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Item 7. Management’s Discussion and Analysis

2021-03-25 compared with 2020-03-24 · 196 added, 203 removed, 193 unchanged (67% of the section changed)

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 our Consolidated Financial Statements (“financial statements”) and related notes thereto, included in Item 8 of this Annual Report.

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.

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

We develop, market and sell high quality LED lighting products and UVCD products and controls in the commercial market and 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 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 lighting and other types of lamps and fixtures in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military TLED, as well as other LED and lighting control and UVCD products.

On October 14, 2020, we announced the launch of our UVCD product portfolio.

The LED lighting industry has changed dramatically over the past several years due to increasing commoditization, competition and price erosion.

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These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business.

In addition to continuous, scheduled cost reductions, our strategy to combat these trends it to move up the value chain, with more innovative and differentiated products and solutions that offer greater, distinct value to our customers.

Two specific examples of these products we have recently developed include the RedCap™, our emergency backup battery integrated TLED, and EnFocus™, our new dimmable/tunable lighting and control platform that we are launching in 2020.

We do believe our revamped go-to-market strategy that focuses more on direct-sales and listens to the voice of the customer has led to better and more impactful product development efforts and will eventually translate into larger addressable market and greater sales growth for us.

The restructuring initiative implemented in the first quarter of 2017 included a new management team, an organizational consolidation of management functions and a hybrid sales model, combining our existing historical direct sales model with sales agencies to expand our market presence throughout the United States.

We closed our New York, New York, Arlington, Virginia and Rochester, Minnesota offices, reduced full-time equivalent headcount by 51% and significantly decreased operating expenses from 2016 levels (a net reduction of $8.4 million, which includes $1.8 million in offsetting restructuring and impairment charges).

As of December 31, 2017, we expanded our sales coverage to the entire United States through six geographic regions and at the time had 50 sales agencies, each of which had, on average, 10 agents representing Energy Focus products.

During 2017, we also implemented a strategic sales initiative to sell certain excess inventory that had previously been written-down, as required by U.S.

This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017.

In 2018, we made significant strides in expanding and diversifying our new product portfolio.

We introduced six new product families, including our commercial fixture family, our double-ended ballast bypass T8 and T5 high-output TLEDs, our Navy retrofit kit, the Invisitube ultra-low EMI TLED and our dimmable industrial downlight.

Our new products, including the RedCap™ emergency battery backup tube, introduced in the fourth quarter of 2017, have gained traction, with sales of new products introduced in the past two years growing from less than 1% of total revenue in the fourth quarter of 2017 to 17% in the fourth quarter of 2018, the highest new product revenue in the last two years.

Our legacy luminaire product line, including our floods, waterline security lights, globes and berth lights, grew by over 90% from 2017 to 2018 and we saw some return of our military Intellitube ® sales as we achieved more competitive pricing through our cost reductions.

In addition to continuously pursuing scheduled cost reductions, our strategy to combat these trends it to move up the value chain, with more innovative and differentiated products and solutions that offer greater, distinct value to our customers.

Two specific examples of these products we have developed include the RedCap ® , our emergency backup battery integrated TLED, and EnFocus™, our new dimmable/color-tunable lighting and control platform that we launched in 2020.

We believe our revamped go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network that covers territories across the country, and listens to the voice of the customer, has led to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.

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.

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.

We believe Energy Focus UVCD solutions are capable of providing affordable continuous disinfection with optimal effectiveness and safety.

We believe that the UVCD products will open up a new, emerging and sizable market for us and expand our sales and growth potential.

Since April 2019, we have experienced significant change at the Company.

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Tu returning to the Company, significant additional restructuring efforts were undertaken.

board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July 2019.

The Company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July 2019, and James R.

Warren as Senior Vice President, General Counsel and Corporate Secretary in September 2020, in addition to recruiting new departmental leaders across the Company.

The cost savings efforts undertaken included the Company implementing phased actions to reduce costs to minimize cash usage.

Our initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing.

In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the three months ended March 31, 2019 and $0.1 million during the second quarter of 2019.

certain elements of supply chain and marketing.

In connection with these actions, we recorded severance and related benefits charges of $0.2 million during the first half of 2019.

These additional restructuring charges primarily related to severance and related benefits charges as a result of eliminating three positions during the first quarter of 2019 and nine positions during the second quarter of 2019, as well as costs associated with closing our offices in San Jose, California and Taipei, Taiwan in the second quarter of 2019.

With quarterly sales for the Company leveling off at its low point in the third quarter of 2019 at $2.9 million, we began to see the impact for our relaunch efforts and restructuring of our sales organization in the fourth quarter achieving sales of $3.5 million, or a quarter-over-quarter growth rate of 21.1%.

With quarterly sales for the Company leveling off at its low point in the third quarter of 2019 at $2.9 million, we began to see the impact of our relaunch efforts and restructuring of our sales organization in the fourth quarter of 2019 achieving sales of $3.5 million, or a sequential quarter-over-quarter growth rate of 21.1%.

In addition, losses were mitigated through the better cost management and a sharp focus on better managing pricing and inventory decisions for the last half of 2019.

Despite progress in these areas in the last three quarters of 2019, the Company’s results reflect continued challenges due to long and unpredictable sales cycles, unexpected delays in customer retrofit budgets and project starts, continuing aggressive price competition, the challenge of reducing losses in the near term, and an intensely competitive industry going through constant change.

The substantial doubt about our ability to continue as a going concern continued to exist as of December 31, 2019.

During the beginning of 2020 we continued to see continued benefits from the relaunch efforts undertaken in the last three quarters of 2019.

It is our belief that the continued momentum of the efforts undertaken in 2019, along with the launch of new and innovative products will continue to result in improved sales and bottom-line performance for the Company, barring significant economic and business impacts from the corona-virus outbreak.

Meanwhile, the Company continues to seek additional external funding alternatives and sources and has not yet achieved but continues to strive to achieve profitability.

