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What changed in CEA Industries Inc.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of CEA Industries Inc.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+257 added−254 removedSource: 10-K (2024-03-29) vs 10-K (2023-03-28)

Top changes in CEA Industries Inc.'s 2024 10-K

257 paragraphs added · 254 removed · 180 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeWe currently do not have projects with the largest, publicly traded firms (typically referred to as “MSOs,” or Multi-State Operators). 7 MFOs are customers who already own cultivation facilities and they are our preferred customers because they are likely already successful and cash-flowing, and they understand the challenges of building a new cultivation facility.
Biggest changeMost of our customers are new entrants to the CEA industry and have no other cultivation facilities. Some customers have one or more facilities which we classify as MFOs (multi-facility operators). We currently do not have projects with the largest, publicly traded firms (typically referred to as “MSOs,” or Multi-State Operators).
We do this by offering our customers a variety of principal service and product offerings that include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) air sanitation products, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) proprietary and third party controls systems and technologies used for environmental, lighting and climate control, and (viii) preventative maintenance services, through our partnership with a certified service contractor network, for CEA facilities.
We do this by offering our customers a variety of service and product offerings that include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) air sanitation products, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) proprietary and third party controls systems and technologies used for environmental, lighting and climate control, and (viii) preventative maintenance services, through our partnership with a certified service contractor network, for CEA facilities.
We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflict will have any impact on our internal control over financial reporting.
We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflicts will have any impact on our internal control over financial reporting.
Notwithstanding the actions of the Biden administration, it should be expected that the Department of Justice will continue to enforce the Controlled Substances Act with respect to cannabis under established principles in setting their law enforcement priorities to prevent: ● the distribution of cannabis products, such as marijuana, to minors; ● criminal enterprises, gangs and cartels receiving revenue from the sale of cannabis; ● the diversion of cannabis products from states where it is legal under state law to states where it is not legal under state law; ● the use of state-authorized cannabis activity as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; ● violence and the use of firearms in the cultivation and distribution of cannabis products; ● driving while impaired and the exacerbation of other adverse public health and safety consequences associated with cannabis product usage; ● the growing of cannabis on public lands; and ● cannabis possession or use on federal property.
Notwithstanding the actions of the Biden administration, it should be expected that the Department of Justice will continue at this time to enforce the Controlled Substances Act with respect to cannabis under established principles in setting their law enforcement priorities to prevent: ● the distribution of cannabis products, such as marijuana, to minors; 8 ● criminal enterprises, gangs and cartels receiving revenue from the sale of cannabis; ● the diversion of cannabis products from states where it is legal under state law to states where it is not legal under state law; ● the use of state-authorized cannabis activity as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; ● violence and the use of firearms in the cultivation and distribution of cannabis products; ● driving while impaired and the exacerbation of other adverse public health and safety consequences associated with cannabis product usage; ● the growing of cannabis on public lands; and ● cannabis possession or use on federal property.
Item 1. Business Overview CEA Industries, through our subsidiary, Surna Cultivation Technologies LLC, is a company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry.
Item 1. Business Overview CEA Industries, through our subsidiary, Surna Cultivation Technologies LLC, is focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry.
Over our 16 years in business, we have served hundreds of commercial indoor CEA facilities. We believe our customers partner with us because we have the reputation and experience to help them make cost-conscious and effective decisions on the design and engineering of their indoor cultivation facilities.
During our years in business we have served hundreds of commercial indoor CEA facilities. We believe our customers partner with us because we have the reputation and experience to help them make cost-conscious and effective decisions on the design and engineering of their indoor cultivation facilities.
As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks related to this conflict.
As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks related to the conflicts.
Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the Ukrainian conflict.
Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the conflicts.
We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflation resulting from the conflict and government spending for the Ukraine and funding of our country’s response.
We believe the conflicts will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from countries involved in the conflicts, supply chain challenges, and the international and US domestic inflation resulting from the conflict and government spending in relation to the conflicts.
Headquartered in Colorado, we leverage our experience in the CEA industry to bring our customers a variety of value-added technology solutions that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements.
Headquartered in Colorado, we aim to provide customers with a variety of value-added technology solutions that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements.
As an example, Colorado issues four types of business licenses including cultivation, manufacturing, dispensing, and testing. In addition, all owners and employees must obtain an occupational license to be permitted to own or work in a facility. All applicants for licenses undergo a background investigation, including a criminal record check for all owners and employees.
In addition, all owners and employees must obtain an occupational license to be permitted to own or work in a facility. All applicants for licenses undergo a background investigation, including a criminal record check for all owners and employees.
The Justice Department maintains that it can still prosecute violations of the federal cannabis laws and continue cases already in the courts. The Rohrabacher-Blumenauer Amendment must be re-enacted every year, and it is continued through September 30, 2023.
The Justice Department maintains that it can still prosecute violations of the federal cannabis laws and continue cases already in the courts. The Rohrabacher-Blumenauer Amendment must be re-enacted every year, and it is continued through March 8, 2024. However, state laws do not supersede the prohibitions set forth in the federal drug laws.
Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market share. Intellectual Property We rely on a combination of patent and trademark rights, licenses, trade secrets, and laws that protect intellectual property, confidential procedures, and contractual restrictions with our employees and others to establish and protect our intellectual property rights.
Intellectual Property We rely on a combination of patent and trademark rights, licenses, trade secrets, and laws that protect intellectual property, confidential procedures, and contractual restrictions with our employees and others to establish and protect our intellectual property rights.
In the past, the Obama administration took the position that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana.
While we do not intend to harvest, manufacture, distribute or sell cannabis or cannabis products, we may be irreparably harmed by a change in the enforcement of cannabis laws by the federal or state governments. 7 In the past, the Obama administration took the position that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana.
We provide a comprehensive range of service solutions that include facility design and budgeting, equipment selection and specification, equipment installation advisory, and preventative maintenance services.
We provide a comprehensive range of service solutions that include facility design and budgeting, equipment selection and specification, equipment installation advisory, and preventative maintenance services. In addition, we provide our customers with product offerings that include both proprietary products and value-added reseller (“VAR”) products.
Additional employees may be hired in the future depending on need, available resources, and our achieved growth. US Government Regulation While we do not generate any revenue from the direct sale of cannabis products, we have historically, and continue to, offer our services and engineering solutions to indoor cultivators that are engaged in various aspects of the cannabis industry.
US Government Regulation While we do not generate any revenue from the direct sale of cannabis products, we have historically, and continue to, offer our services and engineering solutions to indoor cultivators that are engaged in various aspects of the cannabis industry. Cannabis is a Schedule I controlled substance and is illegal under federal law.
Even in those states in which specific uses of marijuana have been legalized, such as medical marijuana or for adult recreational purpose, its use remains a violation of federal laws. 9 A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse.
A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse.
Since we do not install any of the products we sell, our customers are required to use third-party installation contractors, which adds to the variability of the sales cycle.
Since we do not install any of the products we sell, our customers are required to use third-party installation contractors, which adds to the variability of the sales cycle. 6 Our Competition Our environmental control systems and our related engineering and design services compete with various national and local Mechanical, Electrical & Plumbing (MEP) engineering firms.
However, state laws do not supersede the prohibitions set forth in the federal drug laws. 10 In order to participate in either the medical or the adult use aspects of the cannabis industry, all businesses and employees must obtain licenses from the state and, for businesses, local jurisdictions as well.
In order to participate in either the medical or the adult use aspects of the cannabis industry, all businesses and employees must obtain licenses from the state and, for businesses, local jurisdictions as well. As an example, Colorado issues four types of business licenses including cultivation, manufacturing, dispensing, and testing.
Customers use our services for building new CEA facilities and expanding or retrofitting existing CEA facilities. CEA growers currently face a challenging business environment that includes high energy costs, water usage and conservation issues, continuously evolving waste removal regulations, inflationary pressures, and labor shortages.
CEA growers currently face a challenging business environment that includes high energy costs, water usage and conservation issues, continuously evolving waste removal regulations, inflationary pressures, and labor shortages. In addition to these issues, our cannabis growing customers face increasingly rigorous quality standards and declining cannabis prices in a growing industry whose standards are constantly evolving.
We actively protect our inventions, new technologies, and product developments by maintaining trade secrets and, in limited circumstances, filing for patent protection. Employees We currently have 19 active full-time employees. However, we may engage, and have in the past utilized, the services of consultants, independent contractors, and other non-employee professionals.
We actively protect our inventions, new technologies, and product developments by maintaining trade secrets and, in limited circumstances, filing for patent protection. Employees We currently have 10 active full-time employees. We review our staffing needs in light of our contract obligations and attempt to size and skill match our employees as required.
Our customers vary based on the size of the facility, type of crop being cultivated, and extent of construction or retrofitting of the facility. Most of our customers are new entrants to the CEA industry and have no other cultivation facilities.
Our Customers and Prospects We aim to provide our services and products to customers who are building, upgrading, or expanding an indoor cultivation facility for any crop. Our customers vary based on the size of the facility, type of crop being cultivated, and extent of construction or retrofitting of the facility.
Any change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not intend to harvest, manufacture, distribute or sell cannabis or cannabis products, we may be irreparably harmed by a change in enforcement by the federal or state governments.
Any change in the federal government’s enforcement of current federal laws could cause significant financial damage to us.
Impact of Ukrainian Conflict We believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting.
Consequently, our revenue recognition of some customer sales has been delayed until future periods when the shipment of orders can be completed. Impact of Ukrainian and Israeli Conflicts We believe that the conflicts involving Ukraine and Israel do not have any direct impact on our operations, financial condition, or financial reporting.
We lead with our value proposition of offering a wide range of proprietary and curated products and services, giving more options to our customers to satisfy their individual applications and goals. Our sales strategy involves reaching out to potential customers on leads developed by our marketing efforts and developing those relationships.
Sales and Marketing Our sales strategy involves reaching out to potential customers on leads developed by our marketing efforts and developing those relationships. Our sales cycle can range from several months to 18 months from first contact with a prospect to signing a contract.
In addition to these issues, our cannabis growing customers face increasingly rigorous quality standards and declining cannabis prices in a growing industry whose standards are constantly evolving. We support our clients by providing integrated mechanical, electrical, and plumbing (“MEP”) engineering design, proprietary and curated environmental control equipment, and automation offerings that serve the CEA industry.
The part of the CEA industry focused on food related crops is also facing disruption from evolving market demand, competition, and reorganization, including the lack of growth capital and several noteworthy bankruptcies. We support our clients by providing integrated mechanical, electrical, and plumbing (“MEP”) engineering design, proprietary and curated environmental control equipment, and automation offerings that serve the CEA industry.
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Our revenue stream is currently derived primarily from supplying our products, services and technologies to licensed commercial indoor facilities operating in the cannabis industry. Our customers include state and provincial-regulated CEA growers located in the U.S., Canada, and other international locations. We recently have developed customers in the non-cannabis CEA market to expand our market reach.
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We believe this sustainability-focused technical experience is crucial in the value we provide to our customers. Shares of our common stock and warrants currently are traded on the Nasdaq Capital Markets under the ticker symbols “CEAD” and “CEADW”, respectively. We received a continued listing deficiency letter and must satisfy the deficiency prior to April 9, 2024.
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We believe this sustainability-focused technical experience is crucial in the value we provide to our customers. We have three core assets that we believe will support us as we pursue our business strategy. First, we enjoy strong relationships with relevant stakeholders in the CEA industry.
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If we do not satisfy the deficiency our securities will be removed from trading on Nasdaq by action of the exchange. We believe our securities will then trade on the OTC. We do not anticipate applying for listing on the higher tiers of the OTC.
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Largely focused in the cannabis segment, our partnerships include relationships with new and existing growers, capital providers, consultants, independent contractors, and numerous others. These partnerships include agreements reached in 2022 with Merida Capital and Hydrobuilder Holdings LLC.
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We will continue to be a reporting company with the Securities and Exchange Commission, and we anticipate that brokers will continue to be able to make share transactions in our securities, although they will be subject to trading requirements that will substantially restrict the ability of our stockholders to make share sales and others to make share purchases. 5 Impact of the COVID-19 Pandemic on Our Business The impact of the government and the business economic response to the COVID-19 pandemic affected demand across the majority of our markets and disrupted workflow and completion schedules on projects.
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In June we announced a marketing arrangement with Merida Capital, a cannabis-focused private equity firm, whereby Merida will use CEA Industries Inc. as its sole provider of certain products and services for its indoor cultivation facilities. This relationship resulted in a new contract in October 2022 with one of Merida’s Connecticut based clients.
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We believe we continue to have adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, costs, and working capital, as a result of the pandemic.
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In November of 2022 we announced a strategic alliance with Hydrobuilder Holdings that we believe will result in more project opportunities. Second, our experience in this industry over time has built up specialized engineering know-how and experience. We have been serving indoor cultivators since 2006 and designing CEA cultivation facilities since 2016.
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Due to this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the long-term impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business.
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Since then, we have tested and solidified best practices from designing environmental control systems for CEA cultivation facilities. 5 Third, we have a line of proprietary environmental control products that support the specific growing environments that our customers want. We believe these products offer significant benefits to our customers.
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During the years ended December 31, 2023 and December 31, 2022, and continuing since then, the Company experienced delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain.
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Shares of our common stock and warrants are traded on the Nasdaq Capital Markets under the ticker symbols “CEAD” and “CEADW”, respectively. Impact of the COVID-19 Pandemic on Our Business As a result of the government measures to control the COVID-19 pandemic, there continue to be disruptions in business operations around the world, with a persistent impact on our business.
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However, we may engage, and have in the past utilized, the services of consultants, independent contractors, and other non-employee professionals. Additional employees may be hired in the future depending on need, available resources, and our achieved growth. The Company has experienced a decline in activity, as indicated in its 2023 sales and its current backlog.
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We still are experiencing delays with our international supply of products and shipments from vendors. While these delays have improved in recent months, we, along with many other importers of goods across all industries, continue to experience supply chain disruption. Also, shipping times are still longer than they were prior to the COVID-19 pandemic.
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This decline is due to many factors, including (i) recent challenges in the cannabis market, (ii) continued supply chain-related delays and cancellations that have affected many of its vendors and partners, and (iii) a broader slowdown in the macroeconomic environment.
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We continue to work diligently with our network of freight partners and suppliers to expedite delivery dates and provide solutions to reduce further impact and delays. However, we are unable to determine the full impact of these delays and how long they will continue as they are out of our control.
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As a result, the Company evaluated its current operations, personnel needs and liquidity to make sure our personnel levels match the activity we expect to service over the next several months.
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The CEA Industry According to a leading market research firm, New Frontier Data, the North American cannabis industry is expected to experience compound annual growth on the order of 12% from 2022 through 2030. In addition to the cannabis CEA market the non-cannabis CEA market is also expected to experience material growth over the next years.
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On January 5, 2024, we implemented a downsizing of our operations, including a 23% reduction in our workforce, and significant non-personnel cost reductions in order to preserve our cash resources and better reflect our activity levels.
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Since the technical infrastructure and requirements for growing any plant in a controlled environment are similar, we believe we can bring our operational expertise and suite of products to this adjacent market.
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Even in those states in which specific uses of marijuana have been legalized, such as medical marijuana or for adult recreational purpose, its use remains a violation of federal laws.
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In addition, we provide our customers with product offerings that include both proprietary products and value-added reseller (“VAR”) products. 6 Service Solutions Facility Design and Budgeting ● Licensed Architectural design, including space and operational planning ● Licensed Mechanical, Electrical, and Plumbing (MEP) engineering, including equipment layout and workflow ● Assessment of equipment options based on facility requirements ● Specification/recommendation of equipment for each facility ● Budget Formulation early in the design process to help the customer make appropriate design choices Equipment Selection and Specification ● Identifying, assessing, and selecting equipment to meet customer requirements Equipment Installation Advisory ● Advising contractors to ensure proper cultivation equipment installation Start-up Services ● Initial equipment start-up support ● Controls system checkout and tuning ● Operator training Lifecycle Services ● Preventative Maintenance Services (Subscription) Product Solutions ● Proprietary, white-label environmental control products ● Proprietary Facility Control System (SentryIQ®) ● Value-Added Reseller (“VAR”) of Cultivation and Environmental Control Products ● VAR of Lighting Products ● VAR of Benching and Racking Products ● VAR of Water Remediation Products and HVAC equipment Our Customers and Prospects We provide our services and products to customers who are building, upgrading, or expanding an indoor cultivation facility for any crop.
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Currently, there is much legislation being considered to reform cannabis products and use. The proposed laws cover a wide spectrum from complete federal legalization to specific industry nuances.
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Some customers have one or more facilities which we classify as MFOs (multi-facility operators), and these are our favored prospects that we pursue aggressively or who turn to us after we have served them on a previous facility.
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In September 2023, the MORE Act was introduced that would provide full federal legalization through descheduling with a particular focus on equity provisions, including expungement for certain cannabis offenses and a community reinvestment program. The MORE Act has not passed through committee.
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They are thus a less risky prospect with a much higher likelihood of successfully completing a project. Sales and Marketing We have both marketing and sales employees who focus on winning business from new entrants and smaller MFOs. Through our marketing activities, we focus on generating new leads and positioning ourselves in the CEA facilities indoor cultivation market.
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There are two proposed federal bills that would remove cannabis from the Controlled Substances Act (CSA) entirely and task the Food and Drug Administration (FDA) with regulation of cannabis products. One of these bills, The States Reform Act, adopts a dual federal-state regulatory model, like the regulation of alcohol.
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Our sales cycle can range from several months to 18 months from first contact with a prospect to signing a contract. The sales cycles for our new build commercial projects can vary significantly depending on the size and complexity of the project.
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Another bill, the Strengthening the Tenth Amendment Through Entrusting States (STATES) 2.0 Act, would permit states to to maintain the prohibition of cannabis, but interstate commerce in state-law-compliant cannabis would be legalized, so non-legal states would not be able to prohibit shipments to and from legal states from crossing through their borders.
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From pre-sales and technical advisory meetings to sales contract execution, to engineering and design services and equipment delivery, and all the way through installation and startup of the installed system, the full cycle can range from three months to two years.
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Finally, only one piece of legislation took the rescheduling approach to cannabis legalization in 2023. The Marijuana 1-to-3 Act of 2023, opens new tab would simply direct the Attorney General to transfer cannabis from Schedule I to Schedule III of the CSA without clarifying or addressing any other provisions of federal law.
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Sales, Contract, and Fulfillment Cycle When a customer agrees to enter into a contract with us it can be for any or all of the following: ● Architectural design services; ● MEP engineering services; ● Equipment provision; and ● Preventative maintenance. To enter into a contract, we require a 5-10% deposit and a signed contract.
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However, that was not the only piece of rescheduling-related legislation introduced last year. Lawmakers continued to offer various solutions for providing financial relief for cannabis businesses and legal protections for ancillary businesses in 2023.
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We then require progress payments as architectural and/or engineering work is completed, and before equipment is shipped. We generally do not ship equipment to a customer unless that equipment has been fully paid.
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The most well-known of these bills is the Secure and Fair Enforcement Regulation (SAFER) Banking Act, which would provide safe harbor for financial institutions and other ancillary businesses that work with cannabis industry clients, thus increasing the industry’s access to traditional financial services like loans and deposit accounts.
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The sales and fulfillment cycle can be summarized as follows, with elapsed time from start: Start: Early meetings to understand goals and resources; 1-2 months: Proposal development and presentation; 3 months: Contract acceptance (requires 5-10% deposit); 3 months: Architectural and MEP engineering work begin; 4-5 months: Architectural and MEP engineering work completed, and equipment selections finalized (services paid for before release of construction drawings); 5 months: equipment ordered (40% deposit on equipment received prior to ordering); 6-18 months: construction project commences, equipment delivered as required (fully paid for before shipping); and 12-18 months: all equipment shipped and installed, project completed, operator training and system startup conducted. 8 Anticipated Average Project Revenues.
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Similar to SAFER but with a narrower scope, the Clarifying Law Around Insurance of Marijuana (CLAIM) Act would provide a specific safe harbor for insurance companies that serve the cannabis industry.
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Architectural and engineering services fees per project can range from $10,000 to over $100,000, depending on the size of the project. Revenue from equipment sales on an individual projects has been as much as $3,000,000 but most typically, the per project range is from $500,000 to $1,500,000.
