What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-23 compared with 2022-03-17 · 382 added, 479 removed, 671 unchanged (56% of the section changed)

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Consolidated Statements of Comprehensive Loss for the years ended December 31, 2022 and 2021

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021

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

(the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”).

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows for the years then ended, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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

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

current inventory levels.

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

The assessment is both quantitative and qualitative.

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

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

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

Evaluating the reasonableness of management’s assumptions involved (i) comparing historical sales by product, used as a basis for future demand, to audited sales subledgers on a sample basis, (ii) holding discussions with senior management to determine whether strategic or operational changes in the business were consistent with the projections of future demand that were utilized as the basis for the reserves recorded, and (iii) corroborating management’s qualitative considerations of future demand through review of unfulfilled customer purchase orders as of year-end on a sample basis.

/s/ GBQ Partners, LLC

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Prepaid and other current assets 232 479

Receivable for claimed ERTC 445 445

Total current assets 7,242 13,424

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Operating lease, right-of-use asset 1,180 292

Restructured lease, right-of-use asset — 107

Total assets $ 8,498 $ 14,391

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Accrued sales commissions 76 57

Accrued restructuring — 11

Accrued warranty reserve 183 295

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Operating lease liabilities 198 325

Restructured lease liabilities — 168

Finance lease liabilities — 1

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

PPP loan — 529

Promissory notes payable, net of discounts and loan origination fees 2,618 1,719

Related party promissory notes payable 814 —

Credit line borrowings, net of loan origination fees 1,447 2,169

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Operating lease liabilities, net of current portion 1,029 26

Finance lease liabilities, net of current portion — 1

PPP loan, net of current maturities — 266

Total liabilities 8,975 8,182

STOCKHOLDERS’ EQUITY

STOCKHOLDERS' (DEFICIT) EQUITY

Preferred stock, par value $ 0.0001 per share:

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Issued and outstanding:

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

876,447 shares at December 31, 2022 and December 31, 2021

Common stock, par value $ 0.0001 per share:

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Accumulated deficit ( 149,020 ) ( 138,741 )

Total stockholders' equity 6,209 4,255

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

Total stockholders' (deficit) equity ( 477 ) 6,209

Total liabilities and stockholders' (deficit) equity $ 8,498 $ 14,391

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

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Cost of sales 6,286 8,167

Gross profit 1,698 5,185

Gross (loss) profit ( 318 ) 1,698

Operating expenses:

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Selling, general, and administrative 7,148 8,535

Loss on impairment 338 —

Restructuring — ( 21 )

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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

Other income ( 30 ) ( 876 )

Other expenses 56 65

Loss from operations before income taxes ( 10,275 ) ( 7,887 )

Benefit from income taxes ( 1 ) ( 5 )

Provision for (benefit from) income taxes 4 ( 1 )

Net loss $ ( 10,279 ) $ ( 7,886 )

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Basic and diluted 8,110 4,561

*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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ENERGY FOCUS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

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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 ( 1,721 ) — 344 — — — — —

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Issuance of common stock under employee stock option and stock purchase plans — — 46 — 6 — — 6

Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — — — — ( 1 ) — — ( 1 )

Issuance of common stock and warrants — — 1,313 1 3,499 — — 3,500

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Issuance of common stock upon the exercise of warrants — — 1,465 — — — — —

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

Stock-based compensation — — — — 117 — — 117

Stock issued in exchange transactions — — 657 — 304 — — 304

Net loss — — — — — — ( 10,279 ) ( 10,279 )

Balance at December 31, 2022 876 $ — 9,849 $ 1 $ 148,545 $ ( 3 ) $ ( 149,020 ) $ ( 477 )

*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 ) —

Other income ( 30 ) ( 876 )

Capitalized interest on promissory notes payable 40 —

Gain on forgiveness of PPP loan — ( 801 )

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Stock-based compensation 117 429

Change in fair value of warrant liabilities — 1,086

Provision for doubtful accounts receivable 14 6

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Amortization of loan discounts and origination fees 364 230

Loss on dispositions of property and equipment — 8

Loss on impairment 338 —

Change in operating assets and liabilities:

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Acquisitions of property and equipment ( 41 ) ( 443 )

Proceeds from the sale of property and equipment 25 —

Net cash used in investing activities ( 16 ) ( 443 )

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Offering costs paid on the issuance of common stock and warrants ( 334 ) ( 969 )

Proceeds from PPP loan — 795

Proceeds from exercise of stock options and purchases through employee stock purchase plan 80 100

Principal payments under finance lease obligations ( 1 ) ( 3 )

Proceeds from exercise of stock options and purchases through employee stock purchase plan 6 80

Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — ( 1 )

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

Payments on the Iliad Note — ( 1,306 )

Payments on the 2021 Streeterville Note ( 1,640 ) —

Proceeds from the 2021 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

Proceeds from the 2022 Streeterville Note 2,000 —

Proceeds from related party promissory notes payable 800

Proceeds from promissory notes payable 650 —

Payments for deferred financing costs ( 114 ) ( 30 )

Net payments on credit line borrowings - Credit Facilities ( 768 ) ( 181 )

Net cash provided by financing activities 4,099 10,712

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(amounts in thousands)

Net increase in cash and restricted cash 504 1,486

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

Cash and restricted cash, end of year $ 2,682 $ 2,178

Classification of cash and restricted cash:

Cash $ 2,682 $ 1,836

Restricted cash held in other assets — 342

Cash and restricted cash $ 2,682 $ 2,178

Net increase in cash ( 2,630 ) 504

Cash, beginning of year 2,682 2,178

Cash, end of year $ 52 $ 2,682

Supplemental information:

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Cash paid in year for income taxes $ 1 $ 4

Non-cash investing and financing activities:

Debt-to-equity exchange transactions $ 304 $ —

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

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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 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.

