THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER
THE SECURITIES LAWS OF ANY STATES IN THE UNITED STATES. THESE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.

SUBORDINATED CONVERTIBLE PROMISSORY NOTE

Note Series:
2019MA
 
 
Date of Note:
March 29, 2019
 
 
Principal Amount of Note:
$

For value received ENERGY FOCUS, INC., a Delaware corporation (the “Company”),
promises to pay to the undersigned holder or such party’s assigns (the “Holder”)
the principal amount set forth above with simple interest on the outstanding
principal amount at the rate of (i) from the date hereof until June 30, 2019, 5%
per annum, and (ii) thereafter until the Maturity Date, 10% per annum. Interest
shall commence with the date hereof and shall continue on the outstanding
principal amount until paid in full or converted. Interest shall be computed on
the basis of a year of 365 days for the actual number of days elapsed. All
unpaid interest and principal shall be due and payable upon request of the
Majority Holders on or after December 31, 2021 (the “Maturity Date”).
1.BASIC TERMS.
(a)    Series of Notes. This convertible promissory note (the “Note”) is issued
as part of a series of notes designated by the Note Series above (collectively,
the “Notes”) and issued in a single closing to certain persons and entities
(collectively, the “Holders”). The Company shall maintain a ledger of all
Holders.
(b)    Payments. All payments of interest and principal shall be in lawful money
of the United States of America, shall be made pro rata among all Holders and
shall be made at such place as the Holder indicates. All payments shall be
applied first to accrued interest, and thereafter to principal.
(c)    Prepayment. The Company may not prepay this Note prior to the Maturity
Date without the consent of the Holders of a majority of the outstanding
principal amount of the Notes (the “Majority Holders”).
(d)    Most Favored Nations. If, while this Note is outstanding, the Company
issues other indebtedness of the Company convertible into equity securities of
the Company, or amends any existing indebtedness convertible into equity
securities of the Company, and such newly issued or amended indebtedness would
have material terms that are more favorable, from the perspective of the Holder
(the “Other Debt”), than the terms of this Note, then the Company will provide
the Holder with written notice

--------------------------------------------------------------------------------

 

thereof, together with a copy of all documentation relating to the Other Debt
and, upon request of the Holder, any additional information related to the Other
Debt as may be reasonably requested by the Holder. The Company will provide such
notice to the Holder promptly (and in any event within thirty (30) days)
following the issuance of the Other Debt. In the event the Holder determines
that the terms of the Other Debt are preferable to the terms of this Note, the
Holder will notify the Company in writing within five (5) days following the
Holder’s receipt of such notice from the Company. Promptly after receipt of such
written notice from the Holder, but in any event within thirty (30) days, the
Company will amend and restate this Note to be substantially identical to the
promissory note evidencing the Other Debt, excluding the principal and unpaid
accrued interest.
2.    CONVERSION AND REPAYMENT.
(a)    Automatic Conversion. Subject to Section 2(c) below, the outstanding
principal amount of this Note and any unpaid accrued interest (in total, the
“Aggregate Outstanding Amount”) shall automatically convert in whole without any
further action by the Holder into shares of the Company’s Series A Convertible
Preferred Stock (the “Preferred Stock”), based upon the Conversion Rate (as
defined below), on the eleventh (11th) Trading Day (the “Automatic Conversion
Date”) following earlier of (i) the release by the Company of its results for
the quarter and year ended December 31, 2018 and (ii) the date that is two
Trading Days following the date hereof.
(b)    Conversion Rate. Subject to Section 2(c) below, on the Automatic
Conversion Date, the Aggregate Outstanding Amount of this Note will convert into
the number of shares of Preferred Stock determined by dividing (x) the Aggregate
Outstanding Amount of this Note by (y) the arithmetic average of the VWAP of the
Company’s common stock (the “Common Stock”) measured over the ten (10) Trading
Day period ending on the Trading Day prior to the Automatic Conversion Date (the
“Conversion Rate”); provided, however, that the Conversation Rate shall in no
event be less than $0.20.
(c)    Conversion Limitation. Notwithstanding anything contained herein to the
contrary, if the automatic conversion set forth in Section 2(a) above, as
applied to all of the Holders, would result in the issuance of shares of
Preferred Stock (i) then convertible into such number of shares of Common Stock
that would result in a violation of Rule 5635(d)(1)(B) of the Rules of the
Nasdaq Stock Market (the “Nasdaq Cap”), then no portion of the Aggregate
Outstanding Amount shall convert into shares of Preferred Stock at the
Conversion Rate until the first business day following the date on which the
Company’s stockholders approve the transactions contemplated herein (including,
as applicable, the issuance of Common Stock in excess of the Nasdaq Cap) (the
“Nasdaq Cap Subsequent Automatic Conversion Date”) or (ii) that would exceed the
number of authorized and available shares of Preferred Stock pursuant to the
Company’s Certificate of Incorporation, as amended (the “Charter”), then only
that portion of the Aggregate Outstanding Amount of each of the Notes, allocated
among all of the Holders on a ratable basis based upon the Aggregate Outstanding
Amount of each Note relative to the total Aggregate Outstanding Amount of all of
the Notes, shall convert on the Automatic Conversion Date as would comply with
the Charter. In the case the Notes are partially converted in accordance with
clause (ii) of the immediately preceding sentence, the Notes shall be
surrendered to the Company in accordance with Section 2(d) below and the portion
of the Aggregate Outstanding Amount of each Note that was not converted into
shares of Preferred Stock as a result of the limitations set forth in this
Section 2(c)(ii) shall be reissued to each of the Holders in the form of a new
Note (the “Replacement Notes”); provided, however, that the Aggregate
Outstanding Amount of each of the Replacement Notes shall automatically convert
into shares of Preferred Stock, at the Conversion Rate, on the first business
day following the date on which the Company’s stockholders approve an amendment
to the Charter to increase the number of authorized and available shares of
Preferred Stock to permit such

