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What changed in ENERGY FOCUS, INC/DE's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of ENERGY FOCUS, INC/DE's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+468 added−592 removedSource: 10-K (2024-03-22) vs 10-K (2023-03-23)

Top changes in ENERGY FOCUS, INC/DE's 2023 10-K

468 paragraphs added · 592 removed · 306 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeBy understanding the voice of the customer and by incorporating rapidly evolving technologies surrounding LED and smart lighting, we believe that we will continue to be able to develop solutions that better address customers’ needs with unique and novel product offerings, such as EnFocus™, our dimmable and tunable lighting and control platform, that deliver substantial value to our customers and accelerate LED and smart lighting adoptions. 6 Table of Contents Our Products We design, develop, manufacture and market a wide variety of LED lighting technologies and solutions to serve our primary end user markets, including the following: Commercial products to serve our targeted commercial markets: • RedCap ® emergency battery backup TLEDs; • EnFocus™ powerline lighting control platform including dimming (“DM”) and color tuning (“DCT”); • LED retrofit solutions for existing luminaires, including replacement TLEDs for linear fluorescent lamps, downlights, and retrofit kits for low-bay, high-bay and office applications; and • Industrial grade LED Dock lights.
Biggest changeOur Products We design, develop, manufacture and market a wide variety of LED lighting technologies and solutions to serve our primary end user markets, including the following: Commercial products to serve our targeted commercial markets: • RedCap ® emergency battery backup TLEDs; • EnFocus™ powerline lighting control platform including dimming (“DM”) and color tuning (“DCT”); • LED retrofit solutions for existing luminaires, including replacement TLEDs for linear fluorescent lamps, downlights, and retrofit kits for low-bay, high-bay and office applications; and • Industrial grade LED Dock lights.
We believe that our customer-centric product development efforts represent a better leverage on our R&D investments and aim to continue to focus on developmental projects that could produce more impactful and differentiated products and solutions in a more timely manner for faster customer adoption.
We believe that our customer-centric product development efforts represent a better leverage on our R&D investments and aim to continue to focus on developmental projects that could produce more impactful and differentiated products and solutions in a timelier manner for faster customer adoption.
In addition, we maintain general liability, product recall and workers’ compensation insurance in amounts we believe to be consistent with our risk of loss and industry practice. Regulatory Compliance We derive a significant portion of our revenues from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies.
In addition, we maintain general liability, product recall and workers’ compensation insurance in amounts we believe to be consistent with our risk of loss and industry practice. 9 Table of Contents Regulatory Compliance We derive a significant portion of our revenues from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies.
Navy accounting for approximately 30% of net sales, and sales to a regional commercial lighting retrofit company accounting for approximately 13% of net sales. 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 accounting for approximately 13% of net sales, and sales to a regional commercial lighting retrofit company accounting for approximately 14% of net sales. 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.
One offshore supplier accounted for approximately 16% of our total expenditures for the twelve months ended December 31, 2022. At December 31, 2022, this same offshore supplier accounted for approximately 36% of our trade accounts payable balance. One offshore supplier accounted for approximately 29% of our total expenditures for the twelve months ended December 31, 2021.
One offshore supplier accounted for approximately 16% of our total expenditures for the twelve months ended December 31, 2022. At December 31, 2022, this same offshore supplier accounted for approximately 36% of our trade accounts payable balance.
For this reason, building codes are increasingly requiring not only LEDs, but dimmable LEDs. Governments around the world are implementing regulations and standards that incentivize the use of LED lighting, both smart and conventional, to reduce energy consumption and, therefore, carbon dioxide emissions.
For this reason, building codes are increasingly requiring not only LEDs, but dimmable LEDs. Governments around the world 5 Table of Contents are implementing regulations and standards that incentivize the use of LED lighting, both smart and conventional, to reduce energy consumption and, therefore, carbon dioxide emissions.
Department of Energy, Office of Energy Efficiency and Renewable Energy (“DOE”), entitled “Adoption of Light-Emitting Diodes in Common Lighting Applications,” reports that from 2016 to 2018, 5 Table of Contents installations of LED products have increased in all applications, increasing LED penetration to 30% of all general illumination lighting.
Department of Energy, Office of Energy Efficiency and Renewable Energy (“DOE”), entitled “Adoption of Light-Emitting Diodes in Common Lighting Applications,” reports that from 2016 to 2018, installations of LED products have increased in all applications, increasing LED penetration to 30% of all general illumination lighting.
The information on our website is not a part of, nor is it incorporated by reference into this Annual 10 Table of Contents Report on Form 10-K.
The information on our website is not a part of, nor is it incorporated by reference into this Annual Report on Form 10-K.
We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) 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.
We specialize in energy-efficient LED lighting retrofit product, replacing fluorescent, high-intensity discharge (“HID”) 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.
Since then, we have been building and expanding our commercial and industrial market presence where the economic and non-energy benefits and technical specifications of our high-quality lighting product offerings are compelling, particularly for mission-critical facilities in the enterprise verticals such as healthcare, eldercare, education and the commercial and industrial space.
We launched our first commercial LED lighting products in 2010. Since then, we have been building and expanding our commercial and industrial market presence where the economic and non-energy benefits and technical specifications of our high-quality lighting product offerings are compelling, particularly for mission-critical facilities in the enterprise verticals such as healthcare, eldercare, education and the commercial and industrial space.
Additionally, we have various pending U.S. patent applications, and various pending Patent Cooperation 9 Table of Contents Treaty patent applications filed with the World Intellectual Property Organization that serve as the basis for national patent filings in countries of interest. Our issued patents expire at various times through May 2040.
Additionally, we have various pending U.S. patent applications, and various pending Patent Cooperation Treaty patent applications filed with the World Intellectual Property Organization that serve as the basis for national patent filings in countries of interest. Our over 50 issued patents expire at various times through May 2040.
The SEC maintains a website that contains these reports at www.sec.gov . 11 Table of Contents
The SEC maintains a website that contains these reports at www.sec.gov . 10 Table of Contents
Navy comprised approximately 38% of net sales for the same period. 8 Table of Contents Competition Our LED lighting products compete against a variety of lighting products, including conventional light sources such as compact fluorescent lamps and HID lamps, as well as other TLEDs and integrated LED luminaire products.
Navy comprised approximately 30% of net sales for the same period. Competition Our LED lighting products compete against a variety of lighting products, including conventional light sources such as compact fluorescent lamps and HID lamps, as well as other TLEDs and integrated LED luminaire products.
We have in-house commercial sales personnel and external sales agencies representing Energy Focus products. We aim to continue to expand the coverage of our in-house sales team to eventually cover all geographic regions across the United States. Our MMM sales strategy leverages our brand and past performance and focuses on education about our products as well as ease of procurement.
We aim to continue to expand the coverage of our in-house sales team to eventually cover all geographic regions across the United States. Our MMM sales strategy leverages our brand and past performance and focuses on education about our products as well as ease of procurement.
We encourage and support the growth and development of our employees. Continual learning and career development is advanced through ongoing performance and development conversations with employees and reimbursement is available to employees from time to time for seminars, conferences, formal education, and other training events employees attend in connection with their job duties.
Continual learning and career development is advanced through ongoing performance and development conversations with employees and reimbursement is available to employees from time to time for seminars, conferences, formal education, and other training events employees attend in connection with their job duties.
Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 30% of net sales for the same period. In 2021, two customers accounted for 43% of net sales, with 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 70% of net sales for the same period. In 2022, two customers accounted for 27% of net sales, with sales to our primary distributor for the U.S.
ITEM 1. BUSINESS Overview Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”), and expanded our offerings into the consumer market in the fourth quarter of 2021.
ITEM 1. BUSINESS Overview Energy Focus engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”).
Our primary target customers for our LED lighting and controls systems are enterprise end-users, as well as contractors or ESCOs that could incorporate our products into their projects. We also sell through lighting agencies that represent our products 7 Table of Contents as a complement to our direct sales effort.
Our primary target customers for our LED lighting and controls systems are enterprise end-users, as well as contractors or ESCOs that could incorporate our products into their projects. We also sell through lighting agencies that represent our products as a complement to our direct sales effort. We have in-house commercial sales personnel and external sales agencies representing Energy Focus products.
As a result of the continued macroeconomic impacts of the COVID-19 pandemic, throughout 2021 and 2022, we experienced global supply chain and logistics constraints that impacted our inventory purchasing strategy and increased our transportation costs, in continued efforts to manage both shortages of available components and longer lead times in obtaining components.
As a result of the continued macroeconomic impacts of the COVID-19 pandemic, throughout 2022 and 2023, we experienced logistics constraints with higher cost comparing to pre-COVID-19 that impacted our inventory purchasing strategy and increased our transportation costs, in continued efforts to manage longer lead times in obtaining components.
Our LED products are more energy-efficient than traditional lighting products, such as fluorescent, incandescent and HID lamps, and we believe they can improve the overall sustainability profile of our customers by providing financial, environmental and human health benefits, including achieving significant long-term energy and maintenance cost savings, reducing carbon emission, substantially reducing retrofit waste and enhancing the health and productivity of building occupants.
Navy and allied foreign navies: • Military-grade Intellitube ® retrofit TLED and the Invisitube™ ultra-low EMI TLED; and • Military-grade fixtures, including LED globe lights, berth lights; high-bay fixtures and LED retrofit kits. 6 Table of Contents Our LED products are more energy-efficient than traditional lighting products, such as fluorescent, incandescent and HID lamps, and we believe they can improve the overall sustainability profile of our customers by providing financial, environmental and human health benefits, including achieving significant long-term energy and maintenance cost savings, reducing carbon emission, substantially reducing retrofit waste and enhancing the health and productivity of building occupants.
We compete with LED systems produced by large lighting companies such as Signify Lighting, Osram Sylvania and GE Lighting, as well as smaller manufacturers or distributors such as LED Smart, Revolution Lighting Technologies, Orion Energy Systems, and Keystone Technologies. Some of these competitors offer products with performance characteristics similar to those of our products.
We compete with LED systems produced by large lighting companies such as Signify Lighting, Osram Sylvania and GE Lighting, as well as smaller manufacturers or distributors such as LED Smart, Revolution Lighting Technologies, Orion Energy Systems, and Keystone Technologies.
Concentration of Sales In 2022, two customers accounted for 27% of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 13% of net sales, and sales to a regional commercial lighting retrofit company accounting for approximately 14% of net sales. When sales to our primary distributor for the U.S.
Concentration of Sales In 2023, two customers accounted for 48% of net sales, with sales to our primary distributor and shipbuilder for the U.S. Navy accounting for approximately 35% and sales to a shipbuilder for the U.S. Navy accounting for approximately 13%. When sales to our primary distributor for the U.S.
Manufacturing and Suppliers We produce our lighting products and systems through a combination of internal manufacturing and assembly at our Solon, Ohio facility, and sourced finished goods, manufactured to our specifications. Our internal lighting system manufacturing consists primarily of final assembly, testing, and quality control. We have worked with several vendors to design custom components to meet our specific needs.
Our internal lighting system manufacturing consists primarily of final assembly, testing, and quality control. We have worked with several vendors to design custom components to meet our specific needs.
Our Industry We develop advanced LED lighting and controls retrofit technologies solutions that enable our customers to run their facilities with greater energy efficiency, productivity and human wellness.
We established an international branch which we may refer to as our “Taiwan branch” or “Taipei office” in Taipei, Taiwan in 2023. Our Industry We develop advanced LED lighting and controls retrofit technologies solutions that enable our customers to run their facilities with greater energy efficiency, productivity and human wellness.
Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions.
Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be a market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.
Human Capital At December 31, 2022, we had 20 full-time employees and 3 furloughed employees, all of whom were based in the United States, and no part-time employees. We had one temporary contractor at December 31, 2022. None of our employees or contractors are subject to collective bargaining agreements and we consider our relationship with our employees to be good.
Human Capital As of December 31, 2023, we had 13 full-time employees and one part-time employee, all of whom were based in the United States, and no part-time employees. We had one temporary contractor as of December 31, 2023.
We are also evaluating adjacent technologies including Gallium Nitride (“GaN”) based power supplies and opportunities for energy solutions products that support sustainability in our existing channels. In 2022, we recommitted to building upon the transformation activities started during 2019 and 2020 that sought to stabilize and regrow our business.
We are also evaluating adjacent technologies including Gallium Nitride (“GaN”) based power supplies and opportunities for energy solutions 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.
While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential and size, the MMM business does offer us the opportunity for continued sales, in addition to validating our product quality and strengthening our brand trust in the marketplace.
While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential and size, the MMM 7 Table of Contents business does offer us the opportunity to not just maintain our reputable foothold in this space but continue to grow and position ourselves for an even brighter future within MMM.
At December 31, 2021, this same offshore supplier accounted for approximately 60% of our trade accounts payable balance. Product Development Product development has been a key area of operating focus and competitive differentiation for us in designing and developing industry leading LED lighting.