We plan to achieve profitability through growing our sales by continuing to execute on our direct sales strategy, complemented by our marketing outreach campaigns, channel partnerships, and new sales from an e-commerce platform, which we plan to launch in the first half of 2020, as well as continuing to apply rigorous and economical discipline in our organization, business processes and policies, supply chain and organizational structure.

We are monitoring the potential impact of the corona-virus outbreak.

This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus.

The significance of the impact on us is yet uncertain;

however, a material adverse effect on our customers, suppliers, or logistics providers could significantly impact our operating results.

We also plan to continue to actively follow, assess and analyze the development of the corona-virus outbreak spread and stand ready to adjust our organizational structure, strategies, plans and processes to respond to the impacts from the virus spread in the timeliest manner.

During 2020, we continued to see the benefits from these relaunch efforts undertaken by the new management team, in addition to a number of strategic sourcing projects completed during 2020.

It is our belief that the continued momentum of the efforts undertaken in 2019 and into 2020, along with the development and launch of new and innovative products as well as an expanded sales team and distribution network, will over time result in improved sales and bottom-line performance for the Company.

We launched our EnFocus™ platform during the second quarter of 2020 and continued to receive positive feedback from existing, new, and potential new 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 laying additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and tubular LEDs, a far more affordable and environmentally sustainable solution compared with replacing entire lighting fixtures and incorporating additional wired or wireless communication.

In addition, 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 beginning in the first quarter of 2020.

We announced the following three UVCD products in October 2020:

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

nUVo™ portable disinfection device for offices and homes;

and mUVe™ autonomous robot designed for surface disinfection.

In our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned us to be more competitive in this segment.

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

In addition, during the fourth quarter of 2020, we became an approved supplier for the General Services Administration (“GSA”) and our products are now listed in the GSA website for all federal and military agencies to view and order our products.

While we continue to aggressively seek to increase sales of our commercial products, the MMM business offers us continued sales, in addition to validating our product quality and strengthening our brand trust in the marketplace.

Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives.

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.

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

Despite continuing progress throughout 2020 in reducing our operating losses significantly by 18.7% from December 31, 2019, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in customer retrofit budgets and project starts, and unexpected supply chain issues, all exacerbated by the COVID-19 pandemic since early 2020.

There has also been continuing aggressive price competition in the lighting industry.

We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at December 31, 2020.

The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on our company.

Following a slowdown in the second quarter of 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors 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.

The significance and duration of the ongoing impact on us is still uncertain.

Material adverse effects of the COVID-19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results.

We also plan to continue to actively follow, assess and analyze the ongoing impact of the COVID-19 pandemic and stand ready to adjust our organizational structure, strategies, plans and processes to respond.

Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial position that the COVID-19 pandemic may have.

Continuation of the COVID-19 pandemic and government actions in response thereto could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows.

We aim to stay agile as an organization to respond to potential or continuing weakness in the macro environment and in the meantime expand sales channels and enter new markets such as UVCD that might be able to provide additional growth opportunities.

Results of operations

The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the following periods:

Net sales 100.0 % 100.0 %

Cost of sales 69.2 84.5

Gross profit 30.8 15.5

Operating expenses:

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Selling, general, and administrative 46.9 58.6

Loss on impairment

Restructuring (0.4) 1.6

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Interest expense 2.9 2.5

Loss on extinguishment of debt 1.6 —

Loss from change in fair value of warrants 6.5 —

Other expenses, net 0.4 0.7

Net loss before income taxes (35.5) (57.9)

Provision for (benefit from) income taxes

Provision for income taxes — 0.1

Net loss (35.5) % (58.0) %

A further breakdown of our net sales by product line is as follows (in thousands):

Commercial products $ 5,404 $ 7,877

MMM products 11,424 4,828

Total net sales $ 16,828 $ 12,705

Our net sales of $12.7 million in 2019 decreased 29.8% compared to 2018 mainly driven by a decrease of 48.9% in MMM sales.

This is primarily due to two of our products pending evaluation by Defense Logistics Agency (“DLA”), during which time the US Navy is not allowed to purchase these two products and also due to federal government funding restrictions.

Net sales of our commercial products decreased 9.1% in 2019 as compared to 2018, reflecting fluctuations in the timing, pace, and size of commercial projects.

Net sales of $18.1 million in 2018 decreased 8.8% in comparison to $19.8 million in 2017 .

MMM product sales increased by 104.0% in 2018 as compared to 2017, driven by higher sales of our military globe, flood light, fixture, and Intellitube® product lines.

Net sales of our commercial products decreased 43.1% in 2018 as compared to 2017, reflecting fluctuations in the timing, pace, and size of commercial projects, including the implications of the long sales cycle in our industry.

Our net sales of $16.8 million in 2020 increased 32.5% compared to 2019 mainly driven by an increase of 136.6% in MMM sales.

MMM sales were lower in 2019 primarily due to two of our products that were pending evaluation by the Defense Logistics Agency, during which time the US Navy was not allowed to purchase these two products and also due to federal

government funding restrictions.

In March 2020, we won a contract worth about $3.5 million and throughout 2020, our sales from our in-house sales and inside sales accounts grew significantly.

Net sales of our commercial products decreased 31.4% in 2020 as compared to 2019, reflecting fluctuations in the timing, pace, and size of commercial projects, including impacts of the COVID-19 pandemic.

International sales

We do not generate significant sales from customers outside the United States.

International net sales accounted for approximately 1% of net sales in 2019 , and approximately 2% of net sales in 2018 and 2017 .

International net sales accounted for approximately 1% of net sales in 2020 and 2019, respectively.

Changes in currency exchange rates did not have an impact on net sales in 2020 or 2019, as our sales, including international sales, are denominated in U.S.

Gross profit was $5.2 million in 2020, compared to $2.0 million in 2019.

The decline in gross profit was primarily driven by a decline in MMM sales, due to two of our products pending evaluation by DLA, during which time the U.S.

Navy was not allowed to purchase and also due to federal government funding restrictions.

Our 2019 gross profit as a percent of net sales of 15.5% decreased from our 2018 gross profit as a percent of net sales of 18.8% , particularly due to increases in purchase prices, customs duty and Chinese tariffs, which were partly offset by a benefit of cost of warranty and repair, whereby other cost of sales elements remained relatively flat as compared to 2018.

