10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-24230

ENERGY FOCUS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization) 94-3021850
(I.R.S. Employer Identification No.)

32000 Aurora Rd., Solon, OH
(Address of principal executive offices)

44139
(Zip Code)

(Registrant’s telephone number, including area code): (440) 715-1300

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

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

Large accelerated filer o Accelerated filer o 
Non-accelerated filer þ
(do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the registrants’ Common Stock, $0.0001 par value, as of July 31, 2009 was 15,078,979.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements:
	a. Condensed Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008	3
	b. Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2009 and 2008 (unaudited)	4
	c. Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2009 and 2008 (unaudited)	5
	d. Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008, (unaudited)	6
	e. Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 6.	Exhibits	21
	Signatures	22
	Exhibit Index	23
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Item 1. Financial Statements

ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)

	June 30,			December 31,
	2009			2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,613		$	10,568
Accounts receivable trade, net		1,903			2,668
Inventories, net		4,928			5,539
Prepaid and other current assets		300			639
Total current assets		12,744			19,414
Fixed assets, net		3,582			4,096
Other assets		102			142
Total assets	$	16,428		$	23,652
LIABILITIES
Current liabilities:
Accounts payable	$	1,222		$	2,767
Accrued liabilities		1,186			1,621
Deferred revenue		216			191
Credit line borrowings		1,776			1,904
Current portion of long-term borrowings		—			54
Total current liabilities		4,400			6,537
Other deferred liabilities		67			81
Long-term borrowings		71			245
Total liabilities		4,538			6,863
SHAREHOLDERS’ EQUITY
Preferred stock, par value $0.0001 per share:
Authorized: 2,000,000 shares in 2009 and 2008
Issued and outstanding: no shares in 2009 and 2008		—			—
Common stock, par value $0.0001 per share:
Authorized: 30,000,000 shares in 2009 and 2008
Issued and outstanding: 15,079,000 in 2009 and 14,835,000 in 2008		1			1
Additional paid-in capital		66,238			65,865
Accumulated other comprehensive income		369			251
Accumulated deficit		(54,718	)		(49,328	)
Total shareholders’ equity		11,890			16,789
Total liabilities and shareholders’ equity	$	16,428		$	23,652

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

3

ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Net sales	$	3,815		$	7,616		$	6,620		$	12,453
Cost of sales		3,016			5,173			5,503			8,766
Gross profit		799			2,443			1,117			3,687
Operating expenses:
Research and development		253			192			483			493
Sales and marketing		1,650			2,712			3,530			5,690
General and administrative		1,202			1,182			2,426			2,552
Loss on impairment of assets		165			—			165			—
Total operating expenses		3,270			4,086			6,604			8,735
Loss from operations		(2,471	)		(1,643	)		(5,487	)		(5,048	)
Other income (expense):
Other income		146			30			147			32
Interest expense		(24	)		14			(50	)		8
Loss before income taxes		(2,349	)		(1,599	)		(5,390	)		(5,008	)
Provision for income taxes		—			(40	)		—			(80	)
Net loss	$	(2,349	)	$	(1,639	)	$	(5,390	)	$	(5,088	)
Net loss per share — basic and diluted	$	(0.16	)	$	(0.11	)	$	(0.36	)	$	(0.38	)
Shares used in computing net loss per share — basic and diluted		14,915			14,830			14,877			13,521

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

4

ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Net loss	$	(2,349	)	$	(1,639	)	$	(5,390	)	$	(5,088	)
Other comprehensive income (loss):
Foreign currency translation adjustments		162			7			118			166
Comprehensive loss	$	(2,187	)	$	(1,632	)	$	(5,272	)	$	(4,922	)

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

5

ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)

	Six months ended
	June 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(5,390	)	$	(5,088	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on impairment of assets		165			—
Depreciation		540			621
Stock-based compensation		364			433
Provision for doubtful accounts receivable		(98	)		(266	)
Deferred taxes		—			80
Deferred revenue		25			(41	)
Loss on disposal of fixed assets		14			1
Changes in assets and liabilities:
Accounts receivable		931			(583	)
Inventories		755			466
Prepaid and other current assets		(19	)		(13	)
Other assets		39			(58	)
Accounts payable		(1,563	)		177
Accrued liabilities		(465	)		213
Total adjustments		688			1,030
Net cash used in operating activities		(4,702	)		(4,058	)
Cash flows from investing activities:
Proceeds from disposal of fixed assets		346			—
Acquisition of fixed assets		(177	)		(298	)
Net cash provided by (used in) investing activities		169			(298	)
Cash flows from financing activities:
Cash proceeds from issuances of common stock, net		10			9,335
Cash proceeds from exercise of stock options		—			130
Proceeds from credit line borrowings		1,904			1,968
Payments of credit line borrowings		(2,027	)		(2,813	)
Proceeds from long-term bank borrowings		70			—
Payments of short and long-term bank borrowings		(288	)		(358	)
Net cash (used in) provided by financing activities		(331	)		8,262
Effect of exchange rate changes on cash		(91	)		(69	)
Net (decrease) increase in cash and cash equivalents		(4,955	)		3,837
Cash and cash equivalents, beginning of period		10,568			8,412
Cash and cash equivalents, end of period	$	5,613		$	12,249

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

6

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

1. Nature of Operations

Energy Focus, Inc. and subsidiaries (“the company”) design, develop, manufacture, and market lighting systems and customer specific energy efficient lighting solutions for a wide-range of use in both the general commercial market and the pool market. The company’s lighting technology offers significant energy savings, heat dissipation, and maintenance cost benefits over conventional lighting for multiple applications. The company’s solutions include fiber optic (“EFO”), light-emitting diode (“LED”), ceramic metal halide (“CMH”), high-intensity discharge (“HID”), and other highly energy efficient lighting technologies. The company’s strategy also incorporates continued investment into researching new and emerging energy sources including, but not limited to, solar energy for both the public and private sectors. Typical savings of current technology average 80% in electricity costs, while providing full-spectrum light closely simulating daylight colours.

2. Summary of Significant Accounting Policies

The significant accounting policies of the company, which are summarized below, are consistent with generally accepted accounting principles and reflect practices appropriate to the business in which it operates.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence, and warranty claims; the useful lives for property, equipment, and intangible assets; and stock-based compensation. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to be consistent with the current year presentation.

Basis of Presentation

The consolidated financial statements (“financial statements”) include the accounts of the company and its subsidiaries, Crescent Lighting Limited (“CLL”) located in the United Kingdom and LBM Lichtleit-Fasertechnik (“LBM”) located in Germany. All significant inter-company balances and transactions have been eliminated.

Interim Financial Statements (unaudited)

Although unaudited, the interim financial statements in this report reflect all adjustments, consisting only of all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position, results of operations and cash flows for the interim periods covered and of the financial condition of the company at the interim balance sheet date. The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year.

Year-end Balance Sheet

The year-end balance sheet information was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the company’s audited financial statements and notes thereto for the year ended December 31, 2008, which are contained in the company’s 2008 Annual Report on Form 10-K.

7

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

Foreign Currency Translation

The company’s international subsidiaries use their local currencies as their functional currencies. For those subsidiaries, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts are translated at average exchange rates during the year. Resulting translation adjustments are recorded directly to accumulated comprehensive income as a component of shareholders’ equity. Foreign currency transaction gains and losses are included as a component of other income and expense. Gains and losses from foreign currency translation are included as a separate component of comprehensive income (expense) within the consolidated statement of comprehensive income (loss).

Liquidity

The company has continued to incur losses which have been attributable to operational performance, restructuring, and miscellaneous non-cash charges. This trend has, in turn, led to negative cash flows and ongoing bank debt compliance violations. The company has managed its liquidity during this period through a series of previously announced cost reduction initiatives, bank debt restructuring, and certain asset disposals. However, the ongoing global financial crisis has continued to have a dramatic effect on the company’s industry and customer base. Further, the ongoing recession in the United States and Western Europe, combined with the slowdown of economic growth in the rest of the world, continues to foster a business environment where it is extremely difficult and costly to obtain either equity or non-equity financing. This environment has also increased the potential for customer payment defaults. The company’s liquidity position, as well as its operating performance, has been negatively affected by these economic and industry conditions and by other financial and business factors, many of which are beyond its control.

Management acknowledges that the level of negative cash utilization experienced during the six months ended June 30, 2009, if sustained, could result in the insolvency of the company in 2009 without the infusion of additional equity or non-equity financing. Therefore, the company is aggressively pursuing all of the following sources for working capital funding:

• obtain loans from various financial institutions,

• obtain loans from one or more non-traditional investment capital organizations,

• sale and/or disposition of one or more operating units, and

• obtain funding from the sale of the company’s common stock or other equity instruments.

Obtaining financing through the above mentioned mechanisms contain risks, including:

• loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, and control or revocation provisions, which are not acceptable to management or our Board of Directors,

• the current global economic crisis combined with our current financial condition may prevent us from being able to obtain any debt financing,

• financing may not be available for parties interested in pursuing the acquisition of one or more of our operating units, and

• additional equity financing may not be available to us in the current economic environment and could lead to further dilution of shareholder value for current shareholders of record.

The company continues to aggressively reduce costs, as evidenced in the $2,296,000 decrease in operating expenses, net of a non-cash loss on impairment of fixed assets of $165,000, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008. The company’s cash utilization was $1,187,000 for the three months ended June 30, 2009; a 54.2% decrease compared to the cash utilization for the three months ended June 30, 2008 of $2,589,000. Management continues to execute further cost reductions and organizational realignments in an effort to sustain the company’s ongoing viability throughout the remainder of 2009.

Earnings (Loss) per Share

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average of common shares outstanding for the period. Diluted loss per share is computed giving effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares upon exercise of stock options and warrants, unless the effect would be anti-dilutive.

8

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

A reconciliation of the numerator and denominator of basic and diluted loss per share is provided as follows (in thousands, except per share amounts):

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Numerator — basic and diluted loss per share
Net loss	$	(2,349	)	$	(1,639	)	$	(5,390	)	$	(5,088	)
Denominator — basic and diluted loss per share
Weighted average shares outstanding		14,915			14,830			14,877			13,521
Basic and diluted net loss per share	$	(0.16	)	$	(0.11	)	$	(0.36	)	$	(0.38	)

At June 30, 2009, options and warrants to purchase 5,734,000 shares of common stock were outstanding, but were not included in the calculation of diluted net loss per share because their inclusion would have been anti-dilutive. Options and warrants to purchase 5,106,000 shares of common stock were outstanding at June 30, 2008, but were not included in the calculation of diluted net loss per share because their inclusion would have been anti-dilutive.

Stock-Based Compensation

The company’s stock-based compensation plans are described in detail in its Annual Report on Form 10-K for the year ended December 31, 2008.

For the three and six months ended June 30, 2009, the company recorded compensation expense of $168,000 and $364,000, respectively, compared to $214,000 and $433,000 for the three and six months ended June 30, 2008. Total unearned compensation of $1,152,000 remains at June 30, 2009 compared to $1,363,000 at June 30, 2008. These costs will be charged to expense, amortized on a straight line basis, in future periods through 2013. The remaining weighted average life of the outstanding options is approximately 1.8 years.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of option, risk-free interest rate, and volatility, and are further comparatively detailed below. During the six months ended June 30, 2009, the company granted 465,000 stock options compared to the 225,000 granted during the six months ended June 30, 2008.

The fair value of each option grant and stock purchase plan grant combined is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in the six months ended June 30, 2009 and 2008:

	Six months ended
	June 30,
	2009			2008
Fair value of options issued	$	0.48		$	1.20
Exercise price	$	0.79		$	2.32
Expected life of option	4.0 years			4.0 years
Risk-free interest rate		1.70	%		2.83	%
Expected volatility		84.05	%		66.40	%
Dividend yield		0	%		0	%

9

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

On May 29, 2009, the company’s five senior executive officers agreed to accept voluntary salary reductions for the remainder of the 2009 calendar year in exchange for the issuance of restricted shares of common stock as authorized under the company’s 2008 Stock Incentive Plan. Two other key executives of the company also accepted salary reductions for the balance of the year in exchange for restricted shares. Each officer and key executive voluntarily accepted a ten percent (“10%”) salary reduction for the remainder of 2009, except for one officer who voluntarily accepted a forty percent (“40%”) decrease for the remainder of 2009. The number of restricted shares of common stock issued to each officer and executive was equal to the dollar value of the individual’s salary reduction divided by the closing price per share of the company’s common stock on May 29, 2009. The total number of restricted shares of common stock issued to these officers and executives was 209,000. The company reserves the right to extend these salary reductions into the 2010 calendar year and beyond.

On May 29, 2009, two members of the company’s Board of Directors also voluntarily relinquished their directors’ fee for the balance of 2009 in exchange for restricted shares of common stock on the same terms as the shares granted to the officers. The number of restricted shares of common stock issued to each director was equal to the dollar value of the individual’s relinquished director’s fee divided by the closing price per share of the company’s common stock on May 29, 2009. The total number of restricted shares of common stock issued to these directors was 19,000.

Product Warranties

The company warrants finished goods against defects in material and workmanship under normal use and service for periods of one to three years. Settlement costs consist of actual amounts expensed for warranty service, which are largely a result of third party service calls, and costs of replacement products. A liability for the estimated future costs under product warranties is maintained for products outstanding under warranty (in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Balance at the beginning of the period	$	289		$	190		$	292		$	212
Accruals for warranties issued		34			85			58			138
Settlements made during the period (in cash or in kind)		(192	)		(85	)		(219	)		(160	)
Balance at the end of the period	$	131		$	190		$	131		$	190

3. Inventories

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

	June 30,			December 31,
	2009			2008
Raw materials	$	3,410		$	4,738
Inventory reserve		(1,527	)		(1,795	)
Finished goods		3,045			2,596
	$	4,928		$	5,539

10

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

4. Fixed Assets

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

	June 30,			December 31,
	2009			2008
Equipment (useful life 3 - 15 years)	$	8,544		$	8,632
Tooling (useful life 2 - 5 years)		2,630			2,752
Furniture and fixtures (useful life 5 years)		230			200
Computer software (useful life 3 years)		470			483
Leasehold improvements (the shorter of useful life or lease life)		885			1,276
Construction in progress		2			60
		12,761			13,403
Less: accumulated depreciation		(9,179	)		(9,307	)
	$	3,582		$	4,096

5. Long-Term Borrowings

The company’s bank line of credit in the United States is based on an agreement with Silicon Valley Bank (“SVB”) dated October 15, 2008, modified effective January 31, 2009 and June 12, 2009, and further modified effective July 22, 2009, as defined below. At June 30, 2009, this agreement provided for a $2,000,000 revolving line of credit, renewable on a month-to-month basis. The amount of borrowings available to the company is the lesser of $2,000,000 or 75% of eligible accounts receivable, as defined by the agreement.

Borrowings under this agreement are collateralized by the company’s assets, including intellectual property, and bear interest at the SVB Prime Rate plus 1.50%, as of June 30, 2009. If the company terminates the facility prior to maturity, it will be required to pay a 1.00% termination fee. The company is required to maintain all of its cash and cash equivalents in operating and investment accounts with SVB and its affiliates. The company is also required to comply with certain covenant requirements, including a tangible net worth covenant. As of June 30, 2009, the company is not in compliance with this financial covenant as defined by the original credit agreement. The interest rate at June 30, 2009 was 5.50% and 5.00% at December 31, 2008. Borrowings under the revolving line of credit were $1,776,000 at June 30, 2009 and December 31, 2008. Available borrowings under this revolving line of credit were $256,000 at June 30, 2009 and $263,000 at December 31, 2008. The revolving line of credit borrowings are recorded in the consolidated balance sheets as a current liability.

Effective January 31, 2009, the company entered into a First Loan Modification and Forbearance Agreement with SVB which modified the one year credit agreement entered into on October 15, 2008. This modification to the terms of the 2008 credit agreement states that borrowings bear interest at the SVB Prime Rate plus 1.50%. SVB also agreed to forebear from exercising its rights and remedies against the company as a result of violating its tangible net worth covenant as of December 31, 2008. This forbearance expired on February 15, 2009.

Effective June 12, 2009, the company entered into a Second Loan Modification and Forbearance Agreement with SVB which further modified the one year credit agreement entered into on October 15, 2008, and modified January 31, 2009. This second modification to the terms of the 2008 credit agreement states that borrowings bear interest at the SVB Prime Rate plus 1.50% through June 30, 2009. Beginning July 1, 2009 through, and including, September 30, 2009, borrowings bear interest at the SVB Prime Rate plus 2.00%. Beginning October 1, 2009 and thereafter, borrowings bear interest at the SVB Prime Rate plus 3.00%. While the company remained in violation of its tangible net worth covenant, the company and SVB continued to cooperate to restructure the existing bank line of credit. In addition, SVB agreed to forebear from exercising its rights and remedies against the company as a result of violating its tangible net worth covenant as of June 30, 2009. This forbearance expired on June 30, 2009.

11

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

Effective July 22, 2009, the company entered into a Third Loan Modification and Forbearance Agreement with SVB which modifies the one year credit agreement entered into on October 15, 2008, and modified effective January 31, 2009 and June 12, 2009. This third modification to the terms of the 2008 credit agreement revised the amount of borrowings available to the company to be the lesser of $2,000,000 or the sum of (i) 75% of eligible accounts receivable, and (ii) other cash equivalents on deposit with SVB. While the company remained in violation of its tangible net worth covenant, the company and SVB continued to cooperate to restructure the existing bank line of credit. In addition, SVB agreed to forebear from exercising its rights and remedies against the company as a result of violating its tangible net worth covenant as of July 31, 2009. This forbearance was due to expire on July 31, 2009.

SVB has informed the company that it does not intend to renew the company’s line of credit when it expires on October 15, 2009. The company is actively engaged in discussions with other potential financing sources to replace the SVB line of credit and is currently reviewing credit agreement proposals it has received from selected financial institutions.

On May 27, 2009, the company entered into a Promissory Note (“Note”) with The Quercus Trust (“The Trust”) in the amount of $70,000. Under the terms of this Note, the company agrees to pay The Trust the principal sum of the Note and interest accruing at a yearly rate of 1.00% in one lump sum payment on or before June 1, 2109. The company received the funds on June 9, 2009.

Through the company’s United Kingdom subsidiary, the company maintains a bank overdraft facility of $415,000 (in British pounds sterling, based on the exchange rate at June 30, 2009) under an agreement with Lloyds Bank Plc. There were no borrowings against this facility as of June 30, 2009 or December 31, 2008. This facility is renewed annually on January 1. The interest rate on the facility was 2.75% at June 30, 2009, and 7.25% at December 31, 2008.

Through the company’s German subsidiary, the company maintained a credit facility under an agreement with Sparkasse Neumarkt Bank. This credit facility was put in place to finance the building of offices in Berching, Germany, which were owned and occupied by the company’s German subsidiary. In June, 2009, the company paid, in its entirety, the balance due on the credit facility with proceeds received from the sale of the office building in Berching, Germany. Borrowings against this facility were $299,000 at December 31, 2008 (in Euros, based on the exchange rate at December 31, 2008). The interest rate was 5.49% at December 31, 2008.

In addition, the company’s German subsidiary has a revolving line of credit with Sparkasse Neumarkt Bank. As of June 30, 2009, there were no borrowings against this line of credit and borrowings of $128,000 (in Euros, based on the exchange rate at December 31, 2008) at December 31, 2008. This revolving facility is renewed annually on January 1. The interest rate on this line of credit was 11.00% at December 31, 2008.

Future maturities of remaining borrowings are (in thousands):

	United States		United States
	Credit Line		Long-Term
Year ending June 30,	Borrowings		Borrowings		Total
2010	$	1,776	$	—	$	1,776
2011		—		—		—
2012		—		—		—
2013		—		—		—
2014		—		—		—
2015 and thereafter		—		71		71
Total commitment	$	1,776	$	71	$	1,847

6. Comprehensive Operations

Comprehensive income (loss) is defined as net income (loss) plus sales, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income (loss) but excluded from net income (loss). A separate statement of comprehensive loss has been presented with this report.

12

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

7. Segments and Geographic Information

The company has two primary product lines: pool lighting and general commercial lighting, each of which markets and sells lighting systems and customer specific energy efficient lighting solutions. The company markets its products and solutions for worldwide distribution through a combination of direct sales employees, independent sales representatives, and various distributors in different geographic markets throughout the world.

A summary of sales by geographic area is as follows (in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
	2009		2008		2009		2008
United States Domestic	$	2,495	$	4,447	$	4,089	$	7,027
Other Countries		1,320		3,169		2,531		5,426
	$	3,815	$	7,616	$	6,620	$	12,453

A summary of sales by product line is as follows (in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
	2009		2008		2009		2008
Pool Lighting	$	1,375	$	2,740	$	2,046	$	4,347
Commercial Lighting		2,440		4,876		4,574		8,106
	$	3,815	$	7,616	$	6,620	$	12,453

A summary of long-lived geographic assets (fixed assets) is as follows (in thousands):

	June 30,		December 31,
	2009		2008
United States Domestic	$	3,364	$	3,726
Germany		38		177
Other Countries		180		193
	$	3,582	$	4,096

8. Income Taxes

At June 30, 2009, we have recorded a full valuation allowance against the company’s deferred tax assets in the United States and Germany, due to uncertainties related to its ability to utilize its deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon the company’s estimates of taxable income by jurisdiction and the period over which its deferred tax assets will be recoverable.

