UVCD products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the fourth quarter of 2021.

Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and human health and wellness 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, 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-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications.

In late 2020, we announced the launch of our UVCD product portfolio.

With initial development complete and two products now brought to market, we anticipate the development of additional UVCD products in 2022.

The LED lighting industry continues to be characterized by increasing challenges in differentiating product offerings, competition and price erosion.

We have been experiencing these industry forces in both our military business since 2016 and in our commercial segment where we once commanded significant price premiums for our flicker-free TLEDs with primarily 10-year warranties.

Since April 2019, we have focused on redesigning our products for lower costs and consolidating our supply chain for stronger purchasing power where appropriate in order to price our products more competitively.

Despite these efforts, the pricing of our legacy products remains at a premium to the competitive range and we expect aggressive pricing actions and commoditization to continue to be a headwind until our more differentiated new products ramp in volume.

In more recent years, we have focused on redesigning our products for lower costs and consolidating our supply chain in order to price our products more competitively.

Despite these efforts, our legacy products continue to face aggressive pricing competition.

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 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.

In addition to continuous cost reductions, our strategy to combat these trends is to move up the value chain, with more innovative and differentiated products and solutions that support a premium.

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 informed more impactful product development efforts that could eventually translate into larger addressable markets and greater sales growth for us.

During 2021, we continued to see certain benefits from the relaunch efforts (described below) that began in 2019, 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 2020 and into 2021, 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:

We launched our EnFocus™ platform during the second quarter of 2020 and continued to receive positive feedback from the market.

The EnFocus™ powerline control 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.

Prior to James Tu returning as Chief Executive Officer and Chairman at the beginning of April 2019, the Company had experienced significant sales declines, operating losses and increases in its inventory.

Immediately upon Mr.

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 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

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 replacement LED lamps, 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 the consumer and the commercial and industrial markets in the first quarter of 2020.

In late 2020, we announced the nUVo™ portable disinfection devices for offices and homes.

Sales of these products began during the fourth quarter of 2021.

Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory.

Beginning in 2019, significant restructuring efforts were undertaken.

The Company 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 (“Board of Directors”) and the executive team, and recruited new departmental leaders across the Company.

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

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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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Therefore, the product warranties are not a separate performance obligation and are accounted for as described below.

Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

Sales taxes assessed by governmental authorities and collected by us are accounted for on a net basis and are excluded from net sales.

A disaggregation of product net sales is presented in Note 12, “Product and Geographic Information.”

Cash and restricted cash

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

At December 31, 2021, we had cash of $ 2.7 million and at December 31, 2020, we had cash and restricted cash of $ 2.2 million on deposit with financial institutions located in the United States.

The December 31, 2020 cash balance of $ 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.

Please refer to Note 4, “Leases,” for additional information.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The assessment is both quantitative and qualitative.

During 2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components.

This resulted in a net increase of our gross inventory levels of $ 2.4 million.

We had an increase of excess inventory reserves of $ 0.2 million as compared to 2020.

The assessment for excess and obsolete inventories for 2020 not only included both quantitative and qualitative components, but a COVID-19 pandemic impact analysis as well.

Throughout 2020, we applied 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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Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value.

During the first eleven months of 2019, we evaluated and monitored the creditworthiness of each customer on a case-by-case basis.

However, during December 2019, we transitioned to an account receivables insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention.

This third party also provides credit-worthiness ratings and metrics that significantly assists us in evaluating the credit worthiness of both existing and new customers.

We utilize a third-party account receivables insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention.

This third party also provides credit-worthiness ratings and metrics that significantly assist us in evaluating the credit worthiness of both existing and new customers.

We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated amount of account receivables that will not be collected.

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Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

At December 31, 2020 and 2019, we have recorded a full valuation allowance against our net deferred tax assets in the United States due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.

At December 31, 2021 and 2020, we have recorded a full valuation allowance against our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.

The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

December 2021 Private Placement

In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $ 3.52 per share.

We also sold to the same institutional investors (i) pre-funded warrants (“Pre-Funded Warrants”) to purchase 85,228 shares of common stock at an exercise price of $ 0.0001 per share and (ii) warrants (collectively with the Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $ 3.52 per share.

We paid the placement agent commissions of $ 360 thousand, plus $ 42 thousand in expenses, in connection with the December 2021 Private Placement and we also paid legal, accounting and other fees of $ 97 thousand related to the December 2021 Private Placement.

Total offering costs of $ 499 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, 2021.

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.

