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Basis of Presentation and Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2021
Accounting Policies [Abstract] |
Basis of Presentation and Summary of Significant Accounting Policies | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation 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. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our operations. We have prepared the accompanying financial data for the three and nine months ended September 30, 2021 and 2020 pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020, Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2021 and 2020. Use of estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may vary from the estimates. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence and warranty claims; the useful lives of property and equipment; valuation allowance for net deferred taxes; the cost and offsetting income related to sub-leased property; 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. Certain risks and concentrations We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows: For the three months ended September 30, 2021, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately 19%, 17%, and 27% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 36% of net sales for the same period. For the three months ended September 30, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 67% and 12% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 68% of net sales for the same period. For the nine months ended September 30, 2021, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately 33%, 10%, and 17% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 43% of net sales for the same period. For the nine months ended September 30, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 52% and 14% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 58% of net sales for the same period. Our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company and a U.S. Navy shipbuilder accounted for approximately 12%, 34%, and 27% of net trade accounts receivable, respectively, at September 30, 2021. At December 31, 2020, our primary distributor to the U.S. Navy accounted for 28% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 21% of our net trade accounts receivable. One offshore supplier accounted for approximately 19% and 30%, respectively, of our total expenditures for the three and nine months ended September 30, 2021. For the three months ended September 30, 2020, two offshore suppliers accounted for approximately 25% and 20%, respectively, of total expenditures. These same two suppliers accounted for approximately 19% and 14%, respectively, of total expenditures for the nine months ended September 30, 2020. At September 30, 2021, one offshore supplier accounted for approximately 63% of our trade accounts payable balance. At December 31, 2020, this offshore supplier accounted for approximately 44% of our trade accounts payable balance. Recent accounting pronouncement In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update 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. For smaller reporting companies, this standard will be effective for interim and annual periods starting after December 15, 2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard. Revenue 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. The following table provides a disaggregation of product net sales for the periods presented (in thousands):
| Three months ended September 30, |  |  | Nine months ended September 30,
| 2021 |  | 2020 |  |  | 2021 |  | 2020
Net sales: |  |  |  |  |  |  |  |
Commercial | $ | 1,522 |  |  | $ | 1,456 |  |  |  | $ | 3,513 |  |  | $ | 4,250 |
MMM products | 1,227 |  |  | 4,508 |  |  |  | 3,947 |  |  | 8,832 |
Total net sales | $ | 2,749 |  |  | $ | 5,964 |  |  |  | $ | 7,460 |  |  | $ | 13,082 |
Accounts Receivable Our trade accounts receivable consist of amounts billed to and currently due from customers. Our customers are currently 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. We utilize an account receivable insurance program with a high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provides creditworthiness ratings and metrics that significantly assist us in evaluating the creditworthiness of both existing and new customers. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of accounts receivable 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 certain 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. Geographic information All of our long-lived fixed assets are located in the United States. For the three months ended September 30, 2021, there were less than 1% of sales attributable to customers outside the United States. For the nine months ended September 30, 2021, there were approximately 1% of sales attributable to customers outside the United States. For the three and nine months ended September 30, 2020, there were no net sales attributable to customers outside the United States. The geographic location of our net sales is derived from the destination to which we ship the product. 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):
| Three months ended September 30, |  | Nine months ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Numerator: |  |  |  |  |  |  |
Net loss | $ | (1,140) |  |  | $ | (1,165) |  |  | $ | (5,255) |  |  | $ | (6,046) |
Denominator: |  |  |  |  |  |  |
Basic and diluted weighted average shares of common stock outstanding * | 5,086 |  |  | 3,308 |  |  | 4,309 |  |  | 3,196 |
