ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements (“financial statements”) and related notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
Overview
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”), and expanded our offerings into the consumer market in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products. After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products.
The LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion. We have been experiencing these industry forces in both our military and commercial business since 2016, where we once commanded significant price premiums for our flicker-free TLEDs with industry leading warranties. In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively while not impacting the performance and quality. Despite these efforts, our legacy products continue to face extreme pricing competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business.
In addition to continuously pursuing cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value. Specific examples of these products we have developed include the RedCap®, our patented emergency backup battery integrated TLED, EnFocus™, our unique dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system, which as a result of supply chain challenges we now plan to launch in 2023. Similarly, our plans to expand and enhance the performance of our RedCap® product line are also now expected in 2023. We continue to evaluate our sales strategy and believe our go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network to cover territories across the country, and listening to the voice of the customer, will lead to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.
Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant restructuring efforts were undertaken. The Company replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors (“Board of Directors”) and the executive team, and recruited new departmental leaders across the Company. The initial cost savings efforts to minimize cash usage included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing.
During 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses. Despite these cost-cutting efforts, the company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market.
At the beginning of 2022, the Board of Directors appointed our lead independent director to serve as interim Chief Executive Officer and replace our previous chief executive officer. During 2022, the company redoubled its cost-reduction efforts, reduced its warehouse square footage, undertook an inventory reduction project, and dramatically reduced head count. During 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer products industry experience, and in September 2022, we hired a permanent Chief Executive Officer. We reinvested in our MMM sales channel with a strategic hire in May 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.
It is our belief that the dramatic rightsizing efforts undertaken in 2022, along with ongoing development of innovative, high-value products and an expanded sales and distribution network, will over time result in improved sales and bottom-line performance for the Company.
During 2021 and into 2022, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. We continue to pursue opportunities from the U.S. Navy and the government sector to minimize such volatility. Previously in our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned us to be more competitive along with improved production efficiencies. Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales in 2020, offsetting some of the weakness being experienced in our commercial business that year, though new MMM orders dwindled as we entered 2022. In May 2022 we reinvested in our MMM sales channel with a strategic hire to lead our MMM sales effort. While we continue to aggressively seek to increase sales of our commercial products, the MMM business offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace. However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales.
Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to achieve profitability through developing and launching innovative products such as EnFocusTM powerline control technology and further leveraging our unique and proprietary technology such as RedCap®, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform that aim to serve both consumer and commercial markets. We are also evaluating adjacent technologies including GaN-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
We launched our patented EnFocus™ platform during the second quarter of 2020 and, despite the ongoing, significant delay and slowdown in our customers’ lighting projects following the impacts of the COVID-19 pandemic, we continue to receive positive feedback from the market. The EnFocus™ platform offers two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and LED lamps, a far more secure, affordable and environmentally sustainable solution compared with replacing an entire luminaire and incorporating additional wired or wireless communication.
Despite continuing progress on cost reduction throughout 2022, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in MMM and commercial customer retrofit budgets and project starts, and supply chain issues, all exacerbated by the lingering effects of the COVID-19 pandemic. There has also been continuing aggressive price competition in the lighting industry. We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at December 31, 2022.
The COVID-19 pandemic in particular had, and may continue to have, a significant, long-term economic and business impact on our company. Throughout 2021 and 2022, following a slowdown in 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors continue to delay order placements in reaction to the long-term impacts of the COVID-19 pandemic that continue to cause our customers to suspend or postpone lighting retrofit projects due to budget and occupancy uncertainties. Global supply chain and logistics challenges have further exacerbated slowdowns in customer projects, as well as impacted our inventory strategies to respond to customer and supplier timelines.
We continue to monitor the impact of lingering effects of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken in response to the pandemic. Global supply chain and logistics constraints continue to impact our inventory purchasing strategy, and we have previously had to build up inventory and components in an effort to manage both shortages of available components and longer lead times in obtaining components. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects of lingering effects of the COVID-19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the continued long-term impact of the COVID-19 pandemic and will continue to adjust our organizational structure, strategies, plans and processes to respond.
Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial position that the COVID-19 pandemic will have. Long-term impacts of the COVID-19 pandemic and government actions in response thereto could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows. We will remain agile as an organization to respond to potential or continuing weakness in the macroeconomic environment and in the meantime expand sales channels and continue to evaluate entering new markets that we believe will provide additional growth opportunities.
Results of operations
The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the following periods:
| | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | |
| Net sales | | 100.0 | % | | 100.0 | % | | |
| Cost of sales | | 105.3 | | | 82.8 | | | |
| Gross (loss) profit | | (5.3) | | | 17.2 | | | |
| | | | | | |
| Operating expenses: | | | | | | |
| Product development | | 25.0 | | | 19.2 | | | |
| Selling, general, and administrative | | 119.8 | | | 86.5 | | | |
| Loss on impairment | | 5.6 | | | — | | | |
| | | | | | |
| Restructuring | | — | | | (0.2) | | | |
| Total operating expenses | | 150.4 | | | 105.5 | | | |
| Loss from operations | | (155.7) | | | (88.3) | | | |
| | | | | | |
| Other expenses: | | | | | | |
| | | | | | |
| Interest expense | | 16.0 | | | 8.0 | | | |
| Gain on forgiveness of PPP loan | | — | | | (8.1) | | | |
| | | | | | |
| Other income | | (0.5) | | | (8.9) | | | |
| | | | | | |
| Other expenses, net | | 0.9 | | | 0.7 | | | |
| Net loss before income taxes | | (172.1) | | | (80.0) | | | |
| Benefit from income taxes | | 0.1 | | | — | | | |
| | | | | | |
| | | | | | |
| Net loss | | (172.2) | % | | (80.0) | % | | |
Net sales
A further breakdown of our net sales by product line is as follows (in thousands):
| | | | | | | | | | | | | |
| | 2022 | | 2021 | | |
| Commercial products | $ | 3,746 | | | $ | 4,682 | | | |
| MMM products | 2,222 | | | 5,183 | | | |
| | | | | |
| Total net sales | $ | 5,968 | | | $ | 9,865 | | | |
Our net sales of $6.0 million in 2022 decreased 39.5% compared to 2021, mainly driven by a decrease of 57.1% in MMM sales and a decrease of 20.0% in commercial sales. The decrease in net MMM product sales in 2022 as compared to 2021 was mainly due to a reduced military sales pipeline at the beginning of the year, increased competition, and the delayed timing of expected orders. Net sales of our commercial products decreased in 2022 due to limited product availability impacts from supply chain constraints, our inventory reduction project, and continuing fluctuations in the timing, pace, and size of commercial projects.
International sales
We do not generate significant sales from customers outside the United States. International net sales accounted for approximately 0.4% of net sales in 2022 and 2% of net sales in 2021. Changes in currency exchange rates did not have an impact on net sales in 2022 or 2021, as our sales, including international sales, are denominated in U.S. dollars.
Gross (loss) profit
Gross loss was $0.3 million, or (5.3)% of net sales, for 2022, compared with gross profit of $1.7 million, or 17.2% of net sales for 2021. The year-over-year decrease in gross margin was driven primarily by a diminished sales pipeline and discounted pricing in connection with our inventory reduction project. Beginning in the third quarter of 2022, the warehouse square footage was reduced under the new lease agreement and significant amounts of previously reserved inventories were scrapped over the course of the year in connection with reducing leased square footage. Freight and logistics expense was notably higher at the beginning of 2022 as national imports faced backlogs at the ports. Scrap variance and freight in variance increases over prior year were $548 thousand and $324 thousand, respectively.
Beginning in the fourth quarter of 2022, second source suppliers were sought to replace larger, key suppliers in an effort to identify more competitive pricing. During the fourth quarter of 2022, the Company incurred higher short-term supply chain management expense in connection with mitigating the transition impact of the second sourcing. Additionally, the production operated at excess capacity during the first nine months of 2022, prior to headcount reductions.
Operating expenses
Product development
Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, certain legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred. Cost recovery represents the combination of revenues and credits from government contracts.
Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands):
| | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2022 | | 2021 | | |
| Total gross product development expenses | $ | 1,491 | | | $ | 1,891 | | | |
Gross product development expenses were $1.5 million in 2022, a decrease of 21.2%, compared to $1.9 million in 2021. The $0.4 million decrease primarily resulted from lower product development and testing costs, offset by increased salaries and related benefits expenses prior to significant headcount reductions mid-year. Product development costs in 2021 were largely associated with the development and launch of our UVCD products. These UVCD products were fully launched prior to 2022, and no further investments were necessary in 2022.
Selling, general, and administrative
Selling, general, and administrative expenses were $7.1 million, or 119.8% of net sales, in 2022, compared to $8.5 million, or 86.5% of net sales, in 2021. The year-over-year $1.4 million decrease is comprised of a combination of a $1.5 million decrease from a reduction in headcount and salaries, including stock-based compensation and related benefits and a decrease of $0.1 million in all other general expenses, offset by an increase of $0.2 million in sales commissions and consultants. Significant phased headcount reductions began at the end of the second quarter 2022 and continued throughout the end of the year.
Loss on impairment
As a result of the Company’s impairment analysis, a loss on impairment of $338 thousand was recorded in 2022. In the third quarter of 2022, a loss on impairment of $76 thousand was recorded on the write-off of the UV-Robots. An additional $262 thousand of loss on impairment was recorded in the fourth quarter of 2022, which consisted of tooling, equipment, software, hardware, and construction-in-progress. No such loss on impairment was recorded in 2021.
Restructuring
During 2021, we recorded restructuring credits of approximately $21 thousand, related to the cost and offsetting sub-lease income for the remaining lease obligation for our former New York, New York office which expired in June of 2021.
Please refer to Note 4, “Restructuring,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
Other expenses
Interest expense
We incurred $954 thousand in interest expense in 2022, primarily related to the interest on borrowings and non-cash amortization of fees related to the Credit Facilities, interest on promissory notes in the principal amounts of $1.7 million (the “ 2021 Streeterville Note”) and $2 million (the “2022 Streeterville Note”) the Company sold and issued to Streeterville Capital, LLC (“Streeterville”) pursuant to separate note purchase agreements, and interest on the short-term bridge financing in the aggregate principal amount of $1.45 million pursuant to promissory notes sold and issued by us to certain private parties, including one of our directors.
In 2021, we incurred $792 thousand in interest expense primarily related to the Credit Facilities and the 2021 Streeterville Note.
Gain on forgiveness of PPP loan
Forgiveness income of $801 thousand related to the Paycheck Protection Program (“PPP”) loan taken out during 2020 and forgiven in 2021 was recognized during the first quarter 2021.
Other expenses, net
We recognized other expenses, net, of $56 thousand in 2022, compared to other expenses, net, of $65 thousand in 2021. Other expenses, net, in 2022 and 2021 primarily consisted of bank and collateral management fees.
Income taxes
For each of the years ended December 31, 2022 and 2021, our effective tax rate was 0.0%. In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.2 million additional federal net operating loss we recognized for the year. In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.6 million additional federal net operating loss we recognized for the year.
Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We have recorded a full valuation allowance against our deferred tax assets at December 31, 2022 and 2021, respectively. We had no net deferred liabilities at December 31, 2022 or 2021. We will continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2022, we had net operating loss carry-forwards of approximately $132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes). However, due to changes in our capital structure,
approximately $78.0 million of the $132.4 million is available after the application of IRC Section 382 limitations. As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $9.2 million and $9.6 million in federal net operating losses generated in December 31, 2022 and 2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $35.3 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
Net loss
Net loss was $10.3 million for 2022. This compares with a net loss was $7.9 million for 2021, inclusive of a non-cash, pre-tax gain of $0.8 million from the forgiveness of the Company’s PPP loan and $0.9 million in other income recorded relating to the Employee Retention Tax Credit (“ERTC”) ($431 thousand of which was received during the fourth quarter of 2021).
Liquidity and capital resources
General
We generated a net loss of $10.3 million in 2022, compared to net loss of $7.9 million in 2021. We have incurred substantial losses in the past, and as of December 31, 2022, we had an accumulated deficit of $149.0 million.