Net proceeds to us from the December 2021 Private Placement were approximately $ 4.0 million.

We determined the exercise price of the Pre-Funded Warrants to be nominal and, as such, have considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for the purposes of calculating basic earnings per share (“EPS”).

As of December 31, 2021, December 2021 Warrants to purchase an aggregate of 1,363,641 shares remained outstanding, with a weighted average exercise price of $ 3.30 per share.

None of the December 2021 Warrants were exercised as of December 31, 2021.

In January 2022, all of the Pre-Funded Warrants were exercised.

The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $ 4.5 million in the aggregate.

June 2021 Equity Offering

In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $ 5.05 per share (the “June 2021 Equity Offering”).

We paid the placement agent commissions of $ 400 thousand, plus $ 51 thousand in expenses, in connection with the June 2021 Equity Offering and we also paid legal and other fees of $ 19 thousand related to the June 2021 Equity Offering.

Total offering costs of $ 470 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021.

Net proceeds to us from the June 2021 Equity Offering were approximately $ 4.5 million.

January 2020 Equity Offering

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 (the, “Investor Warrants”) in a concurrent private placement (together with the concurrent registered direct offering, the “January 2020 Equity Offering”) for a purchase price of $ 0.625 per warrant.

We paid the placement agent commissions of $ 193 thousand plus $ 50 thousand in expenses in connection with the January 2020 Equity Offering and we also paid legal, accounting and other fees of $ 231 thousand related to the January 2020 Equity 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, 2021 and 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 (together with the Investor Warrants, the “January 2020 Warrants”).

Net proceeds to us from the January 2020 Equity Offering were approximately $ 2.3 million.

In accordance with the terms of the Iliad Note (as defined below in Note 8, “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.

As of December 31, 2021, January 2020 Warrants issued to purchase an aggregate of 229,414 shares remain outstanding with a weighted average exercise price of $ 3.67 per share.

During the twelve months ended December 31, 2021, 237,892 January 2020 Warrants were exercised resulting in total proceeds of $ 801 thousand.

The exercise of the remaining January 2020 Warrants outstanding could provide us with cash proceeds of up to $ 841 thousand in the aggregate.

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

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

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Due to a potential cash settlement upon occurrence of a fundamental transaction within the January 2020 Equity Offering warrant agreement, the January 2020 Warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three quarters of 2020.

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

As such, during the fourth quarter of 2020, the warrant liability was fair-valued through the modification date and then was reclassified into equity and the January 2020 Warrants are no longer subject to re-measurement at each balance sheet date.

Please also refer to Note 10, “Stockholders’ Equity”.

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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.

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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):

A roll-forward of fair value measurements using significant unobservable inputs (Level 3) for the January 2020 Warrants issued in the January 2020 Equity Offering is as follows (in thousands):

Twelve months ended December 31, 2020

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Balance December 31, 2020 $ —

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-lived assets

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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 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.

We utilize 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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

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Navy comprised approximately 38 % 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.

In 2020, two customers accounted for 62 % of net sales and total net sales of products to the U.S.

Navy represented 53 % of net sales.

• At December 31, 2021, a distributor to the U.S.

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

Department of Defense accounted for 20 % of our net trade accounts receivable and a shipbuilder for the U.S.

Navy accounted for 36 % of our net trade accounts receivable.

At December 31, 2020, 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.

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.

We require substantial amounts of purchased materials from selected vendors.

With specific materials, all of our purchases are from a single vendor.

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 COVID-19 pandemic, and changes in exchange rates and worldwide price and demand levels.

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.

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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 accounted for approximately 29 % of our total expenditures for the twelve months ended December 31, 2021.

At December 31, 2021, this same offshore supplier accounted for approximately 60 % of our trade accounts payable balance.

• 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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Product development

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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):

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*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.

As a result of the net loss we incurred for the year ended December 31, 2021, options, warrants and convertible preferred stock representing approximately 51 thousand, 47 thousand and 260 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.

We determined the exercise price of the Pre-Funded Warrants to be nominal and, as such, have considered the approximately 85 thousand shares underlying them to be outstanding effective December 16, 2021, for the purposes of calculating basic EPS.

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 EPS calculation as their inclusion would have been anti-dilutive.

Stock-based compensation

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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, 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.

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

Advertising expenses

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Advertising expenses were $ 0.4 million and $ 0.1 million for the years ended December 31, 2021 and 2020, 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 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.

Product warranties

We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten years and from one to five years for UVCD products.

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.