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As for financial support, the Small Business Tax Equity Act of 2023, would exempt cannabis sales conducted in compliance with state law from the prohibition of 26 U.S.C. § 280E, thereby allowing businesses to deduct normal business expenses from their taxes.
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Our Competition Our environmental control systems and our related engineering and design services compete with various national and local Mechanical, Electrical & Plumbing (MEP) engineering firms.
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During 2023, there have been a myriad of additional bills introduced that govern the expungement and/or sealing of criminal records for non-violent cannabis offenses, legalizing hem and CBD products and adding FDA regulation for these products, facilitating research on cannabis, access for veterans to medical cannabis, and restoring eligibility for federal employment and the right of medical cannabis patient to purchase and possess firearms.
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As the cannabis segment of the CEA industry continues to mature and develop and legalization becomes more prevalent, we expect to see more competition from agricultural product and service providers who seek to expand into this niche of the CEA market.
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Companies already operating in the non-cannabis CEA industry may have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical, sales and marketing resources. These competitors may adopt more aggressive pricing policies and make more attractive offers to existing and potential clients, employees, strategic partners, distribution channels and advertisers.
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Cannabis is a Schedule I controlled substance and is illegal under federal law.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThe price of our securities in the market on any particular day depends on many factors including, but not limited to, the following: ● price and volume fluctuations in the overall stock market from time to time; ● investor demand for our shares and warrants; ● significant volatility in the market price and trading volume of companies in the cannabis industry; ● variations in our operating results and market conditions specific to our business; ● the emergence of new competitors or new technologies; ● operating and market price performance of other companies that investors deem comparable; ● changes in our Board of Directors (the “Board”) or management; ● sales or purchases of our securities by insiders, including sales of our common stock issued to employees, directors and consultants under our equity incentive plans which were registered under the Securities Act of 1933, as amended (the “Securities Act”) under our S-8 registration statement; ● commencement of, or involvement in, litigation; ● changes in governmental regulations, in particular with respect to the cannabis industry; ● actual or anticipated changes in our earnings, and fluctuations in our quarterly operating results; ● market sentiments about the cannabis industry; ● general economic conditions and trends; and ● departures of any of our key employees. 24 In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company.
Biggest changeThe price of our securities in the market on any particular day depends on many factors including, but not limited to, the following: ● our ability to maintain the listing of our securities on the Nasdaq Stock Market, and our ability to satisfy current continued listing standards, including the current deficiency prior to April 9, 2024; ● price and volume fluctuations in the overall stock market from time to time; ● investor demand for our shares and warrants; ● significant volatility in the market price and trading volume of companies in the cannabis industry; ● variations in our operating results and market conditions specific to our business; ● the emergence of new competitors or new technologies; 23 ● operating and market price performance of other companies that investors deem comparable; ● changes in our Board of Directors (the “Board”) or management; ● sales or purchases of our securities by insiders, including sales of our common stock issued to employees, directors and consultants under our equity incentive plans which were registered under the Securities Act of 1933, as amended (the “Securities Act”) under our S-8 registration statement; ● commencement of, or involvement in, litigation; ● changes in governmental regulations, in particular with respect to the cannabis industry; ● actual or anticipated changes in our earnings, and fluctuations in our quarterly operating results; ● market sentiments about the cannabis industry; ● general economic conditions and trends; and ● departures of any of our key employees.
While we have attempted to identify our business risks in the legal cannabis industry, you should carefully consider that there are other risks that cannot be foreseen or are not described in this report, which could materially and adversely affect our business and financial performance. 15 There is heightened scrutiny by Canadian regulatory authorities related to the cannabis industry.
While we have attempted to identify our business risks in the legal cannabis industry, you should carefully consider that there are other risks that cannot be foreseen or are not described in this report, which could materially and adversely affect our business and financial performance. There is heightened scrutiny by Canadian regulatory authorities related to the cannabis industry.
Although the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance, it is unclear whether the current administration will continue to follow the guidelines of the FinCEN Memorandum. 20 We face risks related to civil asset forfeiture due to the regulatory environment of the cannabis industry in the United States.
Although the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance, it is unclear whether the current administration will continue to follow the guidelines of the FinCEN Memorandum. We face risks related to civil asset forfeiture due to the regulatory environment of the cannabis industry in the United States.
The continuation of normal payment terms and conditions with our customers and suppliers, including our ability to obtain advance payments from our customers, significantly impacts our ability to fund our ongoing operations. 12 Any future equity offering will result in dilution to our shareholders; obtaining borrowed capital may not be possible for us.
The continuation of normal payment terms and conditions with our customers and suppliers, including our ability to obtain advance payments from our customers, significantly impacts our ability to fund our ongoing operations. Any future equity offering will result in dilution to our shareholders; obtaining borrowed capital may not be possible for us.
There can be no assurance that we will be able to make any additional sales of products or services in Canada. Variations in state and local regulation and enforcement in states that have legalized cannabis may impose certain restrictions on cannabis-related activities that may adversely impact our revenue and earnings.
There can be no assurance that we will be able to make any additional sales of products or services in Canada. 20 Variations in state and local regulation and enforcement in states that have legalized cannabis may impose certain restrictions on cannabis-related activities that may adversely impact our revenue and earnings.
The barriers to entry into the CEA industry are not overly significant. Over time we anticipate growth in our competition. Some of our current and future competition may have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical, sales and marketing resources.
The barriers to entry into the CEA industry are not overly significant. Over time we anticipate growth and intensity in our competition. Some of our current and future competition may have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical, sales and marketing resources.
As a result, we may be subject to the changes within that sector and certain of the regulations and enforcement issues of the cannabis industry. ● We have material weaknesses in our controls and procedures for financial reporting. 11 ● We may not be able to implement a successful growth program and, even if that is successful, we may not manage our growth effectively, which may affect our investors’ return on investment. ● We will need to expand our customer base, developing customers operating in the CEA industry, expanding and developing our products and services for these potential customers and increasing our marketing and achieving timely contract execution. ● Due to supply disruptions and competing demand for products, we continue to experience supply issues similar to other members of our industry.
As a result, we may be subject to the changes within that sector and certain of the regulations and enforcement issues of the cannabis industry. ● We have material weaknesses in our controls and procedures for financial reporting. ● We may not be able to implement a successful growth program and, even if that is successful, we may not manage such a program effectively, which may affect our investors’ return on investment. ● We will need to expand our customer base, developing customers operating in the CEA industry, expanding and developing our products and services for these potential customers and increasing our marketing and achieving timely contract execution. ● Due to supply disruptions and competing demand for products, we continue to experience supply issues similar to other members of our industry.
A delisting from The Nasdaq Capital Market and failure to obtain listing on another market or exchange would subject our common stock to so-called penny stock rules that impose additional sales practice and market-making requirements on broker-dealers who sell or make a market in those securities.
A delisting from The Nasdaq Capital Market and failure to obtain listing on another market or exchange would subject our securities to so-called penny stock rules that impose additional sales practice and market-making requirements on broker-dealers who sell or make a market in those securities.
All of the foregoing may impact our customers’ ability to purchase our products and services, which may adversely affect our business, revenue and earnings. Most, if not all, of our customers are impacted by Section 280E of the Code, which limits certain expenses marijuana companies can deduct.
All of the foregoing may impact our customers’ ability to purchase our products and services, which may adversely affect our business, revenue and earnings. 22 Most, if not all, of our customers are impacted by Section 280E of the Code, which limits certain expenses marijuana companies can deduct.
Such result may adversely impact our revenue and earnings. 23 There may be difficulty enforcing certain of our commercial agreements and contracts. Courts will not enforce a contract deemed to involve a violation of law or public policy.
Such result may adversely impact our revenue and earnings. There may be difficulty enforcing certain of our commercial agreements and contracts. Courts will not enforce a contract deemed to involve a violation of law or public policy.
To date, the majority of our revenues have been generated from clients that operate in the legal cannabis industry in the United States and Canada. We provide the majority of our facility engineering design and equipment integration and solutions to facilities in the legal cannabis industry.
To date, the majority of our revenues have been generated from clients that operate in the legal cannabis industry in the United States and Canada. We provide the overwhelming majority of our facility engineering design and equipment integration and solutions to facilities in the legal cannabis industry.
These effects, among others, could have an adverse effect on your investment in our common stock. Registration rights and Rule 144 sales contain risks for shareholders.
These effects, among others, could have an adverse effect on your investment in our common stock. 24 Registration rights and Rule 144 sales contain risks for shareholders.
Any one of these factors could slow or halt the progress and adoption of cannabis for recreational and/or medical purposes, which would limit the overall available market for our products and services, which could adversely impact our business, revenue and earnings. 22 Our customers may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.
Any one of these factors could slow or halt the progress and adoption of cannabis for recreational and/or medical purposes, which would limit the overall available market for our products and services, which could adversely impact our business, revenue and earnings. 21 Our customers may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.
In addition, violations of these laws, or allegations of such violations, could disrupt our clients’ business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will limit the amount of cannabis growth or related products that our commercial clients are authorized to produce.
In addition, violations of these laws, or allegations of such violations, could disrupt our clients’ business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will limit the amount of cannabis grown or related products that our commercial clients are authorized to produce.
Recently in later 2022 and early 2023, we have not been as successful in these endeavours as in the recent past. There can be no assurance our overall sales efforts will be successful to result in profitability. There can be no assurance that customers will purchase our services or products or that we will continue to expand our customer base.
Recently, in later 2022 and in 2023, we have not been as successful in these endeavours as in the past. There can be no assurance our overall sales efforts will be successful to result in profitability. There can be no assurance that customers will purchase our services or products or that we will continue to expand our customer base.
We may not be able to convert all of our contracts representing backlog into revenue. We currently do not convert our backlog on a consistent basis quarter to quarter. ● Although we are not cannabis plant touching, historically we have provided services and equipment to the cannabis industry segment.
We may not be able to convert all of our contracts representing backlog into revenue. We currently do not convert our backlog on a consistent basis quarter to quarter. ● Although we are not cannabis plant or product touching, historically we have provided services and equipment to the cannabis industry segment.
Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results. 18 Our ability to use net operating losses to offset future taxable income may be subject to limitations.
Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results. 17 Our ability to use net operating losses to offset future taxable income may be subject to limitations.
