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 ) 35 Consolidated Balance Sheets as of December 31, 2024 and 2023 37 Consolidated Statements of Operations for the years ended December 31, 2024 and 2023 39 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2024 and 2023 40 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2024 and 2023 41 Consolidated Statements of Cash Flows for the years ended December 31, 2024 and 2023 42 Notes to Consolidated Financial Statements 44 34 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, 2024 and 2023, 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, 2024 and 2023, 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 suffered 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, 2024, the Company had inventories of $3.3 million, net of reserves for excess, obsolete and slow-moving inventories. 35 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 25, 2025 36 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (amounts in thousands except share data) 2024 2023 ASSETS Current assets: Cash $ 565 $ 2,030 Trade accounts receivable, less allowances of $ 15 and $ 20 , respectively 804 1,570 Trade accounts receivable - related party — 202 Inventories, net 3,263 4,439 Prepayments to vendors 356 792 Prepaid and other current assets 157 156 Total current assets 5,145 9,189 Property and equipment, net 90 112 Operating lease, right-of-use asset 377 899 Total assets $ 5,612 $ 10,200 LIABILITIES Current liabilities: Accounts payable $ 970 $ 1,624 Accounts payable - related party 909 2,146 Accrued liabilities 90 110 Accrued legal and professional fees 54 64 Accrued payroll and related benefits 148 199 Accrued sales commissions 15 62 Accrued warranty reserve 118 150 Operating lease liabilities 139 223 Promissory notes payable, net of discounts and loan origination fees — 1,323 Advanced capital contribution — 450 Total current liabilities 2,443 6,351 (continued on the following page) The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (amounts in thousands except share data) 2024 2023 Operating lease liabilities, net of current portion 254 798 Total liabilities 2,697 7,149 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, 2024 and December 31, 2023 Issued and outstanding: 876,447 shares at December 31, 2024 and December 31, 2023 — — Common stock, par value $ 0.0001 per share: Authorized: 50,000,000 shares at December 31, 2024 and December 31, 2023 Issued and outstanding: 5,260,741 shares at December 31, 2024 and 4,348,690 shares at December 31, 2023 1 — Additional paid-in capital 157,814 156,369 Accumulated other comprehensive loss ( 3 ) ( 3 ) Accumulated deficit ( 154,897 ) ( 153,315 ) Total stockholders' equity 2,915 3,051 Total liabilities and stockholders' equity $ 5,612 $ 10,200 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands except per share data) 2024 2023 Net sales $ 4,860 $ 5,717 Cost of sales 4,161 5,494 Gross profit 699 223 Operating expenses: Product development 524 587 Selling, general, and administrative 2,017 3,607 Total operating expenses 2,541 4,194 Loss from operations ( 1,842 ) ( 3,971 ) Other expenses (income): Interest income — ( 57 ) Interest expense 5 380 Gain on debt extinguishment ( 187 ) — Gain on partial lease termination ( 63 ) — Other income ( 27 ) ( 30 ) Other expenses 10 26 Loss from operations before income taxes ( 1,580 ) ( 4,290 ) Provision for income taxes 2 3 Net loss $ ( 1,582 ) $ ( 4,293 ) Net loss per common stock basic and diluted: Net loss $ ( 0.32 ) $ ( 1.32 ) Weighted average shares of common stock outstanding: Basic and diluted 4,947 3,241 The accompanying notes are an integral part of these consolidated financial statements. 39 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2024 2023 Net loss $ ( 1,582 ) $ ( 4,293 ) Other comprehensive loss: Foreign currency translation adjustments — — Comprehensive loss $ ( 1,582 ) $ ( 4,293 ) The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023 ((amounts in thousands except share data)) Additional Paid-in Capital Accumulated Other Comprehensive Loss Preferred Stock Common Stock Accumulated Deficit Shares Amount Shares Amount Total 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 Issuance of common stock — — 818 1 1,300 — — 1,301 Conversion of advanced capital contribution to common stock — — 94 — 141 — — 141 Stock-based compensation — — — — 4 — — 4 Net loss — — — — — — ( 1,582 ) ( 1,582 ) Balance at December 31, 2024 876 $ — 5,261 $ 1 $ 157,814 $ ( 3 ) $ ( 154,897 ) $ 2,915 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2024 2023 Cash flows from operating activities: Net loss $ ( 1,582 ) $ ( 4,293 ) Adjustments to reconcile net loss to net cash used in operating activities: Other income — ( 40 ) Gain on partial lease termination ( 63 ) — Gain on debt extinguishment ( 187 ) — Depreciation 37 33 Stock-based compensation 4 44 Provision for credit losses and sales returns ( 69 ) 6 Provision for slow-moving and obsolete inventories 347 25 Provision for