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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Accrued warranty reserve at the end of the period $ 295 $ 227

Recently adopted accounting pronouncements

In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2021-10, Government Assistance (Topic 832) (“ASU 2021-10”), in order to increase the transparency of government assistance by requiring the disclosure of:

(i) types of assistance;

(ii) an entity’s accounting for the assistance;

and (iii) the effect of the assistance on an entity’s financial statements.

ASU 2021-10 is effective for all entities (including smaller reporting companies) for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted.

The amendments in ASU 2021-10 should be applied either prospectively to all transactions within scope reflected in the financial statements after the effective date, or retrospectively to those same transactions.

The Company has early adopted the new standard effective as of December 31, 2021.

Refer to Note 13 “Other Income,” for additional information.

In August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), to simplify accounting for certain financial instruments with characteristics of liabilities or equity.

ASU 2020-06 is effective for smaller reporting companies for fiscal years beginning after December 15, 2023 and interim periods therein.

Early adoption is permitted beginning January 1, 2021.

The new guidance:

(i) eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments;

(ii) simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity;

(iii) introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity;

and (iv) amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments.

The Company early adopted the new standard effective January 1, 2021.

The adoption of ASU 2020-06 did not have an impact on the Company’s financial position or results of operations upon adoption.

Recently issued accounting pronouncements

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

In June 2016, the FASB issued ASU No.

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

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We are in the process of evaluating the impact of the standard.

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):

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 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.

2016-02, Leases (Topic 842) , which supersedes the current lease accounting requirements.

Additionally, in July 2018, the FASB issued ASU No.

2018-11, Leases (Topic 842):

Targeted Improvements , which simplifies adoption of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842).

The new standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months.

It also requires lessees to disclose certain key information about lease transactions.

Upon implementation, an entity’s lease payment obligations will be recognized at their estimated present value along with a corresponding right-of-use asset.

Lease expense recognition will be generally consistent with current practice.

The Company adopted this guidance as of January 1, 2019 using the required modified retrospective method with the non-comparative transition option.

The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date.

The Company also applied the lease term and impairment hindsight transitional practical expedients.

The Company has chosen to apply the following accounting policy practical expedients:

to not separate lease and non-lease components to new leases as well as existing leases through transition;

and the election to not apply recognition requirements of the guidance to short-term leases.

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.

The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under ASC Topic 420, Exit or Disposal Cost Obligations (“Topic 420”), and impairment charges totaling $ 0.3 million and $ 0.2 million, respectively.

Refer to Note 4, “Leases” below for additional disclosures relating to the Company’s leasing arrangements.

RESTRUCTURING

Due to our financial performance in 2021 and 2020, including net losses of $ 7.9 million and $ 6.0 million, respectively, and total cash used in operating activities of $ 9.8 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, 2021.

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

Immediately upon Mr.

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 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 $ 0.2 million during 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.

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.

The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value.

Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially.

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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory.

Beginning in 2019, significant restructuring efforts were undertaken.

The Company 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 and the executive team, and recruited new departmental leaders across the Company.

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

For the twelve months ended December 31, 2021 and 2020, we recorded net restructuring credits of approximately $ 21 thousand and $ 60 thousand, respectively, 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.

The lease obligation on our former New York, New York office was settled as of June 30, 2021.

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

The recorded value of the ongoing lease obligations was based on the remaining lease term and payment amount, discounted to present value.

Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period were measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially.

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):

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Accretion of lease obligations 2

Reclassification upon adoption of Topic 842 ( 273 )

Payments ( 29 )

Balance at December 31, 2020 $ 11

Accretion of lease obligations 2

Payments ( 11 )

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

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

substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2020.

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 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.

As a result of the restructuring actions and initiatives described above, we have tailored our operating expenses to be more in line with our expected sales volumes, however, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2021.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Throughout 2020 and 2021, we have continued to evaluate and assess strategic options as we seek to achieve profitability.

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

We announced the following UVCD products beginning in the fourth quarter of 2020:

nUVo™ Tower portable air disinfection device for offices and homes and nUVo™ Traveler portable personal air disinfection device for in-vehicle and smaller spaces.

Initial sales of nUVo™ devices began in the fourth quarter of 2021, and we anticipate the development of additional products in 2022.

We plan to achieve profitability by growing our sales through existing lighting, new lighting control systems and UVCD products, and by continuing to refine and 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, as well as our emerging consumer market focus.