Product Development Product development has been a key area of operating focus and competitive differentiation for us in designing and developing industry leading LED lighting. Gross product development expenses for the years ended December 31, 2023 and 2022 were $0.6 million and $1.5 million, respectively.
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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.
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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.
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In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products. After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on LED lighting and controls products for our MMM and commercial and industrial lighting and control products.
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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.
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These efforts include the following key developments that occurred during 2022: • We hired a permanent Chief Executive Officer in September 2022, following a period of interim leadership by our Lead Independent Director after the departure of our previous Chief Executive Officer in February 2022 and Chief Financial Officer and Chief Operating Officer in May 2022. • 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.
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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.
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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.
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These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business.
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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 second quarter of 2022 and 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 July 2022, we 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 our workforce significantly throughout the year to manage fixed costs. • We continued to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives: ◦ In April 2022, we entered into a 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, with net proceeds of approximately $1.8 million. ◦ In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors pursuant to which we agreed to issue and sell (i) 1,313,462 shares of our common stock, (ii) pre-funded warrants (“June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (iii) warrants (the “June 2022 Warrants,” and 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.
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In addition to continuously pursuing cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value.
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Net proceeds from the June 2022 Private Placement were approximately $3.2 million. ◦ From September 2022 to December 2022, we secured short-term unsecured bridge financing of $800 thousand from a member of our board of directors (the “Board of Directors”) and an aggregate of $650 thousand of short-term unsecured bridge financing from private parties, all of which was converted into equity in January 2023 at the time of a strategic investment by Sander Electronics. 4 Table of Contents ◦ In October 2022 and December 2022, we repaid a previously outstanding promissory note with Streeterville by exchanging an aggregate of the approximately $330 thousand amount outstanding for common stock priced at-the-market. ◦ During January 2023, we sold an aggregate of $250 thousand of common stock to a member of our Board of Directors in private placements at fair market value, and also converted the approximately $809 thousand amount outstanding on previously issued short term promissory notes issued to that director as discussed above at fair market value. ◦ In January 2023, we sold an aggregate of $2.7 million of common stock to certain purchasers associated with Sander Electronics, Inc., including conversion of the approximately $609 thousand amount outstanding on previously outstanding short-term promissory notes as discussed above, priced at-the-market. ◦ In January 2023, we amended our inventory lending facility with Crossroads Financial Group, LLC (the “Inventory Facility”), reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1 million in January and February 2023. ◦ In January 2023, we amended the terms of our outstanding promissory note with Streeterville, agreeing to make $750 thousand in payments in 2023 and deferring other payments until 2024. ◦ In February 2023, we agreed to terminate our accounts receivable lending facility with Factors Southwest L.L.C.
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Specific examples of these products we have developed include the RedCap®, our patented emergency backup battery integrated TLED, EnFocus™, our unique dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system.
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(d/b/a FSW Funding) (the “Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”), reducing our monthly borrowing costs. ◦ In February 2023, we sold an aggregate of $400 thousand of common stock to a member of our Board of Directors in a private placement at fair market value.
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We are looking forward to continually supporting the growth of our existing EnFocus™ product line which is particularly attractive for its ease of install and ease of use in spaces with transient occupation. The Company have enhanced the performance of our RedCap® product by providing a more user-friendly experience in 2023.
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During 2022, we continued to broaden our product distribution network by engaging with new lighting agencies and energy service companies (“ESCOs”). We also redoubled our efforts from 2020 and 2021 to streamline our operations by closely managing all spending done throughout the Company, while investing in new products and strategies that sought to reenergize sales.
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We continue to 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 country, and listening to the voice of the customer will lead to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.
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Throughout 2022, 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.
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Throughout 2023, the Company continued to 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 ability of the Company to continue to not only provide quality products and services, but to both expand and rationalize product offerings.
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We continue to monitor the long-term impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental pandemic response.
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It is our belief that the continued dramatic rightsizing efforts undertaken in 2022 and 2023, along with reorganization of the sales team and 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.
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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 impact 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 positive way.
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In 2023, we recommitted to building upon the transformation activities that sought to stabilize and regrow our business. These efforts include the following key developments that occurred during 2023: • On June 28, 2023, we accepted the resignation of four members of the Board of Directors (the “Board”): Jennifer Cheng, Brian Lagarto, Jeffery Parker, and Stephen Socolof.
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MMM LED lighting products to serve the U.S. Navy and allied foreign navies: • Military-grade Intellitube ® retrofit TLED and the Invisitube™ ultra-low EMI TLED; and • Military-grade fixtures, including LED globe lights, berth lights; high-bay fixtures and LED retrofit kits.
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Their terms as directors would have otherwise expired at the 2024 annual meeting of Shareholders of the Company. The resignations did not involve any disagreement with the Company.
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During 2022, we reinvested in our military sales channel with a strategic hire of a U.S. Navy veteran who specializes in government sales. This has allowed us to better engage with the MMM and has presented us with the potential for expansion in military sales beyond the existing product portfolio. We launched our first commercial LED lighting products in 2010.
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On July 2, 2023, the remaining members of the Board unanimously appointed the following four new members to the Board: Kin-Fu Chen, Shou-Jang Lee, Jason Tien-Chia Tsai, and Chiao Chieh (Jay) Huang, each of the new members of the Board of Directors is an independent director under the corporate governance standards of the Nasdaq. • On August 24, 2023, the Board approved the termination of the Company’s chief executive officer and appointed Chiao Chieh (Jay) Huang to serve as the Company’s new chief executive officer.
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Gross product development expenses for the years ended December 31, 2022 and 2021 were $1.5 million and $1.9 million, respectively.
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In line with this decision, Mr. Huang 4 Table of Contents will discontinue his role as Chairman of the Board and the Board has appointed Kin-Fu Chen as the Chairman of the Board. • In 2023, we carefully researched and analyzed our historical sales data and the current market landscape regarding our pricing position and general sales strategy.
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Our core values of accountability, trust, extraordinariness, fun, openness, integrity and kindness underscore everything we do and drive our day-to-day interactions. The safety, health and wellness of our employees is a top priority.
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We acknowledged the presence of increased competition in the MMM sales space, both with respect to pricing and the number of competitors.
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Through teamwork and the adaptability of our management and staff during the COVID-19 pandemic, we embraced a flexible work environment with some of our corporate office employees effectively working from remote locations and others working both remotely and in the office on a hybrid basis.
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Following our assessment, we made changes that positively affected our position within this space and are directly reflected in our Q4 2023 performance. • Beginning in July 2022, we 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 our workforce significantly throughout the year to manage fixed costs.
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During 2023, we thoroughly reviewed and adjusted our commercial pricing position as well as our strategic relationships and partnerships within the commercial LED market space. We believe our new pricing position will give us a greater advantage than previously held against the competition and offer a more attractive entry point for our end customer base.
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Our Corporate Structure and History Fiberstars, Inc. was founded in 1985 in California, and reincorporated in Delaware in November 2006. In May 2007, Fiberstars, Inc. merged with Energy Focus, Inc. (the “Company”), also a Delaware corporation, with the Company as the surviving entity after the merger.
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By understanding the voice of the customer and by incorporating rapidly evolving technologies surrounding LED and smart lighting, we believe that we will continue to be able to develop solutions that better address customers’ needs with unique and novel product offerings, such as EnFocus™, our dimmable and tunable lighting and control platform, that deliver substantial value to our customers and accelerate LED and smart lighting adoptions.
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MMM LED lighting products to serve the U.S.
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Some of these competitors offer products with performance characteristics similar to those of our products. 8 Table of Contents Manufacturing and Suppliers We produce our lighting products and systems through a combination of internal manufacturing and assembly at our Solon, Ohio facility, and sourced finished goods, manufactured to our specifications.
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No offshore supplier accounted for more than 10% of our total expenditures for the twelve months ended December 31, 2023. At December 31, 2023, two offshore suppliers accounted for approximately 16% and 57% (a related party, See Note 13, “Related Party Transactions”) of our trade accounts payable balance, respectively.
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None of our employees or contractors are subject to collective bargaining agreements and we consider our relationship with our employees to be good. We encourage and support the growth and development of our employees.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

65 edited+25 added−19 removed132 unchanged
Biggest changeObtaining additional financing contains risks, including: • additional equity financing may not be available to us on satisfactory terms 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 rates, restrictive covenants and control or revocation provisions, which are not acceptable to management or our Board of Directors; and • the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
Biggest changeObtaining additional financing contains risks, including: • additional equity financing may not be available to us on satisfactory terms 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 rates, restrictive covenants and control or revocation provisions, which are not acceptable to management or our Board of Directors; and • the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing. 11 Table of Contents 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 business plan 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.
On November 16, 2022, we received a letter from the Staff notifying us that we were again 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”).
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, Nasdaq granted us an extension through May 15, 2023 to regain compliance with 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.
Factors that could cause wide fluctuations in our stock price may include, among other things: • actual or anticipated variations in our financial condition and operating results; • general economic conditions and trends; • addition or loss of significant customers and the timing of significant customer purchases; • our ability to effectively implement our growth plans, including new products, and the significance and timing of associated expenses; • unanticipated impairments and other changes that reduce our earnings; • overall conditions or trends in our industry; • the entry or exit of new competitors into our target markets; • any litigation or legal claims; • the terms and amount of any additional financing that we may obtain, if any; • unfavorable publicity; • additions or departures of key personnel; • geopolitical changes, global health concerns and macroeconomic changes; • changes in the estimates of our operating results or changes in recommendations by any securities or industry analysts that elect to follow our common stock; • market expectations following periods of rapid growth; • the potential impact of increased volatility due to elevated trading on the price of our stock; • industry-wide news events that may affect market perceptions of the value of our stock; and • sales of our common stock by us or our stockholders, including sales by our directors and officers.
Factors that could cause wide fluctuations in our stock price may include, among other things: • actual or anticipated variations in our financial condition and operating results; • general economic conditions and trends; • addition or loss of significant customers and the timing of significant customer purchases; • our ability to effectively implement our growth plans, including new products, and the significance and timing of associated expenses; • unanticipated impairments and other changes that reduce our earnings; • overall conditions or trends in our industry; • the entry or exit of new competitors into our target markets; • any litigation or legal claims; • the terms and amount of any additional financing that we may obtain, if any; • unfavorable publicity; • additions or departures of key personnel; • geopolitical changes, global health concerns and macroeconomic changes; 22 Table of Contents • changes in the estimates of our operating results or changes in recommendations by any securities or industry analysts that elect to follow our common stock; • market expectations following periods of rapid growth; • the potential impact of increased volatility due to elevated trading on the price of our stock; • industry-wide news events that may affect market perceptions of the value of our stock; and • sales of our common stock by us or our stockholders, including sales by our directors and officers.
Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our earnings, financial condition, operating results, capital requirements, a capital structure strategy and other factors as deemed necessary by our Board of Directors. 24 Table of Contents The elimination of monetary liability against our directors under Delaware law and the existence of indemnification rights held by our directors and officers may result in substantial expenditures by the Company and may discourage lawsuits against our directors and officers.
Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our earnings, financial condition, operating results, capital requirements, a capital structure strategy and other factors as deemed necessary by our Board of Directors. 23 Table of Contents The elimination of monetary liability against our directors under Delaware law and the existence of indemnification rights held by our directors and officers may result in substantial expenditures by the Company and may discourage lawsuits against our directors and officers.
International business operations are subject to inherent risks, including, among others: • difficulty in enforcing agreements and collecting receivables through foreign legal systems; 19 Table of Contents • unexpected changes in regulatory requirements, tariffs, and other trade barriers, restrictions or disruptions; • potentially adverse tax consequences; • localized impacts of epidemics, pandemics or other contagious outbreaks, such as the COVID-19 pandemic; • the burdens of compliance with the U.S.
International business operations are subject to inherent risks, including, among others: • difficulty in enforcing agreements and collecting receivables through foreign legal systems; • unexpected changes in regulatory requirements, tariffs, and other trade barriers, restrictions or disruptions; • potentially adverse tax consequences; • localized impacts of epidemics, pandemics or other contagious outbreaks, such as the COVID-19 pandemic; • the burdens of compliance with the U.S.
Our independent registered public accounting firm’s opinion on our audited financial statements for the year ended December 31, 2022 includes a modification stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm’s opinion on our audited financial statements for the year ended December 31, 2023 includes a modification stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern.
We could issue additional shares of common stock or preferred stock without stockholder approval, or new securities with terms or rights superior to those of our existing stockholders, which may adversely affect the market price of our common stock. We expect to require additional financing to fund future operations, including our research, development, sales and marketing activities.
We could issue additional shares of common stock or preferred stock without stockholder approval, or new securities with terms or rights superior to those of our existing shareholders, which may adversely affect the market price of our common stock. We expect to require additional financing to fund future operations, including our research, development, sales and marketing activities.
At any given time, we may be subject to litigation or claims related to our products, intellectual property, suppliers, customers, employees, stockholders, distributors, sales representatives and sales of our assets, among other things, the disposition of which may have an adverse effect upon our business, financial condition, or results of operations.
