What changed in this filing

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Item 1. Business

2021-03-25 compared with 2020-03-24 · 145 added, 85 removed, 95 unchanged (71% of the section changed)

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Energy Focus, Inc.

engages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls.

We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military maritime markets (“MMM”).

Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions.

Our goal is to be the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount.

We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products and controls.

In 2019, we were a company that was going through significant transition and transformation in order to stabilize and regrow our business.

This transition is exemplified by the following key and significant changes that occurred during 2019:

Executive management changes - James Tu returned to the Company as our Chairman and Chief Executive Officer and Tod A.

Nestor was named our new President and Chief Financial Officer.

These management changes set the stage to start the stabilization and relaunch necessary to ensure Energy Focus is revitalized to become a viable, trusted and sustainable manufacturer in the LED market.

EnFocus™ lighting platform development - During 2019, we refocused our R&D efforts to define the most acute and significant customer needs and believe that providing affordable and user-friendly lighting controls for existing buildings represents a large market for us in the US and globally.

We ultimately invented and developed a dimming and color tuning lighting control platform, EnFocus™, that is adaptable to all possible lighting environments and can be implemented.

By leveraging on the existing power lines, to facilitate lighting controls, buildings do not have to install new communication wires or wireless communication paths that incur cybersecurity risks.

RedCap™ - We repositioned this patented emergency backup battery integrated technology in order to make it more readily available and simple to understand by customers.

Our activities included items such as supply chain consolidation for cost and pricing reductions and eliminating the need to do a “bundled purchase” in order to buy this highly differentiated and value-added product.

Enhanced focus on direct selling efforts - The company experienced significant decrease in sales and profit in part by relying on an agency-based sales model before the 2019 management change.

We returned to a direct sales model approach that the Company successfully executed in winning marque customers prior to 2017.

While we still work with select lighting agencies, we only work with agencies that understand and embrace our value propositions and can properly and actively support our products and provide sales.

We also have been expanding our internal sales team and channel partnerships to complement our regional sales force.

Other key tactical transitions included:

Securing a $3 million “Key Customer” healthcare contract;

Reengineering and redesign efforts to lower cost on numerous products in our US Navy product line;

Winning an award of a $2.5 million contract for our small globe fixtures, typically found on the exterior of US Navy vessels.

During 2019, we also streamlined our operations including consolidating our R&D operations by closing offices in Taiwan and San Jose, California and establishing a lean organizational structure by further reducing headcount, significantly reducing executive compensation, closely managing all spending done throughout the Company, significantly reducing inventory purchases through more order driven methods, negotiating meaningful cost reductions for our products, while reinvesting in primarily sales driven initiatives and efforts.

As a result of these efforts, we were able to stabilize the company, significantly reduce operating losses even when sales were still low in the third quarter of 2019, reposition the company with a customer centric culture and operation, and began to experience a reversal of momentum in the fourth quarter by achieving a 21.1% increase in quarter-over-quarter growth in sales.

Although the short-term business impact of the corona-virus outbreak is still difficult to predict, we remain optimistic that these stabilization and relaunch efforts will provide benefits in the future for Energy Focus.

We develop advanced LED retrofit technologies and product solutions that enable our customers to run their facilities with greater energy efficiency, productivity and employee wellness.

We aim to be a LED lighting technology leader by providing high-quality, energy-efficient, “flicker-free”, long-lived, and mercury-free TLED products, other LED lamps and fixture products, and lighting controls to replace existing linear fluorescent, incandescent and HID lamps in mostly indoor lighting applications.

We believe these applications represent a significant portion of the LED lighting market and energy savings potential for our targeted commercial, industrial and MMM.

engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient LED lighting systems and controls.

We develop, market and sell high quality energy-efficient LED lighting products and controls and have recently announced development of a range of UVCD products.

We develop, market and sell high quality LED lighting products and UVCD products and controls in the commercial and military maritime markets (“MMM”).

Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and human health through advanced LED retrofit and UVCD solutions.

Our goal is to be the LED and human-centric lighting (“HCL”) technology and market leader for the most demanding applications where performance, quality, value (high quality at an affordable price), environmental impact and health are considered paramount.

We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) lighting and other types of lamps and fixtures in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”), and other LED, UVCD and lighting control products.

In 2020, we continued to build upon the transition and transformation activities started during 2019 in order to stabilize and regrow our business.