Gross profit was $3.4 million in 2018, compared to $5 million in 2017.

The decline in gross profit was principally driven by lower sales volumes year-over-year, reflecting fluctuations in the timing, pace and size of commercial projects.

Our 2018 gross profit as a percent of net sales of 18.8% decreased from our 2017 gross profit as a percent of net sales of 24.3% .

This decrease is attributable to higher unfavorable manufacturing variances and absorption in 2018 as compared to 2017, and the impact of selling large volumes of a low gross margin linear tube for military applications in the first quarter of 2018, prior to achieving cost reductions and improved margins on the product by the end of 2018.

Additionally, the gross profit percentage in 2017 benefited from the reduction in our excess inventory reserves, as we implemented a strategic initiative to sell certain excess inventory in 2017 that had been written down in prior years.

The increase in gross profit was primarily driven by an increase in MMM sales as noted above, as well as improved efficiency in our plant operations.

Our 2020 gross profit as a percent of net sales of 30.8% increased from our 2019 gross profit as a percent of net sales of 15.5%, primarily driven by product mix and margin impact from MMM sales.

Gross margin for 2020 included favorable price and usage variances for material and labor of $0.9 million or 5.5% of net sales and favorable inventory reserves recorded of $0.6 million, or 3.7% of net sales, offsetting unexpected additional manufacturing cost due to supply chain challenges relating primarily to our MMM products.

Operating expenses

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Total gross product development expenses $ 1,415 $ 1,284

Gross product development expenses were $1.3 million in 2019 , a decrease of 50.6% , compared to $2.6 million in 2018 .

The decrease primarily resulted from lower salaries and related benefits of $0.9 million , lower outside testing fees of $0.3 million , as well as lower travel costs of $0.1 million.

Gross product development expenses were $2.6 million in 2018, a decrease of $0.3 million or 11.7% compared to $2.9 million in 2017 .

The decrease primarily resulted from lower outside testing and legal fees of $0.4 million due to the timing of new product introductions.

This decrease was partially offset by higher salaries and related benefits of $0.1 million due to staffing .

Gross product development expenses were $1.4 million in 2020, an increase of 10.2%, compared to $1.3 million in 2019.

The increase primarily resulted from increased product development and testing costs of $0.2 million associated with the development and launch of EnFocus TM and the development of our UVCD products.

Selling, general, and administrative

Selling, general, and administrative expenses were $7.9 million, or 46.9%, of net sales in 2020, compared to $7.4 million, or 58.6%, of net sales in 2019.

Of the year-over-year $2.4 million decrease, approximately $1.4 million is attributable to our restructuring initiative, resulting in reduced salaries, including stock-based compensation and related benefits, $0.3 million to decrease in severance and benefits, $0.2 million decrease each to commissions and depreciation expense, $0.1 million decrease each to accounting fees, network costs and trade show costs.

Savings were offset by increased consultant costs of $0.3 million.

Selling, general, and administrative expenses in 2018 decreased by $1.5 million , or 13.5% , from $11.3 million in 2017 .

Of the decrease, approximately $0.9 million is a result of lower salaries, including stock-based compensation and related benefits, decreases of $0.2 million in each of the following categories:

consulting fees, trade show and marketing expenses, and travel and related expenses, and decreases of $0.1 million each in rent expense and depreciation expense, as we continued our cost control initiatives.

The lower expenses were partially offset by increased severance and benefits of $0.2 million, as a result of the resignation of Jerry Turin, our prior Chief Financial Officer.

Loss on impairment

As a result of the decline in the level of expected future sales of our MMM products and reductions in the cost of procuring components from our suppliers, during 2016 we re-evaluated the economics of manufacturing versus purchasing such components and determined that we would no longer use the equipment and software purchased to conduct this manufacturing.

As of December 31, 2016, we evaluated the carrying value of the equipment and software compared to its fair value and determined that the equipment and software were impaired, recording an impairment loss of $0.9 million to adjust the carrying value of the equipment and software to its estimated net realizable value.

Due to the specialized nature of this equipment we were not able to find a buyer for this equipment in 2017.

As a result, we re-evaluated the carrying value of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million as of December 31, 2017.

We completed the sale of this equipment in the first quarter of 2018.

Please refer to Note 6, “Property and Equipment,” included in Item 8 of this Annual Report for further information.

Of the year-over-year $0.5 million increase, approximately $0.5 million is attributable to increased headcount and salaries, including stock-based compensation and related benefits, $0.2 million to an increase in legal and professional fees, and a $0.1 million increase in recruiting and relocation fees.

These increases were offset by savings of $0.2 million in sales commissions, $0.1 million in travel and related expenses as a result of COVID-19 stay-at-home orders and $0.1 million in reduced depreciation expense.

Restructuring

In the first quarter of 2017, we announced a restructuring initiative including closing our offices in Rochester, Minnesota, New York, New York, and Arlington, Virginia and impacted 20 employees, primarily located in these offices.

During the second quarter of 2017 , we fully exited the New York and Arlington facilities and eliminated an additional 17 production and administrative positions in our Solon location.

During 2017, we recorded restructuring charges totaling approximately $1.7 million consisting of approximately $0.8 million in severance and related benefits, approximately $0.7 million in facilities costs related to the termination of the Rochester lease obligations and the remaining lease obligations for the former New York and Arlington offices, and $0.2 million in other restructuring costs primarily related to fixed asset and prepaid expenses write-offs.

During 2018, we recorded restructuring charges totaling approximately $0.2 million , related to the revision of our initial estimates of the costs and offsetting sublease income and accretion expense for the remaining lease obligation for our former New York, New York and Arlington, Virginia offices.

During 2019, we recorded restructuring charges totaling approximately $0.2 million for the accretion expense for the remaining lease obligation for our former New York, New York and Arlington, Virginia offices.

During 2019 and 2020, we recorded restructuring charges of approximately $0.2 million and credits of approximately $0.1 million, respectively, related to the cost and offsetting sub-lease income for the remaining lease obligation for our former New York, New York and Arlington, Virginia offices.

