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. We develop, market and sell high quality light-emitting diode ("LED") lighting and controls products in the commercial market and military maritime market ("MMM"), and expanded our offerings into the consumer market in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED ("TLED") products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020, we announced the launch of ultraviolet-C light disinfection ("UVCD") products. After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products. The LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion. We have been experiencing these industry forces in both our military and commercial business since 2016, where we once commanded significant price premiums for our flicker-free TLEDs with industry leading warranties. In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively while not impacting the performance and quality. Despite these efforts, our legacy products continue to face extreme pricing competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive. These trends are not unique toEnergy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business. In addition to continuously pursuing cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value. Specific examples of these products we have developed include the RedCap®, our patented emergency backup battery integrated TLED, EnFocus™, our unique dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system, which as a result of supply chain challenges we now plan to launch in 2023. Similarly, our plans to expand and enhance the performance of our RedCap® product line are also now expected in 2023. We continue to evaluate our sales strategy and believe our go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network to cover territories across the country, and listening to the voice of the customer, will lead to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us. Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant restructuring efforts were undertaken. The Company replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors ("Board of Directors") and the executive team, and recruited new departmental leaders across the Company. The initial cost savings efforts to minimize cash usage included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing. During 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses. Despite these cost-cutting efforts, the company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market. 27
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At the beginning of 2022, the Board of Directors appointed our lead independent director to serve as interim Chief Executive Officer and replace our previous chief executive officer. During 2022, the company redoubled its cost-reduction efforts, reduced its warehouse square footage, undertook an inventory reduction project, and dramatically reduced head count. During 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer products industry experience, and inSeptember 2022 , we hired a permanent Chief Executive Officer. We reinvested in our MMM sales channel with a strategic hire inMay 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.
It is our belief that the dramatic rightsizing efforts undertaken in 2022, along with ongoing development of innovative, high-value products and an expanded sales and distribution network, will over time result in improved sales and bottom-line performance for the Company.
During 2021 and into 2022, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing ofU.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. We continue to pursue opportunities from theU.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 in 2020, offsetting some of the weakness being experienced in our commercial business that year, though new MMM orders dwindled as we entered 2022. InMay 2022 we reinvested in our MMM sales channel with a strategic hire to lead our MMM sales effort. While we continue to aggressively seek to increase sales of our commercial products, the MMM business offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace. However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales. Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to achieve profitability through developing and launching innovative products such as EnFocusTM powerline control technology and further leveraging our unique and proprietary technology such as RedCap®, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform that aim to serve both consumer and commercial markets. We are also evaluating adjacent technologies including GaN-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability. We launched our patented EnFocus™ platform during the second quarter of 2020 and, despite the ongoing, significant delay and slowdown in our customers' lighting projects following the impacts of the COVID-19 pandemic, we continue to receive positive feedback from the market. The EnFocus™ platform offers two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and LED lamps, a far more secure, affordable and environmentally sustainable solution compared with replacing an entire luminaire and incorporating additional wired or wireless communication. Despite continuing progress on cost reduction throughout 2022, the Company's results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in MMM and commercial customer retrofit budgets and project starts, and supply chain issues, all exacerbated by the lingering effects of the COVID-19 pandemic. There has also been continuing aggressive price competition in the lighting industry. We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern atDecember 31, 2022 . The COVID-19 pandemic in particular had, and may continue to have, a significant, long-term economic and business impact on our company. Throughout 2021 and 2022, following a slowdown in 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors continue to delay order placements in reaction to the long-term impacts of the COVID-19 pandemic that continue to cause our customers to suspend or postpone lighting retrofit projects due to budget and occupancy uncertainties. Global supply chain and logistics challenges have further exacerbated slowdowns in customer projects, as well as impacted our inventory strategies to respond to customer and supplier timelines. 28
