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 September 30, 20212022
 
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 registrantregistrant: (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 filer☐Accelerated filer☐
Non-accelerated filer☑Smaller 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 November 9, 20217, 2022 was 5,087,574.9,577,026.


TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
ITEM 1.FINANCIAL STATEMENTS
a.Condensed Consolidated Balance Sheets as of September 30, 20212022 (Unaudited) and December 31, 20202021
4
b.Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20212022 and 20202021 (Unaudited)
6
c.Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020 (Unaudited)
7
d.c.Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 20212022 and 20202021 (Unaudited)
87
e.d.Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 20212022 and 20202021 (Unaudited)
109
f.e.Notes to the Condensed Consolidated Financial Statements (Unaudited)
1211
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
4344
ITEM 4.CONTROLS AND PROCEDURES
4344
   
PART II - OTHER INFORMATION
   
ITEM 1.LEGAL PROCEEDINGS
4445
ITEM 1A.RISK FACTORS
4445
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
4445
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
4445
ITEM 4.MINE SAFETY DISCLOSURES
4445
ITEM 5.OTHER INFORMATION
4445
ITEM 6.EXHIBITS
4546
SIGNATURES
4648

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, 20202021 and other matters described in this Quarterly Report and our other filings with the Securities and Exchange Commission generally. Some of these factors include:

•instability in the U.S.our need for and global economies and business interruptions experienced by us, our customers and our suppliers as a result of the coronavirus (“COVID-19”) pandemic and related impacts on travel, trade and business operations;
•our ability to realize the expected novelty, disinfection effectiveness, affordability and estimated delivery timing of our ultraviolet light disinfection (“UVCD”) products and their appeal compared to other products;
•our ability to extend our product portfolio into commercial services and consumer products;
•market acceptance of our light-emitting diode (“LED”) lighting, control and UVCD technologies, services and products;
•our need forobtain additional financing in the near term, on acceptable terms or at all, to continue our operations;
•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;
•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 issues, and related long-term impacts on travel, trade and business operations, as a result 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 end markets, including consumer products;
•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;
•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;
2

•our reliance on a limited number of third-party suppliers and research and development partners, our ability to manage third-party product development and obtain critical components and finished products from such suppliers 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 to our facility by ocean marine and other logistics channels despite global supply chain and logistics disruptions;
•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 invest in growth opportunities;
2

•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 successfully scale our network of sales representatives, agents, distributors and other channel partners to match the sales reach of larger, established competitors;
•our ability to attract, develop and retain qualified personnel, and to do so in a timely manner;
•the impact of any type of legal inquiry, claim or dispute;
•the inflationary or deflationary general economicmacro-economic conditions, including 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 includingsuch 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 made 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;
•our ability to maintain effective internal controls and otherwise comply with our obligations as a public company; and
•our ability to regain and maintain compliance with the continued listing standards of The Nasdaq Stock Market (“Nasdaq”).

Market.
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®, EnFocus™, nUVo™, abUV™, mUVe™, mUVe CrewTM, and SuncycleTMEnFocus™ 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)

September 30,
2021		December 31,
2020		September 30,
2022		December 31,
2021
(Unaudited)(Unaudited)
ASSETSASSETSASSETS
Current assets:Current assets:Current assets:
CashCash$381 $1,836 Cash$41 $2,682 
Trade accounts receivable, less allowances of $18 and $8, respectively1,628 2,021 
Trade accounts receivable, less allowances of $11 and $14, respectivelyTrade accounts receivable, less allowances of $11 and $14, respectively1,007 1,240 
Inventories, netInventories, net7,755 5,641 Inventories, net6,156 7,866 
Short-term depositsShort-term deposits913 796 Short-term deposits610 712 
Prepaid and other current assetsPrepaid and other current assets1,421 782 Prepaid and other current assets788 924 
Total current assetsTotal current assets12,098 11,076 Total current assets8,602 13,424 
Property and equipment, netProperty and equipment, net588 420 Property and equipment, net433 675 
Operating lease, right-of-use assetOperating lease, right-of-use asset419 794 Operating lease, right-of-use asset1,248 292 
Restructured lease, right-of-use asset— 107 
Total assetsTotal assets$13,105 $12,397 Total assets$10,283 $14,391 
LIABILITIESLIABILITIES  LIABILITIES  
Current liabilities:Current liabilities:  Current liabilities:  
Accounts payableAccounts payable$2,606 $2,477 Accounts payable$1,886 $2,235 
Accrued liabilitiesAccrued liabilities233 45 Accrued liabilities82 265 
Accrued legal and professional feesAccrued legal and professional fees17 149 Accrued legal and professional fees66 104 
Accrued payroll and related benefitsAccrued payroll and related benefits691 885 Accrued payroll and related benefits380 718 
Accrued sales commissionsAccrued sales commissions40 95 Accrued sales commissions60 57 
Accrued restructuring— 11 
Accrued warranty reserveAccrued warranty reserve240 227 Accrued warranty reserve242 295 
Deferred revenueDeferred revenue2 72 Deferred revenue7 268 
Operating lease liabilitiesOperating lease liabilities475 598 Operating lease liabilities189 325 
Restructured lease liabilities— 168 
Finance lease liabilitiesFinance lease liabilities1 3 Finance lease liabilities— 1 
Streeterville note, net of discount and loan origination fees1,602 — 
PPP loan— 529 
Notes payable, net of discounts and loan origination feesNotes payable, net of discounts and loan origination fees1,521 1,719 
Related party promissory note payableRelated party promissory note payable451 — 
Credit line borrowings, net of loan origination feesCredit line borrowings, net of loan origination fees2,666 2,298 Credit line borrowings, net of loan origination fees1,976 2,169 
Total current liabilitiesTotal current liabilities8,573 7,557 Total current liabilities6,860 8,156 

(continued on the next page)

4



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

September 30,
2021		December 31,
2020		September 30,
2022		December 31,
2021
(Unaudited)(Unaudited)
Operating lease liabilities, net of current portionOperating lease liabilities, net of current portion30 318 Operating lease liabilities, net of current portion1,082 26 
Finance lease liabilities, net of current portion— 1 
PPP loan, net of current maturities— 266 
Notes payable, net of current maturities, discounts and loan origination feesNotes payable, net of current maturities, discounts and loan origination fees815 — 
Total liabilitiesTotal liabilities8,603 8,142 Total liabilities8,757 8,182 
STOCKHOLDERS' EQUITYSTOCKHOLDERS' EQUITYSTOCKHOLDERS' EQUITY
Preferred stock, par value $0.0001 per share:Preferred stock, par value $0.0001 per share:Preferred stock, par value $0.0001 per share:
Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at September 30, 2021 and December 31, 2020
Issued and outstanding: 876,447 at September 30, 2021 and 2,597,470 at December 31, 2020— — 
Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at September 30, 2022 and December 31, 2021Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at September 30, 2022 and December 31, 2021
Issued and outstanding: 876,447 at September 30, 2022 and December 31, 2021Issued and outstanding: 876,447 at September 30, 2022 and December 31, 2021— — 
Common stock, par value $0.0001 per share:Common stock, par value $0.0001 per share:Common stock, par value $0.0001 per share:
Authorized: 50,000,000 shares at September 30, 2021 and December 31, 2020
Issued and outstanding: 5,087,574 at September 30, 2021 and 3,525,374 at December 31, 2020— — 
Authorized: 50,000,000 shares at September 30, 2022 and December 31, 2021Authorized: 50,000,000 shares at September 30, 2022 and December 31, 2021
Issued and outstanding: 9,191,108 at September 30, 2022 and 6,368,549 at December 31, 2021Issued and outstanding: 9,191,108 at September 30, 2022 and 6,368,549 at December 31, 20211 — 
Additional paid-in capitalAdditional paid-in capital140,615 135,113 Additional paid-in capital148,238 144,953 
Accumulated other comprehensive lossAccumulated other comprehensive loss(3)(3)Accumulated other comprehensive loss(3)(3)
Accumulated deficitAccumulated deficit(136,110)(130,855)Accumulated deficit(146,710)(138,741)
Total stockholders' equityTotal stockholders' equity4,502 4,255 Total stockholders' equity1,526 6,209 
Total liabilities and stockholders' equityTotal liabilities and stockholders' equity$13,105 $12,397 Total liabilities and stockholders' equity$10,283 $14,391 

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
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
20212020202120202022202120222021
Net salesNet sales$2,749 $5,964 $7,460 $13,082 Net sales$1,764 $2,749 $5,305 $7,460 
Cost of salesCost of sales2,186 4,588 5,951 9,331 Cost of sales1,927 2,186 5,385 5,951 
Gross profit563 1,376 1,509 3,751 
Gross (loss) profitGross (loss) profit(163)563 (80)1,509 
Operating expenses:Operating expenses:Operating expenses:
Product developmentProduct development404 401 1,427 996 Product development366 404 1,222 1,427 
Selling, general, and administrativeSelling, general, and administrative1,968 2,003 6,454 6,003 Selling, general, and administrative1,802 1,968 5,893 6,454 
Restructuring1 (16)(21)(44)
Loss on write-off of fixed assetsLoss on write-off of fixed assets76 — 76 — 
Restructuring expense (recovery)Restructuring expense (recovery)— 1 — (21)
Total operating expensesTotal operating expenses2,373 2,388 7,860 6,955 Total operating expenses2,244 2,373 7,191 7,860 
Loss from operationsLoss from operations(1,810)(1,012)(6,351)(3,204)Loss from operations(2,407)(1,810)(7,271)(6,351)
Other expenses (income):Other expenses (income):Other expenses (income):
Interest expenseInterest expense177 124 520 344 Interest expense235 177 679 520 
Gain on forgiveness of PPP loan— — (801)— 
Loss on extinguishment of debt— 159 — 159 
Other income - employee retention tax credit(862)— (862)— 
(Gain) loss from change in fair value of warrants— (153)— 2,274 
Gain on forgiveness of Paycheck Protection Program loanGain on forgiveness of Paycheck Protection Program loan— — — (801)
Other incomeOther income— (862)(30)(862)
Other expensesOther expenses15 25 47 67 Other expenses20 15 49 47 
Loss before income taxes(1,140)(1,167)(5,255)(6,048)
Benefit from income taxes— (2)— (2)
Net lossNet loss$(1,140)$(1,165)$(5,255)$(6,046)Net loss$(2,662)$(1,140)$(7,969)$(5,255)
Net loss per common share - basic and dilutedNet loss per common share - basic and dilutedNet loss per common share - basic and diluted
Net lossNet loss$(0.22)$(0.35)$(1.22)$(1.89)Net loss$(0.29)$(0.22)$(1.05)$(1.22)
Weighted average shares of common stock outstanding:Weighted average shares of common stock outstanding:Weighted average shares of common stock outstanding:
Basic and diluted *5,086 3,308 4,309 3,196 
* Shares outstanding for the nine months ended September 30, 2020 have been restated for the 1-for-5 reverse stock split effective June 11, 2020.
Basic and dilutedBasic and diluted9,190 5,086 7,608 4,309 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSCHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
Three months ended
September 30,		Nine months ended
September 30,
 2021202020212020
Net loss$(1,140)$(1,165)$(5,255)$(6,046)
Other comprehensive income:
Foreign currency translation adjustments— — — — 
Comprehensive loss$(1,140)$(1,165)$(5,255)$(6,046)
Preferred
Stock		Common
Stock		Additional
Paid-in
Capital		Accumulated
Other
Comprehensive Loss		Accumulated
Deficit		Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance at December 31, 2021876 $— 6,368 $— $144,953 $(3)$(138,741)$6,209 
Issuance of common stock upon the exercise of warrants— — 85 — — — — — 
Stock-based compensation— — — — 44 — — 44 
Net loss for the three months ended March 31, 2022— — — — — — (2,821)(2,821)
Balance at March 31, 2022876 $— 6,453 $— $144,997 $(3)$(141,562)$3,432 
Issuance of common stock under employee stock option and stock purchase plans— — 45 — 5 — — 5 
Issuance of common stock and warrants— — 1,313 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 $— 7,811 $1 $148,221 $(3)$(144,048)$4,171 
Issuance of common stock under employee stock option and stock purchase plans— — 1 — — — — — 
Issuance of common stock and warrants— — 1,379 — — — — — 
Stock-based compensation— — — — 17 — — 17 
Net loss for the three months ended September 30, 2022— — — — — — (2,662)(2,662)
Balance at September 30, 2022876 $— 9,191 $1 $148,238 $(3)$(146,710)$1,526 

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












7

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
SharesAmountSharesAmount
Balance at December 31, 20202,597 $— 3,525 $— $135,113 $(3)$(130,855)$4,255 
Issuance of common stock under employee stock option and stock purchase plans— — 1 — — — — — 
Issuance of common stock upon the exercise of warrants— — 156 — 527 — — 527 
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units— — — — (2)— — (2)
Stock-based compensation— — — — 140 — — 140 
Net loss for the three months ended March 31, 2021— — — — — — (1,642)(1,642)
Balance at March 31, 20212,597 $— 3,682 $— $135,778 $(3)$(132,497)$3,278 
Issuance of common stock under employee stock option and stock purchase plans— — 69 — 59 — — 59 
Issuance of common stock— — 990 — 5,000 — — 5,000 
Offering costs on issuance of common stock— — — — (469)— — (469)
Issuance of common stock upon conversion from preferred stock(1,721)— 344 — — — — — 
Stock-based compensation— — — — 208 — — 208 
Net loss for the three months ended June 30, 2021— — — — — — (2,473)(2,473)
Balance at June 30, 2021876 $— 5,085 $— $140,576 $(3)$(134,970)$5,603 
Issuance of common stock under employee stock option and stock purchase plans— — 2 — — — — — 
Offering costs on issuance of common stock and warrants— — — — (1)— — (1)
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units— — — — 1 — — 1 
Stock-based compensation— — — — 39 — — 39 
Net loss for the three months ended September 30, 2021— — — — — — (1,140)(1,140)
Balance at September 30, 2021876 $— 5,087 $— $140,615 $(3)$(136,110)$4,502 
(continued on the next page)








8

ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED 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
SharesAmountShares*Amount
Balance at December 31, 2019— $— 2,486 $— $128,873 $(3)$(124,874)-124874000$3,996 
Issuance of common stock under employee stock option and stock purchase plans— — 5 — — — — — 
Issuance of common stock and warrants— — 688 — 2,749 — — 2,749 
Offering costs on issuance of common stock and warrants— — — — (474)— — (474)
Warrant liability— — — — (1,636)— — (1,636)
Conversion of notes to preferred stock2,709 — — — 1,769 — — 1,769 
Stock-based compensation— — — — 20 — — 20 
Net loss for the three months ended March 31, 2020— — — — — — (541)(541)
Balance at March 31, 20202,709 $— 3,179 $— $131,301 $(3)$(125,415)$5,883 
Issuance of common stock under employee stock option and stock purchase plans— — — — 30 — — 30 
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units— — — — (3)— — (3)
Issuance of common stock upon the exercise of warrants— — 15 — 103 — — 103 
Issuance of common stock upon conversion from preferred stock(112)— 22 — — — — — 
Stock-based compensation— — — — 41 — — 41 
Net loss for the three months ended June 30, 2020— — — — — — (4,340)(4,340)
Balance at June 30, 20202,597 $— 3,216 $— $131,472 $(3)$(129,755)$1,714 
Issuance of common stock under employee stock option and stock purchase plans— — 30 — — — — — 
Issuance of common stock upon the exercise of warrants— — 182 — 1,555 — — 1,555 
Stock-based compensation— — — — 35 — — 35 
Net loss for the three months ended September 30, 2020— — — — — — (1,165)(1,165)
Balance at September 30, 20202,597 $— 3,428 $— $133,062 $(3)$(130,920)$2,139 
*Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.

