STOCKHOLDERS’ EQUITY

Common stock follow-on offering

On September 11, 2015, we announced the pricing of a registered underwritten follow-on offering of shares of our common stock by us and certain of our stockholders (the “Selling Stockholders”). We sold 1,500,000 shares of our common stock at a purchase price to the public of $17.00 per share and the Selling Stockholders sold an additional 1,500,000 shares of our common stock on the same terms and conditions.

The offering closed on September 16, 2015 and we received $23.6 million in net proceeds from the transaction, after giving effect to underwriting discounts and commissions and estimated expenses. We expect to use the net proceeds from the offering to finance our growth efforts, for working capital, and other general corporate purposes.

Public offering

On August 6, 2014, we announced the pricing of a public offering to sell 1,175,000 shares of our common stock at a price of $4.50 per share to the public. The underwriters for the offering were given an option to purchase up to an additional 176,250 shares at $4.50 per share to cover over allotments. On August 8, 2014, they exercised their option to purchase the 176,250 additional shares. The offering closed on August 11, 2014. The net proceeds we received from the offering, after deducting the underwriting discount and offering expenses paid by us, were $5.15 million, including the underwriter’s exercise of the overallotment.

As part of the underwriting agreement, we issued a warrant for 47,000 shares to the underwriter representing four percent of the number of shares of common stock sold in the offering at an issue price of $5.40 per share representing 120 percent of the public offering price of the shares of common stock. In conjunction with the registered offering, our common stock began trading on The NASDAQ Capital Market (“NASDAQ”) under the symbol EFOI on August 7, 2014. The warrant was exercised on September 10, 2015.

Warrants

We have issued warrants in conjunction with various equity issuances, debt financing arrangements, and sales incentives. Additionally, there was a warrant issued to a former employee in 2013 as part of the sales of our pool products business, which was exercised in May 2015.

A summary of warrant activity was as follows:



	Warrants Outstanding		Weighted Average Exercise Price During Period

Balance, December 31, 2013	1,107,549		$	4.41
Warrants issued	147,000		4.65
Warrants expired	(285,000	)	3.87
Balance, December 31, 2014	969,549		4.61
Warrants exercised	(638,189	)	4.58
Warrants cancelled/forfeited	(112,110	)	5.54
Warrants expired	(205,000	)	4.20
Balance, December 31, 2015	14,250		4.30
Warrants cancelled/forfeited	(7,500	)	4.30
Balance, December 31, 2016	6,750		$	4.30

Exercisable, December 31, 2016	—		$	—

The number of warrants and weighted average remaining life (in years) by price for outstanding and exercisable warrants at December 31, 2016 was as follows:



WARRANTS OUTSTANDING				WARRANTS EXERCISABLE
Exercise Price		Number of Shares Outstanding	Weighted Average Remaining Contractual Life	Number of Shares Exercisable	Weighted Average Exercise Price

$	4.30	6,750	1.07 years	—	$	—

Stock-based compensation

On May 6, 2014, our Board of Directors approved the Energy Focus, Inc. 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan was approved by the stockholders at our annual meeting on July 15, 2014, after which no further awards could be issued under the Energy Focus, Inc. 2008 Incentive Stock Plan (the “2008 Plan”). The 2014 Plan allows for awards up to 600,000 shares of common stock and expires on July 15, 2024. On July 22, 2015, the stockholders approved an amendment to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 600,000 shares. We have two other equity-based compensation plans under which options are currently outstanding; however, no new awards may be granted under these plans. Generally, stock options are granted at fair market value and expire ten years from the grant date. Employee grants generally vest in three or four years, while grants to non-employee directors generally vest in one year. The specific terms of each grant are determined by our Board of Directors. At December 31, 2016, 546,638 shares remain available to grant under the 2014 Plan.

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

The impact on our results for stock-based compensation was as follows (in thousands):



	For the year ended December 31,
	2016		2015		2014

Cost of sales	$	56	$	38	$	14
Product development	84		37		8
Selling, general, and administrative	1,220		738		510
Total stock-based compensation	$	1,360	$	813	$	532

At December 31, 2016 and 2015, we had unearned stock compensation expense of $1.2 million and $992 thousand, respectively. These costs will be charged to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 1.8 and 1.9 years as of December 31, 2016 and 2015, respectively.

