UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2022~~2023


☐			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 November 7, ~~2022~~2023 was ~~9,577,026.~~4,348,690.

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
			Page
ITEM 1.	FINANCIAL STATEMENTS
	a.	Condensed Consolidated Balance Sheets as of September 30, ~~2022~~2023 (Unaudited) and December 31, ~~2021~~2022	4
	b.	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 (Unaudited)	6

	c.	Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 (Unaudited)	7
	d.	Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 (Unaudited)	9
	e.	Notes to the Condensed Consolidated Financial Statements (Unaudited)	11
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3231
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		4440
ITEM 4.	CONTROLS AND PROCEDURES		4440

PART II - OTHER INFORMATION

ITEM 1.	~~LEGAL PROCEEDINGS~~		45
~~ITEM 1A.~~	~~RISK FACTORS~~		45
~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~		45
~~ITEM 3.~~	~~DEFAULTS UPON SENIOR SECURITIES~~		45
~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~		45
~~ITEM 5.~~	~~OTHER INFORMATION~~		45
~~ITEM~~ 6.	EXHIBITS		4642
	SIGNATURES		4843

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~~2022 and other matters described in this Quarterly Report and our other filings with the Securities and Exchange Commission generally. Some of these factors include:

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

•our ability to maintain compliance with the continued listing standards of The Nasdaq Stock Market LLC (“Nasdaq”);

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

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

•our ability to realize synergies with our strategic investor;

•instability in the U.S. and global economies and business interruptions experienced by us, our customers and our suppliers, particularly in light of supply chain ~~issues,~~constraints and ~~related~~other long-term impacts ~~on travel, trade and business operations, as a result~~ of the coronavirus (“COVID-19”) pandemic;

•the competitiveness and market acceptance of our light-emitting diode (“LED”) lighting and control technologies and products;

•our ability to compete effectively against companies with lower prices or cost structures, greater resources, or more rapid development capabilities, and new competitors in our target markets;

•our ability to extend our product portfolio into new applications and end ~~markets, including consumer products;~~markets;

•our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters;

•the timing of large customer orders, significant expenses and fluctuations between demand and capacity as we manage inventory and invest in growth opportunities;

•our ability to successfully scale our network of sales representatives, agents, distributors and other channel partners to compete with the sales reach of larger, established competitors;

•our ability to implement plans to increase sales and control expenses;

•our reliance on a limited number of customers for a significant portion of our revenue, and our ability to maintain or grow such sales levels;

•our ability to add new customers to reduce customer concentration;

•our ability to attract and retain a new chief financial officer;

•our ability to manage the size of our workforce while continuing to attract, develop and retain qualified personnel, and to do so in a timely manner;

•our ability to diversify our reliance on a limited number of third-party suppliers and development partners, our ability to manage third-party product development and obtain critical components and finished products on acceptable terms and of acceptable quality despite ongoing global supply chain challenges, and the impact of our fluctuating demand on the stability of such suppliers;

•our ability to timely, efficiently and cost-effectively transport products from our third-party suppliers by ocean marine and other logistics channels despite global supply chain and logistics disruptions;

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

•the macro-economic conditions, including rising interest rates and recessionary trends, in the United States and in other markets in which we operate or secure products, which could affect our ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely and cost-effective manner;

•our dependence on military maritime customers and on the levels and timing of government funding available to such customers, as well as the funding resources of our other customers in the public sector and commercial markets;

•business interruptions resulting from geopolitical actions such as war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires, or from health epidemics or pandemics or other contagious outbreaks;

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

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

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

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

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

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

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

•our ability to maintain effective internal controls and otherwise comply with our obligations as a public ~~company; and~~

•~~our ability to regain and maintain compliance with the continued listing standards of The Nasdaq Stock Market.~~company.

In light of the foregoing, we caution you not to place undue reliance on our forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.

Energy Focus®, Intellitube®, RedCap®, and EnFocus™ are our registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.

ITEM 1. FINANCIAL STATEMENTS

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash	Cash	$	41	$	2,682	Cash	$	1,691	$	52
Trade accounts receivable, less allowances of $11 and $14, respectively		1,007		1,240
Trade accounts receivable, less allowances of $76 and $26, respectively						Trade accounts receivable, less allowances of $76 and $26, respectively	844		445
Inventories, net	Inventories, net	6,156		7,866		Inventories, net	4,901		5,476
Short-term deposits	Short-term deposits	610		712		Short-term deposits	732		592
Prepaid and other current assets	Prepaid and other current assets	788		924		Prepaid and other current assets	189		232

Receivable for claimed Employee Retention Tax Credit						Receivable for claimed Employee Retention Tax Credit	—		445
Total current assets	Total current assets	8,602		13,424		Total current assets	8,357		7,242

Property and equipment, net	Property and equipment, net	433		675		Property and equipment, net	79		76

Operating lease, right-of-use asset	Operating lease, right-of-use asset	1,248		292		Operating lease, right-of-use asset	967		1,180

Total assets	Total assets	$	10,283	$	14,391	Total assets	$	9,403	$	8,498

LIABILITIES	LIABILITIES					LIABILITIES
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	1,886	$	2,235	Accounts payable	$	2,330	$	2,204
Accounts payable -related party						Accounts payable -related party	272		—
Accrued liabilities	Accrued liabilities	82		265		Accrued liabilities	116		145
Accrued legal and professional fees	Accrued legal and professional fees	66		104		Accrued legal and professional fees	89		—
Accrued payroll and related benefits	Accrued payroll and related benefits	380		718		Accrued payroll and related benefits	172		261
Accrued sales commissions	Accrued sales commissions	60		57		Accrued sales commissions	46		76

Accrued warranty reserve	Accrued warranty reserve	242		295		Accrued warranty reserve	147		183
Deferred revenue		7		268

Operating lease liabilities	Operating lease liabilities	189		325		Operating lease liabilities	216		198

Finance lease liabilities		—		1

Promissory notes payable, net of discounts and loan origination fees						Promissory notes payable, net of discounts and loan origination fees	1,266		2,618
Related party promissory notes payable						Related party promissory notes payable	—		814

Notes payable, net of discounts and loan origination fees		1,521		1,719

Credit line borrowings, net of loan origination fees						Credit line borrowings, net of loan origination fees	—		1,447

Related party promissory note payable		451		—

Credit line borrowings, net of loan origination fees		1,976		2,169
Total current liabilities	Total current liabilities	6,860		8,156		Total current liabilities	4,654		7,946

(continued on the next page)

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

September 30,
2022 December 31,
2021
(Unaudited)
Operating lease liabilities, net of current portion 1,082 26
Notes payable, net of current maturities, discounts and loan origination fees 815 —
Total liabilities 8,757 8,182
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.0001 per share:
Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at September 30, 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:
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 1 —
Additional paid-in capital 148,238 144,953
Accumulated other comprehensive loss (3) (3)
Accumulated deficit (146,710) (138,741)
Total stockholders' equity 1,526 6,209
Total liabilities and stockholders' equity $ 10,283 $ 14,391


	September 30, 2023		December 31, 2022
	(Unaudited)


Operating lease liabilities, net of current portion	857		1,029




Total liabilities	5,511		8,975

STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.0001 per share:
Authorized: 5,000,000 shares (3,300,000 designated as Series A Convertible Preferred Stock) at September 30, 2023 and December 31, 2022
Issued and outstanding: 876,447 at September 30, 2023 and December 31, 2022	—		—
Common stock, par value $0.0001 per share:
Authorized: 50,000,000 shares at September 30, 2023 and December 31, 2022
Issued and outstanding: 4,348,690 at September 30, 2023 and 1,406,920* at December 31, 2022	—		1
Additional paid-in capital	156,361		148,545
Accumulated other comprehensive loss	(3)		(3)
Accumulated deficit	(152,466)		(149,020)
Total stockholders' equity (deficit)	3,892		(477)
Total liabilities and stockholders' equity (deficit)	$	9,403	$	8,498
* Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

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

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,					Nine months ended September 30,
		2022		2021		2022		2021			2023			2022		2023		2022
Net sales	Net sales	$	1,764	$	2,749	$	5,305	$	7,460	Net sales	$	1,339		$	1,764	$	3,324	$	5,305
Cost of sales	Cost of sales	1,927		2,186		5,385		5,951		Cost of sales	1,387			1,927		3,176		5,385
Gross (loss) profit	Gross (loss) profit	(163)		563		(80)		1,509		Gross (loss) profit	(48)			(163)		148		(80)

Operating expenses:	Operating expenses:									Operating expenses:
Product development	Product development	366		404		1,222		1,427		Product development	142			366		443		1,222
Selling, general, and administrative	Selling, general, and administrative	1,802		1,968		5,893		6,454		Selling, general, and administrative	713			1,802		2,911		5,893
Loss on write-off of fixed assets	Loss on write-off of fixed assets	76		—		76		—		Loss on write-off of fixed assets	—			76		—		76
Restructuring expense (recovery)		—		1		—		(21)

Total operating expenses	Total operating expenses	2,244		2,373		7,191		7,860		Total operating expenses	855			2,244		3,354		7,191
Loss from operations	Loss from operations	(2,407)		(1,810)		(7,271)		(6,351)		Loss from operations	(903)			(2,407)		(3,206)		(7,271)

Other expenses (income):	Other expenses (income):									Other expenses (income):
Interest expense		235		177		679		520
Gain on forgiveness of Paycheck Protection Program loan		—		—		—		(801)
Interest expense, net										Interest expense, net	34			235		226		679

Other income	Other income	—		(862)		(30)		(862)		Other income	—		—	—		(16)		(30)

Other expenses	Other expenses	20		15		49		47		Other expenses	7			20		28		49

Net loss	Net loss	$	(2,662)	$	(1,140)	$	(7,969)	$	(5,255)	Net loss	$	(944)		$	(2,662)	$	(3,444)	$	(7,969)

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	$	(0.29)	$	(0.22)	$	(1.05)	$	(1.22)	Net loss	$	(0.27)		$	(2.03)	$	(1.20)	$	(7.33)

Weighted average shares of common stock outstanding:	Weighted average shares of common stock outstanding:									Weighted average shares of common stock outstanding:
Basic and diluted		9,190		5,086		7,608		4,309
Basic and diluted *										Basic and diluted *	3,514			1,313		2,868		1,087
* Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.										* Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

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

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
Shares Amount Shares Amount
Balance at December 31, 2021 876 $ — 6,368 $ — $ 144,953 $ (3) $ (138,741) $ 6,209
Issuance of common stock upon the exercise of warrants — — 85 — — — — —
Stock-based compensation — — — — 44 — — 44
Net loss for the three months ended March 31, 2022 — — — — — — (2,821) (2,821)
Balance at March 31, 2022 876 $ — 6,453 $ — $ 144,997 $ (3) $ (141,562) $ 3,432
Issuance of common stock under employee stock option and stock purchase plans — — 45 — 5 — — 5
Issuance of common stock and warrants — — 1,313 1 3,499 — — 3,500
Offering costs on issuance of common stock and warrants — — — — (334) — — (334)
Stock-based compensation — — — — 54 — — 54
Net loss for the three months ended June 30, 2022 — — — — — — (2,486) (2,486)
Balance at June 30, 2022 876 $ — 7,811 $ 1 $ 148,221 $ (3) $ (144,048) $ 4,171
Issuance of common stock under employee stock option and stock purchase plans — — 1 — — — — —
Issuance of common stock and warrants — — 1,379 — — — — —
Stock-based compensation — — — — 17 — — 17
Net loss for the three months ended September 30, 2022 — — — — — — (2,662) (2,662)
Balance at September 30, 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 (Deficit)
	Shares	Amount		Shares*		Amount

Balance at December 31, 2022	876	$	—	1,407		$	1		$	148,545	$	(3)	$	(149,020)	$	(477)

Issuance of common stock	—	—		285		1			3,024		—		—		3,025
Stock issued in exchange transactions	—	—		1,057		—			1,716		—		—		1,716




Stock-based compensation	—	—		—		—			26		—		—		26
Impact of adoption of ASU 2016-13 - CECL	—	—		—		—			—		—		(2)		(2)
Net loss for the three months ended March 31, 2023	—	—		—		—			—		—		(1,333)		(1,333)
Balance at March 31, 2023	876	$	—	2,749		$	2		$	153,311	$	(3)	$	(150,355)	$	2,955
Issuance of common stock	—	—		747		—			1,304		—		—		1,304

Par value adjustment due to reverse stock split	—	—		—		(2)			2		—		—		—
Reduction in equity due to costs from reverse stock split	—	—		—		—			(16)		—		—		(16)


Stock-based compensation	—	—		—		—			23		—		—		23
Net loss for the three months ended June 30, 2023	—	—		—		—			—		—		(1,167)		(1,167)
Balance at June 30, 2023	876	$	—	$	3,496	$	—		$	154,624	$	(3)	$	(151,522)	$	3,099
Issuance of common stock	—	—		853		—			1,750		—		—		1,750



Stock-based compensation	—	—		—		—			(13)		—		—		(13)

Net loss for the three months ended September 30, 2023	—	—		—		—			—		—		(944)		(944)
Balance at September 30, 2023	876	$	—	4,349		$	—		$	156,361	$	(3)	$	(152,466)	$	3,892

*Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

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

(continued on next page)

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
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


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

Balance at December 31, 2021	876	$	—	910	$	—		$	144,953	$	(3)	$	(138,741)	$	6,209




Issuance of common stock upon the exercise of warrants	—	—		12	—			—		—		—		—



Stock-based compensation	—	—		—	—			44		—		—		44


Net loss for the three months ended March 31, 2022	—	—		—	—			—		—		(2,821)		(2,821)
Balance at March 31, 2022	876	$	—	922	$	—		$	144,997	$	(3)	$	(141,562)	$	3,432
Issuance of common stock under employee stock option and stock purchase plans	—	—		6	—			5		—		—		5
Issuance of common stock and warrants	—	—		188	1			3,499		—		—		3,500
Offering costs on issuance of common stock and warrants	—	—		—	—			(334)		—		—		(334)



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

Net loss for the three months ended June 30, 2022	—	—		—	—			—		—		(2,486)		(2,486)
Balance at June 30, 2022	876	$	—	1,116	$	1		$	148,221	$	(3)	$	(144,048)	$	4,171

