The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included in Part I, Item 1, "Financial Statements" of this Quarterly Report, as well as Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("2020 Annual Report"). OverviewEnergy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient light-emitting diode ("LED") lighting systems and controls and development of ultraviolet-C light disinfection ("UVCD") products. We develop, market and sell high quality LED lighting and controls products and UVCD products in the commercial market and military maritime market ("MMM"), and expect to expand our offerings into the consumer market starting in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices and homes with greater energy efficiency, productivity, and human health through advanced LED retrofit and UVCD solutions. Our goal is to be the LED and human-centric lighting ("HCL") technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps and fixtures in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED ("TLED") products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020, we announced the launch of our UVCD product portfolio, which is being brought to market throughout the fourth quarter of 2021 and into 2022. Net sales decreased 43% for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , primarily driven by a 55% decrease in military sales period-over-period, and a decrease in net sales of our commercial products of 17% for the nine months endedSeptember 30, 2021 as compared to the prior year period. The sales cycles for the MMM is dependent on many factors, including the availability of government funding, the timing and fulfillment ofU.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules, and our financial results reflect volatility from fluctuations in the timing, pace and size of MMM projects. The sales cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects due to, among other reasons, the ongoing effects on our customers of the coronavirus ("COVID-19") pandemic. Operating losses increased by$3.1 million , or 98%, in the first nine months of 2021 over the first nine months of 2020. The Company's results reflect the challenges due to long and unpredictable sales cycles, delays in customer retrofit budgets and project starts, and supply chain issues exacerbated by the continuing effects of the COVID-19 pandemic. We have been challenged by continuing and intensifying aggressive price competition in the lighting industry, particularly in our retrofit market. 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 atSeptember 30, 2021 . The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on our company. In the first three quarters of 2021, following a slowdown throughout 2020, we have seen a continuing weakness in commercial sales as our customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the ongoing impacts of the COVID-19 pandemic that caused our customers to suspend or postpone lighting retrofit projects due to budget and occupancy uncertainties. 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 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 may have. Continuation of the COVID-19 pandemic and government actions in response thereto could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows. We will remain agile as an organization to respond to potential or continuing 32 -------------------------------------------------------------------------------- weakness in the macro environment and in the meantime expand sales channels and enter new markets, such as the UVCD and consumer markets, that we believe will provide additional growth opportunities. It is our belief that the momentum of the efforts undertaken in 2020, as described in our 2020 Annual Report, along with our continuing efforts to date in 2021, including the development and launch of new and innovative products, in both lighting controls surrounding the EnFocusTM platform and the UVCD market, as well as our planned entry into the consumer markets with these new products, will over time result in improved sales and bottom-line performance for the Company. We launched our patented EnFocusTM 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 existing, new, and potential new customers. The EnFocusTM platform offers two immediately available product lines: EnFocusTM DM, which provides a dimmable lighting solution, and EnFocusTM DCT, which provides both a dimmable and color tunable lighting solution. EnFocusTM 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 EnFocusTM switches and tubular LEDs, a far more secure, affordable and environmentally sustainable solution compared with replacing entire lighting fixtures and incorporating additional wired or wireless communication. In addition, we recently announced plans for the second generation of EnFocusTM switches and the award-winning SuncycleTM circadian lighting system for both commercial and residential markets, which we plan to launch in early 2022. In addition, in response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we have been developing advanced UVCD air and surface disinfection products for both consumer as well as the commercial and industrial markets. We announced the following UVCD products beginning in the fourth quarter of 2020: abUVTM circadian lighting and UVCD air disinfection integrated troffers controlled by the EnFocusTM platform technology; nUVoTM Tower portable air disinfection device for offices and homes; nUVoTM Traveler portable personal air disinfection device; and mUVeTM autonomous robot designed for surface disinfection. The nUVoTM Tower and nUVoTM Traveler are expected to be available in the fourth quarter of 2021, and the abUVTM and mUVeTM are expected to be available in the first half of 2022. In our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned us to be more competitive along with improved production efficiencies. Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales throughout 2020, offsetting some of the weakness being experienced in our commercial business that year. In addition, during the fourth quarter of 2020, we became an approved supplier for theGeneral 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 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 primarily driven by, and reflect volatility in, our MMM sales. In the first three quarters of 2021, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing ofU.S. Navy awards. We continue to pursue opportunities from theU.S. Navy and the government sector to minimize such volatility. 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 such as our SuncycleTM products that aim to serve both consumer and commercial markets. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability. AtSeptember 30, 2021 , we had$0.4 million in cash and a total of$4.3 million of debt. Total debt atSeptember 30, 2021 included$1.4 million outstanding under our inventory financing facility (the "Inventory Facility"),$1.3 million outstanding under our receivables financing facility (the "Receivables Facility" and, together with the Inventory Facility, the "Credit Facilities") and$1.6 million outstanding on the Streeterville Note (as defined below). AtSeptember 30, 2021 , we had additional availability of$1.6 million under the Inventory Facility and$0.1 million under the Receivables Facility, for a total of$1.7 million of additional availability. Previously, onApril 20, 2021 , we entered into an amendment to the Loan and Security Agreement governing the Inventory Facility (the "Inventory Loan Agreement") to increase the maximum amount 33 -------------------------------------------------------------------------------- that may be available to the Company from$3.0 million previously to$3.5 million , subject to the borrowing base as set forth in the Inventory Loan Agreement. 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 the offering. Total offering costs of$470 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as ofSeptember 30, 2021 . Net proceeds to us from theJune 2021 Equity Offering were approximately$4.5 million . OnApril 27, 2021 , we entered into a note purchase agreement (the "Streeterville Note Purchase Agreement") withStreeterville Capital, LLC ("Streeterville") pursuant to which the Company sold and issued to Streeterville a promissory note in the principal amount of approximately$1.7 million (the "Streeterville Note"). The Streeterville Note was issued with an original issue discount of$194 thousand and Streeterville paid a purchase price of$1.5 million for the Streeterville Note, after deduction of$15 thousand of Streeterville's transaction expenses. The Streeterville Note has a maturity date ofApril 27, 2023 , and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Note at a premium, which is 5% during the first three months and 10% thereafter. Prepayments at the reduced rate in the first three months are limited to 50% of the outstanding balance. Beginning on the first day of the calendar month following the date that is six months after the date of purchase, Streeterville may require the Company to redeem up to$205 thousand of the Streeterville Note in any calendar month. The Company has the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company will increase the amount outstanding under the Streeterville Note by 1.5%. 34 -------------------------------------------------------------------------------- Results of operations The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated: Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 79.5 76.9 79.8 71.3 Gross profit 20.5 23.1 20.2 28.7 Operating expenses: Product development 14.7 6.7 19.1 7.6 Selling, general, and administrative 71.6 33.6 86.5 45.9 Restructuring - (0.3) (0.3) (0.3) Total operating expenses 86.3 40.0 105.3 53.2 Loss from operations (65.8) (16.9) (85.1) (24.5) Other expenses (income): Interest expense 6.4 2.1 7.0 2.6 Gain on forgiveness of PPP loan - - (10.7) - Loss on extinguishment of debt - 2.7 - 1.2 Other income - employee retention tax credit (31.4) - (11.6) - (Gain) loss from change in fair value of warrants - (2.6) - 17.4 Other expenses 0.5 0.4 0.6 0.5 Net income before income taxes Benefit from income taxes - - - - Net loss (41.3) % (19.5) % (70.4) % (46.2) % Net sales A further breakdown of our net sales is presented in the following table (in thousands): Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Commercial$ 1,522 $ 1,456 $ 3,513 $ 4,250 MMM products 1,227 4,508 3,947 8,832 Total net sales$ 2,749 $ 5,964 $ 7,460 $ 13,082 