Energy Focus, Inc: Form 10-Q for the period ended Mar 31, 2026

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2025 (“2025 Annual Report”).

Overview

Energy Focus, Inc. specializes in the design, development, manufacturing, marketing and selling 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”). In addition to our lighting portfolio, we also offer uninterruptible power supply (“UPS”) systems and other power management solutions, which have contributed meaningfully to our revenue in recent quarters and are expected to be a strategic area of continued growth.

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. 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. We are also evaluating additional adjacent technologies, including Gallium Nitride (“GaN”) based power supplies and other 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. In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively while not impacting the performance and quality. Despite these efforts, our legacy products continue to face extreme price competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business.

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. Specific examples of these products we have developed include the RedCap®, our patented emergency backup battery integrated TLED, as well as our robust MMM product offering. The Company has enhanced the performance of our RedCap® product by providing a more user-friendly experience. 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.

It is our belief that our strategic initiatives undertaken in 2025 and 2026, including expansion into energy storage solutions, development of advanced Uninterruptible Power Supply (“UPS”) systems for AI data center applications, and targeted growth in the Taiwan and Japan markets, along with continued product innovation, expanded distribution capabilities, and operational efficiency, will over time result in improved sales and bottom-line performance for the Company.

We have taken steps to strengthen our financial structure through capital increases and cost reduction measures, which we believe have improved our financial position and provided a stronger foundation for our growth initiatives. Our business expansion plans, including investments in energy storage solutions, development of advanced UPS systems for AI data center applications, and expansion into the Taiwan and Japan markets, are supported by financial strategies that we expect will provide funding for our planned growth initiatives, although there can be no assurance that such funding will be adequate. At the same time, our MMM business continues to be affected by delays in government funding, the timing of U.S. Navy awards, and long sales cycles typical of this sector, with the timeline from bid submission to order placement often exceeding six months, and many products being built-to-order, resulting in extended lead times before revenue recognition. To mitigate these factors, we continue to pursue opportunities with the U.S. Navy and other government sectors, while our cost optimization efforts have enhanced our competitiveness and may support our ability to secure new contracts and expand our sales pipeline in 2026 and beyond.

We are actively expanding our commercial product offerings, including our newly introduced UPS systems for data centers. We also continue to advance the expansion of product lines such as ESS and GaN based power supplies, while leveraging stability and opportunities within our MMM business. In 2025, we conducted a comprehensive review of our commercial pricing strategy and reassessed key partnerships within the energy-related market. These strategic adjustments have improved our market position, offering a more competitive pricing structure and a stronger value proposition for our customers. We believe that these initiatives, if successfully implemented, and if our financial position continues to improve, may contribute to growth across both our MMM and commercial business sectors, although there can be no assurance that such growth will occur.

Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. Strategic investments by Sander Electronics, Inc. (“Sander”), a shareholder of the Company, have contributed meaningful external capital and created synergistic opportunities to enhance and diversify our supply chain and product offerings, including through relationships with related parties such as Winner Technology International Limited.

The Company continues to incur losses and has a substantial accumulated deficit, which raises substantial doubt about its ability to continue as a going concern as of March 31, 2026. Management continues to evaluate and implement strategies to improve liquidity and financial performance.

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

Supply-oriented Approach

EFOI is committed to adopting three main sustainable economy strategies: “Green Supply Chain,” “Green Product,” and “Green Manufacturing”, aiming to promote sustainability throughout the entire value chain. The Company is working closely with its supply chain partners to optimize recycling mechanisms and strengthen packaging design, integrating sustainable economy principles into the core of supply chain management.

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. This strategy not only aligns with the Company’s responsibility and sustainability goals but is also expected to enhance overall performance and market competitiveness. EFOI's operational team's new strategy focuses on integrating environmental and economic benefits, aiming to create a win-win situation that benefits the company, society, and the environment.

Under the premise of a similar industrial environment and familiar relationships, our professional skills complement those of our supply chain partners. We believe this foundation of cooperation may enable us to pursue common goals of cost reduction, profit sharing, and exploring new business opportunities. This not only strengthens our cooperative relationship but also lays a solid foundation for our joint efforts towards a better future.

Financial-oriented Approach

The Company applies strategic financial management in the following perspective.