Preferred
Stock		Common
Stock		Additional
Paid-in
Capital		Accumulated
Other
Comprehensive
Loss		Accumulated
Deficit		Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance at December 31, 20202,597 $— 3,525 $— $135,113 $(3)$(130,855)$4,255 
Issuance of common stock under employee stock option and stock purchase plans— — 1 — — — — — 
Issuance of common stock upon the exercise of warrants— — 156 — 527 — — 527 
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units— — — — (2)— — (2)
Stock-based compensation— — — — 140 — — 140 
Net loss for the three months ended March 31, 2021— — — — — — (1,642)(1,642)
Balance at March 31, 20212,597 $— 3,682 $— $135,778 $(3)$(132,497)$3,278 
Issuance of common stock under employee stock option and stock purchase plans— — 69 — 59 — — 59 
Issuance of common stock— — 990 — 5,000 — — 5,000 
Offering costs on issuance of common stock— — — — (469)— — (469)
Issuance of common stock upon conversion from preferred stock(1,721)— 344 — — — — — 
Stock-based compensation— — — — 208 — — 208 
Net loss for the three months ended June 30, 2021— — — — — — (2,473)(2,473)
Balance at June 30, 2021876 $— 5,085 $— $140,576 $(3)$(134,970)$5,603 
Issuance of common stock under employee stock option and stock purchase plans— — 2 — — — — — 
Offering costs on issuance of common stock— — — — (1)— — (1)
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units— — — — 1 — — 1 
Stock-based compensation— — — — 39 — — 39 
Net loss for the three months ended September 30, 2021— — — — — — (1,140)(1,140)
Balance at September 30, 2021876 $— 5,087 $— $140,615 $(3)$(136,110)$4,502 

The accompanying notes are an integral part of these condensed consolidated financial statements.
98

ENERGY FOCUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
20212020202120202022202120222021
Cash flows from operating activities:Cash flows from operating activities:Cash flows from operating activities:
Net lossNet loss$(1,140)$(1,165)$(5,255)$(6,046)Net loss$(2,662)$(1,140)$(7,969)$(5,255)
Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:
Other income - employee retention tax credit(862)— (862)— 
Gain on forgiveness of PPP loan— — (801)— 
Other incomeOther income— (862)(30)(862)
Gain on forgiveness of Paycheck Protection Program loanGain on forgiveness of Paycheck Protection Program loan— — — (801)
DepreciationDepreciation43 48 143 140 Depreciation42 43 129 143 
Stock-based compensationStock-based compensation39 35 387 96 Stock-based compensation17 39 115 387 
Change in fair value of warrant liabilities— (153)— 2,274 
Provision for doubtful accounts receivableProvision for doubtful accounts receivable2 (9)10 (21)Provision for doubtful accounts receivable1 2 (3)10 
Provision for slow-moving and obsolete inventoriesProvision for slow-moving and obsolete inventories(70)90 (9)(229)Provision for slow-moving and obsolete inventories220 (70)164 (9)
Provision for warrantiesProvision for warranties1 14 13 34 Provision for warranties(74)1 (53)13 
Amortization of loan discounts and origination feesAmortization of loan discounts and origination fees61 145 158 221 Amortization of loan discounts and origination fees87 61 247 158 
Loss on write-off of property and equipmentLoss on write-off of property and equipment76 — 76 — 
Changes in operating assets and liabilities (sources / (uses) of cash):Changes in operating assets and liabilities (sources / (uses) of cash):Changes in operating assets and liabilities (sources / (uses) of cash):
Accounts receivableAccounts receivable(500)(901)390 (1,070)Accounts receivable139 (500)240 390 
InventoriesInventories444 551 (2,105)1,138 Inventories792 444 1,546 (2,105)
Short-term depositsShort-term deposits(62)(197)87 (412)Short-term deposits(110)(62)(51)87 
Prepaid and other assetsPrepaid and other assets(91)(76)(119)(59)Prepaid and other assets46 (91)162 (119)
Accounts payableAccounts payable(164)534 (82)1,811 Accounts payable629 (164)(92)(82)
Accrued and other liabilitiesAccrued and other liabilities53 160 (305)453 Accrued and other liabilities(101)53 (461)(305)
Deferred revenueDeferred revenue(69)44 (70)87 Deferred revenue7 (69)(261)(70)
Total adjustmentsTotal adjustments(1,175)285 (3,165)4,463 Total adjustments1,771 (1,175)1,728 (3,165)
Net cash used in operating activitiesNet cash used in operating activities(2,315)(880)(8,420)(1,583)Net cash used in operating activities(891)(2,315)(6,241)(8,420)
Cash flows from investing activities:Cash flows from investing activities:  Cash flows from investing activities:  
Acquisitions of property and equipmentAcquisitions of property and equipment(100)(53)(311)(171)Acquisitions of property and equipment(9)(100)(41)(311)
Net cash used in investing activitiesNet cash used in investing activities(100)(53)(311)(171)Net cash used in investing activities(9)(100)(41)(311)

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109

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

Three months ended
September 30,		Nine months ended
September 30,
2021202020212020
Cash flows from financing activities (sources / (uses) of cash):
Proceeds from the issuance of common stock and warrants— (1)5,000 2,749 
Proceeds from the exercise of warrants— 625 527 676 
Offering costs paid on the issuance of common stock and warrants(1)— (470)(474)
Proceeds from PPP loan— — — 795 
Principal payments under finance lease obligations(1)(1)(3)(3)
Proceeds from exercise of stock options and employee stock purchase plan purchases— — 59 30 
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units1 — (1)(3)
Proceeds from the Streeterville note— — 1,515 — 
Payments on the Iliad note— (450)— (976)
Deferred financing costs— (320)(30)(320)
Net payments on credit line borrowings - AFS— (1,296)— (719)
Net proceeds from the credit line borrowings - Credit Facilities1,128 2,223 337 2,223 
Net cash provided by financing activities1,127 780 6,934 3,978 
Net (decrease) increase in cash and restricted cash(1,288)(153)(1,797)2,224 
Cash and restricted cash, beginning of period1,669 3,069 2,178 692 
Cash and restricted cash, end of period$381 $2,916 $381 $2,916 
Classification of cash and restricted cash:
Cash$381 $2,574 $381 $2,574 
Restricted cash held in other assets— 342 — 342 
Cash and restricted cash$381 $2,916 $381 $2,916 
Three months ended
September 30,		Nine months ended
September 30,
2022202120222021
Cash flows from financing activities (sources / (uses) of cash):
Proceeds from the issuance of common stock and warrants— — 3,500 5,000 
Proceeds from the exercise of warrants— — — 527 
Offering costs paid on the issuance of common stock and warrants— (1)(334)(470)
Principal payments under finance lease obligations— (1)(1)(3)
Proceeds from exercise of stock options and employee stock purchase plan purchases— — 5 59 
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units— 1 — (1)
Proceeds from the 2021 Streeterville note— — — 1,515 
Payments on the 2021 Streeterville note(410)— (1,435)— 
Proceeds from the 2022 Streeterville note— — 2,000 — 
Proceeds from the related party promissory note payable450 — 450 — 
Deferred financing costs paid(95)— (329)(30)
Net payments on the credit line borrowings - Credit Facilities58 1,128 (215)337 
Net cash provided by financing activities3 1,127 3,641 6,934 
Net decrease in cash(897)(1,288)(2,641)(1,797)
Cash, beginning of period938 1,669 2,682 2,178 
Cash, end of period$41 $381 $41 $381 

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

1110
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(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 and development of ultraviolet-C light disinfection (“UVCD”)systems products. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products and UVCD products in the commercial market and military maritime market (“MMM”), and expect to expandexpanded our offerings into the consumer market startingbeginning in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit and UVCD solutions. Our goal is to be the human wellness lighting and LED and human-centric lighting (“HCL”) 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 militarymilitary-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020,After evaluating market demand and supply chain challenges for our ultraviolet-C light disinfection products, we announced the launch ofhave revised our UVCD product portfolio, which is being broughtmarketing strategy to market throughout the fourth quarter of 2021primarily focus on our MMM and into 2022.
On June 11, 2020, in accordance with previous stockholder approval, our board of directors effected a 1-for-5 (the “Split Ratio”) reverse stock split of the Company’s common stock, par value $0.0001 per share. The reverse stock split became effective immediately upon the filing of the Certificate of Amendment to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), with the Delaware Secretary of State (the “Effective Time”). At the Effective Time, every five shares of common stock issuedcommercial and outstanding automatically combined into one validly issued, fully paidindustrial lighting 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 information presented in the financial statements for all prior periods 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.control products.
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 nine months ended September 30, 20212022 and 20202021 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, 20202021 (“20202021 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 20202021 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 September 30, 20212022 and December 31, 2020,2021, Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20212022 and 2020, Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021, and 2020, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 20212022 and 2020,2021, and Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 20212022 and 2020.
12
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
2021.
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; the cost and offsetting income related to sub-leased property; and stock-based compensation. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material.
11
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(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 September 30, 2022, sales to a regional commercial lighting retrofit company accounted for approximately 32% of net sales. For the three months ended September 30, 2021, 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 19%, 17%, and 27% 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 36% of net sales for the same period.
For the threenine months ended September 30, 2020,2022, sales to our primary distributor for the U.S. Navy, and a regional commercial lighting retrofit company, and a commercial building system provider, accounted for approximately 67%13%, 15%, and 12%10% 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 68%17% of net sales for the same period.
For the nine months ended September 30, 2021, 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 33%, 10%, and 17% 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 43% of net sales for the same period. For the nine months ended September 30, 2020, sales to our primary distributor for the U.S. Navy and a
A regional commercial lighting retrofit company, accounted for approximately 52% and 14% 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 58% of net sales for the same period.
Our primary distributor for the U.S. Navy, a regional commercial lighting retrofit companybuilding systems provider, and a U.S. Navy shipbuildermechanical contractor accounted for approximately 12%25%, 34%12%, and 27%12% of net trade accounts receivable, respectively, at September 30, 2021.2022. At December 31, 2020, our primary2021, a distributor to the U.S. NavyDepartment of Defense accounted for 28%20% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 21%36% of our net trade accounts receivable.
One offshore supplier accounted for approximately 19%17% and 30%18%, respectively, of our total expenditures for the three and nine months ended September 30, 2021.2022. For the three months ended September 30, 2020, two offshore suppliers accounted for approximately 25% and 20%, respectively, of total expenditures. These same two suppliers accounted for approximately 19% and 14%, respectively, of total expenditures for the nine months ended September 30, 2020.
At September 30, 2021, one offshore supplier accounted for approximately 63%19% and 30%, respectively, of total expenditures.
At September 30, 2022, one offshore supplier accounted for approximately 45% of our trade accounts payable balance. At December 31, 2020,2021, this offshore supplier accounted for approximately 44%60% of our trade accounts payable balance.
13
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Recent accounting pronouncement
In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. For smaller reporting companies, this standard will be effective for interim and annual periods starting after December 15, 2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.standard but do not expect any material financial statement impact upon adoption.
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
12
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
for as described below. Sales taxes assessed by governmental authorities and collected by us are accounted for on a net basis and are excluded from net sales.
The following table provides a disaggregation of product net sales for the periods presented (in thousands):
Three months ended
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
2021202020212020 2022202120222021
Net sales:Net sales:    Net sales:    
CommercialCommercial$1,522 $1,456 $3,513 $4,250 Commercial$1,288 $1,522 $3,397 $3,513 
MMM productsMMM products1,227 4,508 3,947 8,832 MMM products476 1,227 1,908 3,947 
Total net salesTotal net sales$2,749 $5,964 $7,460 $13,082 Total net sales$1,764 $2,749 $5,305 $7,460 
Accounts Receivable
Our trade accounts receivable consistconsists of amounts billed to and currently due from customers. Our customers are currently 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 utilize ana third-party account receivable insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provides creditworthinesscredit-worthiness ratings and metrics that significantly assist us in evaluating the creditworthinesscredit worthiness of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of accounts receivableaccount receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.
Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to certainfor 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.
14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Geographic information
All of our long-lived fixed assets are located in the United States. For the three months ended September 30, 2022 and September 30, 2021, there were less than 1% of sales were attributable to customers outside the United States. For the nine months ended September 30, 2022 and September 30, 2021, there were approximately 1% of sales attributable to customers outside the United States. For the three and nine months ended September 30, 2020, there were no net sales attributable to customers outside the United States. 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.
13
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
The following table presents a reconciliation of basic and diluted loss per share computations (in thousands):
Three months ended
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
2021202020212020 2022202120222021
Numerator:Numerator:  Numerator:  
Net lossNet loss$(1,140)$(1,165)$(5,255)$(6,046)Net loss$(2,662)$(1,140)$(7,969)$(5,255)
    