This transition is exemplified by the following key and significant developments that occurred during 2020:

• We launched our EnFocus™ platform during the second quarter of 2020 and continued to receive positive feedback from existing, new, and prospective customers.

The EnFocus™ platform offers two immediately available product lines:

EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution.

EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring any wireless communications, through a relatively simple upgrade with EnFocus™ switches and tubular LEDs, a more environmentally sustainable solution compared with replacing each lighting fixture.

• In response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we started developing advanced UVCD products for both consumer as well as the commercial and industrial markets in the first quarter of 2020.

We announced three initial UVCD products in October 2020:

abUV™ circadian lighting and UVCD air disinfection integrated troffers controlled by the EnFocus™ platform technology;

the nUVo™ portable disinfection device for offices and homes;

and the mUVe™ autonomous robot designed for surface disinfection.

• We continued to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives:

◦ In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors and sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock in a concurrent private placement.

In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock.

Net proceeds from the sale of common stock and warrants were approximately $2.3 million;

◦ In April 2020, we were granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the Paycheck Protection Program under Division A of the Coronavirus Aid, Relief and Economic Security Act;

◦ We effected a five-for-one reverse stock split of our common stock in June 2020, to increase the per share trading price of the Company’s common stock to satisfy the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market;

◦ In August 2020, we refinanced our previous secured credit facility with new credit facilities secured by our inventory and receivables, which increased our borrowing capacity at a lower blended borrowing cost;

◦ In December 2020, we amended certain terms of our outstanding warrants, which are now reflected as a component of equity.

• Executive management growth - James R.

Warren joined the Company as Senior Vice President, General Counsel and Corporate Secretary.

The addition of Mr.

Warren furthers the Company’s objectives of strengthening its operational foundation for the Company to be positioned for growth in the LED and UVCD markets.

During 2020, we significantly expanded our engineering capabilities and invested in our intellectual property portfolio for both lighting controls and UVCD products, and we continued to broaden our product distribution network by engaging with new lighting agencies and ESCOs as channel partners and becoming an approved supplier for GSA.

We also streamlined our operations by continuing to closely manage all spending done throughout the Company, significantly reducing inventory purchases through more order driven methods, negotiating meaningful cost reductions through strategic sourcing initiatives for our products and services, while reinvesting in primarily sales driven initiatives and efforts.

As a result of these efforts, we were able to significantly reduce operating losses even throughout the COVID-19 pandemic.

While commercial sales were down versus 2019 levels, primarily due to impacts of the COVID-19 pandemic, we were able to achieve a 32.5% increase in annual sales over 2019 primarily through MMM sales growth.

During 2020, in particular after the pandemic started to impact economic activities and building occupancies, we experienced a slowdown and continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors put lighting retrofit projects on hold or delayed order placements in reaction to the impacts of the COVID-19 pandemic.

We continue to monitor the impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken to curtail and respond to the spread of the virus.

Although the specific timing of business recovery from the impact of the COVID-19 pandemic is still difficult to predict, we remain optimistic that as the number of infected cases stabilizes or declines and the vaccinated population grows throughout 2021, facility capital budgets will start unfreezing and building occupancy will rise, and our relaunch and growth efforts will further impact our financial performance in a positive way.

We plan to achieve profitability through developing and launching new, innovative products such as EnFocus TM and our UVCD products, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel

partnerships.

We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocus TM platform and to expand our UVCD product portfolio.

In addition, we intend to continue to apply rigorous financial discipline in our decision making, improve business processes and policies, continue strategic sourcing activities and consistently evolve supply chain practices to help accelerate our path towards profitability.

We develop advanced LED retrofit technologies and UVCD product solutions that enable our customers to run their facilities with greater energy efficiency, productivity and employee wellness.

We aim to be an LED and HCL technology leader and help create a healthier and safer environment by providing high-quality, energy-efficient, “flicker-free”, long-lived tubular and other LED lamps and fixture products, and lighting controls to replace existing linear fluorescent, incandescent, HID lamps and fixtures, as well as offering innovative and impactful UVCD product solutions.

We believe these applications represent a significant portion of the LED lighting market and energy savings potential for our targeted commercial, industrial and MMM markets.

We believe that the UVCD market is a growing opportunity and that the focus on health and sanitation will remain even after the COVID-19 pandemic is brought under control.

