What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-23 compared with 2022-03-17 · 159 added, 194 removed, 241 unchanged (59% of the section changed)

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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.

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

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

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

Our goal is to be the human wellness lighting and LED 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.

In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products.

After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products.

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.

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

In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively while not impacting the performance and quality.

Despite these efforts, our legacy products continue to face extreme pricing competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive.

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.

In addition to continuously pursuing 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 patented emergency backup battery integrated TLED, EnFocus™, our unique 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, which as a result of supply chain challenges we now plan to launch in 2023.

Similarly, our plans to expand and enhance the performance of our RedCap ® product line are also now expected in 2023.

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

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

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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 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.

The initial cost savings efforts to minimize cash usage 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 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses.

Despite these cost-cutting efforts, the company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market.

At the beginning of 2022, the Board of Directors appointed our lead independent director to serve as interim Chief Executive Officer and replace our previous chief executive officer.

During 2022, the company redoubled its cost-reduction efforts, reduced its warehouse square footage, undertook an inventory reduction project, and dramatically reduced head count.

During 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer products industry experience, and in September 2022, we hired a permanent Chief Executive Officer.

We reinvested in our MMM sales channel with a strategic hire in May 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.

It is our belief that the dramatic rightsizing efforts undertaken in 2022, along with ongoing development of innovative, high-value products and an expanded sales and distribution network, will over time result in improved sales and bottom-line performance for the Company.

During 2021 and into 2022, 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.

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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.

Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales in 2020, offsetting some of the weakness being experienced in our commercial business that year, though new MMM orders dwindled as we entered 2022.

In May 2022 we reinvested in our MMM sales channel with a strategic hire to lead our MMM sales effort.

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.

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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 plan to achieve profitability through developing and launching innovative products such as EnFocus TM powerline control technology 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.

We are also evaluating adjacent technologies including GaN-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels.

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.

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 an entire luminaire and incorporating additional wired or wireless communication.

Despite continuing progress on cost reduction throughout 2022, 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 supply chain issues, all exacerbated by the lingering effects of the COVID-19 pandemic.

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, 2022.

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

and occupancy uncertainties.

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

Throughout 2021 and 2022, 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 continue to delay order placements in reaction to the long-term impacts of the COVID-19 pandemic that continue to cause 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.

We continue to monitor the impact of lingering effects of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken in response to the pandemic.

Global supply chain and logistics constraints continue to impact our inventory purchasing strategy, and we have previously had to build up 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.

Material adverse effects of lingering 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 continued long-term impact of the COVID-19 pandemic and will continue to adjust our organizational structure, strategies, plans and processes to respond.

Long-term impacts 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 continue to evaluate entering new markets that we believe will provide additional growth opportunities.

Results of operations

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Cost of sales 105.3 82.8

Gross profit 17.2 30.8

Gross (loss) profit (5.3) 17.2

Operating expenses:

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Selling, general, and administrative 119.8 86.5

Loss on impairment 5.6 —

Restructuring — (0.2)

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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 income (0.5) (8.9)

Other expenses, net 0.9 0.7

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Total net sales $ 5,968 $ 9,865

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.

Our net sales of $6.0 million in 2022 decreased 39.5% compared to 2021, mainly driven by a decrease of 57.1% in MMM sales and a decrease of 20.0% in commercial sales.

The decrease in net MMM product sales in 2022 as compared to 2021 was mainly due to a reduced military sales pipeline at the beginning of the year, increased competition, and the delayed timing of expected orders.

Net sales of our commercial products decreased in 2022 due to limited product availability impacts from supply chain constraints, our inventory reduction project, and continuing fluctuations in the timing, pace, and size of commercial projects.

International sales

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Changes in currency exchange rates did not have an impact on net sales in 2022 or 2021, as our sales, including international sales, are denominated in U.S.

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.