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

We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls 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 with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions.

Our goal is to be the human wellness lighting and LED 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.

In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products.

After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products.

We are also evaluating adjacent technologies including Gallium Nitride (“GaN”) based power supplies and additional market opportunities in energy solution products that promote sustainability.

The LED lighting industry has changed dramatically over the past several years due to increasing 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.

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.

In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively.

Despite these efforts, our legacy products continue to face aggressive pricing competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive.

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 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.

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 powerline 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 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 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 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.

In addition to continuously pursuing cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value.

Specific examples of these products we have developed include the RedCap ® , our emergency backup battery integrated TLED, EnFocus™, our new dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system for both commercial and residential markets, which as a result of supply chain challenges we now plan to launch in 2023.

Similarly, our plans to expand and enhance the performance of our RedCap ® product line are also now expected in 2023.

We continue to evaluate our sales strategy and believe our go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network to cover territories across the country, and listening to the voice of the customer, will lead to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.

The Company has 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.

The initial cost savings efforts to reduce costs to minimize cash usage 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.

During 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses.

Despite these cost-cutting efforts, the company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market.

At the beginning of 2022, the board of directors appointed our lead independent director to serve as interim chief executive officer and replace our previous chief executive officer.

During 2022, the company expanded its cost-reduction efforts, reduced its warehouse square footage, undertook an inventory reduction project, and dramatically reduced head count.

In February and September of 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

products industry experience.

We reinvested in our MMM sales channel with a strategic hire in May 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of our Company, which are summarized below, are consistent with U.S.

The significant accounting policies of our Company, which are summarized below, are consistent with accounting principles generally accepted in the United States (“U.S.

GAAP”) and reflect practices appropriate to the business in which we operate.

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

Pursuant to ASC 606, Revenue Recognition, contract assets and contract liabilities as of the beginning and ending of the reporting periods must be disclosed.

Please find below the breakout of the Company’s contracts:

At December 31,

2022 2021 2020

Gross Accounts Receivable $ 471 $ 1,254 $ 2,029

Allowance for Doubtful Accounts ( 26 ) ( 14 ) ( 8 )

Net Accounts Receivable $ 445 $ 1,240 $ 2,021

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

Cash and restricted cash

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.

At December 31, 2022, we had cash of $ 0.1 million and at December 31, 2021, we had cash of $ 2.7 million on deposit with financial institutions located in the United States.

ENERGY FOCUS, INC.

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The assessment is both quantitative and qualitative.

The reduction in warehouse space following the new lease agreement in July 2022 required both significant disposal of highly reserved, excess and obsolete inventory and a focus on selling down inventory on hand throughout 2022.

As a result of our initiatives to sell down inventory, we sold some inventory below cost.

The difference between cost and sale price was applied to remaining inventory and included in lower of cost or market component of the provision for excess and obsolete inventory calculation.

We limited inventory and component purchases to top selling products that maintained high inventory turnover.

This resulted in a net decrease of our gross inventory levels of $ 2.9 million and excess and obsolete inventory reserves of $ 0.5 million as compared to 2021.

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.

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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.

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.

From time to time, we have utilized 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 provided credit-worthiness ratings and metrics that significantly assisted 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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Financial Instruments

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.

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.

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”.

Fair value measurements

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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 January 2020 Warrants issued in the January 2020 Equity Offering is as follows (in thousands):

Twelve months ended December 31, 2020

Balance January 1, 2020 $ —

Issuance of warrants, January 2020 1,636

Settlements from exercise ( 1,317 )

Loss from change in fair value of warrants 1,086

Reclassification to equity upon modification ( 1,405 )

Balance December 31, 2020 $ —

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-lived assets

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

Certain risks and concentrations

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

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.

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

• In 2021, two customers accounted for 43 % of net sales, with sales to our primary distributor for the U.S.

Navy accounting for approximately 30 % and sales to a regional commercial lighting retrofit company accounting for approximately 13 % of net sales.

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

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

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

Navy comprised approximately 38 % of net sales for the same period.

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.

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 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.

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

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

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

Deposits paid on unfulfilled orders totaled $ 0.7 million and $ 0.8 million at December 31, 2021 and 2020, respectively.

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

• One offshore supplier 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.

Under the new lease standard, ASC 842, Leases (“Topic 842”), both operating and finance lease are capitalized on the balance sheet.

A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

A period of time may be described in terms of the amount of use of an identified asset.

An operating lease is a contract that permits the use of an asset without transferring

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the ownership rights of said asset.

A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, and the lessor meets all other contract obligations.

The leased asset is amortized over the life of the lease contract.

Product development

9 unchanged sentences

Basic and diluted weighted average common shares outstanding 8,110 4,561

*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, 2022, convertible preferred stock representing approximately 175 thousand shares of common stock were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.