LED lighting, and particularly LED retrofit of fluorescent and incandescent lights in existing buildings, represents a large and growing market.

We estimate the 2017 North American commercial and industrial linear fixtures market, including retrofit applications, to be approximately $16.0 billion.

A 2018 report by Navigant Research entitled, “Tubular LEDs,” forecasts that TLEDs, the segment most important to Energy Focus, will grow at a 7.6% compound annual growth rate from 2018 to 2027.

LEDs are still in the very early phases of adoption in our target markets.

IBIS Industry Reports projects that, by 2020, healthcare, education, commercial and industrial markets will still only be 17% to 18% penetrated, leaving a large opportunity for future growth for us.

A 2020 report issued by the U.S.

Department of Energy, Office of Energy Efficiency and Renewable Energy (“DOE”), entitled “Adoption of Light-Emitting Diodes in Common Lighting Applications” reports that from 2016 to 2018, installations of LED products have increased in all applications, increasing LED penetration to 30% of all general illumination lighting.

In 2019, Navigant Research published a report that concluded that LED lighting had at least matched conventional lighting technologies on a range of features, including energy efficiency, lifetime, versatility and color quality, while becoming increasingly cost competitive.

This same 2019 report forecasts that installed penetration of LED lamps and luminaires will increase dramatically through 2035, reaching about 84%.

The increasing demand for LED lighting is being driven by energy and cost savings, environmental considerations and human health.

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Flicker, which is the modulation of the intensity of LED light at the frequency of the power supply, is well known to cause headaches, eye strain, fatigue, mood triggers and other health issues as well as interfering with electronic equipment such as barcode scanners.

The Department of Energy (“DOE”), which has been a leading advocate of the solid-state lighting (“SSL”) revolution, presented a report at LightFair in May 2018, supporting these and other findings.

The DOE, which has been a leading advocate of the solid-state lighting (“SSL”) revolution, presented a report at LightFair in May 2018, supporting these and other findings.

For these reasons, there is growing demand for flicker-free LED lighting, particularly in healthcare and education where concentration, learning and wellness are imperative.

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Smart, or connected, lighting is disrupting the LED industry and providing new opportunities for growth.

The DOE defines connected lighting as an LED lighting system with integrated sensors and controllers that are networked, enabling lighting products within the system to communicate with each other and transmit data.

The DOE defines connected lighting as an LED-based lighting system with integrated sensors and controllers that are networked (either wired or wireless), enabling lighting products within the system to communicate with each other and transmit data.

In addition to enabling the intensity and correlated color temperature (“CCT”) of lights to respond to ambient light, time of day and the activities of building occupants, connectivity enables building automation functions that extend well beyond lighting.

The interference of blue light with human circadian rhythms is well known.

This can be alleviated by smart lighting techniques that change the CCT of the LEDs depending on the time of day in order to emulate natural light.

Examples include asset tracking, indoor wayfinding, location-based services, air quality, humidity, smoke, fire and carbon monoxide detection, security and surveillance, and Internet-of-Things (IoT).

Since lighting sockets are ubiquitous and have access to power, tubes, controls and fixtures are ideal vehicles to retrofit these capabilities into existing buildings.

According to Market and Research, the global smart lighting market is estimated to grow from $13.4 billion in 2020 and to $30.6 billion by 2025, at a CAGR of 18.0%.

From the customer feedback we have been receiving, there is a great and growing interest in implementing technologies that assist with color-shift and various IoT applications and we believe that the overall smart lighting market is still severely underdeveloped due to the cost and difficulty of installations of related technologies today in the marketplace, representing significant potential for solutions that could meet customer needs and that could also be affordable, easy to install and secure.

We believe our upcoming EnFocus™ lighting platform could effectively address the unmet needs for smart lighting, particularly for existing buildings that have limited economical options to implement lighting controls.

This can be alleviated by circadian lighting, or controlled lighting that is able to change the intensity or CCT of the LEDs depending on the time of day in order to emulate natural light.

Other examples of smart, or connected, lighting applications include asset tracking, indoor wayfinding, location-based services, air quality, humidity, smoke, fire and carbon monoxide detection, security and surveillance, and Internet-of-Things (“IoT”).

Since lighting sockets are ubiquitous throughout buildings and have access to power, tubes, and controls fixtures are ideal vehicles to retrofit these capabilities into existing buildings.