--------------------------------------------------------------------------------

 

conversion (the “Charter Amendment Subsequent Automatic Conversion Date”, and
together with the Nasdaq Cap Subsequent Automatic Conversion Date, the
“Subsequent Automatic Conversion Date”).
(d)    Procedure for Conversion. In connection with any conversion of this Note
into Preferred Stock, the Holder shall surrender this Note to the Company and
deliver to the Company any documentation reasonably required by the Company. 
Such conversion shall be deemed to have been effected as of the close of
business on the date on which this Note shall have been surrendered and such
notice shall have been received by the Company. The Company shall not be
required to issue or deliver the Preferred Stock into which this Note may
convert until the Holder has surrendered this Note to the Company and delivered
to the Company any such documentation.  No fractional shares of Preferred Stock
shall be issued to the Holder upon the conversion of the Note. The Company shall
round up the result of the Conversion Rate to the nearest whole share. As soon
as practicable (but in no event more than 10 calendar days following the
Automatic Conversion Date or the Subsequent Automatic Conversion Date, as
applicable), the Company shall deliver to the Holder, certificates representing
the number of shares of Preferred Stock issuable upon such conversion registered
in such name or names and such denomination or denominations as the Holder shall
have specified.
(e)    Certain Definitions. For purposes hereof,
(i)    “Trading Day” means (A) a day on which the Common Stock is traded on a
Trading Market, or (ii) if the Common Stock is not listed on a Trading Market, a
day on which the Common Stock is quoted on the over-the-counter market, as
reported by the OTC Bulletin Board, or (iii) if the Common Stock is not then
listed on a Trading Market or quoted on the OTC Bulletin Board, a day on which
the Common Stock is quoted in the over-the-counter market as reported by the
Pink OTC Market Inc. or any similar organization or agency succeeding to its
functions of reporting prices; provided, that in the event that the Common Stock
is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading
Day shall mean a Business Day.
(ii)    “Trading Market” means whichever of the New York Stock Exchange or the
NASDAQ Stock Market, Inc. on which the Common Stock is listed or traded on the
date in question.
(iii)    “VWAP” means, for any date, the price determined by the first of the
following clauses that applies: (A) if the Common Stock is then listed or quoted
on a Trading Market that is a national securities exchange, the daily volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from
9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)); (B) if the
Common Stock is then quoted on the OTC Bulletin Board, the volume weighted
average price of the Common Stock for such date (or the nearest preceding date)
on the OTC Bulletin Board; (C) if prices for the Common Stock are reported in
the OTC Pink marketplace (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (D) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in good
faith by the Majority Holders and reasonably acceptable to the Company, the fees
and expenses of which shall be paid by the Company.
3.    EVENTS OF DEFAULT.
(a)    If there shall be any Event of Default (as defined below) hereunder, at
the option and upon the declaration of the Majority Holders and upon written
notice to the Company (which election and notice shall not be required in the
case of an Event of Default under subsection (ii) or (iii) below), this