As described in Note 10, “Stockholders’ Equity,” we raised approximately $ 4.0 million of net proceeds upon the issuance of common stock and December 2021 Warrants in connection with the December 2021 Private Placement, approximately $ 4.5 million of net proceeds upon the issuance of common stock in connection with the June 2021 Equity Offering, and approximately $ 2.3 million of net proceeds upon the issuance of common stock and January 2020 Warrants.

As described in Note 8, “Debt”, in April 2021, we obtained approximately $ 1.5 million of bridge financing, net and in August 2020, we entered into two new revolving credit facilities, which allow for expanded borrowing capacity, which capacity was further increased by an April 20, 2021 amendment to one of the facilities.

The restructuring and cost cutting initiatives implemented during 2020 and continuing into 2021, as well as the December 2021 Private Placement, the June 2021 Equity Offering and the January 2020 Equity Offering that significantly strengthened our balance sheet, the Paycheck Protection Program (“PPP”) loan we obtained in April 2020, our enhanced debt capacity due to the debt refinancing in August 2020, the credit facility capacity increase and bridge financing in April 2021, and the funds we received, and expect to receive, related to the Employee Retention Tax Credit (“ERTC”), see Note 13, “Other Income” for details), were all 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, markets, and customers into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, numerous interruptions and cost increases in the supply chain globally, and the ongoing and lingering economic impact from the COVID-19 pandemic that has significantly diminished the interest and activities for our customers’ lighting retrofit projects until occupancy returns to more normal levels, among other factors.

Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, leading to a buildup of inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining components.

Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility.

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

• 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;

• loans or other debt instruments may have terms 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 the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.

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 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.

Additionally, if we are unable to find a permanent Chief Executive Officer, it may be more difficult to obtain additional financing on satisfactory terms or at all.

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 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 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 .

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, 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.

On August 17, 2020, we received a letter from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) 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, filed on August 13, 2020, reflected that our stockholders’ equity as of June 30, 2020 was $ 1,714,000 .

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.

In accordance with one part of the plan submitted to the Staff, we successfully modified our outstanding January 2020 Warrants and in December 2020, we reclassified $ 1.4 million from warrant liability into equity.

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.

At December 31, 2020, our stockholders’ equity was $ 4,255,000 , satisfying the Minimum Stockholders’ Equity Rule.

At December 31, 2021, our stockholders’ equity was $ 6,209,000 .

On December 21, 2021, we received a letter from the Staff notifying the Company that, as a result of the resignation of a director, as previously disclosed, from the Board of Directors and the Audit and Finance Committee, we are not in compliance with Nasdaq Listing Rule 5605, which requires that our Audit and Finance Committee be comprised of at least three directors, all of whom are independent pursuant to the rules of Nasdaq and applicable law.

The notification letter had no immediate effect on the Company’s listing on the Nasdaq Capital Market.

The letter further provided that, pursuant to Nasdaq Listing Rule 5605(c)(4), we are entitled to a cure period to regain compliance with Nasdaq Listing Rule 5605, which cure period will expire on the earlier of the date of our next annual shareholders’ meeting and November 11, 2022, or, if the next annual shareholders’ meeting is held before May 10, 2022, then the cure period will expire on May 10, 2022.

The Board of Directors has commenced a search for a new independent director, who would be expected to serve on our Audit and Finance Committee, or the Board of Directors will otherwise appoint a current independent director to fill the vacancy on the committee.

The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2026 under which it is responsible for related maintenance, taxes and insurance.

The Company has one finance lease containing a bargain purchase option upon expiration 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 option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option.

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

In accordance with ASC 842, Leases (“Topic 842”), the related right-of-use asset and lease liability was updated at the time of modification in January 2021.

The present value of the lease obligation for this lease was calculated using an incremental borrowing rate of 15.93 %, which was the Company’s blended borrowing rate (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads Financial Group, LLC (as described below in Note 8, “Debt”) and Factors Southwest L.L.C (as described below in Note 8, “Debt”).

The present value of the remaining lease obligation was calculated using an incremental borrowing rate (“IBR”) of 7.25 % (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its former revolving line of credit with Austin Financial Services, Inc.

(the “Austin Facility”).

The weighted average remaining lease term for operating and finance leases is 0.8 years and 0.3 years, respectively.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The weighted average remaining lease term for operating, restructured and finance leases is 1.6 years, 0.5 years, and 1.3 years, respectively.

The Company had two restructured leases with sub-lease components for the New York, New York and Arlington, Virginia offices that were closed in 2017.