We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the approximately 1,378,848 shares underlying them, for the purposes of calculating basic EPS.

The June 2022 Pre-Funded Warrants were all exercised in July 2022.

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.

We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, have considered the approximately 85 thousand shares underlying them to be outstanding effective December 31, 2021, for the purposes of calculating basic EPS.

Stock-based compensation

12 unchanged sentences

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.

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

One product was sold in 2020 with a twenty year warranty.

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.

One contract that expired in 2022 held a warranty of 10 years and this is driving the downward adjustment to existing warranties.

These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future.

7 unchanged sentences

Accrued warranty reserve at the end of the period $ 183 $ 295

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

3 unchanged sentences

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

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

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

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

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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):

Restructuring Liability

Balance at December 31, 2019 $ 38

Accretion of lease obligations 2

Payments ( 29 )

Balance at December 31, 2020 $ 11

Payments ( 11 )

Balance at December 31, 2021 $ —

The following is a reconciliation of the ending balance of our restructuring liability at December 31, 2021 and December 31, 2020 (in thousands):

Balance at December 31 $ — $ 11

Less, short-term restructuring liability — 11

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

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:

• obtaining financing from traditional or non-traditional investment capital organizations or individuals;

• obtaining funding from the sale of our common stock or other equity or debt instruments;

• obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all.

Obtaining additional funding contains risks, including:

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

• 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.

Certain risks and concentrations

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

From time to time, we have utilized a third-party accounts receivable insurance and credit assessment company.

• In 2022, two customers accounted for 27 % of net sales, with sales to our primary distributor for the U.S.

Navy accounting for approximately 13 % and sales to a regional commercial lighting retrofit company accounting for approximately 14 % of net sales.

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

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

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

Navy comprised approximately 30 % of net sales for the same period.

In 2021, two customers accounted for 43 % of net sales, with sales to our primary distributor for the U.S.

Navy accounting for approximately 30 % and sales to a regional commercial lighting retrofit company accounting for approximately 13 % of net sales.

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

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

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

Navy comprised approximately 38 % of net sales for the same period.

• At December 31, 2022, a distributor to the U.S.

Department of Defense accounted for 25 % of our net trade accounts receivable, when combined with our net trade accounts receivable to shipbuilders for the U.S.

Navy, total net accounts receivable related to U.S.

Navy sales is 30 % of total net accounts receivable.

At December 31, 2021, a distributor to 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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 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.

We require substantial amounts of purchased materials from selected vendors.

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

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

Deposits paid on unfulfilled orders totaled $ 0.6 million and $ 0.7 million at December 31, 2022 and 2021, respectively.

• One offshore supplier accounted for approximately 16 % of our total expenditures for the twelve months ended December 31, 2022.

At December 31, 2022, this same offshore supplier accounted for approximately 36 % of our trade accounts payable balance.

• 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.

The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2027 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 Company had one equipment finance lease containing a bargain purchase option which was exercised in July 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 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.

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

Additionally, as of March 25, 2022, the Company extended its headquarters real estate operating lease for manufacturing, warehouse and office space commencing July 1, 2022 to reflect a smaller footprint at reduced costs.

In accordance with “Topic 842”), as a result of the extensions, the related lease liabilities were remeasured and the right-of-use assets and corresponding lease liabilities were adjusted for each lease at the time of modification.

The present value of the lease obligation was calculated using an incremental borrowing rate of 15.93 % for the equipment lease and 16.96% for the real estate lease, 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.

The present value of the remaining lease obligation was calculated using an incremental borrowing rate of 7.25 % (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its revolving lines of credit at the time the leases were entered into.

The weighted average remaining lease term for operating leases is 4.4 years.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2021 and 2020.

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

For the years ended December 31,

Components of leases recognized in net income (loss):

Operating lease cost (income)

6 unchanged sentences

Restructured lease income, net — ( 26 )

Finance lease cost

Interest of lease liabilities 1 —

Finance lease cost, net 1 —

Total lease cost, net $ 412 $ 420

3 unchanged sentences

Operating lease right-of-use assets $ 1,180 $ 292

Restructured lease right-of-use assets — 107

Operating lease right-of-use assets, total 292 901

Operating lease liabilities 1,227 351

Restructured lease liabilities — 168

Operating lease liabilities, total 351 1,084

Finance Leases

7 unchanged sentences

Future minimum lease payments required under operating and finance leases for each of the years 2023 through 2027 are as follows (in thousands):

Operating Leases Finance Lease

2022 $ 332 $ 1

Operating Leases

Jan 2023 to Dec 2023 $ 386

Jan 2024 to Dec 2024 379

Jan 2025 to Dec 2025 385

Jan 2026 to Dec 2026 390

Jan 2027 to Dec 2027 197

Total future undiscounted lease payments 1,737

8 unchanged sentences

Financing cash flows from finance leases $ 1 $ 3

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESTRUCTURING

Due to our financial performance in 2022 and 2021, including net losses of $ 10.3 million and $ 7.9 million, respectively, and total cash used in operating activities of $ 6.7 million and $ 9.8 million, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2022.

As a result of the restructuring actions and initiatives described in Note 1, 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, 2022.

Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage both shortages of available components and longer lead times in obtaining components while balancing the development and implementation of an inventory reduction plan.

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.