Issuance of common stock and warrants	—	—		197	—			—		—		—		—

Stock-based compensation	—	—		—	—			17		—		—		17
Net loss for the three months ended September 30, 2022	—	—		—	—			—		—		(2,662)		(2,662)
Balance at September 30, 2022	876	$	—	1,313	$	1		$	148,238	$	(3)	$	(146,710)	$	1,526

*Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

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

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Cash flows from operating activities:	Cash flows from operating activities:									Cash flows from operating activities:
Net loss	Net loss	$	(2,662)	$	(1,140)	$	(7,969)	$	(5,255)	Net loss	$	(944)	$	(2,662)	$	(3,444)	$	(7,969)
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	—		(862)		(30)		(862)		Other income	(40)		—		(40)		(30)
Gain on forgiveness of Paycheck Protection Program loan		—		—		—		(801)

Depreciation	Depreciation	42		43		129		143		Depreciation	8		42		24		129
Stock-based compensation	Stock-based compensation	17		39		115		387		Stock-based compensation	(13)		17		36		115

Provision for doubtful accounts receivable	Provision for doubtful accounts receivable	1		2		(3)		10		Provision for doubtful accounts receivable	—		1		50		(3)
Provision for slow-moving and obsolete inventories	Provision for slow-moving and obsolete inventories	220		(70)		164		(9)		Provision for slow-moving and obsolete inventories	62		220		(68)		164
Provision for warranties	Provision for warranties	(74)		1		(53)		13		Provision for warranties	—		(74)		(37)		(53)

Amortization of loan discounts and origination fees	Amortization of loan discounts and origination fees	87		61		247		158		Amortization of loan discounts and origination fees	59		87		168		247
Loss on write-off of property and equipment	Loss on write-off of property and equipment	76		—		76		—		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	139		(500)		240		390		Accounts receivable	(46)		139		(449)		240
Inventories	Inventories	792		444		1,546		(2,105)		Inventories	340		792		643		1,546
Short-term deposits	Short-term deposits	(110)		(62)		(51)		87		Short-term deposits	(117)		(110)		(140)		(51)
Prepaid and other assets	Prepaid and other assets	46		(91)		162		(119)		Prepaid and other assets	28		46		488		162
Accounts payable	Accounts payable	629		(164)		(92)		(82)		Accounts payable	(459)		629		398		(92)
Accrued and other liabilities	Accrued and other liabilities	(101)		53		(461)		(305)		Accrued and other liabilities	87		(101)		1		(461)
Deferred revenue	Deferred revenue	7		(69)		(261)		(70)		Deferred revenue	—		7		—		(261)
Total adjustments	Total adjustments	1,771		(1,175)		1,728		(3,165)		Total adjustments	(91)		1,771		1,074		1,728
Net cash used in operating activities	Net cash used in operating activities	(891)		(2,315)		(6,241)		(8,420)		Net cash used in operating activities	(1,035)		(891)		(2,370)		(6,241)
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	(9)		(100)		(41)		(311)		Acquisitions of property and equipment	(27)		(9)		(27)		(41)

Net cash used in investing activities	Net cash used in investing activities	(9)		(100)		(41)		(311)		Net cash used in investing activities	(27)		(9)		(27)		(41)

(continued on next page)

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Cash flows from financing activities (sources / (uses) of cash):	Cash flows from financing activities (sources / (uses) of cash):									Cash flows from financing activities (sources / (uses) of cash):
Proceeds from the issuance of common stock and warrants	Proceeds from the issuance of common stock and warrants	—		—		3,500		5,000		Proceeds from the issuance of common stock and warrants	1,750		—		6,079		3,500
Proceeds from the exercise of warrants		—		—		—		527

Offering costs paid on the issuance of common stock and warrants	Offering costs paid on the issuance of common stock and warrants	—		(1)		(334)		(470)		Offering costs paid on the issuance of common stock and warrants	—		—		—		(334)
Costs related to reverse stock-split										Costs related to reverse stock-split	—		—		(16)		—

Principal payments under finance lease obligations	Principal payments under finance lease obligations	—		(1)		(1)		(3)		Principal payments under finance lease obligations	—		—		—		(1)
Proceeds from exercise of stock options and employee stock purchase plan purchases	Proceeds from exercise of stock options and employee stock purchase plan purchases	—		—		5		59		Proceeds from exercise of stock options and employee stock purchase plan purchases	—		—		—		5
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		—

Payments on the 2021 Streeterville Note										Payments on the 2021 Streeterville Note	—		(410)		—		(1,435)
Proceeds from the 2022 Streeterville Note										Proceeds from the 2022 Streeterville Note	—		—		—		2,000
Payments on the 2022 Streeterville Note										Payments on the 2022 Streeterville Note	(125)		—		(625)		—
Proceeds from the related party promissory note payable	Proceeds from the related party promissory note payable	450		—		450		—		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

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

Net payments on proceeds from the credit line borrowings - Credit Facilities										Net payments on proceeds from the credit line borrowings - Credit Facilities	(188)		58		(1,402)		(215)
Net cash provided by financing activities	Net cash provided by financing activities	3		1,127		3,641		6,934		Net cash provided by financing activities	1,437		3		4,036		3,641

Net decrease in cash		(897)		(1,288)		(2,641)		(1,797)
Net increase (decrease) in cash										Net increase (decrease) in cash	375		(897)		1,639		(2,641)
Cash, beginning of period	Cash, beginning of period	938		1,669		2,682		2,178		Cash, beginning of period	1,316		938		52		2,682
Cash, end of period	Cash, end of period	$	41	$	381	$	41	$	381	Cash, end of period	$	1,691	$	41	$	1,691	$	41

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

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and ~~controls systems products.~~controls. We develop, market, and sell ~~high quality~~high-quality light-emitting diode (“LED”) lighting and ~~controls~~control 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 and productivity and increased human health and wellness through advanced LED retrofit 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 applications. We are also evaluating adjacent technologies, including Gallium Nitride (“GaN”) based power supplies and ~~consumer applications. After evaluating~~additional market ~~demand and supply chain challenges~~opportunities for energy solution products that support sustainability in our ~~ultraviolet-C light disinfection products, we have revised our marketing strategy to primarily focus on our MMM and commercial and industrial lighting and control products.~~existing channels.

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The significant accounting policies of our Company, which are summarized below, are consistent with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect practices appropriate to the business in which we operate. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our operations.

We have prepared the accompanying financial data for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (“~~2021~~2022 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, ~~2021~~2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, and Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2023 and 2022.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Going Concern and Nasdaq Continued Listing Requirements Compliance

Due to our financial performance as of September 30, 2023 and December 31, 2022, including net losses of $3.4 million for the nine months ended September 30, 2023 and $10.3 million for the twelve months ended December 31, 2022, and ~~2021.~~total cash used in operating activities of $2.4 million for the nine months ended September 30, 2023 and $6.7 million for the twelve months ended December 31, 2022, we determined that substantial doubt about our ability to continue as a going concern continues to exist at September 30, 2023. As a result of restructuring actions and initiatives, we have tailored our operating expenses to be more in line with our expected sales volumes; however, we continue to incur losses and have a substantial accumulated deficit.

Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage both shortages of available components and longer lead times in obtaining components while balancing the development and implementation of an inventory reduction plan. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:

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

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

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

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

•additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;

•loans or other debt instruments may have terms or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or the Company’s Board of Directors (the “Board of Directors”); and

•the current environment in the capital markets and volatile interest rates, combined with our capital constraints, may prevent us from being able to obtain adequate debt financing.

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

Nasdaq Capital Market Compliance

Our Common Stock is listed on the Nasdaq Capital Market, which has as one of its continued listing requirements a minimum bid price of at least $1.00 per share. On August 23, 2022, we received a letter from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market notifying us that we were no longer in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price for our common stock was below the minimum $1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until February 20, 2023, to regain compliance with the Bid Price Rule. During the initial compliance period, our Common Stock continued to trade on the Nasdaq Capital Market, but did not satisfy the Bid Price Rule.

On November 16, 2022, we received a letter from the Staff notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”). Our Form 10-Q for the Quarterly Period Ended September 30, 2022 filed on November 10, 2022 reflected that our stockholders’ equity as of September 30, 2022 was $1.5 million. Based on our timely submission of our plan to regain compliance (the “Plan”), Nasdaq granted us an extension through May 15, 2023 to regain compliance with the Minimum Stockholders’ Equity Rule.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

On February 21, 2023, we received written notification (the “Bid Price Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and our common stock is subject to delisting from Nasdaq. On February 24, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the delisting (the “Appeal”). Under Nasdaq rules, the delisting of the Company’s common stock was stayed during the pendency of the Appeal and, during such time, the Company’s common stock continued to be listed on Nasdaq.

On March 28, 2023, the Company received written notification (the “Additional Staff Determination”) from the Staff stating that (i) following the Bid Price Notification, and in accordance with Listing Rule 5810(c)(2)(A), Nasdaq is no longer permitted to consider the stockholders’ equity compliance plan, (ii) the Additional Staff Determination serves as an additional basis for delisting the Company’s common stock from Nasdaq and (iii) the Panel will consider the Additional Staff Determination in rendering a determination regarding the continued listing of the Company’s common stock on Nasdaq.

On April 6, 2023, the Company participated in the Appeal before the Panel. The Company provided an update to the Panel on the Company’s substantial progress made towards the previously submitted Plan during the three months ended March 31, 2023, and requested the Panel grant the Company an exception to (1) re-allow the previously granted exception until May 15, 2023 for the Company to regain compliance with the Minimum Stockholders’ Equity Rule and (2) grant an exception allowing the Company up to 180 days following the Bid Price Notification to regain compliance with the Bid Price Rule by effecting a reverse stock split following stockholder approval at the Company’s 2023 annual meeting of stockholders. On May 1, 2023, the Panel granted the Company’s request (the “Panel Decision”) to continue the Company’s listing on Nasdaq, subject to the following conditions: (1) on or before May 15, 2023, the Company shall file with the SEC its quarterly report for the three months ended March 31, 2023 demonstrating compliance with the Minimum Stockholders’ Equity Rule and (2) on or before July 7, 2023, the Company shall demonstrate compliance with the Bid Price Rule.

On July 27, 2023, the Company received written notification from the Staff stating that the Company has regained compliance with the Bid Price Rule and the Minimum Stockholders’ Equity Rule, as required by the Panel Decision. Pursuant to Nasdaq Listing Rule 5815(d)(4)(B), the Company will be subject to a mandatory panel monitor for a period of one year from July 27, 2023 (the “Monitoring Period”). If, within the Monitoring Period, the Staff finds the Company again out of compliance with the Minimum Stockholders’ Equity Rule, notwithstanding Nasdaq Listing Rule 5810(c)(2), the Company will not be permitted to provide the Staff with a plan of compliance with respect to that deficiency and the Staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Nasdaq Listing Rule 5810(c)(3). Instead, the Staff will issue a delist determination letter and the Company will have an opportunity to request a new hearing with the initial Panel or a newly convened hearings panel if the initial Panel is unavailable. The Company will have the opportunity to respond and present to the Panel as provided by Nasdaq Listing Rule 5815(d)(4)(C). The Company’s common stock may be at that time delisted from Nasdaq.

As of the date of this Quarterly Report, the Company believes it has maintained compliance with the Minimum Stockholders’ Equity Rule for continued listing on the Nasdaq Capital Market. To become compliant with the Bid Price Rule, the Company effected a 1-for-7 reverse stock split to increase the per share trading price of the common stock effective on June 16, 2023 (See Note 9, “Stockholders’ Equity”).

However, there can be no assurance that the Company will be able to maintain compliance with the Minimum Stockholders’ Equity Rule, Bid Price Rule, or other Nasdaq listing requirements. If the Company fails to maintain compliance with Nasdaq’s continued listing standards in accordance with the Panel’s decision, the Company’s common stock will be subject to delisting from Nasdaq.

Use of estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts 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. The Company began using estimates for its calculation of allowance for doubtful accounts receivable under Accounting Standards Codification (“ASC”) 326, Measurement of Credit Losses on

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Financial Instruments (“CECL”) commencing in 2023. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-lived assets for impairment ~~requires~~require considerable judgment. Actual results could differ from those estimates and such differences could be material.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~(Unaudited)~~

~~Certain risks and concentrations~~

We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows:

For the three months ended September 30, 2022, sales to a regional commercial lighting retrofit company accounted for approximately 32% of net sales. For the three months ended September 30, 2021, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately 19%, 17% and 27% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 36% of net sales for the same period.

For the nine months ended September 30, 2022, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company, and a commercial building system provider, accounted for approximately 13%, 15%, and 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 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 regional commercial lighting retrofit company, a commercial building systems provider, and a U.S. Navy mechanical contractor accounted for approximately 25%, 12%, and 12% of net trade accounts receivable, respectively, at 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 17% and 18%, respectively, of our total expenditures for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, one offshore supplier accounted for approximately 19% and 30%, respectively, of total expenditures.

At September 30, 2022, one offshore supplier accounted for approximately 45% of our trade accounts payable balance. At December 31, 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.

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


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Net sales:	Net sales:									Net sales:
Commercial	Commercial	$	1,288	$	1,522	$	3,397	$	3,513	Commercial	$	498	$	1,288	$	1,261	$	3,397
MMM products	MMM products	476		1,227		1,908		3,947		MMM products	841		476		2,063		1,908
Total net sales	Total net sales	$	1,764	$	2,749	$	5,305	$	7,460	Total net sales	$	1,339	$	1,764	$	3,324	$	5,305

Accounts Receivable

Our trade accounts receivable consists of amounts billed to and currently due from customers. ~~Our~~Substantially all of our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We 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 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 forward-looking customer ~~creditworthiness~~credit-worthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.

Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases for major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.

Through November 2022, we utilized a third-party account receivable insurance program with a very high credit worthy insurance company where we had the large majority of the accounts receivable arising during the policy term insured with a portion of self-retention. This third party also provided credit-worthiness ratings and metrics that significantly assisted us in evaluating the credit-worthiness of both existing and new customers. Although the insurance policy is no longer in place, all invoices issued under the previous coverage period are still covered under the policy.

