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 LED lighting systems and controls and
recently announced development of UVCD products. We develop, market and sell
high quality LED lighting products and UVCD products and controls in the
commercial market and MMM. Our mission is to enable our customers to run their
facilities and offices with greater energy efficiency, productivity, and human
health through advanced LED retrofit and UVCD solutions. Our goal is to be the
LED and HCL technology and market leader for the most demanding applications
where performance, quality, value (high quality at an affordable price),
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 and fixtures in institutional buildings for primarily
indoor lighting applications with our innovative, high-quality commercial and
military TLED, as well as other LED and lighting control and UVCD products. On
October 14, 2020, we announced the launch of our UVCD product portfolio.

The LED lighting industry has changed dramatically over the past several years
due to increasing commoditization, 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. Since April 2019,
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, the pricing of our
legacy products remains at a premium to the competitive range and we expect
aggressive pricing actions and commoditization to continue to be a headwind
until our more differentiated new products ramp in volume. 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 it to move up the value chain, with more innovative and
differentiated products and solutions that offer greater, distinct value to our
customers. Two specific examples of these products we have developed include the
RedCap®, our emergency backup battery integrated TLED, and EnFocus™, our new
dimmable/color-tunable lighting and control platform that we launched in 2020.
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.

Leveraging and integrating a broad range of rapidly advancing technologies
including LED lighting, UV-C disinfection, electronics, software, sensors, cloud
and AI, the Energy Focus UVCD solutions aim to provide impactful and affordable
disinfection products for businesses and homes to effectively reduce infection
risks. In addition to being ozone-free, the products are designed to guard
against the risks of direct human exposure to UV-C rays. abUVTM and nUVoTM
include enclosed, self-contained UV-C disinfection units that continuously
inactivate viruses while reducing overall pathogen levels in the air. mUVeTM
incorporates advanced sensor, machine vision and autonomous technologies to
avoid human exposure during disinfection operations. We believe Energy Focus
UVCD solutions are capable of providing affordable continuous disinfection with
optimal 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.

Since April 2019, we have experienced significant change at the Company. Prior
to James Tu returning as Chief Executive Officer and Chairman at the beginning
of April 2019, the Company had experienced significant sales declines, operating
losses and increases in its inventory. Immediately upon Mr. Tu returning to the
Company, significant additional restructuring efforts were undertaken. The
Company has since then 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, as
well as adding very selectively to the executive team by hiring Tod Nestor as
President and Chief Financial Officer at the beginning of July 2019, and James
R. Warren as Senior Vice President, General Counsel and Corporate Secretary in
September 2020, in addition to recruiting new departmental leaders across the
Company. The cost savings efforts undertaken included the Company implementing
phased actions to reduce costs to minimize cash usage. Our 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
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certain elements of supply chain and marketing. In connection with these
actions, we recorded severance and related benefits charges of $0.2 million
during the first half of 2019. These additional restructuring charges primarily
related to severance and related benefits charges as a result of eliminating
three positions during the first quarter of 2019 and nine positions during the
second quarter of 2019, as well as costs associated with closing our offices in
San Jose, California and Taipei, Taiwan in the second quarter of 2019. With
quarterly sales for the Company leveling off at its low point in the third
quarter of 2019 at $2.9 million, we began to see the impact of our relaunch
efforts and restructuring of our sales organization in the fourth quarter of
2019 achieving sales of $3.5 million, or a sequential quarter-over-quarter
growth rate of 21.1%. In addition, losses were mitigated through the better cost
management and a sharp focus on better managing pricing and inventory decisions
for the last half of 2019.

During 2020, we continued to see the benefits from these relaunch efforts
undertaken by the new management team, 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 2019 and into 2020, 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 EnFocus™ platform during the second quarter of 2020 and
continued to receive positive feedback from existing, new, and potential new
customers. 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 tubular LEDs, a far more 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 started
developing advanced UVCD products for both consumer as well as the commercial
and industrial markets beginning in the first quarter of 2020. We announced the
following three UVCD products in October 2020: abUV™ circadian lighting and UVCD
air disinfection integrated troffers controlled by the EnFocus™ platform
technology; nUVo™ portable disinfection device for offices and homes; and mUVe™
autonomous robot designed for surface disinfection.