9. Related Party Transactions

On February 3, 2006, the company had entered into a consulting agreement with David Ruckert, a member of its Board of Directors. This agreement was terminated on June 30, 2007. No payments were made during the three months ending June 30, 2009 or June 30, 2008. Additionally, Mr. Ruckert was granted options to purchase 32,000 shares of the company’s common stock. Stock expense incurred under FAS 123(R) related to these options was $7,000 and $15,000 for the three and six months ended June 30, 2009, respectively, and $7,000 and $15,000 for the three and six months ended June 30, 2008.

13

ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

On October 19, 2007, the company entered into a management agreement with Barry Greenwald, General Manager of its Pool Lighting Division. Per this agreement, the company was to pay Mr. Greenwald nonrefundable amounts totaling $309,000 of additional compensation, of which $77,000 was paid on November 1, 2007. Upon Mr. Greenwald’s termination on January 21, 2008, the company incurred an expense of $232,000, of which $77,000 was paid on March 14, 2008.

On March 14, 2008, the company received an additional $9,335,000 in equity financing, net of expenses. The investment was made by several then current Energy Focus, Inc. shareholders, including four then current members of the company’s Board of Directors. These investors agreed to an at-market purchase of approximately 3.1 million units for $3.205 per unit, based on the closing bid price of the company’s common shares on March 13, 2008 of $3.08. Each unit comprises one share of the company’s common stock, par value $0.0001 per share, and one warrant to purchase one share of the company’s common stock at an exercise price of $3.08 per share. The warrants were immediately separable from the units and immediately exercisable, and will expire five years after the date of their issuance. This additional financing was to be used to fund working capital, pay debt and perform additional research and development. The company received 100% of the funds from escrow on March 17, 2008. Among the investors were Ronald A. Casentini, John M. Davenport, John B. Stuppin, and Philip E. Wolfson, all of whom were members of its Board of Directors at the time of the transaction, and who invested approximately $100,000 in the aggregate. Also among the investors was The Quercus Trust (“The Trust”), whose trustees include David Gelbaum, who became a member of the company’s Board of Directors in February, 2009.

On May 27, 2009, the company entered into a Promissory Note (“Note”) with The Trust in the amount of $70,000. Under the terms of this Note, the company agrees to pay The Trust the principal sum of the Note and interest accruing at a yearly rate of 1.00% in one lump sum payment on or before June 1, 2109. The company received the funds on June 9, 2009.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008.

When used in this discussion, the words “expects,” “anticipates,” “estimates,” “plan,” and similar expressions are intended to identify forward-looking statements. These statements, which include statements as to our expected sales and gross profit margins, expected operating expenses and capital expenditure levels, our sales and marketing expenses, our general and administrative expenses, expected expenses related to compliance with the Sarbanes-Oxley Act of 2002, the adequacy of capital resources and necessity to raise additional funds, our critical accounting policies, expected restructuring costs related to our consolidation in Solon, Ohio, and expected benefits from our consolidation are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as our ability to manage expenses, our ability to reduce manufacturing overhead and general and administrative expenses as a percentage of sales, our ability to collect on doubtful accounts receivable, our ability to increase cash balances in future quarters, the cost of enforcing or defending intellectual property, unforeseen adverse competitive, economic or other factors that may impact our cash position, and risks associated with raising additional funds. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

OVERVIEW

We are engaged in the design, development, manufacturing, and marketing of lighting systems and customer specific energy efficient lighting solutions for a wide-range of use in the general commercial, industrial, and the pool markets. Our lighting technology offers significant energy savings, heat dissipation, and maintenance cost benefits over conventional lighting for multiple applications. Our solutions include fiber optic (“EFO”), light-emitting diode (“LED”), ceramic metal halide (“CMH”), high-intensity discharge (“HID”), and other highly energy efficient lighting technologies. Our strategy also incorporates continued investment into researching new and emerging energy sources including, but not limited to, solar energy for both the public and private sectors. Typical savings of current technology average 80% in electricity costs, while providing full-spectrum light closely simulating daylight colours.

We expect to continue our ongoing leadership role in the United States government’s Very High Efficiency Solar Cell (“VHESC”) Consortium sponsored by the Defense Advanced Research Projects Agency (“DARPA”), where we expect to be able to commercialize a solar cell technology that will significantly surpass current solar efficiencies ranging from 6% - 20%. Our proven optics technology has already shown the ability to achieve approximately 40% efficiency in a laboratory environment and we believe that this efficiency, or greater, can be achieved on a cost-effective, commercially-viable scale.

On July 30, 2009, we announced that we had been selected to receive a $1,400,000 contract by the Naval Research Warfare Center to develop and produce solid state lighting fixtures for use specifically on Virginia Class attack submarines.

RESULTS OF OPERATIONS

Cash utilization was $1,187,000 for the three months ended June 30, 2009; a 54.2% decrease compared to the three months ended June 30, 2008. Cash utilization for the three months ended June 30, 2008 was $2,589,000. Cash utilization was $4,955,000 for the six months ended June 30, 2009; a 13.9% decrease compared to the six months ended June 30, 2008. Cash utilization for the six months ended June 30, 2008 was $5,753,000.

Net sales were $3,815,000 for the three months ended June 30, 2009; a decrease of 49.9% compared to the three months ended June 30, 2008. The decline primarily resulted from decreased pool lighting sales, $1,365,000, decreased sales by our European subsidiaries, $1,806,000, and decreased government sales, $534,000, from second quarter 2008 levels. EFO sales were $1,765,000 for the three months ended June 30, 2009; a decrease of $2,166,000, or 55.1%, from the three months ended June 30, 2008.

Net sales were $6,620,000 for the six months ended June 30, 2009; a decrease of 46.8% compared to the six months ended June 30, 2008. The decline primarily resulted from decreased pool lighting sales, $2,301,000, decreased sales by our European subsidiaries, $2,734,000, and decreased government sales, $803,000, from first half 2008 levels. EFO sales were $3,308,000 for the six months ended June 30, 2009; a decrease of $2,707,000, or 45.0%, from first half 2008 levels.

EFO sales in 2009 and 2008 include sales from EFO fiber optic lighting, EFO LED, EFO Controls, and EFO Government products.

15

Gross profit was $799,000 for the three months ended June 30, 2009; a 67.3% decrease compared to the three months ended June 30, 2008. Gross profit was $1,117,000 for the six months ended June 30, 2009; a 69.7% decrease compared to the six months ended June 30, 2008. The gross profit margin as a percentage of sales decreased to 20.9% and 16.9% for the three and six months ended June 30, 2009, respectively, as compared to 32.1% and 29.6% for the three and six months ended June 30, 2008, respectively.

Deteriorating global economic conditions within the housing and construction industries have had an adverse impact not only on our ability to expand within current markets, but also to penetrate new markets. For 2009, we continue to combat these global economic pressures by focusing sales resources in new and existing market channels including food retailers, cold storage, and government facilities. Furthermore, we will continue to implement strategic sourcing and operational cost reductions on a global basis. Selected price increases will also be implemented. Lastly, we are accelerating our transition into a turn-key energy solutions service provider.

Net research and development expenses were $253,000 for the three months ended June 30, 2009; an increase of $61,000, or 31.8%, as compared to the three months ended June 30, 2008. Gross expenses for research and development decreased by 20.3% from prior year levels primarily due to lower project costs in the United States. Net research and development expenses were $483,000 for the six months ended June 30, 2009; a decrease of $10,000, or 2.0%, as compared to the six months ended June 30, 2008. Gross expenses for research and development decreased by 11.1% from prior year levels primarily due to lower project costs in the United States.

Our gross research and development expenses are reduced on a proportional performance basis under DARPA Small Business Innovation Research (“SBIR”) development contracts. In 2007, SBIR contracts were signed totaling $1,500,000 to be reimbursed over a two-year recovery period. During the first quarter of 2009, additional SBIR contracts were signed totaling $198,000 to be reimbursed over an eight month recovery period. At June 30, 2009, $127,000 remained as unrecognized reductions of gross research and development expenses for these contracts. We are currently pursuing additional contracts through various government agencies, and anticipate being granted additional contracts during the remainder of 2009. The gross research and development spending along with credits from government contracts is shown in the table (in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Gross expenses for research and development	$	390		$	489		$	794		$	893
Deduct: credits from DARPA contracts		(137	)		(297	)		(311	)		(400	)
	$	253		$	192		$	483		$	493

Sales and marketing expenses decreased 39.2% to $1,650,000 for the three months ended June 30, 2009 as compared to $2,712,000 for the three months ended June 30, 2008. Sales and marketing expenses decreased 38.0% to $3,530,000 for the six months ended June 30, 2009 as compared to $5,690,000 for the six months ended June 30, 2008. These decreases are primarily due to lower salaries and benefits and advertising expenses on a global basis, as well as management’s efforts to reduce costs.

General and administrative expenses increased 1.7% to $1,202,000 for the three months ended June 30, 2009 as compared to $1,182,000 for the three months ended June 30, 2008. General and administrative expenses decreased 4.9% to $2,426,000 for the six months ended June 30, 2009 as compared to $2,552,000 for the six months ended June 30, 2008. The decrease is primarily due to lower professional fees in the United States, as well as management’s efforts to reduce costs.

During the three months ended June 30, 2009, we recognized a non-cash expense of $165,000 for the impairment of certain fixed assets being held for sale. This asset impairment stemmed from the sale of the office building owned and occupied by our German subsidiary, as well as other associated fixed assets. There was no impairment of fixed assets in 2008.

We recorded a net loss of $2,349,000 for the three months ended June 30, 2009, a 43.3% increase from the net loss of $1,639,000 for the three months ended June 30, 2008. We recorded a net loss of $5,390,000 for the six months ended June 30, 2009, a 5.9% increase from the net loss of $5,088,000 for the six months ended June 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

At June 30, 2009, our cash and cash equivalents were $5,613,000 as compared to $10,568,000 at December 31, 2008, a net cash decrease of $4,955,000 for the six months ended June 30, 2009. This compares to a net cash increase of $3,837,000 for six months ended June 30, 2008 resulting from the receipt of $9,335,000 of proceeds, net of expenses, from the March 14, 2008 equity financing.

16

Cash Used in Operating Activities

Net cash used in operating activities primarily consists of net loss adjusted by non-cash items, including depreciation, amortization, stock-based compensation, and the effect of changes in working capital. Cash decreased during the six months ended June 30, 2009, by a net loss of $5,390,000, compared to a net loss of $5,088,000 for the three months ended June 30, 2008. After adjustments, net cash used in operating activities was $4,702,000 for the six months ended June 30, 2009, an increase of 15.9% compared to a net cash usage of $4,058,000 for the six months ended June 30, 2008.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $169,000 for the six months ended June 30, 2009; compared to a net cash usage of $298,000 for the six months ended June 30, 2008. This decrease is primarily due to the proceeds generated from the sale of fixed assets associated with our German subsidiary partially offset by acquisitions of fixed assets during the period.

Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $331,000 for the six months ended June 30, 2009. This cash usage was due to payment on our lines of credit, $2,027,000, and long-term bank borrowings, $288,000, offset by borrowings on our lines of credit of $1,904,000. For the six months ended June 30, 2008, financing activities contributed $8,262,000. This net contribution was due primarily to cash proceeds from issuances of common stock and warrants to purchase shares of our common stock for $9,335,000.

Our bank line of credit in the United States is based on an agreement with Silicon Valley Bank (“SVB”) dated October 15, 2008, modified effective January 31, 2009 and further modified effective June 12, 2009. As of June 30, 2009, this agreement provides for a $2,000,000 revolving line of credit, renewable on a month-to-month basis. The amount of borrowings available to the company is the lesser of $2,000,000 or 75% of eligible accounts receivable, as defined by the agreement.

Borrowings under this agreement are collateralized by our assets, including intellectual property, and bear interest at the SVB Prime Rate plus 1.50%, as of June 30, 2009. If we terminate the facility prior to maturity, we will be required to pay a 1.00% termination fee. We are required to maintain all of our cash and cash equivalents in operating and investment accounts with SVB and its affiliates. We are also required to comply with certain covenant requirements, including a tangible net worth covenant. As of June 30, 2009, we were not in compliance with this financial covenant as defined by the original credit agreement. The interest rate at June 30, 2009 was 5.50% and 5.00% at December 31, 2008. Borrowings under the revolving line of credit were $1,776,000 at June 30, 2009 and December 31, 2008. Available borrowings under this revolving line of credit were $256,000 at June 30, 2009 and $263,000 at December 31, 2008. The revolving line of credit borrowings are recorded in the consolidated balance sheets as a current liability.

Effective January 31, 2009, we entered into a First Loan Modification and Forbearance Agreement with SVB which modified the one year credit agreement entered into on October 15, 2008. This modification to the terms of the 2008 credit agreement states that borrowings bear interest at the SVB Prime Rate plus 1.50%. SVB also agreed to forebear from exercising its rights and remedies against the company as a result of violating its tangible net worth covenant as of December 31, 2008. This forbearance expired on February 15, 2009.

Effective June 12, 2009, we entered into a Second Loan Modification and Forbearance Agreement with SVB which further modified the one year credit agreement entered into on October 15, 2008, and modified January 31, 2009. This second modification to the terms of the 2008 credit agreement states that borrowings bear interest at the SVB Prime Rate plus 1.50% through June 30, 2009. Beginning July 1, 2009 through, and including, September 30, 2009, borrowings bear interest at the SVB Prime Rate plus 2.00%. Beginning October 1, 2009 and thereafter, borrowings bear interest at the SVB Prime Rate plus 3.00%. While we remained in violation of our tangible net worth covenant, we continued to cooperate with SVB to restructure the existing bank line of credit. In addition, SVB agreed to forebear from exercising its rights and remedies against us as a result of violating our tangible net worth covenant as of June 30, 2009. This forbearance expired on June 30, 2009.

Effective July 22, 2009, we entered into a Third Loan Modification and Forbearance Agreement with SVB which modifies the one year credit agreement entered into on October 15, 2008, and modified January 31, 2009 and June 12, 2009. This third modification to the terms of the 2008 credit agreement revised the amount of borrowings available to us to be the lesser of $2,000,000 or the sum of (i) 75% of eligible accounts receivable, and (ii) other cash equivalents on deposit with SVB. While we remained in violation of our tangible net worth covenant, we continued to cooperate with SVB to restructure the existing bank line of credit. In addition, SVB agreed to forebear from exercising its rights and remedies against us as a result of violating our tangible net worth covenant as of July 31, 2009. This forbearance was due to expire on July 31, 2009.

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SVB has informed us that it does not intend to renew our line of credit when it expires on October 15, 2009. We are actively engaged in discussions with other potential financing sources to replace the SVB line of credit and are currently reviewing credit agreement proposals we have received from selected financial institutions.

On May 27, 2009, we entered into a Promissory Note (“Note”) with The Quercus Trust (“The Trust”) in the amount of $70,000. Under the terms of this Note, we agree to pay The Trust the principal sum of the Note and interest accruing at a yearly rate of 1.00% in one lump sum payment on or before June 1, 2109. We received the funds on June 9, 2009.

Through our United Kingdom subsidiary, we maintain a bank overdraft facility of $415,000 (in British pounds sterling, based on the exchange rate at June 30, 2009) under an agreement with Lloyds Bank Plc. There were no borrowings against this facility as of June 30, 2009 or December 31, 2008. This facility is renewed annually on January 1. The interest rate on the facility was 2.75% at June 30, 2009, and 7.25% at December 31, 2008.

Through our German subsidiary, we maintained a credit facility under an agreement with Sparkasse Neumarkt Bank. This credit facility was put in place to finance the building of offices in Berching, Germany, which were owned and occupied by our German subsidiary. In June, 2009, we paid, in its entirety, the balance due on the credit facility with proceeds received from the sale of the office building in Berching, Germany. Borrowings against this facility were $299,000 at December 31, 2008 (in Euros, based on the exchange rate at December 31, 2008). The interest rate was 5.49% at December 31, 2008.

In addition, our German subsidiary has a revolving line of credit with Sparkasse Neumarkt Bank. As of June 30, 2009, there were no borrowings against this line of credit and borrowings of $128,000 (in Euros, based on the exchange rate at December 31, 2008) at December 31, 2008. This revolving facility is renewed annually on January 1. The interest rate on this line of credit was 11.00% at December 31, 2008.

We have continued to incur losses which have been attributable to operational performance, restructuring, and miscellaneous non-cash charges. This trend has, in turn, led to negative cash flows and ongoing bank debt compliance violations. We have managed our liquidity during this period through a series of previously announced cost reduction initiatives, bank debt restructuring, and asset disposals. However, the ongoing global financial crisis has continued to have a dramatic effect on our industry and customer base. Further, the ongoing recession in the United States and Western Europe, combined with the slowdown of economic growth in the rest of the world, continues to foster a business environment where it is extremely difficult and costly to obtain either equity or non-equity financing. This environment has also increased the potential for customer payment defaults. Our liquidity position, as well as our operating performance, has been negatively affected by these economic and industry conditions and by other financial and business factors, many of which are beyond its control.

Management acknowledges that the level of negative cash utilization experienced during the six months ended June 30, 2009, if sustained, could result in the insolvency of the company in 2009 without the infusion of additional equity or non-equity financing. Therefore, we are aggressively pursuing all of the following sources for working capital funding:

• obtain loans from various financial institutions,

• obtain loans from one or more non-traditional investment capital organizations,

• sale and/or disposition of one or more operating units, and

• obtain funding from the sale of our common stock or other equity instruments.

Obtaining financing through the above mentioned mechanisms contain risks, including:

• loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, and control or revocation provisions, which are not acceptable to management or our Board of Directors,

• the current global economic crisis combined with our current financial condition may prevent us from being able to obtain any debt financing,

• financing may not be available for parties interested in pursuing the acquisition of one or more of our operating units, and

• additional equity financing may not be available to us in the current economic environment and could lead to further dilution of shareholder value for current shareholders of record.

We continue to aggressively reduce costs, as evidenced in the $2,296,000 decrease in operating expenses, net of a non-cash loss on impairment of fixed assets of $165,000, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008. Our cash utilization was $1,187,000 for the three months ended June 30, 2009; a 54.2% decrease compared to the cash utilization for the three months ended June 30, 2008 of $2,589,000. Management is executing further cost reductions and organizational realignments in an effort to sustain our ongoing viability throughout the remainder of 2009.

In July, 2009, we engaged a leading mergers and acquisitions advisory firm to assist us in evaluating and valuing our individual operating business units and to support the potential divestiture of one or more of those business units.

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CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were utilized. Critical accounting policies, judgments and estimates which we believe have the most significant impact on our financial statements include allowances for doubtful accounts, returns, warranties, valuation of inventories, and stock based compensation. For the detailed discussion of the application of policies critical to our business operations, see our Annual Report on Form 10-K for the year ended December 31, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. FAS 157 went into effect for fiscal years beginning after November 15, 2007 (effective January 1, 2008, for our company). In February 2008, the FASB issued Staff Position FAS 157-1, which provides that FAS 157 does not apply under FAS 13, “Accounting for Leases,” and other accounting pronouncements that address fair value measurements for leases. We adopted the financial assets and liabilities portion of this FASB and it had no effect. In February 2008, the FASB also issued Staff Position FAS 157-2, which delays the effective date of FAS 157 for all nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). For items within the scope of Staff Position FAS 157-2, the effective date will be for fiscal years beginning after November 15, 2008 (January 1, 2009, for our company). Management is continuing to evaluate the effect that this guidance may have on our overall financial position or results of operations and does not anticipate that it will have a significant impact.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). This guidance provides an option to selectively report financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 was in effect for fiscal years beginning after November 15, 2007 (effective January 1, 2008, for our company). We have elected to not apply this fair value option to any of our existing assets or liabilities. However, we may adopt this guidance for assets or liabilities in the future as permitted under FAS 159.

In December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (FAS 141(R)). The new pronouncement requires the acquiring entity in a business combination to recognize only the assets acquired and liabilities assumed in a transaction (e.g., acquisition costs must be expensed when incurred), establishes the fair value at the date of acquisition as the initial measurement for all assets acquired and liabilities assumed, and requires expanded disclosures. FAS 141(R) is in effect for fiscal years beginning after December 15, 2008 (January 1, 2009, for our company). Management is continuing to evaluate the effect that this guidance may have on our overall financial position or results of operations and does not anticipate that it will have a significant impact.

In December 2007, the FASB issued FAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (FAS 160). The new pronouncement requires all entities to report non-controlling (minority) interests in subsidiaries as a component of shareholders’ equity. FAS 160 is in effect for fiscal years beginning after December 15, 2008 (January 1, 2009, for our company). Management is continuing to evaluate the effect that this guidance may have on our overall financial position or results of operations and does not anticipate that it will have a significant impact.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2009, we had $543,000 in cash held in foreign currencies based on the exchange rates at June 30, 2009. The balances for cash held overseas in foreign currencies are subject to exchange rate risk. We have a policy of maintaining cash balances in local currencies unless an amount of cash is occasionally transferred in order to repay inter-company debts.

Item 4. Controls and Procedures

     (a) Evaluation of disclosure controls and procedures.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet, and management believes they meet, reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

     (b) Changes in internal control over financial reporting.