On January 1, 2023, the Company adopted ASC 326. The standard adds to U.S. GAAP an impairment model known as the CECL model, which is based on expected losses rather than incurred losses. This standard only impacts the Company’s trade receivables. The Company decided to use the roll rate method of valuing its reserve for trade receivables. The reserve

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

is based on a careful review of past delinquencies and forward-looking considerations, such as customer responsiveness. This resulted in a $2 thousand adjustment to Retained Earnings as of January 1, 2023 and charges to bad debt expense of $12 thousand in the first quarter of 2023, $3 thousand in the second quarter of 2023, and $(14) thousand in the third quarter of 2023.

Pursuant to ASC 606, Revenue Recognition, contract assets and contract liabilities as of the beginning and ending of the reporting periods must be disclosed. Below is the breakout of the Company’s contract assets for such periods:



	September 30, 2023		December 31, 2022		January 01, 2022
Gross Accounts Receivable	$	920	$	471	$	1,254
Less: Allowance for Doubtful Accounts	(76)		(26)		(14)
Net Accounts Receivable	$	844	$	445	$	1,240

Geographic information

All of our long-lived fixed assets are located in the United States. For the three and nine months ended September 30, 2023 and 2022, ~~and September 30, 2021, less than 1%~~approximately 99% of sales were attributable to customers ~~outside the United States. For the nine months ended September 30, 2022 and September 30, 2021, approximately 1% of sales were attributable to customers outside~~in 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.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

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


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Numerator:	Numerator:									Numerator:
Net loss	Net loss	$	(2,662)	$	(1,140)	$	(7,969)	$	(5,255)	Net loss	$	(944)	$	(2,662)	$	(3,444)	$	(7,969)

Denominator:	Denominator:									Denominator:
Basic and diluted weighted average shares of common stock outstanding		9,190		5,086		7,608		4,309
Basic and diluted weighted average shares of common stock outstanding *										Basic and diluted weighted average shares of common stock outstanding *	3,514		1,313		2,868		1,087

* Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.										* Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

As a result of the net loss we incurred for the three months ended September 30, 2023, convertible securities representing approximately 25 thousand shares of common stock were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three months ended September 30, 2022, warrants and convertible securities representing approximately ~~220~~31 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 September 30, 2021, options, warrants and convertible securities representing approximately 41 thousand, 11 thousand and 17525 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~~2023, convertible securities representing approximately ~~201 thousand and 175~~25 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,~~2022, warrants and convertible securities representing approximately ~~60 thousand, 56~~29 thousand and ~~289~~25 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.

Product warranties

We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten years. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products or rework services provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims. As warranty coverage from prior period sales expires, previous accruals are released. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires.

The following table summarizes warranty activity for the periods presented (in thousands):


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Balance at beginning of period	Balance at beginning of period	$	315	$	239	$	295	$	227	Balance at beginning of period	$	146	$	315	$	183	$	295
Warranty accruals for current period sales, net of changes in inventory reserves for replacements		(23)		10		(17)		49
Adjustments to existing warranties		(57)		4		(29)		16
Warranty accruals for current period sales										Warranty accruals for current period sales	1		(23)		3		(17)
Adjustments to existing warranty reserves										Adjustments to existing warranty reserves	—		(57)		(39)		(29)
In kind settlements made during the period	In kind settlements made during the period	7		(13)		(7)		(52)		In kind settlements made during the period	—		7		—		(7)
Accrued warranty reserve at end of period	Accrued warranty reserve at end of period	$	242	$	240	$	242	$	240	Accrued warranty reserve at end of period	$	147	$	242	$	147	$	242

1416

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(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 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 $18 thousand. Total offering costs of $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 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 nine months ended September 30, 2022, none of these warrants were exercised.

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

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.

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 September 30, 2022. For the three months ended September 30, 2021, we recorded nominal net restructuring expense and for the nine months ended September 30, 2021, we recorded a net restructuring credit of approximately $21 thousand, 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~~	~~(11)~~
~~Balance at September 30, 2021~~	$	—

As a result of the restructuring actions and initiatives described above, we began to tailor our operating expenses to be more in line with our expected sales volumes. Throughout 2022, we have continued to aggressively pursue cost reduction activities, including reducing staffing levels, inventory levels and our real estate footprint, but sales volume have trailed these ongoing cost control efforts. However, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist at September 30, 2022.

Throughout 2021 and 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 plan to achieve profitability by growing our sales, primarily through existing and new commercial and industrial lighting and control systems 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 net proceeds from bridge financing of approximately $0.5 million, $1.8 million and $1.5 million, respectively. Also in April 2021, we expanded the borrowing capacity on one of 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 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.

•~~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.~~

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

~~There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion,~~Certain risks and concentrations

We have certain customers whose net sales individually represented 10% 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~~more of our ~~common stock,~~total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows:

For the three months ended September 30, 2023, sales to one U.S. Navy shipbuilders and ~~any equity we are able~~a distributor to ~~issue could lead to substantial dilution~~the U.S. Navy accounted for ~~current stockholders~~approximately 16% and ~~have rights, preferences and privileges senior~~26% of net sales, respectively. When sales 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~~primary distributors for the U.S. Navy are ~~not acceptable to management or our board of directors; and~~

•~~the current environment in the capital markets and volatile interest rates,~~ combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 42% of net sales for the same period. For the three months ended September 30, 2022, sales to a regional commercial lighting retrofit company accounted for approximately 32% of net sales. When sales to our ~~capital constraints, may prevent us from being able~~primary distributors for the U.S. Navy are combined with sales to ~~obtain adequate debt financing.~~shipbuilders for the U.S. Navy, net sales of products for the U.S. Navy comprised less than 10% of net sales for the same period.

~~Additionally, if we~~For the nine months ended September 30, 2023, sales to a U.S. Navy shipbuilder and a distributor to the Department of Defense accounted for approximately 15% and 14% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are ~~unable~~combined with sales to ~~find~~shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 29% of net sales for the same period. For the nine months ended September 30, 2022, sales to our primary distributor for the U.S. Navy, a ~~permanent chief~~regional commercial lighting retrofit company, and a commercial building system provider, accounted for approximately 13%, 15%, and 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 17% of net sales for the same period.

Two distributors for the Department of Defense and a U.S. Navy shipbuilder accounted for approximately 10%, 21% and 10% of net trade accounts receivable, respectively, at September 30, 2023. At December 31, 2022, a distributor for the Department of Defense accounted for 25% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 30% of our net trade accounts receivable.

One supplier accounted for more than 10% of our total expenditures for the three and nine months ended September 30, 2023. One offshore supplier, which is related party, accounted for approximately 13% and 7%, respectively, of our total expenditures for the three and nine ended September 30, 2023. One offshore supplier accounted for approximately 17% and 18%, respectively, of our total expenditures for the three and nine ended September 30, 2022.

At September 30, 2023, two offshore suppliers accounted for approximately 48% and 22% of our trade accounts payable balance, respectively. At December 31, 2022, one offshore supplier accounted for approximately 36% of our trade accounts payable balance, respectively.

Recently adopted accounting standard

In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial ~~officer,~~instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. For smaller reporting companies, this standard became effective for interim and annual periods starting after December 15, 2022, and has been adopted by the Company. We adopted this guidance during the first quarter of 2023, and it 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 woulddid not have a material ~~adverse effect~~impact 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~~consolidated financial position ~~liquid resources, obligations due~~ or ~~anticipated within the next year, development and implementation~~results of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, could provide us with an ability to finance our operations through the next twelve months and may mitigate the substantial doubt about our ability to continue as a going concern.

On August 23, 2022, we received a 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 September 30, 2022, our stockholders’ equity was $1,526,000.operations.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

NOTE 4.3. INVENTORIES

Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Raw materials	Raw materials	$	3,584	$	3,882	Raw materials	$	3,066	$	3,347
Finished goods	Finished goods	5,231		7,034		Finished goods	4,295		4,656
Reserves for excess, obsolete, and slow-moving inventories	Reserves for excess, obsolete, and slow-moving inventories	(2,659)		(3,050)		Reserves for excess, obsolete, and slow-moving inventories	(2,460)		(2,527)
Inventories, net	Inventories, net	$	6,156	$	7,866	Inventories, net	$	4,901	$	5,476

The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands):


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Beginning balance	Beginning balance	$	(2,792)	$	(2,956)	$	(3,050)	$	(2,894)	Beginning balance	$	(2,400)	$	(2,792)	$	(2,527)	$	(3,050)
Accrual	Accrual	(241)		34		(442)		(64)		Accrual	(169)		(241)		(155)		(442)
Reduction due to sold inventory	Reduction due to sold inventory	21		36		278		72		Reduction due to sold inventory	109		21		222		278
Write-off for disposed inventory	Write-off for disposed inventory	353		—		555		—		Write-off for disposed inventory	—		353		—		555
Reserves for excess, obsolete, and slow-moving inventories	Reserves for excess, obsolete, and slow-moving inventories	$	(2,659)	$	(2,886)	$	(2,659)	$	(2,886)	Reserves for excess, obsolete, and slow-moving inventories	$	(2,460)	$	(2,659)	$	(2,460)	$	(2,659)

NOTE 4. OTHER CURRENT ASSETS

Employee Retention Tax Credit

The CARES Act, which was enacted on March 27, 2020, provides an Employee Retention Tax Credit (“ERTC”) that is a refundable tax credit against certain employer taxes. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021.

For purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the immediately preceding quarter to the corresponding calendar quarter in 2019. The credit is taken against the Company’s share of Social Security Tax when the Company’s payroll provider files, or subsequently amends the applicable quarterly employer tax filings.

Under the amended guidelines, we were eligible to receive the ERTC for the second and third quarters of 2021. As part of the filing of our ~~expense reduction initiatives, we significantly decreased our warehouse space beginning in~~employer tax filings for the third quarter of ~~2022. In connection with the space reduction, in~~2021, we applied for and received a refund of $431 thousand, and we amended our filing for the second quarter of ~~2022,~~2021, for which we ~~began disposing~~received an additional refund of ~~a substantial portion of our excess and obsolete commercial finished goods inventory that was highly reserved, which effort continued into~~approximately $445 thousand during the ~~third~~second quarter of ~~2022. As of September 30, 2022, approximately $563 thousand, on~~2023. This amount was recorded as a ~~gross value basis, of such inventory had been disposed of. Additional inventory management efforts are expected to continue~~receivable in the ~~fourth quarter~~Condensed Consolidated Balance Sheet as of December 31, 2022.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of the following (in thousands):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Equipment (useful life 3 to 15 years)	Equipment (useful life 3 to 15 years)	$	1,096	$	1,308	Equipment (useful life 3 to 15 years)	$	1,061	$	1,061
Tooling (useful life 2 to 5 years)	Tooling (useful life 2 to 5 years)	413		384		Tooling (useful life 2 to 5 years)	190		190
Vehicles (useful life 5 years)		81		83
Furniture and fixtures (useful life 5 years)		86		86
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)	141		169		Leasehold improvements (the shorter of useful life or lease life)	141		141
Finance lease right-of-use asset		13		13
mUVeTM ultraviolet-C light disinfection robots (useful life 5 years)		—		105
Projects in progress	Projects in progress	68		135		Projects in progress	27		—

Property and equipment at cost	Property and equipment at cost	3,042		3,477		Property and equipment at cost	1,419		1,392
Less: accumulated depreciation	Less: accumulated depreciation	(2,609)		(2,802)		Less: accumulated depreciation	(1,340)		(1,316)
Property and equipment, net	Property and equipment, net	$	433	$	675	Property and equipment, net	$	79	$	76

Depreciation expense was ~~$42~~$8 thousand and ~~$43~~$42 thousand for the three months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. For the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, depreciation expense was $24 thousand and $129 thousand, ~~and $143 thousand,~~ respectively. ~~During the third quarter of 2022 it was determined that the mUVe~~TM ~~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.~~

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~(Unaudited)~~

NOTE 6. LEASES

The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases with expirations through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one finance lease on a forklift containing a bargain purchase option, ~~that~~which was ~~not renewed upon expiration of the lease during the second quarter of~~exercised in July 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 ~~to reflect a smaller footprint at reduced costs.~~and extended through 2027. In accordance with ~~Accounting Standards Codification~~ASC 842, Leases (“~~Topic~~ASC 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.~~modification. The present value of the lease obligations for ~~these leases were~~the lease was calculated using an incremental borrowing rate of ~~15.93% for the equipment lease and~~ 16.96% ~~for the real estate lease,~~, which ~~were~~was the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads Financial Group, LLC (as described below in Note 7, “Debt”) and Factors Southwest L.L.C. (as described below in Note 7, “Debt”). The present value of the other remaining lease obligations continues to be calculated using an incremental borrowing rate of 7.25% (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its former revolving line of credit with Austin Financial Services, Inc. ~~(the “Austin Credit Facility”).~~ The weighted average remaining lease term for the operating leases is ~~4.7~~4.0 years.

~~The Company had one restructured lease with a sub-lease component for~~Components of 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 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 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 September 30, 2022 and 2021. Components of the operating and restructured lease costs recognized in net loss for the three and nine months ended September 30, 2022 and 2021, were as follows (in thousands):
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Operating lease cost (income)
Sub-lease income $ (9) $ (25) $ (90) $ (87)
Lease cost 83 139 298 423
Operating lease cost, net 74 114 208 336
Restructured lease cost (income)
Sub-lease income — — — (136)
Lease cost — — — 109
Restructured lease income, net — — — (27)
Total lease cost, net $ 74 $ 114 $ 208 $ 309


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Operating lease cost (income)
Sub-lease income	$	—	$	(9)	$	—	$	(90)
Lease cost	122		83		354		298











Total lease cost, net	$	122	$	74	$	354	$	208

2120

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

Supplemental balance sheet information related to the Company’s operating and finance leases as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows (in thousands):


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
Operating Leases	Operating Leases					Operating Leases
Operating lease right-of-use assets	Operating lease right-of-use assets	$	1,248	$	292	Operating lease right-of-use assets	$	967	$	1,180

Operating lease liabilities	Operating lease liabilities	$	1,271	$	351	Operating lease liabilities	$	1,073	$	1,227

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)		(13)
Finance lease assets, net	Finance lease assets, net	—		1		Finance lease assets, net	$	—	$	—

Finance lease liabilities		—		1
Total finance lease liabilities		$	—	$	1

Future minimum lease payments required under operating ~~and finance~~ leases for each of the 12-month rolling periods below in effect at September 30, ~~2022~~2023 are as follows (in thousands):

Operating Leases

October ~~2022 to September 2023~~

~~384~~

~~October~~ 2023 to September 2024

~~381~~$

378

October 2024 to September 2025

~~383~~380

October 2025 to September 2026

~~389~~388

October 2026 to September 2027

~~295~~294

Total future undiscounted lease payments

~~1,832~~1,440

Less imputed interest

~~(561)~~367

Total lease obligations

~~1,271~~1,073

Supplemental cash flow information related to leases for the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, was as follows (in thousands):


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
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	$	86	$	161	$	326	$	421	Operating cash flows from operating leases	$	97	$	86	$	286	$	326
Operating cash flows from restructured leases		$	—	$	—	$	—	$	35

Financing cash flows from finance leases	Financing cash flows from finance leases	$	—	$	1	$	1	$	3	Financing cash flows from finance leases	$	—	$	—	$	—	$	1

2221

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(Unaudited)

NOTE 7. DEBT

Credit facilities

On August 11, 2020, we entered into two debt financing arrangements (together, the “Credit Facilities”) that ~~allow~~allowed for expanded borrowing capacity at a lower blended borrowing cost.