Consequently, removal from The Nasdaq Capital Market and failure to obtain listing on another market or exchange could affect the ability or willingness of broker-dealers to sell or make a market in our common stock and the ability of purchasers of our common stock to sell their securities in the secondary market.
Consequently, removal from The Nasdaq Capital Market and failure to obtain listing on another market or exchange could affect the ability or willingness of broker-dealers to sell or make a market in our securities and the ability of purchasers of our securities to sell their securities in the secondary market.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future.
The inability to effectively manage our growth or our operational reorganization could harm our business and materially and adversely affect our operating results and financial condition. Any growth in or reorganization of our business and operations is likely to place a strain on our management and administrative resources, infrastructure and systems.
The inability to effectively manage our operational reorganization could harm our business and materially and adversely affect our operating results and financial condition. If there is any growth in or reorganization of our business and operations, it is likely to place a strain on our management and administrative resources, infrastructure and systems.
We expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise, and manage employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention.
We expect that in those instances we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise, and manage employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention.
While we believe we are better positioned to meet the exacting demands of a controlled cultivation environment through precise temperature, humidity, light, and process controls and to satisfy the evolving code and regulatory requirements being imposed at the state and local levels, there can be no assurance that we will be able to successfully compete against these other contractors and suppliers. 17 We will be required to have top quality talent to compete in the marketplace.
While we believe we are better positioned to meet the exacting demands of a controlled cultivation environment through precise temperature, humidity, light, and process controls and to satisfy the evolving code and regulatory requirements being imposed at the state and local levels, there can be no assurance that we will be able to successfully compete against these other contractors and suppliers.
Such equipment deficiencies may lead to down time impacting our revenue. Further, frequent downtime at customers’ sites due to equipment failures may result in such customers generating less revenue and increasing credit default risk.
From time to time, such equipment may not perform to specifications or to our customers’ satisfaction. Such equipment deficiencies may lead to down time impacting our revenue. Further, frequent downtime at customers’ sites due to equipment failures may result in such customers generating less revenue and increasing credit default risk.
Losing clients from the cannabis industry may have a material adverse effect on our revenues and the success of our business. The cannabis industry is still in its early stages of development in the United States.
Losing clients from the cannabis industry may have a material adverse effect on our revenues and the success of our business. The cannabis industry is still developing in the United States.
As of December 31, 2022, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $25,949,000, of which $11,196,000 will expire, if not utilized, in the years 2034 through 2037. However, the balance of $14,753,000 NOLs generated subsequent to December 31, 2017, do not expire but may only be used against taxable income to 80%.
As of December 31, 2023, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $28,840,000, of which $11,196,000 will expire, if not utilized, in the years 2034 through 2037. However, the balance of $17,644,000 NOLs generated subsequent to December 31, 2017, do not expire but may only be used against taxable income to 80%.
Moreover, such dilution could have a material adverse effect on the market price for the shares of our common stock. 26 The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class, or by giving the holders of any such preferred stock the right or ability to block an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock.
The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class, or by giving the holders of any such preferred stock the right or ability to block an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock.
If the equipment does not perform to specifications or to our customers’ satisfaction, there may be an adverse impact on our business and our revenues. ● The build side of the CEA industry is very competitive.
If the equipment does not perform to specifications or to our customers’ satisfaction, there may be an adverse impact on our business and our revenues. ● We rely on a limited number of customers and suppliers. ● The build side of the CEA industry is very competitive.
We have experienced some unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to a significant increase in shipments to U.S. ports, less cargo being shipped by air, unavailability of truckers and a general shortage of containers. We expect this to continue for some time.
Our suppliers could experience uncontrollable delays in delivering our products. We have experienced some unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to a significant increase in shipments to U.S. ports, less cargo being shipped by air, unavailability of truckers and a general shortage of containers.
As a result, if our Board does not declare and pay dividends, the capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our common stock, and you may have to sell some or all of your common stock to generate cash flow from your investment. 25 The market price of our securities may be adversely affected by the sale of shares by our management or large stockholders.
As a result, if our Board does not declare and pay dividends, the capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our common stock, and you may have to sell some or all of your common stock to generate cash flow from your investment.
We cannot assure that we will be able to: ● execute on our business plan and strategy; ● expand our products effectively or efficiently or in a timely manner; ● allocate our human resources optimally; ● meet our capital needs; ● identify and hire qualified employees or retain valued employees; or ● effectively incorporate the components of any business or product line that we may acquire in our effort to achieve growth. 14 Our inability or failure to manage our company effectively could harm our business and materially and adversely affect our operating results and financial condition.
We cannot assure that we will be able to: ● execute on our business plan and strategy; ● expand our products effectively or efficiently or in a timely manner; ● allocate our human resources optimally; ● meet our capital needs; ● identify and hire qualified employees or retain valued employees; or ● effectively incorporate the components of any business or product line that we may acquire in our effort to achieve growth.
The departure of any one of our key employees could have a material adverse effect on our ability to achieve our business objective and maintain the specialized services that we offer our customers.
The departure of any one of our key employees could have a material adverse effect on our ability to achieve our business objective and maintain the specialized services that we offer our customers. We have a limited number of employees that may not be sufficient to service our contracts.
If we are unable to maintain our listing on The Nasdaq Markets for either the common stock or the warrants, or both, it could become more difficult to sell our securities in the public market. Our common stock is listed on The Nasdaq Capital Market. To maintain our listing on this market, we must meet Nasdaq’s listing maintenance standards.
If we are unable to maintain our listing on The Nasdaq Markets for either the common stock or the warrants, or both, it could become more difficult to sell our securities in the public market. Currently, our common stock and warrants are listed on The Nasdaq Capital Market.
These disruptions are also causing price increases, which may become an inflationary force in the marketplace. Equipment failures or poor performance may negatively impact our business. We rely on third party manufacturers for equipment which we sell or lease. From time to time, such equipment may not perform to specifications or to our customers’ satisfaction.
We expect this to continue for some time. These disruptions are also causing price increases, which may become an inflationary force in the marketplace. Equipment failures or poor performance may negatively impact our business. We rely on third party manufacturers for equipment which we sell or lease.
We could issue a significant number of shares of common stock in the future in connection with investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution could be significant.
We could issue a significant number of shares of common stock in the future in connection with investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution could be significant. Moreover, such dilution could have a material adverse effect on the market price for the shares of our common stock.
There is no assurance that we will be able to convert our backlog into revenue or make a profit. We may be unable to convert the full contract value of our backlog in a timely manner, or at all. We inconsistently convert our backlog into revenue on a quarter-to-quarter basis.
We may be unable to convert the full contract value of our backlog in a timely manner, or at all. We inconsistently convert our backlog into revenue on a quarter-to-quarter basis.
These increased costs could adversely impact the gross margin that we earn on sales of our products. Tariffs could also make our products more expensive for customers, which could make our products less competitive and reduce customer demand. Countries may also adopt other protectionist measures that could limit our ability to offer our products and services.
These increased costs could adversely impact the gross margin that we earn on sales of our products. Tariffs could also make our products more expensive for customers, which could make our products less competitive and reduce customer demand.
Summary Of Risk Factors Our business is subject to a number of risks and uncertainties, including those risks discussed at length in the section below titled “Risk Factors.” These risks include, among others, the following: ● Historically, we have had limited revenues and operated our business with a working capital deficit.
In that event, the trading price of our securities could decline, and you could lose part or all of your investment. 9 Summary Of Risk Factors Our business is subject to a number of risks and uncertainties, including those risks discussed at length in the section below titled “Risk Factors.” These risks include, among others, the following: ● Historically, we have had limited revenues and operated our business with a working capital deficit.
The failure of our customers to pay the full amounts due to us could negatively affect future profitability. 13 Because we currently do not maintain effective internal controls over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our common stock may, therefore, be adversely impacted.
Because we currently do not maintain effective internal controls over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our common stock may, therefore, be adversely impacted.
Under such circumstances, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still decline to attest to our management’s assessment, or may issue a report that is qualified, if it is not satisfied with our controls, or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.
Under such circumstances, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still decline to attest to our management’s assessment, or may issue a report that is qualified, if it is not satisfied with our controls, or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. 12 We have identified material weaknesses in our internal control over financial reporting and, if we do not remediate the material weakness or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
Sales of our shares of common stock by our officers or senior managers through 10b5-1 plans or otherwise or by large stockholders could adversely and unpredictably affect the price of our common stock. Additionally, the price of our shares of common stock could be affected even by the potential for sales by these persons.
The market price of our securities may be adversely affected by the sale of shares by our management or large stockholders. Sales of our shares of common stock by our officers or senior managers through 10b5-1 plans or otherwise or by large stockholders could adversely and unpredictably affect the price of our common stock.
We cannot predict the effect that any future sales of our common stock, or the potential for those sales, will have on our share price.
Additionally, the price of our shares of common stock could be affected even by the potential for sales by these persons. We cannot predict the effect that any future sales of our common stock, or the potential for those sales, will have on our share price.
Our future success will depend on the continued service of these key employees or our ability to engage others who are similarly situated in the industry.
We depend on the industry knowledge, technical and financial skill, and network of business contacts of certain key employees. Our future success will depend on the continued service of these key employees or our ability to engage others who are similarly situated in the industry.
You may be diluted by future issuances of preferred stock or additional common stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.
In that event, there is no assurance that we will list our securities on any other trading platform. 25 You may be diluted by future issuances of preferred stock or additional common stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.
If our common stock were to trade in the OTC market, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock.
Listing on such other market or exchange could reduce the liquidity of our securities. If our securities were to trade in the OTC market, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the securities.
In most states, the cultivation of cannabis for personal use continues to be prohibited except by those states that allow small-scale cultivation by the individual in possession of cannabis for medicinal purposes or that person’s caregiver.
In most states, the cultivation of cannabis for personal use continues to be prohibited except by those states that allow small-scale cultivation by the individual in possession of cannabis for medicinal purposes or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of cannabis may indirectly and adversely affect our revenue and earnings.
There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings. We are dependent upon certain key sales, managerial and executive personnel for our future success.
Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings. 16 We are dependent upon certain key sales, managerial and executive personnel for our future success. If we lose any of our key personnel, our ability to implement our business strategy could be significantly harmed.
Supreme Court has ruled that the federal government has the authority to regulate and criminalize the sale, possession and use of cannabis, even for individual medical purposes, regardless of whether it is legal under state law.