--------------------------------------------------------------------------------

 

Note shall accelerate and all principal and unpaid accrued interest shall become
due and payable. The occurrence of any one or more of the following shall
constitute an “Event of Default”:
(i)    The Company fails to pay timely any of the principal amount due under
this Note on the date the same becomes due and payable or any unpaid accrued
interest or other amounts due under this Note on the date the same becomes due
and payable;
(ii)    The Company files any petition or action for relief under any
bankruptcy, reorganization, insolvency or moratorium law or any other law for
the relief of, or relating to, debtors, now or hereafter in effect, or makes any
assignment for the benefit of creditors or takes any corporate action in
furtherance of any of the foregoing;
(iii)    An involuntary petition is filed against the Company (unless such
petition is dismissed or discharged within sixty (60) days under any bankruptcy
statute now or hereafter in effect, or a custodian, receiver, trustee or
assignee for the benefit of creditors (or other similar official) is appointed
to take possession, custody or control of any property of the Company);
(iv)    default in the obligation of the Company for borrowed money, other than
this Note, which shall continue for a period of sixty (60) days, or any event
that results in acceleration of the maturity of any indebtedness of the Company
under any note, indenture, contract, or agreement;
or
(v)    any levy, seizure, attachment, lien, or encumbrance of or on the
Company’s property, other than those existing as of the date hereof, which is
not discharged by the Company within twenty (20) days.
(b)    In the event of any Event of Default hereunder, the Company shall pay all
reasonable attorneys’ fees and court costs incurred by the Holder in enforcing
and collecting this Note.
(c)    The obligations of the Company to pay the principal balance and interest
due to the Holder shall be absolute and unconditional and the Company shall make
such payment without abatement, diminution or deduction regardless of any cause
or circumstances whatsoever including, without limitation, any defense, setoff,
recoupment, or counterclaim which the Company may have or assert against the
Holder or any other person.
4.    MISCELLANEOUS PROVISIONS.
(a)    Waivers. The Company hereby waives demand, notice, presentment, protest
and notice of dishonor.
(b)    Further Assurances. The Holder agrees and covenants that at any time and
from time to time the Holder will promptly execute and deliver to the Company
such further instruments and documents and take such further action as the
Company may reasonably require in order to carry out the full intent and purpose
of this Note and to comply with state or federal securities laws or other
regulatory approvals.
(c)    Transfers of Notes. This Note may be transferred only upon its surrender
to the Company for registration of transfer, duly endorsed, or accompanied by a
duly executed written instrument of transfer in form satisfactory to the Company
to a party that provides to the Company a joinder agreement to the Note Purchase
Agreement dated March 29, 2019 entered into by the initial Holder hereof (the
“Purchase

--------------------------------------------------------------------------------

 

Agreement”), causing the transferee to agree and become entitled to the terms,
rights and conditions set forth therein, including without limitation, making
the representations set forth in Section 3.2 thereof. Thereupon, this Note shall
be reissued to, and registered in the name of, the transferee, or a new Note for
like principal amount and interest shall be issued to, and registered in the
name of, the transferee. Interest and principal shall be paid solely to the
registered holder of this Note. Such payment shall constitute full discharge of
the Company’s obligation to pay such interest and principal.
(d)    Amendment and Waiver. Any term of this Note may be amended or waived with
the written consent of the Company and the Holder. In addition, any term of this
Note may be amended or waived with the written consent of the Company and the
Majority Holders. Upon the effectuation of such waiver or amendment with the
consent of the Majority Holders in conformance with this paragraph, such
amendment or waiver shall be effective as to, and binding against the holders
of, all of the Notes and the Company shall promptly give written notice thereof
to the Holder if the Holder has not previously consented to such amendment or
waiver in writing; provided that the failure to give such notice shall not
affect the validity of such amendment or waiver.
(e)    Governing Law. This Note shall be governed by and construed under the
laws of the State of Delaware, as applied to agreements among Delaware
residents, made and to be performed entirely within the State of Delaware,
without giving effect to conflicts of laws principles.
(f)    Binding Agreement. The terms and conditions of this Note shall inure to
the benefit of and be binding upon the respective successors and assigns of the
parties. Nothing in this Note, expressed or implied, is intended to confer upon
any third party any rights, remedies, obligations or liabilities under or by
reason of this Note, except as expressly provided in this Note.
(g)    Counterparts; Manner of Delivery. This Note may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Counterparts may be
delivered via facsimile, electronic mail (including pdf or any electronic
signature complying with the U.S. federal ESIGN Act of 2000, Uniform Electronic
Transactions Act or other applicable law) or other transmission method and any
counterpart so delivered shall be deemed to have been duly and validly delivered
and be valid and effective for all purposes.
(h)    Titles and Subtitles. The titles and subtitles used in this Note are used
for convenience only and are not to be considered in construing or interpreting
this Note.
(i)    Notices. All notices required or permitted hereunder shall be in writing
and shall be deemed effectively given: (i) upon personal delivery to the party
to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day, (iii) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (iv) one (1) day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications to a party shall be
sent to the party’s address set forth on the signature page hereto or at such
other address(es) as such party may designate by ten (10) days’ advance written
notice to the other party hereto.
(j)    Delays or Omissions. It is agreed that no delay or omission to exercise
any right, power or remedy accruing to the Holder, upon any breach or default of
the Company under this Note shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. It is
further agreed that any waiver, permit, consent or approval of any kind or
character