According to Market and Research, the global smart lighting market is estimated to grow from $13.4 billion in 2020 and to $30.6 billion by 2025, at a compound annual growth rate of 18%.

From the customer feedback we have been receiving, there is a great and growing interest in implementing technologies that assist with color-shift and various IoT applications and we believe that the overall smart lighting market is still largely underdeveloped due to the cost and complexity of installations of related technologies today in the marketplace, representing significant potential for solutions that could meet customer needs and that could also be affordable, easy to install and secure.

Much of this interest and demand has been muted during 2020 as a result of the COVID-19 pandemic, which we believe has primarily delayed, rather than having reduced, our opportunity in the smart lighting marketplace.

We believe our EnFocus™ lighting platform could effectively address the unmet needs for circadian and smart lighting, particularly for existing buildings that have limited economical options and/or IT expertise to implement otherwise complex lighting control systems.

Our patent-pending UVCD technologies and products aim to provide effective, reliable and affordable UVCD solutions for buildings, facilities and homes.

As part of our expanding HCL offering, we are harnessing the power of UV-C light for surface and air disinfection currently via three distinct commercial and consumer products, nUVo™, abUV™ and mUVe™.

These products are designed to achieve upwards of 99.9% disinfection of surface and airborne pathogens such as molds, bacteria and viruses, including influenza and coronaviruses.

While the LED lighting and smart lighting market is large, growing and underpenetrated, it has also been characterized in recent years by intensifying competition, market leadership changes and aggressive pricing tactics on commoditized products.

Our strategy to overcome these challenges is to develop customer-centric technologies and products, and to focus more on a direct sales force approach to ensure and enrich our effective and frequent communication with customers in order to better understand and serve their needs.

By understanding the voice of the customer and by incorporating rapidly evolving technologies surrounding LED and smart lighting, be it hardware, software or sensor-to-cloud technologies, we believe that we will continue to be able to develop solutions that better address the customer’s needs with unique and novel product offerings, such as EnFocus™, our upcoming dimmable and tunable lighting and control platform, that deliver substantial value to our customers and accelerate LED and smart lighting adoptions.

We design, develop, manufacture and market a wide variety of LED lighting technologies, products and solutions to serve our primary end user markets, including the following:

Our strategy to overcome these challenges is to, first and foremost, develop advanced, impactful and customer-centric technologies and products.

In addition, we focus on executing our multi-channel sales strategy and delivering active online educational campaigns combined with a strengthening and expanding sales representative network to ensure and enrich our effective and frequent communication with customers in order to better understand and serve their needs.

By understanding the voice of the customer and by incorporating rapidly evolving technologies surrounding LED and smart lighting, be it hardware, software, sensor or cloud technologies, we believe that we will continue to be able to develop solutions that better address the customer’s needs with unique and novel product offerings, such as EnFocus™, our dimmable and tunable lighting and control platform, that deliver substantial value to our customers and accelerate LED and smart lighting adoptions.

We design, develop, manufacture and market a wide variety of LED lighting technologies and UVCD products and solutions to serve our primary end user markets, including the following:

Commercial products to serve our targeted commercial markets:

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• RedCap ® emergency battery backup TLEDs;

EnFocus™ lighting platform;

• EnFocus™ lighting platform including dimming (“DM”) and color tuning (“DCT”);

• LED fixtures for fluorescent replacement or HID replacement in low-bay, high-bay and office applications;

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• LED retrofit kits;

• During 2021 we plan to start selling and delivering the following UVCD products:

◦ nUVo TM portable air disinfection tower for small offices and homes;

◦ abUV TM integrated LED lighting and UV-C air disinfection troffer powered by the EnFocus TM lighting control platform;

◦ mUVe TM autonomous surface and floor disinfection robot.

MMM LED lighting products to serve the U.S.

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• Military fixtures;

• UVCD related products;

• EnFocus™ lighting platform.

Our LED products are more energy-efficient than traditional lighting products, such as fluorescent, incandescent and HID lamps, and we believe they can improve the overall sustainability profile of our customers by providing financial, environmental and human benefits, including achieving significant long-term energy and maintenance cost savings, reducing carbon emission and enhancing the health of building occupants.

Our LED products are more energy-efficient than traditional lighting products, such as fluorescent, incandescent and HID lamps, and we believe they can improve the overall sustainability profile of our customers by providing financial, environmental and human health benefits, including achieving significant long-term energy and maintenance cost savings, reducing carbon emission, substantially reducing retrofit waste and enhancing the health and productivity of building occupants.