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We continue to monitor the impact of lingering effects of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken in response to the pandemic. Global supply chain and logistics constraints continue to impact our inventory purchasing strategy, and we have previously had to build up inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining components. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects of lingering effects of the COVID-19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the continued long-term impact of the COVID-19 pandemic and will continue to adjust our organizational structure, strategies, plans and processes to respond. Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial position that the COVID-19 pandemic will have. Long-term impacts of the COVID-19 pandemic and government actions in response thereto could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows. We will remain agile as an organization to respond to potential or continuing weakness in the macroeconomic environment and in the meantime expand sales channels and continue to evaluate entering new markets that we believe will provide additional growth opportunities. 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: 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 105.3 82.8 Gross (loss) profit (5.3) 17.2 Operating expenses: Product development 25.0 19.2 Selling, general, and administrative 119.8 86.5 Loss on impairment 5.6 - Restructuring - (0.2) Total operating expenses 150.4 105.5 Loss from operations (155.7) (88.3) Other expenses: Interest expense 16.0 8.0 Gain on forgiveness of PPP loan - (8.1) Other income (0.5) (8.9) Other expenses, net 0.9 0.7 Net loss before income taxes (172.1) (80.0) Benefit from income taxes 0.1 - Net loss (172.2) % (80.0) % 29
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Net sales
A further breakdown of our net sales by product line is as follows (in thousands):
2022 2021 Commercial products$ 3,746 $ 4,682 MMM products 2,222 5,183 Total net sales$ 5,968 $ 9,865 Our net sales of$6.0 million in 2022 decreased 39.5% compared to 2021, mainly driven by a decrease of 57.1% in MMM sales and a decrease of 20.0% in commercial sales. The decrease in net MMM product sales in 2022 as compared to 2021 was mainly due to a reduced military sales pipeline at the beginning of the year, increased competition, and the delayed timing of expected orders. Net sales of our commercial products decreased in 2022 due to limited product availability impacts from supply chain constraints, our inventory reduction project, and continuing fluctuations in the timing, pace, and size of commercial projects.
International sales
We do not generate significant sales from customers outsidethe United States . International net sales accounted for approximately 0.4% of net sales in 2022 and 2% of net sales in 2021. Changes in currency exchange rates did not have an impact on net sales in 2022 or 2021, as our sales, including international sales, are denominated inU.S. dollars.
Gross (loss) profit
Gross loss was$0.3 million , or (5.3)% of net sales, for 2022, compared with gross profit of$1.7 million , or 17.2% of net sales for 2021. The year-over-year decrease in gross margin was driven primarily by a diminished sales pipeline and discounted pricing in connection with our inventory reduction project. Beginning in the third quarter of 2022, the warehouse square footage was reduced under the new lease agreement and significant amounts of previously reserved inventories were scrapped over the course of the year in connection with reducing leased square footage. Freight and logistics expense was notably higher at the beginning of 2022 as national imports faced backlogs at the ports. Scrap variance and freight in variance increases over prior year were$548 thousand and$324 thousand , respectively. Beginning in the fourth quarter of 2022, second source suppliers were sought to replace larger, key suppliers in an effort to identify more competitive pricing. During the fourth quarter of 2022, the Company incurred higher short-term supply chain management expense in connection with mitigating the transition impact of the second sourcing. Additionally, the production operated at excess capacity during the first nine months of 2022, prior to headcount reductions.
Operating expenses
Product development
Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, certain legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred. Cost recovery represents the combination of revenues and credits from government contracts.
Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands):
For
the year ended
2022 2021 Total gross product development expenses $
1,491
Gross product development expenses were$1.5 million in 2022, a decrease of 21.2%, compared to$1.9 million in 2021. The$0.4 million decrease primarily resulted from lower product development and testing costs, offset by increased salaries and related benefits expenses prior to significant headcount reductions mid-year. Product development costs in 2021 were largely associated with the development and launch of our UVCD products. These UVCD products were fully launched prior to 2022, and no further investments were necessary in 2022.
