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Item 7. Management’s Discussion and Analysis

2024-03-22 compared with 2023-03-23 · 155 added, 306 removed, 94 unchanged (83% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements (“financial statements”) and related notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

Energy Focus, Inc.

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.

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

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 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.

Our goal is to be a market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount.

We specialize in energy efficient LED lighting retrofit product 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.

We are also evaluating adjacent technologies, including Gallium Nitride (“GaN”) based power supplies and additional market opportunities for energy solution products that support sustainability in our existing channels.

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 and commercial business since 2016, where we once commanded significant price premiums for our flicker-free TLEDs with industry leading warranties.

We have been experiencing these industry forces in both our military and commercial business since 2016, when 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.

Despite these efforts, our legacy products continue to face extreme price 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 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 are looking forward to the continued support and growth of our existing EnFocus™ product line which is particularly attractive for its ease of install and ease of use in spaces with transient occupation.

The Company have enhanced the performance of our RedCap® product providing a more user- friendly experience 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.

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 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.

Throughout 2023, the Company continued to make significant cost cutting efforts to address operational expenses while maintaining customer satisfaction and delivering goods on-time.

Investments into Energy Focus have contributed to the ability of the Company to continue to not only provide quality products and services, but to both expand and rationalize product offerings.

It is our belief that the continued dramatic rightsizing efforts undertaken in 2022 and 2023, along with reorganization of the sales team and ongoing development of innovative, high-value products and an expanded distribution network, will over time result in improved sales and bottom-line performance for the Company.

During 2022 and into 2023, 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.

This sector also maintains very long sales cycles.

The timeline between bid to order can often take at least six months, and many MMM products are built-to-order with resultant lead times before orders become revenue.

We continue to pursue opportunities from the U.S.

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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 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.

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.

Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales pipeline in the second half of 2023.

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.

During 2023, we thoroughly reviewed and adjusted our commercial pricing position as well as our strategic relationships and partnerships within the commercial LED market space.

We believe our new pricing position will give us a greater advantage than previously held against the competition and offer a more attractive entry point for our end customer base.

We are pleased to see a growth during the fiscal year ended December 31, 2023 in quotation opportunities in both MMM and commercial product lines.

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 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.

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 recent strategic investments in 2023 by Sander Electronics, Inc.

(“Sander”), a shareholder of the Company, contributed meaningful external capital, as well as presented synergistic opportunities to improve and diversify our supply chain and product offerings.

We plan to achieve profitability through increasing sales in our innovative products such as EnFocusTM 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 EnFocusTM platform that aim to serve the commercial market.

We are also evaluating adjacent technologies including ruggedized industrial retrofit lighting applications and 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 to our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.

The EnFocus™ platform offers two immediately available product lines:

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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.

Despite continuing progress on cost reduction throughout 2023 and 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.

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, 2023.

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 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 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.

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 will have.

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.

On June 28, 2023, the Company received notices of resignation from the following four members of the Board of Directors:

Jennifer Cheng, Brian Lagarto, Jeffery Parker, and Stephen Socolof.

Their terms as directors would have otherwise expired at the 2024 annual meeting of stockholders of the Company.

These resignations did not involve any disagreement with the Company.

On July 2, 2023, the remaining members of the Board of Directors unanimously appointed the following four new members to the Board of Directors:

Kin-Fu Chen, Shou-Jang Lee, Jason Tien-Chia Tsai, and Chiao Chieh (Jay) Huang.

The Board of Directors affirmatively determined that, at the time of his appointment, each of the new members of the Board of Directors is an independent director under the corporate governance standards of the Nasdaq.

On August 24, 2023, the Board of Directors approved the termination of the Company’s chief executive officer and appointed Chiao Chieh (Jay) Huang to serve as the Company’s new chief executive officer.

In line with this decision, Mr.

Huang discontinued his role as Chairman of the Board.

As part of this transition, the Board appointed Kin-Fu Chen as the Chairman of the Board.

Our Business Strategy

Demand-oriented Approach

In order to deepen our relationships with customers, we are in the process of re-establishing our service model, aiming to provide richer and more targeted customer service.

We believe that by increasing opportunities for interaction with our customers, we can better understand their needs, thereby enhancing their loyalty to our brand.

To ensure that EFOI’s products, pricing, and customer service lifecycle are better aligned, we are building a comprehensive value model to ensure consistency in the products and services we provide throughout the customer journey.

We have begun an in-depth analysis of our current and past top 10 customers over the last five years to identify the core factors that make them

loyal customers.

