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.

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At the beginning of 2022, the Board of Directors appointed our lead independent
director to serve as interim Chief Executive Officer and replace our previous
chief executive officer. During 2022, the company redoubled its cost-reduction
efforts, reduced its warehouse square footage, undertook an inventory reduction
project, and dramatically reduced head count. During 2022, we also added three
experienced executives to our Board of Directors with extensive lighting and
consumer products industry experience, and 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.

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We continue to monitor the impact of lingering effects of the COVID-19 pandemic
on our customers, suppliers and logistics providers, and to evaluate
governmental actions being taken in response to the pandemic. Global supply
chain and logistics constraints continue to impact our inventory purchasing
strategy, and we have previously had to build up inventory and components in an
effort to manage both shortages of available components and longer lead times in
obtaining components. Disruptions in global logistics networks are also
impacting our lead times and ability to efficiently and cost-effectively
transport products from our third-party suppliers to our facility. The
significance and duration of the ongoing impact on us is still uncertain.
Material adverse effects of lingering effects of the COVID-19 pandemic on market
drivers, our customers, suppliers or logistics providers could significantly
impact our operating results. We also plan to continue to actively follow,
assess and analyze the continued long-term impact of the COVID-19 pandemic and
will continue to adjust our organizational structure, strategies, plans and
processes to respond.

Because the situation continues to evolve, we cannot reasonably estimate the
ultimate impact to our business, results of operations, cash flows and financial
position that the COVID-19 pandemic will have. Long-term impacts of the COVID-19
pandemic and government actions in response thereto could cause further
disruptions to our operations and the operations of our customers, suppliers and
logistics partners and could significantly adversely affect our near-term and
long-term revenues, earnings, liquidity and cash flows. We will remain agile as
an organization to respond to potential or continuing weakness in the
macroeconomic environment and in the meantime expand sales channels and continue
to evaluate entering new markets that we believe will provide additional growth
opportunities.

Results of operations

The following table sets forth the percentage of net sales represented by
certain items reflected on our Consolidated Statements of Operations for the
following periods:

                                             2022         2021
Net sales                                   100.0  %     100.0  %
Cost of sales                               105.3         82.8
Gross (loss) profit                          (5.3)        17.2

Operating expenses:
Product development                          25.0         19.2
Selling, general, and administrative        119.8         86.5
Loss on impairment                            5.6            -

Restructuring                                   -         (0.2)
Total operating expenses                    150.4        105.5
Loss from operations                       (155.7)       (88.3)

Other expenses:

Interest expense                             16.0          8.0
Gain on forgiveness of PPP loan                 -         (8.1)

Other income                                 (0.5)        (8.9)

Other expenses, net                           0.9          0.7
Net loss before income taxes               (172.1)       (80.0)
Benefit from income taxes                     0.1            -

Net loss                                   (172.2) %     (80.0) %


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Net sales

A further breakdown of our net sales by product line is as follows (in thousands):



                        2022         2021
Commercial products   $ 3,746      $ 4,682
MMM products            2,222        5,183

Total net sales       $ 5,968      $ 9,865


Our net sales of $6.0 million in 2022 decreased 39.5% compared to 2021, mainly
driven by a decrease of 57.1% in MMM sales and a decrease of 20.0% in commercial
sales. The decrease in net MMM product sales in 2022 as compared to 2021 was
mainly due to a reduced military sales pipeline at the beginning of the year,
increased competition, and the delayed timing of expected orders. Net sales of
our commercial products decreased in 2022 due to limited product availability
impacts from supply chain constraints, our inventory reduction project, and
continuing fluctuations in the timing, pace, and size of commercial projects.

International sales



We do not generate significant sales from customers 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


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Selling, general, and administrative expenses were $7.1 million, or 119.8% of
net sales, in 2022, compared to $8.5 million, or 86.5% of net sales, in 2021.
The year-over-year $1.4 million decrease is comprised of a combination of a $1.5
million decrease from a reduction in headcount and salaries, including
stock-based compensation and related benefits and a decrease of $0.1 million in
all other general expenses, offset by an increase of $0.2 million in sales
commissions and consultants. Significant phased headcount reductions began at
the end of the second quarter 2022 and continued throughout the end of the year.