Denominator:Denominator:Denominator:
Basic and diluted weighted average shares of common stock outstanding *5,086 3,308 4,309 3,196 
Basic and diluted weighted average shares of common stock outstandingBasic and diluted weighted average shares of common stock outstanding9,190 5,086 7,608 4,309 
*Shares outstandingAs a result of the net loss we incurred for the ninethree months ended September 30, 20202022, warrants and convertible securities representing approximately 220 thousand and 175 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been restated for the 1-for-5 stock split effective June 11, 2020.
anti-dilutive. As a result of the net loss we incurred for the three months ended September 30, 2021, options, warrants and convertible securities representing approximately 41 thousand, 11 thousand and 175 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation becauseas their inclusion would have been anti-dilutive.
As a result of the net loss we incurred for the threenine months ended September 30, 2020, options, restricted share units,2022, warrants and convertible securities representing approximately 117 thousand, 13 thousand, 321201 thousand and 519175 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation asbecause their inclusion would have been anti-dilutive.
As a result of the net loss we incurred for the nine months ended September 30, 2021, options, warrants and convertible securities representing approximately 60 thousand, 56 thousand and 289 thousand shares of common stock, respectively, 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 nine months ended September 30, 2020, options, restricted share units, warrants and convertible securities representing approximately 57 thousand, 7 thousand, 152 thousand and 531 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation as 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 provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and 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
September 30,		Nine months ended
September 30,
2022202120222021
Balance at beginning of period$315 $239 $295 $227 
Warranty accruals for current period sales, net of changes in inventory reserves for replacements(23)10 (17)49 
Adjustments to existing warranties(57)4 (29)16 
In kind settlements made during the period7 (13)(7)(52)
Accrued warranty reserve at end of period$242 $240 $242 $240 
15
14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(Unaudited)
The following table summarizes warranty activityFinancial Instruments
June 2022 Private Placement
In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the periodssale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. 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 (in thousands):as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.
Three months ended
September 30,		Nine months ended
September 30,
2021202020212020
Balance at beginning of period$239 $215 $227 $195 
Warranty accruals for current period sales10 22 49 29 
Adjustments to existing warranties4 4 16 23 
In kind settlements made during the period(13)(11)(52)(17)
Accrued warranty reserve at end of period$240 $230 $240 $230 
In July 2022, all of the June 2022 Pre-Funded Warrants were exercised. As of September 30, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of $1.30 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.
Financial InstrumentsDecember 2021 Private Placement
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “December 2021 Pre-Funded Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. 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. Total offering costs of $499 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds to us from the December 2021 Private Placement were approximately $4.0 million. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, have considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for purposes of calculating net loss per share.
In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of September 30, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding, with an exercise price of $3.52 per share. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.
June 2021 Equity Offering
In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share (the “June 2021 Equity Offering”). We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection with the June 2021 Equity Offering, and we also paid legal and other fees of $19 thousand related to the offering.$18 thousand. Total offering costs of $470$469 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30,December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.
15
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
January 2020 Equity Offering
In January 2020, we completed a registered direct offering of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an exercise price of $3.37 per share (the “Investor Warrants”) in a concurrent private placement (together with the concurrent registered direct offering, the “January 2020 Equity Offering”) for a purchase price of $0.625 per warrant. We paid the placement agent commissions of $193 thousand, plus $50 thousand in expenses, in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $510 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, 2020. In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of $4.99 per share. Net proceeds to us fromshare (together with the sale of common stock and warrants (theInvestor Warrants, the “January 2020 Equity Offering”Warrants”) were approximately $2.3 million. In accordance with the terms.
As of the Iliad Note (as defined below in Note 7, “Debt”), 10% of the gross proceeds from theSeptember 30, 2022, January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount and the balance to interest.
Warrants to purchase an aggregate of 310,860229,414 shares remain outstanding at September 30, 2021 with a weighted average exercise price of $3.59$3.67 per share. The exercise of these warrants could provide us with cash proceeds of up to $1.1$0.8 million in the aggregate. During the nine months ended September 30, 2022, none of these warrants were exercised.
As of September 30, 2021, January 2020 Warrants to purchase an aggregate of 310,860 shares remained outstanding with a weighted average exercise price of $3.59 per share. During the nine months ended September 30, 2021, 156,446 warrantsJanuary 2020 Warrants were exercised resulting in total proceeds of $527 thousand.
Due to a potential cash settlement upon occurrence of a fundamental transaction within the January 2020 warrant agreement, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three quarters of 2020. During December 2020, the warrant holders all agreed to a modification of the terms of their warrants that removed the potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth quarter of 2020, the warrant liability was reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date. Please also refer to Note 9, “Stockholders’ Equity”.
16
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
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 following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 (in thousands):
Fair Value Measurements at September 30, 2020 Using
Balance as ofQuoted Prices in Active Markets for Identical Assets
 (Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
 (Level 3)
DescriptionSeptember 30, 2020
Warrant liabilities$2,928 $— $— $2,928 
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.
The estimated fair value of warrants accounted for as liabilities, representing a level 3 fair value measure, was determined on the issuance date and subsequently marked to market at each financial reporting date until the date the warrants were reclassified into equity, after which the warrants are no longer subject to re-measurement at each balance sheet date. We use the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted-average assumptions, when appropriate.
The following inputs were used at September 30, 2020:
ExpectedRisk-FreeExpected
VolatilityInterest RateLife
Warrants with greater than one-year remaining term103.18% - 99.38%0.21% - 0.24%3.79 - 4.29 years
A roll-forward of fair value measurements using significant unobservable inputs (Level 3) for the warrants is as follows (in thousands):
Nine months ended September 30, 2020
Balance January 1, 2020$— 
Issuance of warrants, January 20201,636 
Settlements from exercise(982)
Gain from change in fair value of warrants2,274 
Balance September 30, 2020$2,928 
17
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
NOTE 3. RESTRUCTURING
There were no restructuring credits or expense recorded for the three and nine months ended September 30, 2022. For the three months ended September 30, 2021, we recorded nominal net restructuring expense and for the nine months ended September 30, 2021, we recorded a net restructuring credit of approximately $21 thousand. For three and nine months ended September 30, 2020, we recorded net restructuring credits of approximately $16 thousand, and $44 thousand, respectively, related to the costs and offsetting sub-lease income and accretion expense for the remaining lease obligation for our former New York, New York office. For additional information regarding the restructuring actions taken as part of the restructuring plans, please refer to Note 3, “Restructuring,” included under Item 8, “Financial Statements and Supplementary Data,” of our 20202021 Annual Report.
The lease obligation on our former New York, New York office was settled as of June 30, 2021. Our restructuring liabilities consisted of estimated ongoing costs related to long-term operating lease obligations, which the Company exited. The recorded value of the lease obligation was based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period were measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 6, “Leases”.
16
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the restructuring plans (in thousands):
20212020
Balance at December 31, 2020 and 2019$11 $38 
Accretion of lease obligations— 2 
Payments(11)(22)
Balance at September 30, 2021 and 2020$— $18 
The following is a reconciliation of the ending balance of our restructuring liability at September 30, 2021 to the balance sheet:
20212020
Balance at September 30, 2021 and 2020$— $18 
Less, short-term restructuring liability— 18 
Long-term restructuring liability, included in other liabilities$— $— 
2021
Balance at December 31, 2020$11 
Payments(11)
Balance at September 30, 2021$— 
As a result of the restructuring actions and initiatives described above, we have reducedbegan to tailor our operating expenses to be more commensuratein line with our expected sales volumes. Throughout 2022, we have continued to aggressively pursue cost reduction activities, including reducing staffing levels, inventory levels and our real estate footprint, but sales volume have trailed these ongoing cost control efforts. However, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist at September 30, 2021.2022.
Throughout 20202021 and the first nine months of 2021,2022, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products surrounding EnFocusTM, aour patented, breakthrough lightingpowerline control platform we officially launched during the second quarter of 2020, andplatform. We also continue to believe our Suncycleproprietary RedCapTM® circadianemergency backup lighting system which we planaddresses a market need and will continue to launch in early 2022. Additionally, during the last quarter of 2020, we announced newly developed UVCD productshelp drive commercial sales for consumerus as it has been well as commercial and industrial markets, of which 2 products are expected to be availablereceived in the fourth quarter of 2021, and 2 products are expected to be available in early 2022.market.
We plan to achieve profitability by growing our sales, primarily through existing and new commercial and industrial lighting new lightingand control systems and UVCD products, and by continuing to refine and execute on our multi-channel sales strategy that targets key verticals, such as government, healthcare, eldercare, education, and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships, as well as our emerging consumer market focus.
As described in Note 9, “Stockholders’ Equity,” we also raised approximately $3.2 million of net proceeds upon the issuance of common stock and June 2022 Warrants in connection with the June 2022 Private Placement, $4.0 million of net proceeds upon the issuance of common stock and December 2021 Warrants in connection with the December 2021 Private Placement, and approximately $4.5 million of net proceeds upon the issuance of common stock in connection with the June 2021 Equity Offering and we raised approximately $2.3 million of net proceeds upon the issuance of common stock and warrants from the January 2020 Equity Offering. As described in Note 7, “Debt”, in September 2022, April 2022 and April 2021, we obtained net proceeds from bridge financing of approximately $0.5 million, $1.8 million and $1.5 million, respectively. Also in April 2021, we expanded the borrowing capacity on one of bridge financing and in August 2020, we entered into
18
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
2 newour revolving credit facilities, which allow for expanded borrowing capacity, which capacity was further increased by an April 20, 2021 amendment to one of the facilities.
The restructuring and cost cutting initiatives implemented during 2020taken throughout 2021 and continuedcontinuing into 2021,2022, as well as the June 2022 Private Placement, the December 2021 Private Placement and the June 2021 Equity Offering and January 2020 Equity Offering that significantly strengthened our balance sheet, the Paycheck Protection Program (“PPP”) loan we obtained in April 2020, our enhanced debt capacity due to the debt refinancing in August 2020, the credit facility capacity increase and bridge financingfinancings in September 2022, April 2022 and April 2021, and the funds we expect to receive related to the Employee Retention Tax Credit (“ERTC”,; see Note 11, “Other Income” for details), were all designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or be successful due to the long sales cycle in our industry, the willingness of our suppliers to continue partnering with us, the corresponding time and inventory management required to ramp up sales from new products, markets, and customers into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, numerous interruptions and cost increases in the global supply chain globally, and the ongoing and lingeringlong-term economic impact from the COVID-19 pandemic that hadhas significantly diminished the interest and activities for our customers’ lighting retrofit projects until occupancy returns to more normal levels, among other factors.
Additionally, global supply chain challengesand logistics constraints are impacting our inventory purchasing strategy, leading to a buildup of inventory and components in an effortas we seek to manage both shortages of available components and longer lead times in obtaining components.components while balancing the development and implementation of an inventory reduction plan. Disruptions and cost increases 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.
17
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
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 substantial dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in the capital markets and volatile interest rates, combined with our capital constraints, may prevent us from being able to obtain adequate debt financing.
Additionally, if we are unable to find a permanent chief financial officer, it may be more difficult to obtain additional financing on satisfactory terms or at all. If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additionalensure 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, willcould provide us with an ability to finance our operations through the next twelve months and willmay mitigate the substantial doubt about our ability to continue as a going concern.
On August 17, 2020,23, 2022, we received a letterwritten notice, (the “Notice”), from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) that the Company is not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”) because the closing bid price of our common stock was below $1.00 per share for 30 consecutive business days. The Notice does not impact the listing of our common stock on The Nasdaq Capital Market at this time. The Notice provided that, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has a period of 180 calendar days from the date of the Notice, or until February 20, 2023, to regain compliance with the Bid Price Requirement. During this period, our common stock will continue to trade on The Nasdaq Capital Market. However, there can be no assurance that the Company will be able to regain compliance with the rule or will otherwise be in compliance with other Nasdaq listing criteria. If we are unable to regain compliance, Nasdaq may make a determination to delist our common stock.
On August 17, 2020, 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 $2,500,000 if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”). Our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, filed on August 13, 2020, reflected that our stockholders’ equity as of June 30, 2020 was $1,714,000. In addition, as of August 13, 2020, we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations. On October 5, 2020, basedBased on our timely submission of our plan to regain compliance, Nasdaq granted us an
19
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
extension through February 15, 2021 to regain compliance with the Minimum Stockholders’ Equity Rule, subject to our compliance with certain terms of the extension.Rule. In accordance with one part of the plan submitted to the Staff, we have successfully modified our outstanding warrantsJanuary 2020 Warrants and are able to now classify the warrants withinin December 2020, we reclassified $1.4 million from warrant liability into equity. At December 31, 2020, our stockholders’ equity was $4,255,000. On January 20, 2021, we received a letter from the Staff notifying us that, on a conditional basis, Nasdaq has determined that we have regained compliance with the Minimum Stockholders’ Equity Rule. At September 30,December 31, 2020, our stockholders’ equity was $4,255,000, satisfying the Minimum Stockholders’ Equity Rule. At December 31, 2021, our stockholders’ equity was $4,502,000.$6,209,000 and at September 30, 2022, our stockholders’ equity was $1,526,000.
18
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
NOTE 4. 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):
September 30,
2021		December 31,
2020		September 30,
2022		December 31,
2021
Raw materialsRaw materials$4,232 $2,695 Raw materials$3,584 $3,882 
Finished goodsFinished goods6,409 5,840 Finished goods5,231 7,034 
Reserves for excess, obsolete, and slow-moving inventoriesReserves for excess, obsolete, and slow-moving inventories(2,886)(2,894)Reserves for excess, obsolete, and slow-moving inventories(2,659)(3,050)
Inventories, netInventories, net$7,755 $5,641 Inventories, net$6,156 $7,866 
The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands):
Three months ended
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
20212020202120202022202120222021
Beginning balanceBeginning balance$(2,956)$(3,326)$(2,894)$(3,645)Beginning balance$(2,792)$(2,956)$(3,050)$(2,894)
AccrualAccrual34 (187)(64)(75)Accrual(241)34 (442)(64)
Reduction due to sold inventoryReduction due to sold inventory36 121 72 288 Reduction due to sold inventory21 36 278 72 
Write-off for disposed inventoryWrite-off for disposed inventory— (23)— 17 Write-off for disposed inventory353 — 555 — 
Reserves for excess, obsolete, and slow-moving inventoriesReserves for excess, obsolete, and slow-moving inventories$(2,886)$(3,415)$(2,886)$(3,415)Reserves for excess, obsolete, and slow-moving inventories$(2,659)$(2,886)$(2,659)$(2,886)

