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 ~~March 31,~~September 30, 2022


☐			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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	EFOI	The Nasdaq Stock Market LLC

Indicate by check mark whether the ~~registrant~~registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated 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 ~~May 9,~~November 7, 2022 was ~~6,453,777.~~9,577,026.

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
			Page
ITEM 1.	FINANCIAL STATEMENTS
	a.	Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 (Unaudited) and December 31, 2021	4
	b.	Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021 (Unaudited)	6

	c.	Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021 (Unaudited)	7
	d.	Condensed Consolidated Statements of Cash Flows for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021 (Unaudited)	89
	e.	Notes to the Condensed Consolidated Financial Statements (Unaudited)	1011
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		2932
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		3944
ITEM 4.	CONTROLS AND PROCEDURES		3944

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		4045
ITEM 1A.	RISK FACTORS		4045
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		4045
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		4045
ITEM 4.	MINE SAFETY DISCLOSURES		4045
ITEM 5.	OTHER INFORMATION		4045
ITEM 6.	EXHIBITS		4146
	SIGNATURES		4348

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, 2021 and other matters described in this Quarterly Report and our other filings with the Securities and Exchange Commission generally. Some of these factors include:

•our need for and ability to obtain additional financing in the near term, on acceptable terms or at all, to continue our operations;

•our ability to 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 and related impacts on travel, trade and business operations;~~pandemic;

•the competitiveness and market acceptance of our light-emitting diode (“LED”) lighting ~~control~~ and ~~ultraviolet light disinfection (“UVCD”)~~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 ~~realize the expected novelty, effectiveness, affordability and availability of our UVCD products and their appeal compared to other competing 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 ~~need for and ability to obtain additional financing in the near term, on acceptable terms or at all, to continue our operations;~~

•~~our ability to refinance or extend maturing debt on acceptable terms or at all;~~

•~~our ability to continue as a going concern for a reasonable period of time;~~

•~~our~~ ability to attract and retain a new chief ~~executive officer (“Chief Executive Officer”) and a new chief~~ financial ~~officer (“Chief Financial Officer”);~~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;

•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 by ocean marine and other logistics channels despite global supply chain and logistics disruptions;

•the impact of any type of legal inquiry, claim or dispute;

•the ~~inflationary or deflationary general economic~~macro-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 ~~including~~such as war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires, or from health epidemics or pandemics or other contagious outbreaks;

•our ability to respond to new lighting and ~~air disinfection~~control technologies and market trends;

•our ability to fulfill our warranty obligations with safe and reliable products;

•any delays we may encounter in making new products available or fulfilling customer specifications;

•any flaws or defects in our products or in the manner in which they are used or installed;

•our ability to protect our intellectual property rights and other confidential information, and manage infringement claims by others;

•our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as those relating to the environment and health and safety;

•risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency fluctuations, including tariffs and other potential barriers to international trade;

•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™,~~ and ~~nUVo™~~EnFocus™ are our registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.

ITEM 1. FINANCIAL STATEMENTS

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash	Cash	$	225	$	2,682	Cash	$	41	$	2,682
Trade accounts receivable, less allowances of $5 and $14, respectively		1,330		1,240
Trade accounts receivable, less allowances of $11 and $14, respectively						Trade accounts receivable, less allowances of $11 and $14, respectively	1,007		1,240
Inventories, net	Inventories, net	7,367		7,866		Inventories, net	6,156		7,866
Short-term deposits	Short-term deposits	701		712		Short-term deposits	610		712
Prepaid and other current assets	Prepaid and other current assets	909		924		Prepaid and other current assets	788		924

Total current assets	Total current assets	10,532		13,424		Total current assets	8,602		13,424

Property and equipment, net	Property and equipment, net	631		675		Property and equipment, net	433		675

Operating lease, right-of-use asset	Operating lease, right-of-use asset	1,386		292		Operating lease, right-of-use asset	1,248		292

Total assets	Total assets	$	12,549	$	14,391	Total assets	$	10,283	$	14,391

LIABILITIES	LIABILITIES					LIABILITIES
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	2,230	$	2,235	Accounts payable	$	1,886	$	2,235
Accrued liabilities	Accrued liabilities	317		265		Accrued liabilities	82		265
Accrued legal and professional fees	Accrued legal and professional fees	69		104		Accrued legal and professional fees	66		104
Accrued payroll and related benefits	Accrued payroll and related benefits	477		718		Accrued payroll and related benefits	380		718
Accrued sales commissions	Accrued sales commissions	71		57		Accrued sales commissions	60		57

Accrued warranty reserve	Accrued warranty reserve	265		295		Accrued warranty reserve	242		295
Deferred revenue	Deferred revenue	—		268		Deferred revenue	7		268
Operating lease liabilities	Operating lease liabilities	237		325		Operating lease liabilities	189		325

Finance lease liabilities	Finance lease liabilities	—		1		Finance lease liabilities	—		1

Streeterville - 2021 note, net of discount and loan origination fees		1,161		1,719
Notes payable, net of discounts and loan origination fees						Notes payable, net of discounts and loan origination fees	1,521		1,719

Related party promissory note payable						Related party promissory note payable	451		—

Credit line borrowings, net of loan origination fees	Credit line borrowings, net of loan origination fees	3,109		2,169		Credit line borrowings, net of loan origination fees	1,976		2,169
Total current liabilities	Total current liabilities	7,936		8,156		Total current liabilities	6,860		8,156

(continued on the next page)

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(Unaudited)					(Unaudited)

Operating lease liabilities, net of current portion	Operating lease liabilities, net of current portion	1,181		26		Operating lease liabilities, net of current portion	1,082		26

Notes payable, net of current maturities, discounts and loan origination fees						Notes payable, net of current maturities, discounts and loan origination fees	815		—
Total liabilities	Total liabilities	9,117		8,182		Total liabilities	8,757		8,182

STOCKHOLDERS' EQUITY	STOCKHOLDERS' EQUITY					STOCKHOLDERS' 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 March 31, 2022 and December 31, 2021
Issued and outstanding: 876,447 at March 31, 2022 and December 31, 2021		—		—
Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at September 30, 2022 and December 31, 2021						Authorized: 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, 2021						Issued 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 March 31, 2022 and December 31, 2021
Issued and outstanding: 6,453,777 at March 31, 2022 and 6,368,549 at December 31, 2021		—		—
Authorized: 50,000,000 shares at September 30, 2022 and December 31, 2021						Authorized: 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, 2021						Issued and outstanding: 9,191,108 at September 30, 2022 and 6,368,549 at December 31, 2021	1		—
Additional paid-in capital	Additional paid-in capital	144,997		144,953		Additional paid-in capital	148,238		144,953
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(3)		(3)		Accumulated other comprehensive loss	(3)		(3)
Accumulated deficit	Accumulated deficit	(141,562)		(138,741)		Accumulated deficit	(146,710)		(138,741)
Total stockholders' equity	Total stockholders' equity	3,432		6,209		Total stockholders' equity	1,526		6,209
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	12,549	$	14,391	Total liabilities and stockholders' equity	$	10,283	$	14,391

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

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)


		Three months ended March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Net sales	Net sales		$	2,061		$	2,637	Net sales	$	1,764	$	2,749	$	5,305	$	7,460
Cost of sales	Cost of sales		2,087			2,084		Cost of sales	1,927		2,186		5,385		5,951
Gross (loss) profit	Gross (loss) profit		(26)			553		Gross (loss) profit	(163)		563		(80)		1,509

Operating expenses:	Operating expenses:							Operating expenses:
Product development	Product development		503			653		Product development	366		404		1,222		1,427
Selling, general, and administrative	Selling, general, and administrative		2,127			2,218		Selling, general, and administrative	1,802		1,968		5,893		6,454
Restructuring recovery			—			(19)
Loss on write-off of fixed assets								Loss on write-off of fixed assets	76		—		76		—
Restructuring expense (recovery)								Restructuring expense (recovery)	—		1		—		(21)
Total operating expenses	Total operating expenses		2,630			2,852		Total operating expenses	2,244		2,373		7,191		7,860
Loss from operations	Loss from operations		(2,656)			(2,299)		Loss from operations	(2,407)		(1,810)		(7,271)		(6,351)

Other expenses (income):	Other expenses (income):							Other expenses (income):
Interest expense	Interest expense		184			127		Interest expense	235		177		679		520
Gain on forgiveness of PPP loan			—			(801)
Gain on forgiveness of Paycheck Protection Program loan								Gain on forgiveness of Paycheck Protection Program loan	—		—		—		(801)

Other income	Other income		(30)			—		Other income	—		(862)		(30)		(862)

Other expenses	Other expenses		11			17		Other expenses	20		15		49		47

Net loss	Net loss		$	(2,821)		$	(1,642)	Net loss	$	(2,662)	$	(1,140)	$	(7,969)	$	(5,255)

