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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
      
Commission file number 001-36583
 
ENERGY FOCUS, INC.
(Exact name of registrant as specified in its charter)  
Delaware 94-3021850
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
32000 Aurora Road, Suite B Solon, OH
(Address of principal executive offices)
   
44139
(Zip Code)
(Registrant’s telephone number, including area code): (440) 715-1300
 
None
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each classTrading
Symbol(s)
Name of each exchange
on which registered
Common Stock, par value $0.0001 per shareEFOIThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No
 
The number of outstanding shares of the registrant’s common stock, $0.0001 par value, as of August 8, 2023 was 3,495,032.



TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
ITEM 1.FINANCIAL STATEMENTS
a.
Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022
b.
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (Unaudited)
c.
Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2023 and 2022 (Unaudited)
d.
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2023 and 2022 (Unaudited)
e.Notes to the Condensed Consolidated Financial Statements (Unaudited)
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.CONTROLS AND PROCEDURES
   
PART II - OTHER INFORMATION
   
ITEM 1.LEGAL PROCEEDINGS
ITEM 1A.RISK FACTORS
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
SIGNATURES

1


PART I - FINANCIAL INFORMATION

Forward-looking statements

Unless the context otherwise requires, all references to “Energy Focus,” “we,” “us,” “our,” “our company,” or “the Company” refer to Energy Focus, Inc., a Delaware corporation, and its consolidated subsidiary for the applicable periods, considered as a single enterprise.
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs, or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, capital expenditures, and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made in light of information currently available to us, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.
We believe that important factors that could cause our actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties outlined under “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and other matters described in this Quarterly Report and our other filings with the Securities and Exchange Commission generally. Some of these factors include:
our need for and ability to obtain additional financing in the near term, on acceptable terms or at all, to continue our operations;
our ability to maintain compliance with the continued listing standards of The Nasdaq Stock Market LLC (“Nasdaq”);
our ability to refinance or extend maturing debt on acceptable terms or at all;
our ability to continue as a going concern for a reasonable period of time;
our ability to realize synergies with our strategic investor;
instability in the U.S. and global economies and business interruptions experienced by us, our customers and our suppliers, particularly in light of supply chain constraints and other long-term impacts of the coronavirus (“COVID-19”) pandemic;
the competitiveness and market acceptance of our light-emitting diode (“LED”) lighting and control technologies and products;
our ability to compete effectively against companies with lower prices or cost structures, greater resources, or more rapid development capabilities, and new competitors in our target markets;
our ability to extend our product portfolio into new applications and end markets;
our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters;
the timing of large customer orders, significant expenses and fluctuations between demand and capacity as we manage inventory and invest in growth opportunities;
our ability to successfully scale our network of sales representatives, agents, distributors and other channel partners to compete with the sales reach of larger, established competitors;
our ability to implement plans to increase sales and control expenses;
our reliance on a limited number of customers for a significant portion of our revenue, and our ability to maintain or grow such sales levels;
our ability to add new customers to reduce customer concentration;
our ability to attract and retain a new chief financial officer;
2


our ability to manage the size of our workforce while continuing to attract, develop and retain qualified personnel, and to do so in a timely manner;
our ability to diversify our reliance on a limited number of third-party suppliers and development partners, our ability to manage third-party product development and obtain critical components and finished products on acceptable terms and of acceptable quality despite ongoing global supply chain challenges, and the impact of our fluctuating demand on the stability of such suppliers;
our ability to timely, efficiently and cost-effectively transport products from our third-party suppliers by ocean marine and other logistics channels despite global supply chain and logistics disruptions;
the impact of any type of legal inquiry, claim or dispute;
the macro-economic conditions, including rising interest rates and recessionary trends, in the United States and in other markets in which we operate or secure products, which could affect our ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely and cost-effective manner;
our dependence on military maritime customers and on the levels and timing of government funding available to such customers, as well as the funding resources of our other customers in the public sector and commercial markets;
business interruptions resulting from geopolitical actions such as war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires, or from health epidemics or pandemics or other contagious outbreaks;
our ability to respond to new lighting and control technologies and market trends;
our ability to fulfill our warranty obligations with safe and reliable products;
any delays we may encounter in making new products available or fulfilling customer specifications;
any flaws or defects in our products or in the manner in which they are used or installed;
our ability to protect our intellectual property rights and other confidential information, and manage infringement claims by others;
our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as those relating to the environment and health and safety;
risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency fluctuations, including tariffs and other potential barriers to international trade; and
our ability to maintain effective internal controls and otherwise comply with our obligations as a public company.
In light of the foregoing, we caution you not to place undue reliance on our forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
Energy Focus®, Intellitube®, RedCap®, and EnFocus™ are our registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.
3