Control and Monitoring of Assets and Liabilities

• Assets: Regularly evaluate all assets, especially inventory, to ensure they remain in optimal condition in terms of value and performance. Minimize or mitigate the impact of inefficient and aging assets, focusing on assets with high efficiency and return.
• Liabilities: Ensure a robust liability structure, optimize the cost of liabilities, and seek lower interest rates and more favorable repayment terms. Regularly review the liability situation to ensure the company’s level of liabilities remains within a safe range.

Structured Profitability

• Revenue Growth: Develop diversified revenue streams, reduce dependency on single business or market, continuously optimize products and services, and enhance market competitiveness.
• Cost Control: Strictly control operating costs, seek opportunities to reduce costs, and ensure the efficient use of resources to optimize operations.
• Cash Flow Management: Establish a sound accounts receivable and payable management system to ensure timely collection of receivables and reasonable arrangement of payments. Maintain sufficient cash reserves to cope with potential funding shortages.

Results of operations

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

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Net sales

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

Net sales of $0.9 million for the first quarter of 2026 increased $0.3 million, or 54%, compared to first quarter of 2025 net sales of $0.6 million, driven by a $0.2 million increase in MMM sales and a $0.1 million increase in commercial sales. The increase in net MMM products sales in the first quarter of 2026 was driven by improved demand compared to the prior year period, which was impacted by reduced military procurement activity associated with the U.S. election cycle. The increase in commercial sales was primarily attributable to improved sales volume, partially offset by inflationary pressures and market-adjusted pricing.

Gross Profit

Gross profit was $0.2 million, representing 23% of net sales, for the first quarter of 2026. This compares with gross profit of $0.2 million, or 32% of net sales, for the first quarter of 2025. The period-over-period change in gross profit was driven mainly by an increase in inventory reserves and lower variable margins, such as tariff impacts.

Operating expenses

Product development

Product development expenses include salaries and related benefits, testing and related costs, travel expenses, cost of supplies, as well as overhead items, such as depreciation and facility costs. Product development costs are expensed as they are incurred.

Product development expenses were $0.1 million for the first quarter of 2026, representing an increase of $26 thousand, or 52% compared to the first quarter of 2025. The increase primarily resulted from higher product testing expenses.

Selling, general and administrative

Selling, general and administrative expenses were $0.3 million for the first quarter of 2026, down 31% from $0.4 million in the first quarter of 2025. The decrease is primarily due to a reduction in insurance fees of $0.1 million.

Interest income

Interest income was $1 thousand for the first quarter of 2026, compared to $0 thousand for the first quarter of 2025. The increase was primarily attributable to interest earned in bank deposits.

Provision for income taxes

Due to the operating losses incurred during the three months ended March 31, 2026 and 2025, and after application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended, it was not necessary to record a provision for U.S. federal income tax or various state income taxes as income tax benefits are fully offset by a valuation allowance recorded.

Net loss

Net loss for the three months ended March 31, 2026 was $0.1 million, a decrease of $0.2 million, or 48% compared to net loss of $0.3 million for the three months ended March 31, 2025. The decrease is mainly due to lower operating expenses in the first quarter of 2026.

Financial condition

As of March 31, 2026, we had $1.1 million in cash and no outstanding debt. We have historically incurred substantial losses, and, as of March 31, 2026, we had an accumulated deficit of $156.1 million. Additionally, our sales have been concentrated among a few major customers and, for the three months ended March 31, 2026, four customers accounted for approximately 63% of net sales.

In 2026 and 2025, we remained committed to building upon the initiatives to stabilize and regrow our business. These efforts include the following key developments that occurred during 2026 and 2025:

• We have reinvested in our MMM sales channel 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.
• We have re-evaluated operating expenses and reduced our workforce significantly throughout 2025 and into 2026 to manage fixed costs.
• We continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives.

We continue to closely monitor our cost control efforts to streamline our operations by closely managing all spending throughout the Company, while carefully investing in new products and strategies that sought to reenergize sales.

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, including expansion into the Japan market through our joint venture investment initiatives. We plan to achieve profitability through developing and launching new, innovative products, UPS systems, our Redcap® emergency battery backup TLEDs, evaluating new growth opportunities such as GaN-based power supply circuitry and other energy solution products, 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. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, decision-making, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.