• obtaining financing from traditional or non-traditional investment capital organizations or individuals;

• obtaining funding from the sale of our common stock or other equity or debt instruments;

• obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all.

Obtaining additional funding contains risks, including:

• additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, 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;

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

Along with the new additions to our Board of Directors, we hired a permanent Chief Executive Officer in September 2022, following a period of interim leadership by our Lead Independent Director after the departure of our previous Chief Executive Officer in February 2022 and Chief Financial Officer and Chief Operating Officer in May 2022.

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, could provide us with an ability to finance our operations through the next twelve months and may mitigate the substantial doubt about our ability to continue as a going concern.

On December 21, 2021, we received a letter from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) notifying us 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 were 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 our listing on the Nasdaq Capital Market.

The letter further provided that, pursuant to Nasdaq Listing Rule 5605(c)(4), we were entitled to a cure period to regain compliance with Nasdaq Listing Rule 5605.

On February 24, 2022, we announced the appointment of two additional independent directors, one of which, was appointed to fill the vacancy on the Audit and Finance Committee, bringing us into compliance with Nasdaq Listing Rule 5605.

On August 23, 2022, we received a letter from the Staff notifying us that we are not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price for our common stock was below the minimum $ 1.00 per share for 30 consecutive business days.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until February 20, 2023, to regain compliance with the Bid Price Rule.

During the initial compliance period, our common stock continued to trade on the Nasdaq Capital Market, but did not satisfy the Bid Price Rule.

On February 21, 2023, we received written notification (the “Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

were ineligible to obtain a second 180 calendar day period to regain compliance because we did not meet the Nasdaq Capital Market’s minimum $ 5,000,000 Stockholders’ Equity initial listing requirement as of September 30, 2022.

Pursuant to the Notification, our common stock is subject to delisting from Nasdaq pending our opportunity to request a hearing before the Nasdaq Hearings Panel (the “Panel”).

The Company intends to diligently pursue an appeal of the Notification before the Panel and regain compliance with the Bid Price Rule.

Under Nasdaq rules, the delisting of our common stock will be stayed during the pendency of the appeal and during such time, our common stock will continue to be listed on Nasdaq.

If we had not requested a hearing before the Panel by February 28, 2023, our common stock would have been scheduled for delisting at the opening of business on March 2, 2023.

On February 24, 2023, we submitted our request for an appeal before the Panel.

There can be no assurance that such appeal will be successful or that we will be able to regain compliance with the Bid Price Rule or maintain compliance with other Nasdaq listing requirements.

If our appeal is denied or if we fail to regain compliance with Nasdaq’s continued listing standards during any period granted by the Panel, our common stock will be subject to delisting from Nasdaq.

On November 16, 2022, 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 $ 2.5 million 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 Form 10-Q for the Quarterly Period Ended September 30, 2022 filed on November 10, 2022 reflected that our stockholders’ equity as of September 30, 2022 was $ 1.5 million.

Based on our timely submission of our plan to regain compliance, Nasdaq granted us an extension through May 15, 2023 to regain compliance with the Minimum Stockholders’ Equity Rule.

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):

9 unchanged sentences

Reduction due to sold inventory 323 125

Write-off for disposed inventory 512 —

Reserves for excess, obsolete, and slow-moving inventories $ ( 2,527 ) $ ( 3,050 )

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.

As part of our expense reduction initiatives, we significantly decreased our warehouse space beginning in the third quarter of 2022.

In connection with the space reduction, in the second quarter of 2022, we began disposing of a substantial portion of our excess and obsolete commercial finished goods inventory that was highly reserved, which effort continued into the fourth quarter of 2022.

The scraping of inventory primarily drove the decrease in excess inventory reserves of $ 0.5 million as compared to 2021.

We also focused on selling down inventory on hand and limited inventory and component purchases to top selling products with expected higher turnover.

This resulted in a net decrease of our gross inventory levels of $ 2.9 million.

We experienced significant global supply chain and logistics constraints during 2021, 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.

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Depreciation expense was $ 0.2 million for both of the years ended December 31, 2022 and 2021.

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

During the third quarter of 2022 it was determined that the mUVeTM ultraviolet-C light disinfection robots were no longer of use and the net book value of $ 76 thousand was recorded as a loss on impairment of fixed assets.

During the fourth quarter, impairment charges totaling $ 258 thousand were recorded, which primarily relates to other assets disposed or otherwise abandoned following a review by management.

Impairment charges were based on level 3 inputs, including estimated residual or sale value to market participants, in determining fair value.

As impaired assets relate primarily to the Company and/or its discontinued products, management determined fair value was insignificant.

For the year ended December 31, 2022, the Company recognized a loss of $ 334 thousand on the impairment of fixed assets.

No such loss was recorded during the year ended December 31, 2021.

PREPAID AND OTHER CURRENT ASSETS

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Short-term deposits - non-inventory — 18

Restricted cash — 342

ERTC funds 445 —

Total prepaid and other current assets $ 232 479

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.

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

Borrowings under the Inventory Facility are permitted up to the lower of (i) $ 3.0 million, which was subsequently increased to $ 3.5 million in April 2022 and reduced to $ 500 thousand in January 2023 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 January 18, 2023, the Company and the IF Lender entered into an

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

amendment to restructure and pay down the Inventory Facility.

Please refer to Note 15, “Subsequent Events” for further detail.