ITEM 1. FINANCIAL STATEMENTS

ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

June 30,
2023
December 31,
2022
(Unaudited)
ASSETS
Current assets:
Cash$1,316 $52 
Trade accounts receivable, less allowances of $79 and $26, respectively
841 445 
Inventories, net5,304 5,476 
Short-term deposits630 592 
Prepaid and other current assets217 232 
Receivable for claimed Employee Retention Tax Credit 445 
Total current assets8,308 7,242 
Property and equipment, net60 76 
Operating lease, right-of-use asset1,034 1,180 
Total assets$9,402 $8,498 
LIABILITIES  
Current liabilities:  
Accounts payable$2,908 $2,204 
Accrued liabilities116 145 
Accrued legal and professional fees89  
Accrued payroll and related benefits268 261 
Accrued sales commissions32 76 
Accrued warranty reserve146 183 
Operating lease liabilities210 198 
Promissory notes payable, net of discounts and loan origination fees1,335 2,618 
Related party promissory notes payable 814 
Credit line borrowings, net of loan origination fees284 1,447 
Total current liabilities5,388 7,946 

(continued on the next page)

4




ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

June 30,
2023
December 31,
2022
(Unaudited)
Operating lease liabilities, net of current portion915 1,029 
Total liabilities6,303 8,975 
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.0001 per share:
Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at June 30, 2023 and December 31, 2022
Issued and outstanding: 876,447 at June 30, 2023 and December 31, 2022
  
Common stock, par value $0.0001 per share:
Authorized: 50,000,000 shares at June 30, 2023 and December 31, 2022
Issued and outstanding: 3,495,924 at June 30, 2023 and 1,406,920* at December 31, 2022
 1 
Additional paid-in capital154,624 148,545 
Accumulated other comprehensive loss(3)(3)
Accumulated deficit(151,522)(149,020)
Total stockholders' equity (deficit)3,099 (477)
Total liabilities and stockholders' equity (deficit)$9,402 $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 condensed consolidated financial statements.
5


ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited) 
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Net sales$1,055 $1,480 $1,985 $3,541 
Cost of sales876 1,371 1,789 3,458 
Gross profit 179 109 196 83 
Operating expenses:
Product development147 353 301 856 
Selling, general, and administrative1,132 1,964 2,198 4,091 
Total operating expenses1,279 2,317 2,499 4,947 
Loss from operations(1,100)(2,208)(2,303)(4,864)
Other expenses (income):
Interest expense, net69 260 192 444 
Other income(16) (16)(30)
Other expenses14 18 21 29 
Net loss$(1,167)$(2,486)$(2,500)$(5,307)
Net loss per common share - basic and diluted
Net loss$(0.42)$(2.43)$(0.98)$(5.45)
Weighted average shares of common stock outstanding:
Basic and diluted *2,766 1,024 2,539 973 
* 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 condensed consolidated financial statements.
6


ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Loss
Accumulated
Deficit
Total
Stockholders'
Equity (Deficit)
SharesAmountShares*Amount
Balance at December 31, 2022876 $ 1,407 $1 $148,545 $(3)$(149,020)$(477)
Issuance of common stock— — 285 1 3,024 — — 3,025 
Stock issued in exchange transactions— — 1,057 — 1,716 — — 1,716 
Stock-based compensation— — — — 26 — — 26 
Impact of adoption of ASU 2016-13 - CECL— — — — — — (2)(2)
Net loss for the three months ended March 31, 2023— — — — — — (1,333)(1,333)
Balance at March 31, 2023876 $ 2,749 $2 $153,311 $(3)$(150,355)$2,955 
Issuance of common stock— — 747 — 1,304 — — 1,304 
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— — — — 23 — — 23 
Net loss for the three months ended June 30, 2023— — — — — — (1,167)(1,167)
Balance at June 30, 2023876 $ 3,496 $ $154,624 $(3)$(151,522)$3,099 

Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders'
Equity (Deficit)
SharesAmountShares*Amount
Balance at December 31, 2021876 $ 910 $ $144,953 $(3)$(138,741)$6,209 
Issuance of common stock upon the exercise of warrants— — 12 — — — — — 
Stock-based compensation— — — — 44 — — 44 
Net loss for the three months ended March 31, 2022— — — — — — (2,821)(2,821)
Balance at March 31, 2022876 $ 922 $ $144,997 $(3)$(141,562)$3,432 
Issuance of common stock under employee stock option and stock purchase plans— — 6 — 5 — — 5 
Issuance of common stock and warrants— — 188 1 3,499 — — 3,500 
Offering costs on issuance of common stock and warrants— — — — (334)— — (334)
Stock-based compensation— — — — 54 — — 54 
Net loss for the three months ended June 30, 2022— — — — — — (2,486)(2,486)
Balance at June 30, 2022876 $ 1,116 $1 $148,221 $(3)$(144,048)$4,171 
*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 condensed consolidated financial statements.
7


ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Cash flows from operating activities:
Net loss$(1,167)$(2,486)$(2,500)$(5,307)
Adjustments to reconcile net loss to net cash used in operating activities:
Other income   (30)
Depreciation8 43 16 87 
Stock-based compensation23 54 49 98 
Provision for doubtful accounts receivable21 5 50 (4)
Provision for slow-moving and obsolete inventories(107)(185)(130)(56)
Provision for warranties3 51 (37)21 
Amortization of loan discounts and origination fees47 91 109 160 
Changes in operating assets and liabilities (sources / (uses) of cash):
Accounts receivable93 184 (403)101 
Inventories(259)384 303 754 
Short-term deposits 47 (23)59 
Prepaid and other assets454 96 460 116 
Accounts payable884 (777)857 (716)
Accrued and other liabilities(152)(149)(86)(360)
Deferred revenue   (268)
Total adjustments1,015 (156)1,165 (38)
Net cash used in operating activities(152)(2,642)(1,335)(5,345)
Cash flows from investing activities:
Acquisitions of property and equipment (2) (37)
Net cash used in investing activities (2) (37)

(continued on next page)















8



ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Cash flows from financing activities (sources / (uses) of cash):
Proceeds from the issuance of common stock and warrants1,304 3,500 4,329 3,500 
Offering costs paid on the issuance of common stock and warrants (334) (334)
Costs related to reverse stock-split(16) (16) 
Principal payments under finance lease obligations   (1)
Proceeds from exercise of stock options and employee stock purchase plan purchases 5  5 
Payments on the 2021 Streeterville Note (410) (1,025)
Proceeds from the 2022 Streeterville Note 2,000  2,000 
Payments on the 2022 Streeterville Note  (500) 
Deferred financing costs (234) (234)
Net payments on proceeds from the credit line borrowings - Credit Facilities(121)(1,170)(1,214)(273)
Net cash provided by financing activities1,167 3,357 2,599 3,638 
Net increase (decrease) in cash1,015 713 1,264 (1,744)
Cash, beginning of period301 225 52 2,682 
Cash, end of period$1,316 $938 $1,316 $938 

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

9

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)

