UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
For the transition period from ___________ to ___________
Commission file number 001-36583
ENERGY FOCUS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3021850
(I.R.S. Employer Identification No.)
32000 Aurora Road, Suite B
Solon, Ohio 44139
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: 440.715.1300
Title of each class
Common stock, par value $0.0001 per share
Securities registered pursuant to Section 12(b) of the Act:
Trading symbol(s)
EFOI
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act of 1933. Yes ☐No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
☐
☑
Accelerated filer
Smaller reporting company
Emerging growth company
☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the Company’s common stock held by non-affiliates of the Company was approximately $17.1 million as of June 30, 2021, the last day of the
Company’s most recently completed second fiscal quarter, when the last reported sales price was $3.98 per share.
Number of the registrant’s shares of common stock outstanding as of March 14, 2022: 6,453,777.
Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission relative to the registrant’s 2022 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
TABLE OF CONTENTS
PART I
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
[RESERVED]
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART III
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
PART IV
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PART I
Forward-Looking Statements
Unless the context otherwise requires, all references to “Energy Focus,” “we,” “us,” “our,” “our company,” or “the Company” refer to Energy Focus,
Inc., a Delaware corporation, and its consolidated subsidiary for the applicable periods, considered as a single enterprise.
This Annual Report on Form 10-K (this “Annual Report”) includes statements that express our opinions, expectations, beliefs, plans, objectives,
assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements can generally be identified by the use of forward-looking terminology, including the
terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could”
or “would” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are
not historical facts. They appear in a number of places throughout this Annual Report and include statements regarding our intentions, beliefs, or current
expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, capital expenditures,
and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not
occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made in light of the
information currently available to us, we caution you that forward-looking statements are not guarantees of future performance and that our actual results
of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-
looking statements contained in this Annual Report. In addition, even if our results of operations, financial condition and liquidity, and industry
developments are consistent with the forward-looking statements contained in this Annual Report, those results or developments may not be indicative of
results or developments in subsequent periods.
We believe that important factors that could cause our actual results to differ materially from forward-looking statements include, but are not limited to, the
risks and uncertainties outlined under “Risk Factors” under Item 1A of this Annual Report and other matters described in this Annual Report and our other
filings with the Securities and Exchange Commission (the “SEC”) generally. Some of these factors include:
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instability in the U.S. and global economies and business interruptions experienced by us, our customers and our suppliers as a result of the
coronavirus (“COVID-19”) pandemic and related impacts on travel, trade and business operations;
the competitiveness and market acceptance of our light-emitting diode (“LED”) lighting, control and ultraviolet light disinfection (“UVCD”)
technologies and products;
our ability to compete effectively against companies with lower prices or cost structures, greater resources, or more rapid development
capabilities, and new competitors in our target markets;
our ability to extend our product portfolio into consumer products;
our ability to realize the expected novelty, disinfection effectiveness, affordability and estimated delivery timing of our UVCD products and their
appeal compared to other products;
our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters;
the timing of large customer orders, significant expenses and fluctuations between demand and capacity as we invest in growth opportunities;
our ability to successfully scale our network of sales representatives, agents, distributors and other channel partners to compete with the sales
reach of larger, established competitors;
our ability to implement plans to increase sales and control expenses;
our reliance on a limited number of customers for a significant portion of our revenue, and our ability to maintain or grow such sales levels;
our ability to add new customers to reduce customer concentration;
our need for additional financing in the near term to continue our operations;
our ability to refinance or extend maturing debt on acceptable terms or at all;
our ability to continue as a going concern for a reasonable period of time;
our ability to attract and retain a new chief executive officer (“Chief Executive Officer”);
our ability to attract, develop and retain qualified personnel, and to do so in a timely manner;
our reliance on a limited number of third-party suppliers and research and development partners, our ability to manage third-party product
development and obtain critical components and finished products from such suppliers on
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acceptable terms and of acceptable quality despite ongoing global supply chain challenges, and the impact of our fluctuating demand on the
stability of such suppliers;
our ability to timely, efficiently and cost-effectively transport products from our third-party suppliers to our facility by ocean marine and other
logistics channels despite global supply chain and logistics disruptions;
the impact of any type of legal inquiry, claim or dispute;
the inflationary or deflationary general economic conditions in the United States and in other markets in which we operate or secure products,
which could affect our ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely and cost-
effective manner;
our dependence on military maritime customers and on the levels and timing of government funding available to such customers, as well as the
funding resources of our other customers in the public sector and commercial markets;
business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters, including earthquakes, typhoons, floods
and fires, or from health epidemics or pandemics or other contagious outbreaks;
our ability to respond to new lighting and air disinfection technologies and market trends;
our ability to fulfill our warranty obligations with safe and reliable products;
any delays we may encounter in making new products available or fulfilling customer specifications;
any flaws or defects in our products or in the manner in which they are used or installed;
our ability to protect our intellectual property rights and other confidential information, and manage infringement claims by others;
our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as
those relating to the environment and health and safety;
risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency
fluctuations, including tariffs and other potential barriers to international trade;
our ability to maintain effective internal controls and otherwise comply with our obligations as a public company; and
our ability to maintain compliance with the continued listing standards of The Nasdaq Stock Market (“Nasdaq”).
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In light of the foregoing, we caution you not to place undue reliance on our forward-looking statements. Any forward-looking statement that we make in this
Annual Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly
announce the results of any revision to any of those statements to reflect future events or developments, except as required by law. Comparisons of results
for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such,
and should only be viewed as historical data. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those
events or how they may affect us.
Energy Focus , Intellitube , Redcap , EnFocus™ and nUVo™ are our registered trademarks. We may also refer to trademarks of other corporations and
organizations in this document.
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ITEM 1. BUSINESS
Overview
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls and
ultraviolet-C light disinfection (“UVCD”) products. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products
and UVCD products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the
fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and
human health and wellness through advanced LED retrofit and UVCD solutions. Our goal is to be the LED and human-centric lighting (“HCL”) technology
and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We
specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) 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 2021, we continued to build upon the transition and transformation activities started during 2019 and 2020 that sought to stabilize and regrow our
business. These transition efforts include the following key developments that occurred during 2021:
• We announced plans for 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. 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 LED lamps, a simpler, more secure, affordable and environmentally sustainable solution
compared with replacing entire lighting fixtures and incorporating additional wired or wireless communication.
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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 enclosed or personal spaces.
Additional nUVo™ product development is planned in 2022 as we expect to refocus our ongoing UVCD development efforts on the commercial
and consumer spaces.
• We continued to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives:
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In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors
pursuant to which we agreed to issue and sell (i) 1,193,185 shares of our common stock, (ii) pre-funded warrants (“Pre-Funded
Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (iii) 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. Net proceeds from the December 2021 Private Placement were approximately $4.0 million.
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◦ During the third quarter of 2021, we applied for approximately $876 thousand in tax refunds relating to our second and third quarter 2021
employer tax filings pursuant to the Employee Retention Tax Credits in accordance with amendments made in 2021 to the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”). We received approximately $431 thousand during the fourth quarter of 2021
and expect to receive the remainder during 2022 after review of our amended tax filing.
In June 2021, we completed a registered direct offering (the “June 2021 Equity Offering”) of 990,100 shares of our common stock to
certain institutional investors. Net proceeds to us from the June 2021 Equity Offering was approximately $4.5 million;
In April 2021, we entered into a note purchase agreement with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and
issued to Streeterville a promissory note in the principal amount of approximately $1.7 million, with net proceeds of approximately $1.5
million.
In April 2021, we increased the maximum amount that may be available to the Company on our inventory financing facility with
Crossroads Financial Group, LLC by $500 thousand, for a total capacity of $3.5 million possible borrowings.
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◦ During the first quarter of 2021, the $795 thousand Paycheck Protection Program loan (and the related interest) we received in 2020
under the CARES Act was forgiven by the Small Business Administration.
During 2021, we continued to expand our engineering capabilities and invest in our intellectual property portfolio for both lighting and controls and UVCD
products, and we broadened our product distribution network by engaging with new lighting agencies and energy service companies (“ESCOs”). We also
extended our efforts from 2020 to streamline our operations by closely managing all spending done throughout the Company, while investing in new
products and strategies that sought to reenergize sales.
Throughout 2021, due to ongoing economic and building occupancy impacts from the COVID-19 pandemic, we again experienced a slowdown and
continuing weakness in commercial sales as our customers in the healthcare, education, and commercial and industrial sectors put lighting retrofit projects
on hold or delayed order placements. 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 respond to the spread of the virus. Although the significance and duration of the ongoing impact on our
customers and us is still uncertain, and the specific timing of business recovery from the impact of the COVID-19 pandemic is still difficult to predict, we
remain optimistic that as the number of infected cases stabilizes or declines, facility capital budgets will start unfreezing, commercial building occupancy
will rise, and our growth efforts will further impact our financial performance in a positive way.
We will 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, such as the UVCD and consumer markets, that we believe will provide additional growth opportunities. We
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plan to achieve profitability through developing and launching new, innovative products, such as our EnFocus
powerline control systems, our Redcap
emergency battery backup tubular LEDs, and our nUVo™ UVCD products, as well as executing on our multi-channel sales strategy that targets key
verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding
channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocus
platform that aim to
serve both consumer and commercial markets, and to refocus our UVCD product portfolio on high growth opportunities. 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.
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Our Industry
We develop advanced LED lighting and controls retrofit technologies and UVCD product solutions that enable our customers to run their facilities and
homes with greater energy efficiency, productivity and human wellness. We aim to be an LED and HCL technology leader, and to help create healthier and
safer environments, by providing high-quality, energy-efficient, “flicker-free,” long-lived LED lamps and fixture products, and lighting controls to replace
existing linear fluorescent, incandescent, HID lamps and fixtures, as well as offering innovative and impactful UVCD product solutions.
We believe these applications represent a significant portion of the LED lighting market and energy savings potential for our targeted commercial, industrial
and MMM markets. We also believe that the UVCD market is a growing opportunity and that the focus on health, sanitation and air quality will remain even
after the COVID-19 pandemic’s impact subsides.
LED lighting, and particularly LED retrofit of fluorescent and incandescent lights in existing buildings, represents a large and growing market. A 2020
report issued by the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy (“DOE”), entitled “Adoption of Light-Emitting Diodes
in Common Lighting Applications,” reports that from 2016 to 2018, installations of LED products have increased in all applications, increasing LED
penetration to 30% of all general illumination lighting. In 2019, Navigant Research published a report that concluded that LED lighting had at least matched
conventional lighting technologies on a range of features, including energy efficiency, lifetime, versatility and color quality, while becoming increasingly
cost competitive. This same 2019 report forecasts that installed penetration of LED lamps and luminaires will increase dramatically through 2035, reaching
about 84%. The increasing demand for LED lighting is being driven by energy and cost savings, environmental considerations and human health.
Energy consumption can be reduced by over 50% by replacing fluorescent tubes with LED tubes and by another 20-30% (70% to over 80% in total) by
utilizing smart lighting technologies, including dimmable TLEDs with ambient light and occupancy sensors. For this reason, building codes are increasingly
requiring not only LEDs, but dimmable LEDs. Governments around the world are implementing regulations and standards that incentivize the use of LED
lighting, both smart and conventional, to reduce energy consumption and, therefore, carbon dioxide emissions. Our new product research and development
investments since 2019 have been focusing on advanced and smart lighting technologies to capitalize on these trends, and EnFocus™
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represents such a control platform that we aim to expand in terms of functionalities, applications and intelligence, going forward.
There is also a growing awareness of the effects of both visible and non-visible light on human health and well-being. Energy Focus has been a leader in
flicker-free technology and one of the first to obtain Underwriters Laboratories (“UL ”) certification at less than 1% optical flicker. Flicker, which is the
modulation of the intensity of LED light at the frequency of the power supply, is well known to cause headaches, eye strain, fatigue, mood triggers and other
health issues as well as interfering with electronic equipment such as barcode scanners. Energy Focus is continually evaluating additional HCL lighting and
control solutions inspired by emerging health and wellness benefits.
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Smart, or connected, lighting is disrupting the LED industry and providing new opportunities for growth. The DOE defines connected lighting as an LED-
based lighting system with integrated sensors and controllers that are networked (either wired or wireless), enabling lighting products within the system to
communicate with each other and transmit data. In addition to enabling the intensity and correlated color temperature (“CCT”) of lights to respond to
ambient light, time of day and the activities of building occupants, connectivity enables building automation functions that extend well beyond lighting. The
interference of blue light with human circadian rhythms is well known. This can be alleviated by circadian lighting, or controlled lighting that is able to
change the intensity or CCT of the LEDs depending on the time of day in order to emulate natural light. Since lighting fixtures are ubiquitous throughout
buildings, the lighting infrastructure is an ideal vehicle to retrofit these and other smart or connected lighting capabilities into existing buildings, and also to
design these capabilities into new construction. According to Market and Research, the global smart lighting market is estimated to grow from $13.4 billion
in 2020 and to $30.6 billion by 2025, at a compound annual growth rate of 18%.
From the customer feedback we have been receiving, we believe that the overall smart lighting market is still largely underdeveloped due to the cost and
complexity for installations of related technologies today in the marketplace, representing significant potential for solutions that could meet customer needs
and could also be affordable, easy to install and secure. Much of this interest and demand has been muted during 2020 and 2021 as a result of the COVID-
19 pandemic, which we believe has primarily delayed, rather than reduced, our opportunity in the smart lighting marketplace. We believe our EnFocus™
lighting platform could effectively address the unmet needs for circadian and smart lighting, particularly for existing buildings that have limited economical
options or IT expertise to implement otherwise complex lighting control systems.
Our UVCD technologies and products aim to provide effective, reliable and affordable UVCD solutions for buildings, facilities and homes. We are
harnessing the power of high-dose ultraviolet-C (“UV-C”) light for air disinfection via various nUVo™ air disinfector consumer products. These products
are designed to achieve upwards of 99.9% disinfection of airborne pathogens such as molds, bacteria and viruses, including influenza and coronaviruses.
While we believe the LED lighting and smart lighting market is large, growing and under-penetrated, it has also been characterized in recent years by
intensifying competition, market leadership changes and aggressive pricing tactics on differentiated products. Our strategy to overcome these challenges is
to, first and foremost, develop advanced, impactful and customer-centric technologies and products. In addition, we focus on executing our multi-channel
sales strategy and delivering educational campaigns combined with a growing sales representative network to drive effective and frequent communication
with customers in order to better understand and serve their needs. By understanding the voice of the customer and by incorporating rapidly evolving
technologies surrounding LED and smart lighting, we believe that we will continue to be able to develop solutions that better address customers’ needs with
unique and novel product offerings, such as EnFocus™, our dimmable and tunable lighting and control platform, that deliver substantial value to our
customers and accelerate LED and smart lighting adoptions.
Our Products
We design, develop, manufacture and market a wide variety of LED lighting technologies and UVCD products and solutions to serve our primary end user
markets, including the following:
Commercial products to serve our targeted commercial markets:
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RedCap emergency battery backup TLEDs;
EnFocus™ powerline lighting control platform including dimming (“DM”) and color tuning (“DCT”);
LED replacement fixtures, including replacement TLEDs for linear fluorescent lamps, downlights, and retrofit kits for low-bay, high-bay and office
applications;
Industrial grade LED Dock lights; and
nUVo™ Tower and nUVo™ Traveler portable UVCD air disinfectors.
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MMM LED lighting products to serve the U.S. Navy and allied foreign navies:
• Military-grade Intellitube retrofit TLED and the Invisitube™ ultra-low EMI TLED; and
• Military-grade fixtures, including LED globe lights, berth lights; high-bay fixtures and LED retrofit kits.
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Our LED products are more energy-efficient than traditional lighting products, such as fluorescent, incandescent and HID lamps, and we believe they can
improve the overall sustainability profile of our customers by providing financial, environmental and human health benefits, including achieving significant
long-term energy and maintenance cost savings, reducing carbon emission, substantially reducing retrofit waste and enhancing the health and productivity
of building occupants.
Our UVCD solutions aim to provide impactful and affordable disinfection products for businesses and homes to effectively reduce infection risks for a
broad range of airborne pathogens, including, among others, influenza, coronaviruses and mold. In addition to being ozone-free, the products are designed
to provide the appropriate dosage that effectively destroys airborne pathogens while also guarding against the risks of direct human exposure to UV-C rays
through our patent-pending UV blocker technology. The nUVo products include enclosed, self-contained UV-C disinfection units that continuously
inactivate viruses while reducing overall pathogen levels in the air.
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The key features of our products are as follows:
• Many of our products make use of proprietary or patented optical and electronics delivery systems that enable high efficiencies with superior
lighting qualities, and proven records of extremely high product reliability;
• Our products have exceptionally long life, with the majority of our TLED sales providing a 10-year warranty;
• Our products have extremely low flicker, including our 500D series TLED products, which were the first in the lighting industry to be certified by
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UL as “low optical flicker, less than 1%”;
• Most of our products meet the lighting efficiency standards mandated by the Energy Independence and Security Act of 2007;
• Most of our products qualify for federal and state tax and rebate incentives for commercial consumers available in certain states; and
• Our UVCD air disinfection products are designed to inactivate more than 99.9% of airborne pathogens.
Our product development capabilities, which we believe provide a strategic competitive advantage, include the following:
• A long research, engineering, and market developmental history, with broad and intimate understanding of lighting technologies and LED lighting
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applications;
Strong and lean team of experienced, cross-disciplinary engineers that forms the foundation of our engineering innovation and competency not
only in lighting but also in electrical, electronics, optical, thermal, mechanical, communications, air flow and software technologies;
Concentration on developing and providing high-quality, price competitive LED lamps and the surrounding technologies to replace fluorescent and
HID lamps and fixtures for commercial and residential markets;
Providing high quality and high performing LED lighting products with a proven history of reliability;
Emphasis on proprietary and patent-pending technologies surrounding LED lighting and UVCD products; and
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• A deep understanding of LED lighting product applications in existing MMM, government, commercial and residential building markets.
As we seek to develop new connected lighting LED solutions, we expect to continue our investments in smart, connected and HCL research and
development, as well as channel partnerships. Lighting controls, including dimming, sensor and daylighting technologies, can yield significant energy
savings and human health benefits. We believe that the controllability of LED technology and our ability and plan to integrate more occupancy sensing and
other controls into our existing products will allow us to further differentiate our LED solutions and provide greater non-energy benefits to our customers.
Sales and Marketing
Our innovative technologies and high-quality performance associated with LED lighting require a continued focus on educating our channel partners as well
as end-users regarding the benefits and unique value propositions of our technologies and products. Our primary target customers for our LED lighting and
controls systems are enterprise end-users, as well as contractors or ESCOs that could incorporate our products into their projects. We also sell through
lighting agencies that represent our products as a complement to our direct sales effort. We have in-house commercial sales personnel and numerous sales
agencies representing Energy Focus products. We aim to continue to expand the coverage of our in-house sales team, which now covers regions in the
Midwest, Northeast, South, Southeast and Southwest, to eventually cover all geographic regions across the
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United States. Our MMM sales strategy leverages our brand and past performance and focuses on education about our products as well as ease of
procurement.
We focus on industry verticals where the economic and non-economic benefits such as health and safety, as well as technical specifications, of our high-
quality lighting product offerings are most compelling. Our LED and UVCD lighting products fall into two broad market categories, commercial markets,
which tend to focus on quality, efficacy, total cost of ownership and return on investment, and MMM which require more rigorous military specifications for
durability and dependability. We also entered consumer markets during fiscal year 2021, selling directly via e-commerce with digital marketing strategies
that profile our UVCD technologies and products that aim to deliver effective and impactful disinfection for homes and small businesses. We expect that our
multi-channel sales strategy will continue to evolve and expand in the future.
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With the introduction of our military-grade Intellitube product in 2011, which replaced two-foot fluorescent lamps on U.S. Navy ships, military sales have
represented the majority of our overall sales. Since our management change in April 2019, we have been focusing on improving the design of our MMM
products to significantly reduce product costs while maintaining the required performance. Such efforts allowed us to win bids and proposals that helped
grow our MMM sales during 2020, offsetting some of the weakness being experienced in our commercial business due to the impact of the COVID-19
pandemic. Despite military funding holds throughout 2021, we continued to win bids and proposals, which contributed to our MMM sales during the year,
though at levels lower than 2020. While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential
and size, the MMM business does offer us the opportunity for continued sales, in addition to validating our product quality and strengthening our brand trust
in the marketplace.
We launched our first commercial LED lighting products in 2010. Since then, we have been building and expanding our commercial and industrial market
presence where the economic and non-energy benefits and technical specifications of our high-quality lighting product offerings are compelling, particularly
for mission-critical facilities in the enterprise verticals such as healthcare, eldercare, education and the commercial and industrial space. For example:
• Given the 24/7 lighting requirements of hospital systems, we believe that our LED solutions offer the proven quality, performance, long lifetime,
return on investment and low flicker lightning that is particularly attractive to this target market. Since 2015, we have been the primary LED
lighting supplier and partner for a major northeast Ohio hospital system and, as a result of our continued success, we have been able to leverage
this relationship to expand into more hospital systems across the country.
• As we advocate for the benefits of low-flicker LED lighting in schools, both in terms of energy-efficiency and in creating a healthy and effective
•
learning environment, we continue to receive orders to retrofit school districts, colleges and universities.
Low and high bay applications are generally used in commercial and industrial markets to provide light to large open areas like big-box retail
stores, warehouses and manufacturing facilities. In the past few years, technological and cost improvements have allowed LED low and high bay
applications to be more competitive against traditional low and high bay applications with fluorescent or metal halide light sources. In the
industrial market in particular, due to the usage of metal halide lighting, the energy and maintenance savings that can be achieved by switching to
our LED products could be substantial, and we believe we have attractive product offerings in this space.
In addition to our direct and indirect sales force, we have also launched our own e-commerce websites to target both commercial customers and retail
consumers, while also offering financing options for customers. We believe that our renewed and continuing focus on multi-disciplinary technology
innovation and engineering designs to both expand product features and benefits, while lowering product costs of ownership, will continue to enhance the
overall competitiveness of our LED lighting and UVCD products and provide us with the strategic advantage and flexibility to expand our distribution
channels.
Concentration of Sales
In 2021, two customers accounted for 43% of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 30% of net
sales, and sales to a regional commercial lighting retrofit company accounting for approximately 13% of net sales. When sales to our primary distributor for
the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 38% of net
sales for the same period.
In 2020, two customers accounted for 62% of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 49% of net
sales, and sales to a regional commercial lighting retrofit company accounting for approximately 12% of net sales. When sales to our primary distributor for
the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 53% of net
sales for the same period.
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Competition
Our LED lighting products compete against a variety of lighting products, including conventional light sources such as compact fluorescent lamps and HID
lamps, as well as other TLEDs and full fixture LED lighting products. Our ability to compete depends substantially upon the superior performance,
incremental benefits and lower total cost of ownership of our products. Principal competitors in our markets include large lamp manufacturers and lighting
fixture companies based in the United States, as well as TLED and LED replacement fixture manufacturers mostly based in Asia, whose financial resources
may substantially exceed ours and whose cost structure as a percentage of sales may be well below ours. These competitors may introduce new or improved
products that may reduce or eliminate some of the competitive advantage of our products and may have substantially lower pricing. We anticipate that the
competition for our products will also come from new technologies that offer increased energy efficiency, lower initial costs, lower maintenance costs, or
advanced features. We compete with LED systems produced by large lighting companies such as Signify Lighting, Osram Sylvania and GE Lighting, as
well as smaller manufacturers or distributors such as LED Smart, Revolution Lighting Technologies, Orion Energy Systems, Green Creative and Keystone
Technologies. Some of these competitors offer products with performance characteristics similar to those of our products.
TM
For our nUVo UVCD air disinfector products, we expect to compete largely with air purifier brands in the market today, such as Dyson, Molekule, Puro,
Novaerus and RxAir. We believe that our proprietary and patent-pending product designs, as well as lower total lifecycle operating costs, in our UVCD
products will enable our products to be more powerful and effective in inactivating virus in a more timely and energy efficient manner.
Manufacturing and Suppliers
We produce our lighting products and systems through a combination of internal manufacturing and assembly at our Solon, Ohio facility, and sourced
finished goods, manufactured to our specifications. Our internal lighting system manufacturing consists primarily of final assembly, testing, and quality
control. We have worked with several vendors to design custom components to meet our specific needs. Our quality assurance program provides for testing
of all sub-assemblies at key stages in the assembly process, as well as testing of finished products produced both internally and sourced through third
parties. Additionally, we are 9001-2015 ISO certified.
