ENERGY FOCUS, INC/DE 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Page Reports of Independent Registered Public Accounting Firm (PCAOB ID 1808 ) 41 Consolidated Balance Sheets as of December 31, 2022 and 2021 43 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 45 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2022 and 2021 46 Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2022 and 2021 47 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 48 Notes to Consolidated Financial Statements 50 40 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Energy Focus, Inc. Solon, Ohio Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Energy Focus, Inc. (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. Continuation as a Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Reserves for Excess, Obsolete and Slow-Moving Inventories Description of the Matter As described in Notes 2 and 5 to the consolidated financial statements, the Company assesses the valuation of inventories each reporting period based on the lower of cost or net realizable value. The Company establishes reserves for excess, obsolete and slow-moving inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles and current inventory levels. The assessment is both quantitative and qualitative. As of December 31, 2022, the Company had inventories of $5.5 million, net of reserves for excess, obsolete and slow-moving inventories. 41 Table of Contents Auditing management's estimates for excess, obsolete and slow-moving inventories required subjective auditor judgment and evaluation of the reasonableness of significant assumptions used in developing the reserves as detailed above, as well as the inputs and related calculations related to historical sales and on-hand inventories. How We Addressed the Matter in Our Audit We obtained an understanding and evaluated the design of internal controls over the Company's reserves for excess, obsolete and slow-moving inventories, including management's assessment of the assumptions and data underlying the reserve calculation. Our substantive audit procedures included, among others, testing the logic and integrity of calculations within management’s analysis; testing the completeness and accuracy of underlying data used, including inventory quantities, carrying costs and the estimate of net realizable value by product; and evaluating the reasonableness of management’s assumptions related to demand forecasts, estimated reserve percentages and qualitative considerations involving, among others, the implications of 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) 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 We have served as the Company's auditor since 2019. Columbus, Ohio March 23, 2023 42 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (amounts in thousands except share data) 2022 2021 ASSETS Current assets: Cash $ 52 $ 2,682 Trade accounts receivable, less allowances of $ 26 and $ 14 , respectively 445 1,240 Inventories, net 5,476 7,866 Short-term deposits 592 712 Prepaid and other current assets 232 479 Receivable for claimed ERTC 445 445 Total current assets 7,242 13,424 Property and equipment, net 76 675 Operating lease, right-of-use asset 1,180 292 Total assets $ 8,498 $ 14,391 LIABILITIES Current liabilities: Accounts payable $ 2,204 $ 2,235 Accrued liabilities 145 265 Accrued legal and professional fees — 104 Accrued payroll and related benefits 261 718 Accrued sales commissions 76 57 Accrued warranty reserve 183 295 Deferred revenue — 268 Operating lease liabilities 198 325 Finance lease liabilities — 1 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 Total current liabilities 7,946 8,156 (continued on the following page) The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (amounts in thousands except share data) 2022 2021 Operating lease liabilities, net of current portion 1,029 26 Total liabilities 8,975 8,182 STOCKHOLDERS' (DEFICIT) EQUITY Preferred stock, par value $ 0.0001 per share: Authorized: 5,000,000 shares ( 3,300,000 shares designated as Series A Convertible Preferred Stock) at December 31, 2022 and December 31, 2021 Issued and outstanding: 876,447 shares at December 31, 2022 and December 31, 2021 — — Common stock, par value $ 0.0001 per share: Authorized: 50,000,000 shares at December 31, 2022 and December 31, 2021 Issued and outstanding: 9,848,438 shares at December 31, 2022 and 6,368,549 shares at December 31, 2021 1 — Additional paid-in capital 148,545 144,953 Accumulated other comprehensive loss ( 3 ) ( 3 ) Accumulated deficit ( 149,020 ) ( 138,741 ) 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. 44 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands except per share data) 2022 2021 Net sales $ 5,968 $ 9,865 Cost of sales 6,286 8,167 Gross (loss) profit ( 318 ) 1,698 Operating expenses: Product development 1,491 1,891 Selling, general, and administrative 7,148 8,535 Loss on impairment 338 — Restructuring — ( 21 ) Total operating expenses 8,977 10,405 Loss from operations ( 9,295 ) ( 8,707 ) Other expenses: Interest expense 954 792 Gain on forgiveness of PPP loan — ( 801 ) Other income ( 30 ) ( 876 ) Other expenses 56 65 Loss from operations before income taxes ( 10,275 ) ( 7,887 ) Provision for (benefit from) income taxes 4 ( 1 ) Net loss $ ( 10,279 ) $ ( 7,886 ) Net loss per common share - basic and diluted: Net loss $ ( 1.27 ) $ ( 1.73 ) Weighted average shares of common shares outstanding: Basic and diluted 8,110 4,561 The accompanying notes are an integral part of these consolidated financial statements. 45 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2022 2021 Net loss $ ( 10,279 ) $ ( 7,886 ) Other comprehensive loss: Foreign currency translation adjustments — — Comprehensive loss $ ( 10,279 ) $ ( 7,886 ) The accompanying notes are an integral part of these consolidated financial statements. 