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we become involved in ordinary routine litigation incidental to our business. Currently, we are not involved in any material litigation.

Item 1A. Risk Factors

There are no significant changes in risk factors from our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 4. Submission of Matters to a Vote of Security Holders

The company’s 2009 Annual Meeting of Shareholders was held on June 24, 2009.

The number of directors of the company was fixed at nine and the following persons were nominated to serve, and were elected, as directors of the company to serve until the next Annual Meeting of Shareholders and until their successors are elected and qualify: John M. Davenport, J. James Finnerty, David Gelbaum, Laurence V. Goddard, Michael A. Kasper, Joseph G. Kaveski, Paul von Paumgartten, David N. Ruckert, and Philip E. Wolfson. The voting results for each nominee were as follows:

Name	For		Withheld
John M. Davenport		10,354,102		148,043
J. James Finnerty		10,169,814		332,331
David Gelbaum		10,336,356		145,789
Laurence V. Goddard		10,170,814		331,331
Michael A. Kasper		8,895,324		1,606,821
Joseph G. Kaveski		10,359,496		146,649
Paul von Paumgartten		10,356,051		146,094
David N. Ruckert		9,616,643		885,502
Philip E. Wolfson		8,834,958		1,667,187

Proposal 2 to ratify the appointment of Plante & Moran, PLLC as the company’s independent registered public accounting firm for the fiscal year ending December 31, 2009 was adopted with 10,395,966 shares voting for, 72,412 shares voting against, and 33,767 shares abstaining.

Item 6. Exhibits

Exhibit
Number	Description of Documents
10.1	First Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of January 31, 2009.
10.2	Second Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of June 12, 2009.
10.3	Third Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of July 22, 2009.
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2003 (18 U.S.C. §1350).
32.2	Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2003 (18 U.S.C. §1350).

21

SIGNATURES

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

	ENERGY FOCUS, INC.
Date: August 13, 2009	By:	/s/ Joseph G. Kaveski
		Joseph G. Kaveski
		Chief Executive Officer
	By:	/s/ Nicholas G. Berchtold
		Nicholas G. Berchtold
		Chief Financial Officer (Principal Financial and Accounting Officer)

22

Exhibit Index

Exhibit
Number	Description of Documents
10.1	First Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of January 31, 2009.
10.2	Second Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of June 12, 2009.
10.3	Third Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of July 22, 2009.
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2003 (18 U.S.C. §1350).
32.2	Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2003 (18 U.S.C. §1350).

23

EX-10.1

Exhibit 10.1

FIRST LOAN MODIFICATION AND FORBEARANCE AGREEMENT

     This First Loan Modification and Forbearance Agreement (this “Loan Modification Agreement”) is entered into as of the First Loan Modification Effective Date, by and between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600, Broomfield, Colorado 80021 (“Bank”), and ENERGY FOCUS, INC., a Delaware corporation, formerly known as Fiberstars, Inc., a Delaware corporation, with offices located at 32000 Aurora Road, Solon, Ohio 44139.

1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness, and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of October 27, 2008, evidenced by, among other documents, a certain Second Amended and Restated Loan and Security Agreement dated as of October 27, 2008 between Borrower and Bank (as may be amended from time to time, the “Loan Agreement”). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the “Security Documents”).

     Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3. ACKNOWLEDGMENT OF DEFAULTS. Borrower acknowledges and agrees that certain Defaults and Events of Default have occurred under the Loan Agreement by virtue of Borrower’s failure to comply with the minimum Tangible Net Worth covenant contained in Section 6.9(a) of the Loan Agreement for the compliance period ending on November 30, 2008 (the “Prior Default ”). Borrower has informed Bank that it anticipates that it will also fail to comply with the minimum Tangible Net Worth covenant set forth in Section 6.9(a) for the compliance period ending December 31, 2008 (the “Anticipated Default”, and together with the Prior Default, the “Existing Defaults”).

4. DESCRIPTION OF CHANGE IN TERMS.

A. Modifications to Loan Agreement.

1 The Loan Agreement shall be amended by deleting the following text appearing in Section 2.3(a) thereof in its entirety:

“(a) Interest Rate; Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall accrue interest at a floating per annum rate equal to the aggregate of the Prime Rate plus one percentage point (1.00%), which interest shall be payable monthly.”

and inserting in lieu thereof the following:

“(a) Interest Rate; Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall accrue interest at a floating per annum rate equal to the aggregate of the Prime Rate plus one and one-half percentage point (1.50%), which interest shall be payable monthly.”

2 The Loan Agreement shall be amended by inserting the following definition in Section 13.1 thereof, in appropriate alphabetical order:

““First Loan Modification Effective Date” is the date indicated on the signature page to the First Loan Modification and Forbearance Agreement entered into between Bank and Borrower.”

5. FORBEARANCE BY BANK.

A.

In consideration of, among other things, Borrower’s compliance with each and every term of this Agreement, Bank hereby agrees to forbear from exercising its rights and remedies against the Borrower as a result of the Existing Defaults until the earlier to occur of (i) a Default or an Event of Default under the Loan Agreement (with the sole exception of the Existing Defaults), (ii) the failure of Borrower to promptly, punctually, or faithfully perform or comply with any term or condition of this Agreement as and when required, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE, or (iii) 3:00 pm (Denver, Colorado time) on February 15, 2009 (the period commencing as of the date of the First Loan Modification Effective Date and ending on the earlier of (i), (ii) or (iii) above shall be referred to as the “Forbearance Period”).

B.

Borrower hereby acknowledges and agrees that nothing contained in this section or in any other section of this Agreement shall be deemed or otherwise construed as a waiver by Bank of the Existing Defaults or any other Default or Event of Default (whether now existing or hereafter arising) or of any of its rights and remedies pursuant to the Existing Loan Documents, applicable law or otherwise. This Loan Modification Agreement shall only constitute an agreement by Bank to forbear from enforcing its rights and remedies based upon the Existing Defaults upon the terms and conditions set forth herein. Upon the expiration of the Forbearance Period, the agreement of Bank to forbear as set forth in this Loan Modification Agreement shall automatically terminate and Bank may immediately commence enforcing its rights and remedies pursuant to the Existing Loan Documents, applicable law or otherwise, in such order and manner as Bank may determine appropriate.

6. TERMS OF FORBEARANCE.

A.

From and after the execution of this Loan Modification Agreement, Borrower agrees that Bank shall have no further obligation to make any Advances to Borrower, or to issue or provide any other extensions of credit of any kind to Borrower (as used herein and in the Loan Agreement, any Advance, Letter of Credit, FX Forward Contract, amount utilized for Cash Management Services, or any other extension of credit by Bank for Borrower’s benefit shall be referred to as a “Credit Extension”). Notwithstanding the foregoing, during the Forbearance Period and at the request of Borrower, Bank may, in its sole and absolute discretion, continue to make any Credit Extensions, subject in all events to the terms and conditions of this Loan Modification Agreement, the Loan Agreement (including but not limited to, all limitations imposed by the Borrowing Base and the Availability Amount) and the other Existing Loan Documents. Borrower covenants and agrees that if, in the sole and absolute discretion of Bank. Bank shall make any Credit Extensions during the Forbearance Period, such act shall not constitute (i) a waiver of any of the Existing Defaults, or of any other Default or Event of Default which may now exist or which, may occur after the date of this Loan Modification Agreement under any of the Existing Loan Documents, or (ii) an agreement on the part of Bank to make any further extensions of credit of any kind to Borrower at a later date.

B.

At all times during the Forbearance Period Borrower shall comply with all terms and conditions contained in the Loan Agreement and other Loan Documents and shall continue to remit all regularly scheduled payments (including, without limitation, all principal, interest, fees, costs and

other amounts) which may become due under the Existing Loan Documents, as and when such payments are due.

7. FEES. Borrower shall pay to Bank a forbearance fee equal to Four Thousand Dollars ($4,000.00), which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with the Existing Loan Documents and this Loan Modification Agreement.

8. RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of October 27, 2008 executed by Borrower, and acknowledges, confirms and agrees the disclosures and information Borrower provided to Bank in the Perfection Certificate have not changed, as of the date hereof.

9. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.

10. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

11. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of the Loan Agreement, the other Existing Loan Documents and all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

12. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

13. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.

14. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this Loan Modification Agreement, Borrower herby reaffirms and hereby grants to Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Silicon Valley Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

15. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the State of California in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY.

16. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

[The remainder of this page is intentionally left blank]

     This Loan Modification Agreement is executed under the laws of the State of California as of the First Loan Modification Effective Date.

BORROWER:			BANK:
ENERGY FOCUS, INC.			SILICON VALLEY BANK
By:	/s/ Nicholas G. Berchtold		By:	/s/ Adam Glick
	Name:	NICHOLAS G. BERCHTOLD		Name:	Adam Glick
	Title:	CHIEF FINANCIAL OFFICER		Title:	Relationship Manager

First Loan Modification Effective date: January 31, 2009

[First Loan Modification and Forbearance Agreement Signature Page]

SECRETARY’S CORPORATE BORROWING CERTIFICATE

Borrower:	Energy Focus, Inc.	Date: October 9th, 2008
Bank:	Silicon Valley Bank

     I hereby certify as follows, as of the date set forth above:

1. I am the Secretary of the Borrower.

2. Borrower’s exact legal name is set forth above. Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Delaware.

3. Attached as Exhibit A hereto is a true, correct and complete copy of Borrower’s Certificate of Incorporation (including amendments), as filed with the Secretary of State of the state in which Borrower is incorporated as set forth in paragraph 2 above. Such Certificate of Incorporation has not been amended, annulled, rescinded, revoked or supplemented, and remains in full force and effect as of the date hereof.

4. Attached as Exhibit B hereto is a true, correct and complete copy of Borrower’s By-laws (including amendments). Such By-Laws have not been amended, annulled, rescinded, revoked or supplemented, and remain in full force and effect as of the date hereof.

5. The persons named below are now and have been duly qualified and acting, officers of the Borrower, duly elected to the office as set forth opposite their respective names and the signatures set forth opposite their respective names and offices are their respective genuine signatures:

Name	Title	Signature
Joseph G Kaveski	Chief Executive Officer	/s/ Joseph G Kaveski
Nicholas G. Berchtold	VP of Finance and Chief Financial Officer	/s/ Nicholas G. Berchtold
Eric Hilliard	VP and Chief Operating Officer	/s/ Eric Hilliard

6. The following resolutions were duly and validly adopted by Borrower’s Board of Directors at a duly held meeting of such directors (or pursuant to a unanimous written consent or other authorized corporate action). Such resolutions are in full force and effect as of the date hereof and have not been in any way modified, repealed, rescinded, amended or revoked, and Bank may rely on them until Bank receives written notice of revocation of same from Borrower.