By analyzing this data, we hope to reveal the key elements that enhance customer stickiness, providing them with more reasons and value to stay with us.

In particular, we are actively focusing on customers with high loyalty to better meet their needs.

This is not only an acknowledgment of our products but also a validation of the quality of our service.

Supply-oriented Approach

EFOI is committed to adopting three main sustainable economy strategies:

“Green Supply Chain”, “Green Product”, and “Green Manufacturing”, aiming to promote sustainability throughout the entire value chain.

The Company is working closely with its supply chain partners to optimize recycling mechanisms and strengthen packaging design, integrating sustainable economy principles into the core of supply chain management.

Guided by the vision of “transcending traditional corporate social responsibility and creating shared value”, EFOI’s team is focusing on stakeholders, aiming to achieve a “dual profit engine” effect by combining financial performance and Environmental, Social, and Governance (ESG) practices.

This strategy not only aligns with the Company’s responsibility and sustainability goals but is also expected to enhance overall performance and market competitiveness.

EFOI's operational team's new strategy focuses on integrating environmental and economic benefits, aiming to create a win-win situation that benefits the company, society, and the environment.

Under the premise of a similar industrial environment and familiar relationships, our professional skills complement those of our supply chain partners.

This foundation of cooperation enables us to more easily achieve common goals of cost reduction, profit sharing, and exploring new business opportunities.

This not only strengthens our cooperative relationship but also lays a solid foundation for our joint efforts towards a better future.

Financial-oriented Approach

The Company applies strategic financial management in the below perspective.

Control and Monitoring of Assets and Liabilities

Regularly evaluate all assets, especially inventory, to ensure they remain in optimal condition in terms of value and performance.

Minimize or mitigate the impact of inefficient and aging assets, focusing on assets with high efficiency and return.

• Liabilities:

Ensure a robust liability structure, optimize the cost of liabilities, and seek lower interest rates and more favorable repayment terms.

Regularly review the liability situation to ensure the company’s level of liabilities remains within a safe range.

Structured Profitability

• Revenue Growth:

Develop diversified revenue streams, reduce dependency on single business or market, continuously optimize products and services, and enhance market competitiveness.

• Cost Control:

Strictly control operating costs, seek opportunities to reduce costs, and ensure the efficient use of resources to optimize operations.

• Cash Flow Management:

Establish a sound accounts receivable and payable management system to ensure timely collection of receivables and reasonable arrangement of payments.

Maintain sufficient cash reserves to cope with potential funding shortages.

Results of operations

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Cost of sales 96.1 105.3

Gross (loss) profit (5.3) 17.2

Gross profit (loss) 3.9 (5.3)

Operating expenses:

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Loss on impairment — 5.6

Restructuring — (0.2)

Total operating expenses 73.4 150.4

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Other expenses:

Interest expense 16.0 8.0

Gain on forgiveness of PPP loan — (8.1)

Interest income (57) ( 57 ) —

Interest expenses 380 954

Other income (0.5) (0.5)

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Total net sales $ 5,717 $ 5,968

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

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

International net sales accounted for approximately 0.4% of net sales in 2022 and 2% of net sales in 2021.

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 (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.

Our net sales of $5.7 million in 2023 decreased 4.2% compared to 2022, mainly driven by an increase of 85.6% in MMM sales and a decrease of 57.5% in commercial sales.

The increase in net MMM product sales in 2023 as compared to 2022 was mainly due to an increased military sales pipeline during the year and our strategic focus on our loyal military customers.

Net sales of our commercial products decreased in 2023 due to limited product availability impacts from supply chain constraints, our inventory reduction project, increased competition, and continuing fluctuations in the timing, pace, and size of commercial projects.

Gross profit (loss)

Gross profit was $0.2 million, or 3.9% of net sales, for 2023, compared with gross loss of $(0.3) million, or (5.3)% of net sales for 2022.

The increase in gross margin resulted from our cost reduction plan related to a cut down of headcounts and was driven primarily by a reduction of scrap, freight in and out variances, which were partially offset by an increased cost of material and temporary labor.

In 2022, significant amounts of previously reserved inventories were scrapped over the course of the year.

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

Beginning in the second quarter of 2023, the Company terminated several employees, and the result was a significant reduction in payroll-related expenses.

Due to the termination of employees, the need for temporary workers was increased.

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 expenses include salaries and related benefits, product testing and related costs, travel, supplies, 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,

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

Gross product development expenses were $0.6 million in 2023, a decrease of 60.6%, compared to $1.5 million in 2022.

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.

The $0.9 million decrease primarily resulted from lower payroll-related expenses due to a reduction in headcounts of $0.8 million and lower product development and testing cost of $0.1 million.

