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 ) 38 Consolidated Balance Sheets as of December 31, 2023 and 2022 40 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 42 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2023 and 2022 43 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2023 and 2022 44 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 45 Notes to Consolidated Financial Statements 48 37 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, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), 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, 2023 and 2022, 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 the notes 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 the notes. 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 4 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, 2023, the Company had inventories of $4.4 million, net of reserves for excess, obsolete and slow-moving inventories. 38 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 22, 2024 39 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (amounts in thousands except share data) 2023 2022 ASSETS Current assets: Cash $ 2,030 $ 52 Trade accounts receivable, less allowances of $ 20 and $ 26 , respectively 1,570 445 Trade accounts receivable - related party 202 — Inventories, net 4,439 5,476 Prepayments to vendors 792 592 Prepaid and other current assets 156 232 Receivable for claimed Employee Retention Tax Credit — 445 Total current assets 9,189 7,242 Property and equipment, net 112 76 Operating lease, right-of-use asset 899 1,180 Total assets $ 10,200 $ 8,498 LIABILITIES Current liabilities: Accounts payable $ 1,624 $ 2,204 Accounts payable - related party 2,146 — Accrued liabilities 110 145 Accrued legal and professional fees 64 — Accrued payroll and related benefits 199 261 Accrued sales commissions 62 76 Accrued warranty reserve 150 183 Operating lease liabilities 223 198 Promissory notes payable, net of discounts and loan origination fees 1,323 2,618 Advanced capital contribution 450 — Related party promissory notes payable — 814 Credit line borrowings, net of loan origination fees — 1,447 Total current liabilities 6,351 7,946 (continued on the following page) The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (amounts in thousands except share data) 2023 2022 Operating lease liabilities, net of current portion 798 1,029 Total liabilities 7,149 8,975 STOCKHOLDERS' EQUITY (DEFICIT) 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, 2023 and December 31, 2022 Issued and outstanding: 876,447 shares at December 31, 2023 and December 31, 2022 — — Common stock, par value $ 0.0001 per share: Authorized: 50,000,000 shares at December 31, 2023 and December 31, 2022 Issued and outstanding: 4,348,690 shares at December 31, 2023 and 1,406,920 * shares at December 31, 2022 — 1 Additional paid-in capital 156,369 148,545 Accumulated other comprehensive loss ( 3 ) ( 3 ) Accumulated deficit ( 153,315 ) ( 149,020 ) Total stockholders' equity (deficit) 3,051 ( 477 ) Total liabilities and stockholders' equity (deficit) $ 10,200 $ 8,498 *Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023. The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands except per share data) 2023 2022 Net sales $ 5,717 $ 5,968 Cost of sales 5,494 6,286 Gross profit (loss) 223 ( 318 ) Operating expenses: Product development 587 1,491 Selling, general, and administrative 3,607 7,148 Loss on impairment — 338 Total operating expenses 4,194 8,977 Loss from operations ( 3,971 ) ( 9,295 ) Other expenses (income): Interest income ( 57 ) — Interest expense 380 954 Other income ( 30 ) ( 30 ) Other expenses 26 56 Loss from operations before income taxes ( 4,290 ) ( 10,275 ) Provision for income taxes 3 4 Net loss $ ( 4,293 ) $ ( 10,279 ) Net loss per common stock basic and diluted: Net loss $ ( 1.32 ) $ ( 8.88 ) Weighted average shares of common stock outstanding: Basic and diluted* 3,241 1,158 * Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023. The accompanying notes are an integral part of these consolidated financial statements. 42 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2023 2022 Net loss $ ( 4,293 ) $ ( 10,279 ) Other comprehensive loss: Foreign currency translation adjustments — — Comprehensive loss $ ( 4,293 ) $ ( 10,279 ) The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (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, 2021 876 $ — 910 $ — $ 144,953 $ ( 3 ) $ ( 138,741 ) $ 6,209 Issuance of common stock under employee stock option and stock purchase plans — — 7 — 6 — — 6 Issuance of common stock and warrants — — 187 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 — — 209 — — — — — Stock-based compensation — — — — 117 — — 117 Stock issued in exchange transactions — — 94 — 304 — — 304 Net loss — — — — — — ( 10,279 ) ( 10,279 ) Balance at December 31, 2022 876 $ — 1,407 $ 1 $ 148,545 $ ( 3 ) $ ( 149,020 ) $ ( 477 ) Issuance of common stock — — 2,477 1 6,078 — — 6,079 Stock issued in exchange transactions — — 465 — 1,716 — — 1,716 Par value adjustment due to reverse stock split — — — ( 2 ) 2 — — — Reduction in equity due to costs from reverse stock split — — — — ( 16 ) — — ( 16 ) Stock-based compensation — — — — 44 — — 44 Impact of adoption of ASU 2016-13 - CECL — — — — — — ( 2 ) ( 2 ) Net loss — — — — — — ( 4,293 ) ( 4,293 ) Balance at December 31, 2023 876 $ — 4,349 $ — $ 156,369 $ ( 3 ) $ ( 153,315 ) $ 3,051 * Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023. The accompanying notes are an integral part of these consolidated financial statements. 44 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 45 Table of Contents 2023 2022 Cash flows from operating activities: Net loss $ ( 4,293 ) $ ( 10,279 ) Adjustments to reconcile net loss to net cash used in operating activities: Other income ( 40 ) ( 30 ) Capitalized interest on promissory notes payable — 40 Depreciation 33 159 Stock-based compensation 44 117 Provision for doubtful accounts receivable 6 14 Provision for slow-moving and obsolete inventories 25 32 Provision for warranties ( 33 ) ( 111 ) Amortization of loan discounts and origination fees 225 364 Loss on impairment — 338 Change in operating assets and liabilities: Accounts receivable ( 1,131 ) 783 Accounts receivable - related party ( 202 ) — Inventories 1,012 2,358 Prepayments to vendors ( 200 ) 120 Prepaid and other assets 521 247 Accounts payable ( 580 ) ( 1 ) Accounts payable- related party 2,146 — Accrued and other liabilities ( 47 ) ( 584 ) Right of use assets and lease liabilities 75 ( 12 ) Deferred