At any given time, we may be subject to litigation or claims related to our products, intellectual property, suppliers, customers, employees, shareholders, distributors, sales representatives and sales of our assets, among other things, the disposition of which may have an adverse effect upon our business, financial condition, or results of operations.
These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us or our stockholders.
These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit us or our shareholders.
In the year ended December 31, 2022, financing activity to sustain ongoing losses included converting approximately $303 thousand of outstanding bridge financing into common stock, the issue and sale of approximately $1.45 million of unsecured bridge financing from October to December 2022, the issue and sale of approximately $3.2 million of common stock and warrants to purchase common stock in June 2022, and the offer and sale of $2.0 million of unsecured bridge debt financing in April 2022.
In the year ended December 31, 2022, financing activity to sustain ongoing losses included converting approximately $303 thousand of outstanding bridge financing into common stock, the issue and sale of approximately $1.5 million of unsecured bridge financing from October to December 2022, the issue and sale of approximately $3.2 million of common stock and warrants to purchase common stock in June 2022, and the offer and sale of $2.0 million of unsecured bridge debt financing in April 2022.
Additionally, if we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and, if the equity securities issued are preferred shares, the holders of the new preferred shares may have rights superior to those of our existing stockholders, which could adversely affect rights of our existing stockholders and the market price of our common stock.
Additionally, if we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and, if the equity securities issued are preferred shares, the holders of the new preferred shares may have rights superior to those of our existing shareholders, which could adversely affect rights of our existing shareholders and the market price of our common stock.
If we raise additional funds by issuing debt securities, the holders of those debt securities would have some rights senior to those of our existing stockholders, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us which could have a materially adverse effect on our business.
If we raise additional funds by issuing debt securities, the holders of those debt securities would have some rights senior to those of our existing shareholders, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us which could have a materially adverse effect on our business.
The exercise of outstanding warrants to purchase our common stock or the conversion of shares of our Series A Preferred Stock (as defined below) into shares of common stock may dilute the ownership interest of our common stockholders. In connection with past financing activity, we have issued convertible preferred stock and warrants to purchase our common stock.
The exercise of outstanding warrants to purchase our common stock or the conversion of shares of our Series A Preferred Stock (as defined below) into shares of common stock may dilute the ownership interest of our investors. In connection with past financing activity, we have issued convertible preferred stock and warrants to purchase our common stock.
In August, 2020, we entered into two Credit Facilities secured by our assets and are subject to customary affirmative and negative operating covenants and events of defaults that restrict indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others.
In August, 2020, we entered into two Credit Facilities secured by our assets and were subject to customary affirmative and negative operating covenants and events of defaults that restrict indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others.
The Receivables Facility capacity was $2.5 million, and the Inventory Facility capacity was initially $3.0 million and increased to $3.5 million in April 2021. As of December 31, 2022, we had cash of approximately $0.1 million and had debt balances of $1.4 million and $1.0 million under the Inventory Facility and the Receivables Facility, respectively.
The Receivables Facility capacity was $2.5 million, and the Inventory Facility capacity was initially $3.0 million and increased to $3.5 million in April 2021. As of December 31, 2022, we had cash of approximately $52 thousand and had debt balances of $1.4 million and $1.0 million under the Inventory Facility and the Receivables Facility, respectively.
Our independent registered public accounting firm’s opinion on our audited financial statements for the fiscal year ended December 31, 2022, included in this Annual Report, contains a modification relating to our ability to continue as a going concern.
Our independent registered public accounting firm’s opinion on our audited financial statements for the fiscal year ended December 31, 2023, included in this Annual Report, contains a modification relating to our ability to continue as a going concern.
The failure or inability of these shipping companies to deliver products or the unavailability of shipping or port services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to global logistics capacity constraints, rising fuel costs and added security costs.
The failure or inability of these shipping companies to deliver products or the unavailability of shipping or port services, even 13 Table of Contents temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to global logistics capacity constraints, rising fuel costs and added security costs.
Because our common stock is thinly-traded, investors seeking to buy or sell a certain quantity of our shares in the public market may be unable to do so within one or more trading days and it may be difficult for stockholders to sell all of their shares in the 23 Table of Contents market at any given time at prevailing prices.
Because our common stock is thinly-traded, investors seeking to buy or sell a certain quantity of our shares in the public market may be unable to do so within one or more trading days and it may be difficult for stockholders to sell all of their shares in the market at any given time at prevailing prices.
Any such issuances could be made at a price that reflects a discount to the then-current trading price of our common stock. These issuances could be dilutive to our existing stockholders and cause the market price of our common stock to decline.
Any such issuances could be made at a price that reflects a discount to the then-current trading price of our common stock. These issuances could be dilutive to our existing shareholders and cause the market price of our common stock to decline.
Although 16 Table of Contents we believe that our agency strategy will increase the role of independent agents and sales representatives over time, direct sales using internal sales personnel still account for a substantial portion of our sales, and our agency plans may take longer to contribute significantly to our operating results.
Although we believe that our agency strategy will increase the role of independent agents and sales representatives over time, direct sales using internal sales personnel still account for a substantial portion of our sales, and our agency plans may take longer to contribute significantly to our operating results.
Our Certificate of Incorporation eliminates the personal liability of our directors to the Company and our stockholders for damages for breach of fiduciary duty as a director to the extent permissible under Delaware law.
Our Certificate of Incorporation eliminates the personal liability of our directors to the Company and our shareholders for damages for breach of fiduciary duty as a director to the extent permissible under Delaware law.
Our Board of Directors has the authority, without action or vote of our stockholders, to issue authorized but unissued shares of common and preferred stock subject to Nasdaq’s rules.
Our Board of Directors has the authority, without action or vote of our shareholders, to issue authorized but unissued shares of common and preferred stock subject to Nasdaq’s rules.
The exercise of some or all of the outstanding warrants to purchase our common stock or the conversion of some or all of the outstanding Series A Preferred Stock may dilute the ownership interests of our stockholders.
The exercise of some or all of the outstanding warrants to purchase our common stock or the conversion of some or all of the outstanding Series A Preferred Stock may dilute the ownership interests of our shareholders.
In the high-performance lighting markets in which we sell our advanced lighting systems, our products compete with lighting products utilizing traditional lighting technology provided by many vendors. Our higher quality and value advanced lighting and control systems also face competition from lower quality, commodity lighting products when customers may be overly purchase-price sensitive.
The lighting industry is highly competitive. In the high-performance lighting markets in which we sell our advanced lighting systems, our products compete with lighting products utilizing traditional lighting technology provided by many vendors. Our higher quality and value advanced lighting and control systems also face competition from lower quality, commodity lighting products when customers may be overly purchase-price sensitive.
As such, we will likely need additional external financing during 12 Table of Contents 2023 and will continue to review and pursue external funding sources 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.
As such, we will likely need additional external financing during 2024 and will continue to review and pursue external funding sources 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.
Notwithstanding continued performance improvements and cost reductions of LED lighting technologies, limited customer awareness of the benefits of LED lighting products, lack of widely accepted standards governing LED lighting products and customer unwillingness to adopt LED lighting products could significantly limit the demand for LED lighting products.
Notwithstanding continued performance improvements and cost reductions of LED lighting technologies, limited 15 Table of Contents customer awareness of the benefits of LED lighting products, lack of widely accepted standards governing LED lighting products and customer unwillingness to adopt LED lighting products could significantly limit the demand for LED lighting products.
If we do not anticipate and effectively manage these risks, these factors may have a material adverse impact on our business operations. Risks Associated with Legal and Regulatory Matters We may be subject to legal claims against us or claims by us that could have a significant impact on our resulting financial performance.
If we do not anticipate and effectively manage these risks, these factors may have a material adverse impact on our business operations. 18 Table of Contents Risks Associated with Legal and Regulatory Matters We may be subject to legal claims against us or claims by us that could have a significant impact on our resulting financial performance.
Factors that may contribute to fluctuations include: • changes in aggregate capital spending, cyclicality and other economic conditions, including inflationary pressures, or domestic and international demand in the industries; • the timing of large customer orders to which we may have limited visibility and cannot control; • competition for our products, including the entry of new competitors and significant declines in competitive pricing; • our ability to effectively manage our working capital; • our ability to generate increased demand in our current and targeted markets, particularly those in which we have limited experience; • our ability to satisfy customer demands in a timely and cost-effective manner; • pricing and availability of labor and materials; • quality testing and reliability of new products; • our inability to adjust certain fixed costs and expenses for changes in demand and the timing and significance of expenditures that may be incurred to facilitate our growth; • macroeconomic, geopolitical and health concerns, including long-term effects of the COVID-19 pandemic; • seasonal fluctuations in demand and our revenue; and • disruption in component supply from foreign vendors.
Factors that may contribute to fluctuations include: • changes in aggregate capital spending, cyclicality and other economic conditions, including inflationary pressures, or domestic and international demand in the industries; • the timing of large customer orders to which we may have limited visibility and cannot control; • competition for our products, including the entry of new competitors and significant declines in competitive pricing; • our ability to effectively manage our working capital; • our ability to generate increased demand in our current and targeted markets, particularly those in which we have limited experience; • our ability to satisfy customer demands in a timely and cost-effective manner; • pricing and availability of labor and materials; • quality testing and reliability of new products; • our inability to adjust certain fixed costs and expenses for changes in demand and the timing and significance of expenditures that may be incurred to facilitate our growth; • macroeconomic, geopolitical and health concerns, including long-term effects of the COVID-19 pandemic; • seasonal fluctuations in demand and our revenue; and • disruption in component supply from foreign vendors. 16 Table of Contents Depressed general economic conditions may adversely affect our operating results and financial condition.
If we are not able to increase or decrease our production capacity at our targeted rate or if there are unforeseen costs associated with adjusting our capacity levels or there are unanticipated interruptions in our global supply chain or logistics from such possibilities as long-term effects of the COVID-19 pandemic, shifting workforces, geopolitical tension or energy policies, we may not be able to achieve our financial targets.
If we are not able to increase or decrease our production capacity at our targeted rate or if there are unforeseen costs associated with adjusting our capacity levels or there are unanticipated interruptions in our global supply chain or logistics from such possibilities as long-term effects of the COVID-19 pandemic, geopolitical tension as the military conflict in Ukraine and the Middle East, shifting workforces, or energy policies, we may not be able to achieve our financial targets.
Even if our products meet standard specifications, our customers may attempt to use our products in 18 Table of Contents applications for which they were not designed or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.
Even if our products meet standard specifications, our customers may attempt to use our products in applications for which they were not designed or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.
Litigation could delay development or sales efforts and an adverse outcome in litigation, or any similar proceedings, could subject us to significant liabilities, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies.
Litigation could delay development or sales 17 Table of Contents efforts and an adverse outcome in litigation, or any similar proceedings, could subject us to significant liabilities, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies.
For the year ended December 31, 2022, we reported a net loss of $10.3 million and are dependent upon the availability of financing in order to continue our business.
For the year ended December 31, 2023, we reported a net loss of $4.3 million and are dependent upon the availability of financing in order to continue our business.
Historically our customer base has been highly concentrated and a few customers have represented a substantial portion of our net sales. In 2022, two customers accounted for 27% of net sales. Total sales to our primary distributor to the U.S. Navy combined with sales to shipbuilders for the U.S. Navy represented 30% of net sales in 2022.
Historically our customer base has been highly concentrated and a few customers have represented a substantial portion of our net sales. In 2023, two customers accounted for 48% of net sales. Total sales to our primary distributor to the U.S. Navy, combined with sales to shipbuilders for the U.S. Navy represented 70% of net sales in 2023.
In January 2023, we amended the Inventory Facility, reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1 million in January and February 2023. In February 2023, we agreed to terminate the Receivables Facility.
In January 2023, we amended the Inventory Facility, reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1 million in January and February 2023. In February 2023, we agreed to terminate the Receivables Facility. In September 2023, we paid down the remaining balance under the Inventory Facility.
If our agents do not achieve our sales objectives or these relationships take significant time to develop, our revenue may decline, fail to grow or not increase as rapidly as we intend in order to achieve profitability and grow our business. During 2022, we refocused our agency relationships on those that were both mutually beneficial and strategically important.
If our agents do not achieve our sales objectives or these relationships take significant time to develop, our revenue may decline, fail to grow or not increase as rapidly as we intend in order to achieve profitability and grow our business. We improved and continued to maintain our agency relationships that were both mutually beneficial and strategically important.
We have incurred substantial losses in the past and reported net losses from operations of $10.3 million and $7.9 million for the years ended December 31, 2022 and 2021, respectively.
We have incurred substantial losses in the past and reported net losses from operations of $4.3 million and $10.3 million for the years ended December 31, 2023 and 2022, respectively.
A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results. If we are not able to compete effectively against companies with lower cost structures or greater resources, or new competitors who enter our target markets, our sales will be adversely affected. The lighting industry is highly competitive.