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, 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.
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 (the “Certificate of Amendment”) to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), and authorized the board of directors of the Company to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock, par value $0.0001 per share, 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 ratio 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 an effective date of 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 $0.0001 par value per share of common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at 50,000,000 shares. Proportional adjustments were made to the conversion and exercise prices of our outstanding warrants and stock options, and to the number of shares issued and issuable under our stock incentive plans in connection with the reverse stock split. The current financial statements, as well as the prior-period financial statements have been retroactively adjusted to reflect the reverse stock split. Preferred shares outstanding were not affected by the reverse stock split and as such, those shares have not been adjusted.
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation

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.
We have prepared the accompanying financial data for the three and six months ended June 30, 2023 and 2022 pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended
10

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
June 30, 2023 and 2022, and Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2023 and 2022.
Going Concern and Nasdaq Continued Listing Requirements Compliance
Due to our financial performance as of June 30, 2023 and December 31, 2022, including net losses of $2.5 million for the six months ended June 30, 2023 and $10.3 million for the twelve months ended December 31, 2022, and total cash used in operating activities of $1.3 million for the six months ended June 30, 2023 and $6.7 million for the twelve months ended December 31, 2022, we determined that substantial doubt about our ability to continue as a going concern continues to exist at June 30, 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.
Along with the new additions to the Board of Directors, we hired a permanent Chief Executive Officer in September 2022, following a period of interim leadership by our current Lead Independent Director after the departure of our previous Chief Executive Officer in February 2022 and Chief Financial Officer and Chief Operating Officer in May 2022.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to ensure adequate external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, could provide us with an ability to finance our operations through the next twelve months and may mitigate the substantial doubt about our ability to continue as a going concern.
Our Common Stock is listed on the Nasdaq Capital Market, which has as one of its continued listing requirements a minimum bid price of at least $1.00 per share. Our Common Stock traded below $1.00 per share starting in the second quarter of 2022. On August 23, 2022, we received a letter from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market notifying us that we were no longer in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price for our common stock was below the minimum $1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until February 20, 2023, to regain compliance with the Bid Price Rule. During the initial compliance period, our Common Stock continued to trade on the Nasdaq Capital Market, but did not satisfy the Bid Price Rule.
On 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
11

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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 Quarterly 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 effected a 1-for-7 reverse stock split to increase the per share trading price of the common stock. 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 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, the Board of Directors determined to set 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. 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. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 19, 2023.
12

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)

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 reported 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.
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 are accounted for on a net basis and are excluded from net sales.
The following table provides a disaggregation of product net sales for the periods presented (in thousands):
Three months ended
June 30,
Six months ended
June 30,
 2023202220232022
Net sales:    
Commercial$442 $975 $763 $2,109 
MMM products613 505 1,222 1,432 
Total net sales$1,055 $1,480 $1,985 $3,541 
Accounts Receivable
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
13

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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. 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 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 roll rate method of valuing its reserve for trade receivables. The reserve is based on a careful review of past delinquencies and forward-looking considerations, such as customer responsiveness. This resulted in a $2.6 thousand adjustment to Retained Earnings as of December 31, 2022 and charges to bad debt expense of $12 thousand in the first quarter of 2023 and $3 thousand in the second quarter of 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:

June 30, 2023December 31, 2022January 01, 2022
Gross Accounts Receivable$920 $471 $1,254 
Less: Allowance for Doubtful Accounts$(79)$(26)$(14)
Net Accounts Receivable$841 $445 $1,240 
Geographic information
All of our long-lived fixed assets are located in the United States. For the three months ended June 30, 2023 and 2022, less than 1% of sales were attributable to customers outside the United States. For the six months ended June 30, 2023, less than 1% of sales were attributable to customers outside the United States and approximately 1% of sales were attributable to customers outside the United States for the six months ended June 30, 2022. The geographic location of our net sales is derived from the destination to which we ship the product.
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.
14

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
The following table presents a reconciliation of basic and diluted loss per share computations (in thousands):
Three months ended
June 30,
Six months ended
June 30,
 2023202220232022
Numerator:  
Net loss$(1,167)$(2,486)$(2,500)$(5,307)
  