Inventory Facility with Crossroads

The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company ~~(the “IF Lender”~~(“Crossroads”). Borrowings under the original Inventory Facility were permitted up to the lower of (i) $3.0 million, which amount was subsequently increased to $3.5 million ~~as described below,~~in April 2021, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75% of inventory costs or 85% of the inventory net orderly liquidation value, less the availability reserves.

On ~~April 20, 2021,~~January 18, 2023, the Company and ~~the IF Lender~~Crossroads entered into an amendment to the Inventory Loan Agreement (the “Crossroads Amendment”) to ~~increase~~restructure and pay down the Inventory Facility. The Crossroads Amendment provides that the Company make payments to reduce the outstanding obligations under the Inventory Facility of $750 thousand by January 20, 2023 and $250 thousand by February 15, 2023 (which amounts the Company has paid). The Company also agreed to make monthly payments of approximately $40 thousand towards the remaining outstanding obligations under the Inventory Facility, and to reduce the maximum amount that may be available to the Company under the Inventory Facility from ~~$3.0~~$3.5 million to ~~$3.5 million,~~$500 thousand, subject to the borrowing base as set forth in the Inventory Loan Agreement.

Pursuant to the Crossroads Amendment, Crossroads and the Company also agreed to extend the Inventory Facility’s current term through December 31, 2023, while eliminating the minimum borrowing amount and unused line fees and reducing the monthly service fee to a lower, fixed amount. The ~~outstanding indebtedness~~Company also agreed to a slightly increased interest rate, which was more than offset by the reduction in the monthly service fees. Pursuant to the Crossroads Amendment, the interest rate on borrowings under the Inventory Facility ~~accrues at an annual~~is now a per annum rate equal to (i) the ~~greater of (i) 5.75% and (ii) 4.00% plus the three-month~~Three-Month LIBOR rate ~~(3.07% and 0.21%~~plus 5.5% or (ii) at ~~September 30, 2022 and December 31, 2021, respectively) and is also subject to a service fee of 1% per month. The annualized interest~~Crossroads’ discretion, an alternative reference rate, ~~at September 30, 2022 and December 31, 2021, which includes interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was 23.4% and 22.4%~~SOFR (Secured Overnight Financing Rate), 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)plus 6.00%. The Inventory Facility ~~term~~ was ~~automatically extended for one year~~paid in full on ~~August 11, 2022,~~September 24, 2023 and ~~now matures on August 11, 2023, subject to early termination upon demand by~~ the ~~IF lender with 90 days’ notice~~Company wrote off the difference of $40 thousand between the final invoice amount and ~~otherwise in accordance with~~ the ~~terms~~carrying value of the ~~Inventory Loan Agreement. The annual facility fee of $70 thousand~~debt, which was ~~paid during September of 2022 upon renewal. During the third quarter of 2022,~~recorded 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~~interest income.

Receivables Facility 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.~~FSW Funding

The second ~~arrangement is~~Credit Facility was a receivables financing facility (the “Receivables Facility”) pursuant to the Loan and Security Agreement (the “Receivables Loan Agreement”) between the Company and Factors Southwest L.L.C. (d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”). Borrowings under the Receivables Facility ~~are~~were permitted up to the lower of (i) $2.5 million and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at 90% of the face value of such accounts receivable, less availability reserves, if any. ~~Interest on~~

On February 7, 2023, the Company and the RF Lender agreed to terminate the Receivables Facility. All outstanding ~~indebtedness~~amounts under the Receivables Facility ~~accrues at an annual rate equal~~were repaid prior to ~~(i) the highest prime rate announced from time to time by the Wall Street Journal (6.25% at September 30, 2022~~termination, and ~~3.25% at December 31, 2021) plus (ii) 2%. At September 30, 2022 and December 31, 2021, the annualized interest rate, which includes interest~~there were no prepayment fees ~~and the annual facility fee, was 9.4% and 8.0%, respectively. The annualized interest rate on the collateral management fee was 6.0% at both September 30, 2022 and December 31, 2021.~~in connection with termination. The Receivables Facility ~~is also~~was secured by substantially all of the present and future assets of the Company and ~~is also governed by~~was subject to an intercreditor agreement ~~among the Company, the IF Lender and the RF Lender. A $25 thousand, or 1%, facility fee~~with Crossroads, which intercreditor agreement 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, 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.also terminated.

Borrowings under the Inventory Facility were ~~$1.6 million and $1.2~~$1.4 million at ~~September 30, 2022 and~~ December 31, ~~2021, respectively.~~2022. Borrowings under the Receivables Facility were ~~$0.4 million and $1.0~~$0.1 million at ~~September 30, 2022 and~~ December 31, ~~2021, respectively.~~2022. These ~~Credit Facilities~~facilities are recorded in the Condensed Consolidated Balance Sheets as of ~~September 30, 2022 and~~ December 31, ~~2021~~2022 as a current liability under the caption “Credit line borrowings.” Outstanding balances include ~~unamortized net issuance costs totaling $64 thousand and $84~~$47 thousand for the Inventory Facility and ~~$21 thousand and $24~~$15 thousand for the Receivables Facility as of ~~September 30, 2022 and~~ December 31, ~~2021, respectively.~~2022.

Promissory Notes

During the third and fourth quarters of the year ended December 31, 2022, we entered into short-term unsecured promissory notes (the “2022 Promissory Notes”) with Mei Yun (Gina) Huang, Jay Huang, and Tingyu Lin. Ms. Huang is a member of the Board of Directors and Mr. Jay Huang is our Chief Executive Officer (“CEO”) and a former member of the Board of Directors in connection with the Sander Private Placement, as described below in Note 9, “Stockholders’ Equity.” The total

2322

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2022~~2023

(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~~Notes was ~~$0.5~~$1.5 million at ~~September 30,~~December 31, 2022. ~~Please refer to~~All of the 2022 Promissory Notes were exchanged for common stock on January 17, 2023. See Note ~~12, “Related Party Transaction” for further detail.~~9, “Stockholders’ Equity.”

The following summarizes the 2022 Promissory Notes at December 31, 2022:


At December 31, 2022
	G. Huang		J. Huang		J. Huang		G. Huang		J. Huang		J. Huang		T. Lin		Total
Date entered	September 16, 2022		October 25, 2022		November 4, 2022		November 9, 2022		December 6, 2022		December 21, 2022		December 31, 2022
Term	9 months		9 months		9 months		9 months		9 months		9 months		9 months
Principal amount	$450,000		$50,000		$250,000		$350,000		$200,000		$100,000		$50,000		$1,450,000
Maturity date	June 16, 2023		July 25, 2023		August 4, 2023		August 9, 2023		September 6, 2023		September 21, 2023		September 30, 2023
Interest rate	8	%	8	%	8	%	8	%	8	%	8	%	8	%
Default interest rate	10	%	10	%	10	%	10	%	10	%	10	%	10	%
Outstanding Amount	$460,455		$50,734		$253,123		$353,989		$201,096		$100,219		$50,011		$1,469,627

Streeterville Notes

2022 Streeterville Note

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

The 2022 Streeterville Note ~~has a~~had an original 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~~On January 17, 2023, we agreed with Streeterville to restructure and pay down 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~~extend its maturity date to ~~50% of~~December 1, 2024 (the “2022 Streeterville Note Amendment”). We agreed to make payments to reduce the outstanding ~~balance. Beginning on December 1, 2022, Streeterville may require the Company to redeem up to $225 thousand~~amounts of the 2022 Streeterville Note ~~in any calendar month. The Company~~by $500 thousand by January 20, 2023 (which amount has been paid) and by $250 thousand by July 14, 2023 ($125 thousand of which has already been satisfied pursuant to the ~~right~~March 2023 Exchange Agreement (as defined below) and $125 thousand has been paid on ~~five occasions, but not during more than three consecutive months,~~July 12, 2023). Streeterville agreed to ~~defer all redemptions that Streeterville could otherwise require~~extend the ~~Company to make during any calendar month. Each exercise~~term of ~~this deferral right by the Company will increase the amount outstanding under~~ the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we would make twelve monthly repayments of approximately $117 thousand each. We would have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.

On March 31, 2023, the Company entered into an Exchange Agreement (the “March 2023 Exchange Agreement”) with Streeterville, pursuant to which we agreed to (i) partition from the 2022 Streeterville Note a new Promissory Note (the “March 2023 Partitioned Note”) in the original principal amount of $250 thousand (the “March 2023 Exchange Amount”), (ii) cause the outstanding balance of the 2022 Streeterville Note to be reduced by ~~1.5%~~an amount equal to the March 2023 Exchange Amount, and (iii) exchange (the “March 2023 Exchange”) the March 2023 Partitioned Note for 71,715 shares of the Company’s common stock.

The March 2023 Exchange was priced at-the-market under the Nasdaq rules and was effected pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). There are no gross proceeds to the Company in respect of the March 2023 Exchange, provided that $125 thousand of the March 2023 Exchange Amount will be applied toward the $250 thousand payment due on or before July 14, 2023 pursuant to the 2022 Streeterville Note Amendment, $125 thousand will be credited to satisfy the December 1, 2024 required payment and a portion of the November 1, 2024 required payment, in each case pursuant to the 2022 Streeterville Note Amendment.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

The total liability for the 2022 Streeterville Note, net of discount and financing fees, was ~~$1.9~~$1.3 million and $2.0 million at September 30, ~~2022. Unamortized loan discount~~2023 and ~~debt issuance costs for the~~December 31, 2022, ~~Streeterville Note were $183 thousand at September 30, 2022.~~respectively.

In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.

2021 Streeterville Note

On April 27, 2021, we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $1.7 million (the “2021 Streeterville Note”). The 2021 Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the 2021 Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses.

The 2021 Streeterville Note ~~has~~had a maturity date of April 27, 2023, and ~~accrues~~accrued 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~~could require the Company to redeem up to $205 thousand of the 2021 Streeterville Note in any calendar month. The Company ~~has~~had the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar ~~month, and Streeterville agreed to accept a fourth redemption deferral on the same terms during the third quarter of 2022.~~month. Each exercise of this deferral right by the Company ~~will increase~~increased the amount outstanding under the 2021 Streeterville Note by 1.5%. The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022. The Company and Streeterville ~~have~~ agreed to exchange common stock, priced at-the-market, for the required ~~redemption~~redemptions in October 2022 and December 2022, totaling ~~$205~~$305 thousand converted to equity.

~~The total liability for~~ These exchanges satisfied the redemption notices provided by Streeterville, and following the December 2022 exchange, the 2021 Streeterville Note ~~net of~~was paid in full. We wrote off $100 thousand in remaining original issue discount ~~and financing fees, was $0.4 million and $1.7 million~~costs at September 30, 2022 and December 31, 2021, respectively. Unamortized loan discount and debt issuance costs for the 2021 Streeterville Note were $61 thousand and $140 thousand at 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 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 nine months ended September 30, 2021.that time.

NOTE 8. INCOME TAXES

As a result of the operating loss incurred during each of the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, and after the application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), it was not necessary to record a provision for U.S. federal income tax.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we had a full valuation allowance recorded against our deferred tax assets.

The valuation allowance was recorded due to uncertainties related to our ability to realize the deferred tax assets, primarily consisting of certain net operating loss carry-forwards. The valuation allowance is based on management’s estimates of taxable income by jurisdiction and the periods over which the deferred tax assets will be recoverable.

At December 31, ~~2021,~~2022, we had a net operating loss carry-forward of approximately ~~$125.4~~$132.4 million for federal income tax purposes ($~~77.2~~77.6 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the ~~$125.4~~$132.4 million is available to offset future taxable income after the application of the limitations found under Section 382 of the Internal Revenue Code of 1986, as amended. As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income and can be carried forward indefinitely. The ~~$9.6~~$9.2 million and ~~$7.1~~$9.6 million in federal net operating losses generated in ~~2021~~2022 and ~~2020,~~2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please refer to Note 11, “Income Taxes,” included under Item 8, “Financial Statements and Supplementary Data,” of our ~~2021~~2022 Annual Report.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 9. STOCKHOLDERS’ EQUITY

September 2023 Private Placement

On September 29, 2023, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of 853,658 shares of the Company’s common stock, par value $0.0001 per share, for a purchase price per share of $2.05 (the “September 2023 Private Placement”).

Aggregate gross proceeds to the Company in respect of the September 2023 Private Placement were approximately $1.75 million. The September 2023 Private Placement closed on September 29, 2023.

June 2023 Private Placement

On June 29, 2023, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of 746,875 shares of the Company’s common stock, par value $0.0001 per share, for a purchase price per share of $1.76 (the “June 2023 Private Placement”). One of the purchasers was Mr. Huang, the Company’s CEO.

Aggregate gross proceeds to the Company in respect of the June 2023 Private Placement were approximately $1.3 million. The June 2023 Private Placement closed on June 29, 2023.

1-for-7 Reverse Stock Split

At the Company’s annual meeting of stockholders held on June 15, 2023, the Company’s stockholders approved a form of the certificate of amendment (“Certificate of Amendment”) to the Certificate of Incorporation and authorized our board of directors to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-10, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.