The lease on our Arlington, Virginia office ended September 30, 2019.

As of December 31, 2019, we estimated that we would receive a total of approximately $0.4 million in sublease payments to offset our remaining lease obligations of $0.5 million, which extend until June 2021.

During 2020, we recorded no restructuring-related severance and related benefits charges.

During the first half of 2019, we recorded severance and related benefits charges of $0.2 million with no material restructuring charges recorded during the second half of 2019.

As of December 31, 2020, we estimate that we will receive a total of approximately $0.1 million in sublease payments to offset our remaining lease obligations of $0.2 million, which extend until June 2021.

We expect to incur insignificant additional costs over the remaining life of our lease obligations.

Please refer to Note 3, “Restructuring,” included in Item 8 of this Annual Report for further information.

Please refer to Note 3, “Restructuring,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.

Other expenses

Interest expense

We incurred $317 thousand in interest expense in 2019, primarily related to interest on borrowings and non-cash amortization of fees related to the revolving credit facility we entered into during December 2018 and under the Iliad Note Purchase Agreement we entered into during November 2019.

We incurred $8 thousand in interest expense in 2018, primarily related to borrowings under the revolving credit facility.

We incurred $2 thousand in interest expense in 2017 related to an insurance premium financing agreement.

We incurred $481 thousand in interest expense in 2020, primarily related to interest on borrowings and non-cash amortization of fees related to the Austin Facility, the promissory note in the principal amount of $1.3 million (the “Iliad Note”) the Company sold and issued to Iliad Research and Trading, L.P.

(“Iliad”), pursuant to a note purchase agreement (the “Iliad Note Purchase Agreement”) with Iliad, and the interest on borrowings and non-cash amortization of fees related to the Credit Facilities.

We incurred $317 thousand in interest expense in 2019, primarily related to interest on borrowings and non-cash amortization of fees related to the Austin Facility and under the Iliad Note.

Loss on extinguishment of debt

A loss of $276 thousand on the extinguishment of debt was recognized during the year ended December 31, 2020, consisting of a $100 thousand termination fee and the write-off of the remaining related debt acquisition costs of $59 thousand from the Austin Facility and the write-off of the remaining debt acquisition costs of $117 thousand relating to the Iliad Note.

Loss from change in fair value of warrants

A loss of $1.1 million was recognized during the year ended December 31, 2020 for the market value change in our warrant liabilities.

The loss recognized was a result of the revaluation of the warrant liability using the market price of the Company’s common stock at December 22, 2020, versus the market price of the Company’s common stock at the time of initial issuance of the warrants (January 13, 2020).

On December 22, 2020, all warrant holders agreed to a modification of the terms of their warrants that qualified the warrants for equity accounting.

At that time, the liability relating to the remaining 467,306 warrants was fair-valued with the offsetting adjustment recorded in income.

The $1.4 million warrant liability was then reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date.

Other expenses, net

We recognized other expenses, net of $91 thousand in 2019 , compared to other expenses, net of $7 thousand in 2018 and other expenses, net of $99 thousand in 2017 .

Other expenses, net in 2019 primarily consisted of $80 thousand of collateral management fees related to the revolving credit facility we entered into during December 2018 and a net loss on the sale and disposal of fixed assets of $24 thousand, partially offset by various refunds of $12 thousand.

Other expenses, net in 2018 primarily consisted of the non-cash amortization of fees related to the revolving credit facility of $9 thousand and a net loss on the sale and disposal of fixed assets of $2 thousand, partially offset by a net gain on foreign exchange of $4 thousand.

Other expenses in 2017 primarily consisted of losses on the disposal of fixed assets partially offset by interest income on our cash balances.

We recognized other expenses, net, of $73 thousand in 2020, compared to other expenses, net, of $91 thousand in 2019.

Other expenses, net, in 2020 primarily consisted of bank and collateral management fees.

Other expenses, net in 2019 primarily consisted of $80 thousand of collateral management fees related to the Austin Facility and a net loss on the sale and disposal of fixed assets of $24 thousand, partially offset by various refunds of $12 thousand.

For the years ended December 31, 2020 and 2019, our effective tax rate was 0.1% and (0.1)%, respectively.

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In 2019, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $8.3 million additional federal net operating loss we recognized for the year.

In 2017, our effective tax rate was lower than the statutory rate due to the remeasurement of our deferred tax assets resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”) and a decrease in the valuation allowance.

On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code.

Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, repeal of the corporate Alternative Minimum Tax, elimination of certain deductions, and changes to the carryforward period and utilization of Net Operating Losses generated after December 31, 2017.

We have calculated the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing.

As a result of the Act, we have recorded $0.1 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted.

This amount related to the release of the valuation allowance on our Alternative Minimum Tax Credit carry forward, which is expected to be fully refunded by 2021.

We remeasured our deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future.

The impact of the remeasurement was $5.9 million of additional tax expense, which was offset by a $5.9 million valuation allowance reduction resulting in no net impact to the financial statements.

Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation.

We may make adjustments to amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.

Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.

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Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies.

We have recorded a full valuation allowance against our deferred tax assets at December 31, 2019 and 2018, respectively.

We have recorded a full valuation allowance

against our deferred tax assets at December 31, 2020 and 2019, respectively.

We had no net deferred liabilities at December 31, 2020 or 2019.

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However, due to changes in our capital structure, approximately $61.5 million of the $115.9 million is available after the application of IRC Section 382 limitations.

As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely.

The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018 will be subject to the new limitations under the Act.

The $7.1 million and $8.3 million in federal net operating losses generated in 2020 and 2019 will be subject to the new limitations under the Tax Act.

If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes.

Please refer to Note 12, “Income Taxes,” included in Item 8 of this Annual Report for further information.

Despite a $5.4 million , or 29.8 percent , decline in net sales, our net loss from operations improved to $7.4 million in 2019 compared to $9.1 million in 2018 .