revenue — ( 268 ) Total adjustments 1,854 3,566 Net cash used in operating activities ( 2,439 ) ( 6,713 ) Cash flows from investing activities: Acquisitions of property and equipment ( 69 ) ( 41 ) Proceeds from the sale of property and equipment — 25 Net cash used in investing activities ( 69 ) ( 16 ) Cash flows from financing activities: Proceeds from the issuance of common stock and warrants 6,079 3,500 Costs related to reverse stock-split ( 16 ) — Offering costs paid on the issuance of common stock and warrants — ( 334 ) Principal payments under finance lease obligations — ( 1 ) Proceeds from exercise of stock options and purchases through employee stock purchase plan — 6 Payments on the 2021 Streeterville Note — ( 1,640 ) Payments on the 2022 Streeterville Note ( 625 ) — 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 ) Net payments on credit line borrowings - Credit Facilities ( 1,402 ) ( 768 ) Advanced capital contribution 450 — Net cash provided by financing activities 4,486 4,099 (continued on the following page) 46 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2023 2022 Net increase (decrease) in cash 1,978 ( 2,630 ) Cash, beginning of year 52 2,682 Cash, end of year $ 2,030 $ 52 Supplemental information: Cash paid in year for interest $ 380 $ 364 Cash paid in year for income taxes $ — $ 1 Non-cash investing and financing activities: Debt-to-equity exchange transactions $ 1,716 $ 304 The accompanying notes are an integral part of these consolidated financial statements. 47 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”). Our mission is to enable our customers to run their facilities with greater energy efficiency and productivity, and increased 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 applications. We are also evaluating adjacent technologies including Gallium Nitride (“GaN”) based power supplies and additional market opportunities for energy solution products that support sustainability in our existing channels. NOTE 2. BASIS OF PRESENTATION AND 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. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our operations. Going Concern and Nasdaq Continued Listing Requirements Compliance Due to our financial performance as of December 31, 2023 and 2022, including net losses of $ 4.3 million and $ 10.3 million for the twelve months ended December 31, 2023 and 2022, respectively, and total cash used in operating activities of $ 2.4 million and $ 6.7 million for the twelve months ended December 31, 2023 and 2022, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2023. As a result of restructuring actions and initiatives, 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. 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 the Company’s Board of Directors (the “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. 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 48 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Nasdaq Capital Market Compliance Our common stock is listed on the Nasdaq Capital Market, which has a minimum bid price of at least $ 1.00 per share as one of its continued listing requirements. On August 23, 2022, we received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”) notifying us that we were not in compliance with the 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 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 (the “Plan”), Nasdaq granted us an extension through May 15, 2023 to regain compliance with the Minimum Stockholders’ Equity Rule. On February 21, 2023, we received written notification (the “Bid Price Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and our common stock is subject to delisting from Nasdaq. On February 24, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the delisting (the “Appeal”). Under Nasdaq rules, the delisting of the Company’s common stock was stayed during the pendency of the Appeal and, during such time, the Company’s common stock continued to be listed on Nasdaq. On March 28, 2023, the Company received written notification (the “Additional Staff Determination”) from the Staff stating that (i) following the Bid Price Notification, and in accordance with Listing Rule 5810(c)(2)(A), Nasdaq is no longer permitted to consider the stockholders’ equity compliance plan, (ii) the Additional Staff Determination serves as an additional basis for delisting the Company’s common stock from Nasdaq and (iii) the Panel will consider the Additional Staff Determination in rendering a determination regarding the continued listing of the Company’s common stock on Nasdaq. On April 6, 2023, the Company participated in the Appeal before the Panel. The Company provided an update to the Panel on the Company’s substantial progress made towards the previously submitted Plan during the three months ended March 31, 2023, and requested the Panel grant the Company an exception to (1) re-allow the previously granted exception until May 15, 2023 for the Company to regain compliance with the Minimum Stockholders’ Equity Rule and (2) grant an exception allowing the Company up to 180 days following the Bid Price Notification to regain compliance with the Bid Price Rule by effecting a reverse stock split following stockholder approval at the Company’s 2023 annual meeting of stockholders. On May 1, 2023, the Panel granted the Company’s request (the “Panel Decision”) to continue the Company’s listing on Nasdaq, subject to the following conditions: (1) on or before May 15, 2023, the Company shall file with the SEC its quarterly report for the three months ended March 31, 2023 demonstrating compliance with the Minimum Stockholders’ Equity Rule and (2) on or before July 7, 2023, the Company shall demonstrate compliance with the Bid Price Rule. On July 27, 2023, the Company received written notification from the Staff stating that the Company has regained compliance with the Bid Price Rule and the Minimum Stockholders’ Equity Rule, as required by the Panel Decision. Pursuant to Nasdaq Listing Rule 5815(d)(4)(B), the Company will be subject to a mandatory panel monitor for a period of one year from July 27, 2023 (the “Monitoring Period”). If, within the Monitoring Period, the Staff finds the Company again out of compliance with the Minimum Stockholders’ Equity Rule, notwithstanding Nasdaq Listing Rule 5810(c)(2), the Company will not be permitted to provide the Staff with a plan of compliance with respect to that deficiency and the Staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Nasdaq Listing Rule 5810(c)(3). Instead, the Staff