The New York, New York lease expires in 2021 and the Arlington, Virginia lease expired in September 2019.

At the “cease use” date in 2017, the Company recorded the present value of the future minimum payments under the leases and costs that continue to be incurred with no economic benefit to the Company in accordance with Topic 420.

The Company entered into sub-leases for both offices and included the estimated sub-lease payments as an offset to the remaining lease obligations, as required by Topic 420 at that time.

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 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 Company had one restructured lease with a sub-lease component for the New York, New York office that was closed in 2017.

The lease expired in June 2021.

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

Per the terms of the lease agreement, the restrictions on the cash were lifted in September 2021 and the cash was returned to the Company.

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 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.

As a result of this evaluation, the Company determined that the operating lease right-of-use asset for the Solon, Ohio operating lease was impaired upon the adoption of Topic 842.

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.

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, 2021 and 2020.

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

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Restructured lease income, net ( 26 ) ( 35 )

Finance lease cost

Interest of lease liabilities — 1

Finance lease cost, net — 1

Total lease cost, net $ 420 $ 457

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Total finance lease liabilities $ 1 $ 4

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

2021 $ 622 $ 170 $ ( 136 ) $ 3

2022 329 — — 1

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future minimum lease payments required under operating and finance leases for each of the years 2022 through 2026 are as follows (in thousands):

Operating Leases Finance Lease

2022 $ 332 $ 1

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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):

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Reduction due to sold inventory 125 343

Write-off for disposed inventory — 536

Reserves for excess, obsolete, and slow-moving inventories $ ( 3,050 ) $ ( 2,894 )

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.

During the second half of 2019, management negotiated cost reduction terms with suppliers on certain products.

This initiative, in conjunction with a price adjustment strategy on products we have in excess inventory, resulted in a net reduction of our gross inventory levels and excess inventory reserves of $ 1.9 million compared to 2018.

Throughout 2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components.

This resulted in a net increase of our gross inventory levels of $ 2.4 million and excess inventory reserves of $ 0.2 million as compared to 2020.

During 2020, we applied 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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT

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Finance lease right-of-use asset 13 13

UV - Robots (useful life 5 years)

Construction in progress 135 140

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Property and equipment, net $ 675 $ 420

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.

The net carrying value of the property and equipment of the office was immaterial.

Depreciation expense was $ 0.2 million for both of the years ended December 31, 2021 and 2020.

There were no impairment charges for property and equipment during 2021 and 2020.

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Prepaid rent 74 80

Short-term deposits - non-inventory 18 —

Restricted cash — 342

ERTC funds 445 —

Total prepaid and other current assets $ 924 782

ACCRUED LIABILITIES

Accrued current liabilities consisted of the following (in thousands):

At December 31,

Accrued legal and professional fees $ 149 $ 215

Accrued payroll and related benefits 885 360

Accrued sales commissions 95 32

Accrued restructuring 11 24

Accrued warranty reserve 227 195

Accrued liabilities 45 186

Total accrued liabilities $ 1,412 $ 1,012

Credit Facilities

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

On August 11, 2020, we entered into two debt financing arrangements (together, the “Credit Facilities”) that allow for expanded borrowing capacity at a lower blended borrowing cost.

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 %.

Borrowings under the Inventory Facility are permitted up to the lower of (i) $ 3.0 million, which was subsequently increased to $ 3.5 million as described below, 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.

On April 20, 2021, the Company and the IF Lender entered into an amendment to the Inventory Loan Agreement to increase the maximum amount that may be available to the Company from $ 3.0 million to $ 3.5 million, subject to the borrowing base as set forth in the Inventory Loan Agreement.

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 ( 0.21 % and 0.24 % at December 31, 2021 and

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2020, respectively) and is also subject to a service fee of 1 % per month.

The annualized interest rate at December 31, 2021 and 2020, which includes interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was 22.4 % and 23.6 %, respectively.

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.

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.

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).

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(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

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 %.

Borrowings under the Receivables Facility are permitted up to the lower 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 ( 3.25 % at both December 31, 2021 and 2020) plus (ii) 2 %.

At December 31, 2021 and 2020, the annualized interest rate, which includes interest fees and the annual facility fee, was 8.0 % and 7.9 %, respectively.

The annualized interest rate on the collateral management fee was 5.9 % at both December 31, 2021 and 2020.

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.

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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.

Borrowings under the Inventory Facility were $ 1.2 million and $ 1.3 million at December 31, 2021 and 2020, respectively.