Manufacturing costs are managed through the balance of internal production and outsourced production for certain parts and components, as well as
finished goods in specific product lines, to a small number of vendors in various locations throughout the world, primarily in the United States, Malaysia,
Taiwan, and China. In some cases, we rely upon a single supplier to source certain components, sub-assemblies, or finished goods. We continually attempt
to improve our global supply chain practices to satisfy client demands in terms of quality and volumes, while controlling our costs and achieving targeted
gross margins, and this includes the evaluation of additional outsourcing or further insourcing of internal production where cost, quality and performance
can be maintained or improved. A 2021 DOE report entitled, “2020 LED Manufacturing Supply Chain”, indicated that most of the world’s LED lamp
production and a significant portion of LED luminaire manufacturing takes place in China with virtually no LED lamp manufacturing taking place in the
United States today.
Our supplier concentration is heavily focused within Asia. As a result of the macroeconomic impacts of the COVID-19 pandemic, 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, as well as increased transportation costs, in an effort to manage both shortages of available components and longer lead times in obtaining
components.
One offshore supplier accounted for approximately 29% of our total expenditures for the twelve months ended December 31, 2021. At December 31, 2021,
this same offshore supplier accounted for approximately 60% of our trade accounts payable balance.
One offshore supplier and one domestic supplier accounted for approximately 21% and 12%, respectively, of our total expenditures for the twelve months
ended December 31, 2020. At December 31, 2020, this same offshore supplier accounted for approximately 44% of our trade accounts payable balance.
Product Development
Product development has been a key area of operating focus and competitive differentiation for us in designing and developing industry leading LED
lighting and UVCD products. Gross product development expenses for the years ended December 31, 2021 and 2020 were $1.9 million and $1.4 million,
respectively. We believe that our customer-centric product development efforts represent a better leverage on our R&D investments and aim to continue to
focus on developmental projects that could produce more impactful and differentiated products and solutions in a more timely manner for faster customer
adoption.
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Intellectual Property
We have a policy of seeking to protect our intellectual property through patents, license agreements, trademark registrations, confidential disclosure
agreements, and trade secrets as management deems appropriate. Certain of our patents are key to our current product lines. Additionally, we have various
pending U.S. patent applications, and various pending Patent Cooperation Treaty patent applications filed with the World Intellectual Property Organization
that serve as the basis for national patent filings in countries of interest. Our issued patents expire at various times through May 2040. Generally, the term of
patent protection is twenty years from the earliest effective filing date of the patent application. There can be no assurance; however, that our issued patents
are valid or that any patents applied for will be issued, and that our competitors or clients will not copy aspects of our lighting systems or obtain information
that we regard as proprietary. There can also be no assurance that others will not independently develop products similar to ours. The laws of some foreign
countries in which we manufacture, sell or may sell our products do not protect proprietary rights to products to the same extent as the laws of the United
States.
Insurance
All of our properties and equipment are covered by insurance and we believe that such insurance is adequate. In addition, we maintain general liability,
product recall and workers’ compensation insurance in amounts we believe to be consistent with our risk of loss and industry practice.
Regulatory Compliance
We derive a significant portion of our revenues from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies.
Contracts with government customers are subject to various procurement laws and regulations, business prerequisites to qualify for such contracts,
accounting procedures, intellectual property processes, and contract provisions relating to their formation, administration and performance, which may
provide for various rights and remedies in favor of the governments that are not typically applicable to or found in commercial contracts.
In addition, although not legally required to do so, we strive to obtain certification for substantially all our products. In the United States, we seek
certification on substantially all of our products from UL , Intertek Testing Services (“ETL ”), or DesignLights Consortium (“DLC™”). Where appropriate
in jurisdictions outside the United States, we seek to obtain other similar national or regional certifications for our products. Although we believe that our
broad knowledge and experience with electrical codes and safety standards have facilitated certification approvals, we cannot ensure that we will be able to
obtain any such certifications for our new products or that, if certification standards are amended, we will be able to maintain such certifications for our
existing products.
®
®
Human Capital
At December 31, 2021, we had 58 full-time employees, all of whom were based in the United States, and no part-time employees. We also had four
temporary contractors at December 31, 2021. None of our employees or contractors are subject to collective bargaining agreements and we consider our
relationship with our employees to be good. We encourage and support the growth and development of our employees. Continual learning and career
development is advanced through ongoing performance and development conversations with employees and reimbursement is available to employees for
seminars, conferences, formal education, and other training events employees attend in connection with their job duties.
Our core values of accountability, trust, extraordinariness, fun, openness, integrity and kindness underscore everything we do and drive our day-to-day
interactions. The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic has presented a unique challenge with regard to
maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we have been
able to transition some of our corporate office employees to effectively working from remote locations on a full-time basis, with others working both
remotely and in the office on a hybrid basis, and also to ensure a safely-distanced working environment for employees who remain in our facility.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our current and future
employees. The principal purposes of our annual bonus plan and equity incentive plan are to attract, retain and motivate employees through the granting of
long-term incentive compensation awards.
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Business Segments
We currently operate in a single business segment that includes the marketing and sale of commercial and MMM lighting products and controls and UVCD
products. Please refer to Note 12, “Product and Geographic Information,” included in Item 8, “Financial Statements and Supplementary Data,” of this
Annual Report, for additional information.
Available Information
Our principal executive offices are located at 32000 Aurora Road, Suite B, Solon, Ohio 44139. Our telephone number is 440.715.1300. Our website address
is www.energyfocus.com. We are providing the address to our website solely for the information of investors. The information on our website is not a part
of, nor is it incorporated by reference into this Annual Report. Through our website, we make available, free of charge, our annual proxy statement, annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically
file such material with, or furnish them to, the Securities and Exchange Commission, or the SEC. The SEC maintains a website that contains these reports
at www.sec.gov.
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ITEM 1A. RISK FACTORS
Risks Associated with Our Business
The COVID-19 pandemic could continue to have an adverse effect on our business.
The COVID-19 pandemic continues to have an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health
crisis, which continues to create significant uncertainties. These uncertainties include, but are not limited to, the adverse effect of the pandemic on the
economy, our supply chain partners, transportation and logistics providers, our employees and customers. As the pandemic continues and infection rates
oscillate with new variants, fear about becoming ill with the virus and recommendations or mandates from federal, state and local authorities to avoid large
gatherings of people or self-quarantine may recur or continue to increase, which has already affected, and may continue to affect our supply chain, as well as
our customer base. Continued impacts of the pandemic could materially adversely affect our near-term and long-term revenues, earnings, liquidity and cash
flows, and may require significant actions in response, including, but not limited to, employee furloughs, workforce reductions, plant or other operational
shut-downs, expense reductions or discounting of pricing of our products, all in an effort to mitigate such impacts. The extent of the ongoing impact of the
pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the
United States, including new variants, the timing and success of vaccine programs, the impact on capital and financial markets and the related impact on
consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may
arise that we are not aware of currently.
We depend on our executive leadership, management and key employees. Our lead independent director is currently serving as Interim Chief Executive
Officer while we search for a new Chief Executive Officer. Delays or other challenges in identifying, attracting and retaining a new Chief Executive Officer
could adversely impact our business.
In January 2022, our lead independent director assumed the title of Interim Chief Executive Officer, replacing our former Chief Executive Officer, while a
search is conducted for a new long-term Chief Executive Officer. It is very important that we are able to attract and retain a highly skilled Chief Executive
Officer, in order to execute on the opportunities available to us. Competition for qualified executives can be intense, and there are a limited number of
people with the requisite knowledge and experience. Under these conditions, we could be delayed in or otherwise unable to recruit and retain the right
leader for our organization. If we cannot attract and retain a qualified Chief Executive Officer, or fail to do so in a timely manner, it could have a material
adverse impact on our operating results and stock price.
If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.
We are highly dependent on our senior management and other key personnel due to our very lean organizational structure. Our future success will depend
on our ability to attract, retain, develop and motivate qualified executive, technical, sales, marketing, operating, financial and management personnel, for
whom competition is very intense. As we attempt to rapidly grow our business, it could be especially difficult to attract, retain and adequately compensate
qualified personnel, especially in light of our lean cost structure and the tightening of the labor market due to the effects of the COVID-19 pandemic, which
has led to increased competition for employees. The loss of, or failure to attract, hire, and retain any such persons could delay product development cycles,
disrupt our operations, increase our costs, or otherwise harm our business or results of operations. We also do not maintain “key person” insurance policies
on any of our officers or our other employees, nor have employment contracts.
We rely on equity and debt financing to operate our business and will require additional financing in the near term, which we may not be able to raise on
favorable terms or at all, and our failure to obtain funding when needed may force us to delay, scale back or eliminate our business plan or even
discontinue or curtail our operations.
For the year ended December 31, 2021, we reported a net loss of $7.9 million and are dependent upon the availability of financing in order to continue our
business.
In December 2021, we completed 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 the December 2021 Warrants, consisting of, (i) Pre-Funded
Warrants to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) additional warrants to purchase up to an aggregate of
1,278,413 shares of common stock at an exercise price of $3.52 per share. Net proceeds from the December 2021 Private Placement were approximately
$4.0 million.
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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. None of the December 2021 Warrants were exercised as of December 31, 2021. In January 2022, all of the Pre-Funded Warrants were
exercised. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.
In June 2021, we completed the June 2021 Equity Offering, in which we issued and sold 990,100 shares of our common stock to certain institutional
investors, at a purchase price of $5.05 per share. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.
On August 11, 2020, we entered into 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”). The Receivables Facility capacity
is $2.5 million, and the Inventory Facility capacity was increased (from $3.0 million) to $3.5 million in April 2021. As of December 31, 2021, we had cash
of approximately $2.7 million and had debt balances of $1.2 million and $1.0 million under the Inventory Facility and the Receivables Facility, respectively.
In addition, our accounts receivable balance was $1.2 million and our gross inventory balance was $10.9 million on December 31, 2021. As of February 28,
2022, our cash was approximately $0.3 million and our total outstanding net balance under the Credit Facilities was approximately $1.6 million in the
aggregate. Also, our accounts receivable balance was $0.7 million and our gross inventory balance was $10.6 million on February 28, 2022. Our ability to
draw on the Receivables Facility is limited based on the amount of eligible accounts receivable, and our ability to draw on the Inventory Facility is limited
based on the value of our eligible inventory. The repayment of outstanding advances and interest under the Credit Facilities may be accelerated upon an
event of default, including, but not limited to, failure to make timely payments or breach of any terms set forth in the loan agreements. The Credit Facilities
are secured by our assets and are subject to customary affirmative and negative operating covenants and defaults, restricting indebtedness, liens, corporate
transactions, dividends, and affiliate transactions, among others. The maturity date of the Credit Facilities is August 11, 2022. There can be no assurance
that this facility will be renewed or replaced on commercially reasonable terms or at all.
Even with access to borrowings under the Credit Facilities, we may not generate sufficient cash flows from our operations or be able to borrow sufficient
funds to sustain our operations. As such, we will likely need additional external financing during 2022 and will continue to review and pursue external
funding sources including, but not limited to, the following:
•
•
•
obtaining financing from traditional or non-traditional investment capital organizations or individuals;
obtaining funding from the sale of our common stock or other equity or debt instruments; and
obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional financing contains risks,
including:
•
additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current
stockholders and have rights, preferences and privileges senior to our common stock;
loans or other debt instruments may have terms or conditions, such as interest rates, restrictive covenants and control or revocation provisions,
which are not acceptable to management or our board of directors (the “Board of Directors”); and
the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt
financing.
•
•
Additionally, if we are unable to find a permanent Chief Executive Officer, it may be more difficult to obtain additional financing on satisfactory terms or at
all. If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs,
we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material
adverse effect on our business, future prospects, and financial condition. A lack of additional financing could also result in our inability to continue as a
going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire
investment.
Our independent registered public accounting firm’s opinion on our audited financial statements for the fiscal year ended December 31, 2021, included in
this Annual Report, contains a modification relating to our ability to continue as a going concern.
Our independent registered public accounting firm’s opinion on our audited financial statements for the year ended December 31, 2021 includes a
modification stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our obligations and sustain
our operations raise substantial doubt about our ability to continue as a going concern. In addition, Note 3 “Restructuring”, to our financial statements
included in Part II, Item 8 “Financial
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Statements and Supplementary Data,” of this Annual Report includes disclosure describing the existence of conditions that raise substantial doubt about our
ability to continue as a going concern for a reasonable period of time.
While we continue to pursue funding sources and transactions that could raise capital, there can be no assurances that we will be successful in these efforts
or will be able to resolve our liquidity issues or eliminate our operating losses. If we are unable to generate enough cash or obtain sufficient additional
funding, we would need to scale back or significantly adjust our business plan, further reduce our operating costs and headcount, or discontinue or curtail
our operations. Accordingly, our business, prospects, financial condition and results of operations could be materially and adversely affected, and we may
be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the
value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their
investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have a history of operating losses and will incur losses in the future as we continue our efforts to grow sales and streamline our operations at a
profitable level.
We have incurred substantial losses in the past and reported net losses from operations of $7.9 million and $6.0 million for the years ended December 31,
2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $138.7 million and cash of approximately $2.7 million, compared
to an accumulated deficit of $130.9 million and cash of approximately $1.8 million as of December 31, 2020.
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
product pipeline and potential long-term revenue growth, continue our efforts to reduce product cost, drive further operating efficiencies and develop and
execute a strategic product pipeline for profitable and compelling LED lighting and control and UVCD products. There is a risk that our strategy to return to
profitability may not be as successful as we envision, or occur as quickly as we expect. We might require additional financing in the near-term and, if our
operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need
additional funding, none of which may be available on favorable terms or at all and could require us to sell certain assets or discontinue or curtail our
operations.
While we are attempting to diversify our customer base, we have historically derived a significant portion of our revenue from a few customers, and the loss
of one of these customers, or a reduction in their demand for our products, could adversely affect our business, financial condition, results of operations,
and prospects.
Historically our customer base has been highly concentrated and a few customers have represented a substantial portion of our net sales. In 2021, two
customers accounted for 43% of net sales. Total sales to our primary distributor to the U.S. Navy and a primary shipbuilder for the U.S. Navy represented
38% of net sales in 2021. In 2020, two customers accounted for 62% of net sales. Total sales to our primary distributor to the U.S. Navy, and a primary
shipbuilder for the U.S. Navy represented 53% of net sales in 2020.
We generally do not have long-term contracts with our customers that commit them to purchase any minimum amount of our products or require them to
continue to do business with us. We could lose business from any one of our significant customers for a variety of reasons, many of which are outside of our
control, including the impact of the COVID-19 pandemic, changes in levels of government funding and rebate programs, our inability to comply with
government contracting laws and regulations, changes in customers’ procurement strategies or their lighting retrofit plans, changes in product specifications,
additional competitors entering particular markets, our failure to keep pace with technological advances and cost reductions, and damage to our professional
reputation, among others.
We are attempting to expand and diversify our customer base and reduce the dependence on one or a few customers, through the addition of sales
representatives and other potential marketing partnerships and our direct-to-customer sales strategy, as well as expanding our consumer-focused product
offerings, including our focus on the UVCD-space, but we cannot provide any assurance that our efforts will be successful. We anticipate that a limited
number of customers could continue to comprise a substantial portion of our revenue for the foreseeable future. If we continue to do business with our
significant customers, our concentration can cause variability in our results because we cannot control the timing or amounts of their purchases. A
significant customer could cease to do or drastically reduce its business with us with little or no notice, which could adversely affect our results of
operations and cash flows in particular periods.
Historically, we have experienced long sales-cycles, as well as slow ramp-up by new customers to purchase large amounts of LED products from us. Given
the fiercely competitive lighting market in which we operate, we are constantly trying to balance pricing with the quality-premium our products command
both in brand reputation and performance. As a result, adding new
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customers could generally be a slow process, and increasing new customers’ sales to more significant levels usually takes a long period of time. As we
continue to develop more customer-centric new products such as EnFocus™ and nUVo™, we hope to both add new customers more quickly and have our
customers scale their purchasing levels more quickly. Our UVCD portfolio of products also expands our traditional government and commercial markets to
include the consumer market, increasing the scope and expense of our marketing efforts. However, there is no guarantee of faster customer acceptance or
performance of these new products or any other that has been or is being developed.
If critical components and finished products that we currently research and develop with and purchase from a small number of third-party development
partners and suppliers become unavailable or increase in price, or if our development partners, suppliers or delivery channels fail to meet our requirements
for quality, quantity, and timeliness, our revenue and reputation in the marketplace could be harmed, which would damage our business.
In an effort to reduce research and development and manufacturing costs, we have outsourced the research, development and production of certain parts and
components, as well as finished goods in our product lines, to a small number of vendors in various locations throughout the world, primarily in the United
States, Malaysia, Taiwan and China. We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply
arrangements with such suppliers. While we believe alternative sources for these components and products are available, we have selected these particular
suppliers based on their ability to provide quality products at a cost-effective price, to meet our specifications, and to deliver within scheduled time frames.
We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their
obligations to us. If our ability to manage third-party product development efforts are unsuccessful or our suppliers fail to perform their obligations in a
timely manner or at satisfactory quality levels, we may suffer lost or delayed sales, increased costs of goods sold, reductions in revenue or margin, and
damage to our reputation in the market, all of which would adversely affect our business. As demand for our products fluctuates, which fluctuations can be
hard to predict, we may not need a sustained level of inventory, which may cause financial hardship for our suppliers or they may need to divert production
capacity elsewhere. In the past, we have had to purchase quantities of certain components that are critical to our product manufacturing and were in excess
of our estimated near-term requirements as a result of supplier delivery constraints and concerns over component availability, and we may need to do so in
the future. As a result, we have had, and may need to continue, to devote additional working capital to support a large amount of component and raw
material inventory that may not be used over a reasonable period to produce saleable products, and we may be required to increase our excess and obsolete
inventory reserves to provide for these excess quantities, particularly if demand for our products does not meet our expectations.
We may be vulnerable to unanticipated product development delays, price increases and payment term changes. Significant increases in the prices of
sourced components and products and shipping costs, could cause our product prices to increase, which may reduce demand for our products or make us
more susceptible to competition. Furthermore, in the event that we are unable to pass along increases in operating costs to our customers, margins and
profitability may be adversely affected. Accordingly, the loss of all or one of these suppliers could have a material adverse effect on our operations until
such time as an alternative supplier could be found.
Additionally, consolidation in the lighting industry could result in one or more current suppliers being acquired by a competitor, rendering us unable to
continue purchasing key components and products at competitive prices.
We also may be subject to various import duties and tariffs applicable to materials manufactured in foreign countries and may be affected by various other
import and export restrictions, as well as other considerations or developments impacting upon international trade, including economic or political
instability, tariffs, shipping delays and product quotas. These international trade factors will, under certain circumstances, have an impact on the cost of
components, which will have an impact on the cost to us of the manufactured product and the wholesale and retail prices of our products.
We rely on arrangements with independent shipping companies for the delivery of our products from vendors abroad. The failure or inability of these
shipping companies to deliver products or the unavailability of shipping or port services, even temporarily, could have a material adverse effect on our
business. We may also be adversely affected by an increase in freight surcharges due to global logistics capacity constraints, rising fuel costs and added
security costs.
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If we are unable to implement plans to increase sales and control expenses to manage future growth effectively, our profitability goals and liquidity will be
adversely affected.
Our ability to achieve our desired growth depends on the adoption of high quality LED lighting and controls within the general lighting market, the adoption
of our UVCD products within the healthy home and workspace markets, and our ability to affect and adapt to these rates of adoption. The pace of continued
growth in these markets is uncertain, and in order to grow our sales, we may need to:
• manage organizational complexity and ensure effective and timely communication;
•
•
•
•
•
expand the skills and capabilities of our current management, engineering and sales teams;
add experienced senior level managers;
attract, retain and adequately compensate qualified employees;
adequately maintain and adjust the operational and financial controls that support our business;
expand research and development, sales and marketing, technical support, distribution capabilities, manufacturing planning or administrative
functions and capabilities;
• maintain or establish additional manufacturing facilities and equipment, as well as secure sufficient third-party manufacturing resources, to
adequately meet customer demand or lower manufacturing costs; and
• manage an increasingly complex supply chain to maintain a sufficient supply of materials and deliver on time to our manufacturing facilities.
These efforts to grow our business, both in terms of size and in diversity of customer bases served, may put a significant strain on our resources. We have
implemented comprehensive cost-saving initiatives to reduce our net loss and mitigate doubt about our ability to continue as a going concern. These
initiatives have improved efficiency and streamlined our operations, but we continue to operate at a loss and may need additional funding or further cost-
cutting to manage liquidity.
Our possible future growth may exceed our current capacity and require rapid expansion in certain functional areas. We may lack sufficient funding to
appropriately expand or incur significant expenses as we attempt to scale our resources and make investments in our business that we believe are necessary
to achieve short-term and long-term growth goals. Such investments take time to become fully operational, and we may not be able to expand quickly
enough to exploit targeted market opportunities. In addition to our own manufacturing capacity, we are increasingly utilizing contract manufacturers and
original design manufacturers (“ODMs”) to produce our products for us. There are also inherent execution risks in expanding product lines and production
capacity, whether through our facilities or that of a third-party manufacturer, that could increase costs and reduce our operating results, including design and
construction cost overruns, poor production process yields and reduced quality control. If we are unable to fund any necessary expansion or manage our
growth effectively, we may not be able to adequately meet demand, our expenses could increase without a proportionate increase in revenue, our margins
could decrease, and our business and results of operations could be adversely affected.
Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and capacity.
As our customer base and customer demand for our products changes and as we launch new products, we must be able to adjust our production capacity to
meet demand. We are continually taking steps to address our manufacturing capacity needs for our products. If we are not able to increase or decrease our
production capacity at our targeted rate or if there are unforeseen costs associated with adjusting our capacity levels or there are unanticipated interruptions
in our global supply chain or logistics from such possibilities as the COVID-19 pandemic, shifting workforces or energy policies, we may not be able to
achieve our financial targets. In addition, as we introduce new products and further refine existing products, we must balance the production and inventory
of prior generation products with the production and inventory of new products, whether manufactured by us or our contract manufacturers, to maintain a
product mix that will satisfy customer demand and mitigate the risk of incurring cost write-downs on the previous generation products, related raw materials
and tooling.
If customer demand does not materialize at the rate forecasted, we may not be able to scale back our manufacturing expenses or overhead costs to
correspond to the demand. This could result in lower margins, write-downs of our inventory and adversely impact our business and results of operations.
Additionally, if product demand decreases or we fail to forecast demand accurately, our results may be adversely impacted due to higher costs resulting from
lower factory utilization, causing higher fixed costs per unit produced. In addition, our efforts to improve quoted delivery lead-time performance may result
in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net
sales and operating results.
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If we are not able to compete effectively against companies with lower cost structures or greater resources, or new competitors who enter our target
markets, our sales will be adversely affected.
The lighting industry is highly competitive. In the high-performance lighting markets in which we sell our advanced lighting systems, our products compete
with lighting products utilizing traditional lighting technology provided by many vendors. Our higher quality and value advanced lighting and control
systems also face competition from lower quality, commodity lighting products when customers may be overly purchase-price sensitive. For sales of MMM
products, we compete with a small number of qualified military lighting lamp and fixture suppliers. In certain commercial applications, we typically
compete with LED systems produced by large lighting companies. Our primary competitors include Signify, Osram Sylvania, LED Smart, Revolution
Lighting Technologies, Orion Energy Systems, Green Creative and Keystone Technologies. Some of these competitors offer products with performance
characteristics similar to those of our products. Many of our competitors are larger, more established companies with greater resources to devote to research
and development, manufacturing and marketing, as well as greater brand recognition. In addition, larger competitors who purchase greater unit volumes
from component suppliers may be able to negotiate lower costs, thereby enabling them to offer lower pricing to end customers. Moreover, the relatively low
barriers to entry into the lighting industry and the limited proprietary nature of many lighting products also permit new competitors to enter the industry
easily and with lower costs.
In each of our markets, we also anticipate the possibility that LED component manufacturers, including those that currently supply us with LEDs, may seek
to compete with us. Our competitors’ lighting technologies and products may be more readily accepted by customers than our products will be. Moreover, if
one or more of our competitors or suppliers were to merge, the change in the competitive landscape could adversely affect our competitive position.
Additionally, to the extent that competition in our markets intensifies, we may be required to further reduce our prices in order to remain competitive. If we
do not compete effectively, or if we reduce our prices without making commensurate reductions in our costs, our net sales, margins, and profitability and our
future prospects for success may be harmed.
We work with independent agents and sales representatives for a portion of our net sales, and the failure to incentivize, retain and manage our relationships
with these third parties, or the termination of these relationships, could cause our net sales to decline and harm our business.
In the past, we pursued an agency-driven sales channel strategy in order to expand our market presence throughout the United States. As a result, at that
time, we had increased our reliance on independent sales agent channels to market and sell our LED lighting and control products. In addition, these parties
provide technical sales support to end-users. The current agreements with our agents are generally non-exclusive on the agents’ product portfolio, meaning
they can sell our competitors’ products. Any such agreements we enter into in the future may be on similar terms. Our agents may not be motivated to or
successfully pursue the sales opportunities available to them, or they may prefer to sell or be more familiar with the products of our competitors. If our
agents do not achieve our sales objectives or these relationships take significant time to develop, our revenue may decline, fail to grow or not increase as
rapidly as we intend in order to achieve profitability and grow our business. During 2020 and 2021, we significantly reduced our reliance on agencies for a
substantial portion of our sales, and refocused our agency relationships on those that were both mutually beneficial and strategically important. Although we
believe that our agency strategy will increase the role of independent agents and sales representatives over time, direct sales using internal sales personnel
still account for a substantial portion of our sales, and our agency plans may take longer to contribute significantly to our operating results.
Furthermore, our agency agreements are generally short-term and can be cancelled by either party without significant financial consequence. The
termination of or the inability to negotiate extensions of these contracts on acceptable terms could adversely impact sales of our products. Additionally, we
cannot be certain that we or end-users will be satisfied by their performance. If these agents significantly change their terms with us, or change their end-
user relationships, there could be an impact on our net sales and profits.
If our LED lighting and control technology or our UVCD products fail to gain widespread market acceptance or we are unable to respond effectively as new
technologies and market trends emerge, our competitive position and our ability to generate revenue, and profits may be harmed.
To be successful in our respective markets for LED lighting and control technology and our UVCD products, we depend on continued market acceptance of
our existing LED lighting and control technology establishing market acceptance for our new UVCD products, including in the consumer and commercial
markets. Although adoption of LED lighting and air and surface sanitation products continues to grow, including in response to the COVID-19 pandemic
and increased awareness of sanitation, the use of LED lighting products for general illumination and the use of UVCD products for air and surface
sanitation are in their early stages of market adoption, are still limited, and face significant challenges. Potential customers may be reluctant to adopt LED
lighting products as an alternative to traditional lighting technology or UVCD products as an alternative to
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traditional chemical-based sanitation because of their higher initial costs or perceived risks relating to their novelty, reliability, usefulness, quality and cost-
effectiveness when compared to other established lighting sources and sanitation processes available in the market. Changes in economic and market
conditions may also make traditional lighting and sanitation technologies more appealing. For example, declining energy prices in certain regions or
countries may favor existing lighting technologies that are less energy-efficient, reducing the rate of adoption for LED lighting products in those areas.
Notwithstanding continued performance improvements and cost reductions of LED lighting and UVCD technologies, limited customer awareness of the
benefits of LED lighting and UVCD products, lack of widely accepted standards governing LED lighting and UVCD products and customer unwillingness
to adopt LED lighting and UVCD products could significantly limit the demand for LED lighting and UVCD products. Even potential customers that are
inclined to adopt energy-efficient lighting technology or new or increased sanitation technologies may defer investment as LED lighting and UVCD
products continue to experience rapid technological advances. Any of the foregoing could adversely impact our results of operations and limit our market
opportunities.
In addition, we will need to keep pace with rapid changes in LED lighting and control technology and UVCD air and surface sanitation technology,
changing customer requirements, new product introductions and cost reductions by competitors and evolving industry standards, any of which could render
our existing products obsolete if we fail to respond in a timely manner. The development, introduction, and acceptance of new, re-designed or reduced cost
products incorporating advanced technology is a complex process subject to numerous uncertainties, including:
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available funding to sustain adequate development efforts;
achievement of technology breakthroughs required to make commercially viable devices, and in turn, protecting those breakthroughs through
intellectual property;
the accuracy of our predictions for market requirements;
our ability to predict, influence, or react to evolving standards;
acceptance of our new product designs;
acceptance of new technologies in certain markets;
the combination of other desired technological advances with lighting products, such as controls;
the availability of qualified research and development personnel;
our timely completion of product designs and development;
our ability to develop repeatable processes to manufacture new products in sufficient quantities, with the desired specifications, and at competitive
costs;
our ability to effectively transfer products and technology from development to manufacturing; and
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We could experience delays in the introduction of these products. We could also devote substantial resources to the development of new technologies or
products that are ultimately not successful.
If effective new sources of light, other than LEDs, or effective new sanitation technologies, other than UVCD, are discovered and commercialized, our
current products and technologies could become less competitive or obsolete. If others develop innovative proprietary lighting or sanitation technology that
is superior to ours, or if we fail to accurately anticipate technology, pricing and market trends, address market saturation and customer confusion, respond on
a timely basis with our own development of new and reliable products and enhancements to existing products, and achieve broad market acceptance of these
products and enhancements, our competitive position may be harmed and we may not achieve sufficient growth in our net sales to attain or sustain
profitability.
Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance.
Our operating results have fluctuated significantly in the past and could fluctuate in the future. Factors that may contribute to fluctuations include:
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changes in aggregate capital spending, cyclicality and other economic conditions, including inflationary pressures, or domestic and international
demand in the industries;
the timing of large customer orders to which we may have limited visibility and cannot control;
competition for our products, including the entry of new competitors and significant declines in competitive pricing;
our ability to effectively manage our working capital;
our ability to generate increased demand in our current and targeted markets, particularly those in which we have limited experience;
our ability to satisfy customer demands in a timely and cost-effective manner;
pricing and availability of labor and materials;
quality testing and reliability of new products;
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our inability to adjust certain fixed costs and expenses for changes in demand and the timing and significance of expenditures that may be incurred
to facilitate our growth;
• macroeconomic, geopolitical and health concerns, including the COVID-19 pandemic;
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seasonal fluctuations in demand and our revenue; and
disruption in component supply from foreign vendors.
Depressed general economic conditions may adversely affect our operating results and financial condition.
Our business is sensitive to changes in general economic conditions, both inside and outside the United States. Slow growth in the economy or an economic
downturn, particularly one affecting construction and building renovation, or that causes end-users to reduce or delay their purchases of lighting products,
services, or retrofit activities, would have a material adverse effect on our business, cash flows, financial condition and results of operations. LED lighting
retrofit projects, in particular, tend to require a significant capital commitment, which is offset by cost savings achieved over time. As such, a lack of
available capital, whether due to economic factors or conditions in the equity or debt markets, could have the effect of reducing demand for our products. A
decrease in demand could adversely affect our ability to meet our working capital requirements and growth objectives, or could otherwise adversely affect
our business, financial condition, and results of operations.
Customers may be unable to obtain financing to make purchases from us.
Some of our customers require financing in order to purchase our products, and the initial investment is higher than that which is required with traditional
lighting products. The potential inability of these customers to access the capital needed to finance purchases of our products and meet their payment
obligations to us could adversely impact the appeal of our products relative to those with lower upfront costs and have a negative impact on our financial
condition and results of operations. There can be no assurance that third-party finance companies will provide capital to our customers.
A significant portion of our business is dependent upon the existence of government funding, which may not be available into the future and could result in a
reduction in sales and harm to our business.
Some of our customers are dependent on governmental funding, including U.S. and foreign allied navies and U.S. military bases. If any of these customers
or potential customers abandon, curtail, or delay planned LED lighting retrofit projects as a result of the levels of funding available to them or changes in
budget priorities, it would adversely affect our opportunities to generate product sales.
Our products could contain defects, or they may be installed or operated incorrectly, which could reduce sales of those products or result in claims against
us.
Despite product testing, defects may be found in our existing or future products. This could result in, among other things, a delay in the recognition or loss
of net sales, the write-down or destruction of existing inventory, insurance recoveries that fail to cover the full costs associated with product recalls or other
claims, significant warranty, support, and repair costs, diversion of the attention of our engineering personnel from our product development efforts, and
damage to our relationships with our customers. The occurrence of these problems could also result in reputational and brand damage or the delay or loss of
market acceptance of our lighting products and would likely harm our business. In addition, our customers may specify quality, performance, and reliability
standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products
may contain undetected defects or flaws that only become evident after shipment. Even if our products meet standard specifications, our customers may
attempt to use our products in applications for which they were not designed or in products that were not designed or manufactured properly, resulting in
product failures and creating customer satisfaction issues.
Some of our products use line voltages (such as 120 or 240 volts AC), which involve enhanced risk of electrical shock, injury or death in the event of a short
circuit or other malfunction. Defects, integration issues or other performance problems in our lighting products could result in personal injury or financial or
other damages to end-users or could damage market acceptance of our products. Our customers and end-users could also seek damages from us for their
losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend and the adverse publicity
generated by such a claim against us or others in our industry could negatively impact our reputation.
We provide warranty periods generally ranging from one to ten years on our LED lighting products and one year for our UVCD products. Although we
believe our reserves are appropriate, we are making projections about the future reliability of new products and technologies, and we may experience
increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated
with customer support.
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Our industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which may result in protracted and expensive
litigation. We have engaged in litigation in the past and litigation may be necessary in the future to enforce our intellectual property rights or to determine
the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others.
Additionally, we could be required to defend against individuals and groups who have been purchasing intellectual property assets for the sole purpose of
making claims of infringement and attempting to extract settlements from companies like ours. Litigation could delay development or sales efforts and an
adverse outcome in litigation, or any similar proceedings, could subject us to significant liabilities, require us to license disputed rights from others or
require us to cease marketing or using certain products or technologies. We may not be able to obtain any licenses on acceptable terms, if at all, and may
attempt to redesign those products that contain allegedly infringing intellectual property, which may not be possible. We also may have to indemnify certain
customers if it is determined that we have infringed upon or misappropriated another party’s intellectual property. The costs of addressing any intellectual
property litigation claim, including legal fees and expenses and the diversion of management resources, regardless of whether the claim is valid, could be
significant and could materially harm our business, financial condition, and results of operations.
From time to time, we have been and may in the future be subject to claims or allegations that we infringe upon or have misappropriated the intellectual
property of third parties. Defending against such claims is costly and intellectual property litigation often involves complex questions of fact and law, with
unpredictable results. We may be forced to acquire rights to such third-party intellectual property on unfavorable terms (if rights are made available at all),
pay damages, modify accused products to be non-infringing, or stop selling the applicable product altogether.
We may be subject to confidential information theft or misuse, which could harm our business and results of operations.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential
information. Our security measures may be breached as the result of industrial or other espionage actions of outside parties, employee error, malfeasance or
otherwise, and as a result, an unauthorized party may obtain access to our systems. In addition, these same risks to our information technology systems also
apply to the third-party service providers’ information technology systems utilized by the Company. Additionally, outside parties may attempt to access our
confidential information through other means, for example by fraudulently inducing our employees to disclose confidential information. We actively seek to
prevent, detect and investigate any unauthorized access, which occasionally occurs despite our best efforts. We might be unaware of any such access or
unable to determine its magnitude and effects. The theft, corruption or unauthorized use or publication of our trade secrets and other confidential business
information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development
could be reduced. Our business could be subject to significant disruption, widespread negative publicity and a loss of customers, and we could suffer legal
liabilities and monetary or other losses.
We have international operations and are subject to risks associated with operating in international markets.
We outsource the production of certain parts and components, as well as finished goods in certain product lines, to a small number of vendors in various
locations outside of the United States, including Malaysia, Taiwan and China. Although we do not currently generate significant sales from customers
outside the United States, we are targeting foreign allied navies as a potential opportunity to generate additional sales of our MMM products as well as a
limited number of foreign geographic markets which we expect to expand over time.
International business operations are subject to inherent risks, including, among others:
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difficulty in enforcing agreements and collecting receivables through foreign legal systems;
unexpected changes in regulatory requirements, tariffs, and other trade barriers, restrictions or disruptions;
potentially adverse tax consequences;
localized impacts of epidemics, pandemics or other contagious outbreaks, such as the COVID-19 pandemic;
the burdens of compliance with the U.S. Foreign Corrupt Practices Act, similar anti-bribery laws in other countries, and a wide variety of other
laws;
import and export license requirements and restrictions of the United States and each other country in which we operate;
exposure to different legal standards and reduced protection for intellectual property rights in some countries;
currency fluctuations and restrictions; and
political, social, and economic instability, including war and the threat of war, acts of terrorism, pandemics, boycotts, curtailment of trade, or other
business restrictions.
If we do not anticipate and effectively manage these risks, these factors may have a material adverse impact on our business operations.
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Risks Associated with Legal and Regulatory Matters
We may be subject to legal claims against us or claims by us that could have a significant impact on our resulting financial performance.
At any given time, we may be subject to litigation or claims related to our products, intellectual property, suppliers, customers, employees, stockholders,
distributors, sales representatives and sales of our assets, among other things, the disposition of which may have an adverse effect upon our business,
financial condition, or results of operations. The outcome of litigation is difficult to assess or quantify. Lawsuits can result in the payment of substantial
damages by defendants. If we are required to pay substantial damages and expenses as a result of these or other types of lawsuits, our business and results of
operations would be adversely affected. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend
and may divert time and money away from our operations. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect
to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results
of our operations.
Our business may suffer if we fail to comply with government contracting laws and regulations.
We derive a significant portion of our revenues from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies.
Contracts with government customers are subject to various procurement laws and regulations, business prerequisites to qualify for such contracts,
accounting procedures, intellectual property processes, and contract provisions relating to their formation, administration and performance, which may
provide for various rights and remedies in favor of the governments that are not typically applicable to or found in commercial contracts. Failure to comply
with these laws, regulations, or provisions in our government contracts could result in litigation, the imposition of various civil and criminal penalties,
termination of contracts, forfeiture of profits, suspension of payments, or suspension from future government contracting. If our government contracts are
terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected, our business could suffer due to,
among other factors, lost sales, the costs of any government action or penalties, damages to our reputation and the inability to recover our investment in
developing and marketing products for MMM use.
If we are unable to obtain and adequately protect our intellectual property rights or are subject to claims that our products infringe on the intellectual
property rights of others, our ability to commercialize our products could be substantially limited.
We consider our technology and processes proprietary. If we are not able to adequately protect or enforce the proprietary aspects of our technology,
competitors may utilize our proprietary technology. As a result, our business, financial condition, and results of operations could be adversely affected. We
protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements,
and similar means. Despite our efforts, other parties may attempt to disclose, obtain, or use our technologies. Our competitors may also be able to
independently develop products that are substantially equivalent or superior to our products or slightly modify our products. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary
rights adequately in the United States or abroad. Furthermore, there can be no assurance that we will be issued patents for which we have applied or obtain
additional patents, or that we will be able to obtain licenses to patents or other intellectual property rights of third parties that we may need to support our
business in the future. The inability to obtain certain patents or rights to third-party patents and other intellectual property rights in the future could have a
material adverse effect on our business.
The ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have significant U.S. net operating loss and tax credit carryforwards (the “Tax Attributes”). Under federal tax laws, we can carry forward and use our
Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of
1986, as amended (the “IRC”). Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our Tax Attributes, as well as
certain built-in-losses, against future U.S. taxable income in the event of a change in ownership, as defined under the IRC. Share issuances in connection
with our past financing transactions or other future changes in our stock ownership, which may be beyond our control, could result in changes in ownership
for purposes of the IRC. Such changes in ownership could further limit our ability to use our Tax Attributes. Accordingly, any such occurrences could
adversely affect our financial condition, operating results and cash flows.
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The cost of compliance with environmental, health, safety, and other laws and regulations could adversely affect our results of operations or financial
condition.
We are subject to a broad range of environmental, health, safety, and other laws and regulations. These laws and regulations impose increasingly stringent
environmental, health, and safety protection standards and permit requirements regarding, among other things, air emissions, wastewater storage, treatment,
and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, the remediation of environmental contamination, and
working conditions for our employees. Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Clean Water Act, and comparable laws in U.S. states and other jurisdictions world-wide, impose joint and several liability for the cost of
environmental remediation, natural resource damages, third-party claims, and other expenses, without regard to the fault or the legality of the original
conduct, on those persons who contributed to the release of a hazardous substance into the environment. We may also be affected by future laws or
regulations, including those imposed in response to energy, climate change, geopolitical, or similar concerns. These laws may impact the sourcing of raw
materials and the manufacture and distribution of our products and place restrictions and other requirements on the products that we can sell in certain
geographical locations.
We may be exposed to certain regulatory and financial risks related to climate change.
Growing concerns about climate change may result in the imposition of additional regulations or restrictions to which we may
become subject. A number of governments or governmental bodies have introduced or are contemplating regulatory changes in
response to climate change. The outcome of new legislation or regulation in the U.S. and other jurisdictions in which we operate may result in new or
additional requirements, fees or restrictions on certain activities. Compliance with these climate change initiatives may also result in additional costs to us,
including, among other things, increased production costs, additional taxes, reduced emission allowances or additional restrictions on production or
operations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject
to such limitations. We may not be able to recover the cost of compliance with new or more stringent laws and regulations, which could adversely affect our
results of operations, cash flow or financial condition.
Our net sales might be adversely impacted if our lighting systems do not meet certain certification and compliance standards.
We are required to comply with certain legal requirements governing the materials in our products. Although we are not aware of any efforts to amend any
existing legal requirements or implement new legal requirements in a manner with which we cannot comply, our net sales might be adversely affected if
such an amendment or implementation were to occur.
Moreover, although not legally required to do so, we strive to obtain certification for substantially all our products. In the United States, we seek
certification on substantially all of our products from UL , ETL , or DLC™. Where appropriate in jurisdictions outside the United States, we seek to obtain
other similar national or regional certifications for our products. Although we believe that our broad knowledge and experience with electrical codes and
safety standards have facilitated certification approvals, we cannot ensure that we will be able to obtain any such certifications for our new products or that,
if certification standards are amended, we will be able to maintain such certifications for our existing products. Moreover, although we are not aware of any
effort to amend any existing certification standard or implement a new certification standard in a manner that would render us unable to maintain
certification for our existing products or obtain ratification for new products, our net sales might be adversely affected if such an amendment or
implementation were to occur.
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If we experience a material weakness in our internal control over financial reporting in the future or fail to otherwise maintain effective financial reporting
systems and processes, we may be unable to accurately and timely report our financial results or comply with the requirements of being a public company,
which could cause the price of our common stock to decline and harm our business.
As a public company reporting to the SEC, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, including
Section 404(a) that requires that we annually evaluate and report on our systems of internal controls.
We cannot be certain that we will not in the future have material weaknesses in our internal control over financial reporting, or that we will successfully
remediate any that we find. In addition, the processes and systems of internal controls we have developed to date may not be adequate. Accordingly, there
could be a reasonable possibility that material weaknesses could result in a misstatement of our accounts or disclosures that would result in a material
misstatement of our financial statements that would not be prevented or detected on a timely basis, or cause us to fail to meet our obligations to file periodic
financial reports on a timely basis. Any of these failures could result in adverse consequences that could materially and adversely affect our business,
including an adverse impact on the market price of our common stock, potential action by the SEC against us,
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possible defaults under our debt agreements, shareholder lawsuits, delisting of our stock, general damage to our reputation and the diversion of significant
management and financial resources.
We rely heavily on information technology in our operations and any material failure, weakness, interruption or breach of security could prevent us from
effectively operating our business, which could have a material adverse effect on our business, financial condition, and results of operations.
We rely heavily on our information technology systems, including our enterprise resource planning (“ERP”) and customer relationship management
(“CRM”) software, across our operations and corporate functions, including for management of our supply chain, payment of obligations, data warehousing
to support analytics, finance systems, accounting systems, and other various processes and procedures, some of which are handled by third parties, as well
as lead generation, customer tracking, customer sourcing, etc. We also rely heavily on remote communication tools such as Microsoft Teams and Zoom to
accommodate remote work environment and external meetings.
Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our business and results
of operations may be adversely affected if we experience system usage problems. The failure of these systems to operate effectively, maintenance problems,
system conversions, back-up failures, problems or lack of resources for upgrading or transitioning to new platforms or damage or interruption from
circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, systems failure, security breaches, cyber-attacks,
viruses or human error could result in, among other things, transaction errors, processing inefficiencies, loss of data, inability to generate timely SEC
reports, loss of sales and customers and reduced efficiency in our operations. Additionally, we and our customers could suffer financial and reputational
harm if customer or Company proprietary information is compromised by such events. Remediation of such problems could result in significant unplanned
capital investments and any damage or interruption could have a material adverse effect on our business, financial condition, and results of operations.
Risks Associated with an Investment in Our Common Stock
As a “thinly-traded” stock with a relatively small public float, the market price of our common stock is highly volatile and may decline regardless of our
operating performance.
Our common stock is “thinly-traded” and we have a relatively small public float, which increases volatility in the share price and makes it difficult for
investors to buy or sell shares in the public market without materially affecting our share price. Since the beginning of 2021, our market price has ranged
from a low of $1.14 to a high of $9.64 and continues to experience significant volatility. Broad market and industry factors also may adversely affect the
market price of our common stock, regardless of our actual operating performance. Factors that could cause wide fluctuations in our stock price may
include, among other things:
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actual or anticipated variations in our financial condition and operating results;
general economic conditions and trends;
addition or loss of significant customers and the timing of significant customer purchases;
our ability to effectively implement our growth plans, including new products, and the significance and timing of associated expenses;
unanticipated impairments and other changes that reduce our earnings;
overall conditions or trends in our industry;
the entry or exit of new competitors into our target markets;
any litigation or legal claims;
the terms and amount of any additional financing that we may obtain, if any;
unfavorable publicity;
additions or departures of key personnel;
geopolitical changes, global health concerns and macroeconomic changes;
changes in the estimates of our operating results or changes in recommendations by any securities or industry analysts that elect to follow our
common stock;
• market expectations following periods of rapid growth;
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•
the potential impact of increased volatility due to elevated trading on the price of our stock;
industry-wide news events that may affect market perceptions of the value of our stock; and
sales of our common stock by us or our stockholders, including sales by our directors and officers.
Because our common stock is thinly-traded, investors seeking to buy or sell a certain quantity of our shares in the public market may be unable to do so
within one or more trading days and it may be difficult for stockholders to sell all of their shares in the market at any given time at prevailing prices. Any
attempts to buy or sell a significant quantity of our shares could materially affect our share price. In addition, because our common stock is thinly-traded and
we have a relatively small public float, the
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market price of our shares may be disproportionately affected by any news, commentary or rumors regarding us or our industry, regardless of the source or
veracity, which could also result in increased volatility.
In addition, in the past, following periods of volatility in the market price of a company’s securities, securities litigation has often been instituted against
these companies. Volatility in the market price of our shares could also increase the likelihood of regulatory scrutiny. Securities litigation, if instituted
against us, or any regulatory inquiries or actions that we face could result in substantial costs, diversion of our management’s attention and resources and
unfavorable publicity, regardless of the merits of any claims made against us or the ultimate outcome of any such litigation or action.
We could issue additional shares of common stock or preferred stock without stockholder approval, or new securities with terms or rights superior to those
of our existing stockholders, which may adversely affect the market price of our common stock.
We expect to require additional financing to fund future operations, including our research, development, sales and marketing activities. We are authorized
to issue 50,000,000 shares of common stock of which 6,453,777 shares were issued and outstanding as of March 14, 2022, and 5,000,000 shares of
preferred stock, of which 876,447 were issued and outstanding as of March 14, 2022. Our Board of Directors has the authority, without action or vote of our
stockholders, to issue authorized but unissued shares of common and preferred stock subject to Nasdaq’s rules. Additionally, if we raise additional funds by
issuing equity securities, the percentage ownership of our current stockholders will be reduced, and, if the equity securities issued are preferred shares, the
holders of the new preferred shares may have rights superior to those of our existing stockholders, which could adversely affect rights of our existing
stockholders and the market price of our common stock. In addition, in order to raise additional capital or acquire businesses in the future, we may need to
issue securities that are convertible or exchangeable for shares of our common or preferred stock. If we raise additional funds by issuing debt securities, the
holders of those debt securities would have some rights senior to those of our existing stockholders, and the terms of these debt securities could impose
restrictions on operations and create a significant interest expense for us which could have a materially adverse effect on our business. Any such issuances
could be made at a price that reflects a discount to the then-current trading price of our common stock. These issuances could be dilutive to our existing
stockholders and cause the market price of our common stock to decline.
The exercise of outstanding warrants to purchase our common stock or the conversion of shares of our Series A Convertible Preferred Stock into shares of
common stock may dilute the ownership interest of our common stockholders.
In connection with past financing activity, we have issued convertible preferred stock and warrants to purchase our common stock. The exercise of some or
all of the outstanding warrants to purchase our common stock or the conversion of some or all of the outstanding Series A Convertible Preferred Stock may
dilute the ownership interests of our stockholders. Any sales of our common stock issuable upon the exercise of the warrants or conversion of the Series A
Preferred Stock could adversely affect prevailing market prices of our common stock. In addition, the anticipated exercise of the warrants or conversion of
the Series A Convertible Preferred Stock could depress the price of our common stock.
Our failure to comply with the continued listing requirements of Nasdaq could adversely affect the price of our common stock and its liquidity.
Our common stock is currently listed on the Nasdaq Capital Market. We must comply with Nasdaq’s continued listing requirements related to, among other
things, stockholders’ equity, market value, minimum bid price, and corporate governance in order to remain so listed. There can be no assurances that we
will be able to comply with the applicable listing requirements.