In order for us to operate our business profitably, we need to grow our sales, maintain cost control discipline while balancing development of our new products required for long-term competitiveness and revenue growth, continue our efforts to reduce product cost, and drive further operating efficiencies. There is a risk that our strategy to return to profitability may not be successful. We will likely require additional financing in the next twelve months to achieve our strategic plan and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional financing thereafter, none of which may be available on favorable terms or at all and could require us to discontinue or curtail our operations.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plan to continue to ensure appropriate levels of the availability of external financing, current financial position, liquid resources, obligations due or anticipated within the next year, and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2023 and will mitigate the substantial doubt about our ability to continue as a going concern.
Credit Facilities
On August 11, 2020, we entered into the Credit Facilities. The Credit Facilities consist of the Inventory Facility, an inventory financing facility for up to $3.0 million, which amount was subsequently increased to $3.5 million in April 2021. In January 2023, we amended the Inventory Facility, reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1 million in January and February 2023. The Receivables Facility, a receivables financing facility for up to $2.5 million, was terminated in February 2023, further reducing our monthly borrowing costs. As of December 31, 2022, our cash was approximately $0.1 million and our total outstanding balance was approximately $1.5 million under the Credit Facilities. As of December 31, 2022, our additional availability under the Credit Facilities was $55 thousand.
June 2022 Private Placement
In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. In connection with the June 2022 Private Placement, we paid the placement agent commissions of $252 thousand, plus $35 thousand in expenses, and we also paid legal, accounting and other fees of $47 thousand. Total offering costs of $334 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.
In July 2022, all of the June 2022 Pre-Funded Warrants were exercised. As of December 31, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares remained outstanding, with a weighted average exercise price of $1.30 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.
2022 Streeterville Note
On April 21, 2022, we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville the 2022 Streeterville Note. The 2022 Streeterville Note was issued with an original issue discount of $215 thousand and Streeterville paid a purchase price of approximately $1.8 million for the 2022 Streeterville Note, from which the Company paid $15 thousand to Streeterville for Streeterville’s transaction expenses.
The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and to extend its maturity date to December 1, 2024. We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $500 thousand by January 20, 2023 and $250 thousand by July 14, 2023. The $500 thousand was paid in January 2023. Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we will make twelve monthly repayments of approximately $117 thousand each. We have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled. Please refer to Note 15, “Subsequent Events” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further detail.
The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $2.0 million at December 31, 2022.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.
December 2021 Private Placement
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants (“December 2021 Pre-Funded Warrants”) to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. We paid the placement agent commission of $360 thousand, plus $42 thousand in expenses, in connection with the December 2021 Private Placement and we also paid legal, accounting and other fees of $97 thousand related to the December 2021 Private Placement. Total offering costs of $499 thousand have been presented as a reduction of additional paid-in-capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2022. Net proceeds to us from the December 2021 Private Placement were approximately $4.0 million. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for purposes of calculating net loss per share.
In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of December 31, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares remained outstanding, with an exercise price of $3.52 per share. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.
June 2021 Equity Offering
In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share (the “June 2021 Equity Offering”). We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection with the June 2021 Equity Offering and we also paid legal and other fees of $19 thousand related to the June 2021 Equity Offering. Total offering costs of $469 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.
2021 Streeterville Note
On April 27, 2021, we entered into a note purchase agreement with Streeterville, pursuant to which we sold and issued the 2021 Streeterville Note. The 2021 Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the 2021 Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses.
Beginning on November 1, 2021, Streeterville could require the Company to redeem up to $205 thousand of the 2021 Streeterville Note in any calendar month. The Company had the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company increased the amount outstanding under the 2021 Streeterville Note by 1.5%. The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022. The Company and Streeterville agreed to exchange common stock, priced at-the-market, for the required redemptions in October 2022 and December 2022, totaling $305 thousand converted to equity. These exchanges satisfied the redemption notices provided by Streeterville, and following the December 2022 exchange, the note was paid in full.
January 2020 Equity Offering
In January 2020, we completed a registered direct offering for the sale of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an exercise price of $3.37 per share in a concurrent private placement (the “January 2020 Investor Warrants”) for a purchase of $0.625 per warrant. In addition, we issued warrants to the placement agent to purchase up to 48,185 shares of common stock at an exercise price of $4.99 per share (together with the January 2020 Investor Warrants, the “January 2020 Warrants”). Proceeds to us, before expenses, from the January 2020 Equity Offering were approximately $2.8 million.
Convertible Notes
On March 29, 2019, we issued $1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain investors in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5% per annum until June 30, 2019 and at a rate of 10% thereafter. Pursuant to their terms, on January 16, 2020, following approval by our stockholders of certain amendments to the Company’s Certificate of Incorporation, the principal amount of all of the Convertible Notes, and the accumulated interest thereon ($0.1 million), which totaled $1.8 million, were converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), which is convertible on a one-for-five basis into shares of our common stock. During 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock. During 2022, no shares of Series A Preferred Stock was converted into shares of common stock.
Need for Additional Financing
Even with access to outstanding borrowings under the Inventory Facility, which we have further curtailed and agreed to pay down in 2023, we may not generate sufficient cash flows from our operations or be able to borrow sufficient funds to sustain our operations within the next twelve months or in the time periods thereafter. As such, we will likely need additional external financing during 2023 and thereafter and will continue to review and pursue external funding sources including, but not limited to, the following:
•obtaining financing from traditional or non-traditional investment capital organizations or individuals;
•obtaining funding from the sale of our common stock or other equity or debt instruments; and
•obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain future funding on acceptable terms, in a timely fashion, or at all. Obtaining additional financing contains risks, including:
•additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to substantial dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms and/or conditions, such as interest rates, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our Board of Directors; and
•the current environment in the capital markets and volatile interest rates, combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
Additionally, if we are unable to find a permanent Chief Financial Officer, it may be more difficult to obtain additional financing on satisfactory terms or at all. If we fail to obtain additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional financing could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Cash and debt
At December 31, 2022, our cash balance was $0.1 million, compared to $2.7 million at December 31, 2021.
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands): | | | | | | | | | | | | | |
| | 2022 | | 2021 | | |
| Net cash used in operating activities | $ | (6,713) | | | $ | (9,765) | | | |
| | | | | |
| Net cash used in investing activities | $ | (16) | | | $ | (443) | | | |
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| Proceeds from the issuance of common stock and warrants | $ | 3,500 | | | $ | 9,500 | | | |
| Proceeds from the exercise of warrants | — | | | 801 | | | |
| Offering costs paid on the issuance of common stock and warrants | (334) | | | (969) | | | |
| | | | | |
| Principal payments under finance lease obligations | (1) | | | (3) | | | |
| Proceeds from exercise of stock options and purchases through employee stock purchase plan | 6 | | | 80 | | | |
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | — | | | (1) | | | |
| | | | | |
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| Payments for deferred financing costs | (114) | | | (30) | | | |
| Payments on the 2021 Streeterville Note | (1,640) | | | — | | | |
| | | | | |
| Proceeds from the 2021 Streeterville Note | — | | | 1,515 | | | |
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| Proceeds from the 2022 Streeterville Note | 2,000 | | | — | | | |
| Proceeds from related party promissory notes payable | 800 | | | — | | | |
| Proceeds from promissory notes payable | 650 | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
| Net payments on credit line borrowings - Credit Facilities | (768) | | | (181) | | | |
| Net cash provided by financing activities | $ | 4,099 | | | $ | 10,712 | | | |
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Cash used in operating activities
Net cash used in operating activities of $6.7 million in 2022 resulted primarily from the net loss incurred of $10.3 million, adjusted for non-cash items, including: depreciation and amortization of $0.5 million, stock-based compensation, net of $0.1 million, and non-favorable provisions from inventory $32 thousand, and favorable provisions from warranty of $0.1 million, as well as a loss on impairment of property and equipment of $0.3 million. We generated $0.8 million through the timing of collection of accounts receivable, $0.2 million from the change in prepaid and other current assets, $0.1 million for short-term deposits, and $2.4 million in inventory as we sold off a substantial portion of the stock on hand. We used $0.3 million from changes in deferred revenue, $1 thousand in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and $0.6 million through a decrease of other accrued liabilities.
Net cash used in operating activities of $9.8 million in 2021 resulted primarily from the net loss incurred of $7.9 million, adjusted for non-cash items, including: depreciation and amortization of $0.2 million, stock-based compensation, net of $0.4 million, gain on forgiveness of the PPP loan of $0.8 million, other income related to the ERTC of $0.9 million, and unfavorable provisions from inventory and warranty of $0.2 million and $0.1 million, respectively, as well as accounts receivable and working capital changes. We generated $0.8 million through the timing of collection of accounts receivable, $0.7 million from the change in prepaid and other current assets (primarily the receipt of ERTC funds), $0.3 million for short-term deposits related to the timing of inventory receipts with our contract manufacturers for our nUVo™ and EnFocus™ products, and $0.2 million from changes in deferred revenue. We used $2.4 million from a net increase in inventories primarily due to the timing of inventory receipts, $0.4 million in cash for a decrease in accounts payable due to the timing of inventory receipts and payments, and $0.4 million through a decrease of other accrued liabilities, primarily related to accrued payroll and benefits and commissions.
Cash used in investing activities
Net cash used in investing activities was $16 thousand in 2022, primarily from the acquisition of property and equipment.
Net cash used by investing activities was $0.4 million in 2021, and resulted primarily from the addition of software and tooling to support production operations as well as the development of an e-commerce platform.
Cash provided by financing activities
Net cash provided by financing activities for the year ended December 31, 2022 of $4.1 million primarily resulted from the proceeds from the issuance of common stock and warrants of $3.5 million and proceeds from promissory notes payable of $0.7 million and related party promissory notes payable of $0.8 million. Additionally, the issuance of the 2022 Streeterville Note provided net proceeds of $2.0 million. The increases in cash were offset by payments on the 2021 Streeterville Note of $1.6 million.
Net cash provided by financing activities for the year ended December 31, 2021 of $10.7 million primarily resulted from $4.0 million and $4.5 million in net proceeds received from the December 2021 Private Placement and the June 2021 Equity Offering, respectively, $1.5 million of net proceeds from the 2021 Streeterville Note, and $0.8 million of proceeds from the exercise of 237,892 January 2020 Warrants. These increases in cash were offset by net payments made against borrowings under the Inventory Facility and the Receivables Facility of $150 thousand and $31 thousand, respectively.
Credit Facilities
On August 11, 2020, we entered into the Credit Facilities, consisting of two debt financing arrangements. The Credit Facilities consist of the Inventory Facility, a two-year inventory financing facility for up to $3.0 million, which amount was subsequently increased to $3.5 million, and the Receivables Facility, a two-year receivables financing facility for up to $2.5 million. On January 18, 2023, the Company and the Inventory Lender entered into an amendment to restructure and pay down the Inventory Facility during 2023, which amendment reduced the overall availability to $500 thousand. On February 7, 2023, the Company and Receivable Lender terminated the Receivables Facility.
Net borrowings under the Inventory Facility at December 31, 2022 and 2021 were $1.4 million and $1.2 million, respectively. Net borrowings under the Receivables Facility at December 31, 2022 and December 31, 2021 were $0.1 million and $1.0 million, respectively. These facilities are recorded in the Consolidated Balance Sheets as of December 31, 2022 and 2021 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $47 thousand and $84 thousand, respectively, for the Inventory Facility and $15 thousand and $24 thousand, respectively, for the Receivables Facility as of December 31, 2022 and 2021.
For more information, see Note 8, “Debt,” and Note 15, “Subsequent Events,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
Off-balance sheet arrangements
We had no off-balance sheet arrangements at December 31, 2022 or 2021.
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the reported amounts of net sales and expenses in the financial statements. Material differences may result in
the amount and timing of net sales and expenses if different judgments or different estimates were utilized. Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial statements are set forth below:
•revenue recognition,
•allowances for doubtful accounts, returns and discounts,
•impairment of long-lived assets,
•valuation of inventories,
•accounting for income taxes,
•share-based compensation, and
•leases.
Revenue recognition
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. therefore, the product warranties are not a separate performance obligation and are accounted for as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
A disaggregation of product net sales is presented in Note 12, “Product and Geographic Information,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.
Accounts Receivable
Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. From time to time, we have utilized a third-party account receivable insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provided credit-worthiness ratings and metrics that significantly assisted us in evaluating the credit worthiness of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of account receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.
Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.
Allowances for doubtful accounts, returns, and discounts
We establish allowances for doubtful accounts and returns for probable losses based on the customers’ loss history with us, the financial condition of the customer, the condition of the general economy and the industry as a whole, and the contractual terms established with the customer. The specific components are as follows:
•allowance for doubtful accounts for accounts receivable, and
•allowance for sales returns and discounts.