Liquidity and capital resources

Cash

As of March 31, 2026, our cash balance was $1.1 million, compared to $1.1 million as of December 31, 2025. On April 3, 2026, we entered into agreements related to a joint venture investment in Japan under which our total expected investment commitment for a 35% ownership interest is approximately $1.1 million. As of May 12, 2026, we had invested approximately $535 thousand toward this commitment, with the remaining balance of approximately $565 thousand expected to be funded during project development. This commitment may place additional pressure on our liquidity and may increase our dependence on additional financing, capital raising activities, or other funding alternatives to support operations and strategic initiatives.

• As of March 31, 2026, we held total cash of $1.1 million, of which approximately $0.3 million was maintained in a bank account in Taiwan, with the remaining $0.8 million in bank accounts in the United States. These funds support the operations of our wholly owned Taiwanese branch and are denominated in NTD.
• The ability to access this cash for general corporate purposes in the United States may be subject to foreign exchange controls, local banking regulations, or unfavorable tax consequences. While there are currently no formal restrictions on the transfer of funds from Taiwan to the United States, repatriation of these funds may result in foreign withholding taxes or other costs, which could impact our overall liquidity. As such, our ability to deploy foreign cash for domestic use may be limited or delayed.
• Management continues to monitor its cash position, operating cash flows, and funding needs in both domestic and foreign jurisdictions.

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

Net cash provided by (used in) operating activities

Net cash provided by operating activities was $0.1 million for the three months ended March 31, 2026. The net loss for the period was $0.1 million, adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, accounts receivable reserves and working capital changes. During the three months ended March 31, 2026, major changes included $0.1 million in cash generated from collections of accounts receivable and a $0.9 million change in related party accounts payable due to timing of inventory receipts and payments, which was partially offset by $0.8 million change in inventory.

Net cash used in operating activities was $0.3 million for the three months ended March 31, 2025. The net loss for the three months ended March 31, 2025 was $0.3 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, accounts receivable reserves and working capital changes. During the three months ended March 31, 2025, changes included cash generated of $0.2 million from collection of accounts receivable, which was partially offset by $0.2 million changes in prepayment for vendors, and $0.1 million change in accounts payable due to timing inventory receipts and payments.

Net cash used in investing activities

For the three months ended March 31, 2026, the Company did not have any activities in connection with investing activities.

Net cash used in investing activities was $5 thousand for the three months ended March 31, 2025, primarily from the acquisition of property and equipment.

Net cash provided by financing activities

For the three months ended March 31, 2026, the Company did not have any activities in connection with financing activities.

Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2025, primarily reflecting net proceeds from the issuance of common stock.

Contractual and other obligations

Please refer to Note 9 “Purchase Commitments” included under Part I, Item 1, “Financial Statements,” of this Quarterly Report.

Foreign currency exchange risk

Because we maintain operations and cash balances in Taiwan, we are exposed to fluctuations in the New Taiwan dollar (NTD) exchange rate relative to the U.S. dollar. Changes in exchange rates can affect the reported value of our foreign cash balances, revenues, and expenses, as well as result in transaction gains or losses on intercompany and third-party balances.

As of March 31, 2026, we had a net NTD exposure of approximately $318 thousand, consisting of NTD cash of $320 thousand, partially offset by NTD accounts payable of $2 thousand. In addition, we held approximately $155 thousand in JPY denominated advances for investment in a joint venture related to our Japan ESS initiative.

For the three months ended March 31, 2026, we recognized net foreign currency transaction losses of approximately $8 thousand. We do not currently employ financial instruments to hedge our foreign currency exposure. We continue to monitor our exposure to NTD and JPY and may consider hedging strategies in the future if our foreign currency risk increases materially.

Critical accounting policies

There have been no material changes to our critical accounting policies as compared to those included in our 2025 Annual Report.

Certain risks and concentrations

We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance. Please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part I, Item 1, “Financial Statements,” of this Quarterly Report.

Recent accounting pronouncements

For information on recent accounting pronouncements, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part I, Item 1, “Financial Statements,” of this Quarterly Report.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.

Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer who also serves as our principal financial officer as appropriate, to allow for timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures, as of March 31, 2026, the end of the period covered by this Quarterly Report. Management, with the participation of our Chief Executive Officer and Principal Financial Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this Quarterly Report. Based on this evaluation, our management concluded that our disclosure controls and procedures were effective as of March 31, 2026.

Changes in internal control over financial reporting

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

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.