BE IT RESOLVED, that any one (1) of the above named officers or employees of Borrower, acting for and on behalf of Borrower, are authorized and empowered:

Borrow Money. To borrow from time to time from Silicon Valley Bank (“Bank”), on such terms as may be agreed upon between the officers of Borrower and Bank, such sum or sums of money as in their judgment should be borrowed.

-1-

Execute Loan Documents. To execute and deliver to Bank the loan documents of Borrower at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of Borrower to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the loan documents, or any portion of the loan documents.

Grant Security. To grant a security interest to Bank in any of Borrower’s assets, which security interest shall secure all of Borrower’s obligations to Bank.

Negotiate Items. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to Borrower or in which Borrower may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of Borrower with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable.

Letters of Credit. To execute letter of credit applications and other related documents pertaining to Bank’s issuance of letters of credit.

Foreign Exchange Contracts. To execute and deliver foreign exchange contracts, either spot or forward, from time to time, in such amount as_, in the judgment of the officer or officers herein authorized.

Issue Warrants. To issue warrants to purchase Borrower’s capital stock, for such class, series and number, and on such terms, as an officer of Borrower shall deem appropriate. Upon such issuance the requisite number of shares of Borrower’s capital stock will be automatically reserved for the exercise of such Warrants.

Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements, including agreements waiving the right to a trial by jury, as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions.

BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these Resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of Borrower’s agreements or commitments in effect at the time notice is given.

-2-

     IN WITNESS WHEREOF, I have executed this Certificate on behalf of the Borrower in my capacity as Secretary as of the 27^th day of October, 2008.

CERTIFIED TO AND ATTESTED BY:
By:	/s/ Nicholas G. Berchtold
	Name:	Nicholas G. Berchtold
	Title:	Secretary

     I, the Chief Executive Officer of Borrower, hereby certify as to paragraphs 1 through 6 above, as of the date set forth above.

By:	/s/ Joseph G. Kaveski
	Name:	Joseph G. Kaveski
	Title:	Chief Executive Officer

-3-

EX-10.2

Exhibit 10.2

SECOND LOAN MODIFICATION AND FORBEARANCE AGREEMENT

     This Second Loan Modification and Forbearance Agreement (this “Loan Modification Agreement”) is entered into as of the Second Loan Modification Effective Date, by and between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600, Broomfield, Colorado 80021 (“Bank”), and ENERGY FOCUS, INC., a Delaware corporation, formerly known as Fiberstars, Inc., a Delaware corporation, with offices located at 32000 Aurora Road, Solon, Ohio 44139.

1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of October 27, 2008, evidenced by, among other documents, a certain Second Amended and Restated Loan and Security Agreement dated as of October 27, 2008 between Borrower and Bank, as amended by a certain First modification and Forbearance Agreement dated as of January 31, 2009 between Borrower and Bank (the “First Amendment”, and as may be further amended from time to time, the “Loan Agreement”). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and as described in a certain Intellectual Property Security agreement between borrower and Bank, as ratifies and reaffirmed by a certain Reaffirmation of Intellectual Property Security Agreement dated as of October 27, 2008 between Borrower and Bank (collectively, the “IP Agreement”, and together with any other collateral security granted to Bank, the “Security Documents”).

     Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3. ACKNOWLEDGMENT OF DEFAULTS. Borrower acknowledges and agrees that certain Defaults and Events of Default have occurred under the Loan Agreement by virtue of Borrower’s failure to comply with the minimum Tangible Net Worth covenant contained in Section 6.9(a) of the Loan Agreement for the compliance periods ended on November 30, 2008 and December 31, 2008 (the “Prior Defaults”). Bank is currently forbearing from enforcing its rights and remedies under the Loan Agreement due to the Prior Defaults. In addition. Borrower failed to comply with the minimum Tangible Net Worth covenant set forth in Section 6.9(a) for the compliance periods ended January 31, 2009, February 28, 2009, March 31, 2009 and April 30, 2009 (the “Additional Defaults”, and together with the Prior Defaults, the “Existing Defaults”).

4. DESCRIPTION OF CHANGE IN TERMS.

A. Modifications to Loan Agreement.

1 The Loan Agreement shall be amended by deleting the following text appearing in Section 2.3(a) thereof in its entirety:

“(a) Interest Rate; Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall accrue interest at a floating per annum rate equal to the aggregate of the Prime Rate plus one and one-half percentage point (1.50%), which interest shall be payable monthly.”

and inserting in lieu thereof the following:

“(a) Interest Rate; Advances. Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall

accrue interest at a floating per annum rate equal to (i) from the Second Loan Modification Effective Date through and including June 30, 2009, the aggregate of the Prime Rate plus one and one-half percentage point (1.50%); (ii) beginning July 1, 2009 through and including September 30, 2009, the aggregate of the Prime Rate plus two percentage points (2.00%); and (iii) beginning October 1, 2009 and thereafter, the aggregate of the Prime Rate plus three percentage points (3.00%), which interest shall in any event be payable monthly.”

2 The Loan Agreement shall be amended by deleting the following text appearing in Section 2.4(e) thereof in its entirety:

“(e) Collateral Monitoring Fee. A monthly collateral monitoring fee of Seven Hundred Fifty Dollars ($750.00), payable in arrears on the last day of each month; provided, however, that during any Streamline Period, the collateral monitoring fee shall be $0.00 (in each case, the collateral monitoring fee will be prorated for any partial month); and”

and inserting in lieu thereof the following:

“(e) Collateral Monitoring Fee. A monthly collateral monitoring fee of Seven Hundred Fifty Dollars ($750.00), payable in arrears on the last day of each month (prorated for any partial month at the beginning and upon termination of this Agreement); and”

3 The Loan Agreement shall be amended by deleting the following text at the end of Section 6.2(a) in its entirety:

“Notwithstanding the foregoing, during a Streamline Period, provided no Event of Default has occurred and is continuing, Borrower shall be required to provide Bank with the reports and schedules required pursuant to clause (a)(i)(A) above on a monthly basis.”

4 The Loan Agreement shall be amended by deleting the following text appearing in Section 6.8 thereof in its entirety:

“6.8 Operating Accounts.

(a) Maintain its and its Subsidiaries’, if any, primary depository, operating accounts and securities accounts with Bank and Bank’s affiliates with all excess funds maintained at or invested through Bank or an affiliate of Bank, which accounts shall represent at least eighty-five percent (85%) of the dollar value of Borrower’s and such Subsidiaries accounts at all financial institutions.

(b) Provide Bank five (5) days prior-written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or its Affiliates. In addition,

for each Collateral Account that Borrower at any time maintains in the United States at financial institutions other than Bank, in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) at any time, Borrower shall cause the applicable bank or financial institution (other than Bank) at or with which any such Collateral Account is maintained lo execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with the terms hereunder. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s employees and identified to Bank by Borrower as such.”

and inserting in lieu thereof the following:

“6.8 Operating Accounts.

(a) Maintain all of its and its Subsidiaries domestic depository, operating accounts and securities accounts with Bank, with all excess funds maintained at or invested through Bank.

(b) Provide Bank five (5) days prior-written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates. For each Collateral Account that Borrower at any time maintains, Borrower shall cause the applicable bank or financial institution (other than Bank) at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with the terms hereunder which Control Agreement may not be terminated without the prior written consent of Bank. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s employees and identified to Bank by Borrower as such.”

5 The Loan Agreement shall be amended by deleting the following text appearing in Section 6.9 thereof in its entirety:

“6.9 Financial Covenants.

Borrower shall maintain at all times, to be tested as of the last day of each month, on a non-consolidated basis determined by Bank from Borrower’s unconsolidated balance sheet:

(a) Tangible Net Worth. From the monthly period ended September 30, 2008 through and including the monthly period ending December 31, 2008, a Tangible Net Worth of not less than Sixteen Million Dollars ($16,000,000), in each case increasing by (i) seventy-five percent (75%) of issuances of

equity or seventy-five percent (75%) of the principal amount of Subordinated Debt issued or incurred by the Borrower after the Effective Date and (ii) seventy-five percent (75%) of Borrower’s unconsolidated net income. Increases in this Tangible Net Worth covenant based on consideration received from (a) the issuance of equity securities of Borrower and Subordinated Debt shall be effective as of the end of the fiscal month in which such consideration is received and (b) quarterly income shall be effective as of the end of each fiscal quarter, and shall continue effective thereafter.

Notwithstanding the foregoing, not later than December 31, 2008, Bank shall, after consultation with Borrower in its reasonable discretion, revise the Tangible Net Worth covenant described in clause (a) above for the period beginning January 1, 2009 and for each fiscal month thereafter.”

and inserting in lieu thereof the following:

“6.9 Financial Covenants.

Borrower shall maintain at all times, to be tested as of the last day of each month, on a non-consolidated basis determined by Bank from Borrower’s unconsolidated balance sheet:

(a) Tangible Net Worth. From the monthly period ended September 30, 2008 and for each monthly period thereafter, a Tangible Net Worth of not less than Sixteen Million Dollars ($16,000,000), in each case increasing by (i) seventy-five percent (75%) of issuances of equity or seventy-five percent (75%) of the principal amount of Subordinated Debt issued or incurred by the Borrower after the Effective Date and (ii) seventy-five percent (75%) of Borrower’s unconsolidated net income. Increases in this Tangible Net Worth covenant based on consideration received from (a) the issuance of equity securities of Borrower and Subordinated Debt shall be effective as of the end of the fiscal month in which such consideration is received and (b) quarterly income shall be effective as of the end of each fiscal quarter, and shall continue effective thereafter.”

6 The Loan Agreement shall be amended by deleting the following definitions in Section 13.1 thereof, each in its entirety:

“Borrowing Base” is (a) seventy-five percent (75%) of Eligible Accounts other than Eligible ‘Early Buy’ Pool and Spa Accounts plus (b) the lesser of (X) fifty percent (50%) of Borrower’s cash at Bank or (Y) One Million Five Hundred Thousand Dollars ($1,500,000), plus (c) the lesser of (X) seventy-five percent (75%) of Eligible ‘Early Buy’ Pool and Spa Accounts or (Y) Five Hundred Thousand Dollars ($500,000), in each case as determined by Bank from Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may decrease the foregoing percentages and/or amounts in its good faith business judgment based on events, conditions, contingencies, or risks

which, as determined by Bank, may adversely affect the value of the Collateral.

“Eligible ‘Early Buy’ Pool and Spa Accounts” means all of Borrower’s pool and spa accounts that are otherwise Eligible Accounts that are (a) pre-approved by Bank in writing and (b) due and payable ninety-one (91) to one hundred eighty (180) days from invoice date; provided, however, that Eligible ‘Early Buy’ Pool and Spa Accounts do not include pool and spa accounts that are not paid within the earlier of (X) thirty (30) days from the invoice due date or (Y) one hundred eighty (180) days from the invoice date.