In 2022 and 2021, the total allowance was $26 thousand and $14 thousand, respectively, which was all related to sales returns. We review these allowance accounts periodically and adjust them accordingly for current conditions.
Long-lived assets
Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to fifteen years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement of Operations. Refer to Note 6, “Property and Equipment,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. In 2022, a loss on impairment of $338 thousand was recorded. Refer to Note 6, “Property and Equipment,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Valuation of inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We establish provisions for excess and obsolete inventories after evaluation of historical sales, market prices, current economic trends, forecasted sales, product lifecycles, and current inventory levels. Throughout 2022, we faced supply chain constraints and also undertook an inventory reduction project in connection with reducing our warehouse square footage, which impacted our inventory purchasing strategy and resulted in a decrease in our gross inventory levels of $2.9 million and excess inventory reserves of $0.5 million compared to 2021. During 2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components, which resulted in an increase in our gross inventory levels of $2.4 million and excess inventory reserves of $0.2 million compared to 2020. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Refer to Note 5, “Inventories,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Accounting for income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. At December 31, 2022 and 2021, we have recorded a full valuation allowance against our deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2022, we had net operating loss carry-forwards of approximately $132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $78.0 million of the $132.4 million is available to offset future taxable income after the application of IRC Section 382 limitations. As a result of the Tax Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $9.2 million and $9.6 million in federal net operating losses generated in
2022 and 2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $37.5 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11, “Income Taxes,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for further information.
Share-based payments
The cost of employee and director stock options and restricted stock units, as well as other share-based compensation arrangements, is reflected in the Consolidated Financial Statements based on the estimated grant date fair value method under the authoritative guidance. Management applies the Black-Scholes option pricing model to options issued to employees and directors to determine the fair value of stock options and apply judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. The assumptions used in calculating the fair value of share-based awards under Black-Scholes represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. Restricted stock units and stock options issued to non-employees are valued based upon the intrinsic value of the award. See Note 10, “Stockholders’ Equity,” included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report for additional information.
Leases
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one finance lease on a forklift containing a bargain purchase option which was exercised in July 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option.
Additionally, as of March 25, 2022, the terms of our expiring headquarters real estate operating lease for manufacturing, warehouse and office space have been modified beginning July 1, 2022 to reflect a smaller footprint at reduced costs through 2027. In accordance with Accounting Standards Codification 842, Leases (“Topic 842”), as a result of the extension, the related lease liability was remeasured and the right-of-use asset was adjusted for the modification in March 2022. The present value of the lease obligation for this lease was calculated using an incremental borrowing rate of 16.96%, which was the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit. The weighted average remaining lease term for the operating leases is 4.7 years.
The Company had one restructured lease with a sub-lease component for the New York, New York office that was closed in 2017. The lease expired in June 2021. As part of the lease agreement, there was $0.3 million in restricted cash in prepaid and other current assets on the accompanying Consolidated Balance Sheets as of December 31, 2020 which represented collateral against the related letter of credit issued as part of the lease agreement. Per the terms of the lease agreement, the restrictions on the cash were lifted in September 2021 and the cash was returned to the Company.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. This standard is effective for interim and annual periods starting after December 15, 2022 and will generally requires adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
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Reports of Independent Registered Public Accounting Firm (PCAOB ID 1808) | |
Consolidated Balance Sheets as of December 31, 2022 and 2021 | |
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 | |
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2022 and 2021 | |
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2022 and 2021 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 | |
| Notes to Consolidated Financial Statements | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Energy Focus, Inc.
Solon, Ohio
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Energy Focus, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows for the years then ended, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Continuation as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Reserves for Excess, Obsolete and Slow-Moving Inventories
Description of the Matter
As described in Notes 2 and 5 to the consolidated financial statements, the Company assesses the valuation of inventories each reporting period based on the lower of cost or net realizable value. The Company establishes reserves for excess, obsolete and slow-moving inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles and current inventory levels. The assessment is both quantitative and qualitative. As of December 31, 2022, the Company had inventories of $5.5 million, net of reserves for excess, obsolete and slow-moving inventories.
Auditing management's estimates for excess, obsolete and slow-moving inventories required subjective auditor judgment and evaluation of the reasonableness of significant assumptions used in developing the reserves as detailed above, as well as the inputs and related calculations related to historical sales and on-hand inventories.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design of internal controls over the Company's reserves for excess, obsolete and slow-moving inventories, including management's assessment of the assumptions and data underlying the reserve calculation.
Our substantive audit procedures included, among others, testing the logic and integrity of calculations within management’s analysis; testing the completeness and accuracy of underlying data used, including inventory quantities, carrying costs and the estimate of net realizable value by product; and evaluating the reasonableness of management’s assumptions related to demand forecasts, estimated reserve percentages and qualitative considerations involving, among others, the implications of new or revised operational strategies. Evaluating the reasonableness of management’s assumptions involved (i) comparing historical sales by product, used as a basis for future demand, to audited sales subledgers on a sample basis, (ii) holding discussions with senior management to determine whether strategic or operational changes in the business were consistent with the projections of future demand that were utilized as the basis for the reserves recorded, and (iii) corroborating management’s qualitative considerations of future demand through review of unfulfilled customer purchase orders as of year-end on a sample basis.
/s/ GBQ Partners, LLC
We have served as the Company's auditor since 2019.
Columbus, Ohio
March 23, 2023
ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(amounts in thousands except share data)
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| | 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash | $ | 52 | | | $ | 2,682 | |
Trade accounts receivable, less allowances of $26 and $14, respectively | 445 | | | 1,240 | |
| Inventories, net | 5,476 | | | 7,866 | |
| Short-term deposits | 592 | | | 712 | |
| Prepaid and other current assets | 232 | | | 479 | |
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| Receivable for claimed ERTC | 445 | | | 445 | |
| Total current assets | 7,242 | | | 13,424 | |
| Property and equipment, net | 76 | | | 675 | |
| Operating lease, right-of-use asset | 1,180 | | | 292 | |
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| Total assets | $ | 8,498 | | | $ | 14,391 | |
| LIABILITIES | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 2,204 | | | $ | 2,235 | |
| Accrued liabilities | 145 | | | 265 | |
| Accrued legal and professional fees | — | | | 104 | |
| Accrued payroll and related benefits | 261 | | | 718 | |
| Accrued sales commissions | 76 | | | 57 | |
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| Accrued warranty reserve | 183 | | | 295 | |
| Deferred revenue | — | | | 268 | |
| Operating lease liabilities | 198 | | | 325 | |
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| Finance lease liabilities | — | | | 1 | |
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| Promissory notes payable, net of discounts and loan origination fees | 2,618 | | | 1,719 | |
| Related party promissory notes payable | 814 | | | — | |
| Credit line borrowings, net of loan origination fees | 1,447 | | | 2,169 | |
| Total current liabilities | 7,946 | | | 8,156 | |
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The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(amounts in thousands except share data)
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| | 2022 | | 2021 |
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| Operating lease liabilities, net of current portion | 1,029 | | | 26 | |
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| Total liabilities | 8,975 | | | 8,182 | |
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| STOCKHOLDERS' (DEFICIT) EQUITY | | | |
Preferred stock, par value $0.0001 per share: | | | |
Authorized: 5,000,000 shares (3,300,000 shares designated as Series A Convertible Preferred Stock) at December 31, 2022 and December 31, 2021 | | | |
Issued and outstanding: 876,447 shares at December 31, 2022 and December 31, 2021 | — | | | — | |
Common stock, par value $0.0001 per share: | | | |
Authorized: 50,000,000 shares at December 31, 2022 and December 31, 2021 | | | |
Issued and outstanding: 9,848,438 shares at December 31, 2022 and 6,368,549 shares at December 31, 2021 | 1 | | | — | |
| Additional paid-in capital | 148,545 | | | 144,953 | |
| Accumulated other comprehensive loss | (3) | | | (3) | |
| Accumulated deficit | (149,020) | | | (138,741) | |
| Total stockholders' (deficit) equity | (477) | | | 6,209 | |
| Total liabilities and stockholders' (deficit) equity | $ | 8,498 | | | $ | 14,391 | |
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The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands except per share data)
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| | 2022 | | 2021 | | |
| Net sales | $ | 5,968 | | | $ | 9,865 | | | |
| Cost of sales | 6,286 | | | 8,167 | | | |
| Gross (loss) profit | (318) | | | 1,698 | | | |
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| Operating expenses: | | | | | |
| Product development | 1,491 | | | 1,891 | | | |
| Selling, general, and administrative | 7,148 | | | 8,535 | | | |
| Loss on impairment | 338 | | | — | | | |
| Restructuring | — | | | (21) | | | |
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| Total operating expenses | 8,977 | | | 10,405 | | | |
| Loss from operations | (9,295) | | | (8,707) | | | |
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| Other expenses: | | | | | |
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| Interest expense | 954 | | | 792 | | | |
| Gain on forgiveness of PPP loan | — | | | (801) | | | |
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| Other income | (30) | | | (876) | | | |
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| Other expenses | 56 | | | 65 | | | |
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| Loss from operations before income taxes | (10,275) | | | (7,887) | | | |
| Provision for (benefit from) income taxes | 4 | | | (1) | | | |
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| Net loss | $ | (10,279) | | | $ | (7,886) | | | |
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| Net loss per common share - basic and diluted: | | | | | |
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| Net loss | $ | (1.27) | | | $ | (1.73) | | | |
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| Weighted average shares of common shares outstanding: | | | | | |
| Basic and diluted | 8,110 | | | 4,561 | | | |
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The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
| | | | | | | | | | | | | |
| | 2022 | | 2021 | | |
| Net loss | $ | (10,279) | | | $ | (7,886) | | | |
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| Other comprehensive loss: | | | | | |
| Foreign currency translation adjustments | — | | | — | | | |
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| Comprehensive loss | $ | (10,279) | | | $ | (7,886) | | | |
The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(amounts in thousands)
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| | | | | | | | | | | | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | | | |
| | Preferred Stock | | Common Stock | | Accumulated
Deficit | |
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| Balance at December 31, 2020 | 2,597 | | | $ | — | | | 3,525 | | | $ | — | | | | | | | $ | 135,113 | | | $ | (3) | | | $ | (130,855) | | | $ | 4,255 | |
| Issuance of common stock under employee stock option and stock purchase plans | — | | | — | | | 79 | | | — | | | | | | | 80 | | | — | | | — | | | 80 | |
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | — | | | — | | | — | | | — | | | | | | | (1) | | | — | | | — | | | (1) | |
| Issuance of common stock and warrants | — | | | — | | | 2,183 | | | — | | | | | | | 9,500 | | | — | | | — | | | 9,500 | |
| Offering costs on issuance of common stock and warrants | — | | | — | | | — | | | — | | | | | | | (969) | | | — | | | — | | | (969) | |
| Issuance of common stock upon the exercise of warrants | — | | | — | | | 237 | | | — | | | | | | | 801 | | | — | | | — | | | 801 | |
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| Issuance of common stock upon the conversion from preferred stock | (1,721) | | | — | | | 344 | | | — | | | | | | | — | | | — | | | — | | | — | |
| Stock-based compensation | — | | | — | | | — | | | — | | | | | | | 429 | | | — | | | — | | | 429 | |
| Net loss | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (7,886) | | | (7,886) | |
| Balance at December 31, 2021 | 876 | | | $ | — | | | 6,368 | | | $ | — | | | | | | | $ | 144,953 | | | $ | (3) | | | $ | (138,741) | | | $ | 6,209 | |
| Issuance of common stock under employee stock option and stock purchase plans | — | | | — | | | 46 | | | — | | | | | | | 6 | | | — | | | — | | | 6 | |
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| Issuance of common stock and warrants | — | | | — | | | 1,313 | | | 1 | | | | | | | 3,499 | | | — | | | — | | | 3,500 | |
| Offering costs on issuance of common stock and warrants | — | | | — | | | — | | | — | | | | | | | (334) | | | — | | | — | | | (334) | |
| Issuance of common stock upon the exercise of warrants | — | | | — | | | 1,465 | | | — | | | | | | | — | | | — | | | — | | | — | |
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| Stock-based compensation | — | | | — | | | — | | | — | | | | | | | 117 | | | — | | | — | | | 117 | |
| Stock issued in exchange transactions | — | | | — | | | 657 | | | — | | | | | | | 304 | | | — | | | — | | | 304 | |
| Net loss | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (10,279) | | | (10,279) | |
| Balance at December 31, 2022 | 876 | | | $ | — | | | 9,849 | | | $ | 1 | | | | | | | $ | 148,545 | | | $ | (3) | | | $ | (149,020) | | | $ | (477) | |
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The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
| | | | | | | | | | | | | |
| | 2022 | | 2021 | | |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (10,279) | | | $ | (7,886) | | | |
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| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
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| Other income | (30) | | | (876) | | | |
| Capitalized interest on promissory notes payable | 40 | | | — | | | |
| Gain on forgiveness of PPP loan | — | | | (801) | | | |
| Depreciation | 159 | | | 188 | | | |
| Stock-based compensation | 117 | | | 429 | | | |
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| Provision for doubtful accounts receivable | 14 | | | 6 | | | |