will issue a delist determination letter and the Company will have an opportunity to request a new hearing with the initial Panel or a newly convened hearings panel if the initial Panel is unavailable. The Company will have the opportunity to respond and present to the Panel as provided by Nasdaq Listing Rule 5815(d)(4)(C). The Company’s common stock may be at that time delisted from Nasdaq. As of the date of this Annual Report, the Company believes it has maintained compliance with the Minimum Stockholders’ Equity Rule for continued listing on the Nasdaq Capital Market. To become compliant with the Bid Price Rule, the Company 49 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS effected a 1-for-7 reverse stock split to increase the per share trading price of the common stock effective June 16, 2023 (See Note 9, “Stockholders’ Equity”). However, there can be no assurance that the Company will be able to maintain compliance with the Minimum Stockholders’ Equity Rule, Bid Price Rule, or other Nasdaq listing requirements. If the Company fails to maintain compliance with Nasdaq’s continued listing standards in accordance with the Panel’s decision, the Company’s common stock will be subject to delisting from Nasdaq. Use of estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may vary from the estimates. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence and warranty claims, the useful lives of property and equipment, valuation allowance for net deferred taxes, and stock-based compensation. The Company began using estimates for its calculation of allowance for doubtful accounts receivable under Accounting Standards Codification (“ASC”) 326, Measurement of Credit Losses on Financial Instruments (“CECL”) commencing in 2023. 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. We have prepared the accompanying consolidated financial statements in accordance with U.S. GAAP and pursuant to the rules and regulations of the United States Securities & Exchange Commission (“SEC”). Revenue 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. A disaggregation of product net sales is presented in Note 11, “Product and Geographic Information.” Accounts Receivable and Allowance for Credit Losses Our trade accounts receivable consists of amounts billed to and currently due from customers. Substantially all of 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. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of account receivables that will not be collected. The allowance is based on an assessment of forward-looking customer credit-worthiness 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 for major customers or with particular orders. 50 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Through November 2022, we utilized a third-party account receivable insurance program with a very high credit worthy insurance company where we had the large majority of the accounts receivable arising during the policy term 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. Although the insurance policy is no longer in place, all invoices issued under the previous coverage period are still covered under the policy. On January 1, 2023, the Company adopted Financial Instruments - Credit Losses (“ASC 326”). The standard adds to U.S. GAAP an impairment model known as the CECL model, which is based on expected losses rather than incurred losses. This standard only impacts the Company’s trade receivables. The Company decided to use the historical loss rate method of valuing its reserve for trade receivables. The allowance for credit losses is reviewed and assessed for adequacy on a quarterly basis. We take into consideration (1) any circumstances of which we are aware of a customer's inability to meet its financial obligations and (2) our judgments as to prevailing economic conditions in the industry and their impact on our customers. If circumstances change, and the financial condition of our customers is adversely affected and they are unable to meet their financial obligations, we may need to take additional allowances, which would result in an increase in our operating expense. This resulted in a $ 2 thousand adjustment to Retained Earnings as of January 1, 2023 and charges to credit loss expense of $ 4 thousand for the year ended December 31, 2023. Pursuant to ASC 606, Revenue Recognition , contract assets and contract liabilities as of the beginning and ending of the reporting periods must be disclosed. Below is the breakout of the Company’s contract assets for such periods: December 31, 2023 December 31, 2022 January 01, 2022 Accounts Receivable $ 1,590 $ 471 $ 1,254 Less: Reserve for Credit Losses/Allowance for Doubtful Accounts ( 20 ) ( 26 ) ( 14 ) Net Accounts Receivable $ 1,570 $ 445 $ 1,240 Activity related to our reserve for credit losses was as follows (in thousands): Allowance for doubtful accounts as of December 31, 2022 $ ( 26 ) Cumulative effect of the implementation of ASC 326 ( 2 ) Reserve for credit losses as of December 31, 2023 ( 4 ) Prior year reclassification of sales returns out of allowance for doubtful accounts 12 Allowance for doubtful accounts as of December 31, 2023 $ ( 20 ) Geographic information All of our long-lived fixed assets are located in the United States. For the years ended December 31, 2023 and 2022, approximately 100 % of sales were attributable to customers in the United States. The geographic location of our net sales is derived from the destination to which we ship the product. Cash Cash consists of investments in money market funds and deposits with banks. At December 31, 2023 and 2022, we had cash of $ 2.0 million and $ 52 thousand, respectively, on deposit with financial institutions located in the United States. 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 51 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 1.0 million and a net increase of excess and obsolete inventory reserves of $ 26 thousand as co mpared to 2022. Please refer to Note 4, “ Inventories” for additional information. 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, 2023 and 2022, 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. 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. 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. 52 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and equipment 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. Impairment of Long-lived assets 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 5, “Property and Equipment,” for additional information. Leases The Company determines if an arrangement is a lease at its inception. 