46 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (amounts in thousands) Additional Paid-in Capital Accumulated Other Comprehensive Loss Preferred Stock Common Stock Accumulated Deficit Shares Amount Shares Amount Total Balance at December 31, 2020 2,597 $ — 3,525 $ — $ 135,113 $ ( 3 ) $ ( 130,855 ) $ 4,255 Issuance of common stock under employee stock option and stock purchase plans — — 79 — 80 — — 80 Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — — — — ( 1 ) — — ( 1 ) Issuance of common stock and warrants — — 2,183 — 9,500 — — 9,500 Offering costs on issuance of common stock and warrants — — — — ( 969 ) — — ( 969 ) Issuance of common stock upon the exercise of warrants — — 237 — 801 — — 801 Issuance of common stock upon the conversion from preferred stock ( 1,721 ) — 344 — — — — — Stock-based compensation — — — — 429 — — 429 Net loss — — — — — — ( 7,886 ) ( 7,886 ) Balance at December 31, 2021 876 $ — 6,368 $ — $ 144,953 $ ( 3 ) $ ( 138,741 ) $ 6,209 Issuance of common stock under employee stock option and stock purchase plans — — 46 — 6 — — 6 Issuance of common stock and warrants — — 1,313 1 3,499 — — 3,500 Offering costs on issuance of common stock and warrants — — — — ( 334 ) — — ( 334 ) Issuance of common stock upon the exercise of warrants — — 1,465 — — — — — 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 ) The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2022 2021 Cash flows from operating activities: Net loss $ ( 10,279 ) $ ( 7,886 ) Adjustments to reconcile net loss to net cash used in operating activities: Other income ( 30 ) ( 876 ) Capitalized interest on promissory notes payable 40 — Gain on forgiveness of PPP loan — ( 801 ) Depreciation 159 188 Stock-based compensation 117 429 Provision for doubtful accounts receivable 14 6 Provision for slow-moving and obsolete inventories 32 156 Provision for warranties ( 111 ) 68 Amortization of loan discounts and origination fees 364 230 Loss on impairment 338 — Change in operating assets and liabilities: Accounts receivable 783 783 Inventories 2,358 ( 2,381 ) Short-term deposits 120 257 Prepaid and other assets 247 669 Accounts payable ( 1 ) ( 423 ) Accrued and other liabilities ( 596 ) ( 380 ) Deferred revenue ( 268 ) 196 Total adjustments 3,566 ( 1,879 ) Net cash used in operating activities ( 6,713 ) ( 9,765 ) Cash flows from investing activities: Acquisitions of property and equipment ( 41 ) ( 443 ) Proceeds from the sale of property and equipment 25 — Net cash used in investing activities ( 16 ) ( 443 ) Cash flows from financing activities: Proceeds from the issuance of common stock and warrants 3,500 9,500 Proceeds from the exercise of warrants — 801 Offering costs paid on the issuance of common stock and warrants ( 334 ) ( 969 ) 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 on the 2021 Streeterville Note ( 1,640 ) — Proceeds from the 2021 Streeterville Note — 1,515 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 48 Table of Contents (continued on the following page) ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2022 2021 Net increase in cash ( 2,630 ) 504 Cash, beginning of year 2,682 2,178 Cash, end of year $ 52 $ 2,682 Supplemental information: Cash paid in year for interest $ 364 $ 381 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. 49 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS Energy Focus, Inc. 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 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 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 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 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 50 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory excess and obsolescence reserve and warranty claims, the useful lives for property and equipment and stock-based compensation. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material. Basis of presentation The Consolidated Financial Statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our operations. Revenue recognition Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described below. 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 Less: 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 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. 51 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inventories We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and current inventory levels. The assessment is both quantitative and qualitative. 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. This resulted in a net increase of our gross inventory levels of $ 2.4 million. We had an increase of excess inventory reserves of $ 0.2 million as compared to 2020. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Please refer to Note 5, “Inventories,” for additional information. Accounts receivable Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. 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. 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. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers. Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms. Income taxes As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. At December 31, 2022 and 2021, we have recorded a full valuation allowance against our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis. 52 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Instruments Fair value measurements Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value of financial assets and liabilities are measured on a recurring or non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. We utilize valuation techniques that maximize the use of available market information and generally accepted valuation methodologies. We assess the inputs used to measure fair value using a three-tier hierarchy. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below. We classify the inputs used to measure fair value into the following hierarchy: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3 Unobservable inputs for the asset or liability. The carrying amounts of certain financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our revolving credit facilities also approximates fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis. We review and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in a fair value measurement may result in a reclassification between fair value hierarchy levels. There were no reclassifications for all periods presented. Long-lived assets Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to 15 years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statements of Operations. Refer to Note 6, “Property and Equipment,” for additional information. Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. Refer to Note 6, “Property and Equipment,” for additional information. Leases 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 53 Table of Contents 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 Product development expenses include salaries, contractor and consulting fees, supplies and materials, as well as costs related to other overhead items such as depreciation and facilities costs. Research and development costs are expensed as they are incurred. Net loss per share Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential shares of common stock outstanding during the period. Dilutive potential shares of common stock consist of incremental shares upon the exercise of stock options, warrants and convertible securities, unless the effect would be anti-dilutive. The following table presents a reconciliation of basic and diluted loss per share computations (in thousands, except per share amounts): For the years ended December 31, 2022 2021 Numerator: Net loss $ ( 10,279 ) $ ( 7,886 ) Denominator: Basic and diluted weighted average common shares outstanding 8,110 4,561 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 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 We recognize compensation expense based on the estimated grant date fair value under the authoritative guidance. Management applies the Black-Scholes option pricing model to value stock options issued to employees and directors and applies judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. Compensation expense is generally amortized on a straight-line basis over the requisite service period, which is generally the vesting period. See Note 10, “Stockholders’ Equity,” for additional information. Common stock, stock options, and warrants issued to non-employees that are not part of an equity offering are accounted for under the applicable guidance under Accounting Standards Codification (“ASC”) 505-50, “Equity-Based Payments to Non-Employees,” and are generally re-measured at each reporting date until the awards vest. Advertising expenses Advertising expenses are charged to operations in the period incurred. They consist of costs for the placement of our advertisements in various media and the costs of demos provided to potential distributors of our products. Advertising expenses were $ 0.3 million and $ 0.4 million for the years ended December 31, 2022 and 2021, respectively. 54 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Product warranties 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. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires. The following table summarizes warranty activity for the periods presented (in thousands): At December 31, 2022 2021 Balance at the beginning of the year $ 295 $ 227 Accruals for warranties issued 24 ( 41 ) Adjustments to existing warranties ( 136 ) 47 Settlements made during the year (in kind) — 62 Accrued warranty reserve at the end of the period $ 183 $ 295 Recently issued accounting pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. 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. 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. 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 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. 55 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 0.6 million and $ 0.7 million at December 31, 2022 and 2021, 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 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. NOTE 3. LEASES 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 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 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. 56 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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): 2022 2021 Operating lease cost (income) Sub-lease income $ ( 90 ) $ ( 112 ) Lease cost 501 558 Operating lease cost, net 411 446 Restructured lease cost (income) Sub-lease income — ( 136 ) Lease cost — 110 Restructured lease income, net — ( 26 ) Finance lease cost Interest of lease liabilities 1 — Finance lease cost, net 1 — Total lease cost, net $ 412 $ 420 Supplemental Consolidated Balance Sheet information related to the Company’s operating and finance leases are as follows (in thousands): At December 31, 2022 2021 Operating Leases Operating lease right-of-use assets $ 1,180 $ 292 Operating lease liabilities 1,227 351 Finance Leases Property and equipment 13 13 Allowances for depreciation ( 13 ) ( 12 ) Finance lease assets, net — 1 Finance lease liabilities — 1 Total finance lease liabilities $ — $ 1 57 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 Less imputed interest ( 510 ) Total lease obligations $ 1,227 Supplemental cash flow information related to leases was as follows (in thousands): Years ended December 31, 2022 2021 Supplemental Cash Flow Information: Cash paid, net, for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 423 $ 532 Operating cash flows from restructured leases $ — $ 35 Financing cash flows from finance leases $ 1 $ 3 58 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. 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. 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; and • 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; • 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; and • 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 59 Table of Contents 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. 