Net loss per common share - basic and diluted	Net loss per common share - basic and diluted							Net loss per common share - basic and diluted
Net loss	Net loss		$	(0.44)		$	(0.45)	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	Basic and diluted		6,437			3,612		Basic and diluted	9,190		5,086		7,608		4,309

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

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				Preferred Stock			Common Stock					Additional Paid-in Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit		Total Stockholders' Equity
		Shares	Amount		Shares	Amount													Shares	Amount		Shares	Amount

Balance at December 31, 2021	Balance at December 31, 2021	876	$	—	6,368	$	—		$	144,953	$	(3)	$	(138,741)	$	6,209		Balance at December 31, 2021	876	$	—	6,368	$	—			$	144,953	$	(3)	$	(138,741)	$	6,209

Issuance of common stock upon the exercise of warrants	Issuance of common stock upon the exercise of warrants	—	—		85	—			—		—		—		—			Issuance of common stock upon the exercise of warrants	—	—		85	—				—		—		—		—

Stock-based compensation	Stock-based compensation	—	—		—	—			44		—		—		44			Stock-based compensation	—	—		—	—				44		—		—		44
Net loss for the three months ended March 31, 2022	Net loss for the three months ended March 31, 2022	—	—		—	—			—		—		(2,821)		(2,821)			Net loss for the three months ended March 31, 2022	—	—		—	—				—		—		(2,821)		(2,821)
Balance at March 31, 2022	Balance at March 31, 2022	876	$	—	6,453	$	—		$	144,997	$	(3)	$	(141,562)	$	3,432		Balance at March 31, 2022	876	$	—	6,453	$	—			$	144,997	$	(3)	$	(141,562)	$	3,432
Issuance of common stock under employee stock option and stock purchase plans																		Issuance of common stock under employee stock option and stock purchase plans	—	—		45	—				5		—		—		5

Issuance of common stock and warrants																		Issuance of common stock and warrants	—	—		1,313	1				3,499		—		—		3,500

Offering costs on issuance of common stock and warrants																		Offering costs on issuance of common stock and warrants	—	—		—	—				(334)		—		—		(334)

Stock-based compensation																		Stock-based compensation	—	—		—	—				54		—		—		54

Net loss for the three months ended June 30, 2022																		Net loss for the three months ended June 30, 2022	—	—		—	—				—		—		(2,486)		(2,486)
Balance at June 30, 2022																		Balance at June 30, 2022	876	$	—	7,811	$	1			$	148,221	$	(3)	$	(144,048)	$	4,171
Issuance of common stock under employee stock option and stock purchase plans																		Issuance of common stock under employee stock option and stock purchase plans	—	—		1	—				—		—		—		—

Issuance of common stock and warrants																		Issuance of common stock and warrants	—	—		1,379	—				—		—		—		—

Stock-based compensation																		Stock-based compensation	—	—		—	—				17		—		—		17

Net loss for the three months ended September 30, 2022																		Net loss for the three months ended September 30, 2022	—	—		—	—				—		—		(2,662)		(2,662)
Balance at September 30, 2022																		Balance at September 30, 2022	876	$	—	9,191	$	1			$	148,238	$	(3)	$	(146,710)	$	1,526

Preferred
Stock Common
Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders'
Equity
Shares Amount Shares Amount
Balance at December 31, 2020 2,597 $ — 3,525 $ — $ 135,113 $ (3) $ (130,855) -124874000 $ 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, 2021 2,597 $ — 3,682 $ — $ 135,778 $ (3) $ (132,497) $ 3,278

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
	Shares	Amount		Shares	Amount

Balance at December 31, 2020	2,597	$	—	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, 2021	2,597	$	—	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, 2021	876	$	—	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, 2021	876	$	—	5,087	$	—		$	140,615	$	(3)	$	(136,110)	$	4,502

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

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


		Three months ended March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Cash flows from operating activities:	Cash flows from operating activities:							Cash flows from operating activities:
Net loss	Net loss		$	(2,821)		$	(1,642)	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	Other income		(30)			—		Other income	—		(862)		(30)		(862)
Gain on forgiveness of PPP loan			—			(801)
Gain on forgiveness of Paycheck Protection Program loan								Gain on forgiveness of Paycheck Protection Program loan	—		—		—		(801)
Depreciation	Depreciation		44			47		Depreciation	42		43		129		143
Stock-based compensation	Stock-based compensation		44			140		Stock-based compensation	17		39		115		387

Provision for doubtful accounts receivable	Provision for doubtful accounts receivable		(9)			6		Provision for doubtful accounts receivable	1		2		(3)		10
Provision for slow-moving and obsolete inventories	Provision for slow-moving and obsolete inventories		129			89		Provision for slow-moving and obsolete inventories	220		(70)		164		(9)
Provision for warranties	Provision for warranties		(30)			12		Provision for warranties	(74)		1		(53)		13

Amortization of loan discounts and origination fees	Amortization of loan discounts and origination fees		69			38		Amortization of loan discounts and origination fees	87		61		247		158

Loss on write-off of property and equipment								Loss on write-off of property and equipment	76		—		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 receivable	Accounts receivable		(83)			532		Accounts receivable	139		(500)		240		390
Inventories	Inventories		370			(1,963)		Inventories	792		444		1,546		(2,105)
Short-term deposits	Short-term deposits		12			12		Short-term deposits	(110)		(62)		(51)		87
Prepaid and other assets	Prepaid and other assets		20			4		Prepaid and other assets	46		(91)		162		(119)
Accounts payable	Accounts payable		61			951		Accounts payable	629		(164)		(92)		(82)
Accrued and other liabilities	Accrued and other liabilities		(211)			(209)		Accrued and other liabilities	(101)		53		(461)		(305)
Deferred revenue	Deferred revenue		(268)			1		Deferred revenue	7		(69)		(261)		(70)
Total adjustments	Total adjustments		118			(1,141)		Total adjustments	1,771		(1,175)		1,728		(3,165)
Net cash used in operating activities	Net cash used in operating activities		(2,703)			(2,783)		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 equipment	Acquisitions of property and equipment		(35)			(109)		Acquisitions of property and equipment	(9)		(100)		(41)		(311)

Net cash used in investing activities	Net cash used in investing activities		(35)			(109)		Net cash used in investing activities	(9)		(100)		(41)		(311)

(continued on next page)

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Three months ended
March 31,
2022 2021
Cash flows from financing activities (sources / (uses) of cash):
Proceeds from the exercise of warrants — 527
Principal payments under finance lease obligations (1) (1)
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — (2)
Payments on the 2021 Streeterville note (615) —
Net proceeds from the credit line borrowings - Credit Facilities 897 1,080
Net cash provided by financing activities 281 1,604
Net decrease in cash and restricted cash (2,457) (1,288)
Cash and restricted cash, beginning of period 2,682 2,178
Cash and restricted cash, end of period $ 225 $ 890
Classification of cash and restricted cash:
Cash $ 225 $ 548
Restricted cash held in other assets — 342
Cash and restricted cash $ 225 $ 890


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
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 payable	450		—		450		—

Deferred financing costs paid	(95)		—		(329)		(30)

Net payments on the credit line borrowings - Credit Facilities	58		1,128		(215)		337
Net cash provided by financing activities	3		1,127		3,641		6,934



Net decrease in cash	(897)		(1,288)		(2,641)		(1,797)
Cash, beginning of period	938		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.

910

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting and controls systems ~~and ultraviolet-C light disinfection (“UVCD”)~~ 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 expanded our offerings into the consumer market beginning 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 lighting technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. ~~In late 2020,~~After evaluating market demand and supply chain challenges for our ultraviolet-C light disinfection products, we ~~announced the launch of~~have revised our ~~UVCD product portfolio. With initial development complete~~marketing strategy to primarily focus on our MMM and ~~two products now brought to market, we expect to evaluate the potential development of additional UVCD products in 2022.~~commercial and industrial lighting and 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 ~~March 31,~~September 30, 2022 and 2021 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, 2021 (“2021 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 2021 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 ~~March 31,~~September 30, 2022 and December 31, 2021, Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, and Condensed Consolidated Statements of Cash Flows for the three and nine months ended ~~March 31,~~September 30, 2022 and 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.

1011

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~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 ~~March 31,~~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 ~~building systems provider,~~lighting retrofit company accounted for approximately ~~15%~~19%, ~~21%,~~17% and ~~19%~~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 ~~37%~~36% of net sales for the same period.

For the ~~three~~nine months ended ~~March 31, 2021,~~September 30, 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 ~~50%~~13%, 15%, and ~~11%~~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 ~~57%~~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.

A ~~U.S. Navy shipbuilder, a distributor to the U.S. Department of Defense and~~regional commercial lighting retrofit company, a commercial building systems provider, and a U.S. Navy mechanical contractor accounted for approximately ~~11%~~25%, ~~10%~~12%, and ~~28%~~12% of net trade accounts receivable, respectively, at ~~March 31,~~September 30, 2022. At December 31, 2021, a distributor to the U.S. Department of Defense accounted for 20% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 36% of our net trade accounts receivable.