The improvement in our loss is primarily due to our continued cost control initiatives, resulting in an additional net decrease in operating expenses of $3.6 million , partially offset by the lower gross margins as discussed previously.

Net loss was $9.1 million in 2018, a decrease of $2.2 million compared to a net loss of $11.3 million in 2017 .

The improvement in our loss from operations in 2018 as compared to 2017 was directly attributable to our restructuring initiatives, which resulted in a $3.6 million year-over-year operating expense reduction, including $0.1 million in restructuring and asset impairment charges.

Lower net sales, changes in product mix and investments in corporate infrastructure, charges recorded for excess inventory and the asset impairment on certain manufacturing equipment contributed to the difference in operating results.

Please refer to Note 12, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.

Our net loss from operations improved to $6.0 million in 2020 compared to $7.4 million in 2019.

The improvement in our loss is primarily due to increased sales of $4.1 million, or 32.5% over 2019 and our continued cost control initiatives, resulting in an increase in gross margin of 162.7% over 2019.

These improvements were offset slightly by an increase in operating expenses of $0.3 million over 2019.

Liquidity and capital resources

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In order for us to operate our business profitably, we need to grow our sales, maintain cost control discipline while balancing development of our new products required for long-term competitiveness and revenue growth, continue our efforts to reduce product cost, and drive further operating efficiencies.

There is a risk that our strategy to return to profitability may not be as successful as we envision.

There is a risk that our strategy to return to profitability may not be successful.

We will likely require additional financing to achieve our strategic plan and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional funding, none of which may be available on favorable terms or at all and could require us to discontinue or curtail our operations.

Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external financing, obtain appropriate funding facilities, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive and sales reorganization, and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue as a going concern.

Credit Facility

On December 11, 2018, we entered into a $5.0 million revolving line of Credit Facility with Austin Financial Services (“Austin”) as described further below.

As of December 31, 2019 , our cash was approximately $0.4 million and our outstanding balance was approximately $0.7 million under the Credit Facility.

As of December 31, 2019 , our availability under the Credit Facility was $1.6 million.

Considering both quantitative and qualitative information, we continue to believe that the combination of our plan to continue to ensure appropriate levels of the availability of external financing, current financial position, liquid resources, obligations due or anticipated within the next year, executive and sales reorganization, and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2021 and will mitigate the substantial doubt about our ability to continue as a going concern.

Credit Facilities

On August 11, 2020, we entered into the Credit Facilities.

The new Credit Facilities consist of the Inventory Facility, a two-year inventory financing facility for up to $3.0 million, and the Receivables Facility, a two-year receivables financing facility for up to $2.5 million.

These facilities replaced our previous credit facility, the Austin Facility.

As of December 31, 2020, our cash was approximately $1.8 million and our total outstanding balance was approximately $2.3 million under the Credit Facilities.

As of December 31, 2020, our additional availability under the Credit Facilities was $1.7 million.

Convertible Notes

On March 29, 2019, we raised $1.7 million (before transaction expenses) from the issuance of $1.7 million in principal amount of subordinated convertible promissory notes to certain investors (the “Convertible Notes”).

On March 29, 2019, we issued $1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain investors in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended.

The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5% per annum until June 30, 2019 and at a rate of 10% thereafter.

Pursuant to their terms, on January 16, 2020, following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $1,815,041 converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-one basis into shares of our common stock.

On November 25, 2019, the Company entered into the Iliad Note Purchase Agreement with Iliad pursuant to which the Company sold and issued to Iliad the Iliad Note in the principal amount of $1.3 million.

The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad’s transaction expenses.

The Iliad Note has a maturity date of November 24, 2021 and accrues interest at 8% per annum, compounded daily, on the outstanding balance.

The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year and 10% during the second year.

Beginning in May 2020, Iliad may require the Company to redeem up to $150 thousand of the Iliad Note in any calendar month.

The Company has the right on three occasions to defer all redemptions that Iliad could otherwise require the Company to make during any calendar month.

Each exercise of this deferral right by the Company will increase the amount outstanding under the Note by 1.5%.

In the event our common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting.

Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:

10% of gross proceeds the Company receives from the sale of our common stock or other equity must be paid to Iliad and will be applied to reduce the outstanding balance of the Iliad Note (the failure to make such a prepayment is not an event of default under the Iliad Note, but will increase the amount then outstanding under the Note by 10%);

unless agreed to by Iliad, we will not engage in certain financings that involve the issuance of securities that include a conversion rights in which the number of shares of common stock that may be issued pursuant to such conversion right varies with the market price of our common stock (a “Restricted Issuance”);

provided, however, if Iliad does not agree to a Restricted Issuance, the Company may on up to three occasions make the Restricted Issuance anyway, but the outstanding balance of the Iliad Note will increase 3% on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.

Upon the occurrence of an event of default under the Iliad Note, Iliad may accelerate the date for the repayment of the amount outstanding under the Iliad Note and increase the amount outstanding by an amount ranging from 5% to 15%, depending on the nature of the default.

Certain insolvency and bankruptcy related events of default will result in the automatic acceleration of the amount outstanding under the Iliad Note and the outstanding amount due will be automatically increased by 5%.

After the occurrence of an event of default, Iliad may elect to have interest accrue on the Iliad Note at a rate per annum of 22%, or such lesser rate as permitted under applicable law.

Pursuant to their terms, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the Convertible Notes, and the accumulated interest thereon ($0.1 million), which totaled $1.8 million, were converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per

share (the “Series A Preferred Stock”), which is convertible on a one-for-five basis into shares of our common stock.

During 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock.

On November 25, 2019, we entered into the Iliad Note Purchase Agreement with Iliad pursuant to which the Company sold and issued to Iliad the Iliad Note in the principal amount of $1.3 million.

On December 1, 2020, we repaid the remaining outstanding balance of $30 thousand on the Iliad Note prior to its maturity date of November 24, 2021.

We wrote-off $117 thousand in remaining debt and original issue discount costs at that time.

The debt acquisition and original issue discount costs written-off are reflected as a loss on extinguishment of debt in our Consolidated Statements of Operations for the year ended December 31, 2020.