60 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INVENTORIES 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): At December 31, 2022 2021 Raw materials $ 3,347 $ 3,882 Finished goods 4,656 7,034 Reserve for excess, obsolete, and slow-moving inventories ( 2,527 ) ( 3,050 ) Inventories, net $ 5,476 $ 7,866 The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands): At December 31, 2022 2021 Beginning balance $ ( 3,050 ) $ ( 2,894 ) Accrual ( 312 ) ( 281 ) 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 ) 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. . 61 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of the following (in thousands): At December 31, 2022 2021 Equipment (useful life 3 - 15 years) $ 1,061 $ 1,308 Tooling (useful life 2 - 5 years) 190 384 Vehicles (useful life 5 years) — 83 Furniture and fixtures (useful life 5 years) — 86 Computer software (useful life 3 years) — 1,194 Leasehold improvements (the shorter of useful life or lease life) 141 169 Finance lease right-of-use asset — 13 UV - Robots (useful life 5 years) — 105 Construction in progress — 135 Property and equipment at cost 1,392 3,477 Less: accumulated depreciation ( 1,316 ) ( 2,802 ) Property and equipment, net $ 76 $ 675 Depreciation expense was $ 0.2 million for both of the years ended December 31, 2022 and 2021. 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. NOTE 7. PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets consisted of the following (in thousands): At December 31, 2022 2021 Prepaid insurance $ 63 $ 131 Prepaid expenses 130 253 Prepaid rent 39 74 Short-term deposits - non-inventory — 18 Other — 3 Total prepaid and other current assets $ 232 479 NOTE 8. DEBT Credit Facilities 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 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 62 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Inventory Facility’s interest and service fees combined amount is subject to a minimum monthly fee of $ 18 thousand. There would be no breakage fee for the Company for the Inventory Facility if the Company were to refinance it with an American Bankers Association (“ABA”) equivalent institution. 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 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. (d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”). 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. 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 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. 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 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. 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. Ms. 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: 63 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2022 G. Huang J. Huang J. Huang G. Huang J. Huang J. Huang T. Lin Total 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 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. 64 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. PPP Loan 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. 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. NOTE 9. COMMITMENTS AND CONTINGENCIES Purchase Commitments 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. NOTE 10. 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) 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. Total offering costs of $ 499 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Consolidated Balance Sheet as of December 31, 2021. Net proceeds from the December 2021 Private Placement were approximately $ 4.0 million. 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 65 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS per share. 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. 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 offering. Total offering costs of $ 469 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 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. During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock. During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock. The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group (under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC (“Fusion Park”) and 5 Elements Global Fund L.P. (controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer and 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 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 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”). 66 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 entitle its holder to a number of votes equal to 11.07 % of the number of shares of common stock into which such share of Series A Preferred Stock is convertible. The Series A Preferred Stock (a) has a preference upon liquidation equal to $ 0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. On March 29, 2019, the Company also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of undesignated preferred stock available for designation as Series A Preferred Stock. 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. Stock-based compensation On March 18, 2020, our Board of Directors approved the Energy Focus, Inc. 2020 Stock Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the stockholders at our annual meeting on September 17, 2020, after which no further awards could be issued under the Energy Focus, Inc. 2014 Stock Incentive Plan (the “2014 Plan”). The 2020 Plan initially allows for awards up to 350,000 shares of common stock and expires on September 17, 2030. 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. 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. Employee grants generally vest in three or four years , while grants to non-employee directors generally vest in one year . The specific terms of each grant are determined by our Board of Directors. Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize compensation expense using a straight-line amortization method. The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands): For the year ended December 31, 2022 2021 Cost of sales $ 2 $ 9 Product development 15 14 Selling, general, and administrative 100 406 Total stock-based compensation $ 117 $ 429 At December 31, 2022 and 2021, we had unearned stock compensation expense of $ 0.1 million and $ 0.3 million, respectively. These costs will be charged to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 2.8 years as of December 31, 2022 and 2.7 years as of December 31, 2021. 67 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock options The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows: 2022 2021 Fair value of options issued $ 0.77 $ 3.92 Exercise price $ 0.95 $ 5.07 Expected life of option (in years) 6.1 6.2 Risk-free interest rate 3.0 % 0.9 % Expected volatility 104.0 % 96.3 % Dividend yield 0.00 % 0.00 % We utilize the simplified method as provided by ASC 718-10 to calculate the expected stock option life. Under ASC 718-10, the expected stock option life is based on the midpoint between the vesting date and the end of the contractual term of the stock option award. The use of this simplified method in place of using the actual historical exercise data is allowed when a stock option award meets all of the following criteria: the exercise price of the stock option equals the stock price on the date of grant; the exercisability of the stock option is only conditional upon completing the service requirement through the vesting date; employees who terminate their service prior to the vesting date forfeit their stock options; employees who terminate their service after vesting are granted a limited time period to exercise their stock options; and the stock options are nontransferable and non-hedgeable. We believe that our stock option awards meet all of these criteria. The estimated expected life of the option is calculated based on contractual life of the option, the vesting life of the option, and historical exercise patterns of vested options. The risk-free interest rate is based on U.S. treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the option. The volatility estimates are calculated using historical volatility of our stock price calculated over a period of time representative of the expected life of the option. 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. 68 Table of Contents 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 . A summary of option activity under all plans was as follows: Number of Options Weighted Average Exercise Price Per Share Outstanding at December 31, 2020 221,450 3.45 Granted 88,240 5.07 Cancelled ( 36,706 ) 5.35 Expired ( 1,650 ) 49.18 Exercised ( 4,225 ) 1.96 Outstanding at December 31, 2021 267,109 $ 3.46 Granted 226,960 0.95 Cancelled ( 160,778 ) 2.99 Expired ( 2,233 ) 2.78 Exercised ( 250 ) 1.45 Outstanding at December 31, 2022 330,808 $ 1.97 Vested and expected to vest at December 31, 2022 276,267 $ 2.13 Exercisable at December 31, 2022 117,542 $ 3.13 The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options. 250 options were exercised during 2022 and 4,225 options were exercised during 2021. 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: OPTIONS OUTSTANDING OPTIONS EXERCISABLE Range of Exercise Prices Number of Shares Outstanding Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price Number of Shares Exercisable Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price $ 0.42 — $ 0.74 2,640 9.6 $ 0.72 — — $ — $ 0.75 — $ 0.78 150,000 9.7 0.75 — — — $ 0.79 — $ 1.80 69,284 7.0 1.46 32,204 4.8 1.49 $ 1.81 — $ 2.25 48,125 5.2 2.10 48,125 5.2 2.10 $ 2.26 — $ 27.35 60,759 6.9 5.53 37,213 6.1 5.88 330,808 8.0 $ 1.97 117,542 5.4 $ 3.13 69 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock Units In 2015, we began issuing restricted stock units to certain employees and non-employee Directors under the 2014 Plan with vesting periods ranging from one to four years from the grant date. In 2020, we began issuing restricted stock units to certain employees and non-employee Directors under the 2020 Plan with vesting periods ranging from one to four years . The following table shows a summary of restricted stock unit activity: Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value At December 31, 2020 4,480 $ 8.64 Granted 50,000 5.26 Vested ( 52,080 ) 5.46 At December 31, 2021 2,400 $ 7.14 Granted 50,000 1.26 Vested ( 40,800 ) 1.51 At December 31, 2022 11,600 $ 1.59 Employee stock purchase plans In September 2013, our stockholders approved the 2013 Employee Stock Purchase Plan (the “2013 Plan”) to replace the 1994 prior purchase plan. A total of 100,000 shares of common stock were provided for issuance under the 2013 Plan. The 2013 Plan permits eligible employees to purchase common stock through payroll deductions at a price equal to the lower of 85 percent of the fair market value of our common stock at the beginning or end of the offering period. Employees may end their participation at any time during the offering period, and participation ends automatically upon termination of employment with us. During 2022 and 2021, employees purchased 3,971 and 22,000 shares, respectively. At December 31, 2022, 28,523 shares remained available for purchase under the 2013 Plan. NOTE 11. INCOME TAXES We file income tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2019. Our practice is to recognize interest and penalties related to income tax matters in income tax expense when and if they become applicable. At December 31, 2022 and 2021, respectively, there were no accrued interest and penalties related to uncertain tax positions. The following table shows the components of the provision for income taxes (in thousands): For the year ended December 31, 2022 2021 Current: State $ 4 $ ( 1 ) Deferred: U.S. Federal — — Provision for (benefit from) income taxes $ 4 $ ( 1 ) 70 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the (benefit from) provision for income taxes reflected in our Consolidated Statements of Operations are as follows: For the year ended December 31, 2022 2021 U.S. statutory rate 21.0 % 21.0 % State taxes (net of federal tax benefit) 1.3 9.7 Valuation allowance ( 18.2 ) ( 32.7 ) Other ( 4.1 ) 2.0 0.0 % 0.0 % The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands): At December 31, 2022 2021 Accrued expenses and other reserves $ 1,455 $ 1,550 Right-of-use-asset ( 294 ) ( 73 ) Lease liabilities 306 88 Tax credits, deferred R&D, and other 438 49 Net operating loss 18,856 17,318 Valuation allowance ( 20,764 ) ( 18,932 ) Net deferred tax assets $ — $ — In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $ 9.2 million additional federal net operating loss we recognized for the year. 