Selling, general, and administrative
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Selling, general, and administrative expenses were$7.1 million , or 119.8% of net sales, in 2022, compared to$8.5 million , or 86.5% of net sales, in 2021. The year-over-year$1.4 million decrease is comprised of a combination of a$1.5 million decrease from a reduction in headcount and salaries, including stock-based compensation and related benefits and a decrease of$0.1 million in all other general expenses, offset by an increase of$0.2 million in sales commissions and consultants. Significant phased headcount reductions began at the end of the second quarter 2022 and continued throughout the end of the year.
Loss on impairment
As a result of the Company's impairment analysis, a loss on impairment of$338 thousand was recorded in 2022. In the third quarter of 2022, a loss on impairment of$76 thousand was recorded on the write-off of the UV-Robots. An additional$262 thousand of loss on impairment was recorded in the fourth quarter of 2022, which consisted of tooling, equipment, software, hardware, and construction-in-progress. No such loss on impairment was recorded in 2021.
Restructuring
During 2021, we recorded restructuring credits of approximately$21 thousand , related to the cost and offsetting sub-lease income for the remaining lease obligation for our formerNew York, New York office which expired in June of 2021.
Please refer to Note 4, "Restructuring," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for further information.
Other expenses Interest expense We incurred$954 thousand in interest expense in 2022, primarily related to the interest on borrowings and non-cash amortization of fees related to the Credit Facilities, interest on promissory notes in the principal amounts of$1.7 million (the " 2021 Streeterville Note") and$2 million (the "2022 Streeterville Note") the Company sold and issued toStreeterville Capital, LLC ("Streeterville") pursuant to separate note purchase agreements, and interest on the short-term bridge financing in the aggregate principal amount of$1.45 million pursuant to promissory notes sold and issued by us to certain private parties, including one of our directors.
In 2021, we incurred
Gain on forgiveness of PPP loan
Forgiveness income of$801 thousand related to the Paycheck Protection Program ("PPP") loan taken out during 2020 and forgiven in 2021 was recognized during the first quarter 2021. Other expenses, net We recognized other expenses, net, of$56 thousand in 2022, compared to other expenses, net, of$65 thousand in 2021. Other expenses, net, in 2022 and 2021 primarily consisted of bank and collateral management fees.
Income taxes
For each of the years endedDecember 31, 2022 and 2021, our effective tax rate was 0.0%. In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the$9.2 million additional federal net operating loss we recognized for the year. 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. 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 atDecember 31, 2022 and 2021, respectively. We had no net deferred liabilities atDecember 31, 2022 or 2021. We will continue to evaluate the need for a valuation allowance on a quarterly basis.
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approximately$78.0 million of the$132.4 million is available after the application of IRC Section 382 limitations. As a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), net operating loss carry-forwards generated in tax years beginning afterDecember 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The$9.2 million and$9.6 million in federal net operating losses generated inDecember 31, 2022 and 2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior toDecember 31, 2017 of$35.3 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, "Income Taxes," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for further information.
Net loss
Net loss was$10.3 million for 2022. This compares with a net loss was$7.9 million for 2021, inclusive of a non-cash, pre-tax gain of$0.8 million from the forgiveness of the Company's PPP loan and$0.9 million in other income recorded relating to the Employee Retention Tax Credit ("ERTC") ($431 thousand of which was received during the fourth quarter of 2021).
Liquidity and capital resources
General
We generated a net loss of
In order for us to operate our business profitably, we need to grow our sales, maintain cost control discipline while balancing development of our new products required for long-term competitiveness and revenue growth, continue our efforts to reduce product cost, and drive further operating efficiencies. There is a risk that our strategy to return to profitability may not be successful. We will likely require additional financing in the next twelve months to achieve our strategic plan and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional financing thereafter, none of which may be available on favorable terms or at all and could require us to discontinue or curtail our operations. Considering both quantitative and qualitative information, we continue to believe that the combination of our plan to continue to ensure appropriate levels of the availability of external financing, current financial position, liquid resources, obligations due or anticipated within the next year, and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2023 and will mitigate the substantial doubt about our ability to continue as a going concern.
