ENERGY FOCUS, INC/DE

ITEM 1A. RISK FACTORS

As a smaller reporting company, we are not required to provide a separate risk factors section in this Quarterly Report. However, we have elected to include the following updated risk factors to provide additional context for investors. These risks supplement those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024. You should carefully consider these risks, together with all other information in this Quarterly Report and our other SEC filings, before making an investment decision.

We may fail to secure sufficient additional financing, which could prevent us from executing our business plan and continuing as a going concern.

Our cash balance of $0.5 million as of March 31June 30, 2025, and ongoing operating losses raise substantial doubt about our ability to continue as a going concern. We are actively seeking at least $1 million in capital through equity, debt, or strategic partnerships, but there can be no assurance that we will secure such funding on acceptable terms or at all. Equity financing may significantly dilute existing shareholders, while debt financing could impose restrictive covenants or high interest rates. Failure to obtain adequate financing could result in reduced operations, delayed product development, or insolvency.

Global trade policies, including tariffs, could increase costs and disrupt our supply chain, adversely affecting our operations and profitability.

Our operations are subject to risks arising from global trade policies, particularly the imposition of tariffs and other trade barriers by the United States, China, the European Union, and other nations, which have intensified under the current U.S. administration. As of March 31June 30, 2025, approximately 4991% of our purchase commitments are with Sander Electronics Co Ltd, a Taiwan-based related party, which could be indirectly affected by international trade tensions, including tariffs. These policies may increase the cost of imported components, extend delivery times due to customs delays, or reduce demand for our products if customers face higher prices. For example, tariffs imposed in early 2025 on electronic components could increase our cost of sales by approximately 10% to 15% annually based on current inventory levels and asssupply chain composition, assuming the relevant products become subject to new or additional tariffs. These risks are heightened by our significant concentration of purchases with Taiwan-based related party suppliers (representing 91% of our purchase commitments as of June 30, 2025), which may be indirectly affected by U.S.-China trade tensions and broader Asian trade policies, even if not directly subject to specific tariffs.

The unforeseen results of potential trade disputes and reciprocal tariffs worldwide could further impact our business. Increased trade protectionism, as governments seek to protect or revive domestic industries, may lead to restrictions on imports, such as tariffs, that could significantly affect global trade and, indirectly, the demand for our LED lighting products. Such restrictions could increase the cost of exported goods, prolong delivery times, and elevate risks associated with exporting, potentially leading to a decline in the volume of exported goods and demand for our products. The interconnected nature of global supply chains means that trade policies, even in countries not directly imposing or subject to tariffs, could disrupt our access to critical components.

Tensions over trade remain high, particularly between the U.S., China, and the European Union. The current U.S. administrations extensive use of tariffs as a policy tool has introduced significant uncertainty regarding future trade relationships with key markets, including China, the European Union, Canada, and Mexico. These tariffs have prompted, and may continue to prompt, retaliatory tariffs from other nations, raising concerns about a prolonged trade war. Protectionist developments, or the perception that they may occur, could materially adversely affect global economic conditions, reduce international trade, and disrupt our supply chain, particularly for components sourced from Asia. Such disruptions could strain our liquidity, increase operating costs, and hinder our ability to compete effectively in the LED lighting market, adversely impacting our business, results of operations, and financial condition.

Foreign currency fluctuations may adversely affect our financial results.

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We have operations and business relationships in Taiwan that expose us to foreign currency risk. As of June 30, 2025, we held approximately $85 thousand in NTD denominated cash, $604 thousand in NTD accounts receivable, and $116 thousand in NTD accounts payable, resulting in a net NTD exposure of approximately $573 thousand. Fluctuations in the exchange rate between the U.S. dollar and NTD directly impact our financial results when these amounts are translated to U.S. dollars for financial reporting purposes. Additionally, economic, political and other risks associated with foreign operations could adversely affect our financial results.

During the three months ended June 30, 2025, we recognized an foreign exchange gain of $45 thousand related to NTD transactions and balances. These fluctuations can be significant relative to our quarterly results and may increase volatility in our reported financial performance. We do not currently hedge our foreign currency exposure, and significant strengthening of the U.S. dollar relative to the NTD could adversely impact our results of operations and financial condition.

A portion of our cash and operating activities are located in Taiwan, and we are subject to risks associated with foreign currency fluctuations, repatriation restrictions, and local regulations. While there are no current limitations on our ability to access funds held in Taiwan, future government actions, currency controls, or changes in tax law could restrict or delay our ability to repatriate earnings or transfer funds. Additionally, fluctuations in the exchange rate between the New Taiwan dollar and the U.S. dollar may materially affect our reported financial results, and we do not currently hedge this exposure.

Although the substantial majority of our business activity takes place in the U.S., we derive a portion of our revenues and earnings from operations in foreign countries, which is expected to increase with our investment in foreign locations. As a result, we are subject to risks associated with doing business internationally. The risks of doing business in foreign countries include, among other factors: the potential for adverse changes in the local political climate, in diplomatic relations between foreign countries and the U.S. or in government policies, laws or regulations; international conflicts; terrorist activity that may cause social disruption; logistical and communications challenges; costs of complying with a variety of laws and regulations; difficulty in staffing and managing geographically diverse operations; deterioration of foreign economic conditions; inflation and fluctuations in interest rates; foreign currency exchange rate fluctuations; foreign exchange restrictions; differing local business practices and cultural considerations; restrictions on imports and exports or sources of supply, including energy and raw materials; changes in duties, quotas, tariffs, taxes or other protectionist measures; and potential issues related to matters covered by the Foreign Corrupt Practices Act, regulations related to import/export controls, the Office of Foreign Assets Control sanctions program, anti-boycott provisions or similar laws. We believe that our business activities outside of the U.S. involve a higher degree of risk than our domestic activities, and any one or more of these factors could adversely affect our operating results and financial condition. In addition, global and regional economic conditions and the volatility of worldwide capital and credit markets have significantly impacted and may continue to significantly impact our foreign customers and markets. These factors may result in decreased demand in our foreign operations.