ENERGY FOCUS, INC/DE 10-K

ITEM 7. 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 Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report. Overview Energy Focus, Inc. 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. 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 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. 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. 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. 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. 28 Table of Contents 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 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 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 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 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. 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, 2021. The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on our company. 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 29 Table of Contents 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. 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 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 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: 2021 2020 Net sales 100.0 % 100.0 % Cost of sales 82.8 69.2 Gross profit 17.2 30.8 Operating expenses: Product development 19.2 8.4 Selling, general, and administrative 86.5 46.9 Restructuring (0.2) (0.4) Total operating expenses 105.5 54.9 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 Other expenses, net 0.7 0.4 Net loss before income taxes (80.0) (35.5) Benefit from income taxes — — Net loss (80.0) % (35.5) % 30 Table of Contents Net sales A further breakdown of our net sales by product line is as follows (in thousands): 2021 2020 Commercial products $ 4,682 $ 5,404 MMM products 5,183 11,424 Total net sales $ 9,865 $ 16,828 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 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. dollars. Gross profit 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, 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. Cost recovery represents the combination of revenues and credits from government contracts. Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands): For the year ended December 31, 2021 2020 Total gross product development expenses $ 1,891 $ 1,415 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, 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. 31 Table of Contents 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 $0.6 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 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. Other expenses Interest expense 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. 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 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. 32 Table of Contents 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 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 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 January 2020 Warrants (January 13, 2020). 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 2021 and 2020 primarily consisted of bank and collateral management fees. Income taxes For the years ended December 31, 2021 and 2020, our effective tax rate was 0.0% and 0.1%, respectively. In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.6 million additional federal net operating loss we recognized for the year. In 2020, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $7.1 million additional federal net operating loss we recognized for the year. 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. 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 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. We will continue to evaluate the need for a valuation allowance on a quarterly basis. At December 31, 2021, we had net operating loss carry-forwards of approximately $125.4 million for federal income tax purposes ($77.2 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $125.4 million is available after the application of IRC Section 382 limitations. 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 $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. Net loss 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. 33 Table of Contents Liquidity and capital resources General We generated a net loss of $7.9 million in 2021, compared to net loss of $6.0 million in 2020. We have incurred substantial losses in the past, and as of December 31, 2021, we had an accumulated deficit of $138.7 million. 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 successful. 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 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. As of December 31, 2021, our cash was approximately $2.7 million and our total outstanding balance was approximately $2.2 million under the Credit Facilities. As of December 31, 2021, our additional availability under the Credit Facilities was $1.7 million. 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. 34 Table of Contents 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. Iliad Note 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. 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. 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. 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 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 35 Table of Contents 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 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; • obtaining funding from the sale of our common stock or other equity or debt instruments; and • 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 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 or conditions, such as interest rates, restrictive covenants and control or revocation provisions, which are not acceptable to management or our Board of Directors; and • 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. 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. 36 Table of Contents Cash and debt At December 31, 2021, our cash balance was $2.7 million, compared to $1.8 million at December 31, 2020. The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands): 2021 2020 Net cash used in operating activities $ (9,765) $ (2,451) Net cash used in investing activities $ (443) $ (223) Proceeds from the issuance of common stock and warrants $ 9,500 $ 2,749 Proceeds from the exercise of warrants 801 918 Offering costs paid on the issuance of common stock and warrants (969) (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 80 100 Common stock withheld in lieu of income tax withholding on vesting of restricted stock units (1) (3) Payments for deferred financing costs & termination fees (30) (320) Payments on the Iliad Note — (1,306) 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 Cash used in operating activities 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. 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. 37 Table of Contents Cash used in investing activities 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, 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. 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. 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. Credit Facilities On August 11, 2020, we entered into the Credit Facilities, consisting of two debt financing arrangements. 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. 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. 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 8 “Debt” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report. 38 Table of Contents Off-balance sheet arrangements We had no off-balance sheet arrangements at December 31, 2021 or 2020. Critical accounting policies and estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the reported amounts of net sales and expenses in the financial statements. Material differences may result in the amount and timing of net sales and expenses if different judgments or different estimates were utilized. Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial statements are set forth below: • revenue recognition, • allowances for doubtful accounts, returns and discounts, • impairment of long-lived assets, • valuation of inventories, • accounting for income taxes, • share-based compensation, and • leases. Revenue recognition Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. therefore, the product warranties are not a separate performance obligation and are accounted for as described below. 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 12, “Product and Geographic Information,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report. Accounts Receivable Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. 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. 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. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of account receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers. Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms. 39 Table of Contents 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. The specific components are as follows: • allowance for doubtful accounts for accounts receivable, and • allowance for sales returns and discounts. In 2021 and 2020, the total allowance was $14 thousand and $8 thousand, respectively, which was all related to sales returns. We review these allowance accounts periodically and adjust them accordingly for current conditions. Long-lived assets Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to fifteen years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. 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, “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. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. 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. 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 We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. 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 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. 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 As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance. 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, 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 40 Table of Contents 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. At December 31, 2021, we had net operating loss carry-forwards of approximately $125.4 million for federal income tax purposes ($77.2 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $125.4 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 $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. Please refer to Note 11, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information. Share-based payments The cost of employee and director stock options and restricted stock units, as well as other share-based compensation arrangements, is reflected in the Consolidated Financial Statements based on the estimated grant date fair value method under the authoritative guidance. Management applies the Black-Scholes option pricing model to options issued to employees and directors to determine the fair value of stock options and apply judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. The assumptions used in calculating the fair value of share-based awards under Black-Scholes represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. Restricted stock units and stock options issued to non-employees are valued based upon the intrinsic value of the award. See Note 10, “Stockholders’ Equity,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information. Leases 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 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. The Company also applied the lease term and impairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply recognition requirements of the guidance to short-term leases. 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. 41 Table of Contents 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 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. ITEM 7A. 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. 42 Table of Contents