Denominator:
Basic and diluted weighted average shares of common stock outstanding *
2,766 1,024 2,539 973 
* 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 three months ended June 30, 2023, convertible securities representing approximately 25 thousand shares of common stock were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three months ended June 30, 2022, restricted share units, warrants and convertible securities representing approximately 2 thousand, 53 thousand and 25 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive.
As a result of the net loss we incurred for the six months ended June 30, 2023, convertible securities 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 six months ended June 30, 2022, restricted share units, warrants and convertible securities representing approximately 1 thousand, 31 thousand and 25 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.
Product warranties
We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten years. 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. As warranty coverage from prior period sales expire, previous accruals are released. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires.
The following table summarizes warranty activity for the periods presented (in thousands):
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Balance at beginning of period$143 $265 $183 $295 
Warranty accruals for current period sales3 7 2 6 
Adjustments to existing warranty reserves 43 (39)28 
In kind settlements made during the period   (14)
Accrued warranty reserve at end of period$146 $315 $146 $315 
15

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
Financial Instruments
Fair Value Measurements
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 1Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2Unadjusted 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 3Unobservable 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.
16

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows:
For the three months ended June 30, 2023, sales to two U.S. Navy shipbuilders and a distributor to the U.S. Navy accounted for approximately 26% and 16% of net sales, respectively. When sales to our primary distributors for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 42% of net sales for the same period. For the three months ended June 30, 2022, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company, and a commercial building systems provider accounted for approximately 22%, 14%, and 13% of net sales, respectively. When sales to our primary distributors for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 24% of net sales for the same period.
For the six months ended June 30, 2023, sales to a U.S. Navy shipbuilder and a distributor to the Department of Defense accounted for approximately 23% and 11% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 34% of net sales for the same period. For the six months ended June 30, 2022, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately 18%, 12%, and 12% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 31% of net sales for the same period.
A distributor for the Department of Defense and a U.S. Navy shipbuilder accounted for approximately 24% and 14% of net trade accounts receivable, respectively, at June 30, 2023. At December 31, 2022, a distributor for the Department of Defense accounted for 25% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 30% of our net trade accounts receivable.
No one supplier accounted for more than 10% of our total expenditures for the three and six months ended June 30, 2023. Two offshore suppliers accounted for approximately 19% and 10%, respectively, of our total expenditures for the three months ended June 30, 2022. For the six months ended June 30, 2022, one offshore supplier accounted for approximately 19% of our total expenditures.
At June 30, 2023, one offshore supplier accounted for approximately 31% of our trade accounts payable balance. At December 31, 2022, this offshore supplier accounted for approximately 36% of our trade accounts payable balance.
Recently adopted accounting standard
In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (ASC 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 financial position or results of operations.
17

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
NOTE 3. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):
June 30,
2023
December 31,
2022
Raw materials$3,521 $3,347 
Finished goods4,183 4,656 
Reserves for excess, obsolete, and slow-moving inventories (2,400)(2,527)
Inventories, net$5,304 $5,476 
The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands):
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Beginning balance$(2,507)$(3,179)$(2,527)$(3,050)
Accrual70 (56)14 (201)
Reduction due to sold inventory37 241 113 257 
Write-off for disposed inventory 202  202 
Reserves for excess, obsolete, and slow-moving inventories$(2,400)$(2,792)$(2,400)$(2,792)

NOTE 4. OTHER CURRENT ASSETS
Employee Retention Tax Credit
The CARES Act, which was enacted on March 27, 2020, provides an Employee Retention Tax Credit (“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 the second quarter of 2023. This amount was recorded as a receivable in the Condensed Consolidated Balance Sheet as of December 31, 2022.
18

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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):
June 30,
2023
December 31,
2022
Equipment (useful life 3 to 15 years)
$1,061 $1,061 
Tooling (useful life 2 to 5 years)
190 190 
Leasehold improvements (the shorter of useful life or lease life)141 141 
Property and equipment at cost1,392 1,392 
Less: accumulated depreciation(1,332)(1,316)
Property and equipment, net$60 $76 
Depreciation expense was $8 thousand and $43 thousand for the three months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023 and 2022, depreciation expense was $16 thousand and $87 thousand, respectively.
NOTE 6. LEASES
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases with expirations through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one finance lease on a forklift containing a bargain purchase option, which was exercised in July 2022. As of March 25, 2022, the terms of our real estate operating lease have been modified beginning July 1, 2022 and extended through 2027. In accordance with ASC 842, Leases (“ASC 842”), the related lease liability was remeasured and the right-of-use asset was adjusted for each lease at the time of modification. The present value of the lease obligations for the lease was calculated using an incremental borrowing rate of 16.96%, which was the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads Financial Group, LLC (as described below in Note 7, “Debt”) and Factors Southwest L.L.C. (as described below in Note 7, “Debt”). The present value of the other remaining lease obligations continues to be calculated using an incremental borrowing rate of 7.25% (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its former revolving line of credit with Austin Financial Services, Inc. The weighted average remaining lease term for the operating leases is 4.0 years.
Components of the operating lease costs recognized in net loss were as follows (in thousands):
Three months ended June 30,Six months ended June 30,
 2023202220232022
Operating lease cost (income)
Sub-lease income$ $(56)$ $(81)
Lease cost115 83 232 215 
Total lease cost, net$115 $27 $232 $134 
19

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
Supplemental balance sheet information related to the Company’s operating and finance leases as of June 30, 2023 and December 31, 2022 are as follows (in thousands):
 June 30, 2023December 31, 2022
Operating Leases
Operating lease right-of-use assets$1,034 $1,180 
Operating lease liabilities$1,125 $1,227 
Finance Leases
Property and equipment13 13 
Allowances for depreciation(13)(13)
Finance lease assets, net$ $ 
Future minimum lease payments required under operating leases for each of the 12-month rolling periods below in effect at June 30, 2023 are as follows (in thousands):
Operating Leases
July 2023 to June 2024$380 
July 2024 to June 2025378 
July 2025 to June 2026386 
July 2026 to June 2027393 
Total future undiscounted lease payments1,537 
Less imputed interest412 
Total lease obligations$1,125 
Supplemental cash flow information related to leases for the three and six months ended June 30, 2023 and 2022, was as follows (in thousands):
Three months ended June 30,Six months ended June 30,
 2023202220232022
Supplemental cash flow information 
Cash paid, net, for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$94 $104 $189 $240 
Financing cash flows from finance leases$ $ $ $1 
20

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
NOTE 7. DEBT
Credit facilities
On August 11, 2020, we entered into two debt financing arrangements (together, the “Credit Facilities”) that allowed for expanded borrowing capacity at a lower blended borrowing cost. The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (“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 provides that the Company make payments to reduce the outstanding obligations under the Inventory Facility of $750 thousand by January 20, 2023 and $250 thousand by February 15, 2023 (which amounts the Company has paid). 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 is now a per annum rate equal to (i) the Three-Month LIBOR rate plus 5.5% (currently 11.05% per annum) or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus 6.00% (currently 11.09% per annum). As of June 30, 2023, the effective rate was equal to 12.34%.
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 were 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 were $0.3 million and $1.4 million at June 30, 2023 and December 31, 2022, respectively. Borrowings under the Receivables Facility were approximately $0.1 million at December 31, 2022. These facilities are recorded in the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 as a current liability under the caption “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $12 thousand for the Inventory Facility as of June 30, 2023, and $47 thousand for the Inventory Facility and $15 thousand for the Receivables Facility as of December 31, 2022.
Promissory Notes
During the third and fourth quarters of the year ended December 31, 2022, we entered into short-term unsecured promissory notes (the “2022 Promissory Notes”) with Mei Yun (Gina) Huang, Jay Huang, and Tingyu Lin. Ms. Huang is a member of the Board of Directors and Mr. Huang became a member of the Board of Directors in January 2023 in connection with the Sander Private Placement, as described below in Note 9, “Stockholders’ Equity.” 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.”
21