In our MMM business, significant efforts undertaken to reduce costs in our
product offerings have positioned us to be more competitive in this segment.
Such efforts allowed us to continue to win bids and proposals that helped grow
our MMM sales during 2020, offsetting some of the weakness being experienced in
our commercial business. In addition, during the fourth quarter of 2020, we
became an approved supplier for the General Services Administration ("GSA") and
our products are now listed in the GSA website for all federal and military
agencies to view and order our products. While we continue to aggressively seek
to increase sales of our commercial products, the MMM business offers us
continued sales, in addition to validating our product quality and strengthening
our brand trust in the marketplace.

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

Despite continuing progress throughout 2020 in reducing our operating losses
significantly by 18.7% from December 31, 2019, the Company's results reflect the
challenges due to long and unpredictable sales cycles, unexpected delays in
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, 2020.

The COVID-19 pandemic in particular has, and may continue to have, a significant
economic and business impact on our company. Following a slowdown in the second
quarter of 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.

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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. 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 aim to stay agile as
an organization to respond to potential or continuing weakness in the macro
environment and in the meantime expand sales channels and enter new markets such
as UVCD that might be able to 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:
                                                  2020         2019
Net sales                                        100.0  %     100.0  %
Cost of sales                                     69.2         84.5
Gross profit                                      30.8         15.5

Operating expenses:
Product development                                8.4         10.1
Selling, general, and administrative              46.9         58.6

Restructuring                                     (0.4)         1.6
Total operating expenses                          54.9         70.3
Operating loss                                   (24.1)       (54.7)

Other expenses:

Interest expense                                   2.9          2.5
Loss on extinguishment of debt                     1.6            -
Loss from change in fair value of warrants         6.5            -
Other expenses, net                                0.4          0.7
Net loss before income taxes                     (35.5)       (57.9)
Provision for income taxes                           -          0.1

Net loss                                         (35.5) %     (58.0) %



Net sales

A further breakdown of our net sales by product line is as follows (in
thousands):
                                               2020          2019
                      Commercial products   $  5,404      $  7,877
                      MMM products            11,424         4,828

                      Total net sales       $ 16,828      $ 12,705



Our net sales of $16.8 million in 2020 increased 32.5% compared to 2019 mainly
driven by an increase of 136.6% in MMM sales. MMM sales were lower in 2019
primarily due to two of our products that were pending evaluation by the Defense
Logistics Agency, during which time the US Navy was not allowed to purchase
these two products and also due to federal
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government funding restrictions. 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 31.4% in 2020 as compared to 2019, reflecting fluctuations in the
timing, pace, and size of commercial projects, including 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 1% of net sales in 2020 and
2019, respectively. Changes in currency exchange rates did not have an impact on
net sales in 2020 or 2019, as our sales, including international sales, are
denominated in U.S. dollars.

Gross profit



Gross profit was $5.2 million in 2020, compared to $2.0 million in 2019. The
increase in gross profit was primarily driven by an increase in MMM sales as
noted above, as well as improved efficiency in our plant operations. Our 2020
gross profit as a percent of net sales of 30.8% increased from our 2019 gross
profit as a percent of net sales of 15.5%, primarily driven by product mix and
margin impact from MMM sales. Gross margin for 2020 included favorable price and
usage variances for material and labor of $0.9 million or 5.5% of net sales and
favorable inventory reserves recorded of $0.6 million, or 3.7% of net sales,
offsetting unexpected additional manufacturing cost due to supply chain
challenges relating primarily to our MMM products.

Operating expenses

Product development



Product development expenses include salaries, including stock-based
compensation and related benefits, contractor and consulting fees, legal fees,
supplies and materials, as well as overhead items, such as depreciation and
facilities costs. Product development costs are expensed as they are incurred.
Cost recovery represents the combination of revenues and credits from government
contracts.

Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands):


                                                                        For

the year ended December 31,


                                                                           2020                    2019
Total gross product development expenses                           $

1,415 $ 1,284





Gross product development expenses were $1.4 million in 2020, an increase of
10.2%, compared to $1.3 million in 2019. The increase primarily resulted from
increased product development and testing costs of $0.2 million associated with
the development and launch of EnFocusTM and the development of our UVCD
products.