The Iliad Note accrued interest at 8% per annum, compounded daily, on the outstanding balance.

We were able to prepay the amounts outstanding under the Iliad Note at a premium, which was 15% during the first year and 10% during the second year.

Beginning in May 2020, Iliad could have required us to redeem up to $150 thousand of the Iliad Note in any calendar month.

We had the right on three occasions to defer all redemptions that Iliad could otherwise require us to make during any calendar month.

No such deferrals were exercised.

Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we had, among other things, agreed that, until the Iliad Note was repaid, 10% of gross proceeds the Company received from the sale of our common stock or other equity must be paid to Iliad and applied to reduce the outstanding balance of the Iliad Note.

January 2020 Equity Offering

In January of 2020, we retained H.C.

Wainwright & Co., LLC to act as our exclusive placement agent in connection with the offer and sale of 3,441,803 shares of our common stock to certain institutional investors, at a purchase price of $0.674 per share, in a registered direct offering.

We also sold to the same institutional investors unregistered warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant.

We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement, and we also paid clearing fees of $13 thousand .

In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $3.37 per share.

We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an exercise price of $3.37 per share in a concurrent private placement for a purchase price of $0.625 per warrant.

We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $231 thousand related to the offering.

Proceeds to us, before expenses, from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $2.8 million.

In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ( $275 thousand ) were used to make payments on the Iliad Note, a large portion of which was the outstanding principal amount.

In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, a large portion of which was applied to reduce the outstanding principal amount.

Need for Additional Financing

The proceeds from the Convertible Notes, the Note Purchase Agreement and the January 2020 Equity Offering will only continue to provide funding for the near-term and our ability to draw on the Credit Facility is limited based on the amount of qualified accounts receivable, plus a portion of the net realizable value of our eligible inventory.

Even with the Credit Facility, we may not generate sufficient cash flows from our operations or be able to borrow sufficient funds under the Credit Facility to sustain our operations and grow our business.

As such, we expect to need additional external financing during 2020 and will continue to review and pursue selected external funding sources including, but not limited to, the following:

Even with access to borrowings under the Credit Facilities, we may not generate sufficient cash flows from our operations or be able to borrow sufficient funds to sustain our operations.

As such, we will likely need additional external financing during 2021 and will continue to review and pursue external funding sources including, but not limited to, the following:

• obtaining financing from traditional or non-traditional investment capital organizations or individuals;

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• additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;

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 environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.

If we fail to obtain required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition.

A lack of additional financing could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtain our operations and, as a result, investors in the Company could lose their entire investment.

“Debt” and Note 16 “Subsequent Events” in Item 8 of this Annual Report for more information.

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

• the current environment in the capital markets, as well as global health risks, combined with our capital constraints may prevent us from being able to obtain adequate debt financing.

If we fail to obtain additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition.

A lack of additional financing could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.

Cash and debt

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Net cash used in operating activities $ (2,451) $ (6,624)

Net cash (used in) provided by investing activities

Net cash used in investing activities $ (223) $ (129)

Proceeds from the issuance of common stock and warrants $ 2,749 $ —

Proceeds from the exercise of warrants 918 —

Offering costs paid on the issuance of common stock and warrants (510) —

Proceeds from PPP loan 795 —

Principal payments under finance lease obligations (3) (3)

Proceeds from exercise of stock options and purchases through employee stock purchase plan 100 —

Common stock withheld in lieu of income tax withholding on vesting of restricted stock units (3) (110)

Loan origination fees

Principal payments under finance lease obligations

Payments for deferred financing costs & termination fees (320) (208)

Proceeds from the Iliad Note — 1,115

Payments on the Iliad Note (1,306) —

Proceeds from convertible notes — 1,700

Net (payments on) proceeds from credit line borrowings

Net proceeds from credit line borrowings - Credit Facilities 2,459 —

Net payments from credit line borrowings - Austin Facility (719) (1,400)

Net cash provided by financing activities $ 4,160 $ 1,094

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Net cash used in operating activities of $2.5 million in 2020 resulted primarily from the net loss incurred of $6.0 million, adjusted for non-cash items, including:

depreciation and amortization of $0.2 million and stock-based compensation, net of $0.1 million, change in fair value of warrant liabilities of $1.1 million and favorable provisions from inventory of $0.6 million.

We generated $1.1 million in cash for an increase in accounts payable due to the timing of inventory receipts and payments, $1.1 million from a net decrease in inventories primarily due to the timing of inventory receipts, $0.4 million through the timing of collection of accounts receivable and $0.3 million through an increase of other accrued liabilities, primarily related to accrued payroll and benefits and commissions.

We used $0.7 million for short-term deposits to our contract manufacturers for inventory for the new EnFocus™ platform.

Net cash used in operating activities of $6.6 million in 2019 resulted primarily from the net loss incurred of $7.4 million, adjusted for non-cash items, including:

depreciation and amortization of $0.3 million and stock-based compensation, net of $0.6 million.

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The cash used by these working capital changes was partially offset by cash generated by a net decrease in inventories of $1.9 million as we sold existing inventory and reduced inventory purchasing and prepaid expenses of $(0.1) million, as the inventory for which we paid deposits to our contract manufacturers in prior quarters was received in the first quarter of 2019.

Net cash used in operating activities of $6.8 million in 2018 resulted primarily from the net loss incurred of $9.1 million , adjusted for non-cash items, including:

depreciation and amortization of $0.5 million and stock-based compensation, net of $0.9 million .

Cash generated by a decrease in accounts receivable of $1.4 million and increases in accounts payable for inventory purchases and accrued expenses primarily for severance of $2.0 million and $0.2 million , respectively, further offset the cash impact of the net loss incurred.

The cash generated by these working capital changes was partially offset by cash used for increases in inventories of $2.4 million , as we purchased inventory for anticipated demand and new product introductions, and prepaid expenses of $0.5 million , primarily for deposit advances made for future inventory purchases.

Net cash used in operating activities in 2017 of $5.9 million resulted primarily from the net loss incurred of $11.3 million , adjusted for non-cash items, including:

depreciation and amortization of $0.7 million , stock-based compensation, net of $0.5 million , and fixed asset impairment and disposal losses of $0.4 million .

Cash generated by decreases in inventory and accounts receivable of $5.2 million and $2.2 million , respectively, further offset the cash impact of the net loss incurred.

The cash generated by these working capital changes was partially offset by cash used for decreases in trade accounts payable of $1.8 million , primarily related to the timing of inventory purchases and decreased accrued expenses of $0.6 million , primarily related to lower severance, sales commissions, product warranty, and payroll accruals.

Cash (used in) provided by investing activities

Net cash used by investing activities was $0.1 million in 2019 and resulted primarily from the addition of property and equipment tooling to support production operations.

Net cash provided by investing activities was $0.2 million in 2018 and resulted primarily from the proceeds we received from the sale of certain equipment previously classified as held for sale, partially offset by purchases of computer equipment, equipment to support production operations, and leasehold improvements.

Net cash used in investing activities was $0.1 million in 2017, and resulted primarily from the purchase of software and equipment to support our website and marketing efforts, partially offset by proceeds received from the sale of certain computer equipment and reimbursements from our landlord for certain leasehold improvements.

Cash used in investing activities

Net cash used by investing activities was $0.2 million in 2020 and $0.1 million in 2019, respectively, and resulted primarily from the addition of property and equipment tooling to support production operations.

Cash provided by financing activities

Net cash provided by financing activities for the year ended December 31, 2019 of $1.1 million primarily resulted from net proceeds from the Convertible Notes of $1.7 million and the Iliad note of $1.1 million offset by payments to the revolving credit facility of $1.4 million .

Net cash provided by financing activities for the year ended December 31, 2018 of $2.2 million primarily resulted from the proceeds we received on borrowings under our revolving credit facility.

Net cash provided by financing activities for the year ended December 31, 2017 of $0.1 million resulted from activity related to the Company’s equity award and employee stock purchase plans.

Net cash provided by financing activities for the year ended December 31, 2020 of $4.2 million primarily resulted from $2.7 million in proceeds received from the January 2020 Equity Offering, partially offset by $0.5 million in offering costs.

Investors in the January 2020 Equity Offering received warrants to purchase shares of our common stock, of which warrants to purchase an aggregate of 467,306 shares remain outstanding at December 31, 2020 with a weighted average exercise price of $3.51 per share.

During the year ended December 31, 2020, 269,240 warrants were exercised resulting in $0.9 million of proceeds.

The exercise of the warrants remaining outstanding at December 31, 2020, could provide us with cash proceeds of up to $1.6 million in the aggregate.

During the year ended December 31, 2020, we received $0.8 million in proceeds from the PPP loan, $1.4 million from borrowings under the Inventory Facility and $1.1 million from borrowings under the Receivables Facility, and paid $0.7 million, net, on the Austin Facility.

Also during the year ended December 31, 2020, we paid $0.2 million in deferred financing fees on the Credit Facilities.

On August 11, 2020, we paid the outstanding balance of $1.4 million to close out the Austin Facility, which included a $100 thousand termination fee.

During the year ended December 31, 2020, we repaid $1.3 million aggregate principal amount under the Iliad Note, which included a mandatory repayment pursuant to the terms of the Iliad Note in connection with the issuance of common stock in the January 2020 Equity Offering, of which $0.2 million was allocated against principal.

At December 31, 2020, we had additional availability for us to borrow of $1.0 million under the Inventory Facility and $0.6 million under the Receivables Facility.

Net cash provided by financing activities for the year ended December 31, 2019 of $1.1 million primarily resulted from net proceeds from the Convertible Notes of $1.7 million and the Iliad Note of $1.1 million offset by payments to the Austin Facility of $1.4 million.

Credit facilities

On December 11, 2018, we entered into a three-year $5.0 million Credit Facility with Austin.

The total loan amount available to us under the Credit Facility from time to time is based on the amount of our (i) qualified accounts receivable, which is equal to the lesser of 85% of our net eligible receivables, or $4.5 million , plus (ii) available inventory, which is the lesser of 20% of the net realizable value of eligible inventory, or $500 thousand .

The Credit Facility charges interest deeming a minimum borrowing requirement of $1.0 million.

As of December 31, 2019 , our availability under the Credit Facility was $1.6 million.

The Credit Facility is secured by a lien on our assets.

Interest on advances under the line is due monthly at the “Prime Rate,” as published by the Wall Street Journal from time to time, plus a margin of 2% .

The borrowing rate as of December 31, 2019 was 6.75%.

Overdrafts are subject to a 2% fee.

Additionally, an annual facility fee of 1% on the entire $5.0 million amount of the Credit Facility is due at the beginning of each of the three years and a 0.5% collateral management fee on the average outstanding loan balance is payable monthly.

We paid Austin the first year’s fee when the Credit Facility was signed and the second year’s fee in December of 2019.

The repayment of outstanding advances and interest under the Credit Facility may be accelerated upon an event of default including, but not limited to, failure to make timely payments or breach of any terms set forth in the Credit Facility.

The Credit Facility has no financial covenants but charges interest deeming a minimum cash balance of $1.0 million and is subject to customary affirmative and negative operating covenants and defaults, and restricting indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others.

The Credit Facility may be terminated by us or by Austin with 90 days written notice.

We have not provided such notice to Austin or received such notice from Austin.

There are liquidated damages if the Credit Facility is terminated prior to December 10, 2021, as follows:

3% in the first twelve-months, 2% in the second twelve-months, and 1% in the third twelve-months after closing.

Borrowings under the revolving line of credit were $0.7 million and $2.2 million at December 31, 2019 and 2018 , respectively, and are recorded in the Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Please refer to Note 9, “Debt,” included in Item 8 of this Annual Report for further information.

On August 11, 2020, we entered into the Credit Facilities, consisting of two debt financing arrangements.

These facilities replaced our previous credit facility, the Austin Facility, substantially increasing the Company’s borrowing capacity and reducing its blended interest expense rate.