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
The following summarizes the 2022 Promissory Notes at December 31, 2022:
At December 31, 2022
G. HuangJ. HuangJ. HuangG. HuangJ. HuangJ. HuangT. Lin Total
Date enteredSeptember 16, 2022October 25, 2022November 4, 2022November 9, 2022December 6, 2022December 21, 2022December 31, 2022
Term9 months9 months9 months9 months9 months9 months9 months
Principal amount$450,000$50,000$250,000$350,000$200,000$100,000$50,000$1,450,000
Maturity dateJune 16, 2023July 25, 2023August 4, 2023August 9, 2023September 6, 2023September 21, 2023September 30, 2023
Interest rate8 %8 %8 %8 %8 %8 %8 %
Default interest rate10 %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 (as amended, 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 by $500 thousand by January 20, 2023 (which amount has been paid) and by $250 thousand by July 14, 2023 ($125 thousand of which has already been satisfied pursuant to the March 2023 Exchange Agreement (as defined below)). Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we would make twelve monthly repayments of approximately $117 thousand each. We would have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.
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 are no gross proceeds to the Company in respect of the March 2023 Exchange, provided that $125 thousand of the March 2023 Exchange Amount will be applied toward the $250 thousand payment due on or before July 14, 2023 pursuant to the 2022 Streeterville Note Amendment, $125 thousand will be credited to satisfy the December 1, 2024 required payment and a portion of the November 1, 2024 required payment, in each case pursuant to the 2022 Streeterville Note Amendment.
The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $1.3 million and $2.0 million at June 30, 2023 and December 31, 2022, respectively.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.
22

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
2021 Streeterville Note
On April 27, 2021, we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $1.7 million (the “2021 Streeterville Note”). The 2021 Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the 2021 Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses. The 2021 Streeterville Note had a maturity date of April 27, 2023, and accrued interest at 8% per annum, compounded daily, on the outstanding balance.
Beginning on November 1, 2021, Streeterville could require the Company to redeem up to $205 thousand of the 2021 Streeterville Note in any calendar month. The Company had the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company increased the amount outstanding under the 2021 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.
NOTE 8. INCOME TAXES
As a result of the operating loss incurred during each of the three and six months ended June 30, 2023 and 2022, and after the application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), it was not necessary to record a provision for U.S. federal income tax.
At June 30, 2023 and December 31, 2022, we had a full valuation allowance recorded against our deferred tax assets.
The valuation allowance was recorded due to uncertainties related to our ability to realize the deferred tax assets, primarily consisting of certain net operating loss carry-forwards. The valuation allowance is based on management’s estimates of taxable income by jurisdiction and the periods over which the deferred tax assets will be recoverable.
At December 31, 2022, we had a net operating loss carry-forward of approximately $132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $132.4 million is available to offset future taxable income after the application of the limitations found under Section 382 of the Internal Revenue Code of 1986, as amended. As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income and can be carried forward indefinitely. The $9.2 million and $9.6 million in federal net operating losses generated in 2022 and 2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please refer to Note 11, “Income Taxes,” included under Item 8, “Financial Statements and Supplementary Data,” of our 2022 Annual Report.
23

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
NOTE 9. STOCKHOLDERS’ EQUITY
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 Jay Huang, a member of the Company’s Board of Directors.
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.
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 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 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. 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.