Loss on impairment



As a result of the Company's impairment analysis, a loss on impairment of $338
thousand was recorded in 2022. In the third quarter of 2022, a loss on
impairment of $76 thousand was recorded on the write-off of the UV-Robots. An
additional $262 thousand of loss on impairment was recorded in the fourth
quarter of 2022, which consisted of tooling, equipment, software, hardware, and
construction-in-progress. No such loss on impairment was recorded in 2021.

Restructuring



During 2021, we recorded restructuring credits of approximately $21 thousand,
related to the cost and offsetting sub-lease income for the remaining lease
obligation for our 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,


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approximately $78.0 million of the $132.4 million is available after the
application of IRC Section 382 limitations. As a result of the Tax Cuts and Jobs
Act of 2017 (the "Tax Act"), net operating loss carry-forwards generated in tax
years beginning 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.

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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.

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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.

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Additionally, if we are unable to find a permanent Chief Financial Officer, it
may be more difficult to obtain additional financing on satisfactory terms or at
all. If we fail to obtain additional financing to sustain our business before we
are able to produce levels of revenue to meet our financial needs, we will need
to delay, scale back or eliminate our business plan and further reduce our
operating costs and headcount, each of which would have a material adverse
effect on our business, future prospects, and financial condition. A lack of
additional financing could also result in our inability to continue as a going
concern and force us to sell certain assets or discontinue or curtail our
operations and, as a result, investors in the Company could lose their entire
investment.

Cash and debt

At 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)



Proceeds from the issuance of common stock and warrants              $     3,500          $     9,500
Proceeds from the exercise of warrants                                         -                  801
Offering costs paid on the issuance of common stock and warrants            (334)                (969)

Principal payments under finance lease obligations                            (1)                  (3)

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

                                                   6                   80

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

                                                      -                   (1)

Payments for deferred financing costs                                       (114)                 (30)
Payments on the 2021 Streeterville Note                                   (1,640)                   -

Proceeds from the 2021 Streeterville Note                                      -                1,515

Proceeds from the 2022 Streeterville Note                                  2,000                    -
Proceeds from related party promissory notes payable                         800                    -
Proceeds from promissory notes payable                                       650                    -

Net payments on credit line borrowings - Credit Facilities                  (768)                (181)
Net cash provided by financing activities                            $

4,099 $ 10,712

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.

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Net cash used in operating activities of $9.8 million in 2021 resulted primarily
from the net loss incurred of $7.9 million, adjusted for non-cash items,
including: depreciation and amortization of $0.2 million, stock-based
compensation, net of $0.4 million, gain on forgiveness of the PPP loan of $0.8
million, other income related to the ERTC of $0.9 million, and unfavorable
provisions from inventory and warranty of $0.2 million and $0.1 million,
respectively, as well as accounts receivable and working capital changes. We
generated $0.8 million through the timing of collection of accounts receivable,
$0.7 million from the change in prepaid and other current assets (primarily the
receipt of ERTC funds), $0.3 million for short-term deposits related to the
timing of inventory receipts with our contract manufacturers for our nUVo™ and
EnFocus™ products, and $0.2 million from changes in deferred revenue. We used
$2.4 million from a net increase in inventories primarily due to the timing of
inventory receipts, $0.4 million in cash for a decrease in accounts payable due
to the timing of inventory receipts and payments, and $0.4 million through a
decrease of other accrued liabilities, primarily related to accrued payroll and
benefits and commissions.

Cash used in investing activities

Net cash used in investing activities was $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

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the amount and timing of net sales and expenses if different judgments or different estimates were utilized. Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial statements are set forth below:



•revenue recognition,
•allowances for doubtful accounts, returns and discounts,
•impairment of long-lived assets,
•valuation of inventories,
•accounting for income taxes,
•share-based compensation, and
•leases.