warranties ( 32 ) ( 33 ) Amortization of loan discounts and origination fees 5 225 Change in operating assets and liabilities: Accounts receivable 1,037 ( 1,131 ) Accounts receivable - related party — ( 202 ) Inventories 829 1,012 Prepayments to vendors 83 ( 200 ) Prepaid and other assets 3 521 Accounts payable ( 301 ) ( 580 ) Accounts payable- related party ( 1,237 ) 2,146 Accrued and other liabilities ( 128 ) ( 47 ) Right of use assets and lease liabilities ( 43 ) 75 Total adjustments 285 1,854 Net cash used in operating activities ( 1,297 ) ( 2,439 ) Cash flows from investing activities: Acquisitions of property and equipment ( 19 ) ( 69 ) Net cash used in investing activities ( 19 ) ( 69 ) Cash flows from financing activities: Proceeds from the issuance of common stock and warrants 851 6,079 Costs related to reverse stock-split — ( 16 ) Payments on the 2022 Streeterville Note ( 1,000 ) ( 625 ) Net payments on credit line borrowings - Credit Facilities — ( 1,402 ) Advanced capital contribution — 450 Net cash (used in) provided by financing activities ( 149 ) 4,486 (continued on the following page) 42 Table of Contents ENERGY FOCUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2024 2023 Net (decrease) increase in cash ( 1,465 ) 1,978 Cash, beginning of year 2,030 52 Cash, end of year $ 565 $ 2,030 Supplemental information: Cash paid in year for interest $ 5 $ 380 Non-cash investing and financing activities: Debt-to-equity exchange transactions $ 591 $ 1,716 The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS Energy Focus, Inc. (the “Company”) 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, 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. Additionally, we have expanded product offerings into both Maritime lighting and Energy Storage Solutions ( “ESS”). 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, 2024 and 2023, including net losses of $ 1.6 million and $ 4.3 million for the twelve months ended December 31, 2024 and 2023, respectively, and total cash used in operating activities of $ 1.3 million and $ 2.4 million for the twelve months ended December 31, 2024 and 2023, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2024. 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 pursuing cost-saving measures to enhance profitability. 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 44 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 As of the date of this Annual Report, the Company believes it has maintained compliance with the Minimum Stockholders’ Equity Rule, which requires listed companies to maintain stockholders’ equity of at least $ 2.5 million for continued listing on the Nasdaq Capital Market. To become compliant with the Bid Price Rule, which has a minimum bid price of at least $ 1.00 per share as one of its continued listing requirements, the Company 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 expected credit loss provision, inventory obsolescence and warranty claims, the determination of the useful lives of property and equipment, valuation of long-lived assets, allowance for deferred tax assets, sales returns and stock-based compensation. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-lived assets for impairment require 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 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 credit losses to provide for the estimated number of account receivables that will not be collected. On January 1, 2023, the Company adopted ASC 326. The standard adds to U.S. GAAP an impairment model known as the CECL model, which is based on expected 45 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 reserve 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 expenses. 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. 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. 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 (in thousands): December 31, 2024 December 31, 2023 January 1, 2023 Accounts Receivable $ 819 $ 1,590 $ 471 Less: Reserve for Credit Losses ( 15 ) ( 20 ) ( 26 ) Net Accounts Receivable $ 804 1,570 445 Activity related to our reserve for credit losses was as follows (in thousands): Allowance for credit losses as of January 1, 2023 $ ( 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 credit losses 12 Allowance for credit losses as of December 31, 2023 $ ( 20 ) Reduction of reserve for credit losses as of December 31, 2024 5 Allowance for credit losses as of December 31, 2024 $ ( 15 ) Geographic information All our long-lived fixed assets are located in the United States. For the years ended December 31, 2024 and 2023, 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, 2024 and 2023, we had cash of $ 0.6 million and $ 2.0 million, 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. 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 46 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2024 and 2023, we 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. 