As part of our expense reduction initiatives, we significantly decreased our warehouse space beginning in the third quarter of 2022. In connection with the space reduction, in the second quarter of 2022, we began disposing of a substantial portion of our excess and obsolete commercial finished goods inventory that was highly reserved, which effort continued into the third quarter of 2022. As of September 30, 2022, approximately $563 thousand, on a gross value basis, of such inventory had been disposed of. Additional inventory management efforts are expected to continue in the fourth quarter of 2022.
2019
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(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):
September 30,
2021		December 31,
2020		September 30,
2022		December 31,
2021
Equipment (useful life 3 to 15 years)Equipment (useful life 3 to 15 years)$1,308 $1,281 Equipment (useful life 3 to 15 years)$1,096 $1,308 
Tooling (useful life 2 to 5 years)Tooling (useful life 2 to 5 years)324 240 Tooling (useful life 2 to 5 years)413 384 
Vehicles (useful life 5 years)Vehicles (useful life 5 years)83 47 Vehicles (useful life 5 years)81 83 
Furniture and fixtures (useful life 5 years)Furniture and fixtures (useful life 5 years)86 137 Furniture and fixtures (useful life 5 years)86 86 
Computer software (useful life 3 years)Computer software (useful life 3 years)1,189 1,057 Computer software (useful life 3 years)1,144 1,194 
Leasehold improvements (the shorter of useful life or lease life)Leasehold improvements (the shorter of useful life or lease life)169 169 Leasehold improvements (the shorter of useful life or lease life)141 169 
Finance lease right-of-use assetFinance lease right-of-use asset13 13 Finance lease right-of-use asset13 13 
UV - Robots (useful life 5 years)105 — 
mUVeTM ultraviolet-C light disinfection robots (useful life 5 years)
mUVeTM ultraviolet-C light disinfection robots (useful life 5 years)
— 105 
Projects in progressProjects in progress68 140 Projects in progress68 135 
Property and equipment at costProperty and equipment at cost3,345 3,084 Property and equipment at cost3,042 3,477 
Less: accumulated depreciationLess: accumulated depreciation(2,757)(2,664)Less: accumulated depreciation(2,609)(2,802)
Property and equipment, netProperty and equipment, net$588 $420 Property and equipment, net$433 $675 
Depreciation expense was $43$42 thousand and $48$43 thousand for the three months ended September 30, 20212022 and 2020,2021, respectively. For the nine months ended September 30, 20212022 and 2020,2021, depreciation expense was $129 thousand and $143 thousand, respectively. During the third quarter of 2022 it was determined that the mUVeTM ultraviolet-C light disinfection robots were no longer of use and $140the net book value of $76 thousand respectively.was recorded as a loss on write-off of fixed assets.
20
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
NOTE 6. LEASES
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases with expirations through 20262027 under which it is responsible for related maintenance, taxes and insurance. The Company hashad one finance lease containing a bargain purchase option that was not renewed upon expiration of the lease induring the second quarter of 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. As of January 21, 2021, the terms of one of theseour equipment operating leases hashad been extended through 2026. Additionally, as of March 25, 2022, in connection with extending through 2027, the terms of our expiring headquarters real estate operating lease for manufacturing, warehouse and office space have been modified beginning July 1, 2022 to reflect a smaller footprint at reduced costs. In accordance with Accounting StandardStandards Codification 842, Leases (“Topic 842”), as a result of the extension, the related right-of-use asset and lease liability was updatedremeasured and the right-of-use asset was adjusted for each lease at the time of modification in January 2021.2021 and March 2022. The present value of the lease obligationobligations for this lease wasthese leases were calculated using an incremental borrowing rate of 15.93%, for the equipment lease and 16.96% for the real estate lease, which waswere the Company’s blended borrowing raterates (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 obligation wasobligations 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 “Austin Credit Facility”). The weighted average remaining lease term for the operating and finance leases is 1.4 years and 0.6 years, respectively.4.7 years.
The Company had one restructured lease with a sub-lease component for the New York, New York office that was closed in 2017. The lease expired in June 2021. As part of the lease agreement, there was $0.3 million in restricted cash in other current assets on the accompanying Condensed Consolidated Balance Sheets as of December 31, 2020, which represented collateral against the related letter of credit issued as part of this agreement. Per the terms of the lease agreement, the restrictions on the cash were lifted in September 2021 and the cash was returned to the Company.
The restructured lease and sub-lease were deemed to be in-scope and thus subject to the requirements of Topic 842 and were evaluated for impairment in accordance with the asset impairment provisions of Accounting StandardStandards Codification 360, Property, Plant and Equipment (“Topic 360”). The Company concluded its net right-of-use assets were not impaired and the carrying amount approximates expected sub-leasesublease income in future years as of December 31, 2020. The Company continued to carry certain immaterial operating expenses associated with this lease as restructuring liabilities and continued to accrete those liabilities in accordance with Accounting StandardStandards Codification 420, Exit or Disposal Cost Obligations (“Topic 420”),
21
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
as has been done since the cease use date in 2017. For additional information regarding treatment of leases please refer to Note 4, “Leases,” included under Item 8, “Financial Statements and Supplementary Data,” of our 20202021 Annual Report.
There were no finance lease costs recognized in net loss for the three and nine months ended September 30, 20212022 and 2020.2021. Components of the operating and restructured lease costs recognized in net loss for the three and nine months ended September 30, 20212022 and 2020,2021, were as follows (in thousands):
Three months ended September 30,Nine months ended September 30,Three months ended September 30,Nine months ended September 30,
2021202020212020 2022202120222021
Operating lease cost (income)Operating lease cost (income)Operating lease cost (income)
Sub-lease incomeSub-lease income$(25)$(26)$(87)$(80)Sub-lease income$(9)$(25)$(90)$(87)
Lease costLease cost139 148 423 451 Lease cost83 139 298 423 
Operating lease cost, netOperating lease cost, net114 122 336 371 Operating lease cost, net74 114 208 336 
Restructured lease cost (income)Restructured lease cost (income)Restructured lease cost (income)
Sub-lease incomeSub-lease income— (68)(136)(204)Sub-lease income— — — (136)
Lease costLease cost— 59 109 180 Lease cost— — — 109 
Restructured lease income, netRestructured lease income, net— (9)(27)(24)Restructured lease income, net— — — (27)
Total lease cost, netTotal lease cost, net$114 $113 $309 $347 Total lease cost, net$74 $114 $208 $309 
21
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Supplemental balance sheet information related to the Company’s operating and finance leases as of September 30, 20212022 and December 31, 20202021 are as follows (in thousands):
 September 30, 2021December 31, 2020
Operating Leases
Operating lease right-of-use assets$419 $794 
Restructured lease right-of-use assets— 107 
Operating lease right-of-use assets, total419 901 
Operating lease liabilities505 916 
Restructured lease liabilities— 168 
Operating lease liabilities, total505 1,084 
Finance Leases
Property and equipment13 13 
Allowances for depreciation(11)(9)
Finance lease assets, net2 4 
Finance lease liabilities1 4 
Total finance lease liabilities$1 $4 
22
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
 September 30, 2022December 31, 2021
Operating Leases
Operating lease right-of-use assets$1,248 $292 
Operating lease liabilities$1,271 $351 
Finance Leases
Property and equipment13 13 
Allowances for depreciation(13)(12)
Finance lease assets, net— 1 
Finance lease liabilities— 1 
Total finance lease liabilities$— $1 
Future minimum lease payments required under operating and finance leases for each of the 12-month rolling periods below in effect at September 30, 20212022 are as follows (in thousands):
Operating LeasesFinance Lease
October 2021 to September 2022$488 $1 
October 2022 to September 202319 — 
October 2023 to September 20248 — 
October 2024 to September 20253 — 
October 2025 to September 20262 — 
Total future undiscounted lease payments520 1 
Less imputed interest(15)— 
Total lease obligations$505 $1 
Operating Leases
October 2022 to September 2023$384 
October 2023 to September 2024381 
October 2024 to September 2025383 
October 2025 to September 2026389 
October 2026 to September 2027295 
Total future undiscounted lease payments1,832 
Less imputed interest(561)
Total lease obligations$1,271 
Supplemental cash flow information related to leases for the three and nine months ended September 30, 20212022 and 2020,2021, was as follows (in thousands):
Three months ended September 30,Nine months ended September 30,Three months ended September 30,Nine months ended September 30,
2021202020212020 2022202120222021
Supplemental cash flow informationSupplemental cash flow information Supplemental cash flow information 
Cash paid, net, for amounts included in the measurement of lease liabilities:Cash paid, net, for amounts included in the measurement of lease liabilities:Cash paid, net, for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leasesOperating cash flows from operating leases$161 $134 $421 $401 Operating cash flows from operating leases$86 $161 $326 $421 
Operating cash flows from restructured leasesOperating cash flows from restructured leases$— $17 $35 $52 Operating cash flows from restructured leases$— $— $— $35 
Financing cash flows from finance leasesFinancing cash flows from finance leases$1 $1 $3 $3 Financing cash flows from finance leases$— $1 $1 $3 
2322
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(Unaudited)
NOTE 7. DEBT
Credit facilities
On August 11, 2020, we entered into 2two debt financing arrangements (together, the “Credit Facilities”) that allow for expanded borrowing capacity at a lower blended borrowing cost. The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (the “IF Lender”). Borrowings under the original Inventory Facility were permitted up to the lower of (i) $3.0 million, which amount was subsequently increased to $3.5 million as described below, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75% of inventory costs or 85% of the inventory net orderly liquidation value, less the availability reserves. On April 20, 2021, the Company and the IF Lender entered into an amendment to the Inventory Loan Agreement to increase the maximum amount that may be available to the Company from $3.0 million to $3.5 million, subject to the borrowing base as set forth in the Inventory Loan Agreement. The outstanding indebtedness under the Inventory Facility accrues at an annual rate equal to the greater of (i) 5.75% and (ii) 4.00% plus the three (3) monththree-month LIBOR rate (3.07% and 0.21% at September 30, 2022 and December 31, 2021, respectively) and is also subject to a service fee of 1% per month. The annualized interest rate at September 30, 20212022 and December 31, 2020,2021, which includes interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was 22.4%23.4% and 23.6%22.4%, respectively. The Inventory Facility’s interest and service fees combined amount is subject to a minimum monthly fee of $18 thousand. There would be no breakage fee for the Company for the Inventory Facility if the Company were to refinance it with an American Bankers Association (“ABA”) equivalent institution after August 11, 2021.institution. The Inventory Facility is secured by substantially all of the present and future assets of the Company and is also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender (defined below). The Inventory Facility term was automatically extended for one year on August 11, 2022, and now matures on August 11, 2022,2023, subject to early termination upon demand by the IF lender with 90 days’ notice and otherwise in accordance with the terms of the Inventory Loan Agreement. The annual facility fee of $70 thousand was paid during September of 2022 upon renewal. During the third quarter of 2022, as a result of a reduction in borrowing base following an updated inventory appraisal, the IF Lender consented to the company reducing its excess borrowings over an 8-week transition period in accordance with an agreed over-allowance schedule. The term is automatically extended in successive one (1) year increments unless terminated by either party in accordance with the Inventory Loan Agreement. On April 20, 2021, the Company and the IF lender entered into an amendment to the Inventory Loan Agreement to increase the maximum amount that may be available to the Company from $3.0 million previously to $3.5 million, subject to the borrowing base as set forth in the Inventory Loan Agreement.
The second arrangement is a receivables financing facility (the “Receivables Facility”) pursuant to the Loan and Security Agreement (the “Receivables Loan Agreement”) between the Company and Factors Southwest L.L.C. (d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”). Borrowings under the Receivables Facility are permitted up to the lower of (i) $2.5 million orand (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. Interest on outstanding indebtedness under the Receivables Facility accrues at an annual rate equal to (i) the highest prime rate announced from time to time by the Wall Street Journal (6.25% at September 30, 2022 and 3.25% at December 31, 2021) plus (ii) 2%. At September 30, 20212022 and December 31, 2020,2021, the annualized interest rate, which includes interest fees and the annual facility fee, was 8.0%9.4% and 7.9%8.0%, respectively. The annualized interest rate on the collateral management fee was 6%6.0% at both September 30, 20212022 and December 31, 2020.2021. The Receivables Facility is also secured by substantially all of the present and future assets of the BorrowerCompany and is also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender. A $25 thousand, or 1%, facility fee was charged at closing. There would be no breakage fee for the Company for the Receivables Facility if the Company were to refinance it with an ABA equivalent institution. The Receivables Facility term was automatically extended for one year on August 11, 2022 and now matures on August 11, 2022,2023, subject to early termination by either party in accordance with the terms of the Receivables Loan Agreement including by optional prepayment of the Receivables Facility along with an early termination fee, provided that the term is automatically extended in successive one (1) year increments unless terminated by either party in accordance with the Receivables Loan Agreement. The annual facility fee of $25 thousand was accrued for during September of 2022 upon renewal.
Borrowings under the Inventory Facility were $1.4$1.6 million and $1.3$1.2 million at September 30, 20212022 and December 31, 2020,2021, respectively. Borrowings under the Receivables Facility were $1.3$0.4 million and $1.0 million at September 30, 20212022 and December 31, 2020,2021, respectively. These facilitiesCredit Facilities are recorded in the Condensed Consolidated Balance Sheets as of September 30, 20212022 and December 31, 20202021 as a current liability under the caption “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $0.1 million$64 thousand and $84 thousand for the Inventory Facility and $14$21 thousand and $24 thousand for the Receivables Facility as of September 30, 2021,2022 and $0.1 million for the Inventory Facility and $40 thousand for the Receivables Facility as of December 31, 2020.
The Credit Facilities replaced the Austin Credit Facility that was entered into on December 11, 2018, and was secured by a lien on our assets. The Austin Credit Facility was a three year, $5.0 million revolving line of credit. Interest on advances under the line was due monthly at the “Prime Rate,” as published by the Wall Street Journal from time to time, plus a2021, respectively.
2423
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(Unaudited)
margin of 2%. Additionally, an annual facility fee of 1% onPromissory Note Payable
On September 16, 2022, we entered into a short-term unsecured Promissory Note (the “2022 Promissory Note”) with Mei-Yun (Gina) Huang in the entire $5.0 millionoriginal principal amount of the Austin Credit Facility was due at the beginning of each$0.5 million. Ms. Huang is a member of the three years thatCompany’s board of directors. The total liability for the Austin Credit Facility2022 Promissory Note was outstanding and a 0.5% collateral management fee on the average outstanding loan balance was payable monthly. On August 11, 2020, we paid $1.4$0.5 million to close the Austin Credit Facility, which included a $100 thousand termination fee. Additionally, we wrote off $59 thousand of the remaining related debt acquisition costs. For additional information regarding the Austin Credit Facility, pleaseat September 30, 2022. Please refer to Note 9, “Debt,” included under Item 8, “Financial Statements and Supplementary Data,” of our 2020 Annual Report.
For additional information regarding the Credit Facilities, please refer to Part II, Item 5, “Other Information,” included in our Quarterly Report on Form 10-Q12, “Related Party Transaction” for the quarterly period ended June 30, 2020, filed on August 13, 2020.further detail.
Streeterville Notes
2022 Note
On April 27, 2021,21, 2022, we entered into a note purchase agreement (the “2022 Streeterville Note Purchase Agreement”) with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $2.0 million (the “2022 Streeterville Note”). The 2022 Streeterville Note was issued with an original issue discount of $215 thousand and Streeterville paid a purchase price of approximately $1.8 million for the 2022 Streeterville Note, from which the Company paid $15 thousand to Streeterville for Streeterville’s transaction expenses.
The 2022 Streeterville Note has a maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the 2022 Streeterville Note at a premium, which is 5% during the first six months and 7.5% thereafter. Prepayments at the reduced rate in the first six months are limited to 50% of the outstanding balance. Beginning on December 1, 2022, Streeterville may require the Company to redeem up to $225 thousand of the 2022 Streeterville Note in any calendar month. The Company has the right on five occasions, but not during more than three consecutive months, 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 will increase the amount outstanding under the 2022 Streeterville Note by 1.5%.
The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $1.9 million at September 30, 2022. Unamortized loan discount and debt issuance costs for the 2022 Streeterville Note were $183 thousand at September 30, 2022.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.
2021 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 “Streeterville“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 has a maturity date of April 27, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the 2021 Streeterville Note at a premium, which is 5% during the first three months and 10% thereafter. Prepayments at the reduced rate in the first three months are limited to 50% of the outstanding balance. Beginning on November 1, 2021, Streeterville may require the Company to redeem up to $205 thousand of the 2021 Streeterville Note in any calendar month. The Company has the right on 3three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month.month, and Streeterville agreed to accept a fourth redemption deferral on the same terms during the third quarter of 2022. Each exercise of this deferral right by the Company will increase 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 have agreed to exchange common stock for the required redemption in October 2022, totaling $205 thousand converted to equity.
The total liability for the 2021 Streeterville Note, net of discount and financing fees, was $1.6$0.4 million and $1.7 million at September 30, 2021.2022 and December 31, 2021, respectively. Unamortized loan discount and debt issuance costs for the 2021 Streeterville Note were $0.1 million$61 thousand and $140 thousand at September 30, 2021.2022 and December 31, 2021, respectively.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2021 Streeterville Note will automatically increase by 15% as of the date of such delisting.
24
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank National Association (“KeyBank”) in the amount of approximately $795 thousand, pursuant to the PPPPaycheck Protection Program (“PPP”) under Division A of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The funds were received on April 20, 2020 and accrued interest at a rate of 1% per annum. At December 31, 2020, $529 thousand was classified as short-term debt and $266 thousand was classified as long-term debt on the Company’s Consolidated Balance Sheet. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The entire principal balance and interest were forgiven by the Small Business Administration (“SBA”) on February 11, 2021. The $801 thousand forgiveness income was recorded as other income in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2021.
Iliad Note
On November 25, 2019, we entered into a note purchase agreement (the “Iliad Note Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”) pursuant to which the Company sold and issued to Iliad a promissory note in the principal amount of $1.3 million (the “Iliad Note”). The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad’s transaction expenses.
In December 2020, we repaid the outstanding balance on the Iliad Note in full prior to its maturity date of November 24, 2021. Remaining debt and original issue discount costs of $117 thousand were written off at that time. The Iliad Note accrued interest at 8% per annum, compounded daily, on the outstanding balance.
25
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we had, among other things, agreed that, until the Iliad Note was repaid, 10% of gross proceeds the Company received from the sale of our common stock or other equity must be paid to Iliad and applied to reduce the outstanding balance of the Iliad Note. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.
The total liability for the Iliad Note, excluding financing fees, was $0.2 million at September 30, 2020. Unamortized loan discount and debt issuance costs were $0.1 million at September 30, 2020.
Convertible Notes
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 the registration requirements of the Securities Act of 1933, as amended. The Convertible Notes bore interest at a rate of 5% per annum until June 30, 2019 and at a rate of 10% thereafter. Pursuant to their terms, 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 andthe accumulated interest thereon ($0.1 million), which totaled $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 Convertible Preferred Stock, par value 0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-five basis into shares of our common stock. During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock. On April 1, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common 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. Please also refer to Note 9, “Stockholders’ Equity”.
NOTE 8. INCOME TAXES
As a result of the operating loss incurred during each of the three and nine months ended September 30, 20212022 and 2020,2021, 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 September 30, 20212022 and December 31, 2020,2021, 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, 2020,2021, we had a net operating loss carry-forward of approximately $115.9$125.4 million for federal income tax purposes ($72.377.2 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $61.5$71.0 million of the $115.9$125.4 million is available to offset future taxable income after the application of IRCthe limitations found under Section 382 limitations.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 $9.6 million and $7.1 million and $8.3 million in federal net operating losses generated in 20202021 and 2019,2020, 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 $37.3$37.5 million will begin to expire in 20212023 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 12,11, “Income Taxes,” included under Item 8, “Financial Statements and Supplementary Data,” of our 20202021 Annual Report.
26
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
NOTE 9. STOCKHOLDERS’ EQUITY
June 2022 Private Placement
In June 2022, we completed the June 2022 Private Placement with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share. We also sold to the same institutional investors (i) June 2022 Pre-Funded Warrants to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. In connection with the June 2022 Private Placement, we paid the placement agent commissions of $252 thousand, plus $35 thousand in expenses, and we also paid legal, accounting and other fees of $47 thousand. Total offering costs of $334 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.
In July 2022, all of the June 2022 Pre-Funded Warrants were exercised. As of September 30, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of $1.30 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.
25
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
December 2021 Private Placement
In December 2021, we completed the December 2021 Private Placement with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) December 2021 Pre-Funded Warrants to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. In connection with the December 2021 Private Placement, we paid the placement agent commission of $360 thousand plus $42 thousand in expenses and we also paid legal, accounting and other fees of $97 thousand. Total offering costs of $499 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds from the December 2021 Private Placement were approximately $4.0 million. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for purposes of calculating net loss per share.
In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of September 30, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding, with an exercise price of $3.52 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.
June 2021 Equity Offering
In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share. We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection with the June 2021 Equity Offering and we also paid legal and other fees of $19 thousand related to the offering.$18 thousand. Total offering costs of $470$469 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30,December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.
Preferred Stock
Pursuant to the terms of the Convertible Notes, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon at the date of conversion (totaling $1.8 million) were converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Preferred Stock, which is convertible on a one-for-five basis into shares of our common stock. During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock. On April 1,During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock. The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group (under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC (“Fusion Park”) and 5 Elements Global Fund L.P. (controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer), as well as Brilliant Start Enterprise Inc. (“Brilliant Start”) and Jag International Ltd. (controlled affiliates of Gina Huang, a member of the Company's board of directors). Upon conversion of their respective shares of Series A Preferred Stock, Fusion Park and Brilliant Start received 184,851 and 159,354 shares, respectively, of the Company’s common stock.
The Series A Preferred Stock was created by the filing of 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”).
26
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes equal to 11.07% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. On March 29, 2019, the Company also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of undesignated preferred stock available for designation as Series A Preferred Stock.
The purchase agreement related to the Convertible Notes 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.
27
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
1-for-5 Reverse Stock Split
On June 11, 2020, in accordance with previous stockholder approval, our board of directors effected a 1-for-5 reverse stock split of the Company’s common stock, par value $0.0001 per share. The reverse stock split became effective at the Effective Time upon the filing of the Certificate of Amendment to the Certificate of Incorporation with the Delaware Secretary of State. At the Effective Time, every five 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.
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 financial statements for the nine months ended September 30, 2020 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.
The reverse stock split was effected solely to increase the per share trading price of the common stock to satisfy the $1.00 minimum bid price requirement pursuant to Nasdaq Listing Rule 5550(a)(2) for continued listing on Nasdaq. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 12, 2020.
January 2020 Equity Offering
Issuance of Common Stock and Warrants
In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $3.37 per share. We also sold, to the same institutional investors, warrantsthe Investor Warrants to purchase up to 688,360 shares of common stock at an exercise price of $3.37 per share in a concurrent private placement for a purchase price of $0.625 per warrant. We paid the placement agent commissions of $193 thousand, plus $50 thousand in expenses, in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $510 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, 2020.2021. In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of $4.99 per share. Net proceeds to us from the sale of common stock and warrantsJanuary 2020 Warrants were approximately $2.3 million. In accordance with the terms of the Iliad Note (as defined above in Note 7, “Debt”), 10% of the gross proceeds from the
January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount and the balance to interest.
Warrants issued to purchase an aggregate of 310,860229,414 shares remain outstanding at September 30, 20212022 with a weighted average exercise price of $3.59$3.67 per share. The exercise of warrants could provide us with cash proceeds of up to $1.1$0.8 million in the aggregate if all warrants are exercised. During the nine months ended September 30, 2022, no January 2020 Warrants were exercised. During the nine months ended September 30, 2021, 156,446 warrants were exercised resulting in total proceeds of $527 thousand.
As of September 30, 2022 and 2021, we had the following outstanding January 2020 warrants to purchase shares of common stock:
Number of Underlying SharesExercise PriceExpiration
Investor Warrants269,180$3.3700January 13, 2025
Placement Agent Warrants41,680$4.9940January 13, 2025
310,860