One offshore supplier accounted for approximately ~~19%~~17% and 18%, respectively, of our total expenditures for the three and nine months ended ~~March 31,~~September 30, 2022. For the three and nine months ended ~~March 31,~~September 30, 2021, ~~this same~~one offshore supplier accounted for approximately ~~26%~~19% and 30%, respectively, of total expenditures.

At ~~March 31,~~September 30, 2022, one offshore supplier accounted for approximately ~~54%~~45% of our trade accounts payable balance. At December 31, 2021, this offshore supplier accounted for approximately 60% of our trade accounts payable balance.

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 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

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

for as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(Unaudited)~~

The following table provides a disaggregation of product net sales for the periods presented (in thousands):


		Three months ended March 31,				Three months ended September 30,						Nine months ended September 30,
		2022		2021				2022		2021			2022		2021
Net sales:	Net sales:						Net sales:
Commercial	Commercial	$	1,134	$	913		Commercial	$	1,288	$	1,522		$	3,397	$	3,513
MMM products	MMM products	927		1,724			MMM products	476		1,227			1,908		3,947
Total net sales	Total net sales	$	2,061	$	2,637		Total net sales	$	1,764	$	2,749		$	5,305	$	7,460

Accounts Receivable

Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We utilize a 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 credit-worthiness ratings and metrics that significantly ~~assists~~assist us in evaluating the credit worthiness of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of account receivables that will not be collected. The allowance is based on an assessment of 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 for major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.

Geographic information

All of our long-lived fixed assets are located in the United States. For the three months ended ~~March 31,~~September 30, 2022 2%and September 30, 2021, less than 1% of sales were attributable to customers outside the United States. For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and September 30, 2021, ~~there were less than~~approximately 1% of sales were 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.

1213

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(Unaudited)

The following table presents a reconciliation of basic and diluted loss per share computations (in thousands):


		Three months ended March 31,				Three months ended September 30,				Nine months ended September 30,
		2022		2021				2022		2021		2022		2021
Numerator:	Numerator:						Numerator:
Net loss	Net loss	$	(2,821)	$	(1,642)		Net loss	$	(2,662)	$	(1,140)	$	(7,969)	$	(5,255)

Denominator:	Denominator:						Denominator:
Basic and diluted weighted average shares of common stock outstanding	Basic and diluted weighted average shares of common stock outstanding	6,437		3,612			Basic and diluted weighted average shares of common stock outstanding	9,190		5,086		7,608		4,309

As a result of the net loss we incurred for the three months ended ~~March 31,~~September 30, 2022, warrants and convertible securities representing approximately 16220 thousand and 175 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 three months ended ~~March 31,~~September 30, 2021, options, ~~restricted share units,~~ warrants and convertible securities representing approximately 7941 thousand, ~~2 thousand, 106~~11 thousand and ~~519~~175 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive.

As a result of the net loss we incurred for the nine months ended September 30, 2022, warrants and convertible securities representing approximately 201 thousand and 175 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, 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.

Product warranties

We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten ~~years and from~~ ~~one~~ to ~~five~~ ~~years for UVCD products.~~ 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 March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Balance at beginning of period	Balance at beginning of period		$	295		$	227	Balance at beginning of period	$	315	$	239	$	295	$	227
Warranty accruals for current period sales			(1)			17
Warranty accruals for current period sales, net of changes in inventory reserves for replacements								Warranty accruals for current period sales, net of changes in inventory reserves for replacements	(23)		10		(17)		49
Adjustments to existing warranties	Adjustments to existing warranties		(15)			14		Adjustments to existing warranties	(57)		4		(29)		16
In kind settlements made during the period	In kind settlements made during the period		(14)			(19)		In kind settlements made during the period	7		(13)		(7)		(52)
Accrued warranty reserve at end of period	Accrued warranty reserve at end of period		$	265		$	239	Accrued warranty reserve at end of period	$	242	$	240	$	242	$	240

1314

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(Unaudited)

Financial Instruments

June 2022 Private Placement

In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of 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. 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.

December 2021 Private Placement

In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 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 ~~March 31,~~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 June 2021 Equity 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 December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.

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. 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 (together with the Investor Warrants, the “January 2020 Warrants”).

As of ~~March 31,~~September 30, 2022, January 2020 Warrants to purchase an aggregate of 229,414 shares remain outstanding with a weighted average exercise price of $3.67 per share. The exercise of these warrants could provide us with cash proceeds of up to $0.8 million in the aggregate. During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, none of these warrants were exercised.

As of ~~March 31,~~September 30, 2021, January 2020 Warrants to purchase an aggregate of 310,860 shares remained outstanding with a weighted average ~~exercises~~exercise price of $3.59 per share. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, 156,446 January 2020 Warrants were exercised resulting in total proceeds of $527 thousand.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(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 1			Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2			Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3			Unobservable inputs for the asset or liability.

~~0The~~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.

NOTE 3. RESTRUCTURING

There were no restructuring credits or expense recorded for the three and nine months ended ~~March 31,~~September 30, 2022. For the three months ended ~~March 31,~~September 30, 2021, we recorded nominal net restructuring ~~credits~~expense and for the nine months ended September 30, 2021, we recorded a net restructuring credit of approximately ~~$19~~$21 thousand, 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 2021 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.

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):


	2021
Balance at December 31, 2020	$	11

Payments	~~(6)~~(11)
Balance at ~~March 31,~~September 30, 2021	$	5—

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(Unaudited)~~

~~The following is a reconciliation of the ending balance of our restructuring liability at March 31, 2021 to the balance sheet:~~


	~~2021~~
~~Balance at March 31, 2021~~	$	5
~~Less, short-term restructuring liability~~	5
~~Long-term restructuring liability, included in other liabilities~~	$	—

As a result of the restructuring actions and initiatives described above, we ~~have tailored~~began to tailor our operating expenses to be more in line with our expected sales ~~volumes; however,~~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 ~~March 31,~~September 30, 2022.

Throughout 2021 and ~~the first quarter of~~ 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, our patented, breakthrough powerline control platform. We also continue to believe our proprietary RedCap® emergency backup lighting system addresses a market need and will continue to help drive commercial sales for us as it has been well received in the market. We brought the first of our UVCD products, the nUVo™ Tower portable air disinfection device for offices and homes and the nUVo™ Traveler portable personal air disinfection device for in-vehicle and smaller spaces, to market beginning in the fourth quarter of 2021, and we expect to evaluate the potential development of additional products in 2022.

We plan to achieve profitability by growing our sales, primarily through existing and new commercial and industrial lighting ~~new lighting~~and 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. As described in Note 7, “Debt”, in September 2022, April 2022 and April 2021, we obtained ~~approximately~~ net proceeds from bridge financing of approximately $0.5 million, $1.8 million and $1.5 million, ~~of bridge financing,~~ respectively. Also in April 2021, we expanded the borrowing capacity on one of our revolving credit facilities.

The restructuring and cost cutting initiatives taken throughout 2021 and continuing into 2022, as well as the June 2022 Private Placement, the December 2021 Private Placement and the June 2021 Equity Offering that strengthened our balance sheet, our credit facility capacity increase and bridge financings 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 supply chain globally, and the ~~ongoing~~long-term economic impact from the COVID-19 pandemic that has 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 and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage both shortages of available components and longer lead times in obtaining ~~components.~~components while balancing the development and implementation of an inventory reduction plan. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:

•obtaining financing from traditional or non-traditional investment capital organizations or individuals;

•obtaining funding from the sale of our common stock or other equity or debt instruments; and

•obtaining debt financing with lending terms that more closely match our business model and capital needs.

1617

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~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 Executive Officer and a Chief Financial Officer,~~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 ensure adequate external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, ~~will~~could provide us with an ability to finance our operations through the next twelve months and ~~will~~may mitigate the substantial doubt about our ability to continue as a going concern.

On August ~~17, 2020,~~23, 2022, we received a ~~letter~~written 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. Based 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. In accordance with one part of the plan submitted to the Staff, we successfully modified our outstanding January 2020 Warrants and in December 2020, we reclassified $1.4 million from warrant liability into equity. 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 December 31, 2020, our stockholders’ equity was $4,255,000, satisfying the Minimum Stockholders’ Equity Rule. At December 31, 2021, our stockholders’ equity was $6,209,000 and at ~~March 31,~~September 30, 2022, our stockholders’ equity was ~~$3,432,000.~~$1,526,000.