On June 15, 2023, our board of directors determined to set the reverse stock split at 1-for-7 (the “Split Ratio”). The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 15, 2023, with the reverse stock split becoming effective on June 16, 2023 (the “Effective Time”). At the Effective Time, every seven shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock. No fractional shares were issued as a result of the reverse stock split. The fractional shares were settled in cash in an amount not material to the Company. The $0.0001 par value per share of common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at 50,000,000 shares.

The current financial statements, as well as the prior-period financial statements have been retroactively adjusted to reflect the reverse stock split.

Our outstanding shares of restricted stock and shares underlying our options and warrants entitling the holders to purchase shares of common stock have been adjusted as a result of the reverse stock split, as required by the terms of these securities. Also, the number of shares reserved for issuance under our existing 2020 Stock Incentive Plan, as amended, and our 2013 Employee Stock Purchase Plan were reduced proportionately based on the Split Ratio. Preferred shares outstanding were not affected by the reverse stock split and as such, those shares have not been adjusted.

The reverse stock split was effected solely to increase the per share trading price of the common stock to satisfy the Bid Price Rule for continued listing on Nasdaq. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 19, 2023.

March 2023 Private Placements

On March 28, 2023, the Company entered into a securities purchase agreement with Mr. Jay Huang pursuant to which the Company agreed to issue and sell, in a private placement (the “March 28, 2023 Private Placement”), 15,500 shares of the Company’s common stock for a purchase price of $3.55 per share.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

On March 30, 2023, the Company entered into a securities purchase agreement with Mei Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement (collectively with the March 28, 2023 Private Placement, the “March 2023 Private Placements”), 71,428 shares of the Company’s common stock for a purchase price of $3.50 per share.

Aggregate gross proceeds to the Company in respect of the March 2023 Private Placements were $305 thousand. Each of the March 2023 Private Placements was priced at-the-market under the Nasdaq rules.

February 2023 Private Placement

On February 24, 2023, the Company entered into a securities purchase agreement with Mei Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement (the “February 2023 Private Placement”), 114,744 shares of the Company’s common stock, for a purchase price of $3.49 per share.

Gross proceeds to the Company in respect of the February 2023 Private Placement were $400 thousand. The February 2023 Private Placement was priced at fair market value under the Nasdaq rules.

January 2023 Sander Electronics Private Placement

On January 17, 2023, the Company entered into a securities purchase agreement (the “Sander Purchase Agreement”) with certain purchasers associated with Sander Electronics, Inc., pursuant to which the Company agreed to issue and sell in a private placement (the “Sander Private Placement”) an aggregate of 778,017 shares of common stock for a purchase price per share of $3.51. Consideration for the transaction included exchange of approximately $657 thousand in the aggregate of outstanding amounts on previous short-term bridge financings, including the 2022 Promissory Notes issued to Mr. Huang, as described above in Note 7, “Debt”.

Aggregate gross proceeds from the Sander Private Placement were approximately $2.1 million. The Sander Private Placement was priced at-the-market under the Nasdaq rules.

January 2023 Transactions with Mei Yun (Gina) Huang

On January 5, 2023, the Company entered into a securities purchase agreement with Mei Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement, 36,828 shares of the Company’s common stock, for a purchase price of $2.72 per share. On January 10, 2023, the Company entered into a securities purchase agreement with Ms. Huang, pursuant to which the Company agreed to issue and sell, in a private placement, 46,543 shares of the Company’s common stock for a purchase price of $3.22 per share.

Aggregate gross proceeds to the Company in respect of these private placements to Ms. Huang were $250 thousand. Each of the private placements to Ms. Huang was priced at fair market value under the Nasdaq rules.

On January 17, 2023, the Company and Ms. Huang entered into exchange agreements pursuant to which the Company and Ms. Huang agreed to exchange the approximately $817 thousand aggregate outstanding amounts on previous short-term bridge financings, including the 2022 Promissory Notes issued to Ms. Huang, as described above in Note 7, “Debt”, for an aggregate of 207,371 shares of common stock at a price per share of $3.94. The exchanges were priced at fair market value under the Nasdaq rules.

June 2022 Private Placement

In June 2022, we completed ~~the June~~a private placement (the “June 2022 Private ~~Placement~~Placement”) with certain institutional investors for the sale of ~~1,313,462~~187,637 shares of our common stock at a purchase price of ~~$1.30~~$9.10 per share. We also sold to the same institutional investors (i) ~~June~~pre-funded warrants (the “June 2022 Pre-Funded ~~Warrants~~Warrants”) to purchase ~~1,378,848~~196,978 shares of common stock at an exercise price of ~~$0.0001~~$0.0007 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of ~~2,692,310~~384,615 shares of common stock at an exercise price of ~~$1.30~~$9.10 per share. In connection with the June 2022 Private Placement, we paid the placement agent commissions of $252 thousand, plus $35 thousand in expenses, and we also paid legal, accounting and other fees of $47 thousand. Total offering costs of $334 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of ~~September 30,~~December 31, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

and, as such, have considered the ~~1,378,848~~196,978 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.

In July 2022, all of the June 2022 Pre-Funded Warrants were exercised. As of September 30, ~~2022,~~2023, June 2022 Warrants to purchase an aggregate of ~~2,692,310~~384,615 shares remained outstanding, with a weighted average exercise price of ~~$1.30~~$9.10 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.

~~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~~a private placement (the “December 2021 Private ~~Placement~~Placement”) with certain institutional investors for the sale of ~~1,193,185~~170,455 shares of our common stock at a purchase price of ~~$3.52~~$24.64 per share. We also sold to the same institutional investors (i) ~~December~~pre-funded warrants (the “December 2021 Pre-Funded ~~Warrants~~Warrants”) to purchase ~~85,228~~12,175 shares of common stock at an exercise price of ~~$0.0001~~$0.0007 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of ~~1,278,413~~182,630 shares of common stock at an exercise price of ~~$3.52~~$24.64 per share. In connection with the December 2021 Private Placement, we paid the placement agent ~~commission~~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 from the December 2021 Private Placement were approximately $4.0 million. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for purposes of calculating net loss per share.

In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of September 30, ~~2022,~~2023, December 2021 Warrants to purchase an aggregate of ~~1,278,413~~182,630 shares remained outstanding, with an exercise price of ~~$3.52~~$24.64 per share. The December 2021 Warrants expire on December 16, 2026. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.

~~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 $18 thousand. Total offering costs of $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%~~1.582% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.

The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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~~1-for-35 basis. ~~On March 29, 2019, the Company also filed a Certificate~~

As 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~~September 30, 2023 and December 31, 2022, there were 876,447 Series A Preferred ~~Stock.~~

~~The purchase agreement related to the Convertible Notes contains customary representations~~Stock issued and ~~warranties and provides for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.~~

~~January 2020 Equity Offering~~

~~Issuance of Common Stock and Warrants~~

In January 2020, we completed a registered direct offering for the sale of 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 688,360outstanding which can be convertible into 25 thousand shares of common stock at ~~an exercise price~~the option 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.holder.

~~January 2020~~ Warrants issued to purchase an aggregate of 229,414 shares remain outstanding at September 30, 2022 with a weighted average exercise price of $3.67 per share. The exercise of warrants could provide us with cash proceeds of up to $0.8 million in the aggregate if all warrants are exercised.

During the three and nine months ended September 30, 2023 and September 30, 2022, no ~~January 2020 Warrants~~warrants were exercised. ~~During the nine months ended September 30, 2021, 156,446 warrants were exercised resulting in total proceeds of $527 thousand.~~

As of September 30, ~~2022~~2023 and ~~2021,~~2022, we had the following outstanding ~~January 2020 warrants to purchase shares of common stock:~~warrants:
As of September 30, 2022 As of September 30, 2021
Number of Underlying Shares Exercise Price Expiration
Investor Warrants 187,734 269,180 $3.3700 January 13, 2025
Placement Agent Warrants 41,680 41,680 $4.9940 January 13, 2025
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.

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~(Unaudited)~~


	As of September 30, 2023	As of September 30, 2022
	Number of Underlying Shares		Exercise Price	Expiration
June 2022 Warrants	384,615	384,615	$9.10	December 16, 2026
December 2021 Warrants	182,630	182,630	$24.64	June 7, 2027
January 2020 Investor Warrants	26,819	26,819	$23.59	January 13, 2025
January 2020 Placement Agent Warrants	5,954	5,954	$34.96	January 13, 2025
	600,018	600,018

Stock-based compensation

Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize expense using a straight-line amortization method.

The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands):


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Cost of sales	Cost of sales	$	—	$	2	$	2	$	7	Cost of sales	$	—	$	—	$	1	$	2
Product development	Product development	4		2		16		10		Product development	(7)		4		—		16
Selling, general, and administrative	Selling, general, and administrative	13		35		97		370		Selling, general, and administrative	(6)		13		35		97
Total stock-based compensation	Total stock-based compensation	$	17	$	39	$	115	$	387	Total stock-based compensation	$	(13)	$	17	$	36	$	115

Total unearned stock-based compensation was $0.1 million at September 30, 2023, compared to $0.2 million at September 30, ~~2022, compared to $0.3 million at September 30, 2021.~~2022. These costs will be charged to expense and amortized on a straight-line basis in future periods. The weighted average period over which the unearned compensation at September 30, ~~2022~~2023 is expected to be recognized is approximately ~~2.5~~2.9 years.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Stock options

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further detailed ~~below.~~below:
Nine months ended
September 30,
2022 2021
Fair value of options issued $ 0.77 $ 4.18
Exercise price $ 0.95 $ 5.39
Expected life of options (in years) 6.1 6.2
Risk-free interest rate 3.0 % 0.8 %
Expected volatility 104.0 % 96.5 %
Dividend yield 0.0 % 0.0 %

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~(Unaudited)~~


	Nine months ended September 30,
	2023			2022
Fair value of options issued	$	2.49		$	5.39
Exercise price	$	3.04		$	6.65
Expected life of options (in years)	6.1			6.1
Risk-free interest rate	3.5		%	3.0		%
Expected volatility	101.8		%	104.0		%
Dividend yield	0.0		%	0.0		%

A summary of option activity under all outstanding stock incentive plans for the nine months ended September 30, ~~2022~~2023 is presented as follows:
Number of
Options Weighted
Average
Exercise
Price Per
Share Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2021 267,109 $ 3.46
Granted 226,820 0.95
Exercised (250) 1.45
Canceled/forfeited (135,447) 3.03
Balance at September 30, 2022 358,064 $ 2.03 8.2
Vested and expected to vest at September 30, 2022 291,379 $ 2.21 7.9
Exercisable at September 30, 2022 118,920 $ 3.21 5.6


	Number of Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)
Balance at December 31, 2022	47,103	$	13.78
Granted	11,427	3.04

Canceled/forfeited	(21,106)	16.80
Expired	(3,827)	17.06
Balance at September 30, 2023	33,597	$	7.85	8.8

Vested and expected to vest at September 30, 2023	27,864	$	8.50	8.7

Exercisable at September 30, 2023	9,574	$	14.94	8.7
*Options have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

Restricted stock units

A summary of restricted stock unit activity under all outstanding stock incentive plans for the nine months ended September 30, ~~2022~~2023 is presented as follows:
Restricted
Stock Units Weighted
Average
Grant
Date
Fair Value Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2021 2,400 $ 7.14
Granted 40,000 1.40
Vested (40,800) 1.51
Balance at September 30, 2022 1,600 $ 7.14 7.9


	Restricted Stock Units	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (in years)
Balance at December 31, 2022	1,657	$	11.13
Expired	(1,428)	4.90
Canceled/forfeited	(229)	49.99


Balance at September 30, 2023	—	$	—	—
*Restricted stock units have been restated for the 1-for-7 reverse stock split effective June 16, 2023.

ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

NOTE 10. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

As of September 30, ~~2022,~~2023, we had approximately ~~$1.0~~$1.5 million in outstanding purchase commitments for inventory, of which ~~$0.8 million~~ is expected to ship in the fourth quarter of ~~2022 and $0.2 million is expected to ship in the first quarter of 2023 and 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 result2023. We have 89% of the ~~foregoing legislation, are eligible to claim~~outstanding purchase commitments with 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)~~

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 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 nine months ended September 30, 2021.related party.

NOTE ~~12.~~ 11.RELATED PARTY ~~TRANSACTION~~TRANSACTIONS

~~On September 16, 2022, we entered into the 2022 Promissory Note~~The Company has an agreement with ~~Ms. Huang in the original principal amount of $0.5 million. Ms. Huang is~~Sander Electronics, Inc., a ~~member~~shareholder of the ~~Company’s board~~Company, which provides for purchases by the Company of ~~directors. The 2022 Promissory Note is an unsecured obligation~~TLED products and ~~has a maturity date~~spare parts. Purchases from Sander Electronics, Inc for the three and nine months ended September 30, 2023 totaled $196 thousand and $272 thousand, respectively. Accounts payable to Sander Electronics, Inc. amounted to $272 thousand and $0 as of ~~June 16,~~September 30, 2023, and ~~accrues interest at 8% per annum, compounded daily,~~December 31, 2022, respectively.

Please refer to Note 7 for further details on ~~the outstanding balance. The Company may prepay the amounts outstanding~~Promissory Notes from shareholders.

Please refer to Note 9 for further details on Private Placements in ~~whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the~~2023 and 2022 Promissory Note, Ms. Huang may, at her option, declare the amount outstanding under the Note immediately due and payable. After the occurrence of an event of default, Ms Huang may elect to have interest accrue on the 2022 Promissory Note at a rate per annum of 10%, or such lesser rate as permitted under applicable law. The total liability for the 2022 Promissory Note was $0.5 million at September 30, 2022.

~~NOTE 13. SUBSEQUENT EVENTS~~

~~Unsecured Notes Payable~~

On November 9, 2022, the Company issued a short-term Promissory Note in favor of Mei-Yun (Gina) Huang in the original principal amount of $350 thousand. Ms. Huang previously provided $450 thousand of bridge financing in September 2022 on the substantially the same terms. Ms. Huang is a member of the Company’s board of directors.

The promissory note has a maturity date of nine months from the date of issuance and bears interest at an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the maturity date. The Company may prepay the amounts outstanding under the note in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the note, Ms. Huang may, at her option, declare the amount outstanding under the note immediately due and payable. After the occurrence of an event of default, Ms. Huang may elect to have interest accrue on the note at a rate per annum of ten percent, or such lesser rate as permitted under applicable law.