| Provision for slow-moving and obsolete inventories | 32 | | | 156 | | | |
| Provision for warranties | (111) | | | 68 | | | |
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| Amortization of loan discounts and origination fees | 364 | | | 230 | | | |
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| Loss on impairment | 338 | | | — | | | |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable | 783 | | | 783 | | | |
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| Inventories | 2,358 | | | (2,381) | | | |
| Short-term deposits | 120 | | | 257 | | | |
| Prepaid and other assets | 247 | | | 669 | | | |
| Accounts payable | (1) | | | (423) | | | |
| Accrued and other liabilities | (596) | | | (380) | | | |
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| Deferred revenue | (268) | | | 196 | | | |
| Total adjustments | 3,566 | | | (1,879) | | | |
| Net cash used in operating activities | (6,713) | | | (9,765) | | | |
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| Cash flows from investing activities: | | | | | |
| Acquisitions of property and equipment | (41) | | | (443) | | | |
| Proceeds from the sale of property and equipment | 25 | | | — | | | |
| Net cash used in investing activities | (16) | | | (443) | | | |
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| Cash flows from financing activities: | | | | | |
| Proceeds from the issuance of common stock and warrants | 3,500 | | | 9,500 | | | |
| Proceeds from the exercise of warrants | — | | | 801 | | | |
| Offering costs paid on the issuance of common stock and warrants | (334) | | | (969) | | | |
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| Principal payments under finance lease obligations | (1) | | | (3) | | | |
| Proceeds from exercise of stock options and purchases through employee stock purchase plan | 6 | | | 80 | | | |
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | — | | | (1) | | | |
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| Payments on the 2021 Streeterville Note | (1,640) | | | — | | | |
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| Proceeds from the 2021 Streeterville Note | — | | | 1,515 | | | |
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| Proceeds from the 2022 Streeterville Note | 2,000 | | | — | | | |
| Proceeds from related party promissory notes payable | 800 | | | | | |
| Proceeds from promissory notes payable | 650 | | | — | | | |
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| Payments for deferred financing costs | (114) | | | (30) | | | |
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| Net payments on credit line borrowings - Credit Facilities | (768) | | | (181) | | | |
| Net cash provided by financing activities | 4,099 | | | 10,712 | | | |
(continued on the following page)
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
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| | 2022 | | 2021 | | |
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| Net increase in cash | (2,630) | | | 504 | | | |
| Cash, beginning of year | 2,682 | | | 2,178 | | | |
| Cash, end of year | $ | 52 | | | $ | 2,682 | | | |
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| Supplemental information: | | | | | |
| Cash paid in year for interest | $ | 364 | | | $ | 381 | | | |
| Cash paid in year for income taxes | $ | 1 | | | $ | 4 | | | |
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| Non-cash investing and financing activities: | | | | | |
| Debt-to-equity exchange transactions | $ | 304 | | | $ | — | | | |
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The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products. After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products. We are also evaluating adjacent technologies including Gallium Nitride (“GaN”) based power supplies and additional market opportunities in energy solution products that promote sustainability.
The LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion. We have been experiencing these industry forces in both our military business since 2016 and in our commercial segment, where we once commanded significant price premiums for our flicker-free TLEDs with primarily 10-year warranties. In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively. Despite these efforts, our legacy products continue to face aggressive pricing competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business.
In addition to continuously pursuing cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value. Specific examples of these products we have developed include the RedCap®, our emergency backup battery integrated TLED, EnFocus™, our new dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system for both commercial and residential markets, which as a result of supply chain challenges we now plan to launch in 2023. Similarly, our plans to expand and enhance the performance of our RedCap® product line are also now expected in 2023. We continue to evaluate our sales strategy and believe our go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network to cover territories across the country, and listening to the voice of the customer, will lead to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.
The Company has experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant restructuring efforts were undertaken. The Company replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our board of directors (“Board of Directors”) and the executive team, and recruited new departmental leaders across the Company. The initial cost savings efforts to reduce costs to minimize cash usage included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing.
During 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses. Despite these cost-cutting efforts, the company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market.
At the beginning of 2022, the board of directors appointed our lead independent director to serve as interim chief executive officer and replace our previous chief executive officer. During 2022, the company expanded its cost-reduction efforts, reduced its warehouse square footage, undertook an inventory reduction project, and dramatically reduced head count. In February and September of 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
products industry experience. We reinvested in our MMM sales channel with a strategic hire in May 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of our Company, which are summarized below, are consistent with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect practices appropriate to the business in which we operate.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory excess and obsolescence reserve and warranty claims, the useful lives for property and equipment and stock-based compensation. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material.
Basis of presentation
The Consolidated Financial Statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our operations.
Revenue recognition
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described below. Sales taxes assessed by governmental authorities and collected by us are accounted for on a net basis and are excluded from net sales. Pursuant to ASC 606, Revenue Recognition, contract assets and contract liabilities as of the beginning and ending of the reporting periods must be disclosed. Please find below the breakout of the Company’s contracts:
| | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2022 | | 2021 | | 2020 |
| Gross Accounts Receivable | $ | 471 | | | $ | 1,254 | | | $ | 2,029 | |
| Less: Allowance for Doubtful Accounts | (26) | | | (14) | | | (8) | |
| Net Accounts Receivable | $ | 445 | | | $ | 1,240 | | | $ | 2,021 | |
A disaggregation of product net sales is presented in Note 12, “Product and Geographic Information.”
Cash
At December 31, 2022, we had cash of $0.1 million and at December 31, 2021, we had cash of $2.7 million on deposit with financial institutions located in the United States.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and current inventory levels. The assessment is both quantitative and qualitative. The reduction in warehouse space following the new lease agreement in July 2022 required both significant disposal of highly reserved, excess and obsolete inventory and a focus on selling down inventory on hand throughout 2022. As a result of our initiatives to sell down inventory, we sold some inventory below cost. The difference between cost and sale price was applied to remaining inventory and included in lower of cost or market component of the provision for excess and obsolete inventory calculation. We limited inventory and component purchases to top selling products that maintained high inventory turnover. This resulted in a net decrease of our gross inventory levels of $2.9 million and excess and obsolete inventory reserves of $0.5 million as compared to 2021.
During 2021, we experienced global supply chain and logistics constraints, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components. This resulted in a net increase of our gross inventory levels of $2.4 million. We had an increase of excess inventory reserves of $0.2 million as compared to 2020. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Please refer to Note 5, “Inventories,” for additional information.
Accounts receivable
Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. From time to time, we have utilized a third-party account receivables insurance program with a very high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provided credit-worthiness ratings and metrics that significantly assisted us in evaluating the credit worthiness of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated amount of account receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.
Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.
Income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. At December 31, 2022 and 2021, we have recorded a full valuation allowance against our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value of financial assets and liabilities are measured on a recurring or non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.
We utilize valuation techniques that maximize the use of available market information and generally accepted valuation methodologies. We assess the inputs used to measure fair value using a three-tier hierarchy. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are described below. We classify the inputs used to measure fair value into the following hierarchy:
| | | | | |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
| Level 3 | Unobservable inputs for the asset or liability. |
The carrying amounts of certain financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our revolving credit facilities also approximates fair value.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis. We review and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in a fair value measurement may result in a reclassification between fair value hierarchy levels. There were no reclassifications for all periods presented.
Long-lived assets
Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to 15 years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statements of Operations. Refer to Note 6, “Property and Equipment,” for additional information.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. Refer to Note 6, “Property and Equipment,” for additional information.
Leases
Under the new lease standard, ASC 842, Leases (“Topic 842”), both operating and finance lease are capitalized on the balance sheet. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. A period of time may be described in terms of the amount of use of an identified asset. An operating lease is a contract that permits the use of an asset without transferring
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the ownership rights of said asset. A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, and the lessor meets all other contract obligations. The leased asset is amortized over the life of the lease contract.
Product development
Product development expenses include salaries, contractor and consulting fees, supplies and materials, as well as costs related to other overhead items such as depreciation and facilities costs. Research and development costs are expensed as they are incurred.
Net loss per share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential shares of common stock outstanding during the period. Dilutive potential shares of common stock consist of incremental shares upon the exercise of stock options, warrants and convertible securities, unless the effect would be anti-dilutive.
The following table presents a reconciliation of basic and diluted loss per share computations (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | |
| Numerator: | | | | | |
| Net loss | $ | (10,279) | | | $ | (7,886) | | | |
| | | | | |
| Denominator: | | | | | |
| Basic and diluted weighted average common shares outstanding | 8,110 | | | 4,561 | | | |
| | |
| | | | | |
| | | | | |
As a result of the net loss we incurred for the year ended December 31, 2022, convertible preferred stock representing approximately 175 thousand shares of common stock were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the approximately 1,378,848 shares underlying them, for the purposes of calculating basic EPS. The June 2022 Pre-Funded Warrants were all exercised in July 2022.
As a result of the net loss we incurred for the year ended December 31, 2021, options, warrants and convertible preferred stock representing approximately 51 thousand, 47 thousand and 260 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, have considered the approximately 85 thousand shares underlying them to be outstanding effective December 31, 2021, for the purposes of calculating basic EPS.
Stock-based compensation
We recognize compensation expense based on the estimated grant date fair value under the authoritative guidance. Management applies the Black-Scholes option pricing model to value stock options issued to employees and directors and applies judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. Compensation expense is generally amortized on a straight-line basis over the requisite service period, which is generally the vesting period. See Note 10, “Stockholders’ Equity,” for additional information. Common stock, stock options, and warrants issued to non-employees that are not part of an equity offering are accounted for under the applicable guidance under Accounting Standards Codification (“ASC”) 505-50, “Equity-Based Payments to Non-Employees,” and are generally re-measured at each reporting date until the awards vest.
Advertising expenses
Advertising expenses are charged to operations in the period incurred. They consist of costs for the placement of our advertisements in various media and the costs of demos provided to potential distributors of our products. Advertising expenses were $0.3 million and $0.4 million for the years ended December 31, 2022 and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product warranties
We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten years. One product was sold in 2020 with a twenty year warranty. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims. One contract that expired in 2022 held a warranty of 10 years and this is driving the downward adjustment to existing warranties. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires.
The following table summarizes warranty activity for the periods presented (in thousands):
| | | | | | | | | | | |
| | At December 31, |
| | 2022 | | 2021 |
| Balance at the beginning of the year | $ | 295 | | | $ | 227 | |
| Accruals for warranties issued | 24 | | | (41) | |
| Adjustments to existing warranties | (136) | | | 47 | |
| Settlements made during the year (in kind) | — | | | 62 | |
| Accrued warranty reserve at the end of the period | $ | 183 | | | $ | 295 | |
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. This standard is effective for interim and annual periods starting after December 15, 2022 and generally requires adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
Certain risks and concentrations
Historically, our products were sold through a direct sales model, which included a combination of direct sales employees, electrical and lighting contractors, and distributors. From time to time, we have utilized a third-party accounts receivable insurance and credit assessment company. Although we maintain allowances for potential credit losses that we believe to be adequate, a payment default on a significant sale could materially and adversely affect our operating results and financial condition, although we have mitigated this risk somewhat through the accounts receivable insurance program.
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable, as follows:
•In 2022, two customers accounted for 27% of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 13% and sales to a regional commercial lighting retrofit company accounting for approximately 14% of net sales. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 30% of net sales for the same period. In 2021, two customers accounted for 43% of net sales, with sales to our primary distributor for the U.S. Navy accounting for approximately 30% and sales to a regional commercial lighting retrofit company accounting for approximately 13% of net sales. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 38% of net sales for the same period.