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. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date. The lease term includes renewal options when it is reasonably certain that the option will be exercised and excludes termination options. Lease expense for these leases is recognized on a straight-line basis over the lease term. We have elected not to recognize ROU assets and lease liabilities that arise from short-term leases for any class of underlying asset. Operating leases are included in Operating lease, right-of-use-assets, Operating lease liabilities, and Long-term operating lease liabilities in our Consolidated Balance Sheets. 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. We recognized $ 0.6 million and $ 1.5 million for the years ended December 31, 2023 and 2022, respectively. 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. 53 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents a reconciliation of basic and diluted loss per share computations (in thousands, except per share amounts): For the years ended December 31, 2023 2022 Numerator: Net loss $ ( 4,293 ) $ ( 10,279 ) Denominator: Basic and diluted weighted average common shares outstanding* 3,241 1,158 * Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023. As a result of the net loss we incurred for the year ended December 31, 2023, convertible preferred stock representing approximately 25 thousand shares of common stock were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the year ended December 31, 2022, convertible preferred stock representing approximately 25 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 196,978 shares underlying them, for the purposes of calculating basic EPS. The June 2022 Pre-Funded Warrants were all exercised in July 2022. 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 9, “Stockholders’ Equity,” for additional information. 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 $ 6 thousand and $ 0.3 million for the years ended December 31, 2023 and 2022, respectively. 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 or rework services 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 drove 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. 54 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes warranty activity for the periods presented (in thousands): At December 31, 2023 2022 Balance at the beginning of the year $ 183 $ 295 Accruals for warranties issued 10 24 Adjustments to existing warranties ( 43 ) ( 136 ) Accrued warranty reserve at the end of the year $ 150 $ 183 Recently issued accounting standards On November 27, 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting-Improvements to Reportable Segment Disclosures , which requires public entities to provide disclosures of significant segment expenses and other segment items. The guidance requires public entities to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually and also applies to public entities with a single reportable segment. Entities are permitted to disclose more than one measure of a segment’s profit or loss if such measures are used by the chief operating decision-maker to allocate resources and assess performance, as long as at least one of those measures is determined in a way that is most consistent with the measurement principles used to measure the corresponding amounts in the consolidated financial statements. The guidance is applied retrospectively to all periods presented in financial statements, unless it is impracticable, and is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. Early adoption is permitted. This standard will only impact disclosures and will be adopted by the Company on January 1, 2024. We are currently evaluating the impact this ASU will have on our financial statements and disclosures. On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures , which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. Under the new guidance, entities must consistently categorize and provide greater disaggregation of information in the rate reconciliation. They must also further disaggregate income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The guidance applies to all entities subject to income taxes and is effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company plans to adopt this standard on January 1, 2025. We are currently evaluating the impact this ASU will have on our financial statements and disclosures. Recently adopted accounting standards In June 2016, the FASB issued Accounting Standard Update 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. For smaller reporting companies, this standard became effective for interim and annual periods starting after December 15, 2022, and has been adopted by the Company. We adopted this guidance during the first quarter of 2023, and it did not have a material impact on our consolidated balance sheets or results of operations. Certain risks and concentrations 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 2023, two customers accounted for 48 % of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 35 % and sales to a shipbuilder for the U.S. Navy accounting for approximately 13 %. 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. • At December 31, 2023, one distributor to the U.S. Department of Defense accounted for 74 % of our net trade accounts receivable, when combined with our net trade accounts receivable to shipbuilders for the U.S. Navy, total net accounts 55 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS receivable related to U.S. Navy sales is 78 % of total net accounts receivable. 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. 