Leveraging and integrating a broad range of rapidly advancing technologies including LED lighting, UV-C disinfection, electronics, software, sensors, cloud and AI the Energy Focus UVCD solutions aim to provide impactful and affordable disinfection products for businesses and homes to effectively reduce infection risks for a broad range of pathogens, including, among others, influenza and coronaviruses amongst others.

In addition to being ozone-free, the products are designed to guard against the risks of direct human exposure to UV-C rays.

abUV TM and nUVo TM include enclosed, self-contained UV-C disinfection units that continuously inactivate viruses while reducing overall pathogen levels in the air.

mUVe TM incorporates advanced sensor, machine vision and autonomous technologies to avoid human exposure during disinfection operations.

The key features of our products are as follows:

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• Our products have extremely low flicker.

Optical flicker, or fluctuations in brightness over time, is largely invisible to the human eye, but has been proven to exert stress on the human brain, causing headaches and eye strain, which reduce occupant comfort and productivity.

The Institute of Electrical and Electronics Engineers (“IEEE”), one of the world's largest technical professional society promoting the development and application of electrotechnology and allied sciences for the benefit of humanity, recommends optical flicker of 5% or less.

Our 500D series TLED products were the first in the lighting industry to be certified by Underwriters Laboratories (“UL ® ”) as “low optical flicker, less than 1%”;

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• Most of our products qualify for federal and state tax and rebate incentives for commercial consumers available in certain states;

• Our UVCD surface and air disinfection product line is designed to inactivate more than 99.9% of airborne pathogens.

Our product development capabilities, which we believe provide a strategic competitive advantage, include the following:

• A long research, engineering, and market developmental history, with broad and intimate understanding of lighting technologies and LED lighting applications;

Strong and growing team of experienced engineers in electrical, electronics, optical, thermal, mechanical, communications and software technologies;

Concentration on developing and providing high-quality, price competitive TLED lamps and the surrounding technologies to replace fluorescent and HID lamps for commercial markets;

Providing high quality and high performing LED and TLED products with a proven history of reliability;

• Strong and growing team of experienced and cross-disciplinary engineers that forms the foundation of our engineering innovation and competency not only in lighting but also in electrical, electronics, optical, thermal, mechanical, communications, air flow and software technologies;

• Concentration on developing and providing high-quality, price competitive TLED lamps and the surrounding technologies to replace fluorescent and HID lamps and fixtures for commercial markets;

• Providing high quality and high performing LED lighting products with a proven history of reliability;

• Emphasis on proprietary and patent-pending technologies surrounding LED lighting and UVCD products;

• A deep understanding of the adoption dynamics and decision-making process for LED lighting products in existing MMM, government and commercial building markets.

As we seek to develop new connected lighting LED solutions, we have invested and expect to continue to expand our investments in smart, connected lighting research and development activities and partnerships.

Lighting controls, including dimming, sensor and daylighting technologies, can yield significant energy savings.

We believe that the controllability of LED technology and our ability and plan to integrate more occupancy sensing, data processing and network interface hardware and software into our existing products will allow us to further differentiate our LED solutions and provide greater non-energy benefits (“NEBs”) to our customers.

As we seek to develop new connected lighting LED solutions, we have invested and expect to continue to expand our investments in smart, connected and HCL research and development activities and partnerships.

Lighting controls, including dimming, sensor and daylighting technologies, can yield significant energy savings and human health benefits.

Sales and Marketing

Due to our belief that technologies and performance associated with LED lighting are not well understood due to the nature of LED’s rapid evolution, we are mainly focusing on a direct sales model that aims to better educate end-users and contracting

partners regarding the benefits and unique value propositions of our products.

Due to our belief that our innovative technologies and high-quality performance associated with LED lighting are not well understood nor easy to communicate due to the nature of rapid technological evolution, we have been focusing on better educating our channel partners as well as end-users regarding the benefits and unique value propositions of our technologies and products.

Our primary target customers are enterprise end-users, as well as contractors or energy service companies that could incorporate our products into their projects.

In a more limited way, we also sell through lighting agencies that represent our products in territories in which we do not have a direct sales presence.

As of December 31, 2019, we have seven in-house sales personnel and eighteen sales agencies, each of which has, on average, approximately ten agents representing Energy Focus products.