A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results. 14 Table of Contents If we are not able to compete effectively against companies with lower cost structures or greater resources, or new competitors who enter our target markets, our sales will be adversely affected.
If others develop innovative proprietary lighting technology that is superior to ours, or if we fail to accurately anticipate technology, pricing and market trends, address market saturation and customer confusion, respond on a timely basis with our own development of new and reliable products and enhancements to existing products, and achieve broad market acceptance of these products and enhancements, our competitive position may be harmed and we may not achieve sufficient growth in our net sales to attain or sustain profitability. 17 Table of Contents Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
If others develop innovative proprietary lighting technology that is superior to ours, or if we fail to accurately anticipate technology, pricing and market trends, address market saturation and customer confusion, respond on a timely basis with our own development of new and reliable products and enhancements to existing products, and achieve broad market acceptance of these products and enhancements, our competitive position may be harmed and we may not achieve sufficient growth in our net sales to attain or sustain profitability.
If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed. We are highly dependent on our senior management and other key personnel due to our very lean organizational structure.
ITEM 1A. RISK FACTORS Risks Associated with Our Business If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed. We are highly dependent on our senior management and other key personnel due to our very lean organizational structure.
Any sales of our common stock issuable upon the exercise of the warrants or conversion of the Series A Preferred Stock could adversely affect prevailing market prices of our common stock. In addition, the anticipated exercise of the warrants or conversion of the Series A Preferred Stock could depress the price of our common stock.
Any sales of our common stock issuable upon the exercise of the warrants or conversion of the Series A Preferred Stock could adversely affect prevailing market prices of our common stock.
If we are unable to fund any necessary expansion or manage our growth effectively, we may not be able to adequately meet demand, our expenses could increase without a proportionate increase in revenue, our margins could decrease, and our business and results of operations could be adversely affected. 15 Table of Contents Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and capacity.
If we are unable to fund any necessary expansion or manage our growth effectively, we may not be able to adequately meet demand, our expenses could increase without a proportionate increase in revenue, our margins could decrease, and our business and results of operations could be adversely affected.
We have significant U.S. net operating loss and tax credit carryforwards (the “Tax Attributes”). Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of 1986, as amended (the “IRC”).
Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of 1986, as amended (the “IRC”).
As a result, we have had, and may need to continue, to devote additional working capital to support a large amount of component and raw material inventory that may not be used over a reasonable period to produce saleable products, and we may be required to increase our excess and obsolete inventory reserves to provide for these excess quantities, particularly if demand for our products does not meet our expectations. 14 Table of Contents We may be vulnerable to unanticipated product development delays, price increases and payment term changes.
As a result, we have had, and may need to continue, to devote additional working capital to support a large amount of component and raw material inventory that may not be used over a reasonable period to produce saleable products, and we may be required to increase our excess and obsolete inventory reserves to provide for these excess quantities, particularly if demand for our products does not meet our expectations.
Since the beginning of 2022, our market price has ranged from a low of $0.28 to a high of $4.63 and continues to experience significant volatility. Broad market and industry factors also may adversely affect the market price of our common stock, regardless of our actual operating performance.
Throughout the fiscal year ended December 31, 2023, our market price has ranged from a low of $0.28 to a high of $4.63 and continues to experience significant volatility. Broad market and industry factors also may adversely affect the market price of our common stock, regardless of our actual operating performance.
Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance. Our operating results have fluctuated significantly in the past and could fluctuate in the future.
Our operating results may fluctuate due to factors that are difficult to forecast and not within our control. Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance. Our operating results have fluctuated significantly in the past and could fluctuate in the future.
As of December 31, 2022, we had an accumulated deficit of $149.0 million and cash of approximately $0.1 million, compared to an accumulated deficit of $138.7 million and cash of approximately $2.7 million as of December 31, 2021.
As of December 31, 2023, we had an accumulated deficit of $153.3 million and cash of approximately $2.0 million, compared to an accumulated deficit of $149.0 million and cash of approximately $0.1 million as of December 31, 2022.
We are authorized to issue 50,000,000 shares of common stock of which 18,133,100 shares were issued and outstanding as of March 17, 2023, and 5,000,000 shares of preferred stock, of which 876,447 were issued and outstanding as of March 17, 2023.
We are authorized to issue 50,000,000 shares of common stock of which 4,443,130 shares were issued and outstanding as of March 18, 2024, and 5,000,000 shares of preferred stock, of which 876,447 were issued and outstanding as of March 18, 2024.
We could lose business from any one of our significant customers for a variety of reasons, many of which are outside of our control, including ongoing long-term impacts of the COVID-19 pandemic, changes in levels of government funding and rebate programs, our inability to comply with government contracting laws and regulations, changes in customers’ procurement strategies or their lighting retrofit plans, changes in product specifications, additional competitors entering particular markets, our failure to keep pace with technological advances and cost reductions, and damage to our professional reputation, among others.
We could lose business from any one of our significant customers for a variety of reasons, many of which are outside of our control, including ongoing long-term impacts of the COVID-19 pandemic, changes in levels of government funding and rebate programs, our inability to comply with government contracting laws and regulations, changes in customers’ procurement strategies or their lighting retrofit plans, changes in product specifications, additional competitors entering particular markets, our failure to keep pace with technological advances and cost reductions, and damage to our professional reputation, among others. 12 Table of Contents We are attempting to expand and diversify our customer base and reduce the dependence on one or a few customers, through the addition of sales representatives and other potential sales channels, but we cannot provide any assurance that our efforts will be successful.
Where appropriate in jurisdictions outside the United States, we seek to obtain other similar national or regional certifications for our products.
In the United States, we seek certification on substantially all of our products from UL ® , ETL ® , or DLC™. Where appropriate in jurisdictions outside the United States, we seek to obtain other similar national or regional certifications for our products.
We are required to comply with certain legal requirements governing the materials in our products. Although we are not aware of any efforts to amend any existing legal requirements or implement new legal requirements in a manner with which we cannot comply, our net sales might be adversely affected if such an amendment or implementation were to occur.
Although we are not aware of any efforts to amend any existing legal requirements or implement new legal requirements in a manner with which we cannot comply, our net sales might be adversely affected if such an amendment or implementation were to occur. 20 Table of Contents Moreover, although not legally required to do so, we strive to obtain certification for substantially all our products.
Depressed general economic conditions may adversely affect our operating results and financial condition. Our business is sensitive to changes in general economic conditions, both inside and outside the United States.
Our business is sensitive to changes in general economic conditions, both inside and outside the United States.
In 2021, two customers accounted for 43% of net sales. Total sales to our primary distributor to the U.S. Navy, and a primary shipbuilder for the U.S. Navy represented 38% of net sales in 2021.
In 2022, two customers accounted for 27% of net sales. Total sales to our primary distributor to the U.S. Navy combined with sales to shipbuilders for the U.S. Navy represented 30% of net sales in 2022.
Significant increases in the prices of sourced components and products and shipping costs, could cause our product prices to increase, which may reduce demand for our products or make us more susceptible to competition. Furthermore, in the event that we are unable to pass along increases in operating costs to our customers, margins and profitability may be adversely affected.
We may be vulnerable to unanticipated product development delays, price increases and payment term changes. Significant increases in the prices of sourced components and products and shipping costs, could cause our product prices to increase, which may reduce demand for our products or make us more susceptible to competition.
We might require additional financing in the near-term and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional funding, none of which may be available on favorable terms or at all and could require us to sell certain assets or discontinue or curtail our operations. 13 Table of Contents While we are attempting to diversify our customer base, we have historically derived a significant portion of our revenue from a few customers, and the loss of one of these customers, or a reduction in their demand for our products, could adversely affect our business, financial condition, results of operations, and prospects.
We might require additional financing in the near-term and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional funding, none of which may be available on favorable terms or at all and could require us to sell certain assets or discontinue or curtail our operations.
Accordingly, the loss of all or one of these suppliers could have a material adverse effect on our operations until such time as an alternative supplier could be found.
Furthermore, in the event that we are unable to pass along increases in operating costs to our customers, margins and profitability may be adversely affected. Accordingly, the loss of all or one of these suppliers could have a material adverse effect on our operations until such time as an alternative supplier could be found.
As a result of these factors, the value of our common stock could decline significantly. We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future.
In addition, the anticipated exercise of the warrants or conversion of the Series A Preferred Stock could depress the price of our common stock, which in turn may result in the value of our common stock declining significantly. We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
As our customer base and customer demand for our products changes and as we launch new products, we must be able to adjust our production capacity to meet demand. We are continually taking steps to address our manufacturing capacity needs for our products.
Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and capacity. As our customer base and customer demand for our products changes and as we launch new products, we must be able to adjust our production capacity to meet demand.
Moreover, although we are not aware of any effort to amend any existing certification standard or implement a new certification standard in a manner that would render us unable to maintain certification for our existing products or obtain ratification for new products, our net sales might be adversely affected if such an amendment or implementation were to occur. 21 Table of Contents If we experience a material weakness in our internal control over financial reporting in the future or fail to otherwise maintain effective financial reporting systems and processes, we may be unable to accurately and timely report our financial results or comply with the requirements of being a public company, which could cause the price of our common stock to decline and harm our business.
Moreover, although we are not aware of any effort to amend any existing certification standard or implement a new certification standard in a manner that would render us unable to maintain certification for our existing products or obtain ratification for new products, our net sales might be adversely affected if such an amendment or implementation were to occur.
The inability to obtain certain patents or rights to third-party patents and other intellectual property rights in the future could have a material adverse effect on our business. 20 Table of Contents The ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
The inability to obtain certain patents or rights to third-party patents and other intellectual property rights in the future could have a material adverse effect on our business. We may be subject to intellectual property infringement claims or other allegations by third parties, which may materially and adversely affect our business, results of operations and prospects.
We currently intend to retain future earnings, if any, to finance the operations and expansion of our business.
We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and expansion of our business.
Even with access to borrowings under the Inventory Facility, we may not generate sufficient cash flows from our operations or be able to borrow sufficient funds to sustain our operations.
As a result, there were no Inventory Facility and Receivables Facility as of December 31, 2023. We may not generate sufficient cash flows from our operations or be able to borrow sufficient funds to sustain our operations.
There can be no assurance that such appeal will be successful or that we will be able to regain compliance 22 Table of Contents with the Bid Price Rule or maintain compliance with other Nasdaq listing requirements.
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.
Under Nasdaq rules, the delisting of our common stock will be stayed during the pendency of the appeal and during such time, our common stock will continue to be listed on Nasdaq. On February 24, 2023, we submitted our request for an appeal before the Panel.
On February 24, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the delisting (the “Appeal”).
On February 21, 2023, we received written notification (the “Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and were ineligible to obtain a second 180 calendar day period to regain compliance because we did not meet the Nasdaq Capital Market’s minimum $5 million Stockholders’ Equity initial listing requirement as of September 30, 2022.
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.
Removed
ITEM 1A. RISK FACTORS Risks Associated with Our Business The long-term impacts caused by the COVID-19 pandemic could continue to have an adverse effect on our business. The COVID-19 pandemic continues to have an unprecedented, long-term impact on the U.S. economy that continues to create significant business uncertainties.
Added
In the year ended December 31, 2023, financing activity to sustain ongoing losses has included (1) selling an aggregate of approximately $6.1 million common stock through several private placement transactions (Please see Note 9 of our financial statements for the year ended December 31, 2023 included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.) and (2) converting approximately $1.7 million of outstanding promissory notes into common stock.
Removed
These uncertainties include, but are not limited to, the adverse effect of the pandemic on the economy, our supply chain partners, transportation and logistics providers, our employees and customers.
Added
While we are attempting to diversify our customer base, we have historically derived a significant portion of our revenue from a few customers, and the loss of one of these customers, or a reduction in their demand for our products, could adversely affect our business, financial condition, results of operations, and prospects.
Removed
As infection rates oscillate with new variants, widespread outbreaks, stay-at-home recommendations or mandates from federal, state and local authorities may recur, which may continue to affect our supply chain and our customer base.
Added
We are continually taking steps to address our manufacturing capacity needs for our products.
Removed
Continued impacts of the pandemic could materially adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows, and may require significant actions in response, including, but not limited to, employee furloughs, workforce reductions, plant or other operational shut-downs, expense reductions or discounting of pricing of our products, all in an effort to mitigate such impacts.
Added
Our products are largely depending on the application of our technology. From time to time, third parties holding similar technologies and intellectual property rights, including companies, competitors, patent holding companies, customers and/or non-practicing entities, may assert intellectual property claims against us.
Removed
The extent of the ongoing impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the United States, the timing and success of vaccine programs, the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.
Added
Although we believe that our products do not infringe upon the intellectual property rights of third parties, we cannot be certain that our operations do not or will not infringe upon or otherwise violate intellectual property rights or other rights held by third parties, and there may be third-party intellectual property rights or other rights that are infringed by our products without our awareness.