March 2023 Private Placements
On March 28, 2023,the Company entered into a securities purchase agreement with Jay Huang, a member of the Board of Directors, 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.
24

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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.
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 June 30, 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.
25

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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 June 30, 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
On March 29, 2019, we issued $1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain investors in a private placement exempt from registration requirements of the Securities Act. The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5.0% per annum until June 30, 2019 and at a rate of 10.0% thereafter.
Pursuant to the terms of the Convertible Notes, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon at the date of conversion (totaling $1.8 million) were converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Preferred Stock, which is convertible on a 1-for-35 basis into shares of our common stock. During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 3,187 shares of common stock. During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 49,172 shares of common stock. The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group (under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC and 5 Elements Global Fund L.P. (controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer), as well as Brilliant Start Enterprise Inc. and Jag International Ltd. (both of which are controlled affiliates of Mei Yun (Gina) Huang, a member of the Company's Board of Directors).
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.
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. On March 29, 2019, the Company also filed a Certificate of Elimination with respect
26

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of undesignated preferred stock available for designation as Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contains customary representations and warranties and provides for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
January 2020 Equity Offering
Issuance of Common Stock and Warrants
In January 2020, we completed a registered direct offering for the sale of 98,337 shares of our common stock to certain institutional investors, at a purchase price of $23.59 per share. We also sold, to the same institutional investors, warrants (the “January 2020 Investor Warrants”) to purchase up to 98,337 shares of common stock at an exercise price of $23.59 per share in a concurrent private placement for a purchase price of $4.38 per warrant. In addition, we issued to the placement agent in connection with such registered direct offering and concurrent private placement warrants (the “January 2020 Placement Agent Warrants” and collectively with the January 2020 Investor Warrants, the “January 2020 Warrants”) to purchase up to 6,883 shares of common stock at an exercise price of $34.96 per share.
January 2020 Warrants issued to purchase an aggregate of 32,773 shares remain outstanding at June 30, 2023 with a weighted average exercise price of $25.66 per share. The exercise of January 2020 Warrants could provide us with cash proceeds of up to approximately $0.8 million in the aggregate if all January 2020 Warrants are exercised. During the three and six months ended June 30, 2023 and June 30, 2022, no January 2020 Warrants were exercised.
As of June 30, 2023 and 2022, we had the following outstanding January 2020 Warrants:
As of June 30, 2023
As of June 30, 2022
Number of Underlying SharesExercise PriceExpiration
Investor Warrants26,81926,819$23.59January 13, 2025
Placement Agent Warrants5,9545,954$34.96January 13, 2025
32,77332,773
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):
Three months ended
June 30,
Six months ended
June 30,
2023202220232022
Cost of sales$1 $1 $1 $2 
Product development3 6 7 12 
Selling, general, and administrative19 47 41 84 
Total stock-based compensation$23 $54 $49 $98 
Total unearned stock-based compensation was $0.1 million at June 30, 2023, compared to $0.2 million at June 30, 2022. These costs will be charged to expense and amortized on a straight-line basis in future periods. The weighted average period over which the unearned compensation at June 30, 2023 is expected to be recognized is approximately 2.6 years.
27

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
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 detailed below:
Six months ended
June 30,
20232022
Fair value of options issued$2.49 $7.93 
Exercise price$3.04 $10.00 
Expected life of options (in years)6.16.1
Risk-free interest rate3.5 %2.0 %
Expected volatility101.8 %99.3 %
Dividend yield0.0 %0.0 %
A summary of option activity under all outstanding stock incentive plans for the six months ended June 30, 2023 is presented as follows:
Number of
Options
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 202247,103 $13.78 
Granted11,427 3.04 
Canceled/forfeited(12,203)19.38 
Expired(3,827)17.06 
Balance at June 30, 202342,500 $8.99 9.0
Vested and expected to vest at June 30, 202333,951 $9.83 8.9
Exercisable at June 30, 20235,786 $23.91 7.4
*Options have been restated for the 1-for-7 reverse stock split effective June 16, 2023.
Restricted stock units
A summary of restricted stock unit activity under all outstanding stock incentive plans for the six months ended June 30, 2023 is presented as follows:
Restricted
Stock Units
Weighted
Average
Grant
Date
Fair Value
Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 20221,657 $11.13 
Granted  
Balance at June 30, 20231,657 $11.13 1.2
*Restricted stock units have been restated for the 1-for-7 reverse stock split effective June 16, 2023.