We have in the past received notices from Nasdaq advising us that we were not in compliance with the continued listing requirements, although, in each
case, we were able to subsequently regain compliance. In January 2019, we received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”)
notifying us that, for the prior 30 consecutive trading days, the closing bid price for our common stock was below the minimum $1.00 per share required
pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), our common stock traded above
$1.00 for the required number of days within the 180-calendar day period immediately following our receipt of the notice to regain compliance with the Bid
Price Rule.
On May 15, 2019, we received a letter from the Staff notifying us that our common stock had again fallen out of compliance with the Bid Price Rule. On
October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 to regain compliance. On April 16, 2020, Nasdaq
announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it had provided temporary relief through June 30, 2020
from compliance with, among other rules, the Bid Price Rule. As a result, we had until July 24, 2020 to regain compliance with the Bid Price Rule, which
we accomplished by effecting a 1-for-5 reverse stock split on June 11, 2020, increasing the per share trading price of our common stock. Our common stock
began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 12, 2020.
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On August 17, 2020, we received a letter from the Staff notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which
requires listed companies to maintain stockholders’ equity of at least $2,500,000 if they do not meet the alternative compliance standards relating to the
market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”). Our Quarterly Report on Form 10-
Q for the quarterly period ended June 30, 2020, reflected that our stockholders’ equity as of June 30, 2020 was $1,714,000. Based on our timely submission
of our plan to regain compliance, Nasdaq granted us an extension through February 15, 2021 to regain compliance with the Minimum Stockholders’ Equity
Rule. In accordance with one part of the plan submitted to the Staff, we successfully modified our outstanding warrants and in December 2020, we
reclassified $1.4 million from warrant liability into equity. At December 31, 2020, our stockholders’ equity was $4,255,000. On January 20, 2021,we
received a letter from the Staff notifying us that, on a conditional basis, Nasdaq has determined that we have regained compliance with the minimum
stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. At December 31, 2021, our stockholders’ equity was $6,209,000.
On December 21, 2021, we received a letter from the Staff notifying the Company that, as a result of the resignation of a director, as previously disclosed,
from the Board of Directors and the Audit and Finance Committee, we are not in compliance with Nasdaq Listing Rule 5605, which requires that our Audit
and Finance Committee be comprised of at least three directors, all of whom are independent pursuant to the rules of Nasdaq and applicable law. The
notification letter had no immediate effect on the Company’s listing on the Nasdaq Capital Market. The letter further provided that, pursuant to Nasdaq
Listing Rule 5605(c)(4), we are entitled to a cure period to regain compliance with Nasdaq Listing Rule 5605, which cure period will expire on the earlier of
the date of our next annual shareholders’ meeting and November 11, 2022, or, if the next annual shareholders’ meeting is held before May 10, 2022, then
the cure period will expire on May 10, 2022. The Board of Directors has commenced a search for a new independent director, who would be expected to
serve on our Audit and Finance Committee, or the Board of Directors will otherwise appoint a current independent director to fill the vacancy on the
committee. On February 24, 2022, the Company announced the appointment of two additional independent directors, one of which, was appointed to fill the
vacancy on the Audit and Finance Committee, bringing us into compliance with Nasdaq Listing Rule 5605.
If we do not remain compliant with Nasdaq’s continued listing requirements, then we could be delisted from The Nasdaq Capital Market. If we were
delisted, it would likely have a negative impact on the price of our common stock and our liquidity. If we are delisted from The Nasdaq Capital Market and
we are not able to list our common stock on another exchange, our common stock could be quoted on the OTC Bulletin Board or in the “pink sheets.” As a
result, we could face significant adverse consequences including, among others:
a limited availability of market quotations for our securities;
a determination that our common stock is a “penny stock,” which would require broker-dealers trading in our common stock to adhere to more
stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and little or no analyst coverage of the Company;
•
• we would no longer qualify for exemptions from state securities registration requirements, which may require us to comply with applicable state
•
•
•
securities laws; and
a decreased ability to issue additional securities (including pursuant to short-form registration statements on Form S-3) or obtain additional
financing in the future.
As a result of these factors, the value of our common stock could decline significantly.
We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently
intend to retain future earnings, if any, to finance the operations and expansion of our business. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors and will be dependent upon our earnings, financial condition, operating results, capital requirements, a capital structure
strategy and other factors as deemed necessary by our Board of Directors.
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The elimination of monetary liability against our directors under Delaware law and the existence of indemnification rights held by our directors and officers
may result in substantial expenditures by the Company and may discourage lawsuits against our directors and officers.
Our Certificate of Incorporation eliminates the personal liability of our directors to the Company and our stockholders for damages for breach of fiduciary
duty as a director to the extent permissible under Delaware law. Further, our Bylaws provide that we are obligated to indemnify any of our directors or
officers to the fullest extent authorized by Delaware law and, subject to certain conditions, advance the expenses incurred by any director or officer in
defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could result in the Company incurring substantial
expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and
resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful,
might otherwise benefit us or our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices and our manufacturing facility are located in an approximately 117,000 square foot facility in Solon, Ohio, under a lease
agreement expiring on June 30, 2022. We believe this facility is adequate to support our current operations. The Company expects to enter into a new lease
upon expiration that we believe will be adequate for our anticipated operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising from the normal course of business. See Note 15, “Legal Matters,” to our financial
statements for the year ended December 31, 2021 included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF
EQUITY SECURITIES
PART II
Market Information
Our common stock trades on The Nasdaq Capital Market under the symbol “EFOI.”
Stockholders
There were approximately 59 holders of record of our common stock as of March 14, 2022, however, a large number of our stockholders hold their stock in
“street name” in brokerage accounts. Therefore, they do not appear on the stockholder list maintained by our transfer agent.
Dividends
We have not declared or paid any cash dividends, and do not anticipate paying cash dividends in the near future.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial
Statements (“financial statements”) and related notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual
Report.
Overview
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls and
ultraviolet-C light disinfection (“UVCD”) products. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products
and UVCD products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the
fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and
human health and wellness through advanced LED retrofit and UVCD solutions. Our goal is to be the LED and human-centric lighting (“HCL”) technology
and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We
specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily
indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and
lighting control products for commercial and consumer applications. In late 2020, we announced the launch of our UVCD product portfolio. With initial
development complete and two products now brought to market, we anticipate the development of additional UVCD products in 2022.
The LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion. We have been experiencing
these industry forces in both our military business since 2016 and in our commercial segment, where we once commanded significant price premiums for
our flicker-free TLEDs with primarily 10-year warranties. In more recent years, we have focused on redesigning our products for lower costs and
consolidating our supply chain for stronger purchasing power where appropriate in order to price our products more competitively. Despite these efforts, our
legacy products continue to face aggressive pricing competition and a convergence of product functionality in the marketplace. These trends are not unique
to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of
business.
In addition to continuously pursuing scheduled cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings
with differentiated products and solutions that offer greater, distinct value. Specific examples of these products we have developed include the RedCap , our
emergency backup battery integrated TLED, EnFocus™, our new dimmable/color-tunable lighting and powerline control platform that we launched in
2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system for both commercial and residential markets, which
we plan to launch in 2022. During 2022, we also plan to expand and enhance the performance of our RedCap product line. We believe our revamped go-to-
market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network that covers territories across the country,
and listens to the voice of the customer, has led to better and more impactful product development efforts that we believe will eventually translate into larger
addressable markets and greater sales growth for us.
®
®
The Energy Focus UVCD solutions aim to provide impactful and affordable disinfection products for businesses and homes to effectively reduce infection
risks and improve indoor air quality. In addition to being ozone-free, the products are designed to guard against the risks of direct human exposure to UV-C
rays. The nUVo 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.
TM
Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant
restructuring efforts were undertaken. The Company replaced the entire senior management team, significantly reduced non-critical expenses, minimized
the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors (“Board of Directors”) and the
executive team, and recruited new departmental leaders across the Company. The cost savings efforts undertaken included phased actions to reduce costs to
minimize cash usage. Initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the
senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain
elements of supply chain and marketing.
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During 2020 and 2021, we continued to see the cost-savings benefits from these relaunch efforts, in addition to a number of strategic sourcing projects
completed during 2020 and 2021. In February 2022, we also added two experienced executives to our Board of Directors with extensive lighting and
consumer products industry experience. It is our belief that the continued momentum of the efforts undertaken in 2020 and into 2021, along with the
development and launch of new and innovative products as well as an expanded sales team and distribution network, will over time result in improved sales
and bottom-line performance for the Company.
We launched our patented EnFocus™ platform during the second quarter of 2020 and, despite the ongoing, significant delay and slowdown in our
customers’ lighting projects following the impacts of the COVID-19 pandemic, we continue to receive positive feedback from the market. The EnFocus™
platform offers two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which
provides both a dimmable and color tunable lighting solution. EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting
using existing wiring, without requiring laying additional data cables or any wireless communication systems, through a relatively simple upgrade with
EnFocus™ switches and LED lamps, a far more secure, affordable and environmentally sustainable solution compared with replacing entire lighting
fixtures and incorporating additional wired or wireless communication.
In addition, in response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we
developed advanced UVCD air disinfection products for both consumer as well as the commercial and industrial markets. Two of these UVCD products
were available beginning in the fourth quarter of 2021: the nUVo™ Tower air disinfector, a portable air disinfection device for offices and homes, and the
nUVo™ Traveler air disinfector, a portable air disinfection device for in-vehicle and other smaller locations. Additional nUVo™ product development is
planned for 2022 as we expect to refocus our ongoing UVCD development efforts on the consumer and commercial space.
During 2021, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S. Navy
awards, with several anticipated projects facing repeated and ongoing delays. We continue to pursue opportunities from the U.S. Navy and the government
sector to minimize such volatility. Previously in our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned
us to be more competitive along with improved production efficiencies. Such efforts allowed us to continue to win bids and proposals that helped grow our
MMM sales throughout 2020, offsetting some of the weakness being experienced in our commercial business that year. In addition, during the fourth quarter
of 2020, we became an approved supplier for the General Services Administration (“GSA”) and many of our products are now listed in the GSA website for
all federal and military agencies to view and order our products, a channel we hope to further develop. While we continue to aggressively seek to increase
sales of our commercial products, the MMM business offers us continued sales opportunities, in addition to validating our product quality and strengthening
our brand trust in the marketplace. However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial
sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales.
Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to
achieve profitability through developing and launching new, innovative products such as EnFocus
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
platform that aim to serve both consumer and
commercial markets. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies,
strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
and our UVCD products and further leveraging our
TM
TM
®
Despite continuing progress throughout 2021, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in
MMM and commercial customer retrofit budgets and project starts, and unexpected supply chain issues, all exacerbated by the COVID-19 pandemic since
early 2020. There has also been continuing aggressive price competition in the lighting industry. We continued to incur losses and we have a substantial
accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at December 31, 2021.
The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on our company. Throughout 2021,
following a slowdown in 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and
industrial sectors delayed order placements in reaction to the impacts of the COVID-19 pandemic that caused our customers to suspend or postpone lighting
retrofit projects due to budget
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and occupancy uncertainties. Global supply chain and logistics challenges have further exacerbated slowdowns in customer projects, as well as impacted
our inventory strategies to respond to customer and supplier timelines.
We continue to monitor the impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions
being taken to curtail and respond to the spread of the virus. Global supply chain and logistics constraints are impacting our inventory purchasing strategy,
leading to a buildup of inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining
components. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from
our third-party suppliers to our facility. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects of the COVID-
19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results. We also plan to continue to
actively follow, assess and analyze the ongoing impact of the COVID-19 pandemic and stand ready to adjust our organizational structure, strategies, plans
and processes to respond.
Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial
position that the COVID-19 pandemic may have. Continuation of the COVID-19 pandemic and government actions in response thereto could cause further
disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and
long-term revenues, earnings, liquidity and cash flows. We will remain agile as an organization to respond to potential or continuing weakness in the
macroeconomic environment and in the meantime expand sales channels and enter new markets such as the UVCD and consumer markets, that we believe
will provide additional growth opportunities.
Results of operations
The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the
following periods:
2021
2020
Net sales
Cost of sales
Gross profit
Operating expenses:
Product development
Selling, general, and administrative
Restructuring
Total operating expenses
Loss from Operations
Other expenses:
Interest expense
Gain on forgiveness of PPP loan
Loss on extinguishment of debt
Other income - employee retention tax credit
Loss from change in fair value of warrants
Other expenses, net
Net loss before income taxes
Benefit from income taxes
Net loss
30
100.0 %
82.8
17.2
19.2
86.5
(0.2)
105.5
(88.3)
8.0
(8.1)
—
(8.9)
—
0.7
(80.0)
—
(80.0)%
100.0 %
69.2
30.8
8.4
46.9
(0.4)
54.9
(24.1)
2.9
—
1.6
—
6.5
0.4
(35.5)
—
(35.5)%
Table of Contents
Net sales
A further breakdown of our net sales by product line is as follows (in thousands):
Commercial products
MMM products
Total net sales
2021
2020
4,682 $
5,183
9,865 $
5,404
11,424
16,828
$
$
Our net sales of $9.9 million in 2021 decreased 41.4% compared to 2020, mainly driven by a decrease of 54.6% in MMM sales. The decrease in net MMM
product sales in 2021 as compared to 2020 was mainly due to the limited availability of government funding and the delayed timing of expected orders.
MMM sales were also higher in 2020 primarily due to delays in government purchasing during 2019 that were pushed into 2020. Additionally, in March
2020, we won a contract worth about $3.5 million, and throughout 2020, our sales from our in-house sales and inside sales accounts grew significantly. Net
sales of our commercial products decreased 13.4% in 2021 as compared to 2020, reflecting continuing fluctuations in the timing, pace, and size of
commercial projects, including continuing impacts of the COVID-19 pandemic.
International sales
We do not generate significant sales from customers outside the United States. International net sales accounted for approximately 2% of net sales in 2021
and 1% of net sales in 2020. Changes in currency exchange rates did not have an impact on net sales in 2021 or 2020, as our sales, including international
sales, are denominated in U.S. dollars.
Gross profit
Gross profit was $1.7 million, or 17.2% of net sales, for 2021, compared with gross profit of $5.2 million, or 30.8% of net sales for 2020. The year-over-
year decrease in gross margin was driven primarily by lower sales, resulting in an overhang in fixed costs against the lower sales volume of $1.0 million, or
10.1% of net sales, and unfavorable inventory and warranty reserve adjustments of $0.3 million, or 2.9% of net sales. Gross margin for 2021 included a
favorable impact from product mix, and favorable price and usage variances for material and labor of $0.8 million, or 8.3% of net sales.
Operating expenses
Product development
Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, certain legal fees,
supplies and materials, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred.
Cost recovery represents the combination of revenues and credits from government contracts.
Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands):
Total gross product development expenses
For the year ended December 31,
2021
2020
$
1,891 $
1,415
Gross product development expenses were $1.9 million in 2021, an increase of 33.6%, compared to $1.4 million in 2020. The increase primarily resulted
from increased product development and testing costs, as well as salaries and related benefit (including stock compensation) costs of $0.3 million and $0.1
million, respectively, associated with the development and launch of our UVCD products.
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Selling, general, and administrative
Selling, general, and administrative expenses were $8.5 million, or 86.5% of net sales, in 2021, compared to $7.9 million, or 46.9% of net sales, in 2020. Of
the year-over-year $0.6 million increase, approximately $0.8 million is attributable to increased headcount and salaries, including stock-based compensation
and related benefits, $0.2 million is related to an increase in trade show and other marketing costs, $0.1 million is related to increased sales commissions,
$0.1 million is related to increased travel and related expenses, $0.1 million is related to an increase in network and other software costs and $0.1 million is
related to an increase in dues and subscriptions. These increases were offset by savings of $0.6 million in legal and professional fees and $0.2 million in
recruiting and relocation fees.
Restructuring
During 2021 and 2020, we recorded restructuring credits of approximately $21 thousand and $60 thousand, respectively, related to the cost and offsetting
sub-lease income for the remaining lease obligation for our former New York, New York and Arlington, Virginia offices. The lease on our Arlington,
Virginia office ended in September of 2019 and the lease on our New York, New York office expired in June of 2021.
Please refer to Note 3, “Restructuring,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
Other expenses
Interest expense
We incurred $792 thousand in interest expense in 2021, primarily related to the interest on borrowings and non-cash amortization of fees related to our
revolving lines of credit with Crossroads Financial Group, LLC (the “Inventory Facility”) and Factors Southwest L.L.C. (d/b/a FSW Funding) (the
“Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”), interest on borrowings and non-cash amortization of fees associated
with the increase in the borrowing capacity on the Inventory Facility, and interest on the promissory note in the principal amount of $1.7 million (the
“Streeterville Note”) the Company sold and issued to Streeterville Capital, LLC (“Streeterville”) pursuant to a note purchase agreement with Streeterville.
In 2020, we incurred $481 thousand in interest expense primarily related to interest on borrowings and non-cash amortization of fees related to our former
revolving line of credit with Austin Financial Services, Inc. (the “Austin Facility”), the promissory note in the principal amount of $1.3 million (the “Iliad
Note”) the Company sold and issued to Iliad Research and Trading, L.P. (“Iliad”), pursuant to a note purchase agreement (the “Iliad Note Purchase
Agreement”) with Iliad, and the interest on borrowings and non-cash amortization of fees related to the Credit Facilities.
Gain on forgiveness of PPP loan
Forgiveness income of $801 thousand related to the Paycheck Protection Program (“PPP”) loan taken out during 2020 and forgiven in 2021 was recognized
during the first quarter 2021.
Loss on extinguishment of debt
A loss of $276 thousand on the extinguishment of debt was recognized during the year ended December 31, 2020, consisting of a $100 thousand termination
fee and the write-off of the remaining related debt acquisition costs of $59 thousand from the Austin Facility as well as the write-off of the remaining debt
acquisition costs of $117 thousand relating to the Iliad Note.
Employee Retention Tax Credit
During the year ended December 31, 2021, we recognized other income of $876 thousand related to eligible Employee Retention Tax Credit (“ERTC”)
expenses incurred during the second and third quarters of 2021 for which we became eligible.
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Loss from change in fair value of warrants
A loss of $1.1 million was recognized during the year ended December 31, 2020 for the market value change in our warrant liabilities related to a private
issuance of warrants to certain institutional investors to purchase up to 688,360 shares of our common stock with an exercise price of $3.37 per share and a
private issuance of warrants to the placement agents to purchase up to 48,185 shares of our common stock with an exercise price of $4.99 per share, both at
a purchase price of $0.625 per warrant (collectively, the “January 2020 Warrants”), which were completed concurrently with a registered direct offering for
the sale of 688,360 shares of our common stock to the same institutional investors, at a purchase price of $3.37 per share, in January 2020 (such concurrent
registered direct offering and private issuance, together, the “January 2020 Equity Offering”). The loss recognized was a result of the revaluation of the
warrant liability using the market price of the Company’s common stock at December 22, 2020, versus the market price of the Company’s common stock at
the time of initial issuance of the January 2020 Warrants (January 13, 2020). The terms of the January 2020 Warrants were amended in December 2020 such
that they were reclassified as equity, and no liability with respect to such January 2020 Warrants exists at either December 31, 2021 or 2020. As such, there
is no related gain or loss recorded for the twelve months ended December 31, 2021.
Other expenses, net
We recognized other expenses, net, of $65 thousand in 2021, compared to other expenses, net, of $73 thousand in 2020. Other expenses, net, in 2021 and
2020 primarily consisted of bank and collateral management fees.
Income taxes
For the years ended December 31, 2021 and 2020, our effective tax rate was 0.0% and 0.1%, respectively.
In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.6 million additional federal
net operating loss we recognized for the year. In 2020, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance
as a result of the $7.1 million additional federal net operating loss we recognized for the year.
Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not
be realized. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some
portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or
loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We have recorded a full valuation allowance
against our deferred tax assets at December 31, 2021 and 2020, respectively. We had no net deferred liabilities at December 31, 2021 or 2020. We will
continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2021, we had net operating loss carry-forwards of approximately $125.4 million for federal income tax purposes ($77.2 million for state
and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $125.4 million is available after the
application of IRC Section 382 limitations. As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in
tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back,
but they can be carried forward indefinitely. The $9.6 million and $7.1 million in federal net operating losses generated in December 31, 2021 and 2020,
respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5
million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, “Income Taxes,”
included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
Net loss
Net loss was $7.9 million for 2021, inclusive of a non-cash, pre-tax gain of $0.8 million from the forgiveness of the Company’s PPP loan and $0.9 million
in other income recorded relating to the ERTC ($431 thousand of which was received during the fourth quarter of 2021). This compares with a net loss of
$6.0 million for 2020, which included a non-cash, pre-tax loss of $1.1 million resulting from the revaluation of the warrant liability throughout 2020.
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Liquidity and capital resources
General
We generated a net loss of $7.9 million in 2021, compared to net loss of $6.0 million in 2020. We have incurred substantial losses in the past, and as of
December 31, 2021, we had an accumulated deficit of $138.7 million.
In order for us to operate our business profitably, we need to grow our sales, maintain cost control discipline while balancing development of our new
products required for long-term competitiveness and revenue growth, continue our efforts to reduce product cost, and drive further operating efficiencies.
There is a risk that our strategy to return to profitability may not be successful. We will likely require additional financing in the next twelve months to
achieve our strategic plan and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of
profitability, we will continue to need additional funding thereafter, none of which may be available on favorable terms or at all and could require us to
discontinue or curtail our operations.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plan to continue to ensure appropriate levels
of the availability of external financing, current financial position, liquid resources, obligations due or anticipated within the next year, and implementation
of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2022 and
will mitigate the substantial doubt about our ability to continue as a going concern.
Credit Facilities
On August 11, 2020, we entered into the Credit Facilities. The Credit Facilities consist of the Inventory Facility, a two-year inventory financing facility for
up to $3.0 million, which amount was subsequently increased to $3.5 million, and the Receivables Facility, a two-year receivables financing facility for up
to $2.5 million. These facilities replaced our previous credit facility, the Austin Facility. As of December 31, 2021, our cash was approximately $2.7 million
and our total outstanding balance was approximately $2.2 million under the Credit Facilities. As of December 31, 2021, our additional availability under the
Credit Facilities was $1.7 million.
December 2021 Private Placement
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185
shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants (“Pre-Funded
Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the Pre-Funded
Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. We
paid the placement agent commission of $360 thousand, plus $42 thousand in expenses, in connection with the December 2021 Private Placement and we
also paid legal, accounting and other fees of $97 thousand related to the December 2021 Private Placement. Total offering costs of $499 thousand have been
presented as a reduction of additional paid-in-capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31,
2021. Net proceeds to us from the December 2021 Private Placement were approximately $4.0 million.
June 2021 Equity Offering
In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05
per share (the “June 2021 Equity Offering”). We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection
with the June 2021 Equity Offering and we also paid legal and other fees of $19 thousand related to the June 2021 Equity Offering. Total offering costs of
$470 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance
Sheet as of December 31, 2021. Total offering costs of $470 thousand have been presented as a reduction of additional paid-in-capital and have been netted
within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were
approximately $4.5 million.
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Streeterville Note
On April 27, 2021, we entered into a note purchase agreement with Streeterville, pursuant to which we sold and issued the Streeterville Note. The
Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the Streeterville
Note, after deduction of $15 thousand of Streeterville’s transaction expenses.
The Streeterville Note has a maturity date of April 27, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The
Company may prepay the amounts outstanding under the Streeterville Note at a 10% premium. Beginning on November 1, 2021, Streeterville may require
the Company to redeem up to $205 thousand of the Streeterville Note in any calendar month. The Company has the right on three occasions to defer all
redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the
Company will increase the amount outstanding under the Streeterville Note by 1.5%. The Company exercised this right twice during the fourth quarter of
2021.
The total liability for the Streeterville Note, net of discount and financing fees, was $1.7 million at December 31, 2021. Unamortized loan discount and debt
issuance costs were $43 thousand at December 31, 2021.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the Streeterville Note will automatically increase by 15% as of the
date of such delisting.
January 2020 Equity Offering
In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a
purchase price of $3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an
exercise price of $3.37 per share in a concurrent private placement (the “Investor Warrants”) for a purchase price of $0.625 per warrant. We paid the
placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the January 2020 Equity Offering and we also paid legal,
accounting and other fees of $231 thousand related to the January 2020 Equity Offering. In addition, we issued warrants to the placement agent to purchase
up to 48,185 shares of common stock at an exercise price of $4.99 per share (together with the Investor Warrants, the, “January 2020 Warrants”). Proceeds
to us, before expenses, from the January 2020 Equity Offering were approximately $2.8 million. In accordance with the terms of the Iliad Note described
below, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, a large portion of
which was applied to reduce the outstanding principal amount.