Removed
In 2023 to date, financing activity to sustain ongoing losses has included transactions with a member of our Board of Directors as well as certain purchases associated with Sander Electronics, a strategic investor, converting approximately $1.5 million of outstanding bridge debt into common stock and also selling an aggregate of approximately $2.72 million in common stock.
Added
We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights or other rights of third parties, some even without merit.
Removed
As a result, our availability under the Credit Facilities has been significantly reduced, and there can be no assurance that these lending facilities will be renewed or replaced on commercially reasonable terms or at all.
Added
If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims.
Removed
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 business plan 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.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES 25 ITEM 3. LEGAL PROCEEDINGS 25 ITEM 4. MINE SAFETY DISCLOSURES 25 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES 26 ITEM 6. [RESERVED] 26 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27 ITEM 7A.
Biggest changeITEM 2. PROPERTIES 25 ITEM 3. LEGAL PROCEEDINGS 25 ITEM 4. MINE SAFETY DISCLOSURES 26 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES 27 ITEM 6. [RESERVED] 27 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in legal proceedings arising from the normal course of business. See Note 16, “Legal Matters,” to our financial statements for the year ended December 31, 2022 included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
Biggest changeITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in legal proceedings arising from the normal course of business. See Note 15, “Legal Matters,” to our financial statements for the year ended December 31, 2023 included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report. 25 Table of Contents

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock trades on The Nasdaq Capital Market under the symbol “EFOI.” Stockholders There were approximately 81 holders of record of our common stock as of February 20, 2023, however, a large number of our stockholders hold their stock in “street name” in brokerage accounts.
Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock trades on The Nasdaq Capital Market under the symbol “EFOI.” Shareholders There were approximately 90 holders of record of our common stock as of March 7, 2024, however, a large number of our stockholders hold their stock in “street name” in brokerage accounts.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands): 2022 2021 Net cash used in operating activities $ (6,713) $ (9,765) Net cash used in investing activities $ (16) $ (443) Proceeds from the issuance of common stock and warrants $ 3,500 $ 9,500 Proceeds from the exercise of warrants — 801 Offering costs paid on the issuance of common stock and warrants (334) (969) Principal payments under finance lease obligations (1) (3) Proceeds from exercise of stock options and purchases through employee stock purchase plan 6 80 Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — (1) Payments for deferred financing costs (114) (30) Payments on the 2021 Streeterville Note (1,640) — Proceeds from the 2021 Streeterville Note — 1,515 Proceeds from the 2022 Streeterville Note 2,000 — Proceeds from related party promissory notes payable 800 — Proceeds from promissory notes payable 650 — Net payments on credit line borrowings - Credit Facilities (768) (181) Net cash provided by financing activities $ 4,099 $ 10,712 Cash used in operating activities Net cash used in operating activities of $6.7 million in 2022 resulted primarily from the net loss incurred of $10.3 million, adjusted for non-cash items, including: depreciation and amortization of $0.5 million, stock-based compensation, net of $0.1 million, and non-favorable provisions from inventory $32 thousand, and favorable provisions from warranty of $0.1 million, as well as a loss on impairment of property and equipment of $0.3 million.
Biggest changeThe following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands): 2023 2022 Net cash used in operating activities $ (2,439) $ (6,713) Net cash used in investing activities $ (69) $ (16) Proceeds from the issuance of common stock and warrants $ 6,079 $ 3,500 Costs related to reverse stock-split (16) — Offering costs paid on the issuance of common stock and warrants — (334) Principal payments under finance lease obligations — (1) Proceeds from exercise of stock options and purchases through employee stock purchase plan — 6 Payments on the 2022 Streeterville Note (625) — Payments for deferred financing costs — (114) Payments on the 2021 Streeterville Note — (1,640) Proceeds from the 2022 Streeterville Note — 2,000 Proceeds from related party promissory notes payable — 800 Proceeds from promissory notes payable — 650 Net payments on credit line borrowings - Credit Facilities (1,402) (768) Advanced capital contribution 450 — Net cash provided by financing activities $ 4,486 $ 4,099 Net cash used in operating activities Net cash used in operating activities of $2.4 million in 2023 resulted primarily from the net loss incurred of $4.3 million, adjusted for non-cash items, including: depreciation and amortization of $0.3 million, stock-based compensation, net of $44 thousand, non-favorable provisions from inventory of $25 thousand and from accounts receivable of $6 thousand, and favorable provisions from warranty of $33 thousand and gain from paid-off of Credit Facilities of $40 thousand.
In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
In addition, we intend to continue to apply rigorous financial discipline to our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We have recorded a full valuation allowance against our deferred tax assets at December 31, 2022 and 2021, respectively.
Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We have recorded a full valuation allowance against our deferred tax assets at December 31, 2023 and 2022, respectively.
ITEM 7. 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 our Consolidated Financial Statements (“financial statements”) and related notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
ITEM 7. 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 II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
Despite these efforts, our legacy products continue to face extreme pricing 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.
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.
Our mission is to enable our customers to run their facilities with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.
Our mission is to enable our customers to run their facilities with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be a market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.
Cash provided by financing activities Net cash provided by financing activities for the year ended December 31, 2022 of $4.1 million primarily resulted from the proceeds from the issuance of common stock and warrants of $3.5 million and proceeds from promissory notes payable of $0.7 million and related party promissory notes payable of $0.8 million.
Net cash provided by financing activities for the year ended December 31, 2022 of $4.1 million primarily resulted from the proceeds from the issuance of common stock and warrants of $3.5 million, proceeds from promissory notes payable of $0.7 million, related party promissory notes payable of $0.8 million, and the issuance of the 2022 Streeterville Note provided net proceeds of $2.0 million.
Other expenses Interest expense We incurred $954 thousand in interest expense in 2022, primarily related to the interest on borrowings and non-cash amortization of fees related to the Credit Facilities, interest on promissory notes in the principal amounts of $1.7 million (the “ 2021 Streeterville Note”) and $2 million (the “2022 Streeterville Note”) the Company sold and issued to Streeterville Capital, LLC (“Streeterville”) pursuant to separate note purchase agreements, and interest on the short-term bridge financing in the aggregate principal amount of $1.45 million pursuant to promissory notes sold and issued by us to certain private parties, including one of our directors.
In 2022, we incurred $954 thousand in interest expense, primarily related to the interest on borrowings and non-cash amortization of fees related to the Credit Facilities, interest on promissory notes in the principal amounts of $1.7 million (the “ 2021 Streeterville Note”) and $2 million (the “2022 Streeterville Note”) the Company sold and issued to Streeterville pursuant to separate note purchase agreements, and interest on the short-term bridge financing in the aggregate principal amount of $1.45 million pursuant to promissory notes sold and issued by us to certain private parties, including one of our directors.
If not utilized, the carry-forwards generated prior to December 31, 2017 of $35.3 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
If not utilized, the carry-forwards generated prior to December 31, 2017 of $0.9 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
It is our belief that the dramatic rightsizing efforts undertaken in 2022, along with ongoing development of innovative, high-value products and an expanded sales and distribution network, will over time result in improved sales and bottom-line performance for the Company.
It is our belief that the continued dramatic rightsizing efforts undertaken in 2022 and 2023, along with reorganization of the sales team and 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.
We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications.
We specialize in energy efficient LED lighting retrofit product 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.
Material differences may result in 36 Table of Contents the amount and timing of net sales and expenses if different judgments or different estimates were utilized.
Material differences may result in the amount and timing of net sales and expenses if different judgments or different estimates were utilized.
We plan to achieve profitability through developing and launching innovative products such as EnFocus TM powerline 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, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships.
We plan to achieve profitability through increasing sales in our innovative products such as EnFocusTM powerline 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, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships.
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 continue to evaluate entering new markets that we believe will provide additional growth opportunities.
We will seek to remain agile as an organization to respond to potential or continuing weakness in the macroeconomic environment and in the meantime seek to expand sales channels and enter new markets that we believe will provide additional growth opportunities.
We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocus TM platform that aim to serve both consumer and commercial markets. We are also evaluating adjacent technologies including GaN-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels.
We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform that aim to serve the commercial market. We are also evaluating adjacent technologies including ruggedized industrial retrofit lighting applications and GaN-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels.
In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.6 million additional federal net operating loss we recognized for the year.
In 2023, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $6.3 million additional federal net 32 Table of Contents operating loss we recognized for the year.
Overview Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”), and expanded our offerings into the consumer market in the fourth quarter of 2021.
Overview Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”).
Despite continuing progress on cost reduction throughout 2022, 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, all exacerbated by the lingering effects of the COVID-19 pandemic. There has also been continuing aggressive price competition in the lighting industry.
Despite continuing progress on cost reduction throughout 2023 and 2022, 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 had no net deferred liabilities at December 31, 2022 or 2021. We will continue to evaluate the need for a valuation allowance on a quarterly basis. At December 31, 2022, we had net operating loss carry-forwards of approximately $132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes).
We had no net deferred liabilities at December 31, 2023 or 2022. We will continue to evaluate the need for a valuation allowance on a quarterly basis. At December 31, 2023, we had net operating loss carry-forwards of approximately $138.7 million for federal income tax purposes ($48.0 million for state and local income tax purposes).
Specific examples of these products we have developed include the RedCap ® , our patented emergency backup battery integrated TLED, EnFocus™, our unique dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system, which as a result of supply chain challenges we now plan to launch in 2023.
Specific examples of these products we have developed include the RedCap ® , our patented emergency backup battery integrated TLED, EnFocus™, our unique dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system.
Other expenses, net We recognized other expenses, net, of $56 thousand in 2022, compared to other expenses, net, of $65 thousand in 2021. Other expenses, net, in 2022 and 2021 primarily consisted of bank and collateral management fees. Income taxes For each of the years ended December 31, 2022 and 2021, our effective tax rate was 0.0%.
Other expenses in 2023 and 2022 primarily consisted of bank and collateral management fees. Provision for income taxes For each of the years ended December 31, 2023 and 2022, our effective tax rate was 0.0%.
In May 2022 we reinvested in our MMM sales channel with a strategic hire to lead our MMM sales effort. While we continue to aggressively seek to increase sales of our commercial products, the MMM business offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace.
While we continue to aggressively seek to increase sales of our commercial products, 28 Table of Contents the MMM business offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace.
Net sales of our commercial products decreased in 2022 due to limited product availability impacts from supply chain constraints, our inventory reduction project, and continuing fluctuations in the timing, pace, and size of commercial projects. International sales We do not generate significant sales from customers outside the United States.
Net sales of our commercial products decreased in 2023 due to limited product availability impacts from supply chain constraints, our inventory reduction project, increased competition, and continuing fluctuations in the timing, pace, and size of commercial projects.
During 2021 and into 2022, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. We continue to pursue opportunities from the U.S. Navy and the government sector to minimize such volatility.
During 2022 and into 2023, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. This sector also maintains very long sales cycles.
Results of operations The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the following periods: 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 105.3 82.8 Gross (loss) profit (5.3) 17.2 Operating expenses: Product development 25.0 19.2 Selling, general, and administrative 119.8 86.5 Loss on impairment 5.6 — Restructuring — (0.2) Total operating expenses 150.4 105.5 Loss from operations (155.7) (88.3) Other expenses: Interest expense 16.0 8.0 Gain on forgiveness of PPP loan — (8.1) Other income (0.5) (8.9) Other expenses, net 0.9 0.7 Net loss before income taxes (172.1) (80.0) Benefit from income taxes 0.1 — Net loss (172.2) % (80.0) % 29 Table of Contents Net sales A further breakdown of our net sales by product line is as follows (in thousands): 2022 2021 Commercial products $ 3,746 $ 4,682 MMM products 2,222 5,183 Total net sales $ 5,968 $ 9,865 Our net sales of $6.0 million in 2022 decreased 39.5% compared to 2021, mainly driven by a decrease of 57.1% in MMM sales and a decrease of 20.0% in commercial sales.
Maintain sufficient cash reserves to cope with potential funding shortages. 30 Table of Contents Results of operations The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the following periods: 2023 2022 Net sales 100.0 % 100.0 % Cost of sales 96.1 105.3 Gross profit (loss) 3.9 (5.3) Operating expenses: Product development 10.3 25.0 Selling, general, and administrative 63.1 119.8 Loss on impairment — 5.6 Total operating expenses 73.4 150.4 Loss from operations (69.5) (155.7) Other expenses: Interest income (57) (57) — Interest expenses 380 954 Other income (0.5) (0.5) Other expenses, net 0.5 0.9 Net loss before income taxes (68.5) (172.2) Benefit from income taxes 0.1 0.2 Net loss (75.1) % (172.3) % Net sales A further breakdown of our net sales by product line is as follows (in thousands): 2023 2022 Commercial products $ 1,593 $ 3,746 MMM products 4,124 2,222 Total net sales $ 5,717 $ 5,968 Our net sales of $5.7 million in 2023 decreased 4.2% compared to 2022, mainly driven by an increase of 85.6% in MMM sales and a decrease of 57.5% in commercial sales.