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 47 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 0.5 million and $ 0.6 million research and development costs for the years ended December 31, 2024 and 2023, 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. 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, 2024 2023 Numerator: Net loss $ ( 1,582 ) $ ( 4,293 ) Denominator: Basic and diluted weighted average common shares outstanding 4,947 3,241 As a result of the net loss we incurred for the years ended December 31, 2024 and 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. 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 48 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 for each of the years ended December 31, 2024 and 2023, 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. 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 adjust to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires. The following table summarizes warranty activity for the periods presented (in thousands): At December 31, 2024 2023 Balance at the beginning of the year $ 150 $ 183 Accruals for warranties issued 3 10 Adjustments to existing warranties ( 35 ) ( 43 ) Accrued warranty reserve at the end of the year $ 118 $ 150 Recently issued accounting standards 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 49 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS adopt this standard on January 1, 2025. We are currently evaluating the impact this ASU will have on our financial statements and disclosures. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. ASU 2023-06 modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. Because of the variety of Topics amended, a broad range of entities may be affected by one or more of those amendments. Many of the amendments allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the SEC’s requirements. Also, the amendments align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, the amendments will be effective two years later. The amendments in this update should be applied prospectively. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. The Company is currently evaluating the potential impact this standard will have on its consolidated financial statements and related disclosures. Recently adopted 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. The Company adopted ASU 2023-07 in 2024. Refer to Note 11 for related disclosures. Other accounting standards that have been issued by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. We do not discuss recent standards that are not anticipated to have an impact on or are unrelated to our consolidated financial condition, results of operations, cash flows or disclosures. 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 2024, two customers collectively accounted for 33 % of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 16 % and sales to a shipbuilder for the U.S. Navy accounting for approximately 17 %. In 2023, two customers collectively 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 %. • At December 31, 2024, three customers collectively accounted for 88 % of our net trade accounts receivables. This including approximately 21 % from distributor to the U.S. Navy, approximately 52 % from shipbuilder to the U.S. Navy, and approximately 15 % from commercial customer accounts. 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 receivable related to U.S. Navy sales is 78 % 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 50 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 0.4 million and $ 0.8 million at December 31, 2024 and 2023, respectively. We have certain vendors who individually represented 10% or more of our total expenditures, or whose net trade accounts payable balance individually represented 10% or more of our total net trade accounts payable, as follows: • One offshore supplier accounted for approximately 36 % of our total expenditures for the twelve months ended December 31, 2024. At December 31, 2024, two offshore suppliers collectively accounted for approximately 36 % and 54 % (a related party, See Note 12, “Related Party Transactions”) of our trade accounts payable balance, respectively. • No offshore supplier accounted for more than 10% of our total expenditures for the twelve months ended December 31, 2023. At December 31, 2023, two offshore suppliers accounted for approximately 16 % and 57 % (a related party, See Note 12, “Related Party Transactions”) of our trade accounts payable balance, respectively. 