Stock options

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows:



	2016			2015			2014

Fair value of options issued	$	5.27		$	5.33		$	3.62
Exercise price	$	7.46		$	7.23		$	4.69
Expected life of option (in years)	5.8			5.8			5.7
Risk-free interest rate	1.5		%	1.7		%	1.8		%
Expected volatility	93.7		%	90.7		%	97.9		%
Dividend yield	0.00		%	0.00		%	0.00		%

We utilize the simplified method as provided by ASC 718-10 to calculate the expected stock option life. Under ASC 718-10, the expected stock option life is based on the midpoint between the vesting date and the end of the contractual term of the stock option award. The use of this simplified method in place of using the actual historical exercise data is allowed when a stock option award meets all of the following criteria: the exercise price of the stock option equals the stock price on the date of grant; the exercisability of the stock option is only conditional upon completing the service requirement through the vesting date; employees who terminate their service prior to the vesting date forfeit their stock options; employees who terminate their service after vesting are granted a limited time period to exercise their stock options; and the stock options are nontransferable and nonhedgeable. We believe that our stock option awards meet all of these criteria. The estimated expected life of the option is calculated based on contractual life of the option, the vesting life of the option, and historical exercise patterns of vested options. The risk-free interest rate is based on U.S. treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the option. The volatility estimates are calculated using historical volatility of our stock price calculated over a period of time representative of the expected life of the option. We have not paid dividends in the past, and do not expect to pay dividends over the corresponding expected term as of the grant date.

Options outstanding under all plans at December 31, 2016 have a contractual life of ten years, and vesting periods between one and four years. A summary of option activity under all plans was as follows:



	Number of Options		Weighted Average Exercise Price Per Share

Outstanding at December 31, 2013	286,188		$	15.30
Granted	326,250		4.76
Cancelled	(145,873	)	12.38
Exercised	(7,294	)	2.30
Outstanding at December 31, 2014	459,271		8.95
Granted	340,500		8.65
Cancelled	(147,152	)	10.10
Exercised	(50,412	)	4.69
Outstanding at December 31, 2015	602,207		8.58
Granted	167,819		7.31
Cancelled	(160,126	)	12.94
Exercised	(79,166	)	4.48
Outstanding at December 31, 2016	530,734		$	7.48

Vested and expected to vest at December 31, 2016	513,052		$	7.50

Exercisable at December 31, 2016	389,748		$	7.75

The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options. The total intrinsic value of options exercised during 2016 was $126 thousand. The total intrinsic value of options outstanding and options exercisable at December 31, 2016 was $106 thousand and $106 thousand, respectively, which was calculated using the closing stock price at the end of the year of $4.25 per share less the option price of the in-the-money grants.

The options outstanding at December 31, 2016 have been segregated into ranges for additional disclosure as follows:



OPTIONS OUTSTANDING							OPTIONS EXERCISABLE
Range of Exercise Prices			Number of Shares Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number of Shares Exercisable	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price

$2.30	—	$4.00	46,164	6.3	$	2.30	46,164	6.3	$	2.30
$4.01	—	$4.45	107,986	7.1	4.10		107,192	7.1	4.10
$4.46	—	$5.48	136,450	8.1	5.40		93,741	8.0	5.36
$5.49	—	$13.58	168,467	8.2	7.73		73,623	6.9	8.57
$13.59	—	$63.60	71,667	7.1	19.28		69,028	7.0	19.44
			530,734	7.6	$	7.48	389,748	7.2	$	7.75

Restricted stock and Restricted Stock Units

Prior to 2011, we issued restricted stock to Executive Officers and Directors in lieu of paying a portion of their cash compensation or Directors’ fees.

In July 2013, we granted restricted stock units to certain employees under the 2008 Plan with a vesting period of one year from the grant date. Beginning in 2015, we began issuing restricted stock units to employees and certain non-employee Directors under the 2014 Plan with vesting periods ranging from 1 to 3 years from the grant date.

The following table shows a summary of restricted stock and restricted stock unit activity:



	Restricted Stock Outstanding		Restricted Stock Units Outstanding		Weighted Average Grant Date Fair Value

At December 31, 2013	35,869		3,659		7.31
Granted	—		—		—
Vested	(35,869	)	(1,220	)	7.20
Forfeited	—		(2,439	)	4.10
At December 31, 2014	—		—		—
Granted	—		73,750		6.92
Forfeited	—		(16,250	)	5.54
At December 31, 2015	—		57,500		$	7.31
Granted	—		290,966		6.56
Vested	—		(11,213	)	14.18
Forfeited	—		(87,138	)	6.73
At December 31, 2016	—		250,115		$	6.34

Employee stock purchase plans

In September 2013, our stockholders approved the 2013 Employee Stock Purchase Plan (the “2013 Plan”) to replace the 1994 prior purchase plan. A total of 500,000 shares of common stock were provided for issuance under the 2013 Plan. The 2013 Plan permits eligible employees to purchase common stock through payroll deductions at a price equal to the lower of 85 percent of the fair market value of our common stock at the beginning or end of the offering period. Employees may end their participation at any time during the offering period, and participation ends automatically upon termination of employment with us. During 2016, 2015 and 2014, employees purchased 22,094, 18,119, and 9,932 shares, respectively. At December 31, 2016, 443,441 shares remained available for purchase under the 2014 Plan.