•At December 31, 2022, a distributor to the U.S. Department of Defense accounted for 25% of our net trade accounts receivable, when combined with our net trade accounts receivable to shipbuilders for the U.S. Navy, total net accounts receivable related to U.S. Navy sales is 30% of total net accounts receivable. At December 31, 2021, a distributor to the U.S. Department of Defense accounted for 20% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 36% of our net trade accounts receivable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We require substantial amounts of purchased materials from selected vendors. With specific materials, all of our purchases are from a single vendor. The availability and costs of materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation to other purchasers, interruptions in production by suppliers, global health issues such as the COVID-19 pandemic, and changes in exchange rates and worldwide price and demand levels. Our inability to obtain adequate supplies of materials for our products at favorable prices could have a material adverse effect on our business, financial position, or results of operations by decreasing our profit margins and by hindering our ability to deliver products to our customers on a timely basis. Additionally, certain vendors require advance deposits prior to the fulfillment of orders. Deposits paid on unfulfilled orders totaled $0.6 million and $0.7 million at December 31, 2022 and 2021, respectively.
We have certain vendors who individually represented 10% or more of our total expenditures, or whose net trade accounts payable balance individually represented 10% or more of our total net trade accounts payable, as follows:
•One offshore supplier accounted for approximately 16% of our total expenditures for the twelve months ended December 31, 2022. At December 31, 2022, this same offshore supplier accounted for approximately 36% of our trade accounts payable balance.
•One offshore supplier accounted for approximately 29% of our total expenditures for the twelve months ended December 31, 2021. At December 31, 2021, this same offshore supplier accounted for approximately 60% of our trade accounts payable balance.
NOTE 3. LEASES
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one equipment finance lease containing a bargain purchase option which was exercised in July 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options, to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. As of January 21, 2021, the terms of one of the equipment operating leases was extended through 2026. Additionally, as of March 25, 2022, the Company extended its headquarters real estate operating lease for manufacturing, warehouse and office space commencing July 1, 2022 to reflect a smaller footprint at reduced costs. In accordance with “Topic 842”), as a result of the extensions, the related lease liabilities were remeasured and the right-of-use assets and corresponding lease liabilities were adjusted for each lease at the time of modification. The present value of the lease obligation was calculated using an incremental borrowing rate of 15.93% for the equipment lease and 16.96% for the real estate lease, which was the Company’s blended borrowing rate (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit. The present value of the remaining lease obligation was calculated using an incremental borrowing rate of 7.25% (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its revolving lines of credit at the time the leases were entered into. The weighted average remaining lease term for operating leases is 4.4 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the operating, restructured and finance lease costs recognized in net loss were as follows (in thousands):
| | | | | | | | | | | |
| For the years ended December 31, |
| Components of leases recognized in net income (loss): | 2022 | | 2021 |
| Operating lease cost (income) | | | |
| Sub-lease income | $ | (90) | | | $ | (112) | |
| Lease cost | 501 | | | 558 | |
| Operating lease cost, net | 411 | | | 446 | |
| | | |
| Restructured lease cost (income) | | | |
| Sub-lease income | — | | | (136) | |
| Lease cost | — | | | 110 | |
| Restructured lease income, net | — | | | (26) | |
| | | |
| Finance lease cost | | | |
| Interest of lease liabilities | 1 | | | — | |
| Finance lease cost, net | 1 | | | — | |
| | | |
| Total lease cost, net | $ | 412 | | | $ | 420 | |
| | | |
Supplemental Consolidated Balance Sheet information related to the Company’s operating and finance leases are as follows (in thousands):
| | | | | | | | | | | | |
| At December 31, | |
| | 2022 | | 2021 | |
| Operating Leases | | | | |
| Operating lease right-of-use assets | $ | 1,180 | | | $ | 292 | | |
| | | | |
| | | | |
| | | | |
| Operating lease liabilities | 1,227 | | | 351 | | |
| | | | |
| | | | |
| | | | |
| Finance Leases | | | | |
| Property and equipment | 13 | | | 13 | | |
| Allowances for depreciation | (13) | | | (12) | | |
| Finance lease assets, net | — | | | 1 | | |
| | | | |
| Finance lease liabilities | — | | | 1 | | |
| Total finance lease liabilities | $ | — | | | $ | 1 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments required under operating and finance leases for each of the years 2023 through 2027 are as follows (in thousands):
| | | | | | | | |
| Operating Leases | | | |
| Jan 2023 to Dec 2023 | $ | 386 | | | | |
| Jan 2024 to Dec 2024 | 379 | | | | |
| Jan 2025 to Dec 2025 | 385 | | | | |
| Jan 2026 to Dec 2026 | 390 | | | | |
| Jan 2027 to Dec 2027 | 197 | | | | |
| | | | |
| Total future undiscounted lease payments | 1,737 | | | | |
| Less imputed interest | (510) | | | | |
| Total lease obligations | $ | 1,227 | | | | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | |
| Years ended December 31, | |
| | 2022 | | 2021 | |
| Supplemental Cash Flow Information: | | | | |
| Cash paid, net, for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | $ | 423 | | | $ | 532 | | |
| Operating cash flows from restructured leases | $ | — | | | $ | 35 | | |
| Financing cash flows from finance leases | $ | 1 | | | $ | 3 | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RESTRUCTURING
Due to our financial performance in 2022 and 2021, including net losses of $10.3 million and $7.9 million, respectively, and total cash used in operating activities of $6.7 million and $9.8 million, respectively, we determined that substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2022.
As a result of the restructuring actions and initiatives described in Note 1, we have tailored our operating expenses to be more in line with our expected sales volumes, however, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2022.
Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage both shortages of available components and longer lead times in obtaining components while balancing the development and implementation of an inventory reduction plan. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport products from our third-party suppliers to our facility. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:
•obtaining financing from traditional or non-traditional investment capital organizations or individuals;
•obtaining funding from the sale of our common stock or other equity or debt instruments; and
•obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:
•additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our Board of Directors; and
•the current environment in the capital markets and volatile interest rates, combined with our capital constraints, may prevent us from being able to obtain adequate debt financing.
Along with the new additions to our Board of Directors, we hired a permanent Chief Executive Officer in September 2022, following a period of interim leadership by our Lead Independent Director after the departure of our previous Chief Executive Officer in February 2022 and Chief Financial Officer and Chief Operating Officer in May 2022.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to ensure adequate external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, could provide us with an ability to finance our operations through the next twelve months and may mitigate the substantial doubt about our ability to continue as a going concern.
On December 21, 2021, we received a letter from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) notifying us that, as a result of the resignation of a director, as previously disclosed, from the Board of Directors and the Audit and Finance Committee, we were not in compliance with Nasdaq Listing Rule 5605, which requires that our Audit and Finance Committee be comprised of at least three directors, all of whom are independent pursuant to the rules of Nasdaq and applicable law. The notification letter had no immediate effect on our listing on the Nasdaq Capital Market. The letter further provided that, pursuant to Nasdaq Listing Rule 5605(c)(4), we were entitled to a cure period to regain compliance with Nasdaq Listing Rule 5605. On February 24, 2022, we announced the appointment of two additional independent directors, one of which, was appointed to fill the vacancy on the Audit and Finance Committee, bringing us into compliance with Nasdaq Listing Rule 5605.
On August 23, 2022, we received a letter from the Staff notifying us that we are not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price for our common stock was below the minimum $1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until February 20, 2023, to regain compliance with the Bid Price Rule. During the initial compliance period, our common stock continued to trade on the Nasdaq Capital Market, but did not satisfy the Bid Price Rule. On February 21, 2023, we received written notification (the “Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were ineligible to obtain a second 180 calendar day period to regain compliance because we did not meet the Nasdaq Capital Market’s minimum $5,000,000 Stockholders’ Equity initial listing requirement as of September 30, 2022. Pursuant to the Notification, our common stock is subject to delisting from Nasdaq pending our opportunity to request a hearing before the Nasdaq Hearings Panel (the “Panel”). The Company intends to diligently pursue an appeal of the Notification before the Panel and regain compliance with the Bid Price Rule. Under Nasdaq rules, the delisting of our common stock will be stayed during the pendency of the appeal and during such time, our common stock will continue to be listed on Nasdaq. If we had not requested a hearing before the Panel by February 28, 2023, our common stock would have been scheduled for delisting at the opening of business on March 2, 2023. On February 24, 2023, we submitted our request for an appeal before the Panel. There can be no assurance that such appeal will be successful or that we will be able to regain compliance with the Bid Price Rule or maintain compliance with other Nasdaq listing requirements. If our appeal is denied or if we fail to regain compliance with Nasdaq’s continued listing standards during any period granted by the Panel, our common stock will be subject to delisting from Nasdaq.
On November 16, 2022, we received a letter from the Staff notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million 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 Form 10-Q for the Quarterly Period Ended September 30, 2022 filed on November 10, 2022 reflected that our stockholders’ equity as of September 30, 2022 was $1.5 million. Based on our timely submission of our plan to regain compliance, Nasdaq granted us an extension through May 15, 2023 to regain compliance with the Minimum Stockholders’ Equity Rule.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value and consists of the following (in thousands):
| | | | | | | | | | | |
| | At December 31, |
| | 2022 | | 2021 |
| Raw materials | $ | 3,347 | | | $ | 3,882 | |
| Finished goods | 4,656 | | | 7,034 | |
| Reserve for excess, obsolete, and slow-moving inventories | (2,527) | | | (3,050) | |
| Inventories, net | $ | 5,476 | | | $ | 7,866 | |
The following is a roll-forward of the reserves for excess, obsolete, and slow-moving inventories (in thousands):
| | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
| Beginning balance | $ | (3,050) | | | $ | (2,894) | |
| Accrual | (312) | | | (281) | |
| Reduction due to sold inventory | 323 | | | 125 | |
| Write-off for disposed inventory | 512 | | | — | |
| Reserves for excess, obsolete, and slow-moving inventories | $ | (2,527) | | | $ | (3,050) | |
As part of our expense reduction initiatives, we significantly decreased our warehouse space beginning in the third quarter of 2022. In connection with the space reduction, in the second quarter of 2022, we began disposing of a substantial portion of our excess and obsolete commercial finished goods inventory that was highly reserved, which effort continued into the fourth quarter of 2022. The scraping of inventory primarily drove the decrease in excess inventory reserves of $0.5 million as compared to 2021. We also focused on selling down inventory on hand and limited inventory and component purchases to top selling products with expected higher turnover. This resulted in a net decrease of our gross inventory levels of $2.9 million.
We experienced significant global supply chain and logistics constraints during 2021, which impacted our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components. This resulted in a net increase of our gross inventory levels of $2.4 million and excess inventory reserves of $0.2 million as compared to 2020.
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of the following (in thousands):
| | | | | | | | | | | |
| | At December 31, |
| | 2022 | | 2021 |
Equipment (useful life 3 - 15 years) | $ | 1,061 | | | $ | 1,308 | |
Tooling (useful life 2 - 5 years) | 190 | | | 384 | |
Vehicles (useful life 5 years) | — | | | 83 | |
Furniture and fixtures (useful life 5 years) | — | | | 86 | |
Computer software (useful life 3 years) | — | | | 1,194 | |
| Leasehold improvements (the shorter of useful life or lease life) | 141 | | | 169 | |
| Finance lease right-of-use asset | — | | | 13 | |
UV - Robots (useful life 5 years) | — | | | 105 | |
| Construction in progress | — | | | 135 | |
| Property and equipment at cost | 1,392 | | | 3,477 | |
| Less: accumulated depreciation | (1,316) | | | (2,802) | |
| Property and equipment, net | $ | 76 | | | $ | 675 | |
Depreciation expense was $0.2 million for both of the years ended December 31, 2022 and 2021. During the third quarter of 2022 it was determined that the mUVeTM ultraviolet-C light disinfection robots were no longer of use and the net book value of $76 thousand was recorded as a loss on impairment of fixed assets. During the fourth quarter, impairment charges totaling $258 thousand were recorded, which primarily relates to other assets disposed or otherwise abandoned following a review by management. Impairment charges were based on level 3 inputs, including estimated residual or sale value to market participants, in determining fair value. As impaired assets relate primarily to the Company and/or its discontinued products, management determined fair value was insignificant. For the year ended December 31, 2022, the Company recognized a loss of $334 thousand on the impairment of fixed assets. No such loss was recorded during the year ended December 31, 2021.