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, where we once commanded significant price premiums for our flicker-free TLEDs with industry leading warranties.
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.
The $9.2 million and $9.6 million in federal net operating losses generated in December 31, 2022 and 2021, respectively, will be subject to the new limitations under the Tax Act.
These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $6.3 million and $9.2 million in federal net operating losses generated in December 31, 2023 and 2022, respectively, will be subject to the new limitations under the Tax Act.
Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial statements are set forth below: • revenue recognition, • allowances for doubtful accounts, returns and discounts, • impairment of long-lived assets, • valuation of inventories, • accounting for income taxes, • share-based compensation, and • leases.
Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial statements are set forth below: • revenue recognition, • allowances for doubtful accounts, returns and discounts, • impairment of long-lived assets, • valuation of inventories, • accounting for income taxes, • share-based compensation, and • leases. 35 Table of Contents Recently adopted accounting guidance For information on recently adopted accounting guidance, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
Additionally, the issuance of the 2022 Streeterville Note provided net proceeds of $2.0 million. The increases in cash were offset by payments on the 2021 Streeterville Note of $1.6 million.
The increases in cash were partially offset by payments on the 2022 Streeterville Note of $0.6 million and Credit Facilities of $1.4 million.
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.
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. Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales pipeline in the second half of 2023.
Cash and debt At December 31, 2022, our cash balance was $0.1 million, compared to $2.7 million at December 31, 2021.
Liquidity and capital resources Cash At December 31, 2023, our cash balance was $2.0 million, compared to $52 thousand at December 31, 2022.
In the third quarter of 2022, a loss on impairment of $76 thousand was recorded on the write-off of the UV-Robots. An additional $262 thousand of loss on impairment was recorded in the fourth quarter of 2022, which consisted of tooling, equipment, software, hardware, and construction-in-progress. No such loss on impairment was recorded in 2021.
An additional $262 thousand loss on impairment was recorded in the fourth quarter of 2022, which consisted of tooling, equipment, software, hardware, and construction-in-progress. Other expenses (income) Interest expenses (income) We incurred $380 thousand in interest expenses and $57 thousand in interest income in 2023.
Beginning in the third quarter of 2022, the warehouse square footage was reduced under the new lease agreement and significant amounts of previously reserved inventories were scrapped over the course of the year in connection with reducing leased square footage. Freight and logistics expense was notably higher at the beginning of 2022 as national imports faced backlogs at the ports.
In 2022, significant amounts of previously reserved inventories were scrapped over the course of the year. Freight and logistics expenses were notably higher at the beginning of 2022 as national imports faced backlogs at the ports. Beginning in the second quarter of 2023, the Company terminated several employees, and the result was a significant reduction in payroll-related expenses.
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. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely.
However, due to changes in our capital structure, approximately $84.30 million of the $138.7 million is available after the application of IRC Section 382 limitations. 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.
We used $0.3 million from changes in deferred revenue, $1 thousand in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and $0.6 million through a decrease of other accrued liabilities. 35 Table of Contents Net cash used in operating activities of $9.8 million in 2021 resulted primarily from the net loss incurred of $7.9 million, adjusted for non-cash items, including: depreciation and amortization of $0.2 million, stock-based compensation, net of $0.4 million, gain on forgiveness of the PPP loan of $0.8 million, other income related to the ERTC of $0.9 million, and unfavorable provisions from inventory and warranty of $0.2 million and $0.1 million, respectively, as well as accounts receivable and working capital changes.
We generated $0.6 million in cash for an increase in accounts payable due to the timing of inventory receipts and payments, $0.5 million from the change in prepaid and other current assets, and $1.0 million in inventory as we sold off a substantial portion of the stock on hand. 34 Table of Contents Net cash used in operating activities of $6.7 million in 2022 resulted primarily from the net loss incurred of $10.3 million, adjusted for non-cash items, including: depreciation and amortization of $0.5 million, stock-based compensation, net of $0.1 million, and non-favorable provisions from inventory of $32 thousand and a loss on impairment of property and equipment of $0.3 million, and favorable provisions from warranty of $0.1 million.
Net cash provided by financing activities for the year ended December 31, 2021 of $10.7 million primarily resulted from $4.0 million and $4.5 million in net proceeds received from the December 2021 Private Placement and the June 2021 Equity Offering, respectively, $1.5 million of net proceeds from the 2021 Streeterville Note, and $0.8 million of proceeds from the exercise of 237,892 January 2020 Warrants.
Cash provided by financing activities Net cash provided by financing activities for the year ended December 31, 2023 of $4.5 million primarily resulted from the proceeds from the issuance of common stock and warrants of $6.1 million and advanced capital contribution of $0.5 million.
The year-over-year $1.4 million decrease is comprised of a combination of a $1.5 million decrease from a reduction in headcount and salaries, including stock-based compensation and related benefits and a decrease of $0.1 million in all other general expenses, offset by an increase of $0.2 million in sales commissions and consultants.
The year-over-year $3.5 million decrease is comprised of a combination of a $2.1 million decrease from a reduction in headcount for salaries, severance, and commissions, a $0.5 million decrease from trade show, marketing, and travel expenses, a $0.2 million decrease from a reduction of software costs, a $0.2 million from reduced recruiting and relocation expenses, a $0.2 million decrease from consultant and professional fees, and remaining from a decrease of all other general expenses.
The decrease in net MMM product sales in 2022 as compared to 2021 was mainly due to a reduced military sales pipeline at the beginning of the year, increased competition, and the delayed timing of expected orders.
The increase in net MMM product sales in 2023 as compared to 2022 was mainly due to an increased military sales pipeline during the year and our strategic focus on our loyal military customers.
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 December 31, 2022. The COVID-19 pandemic in particular had, and may continue to have, a significant, long-term economic and business impact on our company.
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 December 31, 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 Stephen Socolof.
Significant phased headcount reductions began at the end of the second quarter 2022 and continued throughout the end of the year. Loss on impairment As a result of the Company’s impairment analysis, a loss on impairment of $338 thousand was recorded in 2022.
Loss on impairment No loss on impairment was recorded in 2023. As a result of the Company’s impairment analysis, in the third quarter of 2022, a loss on impairment of $76 thousand was recorded on the write-off of the UV-Robots.
Cash used in investing activities Net cash used in investing activities was $16 thousand in 2022, primarily from the acquisition of property and equipment. Net cash used by investing activities was $0.4 million in 2021, and resulted primarily from the addition of software and tooling to support production operations as well as the development of an e-commerce platform.
Cash used in investing activities Net cash used in investing activities was $69 thousand in 2023, primarily from the acquisition of property and equipment. Net cash used in investing activities was $16 thousand in 2022, primarily from the acquisition of property and equipment and partially offset by the proceeds from the sale of property and equipment.
We used $2.4 million from a net increase in inventories primarily due to the timing of inventory receipts, $0.4 million in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and $0.4 million through a decrease of other accrued liabilities, primarily related to accrued payroll and benefits and commissions.
We used $1.1 million through the timing of collection of accounts receivable, $0.2 million for prepayments to vendors, and $47 thousand through a decrease of other accrued liabilities.
Liquidity and capital resources General We generated a net loss of $10.3 million in 2022, compared to net loss of $7.9 million in 2021. We have incurred substantial losses in the past, and as of December 31, 2022, we had an accumulated deficit of $149.0 million.
Financial condition At December 31, 2023, we had $2.0 million in cash and a total of $1.3 million of debt, net of discounts and unamortized debt costs, related to the 2022 Streeterville Note outstanding. We have historically incurred substantial losses, and as of December 31, 2023, we had an accumulated deficit of $153.3 million.
Operating expenses Product development Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, certain legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred. Cost recovery represents the combination of revenues and credits from government contracts.
Due to the termination of employees, the need for temporary workers was increased. 31 Table of Contents Operating expenses Product development Product development expenses include salaries and related benefits, product testing and related costs, travel, supplies, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred.
Gross (loss) profit Gross loss was $0.3 million, or (5.3)% of net sales, for 2022, compared with gross profit of $1.7 million, or 17.2% of net sales for 2021. The year-over-year decrease in gross margin was driven primarily by a diminished sales pipeline and discounted pricing in connection with our inventory reduction project.
Gross profit (loss) Gross profit was $0.2 million, or 3.9% of net sales, for 2023, compared with gross loss of $(0.3) million, or (5.3)% of net sales for 2022.
However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales. Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives.
We are pleased to see a growth during the fiscal year ended December 31, 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.
These UVCD products were fully launched prior to 2022, and no further investments were necessary in 2022. Selling, general, and administrative 30 Table of Contents Selling, general, and administrative expenses were $7.1 million, or 119.8% of net sales, in 2022, compared to $8.5 million, or 86.5% of net sales, in 2021.
Beginning in the second quarter of 2023, the Company terminated several employees, and the result was a significant reduction in payroll-related expenses. Selling, general, and administrative Selling, general, and administrative expenses were $3.6 million, or 63.1% of net sales, in 2023, compared to $7.1 million, or 119.8% of net sales, in 2022.
Removed
In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products. After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products.
Added
We are also evaluating adjacent technologies, including Gallium Nitride (“GaN”) based power supplies and additional market opportunities for energy solution products that support sustainability in our existing channels. The LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion.
Removed
Similarly, our plans to expand and enhance the performance of our RedCap ® product line are also now expected in 2023.
Added
We are looking forward to the continued support and growth of our existing EnFocus™ product line which is particularly attractive for its ease of install and ease of use in spaces with transient occupation. The Company have enhanced the performance of our RedCap® product providing a more user- friendly experience in 2023.
Removed
Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant restructuring efforts were undertaken.
Added
Throughout 2023, the Company continued to 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 ability of the Company to continue to not only provide quality products and services, but to both expand and rationalize product offerings.
Removed
The Company replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors (“Board of Directors”) and the executive team, and recruited new departmental leaders across the Company.
Added
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.
Removed
The initial cost savings efforts to minimize cash usage included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing.
Added
During 2023, we thoroughly reviewed and adjusted our commercial pricing position as well as our strategic relationships and partnerships within the commercial LED market space. We believe our new pricing position will give us a greater advantage than previously held against the competition and offer a more attractive entry point for our end customer base.
Removed
During 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses.
Added
(“Sander”), a shareholder of the Company, contributed meaningful external capital, as well as presented synergistic opportunities to improve and diversify our supply chain and product offerings.
Removed
Despite these cost-cutting efforts, the company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market. 27 Table of Contents At the beginning of 2022, the Board of Directors appointed our lead independent director to serve as interim Chief Executive Officer and replace our previous chief executive officer.
Added
Their terms as directors would have otherwise expired at the 2024 annual meeting of stockholders of the Company. These resignations did not involve any disagreement with the Company.
Removed
During 2022, the company redoubled its cost-reduction efforts, reduced its warehouse square footage, undertook an inventory reduction project, and dramatically reduced head count. During 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer products industry experience, and in September 2022, we hired a permanent Chief Executive Officer.
Added
On July 2, 2023, the remaining members of the Board of Directors unanimously appointed the following four new members to the Board of Directors: Kin-Fu Chen, Shou-Jang Lee, Jason Tien-Chia Tsai, and Chiao Chieh (Jay) Huang.
Removed
We reinvested in our MMM sales channel with a strategic hire in May 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.
Added
The Board of Directors affirmatively determined that, at the time of his appointment, each of the new members of the Board of Directors is an independent director under the corporate governance standards of the Nasdaq.
Removed
Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales in 2020, offsetting some of the weakness being experienced in our commercial business that year, though new MMM orders dwindled as we entered 2022.
Added
On August 24, 2023, the Board of Directors approved the termination of the Company’s chief executive officer and appointed Chiao Chieh (Jay) Huang to serve as the Company’s new chief executive officer. In line with this decision, Mr. Huang discontinued his role as Chairman of the Board.
Removed
We launched our patented EnFocus™ 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.
Added
As part of this transition, the Board appointed Kin-Fu Chen as the Chairman of the Board. Our Business Strategy Demand-oriented Approach In order to deepen our relationships with customers, we are in the process of re-establishing our service model, aiming to provide richer and more targeted customer service.
Removed
Throughout 2021 and 2022, following a slowdown in 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors continue to delay order placements in reaction to the long-term impacts of the COVID-19 pandemic that continue to cause our customers to suspend or postpone lighting retrofit projects due to budget and occupancy uncertainties.
Added
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 comprehensive value model to ensure consistency in the products and services we provide throughout the customer journey.
Removed
Global supply chain and logistics challenges have further exacerbated slowdowns in customer projects, as well as impacted our inventory strategies to respond to customer and supplier timelines. 28 Table of Contents We continue to monitor the impact of lingering effects of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken in response to the pandemic.
Added
We have begun an in-depth analysis of our current and past top 10 customers over the last five years to identify the core factors that make them 29 Table of Contents 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.