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ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
As of September 30, 2020, we had the following outstanding warrants to purchase shares of common stock:
As of September 30, 2022As of September 30, 2021
Number of Underlying SharesExercise PriceExpirationNumber of Underlying SharesExercise PriceExpiration
Investor WarrantsInvestor Warrants497,472$3.3700January 13, 2025Investor Warrants187,734269,180$3.3700January 13, 2025
Placement Agent WarrantsPlacement Agent Warrants41,680$4.9940January 13, 2025Placement Agent Warrants41,68041,680$4.9940January 13, 2025
539,152229,414310,860
Warrant Classification
We account for common stock warrants as either liabilities or equity instruments depending on the specific terms of the warrant agreement. Common stock warrants that could require cash settlement are accounted for as liabilities and are revalued at fair value at each balance sheet date subsequent to the initial issuance. Changes in the fair market value of the warrant are reflected in the condensed consolidated statement of operations as income (expense) based upon the change in fair value of warrants. Common stock warrants without cash settlement provisions are accounted for as equity and re-measurement at each balance sheet date is not required.
The warrants we issued in the January 2020 Equity Offering contained a provision for net cash settlement in the event that there is a fundamental transaction involving the Company (e.g., merger, sale of substantially all assets, tender offer, or share exchange). Due to this provision, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date with fair value adjustments recognized as a component of earnings. During December 2020, the warrant holders agreed to a modification of the terms of their warrants which removed the potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth quarter of 2020, the warrant liability was reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date.
27
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
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
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
20212020202120202022202120222021
Cost of salesCost of sales$2 $1 $7 $2 Cost of sales$— $2 $2 $7 
Product developmentProduct development2 3 10 5 Product development4 2 16 10 
Selling, general, and administrativeSelling, general, and administrative35 31 370 89 Selling, general, and administrative13 35 97 370 
Total stock-based compensationTotal stock-based compensation$39 $35 $387 $96 Total stock-based compensation$17 $39 $115 $387 
Total unearned stock-based compensation was $0.2 million at September 30, 2022, compared to $0.3 million at September 30, 2021, compared to $0.2 million at September 30, 2020.2021. 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 September 30, 20212022 is expected to be recognized is approximately 2.92.5 years.
29
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(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.
Nine months ended
September 30,		Nine months ended
September 30,
2021202020222021
Fair value of options issuedFair value of options issued$4.18 $2.00 Fair value of options issued$0.77 $4.18 
Exercise priceExercise price$5.39 $2.61 Exercise price$0.95 $5.39 
Expected life of options (in years)Expected life of options (in years)6.26.2Expected life of options (in years)6.16.2
Risk-free interest rateRisk-free interest rate0.8 %0.7 %Risk-free interest rate3.0 %0.8 %
Expected volatilityExpected volatility96.5 %93.5 %Expected volatility104.0 %96.5 %
Dividend yieldDividend yield0.0 %0.0 %Dividend yield0.0 %0.0 %
28
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
A summary of option activity under all outstanding stock incentive plans for the nine months ended September 30, 20212022 is presented as follows:
Number of
Options		Weighted
Average
Exercise
Price Per
Share		Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2020221,450 $3.45 
Granted76,900 5.39 
Canceled/forfeited(35,287)5.43 
Expired(1,500)53.50 
Balance at September 30, 2021257,338 $3.49 8.4
Vested and expected to vest at September 30, 2021218,795 $3.43 8.3
Exercisable at September 30, 202178,156 $3.48 7.8
Number of
Options		Weighted
Average
Exercise
Price Per
Share		Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2021267,109 $3.46 
Granted226,820 0.95 
Exercised(250)1.45 
Canceled/forfeited(135,447)3.03 
Balance at September 30, 2022358,064 $2.03 8.2
Vested and expected to vest at September 30, 2022291,379 $2.21 7.9
Exercisable at September 30, 2022118,920 $3.21 5.6
Restricted stock units
A summary of restricted stock unit activity under all outstanding stock incentive plans for the nine months ended September 30, 20212022 is presented as follows:
Restricted
Stock Units		Weighted
Average
Grant
Date
Fair Value		Weighted
Average
Remaining
Contractual
Life (in years)		Restricted
Stock Units		Weighted
Average
Grant
Date
Fair Value		Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 20204,480 $8.64 
Balance at December 31, 2021Balance at December 31, 20212,400 $7.14 
GrantedGranted50,000 5.26 Granted40,000 1.40 
VestedVested(52,080)5.46 Vested(40,800)1.51 
Balance at September 30, 20212,400 $7.14 9.0
Balance at September 30, 2022Balance at September 30, 20221,600 $7.14 7.9

30
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
NOTE 10. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of September 30, 2021,2022, we had approximately $2.9$1.0 million in outstanding purchase commitments for inventory. Of this amount, approximately $2.6inventory, of which $0.8 million is expected to ship in the fourth quarter of 2021, with the balance2022 and $0.2 million is expected to ship in the first quarter of 20222023 and thereafter.beyond.
NOTE 11. OTHER INCOME
Employee Retention Tax Credit
The CARES Act, which was enacted on March 27, 2020, provides an ERTC that is a refundable tax credit against certain employer taxes. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent (70%)70% of the qualified wages paid to employees between December 31, 2020,January 1, 2021 and December 31,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.
29
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
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 quarterquarters 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 are 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 expect to receiveapplied for and received a refund of $431 thousand, and we plan to amendamended our filing for the second quarter of 2021, for which we expect to receive an additional refund of approximately $431$445 thousand. These amounts are recorded as other income in the Condensed Consolidated Statements of Operations during the threequarter ended December 31, 2021, and nine months ended September 30, 2021, andthe $445 thousand expected receivable is included in prepaid and other current assets in the Condensed Consolidated Balance Sheet as of September 30, 2022 and December 31, 2021.
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank in the amount of approximately $795 thousand, pursuant to the PPP under the CARES Act, which was enacted on March 27, 2020. The funds were received on April 20, 2020 and accrued interest at a rate of 1% per annum. At December 31, 2020, $529 thousand was classified as short-term debt and $266 thousand was classified as long-term debt on the Company’s Consolidated Balance Sheet. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The entire principal balance and interest were forgiven by the SBA on February 11, 2021. The $801 thousand forgiveness income was recorded as other income in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2021.

NOTE 12. RELATED PARTY TRANSACTION
On September 16, 2022, we entered into the 2022 Promissory Note with Ms. Huang in the original principal amount of $0.5 million. Ms. Huang is a member of the Company’s board of directors. The 2022 Promissory Note is an unsecured obligation and has a maturity date of June 16, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the 2022 Promissory Note, Ms. Huang may, at her option, declare the amount outstanding under the Note immediately due and payable. After the occurrence of an event of default, Ms Huang may elect to have interest accrue on the 2022 Promissory Note at a rate per annum of 10%, or such lesser rate as permitted under applicable law. The total liability for the 2022 Promissory Note was $0.5 million at September 30, 2022.
NOTE 13. SUBSEQUENT EVENTS
Unsecured Notes Payable
On November 9, 2022, the Company issued a short-term Promissory Note in favor of Mei-Yun (Gina) Huang in the original principal amount of $350 thousand. Ms. Huang previously provided $450 thousand of bridge financing in September 2022 on the substantially the same terms. Ms. Huang is a member of the Company’s board of directors.
The promissory note has a maturity date of nine months from the date of issuance and bears interest at an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the maturity date. The Company may prepay the amounts outstanding under the note in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the note, Ms. Huang may, at her option, declare the amount outstanding under the note immediately due and payable. After the occurrence of an event of default, Ms. Huang may elect to have interest accrue on the note at a rate per annum of ten percent, or such lesser rate as permitted under applicable law.
On November 4, 2022, the Company issued a short-term Promissory Note in favor of Jay Huang in the original principal amount of $250 thousand (the “Huang Note”). In October of 2022, Mr. Huang also provided $50 thousand of bridge financing on the substantially the same terms as the Huang Note.
The Huang Note has a maturity date of nine months from the date of issuance and bears interest at an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the maturity date. The Company may prepay the amounts outstanding under the Huang Note in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the Huang Note, Mr. Huang may, at his option, declare the amount outstanding under the Huang Note immediately due and payable. After the occurrence of an event of default, Mr. Huang
30
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
may elect to have interest accrue on the Huang Note at a rate per annum of ten percent, or such lesser rate as permitted under applicable law.
Exchange Agreement
On October 10, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with Streeterville, to whom we previously sold and issued the 2021 Streeterville Note. Pursuant to the Exchange Agreement, the Company and Streeterville have agreed to (i) partition from the 2021 Streeterville Note a new Promissory Note (the “October Partitioned Note”) in the original principal amount of $205 thousand (the “October Exchange Amount”), (ii) cause the outstanding balance of the 2021Streeterville Note to be reduced by an amount equal to the October Exchange Amount, and (iii) exchange (the “Exchange”) the Partitioned Note for 385,918 shares (the “October Exchange Shares”) of the Company’s common stock.
The October Exchange was each priced at-the-market under Nasdaq rules pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933, as amended. There are no gross proceeds to the Company in respect of the October Exchange, provided that the Exchange satisfied a redemption notice provided by Streeterville under the terms of the 2021 Streeterville Note, pursuant to which the Company otherwise would be required to redeem $205 thousand of the 2021 Streeterville Note in cash, respectively.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 20202021 (“20202021 Annual Report”).
Overview
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient light-emitting diode (“LED”) lighting systems and controls and development of ultraviolet-C light disinfection (“UVCD”) products.systems. We develop, market and sell high quality LEDlight-emitting diode (“LED”) lighting and controls products and UVCD products in the commercial market and military maritime market (“MMM”), and expect to expandexpanded our offerings into the consumer market startingbeginning in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices, homes and homesvessels with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit and UVCD solutions.retrofit. Our goal is to be the human wellness lighting and LED and human-centric lighting (“HCL”) 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 and fixtures in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and militarymilitary-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020,After evaluating market demand and supply chain challenges for our ultraviolet-C light disinfection products, we announced the launch ofhave revised our UVCD product portfolio, which is being broughtmarketing strategy to market throughout the fourth quarter of 2021primarily focus on our MMM and into 2022.commercial and industrial lighting and control products.
Net sales decreased 43%29% for the nine months ended September 30, 20212022 as compared to the nine months ended September 30, 2020,2021, primarily driven by a 55%52% decrease in militaryMMM sales period-over-period,year-over-year and a slight 3% decrease in net sales of our commercial products of 17% for the nine months ended September 30, 2021 as compared to the prior year period.products. The sales cycles for the MMM is dependent on many factors, including the availability and prioritization of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules, and our financial results reflect volatility from fluctuations in the timing, pace and size of MMM projects. TheHowever, we reinvested in our MMM sales channel with a strategic hire in the second quarter of 2022 and continue to pursue these opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings. In our commercial target markets, while we are beginning to see an uptick in customer projects and purchase commitments, the sales cycles can range from several months to over one year and our financial results also reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects due to, among other reasons, the ongoinglong-term effects on our customers of the coronavirus (“COVID-19”) pandemic.
Operating losses increased by $3.1$0.9 million, or 98%14%, in the first nine months of 2021 over2022 from the first nine months of 2020.2021. The Company’s results reflect the challenges due to long and unpredictable sales cycles, delays in customer retrofit budgets and project starts, and supply chain issues, primarily related to supplier concentration and shipping costs exacerbated by the continuing effects of the COVID-19 pandemic. We have been challenged by continuing and intensifying aggressive price competition in the lighting industry, particularly in our retrofit market.market, as well as increased logistics expenses that are weighing on margins. We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at September 30, 2021.2022.
The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on our company. In the first three quarters of 2021, followingus. We saw a slowdown throughout 2020, we have seen a continuing weaknessslight improvement in commercial sales in the first half of 2022, following slowdowns in 2021 and 2020, as ourend customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the ongoing impacts of the COVID-19 pandemic that caused our customers to suspend or postpone lighting retrofit projects due to budget and occupancy uncertainties. We remain cautious as our commercial sales reflect the volatility of large institutional end customers. Global supply chain and logistics challenges have further exacerbated slowdowns in customer projects, as well as impacted our margins, inventory availability and shipping strategies to respond to customer and supplier timelines.
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We continue to monitor the impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken to curtail and respondin response to the spreadpandemic. Global supply chain and logistics constraints are impacting our inventory purchasing strategy as we seek to manage both shortages of the virus.available components and longer lead times in obtaining components. 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. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects of the COVID-19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the ongoinglong-term impact of the COVID-19 pandemic and continuestand ready to adjust our organizational structure, strategies, plans and processes to respond.
Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact of the COVID-19 pandemic to our business, results of operations, cash flows and financial position that the COVID-19 pandemic may have. Continuationposition. Long-term impacts of the COVID-19 pandemic, andas well as government actions in response thereto, could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows. We will remain agile as an organization to respond to potential or continuing
32

