What changed in this filing

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Item 1. Business

2024-03-22 compared with 2023-03-23 · 57 added, 56 removed, 157 unchanged (42% of the section changed)

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 expanded our offerings into the consumer market in the fourth quarter of 2021.

Energy Focus 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”).

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

Our goal is to be the human wellness lighting and LED lighting 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 (“HID”) 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 LED lighting and controls products for our MMM and commercial and industrial lighting and control products.

Our goal is to be a market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.

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

We are also evaluating adjacent technologies including Gallium Nitride (“GaN”) based power supplies and opportunities for energy solutions products that support sustainability in our existing channels.

In 2022, we recommitted to building upon the transformation activities started during 2019 and 2020 that sought to stabilize and regrow our business.

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 and commercial business since 2016, when we once commanded significant price premiums for our flicker-free TLEDs with industry leading 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 while not impacting the performance and quality.

Despite these efforts, our legacy products continue to face extreme price 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 patented emergency backup battery integrated TLED, EnFocus™, our unique 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.

We are looking forward to continually supporting the growth of our existing EnFocus™ product line which is particularly attractive for its ease of install and ease of use in spaces with transient occupation.

The Company have enhanced the performance of our RedCap® product by providing a more user-friendly experience 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.

Throughout 2023, the Company continued to make significant cost cutting efforts to address operational expenses while maintaining customer satisfaction and delivering goods on-time.

Investments into Energy Focus have contributed to the ability of the Company to continue to not only provide quality products and services, but to both expand and rationalize product offerings.

It is our belief that the continued dramatic rightsizing efforts undertaken in 2022 and 2023, along with reorganization of the sales team and ongoing development of innovative, high-value products and an expanded distribution network, will over time result in improved sales and bottom-line performance for the Company.

In 2023, we recommitted to building upon the transformation activities that sought to stabilize and regrow our business.

These efforts include the following key developments that occurred during 2023:

• 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.

• We continued development of the second generation of EnFocus™ powerline control switches and circadian lighting system for commercial markets, which as a result of supply chain challenges we now plan to launch in 2023.

EnFocus™ powerline control enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and EnFocus™ LED lamps.

This upgrade offers a simpler, more secure, affordable and environmentally sustainable solution compared with replacing entire luminaire fixtures and incorporating additional wired or wireless communication.

• We reinvested in our MMM sales channel with a strategic hire in the second quarter of 2022 and are pursuing existing and new sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.

• On June 28, 2023, we accepted the resignation of four members of the Board of Directors (the “Board”):

Jennifer Cheng, Brian Lagarto, Jeffery Parker, and Stephen Socolof.

Their terms as directors would have otherwise expired at the 2024 annual meeting of Shareholders of the Company.

The resignations did not involve any disagreement with the Company.

On July 2, 2023, the remaining members of the Board unanimously appointed the following four new members to the Board:

Kin-Fu Chen, Shou-Jang Lee, Jason Tien-Chia Tsai, and Chiao Chieh (Jay) Huang, each of the new members of the Board of Directors is an independent director under the corporate governance standards of the Nasdaq.

• On August 24, 2023, the Board approved the termination of the Company’s chief executive officer and appointed Chiao Chieh (Jay) Huang to serve as the Company’s new chief executive officer.

In line with this decision, Mr.

will discontinue his role as Chairman of the Board and the Board has appointed Kin-Fu Chen as the Chairman of the Board.

• In 2023, we carefully researched and analyzed our historical sales data and the current market landscape regarding our pricing position and general sales strategy.

We acknowledged the presence of increased competition in the MMM sales space, both with respect to pricing and the number of competitors.

Following our assessment, we made changes that positively affected our position within this space and are directly reflected in our Q4 2023 performance.

• Beginning in July 2022, we reduced our warehouse square footage, and undertook an inventory reduction project throughout 2022 focused on reducing our highly reserved commercial finished good inventory.

• The Company has aggressively re-evaluated operating expenses, and reduced our workforce significantly throughout the year to manage fixed costs.

• We continued to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives:

◦ In April 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, with net proceeds of approximately $1.8 million.

◦ In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors pursuant to which we agreed to issue and sell (i) 1,313,462 shares of our common stock, (ii) pre-funded warrants (“June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (iii) warrants (the “June 2022 Warrants,” and collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share.

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

◦ From September 2022 to December 2022, we secured short-term unsecured bridge financing of $800 thousand from a member of our board of directors (the “Board of Directors”) and an aggregate of $650 thousand of short-term unsecured bridge financing from private parties, all of which was converted into equity in January 2023 at the time of a strategic investment by Sander Electronics.