1718

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~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):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Raw materials	Raw materials	$	3,620	$	3,882	Raw materials	$	3,584	$	3,882
Finished goods	Finished goods	6,926		7,034		Finished goods	5,231		7,034
Reserves for excess, obsolete, and slow-moving inventories	Reserves for excess, obsolete, and slow-moving inventories	(3,179)		(3,050)		Reserves for excess, obsolete, and slow-moving inventories	(2,659)		(3,050)
Inventories, net	Inventories, net	$	7,367	$	7,866	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 March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Beginning balance	Beginning balance		$	(3,050)		$	(2,894)	Beginning balance	$	(2,792)	$	(2,956)	$	(3,050)	$	(2,894)
Accrual	Accrual		(145)			(101)		Accrual	(241)		34		(442)		(64)
Reduction due to sold inventory	Reduction due to sold inventory		16			12		Reduction due to sold inventory	21		36		278		72

Write-off for disposed inventory								Write-off for disposed inventory	353		—		555		—
Reserves for excess, obsolete, and slow-moving inventories	Reserves for excess, obsolete, and slow-moving inventories		$	(3,179)		$	(2,983)	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.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Equipment (useful life 3 to 15 years)	Equipment (useful life 3 to 15 years)	$	1,148	$	1,308	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)	414		384		Tooling (useful life 2 to 5 years)	413		384
Vehicles (useful life 5 years)	Vehicles (useful life 5 years)	83		83		Vehicles (useful life 5 years)	81		83
Furniture and fixtures (useful life 5 years)	Furniture and fixtures (useful life 5 years)	86		86		Furniture and fixtures (useful life 5 years)	86		86
Computer software (useful life 3 years)	Computer software (useful life 3 years)	1,144		1,194		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 asset	Finance lease right-of-use asset	13		13		Finance lease right-of-use asset	13		13
UV - Robots (useful life 5 years)		105		105
mUVeTM ultraviolet-C light disinfection robots (useful life 5 years)						mUVeTM ultraviolet-C light disinfection robots (useful life 5 years)	—		105
Projects in progress	Projects in progress	104		135		Projects in progress	68		135
Property and equipment at cost	Property and equipment at cost	3,266		3,477		Property and equipment at cost	3,042		3,477
Less: accumulated depreciation	Less: accumulated depreciation	(2,635)		(2,802)		Less: accumulated depreciation	(2,609)		(2,802)
Property and equipment, net	Property and equipment, net	$	631	$	675	Property and equipment, net	$	433	$	675

Depreciation expense was ~~$44~~$42 thousand and ~~$47~~$43 thousand for the three months ended ~~March 31,~~September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 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 the net book value of $76 thousand was recorded as a loss on write-off of fixed assets.

1820

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~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 2027 under which it is responsible for related maintenance, taxes and insurance. The Company ~~has~~had 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 our equipment operating leases had 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 ~~and extended through 2027.~~to reflect a smaller footprint at reduced costs. In accordance with Accounting ~~Standard~~Standards Codification 842, Leases (“Topic 842”), as a result of the extension, the related lease liability was remeasured and the right-of-use asset was adjusted for each lease at the time of modification in January 2021 and March 2022. The present value of the lease obligations for these leases were calculated using an incremental borrowing rate of 15.93% for the equipment lease and 16.96% for the real estate lease, which were the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads Financial Group, LLC (as described below in Note 7, “Debt”) and Factors Southwest L.L.C. (as described below in Note 7, “Debt”). The present value of the other remaining lease obligations continues to be calculated using an incremental borrowing rate of 7.25% (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its former revolving line of credit with Austin Financial Services, Inc. (the “Austin Credit Facility”). The weighted average remaining lease term for the operating ~~and finance~~ leases is ~~5.2 years and 0.1 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. 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 ~~ASC~~Accounting Standards 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 sublease 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 ~~Standard~~Standards Codification 420, Exit or Disposal Cost Obligations (“Topic 420”), 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 2021 Annual Report.

There were no finance lease costs recognized in net loss for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021. Components of the operating and restructured lease costs recognized in net loss for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, were as follows (in thousands):


		Three months ended March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Operating lease cost (income)	Operating lease cost (income)							Operating lease cost (income)
Sub-lease income	Sub-lease income		$	(25)		$	(25)	Sub-lease income	$	(9)	$	(25)	$	(90)	$	(87)
Lease cost	Lease cost		132			143		Lease cost	83		139		298		423
Operating lease cost, net	Operating lease cost, net		107			118		Operating lease cost, net	74		114		208		336

Restructured lease cost (income)	Restructured lease cost (income)							Restructured lease cost (income)
Sub-lease income	Sub-lease income		—			(68)		Sub-lease income	—		—		—		(136)
Lease cost	Lease cost		—			56		Lease cost	—		—		—		109
Restructured lease income, net	Restructured lease income, net		—			(12)		Restructured lease income, net	—		—		—		(27)

Total lease cost, net	Total lease cost, net		$	107		$	106	Total lease cost, net	$	74	$	114	$	208	$	309

1921

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(Unaudited)

Supplemental balance sheet information related to the Company’s operating and finance leases as of ~~March 31,~~September 30, 2022 and December 31, 2021 are as follows (in thousands):


		March 31, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Operating Leases	Operating Leases					Operating Leases
Operating lease right-of-use assets	Operating lease right-of-use assets	$	1,386	$	292	Operating lease right-of-use assets	$	1,248	$	292

Operating lease liabilities	Operating lease liabilities	$	1,418	$	351	Operating lease liabilities	$	1,271	$	351

Finance Leases	Finance Leases					Finance Leases
Property and equipment	Property and equipment	13		13		Property and equipment	13		13
Allowances for depreciation	Allowances for depreciation	(13)		(12)		Allowances for depreciation	(13)		(12)
Finance lease assets, net	Finance lease assets, net	—		1		Finance lease assets, net	—		1

Finance lease liabilities	Finance lease liabilities	—		1		Finance lease liabilities	—		1
Total finance lease liabilities	Total 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 ~~March 31,~~September 30, 2022 are as follows (in thousands):

Operating Leases

~~April~~October 2022 to ~~March~~September 2023

~~447~~384

~~April~~October 2023 to ~~March~~September 2024

~~385~~381

~~April~~October 2024 to ~~March~~September 2025

~~379~~383

~~April~~October 2025 to ~~March~~September 2026

~~387~~389

~~April~~October 2026 to ~~March~~September 2027

~~392~~295

~~April 2027 to March 2028~~

Total future undiscounted lease payments

~~2,088~~1,832

Less imputed interest

~~(670)~~(561)

Total lease obligations

~~1,418~~1,271

Supplemental cash flow information related to leases for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, was as follows (in thousands):


		Three months ended March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Supplemental cash flow information	Supplemental 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 leases	Operating cash flows from operating leases		$	136		$	136	Operating cash flows from operating leases	$	86	$	161	$	326	$	421
Operating cash flows from restructured leases	Operating cash flows from restructured leases		$	—		$	17	Operating cash flows from restructured leases	$	—	$	—	$	—	$	35
Financing cash flows from finance leases	Financing cash flows from finance leases		$	1		$	1	Financing cash flows from finance leases	$	—	$	1	$	1	$	3

2022

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(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-month LIBOR rate ~~(0.96%~~(3.07% and 0.21% at ~~March 31,~~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 ~~March 31,~~September 30, 2022 and December 31, 2021, which includes interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was ~~22.9%~~23.4% and 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. 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.

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 and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at 90% of the face value of such accounts receivable, less availability reserves, if any. 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 ~~(3.50%~~(6.25% at ~~March 31,~~September 30, 2022 and 3.25% at December 31, 2021) plus (ii) 2%. At ~~March 31,~~September 30, 2022 and December 31, 2021, the annualized interest rate, which includes interest fees and the annual facility fee, was ~~8.7%~~9.4% and 8.0%, respectively. The annualized interest rate on the collateral management fee was ~~5.9% and 5.90%~~6.0% at ~~March 31,~~both September 30, 2022 and December 31, ~~2021, respectively.~~2021. The Receivables Facility is also secured by substantially all of the present and future assets of the ~~Borrower~~Company 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 ~~$2.3~~$1.6 million and $1.2 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. Borrowings under the Receivables Facility were ~~$0.8~~$0.4 million and $1.0 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. These ~~facilities~~Credit Facilities are recorded in the Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 and December 31, 2021 as a current liability under the caption “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling ~~$51~~$64 thousand and $84 thousand for the Inventory Facility and ~~$14~~$21 thousand and $24 thousand for the Receivables Facility as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

2123

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(Unaudited)

Promissory 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 original principal amount of $0.5 million. Ms. Huang is a member of the Company’s board of directors. The total liability for the 2022 Promissory Note was $0.5 million at September 30, 2022. Please refer to Note 12, “Related Party Transaction” for further detail.

Streeterville Notes

2022 Note

On April 21, 2022, we entered into a note purchase agreement (the “2022 Streeterville Note Purchase Agreement”) with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $2.0 million (the “2022 Streeterville Note”). The 2022 Streeterville Note was issued with an original issue discount of $215 thousand and Streeterville paid a purchase price of approximately $1.8 million for the 2022 Streeterville Note, from which the Company paid $15 thousand to Streeterville for Streeterville’s transaction expenses. ~~See also Note 12, “Subsequent Events”.~~

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 5five 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 “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.~~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 ~~$1.2~~$0.4 million and $1.7 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. Unamortized loan discount and debt issuance costs for the 2021 Streeterville Note were ~~$17~~$61 thousand and ~~$43~~$140 thousand at ~~March 31,~~September 30, 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.