Selling, general, and administrative



Selling, general, and administrative expenses were $7.9 million, or 46.9%, of
net sales in 2020, compared to $7.4 million, or 58.6%, of net sales in 2019. Of
the year-over-year $0.5 million increase, approximately $0.5 million is
attributable to increased headcount and salaries, including stock-based
compensation and related benefits, $0.2 million to an increase in legal and
professional fees, and a $0.1 million increase in recruiting and relocation
fees. These increases were offset by savings of $0.2 million in sales
commissions, $0.1 million in travel and related expenses as a result of COVID-19
stay-at-home orders and $0.1 million in reduced depreciation expense.

Restructuring



During 2019 and 2020, we recorded restructuring charges of approximately $0.2
million and credits of approximately $0.1 million, 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 September 30, 2019.

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During 2020, we recorded no restructuring-related severance and related benefits
charges. During the first half of 2019, we recorded severance and related
benefits charges of $0.2 million with no material restructuring charges recorded
during the second half of 2019.

As of December 31, 2020, we estimate that we will receive a total of
approximately $0.1 million in sublease payments to offset our remaining lease
obligations of $0.2 million, which extend until June 2021. We expect to incur
insignificant additional costs over the remaining life of our lease obligations.
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 $481 thousand in interest expense in 2020, primarily related to
interest on borrowings and non-cash amortization of fees related to the Austin
Facility, the promissory note in the principal amount of $1.3 million (the
"Iliad Note") the Company sold and issued to Iliad Research and Trading, L.P.
("Iliad"), pursuant to a note purchase agreement (the "Iliad Note Purchase
Agreement") with Iliad, and the interest on borrowings and non-cash amortization
of fees related to the Credit Facilities.

We incurred $317 thousand in interest expense in 2019, primarily related to interest on borrowings and non-cash amortization of fees related to the Austin Facility and under the Iliad Note.

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 and the write-off of the remaining debt acquisition
costs of $117 thousand relating to the Iliad Note.

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. 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 warrants (January
13, 2020). On December 22, 2020, all warrant holders agreed to a modification of
the terms of their warrants that qualified the warrants for equity accounting.
At that time, the liability relating to the remaining 467,306 warrants was
fair-valued with the offsetting adjustment recorded in income. The $1.4 million
warrant liability was then reclassified into equity and the warrants are no
longer subject to re-measurement at each balance sheet date.

Other expenses, net



We recognized other expenses, net, of $73 thousand in 2020, compared to other
expenses, net, of $91 thousand in 2019. Other expenses, net, in 2020 primarily
consisted of bank and collateral management fees. Other expenses, net in 2019
primarily consisted of $80 thousand of collateral management fees related to the
Austin Facility and a net loss on the sale and disposal of fixed assets of $24
thousand, partially offset by various refunds of $12 thousand.

Income taxes

For the years ended December 31, 2020 and 2019, our effective tax rate was 0.1% and (0.1)%, respectively.



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. In 2019, our effective
tax rate was lower than the statutory rate due to an increase in the valuation
allowance as a result of the $8.3 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
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against our deferred tax assets at December 31, 2020 and 2019, respectively. We
had no net deferred liabilities at December 31, 2020 or 2019. We will continue
to evaluate the need for a valuation allowance on a quarterly basis.

At December 31, 2020, we had net operating loss carry-forwards of approximately
$115.9 million for federal income tax purposes ($72.3 million for state and
local income tax purposes). However, due to changes in our capital structure,
approximately $61.5 million of the $115.9 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 $7.1 million and $8.3 million in
federal net operating losses generated in 2020 and 2019 will be subject to the
new limitations under the Tax Act. If not utilized, the carry-forwards generated
prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for
federal purposes and have begun to expire for state and local purposes. Please
refer to Note 12, "Income Taxes," included in Item 8, "Financial Statements and
Supplementary Data," of this Annual Report for further information.

Net loss



Our net loss from operations improved to $6.0 million in 2020 compared to $7.4
million in 2019. The improvement in our loss is primarily due to increased sales
of $4.1 million, or 32.5% over 2019 and our continued cost control initiatives,
resulting in an increase in gross margin of 162.7% over 2019. These improvements
were offset slightly by an increase in operating expenses of $0.3 million over
2019.