◦ In October 2022 and December 2022, we repaid a previously outstanding promissory note with Streeterville by exchanging an aggregate of the approximately $330 thousand amount outstanding for common stock priced at-the-market.

◦ During January 2023, we sold an aggregate of $250 thousand of common stock to a member of our Board of Directors in private placements at fair market value, and also converted the approximately $809 thousand amount outstanding on previously issued short term promissory notes issued to that director as discussed above at fair market value.

◦ In January 2023, we sold an aggregate of $2.7 million of common stock to certain purchasers associated with Sander Electronics, Inc., including conversion of the approximately $609 thousand amount outstanding on previously outstanding short-term promissory notes as discussed above, priced at-the-market.

◦ In January 2023, we amended our inventory lending facility with Crossroads Financial Group, LLC (the “Inventory Facility”), reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1 million in January and February 2023.

◦ In January 2023, we amended the terms of our outstanding promissory note with Streeterville, agreeing to make $750 thousand in payments in 2023 and deferring other payments until 2024.

◦ In February 2023, we agreed to terminate our accounts receivable lending facility with Factors Southwest L.L.C.

(d/b/a FSW Funding) (the “Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”), reducing our monthly borrowing costs.

◦ In February 2023, we sold an aggregate of $400 thousand of common stock to a member of our Board of Directors in a private placement at fair market value.

During 2022, we continued to broaden our product distribution network by engaging with new lighting agencies and energy service companies (“ESCOs”).

We also redoubled our efforts from 2020 and 2021 to streamline our operations by closely managing all spending done throughout the Company, while investing in new products and strategies that sought to reenergize sales.

Throughout 2022, due to lingering economic and building occupancy impacts from the COVID-19 pandemic, we experienced continuing weakness in commercial sales as our customers in the healthcare, education, and commercial and industrial sectors put lighting retrofit projects on hold or delayed order placements.

We continue to monitor the long-term impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental pandemic response.

Although the significance and duration of the ongoing impact on our customers and us is still uncertain, and the specific timing of business recovery from the impact of the COVID-19 pandemic is still difficult to predict, we remain optimistic that facility capital budgets will start unfreezing, commercial building occupancy will rise, and our growth efforts will further impact our financial performance in a positive way.

During 2023, we thoroughly reviewed and adjusted our commercial pricing position as well as our strategic relationships and partnerships within the commercial LED market space.

We believe our new pricing position will give us a greater advantage than previously held against the competition and offer a more attractive entry point for our end customer base.

We will seek to remain agile as an organization to respond to potential or continuing weakness in the macroeconomic environment and in the meantime seek to expand sales channels and enter new markets that we believe will provide additional growth opportunities.

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In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, decision-making, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.

Our Corporate Structure and History

Fiberstars, Inc.

was founded in 1985 in California, and reincorporated in Delaware in November 2006.

In May 2007, Fiberstars, Inc.

merged with Energy Focus, Inc.

(the “Company”), also a Delaware corporation, with the Company as the surviving entity after the merger.

We established an international branch which we may refer to as our “Taiwan branch” or “Taipei office” in Taipei, Taiwan in 2023.

We develop advanced LED lighting and controls retrofit technologies solutions that enable our customers to run their facilities with greater energy efficiency, productivity and human wellness.

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A 2020 report issued by the U.S.

Department of Energy, Office of Energy Efficiency and Renewable Energy (“DOE”), entitled “Adoption of Light-Emitting Diodes in Common Lighting Applications,” reports that from 2016 to 2018,

installations of LED products have increased in all applications, increasing LED penetration to 30% of all general illumination lighting.

Department of Energy, Office of Energy Efficiency and Renewable Energy (“DOE”), entitled “Adoption of Light-Emitting Diodes in Common Lighting Applications,” reports that from 2016 to 2018, installations of LED products have increased in all applications, increasing LED penetration to 30% of all general illumination lighting.

In 2019, Navigant Research published a report that concluded that LED lighting had at least matched conventional lighting technologies on a range of features, including energy efficiency, lifetime, versatility and color quality, while becoming increasingly cost competitive.

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For this reason, building codes are increasingly requiring not only LEDs, but dimmable LEDs.

Governments around the world are implementing regulations and standards that incentivize the use of LED lighting, both smart and conventional, to reduce energy consumption and, therefore, carbon dioxide emissions.

Governments around the world

are implementing regulations and standards that incentivize the use of LED lighting, both smart and conventional, to reduce energy consumption and, therefore, carbon dioxide emissions.

Our new product research and development investments since 2019 have been focusing on advanced and smart lighting technologies to capitalize on these trends, and EnFocus™ represents such a control platform that we aim to expand in terms of functionalities, applications and intelligence, going forward.