We aim to continue to expand our in-house sales team, which now covers regions in the Midwest, Northeast, South and West, to eventually cover all geographic regions across the United States.

We focus on industry verticals where the economic and NEBs, as well as technical specifications of our high-quality lighting product offerings are most compelling.

Our LED lighting products fall into two broad market categories, commercial markets, which tend to focus on quality, efficacy, total cost of ownership and return on investment, and MMM which require higher, more rigorous military specifications for durability and dependability.

We also sell through lighting agencies that represent our products as a complement to our direct sales effort.

As of December 31, 2020, we have five in-house commercial sales personnel and seventeen sales agencies, each of which has, on average, approximately four agents representing Energy Focus products.

We aim to continue to expand our in-house sales team, which now covers regions in the Midwest, Northeast, South, Southeast and Southwest, to eventually cover all geographic regions across the United States.

Our MMM sales strategy leverages our brand and past performance and focuses on education about our products as well as ease of procurement.

We focus on industry verticals where the economic and non-economic benefits such as health and safety, as well as technical specifications, of our high-quality lighting product offerings are most compelling.

Our LED and UVCD lighting products fall into two broad market categories, commercial markets, which tend to focus on quality, efficacy, total cost of ownership and return on investment, and MMM which require higher, more rigorous military specifications for durability and dependability.

We also plan to enter consumer markets during fiscal year 2021, selling directly via e-commerce with digital marketing strategies that profile our UVCD technologies and products that aim to deliver effective and impactful disinfection for homes and small businesses.

We expect that our multi-channel sales strategy will continue to evolve and expand in the future.

With the introduction of our military Intellitube ® product in 2011, which replaced two-foot fluorescent lamps on U.S.

Navy ships, military sales had represented the majority of our overall sales.

Since 2016 when the competitive landscape changed due to the entrance of new competitors into the MMM, a drastic decline in pricing and limited remaining opportunities, the military sector, while still important, has made up a smaller percentage of our total sales.

However, since our management change in April 2019, we have been focusing on improving the design of our MMM products to significantly reduce product cost, and we believe that these efforts will enhance our competitiveness in the MMM allowing us to carefully grow this portion of our business.

Since our management change in April 2019, we have been focusing on improving the design of our MMM products to significantly reduce product costs while maintaining the required performance.

Such efforts allowed us to win bids and proposals that helped grow our MMM sales during 2020, offsetting some of the weakness being experienced in our commercial business due to the impact of the COVID-19 pandemic.

While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential and size, the MMM business does offer us continued sales, in addition to validating our product quality and strengthening our brand trust in the marketplace.

We launched our first commercial LED lighting products in 2010.

Since then, we have been aggressively building and expanding our commercial and industrial market presence where the economic and non-energy benefits, and technical specifications of our high-quality lighting product offerings are compelling, particularly for mission-critical facilities in the enterprise verticals such as healthcare, education and industrial.

Since then, we have been building and expanding our commercial and industrial market presence where the economic and non-energy benefits, and technical specifications of our high-quality lighting product offerings are compelling, particularly for mission-critical facilities in the enterprise verticals such as healthcare, education and the commercial and industrial space.

• Given the 24/7 lighting requirements of hospital systems, we believe that our LED solutions offer the proven quality, performance, long lifetime, return on investment and low flicker lightning that is particularly attractive to this target market.

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• As we advocate for the benefits of low-flicker LED lighting in schools, both in terms of energy-efficiency and in creating a healthy and effective learning environment, we continue to receive orders to retrofit school districts, colleges and universities.

Our LED lighting products are now installed in over 100 school districts across the country and increasing number of colleges and universities.

Our LED lighting products are now installed in over 100 school districts across the country and in an increasing number of colleges and universities.

• Low and high bay applications are generally used in commercial and industrial markets to provide light to large open areas like big-box retail stores, warehouses and manufacturing facilities.

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In the industrial market in particular, due to the usage of metal halide lighting, the energy and maintenance savings that can be achieved by switching to our LED products could be substantial, and we believe we have attractive product offerings in this space.

In addition to our direct and indirect sales force, we have also started launching more outbound telephonic and email campaigns that will help us contact a much larger number of potential new customers.