Credit Facilities
OnAugust 11, 2020 , we entered into the Credit Facilities. The Credit Facilities consist of the Inventory Facility, an inventory financing facility for up to$3.0 million , which amount was subsequently increased to$3.5 million inApril 2021 . InJanuary 2023 , we amended the Inventory Facility, reducing the maximum availability to$500 thousand , reducing monthly fees and paying down an aggregate of$1 million in January andFebruary 2023 . The Receivables Facility, a receivables financing facility for up to$2.5 million , was terminated inFebruary 2023 , further reducing our monthly borrowing costs. As ofDecember 31, 2022 , our cash was approximately$0.1 million and our total outstanding balance was approximately$1.5 million under the Credit Facilities. As ofDecember 31, 2022 , our additional availability under the Credit Facilities was$55 thousand .
InJune 2022 , we completed a private placement (the "June 2022 Private Placement") with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of$1.30 per share. We also sold to the same institutional investors (i) pre-funded warrants (the "June 2022 Pre-Funded Warrants") to purchase 1,378,848 shares of common stock at an exercise price of$0.0001 per share and (ii) warrants (collectively with theJune 2022 Pre-Funded Warrants, the "June 2022 Warrants") to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of$1.30 per share. In connection with theJune 2022 Private Placement, we paid the placement agent commissions of$252 thousand , plus$35 thousand in expenses, and we also paid legal, accounting and other fees of$47 thousand . Total offering costs of$334 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as ofDecember 31, 2022 . Net proceeds to us from theJune 2022 Private Placement were approximately$3.2 million . We determined the exercise price of theJune 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effectiveJune 7, 2022 , for purposes of calculating net loss per share. 32
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InJuly 2022 , all of theJune 2022 Pre-Funded Warrants were exercised. As ofDecember 31, 2022 ,June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of$1.30 per share. The exercise of the remainingJune 2022 Warrants outstanding could provide us with cash proceeds of up to$3.5 million in the aggregate.
2022 Streeterville Note
OnApril 21, 2022 , we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville the 2022 Streeterville Note. The 2022 Streeterville Note was issued with an original issue discount of$215 thousand and Streeterville paid a purchase price of approximately$1.8 million for the 2022 Streeterville Note, from which the Company paid$15 thousand to Streeterville for Streeterville's transaction expenses. The 2022 Streeterville Note had an original maturity date ofApril 21, 2024 , and accrues interest at 8% per annum, compounded daily, on the outstanding balance. OnJanuary 17, 2023 , we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and to extend its maturity date toDecember 1, 2024 . We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of$500 thousand byJanuary 20, 2023 and$250 thousand byJuly 14, 2023 . The$500 thousand was paid inJanuary 2023 . Streeterville agreed to extend the term of the 2022 Streeterville Note throughDecember 1, 2024 , and beginningJanuary 1, 2024 , we will make twelve monthly repayments of approximately$117 thousand each. We have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled. Please refer to Note 15, "Subsequent Events" included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for further detail.
The total liability for the 2022 Streeterville Note, net of discount and
financing fees, was
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.
InDecember 2021 , we completed a private placement (the "December 2021 Private Placement") with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of$3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants ("December 2021 Pre-Funded Warrants") to purchase 85,228 shares of common stock at an exercise price of$0.0001 per share and (ii) warrants (collectively with theDecember 2021 Pre-Funded Warrants, the "December 2021 Warrants") to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of$3.52 per share. We paid the placement agent commission of$360 thousand , plus$42 thousand in expenses, in connection with theDecember 2021 Private Placement and we also paid legal, accounting and other fees of$97 thousand related to theDecember 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 ofDecember 31, 2022 . Net proceeds to us from theDecember 2021 Private Placement were approximately$4.0 million . We determined the exercise price of theDecember 2021 Pre-Funded Warrants to be nominal and, as such, considered the 85,228 shares underlying them to be outstanding effectiveDecember 16, 2021 , for purposes of calculating net loss per share. InJanuary 2022 , all of theDecember 2021 Pre-Funded Warrants were exercised. As ofDecember 31, 2022 ,December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding, with an exercise price of$3.52 per share. The exercise of the remainingDecember 2021 Warrants outstanding could provide us with cash proceeds of up to$4.5 million in the aggregate.