NOTE 7. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| | At December 31, |
| | 2022 | | 2021 |
| Prepaid insurance | $ | 63 | | | $ | 131 | |
| Prepaid expenses | 130 | | | 253 | |
| Prepaid rent | 39 | | | 74 | |
| Short-term deposits - non-inventory | — | | | 18 | |
| | | |
| | | |
| | | |
| Other | — | | | 3 | |
| Total prepaid and other current assets | $ | 232 | | | 479 | |
NOTE 8. DEBT
Credit Facilities
On August 11, 2020, we entered into two debt financing arrangements (together, the “Credit Facilities”) that allowed for expanded borrowing capacity at a lower blended borrowing cost. The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (the “IF Lender”). Borrowings under the Inventory Facility are permitted up to the lower of (i) $3.0 million, which was subsequently increased to $3.5 million in April 2022 and reduced to $500 thousand in January 2023 as described below, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at 75% of inventory costs or 85% of the inventory net orderly liquidation value, less the availability reserves. On January 18, 2023, the Company and the IF Lender entered into an
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amendment to restructure and pay down the Inventory Facility. Please refer to Note 15, “Subsequent Events” for further detail. As of December 31, 2022, the terms of the Inventory Facility were as follows. The outstanding indebtedness under the Inventory Facility accrues at an annual rate equal to the greater of (i) 5.75% and (ii) 4.00% plus the three-month LIBOR rate (4.77% and 0.21% at December 31, 2022 and 2021, respectively) and is also subject to a service fee of 1% per month. The annualized interest rate at December 31, 2022 and 2021, which includes interest fees, the annual facility fee, bank fees and other miscellaneous lender fees, was 25.5% and 22.4%, respectively. The Inventory Facility’s interest and service fees combined amount is subject to a minimum monthly fee of $18 thousand. There would be no breakage fee for the Company for the Inventory Facility if the Company were to refinance it with an American Bankers Association (“ABA”) equivalent institution. The Inventory Facility is secured by substantially all of the present and future assets of the Company and is also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender (defined below). The Inventory Facility would have matured on August 11, 2023, subject to early termination upon 90 days’ notice and otherwise in accordance with the terms of the Inventory Loan Agreement.
The second arrangement is a receivables financing facility (the “Receivables Facility”) pursuant to the Loan and Security Agreement (the “Receivables Loan Agreement”) between the Company and Factors Southwest L.L.C. (d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”). Borrowings under the Receivables Facility are permitted up to the lower of (i) $2.5 million or (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at 90% of the face value of such accounts receivable, less availability reserves, if any. On February 7, 2023, the Company completed the termination of its Receivables Facility. Please refer to Note 15, “Subsequent Events” for further detail.
As of December 31, 2022, the terms of the Receivables Facility were as follows. Interest on outstanding indebtedness under the Receivables Facility accrues at an annual rate equal to (i) the highest prime rate announced from time to time by the Wall Street Journal (7.50% and 3.25% at December 31, 2022 and 2021, respectively) plus (ii) 2%. At December 31, 2022 and 2021, the annualized interest rate, which includes interest fees and the annual facility fee, was 10.1% and 8.0%, respectively. The annualized interest rate on the collateral management fee was 6.3% and 5.9% at December 31, 2022 and 2021, respectively. The Receivables Facility is also secured by substantially all of the present and future assets of the Company and is also governed by an intercreditor agreement among the Company, the IF Lender and the RF Lender. A $25 thousand, or 1%, facility fee was charged at closing. There would be no breakage fee for the Company for the Receivables Facility if the Company were to refinance it with an ABA equivalent institution.
Borrowings under the Inventory Facility were $1.4 million and $1.2 million at December 31, 2022 and 2021, respectively. Borrowings under the Receivables Facility were less than $0.1 million and $1.0 million at December 31, 2022 and 2021, respectively. Borrowings under the Credit Facilities are recorded in the Consolidated Balance Sheet as of December 31, 2022 and 2021 as a current liability under the caption “Credit line borrowings, net of origination fees.” Outstanding balances include unamortized net issuance costs totaling $47 thousand and $84 thousand for the Inventory Facility and $15 thousand and $24 thousand for the Receivables Facility as of December 31, 2022 and 2021, respectively.
Promissory Notes
During the third and fourth quarters of the year ended December 31, 2022, we entered into short-term unsecured promissory notes (the “2022 Promissory Notes”) with Mei-Yun (Gina) Huang, Jay Huang, and Tingyu Lin. Ms. Huang is a member of the Company’s Board of Directors and Jay Huang became a member of the Board of Directors in January 2023. The total liability for the 2022 Promissory Notes was $1.5 million at December 31, 2022. All of the 2022 Promissory Notes were exchanged for common stock on January 17, 2023. Please refer to Note 14, “Related Party Transactions” and Note 15, Subsequent Events” for further detail.
The following summarizes the 2022 Promissory Notes at December 31, 2022:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 | |
| | G. Huang | | J. Huang | | J. Huang | | G. Huang | | J. Huang | | J. Huang | | T. Lin | Total |
| Date entered | | September 16, 2022 | | October 25, 2022 | | November 4, 2022 | | November 9, 2022 | | December 6, 2022 | | December 21, 2022 | | December 31, 2022 | |
| Term | | 9 months | | 9 months | | 9 months | | 9 months | | 9 months | | 9 months | | 9 months | |
| Principal amount | | $450,000 | | $50,000 | | $250,000 | | $350,000 | | $200,000 | | $100,000 | | $50,000 | $1,450,000 |
| Maturity date | | June 16, 2023 | | July 25, 2023 | | August 4, 2023 | | August 9, 2023 | | September 6, 2023 | | September 21, 2023 | | September 30, 2023 | |
| Interest rate | | 8 | % | | 8 | % | | 8 | % | | 8 | % | | 8 | % | | 8 | % | | 8 | % | |
| Default interest rate | | 10 | % | | 10 | % | | 10 | % | | 10 | % | | 10 | % | | 10 | % | | 10 | % | |
| Outstanding Amount | | $460,455 | | $50,734 | | $253,123 | | $353,989 | | $201,096 | | $100,219 | | $50,011 | $1,469,627 |
Streeterville Notes
2022 Streeterville Note
On April 21, 2022, we entered into a note purchase agreement with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $2.0 million (the “2022 Streeterville Note”). The 2022 Streeterville Note was issued with an original issue discount of $215 thousand and Streeterville paid a purchase price of approximately $1.8 million for the 2022 Streeterville Note, from which the Company paid $15 thousand to Streeterville for Streeterville’s transaction expenses.
The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at 8% per annum, compounded daily, on the outstanding balance. On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and extend its maturity date to December 1, 2024. We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $500 thousand by January 20, 2023 (which amount has been paid) and $250 thousand by July 14, 2023. Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we will make twelve monthly repayments of approximately $117 thousand each. We have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled. Please refer to Note 15, “Subsequent Events” for further detail.
The total liability for the 2022 Streeterville Note, net of discount and financing fees, was $2.0 million at December 31, 2022.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by 15% as of the date of such delisting.
2021 Streeterville Note
On April 27, 2021, we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $1.7 million (the “2021 Streeterville Note”). The 2021 Streeterville Note was issued with an original issue discount of $194 thousand and Streeterville paid a purchase price of $1.5 million for the 2021 Streeterville Note, after deduction of $15 thousand of Streeterville’s transaction expenses. The 2021 Streeterville Note had a maturity date of April 27, 2023, and accrued interest at 8% per annum, compounded daily, on the outstanding balance.
Beginning on November 1, 2021, Streeterville could require the Company to redeem up to $205 thousand of the 2021 Streeterville Note in any calendar month. The Company had the right on three occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company increased the amount outstanding under the Streeterville Note by 1.5%. The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022. The Company and Streeterville agreed to exchange common stock, priced at-the-market, for the required redemptions in October 2022 and December 2022, totaling $305 thousand converted to equity. These exchanges satisfied the redemption notices provided by Streeterville, and following the December 2022 exchange, the 2021 Streeterville Note was paid in full. We wrote off $100 thousand in remaining original issue discount costs at that time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total liability for the 2021 Streeterville Note, net of discount and financing fees, was $1.7 million at December 31, 2021. Unamortized loan discount and debt issuance costs were $43 thousand at December 31, 2021.
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank National Association (“KeyBank”) in the amount of approximately $795 thousand, pursuant to the PPP under Division A of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The funds were received on April 20, 2020 and accrued interest at a rate of 1% per annum. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The entire principal balance and interest were forgiven by the Small Business Administration on February 11, 2021. The $801 thousand forgiveness income was recorded as other income in the Consolidated Statements of Operations during the year ended December 31, 2021.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of December 31, 2022, we had approximately $0.6 million in outstanding purchase commitments for inventory, of which the majority is expected to ship in the first quarter of 2023.
NOTE 10. STOCKHOLDERS’ EQUITY
June 2022 Private Placement
In June 2022, we completed the June 2022 Private Placement with certain institutional investors for the sale of 1,313,462 shares of our common stock at a purchase price of $1.30 per share. We also sold to the same institutional investors (i) June 2022 Pre-Funded Warrants to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. In connection with the June 2022 Private Placement, we paid the placement agent commissions of $252 thousand, plus $35 thousand in expenses, and we also paid legal, accounting and other fees of $47 thousand. Total offering costs of $334 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2022. Net proceeds to us from the June 2022 Private Placement were approximately $3.2 million. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the 1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.
In July 2022, all of the June 2022 Pre-Funded Warrants were exercised. As of December 31, 2022, June 2022 Warrants to purchase an aggregate of 2,692,310 shares of common stock remained outstanding, with an exercise price of $1.30 per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $3.5 million in the aggregate.
December 2021 Private Placement
In December 2021, we completed the December 2021 Private Placement with certain institutional investors for the sale of 1,193,185 shares of our common stock at a purchase price of $3.52 per share. We also sold to the same institutional investors (i) December 2021 Pre-Funded Warrants to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of 1,278,413 shares of common stock at an exercise price of $3.52 per share. We paid the placement agent commission of $360 thousand plus $42 thousand in expenses in connection with the December 2021 Private Placement and we also paid legal, accounting and other fees of $97 thousand related to the December 2021 Private Placement. Total offering costs of $499 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Consolidated Balance Sheet as of December 31, 2021. Net proceeds from the December 2021 Private Placement were approximately $4.0 million. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, have considered the 85,228 shares underlying them to be outstanding effective December 16, 2021, for the purposes of calculating basic EPS.
In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of December 31, 2022, December 2021 Warrants to purchase an aggregate of 1,278,413 shares of common stock remained outstanding, with an exercise price of $3.52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
per share. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.
June 2021 Equity Offering
In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share. 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 $469 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million.
January 2020 Equity Offering
In January 2020, we completed the January 2020 Equity Offering, pursuant to which we issued the January 2020 Warrants. January 2020 Warrants to purchase an aggregate of 229,414 shares of common stock were outstanding at December 31, 2022 and 2021, with a weighted average exercise price of $3.67 per share. During the year ended December 31, 2022, no January 2020 Warrants issued were exercised and did not result in any proceeds. During the twelve months ended December 31, 2021, 237,892 January 2020 Warrants were exercised, resulting in total proceeds of $801 thousand. The exercise of the remaining January 2020 Warrants outstanding could provide us with cash proceeds of up to $841 thousand in the aggregate.
As of December 31, 2022 and 2021, we had the following outstanding January 2020 Warrants to purchase shares of common stock:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | As of December 31, 2021 | | | | |
| Number of Underlying Shares | | Exercise Price | | Expiration |
| Investor Warrants | 187,734 | | 187,734 | | $3.3700 | | January 13, 2025 |
| Placement Agent Warrants | 41,680 | | 41,680 | | $4.9940 | | January 13, 2025 |
| 229,414 | | 229,414 | | | | |
Preferred Stock
On March 29, 2019 we issued $1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain investors in a private placement exempt from registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5.0% per annum until June 30, 2019 and at a rate of 10.0% thereafter.