In addition, we believe that our renewed and continuing focus on technology innovation and product engineering designs to lower product costs will continue to enhance the overall competitiveness of our LED lighting products and provide us with the strategic flexibility to expand our distribution channels.

In addition to our direct and indirect sales force, we have also launched our own e-commerce website that targets both commercial customers and retail consumers, while also offering financing options for customers.

In addition, we believe that our renewed and continuing focus on multi-disciplinary technology innovation and engineering designs to both expand product features and benefits, while lowering product costs of ownership, will continue to enhance the overall competitiveness of our LED lighting and UVCD products and provide us with the strategic advantage and flexibility to expand our distribution channels.

Concentration of Sales

In 2020, two customers accounted for 62% of net sales, with sales to our primary distributor for the U.S.

Navy accounting for approximately 49% of net sales, and sales to a regional commercial lighting retrofit company accounting for approximately 12% of net sales.

When sales to our primary distributor for the U.S.

Navy are combined with sales to shipbuilders for the U.S.

Navy, total net sales of products for the U.S.

Navy comprised approximately 53% of net sales for the same period.

In 2019, two customers accounted for 45% of net sales and total sales to distributors to the U.S.

Navy represented 23% of net sales.

In 2018, one customer, a distributor to the U.S.

Navy, accounted for 42% of net sales.

In 2017, two commercial customers, a major northeastern Ohio hospital system and a large regional retrofit company located in Texas, accounted for 18% and 13% of net sales, respectively, while sales to a distributor to the U.S.

Navy accounted for 17% of net sales.

Total sales to distributors to the U.S.

Navy represented 22% of net sales in 2017.

Our LED lighting products compete against a variety of lighting products, including conventional light sources such as compact fluorescent lamps and HID lamps, as well as other TLEDs and full fixture lighting products.

Our ability to compete depends substantially upon the superior performance and lower total cost of ownership of our products.

Principal competitors in our markets include large lamp manufacturers and lighting fixture companies based in the United States, as well as TLED manufacturers mostly based in Asia, whose financial resources may substantially exceed ours and whose cost structure may be well below ours.

Our ability to compete depends

substantially upon the superior performance, incremental benefits and lower total cost of ownership of our products.

These competitors may introduce new or improved products that may reduce or eliminate some of the competitive advantage of our products and may have substantially lower pricing.

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Some of these competitors offer products with performance characteristics similar to those of our products.

For our UVCD products, we expect abUV TM to compete with both lighting companies that might expand into the UVCD market with integrated UV and lighting fixtures, such as Philips and Healthe, as well as HVAC air duct disinfection equipment providers, such as Honeywell, REKO Lighting and OdorStop.

For nUVo TM , we expect to compete largely with air purifier brands in the market today, such as Dyson, Molekule and RxAir.

We expect mUVe TM to compete with disinfection equipment and robot companies that use either UV or conventional chemical sprays, such as Xenex, UVD Robots and SmartGuardUV.

We believe that our proprietary and patent-pending product designs in our UVCD products will enable our products to be more powerful and effective in inactivating virus in a more timely and energy efficient manner.

Manufacturing and Suppliers

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Our quality assurance program provides for testing of all sub-assemblies at key stages in the assembly process, as well as testing of finished products produced both internally and sourced through third parties.

Additionally, we are 9001-2015 ISO certified.

Manufacturing costs are managed through the balance of internal production and an outsourced production model for certain parts and components, as well as finished goods in specific product lines, to a small number of vendors in various locations throughout the world, primarily in the United States, Malaysia, Taiwan, and China.

In some cases, we rely upon a single supplier to source certain components, sub-assemblies, or finished goods.

We continually attempt to improve our global supply chain practices to satisfy client demands in terms of quality and volumes, while controlling our costs and achieving targeted gross margins, and this includes the evaluation of additional outsourcing of internal production where cost, quality and performance can be maintained or improved.

We continually attempt to improve our global supply chain practices to satisfy client demands in terms of quality and volumes, while controlling our costs and achieving targeted gross margins, and this includes the evaluation of additional outsourcing or further insourcing of internal production where cost, quality and performance can be maintained or improved.

One offshore supplier and one domestic supplier accounted for approximately 21% and 12%, respectively, of our total expenditures for the twelve months ended December 31, 2020.

At December 31, 2020, this same offshore supplier accounted for approximately 44% of our trade accounts payable balance.

For the twelve months ended December 31, 2019, one offshore supplier accounted for approximately 21% of our total expenditures.