As of December 31, 2022, the terms of the Inventory Facility were as follows.

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 ( 4.77 % and 0.21 % at December 31, 2022 and 2021, respectively) and is also subject to a service fee of 1 % per month.

The annualized interest rate at December 31, 2022 and 2021, which includes interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was 25.5 % and 22.4 %, respectively.

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

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

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

The Inventory Facility would have matured on August 11, 2023, subject to early termination upon 90 days’ notice and otherwise in accordance with the terms of the Inventory Loan Agreement.

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

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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 %.

On February 7, 2023, the Company completed the termination of its Receivables Facility.

Please refer to Note 15, “Subsequent Events” for further detail.

As of December 31, 2022, the terms of the Receivables Facility were as follows.

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 ( 7.50 % and 3.25 % at December 31, 2022 and 2021, respectively) plus (ii) 2 %.

At December 31, 2022 and 2021, the annualized interest rate, which includes interest fees and the annual facility fee, was 10.1 % and 8.0 %, 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.

The annualized interest rate on the collateral management fee was 6.3 % and 5.9 % at December 31, 2022 and 2021, respectively.

The Receivables Facility is also 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.

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

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

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

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

Borrowings under the Inventory Facility were $ 1.4 million and $ 1.2 million at December 31, 2022 and 2021, respectively.

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

Borrowings under the Receivables Facility were less than $ 0.1 million and $ 1.0 million at December 31, 2022 and 2021, respectively.

Borrowings under the Credit Facilities are recorded in the Consolidated Balance Sheet as of December 31, 2022 and 2021 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $ 47 thousand and $ 84 thousand for the Inventory Facility and $ 15 thousand and $ 24 thousand for the Receivables Facility as of December 31, 2022 and 2021, 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 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 %.

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.

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

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

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

Promissory Notes

During the third and fourth quarters of the year ended December 31, 2022, we entered into short-term unsecured promissory notes (the “2022 Promissory Notes”) with Mei-Yun (Gina) Huang, Jay Huang, and Tingyu Lin.

Huang is a member of the Company’s Board of Directors and Jay Huang became a member of the Board of Directors in January 2023.

The total liability for the 2022 Promissory Notes was $ 1.5 million at December 31, 2022.

All of the 2022 Promissory Notes were exchanged for common stock on January 17, 2023.

Please refer to Note 14, “Related Party Transactions” and Note 15, Subsequent Events” for further detail.

The following summarizes the 2022 Promissory Notes at December 31, 2022:

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2022

Date entered September 16, 2022 October 25, 2022 November 4, 2022 November 9, 2022 December 6, 2022 December 21, 2022 December 31, 2022

Term 9 months 9 months 9 months 9 months 9 months 9 months 9 months

Principal amount $ 450,000 $ 50,000 $ 250,000 $ 350,000 $ 200,000 $ 100,000 $ 50,000 $ 1,450,000

Maturity date June 16, 2023 July 25, 2023 August 4, 2023 August 9, 2023 September 6, 2023 September 21, 2023 September 30, 2023

Interest rate 8 % 8 % 8 % 8 % 8 % 8 % 8 %

Default interest rate 10 % 10 % 10 % 10 % 10 % 10 % 10 %

Outstanding Amount $ 460,455 $ 50,734 $ 253,123 $ 353,989 $ 201,096 $ 100,219 $ 50,011 $ 1,469,627

Streeterville Notes

2022 Streeterville Note

On April 21, 2022, 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 $ 2.0 million (the “2022 Streeterville Note”).

The 2022 Streeterville Note was issued with an original issue discount of $ 215 thousand and Streeterville paid a purchase price of approximately $ 1.8 million for the 2022 Streeterville Note, from which the Company paid $ 15 thousand to Streeterville for Streeterville’s transaction expenses.

The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at 8 % per annum, compounded daily, on the outstanding balance.

On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and extend its maturity date to December 1, 2024.

We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $ 500 thousand by January 20, 2023 (which amount has been paid) and $ 250 thousand by July 14, 2023.

Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we will make twelve monthly repayments of approximately $ 117 thousand each.

We have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees.

Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.

Please refer to Note 15, “Subsequent Events” for further detail.

The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $ 2.0 million at December 31, 2022.

In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15 % as of the date of such delisting.

2021 Streeterville Note

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

The 2021 Streeterville Note was issued with an original issue discount of $ 194 thousand and Streeterville paid a purchase price of $ 1.5 million for the 2021 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

The 2021 Streeterville Note had a maturity date of April 27, 2023, and accrued interest at 8 % per annum, compounded daily, on the outstanding balance.

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

The Company had 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 increased the amount outstanding under the Streeterville Note by 1.5 %.

The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022.

The Company and Streeterville agreed to exchange common stock, priced at-the-market, for the required redemptions in October 2022 and December 2022, totaling $ 305 thousand converted to equity.

These exchanges satisfied the redemption notices provided by Streeterville, and following the December 2022 exchange, the 2021 Streeterville Note was paid in full.

We wrote off $ 100 thousand in remaining original issue discount costs at that time.

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 2021 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.

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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

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

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

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

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

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

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Approval to increase the number of authorized shares of Series A Preferred to 3,300,000 (the Original Series A Certificate of Designation as so amended, the “Series A Certificate of Designation”).

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

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

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

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

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

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.

As of December 31, 2022, we had approximately $ 0.6 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2023.

STOCKHOLDERS’ EQUITY

June 2022 Private Placement

In June 2022, we completed the June 2022 Private Placement with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $ 1.30 per share.

We also sold to the same institutional investors (i) June 2022 Pre-Funded Warrants to purchase 1,378,848 shares of common stock at an exercise price of $ 0.0001 per share and (ii) warrants to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $ 1.30 per share.

In connection with the June 2022 Private Placement, we paid the placement agent commissions of $ 252 thousand, plus $ 35 thousand in expenses, and we also paid legal, accounting and other fees of $ 47 thousand.

Total offering costs of $ 334 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, 2022.

Net proceeds to us from the June 2022 Private Placement were approximately $ 3.2 million.

We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.

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

As of December 31, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares of common stock remained outstanding, with an exercise price of $ 1.30 per share.

The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $ 3.5 million in the aggregate.

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 also sold to the same institutional investors (i) December 2021 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 December 2021 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.

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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

We determined the exercise price of the December 2021 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 EPS.

In January 2022, all of the December 2021 Pre-Funded Warrants were exercised.

As of December 31, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares of common stock remained outstanding, with an exercise price of $ 3.52

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3 unchanged sentences

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

January 2020 Equity Offering

In January 2020, we completed the January 2020 Equity Offering, pursuant to which we issued the January 2020 Warrants.

January 2020 Warrants to purchase an aggregate of 229,414 shares of common stock were outstanding at December 31, 2022 and 2021, with a weighted average exercise price of $ 3.67 per share.

During the year ended December 31, 2022, no January 2020 Warrants issued were exercised and did no t result in any proceeds.

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.

As of December 31, 2022 and 2021, we had the following outstanding January 2020 Warrants to purchase shares of common stock:

As of December 31, 2022 As of December 31, 2021

Number of Underlying Shares Exercise Price Expiration

Investor Warrants 187,734 187,734 $ 3.3700 January 13, 2025

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

229,414 229,414

Preferred Stock

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

The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5.0 % per annum until June 30, 2019 and at a rate of 10.0 % thereafter.

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

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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.

(controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer and former 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).

(controlled affiliates of Gina Huang, a current 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”).

The Series A Preferred Stock was created by the filing of the Original Series A Certificate of Designation.

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

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

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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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

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

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 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.

Net proceeds to us from the sale of common stock and January 2020 Warrants were approximately $ 2.3 million.

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

Investor Warrants 187,734 425,626 $ 3.3700 January 13, 2025

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

229,414 467,306

Warrant Classification

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

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

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

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

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

On June 22, 2022, the stockholders approved an amendment and restatement of the 2020 Plan that increased the shares available for issuance under the 2020 Plan by an additional 300,000 shares.

At December 31, 2022, 480,741 shares remain available to grant under the 2020 Plan.

On May 6, 2014, our Board of Directors approved the 2014 Plan.

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

2008 Incentive Stock Plan (the “2008 Plan”).

The 2014 Plan initially allowed for awards up to 120,000 shares of common stock and expires on July 15, 2024.

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

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

No awards may be granted under this plan.

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

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

Effective September 12, 2022, as a material inducement to our Chief Executive Officer’s acceptance of employment, we granted her an initial stock option award to purchase 150,000 shares of the Company’s common stock (the “Inducement Option Award”), which Inducement Option Award will generally vest over a four-year period, with 25% generally vesting on the first anniversary of the grant date, and the remainder generally vesting in substantially equal monthly installments for 36 months thereafter.

The Inducement Option Award, which was intended to be an inducement award under Rule 5635(c)(4) of the Nasdaq Stock Market Listing Rules, was effective on September 12, 2022 and has a per share exercise price equal to the closing price of a share of the Company’s common stock on such date.

We have awards outstanding pursuant to the 2014 Plan and one other historical equity-based compensation plan, however no new awards may be granted under these plans.

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

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

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options outstanding under all plans at December 31, 2022 have a contractual life of ten years , and vesting periods between one and four years .

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Cancelled ( 36,706 ) 5.35

Expired ( 1,650 ) 49.18

Exercised ( 4,225 ) 1.96

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250 options were exercised during 2022 and 4,225 options were exercised during 2021.

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

All outstanding equity awards were out of the money as of December 31, 2022.

The options outstanding at December 31, 2022 have been segregated into ranges for additional disclosure as follows:

8 unchanged sentences

330,808 8.0 $ 1.97 117,542 5.4 $ 3.13

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

6 unchanged sentences

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, 2022 and 2021, 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):

1 unchanged sentence

State $ 4 $ ( 1 )

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

Provision for (benefit from) income taxes $ 4 $ ( 1 )

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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In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $ 9.6 million additional federal net operating loss we recognized for the year.

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.

At December 31, 2022, we had federal and state net operating loss carry-forwards (“NOLs”) of approximately $ 132.4 million for federal income tax purposes ($ 77.6 million for state and local income tax purposes).

However, due to changes in our capital structure, approximately $ 78.0 million of the $ 132.4 million is available after the application of IRC Section 382 limitations.

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.

The $ 9.2 million and $ 9.6 million in federal net operating losses generated in December 31, 2022 and 2021 will be subject to the new limitations under the Tax Act.

If not utilized, the NOLs generated prior to December 31, 2017 of $ 37.5 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes.

1 unchanged sentence

We had no net deferred tax liabilities at December 31, 2022 or 2021, respectively.

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.

In 2021, we recognized various states tax benefits as a result of the adjustment from the 2020 provision to the actual tax on the 2020 returns that were filed in 2020.

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.

3 unchanged sentences

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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3 unchanged sentences

• 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.

• In the year ended December 31, 2022, the Company paid $ 77 thousand of payroll taxes previously deferred from the year ended December 21, 2021.

• The ability to claim an Employee Retention Tax Credit (“ERTC”), which is a refundable payroll tax credit, subject to certain limitations.

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

3 unchanged sentences

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.

We focus our efforts on the sale of LED lighting and controls 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.

We currently operate in a single industry segment, developing and selling our LED lighting products and controls 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, 2022 and 2021, 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

3 unchanged sentences

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.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Under the amended guidelines, we were 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.

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 as a receivable for claimed ERTC in the Consolidated Balance Sheet as of December 31, 2022 and 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.

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

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

RELATED PARTY TRANSACTIONS

On December 12, 2012, our Board of Directors appointed James Tu to serve as our non-executive Chairman.

On April 30, 2013, Mr.

Tu became the Executive Chairman assuming the duties of the Principal Executive Officer.

On October 30, 2013 Mr.

Tu was appointed Executive Chairman and Chief Executive Officer by our Board of Directors.

On May 9, 2016, Mr.

Tu also assumed the role of President.

On August 11, 2016, our Board of Directors appointed a separate Executive Chairman of the Board, and Mr.

Tu continued to serve in the role of Chief Executive Officer and President, until February 19, 2017.

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

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

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

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

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

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

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.

Tu was appointed as a member of our Board of Directors on April 1, 2019 and Chief Executive Officer, President and interim Chief Financial Officer on April 2, 2019.

Tu is also the Founder, Chief Executive Officer and Chief Investment Officer of 5 Elements Global Advisors, an investment advisory and management company managing the holdings of 5 Elements Global Fund LP, which was a beneficial owner of more than 5.0 % of our common stock prior to the August 2014 registered offering.

As of December 31, 2021, 5 Elements Global Fund LP beneficially owns approximately 0.9 % of our common stock.

5 Elements Global Advisors focuses on investing in clean energy companies with breakthrough, commercialized technologies, and near-term profitability potential.

Tu is also Co-Founder of Communal International Ltd.

(“Communal”), a British Virgin Islands company dedicated to assisting clean energy, solutions-based companies, maximizing technology and product potential and gaining them access to global marketing, distribution licensing, manufacturing and financing resources.

Communal has a 50.0 % ownership interest in 5 Elements Energy Efficiencies (BVI) Ltd., a beneficial owner of approximately 0.9 % of our common stock.

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

and owns the other 50.0 %.

She is Co-Founder of Communal International Ltd.

Tu and the mother of Simon Cheng.

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

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

On February 11, 2022, Mr.

1 unchanged sentence

Tu resigned from the Board of Directors.

On September 16, 2022 and November 9, 2022, the Company issued and sold 2022 Promissory Notes to one of the members of its Board of Directors, Gina Huang, for $ 450 thousand and $ 350 thousand, respectively.

Please refer to Note 8, “Debt” for further detail.

During the third and fourth quarters of the year ended December 31, 2022, we issued and sold 2022 Promissory Notes for an aggregate principal amount of $ 600,000 to Jay Huang.

Huang became a member of the Board of Directors in January 2023.

Please refer to Note 8, “Debt” and Note 15, “Subsequent Events,” for further detail.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUBSEQUENT EVENTS

Huang Purchase Agreements

On January 5, 2023, the Company entered into a securities purchase agreement with Mei-Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement 257,798 shares of the Company’s common stock, for a purchase price of $ 0.3879 per share.

On January 10, 2023, the Company entered into a securities purchase agreement with Ms.

Huang, pursuant to which the Company agreed to issue and sell, in a private placement 325,803 shares of the Company’s common stock for a purchase price of $ 0.4604 per share.

On February 24, 2023, the Company entered into a securities purchase agreement with Ms.

Huang, pursuant to which the Company agreed to issue and sell, in a private placement 803,212 shares of the Company’s common stock for a purchase price of $ 0.4980 per share

Aggregate gross proceeds to the Company in respect of these private placements to Ms.

Huang are $ 650 thousand, before deducting estimated offering expenses payable by the Company.

Each of the private placements to Ms.

Huang was priced at fair market value under the Nasdaq rules.

The issuance and sale of the shares pursuant to the purchase agreements with Ms.

Huang are not being registered under the Securities Act, and were made pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder.

Sander Securities Purchase Agreement

On January 17, 2023, the Company entered into a securities purchase agreement (the “Sander Purchase Agreement”) with certain purchasers associated with Sander Electronics, Inc.

(the “Sander Purchasers”), pursuant to which the Company agreed to issue and sell in a private placement (the “Sander Private Placement”) an aggregate of 5,446,252 shares (the “Sander Shares”) of the Company’s common stock, for a purchase price per share of $ 0.5008 .

Consideration for the transaction included exchange of approximately $ 657,000 in the aggregate of outstanding amounts on previous short-term bridge financings.

Aggregate gross proceeds to the Company in respect of the Sander Private Placement is approximately $ 2.1 million, before immaterial offering expenses payable by the Company.

The Sander Private Placement closed on January 20, 2023.

The Sander Private Placement was priced at-the-market under the Nasdaq rules.

The issuance and sale of the Sander Shares pursuant to the Sander Purchase Agreement are not being registered under the Securities Act, and were made pursuant to certain exemptions from registration, including Sections 3(a)(9) and 4(a)(2) of the Securities Act and Regulation D promulgated thereunder, in reliance on the representations and covenants of the Sander Purchasers under the Sander Purchase Agreement.

Pursuant to the Sander Purchase Agreement, the Company agreed to increase the size of the Board of Directors to eight members and to appoint each of Jay Huang and Wen-Jeng Chang as a director for a term expiring at the 2023 annual meeting of the Company’s stockholders or his earlier resignation, death or removal in accordance with the Company’s bylaws.

On January 17, 2023, in connection with the Sander Purchase Agreement, the Company entered into a registration rights agreement with each of the Sander Purchasers.

Exchange Agreement

As discussed in Note 8, “Debt,” on September 16, 2022 and November 9, 2022 the Company sold and issued to Mei Yun (Gina) Huang, a member of the Board of Directors, 2022 Promissory Notes totaling an aggregate principal amount of $ 800,000 .

On January 17, 2023, the Company and Ms.

Huang entered into exchange agreements (the “Exchange Agreements”) with respect to the 2022 Promissory Notes, pursuant to which the Company and Ms.

Huang agreed to exchange (the “Exchanges”) the approximately $ 809,000 aggregate outstanding amounts under the 2022 Promissory Notes for an aggregate of 1,436,959 shares of Common Stock (the “Exchange Shares”) at a price per share of $ 0.5630 .

The Exchanges were priced at fair market value under the Nasdaq rules.

The Exchanges of the Exchange Shares pursuant to the Exchange Agreements are not being registered under the Securities Act, and were effected pursuant to the exemption provided in Section 3(a)(9) of the Securities Act.

Second Amendment to Inventory Facility

On January 18, 2023, the Company and Crossroads entered into a Second Amendment to the Inventory Loan Agreement (the “Crossroads Amendment”) to restructure and pay down the Inventory Facility.

The Crossroads Amendment provides that the Company will make payments to reduce the outstanding obligations under the Inventory Facility of $ 750,000 by January 20,

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2023 (which amount the Company has paid) and $ 250,000 by February 15, 2023.

The Company also agreed to make monthly payments of approximately $ 40,200 towards the remaining outstanding obligations under the Inventory Facility, and to reduce the maximum amount that may be available to the Company under the Inventory Facility from $ 3,500,000 to $ 500,000 , subject to the borrowing base as set forth in the Inventory Loan Agreement.

Pursuant to the Crossroads Amendment, Crossroads and the Company also agreed to extend the Inventory Facility’s current term through December 31, 2023, while eliminating the minimum borrowing amount and unused line fees and reducing the monthly service fee to a lower, fixed amount.

The Company also agreed to a slightly increased interest rate, which was more than offset by the reduction in the monthly service fees.

Pursuant to the Crossroads Amendment, the interest rate on borrowings under the Inventory Facility is now a per annum rate equal to (i) the Three Month Libor rate plus 5.5 % (currently 10.28 % per annum) or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus 6 % (currently 10.176 % per annum).

The foregoing summary description of the Crossroads Amendment is not complete and is qualified in its entirety by reference to the full text of the Crossroads Amendment, which is filed as an exhibit to this Current Report on Form 8-K and is incorporated by reference herein.

Amendment to 2022 Streeterville Note

On April 21, 2022, the Company sold and issued to Streeterville the 2022 Streeterville Note.

On January 17, 2023, the Company and Streeterville entered into an Amendment to Promissory Note (the “Streeterville Amendment”) to restructure and pay down the 2022 Streeterville Note.

Pursuant to the Streeterville Amendment, the Company agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $ 500,000 by January 20, 2023 (which amount the Company has paid) and $ 250,000 by July 14, 2023.

Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, the Company will make twelve monthly repayments of approximately $ 117,000 each.

The Company will have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees.

Provided the Company makes all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.

Termination of Receivables Facility

On February 7, 2023, the Company terminated the Receivables Facility pursuant to the Receivables Loan between the Company and FSW Funding.

All outstanding amounts under the Receivables Facility had been repaid prior to termination, and there were no prepayment fees in connection with termination.

The Receivables Facility was secured by substantially all of the present and future assets of the Company and was subject to an intercreditor agreement with the Company’s inventory lending facility lender, which intercreditor agreement was also terminated.

ENERGY FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEGAL MATTERS

12 unchanged sentences

Quarter First

Net sales $ 2,405 $ 2,749 $ 2,074 $ 2,637

Gross profit 189 563 393 553

Net (loss) sales $ 663 $ 1,764 $ 1,480 $ 2,061

Gross (loss) profit ( 238 ) ( 163 ) 109 ( 26 )

Net loss ( 2,310 ) ( 2,662 ) ( 2,486 ) ( 2,821 )

6 unchanged sentences

Net sales $ 2,405 $ 2,749 $ 2,074 $ 2,637

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

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

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

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

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

Gross (loss) profit 189 563 393 553

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

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

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

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

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data