Gross (loss) profit

Gross loss was $0.3 million, or (5.3)% of net sales, for 2022, compared with gross profit of $1.7 million, or 17.2% of net sales for 2021.

The year-over-year decrease in gross margin was driven primarily by a diminished sales pipeline and discounted pricing in connection with our inventory reduction project.

Beginning in the third quarter of 2022, the warehouse square footage was reduced under the new lease agreement and significant amounts of previously reserved inventories were scrapped over the course of the year in connection with reducing leased square footage.

Freight and logistics expense was notably higher at the beginning of 2022 as national imports faced backlogs at the ports.

Scrap variance and freight in variance increases over prior year were $548 thousand and $324 thousand, respectively.

Beginning in the fourth quarter of 2022, second source suppliers were sought to replace larger, key suppliers in an effort to identify more competitive pricing.

During the fourth quarter of 2022, the Company incurred higher short-term supply chain management expense in connection with mitigating the transition impact of the second sourcing.

Additionally, the production operated at excess capacity during the first nine months of 2022, prior to headcount reductions.

Operating expenses

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Total gross product development expenses $ 1,491 $ 1,891

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.

Gross product development expenses were $1.5 million in 2022, a decrease of 21.2%, compared to $1.9 million in 2021.

The $0.4 million decrease primarily resulted from lower product development and testing costs, offset by increased salaries and related benefits expenses prior to significant headcount reductions mid-year.

Product development costs in 2021 were largely associated with the development and launch of our UVCD products.

These UVCD products were fully launched prior to 2022, and no further investments were necessary in 2022.

Selling, general, and administrative

Selling, general, and administrative expenses were $7.1 million, or 119.8% of net sales, in 2022, compared to $8.5 million, or 86.5% of net sales, in 2021.

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.

The year-over-year $1.4 million decrease is comprised of a combination of a $1.5 million decrease from a reduction in headcount and salaries, including stock-based compensation and related benefits and a decrease of $0.1 million in all other general expenses, offset by an increase of $0.2 million in sales commissions and consultants.

Significant phased headcount reductions began at the end of the second quarter 2022 and continued throughout the end of the year.

Loss on impairment

As a result of the Company’s impairment analysis, a loss on impairment of $338 thousand was recorded in 2022.

In the third quarter of 2022, a loss on impairment of $76 thousand was recorded on the write-off of the UV-Robots.

An additional $262 thousand of loss on impairment was recorded in the fourth quarter of 2022, which consisted of tooling, equipment, software, hardware, and construction-in-progress.

No such loss on impairment was recorded in 2021.

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.

During 2021, we recorded restructuring credits of approximately $21 thousand, related to the cost and offsetting sub-lease income for the remaining lease obligation for our former New York, New York office which expired in June of 2021.

Please refer to Note 4, “Restructuring,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.

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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.

We incurred $954 thousand in interest expense in 2022, primarily related to the interest on borrowings and non-cash amortization of fees related to the Credit Facilities, interest on promissory notes in the principal amounts of $1.7 million (the “ 2021 Streeterville Note”) and $2 million (the “2022 Streeterville Note”) the Company sold and issued to Streeterville Capital, LLC (“Streeterville”) pursuant to separate note purchase agreements, and interest on the short-term bridge financing in the aggregate principal amount of $1.45 million pursuant to promissory notes sold and issued by us to certain private parties, including one of our directors.

In 2021, we incurred $792 thousand in interest expense primarily related to the Credit Facilities and the 2021 Streeterville 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 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 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

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Other expenses, net, in 2022 and 2021 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.

For each of the years ended December 31, 2022 and 2021, our effective tax rate was 0.0%.

In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.2 million additional federal net operating loss we recognized for the year.

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At December 31, 2022, we had net operating loss carry-forwards of approximately $132.4 million for federal income tax purposes ($77.6 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.

However, due to changes in our capital structure,

approximately $78.0 million of the $132.4 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.

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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 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.

Net loss was $10.3 million for 2022.