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 ~~PPP~~Paycheck 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. 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 ~~three~~nine months ended ~~March 31,~~September 30, 2021.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(Unaudited)~~

NOTE 8. INCOME TAXES

As a result of the operating loss incurred during each of the three and nine months ended ~~March 31,~~September 30, 2022 and 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 ~~March 31,~~September 30, 2022 and December 31, 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, 2021, we had a net operating loss carry-forward of approximately $125.4 million for federal income tax purposes ($77.2 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $125.4 million is available to offset future taxable income after the application of the limitations found under Section 382 of the Internal Revenue Code of 1986, as amended. As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income and can be carried forward indefinitely. The $9.6 million and $7.1 million in federal net operating losses generated in 2021 and 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 $37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please refer to Note 11, “Income Taxes,” included under Item 8, “Financial Statements and Supplementary Data,” of our 2021 Annual Report.

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.

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 ~~March 31,~~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.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(Unaudited)~~

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 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. 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”).

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.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(Unaudited)~~

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, the 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, 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 January 2020 Warrants were approximately $2.3 million.

January 2020 Warrants issued to purchase an aggregate of 229,414 shares remain outstanding at ~~March 31,~~September 30, 2022 with a weighted average exercise price of $3.67 per share. The exercise of warrants could provide us with cash proceeds of up to $0.8 million in the aggregate if all warrants are exercised. During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, no January 2020 Warrants were exercised. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, 156,446 warrants were exercised resulting in total proceeds of $527 thousand.

As of ~~March 31,~~September 30, 2022 and 2021, we had the following outstanding January 2020 warrants to purchase shares of common stock:


		As of March 31, 2022	As of March 31, 2021				As of September 30, 2022	As of September 30, 2021
		Number of Underlying Shares		Exercise Price	Expiration		Number of Underlying Shares		Exercise Price	Expiration
Investor Warrants	Investor Warrants	187,734	269,180	$3.3700	January 13, 2025	Investor Warrants	187,734	269,180	$3.3700	January 13, 2025
Placement Agent Warrants	Placement Agent Warrants	41,680	41,680	$4.9940	January 13, 2025	Placement Agent Warrants	41,680	41,680	$4.9940	January 13, 2025
		229,414	310,860				229,414	310,860

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.

2527

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~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 March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Cost of sales	Cost of sales		$	1		$	2	Cost of sales	$	—	$	2	$	2	$	7
Product development	Product development		6			6		Product development	4		2		16		10
Selling, general, and administrative	Selling, general, and administrative		37			132		Selling, general, and administrative	13		35		97		370
Total stock-based compensation	Total stock-based compensation		$	44		$	140	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 ~~March 31, 2022, compared to $0.6 million at March 31,~~September 30, 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 ~~March 31,~~September 30, 2022 is expected to be recognized is approximately ~~2.6~~2.5 years.

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.


		Three months ended March 31,							Nine months ended September 30,
		2022			2021				2022			2021
Fair value of options issued	Fair value of options issued	$	1.17		$	4.26		Fair value of options issued	$	0.77		$	4.18
Exercise price	Exercise price	$	1.48		$	5.51		Exercise price	$	0.95		$	5.39
Expected life of options (in years)	Expected life of options (in years)	6.1			6.2			Expected life of options (in years)	6.1			6.2
Risk-free interest rate	Risk-free interest rate	1.9		%	0.8		%	Risk-free interest rate	3.0		%	0.8		%
Expected volatility	Expected volatility	99.2		%	96.3		%	Expected volatility	104.0		%	96.5		%
Dividend yield	Dividend yield	0.0		%	0.0		%	Dividend yield	0.0		%	0.0		%

2628

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

(Unaudited)

A summary of option activity under all outstanding stock incentive plans for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 is presented as follows:


		Number of Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)		Number of Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)
Balance at December 31, 2021	Balance at December 31, 2021	267,109	$	3.46		Balance at December 31, 2021	267,109	$	3.46
Granted	Granted	60,000	1.48			Granted	226,820	0.95

Exercised						Exercised	(250)	1.45
Canceled/forfeited	Canceled/forfeited	(58,100)	2.88			Canceled/forfeited	(135,447)	3.03

Balance at March 31, 2022		269,009	$	3.15	8.4
Balance at September 30, 2022						Balance at September 30, 2022	358,064	$	2.03	8.2

Vested and expected to vest at March 31, 2022		229,323	$	3.19	8.2
Vested and expected to vest at September 30, 2022						Vested and expected to vest at September 30, 2022	291,379	$	2.21	7.9

Exercisable at March 31, 2022		113,027	$	3.37	7.5
Exercisable at September 30, 2022						Exercisable at September 30, 2022	118,920	$	3.21	5.6

Restricted stock units

A summary of restricted stock unit activity under all outstanding stock incentive plans for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 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, 2021	Balance at December 31, 2021	2,400	$	7.14		Balance at December 31, 2021	2,400	$	7.14
Granted	Granted	40,000	1.40			Granted	40,000	1.40
Vested						Vested	(40,800)	1.51

Balance at September 30, 2022						Balance at September 30, 2022	1,600	$	7.14	7.9

Balance at March 31, 2022		42,400	$	1.72	1.3

NOTE 10. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of ~~March 31,~~September 30, 2022, we had approximately ~~$0.7~~$1.0 million in outstanding purchase commitments for ~~inventory. Of this amount, approximately $0.6~~inventory, of which $0.8 million is expected to ship in the ~~second~~fourth quarter of 2022 ~~with the balance~~and $0.2 million is expected to ship in the ~~third~~first quarter of ~~2022~~2023 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 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021.

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 quarters when compared with the same quarter in 2019 or the immediately preceding quarter to the corresponding calendar quarter in 2019. The credit is taken against the Company’s share of Social Security Tax when the Company’s payroll provider files, or subsequently amends the applicable quarterly employer tax filings.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~(Unaudited)~~

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 applied for and received a refund of $431 thousand, and we amended our filing for the second quarter of 2021, for which we expect to receive an additional refund of approximately $445 thousand. These amounts are recorded as other income in the Condensed Consolidated Statements of Operations during the quarter ended December 31, 2021, and the $445 thousand expected receivable is included in prepaid and other current assets in the Condensed Consolidated Balance Sheet as of ~~March 31,~~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. 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 ~~three~~nine months ended ~~March 31,~~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 ~~12.~~13. SUBSEQUENT EVENTS

~~2022 Streeterville Note~~Unsecured Notes Payable

~~As disclosed in Note 7, “Debt”, on April 21,~~On November 9, 2022, ~~we entered into the 2022 Streeterville Note Purchase Agreement with Streeterville pursuant to which~~ the Company ~~sold and~~ issued ~~to Streeterville the 2022 Streeterville~~a short-term Promissory Note in favor of Mei-Yun (Gina) Huang in the original principal amount of ~~approximately $2.0 million. The~~$350 thousand. Ms. Huang previously provided $450 thousand of bridge financing in September 2022 ~~Streeterville Note was issued with an original issue discount~~on the substantially the same terms. Ms. Huang is a member of ~~$215 thousand and Streeterville paid a purchase price~~the Company’s board of ~~approximately $1.8 million for the 2022 Streeterville Note, from which the Company paid $15 thousand to Streeterville for Streeterville’s transaction expenses.~~directors.

The ~~2022 Streeterville Note~~promissory note has a maturity date of ~~April 21, 2024,~~nine months from the date of issuance and ~~accrues~~bears interest at ~~8% per annum, compounded daily, on~~an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the ~~outstanding balance.~~maturity date. The Company may prepay the amounts outstanding under the ~~Note~~note in whole or in part at ~~a premium, which is 5% during~~any time prior to the ~~first six months and 7.5% percent thereafter. Prepayments~~maturity date. Upon the occurrence of an event of default under the note, Ms. Huang may, 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 5 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 increaseher 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, ~~Streeterville~~the Company issued a short-term Promissory Note ~~by 1.5%~~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.

InThe 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 ~~our common stock is delisted from Nasdaq,~~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

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 ~~will automatically increase by 15% as~~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 ~~date~~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 ~~such delisting.~~the Company’s common stock.

~~Resignation~~The October Exchange was each priced at-the-market under Nasdaq rules pursuant to one or more exemptions from the registration requirements of ~~Tod A. Nestor~~

~~As previously disclosed, on April 25, 2022,~~the Securities Act of 1933, as amended. There are no gross proceeds to the Company ~~received notice from Tod A. Nestor regarding his intention to resign as Chief Operating Officer and Chief Financial Officer~~in respect of the ~~Company. In connection with his departure, Mr. Nestor and~~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 ~~have reached agreement on terms~~otherwise would be required to redeem $205 thousand of ~~a separation and release agreement. Mr. Nestor will continue~~the 2021 Streeterville Note in ~~his current position through May 20, 2022.~~

cash, respectively.