On November 4, 2022, the Company issued a short-term Promissory Note in favor of Jay Huang in the original principal amount of $250 thousand (the “Huang Note”). In October of 2022, Mr. Huang also provided $50 thousand of bridge financing on the substantially the same terms as the Huang Note.

The Huang Note has a maturity date of nine months from the date of issuance and bears interest at an annual rate of eight percent. The outstanding principal balance and all accrued interest thereon are due and payable at the maturity date. The Company may prepay the amounts outstanding under the Huang Note in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the Huang Note, Mr. Huang may, at his option, declare the amount outstanding under the Huang Note immediately due and payable. After the occurrence of an event of default, Mr. Huang

~~ENERGY FOCUS, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~(Unaudited)~~

~~may elect to have interest accrue on the Huang Note at a rate per annum of ten percent, or such lesser rate as permitted under applicable law.~~

~~Exchange Agreement~~

On October 10, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with Streeterville, to whom we previously sold and issued the 2021 Streeterville Note. Pursuant to the Exchange Agreement, the Company and Streeterville have agreed to (i) partition from the 2021 Streeterville Note a new Promissory Note (the “October Partitioned Note”) in the original principal amount of $205 thousand (the “October Exchange Amount”), (ii) cause the outstanding balance of the 2021Streeterville Note to be reduced by an amount equal to the October Exchange Amount, and (iii) exchange (the “Exchange”) the Partitioned Note for 385,918 shares (the “October Exchange Shares”) of the Company’s common stock.

The October Exchange was each priced at-the-market under Nasdaq rules pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933, as amended. There are no gross proceeds to the Company in respect of the October Exchange, provided that the Exchange satisfied a redemption notice provided by Streeterville under the terms of the 2021 Streeterville Note, pursuant to which the Company otherwise would be required to redeem $205 thousand of the 2021 Streeterville Note in cash, respectively.

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~~2022 (“~~2021~~2022 Annual Report”).

Overview

Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing, and sale of energy-efficient lighting systems and ~~controls systems.~~controls. We develop, market and sell ~~high quality~~high-quality light-emitting diode (“LED”) lighting and ~~controls~~control 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.~~retrofit solutions. Our goal is to be ~~the human wellness lighting and LED lighting technology and~~a market leader for the most demanding applications where performance, quality, value, environmental impact, and health are considered paramount. We specialize in energy efficient LED lighting retrofit byproducts, 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. ~~After~~We are also evaluating adjacent technologies, including Gallium Nitride (“GaN”) based power supplies and additional market ~~demand~~opportunities for energy solution products that support sustainability in our existing channels.

The LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion. We have been experiencing these industry forces in both our military and commercial business since 2016, when we once commanded significant price premiums for our flicker-free TLEDs with industry leading warranties. In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively while not impacting the performance and quality. Despite these efforts, our legacy products continue to face extreme price competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, ~~for~~exiting LED lighting, selling assets and even going out of business.

In addition to continuously pursuing cost reductions, our ~~ultraviolet-C light disinfection~~strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value. Specific examples of these products we have ~~revised~~developed include the RedCap®, our ~~marketing strategy to primarily focus on~~patented emergency backup battery integrated TLED, EnFocus™, our ~~MMM and commercial and industrial~~unique dimmable/color-tunable lighting and powerline control ~~products.~~

~~Net sales decreased 29% for~~platform that we launched in 2020, and the ~~nine months ended September 30, 2022 as compared~~second generation of EnFocus™ powerline control switches and circadian lighting system. We are looking forward to the ~~nine months ended September 30, 2021, primarily driven by a 52% decrease in MMM sales year-over-year~~continued support and ~~a slight 3% decrease in sales~~growth of our ~~commercial products.~~existing EnFocus™ product line which is particularly attractive for its ease of install and ease of use in spaces with transient occupation. The ~~sales cycles for~~Company have enhanced the ~~MMM is dependent on many factors, including the availability and prioritization~~performance 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~~RedCap® product by providing a more user friendly experience in the timing, pace and size of MMM projects. 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 long-term effects on our customers of the coronavirus (“COVID-19”) pandemic.

Operating losses increased by $0.9 million, or 14%, in the first nine months of 2022 from the first 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, as well as increased logistics expenses that are weighing on margins. We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at September 30, 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 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.

2023. We continue to ~~monitor~~evaluate our sales strategy and believe our go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network to cover territories across the ~~impact~~country, and listening to the voice of the ~~COVID-19 pandemic on our customers, suppliers~~customer will lead to better and ~~logistics providers,~~more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.

Throughout 2023, the Company continued to ~~evaluate governmental actions being taken in response~~make significant cost cutting efforts to address operational expenses while maintaining customer satisfaction and delivering goods on-time. Investments into Energy Focus have contributed to the 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 planCompany to continue to ~~actively follow, assess~~not only provide quality products and ~~analyze the long-term impact of the COVID-19 pandemic~~services, but to both expand and ~~stand ready to adjust our organizational structure, strategies, plans and processes to respond.~~rationalize product offerings.

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. Long-term impacts of the COVID-19 pandemic, 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 evaluate new consumer markets that we believe may provide additional growth opportunities.

It is our belief that the ~~momentum of the~~continued dramatic rightsizing efforts undertaken in ~~2021, as described in our 2021 Annual Report,~~2022 and 2023, along with ~~our continuing efforts to date in 2022, including the development and launch of new and innovative products such as our EnFocus~~TM powerline controls platform, as well as our planned entry into the consumer markets with these new products, lowering of our fixed costs through improved lease arrangements and reduced headcount beginning in the second halfreorganization of the ~~year,~~sales team and ~~our plans to shift to more cost effective in-bound freight strategies,~~ongoing development of innovative, high-value products and an expanded distribution network, will over time result in improved sales and bottom-line performance for the Company.

During ~~the third quarter~~2021 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 additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and LED lamps. Our EnFocus™ powerline controls offer a more secure, affordable and environmentally sustainable solution compared with replacing entire lighting fixtures and incorporating additional wired or wireless communication.

~~Throughout 2021 and~~ 2022, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing ~~and prioritization~~ of U.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. This sector also maintains very long sales cycles. The timeline between bid to order can often take at least six months, and many MMM products are built-to-order with resultant lead times before orders become revenue. We continue to pursue opportunities from the U.S. Navy and the government sector to minimize such volatility, and reinvested in our MMM sales channel with a strategic hire in the second 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.volatility. 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”)~~Such efforts allowed us to continue to win bids and ~~many of~~ proposals that helped grow

our ~~products are now listed~~MMM sales pipeline in the ~~GSA website for all federal and military agencies~~second half of 2022. In May 2022, we reinvested in our MMM sales channel with a strategic hire to ~~view and order~~lead our ~~products, a channel we hope to further develop.~~MMM sales effort. While we continue to aggressively seek to increase sales of our commercial products, ~~we are reinvesting in~~ the MMM business ~~as we believe it~~ offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace. However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales.

Notwithstanding the aforementioned challenges and results, we are pleased to see a growth during the three months ended September 30, 2023 in quotation opportunities in both MMM and commercial product lines

Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. The recent strategic investments in 2023 by Sander Electronics, Inc. (“Sander”) contributed meaningful external capital, as well as presents synergistic opportunities to improve and diversify our supply chain and product offerings. We plan in part to achieve profitability through ~~developing and launching new,~~increasing sales in our innovative products such as EnFocusTM powerline ~~controls,~~control technology and further leveraging our unique and 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~~the commercial market. We are also evaluating adjacent technologies including ruggedized industrial retrofit lighting applications and ~~commercial markets.~~GaN-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels. In addition, we intend to continue to apply rigorous financial discipline into our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.

~~At September 30,~~

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, a far more secure, affordable and environmentally sustainable solution compared with replacing an entire luminaire and incorporating additional wired or wireless communication.

Despite continuing progress on cost reduction throughout 2022 and 2023, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in MMM and commercial customer retrofit budgets and project starts, and supply chain issues. There has also been continuing aggressive price competition in the lighting industry. We continued to incur losses and we ~~had $41 thousand in cash and~~have a ~~total of $4.8 million of debt, net of discounts and unamortized debt costs. Total debt, net of discounts and unamortized debt costs,~~substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at September 30, 2022 included $1.6 million outstanding under our inventory financing facility (the “Inventory Facility”), $0.4 million outstanding under our receivables financing facility (the “Receivables Facility”2023.

On June 28, 2023, the Company received notices of resignation from the following four members of the Board of Directors: Jennifer Cheng, Brian Lagarto, Jeffery Parker, and ~~together~~Stephen Socolof. Their terms as directors would have otherwise expired at the 2024 annual meeting of stockholders of the Company. The resignations did not involve any disagreement with the ~~Inventory Facility,~~Company.

On July 2, 2023, the ~~“Credit Facilities”), $0.4 million outstanding on~~remaining members of the ~~2021 Streeterville Note (as defined below), $1.9 million outstanding on~~Board of Directors unanimously appointed the ~~2022 Streeterville Note (as defined below)~~following four new members to the Board of Directors: Kin-Fu Chen, Shou-Jang Lee, Jason Tien-Chia Tsai, and ~~$0.5 million outstanding on~~Chao-Jen Huang (“Jay Huang”). The Board of Directors affirmatively determined that, at the ~~2022 Promissory Note (as defined below). At September 30, 2022, we had no additional availability~~time of his appointment, each of the new members of the Board of Directors is an independent director under the ~~Inventory Facility and $0.2 million under~~corporate governance standards of the ~~Receivables Facility. During~~ Nasdaq.

On August 24, 2023, the ~~third quarter~~Board of ~~2022, as a result of a reduction in borrowing base following an updated inventory appraisal,~~Directors approved 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.

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 membertermination of the Company’s ~~board~~chief executive officer and appointed Jay Huang to serve as the Company’s new chief executive officer. In line with this decision, Mr. Huang will discontinue his role as Chairman of ~~directors. The 2022 Promissory Note~~the Board. As part of this transition, the Board has ~~a maturity date~~appointed Kin Fu Chen as the Chairman of ~~June 16, 2023, and accrues interest at 8% per annum, compounded daily, on~~ the outstanding balance. The Company may prepay the amounts outstanding in whole or in part at any time prior to the maturity date. Upon the occurrence of an event of default under the 2022 Promissory Note, the Lender may, at its option, declare the amount outstanding under the 2022 Promissory Note immediately due and payable. After the occurrence of an event of default, the Lender may elect to have interest accrue on the 2022 Promissory Note at a rate per annum of 10%, or such lesser rate as permitted under applicable law.Board.

Our Business Strategy

Demand-oriented Approach

In ~~June 2022,~~order to deepen our relationships with customers, we ~~completed~~are in the process of re-establishing our service model, aiming to provide richer and more targeted customer service. We believe that by increasing opportunities for interaction with our customers, we can better understand their needs, thereby enhancing their loyalty to our brand.

To ensure that EFOI’s products, pricing, and customer service lifecycle are better aligned, we are building a ~~private placement (the “June 2022 Private Placement”) with certain institutional investors for~~comprehensive value model to ensure consistency in the ~~sale of 1,313,462 shares~~products and services we provide throughout the customer journey. We have begun an in-depth analysis of our ~~common stock at a purchase price of $1.30 per share. We also sold~~current and past top 10 customers over the last five years to identify the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. In connection with the June 2022 Private Placement, we paid the placement agent commissions of $252 thousand, plus $35 thousand in expenses, and we also paid legal, accounting and other fees of $47 thousand. Total offering costs of $334 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million.

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

The 2022 Streeterville Note has a maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the 2022 Streeterville Note at a premium, which is 5% during the first six months and 8% thereafter. Prepayments at the reduced rate in the first six months are limited to 50% of the outstanding balance. Beginning on December 1, 2022, Streeterville may require the Company to redeem up to $225 thousand of the 2022 Streeterville Note in any calendar month. The Company has the right on five occasions, but not during more than three consecutive months, to defer all redemptionscore factors that ~~Streeterville could otherwise~~make

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~~require~~them loyal customers. By analyzing this data, we hope to reveal the key elements that enhance customer stickiness, providing them with more reasons and value to stay with us. In particular, we are actively focusing on customers with high loyalty to better meet their needs. This is not only an acknowledgment of our products but also a validation of the quality of our service.

Supply-oriented Approach

EFOI is committed to adopting three main sustainable economy strategies: 'Green Supply Chain', 'Green Product', and 'Green Manufacturing', aiming to promote sustainability throughout the entire value chain. The Company is working closely with its supply chain partners to ~~make during any calendar month. Each exercise~~'optimize recycling mechanisms' and 'strengthen packaging design', integrating sustainable economy principles into the core of ~~this deferral right~~supply chain management.

Guided by the ~~Company will increase~~vision of 'transcending traditional corporate social responsibility and creating shared value', EFOI’s team is focusing on stakeholders, aiming to achieve a 'dual profit engine' effect by combining 'financial performance' and 'Environmental, Social, and Governance (ESG)' practices. This strategy not only aligns with the ~~amount outstanding under~~Company’s responsibility and sustainability goals but is also expected to enhance overall performance and market competitiveness. EFOI's operational team's new strategy focuses on integrating environmental and economic benefits, aiming to create a win-win situation that benefits the ~~2022 Streeterville Note by 1.5%.~~company, society, and the environment.

~~In December 2021, we completed~~

Under the premise of a ~~private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185 shares~~similar industrial environment and familiar relationships, our professional skills complement those of our supply chain partners. This foundation of cooperation enables us to more easily achieve common ~~stock at~~goals of cost reduction, profit sharing, and exploring new business opportunities. This not only strengthens our cooperative relationship but also lays 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 assolid foundation for our joint efforts towards a ~~reduction of additional paid-in capital and have been netted within equity~~better future.

Financial-oriented Approach

The Company applies strategic financial management in the ~~Condensed Consolidated Balance Sheet as~~below perspective.