Beginning in the second quarter of 2023, the Company terminated several employees, and the result was a significant reduction in payroll-related expenses.

Selling, general, and administrative

Selling, general, and administrative expenses were $3.6 million, or 63.1% of net sales, in 2023, compared to $7.1 million, or 119.8% of net sales, in 2022.

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.

The year-over-year $3.5 million decrease is comprised of a combination of a $2.1 million decrease from a reduction in headcount for salaries, severance, and commissions, a $0.5 million decrease from trade show, marketing, and travel expenses, a $0.2 million decrease from a reduction of software costs, a $0.2 million from reduced recruiting and relocation expenses, a $0.2 million decrease from consultant and professional fees, and remaining from a decrease of all other general expenses.

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, 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.

Other expenses

Interest expense

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.

Other expenses, net

We recognized other expenses, net, of $56 thousand in 2022, compared to other expenses, net, of $65 thousand in 2021.

Other expenses, net, in 2022 and 2021 primarily consisted of bank and collateral management fees.

No loss on impairment was recorded in 2023.

As a result of the Company’s impairment analysis, 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 loss on impairment was recorded in the fourth quarter of 2022, which consisted of tooling, equipment, software, hardware, and construction-in-progress.

Other expenses (income)

Interest expenses (income)

We incurred $380 thousand in interest expenses and $57 thousand in interest income in 2023.

Interest expenses primarily related to the interest on borrowings and non-cash amortization of fees related to the Credit Facilities and promissory notes in the principal amount of $2.0 million (the “2022 Streeterville Note”), that the Company issued to Streeterville Capital, LLC (“Streeterville”) pursuant to separate note purchase agreements.

Interest income primarily related to the gain recognized through the pay-off of the Credit Facilities to Crossroads Financial Group, LLC.

In 2022, we incurred $954 thousand in interest expense, 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 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.

Other income and expenses

We recognized other income of $30 thousand each in 2023 and 2022.

Other income in 2023 and 2022 primarily consisted of tax refunds and miscellaneous adjustments from accounts receivable, respectively.

We recognized other expenses of $26 thousand in 2023, compared to other expenses of $56 thousand in 2022.

Other expenses in 2023 and 2022 primarily consisted of bank and collateral management fees.

Provision for income taxes

For each of the years ended December 31, 2023 and 2022, 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.

In 2023, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $6.3 million additional federal net

operating loss we recognized for the year.

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At December 31, 2023, we had net operating loss carry-forwards of approximately $138.7 million for federal income tax purposes ($48.0 million for state and local income tax purposes).

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.

However, due to changes in our capital structure, approximately $84.30 million of the $138.7 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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Net loss was $4.3 million for 2023.

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).

This compares with a net loss of $10.3 million for 2022, mainly driven by reduction of cost of goods sold, product development, selling, general, and administrative expenses as well as interest expenses.

Financial condition

At December 31, 2023, we had $2.0 million in cash and a total of $1.3 million of debt, net of discounts and unamortized debt costs, related to the 2022 Streeterville Note outstanding.

We have historically incurred substantial losses, and as of December 31, 2023, we had an accumulated deficit of $153.3 million.

Additionally, our sales have been concentrated among a few major customers and for the twelve months ended December 31, 2023, two customers accounted for approximately 48% of net sales.

In 2023 and 2022, we recommitted to building upon the transformation activities started during 2019 that sought to stabilize and regrow our business.

These efforts include the following key developments that occurred during 2023 and 2022:

• We continued development of the second generation of EnFocus™ powerline control switches and circadian lighting system for commercial markets, which as a result of supply chain challenges we now plan to reintroduce in 2024.

EnFocus™ powerline control enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and EnFocus™ LED lamps.

This upgrade offers a simpler, more secure, affordable and environmentally sustainable solution compared with replacing entire luminaire fixtures and incorporating additional wired or wireless communication.

• We reinvested in our MMM sales channel and are pursuing existing and new sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.

• Beginning in July 2022, we reduced our warehouse square footage, and undertook an inventory reduction project throughout 2022 focused on reducing our highly reserved commercial finished good inventory.

• The Company has aggressively re-evaluated operating expenses, and reduced its workforce significantly throughout 2022 and into 2023 to manage fixed costs.

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

In September 2023, we entered into a security purchase agreement, pursuant to which we raised aggregate gross proceeds of $1.8 million.

Please refer to Note 9 included under Part II, Item 8 “Financial Statements and Supplementary Data,” of this Annual Report for the details.