This same offshore supplier accounted for approximately 54% of our trade accounts payable balance at December 31, 2019.

Product Development

Product development has been a key area of operating focus and competitive differentiation for us in designing and developing industry leading LED lighting products.

Gross product development expenses for the years ended December 31, 2019 , 2018 and 2017 were $1.3 million , $2.6 million and $2.9 million , respectively.

We believe that our now customer centric product development efforts represent a better leverage on our R&D investments and aim to continue to focus on developmental projects that could produce more timely and impactful products and solutions for faster customer adoptions.

Product development has been a key area of operating focus and competitive differentiation for us in designing and developing industry leading LED lighting and UVCD products.

Gross product development expenses for the years ended December 31, 2020 and 2019 were $1.4 million and $1.3 million, respectively.

We believe that our customer-centric product development efforts represent a better leverage on our R&D investments and aim to continue to focus on developmental projects that could produce more impactful and differentiated products and solutions in a more timely manner for faster customer adoption.

Intellectual Property

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Our issued patents expire at various times through April 2037.

Generally, the term of patent protection is twenty years from the earliest effective filing date of the patent application.

Generally, the term of patent

protection is twenty years from the earliest effective filing date of the patent application.

There can be no assurance;

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In addition, we maintain general liability and workers’ compensation insurance in amounts we believe to be consistent with our risk of loss and industry practice.

At December 31, 2019 , we had 42 full-time employees, all of whom were located in the United States.

We also had four temporary contract employees at December 31, 2019.

None of our employees or contract employees are subject to collective bargaining agreements.

Regulatory Compliance

We derive a significant portion of our revenues from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies.

Contracts with government customers are subject to various procurement laws and regulations, business prerequisites to qualify for such contracts, accounting procedures, intellectual property processes, and contract provisions relating to their formation, administration and performance, which may provide for various rights and remedies in favor of the governments that are not typically applicable to or found in commercial contracts.

In addition, although not legally required to do so, we strive to obtain certification for substantially all our products.

In the United States, we seek certification on substantially all of our products from UL®, Intertek Testing Services (“ETL®”), or DesignLights Consortium (“DLC™”).

Where appropriate in jurisdictions outside the United States, we seek to obtain other similar national or regional certifications for our products.

Although we believe that our broad knowledge and experience with electrical codes and safety standards have facilitated certification approvals, we cannot ensure that we will be able to obtain any such certifications for our new products or that, if certification standards are amended, we will be able to maintain such certifications for our existing products.

Human Capital

At December 31, 2020, we had 57 full-time employees and two part-time employees, all of whom were based in the United States.

We also had twelve temporary contract employees at December 31, 2020.

None of our employees or contract employees are subject to collective bargaining agreements and we consider our relationship with our employees to be good.

We encourage and support the growth and development of our employees.

Continual learning and career development is advanced through ongoing performance and development conversations with employees and reimbursement is available to employees for seminars, conferences, formal education, and other training events employees attend in connection with their job duties.

Our core values of accountability, trust, extraordinariness, fun, openness, integrity and kindness underscore everything we do and drive our day-to-day interactions.

The safety, health and wellness of our employees is a top priority.

The COVID-19 pandemic has presented a unique challenge with regard to maintaining employee safety while continuing successful operations.

Through teamwork and the adaptability of our management and staff, we were able to transition, over a short period of time, a majority of our corporate office employees to effectively working from remote locations on a full-time basis, with others working both remotely and in the office on a hybrid basis, and also to ensure a safely-distanced working environment for employees who remain in our facility.

Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our current and future employees.

The principal purposes of our annual bonus plan and equity incentive plan are to attract, retain and motivate employees through the granting of long-term incentive compensation awards.

Business Segments

We currently operate in a single business segment that includes the marketing and sale of commercial and MMM lighting products and controls.

Please refer to Note 13, “Product and Geographic Information,” included in Item 8 of this Annual Report, for additional information.

Please refer to Note 13, “Product and Geographic Information,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report, for additional information.

Available Information

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The information on our website is not a part of, nor is it incorporated by reference into this Annual Report.

Through our website, we make available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish them to, the Securities and Exchange Commission, or the SEC.

Through our website, we make available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on

Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish them to, the Securities and Exchange Commission, or the SEC.

The SEC maintains a website that contains these reports at www.sec.gov .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business