InJune 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 theJune 2021 Equity Offering and we also paid legal and other fees of$19 thousand related to theJune 2021 Equity Offering. Total offering costs of$469 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as ofDecember 31, 2021 . Net proceeds to us from theJune 2021 Equity Offering were approximately$4.5 million . 33
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2021 Streeterville Note
OnApril 27, 2021 , we entered into a note purchase agreement with Streeterville, pursuant to which we sold and issued the 2021 Streeterville Note. The 2021 Streeterville Note was issued with an original issue discount of$194 thousand and Streeterville paid a purchase price of$1.5 million for the 2021 Streeterville Note, after deduction of$15 thousand of Streeterville's transaction expenses. Beginning onNovember 1, 2021 , Streeterville could require the Company to redeem up to$205 thousand of the 2021 Streeterville Note in any calendar month. The Company had the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company increased the amount outstanding under the 2021 Streeterville Note by 1.5%. The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022. The Company and Streeterville agreed to exchange common stock, priced at-the-market, for the required redemptions inOctober 2022 andDecember 2022 , totaling$305 thousand converted to equity. These exchanges satisfied the redemption notices provided by Streeterville, and following theDecember 2022 exchange, the note was paid in full.
InJanuary 2020 , we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a purchase price of$3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an exercise price of$3.37 per share in a concurrent private placement (the "January 2020 Investor Warrants") for a purchase of$0.625 per warrant. In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of$4.99 per share (together with theJanuary 2020 Investor Warrants, the "January 2020 Warrants"). Proceeds to us, before expenses, from theJanuary 2020 Equity Offering were approximately$2.8 million . Convertible Notes OnMarch 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 ofDecember 31, 2021 and bore interest at a rate of 5% per annum untilJune 30, 2019 and at a rate of 10% thereafter. Pursuant to their terms, onJanuary 16, 2020 , following approval by our stockholders of certain amendments to the Company's Certificate of Incorporation, the principal amount of all of the Convertible Notes, and the accumulated interest thereon ($0.1 million ), which totaled$1.8 million , were converted at a conversion price of$0.67 per share into an aggregate of 2,709,018 shares of the Company's Series A Convertible Preferred Stock, par value$0.0001 per share (the "Series A Preferred Stock"), which is convertible on a one-for-five basis into shares of our common stock. During 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock. During 2022, no shares of Series A Preferred Stock was converted into shares of common stock.