2831

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, 2021 (“2021 Annual Report”).

Overview

Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting and controls ~~systems and ultraviolet-C light disinfection (“UVCD”) products.~~systems. 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 expanded our offerings into the consumer market beginning in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices, homes and vessels 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 lighting technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. ~~In late 2020,~~After evaluating market demand and supply chain challenges for our ultraviolet-C light disinfection products, we ~~announced the launch of~~have revised our ~~UVCD product portfolio. With initial development complete~~marketing strategy to primarily focus on our MMM and ~~two products now brought to market, we expect to evaluate the potential development of additional UVCD products in 2022.~~commercial and industrial lighting and control products.

Net sales decreased ~~22%~~29% for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 as compared to the ~~three~~nine months ended ~~March 31,~~September 30, 2021, primarily driven by a ~~46%~~52% decrease in ~~military~~MMM sales year-over-year ~~offset slightly by an increase~~and a slight 3% decrease in ~~net~~ sales of our commercial ~~products of 24%.~~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. ~~The~~However, 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 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 ~~ongoing~~long-term effects on our customers of the coronavirus (“COVID-19”) pandemic.

Operating losses increased by ~~$0.4~~$0.9 million, or ~~16%~~14%, in the first ~~three~~nine months of 2022 from the first ~~three~~nine months of 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 ~~March 31,~~September 30, 2022.

The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on us. We saw a slight improvement in commercial sales in the first ~~quarter~~half of 2022, following slowdowns in 2021 and 2020, as end customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the 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.

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 respond~~in response to the ~~spread of the virus.~~pandemic. Global supply chain and logistics constraints are impacting our inventory purchasing strategy as we seek to manage both shortages of available components and longer lead times in obtaining components. 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 ~~ongoing~~long-term impact of the COVID-19 pandemic and stand 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. Continuation~~position. Long-term impacts of the COVID-19 pandemic, ~~and its long-term impacts,~~ as 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 weakness in the macroeconomic environment and in the meantime expand sales channels and ~~enter~~evaluate new ~~markets, such as the UVCD and~~ consumer markets that we believe ~~will~~may provide additional growth opportunities.

It is our belief that the momentum of the efforts undertaken in 2021, as described in our 2021 Annual Report, along with our continuing efforts to date in 2022, including the development and launch of new and innovative products ~~in both~~such as our EnFocusTM powerline controls platform, ~~and the UVCD products,~~ as well as our planned entry into the consumer markets with these new products, ~~and~~ 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 EnFocus™ 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 the market through project specifications that are beginning to convert to larger volume orders. The EnFocus™ platform offers two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. EnFocus™ 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 EnFocus™ switches and LED ~~lamps,~~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, in response to the COVID-19 pandemic and an anticipated increase in demand for air quality, sanitation and hygiene expectations for buildings, facilities and homes, we developed advanced UVCD air disinfection products for both consumer as well as the commercial and industrial markets. Two of these UVCD products were available beginning in the fourth quarter of 2021: the nUVo™ Traveler air disinfector, a portable air disinfection device for in-vehicle and other smaller locations and the nUVo™ Tower air disinfector, a portable air disinfection device for offices and homes. With initial development complete and two products now brought to market, we expect to evaluate the potential development of additional UVCD products in 2022.

Throughout 2021 and ~~continuing into the first three months of~~ 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.~~volatility, and reinvested in our MMM sales channel with a strategic hire in the second quarter of 2022. MMM sales cycles are longer than commercial sales, and frequently are for made-to-order products, so we believe the impacts of this reinvestment are still building. Previously 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. Additionally, we are 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, a channel we hope to further develop. While we continue to aggressively seek to increase sales of our commercial products, we are ~~taking steps to reinvest~~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 in part driven by, and reflect volatility in, our MMM sales.

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 powerline controls, ~~and our UVCD products,~~ further leveraging our 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 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 ~~March 31,~~September 30, 2022, we had ~~$0.2 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 ~~March 31,~~September 30, 2022 included ~~$2.3~~$1.6 million outstanding under our inventory financing facility (the “Inventory Facility”), ~~$0.8~~$0.4 million outstanding under our receivables financing facility (the “Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”) ~~and $1.2~~, $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 ~~March 31,~~September 30, 2022, we had no additional availability ~~of $0.5 million~~ under the Inventory Facility and ~~$0.4~~$0.2 million under the Receivables ~~Facility, for~~Facility. During the third quarter of 2022, as a ~~total~~result of ~~$0.9 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 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. ~~As disclosed~~

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 ~~12, “Subsequent Events”~~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%, onor such lesser rate as permitted under applicable law.

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 wethe 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

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 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 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 “2021 Streeterville Note Purchase Agreement”) with Streeterville pursuant to which the Company sold and issued to Streeterville a promissory note in the principal amount of approximately $1.7 million (the “2021 Streeterville Note”). The 2021 Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the 2021 Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses.

The 2021 Streeterville Note 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.~~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.

3135

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 March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Net sales	Net sales		100.0	%		100.0	%	Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	Cost of sales		101.3			79.0		Cost of sales	109.2		79.5		101.5		79.8
Gross (loss) profit	Gross (loss) profit		(1.3)			21.0		Gross (loss) profit	(9.2)		20.5		(1.5)		20.2

Operating expenses:	Operating expenses:							Operating expenses:
Product development	Product development		24.4			24.8		Product development	20.7		14.7		23.0		19.1
Selling, general, and administrative	Selling, general, and administrative		103.2			84.1		Selling, general, and administrative	102.2		71.6		111.1		86.5
Loss on write-off of fixed assets								Loss on write-off of fixed assets	4.3		—		1.4		—
Restructuring recovery	Restructuring recovery		—			(0.7)		Restructuring recovery	—		—		—		(0.3)
Total operating expenses	Total operating expenses		127.6			108.2		Total operating expenses	127.2		86.3		135.5		105.3
Loss from operations	Loss from operations		(128.9)			(87.2)		Loss from operations	(136.4)		(65.8)		(137.0)		(85.1)

Other expenses (income):	Other expenses (income):							Other expenses (income):
Interest expense	Interest expense		8.9			4.8		Interest expense	13.3		6.4		12.8		7.0
Gain on forgiveness of PPP loan			—			(30.4)
Gain on forgiveness of Paycheck Protection Program loan								Gain on forgiveness of Paycheck Protection Program loan	—		—		—		(10.7)

Other income	Other income		(1.5)			—		Other income	—		(31.4)		(0.6)		(11.6)

Other expenses	Other expenses		0.5			0.6		Other expenses	1.1		0.5		0.9		0.6

Net loss	Net loss		(136.8)	%		(62.2)	%	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 March 31,			Three months ended September 30,						Nine months ended September 30,
			2022			2021			2022		2021		2022		2021
Commercial	Commercial		$	1,134		$	913	Commercial	$	1,288	$	1,522	$	3,397	$	3,513
MMM products	MMM products		927			1,724		MMM products	476		1,227		1,908		3,947

Total net sales	Total net sales		$	2,061		$	2,637	Total net sales	$	1,764	$	2,749	$	5,305	$	7,460

Net sales of ~~$2.1~~$1.8 million for the ~~first~~third quarter of 2022 decreased ~~$576 thousand,~~$1.0 million, or ~~22%~~36%, compared to ~~first~~third quarter of 2021 net sales of ~~$2.6~~$2.7 million, primarily driven by a decrease in MMM ~~product sales, offset slightly by a $221 thousand, or 24.2%, increase in net~~ sales of $0.8 million, or 61%, and a decrease of $0.2 million, or 15%, of commercial ~~products.~~products sales. Net MMM product sales decreased in the ~~first~~third quarter of 2022 compared to the same period in 2021, mainly due to availability and prioritization of government project funding and the delayed timing of expected orders. ~~Net~~The decrease in commercial product sales ~~increased 24%~~ in the ~~first~~third quarter of 2022 ~~over the first quarter of 2021, reflecting the~~reflects (i) volatility of sales to large institutional ~~customers.~~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 $5.3 million for the first nine months of 2022 decreased $2.2 million, or 29%, compared to the same period in 2021, primarily driven by a decrease in MMM product 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 2022. Net sales of our commercial products decreased in the first nine months of 2022 compared to the same period of 2021, reflecting the impact of decreased commercial sales during the third quarter of 2022 as well as the impacts in the timing, pace and size of commercial projects.