During 2022 and into 2023, we redoubled our cost control efforts to streamline our operations by closely managing all spending done throughout the Company, while carefully investing in new products and strategies that sought to reenergize sales.

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

We plan to achieve profitability through developing and launching new, innovative products, such as our EnFocusTM powerline control systems, our Redcap® emergency battery backup tubular TLEDs, evaluating new growth opportunities such as GaN-based power supply circuitry and other energy solution products, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships.

We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform that aim to serve the commercial markets.

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

Liquidity and capital resources

We generated a net loss of $10.3 million in 2022, compared to net loss of $7.9 million in 2021.

We have incurred substantial losses in the past, and as of December 31, 2022, we had an accumulated deficit of $149.0 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 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.

Credit Facilities

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

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, 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 (“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.

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, 2022.

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

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 $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.

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

2021 Streeterville Note

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

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.

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 “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.

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 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 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 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:

• 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;

• 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, 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.

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

Cash and debt

At December 31, 2022, our cash balance was $0.1 million, compared to $2.7 million at December 31, 2021.

At December 31, 2023, our cash balance was $2.0 million, compared to $52 thousand at December 31, 2022.

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):

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Proceeds from the issuance of common stock and warrants $ 6,079 $ 3,500

Proceeds from the exercise of warrants — 801

Costs related to reverse stock-split (16) —

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

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Proceeds from exercise of stock options and purchases through employee stock purchase plan — 6

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

Payments on the 2022 Streeterville Note (625) —

Payments for deferred financing costs — (114)

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Proceeds from the 2022 Streeterville Note — 2,000

Proceeds from the 2022 Streeterville Note 2,000 —

Proceeds from related party promissory notes payable — 800

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Net payments on credit line borrowings - Credit Facilities (1,402) (768)

Advanced capital contribution 450 —

Net cash provided by financing activities $ 4,486 $ 4,099

Cash used in operating activities

Net cash used in operating activities

Net cash used in operating activities of $2.4 million in 2023 resulted primarily from the net loss incurred of $4.3 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.

depreciation and amortization of $0.3 million, stock-based compensation, net of $44 thousand, non-favorable provisions from inventory of $25 thousand and from accounts receivable of $6 thousand, and favorable provisions from warranty of $33 thousand and gain from paid-off of Credit Facilities of $40 thousand.

We used $1.1 million through the timing of collection of accounts receivable, $0.2 million for prepayments to vendors, and $47 thousand through a decrease of other accrued liabilities.

We generated $0.6 million in cash for an increase in accounts payable due to the timing of inventory receipts and payments, $0.5 million from the change in prepaid and other current assets, and $1.0 million in inventory as we sold off a substantial portion of the stock on hand.

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 $0.2 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.

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

We used $0.6 million through a decrease of other accrued liabilities and $0.3 million from changes in deferred revenue.

Cash used in investing activities

Net cash used in investing activities was $69 thousand in 2023, 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.

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

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.

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.

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 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.

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.

Net cash provided by financing activities for the year ended December 31, 2023 of $4.5 million primarily resulted from the proceeds from the issuance of common stock and warrants of $6.1 million and advanced capital contribution of $0.5 million.

The increases in cash were partially offset by payments on the 2022 Streeterville Note of $0.6 million and Credit Facilities of $1.4 million.

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, proceeds from promissory notes payable of $0.7 million, related party promissory notes payable of $0.8 million, and the issuance of the 2022 Streeterville Note provided net proceeds of $2.0 million.

The increases in cash were partially offset by payments on the 2021 Streeterville Note of $1.6 million, Credit Facilities of $0.8 million, and the deferred financing cost of $0.1 million.

Off-balance sheet arrangements

We had no off-balance sheet arrangements at December 31, 2022 or 2021.

We had no off-balance sheet arrangements during the years ended December 31, 2023 and 2022.

Contractual and other obligations

As of December 31, 2023, we had approximately $0.5 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2024.

We have 49% of the outstanding purchase commitments with a related party.

There have been no other material changes to our contractual and other obligations as compared to those included in our 2022 Annual Report.

Critical accounting policies and estimates

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.

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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• share-based compensation, and

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.

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.

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.

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 2022 and 2021, the total allowance was $26 thousand and $14 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.

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.

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, 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.

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, 2022 and 2021, we have recorded a full valuation allowance against our deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward.

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

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

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

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

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 $78.0 million of the $132.4 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 $9.2 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.

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.

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 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.

The lease expired in June 2021.

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

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

Recently 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 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.

Recently adopted accounting guidance

For information on recently adopted accounting guidance, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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