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, 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 $ 9.2 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. Since we believe it is more likely than not that the benefit from NOLs will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 2022 and 2021, respectively. We had no net deferred tax liabilities at December 31, 2022 or 2021, respectively. 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. The key provisions of the CARES Act and the Relief Act, as applicable to the Company, include the following: The ability to use NOLs to offset income without the 80% taxable income limitation enacted as part of the Tax Cuts and Jobs Act (“TCJA”) of 2017, and to carry back NOLs to offset prior year income for five years. These are temporary provisions that apply to NOLs incurred in 2018, 2019 or 2020 tax years. We did not recognize any tax benefit for the year ended December 31, 2021 related to our ability to carry back prior year losses, as well as projected current year losses, under the CARES Act to years with the previous 35% tax rate. 71 Table of Contents 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. This limitation was previously 30% of ATI pursuant to the Tax Act, and will revert to 30% after 2020. The Company has no current interest expense limitation. In addition to the aforementioned provisions, the CARES Act also provided the following non-income tax provisions as applicable to the Company: • The ability to defer the payment of the employer portion of social security taxes incurred between March 27, 2020 and December 31, 2020, with 50% of the deferred amount to be paid by December 31, 2021 and the remaining 50% to be paid by December 31, 2022. • 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. • The Company received approximately $ 795 thousand in PPP loans, which were forgiven in 2021. The CARES Act provides that the loan forgiveness is tax-exempt for federal purposes. Refer to Note 8, “Debt” for details. NOTE 12. PRODUCT AND GEOGRAPHIC INFORMATION 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): Year ended December 31, 2022 2021 Commercial products $ 3,746 $ 4,682 MMM products 2,222 5,183 Total net sales $ 5,968 $ 9,865 A geographic summary of net sales is as follows (in thousands): For the year ended December 31, 2022 2021 United States $ 5,944 $ 9,712 International 24 153 Total net sales $ 5,968 $ 9,865 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. NOTE 13. OTHER INCOME Employee Retention Tax Credit The CARES Act, which was enacted on March 27, 2020, provides an ERTC that is a refundable tax credit against certain employer taxes. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021. For purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the 72 Table of Contents 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 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 as a receivable for claimed ERTC in the Consolidated Balance Sheet as of December 31, 2022 and 2021. PPP Loan 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. 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 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. NOTE 14. RELATED PARTY TRANSACTIONS 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. Tu and the Company entered into a Separation and Release Agreement and Mr. 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. Mr. 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. 73 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. SUBSEQUENT EVENTS Ms. 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, 74 Table of Contents 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. 75 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. LEGAL MATTERS We may be the subject of threatened or pending legal actions and contingencies in the normal course of conducting our business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict the future outcome of such matters, we believe that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us. 76 Table of Contents SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8. The following table sets forth our selected unaudited financial information for the four quarters in the years ended December 31, 2022 and 2021, respectively. This information has been prepared on the same basis as the audited financial statements and, in the opinion of management, contains all adjustments necessary for a fair presentation thereof. QUARTERLY FINANCIAL DATA (UNAUDITED) ( amounts in thousands, except per share amounts ) 2022 Fourth Quarter Third Quarter Second Quarter First Quarter 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 ) Net loss per common share attributable to common stockholders (basic and diluted): $ ( 0.23 ) $ ( 0.29 ) $ ( 0.35 ) $ ( 0.44 ) Weighted average shares used in computing net loss per common share (basic and diluted) 9,583 9,190 4,211 6,437 2021 Fourth Quarter Third Quarter Second Quarter First Quarter Net sales $ 2,405 $ 2,749 $ 2,074 $ 2,637 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 loss per common share (basic and diluted) 5,312 5,086 4,211 3,612 77 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.