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. As of March 25, 2022, the terms of our real estate operating lease have been modified beginning July 1, 2022 and extended through 2027. Additionally, Effective July 1, 2024, our warehouse and office lease was amended to reduce the rentable square feet from 62,335 square feet to 29,692 square feet and the rent expenses were decreased in proportion to the reduction in rentable square. The Company recorded this as a lease modification in accordance with ASC 842 Leases (“ASC 842”) and recorded a reduction to the right of use asset and lease liability of approximately $ 395 thousand using an incremental borrowing rate of approximately 13.64 %. The Company recognized a gain on the lease modification of $ 63 thousand which was recorded as other income in the Statement of Operations. The weighted average remaining lease term for the operating leases is 2.5 years. Components of the operating lease costs recognized in net loss were as follows (in thousands): For the years ended December 31, 2024 2023 Lease cost $ 303 $ 461 Supplemental Consolidated Balance Sheet information related to the Company’s operating leases is as follows (in thousands): At December 31, 2024 2023 Operating Leases Operating lease right-of-use assets $ 377 $ 899 Operating lease liabilities 393 1,021 51 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 2025 through 2027 are as follows (in thousands): Operating Leases 2025 182 2026 186 2027 94 Total future undiscounted lease payments 462 Less imputed interest ( 69 ) Total lease obligations $ 393 Supplemental cash flow information related to leases was as follows (in thousands): Years ended December 31, 2024 2023 Supplemental Cash Flow Information: Cash paid, net, for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 343 $ 383 NOTE 4. INVENTORIES Inventories consist of the following (in thousands): At December 31, 2024 2023 Raw materials $ 3,489 $ 2,189 Finished goods 2,585 4,803 Reduction due to permanent markdowns ( 2,464 ) — Reserves for excess, obsolete, and slow-moving inventories ( 347 ) ( 2,553 ) Inventories, net $ 3,263 $ 4,439 The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands): At December 31, 2024 2023 Beginning balance $ ( 2,553 ) $ ( 2,527 ) Accrual ( 347 ) ( 404 ) Reduction due to inventory sold 89 378 Reduction due to permanent markdowns 2,464 — Reserves for excess, obsolete, and slow-moving inventories $ ( 347 ) $ ( 2,553 ) 52 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, 2024 2023 Equipment (useful life 3 - 15 years) $ 490 $ 1,061 Tooling (useful life 2 - 5 years) 171 190 Vehicles (useful life 5 years) 41 41 Leasehold improvements (the shorter of useful life or lease life) 124 141 Construction in progress — 28 Property and equipment at cost 826 1,461 Less: accumulated depreciation ( 736 ) ( 1,349 ) Property and equipment, net $ 90 $ 112 Depreciation expense was $ 37 thousand and $ 33 thousand for the years ended December 31, 2024 and 2023, respectively. In 2024, the Company disposed of fully depreciated equipment and tooling. Therefore, no gain or loss was recorded during the year ended December 31, 2024. NOTE 6. PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets consisted of the following (in thousands): At December 31, 2024 2023 Prepaid insurance $ 36 $ 32 Prepaid expenses 77 81 Prepaid rent 44 41 Other — 2 Total prepaid and other current assets $ 157 156 NOTE 7. DEBT Debt consisted of the following (in thousands): At December 31, 2024 2023 Streeterville notes, net — 1,323 Advanced capital contribution — 450 Total $ — $ 1,773 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”). 53 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 in 2023. 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”). 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. Promissory Notes-Related Parties In 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”). All the 2022 Promissory Notes were exchanged for common stock on January 17, 2023. See Note 9, “Stockholders’ Equity.” 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 accrued 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 had 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 at December 31, 2023. 54 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS O n 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 provided that the Company made payments to reduce the outstanding obligations under the 2022 Streeterville Note of $ 1.0 million in cash by January 19, 2024 and exchange 94,440 shares of common stocks by January 23, 2024 for the remaining amount. On January 23, 2024, the 2022 Streeterville Note was terminated and the Company had no outstanding obligations to Streeterville, upon which the Company recognized a $ 187 thousand other income which is included in gain on debt extinguishment in the Condensed Consolidated Statements of Operations. Advanced capital contribution In October 2023, an unrelated party agreed to subscribe the Company’s common stock in the next round of private placement and transferred funds in the amount of $ 450 thousand . There was no restriction in use of the funds and the advanced capital contribution bore no interest. The advanced capital contribution was exchanged for common stock on March 28, 2024. See Note 9, “Stockholders’ Equity.” NOTE 8. COMMITMENTS AND CONTINGENCIES Purchase Commitments As of December 31, 2024, we had approximately $ 0.3 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2025. We have 88 % of the outstanding purchase commitments with a related party. Settlement of Return of Slow-Moving Inventory On December 30, 2024, in connection with its strategy to reduce a certain quantity of low-turnover inventory, the Company entered into an agreement with the vendor, an unrelated party, to return the inventory purchased between 2021 and 2022 and transfer EnFocus™ registered trademarks (carry amount of $ 0 ). As a result, the Company will recognize a non-cash gain of approximately $ 5 thousand on the settlement of returning inventory, cancelling prepayments made with the vendor, and settlement of outstanding accounts payable with the vendor. Please see below for the related accounts as of December 31, 2024 and the gain that will be recognized on the return date, which is expected to be in the early second quarter of year 2025. At December 31, 2024 Inventories, net $ 338 Prepayments to vendors 307 Accounts payable ( 650 ) EnFocus™ trademark — Net $ ( 5 ) NOTE 9. STOCKHOLDERS’ EQUITY Common Stock 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 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 reverse stock split became 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. 55 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Private Placements The Company entered the securities purchase agreements with certain investors and issued 912,050 and 2,870,964 shares (including debt-to-equity exchange noted in Note 7, “Debt”) of common stock during the years ended December 31, 2024 and 2023, respectively. June 2024 Private Placement On June 21, 2024, the Company entered into a securities purchase agreement with Sander Electronics Inc., a shareholder of the Company controlled by Mr. Chiao Chieh (Jay) Huang, CEO of the Company, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of 534,591 shares of the Company’s common stock, par value $ 0.0001 per share, for a purchase price per share of $ 1.59 (the “June 2024 Private Placement”). Consideration for the transaction included an exchange of $ 850 thousand. Aggregate gross proceeds to the Company in respect of the June 2024 Private Placement were approximately $ 850 thousand. The June 2024 Private Placement closed on June 21, 2024. March 2024 Private Placement On March 28, 2024, the Company entered into a securities purchase agreement with certain purchaser, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of 283,019 shares of the Company’s common stock, par value $ 0.0001 per share, for a purchase price per share of $ 1.59 (the “March 2024 Private Placement”). Consideration for the transaction included exchange of $ 450 thousand in the aggregate of outstanding amounts on previous advanced capital contributions, as described above in Note 6, “Debt”. Aggregate gross proceeds to the Company in respect of the March 2024 Private Placement were approximately $ 450 thousand. The March 2024 Private Placement was priced at-the-market under the Nasdaq rules. 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 56 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. 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 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. 57 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2024 and 2023, 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, 2024 and 2023, no warrants were exercised. As of December 31, 2024 and 2023, we had the following outstanding warrants: As of December 31, 2024 As of December 31, 2023 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, 2024 2023 Cost of sales $ — $ 2 Selling, general, and administrative 4 42 Total stock-based compensation $ 4 $ 44 At December 31, 2024 and 2023, we had unearned stock compensation expense of $ 2 thousand and $ 64 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 1.8 years as of December 31, 2024 and 2.8 years as of December 31, 2023. Stock Options For the years ended December 31, 2024 and 2023, the Company did not grant any 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: 58 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2024 2023 Fair value of options issued $ — $ 2.49 Exercise price $ — $ 3.04 Expected life of option (in years) 0 6.1 Risk-free interest rate — % 3.5 % Expected volatility — % 101.8 % Dividend yield 0.00 % 0.00 % Options outstanding under all plans at December 31, 2024 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, 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 Expired ( 9 ) 53.33 Balance at December 31, 2024 30,566 $ 5.58 Vested and expected to vest at December 31, 2024 28,376 $ 5.67 Exercisable at December 31, 2024 16,735 $ 6.20 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 2024 and 2023. All outstanding equity awards were out of the money as of December 31, 2024. The options outstanding at December 31, 2024 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 8.3 $ 3.04 2,976 8.3 $ 3.04 $ 4.15 — $ 5.73 21,428 7.7 5.25 12,062 7.7 5.25 $ 5.74 — $ 13.48 882 6.2 8.34 680 5.9 8.97 $ 13.49 — $ 27.55 661 4.8 16.80 661 4.8 16.80 $ 27.56 — $ 48.79 453 6.1 39.61 356 6.1 39.97 30,566 7.7 $ 5.58 16,735 7.6 $ 6.20 Restricted Stock Units 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 . During the years ended December 31, 2024 and 2023, no restricted stock units were issued, and as of December 31, 2024 and 2023, there were no outstanding restricted stock units. 