This compares with a 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 Employee Retention Tax Credit (“ERTC”) ($431 thousand of which was received during the fourth quarter of 2021).

Liquidity and capital resources

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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.

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 financing 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 2023 and will mitigate the substantial doubt about our ability to continue as a going concern.

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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.

The Credit Facilities consist of the Inventory Facility, an inventory financing facility for up to $3.0 million, which amount was subsequently increased to $3.5 million in April 2021.

In January 2023, we amended the Inventory Facility, reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1 million in January and February 2023.

The Receivables Facility, a receivables financing facility for up to $2.5 million, was terminated in February 2023, further reducing our monthly borrowing costs.

As of December 31, 2022, our cash was approximately $0.1 million and our total outstanding balance was approximately $1.5 million under the Credit Facilities.

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

As of December 31, 2022, our additional availability under the Credit Facilities was $55 thousand.

June 2022 Private Placement

In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share.

We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share.

In connection with the June 2022 Private Placement, we paid the placement agent commissions of $252 thousand, plus $35 thousand in expenses, and we also paid legal, accounting and other fees of $47 thousand.

Total offering costs of $334 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, 2022.

Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million.

We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.

In July 2022, all of the June 2022 Pre-Funded Warrants were exercised.

As of December 31, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of $1.30 per share.

The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.

2022 Streeterville Note

On April 21, 2022, we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville the 2022 Streeterville Note.

The 2022 Streeterville Note was issued with an original issue discount of $215 thousand and Streeterville paid a purchase price of approximately $1.8 million for the 2022 Streeterville Note, from which the Company paid $15 thousand to Streeterville for Streeterville’s transaction expenses.

The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance.

On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and to extend its maturity date to December 1, 2024.

We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $500 thousand by January 20, 2023 and $250 thousand by July 14, 2023.

The $500 thousand was paid in January 2023.

Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we will make twelve monthly repayments of approximately $117 thousand each.

We have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees.

Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.

Please refer to Note 15, “Subsequent Events” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further detail.

The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $2.0 million at December 31, 2022.

In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.

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 also sold to the same institutional investors (i) pre-funded warrants (“December 2021 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 December 2021 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.

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

We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for purposes of calculating net loss per share.

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

As of December 31, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding, with an exercise price of $3.52 per share.

The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.

June 2021 Equity Offering

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Total offering costs of $469 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.

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The 2021 Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the 2021 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.

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

The Company had 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 increased the amount outstanding under the 2021 Streeterville Note by 1.5%.

The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022.

The Company and Streeterville agreed to exchange common stock, priced at-the-market, for the required redemptions in October 2022 and December 2022, totaling $305 thousand converted to equity.

These exchanges satisfied the redemption notices provided by Streeterville, and following the December 2022 exchange, the note was paid in full.

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”).

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 “January 2020 Investor Warrants”) for a purchase of $0.625 per warrant.

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 January 2020 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.

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

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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.

During 2022, no shares of Series A Preferred Stock was converted into 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.

Even with access to outstanding borrowings under the Inventory Facility, which we have further curtailed and agreed to pay down in 2023, 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 2023 and thereafter and will continue to review and pursue external funding sources including, but not limited to, the following:

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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;

• 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.

• additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to substantial 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, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our Board of Directors;

• the current environment in the capital markets and volatile interest rates, 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 Financial 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.

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Offering costs paid on the issuance of common stock and warrants (334) (969)

Proceeds from PPP loan — 795

Principal payments under finance lease obligations (1) (3)

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Common stock withheld in lieu of income tax withholding on vesting of restricted stock units — (1)

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

Payments on the Iliad Note — (1,306)

Payments for deferred financing costs (114) (30)

Payments on the 2021 Streeterville Note (1,640) —

Proceeds from the 2021 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)

Proceeds from the 2022 Streeterville Note 2,000 —

Proceeds from related party promissory notes payable 800 —

Proceeds from promissory notes payable 650 —

Net payments on credit line borrowings - Credit Facilities (768) (181)

Net cash provided by financing activities $ 4,099 $ 10,712

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Net cash used in operating activities of $6.7 million in 2022 resulted primarily from the net loss incurred of $10.3 million, adjusted for non-cash items, including:

depreciation and amortization of $0.5 million, stock-based compensation, net of $0.1 million, and non-favorable provisions from inventory $32 thousand, and favorable provisions from warranty of $0.1 million, as well as a loss on impairment of property and equipment of $0.3 million.