weakness in the macromacroeconomic environment and in the meantime expand sales channels and enterevaluate new markets, such as the UVCD and consumer markets that we believe willmay provide additional growth opportunities.
It is our belief that the momentum of the efforts undertaken in 2020,2021, as described in our 20202021 Annual Report, along with our continuing efforts to date in 2021,2022, including the development and launch of new and innovative products in both lighting controls surrounding thesuch as our EnFocusTM powerline controls platform, and the UVCD market, as well as our planned entry into the consumer markets with these new products, lowering of our fixed costs through improved lease arrangements and reduced headcount beginning in the second half of the year, and our plans to shift to more cost effective in-bound freight strategies, will over time result in improved sales and bottom-line performance for the Company. During the third quarter and into the fourth quarter of 2022, we have aggressively resized our organization and emphasized sales and operational execution, while also seeking lower cost, higher value opportunities in our supply chain.
We launched our patented EnFocusTMEnFocus™ powerline controls platform during the second quarter of 2020 and, despite the ongoing, significant delay and slowdown in our customers’ lighting projects following the impacts of the COVID-19 pandemic, we continue to receive positive feedback from existing, new, and potential new customers.the market through project specifications that are beginning to convert to larger volume orders. The EnFocusTMEnFocus™ platform offers two immediately available product lines: EnFocusTMEnFocus™ DM, which provides a dimmable lighting solution, and EnFocusTMEnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. EnFocusTMEnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocusTMEnFocus™ switches and tubular LEDs,LED lamps. Our EnFocus™ powerline controls offer a far more secure, affordable and environmentally sustainable solution compared with replacing entire lighting fixtures and incorporating additional wired or wireless communication. In addition, we recently announced plans for
Throughout 2021 and 2022, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing and prioritization of U.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. We continue to pursue opportunities from the U.S. Navy and the government sector to minimize such volatility, and reinvested in our MMM sales channel with a strategic hire in the second generation of EnFocusTM switches and the award-winning SuncycleTM circadian lighting system for both commercial and residential markets, which we plan to launch in early 2022.
In addition, in response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we have been developing advanced UVCD air and surface disinfection products for both consumer as well as the commercial and industrial markets. We announced the following UVCD products beginning in the fourth quarter of 2020: abUVTM circadian lighting2022. MMM sales cycles are longer than commercial sales, and UVCD air disinfection integrated troffers controlled byfrequently are for made-to-order products, so we believe the EnFocusTM platform technology; nUVoTM Tower portable air disinfection device for offices and homes; nUVoTM Traveler portable personal air disinfection device; and mUVeTM autonomous robot designed for surface disinfection. The nUVoTM Tower and nUVoTM Travelerimpacts of this reinvestment are expected to be availablestill building. Previously in the fourth quarter of 2021, and the abUVTM and mUVeTM are expected to be available in the first half of 2022.
In our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned us to be more competitive along with improved production efficiencies. Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales throughout 2020, offsetting some of the weakness being experienced in our commercial business that year. In addition, during the fourth quarter of 2020,Additionally, we becameare an approved supplier for the General Services Administration (“GSA”) and many of our products are now listed in the GSA website for all federal and military agencies to view and order our products.products, a channel we hope to further develop. While we continue to aggressively seek to increase sales of our commercial products, we are reinvesting in the MMM business as we believe it offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace. However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are primarilyin part driven by, and reflect volatility in, our MMM sales. In the first three quarters of 2021, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S. Navy awards. We continue to pursue opportunities from the U.S. Navy and the government sector to minimize such volatility.
33

Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to achieve profitability through developing and launching new, innovative products such as EnFocusTM andpowerline controls, further leveraging our UVCD products,proprietary technology such as RedCap®, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare, eldercare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform such as our SuncycleTM products that aim to serve both consumer and commercial markets. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
At September 30, 2021,2022, we had $0.4 million$41 thousand in cash and a total of $4.3$4.8 million of debt.debt, net of discounts and unamortized debt costs. Total debt, net of discounts and unamortized debt costs, at September 30, 20212022 included $1.4$1.6 million outstanding under our inventory financing facility (the “Inventory Facility”), $1.3$0.4 million outstanding under our receivables financing facility (the “Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”) and $1.6, $0.4 million outstanding on the 2021 Streeterville Note (as defined below), $1.9 million outstanding on the 2022 Streeterville Note (as defined below) and $0.5 million outstanding on the 2022 Promissory Note (as defined below). At September 30, 2021,2022, we had no additional availability of $1.6 million under the Inventory Facility and $0.1$0.2 million under the Receivables Facility, forFacility. During the third quarter of 2022, as a totalresult of $1.7 million of additional availability.a reduction in borrowing base following an updated inventory appraisal, the IF Lender consented to the company reducing its excess borrowings over an 8-week transition period in accordance with an agreed over-allowance schedule. Previously, on April 20, 2021, we entered into an amendment to the Loan and Security Agreement governing the Inventory Facility (the “Inventory Loan Agreement”) to increase the maximum amount
33

that may be available to the Company from $3.0 million previously to $3.5 million, subject to the borrowing base as set forth in the Inventory Loan Agreement.
In September 2022, we entered into a short-term unsecured Promissory Note (the “2022 Promissory Note”) with Mei-Yun (Gina) Huang in the original principal amount of $0.5 million. Ms. Huang is a member of the Company’s board of directors. The 2022 Promissory Note has a maturity date of June 16, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the 2022 Promissory Note, the Lender may, at its option, declare the amount outstanding under the 2022 Promissory Note immediately due and payable. After the occurrence of an event of default, the Lender may elect to have interest accrue on the 2022 Promissory Note at a rate per annum of 10%, or such lesser rate as permitted under applicable law.
In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. 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 September 30, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million.
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 the Company sold and issued to Streeterville a promissory note in the principal amount of approximately $2.0 million (the “2022 Streeterville Note”). The 2022 Streeterville Note was issued with an original issue discount of $215 thousand and Streeterville paid a purchase price of $1.8 million for the 2022 Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses.
The 2022 Streeterville Note has a maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the 2022 Streeterville Note at a premium, which is 5% during the first six months and 8% thereafter. Prepayments at the reduced rate in the first six months are limited to 50% of the outstanding balance. Beginning on December 1, 2022, Streeterville may require the Company to redeem up to $225 thousand of the 2022 Streeterville Note in any calendar month. The Company has the right on five occasions, but not during more than three consecutive months, to defer all redemptions that Streeterville could otherwise
34

require the Company to make during any calendar month. Each exercise of this deferral right by the Company will increase the amount outstanding under the 2022 Streeterville Note by 1.5%.
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “December 2021 Pre-Funded Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. 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. Total offering costs of $499 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds to us from the December 2021 Private Placement were approximately $4.0 million.
In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share (the “June 2021 Equity Offering”). We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection with the June 2021 Equity Offering and we also paid legal and other fees of $19 thousand related to the offering.$18 thousand. Total offering costs of $470$469 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30,December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.
On April 27, 2021, we entered into a note purchase agreement (the “Streeterville“2021 Streeterville Note Purchase Agreement”) with Streeterville Capital, LLC (“Streeterville”) pursuant to which the Company sold and issued to Streeterville a promissory note in the principal amount of approximately $1.7 million (the “Streeterville“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 has a maturity date of April 27, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the 2021 Streeterville Note at a premium, which is 5% during the first three months and 10% thereafter. Prepayments at the reduced rate in the first three months are limited to 50% of the outstanding balance. Beginning on the first day of the calendar month following the date that is six months after the date of purchase, Streeterville may require the Company to redeem up to $205 thousand of the 2021 Streeterville Note in any calendar month. The Company has the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month.month, and Streeterville agreed to accept a fourth redemption deferral on the same terms during the third quarter of 2022. Each exercise of this deferral right by the Company will increase 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.
On October 10, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with Streeterville, to whom we previously sold and issued the 2021 Streeterville Note. Pursuant to the Exchange Agreement, the Company and Streeterville have agreed to (i) partition from the 2021 Streeterville Note a new Promissory Note (the “Partitioned Note”) in the original principal amount of $205 thousand (the “Exchange Amount”), (ii) cause the outstanding balance of the 2021 Streeterville Note to be reduced by an amount equal to the Exchange Amount, and (iii) exchange (the “Exchange”) the Partitioned Note for 385,918 shares (the “Exchange Shares”) of the Company’s common stock.
The October Exchange was priced at-the-market under the rules of The Nasdaq Stock Market (“Nasdaq”) pursuant to one or more exemptions from the registration requirements of the Securities Act. There were no gross proceeds to the Company in respect of the October Exchange, provided that the Exchange satisfied a redemption notice provided by Streeterville under the terms of the 2021 Streeterville Note, pursuant to which the Company otherwise would be required to redeem $205 thousand of the 2021 Streeterville Note in cash, respectively.
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Results of operations
The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:
Three months ended
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
20212020202120202022202120222021
Net salesNet sales100.0 %100.0 %100.0 %100.0 %Net sales100.0 %100.0 %100.0 %100.0 %
Cost of salesCost of sales79.5 76.9 79.8 71.3 Cost of sales109.2 79.5 101.5 79.8 
Gross profit20.5 23.1 20.2 28.7 
Gross (loss) profitGross (loss) profit(9.2)20.5 (1.5)20.2 
Operating expenses:Operating expenses:Operating expenses:
Product developmentProduct development14.7 6.7 19.1 7.6 Product development20.7 14.7 23.0 19.1 
Selling, general, and administrativeSelling, general, and administrative71.6 33.6 86.5 45.9 Selling, general, and administrative102.2 71.6 111.1 86.5 
Restructuring— (0.3)(0.3)(0.3)
Loss on write-off of fixed assetsLoss on write-off of fixed assets4.3 — 1.4 — 
Restructuring recoveryRestructuring recovery— — — (0.3)
Total operating expensesTotal operating expenses86.3 40.0 105.3 53.2 Total operating expenses127.2 86.3 135.5 105.3 
Loss from operationsLoss from operations(65.8)(16.9)(85.1)(24.5)Loss from operations(136.4)(65.8)(137.0)(85.1)
Other expenses (income):Other expenses (income):Other expenses (income):
Interest expenseInterest expense6.4 2.1 7.0 2.6 Interest expense13.3 6.4 12.8 7.0 
Gain on forgiveness of PPP loan— — (10.7)— 
Loss on extinguishment of debt— 2.7 — 1.2 
Other income - employee retention tax credit(31.4)— (11.6)— 
(Gain) loss from change in fair value of warrants— (2.6)— 17.4 
Gain on forgiveness of Paycheck Protection Program loanGain on forgiveness of Paycheck Protection Program loan— — — (10.7)
Other incomeOther income— (31.4)(0.6)(11.6)
Other expensesOther expenses0.5 0.4 0.6 0.5 Other expenses1.1 0.5 0.9 0.6 
Net income before income taxes
Benefit from income taxes— — — — 
Net lossNet loss(41.3)%(19.5)%(70.4)%(46.2)%Net loss(150.8)%(41.3)%(150.1)%(70.4)%