Need for Additional Financing
Even with access to outstanding borrowings under the Inventory Facility, which we have further curtailed and agreed to pay down in 2023, we may not generate sufficient cash flows from our operations or be able to borrow sufficient funds to sustain our operations within the next twelve months or in the time periods thereafter. As such, we will likely need additional external financing during 2023 and thereafter and will continue to review and pursue external funding sources including, but not limited to, the following: •obtaining financing from traditional or non-traditional investment capital organizations or individuals; •obtaining funding from the sale of our common stock or other equity or debt instruments; 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, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to substantial dilution for current stockholders and have rights, preferences and privileges senior to our common stock; •loans or other debt instruments may have terms and/or conditions, such as interest rates, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our Board of Directors; and •the current environment in the capital markets and volatile interest rates, combined with our capital constraints may prevent us from being able to obtain adequate debt financing. 34
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Additionally, if we are unable to find a permanent Chief Financial Officer, it may be more difficult to obtain additional financing on satisfactory terms or at all. If we fail to obtain additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional financing could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment. Cash and debt
At
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):
2022 2021 Net cash used in operating activities $
(6,713)
Net cash used in investing activities $
(16)
Proceeds from the issuance of common stock and warrants$ 3,500 $ 9,500 Proceeds from the exercise of warrants - 801 Offering costs paid on the issuance of common stock and warrants (334) (969) Principal payments under finance lease obligations (1) (3)
Proceeds from exercise of stock options and purchases through employee stock purchase plan
6 80
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units
- (1) Payments for deferred financing costs (114) (30) Payments on the 2021 Streeterville Note (1,640) - Proceeds from the 2021 Streeterville Note - 1,515 Proceeds from the 2022 Streeterville Note 2,000 - Proceeds from related party promissory notes payable 800 - Proceeds from promissory notes payable 650 - Net payments on credit line borrowings - Credit Facilities (768) (181) Net cash provided by financing activities $
4,099
Cash used in operating activities
Net cash used in operating activities of$6.7 million in 2022 resulted primarily from the net loss incurred of$10.3 million , adjusted for non-cash items, including: depreciation and amortization of$0.5 million , stock-based compensation, net of$0.1 million , and non-favorable provisions from inventory$32 thousand , and favorable provisions from warranty of$0.1 million , as well as a loss on impairment of property and equipment of$0.3 million . We generated$0.8 million through the timing of collection of accounts receivable,$0.2 million from the change in prepaid and other current assets,$0.1 million for short-term deposits, and$2.4 million in inventory as we sold off a substantial portion of the stock on hand. We used$0.3 million from changes in deferred revenue,$1 thousand in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and$0.6 million through a decrease of other accrued liabilities. 35
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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.
Cash used in investing activities
Net cash used in investing activities was
Net cash used by investing activities was
Cash provided by financing activities
Net cash provided by financing activities for the year endedDecember 31, 2022 of$4.1 million primarily resulted from the proceeds from the issuance of common stock and warrants of$3.5 million and proceeds from promissory notes payable of$0.7 million and related party promissory notes payable of$0.8 million . Additionally, the issuance of the 2022 Streeterville Note provided net proceeds of$2.0 million . The increases in cash were offset by payments on the 2021 Streeterville Note of$1.6 million . Net cash provided by financing activities for the year endedDecember 31, 2021 of$10.7 million primarily resulted from$4.0 million and$4.5 million in net proceeds received from theDecember 2021 Private Placement and theJune 2021 Equity Offering, respectively,$1.5 million of net proceeds from the 2021 Streeterville Note, and$0.8 million of proceeds from the exercise of 237,892 January 2020 Warrants. These increases in cash were offset by net payments made against borrowings under the Inventory Facility and the Receivables Facility of$150 thousand and$31 thousand , respectively.
Credit Facilities
OnAugust 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 . OnJanuary 18, 2023 , the Company and the Inventory Lender entered into an amendment to restructure and pay down the Inventory Facility during 2023, which amendment reduced the overall availability to$500 thousand . OnFebruary 7, 2023 , the Company and Receivable Lender terminated the Receivables Facility. Net borrowings under the Inventory Facility atDecember 31, 2022 and 2021 were$1.4 million and$1.2 million , respectively. Net borrowings under the Receivables Facility atDecember 31, 2022 andDecember 31, 2021 were$0.1 million and$1.0 million , respectively. These facilities are recorded in the Consolidated Balance Sheets as ofDecember 31, 2022 and 2021 as a current liability under the caption "Credit line borrowings, net of origination fees." Outstanding balances include unamortized net issuance costs totaling$47 thousand and$84 thousand , respectively, for the Inventory Facility and$15 thousand and$24 thousand , respectively, for the Receivables Facility as ofDecember 31, 2022 and 2021.
For more information, see Note 8, "Debt," and Note 15, "Subsequent Events," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report.