Pursuant to the terms of the Convertible Notes, on January 16, 2020, following approval by our stockholders of certain amendments to the Certificate of Incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon at the date of conversion (totaling $1.8 million) were converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Preferred Stock, which is convertible on a one-for-five basis into shares of our common stock. During the year ended December 31, 2020, 111,548 shares of the Series A Preferred Stock were converted into 22,310 shares of common stock. During the year ended December 31, 2021, 1,721,023 shares of Series A Preferred Stock were converted into 344,205 shares of common stock. The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group (under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC (“Fusion Park”) and 5 Elements Global Fund L.P. (controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer and former member of the Board of Directors), as well as Brilliant Start Enterprise Inc. (“Brilliant Start”) and Jag International Ltd. (controlled affiliates of Gina Huang, a current member of the Company's Board of Directors). Upon conversion of their respective shares of Series A Preferred Stock in 2021, Fusion Park and Brilliant Start received 184,851 and 159,354 shares, respectively, of the Company’s common stock.
The Series A Preferred Stock was created by the filing of the Original Series A Certificate of Designation. On January 15, 2020 with prior stockholder approval, the Company amended the Certificate of Incorporation to increase the number of authorized shares of preferred stock to 5,000,000. The Original Series A Certificate of Designation was also amended on January 15, 2020, to increase the number of shares of preferred stock designated as Series A Preferred Stock to 3,300,000 (the Original Series A Certificate of Designation, as so amended, the “Series A Certificate of Designation”).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes equal to 11.07% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. On March 29, 2019, the Company also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of undesignated preferred stock available for designation as Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contained customary representations and warranties and provided for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
Stock-based compensation
On March 18, 2020, our Board of Directors approved the Energy Focus, Inc. 2020 Stock Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the stockholders at our annual meeting on September 17, 2020, after which no further awards could be issued under the Energy Focus, Inc. 2014 Stock Incentive Plan (the “2014 Plan”). The 2020 Plan initially allows for awards up to 350,000 shares of common stock and expires on September 17, 2030. On June 22, 2022, the stockholders approved an amendment and restatement of the 2020 Plan that increased the shares available for issuance under the 2020 Plan by an additional 300,000 shares. At December 31, 2022, 480,741 shares remain available to grant under the 2020 Plan.
Effective September 12, 2022, as a material inducement to our Chief Executive Officer’s acceptance of employment, we granted her an initial stock option award to purchase 150,000 shares of the Company’s common stock (the “Inducement Option Award”), which Inducement Option Award will generally vest over a four-year period, with 25% generally vesting on the first anniversary of the grant date, and the remainder generally vesting in substantially equal monthly installments for 36 months thereafter. The Inducement Option Award, which was intended to be an inducement award under Rule 5635(c)(4) of the Nasdaq Stock Market Listing Rules, was effective on September 12, 2022 and has a per share exercise price equal to the closing price of a share of the Company’s common stock on such date.
We have awards outstanding pursuant to the 2014 Plan and one other historical equity-based compensation plan, however no new awards may be granted under these plans. Generally, stock options are granted at fair market value and expire ten years from the grant date. Employee grants generally vest in three or four years, while grants to non-employee directors generally vest in one year. The specific terms of each grant are determined by our Board of Directors.
Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize compensation expense using a straight-line amortization method.
The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands):
| | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2022 | | 2021 | | |
| Cost of sales | $ | 2 | | | $ | 9 | | | |
| Product development | 15 | | | 14 | | | |
| Selling, general, and administrative | 100 | | | 406 | | | |
| Total stock-based compensation | $ | 117 | | | $ | 429 | | | |
At December 31, 2022 and 2021, we had unearned stock compensation expense of $0.1 million and $0.3 million, respectively. These costs will be charged to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 2.8 years as of December 31, 2022 and 2.7 years as of December 31, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows: | | | | | | | | | | | | | |
| | 2022 | | 2021 | | |
| Fair value of options issued | $ | 0.77 | | | $ | 3.92 | | | |
| Exercise price | $ | 0.95 | | | $ | 5.07 | | | |
| Expected life of option (in years) | 6.1 | | 6.2 | | |
| Risk-free interest rate | 3.0 | % | | 0.9 | % | | |
| Expected volatility | 104.0 | % | | 96.3 | % | | |
| Dividend yield | 0.00 | % | | 0.00 | % | | |
We utilize the simplified method as provided by ASC 718-10 to calculate the expected stock option life. Under ASC 718-10, the expected stock option life is based on the midpoint between the vesting date and the end of the contractual term of the stock option award. The use of this simplified method in place of using the actual historical exercise data is allowed when a stock option award meets all of the following criteria: the exercise price of the stock option equals the stock price on the date of grant; the exercisability of the stock option is only conditional upon completing the service requirement through the vesting date; employees who terminate their service prior to the vesting date forfeit their stock options; employees who terminate their service after vesting are granted a limited time period to exercise their stock options; and the stock options are nontransferable and non-hedgeable. We believe that our stock option awards meet all of these criteria. The estimated expected life of the option is calculated based on contractual life of the option, the vesting life of the option, and historical exercise patterns of vested options. The risk-free interest rate is based on U.S. treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the option. The volatility estimates are calculated using historical volatility of our stock price calculated over a period of time representative of the expected life of the option. We have not paid dividends in the past, and do not expect to pay dividends over the corresponding expected term as of the grant date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options outstanding under all plans at December 31, 2022 have a contractual life of ten years, and vesting periods between one and four years. A summary of option activity under all plans was as follows:
| | | | | | | | | | | |
| Number of
Options | | Weighted
Average
Exercise Price
Per Share |
| | | |
| | | |
| | | |
| | | |
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| | | |
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| | | |
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| | | |
| | | |
| Outstanding at December 31, 2020 | 221,450 | | | 3.45 | |
| Granted | 88,240 | | | 5.07 | |
| Cancelled | (36,706) | | | 5.35 | |
| Expired | (1,650) | | | 49.18 | |
| Exercised | (4,225) | | | 1.96 | |
| Outstanding at December 31, 2021 | 267,109 | | | $ | 3.46 | |
| Granted | 226,960 | | | 0.95 |
| Cancelled | (160,778) | | | 2.99 | |
| Expired | (2,233) | | | 2.78 | |
| Exercised | (250) | | | 1.45 | |
| Outstanding at December 31, 2022 | 330,808 | | | $ | 1.97 | |
| | | |
| Vested and expected to vest at December 31, 2022 | 276,267 | | | $ | 2.13 | |
| | | |
| Exercisable at December 31, 2022 | 117,542 | | | $ | 3.13 | |
| | | |
The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options. 250 options were exercised during 2022 and 4,225 options were exercised during 2021. All outstanding equity awards were out of the money as of December 31, 2022.
The options outstanding at December 31, 2022 have been segregated into ranges for additional disclosure as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OPTIONS OUTSTANDING | | OPTIONS EXERCISABLE |
Range of Exercise Prices | | Number of Shares Outstanding | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Number of Shares Exercisable | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price |
| $0.42 | — | $0.74 | | 2,640 | | | 9.6 | | $ | 0.72 | | | — | | | — | | | $ | — | |
| $0.75 | — | $0.78 | | 150,000 | | | 9.7 | | 0.75 | | | — | | | — | | | — | |
| $0.79 | — | $1.80 | | 69,284 | | | 7.0 | | 1.46 | | | 32,204 | | | 4.8 | | 1.49 | |
| $1.81 | — | $2.25 | | 48,125 | | | 5.2 | | 2.10 | | | 48,125 | | | 5.2 | | 2.10 | |
| $2.26 | — | $27.35 | | 60,759 | | | 6.9 | | 5.53 | | | 37,213 | | | 6.1 | | 5.88 | |
| | | | | 330,808 | | | 8.0 | | $ | 1.97 | | | 117,542 | | | 5.4 | | $ | 3.13 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
In 2015, we began issuing restricted stock units to certain employees and non-employee Directors under the 2014 Plan with vesting periods ranging from one to four years from the grant date. In 2020, we began issuing restricted stock units to certain employees and non-employee Directors under the 2020 Plan with vesting periods ranging from one to four years.
The following table shows a summary of restricted stock unit activity:
| | | | | | | | | | | | | |
| | | | Restricted Stock Units Outstanding | | Weighted
Average
Grant Date
Fair Value |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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| | | | | |
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| At December 31, 2020 | | | 4,480 | | | $ | 8.64 | |
| Granted | | | 50,000 | | | 5.26 | |
| Vested | | | (52,080) | | | 5.46 | |
| | | | | |
| At December 31, 2021 | | | 2,400 | | | $ | 7.14 | |
| Granted | | | 50,000 | | | 1.26 | |
| Vested | | | (40,800) | | | 1.51 | |
| | | | | |
| At December 31, 2022 | | | 11,600 | | | $ | 1.59 | |
Employee stock purchase plans
In September 2013, our stockholders approved the 2013 Employee Stock Purchase Plan (the “2013 Plan”) to replace the 1994 prior purchase plan. A total of 100,000 shares of common stock were provided for issuance under the 2013 Plan. The 2013 Plan permits eligible employees to purchase common stock through payroll deductions at a price equal to the lower of 85 percent of the fair market value of our common stock at the beginning or end of the offering period. Employees may end their participation at any time during the offering period, and participation ends automatically upon termination of employment with us. During 2022 and 2021, employees purchased 3,971 and 22,000 shares, respectively. At December 31, 2022, 28,523 shares remained available for purchase under the 2013 Plan.
NOTE 11. INCOME TAXES
We file income tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2019. Our practice is to recognize interest and penalties related to income tax matters in income tax expense when and if they become applicable. At December 31, 2022 and 2021, respectively, there were no accrued interest and penalties related to uncertain tax positions.
The following table shows the components of the provision for income taxes (in thousands):
| | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2022 | | 2021 | | |
| Current: | | | | | |
| | | | | |
| State | $ | 4 | | | $ | (1) | | | |
| | | | | |
| Deferred: | | | | | |
| U.S. Federal | — | | | — | | | |
| | | | | |
| | | | | |
| Provision for (benefit from) income taxes | $ | 4 | | | $ | (1) | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the (benefit from) provision for income taxes reflected in our Consolidated Statements of Operations are as follows:
| | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2022 | | 2021 | | |
| U.S. statutory rate | 21.0 | % | | 21.0 | % | | |
| State taxes (net of federal tax benefit) | 1.3 | | | 9.7 | | | |
| Valuation allowance | (18.2) | | | (32.7) | | | |
| | | | | |
| Other | (4.1) | | | 2.0 | | | |
| | 0.0 | % | | 0.0 | % | | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):
| | | | | | | | | | | | | |
| | At December 31, |
| | 2022 | | 2021 | | |
| Accrued expenses and other reserves | $ | 1,455 | | | $ | 1,550 | | | |
| Right-of-use-asset | (294) | | | (73) | | | |
| Lease liabilities | 306 | | | 88 | | | |
| Tax credits, deferred R&D, and other | 438 | | | 49 | | | |
| Net operating loss | 18,856 | | | 17,318 | | | |
| Valuation allowance | (20,764) | | | (18,932) | | | |
| Net deferred tax assets | $ | — | | | $ | — | | | |
In 2022, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $9.2 million additional federal net operating loss we recognized for the year. In 2021, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $9.6 million additional federal net operating loss we recognized for the year.
At December 31, 2022, we had federal and state net operating loss carry-forwards (“NOLs”) of approximately $132.4 million for federal income tax purposes ($77.6 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $78.0 million of the $132.4 million is available after the application of IRC Section 382 limitations. As a result of the Tax Cuts and Job Act of 2017 (the “Tax Act”), NOLs generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These NOLs can no longer be carried back, but they can be carried forward indefinitely. The $9.2 million and $9.6 million in federal net operating losses generated in December 31, 2022 and 2021 will be subject to the new limitations under the Tax Act. If not utilized, the NOLs generated prior to December 31, 2017 of $37.5 million will begin to expire in 2024 for federal purposes and have begun to expire for state and local purposes.
Since we believe it is more likely than not that the benefit from NOLs will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 2022 and 2021, respectively. We had no net deferred tax liabilities at December 31, 2022 or 2021, respectively. In 2021, we recognized various states tax benefits as a result of the adjustment from the 2020 provision to the actual tax on the 2020 returns that were filed in 2020.