Supreme Court has ruled that the federal government has the authority to regulate and criminalize the sale, possession and use of cannabis, even for individual medical purposes, regardless of whether it is legal under state law. For over six years, however, the U.S. government has not enforced those laws against companies complying with state cannabis law and their vendors.
Any change in our suppliers’ approach to resolving production issues could disrupt our ability to fulfill orders and could also disrupt our business due to delays in finding new suppliers, providing specifications and testing initial production. Our suppliers could experience uncontrollable delays in delivering our products.
Our suppliers may also have to obtain inventories of the necessary parts and tools for production. Any change in our suppliers’ approach to resolving production issues could disrupt our ability to fulfill orders and could also disrupt our business due to delays in finding new suppliers, providing specifications and testing initial production.
In addition, a company could be adversely affected by any of the liquidity or other risks that are described above as factors that could result in material adverse impacts on us, including but not limited to delayed access or loss of access to uninsured deposits or loss of the ability to draw on existing credit facilities involving a troubled or failed financial institution.
In addition, a company could be adversely affected by any of the liquidity or other risks that are described above as factors that could result in material adverse impacts on us, including but not limited to delayed access or loss of access to uninsured deposits or loss of the ability to draw on existing credit facilities involving a troubled or failed financial institution. 18 Risks Related to the Cannabis Industry Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis, particularly against our customers, would likely result in our inability to execute our business plan.
Management expects that, under typical operating conditions, we will experience substantial variations in our revenues and operating results from quarter to quarter. Our revenue recognition is dependent upon shipment of the equipment portions of our sales contracts, which, in many cases, may be delayed while our customers complete permitting, prepare their facilities for equipment installation or obtain project financing.
Our revenue recognition is dependent upon shipment of the equipment portions of our sales contracts, which, in many cases, may be delayed while our customers complete permitting, prepare their facilities for equipment installation or obtain project financing.
As of December 31, 2022, we had working capital of approximately $14,724,000 and our cash balance was $18,637,000. Notwithstanding the recent capital raise, we expect to need additional funds in the longer term, from time to time, to complete aspects of the overall development of our business plan, such as in connection with the acquisition of strategic assets.
Notwithstanding that capital raise, we expect to need additional funds in the longer term, from time to time, to complete aspects of the overall development of our business plan, such as in connection with the acquisition of strategic assets.
If there is a market, the prices of our publicly traded securities may be volatile, and the price may decrease substantially. We do not intend on paying dividends.
If there is a market, the prices of our publicly traded securities may be volatile, and the price may decrease substantially. We do not intend on paying dividends. ● Our listing on NASDAQ is subject to a de-listing notice. We have must satisfy the continued listing requirements prior to April 9, 2024.
Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering if certain other elements are met.
Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering if certain other elements are met. 19 Despite these laws, the FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking FinCEN enforcement.
Active enforcement of state laws that prohibit personal cultivation of cannabis may indirectly and adversely affect our revenue and earnings. 21 The cannabis industry could face strong opposition from other industries. We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry.
The cannabis industry could face strong opposition from other industries. We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry.
If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our securities could decline, and you could lose part or all of your investment.
If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.
We believe our success will depend in part on our ability to have skilled managerial, product development, sales and marketing, and finance personnel. Our ability to attract and retain personnel with the requisite credentials, experience and skills will depend on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities.
Our ability to attract and retain personnel with the requisite credentials, experience and skills will depend on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. There can be no assurance of success in attracting and retaining such personnel.
If our common stock were delisted, we may seek to list our common stock on the NYSE American or on a regional stock exchange or, if one or more broker-dealer market makers comply with applicable requirements, the over-the-counter (OTC) market. Listing on such other market or exchange could reduce the liquidity of our common stock.
If we are unable to meet Nasdaq’s listing maintenance standards for any reason, our common stock and warrants will be delisted. If our securities are delisted, we may seek to list our securities on the NYSE American or on a regional stock exchange or, if one or more broker-dealer market makers comply with applicable requirements, the over-the-counter (OTC) market.
The cannabis industry has been an emerging industry over the last several years, and cannabis has only been legalized in some states and remains illegal in other states and under U.S. federal law, making it difficult to accurately forecast the demand for our engineering and product solutions in this specific industry.
While we are hopeful that the proportion of non-cannabis revenues might increase over time, decreases in demand from the legal cannabis industry will have a material adverse effect on our revenues and the success of our business operations. 13 The cannabis industry has been an emerging industry over the last several years, and cannabis has only been legalized in some states and remains illegal in other states and under U.S. federal law, making it difficult to accurately forecast the demand for our engineering and product solutions in this specific industry.
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition, and our results of operations. We may be unable to obtain intellectual property rights to effectively protect our branding, products, and other intangible assets.
We may be unable to obtain intellectual property rights to effectively protect our branding, products, and other intangible assets. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights.
For over six years, however, the U.S. government has not enforced those laws against companies complying with state cannabis law and their vendors. 19 The likelihood of any future adverse enforcement against companies complying with state cannabis laws remains uncertain. The U.S. Attorney’s Office will follow established principles that govern all federal prosecutions when deciding which cannabis activities to prosecute.
The likelihood of any future adverse enforcement against companies complying with state cannabis laws remains uncertain. The U.S. Attorney’s Office will follow established principles that govern all federal prosecutions when deciding which cannabis activities to prosecute. As a result, federal prosecutors could and still can use their prosecutorial discretion to decide to prosecute even state-legal cannabis activities. However, generally, U.S.
The risk is that we derive our revenue and profits from selling products and services to the emerging cannabis industry.
The risk is that we derive our revenue and profits from selling products and services to the emerging cannabis industry. The failure of our customers to pay the full amounts due to us could negatively affect future profitability.
Despite these laws, the FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking FinCEN enforcement. It refers to and incorporates supplementary Cole Memo guidance issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA on the same day.
It refers to and incorporates supplementary Cole Memo guidance issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA on the same day.
Such changes could result in future impairments of goodwill, intangible assets, long-lived assets, incremental credit losses on accounts receivable, or excess and obsolete inventory. Any of these events could amplify the other risks and uncertainties described in this Annual Report and could have an adverse effect on our business and financial results.
Such changes could result in future impairments of goodwill, intangible assets, long-lived assets, incremental credit losses on accounts receivable, or excess and obsolete inventory.
If we are unable to secure intellectual property rights to effectively protect our branding, products, and other intangible assets, our revenue and earnings, financial condition, or results of operations could be adversely affected. We also rely on non-disclosure and non-competition agreements to protect portions of our intellectual property portfolio.
While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our branding, products, and other intangible assets, our revenue and earnings, financial condition, or results of operations could be adversely affected.
Any of these suppliers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the material or products on a timely basis. Our suppliers may also have to obtain inventories of the necessary parts and tools for production.
We depend on third party suppliers around the world, including those in The People’s Republic of China, for materials used to assemble our products. Any of these suppliers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the material or products on a timely basis.
If we are unable to effectively market or expand our product and service offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue, and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
If we are unable to effectively market or expand our product and service offerings, we will be unable to grow and expand our business or implement our business strategy.
Due to the potential volatility of our securities prices, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
As a result, federal prosecutors could and still can use their prosecutorial discretion to decide to prosecute even state-legal cannabis activities. However, generally, U.S. Attorneys have not targeted state law compliant entities. The policy of not prosecuting companies complying with state cannabis laws is likely to continue under the Biden Administration.
Attorneys have not targeted state law compliant entities. The policy of not prosecuting companies complying with state cannabis laws is likely to continue under the Biden Administration.
In addition, these failures may also result in additional time spent by our personnel, decreasing profit margins on certain ancillary services. 16 International trade disputes could result in tariffs and other protectionist measures that could adversely affect the Company’s business. Tariffs could increase the cost of our products and the components and raw materials that go into making them.
Overall, our operations and, therefore, financial results are dependent on a limited number of customers and suppliers. International trade disputes could result in tariffs and other protectionist measures that could adversely affect the Company’s business. Tariffs could increase the cost of our products and the components and raw materials that go into making them.
Our operating results may fluctuate significantly based on customer acceptance of our services and products, industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.
Our inability or failure to manage our company effectively could harm our business and materially and adversely affect our operating results and financial condition. Our operating results may fluctuate significantly based on customer acceptance of our services and products, industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers.
Our suppliers could fail to fulfill our orders for parts used to assemble our products, which would disrupt our business, increase our costs, harm our reputation, and potentially cause us to lose our market. We depend on third party suppliers around the world, including those in The People’s Republic of China, for materials used to assemble our products.
This could materially impair our ability to increase sales and revenue, and materially and adversely affect our margins, which could harm our business and cause our stock price to decline. 14 Our suppliers could fail to fulfill our orders for parts used to assemble our products, which would disrupt our business, increase our costs, harm our reputation, and potentially cause us to lose our market.
Risk Factors Risks Relating to Our Business Our revenues have been limited, and we will need to obtain financing for future growth, and possibly our operations, which may not be available to us. Historically, we have raised equity and debt capital to support our operations. We raised approximately $22 million from a public offering completed in February 2022.
No assurance can be given that we will list our securities on any other trading market. 10 Risk Factors Risks Relating to Our Business Our revenues have been limited, and we will need to obtain financing for any substantive growth, and possibly our continued operations, which may not be available to us.
The results of the COVID-19 pandemic may continue to adversely impact, the Company’s operations and financial results. The COVID-19 pandemic resulted in economic disruption that continues. The extent to which our business and financial results are impacted will depend on numerous evolving factors which are uncertain and cannot be predicted.
The results of the COVID-19 pandemic may continue to adversely impact, the Company’s operations and financial results. The impact of the government and the business economic response to the COVID-19 pandemic affected demand across the majority of our markets and disrupted workflow and completion schedules on projects.
Nineteen of those states and the District of Columbia and Northern Mariana have also legalized cannabis for adults for non-medical purposes (sometimes referred to as adult use). Ten additional states have legalized low-tetrahydrocannabinol (“THC”)/high-CBD extracts for select medical conditions (CBD states). Under U.S. federal law, however, those activities are illegal.
Marijuana legalization is mixed across the country. And it is constantly evolving. In four states it continues to be fully illegal. In the other states it is either legalized, available for medical uses and decriminalized, available for medical uses, decriminalized, or permitted for low-tetrahydrocannabinol (“THC”)/high-CBD extracts. Under U.S. federal law, however, those activities are illegal.
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In addition, the change in macroeconomic conditions are impacting the financial and capital markets, foreign currency exchange rates, commodity and energy prices, and interest rates. The effect of inflation in the post pandemic economy is also becoming a significant factor in our business operations and considerations.
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If we do not satisfy these, before that date, our common stock and warrants will be delisted from NASDAQ. In the event of de-listing, we will attempt to list the securities on another trading market.
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We still are experiencing delays with our international supply of products and shipments from vendors. While these delays have improved in recent months, we, along with many other importers of goods across all industries, continue to experience supply chain disruption. Also, shipping times are still longer than they were prior to the COVID-19 pandemic.
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Historically, we have raised equity and debt capital to support our operations. We raised approximately $22 million from a public offering completed in February 2022. As of December 31, 2023, we had working capital of approximately $12,110,000 and our cash balance was approximately $12,508,000.
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These factors have impacted our operations and our contract fulfilment schedules. Our customers also are experiencing post-pandemic disruption that has resulted in delaying grow facility projects, reductions in project size and cancellations of projects.
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We believe we continue to see adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, costs, and working capital. Due to this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the long-term impact of the COVID-19 pandemic to the best of our ability.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our customers.
Biggest changeFrom time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our customers.
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Item 3. Legal Proceedings On October 20, 2023, Sweet Cut Grow, LLC and Green Ice, LLC (collectively, “Claimant”) a client of the Company with which it had an equipment contract and engineering contract, filed a demand for arbitration asserting claims for breach of contract, breach of warranty, and unjust enrichment, and demand for $1,049,280 in damages, plus interest (“Claims”).
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The Company continues to deny all the Claims and has asserted a counterclaim. The Company believes Claimant is owed nothing as the Company fulfilled all its obligations under the contracts to Claimant, and further, that the negligence of a third-party supplier is the basis of the Claims.
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The Company’s equipment contract with Claimant requires the parties to arbitrate their disputes under the rules of the American Arbitration Association (“AAA”). The arbitration will be heard in Denver, Colorado. The matter is in the preliminary phase. The parties will pay their own legal fees and expenses.
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The Company intends to defend itself vigorously, believing there are no merits to the claims as currently presented. Given the current uncertainty around estimability and success of claims, we have not recorded an accrual for any potential loss related to this matter.
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Regardless, we intend to generally defend the claims on the basis that we promptly addressed all problems, and that any issues with defective HVAC equipment are the responsibility of our third-party equipment manufacturer.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 27 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28 Item 6. Selected Financial Data 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 27 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28 Item 6. Selected Financial Data 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAs of December 31, 2022, we have granted under the 2021 Equity Plan, incentive stock options, non-qualified stock options, and a stock bonus award. 28 Number of shares to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) Equity compensation plans approved by shareholders 102,017 $ 4.97 551,113 Equity compensation plans not approved by shareholders (1) - - Total 102,017 $ 4.97 551,113 (1) Of the 666,667 Plan Shares allocated for issuance under the 2021 Equity Plan, as of December 31, 2022, 10,170 shares have been issued, non-qualified stock options over 61,201 shares were issued and outstanding, incentive stock options over 40,816 shares were issued and outstanding, restricted stock units over 3,367 shares were issued and outstanding, and securities in respect of the remaining 551,113 shares were available for future issuance.
Biggest changeNumber of shares to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) Equity compensation plans approved by shareholders (1) 213,632 $ 2.81 320,467 Equity compensation plans not approved by shareholders - - Total 213,632 $ 2.81 320,467 (1) Of the 666,667 Plan Shares allocated for issuance under the 2021 Equity Plan, as of December 31, 2023, 132,568 shares have been issued, non-qualified stock options over 172,815 shares were issued and outstanding, incentive stock options over 40,816 shares were issued and outstanding, and securities in respect of the remaining 320,467 shares were available for future issuance.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Public Securities; Common Stock and Warrants Our shares of common stock are quoted on Nasdaq under the symbol “CEAD”.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Public Securities: Common Stock and Warrants Our shares of common stock currently are quoted on Nasdaq under the symbol “CEAD”.
The 2017 Equity Plan allocates 333,333 shares of our common stock (“Plan Shares”) for issuance of equity awards under the 2017 Equity Plan. As of December 31, 2022, we have granted, under the 2017 Equity Plan, awards in the form of RSAs for services rendered by independent directors and consultants, non-qualified stock options, RSUs and stock bonus awards.
The 2017 Equity Plan allocates 333,333 shares of our common stock (“Plan Shares”) for issuance of equity awards under the 2017 Equity Plan. As of December 31, 2023, we have granted, under the 2017 Equity Plan, awards in the form of RSAs for services rendered by independent directors and consultants, non-qualified stock options, RSUs, and stock bonus awards.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future.
Refer to Note 14 – Equity Incentive Plan of our consolidated financial statements, which are included as part of this Annual Report for the further details on our 2017 Equity Plan and 2021 Equity Plan.
Refer to Note 13 – Equity Incentive Plan of our consolidated financial statements, which are included as part of this Annual Report for further details on our 2017 Equity Plan and 2021 Equity Plan.
The information for our 2017 Equity Plan as of December 31, 2022 is summarized as follows: Number of shares to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) Equity compensation plans approved by shareholders - - - Equity compensation plans not approved by shareholders (1) 147,177 $ 11.88 22,464 Total 147,177 $ 11.88 22,464 (1) Of the 333,333 Plan Shares allocated for issuance under the 2017 Equity Plan, as of December 31, 2022, 163,692 shares have been issued, non-qualified stock options over 147,177 shares were issued and outstanding and securities in respect of the remaining 22,464 shares were available for future issuance. 2021 Equity Incentive Plan On March 22, 2021, the Board approved the 2021 Equity Incentive Plan (the “2021 Equity Plan”), which was approved by the stockholders on July 22, 2021.
The information for our 2017 Equity Plan as of December 31, 2023 is summarized as follows: Number of shares to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) Equity compensation plans approved by shareholders - - - Equity compensation plans not approved by shareholders (1) 145,512 $ 11.85 24,129 Total 145,512 $ 11.85 24,129 (1) Of the 333,333 Plan Shares allocated for issuance under the 2017 Equity Plan, as of December 31, 2023, 163,692 shares have been issued, non-qualified stock options over 145,512 shares were issued and outstanding and securities in respect of the remaining 24,129 shares were available for future issuance. 28 2021 Equity Incentive Plan On March 22, 2021, the Board approved the 2021 Equity Incentive Plan (the “2021 Equity Plan”), which was approved by the stockholders on July 22, 2021.
In addition, we have a class of publicly traded warrants to purchase shares of common stock that are quoted on Nasdaq under the symbol “CEADW.” As of March 28, 2023, we had approximately 32 shareholders of record and approximately 12,181 shareholders who hold their shares in street name.
In addition, we have a class of publicly traded warrants to purchase shares of common stock that are quoted on Nasdaq under the symbol “CEADW.” We received a continued listing deficiency letter and must satisfy the deficiency prior to April 9, 2024.
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If we do not satisfy the deficiency our securities will be removed from trading on Nasdaq by action of the exchange. We believe our securities will then trade on the OTC. We do not anticipate applying for listing on the higher tiers of the OTC.
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We will continue to be a reporting company with the Securities and Exchange Commission, and we anticipate that brokers will continue to be able to make share transactions in our securities, although they will be subject to trading requirements that will substantially restrict the ability of our stockholders to make share sales and others to make share purchases.
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The limited trading will also restrict our ability to use our equity to fund our operations. As of March 9, 2024, we had approximately 32 shareholders of record and as of October 25, 2023, we had approximately 11,694 shareholders who hold their shares in street name.
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As of December 31, 2023, we have granted under the 2021 Equity Plan, incentive stock options, non-qualified stock options, and a stock bonus award.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $1,097,000, (ii) a goodwill impairment charge of $631,000, (iii) an increase in advertising and marketing expenses of $386,000 offset by, (iii) a decrease in product development expenses of $150,000. 35 The increase in SG&A expenses for the year ended December 31, 2022 compared to the year ended December 31, 2021, was due primarily to: (i) an increase of $671,000 in salaries, benefits (including equity-based compensation) and other employee related costs, (ii) an increase of $251,000 for insurance, (iii) an increase in accounting and other professional fees of $177,000, (iv) an increase in board fees of $95,000, (v) an increase of $69,000 for travel expenses, (vi) an increase in bad debt of $67,000, (vii) an increase in investor relations expenses of $61,000, offset by, (viii) a decrease of $115,000 for commissions, (ix) a decrease of $94,000 for depreciation and loss on disposal of fixed assets, and (x) a decrease of $85,000 for business taxes, licenses and other office expenses .
Biggest changeThe decrease in SG&A expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022, was due primarily to: (i) a decrease of $998,000 in salaries, benefits (including equity-based compensation) and other employee related costs, (ii) a decrease of $314,000 in accounting and other professional fees, (iii) a decrease in commissions of $111,000, (iv) a decrease in travel of $104,000, (v) a decrease of $96,000 for facility and office expenses, and (vi) a decrease in bad debt of $89,000, (vii) a decrease of $5,000 for insurance and, (viii) lower losses on asset disposals of $5,000, offset by (ix) an increase of $67,000 for investor relations expense, (x), higher business taxes and licenses of $31,000 , and (xi) an increase of $10,000 for Board of Director fees. 34 The decrease in advertising and marketing expenses was due primarily to: (i) a decrease in salaries and benefits (including equity-based compensation) of $358,000, (ii) a decrease of $296,000 for advertising and promotion, web development and other marketing expenses, (iii) a decrease in expenses for industry trade shows and events of $194,000, and (iv) a decrease of $36,000 for outside marketing services.
We believe the following are the more significant judgments and estimates used in the preparation of our consolidated financial statements. Allowance for accounts receivable . Accounts receivables are recorded at the invoiced amount or based on revenue earned for items not yet invoiced, and generally do not bear interest.
We believe the following are the more significant judgments and estimates used in the preparation of our consolidated financial statements. Accounts receivable and allowance for accounts receivable . Accounts receivables are recorded at the invoiced amount or based on revenue earned for items not yet invoiced, and generally do not bear interest.