3236

Gross ~~loss~~Loss

~~Negative gross profit margin~~Gross loss was ~~$(26) thousand,~~$(0.2) million, or ~~(1)~~(9)% of net sales, for the ~~first~~third quarter of 2022. This compares with gross profit of $0.6 million, or 21% of net sales, in the ~~first quarter of 2021. Sequentially, this compares with gross profit of $0.2 million, or 8% of net sales, in the fourth~~third quarter of 2021. The year-over-year decrease in gross ~~margin rate~~profit was driven by (i) lower sales ~~dollars resulting in less leverage~~volume, an unfavorable impact of ~~our fixed cost portion~~$0.3 million, or 20% of ~~cost of goods sold, in combination with a negative~~net sales; (ii) an unfavorable product mix impact ~~due to product substitution and lower mix of military sales. The decrease in gross margin consists of a variable component~~ of approximately $0.5 million, or 15% decrease to gross margin rate period over period, as well as a slightly negative fixed cost component of negligible dollar impact or a 7% decrease in margin rate period over period. Gross margin for the first quarter of 2022 included unfavorable freight-in variances of $0.2 million, or 8%13% of net sales; (iii) an unfavorable net impact of $0.3 million, or 16% of net sales, ~~unfavorable price~~from our inventory reduction project; and ~~usage variances for material and labor~~(iv) a favorable impact from the reduction in fixed costs of $0.1 million or 4%2% of net ~~sales, as well as~~sales. Gross loss for the third quarter of 2022 also included unfavorable ~~inventory reserves~~freight-in variances of $0.1 million, or 6% of net ~~sales. Gross margin~~sales, while gross profit for the ~~first~~third quarter of 2021 included favorable price and usage variances for material and labor of ~~$0.2~~$0.4 million, or 19% of net sales.

Gross loss was $(0.1) million, or (2)% of net sales, for the first nine months of 2022 compared to a gross profit of $1.5 million, or 20% of net sales, for the first nine months of 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 12% of net sales, and unfavorable inventory and warranty reserves recorded of $0.1 million, or 5%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 ~~$0.5~~$0.4 million for the ~~first~~third quarter of 2022, down ~~23%~~9% from the ~~first~~third quarter of 2021. Product development expenses primarily relate to the development of our next generation of EnFocusTM and RedCap® ~~products as well as~~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. The decrease is primarily related to payroll expense and product testing associated with the development and launch of our ~~UVCD~~ultraviolet-C light disinfection product ~~portfolio.~~portfolio in 2021.

Selling, general and administrative

Selling, general and administrative expenses were ~~$2.1~~$1.8 million for the ~~first~~third quarter of 2022, down 4%8% as compared to ~~$2.2~~$2.0 million in the ~~first~~third quarter of 2021. The decrease in expenses from the ~~first~~third quarter of 2021 primarily relates to ~~a reduction~~reductions of ~~$0.3~~$0.2 million in payroll and payroll related expenses and $0.1 million in trade show and other marketing expenses. These decreases were offset by an increase of $0.1 million in ~~severance~~professional fees.

Selling, general and ~~an increase of $0.1~~administrative expenses were $5.9 million ~~in trade show expenses and marketing investment in our nUVo™ product line.~~

~~The primary drivers of the changes in expenses in~~for the first ~~quarter~~nine months of 2022, ~~versus~~compared to $6.5 million for the first ~~quarter~~nine months of ~~2021 were~~2021. The decrease is primarily due to decreases in payroll of $0.9 million, and $1.2 million, respectively, in payroll and payroll related expenses, $0.2 million in both first quarter 2022 and 2021 in professional and legal fees, $0.2 million in network and software expenses in both first quarter 2022 and 2021, and $0.2 million and $0.1 millionoffset by increases in trade show and other marketing costs ~~in the first quarter~~ of ~~2022~~$0.1 million, severance costs of $0.1 million and ~~first quarter~~recruiting and relocation fees of ~~2021, respectively.~~$0.1 million.

Restructuring

No restructuring expense was recorded for the three and nine months ended ~~March 31, 2022,~~September 30, 2022. For the three months ended September 30, 2021, approximately $1 thousand in restructuring expense was recorded, and for the nine months ended September 30, 2021, approximately ~~$19~~$21 thousand in restructuring credits were ~~recorded for the three months ended March 31, 2021.~~recorded. All restructuring ~~costs~~credits 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.

Other Expense (Income)

Interest expense

Interest expense was $0.2 million for the ~~first~~third quarter of 2022, compared to interest expense of ~~$0.1~~$0.2 million for the ~~first~~third quarter of 2021. ~~The increase in interest~~Interest expense is primarily related to interest and amortization attributable to the 2021 Streeterville Note, ~~as well as~~ the ~~amortization of debt costs related to~~2022 Streeterville Note and the Credit Facilities. The actual cash interest paid in each of the ~~first~~third quarter of 2022 and the third quarter of 2021 was ~~$78 thousand~~$0.1 million.

Interest expense was $0.7 million for the first nine months of 2022, compared to ~~$58 thousand in~~interest expense of $0.5 million for the first ~~quarter~~nine months of 2021. The increase in interest expense was primarily related to interest and amortization attributable to the 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.

Gain on forgiveness of PPP loan

Forgiveness income of ~~$801 thousand~~$0.8 million related to the Paycheck Protection Program (“PPP”) loan taken out during 2020 and forgiven in 2021 was recognized during the first ~~quarter~~half of 2021.

Employee Retention Tax Credit

During the year ended December 31, 2021, we recognized other income of $876 thousand related to eligible Employee Retention Tax Credit (“ERTC”) expenses incurred during the second and third quarters of 2021 for which we became eligible.

Other income and expenses

Other expenses were $20 thousand for the third quarter of 2022, compared to other expenses of $15 thousand for the third quarter of 2021. Other expenses were $49 thousand for the nine months ended September 30, 2022, compared to other expenses of $47 thousand for the nine months ended September 30, 2021. Other expenses are mainly comprised of bank and collateral management fees.

Other income of $30 thousand for the first ~~quarter~~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.

Other expenses were $11 thousand for the first quarter of 2022, compared to other expenses of $17 thousand for the first quarter of 2021. Other expenses are mainly comprised of bank and collateral management fees.

Provision for income taxes

Due to the operating losses incurred during the three and nine months ended ~~March 31,~~September 30, 2022 and 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.

Net loss

For the three months ended ~~March 31,~~September 30, 2022, our net loss of ~~$2.8~~$2.7 million increased ~~72%~~134% over the net loss for the three months ended ~~March 31,~~September 30, 2021 of ~~$1.6~~$1.1 million. The increase is mainly due to lower net sales in the third quarter of 2022.

For the nine months ended September 30, 2022, our net loss of $8.0 million increased 52% over the net loss for the nine months ended September 30, 2021 of $5.3 million. The increase is mainly due to lower net sales in the first ~~quarter~~three quarters of 2022, ~~and~~ the gain on the forgiveness of the PPP loan of $0.8 million recorded in the first quarter of ~~2021.~~2021 and the $0.9 million other income recorded during the third quarter of 2021 for the ERTC funds.

Financial condition

At ~~March 31,~~September 30, 2022, we had ~~$0.2 million~~$41 thousand in cash and a total of ~~$4.3~~$4.8 million of debt, including ~~$2.3~~$1.6 million outstanding under our Inventory Facility, ~~$0.8~~$0.4 million outstanding under our Receivables Facility, ~~and $1.2~~$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 ~~March 31,~~September 30, 2022, we ~~had~~no additional availability ~~of $0.5 million~~ under the Inventory Facility and ~~$0.4~~$0.2 million under the Receivables ~~Facility, for a total of $0.9 million of additional availability.~~Facility. We have historically incurred substantial losses, and as of ~~March 31,~~September 30, 2022, we had an accumulated deficit of ~~$141.6~~$146.7 million. Additionally, our sales have been concentrated among a few major customers and for the ~~three~~nine months ended ~~March 31,~~September 30, 2022, three customers accounted for approximately ~~55%~~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 ~~March 31,~~September 30, 2022.

Throughout 2021 and ~~the first quarter of~~ 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, our patented, breakthrough powerline control platform. We also continue to believe our proprietary RedCap® emergency backup lighting system also addresses a market need and will continue to help drive commercial sales for us as it has been well received in the market.

We brought the first of our UVCD products, the nUVo™ Traveler portable personal air disinfection device for in-vehicle and smaller spaces and the nUVo™ Tower portable air disinfection device for offices and homes, to market beginning in the fourth quarter of 2021, and we expect to evaluate the potential development of additional products in 2022. Our UVCD product line represents a new category of human wellness products. Initial sales in the first quarter of 2022 are building slowly as our ground-up sales initiatives are developed and as we gain market traction.

We plan to achieve profitability by growing our sales through existing ~~lighting,~~and new lighting and 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.

The restructuring and cost cutting initiatives taken throughout 2021 and ~~continuing into~~ 2022, as well as the June 2022 Private Placement, the December 2021 Private Placement and the June 2021 Equity Offering that strengthened our balance sheet, our 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”; see~~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 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 supply chain globally, and the ~~ongoing and lingering~~long-term economic impact from the COVID-19 pandemic that has 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 and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage ~~both~~ shortages of available components, ~~and~~ longer lead times in obtaining ~~components.~~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 in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:

•obtaining financing from traditional or non-traditional investment capital organizations or individuals;

•obtaining funding from the sale of our common stock or other equity or debt instruments; and

•obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:

•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 Executive Officer and permanent Chief Financial Officer,~~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.