--------------------------------------------------------------------------------

 

by the Holder of any breach or default under this Note, or any waiver by the
Holder of any provisions or conditions of this Note, must be in writing and
shall be effective only to the extent specifically set forth in writing and that
all remedies, either under this Note, or by law or otherwise afforded to the
Holder, shall be cumulative and not alternative. This Note shall be void and of
no force or effect in the event that the Holder fails to remit the full
principal amount to the Company within five (5) calendar days of the date of
this Note.
(k)    Entire Agreement. This Note and the Purchase Agreement constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof, and no party shall be liable or bound to any other party in
any manner by any representations, warranties, covenants and agreements except
as specifically set forth herein.
(l)    Exculpation among Holders. The Holder acknowledges that the Holder is not
relying on any person, firm or corporation, other than the Company and its
officers and Board members, in making its investment or decision to invest in
the Company.
(m)    Senior Indebtedness. The obligations evidenced by this Note are hereby
expressly subordinated in right of payment to the prior payment in full of all
of the Company’s obligations under that certain Loan and Security Agreement,
dated as of December 11, 2018, between Austin Financial Services, Inc. and the
Company (the “Senior Indebtedness”). Notwithstanding the foregoing, the Holder
shall be entitled to receive (a) equity securities of the Company from the
conversion of all or any part of the obligations evidenced by this Note, (b) any
note, instrument or other evidence of indebtedness which may be issued by the
Company in exchange for or in substitution of this Note, provided that such
note, instrument or other evidence of indebtedness is subordinated to the Senior
Indebtedness on the same terms and conditions as set forth in this Section 4(m)
and (c) other payments consented to in writing by holders of Senior
Indebtedness.
(n)    Broker’s Fees. Each party hereto represents and warrants that no agent,
broker, investment banker, person or firm acting on behalf of or under the
authority of such party hereto is or will be entitled to any broker’s or
finder’s fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this subsection being untrue.
[Signature pages follow]

--------------------------------------------------------------------------------

 

The parties have executed this SUBORDINATD CONVERTIBLE PROMISSORY NOTE as of the
date first noted above.

 
COMPANY:
 
 

Energy Focus, Inc.
 
 
 
 
By:
/s/ Theodore L. Tewksbury III
 
 
 
 
 
Name:
Theodore L. Tewksbury III
 
 
Title:
Chairman of the Board, Chief Executive Officer and President
 
 
 
 
E-mail:
ttewksbury@energyfocus.com
 
With copy to:
jspreen@bakerlaw.com
 
 
 
Address:
32000 Aurora Road – Suite B
 
 
Solon, Ohio 44139
 
 
 

SIGNATURE PAGE TO
ENERGY FOCUS, INC.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE

--------------------------------------------------------------------------------

 

The parties have executed this SUBORDINATED CONVERTIBLE PROMISSORY NOTE as of
the date first noted above.

 
HOLDER (if an entity):
 
 
Name of Holder:
 
 
 
 
 
By:
 
 
 
 
 
 
Name:
 
 
 
Title:
 
 
 
 
E-mail:
 
 
 
 
Address:
 
 
 
 
 
 
 

 
HOLDER (if an individual):
 
 
Name of Holder:
 
 
 
 
 
Signature:
 
 
 
 
E-mail:
 
 
 
 
Address:
 
 
 
 
 
 
 

SIGNATURE PAGE TO
ENERGY FOCUS, INC.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE