What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-25 · 198 added, 152 removed, 237 unchanged (60% of the section changed)

2 unchanged sentences

Energy Focus, Inc.

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.

engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls and ultraviolet-C light disinfection (“UVCD”) products.

We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products and UVCD products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the fourth quarter of 2021.

Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and human health and wellness 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, 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 in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications.

In late 2020, we announced the launch of our UVCD product portfolio.

With initial development complete and two products now brought to market, we anticipate the development of additional UVCD products in 2022.

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

We have been experiencing these industry forces in both our military business since 2016 and in our commercial segment, where we once commanded significant price premiums for our flicker-free TLEDs with primarily 10-year warranties.

Since April 2019, we have focused on redesigning our products for lower costs and consolidating our supply chain for stronger purchasing power where appropriate in order to price our products more competitively.

Despite these efforts, the pricing of our legacy products remains at a premium to the competitive range and we expect aggressive pricing actions and commoditization to continue to be a headwind until our more differentiated new products ramp in volume.

In more recent years, we have focused on redesigning our products for lower costs and consolidating our supply chain for stronger purchasing power where appropriate in order to price our products more competitively.

Despite these efforts, our legacy products continue to face aggressive pricing competition and a convergence of product functionality in the marketplace.

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 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.

In addition to continuously pursuing scheduled cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value.

Specific examples of these products we have developed include the RedCap ® , our emergency backup battery integrated TLED, EnFocus™, our new dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system for both commercial and residential markets, which we plan to launch in 2022.

During 2022, we also plan to expand and enhance the performance of our RedCap ® product line.

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.

The Energy Focus UVCD solutions aim to provide impactful and affordable disinfection products for businesses and homes to effectively reduce infection risks and improve indoor air quality.

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.

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

We believe Energy Focus UVCD solutions are capable of providing affordable continuous disinfection with high 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.

Prior to James Tu returning as Chief Executive Officer and Chairman at the beginning of April 2019, the Company had experienced significant sales declines, operating losses and increases in its inventory.

Immediately upon Mr.

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

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 $0.2 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 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.

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.

Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory.

Beginning in 2019, significant restructuring efforts were undertaken.

The Company 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 (“Board of Directors”) and the executive team, and recruited new departmental leaders across the Company.

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

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.

During 2020 and 2021, we continued to see the cost-savings benefits from these relaunch efforts, in addition to a number of strategic sourcing projects completed during 2020 and 2021.

In February 2022, we also added two experienced executives to our Board of Directors with extensive lighting and consumer products industry experience.

It is our belief that the continued momentum of the efforts undertaken in 2020 and into 2021, 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.

We launched our patented EnFocus™ platform during the second quarter of 2020 and, despite the ongoing, significant delay and slowdown in our customers’ lighting projects following the impacts of the COVID-19 pandemic, we continue to receive positive feedback from the market.

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.

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 LED lamps, a far more secure, 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 developed advanced UVCD air disinfection products for both consumer as well as the commercial and industrial markets.

Two of these UVCD products were available beginning in the fourth quarter of 2021:

the nUVo™ Tower air disinfector, a portable air disinfection device for offices and homes, and the nUVo™ Traveler air disinfector, a portable air disinfection device for in-vehicle and other smaller locations.

Additional nUVo™ product development is planned for 2022 as we expect to refocus our ongoing UVCD development efforts on the consumer and commercial space.

During 2021, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S.

Navy awards, with several anticipated projects facing repeated and ongoing delays.

We continue to pursue opportunities from the U.S.

Navy and the government sector to minimize such volatility.

Previously in our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned us to be more competitive along with improved production efficiencies.

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

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

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

However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales.

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.

We plan to achieve profitability through developing and launching new, innovative products such as EnFocus TM and our UVCD products and further leveraging our unique and proprietary technology such as RedCap ® , 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 that aim to serve both consumer and commercial markets.

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.

Despite continuing progress throughout 2021, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in MMM and commercial 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.

1 unchanged sentence

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.

Throughout 2021, following a slowdown in 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 that caused our customers to suspend or postpone lighting retrofit projects due to budget

and occupancy uncertainties.

Global supply chain and logistics challenges have further exacerbated slowdowns in customer projects, as well as impacted our inventory strategies to respond to customer and supplier timelines.

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.

Global supply chain and logistics constraints are impacting our inventory purchasing strategy, leading to a buildup of inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining components.

Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility.

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

3 unchanged sentences

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.

We will remain agile as an organization to respond to potential or continuing weakness in the macroeconomic environment and in the meantime expand sales channels and enter new markets such as the UVCD and consumer markets, that we believe will provide additional growth opportunities.

Results of operations

8 unchanged sentences

Total operating expenses 105.5 54.9

Operating loss (24.1) (54.7)

Loss from Operations (88.3) (24.1)

Other expenses:

Interest expense 8.0 2.9

Gain on forgiveness of PPP loan (8.1) —

Loss on extinguishment of debt — 1.6

Other income - employee retention tax credit (8.9) —

Loss from change in fair value of warrants — 6.5

1 unchanged sentence

Net loss before income taxes (80.0) (35.5)

Provision for income taxes — 0.1

Benefit from income taxes — —

Net loss (80.0) % (35.5) %

3 unchanged sentences

Total net sales $ 9,865 $ 16,828

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.

Our net sales of $9.9 million in 2021 decreased 41.4% compared to 2020, mainly driven by a decrease of 54.6% in MMM sales.

The decrease in net MMM product sales in 2021 as compared to 2020 was mainly due to the limited availability of government funding and the delayed timing of expected orders.

MMM sales were also higher in 2020 primarily due to delays in government purchasing during 2019 that were pushed into 2020.

Additionally, 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 13.4% in 2021 as compared to 2020, reflecting continuing fluctuations in the timing, pace, and size of commercial projects, including continuing 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 2020 and 2019, respectively.

International net sales accounted for approximately 2% of net sales in 2021 and 1% of net sales in 2020.

Changes in currency exchange rates did not have an impact on net sales in 2021 or 2020, 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 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.

Gross profit was $1.7 million, or 17.2% of net sales, for 2021, compared with gross profit of $5.2 million, or 30.8% of net sales for 2020.

The year-over-year decrease in gross margin was driven primarily by lower sales, resulting in an overhang in fixed costs against the lower sales volume of $1.0 million, or 10.1% of net sales, and unfavorable inventory and warranty reserve adjustments of $0.3 million, or 2.9% of net sales.

Gross margin for 2021 included a favorable impact from product mix, and favorable price and usage variances for material and labor of $0.8 million, or 8.3% of net sales.

Operating expenses

Product development

Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs.

Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, certain legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs.

Product development costs are expensed as they are incurred.

4 unchanged sentences

Gross product development expenses were $1.9 million in 2021, an increase of 33.6%, compared to $1.4 million in 2020.

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.

The increase primarily resulted from increased product development and testing costs, as well as salaries and related benefit (including stock compensation) costs of $0.3 million and $0.1 million, respectively, associated with the development and launch of our UVCD products.

Selling, general, and administrative

Selling, general, and administrative expenses were $8.5 million, or 86.5% of net sales, in 2021, compared to $7.9 million, or 46.9% of net sales, in 2020.

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.

Of the year-over-year $0.6 million increase, approximately $0.8 million is attributable to increased headcount and salaries, including stock-based compensation and related benefits, $0.2 million is related to an increase in trade show and other marketing costs, $0.1 million is related to increased sales commissions, $0.1 million is related to increased travel and related expenses, $0.1 million is related to an increase in network and other software costs and $0.1 million is related to an increase in dues and subscriptions.

These increases were offset by savings of $0.6 million in legal and professional fees and $0.2 million in recruiting and relocation fees.

Restructuring

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.

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.

During 2021 and 2020, we recorded restructuring credits of approximately $21 thousand and $60 thousand, 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 in September of 2019 and the lease on our New York, New York office expired in June of 2021.

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

1 unchanged sentence

Interest expense

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.

We incurred $792 thousand in interest expense in 2021, primarily related to the interest on borrowings and non-cash amortization of fees related to our revolving lines of credit with Crossroads Financial Group, LLC (the “Inventory Facility”) and Factors Southwest L.L.C.

(d/b/a FSW Funding) (the “Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”), interest on borrowings and non-cash amortization of fees associated with the increase in the borrowing capacity on the Inventory Facility, and interest on the promissory note in the principal amount of $1.7 million (the “Streeterville Note”) the Company sold and issued to Streeterville Capital, LLC (“Streeterville”) pursuant to a note purchase agreement with Streeterville.

In 2020, we incurred $481 thousand in interest expense primarily related to interest on borrowings and non-cash amortization of fees related to our former revolving line of credit with Austin Financial Services, Inc.

(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.

Gain on forgiveness of PPP loan

Forgiveness income of $801 thousand related to the Paycheck Protection Program (“PPP”) loan taken out during 2020 and forgiven in 2021 was recognized during the first quarter 2021.

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.

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 as well as the write-off of the remaining debt acquisition costs of $117 thousand relating to the Iliad Note.

Employee Retention Tax Credit

During the year ended December 31, 2021, we recognized other income of $876 thousand related to eligible Employee Retention Tax Credit (“ERTC”) expenses incurred during the second and third quarters of 2021 for which we became eligible.

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.

A loss of $1.1 million was recognized during the year ended December 31, 2020 for the market value change in our warrant liabilities related to a private issuance of warrants to certain institutional investors to purchase up to 688,360 shares of our common stock with an exercise price of $3.37 per share and a private issuance of warrants to the placement agents to purchase up to 48,185 shares of our common stock with an exercise price of $4.99 per share, both at a purchase price of $0.625 per warrant (collectively, the “January 2020 Warrants”), which were completed concurrently with a registered direct offering for the sale of 688,360 shares of our common stock to the same institutional investors, at a purchase price of $3.37 per share, in January 2020 (such concurrent registered direct offering and private issuance, together, the “January 2020 Equity Offering”).

The terms of the January 2020 Warrants were amended in December 2020 such that they were reclassified as equity, and no liability with respect to such January 2020 Warrants exists at either December 31, 2021 or 2020.

As such, there is no related gain or loss recorded for the twelve months ended December 31, 2021.

Other expenses, net

We recognized other expenses, net, of $65 thousand in 2021, compared to other expenses, net, of $73 thousand in 2020.

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.

Other expenses, net, in 2021 and 2020 primarily consisted of bank and collateral management fees.

For the years ended December 31, 2021 and 2020, our effective tax rate was 0.0% and 0.1%, respectively.

4 unchanged sentences

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, 2020 and 2019, respectively.

We have recorded a full valuation allowance against our deferred tax assets at December 31, 2021 and 2020, respectively.

We had no net deferred liabilities at December 31, 2021 or 2020.

4 unchanged sentences

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

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.

The $9.6 million and $7.1 million in federal net operating losses generated in December 31, 2021 and 2020, respectively, will be subject to the new limitations under the Tax Act.

If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes.

Please refer to Note 11, “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.

Net loss was $7.9 million for 2021, inclusive of a non-cash, pre-tax gain of $0.8 million from the forgiveness of the Company’s PPP loan and $0.9 million in other income recorded relating to the ERTC ($431 thousand of which was received during the fourth quarter of 2021).

This compares with a net loss of $6.0 million for 2020, which included a non-cash, pre-tax loss of $1.1 million resulting from the revaluation of the warrant liability throughout 2020.

Liquidity and capital resources

3 unchanged sentences

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 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.

We will likely require additional financing in the next twelve months 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 thereafter, 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 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, and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2022 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.

The Credit Facilities consist of the Inventory Facility, a two-year inventory financing facility for up to $3.0 million, which amount was subsequently increased to $3.5 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.

1 unchanged sentence

As of December 31, 2021, our additional availability under the Credit Facilities was $1.7 million.

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 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.

December 2021 Private Placement

In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share.

We also sold to the same institutional investors (i) pre-funded warrants (“Pre-Funded Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share.

We paid the placement agent commission of $360 thousand, plus $42 thousand in expenses, in connection with the December 2021 Private Placement and we also paid legal, accounting and other fees of $97 thousand related to the December 2021 Private Placement.

Total offering costs of $499 thousand have been presented as a reduction of additional paid-in-capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021.

Net proceeds to us from the December 2021 Private Placement were approximately $4.0 million.

June 2021 Equity Offering

In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share (the “June 2021 Equity Offering”).

We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection with the June 2021 Equity Offering and we also paid legal and other fees of $19 thousand related to the June 2021 Equity Offering.

Total offering costs of $470 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021.

Total offering costs of $470 thousand have been presented as a reduction of additional paid-in-capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021.

Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.

Streeterville Note

On April 27, 2021, we entered into a note purchase agreement with Streeterville, pursuant to which we sold and issued the Streeterville Note.

The Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses.

The Streeterville Note has a maturity date of April 27, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance.

The Company may prepay the amounts outstanding under the Streeterville Note at a 10% premium.

Beginning on November 1, 2021, Streeterville may require the Company to redeem up to $205 thousand of the Streeterville Note in any calendar month.

The Company has the right on three occasions to defer all redemptions that Streeterville 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 Streeterville Note by 1.5%.

The Company exercised this right twice during the fourth quarter of 2021.

The total liability for the Streeterville Note, net of discount and financing fees, was $1.7 million at December 31, 2021.

Unamortized loan discount and debt issuance costs were $43 thousand at December 31, 2021.

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

January 2020 Equity Offering

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 (the “Investor Warrants”) 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 January 2020 Equity Offering and we also paid legal, accounting and other fees of $231 thousand related to the January 2020 Equity Offering.

In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of $4.99 per share (together with the Investor Warrants, the, “January 2020 Warrants”).

Proceeds to us, before expenses, from the January 2020 Equity Offering were approximately $2.8 million.

In accordance with the terms of the Iliad Note described below, 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.

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.

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 transaction expenses.

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

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.

1 unchanged sentence

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 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 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 applied to reduce the outstanding principal amount.

Convertible Notes

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 the Company’s 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.

During 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock.

Need for Additional Financing

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:

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 within the next twelve months or in the time periods thereafter.

As such, we will likely need additional external financing during 2022 and thereafter 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;

1 unchanged sentence

• obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all.

There can be no assurance that we will obtain future funding on acceptable terms, in a timely fashion, or at all.

Obtaining additional financing contains risks, including:

• 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 rates, restrictive covenants and control or revocation provisions, which are not acceptable to management or our board of directors;

• loans or other debt instruments may have terms 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.

Additionally, if we are unable to find a permanent Chief Executive Officer, it may be more difficult to obtain additional financing on satisfactory terms or at all.

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.

13 unchanged sentences

Payments for deferred financing costs & termination fees (30) (320)

Proceeds from the Iliad Note — 1,115

Payments on the Iliad Note — (1,306)

Proceeds from convertible notes — 1,700

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

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

Proceeds from the Streeterville Note 1,515 —

Net (payments on) proceeds from credit line borrowings - Credit Facilities (181) 2,459

Net payments on credit line borrowings - Austin Facility — (719)

Net cash provided by financing activities $ 10,712 $ 4,160

1 unchanged sentence

Net cash used in operating activities of $9.8 million in 2021 resulted primarily from the net loss incurred of $7.9 million, adjusted for non-cash items, including:

depreciation and amortization of $0.2 million, stock-based compensation, net of $0.4 million, gain on forgiveness of the PPP loan of $0.8 million, other income related to the ERTC of $0.9 million, and unfavorable provisions from inventory and warranty of $0.2 million and $0.1 million, respectively, as well as accounts receivable and working capital changes.

We generated $0.8 million through the timing of collection of accounts receivable, $0.7 million from the change in prepaid and other current assets (primarily the receipt of ERTC funds), $0.3 million for short-term deposits related to the timing of inventory receipts with our contract manufacturers for our nUVo™ and EnFocus™ products, and $0.2 million from changes in deferred revenue.

We used $2.4 million from a net increase in inventories primarily due to the timing of inventory receipts, $0.4 million in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and $0.4 million through a decrease of other accrued liabilities, primarily related to accrued payroll and benefits and commissions.

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.

1 unchanged sentence

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.

Cash used by an increase in accounts receivable of $0.1 million and a decrease in accounts payable mainly for inventory due to the timing of inventory receipts of $2.2 million and a decrease in accrued expenses primarily for accrued payroll and benefits, severance and commissions of $0.5 million further attributed to the cash impact of the net loss incurred.

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.

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.

Net cash used by investing activities was $0.4 million in 2021, primarily from the purchase of software and tooling to support production operations as well as the development of e-commerce platforms.

Net cash used by investing activities was $0.2 million in 2020, 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, 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.

Net cash provided by financing activities for the year ended December 31, 2021 of $10.7 million primarily resulted from $4.0 million and $4.5 million in net proceeds received from the December 2021 Private Placement and the June 2021 Equity Offering, respectively, $1.5 million of net proceeds from the Streeterville Note, and $0.8 million of proceeds from the exercise of 237,892 January 2020 Warrants.

These increases in cash were offset by net payments made against borrowings under the Inventory Facility and the Receivables Facility of $150 thousand and $31 thousand, respectively.

At December 31, 2021, we had additional availability for us to borrow of $1.7 million under the Inventory Facility and $20 thousand under the Receivables Facility.

At December 31, 2021, December 2021 Warrants to purchase an aggregate of 1,363,641 shares remain outstanding with a weighted average exercise price of $3.30 per share.

During the year ended December 31, 2021, no December 2021 Warrants were exercised.

At December 31, 2021, January 2020 Warrants to purchase an aggregate of 229,414 shares remain outstanding with a weighted average exercise price of $3.67 per share.

During the year ended December 31, 2021, 237,892 January 2020 Warrants were exercised resulting in $0.8 million of proceeds.

The exercise of the remaining outstanding January 2020 Warrants and the December 2021 Warrants could provide us with cash proceeds of up to $0.8 million and $4.5 million, respectively.

In January of 2022, all of the Pre-Funded Warrants from the December 2021 Private Placement were exercised.

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.

1 unchanged sentence

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.

Also 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 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.

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

Net borrowings under the Inventory Facility at December 31, 2021 and 2020 were $1.2 million and $1.3 million, respectively.

Net borrowings under the Receivables Facility at both December 31, 2021 and 2020 were $1.0 million.

These facilities are recorded in the Consolidated Balance Sheets as of December 31, 2021 and 2020 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $84 thousand and $121 thousand, respectively, for the Inventory Facility and $24 thousand and $40 thousand, respectively, for the Receivables Facility as of December 31, 2021 and 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.

16 unchanged sentences

Revenue recognition

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No.

2014-09, Revenue from Contracts with Customers (Topic 606) , as amended by subsequently issued additional guidance (together, “ASC 606”) using the modified retrospective method.

The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns.

15 unchanged sentences

Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value.

During the first eleven months of 2019, we evaluated and monitored the creditworthiness of each customer on a case-by-case basis.

However, during December 2019, we transitioned to an account receivable insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention.

We utilize a third-party account receivable insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention.

This third party also provides credit-worthiness ratings and metrics that significantly assists us in evaluating the credit worthiness of both existing and new customers.

6 unchanged sentences

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:

18 unchanged sentences

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 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.

During 2020, we applied 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.

Throughout 2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components, which resulted in an increase in our gross inventory levels of $2.4 million and excess inventory reserves of $0.2 million compared to 2020.

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

6 unchanged sentences

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, 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.

At December 31, 2021 and 2020, we have recorded a full valuation allowance against our deferred tax assets 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.

In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized.

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 continue to evaluate the need for a valuation allowance on a quarterly basis.

3 unchanged sentences

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

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.

The $9.6 million and $7.1 million in federal net operating losses generated in 2021 and 2020, respectively, will be subject to the new limitations under the Tax Act.

If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes.

8 unchanged sentences

See Note 10, “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.

2016-02, Leases (Topic 842) , which supersedes the current lease accounting requirements.

Additionally, in July 2018, the FASB issued ASU No.

As of January 1, 2019, the Company adopted both Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) and ASU No.

2018-11, Leases (Topic 842):

Targeted Improvements , which simplifies adoption of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842).

The new standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months.

It also requires lessees to disclose certain key information about lease transactions.

Upon implementation, an entity’s lease payment obligations will be recognized at their estimated present value along with a corresponding right-of-use asset.

Lease expense recognition will be generally consistent with current practice.

The Company adopted this guidance as of January 1, 2019 using the required modified retrospective method with the non-comparative transition option.

Targeted Improvements issued by the Financial Accounting Standards Board (“FASB”).

The guidance requires a lessee to recognize right-of-use assets and lease liabilities on the balance sheet for leases with lease terms longer than 12 months.

The recognition, measurement and presentation of lease expenses and cash flows depend on the classification by the lessee as a finance or operating lease.

We adopted this guidance using the required modified retrospective method with the non-comparative transition option.

The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date.

3 unchanged sentences

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

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, “Financial Statements and Supplementary Data,” of this Annual Report for additional disclosures relating to the Company’s leasing arrangements.

The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2026 under which it is responsible for related maintenance, taxes and insurance.

The Company has one finance lease containing a bargain purchase option upon expiration in 2022.

The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option.

The Company had one restructured lease with a sub-lease component for the New York, New York office that was closed in 2017.

The lease expired in June 2021.

As part of the lease agreement, there was $0.3 million in restricted cash in prepaid and other current assets on the accompanying Consolidated Balance Sheets as of December 31, 2020 which represented collateral against the related letter of credit issued as part of the lease agreement.

Per the terms of the lease agreement, the restrictions on the cash were lifted in September 2021 and the cash was returned to the Company.

Recently adopted accounting pronouncements

In November 2021, the FASB issued ASU No.

2021-10, Government Assistance (Topic 832) (“ASU 2021-10”), in order to increase the transparency of government assistance by requiring the disclosure of:

(i) types of assistance;

(ii) an entity’s accounting for the assistance;

and (iii) the effect of the assistance on an entity’s financial statements.

ASU 2021-10 is effective for all entities (including smaller reporting companies) for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted.

The amendments in ASU 2021-10 should be applied either prospectively to all transactions within scope reflected in the financial statements after the effective date, or retrospectively to those same transactions.

The Company has early adopted the new standard, effective as of December 31, 2021.

Refer to Note 13 “Other Income,” to our financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data,” of this Annual Report.

In August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) ( “ASU 2020-06”), to simplify accounting for certain financial instruments with characteristics of liabilities or equity.

ASU 2020-06 is effective for smaller reporting companies for fiscal years beginning after December 15, 2023 and interim periods therein.

Early adoption is permitted beginning January 1, 2021.

The new guidance:

(i) eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments;

(ii) simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity;

(iii) introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity;

and (iv) amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments.

The Company early adopted the new standard effective January 1, 2021.

The adoption of ASU 2020-06 did not have an impact on the Company’s financial position or results of operations upon adoption.

Recently issued accounting pronouncements

2 unchanged sentences

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.

3 unchanged sentences

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