Iliad Note
On November 25, 2019, we entered into the Iliad Note Purchase Agreement with Iliad pursuant to which the Company sold and issued to Iliad the Iliad
Note in the principal amount of $1.3 million. The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of
$1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad transaction expenses. The Iliad Note accrued interest at 8% per
annum, compounded daily, on the outstanding balance.
On December 1, 2020, we repaid the remaining outstanding balance of $30 thousand on the Iliad Note prior to its maturity date of November 24, 2021. We
wrote off $117 thousand in remaining debt and original issue discount costs at that time. The debt acquisition and original issue discount costs written-off
are reflected as a loss on extinguishment of debt in our Consolidated Statements of Operations for the year ended December 31, 2020.
Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we had, among other things, agreed that, until the Iliad Note was repaid, 10% of gross
proceeds the Company received from the sale of our common stock or other equity must be paid to Iliad and applied to reduce the outstanding balance of
the Iliad Note.
Convertible Notes
On March 29, 2019, we issued $1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain
investors in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The Convertible Notes had a maturity
date of December 31, 2021 and bore interest at a rate of 5% per annum until June 30, 2019 and at a rate of 10% thereafter. Pursuant to their terms, on
January 16, 2020, following approval by our stockholders of certain amendments to the Company’s Certificate of Incorporation, the principal amount of all
of the Convertible Notes, and the accumulated interest thereon ($0.1 million), which totaled $1.8 million, were converted at a conversion price of $0.67 per
share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred
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Stock, par value $0.0001 per share (the “Series A Preferred Stock”), which is convertible on a one-for-five basis into shares of our common stock. During
2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock. During 2021, 1,721,023 shares of Series A
Preferred Stock were converted into 344,205 shares of common stock.
Need for Additional Financing
Even with access to borrowings under the Credit Facilities, we may not generate sufficient cash flows from our operations or be able to borrow sufficient
funds to sustain our operations within the next twelve months or in the time periods thereafter. As such, we will likely need additional external financing
during 2022 and thereafter and will continue to review and pursue external funding sources including, but not limited to, the following:
•
•
•
obtaining financing from traditional or non-traditional investment capital organizations or individuals;
obtaining funding from the sale of our common stock or other equity or debt instruments; and
obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain future funding on acceptable terms, in a timely fashion, or at all. Obtaining additional financing contains
risks, including:
•
•
•
additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current
stockholders and have rights, preferences and privileges senior to our common stock;
loans or other debt instruments may have terms or conditions, such as interest rates, restrictive covenants and control or revocation provisions,
which are not acceptable to management or our Board of Directors; and
the current environment in the capital markets, as well as global health risks, combined with our capital constraints may prevent us from being able
to obtain adequate debt financing.
Additionally, if we are unable to find a permanent Chief Executive Officer, it may be more difficult to obtain additional financing on satisfactory terms or at
all. If we fail to obtain additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need
to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect
on our business, future prospects, and financial condition. A lack of additional financing could also result in our inability to continue as a going concern and
force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
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Cash and debt
At December 31, 2021, our cash balance was $2.7 million, compared to $1.8 million at December 31, 2020.
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows (in
thousands):
Net cash used in operating activities
Net cash used in investing activities
Proceeds from the issuance of common stock and warrants
Proceeds from the exercise of warrants
Offering costs paid on the issuance of common stock and warrants
Proceeds from PPP loan
Principal payments under finance lease obligations
Proceeds from exercise of stock options and purchases through employee stock purchase plan
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units
Payments for deferred financing costs & termination fees
Payments on the Iliad Note
Proceeds from the Streeterville Note
Net (payments on) proceeds from credit line borrowings - Credit Facilities
Net payments on credit line borrowings - Austin Facility
Net cash provided by financing activities
Cash used in operating activities
2021
2020
$
$
$
$
(9,765) $
(443) $
9,500 $
801
(969)
—
(3)
80
(1)
(30)
—
1,515
(181)
—
10,712 $
(2,451)
(223)
2,749
918
(510)
795
(3)
100
(3)
(320)
(1,306)
—
2,459
(719)
4,160
Net cash used in operating activities of $9.8 million in 2021 resulted primarily from the net loss incurred of $7.9 million, adjusted for non-cash items,
including: depreciation and amortization of $0.2 million, stock-based compensation, net of $0.4 million, gain on forgiveness of the PPP loan of $0.8 million,
other income related to the ERTC of $0.9 million, and unfavorable provisions from inventory and warranty of $0.2 million and $0.1 million, respectively, as
well as accounts receivable and working capital changes. We generated $0.8 million through the timing of collection of accounts receivable, $0.7 million
from the change in prepaid and other current assets (primarily the receipt of ERTC funds), $0.3 million for short-term deposits related to the timing of
inventory receipts with our contract manufacturers for our nUVo™ and EnFocus™ products, and $0.2 million from changes in deferred revenue. We used
$2.4 million from a net increase in inventories primarily due to the timing of inventory receipts, $0.4 million in cash for a decrease in accounts payable due
to the timing of inventory receipts and payments, and $0.4 million through a decrease of other accrued liabilities, primarily related to accrued payroll and
benefits and commissions.
Net cash used in operating activities of $2.5 million in 2020 resulted primarily from the net loss incurred of $6.0 million, adjusted for non-cash items,
including: depreciation and amortization of $0.2 million and stock-based compensation, net of $0.1 million, change in fair value of warrant liabilities of
$1.1 million and favorable provisions from inventory of $0.6 million. We generated $1.1 million in cash for an increase in accounts payable due to the
timing of inventory receipts and payments, $1.1 million from a net decrease in inventories primarily due to the timing of inventory receipts, $0.4 million
through the timing of collection of accounts receivable and $0.3 million through an increase of other accrued liabilities, primarily related to accrued payroll
and benefits and commissions. We used $0.7 million for short-term deposits to our contract manufacturers for inventory for the new EnFocus™ platform.
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Cash used in investing activities
Net cash used by investing activities was $0.4 million in 2021, primarily from the purchase of software and tooling to support production operations as well
as the development of e-commerce platforms.
Net cash used by investing activities was $0.2 million in 2020, and resulted primarily from the addition of property and equipment tooling to support
production operations.
Cash provided by financing activities
Net cash provided by financing activities for the year ended December 31, 2021 of $10.7 million primarily resulted from $4.0 million and $4.5 million in
net proceeds received from the December 2021 Private Placement and the June 2021 Equity Offering, respectively, $1.5 million of net proceeds from the
Streeterville Note, and $0.8 million of proceeds from the exercise of 237,892 January 2020 Warrants. These increases in cash were offset by net payments
made against borrowings under the Inventory Facility and the Receivables Facility of $150 thousand and $31 thousand, respectively. At December 31, 2021,
we had additional availability for us to borrow of $1.7 million under the Inventory Facility and $20 thousand under the Receivables Facility.
At December 31, 2021, December 2021 Warrants to purchase an aggregate of 1,363,641 shares remain outstanding with a weighted average exercise price
of $3.30 per share. During the year ended December 31, 2021, no December 2021 Warrants were exercised. At December 31, 2021, January 2020 Warrants
to purchase an aggregate of 229,414 shares remain outstanding with a weighted average exercise price of $3.67 per share. During the year ended
December 31, 2021, 237,892 January 2020 Warrants were exercised resulting in $0.8 million of proceeds. The exercise of the remaining outstanding
January 2020 Warrants and the December 2021 Warrants could provide us with cash proceeds of up to $0.8 million and $4.5 million, respectively. In
January of 2022, all of the Pre-Funded Warrants from the December 2021 Private Placement were exercised.
During the year ended December 31, 2020, we received $0.8 million in proceeds from the PPP loan, $1.4 million from borrowings under the Inventory
Facility and $1.1 million from borrowings under the Receivables Facility, and paid $0.7 million, net, on the Austin Facility. Also during the year ended
December 31, 2020, we paid $0.2 million in deferred financing fees on the Credit Facilities. On August 11, 2020, we paid the outstanding balance of $1.4
million to close out the Austin Facility, which included a $100 thousand termination fee.
Also during the year ended December 31, 2020, we repaid $1.3 million aggregate principal amount under the Iliad Note, which included a mandatory
repayment pursuant to the terms of the Iliad Note in connection with the issuance of common stock in the January 2020 Equity Offering, of which $0.2
million was allocated against principal. At December 31, 2020, we had additional availability for us to borrow of $1.0 million under the Inventory Facility
and $0.6 million under the Receivables Facility.
Credit Facilities
On August 11, 2020, we entered into the Credit Facilities, consisting of two debt financing arrangements. The Credit Facilities consist of the Inventory
Facility, a two-year inventory financing facility for up to $3.0 million, which amount was subsequently increased to $3.5 million, and the Receivables
Facility, a two-year receivables financing facility for up to $2.5 million. Borrowings under the Credit Facilities replaced our previous credit facility, the
Austin Facility, substantially increasing the Company’s borrowing capacity and reducing its blended interest expense rate.
Net borrowings under the Inventory Facility at December 31, 2021 and 2020 were $1.2 million and $1.3 million, respectively. Net borrowings under the
Receivables Facility at both December 31, 2021 and 2020 were $1.0 million. These facilities are recorded in the Consolidated Balance Sheets as of
December 31, 2021 and 2020 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include
unamortized net issuance costs totaling $84 thousand and $121 thousand, respectively, for the Inventory Facility and $24 thousand and $40 thousand,
respectively, for the Receivables Facility as of December 31, 2021 and 2020.
The Credit Facilities replaced the Austin Facility which was entered into on December 11, 2018 and was secured by a lien on our assets. The Austin Facility
was a three year, $5.0 million revolving line of credit. On August 11, 2020, we paid $1.4 million to close the Austin Facility which included a
$100 thousand termination fee. Additionally, we wrote off $59 thousand of the remaining related debt acquisition costs. The termination fee and the write-
off of debt acquisition costs are reflected as a loss on extinguishment of debt in our Consolidated Statements of Operations for the twelve months ended
December 31, 2020.
For more information, see Note 8 “Debt” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
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Off-balance sheet arrangements
We had no off-balance sheet arrangements at December 31, 2021 or 2020.
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires that we
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the reported amounts of net
sales and expenses in the financial statements. Material differences may result in the amount and timing of net sales and expenses if different judgments or
different estimates were utilized. Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial
statements are set forth below:
•
•
•
•
•
•
•
revenue recognition,
allowances for doubtful accounts, returns and discounts,
impairment of long-lived assets,
valuation of inventories,
accounting for income taxes,
share-based compensation, and
leases.
Revenue recognition
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the
amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the
promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of
our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight
are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales
employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do
not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the
customer that the products are as specified in the contract. therefore, the product warranties are not a separate performance obligation and are accounted for
as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
A disaggregation of product net sales is presented in Note 12, “Product and Geographic Information,” included in Item 8, “Financial Statements and
Supplementary Data,” of this Annual Report.
Accounts Receivable
Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the
normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an
evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We utilize a third-party account
receivable insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a
portion of self-retention. This third party also provides credit-worthiness ratings and metrics that significantly assists us in evaluating the credit worthiness
of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of
account receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the
age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts
have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally
require collateral from our customers.
Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our
customers, but exceptions are made in some cases to major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for
the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line
with our standard payment terms.
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Allowances for doubtful accounts, returns, and discounts
We establish allowances for doubtful accounts and returns for probable losses based on the customers’ loss history with us, the financial condition of the
customer, the condition of the general economy and the industry as a whole, and the contractual terms established with the customer. The specific
components are as follows:
• allowance for doubtful accounts for accounts receivable, and
• allowance for sales returns and discounts.
In 2021 and 2020, the total allowance was $14 thousand and $8 thousand, respectively, which was all related to sales returns. We review these allowance
accounts periodically and adjust them accordingly for current conditions.
Long-lived assets
Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are
charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to
fifteen years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or
otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement
of Operations. Refer to Note 6, “Property and Equipment,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for
additional information.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or
circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the
planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less
than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as
determined by quoted market prices (if available) or the present value of expected future cash flows. Refer to Note 6, “Property and Equipment,” included
in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Valuation of inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We
establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and
current inventory levels. During 2020, we applied discipline in manufacturing and supply chain management, focusing on a reduction of lead time and
inventory on hand, which resulted in a net reduction of our gross inventory levels of $1.2 million and excess inventory reserves of $0.6 million. Throughout
2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and
inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components, which resulted in an
increase in our gross inventory levels of $2.4 million and excess inventory reserves of $0.2 million compared to 2020. Adjustments to our estimates, such as
forecasted sales and expected product lifecycles, could harm our operating results and financial position. Refer to Note 5, “Inventories,” included in Item 8,
“Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Accounting for income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in
which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from
differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which
are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to
the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. At December 31, 2021 and 2020, we have recorded a full valuation allowance against our deferred tax assets due to
uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation
allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In
considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the
deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of
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future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the
need for a valuation allowance on a quarterly basis.
At December 31, 2021, we had net operating loss carry-forwards of approximately $125.4 million for federal income tax purposes ($77.2 million for state
and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $125.4 million is available to offset
future taxable income after the application of IRC Section 382 limitations. As a result of the Tax Act, net operating loss carry-forwards generated in tax
years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but
they can be carried forward indefinitely. The $9.6 million and $7.1 million in federal net operating losses generated in 2021 and 2020, respectively, will be
subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5 million will begin to
expire in 2023 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, “Income Taxes,” included in Item 8,
“Financial Statements and Supplementary Data,” of this Annual Report for further information.
Share-based payments
The cost of employee and director stock options and restricted stock units, as well as other share-based compensation arrangements, is reflected in the
Consolidated Financial Statements based on the estimated grant date fair value method under the authoritative guidance. Management applies the Black-
Scholes option pricing model to options issued to employees and directors to determine the fair value of stock options and apply judgment in estimating key
assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-
price volatility, and expected forfeiture rates. The assumptions used in calculating the fair value of share-based awards under Black-Scholes represent our
best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and
estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. Restricted stock
units and stock options issued to non-employees are valued based upon the intrinsic value of the award. See Note 10, “Stockholders’ Equity,” included in
Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Leases
As of January 1, 2019, the Company adopted both Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements issued by the Financial Accounting Standards Board (“FASB”). The guidance requires a lessee to recognize right-of-
use assets and lease liabilities on the balance sheet for leases with lease terms longer than 12 months. The recognition, measurement and presentation of
lease expenses and cash flows depend on the classification by the lessee as a finance or operating lease. We adopted this guidance using the required
modified retrospective method with the non-comparative transition option. The Company applied the transitional package of practical expedients allowed
by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date. The Company
also applied the lease term and impairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy
practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply
recognition requirements of the guidance to short-term leases. Refer to Note 4, “Leases,” included in Item 8, “Financial Statements and Supplementary
Data,” of this Annual Report for additional disclosures relating to the Company’s leasing arrangements.
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2026 under
which it is responsible for related maintenance, taxes and insurance. The Company has one finance lease containing a bargain purchase option upon
expiration in 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is
reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the
option.
The Company had one restructured lease with a sub-lease component for the New York, New York office that was closed in 2017. The lease expired in June
2021. As part of the lease agreement, there was $0.3 million in restricted cash in prepaid and other current assets on the accompanying Consolidated
Balance Sheets as of December 31, 2020 which represented collateral against the related letter of credit issued as part of the lease agreement. Per the terms
of the lease agreement, the restrictions on the cash were lifted in September 2021 and the cash was returned to the Company.
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Recently adopted accounting pronouncements
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832) (“ASU 2021-10”), in order to increase the transparency of
government assistance by requiring the disclosure of: (i) types of assistance; (ii) an entity’s accounting for the assistance; and (iii) the effect of the assistance
on an entity’s financial statements. ASU 2021-10 is effective for all entities (including smaller reporting companies) for financial statements issued for
annual periods beginning after December 15, 2021, with early adoption permitted. The amendments in ASU 2021-10 should be applied either prospectively
to all transactions within scope reflected in the financial statements after the effective date, or retrospectively to those same transactions. The Company has
early adopted the new standard, effective as of December 31, 2021. Refer to Note 13 “Other Income,” to our financial statements included in Part II, Item 8
“Financial Statements and Supplementary Data,” of this Annual Report.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging -
Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), to simplify accounting for certain financial instruments with characteristics of
liabilities or equity. ASU 2020-06 is effective for smaller reporting companies for fiscal years beginning after December 15, 2023 and interim periods
therein. Early adoption is permitted beginning January 1, 2021. The new guidance: (i) eliminates the current models that require separation of beneficial
conversion and cash conversion features from convertible instruments; (ii) simplifies the derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity; (iii) introduces additional disclosures for convertible debt and freestanding instruments that are indexed
to and settled in an entity’s own equity; and (iv) amends the diluted earnings per share guidance, including the requirement to use the if-converted method
for all convertible instruments. The Company early adopted the new standard effective January 1, 2021. The adoption of ASU 2020-06 did not have an
impact on the Company’s financial position or results of operations upon adoption.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based
on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance
based on its estimate of expected credit losses rather than incurred losses. This standard will be effective for interim and annual periods starting after
December 15, 2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, 17 CFR § 229.10(f)(1), the Company is not required to provide this
information.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID 1808)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
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44
46
48
49
50
51
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Energy Focus, Inc.
Solon, Ohio
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Energy Focus, Inc. (the “Company”) as of December 31, 2021 and 2020, the related
consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes and Schedule
II (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
Continuation as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operations that raise
substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Reserves for Excess, Obsolete and Slow-Moving Inventories
Description of the Matter
As described in Notes 2 and 5 to the consolidated financial statements, the Company assesses the valuation of inventories each reporting period based on the
lower of cost or net realizable value. The Company establishes reserves for excess, obsolete and slow-moving inventories after evaluation of historical sales,
current economic trends, forecasted sales, product lifecycles and
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current inventory levels. The assessment is both quantitative and qualitative. As of December 31, 2021, the Company had inventories of $7.9 million, net of
reserves for excess, obsolete and slow-moving inventories.
Auditing management's estimates for excess, obsolete and slow-moving inventories required subjective auditor judgment and evaluation of the
reasonableness of significant assumptions used in developing the reserves as detailed above, as well as the inputs and related calculations related to
historical sales and on-hand inventories.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design of internal controls over the Company's reserves for excess, obsolete and slow-moving inventories,
including management's assessment of the assumptions and data underlying the reserve calculation.
Our substantive audit procedures included, among others, testing the logic and integrity of calculations within management’s analysis; testing the
completeness and accuracy of underlying data used, including inventory quantities, carrying costs and the estimate of net realizable value by product; and
evaluating the reasonableness of management’s assumptions related to demand forecasts, estimated reserve percentages and qualitative considerations
involving, among others, the implications of the COVID-19 pandemic and new or revised operational strategies. Evaluating the reasonableness of
management’s assumptions involved (i) comparing historical sales by product, used as a basis for future demand, to audited sales subledgers on a sample
basis, (ii) performing sensitivity analyses on reserve percentages applied to categories of projected demand to evaluate the changes in the reserve that would
result from changes in the assumption, (iii) holding discussions with senior management to determine whether strategic or operational changes in the
business were consistent with the projections of future demand that were utilized as basis for the reserves recorded, (iv) corroborating management’s
qualitative considerations through review of recent sales transactions, including those subsequent to year-end, and order backlog and deferrals on a sample
basis, and (v) testing declines in the reserve and evaluating whether such declines were the result of the sale or write-off of inventory or the result of
changes in the significant assumptions used to the develop the reserve.
/s/ GBQ Partners, LLC
We have served as the Company's auditor since 2019.
Columbus, Ohio
March 17, 2022
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ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(amounts in thousands except share data)
ASSETS
Current assets:
Cash
Trade accounts receivable, less allowances of $14 and $8, respectively
Inventories, net
Short-term deposits
Prepaid and other current assets
Total current assets
Property and equipment, net
Operating lease, right-of-use asset
Restructured lease, right-of-use asset
Total assets
LIABILITIES
Current liabilities:
Accounts payable
Accrued liabilities
Accrued legal and professional fees
Accrued payroll and related benefits
Accrued sales commissions
Accrued restructuring
Accrued warranty reserve
Deferred revenue
Operating lease liabilities
Restructured lease liabilities
Finance lease liabilities
Streeterville note, net of discount and loan origination fees
PPP loan
Credit line borrowings, net of loan origination fees
Total current liabilities
(continued on the following page)
$
$
$
2021
2020
2,682 $
1,240
7,866
712
924
13,424
675
292
—
14,391 $
2,235 $
265
104
718
57
—
295
268
325
—
1
1,719
—
2,169
8,156
1,836
2,021
5,641
796
782
11,076
420
794
107
12,397
2,477
45
149
885
95
11
227
72
598
168
3
—
529
2,298
7,557
The accompanying notes are an integral part of these consolidated financial statements.
46
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ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(amounts in thousands except share data)
Operating lease liabilities, net of current portion
Finance lease liabilities, net of current portion
PPP loan, net of current maturities
Total liabilities
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.0001 per share:
Authorized: 5,000,000 shares (3,300,000 shares designated as Series A Convertible Preferred Stock) at
December 31, 2021 and December 31, 2020
Issued and outstanding: 876,447 shares at December 31, 2021 and 2,597,470 shares at December 31, 2020
Common stock, par value $0.0001 per share:
Authorized: 50,000,000 shares at December 31, 2021 and December 31, 2020
Issued and outstanding: 6,368,549 shares at December 31, 2021 and 3,525,374 shares at December 31, 2020
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
2021
2020
26
—
—
8,182
318
1
266
8,142
—
—
—
144,953
(3)
(138,741)
6,209
14,391
$
—
135,113
(3)
(130,855)
4,255
12,397
$
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Net sales
Cost of sales
Gross profit
Operating expenses:
Product development
Selling, general, and administrative
Restructuring
Total operating expenses
Loss from operations
Other expenses:
Interest expense
Gain on forgiveness of PPP loan
Loss on extinguishment of debt
Other income - employee retention tax credit
Loss from change in fair value of warrants
Other expenses
Loss from operations before income taxes
Benefit from income taxes
Net loss
Net loss per common share - basic and diluted:
Net loss
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands except per share data)
2021
2020
$
$
$
9,865 $
8,167
1,698
1,891
8,535
(21)
10,405
(8,707)
792
(801)
—
(876)
—
65
(7,887)
(1)
(7,886) $
16,828
11,643
5,185
1,415
7,900
(60)
9,255
(4,070)
481
—
276
—
1,086
73
(5,986)
(5)
(5,981)
(1.73) $
(1.83)
4,561
3,270
Weighted average shares of common shares outstanding:
Basic and diluted*
*Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.
The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
Net loss
Other comprehensive loss:
Foreign currency translation adjustments
Comprehensive loss
2021
2020
(7,886) $
(5,981)
—
(7,886) $
—
(5,981)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(amounts in thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares*
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance at December 31, 2019
Issuance of common stock under
employee stock option and stock
purchase plans
Common stock withheld in lieu of
income tax withholding on vesting of
restricted stock units
Issuance of common stock and
warrants
Offering costs on issuance of common
stock and warrants
Issuance of common stock upon the
exercise of warrants
Warrant liability - issuance
Warrant liability - modification
Conversion of notes to preferred stock
Issuance of common stock upon the
conversion from preferred stock
Stock-based compensation
Net loss
Balance at December 31, 2020
Issuance of common stock under
employee stock option and stock
purchase plans
Common stock withheld in lieu of
income tax withholding on vesting of
restricted stock units
Issuance of common stock and
warrants
Offering costs on issuance of common
stock and warrants
Issuance of common stock upon the
exercise of warrants
Issuance of common stock upon
conversion from preferred stock
Stock-based compensation
Net loss
Balance at December 31, 2021
— $
—
—
—
—
—
—
—
2,709
(112)
—
—
2,597 $
—
—
—
—
—
(1,721)
—
—
876 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,486 $
— $
128,873 $
(3) $
(124,874) $
3,996
60
—
688
—
269
—
—
—
—
—
—
—
—
—
—
—
100
(3)
2,749
(510)
2,235
(1,636)
1,405
1,769
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22
—
—
3,525 $
—
—
—
— $
—
131
—
135,113 $
—
—
—
(3) $
—
—
(5,981)
(130,855) $
79
—
2,183
—
237
—
—
—
—
—
80
(1)
9,500
(969)
801
—
—
—
—
—
—
—
—
—
—
344
—
—
6,368 $
—
—
—
— $
—
429
—
144,953 $
—
—
—
(3) $
—
—
(7,886)
(138,741) $
100
(3)
2,749
(510)
2,235
(1,636)
1,405
1,769
—
131
(5,981)
4,255
80
(1)
9,500
(969)
801
—
429
(7,886)
6,209
*Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.