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 $ 0.8 million and $ 0.6 million at December 31, 2023 and 2022, 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, a related party, accounted for approximately 28.0 % 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 % (the latter a related party, see Note 13 “Related Party Transactions”) of our trade accounts payable balance. • 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. NOTE 3. LEASES The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases with expirations through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one finance lease on a forklift containing a bargain purchase option, which was exercised in July 2022. As of March 25, 2022, the terms of our real estate operating lease have been modified beginning July 1, 2022 and extended through 2027. In accordance with ASC 842, Leases (“ASC 842”), the related lease liability was remeasured and the right-of-use asset was adjusted at the time of modification. The present value of the lease obligations for the lease was calculated using an incremental borrowing rate of 16.96 % , which was the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads Financial Group, LLC (as described below in Note 7, “Debt”) and Factors Southwest L.L.C. (as described below in Note 7, “Debt”). The weighted average remaining lease term for the operating leases is 3.5 years. Components of the operating lease costs recognized in net loss were as follows (in thousands): For the years ended December 31, 2023 2022 Sub-lease income $ — $ ( 90 ) Lease cost 461 501 Total lease cost, net $ 461 $ 411 Supplemental Consolidated Balance Sheet information related to the Company’s operating leases are as follows (in thousands): At December 31, 2023 2022 Operating Leases Operating lease right-of-use assets $ 899 $ 1,180 Operating lease liabilities 1,021 1,227 56 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 2024 through 2027 are as follows (in thousands): Operating Leases 2024 379 2025 385 2026 390 2027 197 Total future undiscounted lease payments 1,351 Less imputed interest ( 330 ) Total lease obligations $ 1,021 Supplemental cash flow information related to leases was as follows (in thousands): Years ended December 31, 2023 2022 Supplemental Cash Flow Information: Cash paid, net, for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 383 $ 423 Financing cash flows from finance leases $ — $ 1 NOTE 4. INVENTORIES Inventories consist of the following (in thousands): At December 31, 2023 2022 Raw materials $ 2,189 $ 3,347 Finished goods 4,803 4,656 Reserve for excess, obsolete, and slow-moving inventories ( 2,553 ) ( 2,527 ) Inventories, net $ 4,439 $ 5,476 The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands): At December 31, 2023 2022 Beginning balance $ ( 2,527 ) $ ( 3,050 ) Accrual ( 404 ) ( 312 ) Reduction due to sold inventory 378 323 Write-off for disposed inventory — 512 Reserves for excess, obsolete, and slow-moving inventories $ ( 2,553 ) $ ( 2,527 ) . 57 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. 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, 2023 2022 Equipment (useful life 3 - 15 years) $ 1,061 $ 1,061 Tooling (useful life 2 - 5 years) 190 190 Vehicles (useful life 5 years) 41 — Leasehold improvements (the shorter of useful life or lease life) 141 141 Construction in progress 28 — Property and equipment at cost 1,461 1,392 Less: accumulated depreciation ( 1,349 ) ( 1,316 ) Property and equipment, net $ 112 $ 76 Depreciation expense was $ 33 thousand and $ 159 thousand for the years ended December 31, 2023 and 2022, respectively. During the third quarter of 2022 it was determined that the 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 of 2022, impairment charges totaling $ 262 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 $ 338 thousand on the impairment of fixed assets. No such loss was recorded during the year ended December 31, 2023. NOTE 6. PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets consisted of the following (in thousands): At December 31, 2023 2022 Prepaid insurance $ 32 $ 63 Prepaid expenses 81 130 Prepaid rent 41 39 Other 2 — Total prepaid and other current assets $ 156 232 NOTE 7. DEBT Debt consisted of the following (in thousands): At December 31, 2023 2022 Credit facilities, net $ — $ 1,447 Promissory notes - related parties — 814 Streeterville notes, net 1,323 2,618 Advanced capital contribution 450 — Total $ 1,773 $ 4,879 58 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. We paid off and terminated the Credit Facilities during the year ended December 31, 2023. Inventory Facility with Crossroads 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 (“Crossroads”). Borrowings under the original Inventory Facility were permitted up to the lower of (i) $ 3.0 million, which amount was subsequently increased to $ 3.5 million in April 2021, 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 Crossroads entered into an amendment to the Inventory Loan Agreement (the “Crossroads Amendment”) to restructure and pay down the Inventory Facility. The Crossroads Amendment provided that the Company makes payments to reduce the outstanding obligations under the Inventory Facility of $ 750 thousand by January 20, 2023 and $ 250 thousand by February 15, 2023. The Company also agreed to make monthly payments of approximately $ 40 thousand 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 $ 3.5 million to $ 500 thousand, 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 per annum was a rate equal to (i) the Three-Month LIBOR rate plus 5.5 % or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus 6.00 %. The Inventory Facility was paid in full on September 24, 2023, using the interest rate of 11.16 % per annum, and the Company wrote off the difference of $ 40 thousand between the final invoice amount and the carrying value of the debt, which was recorded as interest income. Receivables Facility with FSW Funding The second Credit Facility was 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 were permitted up to the lower of (i) $ 2.5 million and (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 and the RF Lender agreed to terminate the Receivables Facility. 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 Crossroads, which intercreditor agreement was also terminated. Borrowings under the Inventory Facility was $ 1.4 million at December 31, 2022. Borrowings under the Receivables Facility was $ 0.1 million at December 31, 2022. These facilities are recorded in the Consolidated Balance Sheets as of December 31, 2022 as a current liability under the caption “Credit line borrowings.” Promissory Notes-Related Parties 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, Chiao Chieh (Jay) Huang, and Tingyu Lin. Ms. Gina Huang is a member of the Board of Directors and Mr. Jay Huang is our Chief Executive Officer (“CEO”) and a former member of the Board of Directors. 