59 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2021. 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, 2024 and 2023, respectively, there were no accrued interest and penalties related to uncertain tax positions. The following table shows the components of the provision for income taxes (in thousands): For the year ended December 31, 2024 2023 Current: State $ 2 $ 3 Deferred: U.S. Federal — — Provision for income taxes $ 2 $ 3 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, 2024 2023 U.S. statutory rate 21.0 % 21.0 % State taxes (net of federal tax benefit) 4.5 4.5 Valuation allowance 18.4 ( 29.5 ) Federal NOLs write off ( 11.9 ) ( 0.1 ) Federal temporary ( 12.1 ) 0.2 State NOLs write off ( 19.4 ) 7.6 State temporary ( 0.6 ) ( 3.7 ) 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, 2024 2023 Accrued expenses and other reserves $ 684 $ 1,195 Right-of-use-asset ( 82 ) ( 197 ) Lease liabilities 86 224 Tax credits, deferred R&D, and other 579 470 Net operating loss 20,739 20,935 Valuation allowance ( 22,006 ) ( 22,627 ) Net deferred tax assets $ — $ — In 2024 and 2023, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $ 3.4 million and $ 6.3 million additional federal net operating loss we recognized for the year. At December 31, 2024, we had federal and state net operating loss carry-forwards (“NOLs”) of approximately $ 141.1 million for federal income tax purposes ($ 39.1 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $ 86.8 million of the $ 141.1 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 60 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS can only offset 80% of taxable income. These NOLs can no longer be carried back, but they can be carried forward indefinitely. The $ 3.4 million and $ 6.3 million in federal net operating losses generated in 2024 and 2023 will be subject to the new limitations under the Tax Act. If not utilized, the NOLs generated prior to December 31, 2017 of $ 1.0 million will begin to expire in 2025 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, 2024 and 2023, respectively. We had no net deferred tax liabilities at December 31, 2024 and 2023. 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. 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. Operating segments are defined as components of an entity about which discrete financial information is evaluated regularly by the Company’s chief operating decision maker (CODM) in deciding how to allocate resources and assess performance. The Company operates and manages its business as one business segment. The Company has a single management team that reports to the Chief Executive Officer, the Company's CODM, who comprehensively manages the entire Company. The accounting policies of the segment are the same as those described in the summary of significant accounting policies. When evaluating the Company’s financial performance, the CODM is regularly provided with more detailed expense information than what is included in the Company’s statements of operations and comprehensive loss. The CODM uses net loss, as reported in the statements of operations and comprehensive loss, in evaluating the performance of the segment. Decisions regarding resource allocation are made primarily during the annual budget planning process and reallocated as needed throughout the year. The measure of segment assets is reported on the balance sheets as total assets. The following table provides a breakdown of product net sales for the years indicated (in thousands): Year ended December 31, 2024 2023 Commercial products $ 1,390 $ 1,593 MMM products 3,470 4,124 Total net sales $ 4,860 $ 5,717 A geographic summary of net sales is as follows (in thousands): For the year ended December 31, 2024 2023 United States $ 4,848 $ 5,690 International 12 27 Total net sales $ 4,860 $ 5,717 At December 31, 2024 and 2023, approximately 100 % of our long-lived assets, which consist of property and equipment, were located in the United States. NOTE 12. RELATED PARTY TRANSACTIONS 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, which remained unpaid as of December 31, 2023. The Company made new purchases for $ 0.6 million from Sander Electronics, Inc. during 2024 . As of December 31, 2024 a ccounts payable to Sander Electronics, Inc. is $ 0.9 million . Private Placements Please refer to Note 9 for further details on Private Placements in 2024 and 2023. 61 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. 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. 62 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.