Borrowings under the Receivables Facility were $ 1.0 million at both December 31, 2021 and 2020.

Borrowings under the Credit Facilities are recorded in the Consolidated Balance Sheet as of December 31, 2021 and 2020 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $ 84 thousand and $ 121 thousand for the Inventory Facility and $ 24 thousand and $ 40 thousand for the Receivables Facility as of December 31, 2021 and 2020, respectively.

The Credit Facilities replaced the 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.

The Austin Facility charged 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 0.5 % 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.

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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.

Streeterville Note

On April 27, 2021, we entered into a note purchase agreement with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $ 1.7 million (the “Streeterville Note”).

The Streeterville Note was issued with an original issue discount of $ 194 thousand and Streeterville paid a purchase price of $ 1.5 million for the Streeterville Note, after deduction of $ 15 thousand of Streeterville’s transaction expenses.

The Streeterville Note has a maturity date of April 27, 2023, and accrues interest at 8 % per annum, compounded daily, on the outstanding balance.

The Company may prepay the amounts outstanding under the Streeterville Note at a premium, which is

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5 % during the first three months and 10 % thereafter.

Prepayments at the reduced rate in the first three months are limited to 50 % of the outstanding balance.

Beginning on November 1, 2021, Streeterville may require the Company to redeem up to $ 205 thousand of the Streeterville Note in any calendar month.

The Company has the right on three occasions to defer all redemptions that Streeterville 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 Streeterville Note by 1.5 %.

The Company exercised this right twice during the fourth quarter of 2021.

The total liability for the Streeterville Note, net of discount and financing fees, was $ 1.7 million at December 31, 2021.

Unamortized loan discount and debt issuance costs were $ 43 thousand at December 31, 2021.

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

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 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 and accrued interest at a rate of 1 % per annum.

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

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 entire principal balance and interest were forgiven by the Small Business Administration on February 11, 2021.

The $ 801 thousand forgiveness income was recorded as other income in the Consolidated Statements of Operations during the year ended December 31, 2021.

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 year ended December 31, 2020.

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

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.

Convertible Notes

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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.

During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 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 authorized 2,000,000 shares of Series A Preferred Stock (the “Original Series A Certificate of Designation”).

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,

The Original Series A Certificate of Designation was amended on January 15, 2020 following Stockholder

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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”).

In any such vote, 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.

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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”).

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.

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.

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, 2021, we had approximately $ 1.7 million in outstanding purchase commitments for inventory, of which $ 1.5 million is expected to ship in the first quarter of 2022, and $ 0.2 million in the second quarter of 2022 and thereafter.

STOCKHOLDERS’ EQUITY

December 2021 Private Placement

In December 2021, we completed the December 2021 Private Placement with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $ 3.52 per share.

We also sold to the same institutional investors (i) Pre-Funded Warrants to purchase 85,228 shares of common stock at an exercise price of $ 0.0001 per share and (ii) warrants (collectively with the Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $ 3.52 per share.

We paid the placement agent commission of $ 360 thousand plus $ 42 thousand in expenses in connection with the December 2021 Private Placement and we also paid legal, accounting and other fees of $ 97 thousand related to the December 2021 Private Placement.

Total offering costs of $ 499 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, 2021.

Net proceeds from the December 2021 Private Placement were approximately $ 4.0 million.

As of December 31, 2021, December 2021 Warrants to purchase an aggregate of 1,363,641 shares remained outstanding, with a weighted average exercise price of $ 3.30 per share.

None of the December 2021 Warrants were exercised as of December 31, 2021.

In January 2022, all of the Pre-Funded Warrants were exercised.

The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $ 4.5 million in the aggregate.

As of December 31, 2021, we had the following outstanding December 2021 Warrants to purchase shares of common stock:

As of December 31, 2021

Number of Underlying Shares Exercise Price Expiration

Common Warrants 1,278,413 $ 3.5200 December 16, 2026

Pre-Funded Warrants 85,228 $ 0.0001 None

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

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.

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 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.

June 2021 Equity Offering

In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $ 5.05 per share.

Net proceeds to us from the June 2021 Equity Offering were approximately $ 4.5 million.

Preferred Stock

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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.

During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock.

The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group (under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC (“Fusion Park”) and 5 Elements Global Fund L.P.

(controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer and current member of the Board of Directors), as well as Brilliant Start Enterprise Inc.

(“Brilliant Start”) and Jag International Ltd.

(controlled affiliates of Gina Huang, a member of the Company's Board of Directors).