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. See Note 9, “Stockholders’ Equity.” The following summarizes the 2022 Promissory Notes at December 31, 2022: 59 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 (the “2022 Streeterville 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 (the “2022 Streeterville Note Amendment”). We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $ 500 thousand by January 20, 2023 and by $ 250 thousand by July 14, 2023. Beginning January 1, 2024, we agreed to 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. On March 31, 2023, the Company entered into an Exchange Agreement (the “March 2023 Exchange Agreement”) with Streeterville, pursuant to which we agreed to (i) partition from the 2022 Streeterville Note a new Promissory Note (the “March 2023 Partitioned Note”) in the original principal amount of $ 250 thousand (the “March 2023 Exchange Amount”), (ii) cause the outstanding balance of the 2022 Streeterville Note to be reduced by an amount equal to the March 2023 Exchange Amount, and (iii) exchange (the “March 2023 Exchange”) the March 2023 Partitioned Note for 71,715 shares of the Company’s common stock. The March 2023 Exchange was priced at-the-market under the Nasdaq rules and was effected pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). There were no gross proceeds to the Company in respect of the March 2023 Exchange, provided that $ 125 thousand of the March 2023 Exchange Amount was applied toward the $ 250 thousand payment due on or before July 14, 2023 pursuant to the 2022 Streeterville Note Amendment, and $ 125 thousand was credited to satisfy the December 1, 2024 required payment. The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $ 1.3 million and $ 2.0 million at December 31, 2023 and 2022, respectively. In January 2024, we paid off the 2022 Streeterville Note in full. See Note 14 “Subsequent Events”. Unamortized loan discount and debt issuance costs for Streeterville Notes were $ 36 thousand and $ 43 thousand at December 31, 2023 and 2022, respectively. 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. 60 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Advanced capital contribution In October 2023, an unrelated party agreed to subscribe the Company’s common stocks in the next round of private placement and transferred funds in the amount of $ 450 thousand. There is no restriction in use of the funds and the advanced capital contribution bears no interest. The terms of the next round of private placement are undetermined and the Company may return the funds on demand. NOTE 8. COMMITMENTS AND CONTINGENCIES Purchase Commitments As of December 31, 2023, we had approximately $ 0.5 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2024. We have 49 % of the outstanding purchase commitments with a related party. NOTE 9. STOCKHOLDERS’ EQUITY Common Stocks 1-for-7 Reverse Stock Split At the Company’s annual meeting of stockholders held on June 15, 2023, the Company’s stockholders approved a form of the certificate of amendment (“Certificate of Amendment”) to the Certificate of Incorporation and authorized our board of directors to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-10, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion. On June 15, 2023, our board of directors determined to set the reverse stock split at 1-for-7 (the “Split Ratio”). The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 15, 2023, with the reverse stock split becoming effective on June 16, 2023 (the “Effective Time”). At the Effective Time, every seven shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock. No fractional shares were issued as a result of the reverse stock split. The fractional shares were settled in cash in an amount not material to the Company. The $ 0.0001 par value per share of common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at 50,000,000 shares. The current financial statements, as well as the prior-period financial statements have been retroactively adjusted to reflect the reverse stock split. Our outstanding shares of restricted stock and shares underlying our options and warrants entitling the holders to purchase shares of common stock have been adjusted as a result of the reverse stock split, as required by the terms of these securities. Also, the number of shares reserved for issuance under our existing 2020 Stock Incentive Plan, as amended, and our 2013 Employee Stock Purchase Plan were reduced proportionately based on the Split Ratio. Preferred shares outstanding were not affected by the reverse stock split and as such, those shares have not been adjusted. The reverse stock split was effected solely to increase the per share trading price of the common stock to satisfy the Bid Price Rule for continued listing on Nasdaq. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 19, 2023. 61 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Private Placements The Company entered the securities purchase agreements with certain investors and issued 2,870,964 (including debt-to-equity exchange noted in Note 7, “Debt”) and 384,615 shares of common stock during the years ended December 31, 2023 and 2022, respectively. September 2023 Private Placement On September 29, 2023, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of 853,658 shares of the Company’s common stock, par value $ 0.0001 per share, for a purchase price per share of $ 2.05 (the “September 2023 Private Placement”). Aggregate gross proceeds to the Company in respect of the September 2023 Private Placement were approximately $ 1.75 million. The September 2023 Private Placement closed on September 29, 2023. June 2023 Private Placement On June 29, 2023, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of 746,875 shares of the Company’s common stock, par value $ 0.0001 per share, for a purchase price per share of $ 1.76 (the “June 2023 Private Placement”). One of the purchasers was Mr. Huang, the Company’s CEO. Aggregate gross proceeds to the Company in respect of the June 2023 Private Placement were approximately $ 1.3 million. The June 2023 Private Placement closed on June 29, 2023. March 2023 Private Placements On March 28, 2023, the Company entered into a securities purchase agreement with Mr. Chiao Chieh (Jay) Huang, pursuant to which the Company agreed to issue and sell, in a private placement (the “March 28, 2023 Private Placement”), 15,500 shares of the Company’s common stock for a purchase price of $ 3.55 per share. On March 30, 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 (collectively with the March 28, 2023 Private Placement, the “March 2023 Private Placements”), 71,428 shares of the Company’s common stock for a purchase price of $ 3.50 per share. Aggregate gross proceeds to the Company in respect of the March 2023 Private Placements were $ 305 thousand. Each of the March 2023 Private Placements was priced at-the-market under the Nasdaq rules. February 2023 Private Placement On February 24, 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 (the “February 2023 Private Placement”), 114,744 shares of the Company’s common stock, for a purchase price of $ 3.49 per share. Gross proceeds to the Company in respect of the February 2023 Private Placement were $ 400 thousand. The February 2023 Private Placement was priced at fair market value under the Nasdaq rules. January 2023 Sander Electronics Private Placement On January 17, 2023, the Company entered into a securities purchase agreement (the “Sander Purchase Agreement”) with certain purchasers associated with Sander Electronics, Inc., pursuant to which the Company agreed to issue and sell in a private placement (the “Sander Private Placement”) an aggregate of 778,017 shares of common stock for a purchase price per share of $ 3.51 . Consideration for the transaction included exchange of approximately $ 657 thousand in the aggregate of outstanding amounts on previous short-term bridge financings, including the 2022 Promissory Notes issued to Mr. Huang, as described above in Note 7, “Debt”. Aggregate gross proceeds from the Sander Private Placement were approximately $ 2.1 million. The Sander Private Placement was priced at-the-market under the Nasdaq rules. January 2023 Transactions with Mei Yun (Gina) Huang 62 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 36,828 shares of the Company’s common stock, for a purchase price of $ 2.72 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, 46,543 shares of the Company’s common stock for a purchase price of $ 3.22 per share. Aggregate gross proceeds to the Company in respect of these private placements to Ms. Huang were $ 250 thousand. Each of the private placements to Ms. Huang was priced at fair market value under the Nasdaq rules. On January 17, 2023, the Company and Ms. Huang entered into exchange agreements pursuant to which the Company and Ms. Huang agreed to exchange the approximately $ 817 thousand aggregate outstanding amounts on previous short-term bridge financings, including the 2022 Promissory Notes issued to Ms. Huang, as described above in Note 7, “Debt”, for an aggregate of 207,371 shares of common stock at a price per share of $ 3.94 . The exchanges were priced at fair market value under the Nasdaq rules. June 2022 Private Placement In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of 187,637 shares of our common stock at a purchase price of $ 9.10 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 196,978 shares of common stock at an exercise price of $ 0.0007 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 384,615 shares of common stock at an exercise price of $ 9.10 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 196,978 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, 2023, June 2022 Warrants to purchase an aggregate of 384,615 shares remained outstanding, with a weighted average exercise price of $ 9.10 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 a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 170,455 shares of our common stock at a purchase price of $ 24.64 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “December 2021 Pre-Funded Warrants”) to purchase 12,175 shares of common stock at an exercise price of $ 0.0007 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 182,630 shares of common stock at an exercise price of $ 24.64 per share. In connection with the December 2021 Private Placement, we paid the placement agent commissions of $ 360 thousand plus $ 42 thousand in expenses and we also paid legal, accounting and other fees of $ 97 thousand. Net proceeds from the December 2021 Private Placement were approximately $ 4.0 million. In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of December 31, 2023, December 2021 Warrants to purchase an aggregate of 182,630 shares remained outstanding, with an exercise price of $ 24.64 per share. The December 2021 Warrants expire on December 16, 2026. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $ 4.5 million in the aggregate. Preferred Stock The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29, 2019, which designated 2,000,000 shares of the Company’s preferred stock, par value $ 0.0001 per share, as Series A Preferred Stock (the “Original Series A Certificate of Designation”). On January 15, 2020 with prior stockholder approval, the Company amended the Certificate of Incorporation to increase the number of authorized shares of preferred stock to 5,000,000 . The Original Series A Certificate of Designation was also amended on January 15, 2020, to 63 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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”). 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 1.582 % 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 1- for- 35 basis. As of December 31, 2023 and 2022, there were 876,447 Series A Preferred Stock issued and outstanding which can be convertible into 25 thousand shares of common stock at the option of the holder. Warrants During the years ended December 31, 2023 and 2022, no warrants were exercised. As of December 31, 2023 and 2022, we had the following outstanding warrants: As of December 31, 2023 As of December 31, 2022 Number of Underlying Shares Exercise Price Expiration June 2022 Warrants 384,615 384,615 $ 9.10 December 16, 2026 December 2021 Warrants 182,630 182,630 $ 24.64 June 7, 2027 January 2020 Investor Warrants 26,819 26,819 $ 23.59 January 13, 2025 January 2020 Placement Agent Warrants 5,954 5,954 $ 34.96 January 13, 2025 600,018 600,018 Stock-based Compensation Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize 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, 2023 2022 Cost of sales $ 2 $ 2 Product development — 15 Selling, general, and administrative 42 100 Total stock-based compensation $ 44 $ 117 At December 31, 2023 and 2022, we had unearned stock compensation expense of $ 64 thousand and $ 128 thousand, 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 2.7 years years as of December 31, 2023 and 2.8 years as of December 31, 2022. 