Control and Monitoring of ~~December 31, 2021. Net proceeds~~Assets and Liabilities

•Assets: Regularly evaluate all assets, especially inventory, to ~~us from the December 2021 Private Placement were approximately $4.0 million.~~

In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share (the “June 2021 Equity Offering”). We paid the placement agent commissions of $400 thousand, plus $51 thousandensure they remain in ~~expenses,~~optimal condition in connection with the June 2021 Equity Offering and we also paid legal and other fees of $18 thousand. Total offering costs of $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, and Streeterville agreed to accept a fourth redemption deferral on the same terms during the third quarter of 2022. Each exercise of this deferral right by the Company will increase the amount outstanding under the 2021 Streeterville Note by 1.5%. The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022, and once during the third quarter of 2022.

On October 10, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with Streeterville, to whom we previously sold and issued the 2021 Streeterville Note. Pursuant to the Exchange Agreement, the Company and Streeterville have agreed to (i) partition from the 2021 Streeterville Note a new Promissory Note (the “Partitioned Note”) in the original principal amount of $205 thousand (the “Exchange Amount”), (ii) cause the outstanding balance of the 2021 Streeterville Note to be reduced by an amount equal to the Exchange Amount, and (iii) exchange (the “Exchange”) the Partitioned Note for 385,918 shares (the “Exchange Shares”) of the Company’s common stock.

The October Exchange was priced at-the-market under the rules of The Nasdaq Stock Market (“Nasdaq”) pursuant to one or more exemptions from the registration requirements of the Securities Act. There were no gross proceeds to the Company in respect of the October Exchange, provided that the Exchange satisfied a redemption notice provided by Streeterville under the terms of value and performance. Minimize or mitigate the ~~2021 Streeterville Note, pursuant~~impact of inefficient and aging assets, focusing on assets with high efficiency and return.

•Liabilities: Ensure a robust liability structure, optimize the cost of liabilities, and seek lower interest rates and more favorable repayment terms. Regularly review the liability situation to ~~which~~ensure the ~~Company otherwise would be required~~company’s level of liabilities remains within a safe range.

Structured Profitability

•Revenue Growth: Develop diversified revenue streams, reduce dependency on single business or market, continuously optimize products and services, and enhance market competitiveness.

•Cost Control: Strictly control operating costs, seek opportunities to ~~redeem $205 thousand~~reduce costs, and ensure the efficient use of ~~the 2021 Streeterville Note in~~resources to optimize operations.

•Cash Flow Management: Establish a sound accounts receivable and payable management system to ensure timely collection of receivables and reasonable arrangement of payments. Maintain sufficient cash ~~respectively.~~reserves to cope with potential funding shortages.

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Results of operations

The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Net sales	Net sales	100.0	%	100.0	%	100.0	%	100.0	%	Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	Cost of sales	109.2		79.5		101.5		79.8		Cost of sales	103.6		109.2		95.5		101.5
Gross (loss) profit	Gross (loss) profit	(9.2)		20.5		(1.5)		20.2		Gross (loss) profit	(3.6)		(9.2)		4.5		(1.5)

Operating expenses:	Operating expenses:									Operating expenses:
Product development	Product development	20.7		14.7		23.0		19.1		Product development	—		20.7		13.3		23.0
Selling, general, and administrative	Selling, general, and administrative	102.2		71.6		111.1		86.5		Selling, general, and administrative	53.2		102.2		87.6		111.1
Loss on write-off of fixed assets		4.3		—		1.4		—
Restructuring recovery		—		—		—		(0.3)
Loss on write-off of property and equipment										Loss on write-off of property and equipment	—		4.3		—		1.4

Total operating expenses	Total operating expenses	127.2		86.3		135.5		105.3		Total operating expenses	53.2		127.2		100.9		135.5
Loss from operations	Loss from operations	(136.4)		(65.8)		(137.0)		(85.1)		Loss from operations	(56.8)		(136.4)		(96.4)		(137.0)

Other expenses (income):	Other expenses (income):									Other expenses (income):
Interest expense		13.3		6.4		12.8		7.0
Gain on forgiveness of Paycheck Protection Program loan		—		—		—		(10.7)
Interest expense, net										Interest expense, net	2.5		13.3		6.8		12.8

Other income	Other income	—		(31.4)		(0.6)		(11.6)		Other income	—		—		(0.5)		(0.6)

Other expenses	Other expenses	1.1		0.5		0.9		0.6		Other expenses	0.5		1.1		0.8		0.9

Net loss	Net loss	(150.8)	%	(41.3)	%	(150.1)	%	(70.4)	%	Net loss	(59.8)	%	(150.8)	%	(103.5)	%	(150.1)	%

Net sales

A further breakdown of our net sales is presented in the following table (in thousands):


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Commercial	Commercial	$	1,288	$	1,522	$	3,397	$	3,513	Commercial	$	498	$	1,288	$	1,261	$	3,397
MMM products	MMM products	476		1,227		1,908		3,947		MMM products	841		476		2,063		1,908

Total net sales	Total net sales	$	1,764	$	2,749	$	5,305	$	7,460	Total net sales	$	1,339	$	1,764	$	3,324	$	5,305

Net sales of ~~$1.8~~$1.3 million for the third quarter of ~~2022~~2023 decreased ~~$1.0~~$0.4 million, or ~~36%~~24%, compared to third quarter of ~~2021~~2022 net sales of ~~$2.7~~$1.8 million, primarily driven by a decrease in ~~MMM~~commercial sales of $0.8 million, or 61%, ~~and a decrease~~that was partially offset by an increase in MMM sales of ~~$0.2~~$0.4 million, or ~~15%,~~77%. MMM sales increased due to larger sales orders obtained for MMM products as well as efficiency increased by the replacement of ~~commercial products sales.~~the head of MMM sales mid-year 2022. Net ~~MMM~~commercial product sales decreased in the third quarter of ~~2022~~2023 compared to the same period in ~~2021, mainly~~2022, primarily due to the lack of availability ~~and prioritization of government project funding and the delayed timing of expected orders. The decrease~~ in high margin, high demand commercial product sales in the third quarter of 2022 reflects (i) volatility of sales to large institutional customers; (ii) fluctuations in the timing and pace of commercial projects, including where lead times extended into the subsequent quarter; and (iii) lingering macroeconomic supply chain impactsproducts as a result of supply chain interruptions as well as the ~~COVID-19 pandemic.~~new CEO’s focus on internal processes such as cost management.

Net sales of ~~$5.3~~$3.3 million for the first nine months of ~~2022~~2023 decreased ~~$2.2~~$2.0 million, or ~~29%~~37%, compared to the same period in ~~2021,~~2022, primarily driven by a 63% decrease in commercial product sales, that was partially offset by an increase in MMM product ~~sales.~~sales of 8% for the first nine months of 2023, as compared to the same period of 2022. Net commercial product sales for the first nine months of 2023 decreased as compared to the same period of 2022 due to the unavailability of high margin, high demand commercial items because of supply chain interruptions. Net sales of our MMM products ~~decreased~~increased mainly due to ~~availability~~larger sales orders obtained for MMM products and efficiency increased by the replacement of ~~government funding and~~ the ~~delayed timing~~head of ~~expected orders in the first nine months of~~MMM sales mid-year 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.

3634

Gross ~~Loss~~Profit

Gross loss was ~~$(0.2)~~$0.0 million, or ~~(9)~~(4)% of net sales, for the third quarter of ~~2022.~~2023. This compares with gross ~~profit~~loss of ~~$0.6~~$(0.2) million, or ~~21%~~(9)% of net sales, in the third quarter of ~~2021.~~2022. The ~~year-over-year decrease~~period-over-period increase in gross profit was driven mainly by ~~(i) lower sales volume, an~~the $0.6 million favorable impact from variable costs which included a one-time adjustment taken during the period of 2022 for a scrap write-off which was slightly offset by the $0.1 million unfavorable impact of ~~$0.3~~higher fixed costs.

Gross profit was $0.1 million, or ~~20% of net sales; (ii) an unfavorable product mix impact of approximately $0.2 million, or 13% of net sales; (iii) an unfavorable net impact of $0.3 million, or 16%~~10% of net sales, ~~from our inventory reduction project; and (iv) a favorable impact from the reduction in fixed costs of $0.1 million or 2% of net sales. Gross loss~~ for the ~~third quarter~~first nine months of ~~2022 also included unfavorable freight-in variances~~2023 compared to gross loss of ~~$0.1 million, or 6% of net sales, while gross profit for the third quarter of 2021 included favorable price and usage variances for material and labor of $0.4 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~~2022. The year-over-year increase was driven by (i) a ~~gross profit of $1.5~~favorable $0.1 million decrease in fixed costs, or ~~20%~~2% 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;~~and (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~~$2.1 million, or 3%39% of net sales, from variable cost such as change in inventory reserves which included a one-time adjustment taken during the ~~reduction of fixed costs. The gross loss for the first nine months~~period 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 2% of net sales.a scrap write-off.

Operating expenses

Product development

Product development expenses include salaries and related expenses, contractor and consulting fees, product development related 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 $0.1 million for the third quarter of 2023, down 61% from the third quarter of 2022. Product development expenses in the third quarter of 2023 primarily relate to salaries and related employee benefits and taxes.

Product development expenses were $0.4 million for the ~~third quarter~~first nine months of ~~2022, down 9% from the third quarter of 2021. Product development expenses primarily relate~~2023, a $0.8 million decrease compared to ~~the development of our next generation of EnFocus~~TM ~~and RedCap~~® ~~products.~~

~~Product development expenses were~~ $1.2 million for the first nine months of ~~2022, a $0.2 million decrease compared to $1.4 million for the first nine months of 2021.~~2022. The decrease is primarily related to payroll expense, decreased headcount, and customization of product ~~testing associated with the development and launch of our ultraviolet-C light disinfection product portfolio in 2021.~~offerings for key customers.

Selling, general and administrative

Selling, general and administrative expenses were ~~$1.8~~$0.7 million for the third quarter of ~~2022,~~2023, down 8%60% as compared to ~~$2.0~~$1.8 million in the third quarter of ~~2021.~~2022. The decrease in expenses from the third quarter of ~~2021~~2022 primarily relates to ~~reductions~~(i) a reduction of ~~$0.2~~$0.6 million in payroll and payroll related expenses ~~and~~due to reduced headcount; (ii) a reduction of $0.1 million in trade show and other marketing ~~expenses. These decreases were offset by an increase~~expense; (iii) a reduction of $0.3 million in professional fees such as legal, recruiting, and directors; and (iv) a reduction of $0.1 million in ~~professional fees.~~office related expenses.

Selling, general and administrative expenses were $2.9 million for the first nine months of 2023, compared to $5.9 million for the first nine months of ~~2022, compared to $6.5 million for the first nine months of 2021.~~2022. The decrease is primarily due to (i) decreases in payroll and payroll related expenses of ~~$0.9~~$1.8 million ~~offset by increases~~due to reduced headcount; (ii) a reduction of $0.4 million in trade show and other marketing ~~costs~~expense; (iii) a reduction of ~~$0.1~~$0.4 million ~~severance costs of $0.1 million and~~in professional fees such as legal, consulting, recruiting, and ~~relocation fees~~directors; and (iv) a reduction in depreciation and software expenses of ~~$0.1~~$0.4 million.

~~Restructuring~~

No restructuring expense was recorded for the three and nine months ended September 30, 2022. For the three months ended September 30, 2021, approximately $1 thousand in restructuring expense was recorded, and for the nine months ended September 30, 2021, approximately $21 thousand in restructuring credits were recorded. All restructuring 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~~$34 thousand for the third quarter of ~~2022,~~2023, compared to interest expense of ~~$0.2 million~~$235 thousand for the third quarter of ~~2021. Interest~~2022. The decrease in interest expense is primarily related to interest ~~and amortization~~ attributable to an overall reduction in principal on the ~~2021 Streeterville Note,~~Inventory Facility (as defined below) and the 2022 Streeterville Note (as defined below), lower facility fees on the Inventory Facility and elimination of the ~~Credit Facilities.~~Receivables Facility (as defined below), as well as the amortization of debt costs related to the Inventory Facility. The actual cash interest paid in ~~each of~~ the third quarter of ~~2022 and~~2023 was $7 thousand compared to $84 thousand in the third quarter of ~~2021 was $0.1 million.~~2022.

Interest expense was ~~$0.7 million~~$226 thousand for the first nine months of ~~2022,~~2023, compared to interest expense of ~~$0.5 million~~$679 thousand for the first nine months of ~~2021.~~2022. The ~~increase~~decrease in interest expense ~~was~~is primarily related to interest ~~and amortization~~ attributable to a promissory note we sold and issued to Streeterville Capital, LLC (“Streeterville”) in the ~~2022~~principal amount of approximately $1.7 million (the “2021 Streeterville ~~Note.~~Note”), as well as the amortization of debt costs related to the Credit Facilities (as defined below). The actual cash interest paid for each of the nine months ended September 30, 2023 and 2022 was $77 thousand and ~~the nine months ended September 30, 2021 was $0.3 million.~~$267 thousand, respectively.

~~Gain on forgiveness of PPP loan~~

~~Forgiveness income of $0.8 million related to the Paycheck Protection Program (“PPP”) loan taken out during 2020 and forgiven in 2021 was recognized during the first 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 $7 thousand for the third quarter of 2023, compared to other expenses of $20 thousand for the third quarter of ~~2022,~~2022. Other expenses were $28 thousand for the nine months ended September 30, 2023, 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.~~2022. Other expenses are mainly comprised of bank and collateral management fees.

Other income for the nine months ended September 30, 2023 of $16 thousand, relates to the reversal of credit balances recorded from online retail sales which was taken to income during the second quarter of 2023. Other income of $30 thousand for the ~~first nine months~~third quarter of 2022 relates to an aged customer credit balance the Company had been carrying for which the customer had not responded to various inquiries. This credit was taken to income during the first quarter of 2022.

Provision for income taxes

Due to the operating losses incurred during the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, 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 September 30, ~~2022,~~2023, our net loss of $0.9 million decreased 65% from $2.7 million ~~increased 134% over the~~ net loss for the three months ended September 30, ~~2021 of $1.1 million.~~2022. The ~~increase~~decrease is ~~mainly~~primarily due to ~~lower net sales~~a decrease in operating expenses in the third quarter of ~~2022.~~2023 from the third quarter of 2022 as gross profit remained relatively flat.