Net sales of$2.7 million for the third quarter of 2021 decreased 54% compared to third quarter of 2020 net sales of$6.0 million , primarily driven by a decrease in MMM product sales. Net MMM product sales decreased in the third quarter of 2021 compared to the same period in 2020, mainly due to availability of government funding and the delayed timing of expected orders as well as a large military contract fulfilled during the third quarter of 2020. Net sales of$7.5 million for the first nine months of 2021 decreased 43% compared to the same period in 2020, primarily driven by a decrease in MMM product sales and somewhat by reduced commercial sales. Net sales of our MMM products decreased mainly due to availability of government funding and the delayed timing of expected orders in the first nine months of 2021. Net sales of our commercial products decreased in the first nine months of 2021 compared to the same period of 2020, reflecting (i) a decrease in sales, caused by delayed orders that have occurred mainly in the healthcare, education, commercial and industrial sectors because of the macroeconomic slowdown and purchasing decisions being put 35 -------------------------------------------------------------------------------- on hold due to the COVID-19 pandemic, (ii) lower sales from our agency network, which was also impacted by the COVID-19 pandemic, and (iii) fluctuations in the timing, pace and size of commercial projects. Gross profit Gross profit was$0.6 million , or 20.5% of net sales, for the third quarter of 2021, compared to$1.4 million , or 23.1% of net sales, for the third quarter of 2020. Gross margin for the third quarter of 2021 included favorable price and usage variances for material and labor of$0.1 million , or 2.6% of net sales, and favorable inventory and warranty reserves of$0.1 million , or 2.0% of net sales. Gross margin for the third quarter of 2020 included favorable price and usage variances for material and labor of$0.4 million , or 7.2% of net sales. Gross profit was$1.5 million , or 20.2% of net sales, for the first nine months of 2021 compared to$3.8 million , or 28.7% of net sales, for the first nine months of 2020. The decrease was primarily related to product mix and included favorable price and usage variances for material and labor of$0.6 million , or 8.6% of net sales, and unfavorable inventory and warranty reserves recorded of$0.1 million , or 0.8% of net sales. The gross margin for the first nine months of 2020 was primarily a result of unexpected additional manufacturing costs as a result of supply chain challenges relating primarily to our MMM products, which adversely impacted our gross profit by approximately 2.1% of net sales. The remaining increase was primarily related to relatively higher profit margin of sold product, favorable price and usage variances for material and labor of$0.7 million , or 5.5% of net sales, and favorable inventory reserves recorded of$0.4 million , or 3.0% of net sales. Operating expenses Product development Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred. Product development expenses were$0.4 million for the third quarter of 2021, flat compared to the third quarter of 2020. Product development expenses mainly relate to the development and launch of our UVCD product portfolio. Product development expenses were$1.4 million for the first nine months of 2021, a$0.4 million increase compared to$1.0 million for the first nine months of 2020. The increase is primarily related to payroll expense and product testing associated with the development and launch of our UVCD product portfolio. Selling, general and administrative Selling, general and administrative expenses were$2.0 million for the third quarter of 2021, flat as compared to the third quarter of 2020. The primary drivers of expenses in both the third quarter of 2021 and third quarter of 2020 were$0.9 million in payroll and payroll related expenses,$0.1 million in marketing, advertising and related expenses,$0.3 million in dues and fees, supplies, utilities and rent, software contracts, and miscellaneous taxes,$0.1 million in commissions and employee bonuses,$0.1 million in insurance expense and$0.1 million in external reporting expenses. For the third quarter of 2021, professional, legal, consulting and recruiting fees were$0.2 million as compared to$0.4 million in the third quarter of 2020. Selling, general and administrative expenses were$6.5 million for the first nine months of 2021, compared to$6.0 million for the first nine months of 2020. The increase is primarily due to increases in payroll of$0.5 million , stock compensation expense of$0.3 million , and marketing, advertising and related expenses of$0.2 million as well as a total of$0.4 million for dues and fees, supplies, utilities and rent, software contracts, commissions and miscellaneous taxes. These increases were partially offset by decreases of$0.5 million in professional service fees,$0.2 million in employee bonuses,$0.1 million in recruiting fees and$0.1 million in external reporting fees. Restructuring For the three months endedSeptember 30, 2021 , we recorded nominal restructuring expense and for the three months endedSeptember 30, 2020 , we recorded restructuring credits totaling approximately$16 thousand . For the nine months endedSeptember 30, 2021 and 2020, we recorded restructuring credits totaling approximately$21 thousand and$44 thousand , respectively. All restructuring costs are related to the cost and offsetting sub-lease income for the lease obligations for the formerNew York, New York office, which ended as ofJune 30, 2021 . 36 -------------------------------------------------------------------------------- Interest expense Interest expense was$0.2 million for the third quarter of 2021, compared to interest expense of$0.1 million for the third quarter of 2020. The increase in interest expense of$0.1 million is primarily related to interest pursuant to the Credit Facilities as well as the Streeterville note. The actual cash interest paid in the third quarter of 2021 was$95 thousand compared to$40 thousand in the third quarter of 2020. Interest expense was$0.5 million for the first nine months of 2021, compared to interest expense of$0.3 million for the first nine months of 2020. The increase in interest expense of$0.2 million was primarily related to fees associated with the increase in the borrowing capacity on the Inventory Facility during the second quarter of 2021. The actual cash interest paid for the nine months endedSeptember 30, 2021 was$0.3 million compared to$0.1 million for the nine months endedSeptember 30, 2020 . Employee Retention Tax Credit We recognized other income of$0.9 million during the third quarter 2021, which represents the refund amount we expect to receive from the Employee Retention Tax Credit ("ERTC") for which we became eligible. The expected refund is related to eligible expenses incurred during the second and third quarters of 2021. Gain on forgiveness of PPP loan Forgiveness income of$0.8 million related to the Paycheck Protection Program ("PPP") loan taken out during 2020 and forgiven in 2021 was recognized during the first quarter 2021. Loss on extinguishment of debt A loss of$159 thousand on the extinguishment of our former revolving line of credit withAustin Financial Services, Inc. (the "Austin Credit Facility") was recognized during the three and nine months endedSeptember 30, 2020 , consisting of a$100 thousand termination fee and the write-off of the remaining related debt acquisition costs of$59 thousand . Loss from change in fair value of warrants A loss of$2.3 million was recognized during the nine months endedSeptember 30, 2020 for the market value change in our warrant liabilities. The loss recognized in the first nine months of 2020 was a result of the revaluation of the warrant liability using the market price of the Company's common stock atSeptember 30, 2020 versus the market price of the Company's common stock at the time of initial issuance of the warrants (January 13, 2020 ). The terms of the warrants were amended inDecember 2020 such that they were reclassified as equity, and no warrant liability exists atSeptember 30, 2021 . As such, there is no related gain or loss recorded for the nine months endedSeptember 30, 2021 . Other expenses Other expenses were$15 thousand for the third quarter of 2021, compared to other expenses of$25 thousand for the third quarter of 2020. Other expenses were$47 thousand for the nine months endedSeptember 30, 2020 compared to other expenses of$67 thousand for the nine months endedSeptember 30, 2020 . Other expenses are mainly comprised of bank and collateral management fees. Provision for income taxes Due to the operating losses incurred during the three and nine months endedSeptember 30, 2021 and 2020, and after application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended, it was not necessary to record a provision forU.S. federal income tax or various state income taxes as income tax benefits are fully offset by a valuation allowance recorded. The Company recorded a 2019 provision to return benefit of$2 thousand for various state income tax returns filed during the period endedSeptember 30, 2020 . Net loss For the three months endedSeptember 30, 2021 , our net loss of$1.1 million was flat when compared to the net loss for the three months endedSeptember 30, 2020 . The decrease in gross profit of$0.8 million was offset entirely by the other income recorded related to the ERTC. 37 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , our net loss was$5.3 million compared to$6.0 million for the nine months endedSeptember 30, 2020 . The decrease in the net loss was primarily driven by a decrease in gross profit of$2.2 million , increases in product development costs of$0.4 million , increases in selling, general and administrative costs of$0.5 million and increases in interest costs of$0.2 million . These cost increases were offset by other income of$0.9 million relating to the ERTC, the gain on the forgiveness of the PPP loan of$0.8 million , and the first nine months of 2021 do not reflect the impact of the$2.3 million loss from the fair value of warrants, which occurred during the nine months endedSeptember 30, 2020 . Financial condition AtSeptember 30, 2021 , we had$0.4 million in cash and a total of$4.3 million of debt, including$1.4 million outstanding under our Inventory Facility and$1.3 million outstanding under our Receivables Facility, and$1.5 million outstanding on the