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: 64 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2023 2022 Fair value of options issued $ 2.49 $ 0.77 Exercise price $ 3.04 $ 0.95 Expected life of option (in years) 6.1 6.1 Risk-free interest rate 3.5 % 3.0 % Expected volatility 101.8 % 104.0 % 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. Options outstanding under all plans at December 31, 2023 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, 2021 38,032 $ 24.30 Granted 32,317 6.67 Exercised ( 22,893 ) 21.00 Canceled/forfeited ( 318 ) 19.52 Expired ( 36 ) 10.18 Outstanding at December 31, 2022 47,102 13.78 Granted 11,427 $ 3.04 Canceled/forfeited ( 24,076 ) 18.55 Expired ( 3,878 ) 17.03 Balance at December 31, 2023 30,575 $ 5.60 Vested and expected to vest at December 31, 2023 25,679 $ 5.77 Exercisable at December 31, 2023 8,068 $ 7.53 *Options have been restated for the 1-for-7 reverse stock split effective June 16, 2023. The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options. No options were exercised during 2023 and 22,893 options were exercised during 2022. All outstanding equity awards were out of the money as of December 31, 2023. 65 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The options outstanding at December 31, 2023 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 $ 3.04 — $ 4.14 7,142 9.3 $ 3.04 — — $ — $ 4.15 — $ 5.73 21,428 8.7 5.25 6,702 8.7 5.25 $ 5.74 — $ 13.48 882 7.2 8.34 453 6.7 9.26 $ 13.49 — $ 27.55 661 5.8 16.80 661 5.8 16.80 $ 27.56 — $ 59.78 463 7.0 39.91 252 6.8 40.68 30,576 8.7 $ 5.60 8,068 8.3 $ 7.53 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 Outstanding at December 31, 2021 343 $ 1.02 Granted 7,143 $ 0.18 Expired ( 5,829 ) $ 0.22 Outstanding at December 31, 2022 1,657 $ 11.13 Expired ( 1,428 ) $ 4.90 Canceled/forfeited ( 229 ) $ 49.99 Outstanding at December 31, 2023 — $ — *Restricted stock units have been restated for the 1-for-7 reverse stock split effective June 16, 2023. NOTE 10. 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 2020. 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, 2023 and 2022, respectively, there were no accrued interest and penalties related to uncertain tax positions. 66 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the components of the provision for income taxes (in thousands): For the year ended December 31, 2023 2022 Current: State $ 3 $ 4 Deferred: U.S. Federal — — Provision for (benefit from) income taxes $ 3 $ 4 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, 2023 2022 U.S. statutory rate 21.0 % 21.0 % State taxes (net of federal tax benefit) 4.5 1.3 Valuation allowance ( 29.5 ) ( 18.2 ) Other 4.1 ( 4.1 ) 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, 2023 2022 Accrued expenses and other reserves $ 1,195 $ 1,458 Right-of-use-asset ( 197 ) ( 294 ) Lease liabilities 224 306 Tax credits, deferred R&D, and other 470 438 Net operating loss 20,935 18,856 Valuation allowance ( 22,627 ) ( 20,764 ) Net deferred tax assets $ — $ — In 2023, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $ 6.3 million additional federal net operating loss we recognized for the year. In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $ 9.2 million additional federal net operating loss we recognized for the year. At December 31, 2023, we had federal and state net operating loss carry-forwards (“NOLs”) of approximately $ 138.7 million for federal income tax purposes ($ 48.0 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $ 84.3 million of the $ 138.7 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 $ 6.3 million and $ 9.2 million in federal net operating losses generated in December 31, 2023 and 2022 will be subject to the new limitations under the Tax Act. If not utilized, the NOLs generated prior to December 31, 2017 of $ 0.9 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, 2023 and 2022, respectively. We had no net deferred tax liabilities at December 31, 2023 or 2022, respectively. 67 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. 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, 2023 2022 Commercial products $ 1,593 $ 3,746 MMM products 4,124 2,222 Total net sales $ 5,717 $ 5,968 A geographic summary of net sales is as follows (in thousands): For the year ended December 31, 2023 2022 United States $ 5,690 $ 5,815 International 27 153 Total net sales $ 5,717 $ 5,968 At December 31, 2023 and 2022, approximately 100 % of our long-lived assets, which consist of property and equipment, were located in the United States. NOTE 12. RECEIVABLE FOR CLAIMED EMPLOYEE RETENTION TAX CREDIT The CARES Act, which was enacted on March 27, 2020, provides an ERTC that is a refundable tax credit against certain employer taxes. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021. For purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the immediately preceding quarter to the corresponding calendar quarter in 2019. The credit is taken against the Company’s share of Social Security Tax when the Company’s payroll provider files, or subsequently amends the applicable quarterly employer tax filings. Under the amended guidelines, we 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 received an additional refund of approximately $ 445 thousand during 2023. This amount was recorded as a receivable in the Consolidated Balance Sheet as of December 31, 2022 and was received during 2023. NOTE 13. RELATED PARTY TRANSACTIONS Promissory Notes 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, Mei-Yun (Gina) Huang, for $ 450 thousand and $ 350 thousand, respectively. 68 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Chiao Chieh (Jay) Huang, our CEO. Please refer to Note 7, “Debt” for further detail. Purchase Transactions The Company has a purchase agreement for TLED products and spare parts with Sander Electronics, Inc., a shareholder of the Company. Purchases from Sander Electronics, Inc. for the year ended December 31, 2023 totaled $ 2.1 million. Accounts payable to Sander Electronics, Inc. amounted to $ 2.1 million as of December 31, 2023. The Company did not enter into any transactions with Sander Electronics, Inc. during the fiscal year of 2022. Private Placements Please refer to Note 9 for further details on Private Placements in 2023 and 2022. 69 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. SUBSEQUENT EVENTS Early Payoff 2022 Streeterville Note On January 18, 2024, the Company and Streeterville entered into a payoff letter (the “Letter”) and exchange agreement (“Exchange Agreement”) to pay off the 2022 Streeterville Note early. The Letter and Exchange Agreement provide that the Company makes payments to reduce the outstanding obligations under the 2022 Streeterville Note of $ 1.0 million in cash by January 19, 2024 and exchanges 94,440 shares of common stocks by January 23, 2024 for the remaining amount. In January 2024, we paid off the 2022 Streeterville Note in full early. 70 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. 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. 71 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.