Net sales
A further breakdown of our net sales is presented in the following table (in thousands):
Three months ended
September 30,		Nine months ended
September 30,		Three months ended
September 30,		Nine months ended
September 30,
20212020202120202022202120222021
CommercialCommercial$1,522 $1,456 $3,513 $4,250 Commercial$1,288 $1,522 $3,397 $3,513 
MMM productsMMM products1,227 4,508 3,947 8,832 MMM products476 1,227 1,908 3,947 
Total net salesTotal net sales$2,749 $5,964 $7,460 $13,082 Total net sales$1,764 $2,749 $5,305 $7,460 
Net sales of $2.7$1.8 million for the third quarter of 20212022 decreased 54%$1.0 million, or 36%, compared to third quarter of 20202021 net sales of $6.0$2.7 million, primarily driven by a decrease in MMM productsales of $0.8 million, or 61%, and a decrease of $0.2 million, or 15%, of commercial products sales. Net MMM product sales decreased in the third quarter of 20212022 compared to the same period in 2020,2021, mainly due to availability and prioritization of government project funding and the delayed timing of expected orders as well as a large military contract fulfilled duringorders. The decrease in commercial product sales in the third quarter of 2020.2022 reflects (i) volatility of sales to large institutional customers; (ii) fluctuations in the timing and pace of commercial projects, including where lead times extended into the subsequent quarter; and (iii) lingering macroeconomic supply chain impacts as a result of the COVID-19 pandemic.
Net sales of $7.5$5.3 million for the first nine months of 20212022 decreased 43%$2.2 million, or 29%, compared to the same period in 2020,2021, primarily driven by a decrease in MMM product sales and somewhat by reduced commercial sales. Net sales of our MMM products decreased mainly due to availability of government funding and the delayed timing of expected orders in the first nine months of 2021.2022. Net sales of our commercial products decreased in the first nine months of 20212022 compared to the same period of 2020,2021, reflecting (i) a decrease inthe impact of decreased commercial sales caused by delayed orders that have occurred mainly induring the healthcare, education, commercial and industrial sectors becausethird quarter of 2022 as well as the macroeconomic slowdown and purchasing decisions being put
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on hold due to the COVID-19 pandemic, (ii) lower sales from our agency network, which was also impacted by the COVID-19 pandemic, and (iii) fluctuationsimpacts in the timing, pace and size of commercial projects.
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Gross profit
Gross profitLoss
Gross loss was $0.6$(0.2) million, or 20.5%(9)% of net sales, for the third quarter of 2021, compared to $1.42022. This compares with gross profit of $0.6 million, or 23.1%21% of net sales, in the third quarter of 2021. The year-over-year decrease in gross profit was driven by (i) lower sales volume, an unfavorable impact of $0.3 million, or 20% of net sales; (ii) an unfavorable product mix impact of approximately $0.2 million, or 13% of net sales; (iii) an unfavorable net impact of $0.3 million, or 16% of net sales, from our inventory reduction project; and (iv) a favorable impact from the reduction in fixed costs of $0.1 million or 2% of net sales. Gross loss for the third quarter of 2020. Gross margin2022 also included unfavorable freight-in variances of $0.1 million, or 6% of net sales, while gross profit for the third quarter of 2021 included favorable price and usage variances for material and labor of $0.1 million, or 2.6% of net sales, and favorable inventory and warranty reserves of $0.1 million, or 2.0% of net sales. Gross margin for the third quarter of 2020 included favorable price and usage variances for material and labor of $0.4 million, or 7.2%19% of net sales.
Gross profitloss was $1.5$(0.1) million, or 20.2%(2)% of net sales, for the first nine months of 20212022 compared to $3.8a gross profit of $1.5 million, or 28.7%20% of net sales, for the first nine months of 2020.2021. The decrease was primarily related to (i) lower sales volume, which was an unfavorable impact of $0.8 million, or 16% of net sales; (ii) an unfavorable impact from product mix of $0.8 million, or 16% of net sales; (iii) an unfavorable net impact of approximately $0.6 million, or 11% of net sales, mainly from the unfavorable net changes related to the inventory reduction project versus 2021; and (iv) a favorable impact of approximately $0.6 million, or 3% of net sales, from the reduction of fixed costs. The gross loss for the first nine months of 2022 included unfavorable freight-in variances of $0.4 million, or 7% of net sales. Gross profit for the first nine months of 2021 included favorable price and usage variances for material and labor of $0.6 million, or 8.6%12% of net sales, and unfavorable inventory and warranty reserves recorded of $0.1 million, or 0.8% of net sales. The gross margin for the first nine months of 2020 was primarily a result of unexpected additional manufacturing costs as a result of supply chain challenges relating primarily to our MMM products, which adversely impacted our gross profit by approximately 2.1% of net sales. The remaining increase was primarily related to relatively higher profit margin of sold product, favorable price and usage variances for material and labor of $0.7 million, or 5.5% of net sales, and favorable inventory reserves recorded of $0.4 million, or 3.0%2% of net sales.
Operating expenses
Product development 
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.
Product development expenses were $0.4 million for the third quarter of 2021, flat compared to2022, down 9% from the third quarter of 2020.2021. Product development expenses mainlyprimarily relate to the development and launch of our UVCD product portfolio.next generation of EnFocusTM and RedCap® products.
Product development expenses were $1.2 million for the first nine months of 2022, a $0.2 million decrease compared to $1.4 million for the first nine months of 2021, a $0.4 million increase compared to $1.0 million for the first nine months of 2020.2021. The increasedecrease is primarily related to payroll expense and product testing associated with the development and launch of our UVCDultraviolet-C light disinfection product portfolio.portfolio in 2021.
Selling, general and administrative
Selling, general and administrative expenses were $2.0$1.8 million for the third quarter of 2021, flat2022, down 8% as compared to $2.0 million in the third quarter of 2020.2021. The primary drivers ofdecrease in expenses in bothfrom the third quarter of 2021 and third quarterprimarily relates to reductions of 2020 were $0.9$0.2 million in payroll and payroll related expenses $0.1 million in marketing, advertising and related expenses, $0.3 million in dues and fees, supplies, utilities and rent, software contracts, and miscellaneous taxes, $0.1 million in commissions and employee bonuses, $0.1 million in insurance expense and $0.1 million in external reportingtrade show and other marketing expenses. For the third quarterThese decreases were offset by an increase of 2021, professional, legal, consulting and recruiting fees were $0.2 million as compared to $0.4$0.1 million in the third quarter of 2020.professional fees.
Selling, general and administrative expenses were $5.9 million for the first nine months of 2022, compared to $6.5 million for the first nine months of 2021, compared to $6.0 million for the first nine months of 2020.2021. The increasedecrease is primarily due to increasesdecreases in payroll of $0.5$0.9 million, stock compensation expenseoffset by increases in trade show and other marketing costs of $0.3$0.1 million, severance costs of $0.1 million and marketing, advertisingrecruiting and related expensesrelocation fees of $0.2 million as well as a total of $0.4 million for dues and fees, supplies, utilities and rent, software contracts, commissions and miscellaneous taxes. These increases were partially offset by decreases of $0.5 million in professional service fees, $0.2 million in employee bonuses, $0.1 million in recruiting fees and $0.1 million in external reporting fees.million.
Restructuring
No restructuring expense was recorded for the three and nine months ended September 30, 2022. For the three months ended September 30, 2021, we recorded nominalapproximately $1 thousand in restructuring expense was recorded, and for the three months ended September 30, 2020, we recorded restructuring credits totaling approximately $16 thousand. For the nine months ended September 30, 2021, and 2020, we recorded restructuring credits totaling approximately $21 thousand and $44 thousand, respectively.in restructuring credits were recorded. All restructuring costscredits are related to the cost and offsetting sub-lease income for the lease obligations for the former New York, New York office, which ended as of June 30, 2021.
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Other Expense (Income)
Interest expense
Interest expense was $0.2 million for the third quarter of 2021,2022, compared to interest expense of $0.1$0.2 million for the third quarter of 2020. The increase in interest2021. Interest expense of $0.1 million is primarily related to interest pursuantand amortization attributable to the 2021 Streeterville Note, the 2022 Streeterville Note and the Credit Facilities as well as the Streeterville note.Facilities. The actual cash interest paid in each of the third quarter of 2022 and the third quarter of 2021 was $95 thousand compared to $40 thousand in the third quarter of 2020.$0.1 million.
Interest expense was $0.7 million for the first nine months of 2022, compared to interest expense of $0.5 million for the first nine months of 2021, compared to interest expense of $0.3 million for the first nine months of 2020.2021. The increase in interest expense of $0.2 million was primarily related to fees associated withinterest and amortization attributable to the increase in the borrowing capacity on the Inventory Facility during the second quarter of 2021.2022 Streeterville Note. The actual cash interest paid for each of the nine months ended September 30, 2022 and the nine months ended September 30, 2021 was $0.3 million compared to $0.1 million for the nine months ended September 30, 2020.
Employee Retention Tax Credit
We recognized other income of $0.9 million during the third quarter 2021, which represents the refund amount we expect to receive from the Employee Retention Tax Credit (“ERTC”) for which we became eligible. The expected refund is related to eligible expenses incurred during the second and third quarters of 2021.million.
Gain on forgiveness of PPP loan
Forgiveness income of $0.8 million related to the Paycheck Protection Program (“PPP”) loan taken out during 2020 and forgiven in 2021 was recognized during the first quarterhalf of 2021.
Loss on extinguishmentEmployee Retention Tax Credit
During the year ended December 31, 2021, we recognized other income of debt
A loss of $159$876 thousand on the extinguishment of our former revolving line of credit with Austin Financial Services, Inc. (the “Austinrelated to eligible Employee Retention Tax Credit Facility”(“ERTC”) was recognizedexpenses incurred during the threesecond and nine months ended September 30, 2020, consistingthird quarters of a $1002021 for which we became eligible.
Other income and expenses
Other expenses were $20 thousand termination fee and the write-off of the remaining related debt acquisition costs of $59 thousand.
Loss from change in fair value of warrants
A loss of $2.3 million was recognized during the nine months ended September 30, 2020 for the market value change in our warrant liabilities. The loss recognized inthird quarter of 2022, compared to other expenses of $15 thousand for the first nine monthsthird quarter of 2020 was a result of the revaluation of the warrant liability using the market price of the Company’s common stock at September 30, 2020 versus the market price of the Company’s common stock at the time of initial issuance of the warrants (January 13, 2020). The terms of the warrants2021. Other expenses were amended in December 2020 such that they were reclassified as equity, and no warrant liability exists at September 30, 2021. As such, there is no related gain or loss recorded$49 thousand for the nine months ended September 30, 2021.
Other expenses
Other expenses were $15 thousand for the third quarter of 2021,2022, compared to other expenses of $25 thousand for the third quarter of 2020. Other expenses were $47 thousand for the nine months ended September 30, 2020 compared to other expenses of $67 thousand for the nine months ended September 30, 2020.2021. Other expenses are mainly comprised of bank and collateral management fees.
Other income of $30 thousand for the first nine months of 2022 relates to an aged customer credit balance the Company had been carrying for which the customer had not responded to various inquiries. This credit was taken to income during the first quarter of 2022.

Provision for income taxes
Due to the operating losses incurred during the three and nine months ended September 30, 20212022 and 2020,2021, and after application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended, it was not necessary to record a provision for U.S. federal income tax or various state income taxes as income tax benefits are fully offset by a valuation allowance recorded. The Company recorded a 2019 provision to return benefit of $2 thousand for various state income tax returns filed during the period ended September 30, 2020.
Net loss
For the three months ended September 30, 2021,2022, our net loss of $1.1$2.7 million was flat when compared toincreased 134% over the net loss for the three months ended September 30, 2020.2021 of $1.1 million. The decreaseincrease is mainly due to lower net sales in gross profitthe third quarter of $0.8 million was offset entirely by the other income recorded related to the ERTC.
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2022.
For the nine months ended September 30, 2021,2022, our net loss was $5.3of $8.0 million compared to $6.0 millionincreased 52% over the net loss for the nine months ended September 30, 2020.2021 of $5.3 million. The decreaseincrease is mainly due to lower net sales in the net loss was primarily driven by a decrease in gross profitfirst three quarters of $2.2 million, increases in product development costs of $0.4 million, increases in selling, general and administrative costs of $0.5 million and increases in interest costs of $0.2 million. These cost increases were offset by other income of $0.9 million relating to the ERTC,2022, the gain on the forgiveness of the PPP loan of $0.8 million recorded in the first quarter of 2021 and the first nine months$0.9 million other income recorded during the third quarter of 2021 do not reflectfor the impact of the $2.3 million loss from the fair value of warrants, which occurred during the nine months ended September 30, 2020.ERTC funds.
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Financial condition
At September 30, 2021,2022, we had $0.4 million$41 thousand in cash and a total of $4.3$4.8 million of debt, including $1.4$1.6 million outstanding under our Inventory Facility, and $1.3$0.4 million outstanding under our Receivables Facility, and $1.5$0.4 million outstanding on the 2021 Streeterville Note, $1.9 million outstanding on the 2022 Streeterville Note, and $0.5 million outstanding on the 2022 Promissory Note. At September 30, 2021,2022, we hadno additional availability of $1.6 million under the Inventory Facility and $0.1$0.2 million under the Receivables Facility, for a total of $1.7 million of additional availability.Facility. We have historically incurred substantial losses, and as of September 30, 2021,2022, we had an accumulated deficit of $136.1$146.7 million. Additionally, our sales have been concentrated among a few major customers and for the nine months ended September 30, 2021,2022, three customers accounted for approximately 60%38% of net sales.
As a result of the restructuring actions and initiatives described above,in Note 3. “Restructuring,” we have previously reduced our operating expenses to be more commensurate with our expected sales volumes. In the second and third quarters of 2022, we repeatedly revisited cost reduction opportunities and further reduced operating expenses for the second half of 2022. However, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist at September 30, 2021.2022.
Throughout 20202021 and the first nine months of 2021,2022, we have continued to evaluate and assess financing and other strategic options as we seek to achieve profitability. We plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products surrounding EnFocusTM, aour patented, breakthrough lightingpowerline control platform we officially launched during the second quarter of 2020, andplatform. We also continue to believe our Suncycleproprietary RedCapTM® circadianemergency backup lighting system which we planalso addresses a market need and will continue to launch in early 2022. Additionally, during the last quarter of 2020, we announced newly developed UVCD productshelp drive commercial sales for consumerus as it has been well as commercial and industrial markets, of which two products are expected to be availablereceived in the fourth quarter of 2021, and two products are expected to be available in early 2022.market.
We plan to achieve profitability throughby growing our sales through existing lighting and new lighting and control and UVCDsystems products, and by continuing to refine and execute on our multi-channel sales strategy that targets key verticals, such as government, healthcare, eldercare, education, and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships, as well as our emerging consumer market focus.
As described in Note 9, “Stockholders’ Equity,” included under Part I, Item 1, “Financial Statements,” of this Quarterly Report, we also raised approximately $4.5 million of net proceeds from the June 2021 Equity Offering and, in January 2020, we raised approximately $2.3$3.2 million of net proceeds upon the issuance of common stock and warrants (the “January 2020June 2022 Warrants in connection with the June 2022 Private Placement, $4.0 million of net proceeds upon the issuance of common stock and December 2021 Warrants in connection with the December 2021 Private Placement, and approximately $4.5 million of net proceeds upon the issuance of common stock in connection with the June 2021 Equity Offering”). InOffering. As described in Note 7, “Debt”, in September 2022, April 2022 and April 2021, we obtained approximately $1.5 million of net proceeds from bridge financing of approximately $0.5 million, $1.8 million and separately increased$1.5 million, respectively. Also in April 2021, we expanded the capacity of the Inventory Facility, which allows for expanded borrowing capacity under the Credit Facilities entered into in August 2020 as described in Note 7, “Debt,” included under Part I, Item 1, “Financial Statements,”on one of this Quarterly Report.our revolving credit facilities.
The restructuring and cost cutting initiatives implemented during 2020taken throughout 2021 and continued into 2021,2022, as well as the June 2022 Private Placement, the December 2021 Private Placement and the June 2021 Equity Offering and January 2020 Equity Offering that significantly strengthened our balance sheet, the Paycheck Protection Program (“PPP”) loan we obtained in April 2020, our enhanced debt capacity due to the debt refinancing in August 2020, the credit facility capacity increase and bridge financing in April 2021 and April 2022, and the funds we expect to receive related to the Employee Retention Tax Credit (“ERTC”, seeERTC (see Note 11, “Other Income” for details), were all designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or be successful due to the long sales cycle in our industry, the willingness of our suppliers to continue partnering with us, the corresponding time required to ramp up sales from new products, markets, and customers into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, numerous interruptions and cost increases in the global supply chain globally, and the ongoing and lingeringlong-term economic impact from the COVID-19 pandemic that hadhas significantly diminished the interest and activities for our customers’ lighting retrofit projects until occupancy returns to more normal levels, among other factors.