The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
2021
2020
$
(7,886) $
(5,981)
Other income - employee retention tax credit
Gain on forgiveness of PPP loan
Depreciation
Stock-based compensation
Change in fair value of warrant liabilities
Provision for doubtful accounts receivable
Provision for slow-moving and obsolete inventories
Provision for warranties
Amortization of loan discounts and origination fees
Loss on dispositions of property and equipment
Change in operating assets and liabilities:
Accounts receivable
Inventories
Short-term deposits
Prepaid and other assets
Accounts payable
Accrued and other liabilities
Deferred revenue
Total adjustments
Net cash used in operating activities
Cash flows from investing activities:
Acquisitions of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from the issuance of common stock and warrants
Proceeds from the exercise of warrants
Offering costs paid on the issuance of common stock and warrants
Proceeds from PPP loan
Proceeds from exercise of stock options and purchases through employee stock purchase plan
Principal payments under finance lease obligations
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units
Payments for deferred financing costs & termination fees
Payments on the Iliad Note
Proceeds from the Streeterville Note
Net payments on credit line borrowings - Austin Facility
Net (payments on) proceeds from credit line borrowings - Credit Facilities
Net cash provided by financing activities
(continued on the following page)
51
(876)
(801)
188
429
—
6
156
68
230
—
783
(2,381)
257
669
(423)
(380)
196
(1,879)
(9,765)
(443)
(443)
9,500
801
(969)
—
80
(3)
(1)
(30)
—
1,515
—
(181)
10,712
—
—
184
131
1,086
(20)
(610)
31
395
8
377
1,137
(670)
(18)
1,096
349
54
3,530
(2,451)
(223)
(223)
2,749
918
(510)
795
100
(3)
(3)
(320)
(1,306)
—
(719)
2,459
4,160
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ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
Net increase in cash and restricted cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of year
Classification of cash and restricted cash:
Cash
Restricted cash held in other assets
Cash and restricted cash
Supplemental information:
Cash paid in year for interest
Cash paid in year for income taxes
2021
2020
504
2,178
2,682 $
2,682 $
—
2,682 $
381 $
4 $
1,486
692
2,178
1,836
342
2,178
269
4
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls and
ultraviolet-C light disinfection (“UVCD”) products. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products
and UVCD products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the
fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and
human health and wellness through advanced LED retrofit and UVCD solutions. Our goal is to be the LED and human-centric lighting (“HCL”) technology
and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We
specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily
indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and
lighting control products for commercial and consumer applications. In late 2020, we announced the launch of our UVCD product portfolio. With initial
development complete and two products now brought to market, we anticipate the development of additional UVCD products in 2022.
The LED lighting industry continues to be characterized by increasing challenges in differentiating product offerings, 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 in order to price our products more competitively. Despite these efforts, our legacy products continue to
face aggressive pricing competition. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing
challenges, exiting LED lighting, selling assets and even going out of business. In addition to continuous cost reductions, our strategy to combat these trends
is to move up the value chain, with more innovative and differentiated products and solutions that support a premium. Two specific examples of these
products we have recently developed include the RedCap , our emergency backup battery integrated TLED, and EnFocus™, our new dimmable/tunable
lighting and powerline control platform that we launched in 2020. We believe our revamped go-to-market strategy that focuses more on direct-sales and
additional sales representatives and listens to the voice of the customer, has informed more impactful product development efforts that could eventually
translate into larger addressable markets and greater sales growth for us.
®
During 2021, we continued to see certain benefits from the relaunch efforts (described below) that began in 2019, in addition to a number of strategic
sourcing projects completed during 2020. It is our belief that the continued momentum of the efforts undertaken in 2020 and into 2021, along with the
development and launch of new and innovative products, will over time result in improved sales and bottom-line performance for the Company. We
launched our EnFocus™ platform during the second quarter of 2020 and continued to receive positive feedback from the market. The EnFocus™ powerline
control 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 any wireless communications, through a relatively simple upgrade with EnFocus™ switches and replacement LED
lamps, a more environmentally sustainable solution compared with replacing each lighting fixture.
In addition, in response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we
started developing advanced UVCD products for both the consumer and the commercial and industrial markets in the first quarter of 2020. In late 2020, we
announced the nUVo™ portable disinfection devices for offices and homes. Sales of these products began during the fourth quarter of 2021.
Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant
restructuring efforts were undertaken. The Company replaced the entire senior management team, significantly reduced non-critical expenses, minimized
the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors (“Board of Directors”) and the
executive team, and recruited new departmental leaders across the Company. The cost savings efforts undertaken included phased actions to reduce costs to
minimize cash usage. Initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the
senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain
elements of supply chain and marketing.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 11, 2020, in accordance with previous stockholder approval, our Board of Directors effected a 1-for-5 (the “Split Ratio”) reverse stock split of the
Company’s common stock, par value $0.0001 per share. The reverse stock split became effective immediately upon the filing of the Certificate of
Amendment to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), with the Delaware Secretary of State (the
“Effective Time”). At the Effective Time, every five shares of common stock issued and outstanding automatically combined into one validly issued, fully
paid and non-assessable share of common stock. No fractional shares were issued as a result of the reverse stock split. The $0.0001 par value per share of
common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under
the Certificate of Incorporation remained unchanged at 50,000,000 shares. Proportional adjustments were made to the conversion and exercise prices of our
outstanding warrants and stock options, and to the number of shares issued and issuable under our stock incentive plans in connection with the reverse stock
split. The information presented in the financial statements for all prior periods have been retroactively adjusted to reflect the reverse stock split. Preferred
shares outstanding were not affected by the reverse stock split and, as such, those shares have not been adjusted.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of our Company, which are summarized below, are consistent with U.S. GAAP and reflect practices appropriate to the
business in which we operate.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods presented. Estimates include, but are not limited to, the establishment of reserves for accounts
receivable, sales returns, inventory excess and obsolescence reserve and warranty claims, the useful lives for property and equipment and stock-based
compensation. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-
lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material.
Basis of presentation
The Consolidated Financial Statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated.
Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our operations.
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 and collected by us 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.”
Cash and restricted cash
At December 31, 2021, we had cash of $2.7 million and at December 31, 2020, we had cash and restricted cash of $2.2 million on deposit with financial
institutions located in the United States. The December 31, 2020 cash balance of $2.2 million of cash includes restricted cash of $0.3 million which is
presented within prepaid and other current assets and other assets in the accompanying Consolidated Balance Sheets. Please refer to Note 4, “Leases,” for
additional information.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We
establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and
current inventory levels. The assessment is both quantitative and qualitative. 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. This resulted in a net increase of our gross inventory levels of $2.4 million. We had an
increase of excess inventory reserves of $0.2 million as compared to 2020.
The assessment for excess and obsolete inventories for 2020 not only included both quantitative and qualitative components, but a COVID-19 pandemic
impact analysis as well. Throughout 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 compared to
2019. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Please
refer to Note 5, “Inventories,” for additional information.
Accounts receivable
Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the
normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an
evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We utilize a third-party account
receivables 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 assist 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 amount 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.
Income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in
which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from
differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which
are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to
the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. At December 31, 2021 and 2020, we have recorded a full valuation allowance against our net 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.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
December 2021 Private Placement
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185
shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants (“Pre-Funded
Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the Pre-Funded
Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. We
paid the placement agent commissions 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 Consolidated Balance Sheet as of December 31, 2021. Net
proceeds to us from the December 2021 Private Placement were approximately $4.0 million. We determined the exercise price of the Pre-Funded Warrants
to be nominal and, as such, have considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for the purposes of
calculating basic earnings per share (“EPS”).
As of December 31, 2021, December 2021 Warrants to purchase an aggregate of 1,363,641 shares remained outstanding, with a weighted average exercise
price of $3.30 per share. None of the December 2021 Warrants were exercised as of December 31, 2021. In January 2022, all of the Pre-Funded Warrants
were exercised. 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
$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.
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 (the, “Investor Warrants”) in a concurrent private placement (together with the concurrent registered direct offering, the
“January 2020 Equity Offering”) 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. Total offering costs of $510 thousand have been presented as a reduction of additional paid-in capital and have been netted within
equity in the Consolidated Balance Sheet as of December 31, 2021 and 2020. 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”). Net proceeds to
us from the January 2020 Equity Offering were approximately $2.3 million. In accordance with the terms of the Iliad Note (as defined below in Note 8,
“Debt”), 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226
thousand went towards the outstanding principal amount and the balance to interest.
As of December 31, 2021, January 2020 Warrants issued to purchase an aggregate of 229,414 shares remain outstanding with a weighted average exercise
price of $3.67 per share. During the twelve months ended December 31, 2021, 237,892 January 2020 Warrants were exercised resulting in total proceeds of
$801 thousand. The exercise of the remaining January 2020 Warrants outstanding could provide us with cash proceeds of up to $841 thousand in the
aggregate. At December 31, 2020, January 2020 Warrants issued to purchase an aggregate of 467,306 shares remained outstanding with a weighted average
exercise price of $3.51 per share. During the twelve months ended December 31, 2020, 269,240 January 2020 Warrants were exercised resulting in total
proceeds of $918 thousand.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to a potential cash settlement upon occurrence of a fundamental transaction within the January 2020 Equity Offering warrant agreement, the January
2020 Warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three
quarters of 2020. During December 2020, the warrant holders agreed to a modification of the terms of their January 2020 Warrants which removed the
potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth quarter of 2020, the warrant liability was fair-
valued through the modification date and then was reclassified into equity and the January 2020 Warrants are no longer subject to re-measurement at each
balance sheet date. Please also refer to Note 10, “Stockholders’ Equity”.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market
participants on the measurement date. The fair value of financial assets and liabilities are measured on a recurring or non-recurring basis. Financial assets
and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and
liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.
We utilize valuation techniques that maximize the use of available market information and generally accepted valuation methodologies. We assess the inputs
used to measure fair value using a three-tier hierarchy. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value,
giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are described below. We classify the inputs used to measure fair value into the following hierarchy:
Level 1
Level 2
Level 3
Unadjusted quoted prices in active markets for identical assets or liabilities.
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or
liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Unobservable inputs for the asset or liability.
The carrying amounts of certain financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value
due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our
revolving credit facilities also approximates fair value.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In
determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis. We review
and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in a fair
value measurement may result in a reclassification between fair value hierarchy levels. There were no reclassifications for all periods presented.
A roll-forward of fair value measurements using significant unobservable inputs (Level 3) for the January 2020 Warrants issued in the January 2020 Equity
Offering is as follows (in thousands):
Balance January 1, 2020
Issuance of warrants, January 2020
Settlements from exercise
Loss from change in fair value of warrants
Reclassification to equity upon modification
Balance December 31, 2020
57
Twelve months ended December
31, 2020
$
$
—
1,636
(1,317)
1,086
(1,405)
—
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 15
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 Statements of
Operations. Refer to Note 6, “Property and Equipment,” for additional information.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or
circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the
planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less
than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as
determined by quoted market prices (if available) or the present value of expected future cash flows. Refer to Note 6, “Property and Equipment,” for
additional information.
Certain risks and concentrations
Historically our products were sold through a direct sales model, which included a combination of direct sales employees, electrical and lighting contractors,
and distributors. We utilize a third-party accounts receivable insurance and credit assessment company. Although we maintain allowances for potential
credit losses that we believe to be adequate, a payment default on a significant sale could materially and adversely affect our operating results and financial
condition, although we have mitigated this risk somewhat through the accounts receivable insurance program.
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance
individually represented 10% or more of our total net trade accounts receivable, as follows:
•
In 2021, two customers accounted for 43% of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 30%
and sales to a regional commercial lighting retrofit company accounting for approximately 13% of net sales. When sales to our primary distributor
for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately
38% of net sales for the same period. In 2020, two customers accounted for 62% of net sales and total net sales of products to the U.S. Navy
represented 53% of net sales.
• At December 31, 2021, a distributor to the U.S. Department of Defense accounted for 20% of our net trade accounts receivable and a shipbuilder
for the U.S. Navy accounted for 36% of our net trade accounts receivable. At December 31, 2020, a distributor to the U.S. Navy accounted for 28%
of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 21% of our net trade accounts receivable.
We require substantial amounts of purchased materials from selected vendors. With specific materials, all of our purchases are from a single vendor. The
availability and costs of materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation to other purchasers,
interruptions in production by suppliers, global health issues such as the COVID-19 pandemic, and changes in exchange rates and worldwide price and
demand levels. Our inability to obtain adequate supplies of materials for our products at favorable prices could have a material adverse effect on our
business, financial position, or results of operations by decreasing our profit margins and by hindering our ability to deliver products to our customers on a
timely basis. Additionally, certain vendors require advance deposits prior to the fulfillment of orders. Deposits paid on unfulfilled orders totaled $0.7 million
and $0.8 million at December 31, 2021 and 2020, respectively.
We have certain vendors who individually represented 10% or more of our total expenditures, or whose net trade accounts payable balance individually
represented 10% or more of our total net trade accounts payable, as follows:
• One offshore supplier accounted for approximately 29% of our total expenditures for the twelve months ended December 31, 2021. At
December 31, 2021, this same offshore supplier accounted for approximately 60% of our trade accounts payable balance.
• One offshore supplier and one domestic supplier accounted for approximately 21% and 12%, respectively, of our total expenditures for the twelve
months ended December 31, 2020. At December 31, 2020, this same offshore supplier accounted for approximately 44% of our trade accounts
payable balance.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product development
Product development expenses include salaries, contractor and consulting fees, supplies and materials, as well as costs related to other overhead items such
as depreciation and facilities costs. Research and development costs are expensed as they are incurred.
Net loss per share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock
outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential shares of
common stock outstanding during the period. Dilutive potential shares of common stock consist of incremental shares upon the exercise of stock options,
warrants and convertible securities, unless the effect would be anti-dilutive.
The following table presents a reconciliation of basic and diluted loss per share computations (in thousands, except per share amounts):
Numerator:
Net loss
Denominator:
For the years ended December 31,
2021
2020
$
(7,886) $
(5,981)
Basic and diluted weighted average common shares outstanding*
4,561
3,270
*Shares outstanding for prior periods have been restated for the 1-for-5 stock split effective June 11, 2020.
As a result of the net loss we incurred for the year ended December 31, 2021, options, warrants and convertible preferred stock representing approximately
51 thousand, 47 thousand and 260 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their
inclusion would have been anti-dilutive. We determined the exercise price of the Pre-Funded Warrants to be nominal and, as such, have considered the
approximately 85 thousand shares underlying them to be outstanding effective December 16, 2021, for the purposes of calculating basic EPS.
As a result of the net loss we incurred for the year ended December 31, 2020, options, restricted share units, warrants and convertible preferred stock
representing approximately 69 thousand, 4 thousand, 174 thousand and 506 thousand shares of common stock, respectively, were excluded from the basic
EPS calculation as their inclusion would have been anti-dilutive.
Stock-based compensation
We recognize compensation expense based on the estimated grant date fair value under the authoritative guidance. Management applies the Black-Scholes
option pricing model to value stock options issued to employees and directors and applies 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. Compensation expense is generally amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
See Note 10, “Stockholders’ Equity,” for additional information. Common stock, stock options, and warrants issued to non-employees that are not part of an
equity offering are accounted for under the applicable guidance under Accounting Standards Codification (“ASC”) 505-50, “Equity-Based Payments to
Non-Employees,” and are generally re-measured at each reporting date until the awards vest.
Advertising expenses
Advertising expenses are charged to operations in the period incurred. They consist of costs for the placement of our advertisements in various media and
the costs of demos provided to potential distributors of our products. Advertising expenses were $0.4 million and $0.1 million for the years ended
December 31, 2021 and 2020, respectively.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product warranties
We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten years and from one to five years for
UVCD products. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products
provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual
claims incurred to date and the estimated nature, frequency, and costs of future claims. These estimates are inherently uncertain and changes to our historical
or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy
of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or
the underlying replacement product costs, or the warranty period expires.
The following table summarizes warranty activity for the periods presented (in thousands):
Balance at the beginning of the year
Accruals for warranties issued
Adjustments to existing warranties
Settlements made during the year (in kind)
Accrued warranty reserve at the end of the period
Recently adopted accounting pronouncements
At December 31,
2021
2020
$
$
227 $
(41)
47
62
295 $
195
33
19
(20)
227
In November 2021, the Financial Accounting Standards Board (“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,” for
additional information.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging -
Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), to simplify accounting for certain financial instruments with characteristics of
liabilities or equity. ASU 2020-06 is effective for smaller reporting companies for fiscal years beginning after December 15, 2023 and interim periods
therein. Early adoption is permitted beginning January 1, 2021. The new guidance: (i) eliminates the current models that require separation of beneficial
conversion and cash conversion features from convertible instruments; (ii) simplifies the derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity; (iii) introduces additional disclosures for convertible debt and freestanding instruments that are indexed
to and settled in an entity’s own equity; and (iv) amends the diluted earnings per share guidance, including the requirement to use the if-converted method
for all convertible instruments. The Company early adopted the new standard effective January 1, 2021. The adoption of ASU 2020-06 did not have an
impact on the Company’s financial position or results of operations upon adoption.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based
on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance
based on its estimate of expected credit losses rather than incurred losses. This standard will be effective for interim and annual periods starting after
December 15, 2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
60
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RESTRUCTURING
Due to our financial performance in 2021 and 2020, including net losses of $7.9 million and $6.0 million, respectively, and total cash used in operating
activities of $9.8 million and $2.5 million, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to
exist at December 31, 2021.
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 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.
For the twelve months ended December 31, 2021 and 2020, we recorded net restructuring credits of approximately $21 thousand and $60 thousand,
respectively, related to the costs and offsetting sub-lease income and accretion expense for the remaining lease obligation for our former New York, New
York office. The lease obligation on our former New York, New York office was settled as of June 30, 2021.
Our restructuring liabilities consisted of estimated ongoing costs related to long-term operating lease obligations, which the Company exited. The recorded
value of the ongoing lease obligations was based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent
periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period were measured using the credit adjusted,
risk free rate that was used to measure the restructuring liabilities initially.
The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the Company’s restructuring plans (in
thousands):
Balance at December 31, 2019
Accretion of lease obligations
Payments
Balance at December 31, 2020
Payments
Balance at December 31, 2021
Restructuring
Liability
$
$
$
The following is a reconciliation of the ending balance of our restructuring liability at December 31, 2021 and December 31, 2020 (in thousands):
Balance at December 31
Less, short-term restructuring liability
Long-term restructuring liability, included in other liabilities
2021
2020
$
$
— $
—
— $
38
2
(29)
11
(11)
—
11
11
—
As a result of the restructuring actions and initiatives described above, we have tailored our operating expenses to be more in line with our expected sales
volumes, however, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going
concern continues to exist at December 31, 2021.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Throughout 2020 and 2021, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to continue to develop
advanced lighting and lighting control technologies and introduce impactful new products surrounding EnFocus
control platform we officially launched during the second quarter of 2020. We announced the following UVCD products beginning in the fourth quarter of
2020: nUVo™ Tower portable air disinfection device for offices and homes and nUVo™ Traveler portable personal air disinfection device for in-vehicle and
smaller spaces. Initial sales of nUVo™ devices began in the fourth quarter of 2021, and we anticipate the development of additional products in 2022.
, a patented, breakthrough powerline
TM
We plan to achieve profitability by growing our sales through existing lighting, new lighting control systems and UVCD products, and by continuing to
refine and execute 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, as well as our emerging consumer market focus.
As described in Note 10, “Stockholders’ Equity,” we raised approximately $4.0 million of net proceeds upon the issuance of common stock and December
2021 Warrants in connection with the December 2021 Private Placement, approximately $4.5 million of net proceeds upon the issuance of common stock in
connection with the June 2021 Equity Offering, and approximately $2.3 million of net proceeds upon the issuance of common stock and January 2020
Warrants. As described in Note 8, “Debt”, in April 2021, we obtained approximately $1.5 million of bridge financing, net and in August 2020, we entered
into two new revolving credit facilities, which allow for expanded borrowing capacity, which capacity was further increased by an April 20, 2021
amendment to one of the facilities.
The restructuring and cost cutting initiatives implemented during 2020 and continuing into 2021, as well as the December 2021 Private Placement, the June
2021 Equity Offering and the January 2020 Equity Offering that significantly strengthened our balance sheet, the Paycheck Protection Program (“PPP”)
loan we obtained in April 2020, our enhanced debt capacity due to the debt refinancing in August 2020, the credit facility capacity increase and bridge
financing in April 2021, and the funds we received, and expect to receive, related to the Employee Retention Tax Credit (“ERTC”), see Note 13, “Other
Income” for details), were all designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or
be successful due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products, markets, and customers into
this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration,
numerous interruptions and cost increases in the supply chain globally, and the ongoing and lingering economic impact from the COVID-19 pandemic that
has significantly diminished the interest and activities for our customers’ lighting retrofit projects until occupancy returns to more normal levels, among
other factors.
Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, leading to a buildup of inventory and
components in an effort to manage both shortages of available components and longer lead times in obtaining components. Disruptions in global logistics
networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. As
a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines
required to achieve these objectives including, but not limited to, the following:
•
•
•
obtaining financing from traditional or non-traditional investment capital organizations or individuals;
obtaining funding from the sale of our common stock or other equity or debt instruments; and
obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding 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 rate, restrictive covenants, conversion features, refinancing demands,
and control or revocation provisions, which are not acceptable to management or our Board of Directors; and
the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt
financing.
•
•
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, if we are unable to find a permanent Chief Executive Officer, it may be more difficult to obtain additional financing on satisfactory terms or at
all. If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs,
we will need to delay, scale back or eliminate our growth plans 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 funding 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.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to ensure adequate external funding,
timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and
implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing,
and development of potential channel partnerships, if adequately executed, will provide us with an ability to finance our operations through the next twelve
months and will mitigate the substantial doubt about our ability to continue as a going concern.
On August 17, 2020, we received a letter from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) notifying us that we
were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2,500,000
if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the
“Minimum Stockholders’ Equity Rule”). Our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, filed on August 13, 2020,
reflected that our stockholders’ equity as of June 30, 2020 was $1,714,000. Based on our timely submission of our plan to regain compliance, Nasdaq
granted us an extension through February 15, 2021 to regain compliance with the Minimum Stockholders’ Equity Rule. In accordance with one part of the
plan submitted to the Staff, we successfully modified our outstanding January 2020 Warrants and in December 2020, we reclassified $1.4 million from
warrant liability into equity. On January 20, 2021, we received a letter from the Staff notifying us that, on a conditional basis, Nasdaq has determined that
we have regained compliance with the Minimum Stockholders’ Equity Rule. At December 31, 2020, our stockholders’ equity was $4,255,000, satisfying the
Minimum Stockholders’ Equity Rule. At December 31, 2021, our stockholders’ equity was $6,209,000.
On December 21, 2021, we received a letter from the Staff notifying the Company that, as a result of the resignation of a director, as previously disclosed,
from the Board of Directors and the Audit and Finance Committee, we are not in compliance with Nasdaq Listing Rule 5605, which requires that our Audit
and Finance Committee be comprised of at least three directors, all of whom are independent pursuant to the rules of Nasdaq and applicable law. The
notification letter had no immediate effect on the Company’s listing on the Nasdaq Capital Market. The letter further provided that, pursuant to Nasdaq
Listing Rule 5605(c)(4), we are entitled to a cure period to regain compliance with Nasdaq Listing Rule 5605, which cure period will expire on the earlier of
the date of our next annual shareholders’ meeting and November 11, 2022, or, if the next annual shareholders’ meeting is held before May 10, 2022, then
the cure period will expire on May 10, 2022. The Board of Directors has commenced a search for a new independent director, who would be expected to
serve on our Audit and Finance Committee, or the Board of Directors will otherwise appoint a current independent director to fill the vacancy on the
committee.
NOTE 4. LEASES
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2026 under
which it is responsible for related maintenance, taxes and insurance. The Company has one finance lease containing a bargain purchase option upon
expiration in 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is
reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the
option. As of January 21, 2021, the terms of one of these equipment operating leases has been extended through 2026. In accordance with ASC 842, Leases
(“Topic 842”), the related right-of-use asset and lease liability was updated at the time of modification in January 2021. The present value of the lease
obligation for this lease was calculated using an incremental borrowing rate of 15.93%, which was the Company’s blended borrowing rate (including
interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads
Financial Group, LLC (as described below in Note 8, “Debt”) and Factors Southwest L.L.C (as described below in Note 8, “Debt”). The present value of the
remaining lease obligation was calculated using an incremental borrowing rate (“IBR”) of 7.25% (which excludes the annual facility fee and other lender
fees), which was the Company’s borrowing rate on its former revolving line of credit with Austin Financial Services, Inc. (the “Austin Facility”). The
weighted average remaining lease term for operating and finance leases is 0.8 years and 0.3 years, respectively.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 this 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.
The restructured lease and sub-lease were deemed to be in-scope and thus subject to the requirements of Topic 842 and were evaluated for impairment in
accordance with the asset impairment provisions of ASC 360, Property, Plant and Equipment (“Topic 360”). The Company concluded its net right-of-use
assets were not impaired and the carrying amount approximates expected sublease income in future years as of December 31, 2021 and 2020.