“Liquidity Ratio” is, for any date of measurement, the ratio of (a) Borrower’s cash at Bank on such date; to (b) all outstanding Indebtedness owed by Borrower to Bank on such date.

“Revolving Line” is an Advance or Advances in an aggregate amount of up to Four Million Dollars ($4,000,000) outstanding at any time.

“Streamline Period” is any date in which Borrower’s Liquidity Ratio is greater than 2.50:1.00.”

and inserting in lieu thereof the following:

““Borrowing Base” is (a) seventy-five percent (75%) of Eligible Accounts, as determined by Bank from Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may decrease the foregoing percentage in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Bank, may adversely affect the value of the Collateral.

“Revolving Line” is an Advance or Advances in an aggregate amount of up to Two Million Dollars ($2,000,000) outstanding at any time.”

7 The Loan Agreement shall be amended by inserting the following definition in Section 13.1 thereof, in appropriate alphabetical order:

““Second Loan Modification Effective Date” is the date indicated on the signature page to the Second Loan Modification and Forbearance Agreement entered into between Bank and Borrower.”

8 The Compliance Certificate appearing as Exhibit D to the Loan Agreement is hereby replaced with the Compliance Certificate attached as Exhibit B hereto.

5. FORBEARANCE BY BANK.

A. In consideration of, among other things, Borrower’s compliance with each and every term of this Agreement, Bank hereby agrees to forbear from exercising its rights and remedies against the

Borrower as a result of the Existing Defaults until the earlier to occur of (i) a Default or an Event of Default under the Loan Agreement (with the sole exception of the Existing Defaults), (ii) the failure of Borrower to promptly, punctually, or faithfully perform or comply with any term or condition of this Agreement as and when required, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE, or (iii) 3:00 pm (Denver, Colorado time) on June 30, 2009 (the period commencing as of the date of the First Loan Modification Effective Date and ending on the earlier of (i), (ii) or (iii) above shall be referred to as the “Forbearance Period”).

B.

Borrower hereby acknowledges and agrees that nothing contained in this section or in any other section of this Agreement shall be deemed or otherwise construed as a waiver by Bank of the Existing Defaults or any other Default or Event of Default (whether now existing or hereafter arising) or of any of its rights and remedies pursuant to the Existing Loan Documents, applicable law or otherwise. This Loan Modification Agreement shall only constitute an agreement by Bank to forbear from enforcing its rights and remedies based upon the Existing Defaults upon the terms and conditions set forth herein. Upon the expiration of the Forbearance Period, the agreement of Bank to forbear as set forth in this Loan Modification Agreement shall automatically terminate and Bank may immediately commence enforcing its rights and remedies pursuant to the Existing Loan Documents, applicable law or otherwise, in such order and manner as Bank may determine appropriate.

6. TERMS OF FORBEARANCE.

A.

From and after the execution of this Loan Modification Agreement, Borrower agrees that Bank shall have no further obligation to make any Advances to Borrower, or to issue or provide any other extensions of credit of any kind to Borrower (as used herein and in the Loan Agreement, any Advance, Letter of Credit, FX Forward Contract, amount utilized for Cash Management Services, or any other extension of credit by Bank for Borrower’s benefit shall be referred to as a “Credit Extension”). Notwithstanding the foregoing, during the Forbearance Period and at the request of Borrower, Bank may, in its sole and absolute discretion, continue to make any Credit Extensions, subject in all events to the terms and conditions of this Loan Modification Agreement, the Loan Agreement (including but not limited to, all limitations imposed by the Borrowing Base and the Availability Amount) and the other Existing Loan Documents. Borrower covenants and agrees that if, in the sole and absolute discretion of Bank, Bank shall make any Credit Extensions during the Forbearance Period, such act shall not constitute (i) a waiver of any of the Existing Defaults, or of any other Default or Event of Default which may now exist or which may occur after the date of this Loan Modification Agreement under any of the Existing Loan Documents, or (ii) an agreement on the part of Bank to make any further extensions of credit of any kind to Borrower at a later date.

B.

At all times during the Forbearance Period Borrower shall comply with all terms and conditions contained in the Loan Agreement and other Loan Documents and shall continue to remit all regularly scheduled payments (including, without limitation, all principal, interest, fees, costs and other amounts) which may become due under the Existing Loan Documents, as and when such payments are due.

7. FEES. Borrower shall pay to Bank a forbearance fee equal to Four Thousand Dollars ($4,000.00), which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with the Existing Loan Documents and this Loan Modification Agreement.

8. RATIFICATION OF IP AGREEMENT. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of the IP Agreement, and acknowledges, confirms and agrees that said IP Agreement contains an accurate and complete listing of all Intellectual Property Collateral as defined in said IP Agreement, shall remain in full force and effect. Notwithstanding the terms and conditions of the IP Agreement, the

Borrower shall not register any Copyrights or Mask Works in the United States Copyright Office unless it: (i) has given at least fifteen (15) days’ prior-written notice to Bank of its intent to register such Copyrights or Mask Works and has provided Bank with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (ii) executes a security agreement or such other documents as Bank may reasonably request in order to maintain the perfection and priority of Bank’s security interest in the Copyrights proposed to be registered with the United States Copyright Office; and (iii) records such security documents with the United States Copyright Office contemporaneously with filing the Copyright application(s) with the United States Copyright Office. Borrower shall promptly provide to Bank a copy of the Copyright application(s) filed with the United States Copyright Office, together with evidence of the recording of the security documents necessary for Bank to maintain the perfection and priority of its security interest in such Copyrights or Mask Works. Borrower shall provide written notice to Bank of any application filed by Borrower in the United States Patent Trademark Office for a patent or to register a trademark or service mark within thirty (30) days of any such filing.

9. RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of October 27, 2008 executed by Borrower, and acknowledges, confirms and agrees the disclosures and information Borrower provided to Bank in the Perfection Certificate have not changed, as of the date hereof.

10. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.

11. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

12. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of the Loan Agreement, the other Existing Loan Documents and all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

13. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

14. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.

15. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this Loan Modification Agreement, Borrower hereby reaffirms and hereby grants to Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Silicon Valley Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured

and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

16. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the State of California in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY.

17. CONFIDENTIALITY. Bank may use confidential information for the development of databases, reporting purposes, and market analysis, so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately preceding sentence shall survive the termination of the Loan Agreement.

18. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

[The remainder of this page is intentionally left]

This Loan Modification Agreement is executed under the laws of the State of California as of the Second Loan Modification Effective Date.

BORROWER:			BANK:
ENERGY FOCUS, INC.			SILICON VALLEY BANK
By:	/s/ Nicholas G. Berchtold		By:
	Name:	Nicholas G. Berchtold		Name:
	Title:	VP Finance and CFO		Title:

Second Loan Modification Effective Date: June 12, 2009

[Second Loan Modification and Forbearance Agreement Signature Page]

EX-10.3

Exhibit 10.3

THIRD LOAN MODIFICATION AND FORBEARANCE AGREEMENT

     This Third Loan Modification and Forbearance Agreement (this “Loan Modification Agreement”) is entered into as of the Third Loan Modification Effective Date, by and between SILICON VALLEY BANK, a California corporation, with its principal place of business 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 380 Interlocken Crescent, Suite 600, Broomfield, Colorado 80021 (“Bank”) and ENERGY FOCUS, INC., a Delaware corporation, formerly known as Fiberstars, Inc., a Delaware corporation, with offices located at 32000 Aurora Road, Solon, Ohio 44139.

1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank. Borrower is indebted to Bank pursuant to a loan arrangement dated as of October 27, 2008, evidenced by, among other documents, a certain Second Amended and Restated Loan and Security Agreement dated as of October 27, 2008 between Borrower and Bank (the “Original Loan Agreement”), as amended by a certain First Modification and Forbearance Agreement dated as of January 31, 2009 between Borrower and Bank (the “First Amendment”), and as further modified by a certain Second Loan Modification and Forbearance Agreement, dated as of June 12, 2009 (the “Second Amendment”, and together with the First Amendment and the Original Loan Agreement, and as, may be further amended from time to time, the “Loan Agreement”). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and as described in a certain Intellectual Property Security Agreement between borrower and Bank, as ratified and reaffirmed by a certain Reaffirmation of Intellectual Property Security Agreement dated as of October 27, 2008 between Borrower and Bank (collectively, the “IP Agreement”, and together with any other collateral security granted to Bank, the “Security Documents”).

     Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3. ACKNOWLEDGMENT OF DEFAULTS. Borrower acknowledges and agrees that Bank is currently forbearing from enforcing its rights and remedies pursuant to the First Amendment and the Second Amendment due to certain Defaults and Events of Default that have occurred under the Loan Agreement by virtue of Borrower’s failure to comply with the minimum Tangible Net Worth covenant contained in Section 6.9(a) of the Loan Agreement for the compliance periods ended on November 30, 2008 and December 31, 2008, January 31, 2009, February 28, 2009, March 31, 2009, April 30, 2009 (the “Prior Defaults”). In addition, Borrower failed to comply with the minimum Tangible Net Worth covenant set forth in Section 6.9(a) for the compliance period ended May 31, 2009 (the “Additional Default”, and together with the Prior Defaults, the “Existing Defaults”).

4. DESCRIPTION OF CHANGE IN TERMS.

A. Modifications to Loan Agreement.

1 The Loan Agreement shall be amended by inserting the following new Section 2.5 immediately following Section 2.4 thereof:

“2.5 Interest on Pledged CD; Payment of Interest on Pledged CD; Termination of Pledged CD.

(a) Interest on Pledged CD. Each Pledged CD shall bear interest at the Pledged CD Rate. The initial CD Interest Period applicable to the Pledged CDs in connection with the notice of delivery of Pledged CD will be indicated on the form attached as

Schedule A hereto. Thereafter, each subsequent CD Interest Period will begin automatically in seven-day increments until the termination of the Pledged CD in accordance with Section 2.5(c) hereof.

(b) Payment of Interest on the Pledged CD. Accrued but unpaid interest on the Pledged CD shall be payable upon the termination of the Pledged CD in accordance with Section 2.5(c) hereof.

(c) Termination of Pledged CD. The Pledged CD will terminate upon the earlier to occur of (i) the occurrence of an Event of Default (other than the Existing Defaults) and (ii) the Revolving Line Maturity Date. Upon termination of the Pledged CD, the entire outstanding principal of and accrued but unpaid interest on the Pledged CD shall be applied to the Obligations pursuant to the terms of Section 9.4 hereof.