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 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. Based 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. In accordance with one part of the plan submitted to the Staff, we successfully modified our outstanding January 2020 Warrants and in December 2020, we reclassified $1.4 million from warrant liability into equity. 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 December 31, 2020, our stockholders’ equity was $4,255,000, satisfying the Minimum Stockholders’ Equity Rule. At

December 31, 2021, our stockholders’ equity was $6,209,000 and at ~~March 31,~~September 30, 2022, our stockholders’ equity was ~~$3,432,000.~~$1,526,000.

Liquidity and capital resources

Cash

At ~~March 31,~~September 30, 2022, our cash balance was approximately ~~$0.2 million,~~$41 thousand, compared to approximately $2.7 million at December 31, 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):


		Three months ended March 31,					Nine months ended September 30,
		2022		2021			2022		2021
Net cash used in operating activities	Net cash used in operating activities	$	(2,703)	$	(2,783)	Net cash used in operating activities	$	(6,241)	$	(8,420)

Net cash used in investing activities	Net cash used in investing activities	$	(35)	$	(109)	Net cash used in investing activities	$	(41)	$	(311)

Net cash provided by financing activities	Net cash provided by financing activities	$	281	$	1,604	Net cash provided by financing activities	$	3,641	$	6,934

Net cash used in operating activities

Net cash used in operating activities was ~~$2.7~~$6.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022. The net loss was ~~$2.8~~$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 ~~three~~nine months ended ~~March 31,~~September 30, 2022, we generated ~~$0.4~~$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. We used $0.1 million through the timing of collection of accounts receivable, $0.2~~payments, $0.5 million due to changes in accrued and other liabilities (primarily due to a decrease in accrued ~~payroll of $0.2 million; this decrease was slightly offset by an increase of $0.1 million in accrued severance)~~payroll), and $0.3 million from changes in deferred revenue.

Net cash used in operating activities was ~~$2.8~~$8.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021. The net loss was ~~$1.6~~$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 ~~three~~nine months ended ~~March 31,~~September 30, 2021, we generated ~~$1.0~~$0.4 million ~~in cash from~~through the timing of collection of accounts ~~payable~~receivable and $0.1 million due to the timing of inventory receipts and ~~payments, and $0.5~~payments. We used $0.1 million through the timing of ~~collection~~the receipt of ~~accounts receivable. We used $2.0~~inventory against short-term deposits and $2.1 million for ~~inventories~~inventory primarily due to ~~the timing~~global supply chain challenges that are impacting our inventory purchasing strategy, leading to a buildup of inventory ~~receipts,~~ and weinventory components in an effort to manage both shortages of available components and longer lead times in obtaining components. We also used ~~$0.2~~$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 ~~$0.1~~$0.2 million in accrued accounting and legal fees and $0.2 million in accrued ~~bonuses; offset by increases of~~bonuses), and $0.1 million from changes in ~~accrued payroll).~~prepaid and other current assets.

Net cash used in investing activities

Net cash used in investing activities was ~~$35~~$41 thousand for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and resulted primarily from the purchase of tooling.

For the ~~three~~nine months ended ~~March 31,~~September 30, 2021, net cash used in investing activities was ~~$109~~$311 thousand and resulted primarily from the purchase of software and a ~~vehicle to support production operations, as well as~~ development of the ~~e-commerce platform.~~mUVeTM ultraviolet-C light disinfection robot. The mUVeTM ultraviolet-C light disinfection robots were fully written off in the third quarter of 2022.

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Net cash provided by financing activities

Net cash provided by financing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 was ~~$0.3~~$3.6 million, primarily related to proceeds of $450 thousand from the 2022 Promissory Note, net proceeds of $1.8 million from the ~~Credit Facilities~~2022 Streeterville Note and net proceeds of ~~$0.9~~$3.2 million from the June 2022 Private Placement. These proceeds were offset slightly by ~~$0.6~~$1.4 million in payments made against the 2021 Streeterville ~~Note.~~Note and $0.2 million in net payments made on the Credit Facilities.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, all of the December 2021 Pre-Funded Warrants as well as the June 2022 Pre-Funded Warrants were exercised. ~~At March 31,~~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 ~~remain~~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 ~~March 31,~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2021 was ~~$1.6~~$6.9 million, primarily related to $4.5 million of net proceeds from the ~~Credit Facilities~~June 2021 Equity Offering, $1.5 million of ~~$1.1 million and~~net proceeds from the 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 remained outstanding at September 30, 2021 with a weighted average exercise price of $3.59 per share.

Contractual and other obligations

Commitments

There have been no other material changes to our contractual and other obligations as compared to those included in our 2021 Annual Report.

Critical accounting policies

There have been no material changes to our critical accounting policies as compared to those included in our 2021 Annual Report.

Certain risks and concentrations

One offshore supplier accounted for approximately ~~19%~~17% and 18%, respectively, of our total expenditures for the three and nine. months ended ~~March 31,~~September 30, 2022. For the three and nine months ended ~~March 31,~~September 30, 2021, ~~this same~~one offshore supplier accounted for approximately ~~26%~~19% and 30%, respectively, of total expenditures.

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 ~~Interim~~ 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 ~~Interim~~ Chief Executive ~~Officer and Chief Financial~~ Officer, the effectiveness of our disclosure controls and procedures, as of ~~March 31,~~September 30, 2022, the end of the period covered by this Quarterly Report. Management, with the participation of our ~~Interim~~ 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 ~~Interim~~ Chief Executive ~~Officer and Chief Financial~~ Officer concluded that our disclosure controls and procedures were effective as of ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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

~~None.~~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 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.

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ITEM 6. EXHIBITS

EXHIBIT INDEX


Exhibit Number			Description of Documents
3.1			Certificate of Incorporation of Energy Focus, Inc. (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on May 1, 2006).
3.2			Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on June 21, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
3.3			Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on October 9, 2012 (incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
3.4			Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on October 28, 2013 (incorporated by reference to Exhibit 3.4 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
3.5			Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on July 16, 2014 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014).
3.6			Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on July 24, 2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 27, 2015).
3.7			Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on January 15, 2020 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
3.8			Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019).
3.9			Amendment to the Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 30, 2019).
3.10			Amendment to the Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on January 15, 2020 (incorporated by reference to Exhibit 3.10 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
3.11			Certificate of Amendment of Certificate of Incorporation, dated June 11, 2020 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 11, 2020).
3.12			Bylaws of Energy Focus, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 18, 2020).
3.13			Certificate of Ownership and Merger, Merging Energy Focus, Inc., a Delaware corporation, into Fiberstars, Inc., a Delaware corporation, filed with the Secretary of State of the State of Delaware on May 4, 2007 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2007).
~~10.1~~10.1+			~~Separation Agreement and Release,~~Chief Executive Officer Offer Letter dated ~~as of February 11,~~September 6, 2022 between ~~the Company~~Lesley A. Matt and ~~James Tu (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form~~ ~~8-K filed on February 17, 2022~~).Energy Focus, Inc.
10.2			Promissory Note, ~~Purchase Agreement, dated~~date d as of ~~April 21,~~September 16, 2022 , by and between the Company and ~~Streeterville Capital, LLC~~Mei-Yun Huang (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on ~~April 25,~~September 22, 2022).
10.3			Promissory Note, dated as of ~~April 21,~~October 27, 2022, by and between the Company and ~~Streeterville Capital, LLC (incorporated~~Jay Huang
10.4			Promissory Note, dated as of November 4, 2022, by ~~reference to Exhibit 10.2 to~~and between the ~~Registrant’s Current Report on Form 8-K filed on April 25, 2022).~~Company and Jay Huang
10.5			Promissory Note, dated as of November 9, 2022, by and between the Company an d Mei-Yu n Huang
31.1+			Certification of ~~Chief~~Principal Executive Officer ~~Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.2+~~			~~Certification of Chief~~and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1++			Certification of ~~Chief~~Principal Executive Officer and ~~Chief~~Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*101			The following financial information from our Quarterly Report for the quarter ended ~~March 31,~~September 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at ~~March 31,~~September 30, 2022 and December 31, 2021, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, (v) Condensed Consolidated Statements of Cash Flows for the three and ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, and (vi) the Notes to Condensed Consolidated Financial Statements.
*104			Cover Page Interactive Data File (embedded within the Inline XBRL document)

* 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.

4247

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:	~~May 12,~~November 10, 2022	By:	/s/ ~~Stephen Socolof~~Lesley A. Matt
			~~Stephen Socolof~~Lesley A. Matt
			~~Chairman and Interim~~ Chief Executive Officer
			(Principal Executive ~~Officer)~~



~~Date:~~	~~May 12, 2022~~	~~By:~~	~~/s/ Tod A. Nestor~~
			~~Tod A. Nestor~~
			~~Chief Operating~~ Officer and ~~Chief Financial Officer~~
			(Principal Financial ~~and Accounting~~ Officer)