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Additionally, global supply chain challengesand logistics constraints are impacting our inventory purchasing strategy, leadingas we seek to a buildup of inventory and components in an effort to manage both shortages of available components, and longer lead times in obtaining components.components, and the willingness of our suppliers to continue providing timely and cost-effective products, while balancing the development and implementation of an inventory reduction plan. Disruptions and cost increases 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
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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 substantial dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in the capital markets and volatile interest rates, combined with our capital constraints, may prevent us from being able to obtain adequate debt financing.
If we are unable to find a permanent chief financial officer, it may be more difficult to obtain additional financing on satisfactory terms or at all. If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additionalensure 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, willcould provide us with an ability to finance our operations through the next twelve months and willmay mitigate the substantial doubt about our ability to continue as a going concern.
On August 23, 2022, we received a written notice (the “Notice”) from Nasdaq’s Listing Qualifications staff (the “Staff”) that the Company is not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”), because the closing bid price of our common stock was below $1.00 per share for 30 consecutive business days. The Notice does not impact the listing of our common stock on The Nasdaq Capital Market at this time. The Notice provided that, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has a period of 180 calendar days from the date of the Notice, or until February 20, 2023, to regain compliance with the Bid Price Requirement. During this period, our common stock will continue to trade on The Nasdaq Capital Market. However, there can be no assurance that the Company will be able to regain compliance with the rule or will otherwise be in compliance with other Nasdaq listing criteria. If we are unable to regain compliance, Nasdaq may make a determination to delist our common stock.
On August 17, 2020, we received a letter from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”)Staff notifying us that we arewere no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2,500,000 if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”). Our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, filed on August 13, 2020, reflected that our stockholders’ equity as of June 30, 2020 was $1,714,000. In addition, as of August 13, 2020, we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations. On October 5, 2020, basedBased on our timely submission of our plan to regain compliance, Nasdaq granted us an extension through February 15, 2021 to regain compliance with the Minimum Stockholders’ Equity Rule, subject to our compliance with certain terms of the extension.Rule. In accordance with one part of the plan submitted to the Staff, we have successfully modified our outstanding warrantsJanuary 2020 Warrants and are able to now classify the warrants withinin December 2020, we reclassified $1.4 million from warrant liability into equity. At December 31, 2020, our stockholders’ equity was $4,255,000. On January 20, 2021, we received a letter from the Staff notifying us that, on a conditional basis, Nasdaq has determined that we have regained compliance with the Minimum Stockholders’ Equity Rule. At September 30,December 31, 2020, our stockholders’ equity was $4,255,000, satisfying the Minimum Stockholders’ Equity Rule. At
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December 31, 2021, our stockholders’ equity was $4,502,000.$6,209,000 and at September 30, 2022, our stockholders’ equity was $1,526,000.
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Liquidity and capital resources
Cash
At September 30, 2021,2022, our cash balance was approximately $0.4 million,$41 thousand, compared to approximately $1.8$2.7 million at December 31, 2020. The balance at December 31, 2020 excluded restricted cash of $0.3 million for a letter of credit requirement under a lease obligation. Per the terms of the lease agreement, the restrictions on the cash were lifted in September 2021 and the cash was returned to the Company.2021.
The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows included in Part I, Item 1, “Financial Statements,” of this Quarterly Report (in thousands):
Nine months ended
September 30,		Nine months ended
September 30,
2021202020222021
Net cash used in operating activitiesNet cash used in operating activities$(8,420)$(1,583)Net cash used in operating activities$(6,241)$(8,420)
Net cash used in investing activitiesNet cash used in investing activities$(311)$(171)Net cash used in investing activities$(41)$(311)
Net cash provided by financing activitiesNet cash provided by financing activities$6,934 $3,978 Net cash provided by financing activities$3,641 $6,934 
Net cash used in operating activities
Net cash used in operating activities was $6.2 million for the nine months ended September 30, 2022. The net loss was $8.0 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, and accounts receivable reserves and working capital changes. During the nine months ended September 30, 2022, we generated $1.5 million from inventory, $0.2 million through the timing of collection of accounts receivable, and $0.2 million from changes in prepaid and other assets. We used $0.1 million from accounts payable due to the timing of inventory receipts and payments, $0.5 million due to changes in accrued and other liabilities (primarily due to a decrease in accrued payroll), and $0.3 million from changes in deferred revenue.
Net cash used in operating activities was $8.4 million for the nine months ended September 30, 2021. The net loss was $5.3 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, gain on forgiveness of the PPP loan, other income related to the ERTC, and accounts receivable reserves and working capital changes. During the nine months ended September 30, 2021, we generated $0.4 million through the timing of collection of accounts receivable and $0.1 million due to the timing of inventory receipts and payments. We used $0.1 million through the timing of the receipt of inventory against short-term deposits and $2.1 million for inventory primarily due to global supply chain challenges that are impacting our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components. We also used $0.3 million due to changes in accrued and other liabilities (primarily due to an increase in accrued payroll of $0.2 million; this increase was offset by a reduction of $0.2 million in accrued accounting and legal fees and $0.2 million in accrued bonuses), and $0.1 million from changes in prepaid and other current assets.
Net cash used in operating activities was $1.6 million for the nine months ended September 30, 2020. The net loss incurred of $6.0 million was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, change in fair value of warrant liabilities, provisions for inventory, warranty and accounts receivable reserves and working capital changes. During the nine months ended September 30, 2020, we generated $1.8 million in cash for accounts payable due to the timing of inventory receipts and payments, and $1.1 million for inventories primarily due to the timing of inventory receipts and we used $0.5 million of short-term deposits due to prepaid deposits to our contract manufacturers for inventory for the EnFocusTM platform. During the nine months ended September 30, 2020, we used cash of $1.1 million through the timing of collection of accounts receivable.
Net cash used in investing activities
Net cash used in investing activities was $311$41 thousand for the nine months ended September 30, 2022 and resulted primarily from the purchase of tooling.
For the nine months ended September 30, 2021, net cash used in investing activities was $311 thousand and resulted primarily from the purchase of software and a development of the mUVeTM UVCDultraviolet-C light disinfection robot. The mUVeTM ultraviolet-C light disinfection robots were fully written off in the third quarter of 2022.
For the nine months ended September 30, 2020, net cash used in investing activities was $171 thousand and resulted primarily from the purchase of software and tooling to support production operations and development of e-commerce platforms.
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Net cash provided by financing activities
Net cash provided by financing activities during the nine months ended September 30, 2022 was $3.6 million, primarily related to proceeds of $450 thousand from the 2022 Promissory Note, net proceeds of $1.8 million from the 2022 Streeterville Note and net proceeds of $3.2 million from the June 2022 Private Placement. These proceeds were offset slightly by $1.4 million in payments made against the 2021 Streeterville Note and $0.2 million in net payments made on the Credit Facilities.
During the nine months ended September 30, 2022, all of the December 2021 Pre-Funded Warrants as well as the June 2022 Pre-Funded Warrants were exercised. As of September 30, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of $1.30 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate. Also at September 30, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding with an exercise price of $3.52 per share. January 2020 Warrants to purchase an aggregate of 229,414 shares remain outstanding at September 30, 2022, with a weighted average exercise price of $3.67 per share. The exercise of the remaining outstanding December 2021 Warrants and January 2020 Warrants could provide us with cash proceeds of up to $4.5 million and $0.8 million, respectively.
Net cash provided by financing activities during the nine months ended September 30, 2021 was $6.9 million, primarily related to $4.5 million of net proceeds from the June 2021 Equity Offering, $1.5 million of net proceeds from the
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2021 Streeterville Note, proceeds from the exercise of 156,446 warrants of $0.5 million and net proceeds from the Credit Facilities of $0.3 million. Investors in the January 2020 Equity Offering received warrants to purchase shares of our common stock, of which warrants to purchase an aggregate of 310,860 shares remainremained outstanding at September 30, 2021 with a weighted average exercise price of $3.59 per share. The exercise of the outstanding warrants could provide us with cash proceeds of up to $1.1 million in the aggregate.
Net cash provided by financing activities during the nine months ended September 30, 2020 was $4.0 million, primarily resulting from the $2.7 million in proceeds received from the January 2020 Equity Offering, partially offset by $0.5 million in offering costs for the issuance. During the nine months ended September 30, 2020, 197,394 warrants were exercised resulting in $0.7 million in proceeds.
Also during the nine months ended September 30, 2020, we received $0.8 million in proceeds from the PPP loan, $1.2 million from borrowings under the Inventory Facility and $1.0 million from borrowings under the Receivables Facility and paid $0.7 million, net, on the Austin Credit Facility. Additionally, we paid $0.2 million in deferred financing fees on the Inventory and Receivables Facilities combined. On August 11, 2020, we paid the outstanding balance of $1.4 million to close out our former Austin Credit Facility, which included a $100 thousand termination fee.
During the nine months ended September 30, 2020, we repaid $1.0 million aggregate principal amount under the Iliad Note, which included a mandatory repayment pursuant to the terms of the Iliad Note in connection with the issuance of common stock in the January 2020 Equity Offering, of which $0.2 million was allocated against principal. At September 30, 2020, we had additional availability for us to borrow of $1.1 million under the Inventory Facility and $1.2 million under the Receivables Facility.
Contractual and other obligations
Commitments
As of September 30, 2021,2022, we had approximately $2.9$1.0 million in outstanding purchase commitments for inventory. Of this amount, approximately $2.6inventory, of which $0.8 million is expected to ship in the fourth quarter of 2021, with the balance2022 and $0.2 million is expected to ship in the first quarter of 20222023 and thereafter.beyond.
There have been no other material changes to our contractual and other obligations as compared to those included in our 20202021 Annual Report.
Critical accounting policies
Fair value of warrant liabilities
Due to a potential cash settlement upon occurrence of a fundamental transaction within the warrant agreement, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three quarters of 2020. We used the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted average assumptions, when appropriate.
During December 2020, the warrant holders agreed to a modification of the terms of their warrants which removed the potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth quarter of 2020, the warrant liability was reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date.
There have been no other material changes to our critical accounting policies as compared to those included in our 20202021 Annual Report.
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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 September 30, 2022, sales to a regional commercial lighting retrofit company accounted for approximately 32% of net sales. For the three months ended September 30, 2021, 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 19%, 17%, and 27% 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 36% of net sales for the same period.
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For the threenine months ended September 30, 2020,2022, sales to our primary distributor for the U.S. Navy, and a regional commercial lighting retrofit company, and a commercial building system provider, accounted for approximately 67%13%, 15%, and 12%10% 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 68%17% of net sales for the same period.
For the nine months ended September 30, 2021, 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 33%, 10%, and 17% 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 43% of net sales for the same period. For the nine months ended September 30, 2020, sales to our primary distributor for the U.S. Navy and a
A regional commercial lighting retrofit company, accounted for approximately 52% and 14% 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 58% of net sales for the same period.
Our primary distributor for the U.S. Navy, a regional commercial lighting retrofit companybuilding systems provider, and a U.S. Navy shipbuildermechanical contractor accounted for approximately 12%25%, 34%12%, and 27%12% of net trade accounts receivable, respectively, at September 30, 2021.2022. At December 31, 2020, our primary2021, a distributor to the U.S. NavyDepartment of Defense accounted for 28%20% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 21%36% of our net trade accounts receivable.
One offshore supplier accounted for approximately 19%17% and 30%18%, respectively, of our total expenditures for the three and ninenine. months ended September 30, 2021.2022. For the three months ended September 30, 2020, two offshore suppliers accounted for approximately 25% and 20%, respectively, of total expenditures. These same two suppliers accounted for approximately 19% and 14%, respectively, of total expenditures for the nine months ended September 30, 2020.
At September 30, 2021, one offshore supplier accounted for approximately 63%19% and 30%, respectively, of total expenditures.
At September 30, 2022, one offshore supplier accounted for approximately 45% of our trade accounts payable balance. At December 31, 2020,2021, this offshore supplier accounted for approximately 44%60% of our trade accounts payable balance.
Recent accounting pronouncements
For information on recent accounting pronouncements, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part I, Item 1, “Financial Statements,” of this Quarterly Report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer,who also serves as our principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer, and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of September 30, 2021,2022, the end of the period covered by this Quarterly Report. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.2022.
Changes in internal control over financial reporting
During the quarterly period covered by this Quarterly Report, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2021,2022, we were not involved in any material legal proceedings.
ITEM 1A. RISK FACTORS
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
On November 11, 2021, Geraldine McManus,9, 2022, the Company issued a short-term Promissory Note in favor of Mei-Yun (Gina) Huang in the original principal amount of $350 thousand. Ms. Huang previously provided $450 thousand of bridge financing in September 2022 on the substantially the same terms. Ms. Huang is a member of the Company’s board of directorsdirectors.
The promissory note has a maturity date of nine months from the date of issuance and bears interest at an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the maturity date. The Company may prepay the amounts outstanding under the note in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the note, Ms. Huang may, at her option, declare the amount outstanding under the note immediately due and payable. After the occurrence of an event of default, Ms. Huang may elect to have interest accrue on the note at a rate per annum of ten percent, or such lesser rate as permitted under applicable law.
On November 4, 2022, the Company issued a short-term Promissory Note in favor of Jay Huang in the original principal amount of $250 thousand (the “Huang Note”). In October of 2022, Mr. Huang also provided her notice$50 thousand of resignationbridge financing on the substantially the same terms as the Huang Note.
The Huang Note has a maturity date of nine months from the board, effective November 11, 2021. Ms. McManus’ term would have otherwise expireddate of issuance and bears interest at an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the 2022 annual meetingmaturity date. The Company may prepay the amounts outstanding under the Huang Note in whole or in part at any time prior to the maturity date. Upon the occurrence of stockholdersan event of default under the Company. Ms. McManus resignedHuang Note, Mr. Huang may, at his option, declare the amount outstanding under the Huang Note immediately due and payable. After the occurrence of an event of default, Mr. Huang may elect to focushave interest accrue on other professional commitments in her capacitythe Huang Note at a rate per annum of ten percent, or such lesser rate as a Managing Member of Granger Management, an independent investment business. Ms. McManus’ resignation did not involve any disagreement with the Company.permitted under applicable law.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
Exhibit
Number		Description of Documents
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
10.1+
10.2
10.3
10.4
10.5
31.1+
31.2+
32.1++
*101
The following financial information from our Quarterly Report for the quarter ended September 30, 2021,2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 20212022 and December 31, 2020,2021, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021, and 2020, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 20212022 and 2020,2021, (v) Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 20212022 and 2020,2021, and (vi) the Notes to Condensed Consolidated Financial Statements.
*104Cover Page Interactive Data File (embedded within the Inline XBRL document)

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*    Pursuant to Regulation S-T, this interactive data file is not deemed filed for purposes of Section 11 of the Securities Act, or Section 18 of the Exchange Act, or otherwise subject to the liabilities of these sections.
+     Filed herewith.
++ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act or the Exchange Act.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ENERGY FOCUS, INC.
Date:November 12, 202110, 2022By:/s/ James TuLesley A. Matt
James TuLesley A. Matt
Executive Chairman and Chief Executive Officer
(Principal Executive Officer)
Date:November 12, 2021By:/s/ Tod A. Nestor
Tod A. Nestor
Chief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)


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