Borrowings under the Inventory Facility were $1.3 million and borrowings under the Receivables Facility were $1.0 million at December 31, 2020.

These facilities are recorded in the Consolidated Balance Sheet as of December 31, 2020 as a current liability under the caption “Credit line borrowings, net or origination fees.” Outstanding balances include unamortized net issuance costs totaling $0.1 million for the Inventory Facility and $40 thousand for the Receivables Facility as of December 31, 2020.

The Credit Facilities replaced the Austin Facility which was entered into on December 11, 2018 and was secured by a lien on our assets.

The Austin Facility was a three year, $5.0 million revolving line of credit.

Borrowings under the Austin Facility were $0.7 million at December 31, 2019 with total availability of $1.6 million.

On August 11, 2020, we paid $1.4 million to close the Austin Facility which included a $100 thousand termination fee.

Additionally, we wrote off $59 thousand of the remaining related debt acquisition costs.

The termination fee and the write-off of debt acquisition costs are reflected as a loss on extinguishment of debt in our Consolidated Statements of Operations for the twelve months ended December 31, 2020.

For more information, see Note 9 “Debt” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

Off-balance sheet arrangements

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Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

A disaggregation of product net sales is presented in Note 13, “Product and Geographic Information.”

A disaggregation of product net sales is presented in Note 13, “Product and Geographic Information,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

Accounts Receivable

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Allowances for doubtful accounts, returns, and discounts

We establish allowances for doubtful accounts and returns for probable losses based on the customers’ loss history with us, the financial condition of the customer, the condition of the general economy and the industry as a whole, and the contractual terms established with the customer.

We establish allowances for doubtful accounts and returns for probable losses based on the customers’ loss history with us, the

financial condition of the customer, the condition of the general economy and the industry as a whole, and the contractual terms established with the customer.

The specific components are as follows:

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When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement of Operations.

Refer to Note 6, “Property and Equipment,” included in Item 8 of this Annual Report for additional information.

Refer to Note 6, “Property and Equipment,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.

Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable.

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An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows.

At December 31, 2016, we recorded an impairment loss of $0.9 million related to our surface mount technology equipment.

Due to the specialized nature of this equipment we were not able to find a buyer for this equipment in 2017.

As a result, we re-evaluated the carrying value of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million as of December 31, 2017.

We completed the sale of this equipment in the first quarter of 2018.

Refer to Note 6, “Property and Equipment,” included in Item 8 of this Annual Report for additional information.

Refer to Note 6, “Property and Equipment,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.

Valuation of inventories

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We establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and current inventory levels.

During 2017, we implemented a strategic sales initiative to sell certain excess inventory that had previously been written down in conjunction with our excess inventory reserve analysis in prior years, as required by U.S.

This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017.

During 2018, due to the introduction of new products and technological advancements, we charged $17 thousand to cost of sales for excess and obsolete inventories.

During 2019, due to efforts to sell excess and obsolete inventory and better management of inventory orders, we realized a net reduction of our excess inventory reserves of $567 thousand.

During 2019, due to efforts to sell excess and obsolete inventory and better management of inventory orders, we realized a net reduction of our excess inventory reserves of $0.6 million.

During 2020, we continued to apply discipline in manufacturing and supply chain management, focusing on a reduction of lead time and inventory on hand which resulted in a net reduction of our gross inventory levels of $1.2 million and excess inventory reserves of $0.6 million compared to 2019.

Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position.

Refer to Note 5, “Inventories,” included in Item 8 of this Annual Report for additional information.

Refer to Note 5, “Inventories,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.

Accounting for income taxes

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Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

At December 31, 2019 and 2018 , we have recorded a full

valuation allowance against our deferred tax assets in the United States due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.

At December 31, 2020 and 2019, we have recorded a full valuation allowance against our deferred tax assets in the United States due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.

The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable.

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At December 31, 2020, we had net operating loss carry-forwards of approximately $115.9 million for federal income tax purposes ($72.3 million for state and local income tax purposes).

However, due to changes in our capital structure, approximately $54.5 million of the $108.8 million is available after the application of IRC Section 382 limitations.

As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

However, due to changes in our capital structure, approximately $61.5 million of the $115.9 million is available to offset future taxable income after the application of IRC Section 382 limitations.

As a result of the Tax Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income.

These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely.

The $8.3 million and $8.7 million in federal net operating losses generated in 2019 and 2018 will be subject to the new limitations under the Act.

The $7.1 million and $8.3 million in federal net operating losses generated in 2020 and 2019 will be subject to the new limitations under the Tax Act.

If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes.

Please refer to Note 12, “Income Taxes,” included in Item 8 of this Annual Report for further information.

Please refer to Note 12, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.

Share-based payments

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Restricted stock units and stock options issued to non-employees are valued based upon the intrinsic value of the award.

See Note 11, “Stockholders’ Equity,” included in Item 8 of this Annual Report for additional information.

See Note 11, “Stockholders’ Equity,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.

In February 2016, the FASB issued ASU No.

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and the election to not apply recognition requirements of the guidance to short-term leases.

The results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

On adoption, we recognized additional operating lease liabilities of approximately $2.9 million as of January 1, 2019, with corresponding right-of-use assets based on the present value of the remaining minimum rental payments for our existing operating leases.

The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under Accounting Standards Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations (“Topic

420”) and impairment charges totaling $0.3 million and $0.2 million, respectively.

Refer to Note 4, “Leases,” included in Item 8 of this Annual Report for additional disclosures relating to the Company’s leasing arrangements.

Refer to Note 4, “Leases,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional disclosures relating to the Company’s leasing arrangements.

Recently issued accounting pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license.

This standard is effective for interim and annual periods beginning after December 15, 2019.

We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which significantly changes the accounting for credit losses on instruments within its scope.

The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses

rather than incurred losses.

This standard will be effective for interim and annual periods starting after December 15, 2022 and will generally require adoption on a modified retrospective basis.

We are in the process of evaluating the impact of the standard.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, 17 CFR § 229.10(f)(1), the Company is not required to provide this information.

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 7. Management’s Discussion and Analysis