Upon conversion of their respective shares of Series A Preferred Stock in 2021, Fusion Park and Brilliant Start received 184,851 and 159,354 shares, respectively, of the Company’s 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”).

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

On March 29, 2019, the Company 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 undesignated preferred stock available for designation as Series A Preferred Stock.

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 at the Effective Time upon the filing of the Certificate of Amendment to 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

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.

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 financial statements for the twelve months ended December 31, 2020 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.

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.

Net proceeds to us from the sale of common stock and January 2020 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:

January 2020 Warrants issued to purchase an aggregate of 229,414 shares remain outstanding at December 31, 2021, with a weighted average exercise price of $ 3.67 per share.

During the twelve months ended December 31, 2021, 237,892 January 2020 Warrants issued were exercised resulting in total proceeds of $ 801 thousand.

The exercise of the remaining January 2020 Warrants outstanding could provide us with cash proceeds of up to $ 841 thousand in the aggregate.

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

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

As of December 31, 2021 and 2020, we had the following outstanding January 2020 Warrants to purchase shares of common stock:

As of December 31, 2021 As of December 31, 2020

Number of Underlying Shares Exercise Price Expiration

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

229,414 467,306

Warrant Classification

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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

The January 2020 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 January 2020 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.

Stock-based compensation

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The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 2.7 years as of December 31, 2021 and 3.1 years as of December 31, 2020.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock options

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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

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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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Cancelled ( 33,774 ) 9.56

Expired ( 5,505 ) 26.65

Exercised ( 12,157 ) 2.11

Outstanding at December 31, 2020 221,450 $ 3.45

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Cancelled ( 36,706 ) 5.35

Expired ( 1,650 ) 49.18

Exercised ( 4,225 ) 1.96

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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.

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

4,225 options were exercised during 2021 and 12,157 options were exercised during 2020.

The total intrinsic value of options outstanding and options exercisable at December 31, 2021 was $ 426 thousand and $ 191 thousand, respectively, which was calculated using the closing stock price at the end of the year of $ 4.27 per share less the option price of the in-the-money grants.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The options outstanding at December 31, 2021 have been segregated into ranges for additional disclosure as follows:

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267,109 8.2 $ 3.46 92,121 7.6 $ 3.28

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

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Vested ( 52,080 ) 5.46

Forfeited ( 1,255 ) 12.40

At December 31, 2021 2,400 $ 7.14

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At December 31, 2021 and 2020, respectively, there were no accrued interest and penalties related to uncertain tax positions.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the components of the provision for income taxes (in thousands):

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(Benefit from) provision for income taxes $ ( 1 ) $ ( 5 )

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Other 2.0 ( 0.5 )

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 2020, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $ 7.1 million additional federal net operating loss we recognized for the year.

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 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.

At December 31, 2021, we had net operating loss carry-forwards (“NOLs”) of approximately $ 125.4 million for federal income tax purposes ($ 77.2 million for state and local income tax purposes).

However, due to changes in our capital structure, approximately $ 71.0 million of the $ 125.4 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.

As a result of the Tax Cuts and Job Act of 2017 (the “Tax Act”), NOLs generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

These NOLs can no longer be carried back, but they can be carried forward indefinitely.

The $ 9.6 million and $ 7.1 million in federal net operating losses generated in 2021 and 2020 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.

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.

If not utilized, the NOLs generated prior to December 31, 2017 of $ 37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes.

Since we believe it is more likely than not that the benefit from NOLs will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 2021 and 2020, respectively.

We had no net deferred tax liabilities at December 31, 2021 or 2020, respectively.

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.

PRODUCT AND GEOGRAPHIC INFORMATION

We focus our efforts on the sale of LED lighting products, in particular our MMM and commercial tubular TLED lines of products and controls, into targeted vertical markets.

Our products are sold primarily in the United States through a combination of direct sales employees, lighting agents, independent sales representatives and distributors.

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

In 2020, we recognized various states tax benefits as a result of the adjustment from

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The CARES Act was enacted on March 27, 2020 and the Consolidated Appropriations Act (the “Relief Act”) was enacted on December 27, 2020 in the United States.

The key provisions of the CARES Act and the Relief Act, as applicable to the Company, include the following:

The ability to use NOLs to offset income without the 80% taxable income limitation enacted as part of the Tax Cuts and Jobs Act (“TCJA”) of 2017, and to carry back NOLs to offset prior year income for five years.

These are temporary provisions that apply to NOLs incurred in 2018, 2019 or 2020 tax years.