Liquidity and capital resources

General

We generated a net loss of $6.0 million in 2020, compared to net loss of $7.4 million in 2019. We have incurred substantial losses in the past, and as of December 31, 2020, we had an accumulated deficit of $130.9 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 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, 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, executive
and sales reorganization, and implementation of our product development and
sales channel strategy, if adequately executed, will provide us with an ability
to finance our operations through 2021 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 new Credit
Facilities consist of the Inventory Facility, a two-year inventory financing
facility for up to $3.0 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, 2020, our
cash was approximately $1.8 million and our total outstanding balance was
approximately $2.3 million under the Credit Facilities. As of December 31, 2020,
our additional availability under the Credit Facilities was $1.7 million.

Convertible Notes
On March 29, 2019, we issued $1.7 million aggregate principal amount of
subordinated convertible promissory notes (the "Convertible Notes") to certain
investors in a private placement exempt from the registration requirements of
the Securities Act of 1933, as amended. The Convertible Notes had a maturity
date of December 31, 2021 and bore interest at a rate of 5% per annum until June
30, 2019 and at a rate of 10% thereafter. Pursuant to their terms, on January
16, 2020, following approval by our stockholders of certain amendments to the
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
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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.
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.

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. The Iliad Note accrued interest at 8% per
annum, compounded daily, on the outstanding balance. We were able to prepay the
amounts outstanding under the Iliad Note at a premium, which was 15% during the
first year and 10% during the second year. Beginning in May 2020, Iliad could
have required us to redeem up to $150 thousand of the Iliad Note in any calendar
month. We had the right on three occasions to defer all redemptions that Iliad
could otherwise require us to make during any calendar month. No such deferrals
were exercised.

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.
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 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. Proceeds to
us, before expenses, from the sale of common stock and warrants (the "January
2020 Equity Offering") were approximately $2.8 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, a large
portion of which was applied to reduce the outstanding principal amount.

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. As such, we will likely need additional external
financing during 2021 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 and/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.

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, 2020, our cash balance was $1.8 million, compared to $0.4 million at December 31, 2019.

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):


                                                                        2020                 2019
Net cash used in operating activities                              $

(2,451) $ (6,624)



Net cash used in investing activities                              $

(223) $ (129)



Proceeds from the issuance of common stock and warrants            $     2,749          $         -
Proceeds from the exercise of warrants                                     918                    -

Offering costs paid on the issuance of common stock and warrants (510)

                   -
Proceeds from PPP loan                                                     795                    -
Principal payments under finance lease obligations                          (3)                  (3)

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

                                               100                    -

Common stock withheld in lieu of income tax withholding on vesting of restricted stock units

                                                   (3)                (110)
Payments for deferred financing costs & termination fees                  (320)                (208)
Proceeds from the Iliad Note                                                 -                1,115
Payments on the Iliad Note                                              (1,306)                   -
Proceeds from convertible notes                                              -                1,700
Net proceeds from credit line borrowings - Credit Facilities             2,459                    -
Net payments from credit line borrowings - Austin Facility                (719)              (1,400)
Net cash provided by financing activities                          $

4,160 $ 1,094

Cash used in operating activities



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.

Net cash used in operating activities of $6.6 million in 2019 resulted primarily
from the net loss incurred of $7.4 million, adjusted for non-cash items,
including: depreciation and amortization of $0.3 million and stock-based
compensation, net of $0.6 million. Cash used by an increase in accounts
receivable of $0.1 million and a decrease in accounts payable mainly for
inventory due to the timing of inventory receipts of $2.2 million and a decrease
in accrued expenses primarily for accrued payroll and benefits, severance and
commissions of $0.5 million further attributed to the cash impact of the net
loss incurred. The cash used by these working capital changes was partially
offset by cash generated by a net decrease in inventories of $1.9 million as we
sold existing inventory and reduced inventory purchasing and prepaid expenses of
$(0.1) million, as the inventory for which we paid deposits to our contract
manufacturers in prior quarters was received in the first quarter of 2019.

Cash used in investing activities



Net cash used by investing activities was $0.2 million in 2020 and $0.1 million
in 2019, respectively, and resulted primarily from the addition of property and
equipment tooling to support production operations.


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Cash provided by financing activities



Net cash provided by financing activities for the year ended December 31, 2020
of $4.2 million primarily resulted from $2.7 million in proceeds received from
the January 2020 Equity Offering, partially offset by $0.5 million in offering
costs. Investors in the January 2020 Equity Offering received warrants to
purchase shares of our common stock, of which warrants to purchase an aggregate
of 467,306 shares remain outstanding at December 31, 2020 with a weighted
average exercise price of $3.51 per share. During the year ended December 31,
2020, 269,240 warrants were exercised resulting in $0.9 million of proceeds. The
exercise of the warrants remaining outstanding at December 31, 2020, could
provide us with cash proceeds of up to $1.6 million in the aggregate.