Revenue recognition



Net sales include revenues from sales of products and shipping and handling
charges, net of estimates for product returns. Revenue is measured at the amount
of consideration we expect to receive in exchange for the transferred products.
We recognize revenue at the point in time when we transfer the promised products
to the customer and the customer obtains control over the products.
Distributors' obligations to us are not contingent upon the resale of our
products. We recognize revenue for shipping and handling charges at the time the
goods are shipped to the customer, and the costs of outbound freight are
included in cost of sales. We provide for product returns based on historical
return rates. While we incur costs for sales commissions to our sales employees
and outside agents, we recognize commission costs concurrent with the related
revenue, as the amortization period is less than one year. We do not incur any
other incremental costs to obtain contracts with our customers. Our product
warranties are assurance-type warranties, which promise the customer that the
products are as specified in the contract. therefore, the product warranties are
not a separate performance obligation and are accounted for as described below.
Sales taxes assessed by governmental authorities are accounted for on a net
basis and are excluded from net sales.

A disaggregation of product net sales is presented in Note 12, "Product and Geographic Information," included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report.

Accounts Receivable



Our trade accounts receivable consists of amounts billed to and currently due
from customers. Our customers are concentrated 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.


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Long-lived assets



Property and equipment are stated at cost and include expenditures for additions
and major improvements. Expenditures for repairs and maintenance are charged to
operations as incurred. We use the straight-line method of depreciation over the
estimated useful lives of the related assets (generally two to fifteen years)
for financial reporting purposes. Accelerated methods of depreciation are used
for federal income tax purposes. When assets are sold or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any gain
or loss is reflected in the Consolidated Statement of Operations. Refer to Note
6, "Property and Equipment," included in Item 8, "Financial Statements and
Supplementary Data," of this Annual Report for additional information.

Long-lived assets are reviewed for impairment whenever events or circumstances
indicate the carrying amount may not be recoverable. Events or circumstances
that would result in an impairment review primarily include operations reporting
losses, a significant change in the use of an asset, or the planned disposal or
sale of the asset. The asset would be considered impaired when the future net
undiscounted cash flows generated by the asset are less than its carrying value.
An impairment loss would be recognized based on the amount by which the carrying
value of the asset exceeds its fair value, as determined by quoted market prices
(if available) or the present value of expected future cash flows. In 2022, a
loss on impairment of $338 thousand was recorded. Refer to Note 6, "Property and
Equipment," included in Item 8, "Financial Statements and Supplementary Data,"
of this Annual Report for additional information.

Valuation of inventories



We state inventories at the lower of standard cost (which approximates actual
cost determined using the first-in-first-out method) or net realizable value. We
establish provisions for excess and obsolete inventories after evaluation of
historical sales, market prices, current economic trends, forecasted sales,
product lifecycles, and current inventory levels. Throughout 2022, we faced
supply chain constraints and also undertook an inventory reduction project in
connection with reducing our warehouse square footage, which impacted our
inventory purchasing strategy and resulted in a decrease in our gross inventory
levels of $2.9 million and excess inventory reserves of $0.5 million compared to
2021. During 2021, we experienced global supply chain and logistics constraints,
which impacted our inventory purchasing strategy, leading to a buildup of
inventory and inventory components in an effort to manage both shortages of
available components and longer lead times in obtaining components, which
resulted in an increase in our gross inventory levels of $2.4 million and excess
inventory reserves of $0.2 million compared to 2020. Adjustments to our
estimates, such as forecasted sales and expected product lifecycles, could harm
our operating results and financial position. Refer to Note 5, "Inventories,"
included in Item 8, "Financial Statements and Supplementary Data," of this
Annual Report for additional information.

Accounting for income taxes



As part of the process of preparing the Consolidated Financial Statements, we
are required to estimate our income tax liability in each of the jurisdictions
in which we do business. This process involves estimating our actual current tax
expense together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenues, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in our Consolidated Balance Sheets. We then assess the likelihood of
the deferred tax assets being recovered from future taxable income and, to the
extent we believe it is more likely than not that the deferred tax assets will
not be recovered, or is unknown, we establish a valuation allowance.

Significant management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. 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

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2022 and 2021, respectively, will be subject to the new limitations under the
Tax Act. If not utilized, the carry-forwards generated prior 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.

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