Components of the operating, restructured and finance lease costs recognized in net loss were as follows (in thousands):
Operating lease cost (income)
Sub-lease income
Lease cost
Operating lease cost, net
Restructured lease cost (income)
Sub-lease income
Lease cost
Restructured lease income, net
Total lease cost, net
For the years ended December 31,
2020
2021
$
$
(112) $
558
446
(136)
110
(26)
420 $
Supplemental Consolidated Balance Sheet information related to the Company’s operating and finance leases are as follows (in thousands):
Operating Leases
Operating lease right-of-use assets
Restructured lease right-of-use assets
Operating lease right-of-use assets, total
Operating lease liabilities
Restructured lease liabilities
Operating lease liabilities, total
Finance Leases
Property and equipment
Allowances for depreciation
Finance lease assets, net
Finance lease liabilities
Total finance lease liabilities
At December 31,
2021
2020
$
$
292 $
—
292
351
—
351
13
(12)
1
1
1 $
64
(105)
597
492
(272)
237
(35)
457
794
107
901
916
168
1,084
13
(9)
4
4
4
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments required under operating and finance leases for each of the years 2022 through 2026 are as follows (in thousands):
Operating Leases
Finance Lease
2022
2023
2024
2025
2026
Total future undiscounted lease payments
Less imputed interest
Total lease obligations
Supplemental cash flow information related to leases was as follows (in thousands):
Supplemental Cash Flow Information:
Cash paid, net, for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from restructured leases
Financing cash flows from finance leases
NOTE 5. INVENTORIES
$
$
$
$
$
332 $
19
4
3
1
359
(8)
351 $
Years ended December 31,
2021
2020
532 $
35 $
3 $
1
—
—
—
—
1
—
1
537
69
3
Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable
value and consists of the following (in thousands):
Raw materials
Finished goods
Reserve for excess, obsolete, and slow-moving inventories
Inventories, net
At December 31,
2021
2020
$
$
3,882 $
7,034
(3,050)
7,866 $
The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands):
Beginning balance
Accrual
Reduction due to sold inventory
Reserves for excess, obsolete, and slow-moving inventories
At December 31,
2021
2020
$
$
(2,894) $
(281)
125
(3,050) $
2,695
5,840
(2,894)
5,641
(3,518)
281
343
(2,894)
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. This
resulted in a net increase of our gross inventory levels of $2.4 million and excess inventory reserves of $0.2 million as compared to 2020.
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 compared to 2019.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of
the following (in thousands):
Equipment (useful life 3 - 15 years)
Tooling (useful life 2 - 5 years)
Vehicles (useful life 5 years)
Furniture and fixtures (useful life 5 years)
Computer software (useful life 3 years)
Leasehold improvements (the shorter of useful life or lease life)
Finance lease right-of-use asset
UV - Robots (useful life 5 years)
Construction in progress
Property and equipment at cost
Less: accumulated depreciation
Property and equipment, net
At December 31,
2021
2020
$
$
1,308 $
384
83
86
1,194
169
13
105
135
3,477
(2,802)
675 $
1,281
240
47
137
1,057
169
13
—
140
3,084
(2,664)
420
Depreciation expense was $0.2 million for both of the years ended December 31, 2021 and 2020. There were no impairment charges for property and
equipment during 2021 and 2020.
NOTE 7. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following (in thousands):
Prepaid insurance
Prepaid expenses
Prepaid rent
Short-term deposits - non-inventory
Restricted cash
ERTC funds
Other
Total prepaid and other current assets
NOTE 8. DEBT
Credit Facilities
At December 31,
2021
2020
$
$
$
131
253
74
18
—
445
3
924
126
233
80
—
342
—
1
782
On August 11, 2020, we entered into two debt financing arrangements (together, the “Credit Facilities”) that allow for expanded borrowing capacity at a
lower blended borrowing cost. The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security
Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company
(the “IF Lender”). Borrowings under the Inventory Facility are permitted up to the lower of (i) $3.0 million, which was subsequently increased to $3.5
million as described below, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75%
of inventory costs or 85% of the inventory net orderly liquidation value, less the availability reserves. On April 20, 2021, the Company and the IF Lender
entered into an amendment to the Inventory Loan Agreement to increase the maximum amount that may be available to the Company from $3.0 million to
$3.5 million, subject to the borrowing base as set forth in the Inventory Loan Agreement. The outstanding indebtedness under the Inventory Facility accrues
at an annual rate equal to the greater of (i) 5.75% and (ii) 4.00% plus the three-month LIBOR rate (0.21% and 0.24% at December 31, 2021 and
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2020, respectively) and is also subject to a service fee of 1% per month. The annualized interest rate at December 31, 2021 and 2020, which includes
interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was 22.4% and 23.6%, respectively. The Inventory Facility’s interest and
service fees combined amount is subject to a minimum monthly fee of $18 thousand. There would be no breakage fee for the Company for the Inventory
Facility if the Company were to refinance it with an American Bankers Association (“ABA”) equivalent institution. The Inventory Facility is secured by
substantially all of the present and future assets of the Company and is also governed by an intercreditor agreement among the Company, the IF Lender and
the RF Lender (defined below). The Inventory Facility matures on August 11, 2022, subject to early termination upon 90 days’ notice and otherwise in
accordance with the terms of the Inventory Loan Agreement. The term is automatically extended in successive one year increments unless terminated by
either party in accordance with the Inventory Loan Agreement.
The second arrangement is a receivables financing facility (the “Receivables Facility”) pursuant to the Loan and Security Agreement (the “Receivables
Loan Agreement”) between the Company and Factors Southwest L.L.C. (d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”).
Borrowings under the Receivables Facility are permitted up to the lower of (i) $2.5 million or (ii) a borrowing base determined from time to time based on
the value of the Company’s eligible accounts receivable, valued at 90% of the face value of such accounts receivable, less availability reserves, if any.
Interest on outstanding indebtedness under the Receivables Facility accrues at an annual rate equal to (i) the highest prime rate announced from time to time
by the Wall Street Journal (3.25% at both December 31, 2021 and 2020) plus (ii) 2%. At December 31, 2021 and 2020, the annualized interest rate, which
includes interest fees and the annual facility fee, was 8.0% and 7.9%, respectively. The annualized interest rate on the collateral management fee was 5.9%
at both December 31, 2021 and 2020. The Receivables Facility is also secured by substantially all of the present and future assets of the Borrower and is
also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender. A $25 thousand, or 1%, facility fee was charged at
closing. There would be no breakage fee for the Company for the Receivables Facility if the Company were to refinance it with an ABA equivalent
institution. The Receivables Facility matures on August 11, 2022, subject to early termination in accordance with the terms of the Receivables Loan
Agreement; provided that the term is automatically extended in successive one year increments unless terminated by either party in accordance with the
Receivables Loan Agreement.
Borrowings under the Inventory Facility were $1.2 million and $1.3 million at December 31, 2021 and 2020, respectively. Borrowings under the
Receivables Facility were $1.0 million at both December 31, 2021 and 2020. Borrowings under the Credit Facilities are recorded in the Consolidated
Balance Sheet as of December 31, 2021 and 2020 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding
balances include unamortized net issuance costs totaling $84 thousand and $121 thousand for the Inventory Facility and $24 thousand and $40 thousand for
the Receivables Facility as of December 31, 2021 and 2020, respectively.
The Credit Facilities replaced the Austin Facility that 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. The total loan amount available to us under the Austin Facility from time to time was based on the
amount of our (i) qualified accounts receivable, which is equal to the lesser of 85% of our net eligible receivables of, or $4.5 million, plus (ii) available
inventory, which is the lesser of 20% of the net realizable value of eligible inventory of, or $500 thousand. The Austin Facility charged interest deeming a
minimum borrowing requirement of $1.0 million. Interest on advances under the line was due monthly at the “Prime Rate,” as published by the Wall Street
Journal from time to time, plus a margin of 2%. Overdrafts were subject to a 2% fee. Additionally, an annual facility fee of 1% on the entire $5.0 million
amount of the Austin Facility was due at the beginning of each of the three years that the Austin Facility was outstanding and a 0.5% collateral management
fee on the average outstanding loan balance was payable monthly. 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.
Streeterville Note
On April 27, 2021, we entered into a note purchase agreement with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to
Streeterville a promissory note in the principal amount of approximately $1.7 million (the “Streeterville Note”). The Streeterville Note was issued with an
original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the Streeterville Note, after deduction of $15 thousand of
Streeterville’s transaction expenses.
The Streeterville Note has a maturity date of April 27, 2023, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The
Company may prepay the amounts outstanding under the Streeterville Note at a premium, which is
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5% during the first three months and 10% thereafter. Prepayments at the reduced rate in the first three months are limited to 50% of the outstanding balance.
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.
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank National Association (“KeyBank”) in the amount of approximately $795 thousand,
pursuant to the PPP under Division A of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27,
2020. The funds were received on April 20, 2020 and accrued interest at a rate of 1% per annum. At December 31, 2020, $529 thousand was classified as
short-term debt and $266 thousand was classified as long-term debt on the Company’s Consolidated Balance Sheet. Under the terms of the PPP, certain
amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The entire principal balance and interest were
forgiven by the Small Business Administration on February 11, 2021. The $801 thousand forgiveness income was recorded as other income in the
Consolidated Statements of Operations during the year ended December 31, 2021.
Iliad Note
On November 25, 2019, we entered into a note purchase agreement (the “Iliad Note Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”)
pursuant to which the Company sold and issued to Iliad a promissory note in the principal amount of $1.3 million (the “Iliad Note”). 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.
On December 1, 2020, we repaid the $30 thousand remaining outstanding balance on the Iliad Note in full prior to its maturity date of November 24, 2021.
Remaining debt and original issue discount costs of $117 thousand were written off at that time and are reflected as a loss on extinguishment of debt in our
Consolidated Statements of Operations for the year ended December 31, 2020. The Iliad Note accrued interest at 8% per annum, compounded daily, on the
outstanding balance.
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. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used
to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.
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 10.0% thereafter. Pursuant to their terms, on
January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the
Convertible Notes, and the accumulated interest thereon ($0.1 million), which totaled $1.8 million, were converted at a conversion price of $0.67 per share
into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”),
which is convertible on a one-for-five basis into shares of our common stock. During the year ended December 31, 2020, 111,548 shares of the Series A
Preferred Stock were converted into 22,310 shares of common stock. During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred
Stock were converted into 344,205 shares of common stock.
The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29,
2019, which authorized 2,000,000 shares of Series A Preferred Stock (the “Original Series A Certificate of Designation”). The Original Series A Certificate
of Designation was amended on January 15, 2020 following Stockholder
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approval to increase the number of authorized shares of Series A Preferred to 3,300,000 (the Original Series A Certificate of Designation as so amended,
the “Series A Certificate of Designation”).
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of
outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for
their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall be entitled to a number of votes equal
to 11.07% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common
stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and
(c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. We also filed a Certificate of Elimination with respect
to the authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of preferred stock available for designation as the
Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contained customary representations and warranties and provided for resale registration rights with
respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of December 31, 2021, we had approximately $1.7 million in outstanding purchase commitments for inventory, of which $1.5 million is expected to ship
in the first quarter of 2022, and $0.2 million in the second quarter of 2022 and thereafter.
NOTE 10. STOCKHOLDERS’ EQUITY
December 2021 Private Placement
In December 2021, we completed 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 to purchase 85,228 shares of common
stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up
to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. We paid the placement agent commission of $360 thousand
plus $42 thousand in expenses in connection with the December 2021 Private Placement and we also paid legal, accounting and other fees of $97 thousand
related to the December 2021 Private Placement. Total offering costs of $499 thousand have been presented as a reduction of additional paid-in capital and
have been netted within equity in the Consolidated Balance Sheet as of December 31, 2021. Net proceeds from the December 2021 Private Placement were
approximately $4.0 million. We determined the exercise price of the Pre-Funded Warrants to be nominal and, as such, have considered the 85,228 shares
underlying them to be outstanding effective December 16, 2021, for the purposes of calculating basic EPS.
As of December 31, 2021, December 2021 Warrants to purchase an aggregate of 1,363,641 shares remained outstanding, with a weighted average exercise
price of $3.30 per share. None of the December 2021 Warrants were exercised as of December 31, 2021. In January 2022, all of the Pre-Funded Warrants
were exercised. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the
aggregate.
As of December 31, 2021, we had the following outstanding December 2021 Warrants to purchase shares of common stock:
Common Warrants
Pre-Funded Warrants
Exercise Price
$3.5200
$0.0001
Expiration
December 16, 2026
None
As of December 31, 2021
Number of Underlying Shares
1,278,413
85,228
1,363,641
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 offering. Total offering costs of $470 thousand have been presented as a reduction of
additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds to us
from the June 2021 Equity Offering were approximately $4.5 million.
Preferred Stock
Pursuant to the terms of the Convertible Notes, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of
Incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon at the date of conversion (totaling $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 Preferred Stock, which is
convertible on a one-for-five basis into shares of our common stock. During the year ended December 31, 2020, 111,548 shares of the Series A Preferred
Stock were converted into 22,310 shares of common stock. During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were
converted into 344,205 shares of common stock. The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group
(under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC
(“Fusion Park”) and 5 Elements Global Fund L.P. (controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer
and current member of the Board of Directors), as well as Brilliant Start Enterprise Inc. (“Brilliant Start”) and Jag International Ltd. (controlled affiliates of
Gina Huang, a member of the Company's Board of Directors). Upon conversion of their respective shares of Series A Preferred Stock in 2021, Fusion Park
and Brilliant Start received 184,851 and 159,354 shares, respectively, of the Company’s common stock.
The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29,
2019, which designated 2,000,000 shares of the Company’s preferred stock, par value $0.0001 per share, as Series A Preferred Stock (the “Original Series A
Certificate of Designation”). On January 15, 2020 with prior stockholder approval, the Company amended the Certificate of Incorporation to increase the
number of authorized shares of preferred stock to 5,000,000. The Original Series A Certificate of Designation was also amended on January 15, 2020, to
increase the number of shares of preferred stock designated as Series A Preferred Stock to 3,300,000 (the Original Series A Certificate of Designation, as so
amended, the “Series A Certificate of Designation”).
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of
outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for
their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes
equal to 11.07% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common
stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and
(c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. On March 29, 2019, the Company also filed a
Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of
undesignated preferred stock available for designation as Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contained customary representations and warranties and provided for resale registration rights with
respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
1-for-5 Reverse Stock Split
On June 11, 2020, in accordance with previous stockholder approval, our Board of Directors effected a 1-for-5 reverse stock split of the Company’s
common stock, par value $0.0001 per share. The reverse stock split became effective at the Effective Time upon the filing of the Certificate of Amendment
to the Certificate of Incorporation with the Delaware Secretary of State. At the Effective Time, every five shares of common stock issued and outstanding
automatically combined into one validly issued, fully paid and non-assessable share of common stock. No fractional shares were issued as a result of the
reverse stock split. The fractional shares were settled in cash in an amount not material to the Company. The $0.0001 par value per share of
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common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under
the Certificate of Incorporation remained unchanged at 50,000,000 shares.
Proportional adjustments were made to the conversion and exercise prices of our outstanding warrants and stock options, and to the number of shares issued
and issuable under our stock incentive plans in connection with the reverse stock split. The financial statements for the twelve months ended December 31,
2020 have been retroactively adjusted to reflect the reverse stock split. Preferred shares outstanding were not affected by the reverse stock split and, as such,
those shares have not been adjusted.
The reverse stock split was effected solely to increase the per share trading price of the common stock to satisfy the $1.00 minimum bid price requirement
pursuant to Nasdaq Listing Rule 5550(a)(2) for continued listing on Nasdaq. The common stock began trading on Nasdaq on a split-adjusted basis at the
opening of trading on June 12, 2020.
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 (the, “Investor Warrants”) in a concurrent private placement for a purchase price of $0.625 per warrant. We paid the
placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private
placement and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $510 thousand have been
presented as a reduction of additional paid-in capital and have been netted within equity in the Consolidated Balance Sheet as of December 31, 2021 and
2020. 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”). Net proceeds to us from the sale of common stock and January 2020 Warrants were
approximately $2.3 million. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering
($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount and the balance to
interest.
January 2020 Warrants issued to purchase an aggregate of 229,414 shares remain outstanding at December 31, 2021, with a weighted average exercise price
of $3.67 per share. During the twelve months ended December 31, 2021, 237,892 January 2020 Warrants issued were exercised resulting in total proceeds
of $801 thousand. The exercise of the remaining January 2020 Warrants outstanding could provide us with cash proceeds of up to $841 thousand in the
aggregate. At December 31, 2020, January 2020 Warrants issued to purchase an aggregate of 467,306 shares remained outstanding, with a weighted average
exercise price of $3.51 per share. During the twelve months ended December 31, 2020, 269,240 January 2020 Warrants issued were exercised, resulting in
total proceeds of $918 thousand.
As of December 31, 2021 and 2020, we had the following outstanding January 2020 Warrants to purchase shares of common stock:
Investor Warrants
Placement Agent Warrants
Warrant Classification
As of December 31, 2021 As of December 31, 2020
Number of Underlying Shares
187,734
41,680
229,414
425,626
41,680
467,306
Exercise Price
$3.3700
$4.9940
Expiration
January 13, 2025
January 13, 2025
We account for common stock warrants as either liabilities or equity instruments depending on the specific terms of the warrant agreement. Common stock
warrants that could require cash settlement are accounted for as liabilities and are revalued at fair value at each balance sheet date subsequent to the initial
issuance. Changes in the fair market value of the warrant are reflected in the consolidated statement of operations as income (expense) based upon the
change in fair value of warrants. Common stock warrants without cash settlement provisions are accounted for as equity and re-measurement at each
balance sheet date is not required.
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The January 2020 Warrants we issued in the January 2020 Equity Offering contained a provision for net cash settlement in the event that there is a
fundamental transaction involving the Company (e.g., merger, sale of substantially all assets, tender offer, or share exchange). Due to this provision, the
January 2020 Warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date with fair
value adjustments recognized as a component of earnings. During December 2020, the warrant holders agreed to a modification of the terms of their
January 2020 Warrants which removed the potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth
quarter of 2020, the warrant liability was fair-valued through the modification date and then was reclassified into equity and the January 2020 Warrants are
no longer subject to re-measurement at each balance sheet date.
Stock-based compensation
On March 18, 2020, our Board of Directors approved the Energy Focus, Inc. 2020 Stock Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by
the stockholders at our annual meeting on September 17, 2020, after which no further awards could be issued under the Energy Focus, Inc. 2014 Stock
Incentive Plan (the “2014 Plan”). The 2020 Plan initially allows for awards up to 350,000 shares of common stock and expires on September 17, 2030. At
December 31, 2021, 208,256 shares remain available to grant under the 2020 Plan.
On May 6, 2014, our Board of Directors approved the 2014 Plan. The 2014 Plan was approved by the stockholders at our annual meeting on July 15, 2014,
after which no further awards could be issued under the Energy Focus, Inc. 2008 Incentive Stock Plan (the “2008 Plan”). The 2014 Plan initially allowed for
awards up to 120,000 shares of common stock and expires on July 15, 2024. On July 22, 2015, the stockholders approved an amendment to the 2014 Plan to
increase the shares available for issuance under the 2014 Plan by an additional 120,000 shares. On June 21, 2017, the stockholders approved an amendment
to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 260,000. No awards may be granted under this plan.
We have one other historical equity-based compensation plan under which options are currently outstanding; however, no new awards may be granted under
this plan. Generally, stock options are granted at fair market value and expire ten years from the grant date. Employee grants generally vest in three or four
years, while grants to non-employee directors generally vest in one year. The specific terms of each grant are determined by our Board of Directors.
Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize compensation
expense using a straight-line amortization method.
The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands):
Cost of sales
Product development
Selling, general, and administrative
Total stock-based compensation
For the year ended December 31,
2020
2021
$
$
9 $
14
406
429 $
2
10
119
131
At December 31, 2021 and 2020, we had unearned stock compensation expense of $0.3 million and $0.2 million, respectively. These costs will be charged
to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is
expected to be amortized was approximately 2.7 years as of December 31, 2021 and 3.1 years as of December 31, 2020.
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Stock options
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation
include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows:
Fair value of options issued
Exercise price
Expected life of option (in years)
Risk-free interest rate
Expected volatility
Dividend yield
$
$
2021
2020
$
$
3.92
5.07
6.2
0.9 %
96.3 %
0.00 %
2.06
2.68
6.1
0.7 %
93.6 %
0.00 %
We utilize the simplified method as provided by ASC 718-10 to calculate the expected stock option life. Under ASC 718-10, the expected stock option life
is based on the midpoint between the vesting date and the end of the contractual term of the stock option award. The use of this simplified method in place
of using the actual historical exercise data is allowed when a stock option award meets all of the following criteria: the exercise price of the stock option
equals the stock price on the date of grant; the exercisability of the stock option is only conditional upon completing the service requirement through the
vesting date; employees who terminate their service prior to the vesting date forfeit their stock options; employees who terminate their service after vesting
are granted a limited time period to exercise their stock options; and the stock options are nontransferable and non-hedgeable. We believe that our stock
option awards meet all of these criteria. The estimated expected life of the option is calculated based on contractual life of the option, the vesting life of the
option, and historical exercise patterns of vested options. The risk-free interest rate is based on U.S. treasury zero-coupon yield curve on the grant date for a
maturity similar to the expected life of the option. The volatility estimates are calculated using historical volatility of our stock price calculated over a period
of time representative of the expected life of the option. We have not paid dividends in the past, and do not expect to pay dividends over the corresponding
expected term as of the grant date.
Options outstanding under all plans at December 31, 2021 have a contractual life of ten years, and vesting periods between one and four years. A summary
of option activity under all plans was as follows:
Outstanding at December 31, 2019
Granted
Cancelled
Exercised
Outstanding at December 31, 2020
Granted
Cancelled
Expired
Exercised
Outstanding at December 31, 2021
Vested and expected to vest at December 31, 2021
Exercisable at December 31, 2021
Number of
Options
Weighted
Average
Exercise Price
Per Share
155,031 $
112,350
(33,774)
(12,157)
221,450 $
88,240
(36,706)
(1,650)
(4,225)
267,109 $
231,462 $
92,121 $
5.23
2.68
9.56
2.11
3.45
5.07
5.35
49.18
1.96
3.46
3.41
3.28
The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options.
4,225 options were exercised during 2021 and 12,157 options were exercised during 2020. The total intrinsic value of options outstanding and options
exercisable at December 31, 2021 was $426 thousand and $191 thousand, respectively, which was calculated using the closing stock price at the end of the
year of $4.27 per share less the option price of the in-the-money grants.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The options outstanding at December 31, 2021 have been segregated into ranges for additional disclosure as follows:
OPTIONS OUTSTANDING
Number of
Shares
Outstanding
Weighted Average
Remaining
Contractual Life
(in years)
Weighted Average
Exercise Price
Number of
Shares
Exercisable
OPTIONS EXERCISABLE
Weighted Average
Remaining
Contractual Life
(in years)
Weighted Average
Exercise Price
69,377
79,975
38,406
58,474
20,877
267,109
8.2 $
7.5
8.6
9.1
7.5
8.2 $
1.49
2.10
2.77
5.55
10.69
3.46
27,078
43,900
11,046
319
9,778
92,121
8.1 $
7.5
7.8
7.4
6.1
7.6 $
1.49
2.10
2.46
5.52
14.40
3.28
Range of Exercise Prices
$1.45 — $1.68
$1.69 — $2.20
$2.21 — $5.42
$5.43 — $5.81
$5.82 — $29.75
Restricted Stock Units
In 2015, we began issuing restricted stock units to certain employees and non-employee Directors under the 2014 Plan with vesting periods ranging from
one to four years from the grant date. In 2020, we began issuing restricted stock units to certain employees and non-employee Directors under the 2020 Plan
with vesting periods ranging from one to four years.
The following table shows a summary of restricted stock unit activity:
At December 31, 2019
Granted
Vested
Forfeited
At December 31, 2020
Granted
Vested
At December 31, 2021
Employee stock purchase plans
Restricted Stock Units
Outstanding
Weighted
Average
Grant Date
Fair Value
6,603 $
19,200
(20,068)
(1,255)
4,480
50,000
(52,080)
2,400 $
13.17
2.44
3.96
12.40
8.64
5.26
5.46
7.14
In September 2013, our stockholders approved the 2013 Employee Stock Purchase Plan (the “2013 Plan”) to replace the 1994 prior purchase plan. A total of
100,000 shares of common stock were provided for issuance under the 2013 Plan. The 2013 Plan permits eligible employees to purchase common stock
through payroll deductions at a price equal to the lower of 85 percent of the fair market value of our common stock at the beginning or end of the offering
period. Employees may end their participation at any time during the offering period, and participation ends automatically upon termination of employment
with us. During 2021 and 2020, employees purchased 22,000 and 26,632 shares, respectively. At December 31, 2021, 28,523 shares remained available for
purchase under the 2013 Plan.