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.

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.



Net cash provided by financing activities for the year ended December 31, 2019
of $1.1 million primarily resulted from net proceeds from the Convertible Notes
of $1.7 million and the Iliad Note of $1.1 million offset by payments to the
Austin Facility of $1.4 million.

Credit facilities



On August 11, 2020, we entered into the Credit Facilities, consisting of two
debt financing arrangements. The new Credit Facilities consist of the Inventory
Facility, a two-year inventory financing facility for up to $3.0 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, substantially increasing the Company's borrowing capacity and reducing
its blended interest expense rate.

Borrowings under the Inventory Facility were $1.3 million and borrowings under
the Receivables Facility were $1.0 million at December 31, 2020. These
facilities are recorded in the Consolidated Balance Sheet as of December 31,
2020 as a current liability under the caption "Credit line borrowings, net or
origination fees." Outstanding balances include unamortized net issuance costs
totaling $0.1 million for the Inventory Facility and $40 thousand for the
Receivables Facility as of December 31, 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. Borrowings under the
Austin Facility were $0.7 million at December 31, 2019 with total availability
of $1.6 million. 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 9 "Debt" 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 December 31, 2020 or 2019.

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.
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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



On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606), as amended by subsequently
issued additional guidance (together, "ASC 606") using the modified
retrospective method. The adoption of ASC 606 did not have a material impact on
our consolidated financial position or results of operations, as our revenue
arrangements generally consist of a single performance obligation to transfer
promised goods at a fixed price.

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 13, "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. During the first eleven months of 2019,
we evaluated and monitored the creditworthiness of each customer on a
case-by-case basis. However, during December 2019, we transitioned to an 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.

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


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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 2020 and 2019, the total allowance was $8 thousand and $28 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 2019, due to efforts to sell excess and
obsolete inventory and better management of inventory orders, we realized a net
reduction of our excess inventory reserves of $0.6 million. During 2020, we
continued to apply 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. 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, 2020 and 2019, we have
recorded a full valuation allowance against our deferred tax assets in the
United States 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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At December 31, 2020, we had net operating loss carry-forwards of approximately
$115.9 million for federal income tax purposes ($72.3 million for state and
local income tax purposes). However, due to changes in our capital structure,
approximately $61.5 million of the $115.9 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 $7.1 million and $8.3 million in federal net
operating losses generated in 2020 and 2019 will be subject to the new
limitations under the Tax Act. If not utilized, the carry-forwards generated
prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for
federal purposes and have begun to expire for state and local purposes. Please
refer to Note 12, "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 11, "Stockholders' Equity," included in Item 8, "Financial Statements
and Supplementary Data," of this Annual Report for additional information.

Leases



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which
supersedes the current lease accounting requirements. Additionally, in July
2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted
Improvements, which simplifies adoption of Topic 842 by allowing an additional
transition method that will not require restatement of prior periods and
providing a new practical expedient for lessors to avoid separating lease and
non-lease components within a contract if certain criteria are met (provisions
of which must be elected upon adoption of Topic 842). The new standard requires
a lessee to record on the balance sheet the assets and liabilities for the
rights and obligations created by leases with lease terms of more than 12
months. It also requires lessees to disclose certain key information about lease
transactions. Upon implementation, an entity's lease payment obligations will be
recognized at their estimated present value along with a corresponding
right-of-use asset. Lease expense recognition will be generally consistent with
current practice.

The Company adopted this guidance as of January 1, 2019 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.

On adoption, we recognized additional operating lease liabilities of
approximately $2.9 million as of January 1, 2019, with corresponding
right-of-use assets based on the present value of the remaining minimum rental
payments for our existing operating leases. The operating lease right-of-use
assets recorded upon adoption were offset by the carrying value of liabilities
previously recorded under Accounting Standards Codification ("ASC") Topic 420,
Exit or Disposal Cost Obligations ("Topic 420") and impairment charges totaling
$0.3 million and $0.2 million, respectively. 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.

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
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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.

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