We generated $0.8 million through the timing of collection of accounts receivable, $0.2 million from the change in prepaid and other current assets, $0.1 million for short-term deposits, and $2.4 million in inventory as we sold off a substantial portion of the stock on hand.

We used $0.3 million from changes in deferred revenue, $1 thousand in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and $0.6 million through a decrease of other accrued liabilities.

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.

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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.

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.

Net cash used in investing activities was $16 thousand in 2022, primarily from the acquisition of property and equipment.

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

Cash provided by financing activities

Net cash provided by financing activities for the year ended December 31, 2022 of $4.1 million primarily resulted from the proceeds from the issuance of common stock and warrants of $3.5 million and proceeds from promissory notes payable of $0.7 million and related party promissory notes payable of $0.8 million.

Additionally, the issuance of the 2022 Streeterville Note provided net proceeds of $2.0 million.

The increases in cash were offset by payments on the 2021 Streeterville Note of $1.6 million.

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 2021 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

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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.

On January 18, 2023, the Company and the Inventory Lender entered into an amendment to restructure and pay down the Inventory Facility during 2023, which amendment reduced the overall availability to $500 thousand.

On February 7, 2023, the Company and Receivable Lender terminated the Receivables Facility.

Net borrowings under the Inventory Facility at December 31, 2022 and 2021 were $1.4 million and $1.2 million, respectively.

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

Net borrowings under the Receivables Facility at December 31, 2022 and December 31, 2021 were $0.1 million and $1.0 million, respectively.

These facilities are recorded in the Consolidated Balance Sheets as of December 31, 2022 and 2021 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $47 thousand and $84 thousand, respectively, for the Inventory Facility and $15 thousand and $24 thousand, respectively, for the Receivables Facility as of December 31, 2022 and 2021.

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.

For more information, see Note 8, “Debt,” and Note 15, “Subsequent Events,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

Off-balance sheet arrangements

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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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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:

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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.

From time to time, we have utilized 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 provided credit-worthiness ratings and metrics that significantly assisted 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.

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

In 2022, a loss on impairment of $338 thousand was recorded.

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

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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.

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

Throughout 2022, we faced supply chain constraints and also undertook an inventory reduction project in connection with reducing our warehouse square footage, which impacted our inventory purchasing strategy and resulted in a decrease in our gross inventory levels of $2.9 million and excess inventory reserves of $0.5 million compared to 2021.

During 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.

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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.

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.

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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.

The $9.2 million and $9.6 million in federal net operating losses generated in

2022 and 2021, 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 2024 for federal purposes and have begun to expire for state and local purposes.

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See Note 10, “Stockholders’ Equity,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.

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 2027 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 Company had one finance lease on a forklift containing a bargain purchase option which was exercised in July 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.

Additionally, as of March 25, 2022, the terms of our expiring headquarters real estate operating lease for manufacturing, warehouse and office space have been modified beginning July 1, 2022 to reflect a smaller footprint at reduced costs through 2027.

In accordance with Accounting Standards Codification 842, Leases (“Topic 842”), as a result of the extension, the related lease liability was remeasured and the right-of-use asset was adjusted for the modification in March 2022.

The present value of the lease obligation for this lease was calculated using an incremental borrowing rate of 16.96%, which was the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit.

The weighted average remaining lease term for the operating leases is 4.7 years.

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

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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

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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.

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

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

2 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