*Shares outstanding for the nine months ended September 30, 2020 have been restated for the 1-for-5 stock split effective June 11, 2020. As a result of the net loss we incurred for the three months ended September 30, 2021, options, warrants and convertible securities representing approximately 41 thousand, 11 thousand and 175 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three months ended September 30, 2020, options, restricted share units, warrants and convertible securities representing approximately 117 thousand, 13 thousand, 321 thousand and 519 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the nine months ended September 30, 2021, options, warrants and convertible securities representing approximately 60 thousand, 56 thousand and 289 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the nine months ended September 30, 2020, options, restricted share units, warrants and convertible securities representing approximately 57 thousand, 7 thousand, 152 thousand and 531 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive. Product warranties We warrant our commercial and MMM LED products and controls for periods generally ranging from five to ten years. 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. 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):
| Three months ended September 30, |  | Nine months ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Balance at beginning of period | $ | 239 |  |  | $ | 215 |  |  | $ | 227 |  |  | $ | 195 |
Warranty accruals for current period sales | 10 |  |  | 22 |  |  | 49 |  |  | 29 |
Adjustments to existing warranties | 4 |  |  | 4 |  |  | 16 |  |  | 23 |
In kind settlements made during the period | (13) |  |  | (11) |  |  | (52) |  |  | (17) |
Accrued warranty reserve at end of period | $ | 240 |  |  | $ | 230 |  |  | $ | 240 |  |  | $ | 230 |
Financial Instruments In June 2021, we completed a registered direct offering of 990,100 shares of our common stock to certain institutional investors, at a purchase price of $5.05 per share (the “June 2021 Equity Offering”). We paid the placement agent commissions of $400 thousand, plus $51 thousand in expenses, in connection with the June 2021 Equity Offering and we also paid legal and other fees of $19 thousand related to the offering. Total offering costs of $470 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of September 30, 2021. Net proceeds to us from the June 2021 Equity Offering were approximately $4.5 million. In January 2020, we completed a registered direct offering of 688,360 shares of our common stock to certain institutional investors, at a purchase price of $3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to 688,360 shares of common stock at an exercise price of $3.37 per share in a concurrent private placement for a purchase price of $0.625 per warrant. We paid the placement agent commissions of $193 thousand, plus $50 thousand in expenses, in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $510 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, 2020. 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. Net proceeds to us from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $2.3 million. In accordance with the terms of the Iliad Note (as defined below in Note 7, “Debt”), 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount and the balance to interest. Warrants to purchase an aggregate of 310,860 shares remain outstanding at September 30, 2021 with a weighted average exercise price of $3.59 per share. The exercise of warrants could provide us with cash proceeds of up to $1.1 million in the aggregate. During the nine months ended September 30, 2021, 156,446 warrants were exercised resulting in total proceeds of $527 thousand. Due to a potential cash settlement upon occurrence of a fundamental transaction within the January 2020 warrant agreement, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three quarters of 2020. During December 2020, the warrant holders all agreed to a modification of the terms of their warrants that removed the potential cash settlement option upon the occurrence of a fundamental transaction. As such, during the fourth quarter of 2020, the warrant liability was reclassified into equity and the warrants are no longer subject to re-measurement at each balance sheet date. Please also refer to Note 9, “Stockholders’ Equity”. Fair Value Measurements 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 following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 (in thousands):
|  |  | Fair Value Measurements at September 30, 2020 Using
| Balance as of |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Description | September 30, 2020 |  |  |
Warrant liabilities | $ | 2,928 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,928 |
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. The estimated fair value of warrants accounted for as liabilities, representing a level 3 fair value measure, was determined on the issuance date and subsequently marked to market at each financial reporting date until the date the warrants were reclassified into equity, after which the warrants are no longer subject to re-measurement at each balance sheet date. We use the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted-average assumptions, when appropriate. The following inputs were used at September 30, 2020:
| Expected |  | Risk-Free |  | Expected
| Volatility |  | Interest Rate |  | Life
Warrants with greater than one-year remaining term | 103.18% - 99.38% |  | 0.21% - 0.24% |  | 3.79 - 4.29 years
A roll-forward of fair value measurements using significant unobservable inputs (Level 3) for the warrants is as follows (in thousands):
| Nine months ended September 30, 2020
Balance January 1, 2020 | $ | — |
Issuance of warrants, January 2020 | 1,636 |
Settlements from exercise | (982) |
Gain from change in fair value of warrants | 2,274 |
Balance September 30, 2020 | $ | 2,928 |

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