We did not recognize any tax benefit for the year ended December 31, 2021 related to our ability to carry back prior year losses, as well as projected current year losses, under the CARES Act to years with the previous 35% tax rate.

The ability to claim a current deduction for interest expense up to 50% of Adjusted Taxable Income (“ATI”) for tax years 2019 and 2020.

This limitation was previously 30% of ATI pursuant to the Tax Act, and will revert to 30% after 2020.

The Company has no current interest expense limitation.

In addition to the aforementioned provisions, the CARES Act also provided the following non-income tax provisions as applicable to the Company:

• The ability to defer the payment of the employer portion of social security taxes incurred between March 27, 2020 and December 31, 2020, with 50% of the deferred amount to be paid by December 31, 2021 and the remaining 50% to be paid by December 31, 2022.

For the year ended December 31, 2021, the Company has deferred $ 77 thousand of payroll taxes.

• The ability to claim an ERTC, which is a refundable payroll tax credit, subject to certain limitations.

Refer to Note 13, “Other Income” for details.

• The Company received approximately $ 795 thousand in PPP loans, which were forgiven in 2021.

The CARES Act provides that the loan forgiveness is tax-exempt for federal purposes.

Refer to Note 8, “Debt” for details.

PRODUCT AND GEOGRAPHIC INFORMATION

We focus our efforts on the sale of LED lighting and controls products and UVCD products in the commercial market and MMM, and began to expand our offerings into the consumer market in the fourth quarter of 2021.

Our products are sold primarily in the United States through a combination of direct sales employees, lighting agents, independent sales representatives and distributors, and via e-commerce with digital marketing strategies that profile our UVCD technologies.

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

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

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At December 31, 2021 and 2020, approximately 100 % of our long-lived assets, which consist of property and equipment, were located in the United States.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Employee Retention Tax Credit

The CARES Act, which was enacted on March 27, 2020, provides an ERTC that is a refundable tax credit against certain employer taxes.

The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act.

Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021.

Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021.

For purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the immediately preceding quarter to the corresponding calendar quarter in 2019.

The credit is taken against the Company’s share of Social Security Tax when the Company’s payroll provider files, or subsequently amends the applicable quarterly employer tax filings.

Under the amended guidelines, we are eligible to receive the ERTC for the second and third quarters of 2021.

As part of the filing of our employer tax filings for the third quarter of 2021, we applied for and received a refund of $ 431 thousand, and we amended our filing for the second quarter of 2021, for which we expect to receive an additional refund of approximately $ 445 thousand.

These amounts are recorded as other income in the Consolidated Statements of Operations during the year ended December 31, 2021, and the $ 445 thousand expected receivable is included in prepaid and other current assets in the Consolidated Balance Sheet as of December 31, 2021.

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

The funds were received on April 20, 2020, and accrued interest at a rate of 1 % per annum.

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

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 entire principal balance and interest were forgiven by the Small Business Administration on February 11, 2021.

The $ 801 thousand forgiveness income was recorded as other income in the Consolidated Statements of Operations during the year ended December 31, 2021.

RELATED PARTY TRANSACTIONS

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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.

Pursuant to the Note Purchase Agreement, Fusion Park and Brilliant Start purchased $ 580 thousand and

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$ 500 thousand, respectively, in principal amount of Convertible Notes.

In connection with the sale of Convertible Notes, Mr.

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Tu and the mother of Simon Cheng.

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.

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.

Schema Cheng is also the mother of Jennifer Cheng, a current member of our Board of Directors.

On January 11, 2022, our Board of Directors appointed Stephen Socolof, our Lead Independent Director, as Interim Chief Executive Officer to replace Mr.

On February 11, 2022, Mr.

Tu and the Company entered into a Separation and Release Agreement and Mr.

Tu resigned from the Board of Directors.

LEGAL MATTERS

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For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.

SUBSEQUENT EVENTS

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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Gross profit 189 563 393 553

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 :

Net loss ( 2,631 ) ( 1,140 ) ( 2,473 ) ( 1,642 )

Net loss per common share attributable to common stockholders (basic and diluted):

$ ( 0.50 ) $ ( 0.22 ) $ ( 0.59 ) $ ( 0.45 )

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

Weighted average shares used in computing net loss per common share (basic and diluted) 5,312 5,086 4,211 3,612

Quarter Third

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

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

Net loss per common share (basic and diluted) 1

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 )

Shares outstanding (basic and diluted) 2

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

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.

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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