Removed
Global supply chain and logistics constraints continue to impact our inventory purchasing strategy, and we have previously had to build up inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining components.
Added
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.
Removed
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.
Added
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 optimize recycling mechanisms and strengthen packaging design, integrating sustainable economy principles into the core of supply chain management.
Removed
Material adverse effects of lingering effects of the COVID-19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the continued long-term impact of the COVID-19 pandemic and will continue to adjust our organizational structure, strategies, plans and processes to respond.
Added
Guided by the 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.
Removed
Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial position that the COVID-19 pandemic will have.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

161 edited+74 added−119 removed55 unchanged
Biggest changeCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (amounts in thousands) Additional Paid-in Capital Accumulated Other Comprehensive Loss Preferred Stock Common Stock Accumulated Deficit Shares Amount Shares Amount Total 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 — — 79 — 80 — — 80 Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — — — — (1) — — (1) Issuance of common stock and warrants — — 2,183 — 9,500 — — 9,500 Offering costs on issuance of common stock and warrants — — — — (969) — — (969) Issuance of common stock upon the exercise of warrants — — 237 — 801 — — 801 Issuance of common stock upon the conversion from preferred stock (1,721) — 344 — — — — — Stock-based compensation — — — — 429 — — 429 Net loss — — — — — — (7,886) (7,886) Balance at December 31, 2021 876 $ — 6,368 $ — $ 144,953 $ (3) $ (138,741) $ 6,209 Issuance of common stock under employee stock option and stock purchase plans — — 46 — 6 — — 6 Issuance of common stock and warrants — — 1,313 1 3,499 — — 3,500 Offering costs on issuance of common stock and warrants — — — — (334) — — (334) Issuance of common stock upon the exercise of warrants — — 1,465 — — — — — Stock-based compensation — — — — 117 — — 117 Stock issued in exchange transactions — — 657 — 304 — — 304 Net loss — — — — — — (10,279) (10,279) Balance at December 31, 2022 876 $ — 9,849 $ 1 $ 148,545 $ (3) $ (149,020) $ (477) The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents ENERGY FOCUS, INC.
Biggest changeCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (amounts in thousands) Additional Paid-in Capital Accumulated Other Comprehensive Loss Preferred Stock Common Stock Accumulated Deficit Shares Amount Shares* Amount Total Balance at December 31, 2021 876 $ — 910 $ — $ 144,953 $ (3) $ (138,741) $ 6,209 Issuance of common stock under employee stock option and stock purchase plans — — 7 — 6 — — 6 Issuance of common stock and warrants — — 187 1 3,499 — — 3,500 Offering costs on issuance of common stock and warrants — — — — (334) — — (334) Issuance of common stock upon the exercise of warrants — — 209 — — — — — Stock-based compensation — — — — 117 — — 117 Stock issued in exchange transactions — — 94 — 304 — — 304 Net loss — — — — — — (10,279) (10,279) Balance at December 31, 2022 876 $ — 1,407 $ 1 $ 148,545 $ (3) $ (149,020) $ (477) Issuance of common stock — — 2,477 1 6,078 — — 6,079 Stock issued in exchange transactions — — 465 — 1,716 — — 1,716 Par value adjustment due to reverse stock split — — — (2) 2 — — — Reduction in equity due to costs from reverse stock split — — — — (16) — — (16) Stock-based compensation — — — — 44 — — 44 Impact of adoption of ASU 2016-13 - CECL — — — — — — (2) (2) Net loss — — — — — — (4,293) (4,293) Balance at December 31, 2023 876 $ — 4,349 $ — $ 156,369 $ (3) $ (153,315) $ 3,051 *Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset.
Impairment of Long-lived assets Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset.
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 with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $2.0 million (the “2022 Streeterville Note”).
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 “2022 Streeterville Note”).
We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications.
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 a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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 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.
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.
Our mission is to enable our customers to run their facilities, offices with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.
Our mission is to enable our customers to run their facilities 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 technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.
An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. Refer to Note 6, “Property and Equipment,” for additional information.
An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. Refer to Note 5, “Property and Equipment,” for additional information.
The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and extend its maturity date to December 1, 2024.
The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and extend its maturity date to December 1, 2024 (the “2022 Streeterville Note Amendment”).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, 17 CFR § 229.10(f)(1), the Company is not required to provide this information. 39 Table of Contents ITEM 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, 17 CFR § 229.10(f)(1), the Company is not required to provide this information. 36 Table of Contents ITEM 8.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Reserves for Excess, Obsolete and Slow-Moving Inventories Description of the Matter As described in Notes 2 and 5 to the consolidated financial statements, the Company assesses the valuation of inventories each reporting period based on the lower of cost or net realizable value.
Reserves for Excess, Obsolete and Slow-Moving Inventories Description of the Matter As described in Notes 2 and 4 to the consolidated financial statements, the Company assesses the valuation of inventories each reporting period based on the lower of cost or net realizable value.
At December 31, 2022 and 2021, we have recorded a full valuation allowance against our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.
At December 31, 2023 and 2022, we have recorded a full valuation allowance against our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Instruments Fair value measurements Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value of financial assets and liabilities are measured on a recurring or non-recurring basis.
Financial Instruments Fair value measurements Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value of financial assets and liabilities are measured on a recurring or non-recurring basis.
Continuation as a Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.
Continuation as a Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the notes to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.
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.
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.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a 1- for- 35 basis.
Management’s plans in regard to these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management.
Management's plans in regard to these matters are also described in the notes. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
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.
During the third quarter of 2022 it was determined that the mUVeTM ultraviolet-C light disinfection robots were no longer of use and the net book value of $76 thousand was recorded as a loss on impairment of fixed assets.
During the third quarter of 2022 it was determined that the light disinfection robots were no longer of use and the net book value of $76 thousand was recorded as a loss on impairment of fixed assets.
During the fourth quarter, impairment charges totaling $258 thousand were recorded, which primarily relates to other assets disposed or otherwise abandoned following a review by management. Impairment charges were based on level 3 inputs, including estimated residual or sale value to market participants, in determining fair value.
During the fourth quarter of 2022, impairment charges totaling $262 thousand were recorded, which primarily relates to other assets disposed or otherwise abandoned following a review by management. Impairment charges were based on level 3 inputs, including estimated residual or sale value to market participants, in determining fair value.
Borrowings under the Receivables Facility are permitted up to the lower of (i) $2.5 million or (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.
Borrowings under the Receivables Facility were permitted up to the lower of (i) $2.5 million and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at 90% of the face value of such accounts receivable, less availability reserves, if any.
INCOME TAXES We file income tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2019.
NOTE 10. INCOME TAXES We file income tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2020.
Long-lived assets Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to 15 years) for financial reporting purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and equipment Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to 15 years) for financial reporting purposes.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
The $9.2 million and $9.6 million in federal net operating losses generated in December 31, 2022 and 2021 will be subject to the new limitations under the Tax Act.
The $6.3 million and $9.2 million in federal net operating losses generated in December 31, 2023 and 2022 will be subject to the new limitations under the Tax Act.
The Company also agreed to make monthly payments of approximately $40,200 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 $3,500,000 to $500,000, subject to the borrowing base as set forth in the Inventory Loan Agreement.
The Company also agreed to make monthly payments of approximately $40 thousand towards the remaining outstanding obligations under the Inventory Facility, and to reduce the maximum amount that may be available to the Company under the Inventory Facility from $3.5 million to $500 thousand, subject to the borrowing base as set forth in the Inventory Loan Agreement.
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.
We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 196,978 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share. In July 2022, all of the June 2022 Pre-Funded Warrants were exercised.
As of December 31, 2022, the Company had inventories of $5.5 million, net of reserves for excess, obsolete and slow-moving inventories. 41 Table of Contents Auditing management's estimates for excess, obsolete and slow-moving inventories required subjective auditor judgment and evaluation of the reasonableness of significant assumptions used in developing the reserves as detailed above, as well as the inputs and related calculations related to historical sales and on-hand inventories.
As of December 31, 2023, the Company had inventories of $4.4 million, net of reserves for excess, obsolete and slow-moving inventories. 38 Table of Contents Auditing management's estimates for excess, obsolete and slow-moving inventories required subjective auditor judgment and evaluation of the reasonableness of significant assumptions used in developing the reserves as detailed above, as well as the inputs and related calculations related to historical sales and on-hand inventories.
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”).
Inventory Facility with Crossroads The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (“Crossroads”).
In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $9.6 million additional federal net operating loss we recognized for the year.
In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $9.2 million additional federal net operating loss we recognized for the year.
Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis. 52 Table of Contents ENERGY FOCUS, INC.
Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis.
We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the approximately 1,378,848 shares underlying them, for the purposes of calculating basic EPS. The June 2022 Pre-Funded Warrants were all exercised in July 2022.
We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the approximately 196,978 shares underlying them, for the purposes of calculating basic EPS. The June 2022 Pre-Funded Warrants were all exercised in July 2022.
In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes equal to 11.07% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes equal to 1.582% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
If not utilized, the NOLs generated prior to December 31, 2017 of $37.5 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes.
If not utilized, the NOLs generated prior to December 31, 2017 of $0.9 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes.
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.
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. 52 Table of Contents ENERGY FOCUS, INC.
As impaired assets relate primarily to the Company and/or its discontinued products, management determined fair value was insignificant. For the year ended December 31, 2022, the Company recognized a loss of $334 thousand on the impairment of fixed assets. No such loss was recorded during the year ended December 31, 2021. NOTE 7.
As impaired assets relate primarily to the Company and/or its discontinued products, management determined fair value was insignificant. For the year ended December 31, 2022, the Company recognized a loss of $338 thousand on the impairment of fixed assets. No such loss was recorded during the year ended December 31, 2023. NOTE 6.
Additionally, certain vendors require advance deposits prior to the fulfillment of orders. Deposits paid on unfulfilled orders totaled $0.6 million and $0.7 million at December 31, 2022 and 2021, respectively.
Additionally, certain vendors require advance deposits prior to the fulfillment of orders. Deposits paid on unfulfilled orders totaled $0.8 million and $0.6 million at December 31, 2023 and 2022, respectively.
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.
As part of the filing of our employer tax filings for the third quarter of 2021, we applied for and received a refund of $431 thousand, and we amended our filing for the second quarter of 2021, for which we received an additional refund of approximately $445 thousand during 2023.
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.
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. 54 Table of Contents ENERGY FOCUS, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Page Reports of Independent Registered Public Accounting Firm (PCAOB ID 1808) 41 Consolidated Balance Sheets as of December 31, 2022 and 2021 43 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 45 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2022 and 2021 46 Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2022 and 2021 47 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 48 Notes to Consolidated Financial Statements 50 40 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Energy Focus, Inc.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Page Reports of Independent Registered Public Accounting Firm (PCAOB ID 1808) 38 Consolidated Balance Sheets as of December 31, 2023 and 2022 40 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 42 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2023 and 2022 43 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2023 and 2022 44 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 45 Notes to Consolidated Financial Statements 48 37 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Energy Focus, Inc.
These costs will be charged to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 2.8 years as of December 31, 2022 and 2.7 years as of December 31, 2021. 67 Table of Contents ENERGY FOCUS, INC.
These costs will be charged to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 2.7 years years as of December 31, 2023 and 2.8 years as of December 31, 2022.
(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows for the years then ended, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”).
(the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes and Schedule II (collectively referred to as the "consolidated financial statements").
PRODUCT AND GEOGRAPHIC INFORMATION We focus our efforts on the sale of LED lighting and controls products in the commercial market and MMM, and began to expand our offerings into the consumer market in the fourth quarter of 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. PRODUCT AND GEOGRAPHIC INFORMATION We focus our efforts on the sale of LED lighting and controls products in the commercial market and MMM, and began to expand our offerings into the consumer market in the fourth quarter of 2021.
For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us. 76 Table of Contents SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8.
For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us. 71 Table of Contents ENERGY FOCUS, INC.
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable, as follows: • In 2022, two customers accounted for 27% of net sales, with sales to our primary distributor for the U.S.
Certain risks and concentrations We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable as follows: • In 2023, two customers accounted for 48% of net sales, with sales to our primary distributor for the U.S.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2022 2021 Net loss $ (10,279) $ (7,886) Other comprehensive loss: Foreign currency translation adjustments — — Comprehensive loss $ (10,279) $ (7,886) The accompanying notes are an integral part of these consolidated financial statements. 46 Table of Contents ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2023 2022 Net loss $ (4,293) $ (10,279) Other comprehensive loss: Foreign currency translation adjustments — — Comprehensive loss $ (4,293) $ (10,279) The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2022 2021 Net increase in cash (2,630) 504 Cash, beginning of year 2,682 2,178 Cash, end of year $ 52 $ 2,682 Supplemental information: Cash paid in year for interest $ 364 $ 381 Cash paid in year for income taxes $ 1 $ 4 Non-cash investing and financing activities: Debt-to-equity exchange transactions $ 304 $ — The accompanying notes are an integral part of these consolidated financial statements. 49 Table of Contents ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, (amounts in thousands) 2023 2022 Net increase (decrease) in cash 1,978 (2,630) Cash, beginning of year 52 2,682 Cash, end of year $ 2,030 $ 52 Supplemental information: Cash paid in year for interest $ 380 $ 364 Cash paid in year for income taxes $ — $ 1 Non-cash investing and financing activities: Debt-to-equity exchange transactions $ 1,716 $ 304 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents ENERGY FOCUS, INC.
