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OFFON

ENERGY FOCUS, INC.

(EFOI)
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ENERGY FOCUS, INC/DE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/12/2021 | 08:20am EST
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 ended December 31, 2020 ("2020 Annual Report").
Overview
Energy 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 ended September 30, 2021 as compared
to the nine months ended September 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 ended September 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 of U.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 at September 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
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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 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 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 of U.S. Navy awards. We continue to pursue opportunities from the U.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.
At September 30, 2021, we had $0.4 million in cash and a total of $4.3 million
of debt. Total debt at September 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). At
September 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, on April 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
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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.
In June 2021, we completed a registered direct offering of 990,100 shares of our
common stock to certain institutional investors, at a purchase price of $5.05
per share (the "June 2021 Equity Offering"). We paid the placement agent
commissions of $400 thousand, plus $51 thousand in expenses, in connection with
the June 2021 Equity Offering and we also paid legal and other fees of $19
thousand related to the offering. Total offering costs of $470 thousand have
been presented as a reduction of additional paid-in capital and have been netted
within equity in the Condensed Consolidated Balance Sheet as of September 30,
2021. Net proceeds to us from the June 2021 Equity Offering were approximately
$4.5 million.
On April 27, 2021, we entered into a note purchase agreement (the "Streeterville
Note Purchase Agreement") with Streeterville 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 of April 27, 2023, and accrues
interest at 8% per annum, compounded daily, on the outstanding balance. The
Company may prepay the amounts outstanding under the 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%.
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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
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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 ended September 30, 2021, we recorded nominal restructuring
expense and for the three months ended September 30, 2020, we recorded
restructuring credits totaling approximately $16 thousand. For the nine months
ended September 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 former New York, New York office, which ended as of June 30,
2021.
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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 ended
September 30, 2021 was $0.3 million compared to $0.1 million for the nine months
ended September 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 with Austin Financial Services, Inc. (the "Austin Credit Facility") was
recognized during the three and nine months ended September 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 ended September 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 at September 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 in December 2020 such that they were reclassified as equity, and no
warrant liability exists at September 30, 2021. As such, there is no related
gain or loss recorded for the nine months ended September 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 ended September 30, 2020 compared to other
expenses of $67 thousand for the nine months ended September 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 ended
September 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 for U.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 ended September 30,
2020.
Net loss
For the three months ended September 30, 2021, our net loss of $1.1 million was
flat when compared to the net loss for the three months ended September 30,
2020. The decrease in gross profit of $0.8 million was offset entirely by the
other income recorded related to the ERTC.
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For the nine months ended September 30, 2021, our net loss was $5.3 million
compared to $6.0 million for the nine months ended September 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 ended September 30, 2020.
Financial condition
At September 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. At September 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 of
September 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 ended September 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 at September 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 the June 2021 Equity Offering and, in January 2020,
we raised approximately $2.3 million of net proceeds upon the issuance common
stock and warrants (the "January 2020 Equity Offering"). In April 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 in August
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 the June 2021 Equity Offering and January 2020
Equity Offering that significantly strengthened our balance sheet, the Paycheck
Protection Program ("PPP") loan we obtained in April 2020, our enhanced debt
capacity due to the debt refinancing in August 2020, the credit facility
capacity increase and bridge financing in April 2021, and the funds we 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
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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.
On August 17, 2020, we received a letter from the Listing Qualifications staff
(the "Staff") of The Nasdaq Stock Market ("Nasdaq") notifying us that we 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 ended
June 30, 2020, filed on August 13, 2020, reflected that our stockholders' equity
as of June 30, 2020 was $1,714,000. In addition, as of August 13, 2020, we did
not meet the alternative compliance standards relating to the market value of
listed securities or net income from continuing operations. On October 5, 2020,
based on our timely submission of our plan to regain compliance, Nasdaq granted
us an extension through February 15, 2021, to regain compliance with the Minimum
Stockholders' Equity Rule, 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. At December 31, 2020, our stockholders' equity was
$4,255,000. On January 20, 2021, we received a letter from the Staff notifying
us that, on a conditional basis, Nasdaq has determined that we have regained
compliance with the Minimum Stockholders' Equity Rule. At September 30, 2021 our
stockholders' equity was $4,502,000.
                                       39
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Liquidity and capital resources
Cash
At September 30, 2021, our cash balance was approximately $0.4 million, compared
to approximately $1.8 million at December 31, 2020. The balance at December 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 in September 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 $ (8,420) $ (1,583)

Net cash used in investing activities $ (311) $ (171)

Net cash provided by financing activities $ 6,934 $ 3,978



Net cash used in operating activities
Net cash used in operating activities was $8.4 million for the nine months ended
September 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 ended September 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 ended
September 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 ended September 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 ended September 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
ended September 30, 2021 and resulted primarily from the purchase of software
and a development of the mUVeTM UVCD robot.
For the nine months ended September 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 ended September
30, 2021 was $6.9 million, primarily related to $4.5 million of net proceeds
from the June 2021 Equity Offering, $1.5 million of net proceeds from the
                                       40
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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 the January 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 at September 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 ended September
30, 2020 was $4.0 million, primarily resulting from the $2.7 million in proceeds
received from the January 2020 Equity Offering, partially offset by $0.5 million
in offering costs for the issuance. During the nine months ended September 30,
2020, 197,394 warrants were exercised resulting in $0.7 million in proceeds.
Also during the nine months ended September 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. On August 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 ended September 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 the January 2020 Equity Offering, of which $0.2
million was allocated against principal. At September 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 of September 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.
During December 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
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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 ended September 30, 2021, sales to our primary distributor
for the U.S. Navy, a U.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 the U.S. Navy are
combined with sales to shipbuilders for the U.S. Navy, total net sales of
products for the U.S. Navy comprised approximately 36% of net sales for the same
period. For the three months ended September 30, 2020, sales to our primary
distributor for the U.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 the U.S. Navy are combined with sales to
shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy
comprised approximately 68% of net sales for the same period.
For the nine months ended September 30, 2021, sales to our primary distributor
for the U.S. Navy, a U.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 the U.S. Navy are
combined with sales to shipbuilders for the U.S. Navy, total net sales of
products for the U.S. Navy comprised approximately 43% of net sales for the same
period. For the nine months ended September 30, 2020, sales to our primary
distributor for the U.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 the U.S. Navy are combined with sales to
shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy
comprised approximately 58% of net sales for the same period.
Our primary distributor for the U.S. Navy, a regional commercial lighting
retrofit company and a U.S. Navy shipbuilder accounted for approximately 12%,
34%, and 27% of net trade accounts receivable, respectively, at September 30,
2021. At December 31, 2020, our primary distributor to the U.S. Navy accounted
for 28% of our net trade accounts receivable and a shipbuilder for the U.S. Navy
accounted for 21% of our net trade accounts receivable.
One offshore supplier accounted for approximately 19% and 30%, respectively, of
our total expenditures for the three and nine months ended September 30, 2021.
For the three months ended September 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 ended September 30, 2020.
At September 30, 2021, one offshore supplier accounted for approximately 63% of
our trade accounts payable balance. At December 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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