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Our primary target customers for our LED lighting and controls systems are enterprise end-users, as well as contractors or ESCOs that could incorporate our products into their projects.

We also sell through lighting agencies that represent our products

as a complement to our direct sales effort.

We also sell through lighting agencies that represent our products as a complement to our direct sales effort.

We have in-house commercial sales personnel and external sales agencies representing Energy Focus products.

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These efforts helped offset some of the weakness experienced in our commercial business due to the impact of the COVID-19 pandemic, though sales levels were challenged as the amounts and timing of military funding fluctuated.

While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential and size, the MMM business does offer us the opportunity for continued sales, in addition to validating our product quality and strengthening our brand trust in the marketplace.

During 2022, we reinvested in our military sales channel with a strategic hire of a U.S.

Navy veteran who specializes in government sales.

This has allowed us to better engage with the MMM and has presented us with the potential for expansion in military sales beyond the existing product portfolio.

While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential and size, the MMM

business does offer us the opportunity to not just maintain our reputable foothold in this space but continue to grow and position ourselves for an even brighter future within MMM.

We launched our first commercial LED lighting products in 2010.

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Concentration of Sales

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

In 2023, two customers accounted for 48% of net sales, with sales to our primary distributor and shipbuilder for the U.S.

Navy accounting for approximately 35% and sales to a shipbuilder for the U.S.

Navy accounting for approximately 13%.

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

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Our supplier concentration is heavily focused within Asia.

As a result of the continued macroeconomic impacts of the COVID-19 pandemic, throughout 2021 and 2022, we experienced global supply chain and logistics constraints that impacted our inventory purchasing strategy and increased our transportation costs, in continued efforts to manage both shortages of available components and longer lead times in obtaining components.

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.

As a result of the continued macroeconomic impacts of the COVID-19 pandemic, throughout 2022 and 2023, we experienced logistics constraints with higher cost comparing to pre-COVID-19 that impacted our inventory purchasing strategy and increased our transportation costs, in continued efforts to manage longer lead times in obtaining components.

No offshore supplier accounted for more than 10% of our total expenditures for the twelve months ended December 31, 2023.

At December 31, 2023, two offshore suppliers accounted for approximately 16% and 57% (a related party, See Note 13, “Related Party Transactions”) of our trade accounts payable balance, respectively.

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

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Gross product development expenses for the years ended December 31, 2023 and 2022 were $0.6 million and $1.5 million, respectively.

We believe that our customer-centric product development efforts represent a better leverage on our R&D investments and aim to continue to focus on developmental projects that could produce more impactful and differentiated products and solutions in a more timely manner for faster customer adoption.

Intellectual Property

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Additionally, we have various pending U.S.

patent applications, and various pending Patent Cooperation

Treaty patent applications filed with the World Intellectual Property Organization that serve as the basis for national patent filings in countries of interest.

Our issued patents expire at various times through May 2040.

patent applications, and various pending Patent Cooperation Treaty patent applications filed with the World Intellectual Property Organization that serve as the basis for national patent filings in countries of interest.

Our over 50 issued patents expire at various times through May 2040.

Generally, the term of patent protection is twenty years from the earliest effective filing date of the patent application.

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Human Capital

At December 31, 2022, we had 20 full-time employees and 3 furloughed employees, all of whom were based in the United States, and no part-time employees.

We had one temporary contractor at December 31, 2022.

As of December 31, 2023, we had 13 full-time employees and one part-time employee, all of whom were based in the United States, and no part-time employees.

We had one temporary contractor as of December 31, 2023.

None of our employees or contractors are subject to collective bargaining agreements and we consider our relationship with our employees to be good.

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Continual learning and career development is advanced through ongoing performance and development conversations with employees and reimbursement is available to employees from time to time for seminars, conferences, formal education, and other training events employees attend in connection with their job duties.

Our core values of accountability, trust, extraordinariness, fun, openness, integrity and kindness underscore everything we do and drive our day-to-day interactions.

The safety, health and wellness of our employees is a top priority.

Through teamwork and the adaptability of our management and staff during the COVID-19 pandemic, we embraced a flexible work environment with some of our corporate office employees effectively working from remote locations and others working both remotely and in the office on a hybrid basis.

Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our current and future employees.

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We are providing the address to our website solely for the information of investors.

The information on our website is not a part of, nor is it incorporated by reference into this Annual

Report on Form 10-K.

The information on our website is not a part of, nor is it incorporated by reference into this Annual Report on Form 10-K.

Through our website, we make available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish them to, the Securities and Exchange Commission, or the SEC.

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

What changed 10-K

Item 1. Business