Pursuant to the Crossroads Amendment, the interest rate on borrowings under the Inventory Facility is now a per annum rate equal to (i) the Three Month Libor rate plus 5.5% (currently 10.28% per annum) or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus 6% (currently 10.176% per annum).
Pursuant to the Crossroads Amendment, the interest rate on borrowings under the Inventory Facility per annum was a rate equal to (i) the Three-Month LIBOR rate plus 5.5% or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus 6.00%.
Since we believe it is more likely than not that the benefit from NOLs will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 2022 and 2021, respectively. We had no net deferred tax liabilities at December 31, 2022 or 2021, respectively.
Since we believe it is more likely than not that the benefit from NOLs will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 2023 and 2022, respectively. We had no net deferred tax liabilities at December 31, 2023 or 2022, respectively. 67 Table of Contents ENERGY FOCUS, INC.
We have certain vendors who individually represented 10% or more of our total expenditures, or whose net trade accounts payable balance individually represented 10% or more of our total net trade accounts payable, as follows: • One offshore supplier accounted for approximately 16% of our total expenditures for the twelve months ended December 31, 2022.
We have certain vendors who individually represented 10% or more of our total expenditures, or whose net trade accounts payable balance individually represented 10% or more of our total net trade accounts payable, as follows: • One offshore supplier, a related party, accounted for approximately 28.0% of our total expenditures for the twelve months ended December 31, 2023.
On August 23, 2022, we received a letter from the Staff notifying us that we are 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 Rule”), because the closing bid price for our common stock was below the minimum $1.00 per share for 30 consecutive business days.
On August 23, 2022, we received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”) notifying us that we were not in compliance with the 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.
NOTE 13. 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.
NOTE 12. RECEIVABLE FOR CLAIMED 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.
As a result of the net loss we incurred for the year ended December 31, 2021, options, warrants and convertible preferred stock representing approximately 51 thousand, 47 thousand and 260 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 year ended December 31, 2023, convertible preferred stock representing approximately 25 thousand shares of common stock were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.
We do not generally require collateral from our customers. Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to major customers or with particular orders.
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. 50 Table of Contents ENERGY FOCUS, INC.
Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statements of Operations. Refer to Note 6, “Property and Equipment,” for additional information.
Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statements of Operations.
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 72 Table of Contents ENERGY FOCUS, INC.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the (benefit from) provision for income taxes reflected in our Consolidated Statements of Operations are as follows: For the year ended December 31, 2022 2021 U.S. statutory rate 21.0 % 21.0 % State taxes (net of federal tax benefit) 1.3 9.7 Valuation allowance (18.2) (32.7) Other (4.1) 2.0 0.0 % 0.0 % The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands): At December 31, 2022 2021 Accrued expenses and other reserves $ 1,455 $ 1,550 Right-of-use-asset (294) (73) Lease liabilities 306 88 Tax credits, deferred R&D, and other 438 49 Net operating loss 18,856 17,318 Valuation allowance (20,764) (18,932) Net deferred tax assets $ — $ — In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.2 million additional federal net operating loss we recognized for the year.
Federal — — Provision for (benefit from) income taxes $ 3 $ 4 The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the (benefit from) provision for income taxes reflected in our Consolidated Statements of Operations are as follows: For the year ended December 31, 2023 2022 U.S. statutory rate 21.0 % 21.0 % State taxes (net of federal tax benefit) 4.5 1.3 Valuation allowance (29.5) (18.2) Other 4.1 (4.1) 0.0 % 0.0 % The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands): At December 31, 2023 2022 Accrued expenses and other reserves $ 1,195 $ 1,458 Right-of-use-asset (197) (294) Lease liabilities 224 306 Tax credits, deferred R&D, and other 470 438 Net operating loss 20,935 18,856 Valuation allowance (22,627) (20,764) Net deferred tax assets $ — $ — In 2023, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $6.3 million additional federal net operating loss we recognized for the year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of our Company, which are summarized below, are consistent with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect practices appropriate to the business in which we operate. Use of estimates The preparation of financial statements in conformity with U.S.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of our Company, which are summarized below, are consistent with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect practices appropriate to the business in which we operate.
The difference between cost and sale price was applied to remaining inventory and included in lower of cost or market component of the provision for excess and obsolete inventory calculation. We limited inventory and component purchases to top selling products that maintained high inventory turnover.
The difference between cost and sale price 51 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS was applied to remaining inventory and included in lower of cost or market component of the provision for excess and obsolete inventory calculation. We limited inventory and component purchases to top selling products that maintained high inventory turnover.
The following table provides a breakdown of product net sales for the years indicated (in thousands): Year ended December 31, 2022 2021 Commercial products $ 3,746 $ 4,682 MMM products 2,222 5,183 Total net sales $ 5,968 $ 9,865 A geographic summary of net sales is as follows (in thousands): For the year ended December 31, 2022 2021 United States $ 5,944 $ 9,712 International 24 153 Total net sales $ 5,968 $ 9,865 At December 31, 2022 and 2021, approximately 100% of our long-lived assets, which consist of property and equipment, were located in the United States.
The following table provides a breakdown of product net sales for the years indicated (in thousands): Year ended December 31, 2023 2022 Commercial products $ 1,593 $ 3,746 MMM products 4,124 2,222 Total net sales $ 5,717 $ 5,968 A geographic summary of net sales is as follows (in thousands): For the year ended December 31, 2023 2022 United States $ 5,690 $ 5,815 International 27 153 Total net sales $ 5,717 $ 5,968 At December 31, 2023 and 2022, approximately 100% of our long-lived assets, which consist of property and equipment, were located in the United States.
Our practice is to recognize interest and penalties related to income tax matters in income tax expense when and if they become applicable. At December 31, 2022 and 2021, respectively, there were no accrued interest and penalties related to uncertain tax positions.
Our practice is to recognize interest and penalties related to income tax matters in income tax expense when and if they become applicable. At December 31, 2023 and 2022, respectively, there were no accrued interest and penalties related to uncertain tax positions. 66 Table of Contents ENERGY FOCUS, INC.
At December 31, 2022, we had federal and state net operating loss carry-forwards (“NOLs”) of approximately $132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $78.0 million of the $132.4 million is available after the application of IRC Section 382 limitations.
At December 31, 2023, we had federal and state net operating loss carry-forwards (“NOLs”) of approximately $138.7 million for federal income tax purposes ($48.0 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $84.3 million of the $138.7 million is available after the application of IRC Section 382 limitations.
Borrowings under the Inventory Facility are permitted up to the lower of (i) $3.0 million, which was subsequently increased to $3.5 million in April 2022 and reduced to $500 thousand in January 2023 as described below, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75% of inventory costs or 85% of the inventory net orderly liquidation value, less the availability reserves.
Borrowings under the original Inventory Facility were permitted up to the lower of (i) $3.0 million, which amount was subsequently increased to $3.5 million in April 2021, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75% of inventory costs or 85% of the inventory net orderly liquidation value, less the availability reserves.
Huang Purchase Agreements 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 257,798 shares of the Company’s common stock, for a purchase price of $0.3879 per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
Revenue recognition 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.
GAAP and pursuant to the rules and regulations of the United States Securities & Exchange Commission (“SEC”). Revenue Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products.
The following summarizes the 2022 Promissory Notes at December 31, 2022: 63 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2022 G. Huang J. Huang J. Huang G. Huang J. Huang J. Huang T.
See Note 9, “Stockholders’ Equity.” The following summarizes the 2022 Promissory Notes at December 31, 2022: 59 Table of Contents ENERGY FOCUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2022 G. Huang J. Huang J. Huang G. Huang J. Huang J. Huang T.
They consist of costs for the placement of our advertisements in various media and the costs of demos provided to potential distributors of our products. Advertising expenses were $0.3 million and $0.4 million for the years ended December 31, 2022 and 2021, respectively. 54 Table of Contents ENERGY FOCUS, INC.
They consist of costs for the placement of our advertisements in various media and the costs of demos provided to potential distributors of our products. Advertising expenses were $6 thousand and $0.3 million for the years ended December 31, 2023 and 2022, respectively.
The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands): For the year ended December 31, 2022 2021 Cost of sales $ 2 $ 9 Product development 15 14 Selling, general, and administrative 100 406 Total stock-based compensation $ 117 $ 429 At December 31, 2022 and 2021, we had unearned stock compensation expense of $0.1 million and $0.3 million, respectively.
The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands): For the year ended December 31, 2023 2022 Cost of sales $ 2 $ 2 Product development — 15 Selling, general, and administrative 42 100 Total stock-based compensation $ 44 $ 117 At December 31, 2023 and 2022, we had unearned stock compensation expense of $64 thousand and $128 thousand, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease payments required under operating and finance leases for each of the years 2023 through 2027 are as follows (in thousands): Operating Leases Jan 2023 to Dec 2023 $ 386 Jan 2024 to Dec 2024 379 Jan 2025 to Dec 2025 385 Jan 2026 to Dec 2026 390 Jan 2027 to Dec 2027 197 Total future undiscounted lease payments 1,737 Less imputed interest (510) Total lease obligations $ 1,227 Supplemental cash flow information related to leases was as follows (in thousands): Years ended December 31, 2022 2021 Supplemental Cash Flow Information: Cash paid, net, for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 423 $ 532 Operating cash flows from restructured leases $ — $ 35 Financing cash flows from finance leases $ 1 $ 3 58 Table of Contents ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease payments required under operating and finance leases for each of the years 2024 through 2027 are as follows (in thousands): Operating Leases 2024 379 2025 385 2026 390 2027 197 Total future undiscounted lease payments 1,351 Less imputed interest (330) Total lease obligations $ 1,021 Supplemental cash flow information related to leases was as follows (in thousands): Years ended December 31, 2023 2022 Supplemental Cash Flow Information: Cash paid, net, for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 383 $ 423 Financing cash flows from finance leases $ — $ 1 NOTE 4.
All outstanding amounts under the Receivables Facility had been repaid prior to termination, and there were no prepayment fees in connection with termination.
On February 7, 2023, the Company and the RF Lender agreed to terminate the Receivables Facility. All outstanding amounts under the Receivables Facility had been repaid prior to termination, and there were no prepayment fees in connection with termination.
RESTRUCTURING Due to our financial performance in 2022 and 2021, including net losses of $10.3 million and $7.9 million, respectively, and total cash used in operating activities of $6.7 million and $9.8 million, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2022.
Going Concern and Nasdaq Continued Listing Requirements Compliance Due to our financial performance as of December 31, 2023 and 2022, including net losses of $4.3 million and $10.3 million for the twelve months ended December 31, 2023 and 2022, respectively, and total cash used in operating activities of $2.4 million and $6.7 million for the twelve months ended December 31, 2023 and 2022, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2023.
COMMITMENTS AND CONTINGENCIES Purchase Commitments As of December 31, 2022, we had approximately $0.6 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2023. NOTE 10.
COMMITMENTS AND CONTINGENCIES Purchase Commitments As of December 31, 2023, we had approximately $0.5 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2024. We have 49% of the outstanding purchase commitments with a related party. NOTE 9.
December 2021 Private Placement In December 2021, we completed the December 2021 Private Placement with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share.
December 2021 Private Placement In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 170,455 shares of our common stock at a purchase price of $24.64 per share.
We also sold to the same institutional investors (i) 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.
We also sold to the same institutional investors (i) pre-funded warrants (the “December 2021 Pre-Funded Warrants”) to purchase 12,175 shares of common stock at an exercise price of $0.0007 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 182,630 shares of common stock at an exercise price of $24.64 per share.
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 325,803 shares of the Company’s common stock for a purchase price of $0.4604 per share. On February 24, 2023, the Company entered into a securities purchase agreement with Ms.
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.
STOCKHOLDERS’ EQUITY June 2022 Private Placement In June 2022, we completed the June 2022 Private Placement with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share.
June 2022 Private Placement In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of 187,637 shares of our common stock at a purchase price of $9.10 per share.
As of December 31, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares of common stock remained outstanding, with an 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.
As of December 31, 2023, June 2022 Warrants to purchase an aggregate of 384,615 shares remained outstanding, with a weighted average exercise price of $9.10 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.
As a result of the restructuring actions and initiatives described in Note 1, 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, and substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2022.
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.
Actual results could differ from those estimates and such differences could be material. Basis of presentation The Consolidated Financial Statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our operations.
Actual results could differ from those estimates and such differences could be material. Basis of presentation The Consolidated Financial Statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated. We have prepared the accompanying consolidated financial statements in accordance with U.S.

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