NOTE 11. INCOME TAXES
We file income tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. With few exceptions, we are no longer subject
to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2018. Our practice is to recognize interest and
penalties related to income tax matters in income tax expense when and if they become applicable. At December 31, 2021 and 2020, respectively, there
were no accrued interest and penalties related to uncertain tax positions.
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ENERGY FOCUS, INC.
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The following table shows the components of the provision for income taxes (in thousands):
Current:
State
Deferred:
U.S. Federal
(Benefit from) provision for income taxes
For the year ended December 31,
2020
2021
$
$
(1) $
—
(1) $
(5)
—
(5)
The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the (benefit from) provision for income
taxes reflected in our Consolidated Statements of Operations are as follows:
U.S. statutory rate
State taxes (net of federal tax benefit)
Valuation allowance
Other
For the year ended December 31,
2020
2021
21.0 %
9.7
(32.7)
2.0
0.0 %
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):
Accrued expenses and other reserves
Right-of-use-asset
Lease liabilities
Tax credits, deferred R&D, and other
Net operating loss
Valuation allowance
Net deferred tax assets
At December 31,
2021
2020
$
$
1,550 $
(73)
88
49
17,318
(18,932)
— $
21.0 %
5.6
(26.0)
(0.5)
0.1 %
1,787
(225)
271
20
14,510
(16,363)
—
In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.6 million additional federal
net operating loss we recognized for the year. In 2020, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance
of the $7.1 million additional federal net operating loss we recognized for the year.
At December 31, 2021, we had net operating loss carry-forwards (“NOLs”) of approximately $125.4 million for federal income tax purposes ($77.2 million
for state and local income tax purposes). However, due to changes in our capital structure, approximately $71.0 million of the $125.4 million is available to
offset future taxable income after the application of the limitations found under Section 382 of the Internal Revenue Code of 1986, as amended. As a result
of the Tax Cuts and Job Act of 2017 (the “Tax Act”), NOLs generated in tax years beginning after December 31, 2017 can only offset 80% of taxable
income. These NOLs 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 will be subject to the new limitations under the Tax Act. If not utilized, the NOLs generated prior to December 31, 2017
of $37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes.
Since we believe it is more likely than not that the benefit from NOLs will not be realized, we have provided a full valuation allowance against our deferred
tax assets at December 31, 2021 and 2020, respectively. We had no net deferred tax liabilities at December 31, 2021 or 2020, respectively. In 2020, we
recognized various states tax benefits as a result of the adjustment from
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the 2019 provision to the actual tax on the 2019 returns that were filed in 2019. In 2019, we recognized various states tax expense as a result of the
adjustment from the 2018 provision to the actual tax on the 2018 returns that were filed in 2019.
The CARES Act was enacted on March 27, 2020 and the Consolidated Appropriations Act (the “Relief Act”) was enacted on December 27, 2020 in the
United States. The key provisions of the CARES Act and the Relief Act, as applicable to the Company, include the following:
The ability to use NOLs to offset income without the 80% taxable income limitation enacted as part of the Tax Cuts and Jobs Act (“TCJA”) of 2017, and to
carry back NOLs to offset prior year income for five years. These are temporary provisions that apply to NOLs incurred in 2018, 2019 or 2020 tax years.
We did not recognize any tax benefit for the year ended December 31, 2021 related to our ability to carry back prior year losses, as well as projected current
year losses, under the CARES Act to years with the previous 35% tax rate.
The ability to claim a current deduction for interest expense up to 50% of Adjusted Taxable Income (“ATI”) for tax years 2019 and 2020. This limitation
was previously 30% of ATI pursuant to the Tax Act, and will revert to 30% after 2020. The Company has no current interest expense limitation.
In addition to the aforementioned provisions, the CARES Act also provided the following non-income tax provisions as applicable to the Company:
•
•
•
The ability to defer the payment of the employer portion of social security taxes incurred between March 27, 2020 and December 31, 2020, with
50% of the deferred amount to be paid by December 31, 2021 and the remaining 50% to be paid by December 31, 2022. For the year ended
December 31, 2021, the Company has deferred $77 thousand of payroll taxes.
The ability to claim an ERTC, which is a refundable payroll tax credit, subject to certain limitations. Refer to Note 13, “Other Income” for details.
The Company received approximately $795 thousand in PPP loans, which were forgiven in 2021. The CARES Act provides that the loan
forgiveness is tax-exempt for federal purposes. Refer to Note 8, “Debt” for details.
NOTE 12. PRODUCT AND GEOGRAPHIC INFORMATION
We focus our efforts on the sale of LED lighting and controls products and UVCD products in the commercial market and MMM, and began to expand our
offerings into the consumer market in the fourth quarter of 2021. Our products are sold primarily in the United States through a combination of direct sales
employees, lighting agents, independent sales representatives and distributors, and via e-commerce with digital marketing strategies that profile our UVCD
technologies. We currently operate in a single industry segment, developing and selling our LED lighting products and controls as well as UVCD products
into the MMM and commercial markets.
The following table provides a breakdown of product net sales for the years indicated (in thousands):
Commercial products
MMM products
Total net sales
A geographic summary of net sales is as follows (in thousands):
United States
International
Total net sales
Year ended December 31,
2021
2020
4,682 $
5,183
9,865 $
For the year ended December 31,
2020
2021
9,712 $
153
9,865 $
5,404
11,424
16,828
16,685
143
16,828
$
$
$
$
At December 31, 2021 and 2020, approximately 100% of our long-lived assets, which consist of property and equipment, were located in the United States.
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NOTE 13. OTHER INCOME
Employee Retention Tax Credit
The CARES Act, which was enacted on March 27, 2020, provides an ERTC that is a refundable tax credit against certain employer taxes. The ERTC was
subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American
Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we
and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit
against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30,
2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per
calendar quarter in 2021.
For purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each
of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the immediately preceding quarter to the corresponding calendar
quarter in 2019. The credit is taken against the Company’s share of Social Security Tax when the Company’s payroll provider files, or subsequently amends
the applicable quarterly employer tax filings.
Under the amended guidelines, we are eligible to receive the ERTC for the second and third quarters of 2021. As part of the filing of our employer tax
filings for the third quarter of 2021, we applied for and received a refund of $431 thousand, and we amended our filing for the second quarter of 2021, for
which we expect to receive an additional refund of approximately $445 thousand. These amounts are recorded as other income in the Consolidated
Statements of Operations during the year ended December 31, 2021, and the $445 thousand expected receivable is included in prepaid and other current
assets in the Consolidated Balance Sheet as of December 31, 2021.
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank in the amount of approximately $795 thousand, pursuant to the PPP under the CARES
Act, which was enacted on March 27, 2020. The funds were received on April 20, 2020, and accrued interest at a rate of 1% per annum. At December 31,
2020, $529 thousand was classified as short-term debt and $266 thousand was classified as long-term debt on the Company’s Consolidated Balance Sheet.
Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The entire
principal balance and interest were forgiven by the Small Business Administration on February 11, 2021. The $801 thousand forgiveness income was
recorded as other income in the Consolidated Statements of Operations during the year ended December 31, 2021.
NOTE 14. RELATED PARTY TRANSACTIONS
On December 12, 2012, our Board of Directors appointed James Tu to serve as our non-executive Chairman. On April 30, 2013, Mr. Tu became the
Executive Chairman assuming the duties of the Principal Executive Officer. On October 30, 2013 Mr. Tu was appointed Executive Chairman and Chief
Executive Officer by our Board of Directors. On May 9, 2016, Mr. Tu also assumed the role of President. On August 11, 2016, our Board of Directors
appointed a separate Executive Chairman of the Board, and Mr. Tu continued to serve in the role of Chief Executive Officer and President, until February
19, 2017.
On November 30, 2018, each of Gina Huang, Brilliant Start Enterprise, Inc. (“Brilliant Start”), Jag International Ltd., Jiangang Quo, Cleantech Global Ltd.,
James Tu, 5 Elements Global Fund L.P., Schema Hui Cheng, Communal International, Ltd., and 5 Elements Energy Efficiency Limited (the “Former
Schedule 13D Parties”) filed a Schedule 13D with the SEC, indicating that they may have been deemed to be a “group” under Section 13(d)(3) of the
Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder, and that such group beneficially owned 17.6% of our common stock. The
Schedule 13D was amended on February 26, 2019 and April 3, 2019.
On February 21, 2019, the Former Schedule 13D Parties entered into a settlement with the Company providing for the appointment of two directors
(Geraldine McManus and Jennifer Cheng) and the nomination of those two directors for election at the Company’s 2019 annual meeting of stockholders.
On March 29, 2019, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with certain investors, including Fusion Park
LLC (of which James Tu is the sole member) (“Fusion Park”) and Brilliant Start (which is controlled by Gina Huang, a current member of our Board of
Directors), for the purchase of an aggregate of $1.7 million of Convertible Notes. Pursuant to the Note Purchase Agreement, Fusion Park and Brilliant Start
purchased $580 thousand and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$500 thousand, respectively, in principal amount of Convertible Notes. In connection with the sale of Convertible Notes, Mr. Tu was appointed as a member
of our Board of Directors on April 1, 2019 and Chief Executive Officer, President and interim Chief Financial Officer on April 2, 2019.
Mr. Tu is also the Founder, Chief Executive Officer and Chief Investment Officer of 5 Elements Global Advisors, an investment advisory and management
company managing the holdings of 5 Elements Global Fund LP, which was a beneficial owner of more than 5.0% of our common stock prior to the August
2014 registered offering. As of December 31, 2021, 5 Elements Global Fund LP beneficially owns approximately 0.9% of our common stock. 5 Elements
Global Advisors focuses on investing in clean energy companies with breakthrough, commercialized technologies, and near-term profitability potential. Mr.
Tu is also Co-Founder of Communal International Ltd. (“Communal”), a British Virgin Islands company dedicated to assisting clean energy, solutions-based
companies, maximizing technology and product potential and gaining them access to global marketing, distribution licensing, manufacturing and financing
resources. Communal has a 50.0% ownership interest in 5 Elements Energy Efficiencies (BVI) Ltd., a beneficial owner of approximately 0.9% of our
common stock. Schema Cheng controls 5 Elements Energy Efficiencies (BVI) Ltd. and owns the other 50.0%. She is Co-Founder of Communal
International Ltd. with Mr. Tu and the mother of Simon Cheng. Mr. Cheng was a member of our Board of Directors through February 19, 2017 and an
employee of the Company through June 30, 2018 and rejoined the Company on August 5, 2019. Schema Cheng is also the mother of Jennifer Cheng, a
current member of our Board of Directors.
On January 11, 2022, our Board of Directors appointed Stephen Socolof, our Lead Independent Director, as Interim Chief Executive Officer to replace Mr.
Tu. On February 11, 2022, Mr. Tu and the Company entered into a Separation and Release Agreement and Mr. Tu resigned from the Board of Directors.
NOTE 15. LEGAL MATTERS
We may be the subject of threatened or pending legal actions and contingencies in the normal course of conducting our business. We provide for costs
related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results
of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of
such matters. While it is not possible to predict the future outcome of such matters, we believe that the ultimate resolution of such individual or aggregated
matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For certain types of claims, we
maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we
believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal
proceedings against us.
78
Table of Contents
SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8.
The following table sets forth our selected unaudited financial information for the four quarters in the years ended December 31, 2021 and 2020,
respectively. This information has been prepared on the same basis as the audited financial statements and, in the opinion of management, contains all
adjustments necessary for a fair presentation thereof.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(amounts in thousands, except per share amounts)
2021
Net sales
Gross profit
Net loss
Net loss per common share attributable to common stockholders (basic and
diluted):
Weighted average shares used in computing net loss per common share
(basic and diluted)
2020
Net sales
Gross profit
Net income (loss)
Net income (loss) per common share attributable to common stockholders -
1
basic :
Net income (loss) per common share attributable to common stockholders -
1
diluted :
Weighted average shares used in computing net income (loss) per common
2
share :
Basic
Diluted
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
2,405 $
189
(2,631)
2,749 $
563
(1,140)
2,074 $
393
(2,473)
2,637
553
(1,642)
(0.50) $
(0.22) $
(0.59) $
(0.45)
5,312
5,086
4,211
3,612
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
3,746 $
1,434
65
5,964 $
1,376
(1,165)
3,335 $
1,343
(4,340)
3,783
1,032
(541)
0.01 $
(0.35) $
(1.36) $
(0.18)
0.01 $
(0.35) $
(1.36) $
(0.18)
$
$
$
$
$
3,491
4,307
3,308
3,308
3,192
3,192
3,086
3,086
1
In accordance with Topic 260 "Earnings Per Share", net income has been allocated to holders of common shares and participating securities including
preferred shares and warrants, accordingly. Earnings per share disclosed above utilizes income attributable to common shareholders after this required
allocation.
2
Shares outstanding for prior periods have been restated for the 1-for-5 reverse stock split effective June 11, 2020.
79
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is
accumulated and communicated to management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures, as of December 31, 2021, the end of the period covered by this report.
Management, with the participation of our current Interim Chief Executive Officer and Chief Financial Officer, did evaluate the effectiveness of our
disclosure controls and procedures as of the end of period covered by this report. Based on this evaluation, our Interim Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021.
Management’s report on internal controls over financial reporting
Management of Energy Focus, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2021 based upon criteria
established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO Framework”).
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and circumvention or
overriding of controls; therefore, it can provide only reasonable assurance with respect to reliable financial reporting. Furthermore, effectiveness of an
internal control system in future periods cannot be guaranteed, because the design of any system of internal controls is based in part upon assumptions about
the likelihood of future events. There can be no assurance that any control design will succeed in achieving its stated goals under all potential future
conditions. Over time, certain controls may become inadequate because of changes in business conditions, or the degree of compliance with policies and
procedures may deteriorate. As such, misstatements due to error or fraud may occur and not be detected.
Based upon our evaluation under the COSO framework as of December 31, 2021, management concluded that its internal control over financial reporting
was effective as of December 31, 2021.
Changes in internal control over financial reporting
During the quarter ended December 31, 2021, there were no changes in our internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of Independent Registered Public Accounting Firm
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our independent public accounting firm pursuant to the rules of the SEC that permit us to
provide only management’s report.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Except as set forth in Part I, the information required by Items 10, 11, 12, 13 and 14 will appear in the definitive Energy Focus, Inc. Proxy
Statement for the Annual Meeting of Stockholders to be held on or about May 25, 2022, which will be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 and is incorporated by reference in this Annual Report pursuant to General Instruction G(3) of Form 10-K (other than the portions
thereof not deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934).
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial statements
PART IV
The financial statements required by this Item 15(a)(1) are set forth in Item 8, “Financial Statements and Supplementary Data,” of this Annual
Report.
(2) Financial statement schedules
Schedule II—Valuation and Qualifying Accounts is set forth below. All other schedules are omitted either because they are not applicable, or the
required information is shown in the financial statements or the notes.
SCHEDULE II
ENERGY FOCUS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Description
Year ended December 31, 2021
Allowance for doubtful accounts and returns
Inventory reserves
Valuation allowance for deferred tax assets
Year ended December 31, 2020
Allowance for doubtful accounts and returns
Inventory reserves
Valuation allowance for deferred tax assets
(3) Exhibits
Beginning
Balance
Charges to
Revenue/
Expense
Deductions
Ending
Balance
$
$
8 $
2,894
16,363
28 $
3,518
14,390
6 $
281
2,568
— $
—
1,973
— $
125
—
20 $
624
—
14
3,050
18,931
8
2,894
16,363
Exhibit
Number
3.1
Description of Documents
Certificate of Incorporation of Energy Focus, Inc. (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule
14A filed May 1, 2006).
EXHIBIT INDEX
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Table of Contents
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
4.1
4.2
4.3
4.4
4.5
10.1*
10.2*
10.3*
10.4*
10.5*
Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on June 21,
2010 (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on October
9, 2012 (incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on October
28, 2013 (incorporated by reference to Exhibit 3.4 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on July 16,
2014 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014).
Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on July 24,
2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 27, 2015).
Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on January
15, 2020 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on
March 29, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019).
Amendment to the Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. filed with the Secretary of State of the State
of Delaware on May 30, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 30, 2019).
Amendment to the Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. filed with the Secretary of State of the State
of Delaware on January 15, 2020 (incorporated by reference to Exhibit 3.10 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2020).
Certificate of Amendment of Certificate of Incorporation, dated June 11, 2020 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K filed on June 11, 2020).
Bylaws of Energy Focus, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 18, 2020).
Certificate of Ownership and Merger, Merging Energy Focus, Inc., a Delaware corporation, into Fiberstars, Ind. a Delaware corporation, filed with the
Secretary of State of the State of Delaware on May 4, 2007 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q
filed on May 10, 2007).
Description of Securities of Energy Focus, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K filed on March
24, 2020).
Form of Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on January 13, 2020).
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on January 13, 2020).
Form of Amendment to Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K
filed on March 25, 2021).
Form of Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on December 15, 2021).
2013 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Form DEF14A filed on
August 16, 2013).
2008 Incentive Stock Plan, as amended (incorporated by reference from Appendix B to the Registrant’s Preliminary Proxy Statement on Form
PRER14A filed on June 8, 2012).
2014 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed on February 22,
2018).
Form of Nonqualified Stock Option Grant Agreement to Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on July 16, 2014).
Form of Nonqualified Stock Option Grant Agreement to Employees (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed on July 16, 2014).
10.6*
Form of Restricted Stock Unit Grant Agreement to Employees (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-
K filed on July 16, 2014).
10.7*
Form of Restricted Stock Unit Grant Agreement to Non-Employee Directors (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual
Report on Form 10-K filed on February 22, 2018).
10.8*
Form of Incentive Stock Option Grant Agreement to Employees (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-
K filed on July 16, 2014).
10.9*
Form of Notice of Stock Option Grant for 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q filed on November 13, 2013).
82
Table of Contents
10.10*
10.11
10.12
10.13
10.14*
10.15*
10.16
10.17
10.18
10.19#
10.20*
10.21*
Agreement dated February 21, 2019 entered into by Energy Focus, Inc. and the Investor Group thereto (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on February 26, 2019).
Note Purchase Agreement, dated March 29, 2019, among the Company and each of the Investors thereto (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed on April 1, 2019).
Form of Subordinated Convertible Promissory Note entered into by the Company and each of the Investors on March 29, 2019 (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019).
Form of Amended and Restated Subordinated Convertible Promissory Note entered into by the Company and each of the Investors thereto (incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 30, 2019).
President and Chief Financial Officer Offer Letter dated June 18, 2019 between Tod A. Nestor and Energy Focus, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 22, 2019).
Energy Focus, Inc. Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 19,
2019).
Form of Securities Purchase Agreement, dated as of January 9, 2020, between the Company and each purchaser named in the signature pages thereto
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on January 13, 2020).
SBA Loan Agreement, dated as of April 17, 2020, between the Company and KeyBank National Association (incorporated by reference to Exhibit 10.2
to the Registrant’s Quarterly Report on Form 10-Q filed on May 13, 2020).
Loan and Security Agreement, dated as of August 11, 2020, by and between the Company and Crossroads Financial Group, LLC (incorporated by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 13, 2020).
Loan and Security Agreement, dated as of August 11, 2020, by and between the Company and Factors Southwest L.L.C. (incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 13, 2020).
Energy Focus, Inc. 2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
September 22, 2020).
Energy Focus, Inc. 2020 Stock Incentive Plan - Form of Restricted Stock Unit Award Agreement for Employees (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed on September 22, 2020).
10.22*
Energy Focus, Inc. 2020 Stock Incentive Plan - Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 22, 2020).
10.23*
Energy Focus, Inc. 2020 Stock Incentive Plan - Form of Nonqualified Stock Option Agreement for Employees (incorporated by reference to Exhibit 10.4
to the Registrant’s Current Report on Form 8-K filed on September 22, 2020).
10.24*
Energy Focus, Inc. 2020 Stock Incentive Plan - Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K filed on September 22, 2020).
10.25
First Amendment to Loan and Security Agreement, dates as of April 20, 2021 by and between the Company and Crossroads Financial Group, LLC
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 21, 2021).
10.26
Note Purchase Agreement, dated as of April 27, 2021 by and between the Company and Streeterville Capital, LLC (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on April 28, 2021).
10.27
Promissory Note Agreement, dated as of April 27, 2021 by and between the Company and Streeterville Capital, LLC (incorporated by reference to
Exhibit 10.2 in the Registrant’s Current Report on Form 8-K filed on April 28, 2021).
10.28##
Form of Securities Purchase Agreement, dated as of December 13, 2021, between the Company and each purchaser named in the signature pages thereto
(incorporated by reference to Exhibit 10.1 in the Registrant’s Current Report on Form 8-K filed on December 15, 2021).
10.29
Registration Rights Agreement, dated as of December 13, 2021, between the Company and each purchaser named in the signature pages thereto
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 15, 2021).
10.30
Separation Agreement and Release, dated as of February 11, 2022, between the Company and James Tu (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on February 17, 2022).
21.1
23.1
31.1
31.2
32.1+
101+**
Subsidiaries of the Registrant (filed with this Report).
Consent of GBQ Partners, LLC, Independent Registered Public Accounting Firm (filed with this Report).
Certification of Interim Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Interim Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following financial information from Energy Focus, Inc. Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline
XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated
Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) the
Notes to Consolidated Financial Statements.
104**
Cover Page Interactive Data File (embedded within the Inline XBRL document).
*
Management contract or compensatory plan or arrangement.
83
Table of Contents
**
+
#
##
Pursuant to Regulation S-T, this interactive data file is not deemed filed for purposes of Section 11 of the Securities Act, or Section 18 of the Exchange
Act, or otherwise subject to the liabilities of these sections.
This exhibit will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that Section. Such exhibit
shall not be deemed incorporated into any filing under the Securities Act or the Exchange Act.
Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).
Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or
exhibit will be furnished to the Securities and Exchange Commission upon request.
ITEM 16. FORM 10-K SUMMARY
None.
84
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
SIGNATURES
Date: March 17, 2022
ENERGY FOCUS, INC.
By:
/s/ Stephen Socolof
Stephen Socolof
Interim Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities indicated and on the date indicated:
Date
March 17, 2022
March 17, 2022
March 17, 2022
March 17, 2022
March 17, 2022
March 17, 2022
March 17, 2022
Signature
/s/ Stephen Socolof
Stephen Socolof
/s/ Tod Nestor
Tod Nestor
/s/ Jennifer Y. Cheng
Jennifer Y. Cheng
/s/ Gina Huang (Mei Yun Huang)
Gina Huang (Mei Yun Huang)
/s/ Philip Politziner
Philip Politziner
/s/ Brian J. Lagarto
Brian J. Lagarto
/s/ Jeffery R. Parker
Jeffery R. Parker
85
Title
Director and Interim Chief Executive Officer
(Principal Executive Officer)
Chief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Name Location Doing Business as
Energy Focus LED Solutions, LLC Solon, Ohio Energy Focus LED Solutions, LLC
SUBSIDIARIES
EXHIBIT 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
Energy Focus, Inc.
Solon, Ohio
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 (No. 333-237614), and Form S-3 (Nos. 333-261905 and
333-261906) and Form S-8 (Nos. 333-249272, 333-219805, 333-206088, 333-197422, 333-193024, 333-184028 and 333-169274) of Energy Focus, Inc.
(the "Company") of our report dated March 17, 2022, relating to the consolidated financial statements and financial statement schedule, which appear in the
Company's Annual Report on Form 10-K for the year ended December 31, 2021 to which this consent is filed as an exhibit. Our report contains an
explanatory paragraph regarding the Company's ability to continue as a going concern.
/s/ GBQ Partners, LLC
Columbus, Ohio
March 17, 2022
EXHIBIT 31.1
I, Stephen Socolof, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Energy Focus, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
By:
/s/ Stephen Socolof
Name: Stephen Socolof
Interim Chief Executive Officer
Title:
Date: March 17, 2022
EXHIBIT 31.2
I, Tod A. Nestor, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Energy Focus, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
By:
/s/ Tod A. Nestor
Name: Tod A. Nestor
Chief Operating Officer and Chief Financial Officer
Title:
Date: March 17, 2022
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Energy Focus, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021 (the “Report”), I,
Stephen Socolof, Interim Chief Executive Officer of the Company, and I, Tod A. Nestor, Chief Operating Officer and Chief Financial Officer of the
Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that to the best of my
knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Stephen Socolof
Stephen Socolof
Interim Chief Executive Officer
Date:
March 17, 2022
/s/ Tod A. Nestor
Tod A. Nestor
Chief Operating Officer and Chief Financial Officer
March 17, 2022
Date:
A signed original of this written statement required by Section 906 has been provided to Energy Focus, Inc. and will be retained by Energy Focus, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.