For the nine months ended September 30, ~~2022,~~2023, our net loss of $3.4 million decreased 57% from $8.0 million ~~increased 52% over the~~ net loss for the nine months ended September 30, ~~2021 of $5.3 million.~~2022. The ~~increase~~decrease is ~~mainly~~primarily due to ~~lower net sales~~a decrease in operating expenses in the first ~~three quarters~~nine months of 2023 from the first nine months of 2022 ~~the gain on the forgiveness of the PPP loan of $0.8 million recorded in the first quarter of 2021 and the $0.9 million other income recorded during the third quarter of 2021 for the ERTC funds.~~as gross profit remained relatively flat.

Financial condition

At September 30, ~~2022,~~2023, we had ~~$41 thousand~~$1.7 million in cash and a total of ~~$4.8~~$1.3 million of debt, including $1.6 million outstanding under our Inventory Facility, $0.4 million outstanding under our Receivables Facility, $0.4 million outstanding on the 2021 Streeterville Note, $1.9 million outstanding onnet of discounts and unamortized debt costs, related to the 2022 Streeterville Note ~~and $0.5 million outstanding on the 2022 Promissory Note. At September 30, 2022, we no additional availability under the Inventory Facility and $0.2 million under the Receivables Facility.~~outstanding. We have historically incurred substantial losses, and as of September 30, ~~2022,~~2023, we had an accumulated deficit of ~~$146.7~~$152.5 million. Additionally, our sales have been concentrated among a few major customers and for the nine months ended September 30, ~~2022, three~~2023, two customers accounted for approximately ~~38%~~29% of net sales.

AsIn 2022 and 2023, we recommitted to building upon the transformation activities started during 2019 and 2020 that sought to stabilize and regrow our business. These efforts include the following key developments that occurred during 2022 and 2023:

•We continued development of the second generation of EnFocus™ powerline control switches and circadian lighting system for commercial markets, which as a result of supply chain challenges we now plan to launch in 2023. EnFocus™ powerline control enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and EnFocus™ LED lamps. This upgrade offers a simpler, more secure, affordable and environmentally sustainable solution compared with replacing entire luminaire fixtures and incorporating additional wired or wireless communication.

•We reinvested in our MMM sales channel with a strategic hire in the ~~restructuring actions~~second quarter of 2022 and ~~initiatives described~~are pursuing existing and new sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.

•Beginning in ~~Note 3. “Restructuring,”~~July 2022, we ~~have previously~~ reduced our warehouse square footage, and undertook an inventory reduction project throughout 2022 focused on reducing our highly reserved commercial finished good inventory.

•The Company has aggressively re-evaluated operating expenses, and reduced its workforce significantly throughout 2022 and into 2023 to ~~be more commensurate with~~manage fixed costs.

•We continued to seek additional external funding alternatives and sources to support our ~~expected sales volumes.~~growth strategies, plans and initiatives. In ~~the second~~August 2023, we entered into a security purchase agreement, pursuant to which we raised an

aggregate gross proceeds of $1.8 million. Please refer to Note 7 and ~~third quarters~~Note 9 include under Part I, “Financial Statements” of ~~2022, we repeatedly revisited cost reduction opportunities and further reduced operating expenses~~this Quarterly Report for the ~~second half of 2022. However,~~details.

During 2022 and into 2023, we redoubled our cost control efforts to streamline our operations by closely managing all spending done throughout the Company, while carefully investing in new products and strategies that sought to reenergize sales.

Throughout 2022 and into 2023, due to lingering economic and building occupancy impacts from the COVID-19 pandemic, we experienced continuing weakness in commercial sales as our customers in the healthcare, education, and commercial and industrial sectors put lighting retrofit projects on hold or delayed order placements. We continue to ~~incur losses~~monitor the long-term impact of the COVID-19 pandemic on our customers, suppliers and ~~have~~logistics providers. Although the significance and duration of the ongoing impact on our customers and us is still uncertain, and the specific timing of business recovery from the long-term impacts of the COVID-19 pandemic is still difficult to predict, we remain optimistic that facility capital budgets will start unfreezing, commercial building occupancy will rise, and our growth efforts will further impact our financial performance in a ~~substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist at September 30, 2022.~~positive way.

~~Throughout 2021 and 2022, we have continued to evaluate and assess financing and other strategic options as we~~We will seek to ~~achieve profitability. We plan~~remain agile as an organization to ~~continue~~respond to ~~develop advanced lighting and lighting control technologies and introduce impactful new products surrounding EnFocus~~TM~~, 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~~potential or continuing weakness in the ~~market.~~

macroeconomic environment and in the meantime seek to expand sales channels and enter new markets that we believe will provide additional growth opportunities. We plan to achieve profitability ~~by growing~~through developing and launching new, innovative products, such as our ~~sales through existing and new lighting and~~EnFocusTM powerline control systems, our Redcap® emergency battery backup tubular TLEDs, evaluating new growth opportunities such as GaN-based power supply circuitry and other energy solution products, ~~and by continuing to refine and execute~~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, as well as our emerging consumer market focus.~~

~~As described in Note 9, “Stockholders’ Equity,” we~~partnerships. We also ~~raised approximately $3.2 million of net proceeds~~plan to continue to develop advanced lighting and lighting control applications built upon the ~~issuance of common stock and June 2022 Warrants in connection with~~EnFocusTM platform that aim to serve 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,commercial markets. In addition, we obtained net proceeds from bridge financing of approximately $0.5 million, $1.8 million and $1.5 million, respectively. Also in April 2021, we expanded the borrowing capacity on one of our revolving credit facilities.

The restructuring and cost cutting initiatives taken throughout 2021 and 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 expectintend to ~~receive related~~continue to the 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 cycleapply rigorous financial discipline 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,~~organizational structure, decision-making, business processes 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~~policies, strategic sourcing activities and ~~cost increases in the~~ supply chain ~~globally, and the long-term economic impact from the COVID-19 pandemic that has significantly diminished the interest and activities for~~practices to help accelerate our ~~customers’ lighting retrofit projects until occupancy returns to more normal levels, among other factors.~~path towards profitability.

Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage shortages of available components, longer lead times in obtaining 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:~~

•additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to substantial dilution for current stockholders and have rights, preferences and privileges senior to our common stock;

•loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and

•~~the current environment in the capital markets and volatile interest rates, combined with our capital constraints, may prevent us from being able to obtain adequate debt financing.~~

If we are unable to find a permanent chief financial officer, it may be more difficult to obtain additional financing on satisfactory terms or at all. If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.

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.

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

Liquidity and capital resources

Cash

At September 30, ~~2022,~~2023, our cash balance was approximately ~~$41 thousand,~~$1.7 million, compared to approximately ~~$2.7~~$0.1 million at December 31, ~~2021.~~2022.

The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows included in Part I, Item 1, “Financial Statements,” of this Quarterly Report (in thousands):


		Nine months ended September 30,					Nine months ended September 30,
		2022		2021			2023		2022
Net cash used in operating activities	Net cash used in operating activities	$	(6,241)	$	(8,420)	Net cash used in operating activities	$	(2,370)	$	(6,241)

Net cash used in investing activities	Net cash used in investing activities	$	(41)	$	(311)	Net cash used in investing activities	$	(27)	$	(41)

Net cash provided by financing activities	Net cash provided by financing activities	$	3,641	$	6,934	Net cash provided by financing activities	$	4,036	$	3,641

Net cash used in operating activities

Net cash used in operating activities was $2.4 million for the nine months ended September 30, 2023. The net loss for the nine months ended September 30, 2023 was $3.4 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, and accounts receivable reserves and working capital changes. During the nine months ended September 30, 2023, we generated $0.6 million from inventory, $0.5 million from changes in prepaid and other assets, mainly from the receipt of $445 thousand in Employee Retention Tax Credit funds, and $0.4 million from accounts payable due to the timing of inventory receipts and payments. During the nine months ended September 30, 2023, we used $0.4 million through the timing of collection of accounts receivable.

Net cash used in operating activities was $6.2 million for the nine months ended September 30, 2022. The net loss for the nine months ended September 30, 2022 was $8.0 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, and accounts receivable reserves and working capital changes. During the nine months ended September 30, 2022, we generated $1.5 million from inventory, $0.2 million through the timing of collection of accounts receivable, and $0.2 million from changes in prepaid and other assets. We used $0.1 million from accounts payable due to the timing of inventory receipts and payments, $0.5 million due to changes in accrued and other liabilities (primarily due to a decrease in accrued payroll), and $0.3 million from changes in deferred revenue.

Net cash used in operating activities was $8.4 million for the nine months ended September 30, 2021. The net loss was $5.3 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, gain on forgiveness of the PPP loan, other income related to the ERTC, and accounts receivable reserves and working capital changes. During the nine months ended September 30, 2021, we generated $0.4 million through the timing of collection of accounts receivable and $0.1 million due to the timing of inventory receipts and payments. We used $0.1 million through the timing of the receipt of inventory against short-term deposits and $2.1 million for inventory primarily due to global supply chain challenges that are impacting our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components. We also used $0.3 million due to changes in accrued and other liabilities (primarily due to an increase in accrued payroll of $0.2 million; this increase was offset by a reduction of $0.2 million in accrued accounting and legal fees and $0.2 million in accrued bonuses), and $0.1 million from changes in prepaid and other current assets.

~~Net cash used in~~ investing activities

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

For the nine months ended September 30, ~~2021,~~2023 and 2022, net cash used in investing activities was ~~$311~~$27 thousand and ~~resulted~~$41 thousand, respectively, which is primarily from the purchase of ~~software and a development of the mUVe~~TM ~~ultraviolet-C light disinfection robot. The mUVe~~TM ~~ultraviolet-C light disinfection robots were fully written off in the third quarter of 2022.~~

tooling.

Net cash provided by financing activities

Net cash provided by financing activities during the nine months ended September 30, 2023 was $4.0 million, primarily related to $6.1 million of net proceeds from the issuance of common stock, offset by net payments on the Credit Facilities of $1.4 million and the 2022 Streeterville Note of $625 thousand.

As of September 30, 2023, the June 2022 Warrants, expiring June 7, 2027, to purchase an aggregate of 384,616 shares remained outstanding, with a weighted average exercise price of $9.10 per share; warrants issued in December 2021, expiring December 16, 2026 (the “December 2021 Warrants”), to purchase an aggregate of 182,630 shares remained outstanding, with an exercise price of $24.64 per share, and warrants issued in January 2020, expiring January 13, 2025 (the “January 2020 Warrants”), to purchase an aggregate of 32,773 shares remained outstanding with a weighted average exercise price of $25.66 per share. The exercise of the remaining June 2022 Warrants, December 2021 Warrants and January 2020 Warrants outstanding could provide us with cash proceeds of up to $3.5 million, $4.5 million and $0.8 million, respectively, in the aggregate.

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

During the nine months ended September 30, 2022, all of the December 2021 Pre-Funded Warrants as well as the June 2022 Pre-Funded Warrants were exercised. As of September 30, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of $1.30 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate. Also at September 30, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding with an exercise price of $3.52 per share. January 2020 Warrants to purchase an aggregate of 229,414 shares remain outstanding at September 30, 2022, with a weighted average exercise price of $3.67 per share. The exercise of the remaining outstanding December 2021 Warrants and January 2020 Warrants could provide us with cash proceeds of up to $4.5 million and $0.8 million, respectively.

Net cash provided by financing activities during the nine months ended September 30, 2021 was $6.9 million, primarily related to $4.5 million of net proceeds from the June 2021 Equity Offering, $1.5 million of net proceeds from the 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~~2022 Annual Report.

Critical accounting policies and estimates

There have been no material changes to our critical accounting policies as compared to those included in our ~~2021~~2022 Annual Report.

Certain risks and concentrations

individually represented 10% or more of our total trade accounts payable ~~balance, as follows:~~

~~For the three months ended September 30, 2022, sales~~balance. Please refer to ~~a regional commercial lighting retrofit company accounted for approximately 32%~~Note 2, “Basis 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,~~Presentation and ~~a regional commercial lighting retrofit company accounted for approximately 19%, 17% and 27%~~Summary 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~~Significant Accounting Policies,” included under Part I, Item 1, “Financial Statements,” of ~~products for the U.S. Navy comprised approximately 36% of net sales for the same period.~~this Quarterly Report.

One offshore supplier accounted for approximately 17% and 18%, respectively, of our total expenditures for the three and nine. months ended September 30, 2022. For the three and nine months ended September 30, 2021, one offshore supplier accounted for approximately 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 Chief Executive Officer who also serves as our principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer, the effectiveness of our disclosure controls and procedures, as of September 30, ~~2022,~~2023, the end of the period covered by this Quarterly Report. Management, with the participation of our Chief Executive Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were effective as of September 30, ~~2022.~~2023.

Changes in internal control over financial reporting

During the quarterly period covered by this Quarterly Report, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

~~ITEM 1. LEGAL PROCEEDINGS~~

~~From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 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~~

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ITEM 6. EXHIBITS

EXHIBIT INDEX


Exhibit Number			Description of Documents
~~3.1~~10.1			~~Certificate~~Form 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,~~Securities Purchase Agreement, 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+~~			~~Chief Executive Officer Offer Letter dated September 6, 2022 between Lesley A. Matt and Energy Focus, Inc.~~
~~10.2~~			~~Promissory Note, date~~d as of ~~September 16, 2022~~, ~~by and~~June 29, 2023, between the Company and ~~Mei-Yun Huang~~each purchaser named in the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on ~~September22, 2022)~~July 5, 2023).
~~10.3~~			~~Promissory Note, dated as of October 27, 2022, by and between the Company and Jay Huang~~
~~10.4~~			~~Promissory Note, dated as of November 4, 2022, by and between the Company and Jay Huang~~
~~10.5~~			~~Promissory Note, dated as of November 9, 2022, by and between the Company an~~d ~~Mei-Yun Huang~~
31.1+			Certification of Principal Executive Officer ~~and~~Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+			Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1++			Certification of Principal Executive Officer and 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 September 30, ~~2022,~~2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, (v) Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			ENERGY FOCUS, INC.

Date:	November ~~10, 2022~~9, 2023	By:	/s/ ~~Lesley A. Matt~~Chiao Chieh Jay Huang
			~~Lesley A. Matt~~Chiao Chieh Jay Huang
			Chief Executive Officer
			(Principal Executive Officer and Principal Financial Officer)

4843


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