Off-balance sheet arrangements
We had no off-balance sheet arrangements at
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the reported amounts of net sales and expenses in the financial statements. Material differences may result in 36
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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 inthe United States . In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an evaluation of the customer's financial condition and the amounts due are stated at their estimated net realizable value. From time to time, we have utilized a third-party account receivable insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provided credit-worthiness ratings and metrics that significantly assisted us in evaluating the credit worthiness of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of account receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers. Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.
Allowances for doubtful accounts, returns, and discounts
We establish allowances for doubtful accounts and returns for probable losses based on the customers' loss history with us, the financial condition of the customer, the condition of the general economy and the industry as a whole, and the contractual terms established with the customer. The specific components are as follows: •allowance for doubtful accounts for accounts receivable, and •allowance for sales returns and discounts.
In 2022 and 2021, the total allowance was
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Long-lived assets
Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to fifteen years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement of Operations. Refer to Note 6, "Property and Equipment," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for additional information. Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. In 2022, a loss on impairment of$338 thousand was recorded. Refer to Note 6, "Property and Equipment," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for additional information.
Valuation of inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We establish provisions for excess and obsolete inventories after evaluation of historical sales, market prices, current economic trends, forecasted sales, product lifecycles, and current inventory levels. Throughout 2022, we faced supply chain constraints and also undertook an inventory reduction project in connection with reducing our warehouse square footage, which impacted our inventory purchasing strategy and resulted in a decrease in our gross inventory levels of$2.9 million and excess inventory reserves of$0.5 million compared to 2021. During 2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components, which resulted in an increase in our gross inventory levels of$2.4 million and excess inventory reserves of$0.2 million compared to 2020. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Refer to Note 5, "Inventories," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for additional information.
Accounting for income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. AtDecember 31, 2022 and 2021, we have recorded a full valuation allowance against our deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis. AtDecember 31, 2022 , we had net operating loss carry-forwards of approximately$132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes). However, due to changes in our capital structure, approximately$78.0 million of the$132.4 million is available to offset future taxable income after the application of IRC Section 382 limitations. As a result of the Tax Act, net operating loss carry-forwards generated in tax years beginning afterDecember 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The$9.2 million and$9.6 million in federal net operating losses generated in 38
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2022 and 2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior toDecember 31, 2017 of$37.5 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, "Income Taxes," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for further information.
Share-based payments
The cost of employee and director stock options and restricted stock units, as well as other share-based compensation arrangements, is reflected in the Consolidated Financial Statements based on the estimated grant date fair value method under the authoritative guidance. Management applies the Black-Scholes option pricing model to options issued to employees and directors to determine the fair value of stock options and apply judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. The assumptions used in calculating the fair value of share-based awards under Black-Scholes represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. Restricted stock units and stock options issued to non-employees are valued based upon the intrinsic value of the award. See Note 10, "Stockholders' Equity," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report for additional information.
Leases
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one finance lease on a forklift containing a bargain purchase option which was exercised inJuly 2022 . The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. Additionally, as ofMarch 25, 2022 , the terms of our expiring headquarters real estate operating lease for manufacturing, warehouse and office space have been modified beginningJuly 1, 2022 to reflect a smaller footprint at reduced costs through 2027. In accordance with Accounting Standards Codification 842, Leases ("Topic 842"), as a result of the extension, the related lease liability was remeasured and the right-of-use asset was adjusted for the modification inMarch 2022 . The present value of the lease obligation for this lease was calculated using an incremental borrowing rate of 16.96%, which was the Company's blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit. The weighted average remaining lease term for the operating leases is 4.7 years. The Company had one restructured lease with a sub-lease component for theNew York, New York office that was closed in 2017. The lease expired inJune 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 ofDecember 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 inSeptember 2021 and the cash was returned to the Company.
Recently issued accounting pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. This standard is effective for interim and annual periods starting afterDecember 15, 2022 and will generally requires adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
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