Streeterville Note. AtSeptember 30, 2021 , we had additional availability of$1.6 million under the Inventory Facility and$0.1 million under the Receivables Facility, for a total of$1.7 million of additional availability. We have historically incurred substantial losses, and as ofSeptember 30, 2021 , we had an accumulated deficit of$136.1 million . Additionally, our sales have been concentrated among a few major customers and for the nine months endedSeptember 30, 2021 , three customers accounted for approximately 60% of net sales. As a result of the restructuring actions and initiatives described above, we have previously reduced our operating expenses to be more commensurate with our expected sales volumes. However, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist atSeptember 30, 2021 . Throughout 2020 and the first nine months of 2021, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products surrounding EnFocusTM, a breakthrough lighting control platform we officially launched during the second quarter of 2020, and our SuncycleTM circadian lighting system, which we plan to launch in early 2022. Additionally, during the last quarter of 2020, we announced newly developed UVCD products for consumer as well as commercial and industrial markets, of which two products are expected to be available in the fourth quarter of 2021, and two products are expected to be available in early 2022. We plan to achieve profitability through growing our sales, through existing lighting and new lighting control and UVCD products, and by continuing to refine and execute on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education, and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships, as well as our emerging consumer market focus. As described in Note 9, "Stockholders' Equity," included under Part I, Item 1, "Financial Statements," of this Quarterly Report, we raised approximately$4.5 million of net proceeds from theJune 2021 Equity Offering and, inJanuary 2020 , we raised approximately$2.3 million of net proceeds upon the issuance common stock and warrants (the "January 2020 Equity Offering"). InApril 2021 , we obtained approximately$1.5 million of net proceeds from bridge financing and separately increased the capacity of the Inventory Facility, which allows for expanded borrowing capacity under the Credit Facilities entered into inAugust 2020 as described in Note 7, "Debt," included under Part I, Item 1, "Financial Statements," of this Quarterly Report. The restructuring and cost cutting initiatives implemented during 2020 and continued into 2021, as well as theJune 2021 Equity Offering andJanuary 2020 Equity Offering that significantly strengthened our balance sheet, the Paycheck Protection Program ("PPP") loan we obtained inApril 2020 , our enhanced debt capacity due to the debt refinancing inAugust 2020 , the credit facility capacity increase and bridge financing inApril 2021 , and the funds we expect to receive related to the Employee Retention Tax Credit ("ERTC", see Note 11, "Other Income" for details), were all designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or be successful due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products, markets, and customers into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, interruptions and cost increases in the global supply chain, and the ongoing and lingering economic impact from the COVID-19 pandemic that had significantly diminished the interest and activities for our customers' lighting retrofit projects until occupancy returns to more normal levels, among other factors. Additionally, global supply chain challenges are impacting our inventory purchasing strategy, leading to a buildup of inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining components. Disruptions and cost increases in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. As a result, we will continue 38 -------------------------------------------------------------------------------- to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following: •obtaining financing from traditional or non-traditional investment capital organizations or individuals; •obtaining funding from the sale of our common stock or other equity or debt instruments; and •obtaining debt financing with lending terms that more closely match our business model and capital needs. There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including: •additional equity financing may not be available to us on satisfactory terms, and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock; •loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and •the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing. If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment. Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, will provide us with an ability to finance our operations through the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern. OnAugust 17, 2020 , we received a letter from the Listing Qualifications staff (the "Staff") ofThe Nasdaq Stock Market ("Nasdaq") notifying us that we are no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders' equity of at least$2,500,000 if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the "Minimum Stockholders' Equity Rule"). Our Quarterly Report on Form 10-Q for the quarterly period endedJune 30, 2020 , filed onAugust 13, 2020 , reflected that our stockholders' equity as ofJune 30, 2020 was$1,714,000 . In addition, as ofAugust 13, 2020 , we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations. OnOctober 5, 2020 , based on our timely submission of our plan to regain compliance, Nasdaq granted us an extension throughFebruary 15, 2021 , to regain compliance with the Minimum Stockholders' Equity Rule, subject to our compliance with certain terms of the extension. In accordance with one part of the plan submitted to the Staff, we have successfully modified our outstanding warrants and are able to now classify the warrants within equity. AtDecember 31, 2020 , our stockholders' equity was$4,255,000 . OnJanuary 20, 2021 , we received a letter from the Staff notifying us that, on a conditional basis, Nasdaq has determined that we have regained compliance with the Minimum Stockholders' Equity Rule. AtSeptember 30, 2021 our stockholders' equity was$4,502,000 . 39 -------------------------------------------------------------------------------- Liquidity and capital resources Cash AtSeptember 30, 2021 , our cash balance was approximately$0.4 million , compared to approximately$1.8 million atDecember 31, 2020 . The balance atDecember 31, 2020 excluded restricted cash of$0.3 million for a letter of credit requirement under a lease obligation. Per the terms of the lease agreement, the restrictions on the cash were lifted inSeptember 2021 and the cash was returned to the Company. The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows included in Part I, Item 1, "Financial Statements," of this Quarterly Report (in thousands): Nine months ended September 30, 2021 2020
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net cash used in operating activities Net cash used in operating activities was$8.4 million for the nine months endedSeptember 30, 2021 . The net loss was$5.3 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, gain on forgiveness of the PPP loan, other income related to the ERTC, and accounts receivable reserves and working capital changes. During the nine months endedSeptember 30, 2021 , we generated$0.4 million through the timing of collection of accounts receivable and$0.1 million due to the timing of inventory receipts and payments. We used$0.1 million through the timing of the receipt of inventory against short-term deposits and$2.1 million for inventory primarily due to global supply chain challenges that are impacting 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. We also used$0.3 million due to changes in accrued and other liabilities (primarily due to an increase in accrued payroll of$0.2 million ; this increase was offset by a reduction of$0.2 million in accrued accounting and legal fees and$0.2 million in accrued bonuses), and$0.1 million from changes in prepaid and other current assets. Net cash used in operating activities was$1.6 million for the nine months endedSeptember 30, 2020 . The net loss incurred of$6.0 million was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, change in fair value of warrant liabilities, provisions for inventory, warranty and accounts receivable reserves and working capital changes. During the nine months endedSeptember 30, 2020 , we generated$1.8 million in cash for accounts payable due to the timing of inventory receipts and payments, and$1.1 million for inventories primarily due to the timing of inventory receipts and we used$0.5 million of short-term deposits due to prepaid deposits to our contract manufacturers for inventory for the EnFocusTM platform. During the nine months endedSeptember 30, 2020 , we used cash of$1.1 million through the timing of collection of accounts receivable. Net cash used in investing activities Net cash used in investing activities was$311 thousand for the nine months endedSeptember 30, 2021 and resulted primarily from the purchase of software and a development of the mUVeTM UVCD robot. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was$171 thousand and resulted primarily from the purchase of software and tooling to support production operations and development of e-commerce platforms. Net cash provided by financing activities Net cash provided by financing activities during the nine months endedSeptember 30, 2021 was$6.9 million , primarily related to$4.5 million of net proceeds from theJune 2021 Equity Offering,$1.5 million of net proceeds from the 40 -------------------------------------------------------------------------------- Streeterville Note, proceeds from the exercise of 156,446 warrants of$0.5 million and net proceeds from the Credit Facilities of$0.3 million . Investors in theJanuary 2020 Equity Offering received warrants to purchase shares of our common stock, of which warrants to purchase an aggregate of 310,860 shares remain outstanding atSeptember 30, 2021 with a weighted average exercise price of$3.59 per share. The exercise of the outstanding warrants could provide us with cash proceeds of up to$1.1 million in the aggregate. Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was$4.0 million , primarily resulting from the$2.7 million in proceeds received from theJanuary 2020 Equity Offering, partially offset by$0.5 million in offering costs for the issuance. During the nine months endedSeptember 30, 2020 , 197,394 warrants were exercised resulting in$0.7 million in proceeds. Also during the nine months endedSeptember 30, 2020 , we received$0.8 million in proceeds from the PPP loan,$1.2 million from borrowings under the Inventory Facility and$1.0 million from borrowings under the Receivables Facility and paid$0.7 million , net, on the Austin Credit Facility. Additionally, we paid$0.2 million in deferred financing fees on the Inventory and Receivables Facilities combined. OnAugust 11, 2020 , we paid the outstanding balance of$1.4 million to close out our former Austin Credit Facility, which included a$100 thousand termination fee. During the nine months endedSeptember 30, 2020 , we repaid$1.0 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 theJanuary 2020 Equity Offering, of which$0.2 million was allocated against principal. AtSeptember 30, 2020 , we had additional availability for us to borrow of$1.1 million under the Inventory Facility and$1.2 million under the Receivables Facility. Contractual obligations As ofSeptember 30, 2021 , we had approximately$2.9 million in outstanding purchase commitments for inventory. Of this amount, approximately$2.6 million is expected to ship in the fourth quarter of 2021, with the balance expected to ship in the first quarter of 2022 and thereafter. There have been no other material changes to our contractual obligations as compared to those included in our 2020 Annual Report. Critical accounting policies Fair value of warrant liabilities Due to a potential cash settlement upon occurrence of a fundamental transaction within the warrant agreement, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three quarters of 2020. We used the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted average assumptions, when appropriate. DuringDecember 2020 , the warrant holders agreed to a modification of the terms of their warrants which removed the potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth quarter of 2020, the warrant liability was reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date. There have been no other material changes to our critical accounting policies as compared to those included in our 2020 Annual Report. 41 -------------------------------------------------------------------------------- Certain risks and concentrations We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows: For the three months endedSeptember 30, 2021 , sales to our primary distributor for theU.S. Navy , aU.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately 19%, 17%, and 27% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to shipbuilders for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 36% of net sales for the same period. For the three months endedSeptember 30, 2020 , sales to our primary distributor for theU.S. Navy and a regional commercial lighting retrofit company accounted for approximately 67% and 12% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to shipbuilders for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 68% of net sales for the same period. For the nine months endedSeptember 30, 2021 , sales to our primary distributor for theU.S. Navy , aU.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately 33%, 10%, and 17% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to shipbuilders for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 43% of net sales for the same period. For the nine months endedSeptember 30, 2020 , sales to our primary distributor for theU.S. Navy and a regional commercial lighting retrofit company accounted for approximately 52% and 14% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to shipbuilders for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 58% of net sales for the same period. Our primary distributor for theU.S. Navy , a regional commercial lighting retrofit company and aU.S. Navy shipbuilder accounted for approximately 12%, 34%, and 27% of net trade accounts receivable, respectively, atSeptember 30, 2021 . AtDecember 31, 2020 , our primary distributor to theU.S. Navy accounted for 28% of our net trade accounts receivable and a shipbuilder for theU.S. Navy accounted for 21% of our net trade accounts receivable. One offshore supplier accounted for approximately 19% and 30%, respectively, of our total expenditures for the three and nine months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2020 , two offshore suppliers accounted for approximately 25% and 20%, respectively, of total expenditures. These same two suppliers accounted for approximately 19% and 14%, respectively, of total expenditures for the nine months endedSeptember 30, 2020 . AtSeptember 30, 2021 , one offshore supplier accounted for approximately 63% of our trade accounts payable balance. AtDecember 31, 2020 , this offshore supplier accounted for approximately 44% of our trade accounts payable balance. Recent accounting pronouncements For information on recent accounting pronouncements, please refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," included under Part I, Item 1, "Financial Statements," of this Quarterly Report. 42
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