The CARES Act was enacted on March 27, 2020 and the Consolidated Appropriations Act (the “Relief Act”) was enacted on December 27, 2020 in the United States. The key provisions of the CARES Act and the Relief Act, as applicable to the Company, include the following:
The ability to use NOLs to offset income without the 80% taxable income limitation enacted as part of the Tax Cuts and Jobs Act (“TCJA”) of 2017, and to carry back NOLs to offset prior year income for five years. These are temporary provisions that apply to NOLs incurred in 2018, 2019 or 2020 tax years. We did not recognize any tax benefit for the year ended December 31, 2021 related to our ability to carry back prior year losses, as well as projected current year losses, under the CARES Act to years with the previous 35% tax rate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ability to claim a current deduction for interest expense up to 50% of Adjusted Taxable Income (“ATI”) for tax years 2019 and 2020. This limitation was previously 30% of ATI pursuant to the Tax Act, and will revert to 30% after 2020. The Company has no current interest expense limitation.
In addition to the aforementioned provisions, the CARES Act also provided the following non-income tax provisions as applicable to the Company:
•The ability to defer the payment of the employer portion of social security taxes incurred between March 27, 2020 and December 31, 2020, with 50% of the deferred amount to be paid by December 31, 2021 and the remaining 50% to be paid by December 31, 2022.
•In the year ended December 31, 2022, the Company paid $77 thousand of payroll taxes previously deferred from the year ended December 21, 2021.
•The ability to claim an Employee Retention Tax Credit (“ERTC”), which is a refundable payroll tax credit, subject to certain limitations. Refer to Note 13, “Other Income” for details.
•The Company received approximately $795 thousand in PPP loans, which were forgiven in 2021. The CARES Act provides that the loan forgiveness is tax-exempt for federal purposes. Refer to Note 8, “Debt” for details.
NOTE 12. PRODUCT AND GEOGRAPHIC INFORMATION
We focus our efforts on the sale of LED lighting and controls products in the commercial market and MMM, and began to expand our offerings into the consumer market in the fourth quarter of 2021. Our products are sold primarily in the United States through a combination of direct sales employees, lighting agents, independent sales representatives and distributors. We currently operate in a single industry segment, developing and selling our LED lighting products and controls into the MMM and commercial markets.
The following table provides a breakdown of product net sales for the years indicated (in thousands):
| | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | |
| Commercial products | $ | 3,746 | | | $ | 4,682 | | | |
| MMM products | 2,222 | | | 5,183 | | | |
| | | | | |
| Total net sales | $ | 5,968 | | | $ | 9,865 | | | |
A geographic summary of net sales is as follows (in thousands):
| | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2022 | | 2021 | | |
| United States | $ | 5,944 | | | $ | 9,712 | | | |
| International | 24 | | | 153 | | | |
| Total net sales | $ | 5,968 | | | $ | 9,865 | | | |
At December 31, 2022 and 2021, approximately 100% of our long-lived assets, which consist of property and equipment, were located in the United States.
NOTE 13. OTHER INCOME
Employee Retention Tax Credit
The CARES Act, which was enacted on March 27, 2020, provides an ERTC that is a refundable tax credit against certain employer taxes. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021.
For purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
immediately preceding quarter to the corresponding calendar quarter in 2019. The credit is taken against the Company’s share of Social Security Tax when the Company’s payroll provider files, or subsequently amends the applicable quarterly employer tax filings.
Under the amended guidelines, we were eligible to receive the ERTC for the second and third quarters of 2021. As part of the filing of our employer tax filings for the third quarter of 2021, we applied for and received a refund of $431 thousand, and we amended our filing for the second quarter of 2021, for which we expect to receive an additional refund of approximately $445 thousand. These amounts are recorded as other income in the Consolidated Statements of Operations during the year ended December 31, 2021, and the $445 thousand expected receivable is included as a receivable for claimed ERTC in the Consolidated Balance Sheet as of December 31, 2022 and 2021.
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank in the amount of approximately $795 thousand, pursuant to the PPP under the CARES Act, which was enacted on March 27, 2020. The funds were received on April 20, 2020 and accrued interest at a rate of 1% per annum. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The entire principal balance and interest were forgiven by the SBA on February 11, 2021. The $801 thousand forgiveness income was recorded as other income in the Condensed Consolidated Statements of Operations during the year ended December 31, 2021.
NOTE 14. RELATED PARTY TRANSACTIONS
On January 11, 2022, our Board of Directors appointed Stephen Socolof, our Lead Independent Director, as Interim Chief Executive Officer to replace James Tu. On February 11, 2022, Mr. Tu and the Company entered into a Separation and Release Agreement and Mr. Tu resigned from the Board of Directors.
On September 16, 2022 and November 9, 2022, the Company issued and sold 2022 Promissory Notes to one of the members of its Board of Directors, Gina Huang, for $450 thousand and $350 thousand, respectively. Please refer to Note 8, “Debt” for further detail.
During the third and fourth quarters of the year ended December 31, 2022, we issued and sold 2022 Promissory Notes for an aggregate principal amount of $600,000 to Jay Huang. Mr. Huang became a member of the Board of Directors in January 2023. Please refer to Note 8, “Debt” and Note 15, “Subsequent Events,” for further detail.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. SUBSEQUENT EVENTS
Ms. Huang Purchase Agreements
On January 5, 2023, the Company entered into a securities purchase agreement with Mei-Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement 257,798 shares of the Company’s common stock, for a purchase price of $0.3879 per share. On January 10, 2023, the Company entered into a securities purchase agreement with Ms. Huang, pursuant to which the Company agreed to issue and sell, in a private placement 325,803 shares of the Company’s common stock for a purchase price of $0.4604 per share. On February 24, 2023, the Company entered into a securities purchase agreement with Ms. Huang, pursuant to which the Company agreed to issue and sell, in a private placement 803,212 shares of the Company’s common stock for a purchase price of $0.4980 per share
Aggregate gross proceeds to the Company in respect of these private placements to Ms. Huang are $650 thousand, before deducting estimated offering expenses payable by the Company. Each of the private placements to Ms. Huang was priced at fair market value under the Nasdaq rules. The issuance and sale of the shares pursuant to the purchase agreements with Ms. Huang are not being registered under the Securities Act, and were made pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder.
Sander Securities Purchase Agreement
On January 17, 2023, the Company entered into a securities purchase agreement (the “Sander Purchase Agreement”) with certain purchasers associated with Sander Electronics, Inc. (the “Sander Purchasers”), pursuant to which the Company agreed to issue and sell in a private placement (the “Sander Private Placement”) an aggregate of 5,446,252 shares (the “Sander Shares”) of the Company’s common stock, for a purchase price per share of $0.5008. Consideration for the transaction included exchange of approximately $657,000 in the aggregate of outstanding amounts on previous short-term bridge financings.
Aggregate gross proceeds to the Company in respect of the Sander Private Placement is approximately $2.1 million, before immaterial offering expenses payable by the Company. The Sander Private Placement closed on January 20, 2023.
The Sander Private Placement was priced at-the-market under the Nasdaq rules. The issuance and sale of the Sander Shares pursuant to the Sander Purchase Agreement are not being registered under the Securities Act, and were made pursuant to certain exemptions from registration, including Sections 3(a)(9) and 4(a)(2) of the Securities Act and Regulation D promulgated thereunder, in reliance on the representations and covenants of the Sander Purchasers under the Sander Purchase Agreement.
Pursuant to the Sander Purchase Agreement, the Company agreed to increase the size of the Board of Directors to eight members and to appoint each of Jay Huang and Wen-Jeng Chang as a director for a term expiring at the 2023 annual meeting of the Company’s stockholders or his earlier resignation, death or removal in accordance with the Company’s bylaws.
On January 17, 2023, in connection with the Sander Purchase Agreement, the Company entered into a registration rights agreement with each of the Sander Purchasers.
Exchange Agreement
As discussed in Note 8, “Debt,” on September 16, 2022 and November 9, 2022 the Company sold and issued to Mei Yun (Gina) Huang, a member of the Board of Directors, 2022 Promissory Notes totaling an aggregate principal amount of $800,000. On January 17, 2023, the Company and Ms. Huang entered into exchange agreements (the “Exchange Agreements”) with respect to the 2022 Promissory Notes, pursuant to which the Company and Ms. Huang agreed to exchange (the “Exchanges”) the approximately $809,000 aggregate outstanding amounts under the 2022 Promissory Notes for an aggregate of 1,436,959 shares of Common Stock (the “Exchange Shares”) at a price per share of $0.5630.
The Exchanges were priced at fair market value under the Nasdaq rules. The Exchanges of the Exchange Shares pursuant to the Exchange Agreements are not being registered under the Securities Act, and were effected pursuant to the exemption provided in Section 3(a)(9) of the Securities Act.
Second Amendment to Inventory Facility
On January 18, 2023, the Company and Crossroads entered into a Second Amendment to the Inventory Loan Agreement (the “Crossroads Amendment”) to restructure and pay down the Inventory Facility. The Crossroads Amendment provides that the Company will make payments to reduce the outstanding obligations under the Inventory Facility of $750,000 by January 20,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2023 (which amount the Company has paid) and $250,000 by February 15, 2023. The Company also agreed to make monthly payments of approximately $40,200 towards the remaining outstanding obligations under the Inventory Facility, and to reduce the maximum amount that may be available to the Company under the Inventory Facility from $3,500,000 to $500,000, subject to the borrowing base as set forth in the Inventory Loan Agreement.
Pursuant to the Crossroads Amendment, Crossroads and the Company also agreed to extend the Inventory Facility’s current term through December 31, 2023, while eliminating the minimum borrowing amount and unused line fees and reducing the monthly service fee to a lower, fixed amount. The Company also agreed to a slightly increased interest rate, which was more than offset by the reduction in the monthly service fees. Pursuant to the Crossroads Amendment, the interest rate on borrowings under the Inventory Facility is now a per annum rate equal to (i) the Three Month Libor rate plus 5.5% (currently 10.28% per annum) or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus 6% (currently 10.176% per annum).
The foregoing summary description of the Crossroads Amendment is not complete and is qualified in its entirety by reference to the full text of the Crossroads Amendment, which is filed as an exhibit to this Current Report on Form 8-K and is incorporated by reference herein.
Amendment to 2022 Streeterville Note
On April 21, 2022, the Company sold and issued to Streeterville the 2022 Streeterville Note. On January 17, 2023, the Company and Streeterville entered into an Amendment to Promissory Note (the “Streeterville Amendment”) to restructure and pay down the 2022 Streeterville Note.
Pursuant to the Streeterville Amendment, the Company agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note of $500,000 by January 20, 2023 (which amount the Company has paid) and $250,000 by July 14, 2023. Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, the Company will make twelve monthly repayments of approximately $117,000 each. The Company will have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided the Company makes all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.
Termination of Receivables Facility
On February 7, 2023, the Company terminated the Receivables Facility pursuant to the Receivables Loan between the Company and FSW Funding. All outstanding amounts under the Receivables Facility had been repaid prior to termination, and there were no prepayment fees in connection with termination. The Receivables Facility was secured by substantially all of the present and future assets of the Company and was subject to an intercreditor agreement with the Company’s inventory lending facility lender, which intercreditor agreement was also terminated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. LEGAL MATTERS
We may be the subject of threatened or pending legal actions and contingencies in the normal course of conducting our business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict the future outcome of such matters, we believe that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8.
The following table sets forth our selected unaudited financial information for the four quarters in the years ended December 31, 2022 and 2021, respectively. This information has been prepared on the same basis as the audited financial statements and, in the opinion of management, contains all adjustments necessary for a fair presentation thereof.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(amounts in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net (loss) sales | | $ | 663 | | | $ | 1,764 | | | $ | 1,480 | | | $ | 2,061 | |
| Gross (loss) profit | | (238) | | | (163) | | | 109 | | | (26) | |
| Net loss | | (2,310) | | | (2,662) | | | (2,486) | | | (2,821) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net loss per common share attributable to common stockholders (basic and diluted): | | $ | (0.23) | | | $ | (0.29) | | | $ | (0.35) | | | $ | (0.44) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Weighted average shares used in computing net loss per common share (basic and diluted) | | 9,583 | | | 9,190 | | | 4,211 | | | 6,437 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net sales | | $ | 2,405 | | | $ | 2,749 | | | $ | 2,074 | | | $ | 2,637 | |
| Gross (loss) profit | | 189 | | | 563 | | | 393 | | | 553 | |
| Net loss | | (2,631) | | | (1,140) | | | (2,473) | | | (1,642) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net loss per common share attributable to common stockholders (basic and diluted): | | $ | (0.50) | | | $ | (0.22) | | | $ | (0.59) | | | $ | (0.45) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Weighted average shares used in computing net loss per common share (basic and diluted) | | 5,312 | | | 5,086 | | | 4,211 | | | 3,612 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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