2 The Loan Agreement shall be amended by deleting the following text appearing in Section 4.1 thereof in its entirety:

“4.1 Grant of Security Interest. Borrower herby grants Bank to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have superior priority to Bank’s Lien under this Agreement). If Borrower shall acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank.”

and inserting in lieu thereof the following:

“4.1 Grant a Security Interest

(a) Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations a continuing security interest in, and pledges and assigns to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents and warrants that the security interest granted herein shall be a first priority perfected security interest in the Collateral. If Borrower shall acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all

upon the terms of this Agreement, with such writing to be in form and substance satisfactory to Bank.

(b) Borrower hereby assigns, pledges, delivers, and transfers to Bank, and hereby grants to Bank, a continuing first priority security interest in and against all right, title and interest of the following, whether now or hereafter existing or acquired by Borrower, and Pledged CD issued from time to time and general intangibles arising therefrom or relating thereto; and all documents, instruments and agreements evidencing the same; and all extensions, renewals, modifications and replacements of the foregoing; and any interest or other amounts payable in connection therewith, including, without limitation:

(i) all proceeds of the foregoing (including whatever is receivable or received when any Pledged CD or proceeds is invested, sold, collected, exchanged, returned, substituted or otherwise disposed of, whether such disposition is voluntary or involuntary, including rights to payment and return premiums and insurance proceeds under insurance with respect to any Pledged CD, and all rights to payment with respect to any cause of action affecting or relating to the Pledged CD); and

(ii) all renewals, replacements and substitutions of items of any Pledged CD.

If this Agreement is terminated. Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. The parties to this Agreement do not intend that Borrower’s delivery of any Pledged CD to Bank as herein provided will constitute an advance payment of any Obligations or liquidated damages, nor do the parties intend that any Pledged CD increase the dollar amount of the Obligations.”

3 The Loan Agreement shall be amended by deleting the following definitions in Section 13.1 thereof, each in its entirety:

“Borrowing Base” is seventy-five percent (75%) of Eligible Accounts, as determined by Bank from Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may decrease the foregoing percentage in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Bank, may adversely affect the value of the Collateral.”

and inserting in lieu thereof the following:

“Borrowing Base” is (a) seventy-five percent (75%) of Eligible Accounts, as determined by Bank from Borrower’s most recent Borrowing Base Certificate plus (b) from the Third Loan Modification Effective date through and including the Revolving Line Maturity Date, up to One Million Three Hundred Thousand Dollars ($1,300,000), at all times secured in full by the Pledged

CD; provided, however, that Bank may decrease the foregoing percentage or amount in its good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Bank, may adversely affect the value of the Collateral.

4. The Loan Agreement shall be amended by inserting the following definition in Section 13.1 thereof, in appropriate alphabetical order:

““CD Interest Determination Date” shall mean the date of delivery of a Pledged CD and the date of the commencement of each CD Interest Period.

“CD Interest Period” shall mean the period commencing initially on the date of delivery of a Pledged CD and thereafter on the date immediately following the end of any such initial period or subsequent period, and ending on the last Business Day of the period ending approximately seven (7) days thereafter.

“Pledged CD” shall mean any and all certificates of deposit issued to Borrower by Bank, in a minimum principal amount of not less than One Million Three Hundred Thousand Dollars ($1,300,000), plus any accrued but unpaid interest thereon.

“Pledged CD Rate” shall mean, for any CD Interest Determination Date, Bank’s prevailing commercial rate in effect on such date.

“Third Loan Modification Effective Date” is the date indicated on the signature page to the Third Loan Modification and Forbearance Agreement entered into between Bank and Borrower.”

5. FORBEARANCE BY BANK.

A.

In consideration of, among other things, Borrower’s compliance with each and every term of this Loan Modification Agreement, Bank hereby agrees to forbear from exercising its rights and remedies against the Borrower as a result of the Existing Defaults until the earlier to occur of (i) a Default or an Event of Default under the Loan Agreement (with the sole exception of the Existing Defaults), (ii) the failure of Borrower to promptly, punctually, or faithfully perform or comply with any term or condition of this Agreement as and when required, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE, or (iii) 3:00 pm (Denver, Colorado time) on July 31, 2009 (the period commencing as of the date of the Third Loan Modification Effective Date and ending on the earlier of (i), (ii) or (iii) above shall be referred to as the “Forbearance Period”).

B.

Borrower hereby acknowledges and agrees that nothing contained in this section or in any other section of the Loan Modification Agreement shall be deemed or otherwise construed as a waiver by Bank of the Existing Defaults or any other Default or Event of Default (whether now existing or hereafter arising) or of any of its rights and remedies pursuant to the Existing Loan Documents, applicable law or otherwise. This Loan Modification Agreement shall only constitute an agreement by Bank to forbear from enforcing its rights and remedies based upon the Existing Defaults upon the terms and conditions set forth herein. Upon the expiration of the Forbearance

Period, the agreement of Bank to forbear as set forth in this Loan Modification Agreement shall automatically terminate and Bank may immediately commence enforcing its rights and remedies pursuant to the Existing Loan Documents, applicable law or otherwise, in such order and manner as Bank may determine appropriate.

6. TERMS OF FORBEARANCE.

A.

From and after the execution of this Loan Modification Agreement, Borrower agrees that Bank shall have no further obligation to make any Advances to Borrower, or to issue or provide any other extensions of credit of any kind to Borrower (as used herein and in the Loan Agreement, any Advance, Letter of Credit, FX Forward Contract, amount utilized for Cash Management Services, or any other extension of credit by Bank for Borrower’s benefit shall be referred to as a “Credit Extension”). Notwithstanding the foregoing, during the Forbearance Period and at the request of Borrower, Bank may, in its sole and absolute discretion, continue to make any Credit Extensions, subject in all events to the terms and conditions of this Loan Modification Agreement, the Loan Agreement (including but not limited to, all limitations imposed by the Borrowing Base and the Availability Amount) and the other Existing Loan Documents. Borrower covenants and agrees that if, in the sole and absolute discretion of Bank, Bank shall make any Credit Extensions during the Forbearance Period, such act shall not constitute (i) a waiver of any of the Existing Defaults, or of any other Default or Event of Default which may now exist or which may occur after the date of this Loan Modification Agreement under any of the Existing Loan Documents, or (ii) an agreement on the part of Bank to make any further extensions of credit of any kind to Borrower at a later date.

B.

At all times during the Forbearance Period Borrower shall comply with all terms and conditions contained in the Loan Agreement and other Loan Documents and shall continue to remit all regularly scheduled payments (including, without limitation, all principal, interest, fees, costs and other amounts) which may become due under the Existing Loan Documents, as and when such payments are due.

7. FEES. Borrower shall pay to Bank a forbearance fee equal to Four Thousand Dollars ($4,000.00), which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with the Existing Loan Documents and this Loan Modification Agreement.

8. RATIFICATION OF IP AGREEMENT. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of the IP Agreement, and acknowledges, confirms and agrees that said IP Agreement contains an accurate and complete listing of all Intellectual Property Collateral as defined in said IP Agreement, which shall remain in full force and effect. Notwithstanding the terms and conditions of the IP Agreement, the Borrower shall not register any Copyrights or Mask Works in the United States Copyright Office unless it: (i) has given at least fifteen (15) days, prior-written notice of Bank of its intent to register such Copyrights or Mask Works and has provided Bank with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (ii) executes a security agreement or such other documents as Bank may reasonably request in order to maintain the perfection and priority of Bank’s security interest in the Copyrights proposed to be registered with the United States Copyright Office; and (iii) records such security documents with the United States Copyright Office contemporaneously with filing the Copyright application(s) with the United States Copyright Office. Borrower shall promptly provide to Bank a copy of the Copyright application(s) filed with the United States Copyright Office, together with evidence of the recording of the security documents necessary for Bank to maintain the perfection and priority of its security interest in such Copyrights or Mask Works. Borrower shall provide written notice to Bank of any application filed by Borrower in the United States Patent Trademark Office for a patent or to register a trademark or service mark within thirty (30) days of any such filing.

9. RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of October 27, 2008

executed by Borrower, and acknowledges, confirms and agrees the disclosures and information Borrower provided to Bank in the Perfection Certificate have not changed, as of the date hereof.

10. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank’s interest in the Collateral, including a notice that any disposition of the Collateral, by either the Borrower or any other Person, shall be deemed to violate the rights of the Bank under the Code.

11. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

12. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of the Loan Agreement the other Existing Loan Documents and all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

13. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

14. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.

15. RIGHT OF SET-OFF. In consideration of Bank’s agreement to enter into this Loan Modification Agreement, Borrower hereby reaffirms and hereby grants to Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Silicon Valley Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

16. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the State of California in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY.

17. CONFIDENTIALITY. Bank may use confidential information for the development of databases, reporting purposes, and market analysis, so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately preceding sentence shall survive the termination, of the Loan Agreement.

18. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

[The remainder of this page is intentionally left blank]

     This Loan Modification Agreement is executed under the laws of the State of California as of the Third Loan Modification Effective Date.

BORROWER:			BANK:
ENERGY FOCUS, INC.			SILICON VALLEY BANK
By:	/s/ Nicholas Berchtold		By:	/s/ Shane Anderson
	Name:	Nicholas Berchtold		Name:	Shane Anderson
	Title:	Chief Financial Officer		Title:	SRM

Third Loan Modification Effective Date: July 22, 2009

[Third Loan Modification and Forbearance Agreement Signature Page]

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Joseph G. Kaveski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Energy Focus, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 13, 2009

/s/Joseph G. Kaveski  

Joseph G. Kaveski 

Chief Executive Officer 

24

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Nicholas G. Berchtold, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Energy Focus, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quartssser (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 13, 2009

/s/ Nicholas G. Berchtold  

Nicholas G. Berchtold 

Chief Financial Officer 

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EX-32.1

EXHIBIT 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER UNDER 18 U.S.C. § 1350

I, Joseph G. Kaveski, the Chief Executive Officer of Energy Focus, Inc. (the “company”), certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to the best of my knowledge,

(i) The Quarterly Report of the company on Form 10-Q for the period ended June 30, 2009 (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.

/s/ Joseph G. Kaveski  

Joseph G. Kaveski 
August 13, 2009

A signed original of this written statement required by Section 906 has been provided to Energy Focus, Inc. and will be retained by Energy Focus, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.2

EXHIBIT 32.2

STATEMENT OF CHIEF FINANCIAL OFFICER UNDER 18 U.S.C. § 1350

I, Nicholas G. Berchtold, the Chief Financial Officer of Energy Focus, Inc. (the “company”), certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to the best of my knowledge,

(i) The Quarterly Report of the company on Form 10-Q for the period ended June 30, 2009 (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.

/s/ Nicholas G. Berchtold  

Nicholas G. Berchtold 
August 13, 2009

A signed original of this written statement required by Section 906 has been provided to Energy Focus, Inc. and will be retained by Energy Focus, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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