Our principal service and product offerings include: (i) floor plans and architectural design of cultivation facilities, (ii) licensed mechanical, electrical, and plumbing (MEP) engineering of commercial scale environmental control systems specific to cultivation facilities, (iii) process cooling systems and other climate control systems, (iv) air handling equipment and systems, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) automation and control devices, systems and technologies used for environmental, lighting and climate control, and (viii) preventative maintenance services for CEA facilities.
Our service and product offerings include: (i) floor plans and architectural design of cultivation facilities, (ii) licensed mechanical, electrical, and plumbing (MEP) engineering of commercial scale environmental control systems specific to cultivation facilities, (iii) process cooling systems and other climate control systems, (iv) air handling equipment and systems, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) automation and control devices, systems and technologies used for environmental, lighting and climate control, and (viii) preventative maintenance services for CEA facilities.
We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflict will have any impact on our internal control over financial reporting.
We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflicts will have any impact on our internal control over financial reporting.
An unfavorable outcome to any legal matter, if material, could have an adverse effect on our operations or our financial position, liquidity or results of operations. 38 Other Commitments In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties.
An unfavorable outcome to any legal matter, if material, could have an adverse effect on our operations or our financial position, liquidity or results of operations. 37 Other Commitments In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties.
For equipment sales, the standalone selling price is determined by forecasting the expected costs of the equipment and then adding an appropriate margin, based on a range of acceptable margins established by management.
For equipment sales, the standalone selling price is determined by forecasting the expected costs of the equipment and components and then adding an appropriate margin, based on a range of acceptable margins established by management.
In contrast, after the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial equipment paid contracts”), we are typically better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. 34 Commitments and contingencies .
In contrast, after the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial equipment paid contracts”), we are typically better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. 33 Commitments and contingencies .
This section provides an analysis of cash flow, contractual obligations, and certain other matters affecting our financial position. 29 Executive Overview CEA Industries Inc. is a company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry.
This section provides an analysis of cash flow, contractual obligations, and certain other matters affecting our financial position. 29 Executive Overview CEA Industries Inc. is focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry.
However, there continues to be significant uncertainty regarding the timing of our recognition of revenue in our Q4 2022 backlog. Refer to the Revenue Recognition section of Note 2 in our consolidated financial statements, included as part of this Annual Report for additional information on our estimate of future revenue recognition on our remaining performance obligations.
However, there continues to be significant uncertainty regarding the timing of our recognition of revenue in our Q4 2023 backlog. Refer to the Revenue Recognition section of Note 2 in our consolidated financial statements, included as part of this Annual Report for additional information on our estimate of future revenue recognition on our remaining performance obligations.
Despite this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business.
Due to this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the long-term impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business.
As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks related to this conflict.
As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks related to the conflicts.
There is significant uncertainty regarding the timing of our recognition on all remaining performance obligations as of December 31, 2022.
There is significant uncertainty regarding the timing of our recognition on all remaining performance obligations as of December 31, 2023.
The net loss included $631,000 for a goodwill impairment charge, $314,000 of non-cash, stock-based compensation costs and depreciation and amortization expense of $26,000 in the year ended December 31, 2022, as compared to non-cash, stock-based compensation expense of $391,000 and depreciation and amortization of $58,000 in the year ended December 31, 2021.
The net loss included $188,000 of non-cash, stock-based compensation costs and depreciation and amortization expense of $26,000 in the year ended December 31, 2023, as compared to $631,000 for a goodwill impairment charge, $314,000 of non-cash, stock-based compensation costs and depreciation and amortization expense of $26,000 in the year ended December 31, 2022.
The grant date fair value of stock options is based on the Black-Scholes Model. The Black-Scholes Model requires judgmental assumptions including volatility and expected term, both based on historical experience. The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected term of the option. Allocation of transaction price; standalone selling price .
The grant date fair value of stock options is based on the Black-Scholes Model. The Black-Scholes Model requires judgmental assumptions including volatility and expected term, both based on historical experience. The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected term of the option. Revenue Recognition.
Once the selling prices are determined, we apply the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as each performance obligation is fulfilled. Remaining performance obligations.
Once the selling prices are determined, we apply the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as each promise is fulfilled.
Historically, nearly all of our customers have been in the cannabis cultivation business. We believe our customers engage us for their environmental and climate control systems because they value our reputation as experts in the industry. We leverage our reputation and know-how against the many local contractors and MEP engineers who collectively constitute our largest competitors.
We believe our customers engage us for their environmental and climate control systems because they value our reputation as experts in the industry. We leverage our reputation and know-how against the many local contractors and MEP engineers who collectively constitute our largest competitors.
Accordingly, the time it takes for these customers to complete a new build project, which corresponds to when we are able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation systems; (vii) the availability of power; and (viii) delays that are typical in completing any construction project.
Accordingly, the time it takes for these customers to complete a new build project, which corresponds to when we are able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation systems; (vii) the availability of power; and (viii) delays that are typical in completing any construction project. 31 We have provided an estimate in our consolidated financial statements of when we expect to recognize revenue on our remaining performance obligations (i.e., our Q4 2023 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts.
The variable cost component, which represents our cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs, totaled $8,567,000, or 75.9% of total revenue, in the year ended December 31, 2022, as compared to $9,371,000, or 68.7% of total revenue, in the year ended December 31, 2021.
The variable cost component, which represents our cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs, totaled $5,090,000, or 73.6% of total revenue, in the year ended December 31, 2023, as compared to $8,567,000, or 75.9% of total revenue, in the year ended December 31, 2022.
Summary of Cash Flows The following summarizes our cash flows for the years ended December 31, 2022 and 2021: For the Twelve Months Ended December 31, 2022 2021 Net cash used in operating activities $ (3,190,000 ) $ (3,207,000 ) Net cash used in investing activities (28,000 ) (57,000 ) Net cash provided by financing activities 19,695,000 3,139,000 Net increase (decrease) in cash $ 16,477,000 $ (125,000 ) Operating Activities We incurred a net loss for the year ended December 31, 2022 of $5,497,000 compared to a net loss for the year ended December 31, 2021 of $1,338,000.
Summary of Cash Flows The following summarizes our cash flows for the years ended December 31, 2023 and December 31, 2022: For the Twelve Months Ended December 31, 2023 2022 Net cash used in operating activities $ (6,129,000 ) $ (3,190,000 ) Net cash used in investing activities - (28,000 ) Net cash provided by financing activities - 19,695,000 Net increase (decrease) in cash $ (6,129,000 ) $ 16,477,000 Operating Activities We incurred a net loss for the year ended December 31, 2023 of $2,912,000 compared to a net loss for the year ended December 31, 2022 of $5,497,000.
Significant non-cash items during 2022 included: (i) a goodwill impairment charge of $631,000, (ii) stock-related compensation of $314,000, and (iii) $103,000 for the amortization on an ROU asset.
Significant non-cash items during 2023 included: (i) stock-related compensation of $188,000, (ii) excess and obsolete inventory charges of $122,000, and (iii) $107,000 for the amortization on an ROU asset. Significant non-cash items during 2022 included: (i) a goodwill impairment charge of $631,000, (ii) stock-related compensation of $314,000, and (iii) $103,000 for the amortization on an ROU asset.
Moreover, the results of complex legal proceedings are difficult to predict, and our view of these matters may change in the future as the litigation and events related thereto unfold.
Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict, and our view of these matters may change in the future as the litigation and events related thereto unfold.
We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response.
We believe the conflicts will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from countries involved in the conflicts, supply chain challenges, and the international and US domestic inflation resulting from the conflict and government spending in relation to the conflicts.
The operating loss included $631,000 for a goodwill impairment charge, $314,000 of non-cash, stock-based compensation expenses and $26,000 for depreciation and amortization in the year ended December 31, 2022, as compared to $324,000 for stock-based compensation and $58,000 of depreciation and amortization for the year ended December 31, 2021. Excluding these non-cash items, our adjusted operating loss increased by $3,156,000.
The operating loss included $188,000 of non-cash, stock-based compensation expenses and $26,000 for depreciation and amortization in the year ended December 31, 2023, as compared to $631,000 for a goodwill impairment charge, $314,000 for stock-based compensation, and $26,000 of depreciation and amortization for the year ended December 31, 2022. Excluding these non-cash items, our adjusted operating loss decreased by $2,013,000.
The decrease was primarily attributable to: (i) an increase in net loss of $4,159,000, (ii) a decrease in cash used for working capital of $3,428,000 and, (iii) an increase in non-cash operating charges of $748,000.
The increase was primarily attributable to: (i) an increase in cash used for working capital of $4,965,000, (ii) a decrease in net loss of $2,586,000 and, (iii) a decrease in non-cash operating charges of $560,000.
The best observable input is our actual selling price for the same good or service. For engineering services, we estimate the standalone selling price by reference to certain physical characteristics of the project, such as facility size and mechanical systems involved, which are indicative of the scope and complexity of the mechanical engineering services to be provided.
For engineering services, we estimate the standalone selling price by reference to certain physical characteristics of the project, such as facility size and mechanical systems involved, which are indicative of the scope and complexity of the mechanical engineering services to be provided.
Consequently, our revenue recognition of these customer sales has been delayed until future periods when the shipment of these orders can be completed. 30 Impact of Ukrainian Conflict Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting.
Consequently, our revenue recognition of some customer sales has been delayed until future periods when the shipment of orders can be completed. Impact of Ukrainian and Israeli Conflicts We believe that the conflicts involving Ukraine and Israel do not have any direct impact on our operations, financial condition, or financial reporting.
The Company also issued to the representative of the underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.16, during the period commencing August 9, 2022, and expiring on February 10, 2027.
The Company also issued to the representative of the underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.16, during the period commencing August 9, 2022, and expiring on February 10, 2027. The net proceeds from the offering have been used for general corporate and working capital purposes.
Historically, our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities that grow cannabis, but we have served facilities growing other crops and we intend to pursue such facilities as customers more in the future. We have three core assets that we believe are important to our going-forward business strategy.
Historically, our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities that grow cannabis, but we have served facilities growing other crops and we intend to pursue such facilities as customers more in the future. Historically, nearly all of our customers have been in the cannabis cultivation business.
Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the Ukrainian conflict. Revenue . Our 2022 revenue was approximately $11,283,000. Our 2022 revenue represents a decrease of 17% compared to 2021.
Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the conflicts. 30 Revenue . Our 2023 revenue was approximately $6,911,000. Our 2023 revenue represents a decrease of 39% compared to 2022. Gross Margin .
Excluding these non-cash items, our adjusted net loss increased by $3,637,000. Liquidity, Capital Resources and Financial Position Cash and Cash Equivalents As of December 31, 2022, we had cash and cash equivalents of $18,637,000, compared to cash and cash equivalents of $2,160,000 as of December 31, 2021.
Excluding these non-cash items, our adjusted net loss decreased by $1,828,000. Liquidity, Capital Resources and Financial Position Cash and Cash Equivalents As of December 31, 2023, we had cash and cash equivalents of $12,508,000, compared to cash and cash equivalents of $18,637,000 as of December 31, 2022.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on standalone selling price. When estimating the selling price, we use various observable inputs.
When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on standalone selling price. When estimating the selling price, we use various observable inputs.
In the year ended December 31, 2022, as compared to the prior year, our cost of equipment decreased by $1,077,000 primarily due to the decrease in revenue, offset by a minor increase in our equipment margin of 3.8 percentage points.
In the year ended December 31, 2023, as compared to the prior year, our cost of equipment decreased by $3,109,000 primarily due to the decrease in revenue, offset by a decrease in our equipment margin.
The fixed cost component represents engineering, manufacturing and project management salaries and benefits and manufacturing overhead that totaled $1,572,000, or 13.9% of total revenue, for the year ended December 31, 2022, as compared to $1,342,000, or 9.8% of total revenue, for the year ended December 31, 2021.
Our revenue cost structure is comprised of both fixed and variable components. The fixed cost component represents engineering, manufacturing and project management salaries and benefits and manufacturing overhead that totaled $1,279,000, or 18.5% of total revenue, for the year ended December 31, 2023, as compared to $1,572,000, or 13.9% of total revenue, for the year ended December 31, 2022.
Cost of revenue decreased by $575,000 from $10,713,000 for the year ended December 31, 2021 to $10,138,000 for the year ended December 31, 2022. The factors impacting this change are discussed below. The gross profit for the year ended December 31, 2022 was $1,145,000 compared to $2,926,000 for the year ended December 31, 2021.
Cost of revenue decreased by $3,769,000, or 37%, from $10,138,000 for the year ended December 31, 2022 to $6,369,000 for the year ended December 31, 2023. The factors impacting this change are discussed below. The gross profit for the year ended December 31, 2023 was $542,000 compared to $1,145,000 for the year ended December 31, 2022.
Results of Operations Comparison of Years ended December 31, 2022 and 2021 Revenues and Cost of Goods Sold Revenue for the year ended December 31, 2022 was $11,283,000 compared to $13,639,000 for the year ended December 31, 2021, a decrease of $2,356,000, or 17%.
Results of Operations Comparison of Years ended December 31, 2023 and 2022 Revenues and Cost of Goods Sold Revenue for the year ended December 31, 2023 was $6,911,000 compared to $11,283,000 for the year ended December 31, 2022, a decrease of $4,372,000, or 39%.
Our 2022 adjusted net loss was approximately $4,526,000 compared to a 2021 adjusted net loss of approximately $889,000. Our adjusted net income (loss) is a key management metric for us because it provides a proxy for the cash we generate from operations. Capital Resources.
Our 2023 adjusted net loss was approximately $2,698,000, compared to a 2022 adjusted net loss of approximately $4,526,000, a decrease of $1,828,000, or 40%. See Results of Operations below. Our adjusted net income (loss) is a key management metric for us because it provides a proxy for the cash we generate from (use in) operations. Capital Resources.
Cash flows from financing activities during the year ended December 31, 2022, was the result of cash proceeds from the sale of common stock and warrants (net of issuance costs) of $21,711,000, offset by a cash payment of $2,016,000 for the redemption of series B preferred stock, including related interest.
Cash flows from financing activities during the year ended December 31, 2022, was the result of cash proceeds from the sale of common stock and warrants (net of issuance costs) of $21,711,000, offset by a cash payment of $2,016,000 for the redemption of series B preferred stock, including related dividends. 36 Common Stock Equity Offering On February 10, 2022, the Company signed a firm commitment underwriting agreement for the public offering of shares of common stock and warrants, which closed on February 15, 2022.
Inventory is stated at the lower of cost or net realizable value. The inventory is valued based on a first-in, first-out (“FIFO”) basis. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors.
The inventory is valued based on a first-in, first-out (“FIFO”) basis. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence or impaired inventory.
For the quarter ended December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 Backlog, beginning balance $ 9,881,000 $ 10,818,000 $ 11,179,000 $ 9,698,000 $ 6,832,000 Net bookings, current period $ 3,993,000 $ 2,105,000 $ 1,534,000 $ 2,197,000 $ 206,000 Recognized revenue, current period $ 3,056,000 $ 1,744,000 $ 3,015,000 $ 5,063,000 $ 1,461,000 Backlog, ending balance $ 10,818,000 $ 11,179,000 $ 9,698,000 $ 6,832,000 $ 5,577,000 31 The completion of a customer’s new build facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment.
For the quarter ended December 31, 2022 March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023 Backlog, beginning balance $ 6,832,000 $ 5,577,000 $ 1,869,000 $ 1,066,000 $ 548,000 Net bookings, current period 206,000 826,000 205,000 366,000 138,000 Recognized revenue, current period (1,461,000 ) (4,534,000 ) (1,008,000 ) (884,000 ) (251,000 ) Backlog, ending balance $ 5,577,000 $ 1,869,000 $ 1,066,000 $ 548,000 $ 435,000 The completion of a customer’s new build facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment.
The decrease in product development costs was primarily due to (i) a decrease in material costs of $130,000, (ii) a decrease in salaries and benefits (including equity-based compensation) of $88,000 offset by, (iii) an increase in consulting of $56,000 and, (iv) an increase in travel of $12,000.
The decrease in product development costs was primarily due to (i) a decrease in salaries and benefits (including equity-based compensation) of $193,000, (ii) a decrease in material costs of $35,000 and, (iii) a decrease in travel of $16,000.
The increase of $230,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $249,000, offset by a decrease of $19,000 in fixed overhead.
The decrease of $293,000 was primarily due to a decrease in salaries and benefits (including stock-based compensation) of $267,000, and a decrease of $26,000 in fixed overhead.
As of December 31, 2022, and December 31, 2021, the allowance for doubtful accounts was $127,233 and $181,942, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 32 Excess and obsolete inventory .
As of December 31, 2023, and December 31, 2022, the allowance for doubtful accounts was $125,000 and $127,000, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory . Inventory is stated at the lower of cost or net realizable value.
As of December 31, 2022, we had an accumulated deficit of $34,279,000, working capital of $14,724,000, and stockholders’ equity of $14,895,000. Inflation Recently, our operations have started to be influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate.
As of December 31, 2023, we had an accumulated deficit of $37,190,000, working capital of $12,110,000, and stockholders’ equity of $12,261,000. Inflation Our operations are being influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build CEA facilities in which we operate.
Our 2022 gross margin was 10.1%, a decrease from 21.5% in 2021. This decrease was primarily due to lower revenue, an increase in our fixed cost base, and an increase in our variable costs as a percent of revenue including lower margins on equipment sales as described in Results of Operations below. Profitability .
Our 2023 gross margin was 7.8%, a decrease from 10.1% in 2022. This decrease was primarily due to lower revenue and an increase in our fixed cost base as a percent of revenue. We experienced a small decrease in variable costs as a percentage of revenue. See Results of Operations below. Profitability .
Gross profit margin decreased by 11.4 percentage points from 21.5% for the year ended December 31, 2021 to 10.1% for the year ended December 31, 2022. This decrease was primarily due to an increase in our fixed cost base and higher variable costs as a percent of revenue. Our revenue cost structure is comprised of both fixed and variable components.
Gross profit margin decreased by 2.3 percentage points from 10.1% for the year ended December 31, 2022 to 7.8% for the year ended December 31, 2023. This decrease was primarily due to a decrease in revenue, an increase in our fixed cost base as a percent of revenue, offset by slightly lower variable costs as a percent of revenue.
Our cash is held in bank depository accounts in certain financial institutions. During the year ended December 31, 2022, we held deposits in financial institutions that exceeded the federally insured amount.
The decrease in cash and cash equivalents during the year ended December 31, 2023 was the result of cash used in operations of $6,129,000. Our cash is held in bank depository accounts in certain financial institutions. During the year ended December 31, 2023, we held deposits in financial institutions that exceeded the federally insured amount.
While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability, especially since most of our customers are funded on an as-needed basis to complete facility construction.
While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability, especially since most of our customers are funded on an as-needed basis to complete facility construction. 35 As of December 31, 2023, we had no indebtedness, total accounts payable and accrued liabilities of $625,000, deferred revenue of $500,000, and the current portion of operating lease liability of $127,000.
Other Income (Expense) Our other income (net) decreased by $414,000 from $641,000 for the year ended December 31, 2021, to $227,000 for the year ended December 31, 2022. The other income for 2022 primarily consisted of (i) $185,000 from an insurance settlement, and (ii) $35,000 for interest on a money market account.
Other Income (Expense) Our other income (net) decreased by $185,000 from $227,000 for the year ended December 31, 2022, to $42,000 for the year ended December 31, 2023. The other income for 2023 primarily consisted of (i) $34,000 for interest on our money market account, and (ii) $8,000 for and adjustment to our ERC credit and unclaimed property.
We had an accumulated deficit of $34,279,000 as of December 31, 2022. Cash used in operations for the year ended December 31, 2022 was $3,190,000 compared to cash used in operations of $3,207,000 for the year ended December 31, 2021, a decrease in cash usage of $17,000.
We had an accumulated deficit of $37,190,000 as of December 31, 2023. Cash used in operations for the year ended December 31, 2023 was $6,129,000 compared to cash used in operations of $3,190,000 for the year ended December 31, 2022, an increase of $2,939,000.
Operating Loss We had an operating loss of $5,724,000 for the year ended December 31, 2022, as compared to an operating loss of $1,979,000 for the year ended December 31, 2021, an increase of $3,745,000, or 189%.
Operating Loss We had an operating loss of $2,953,000 for the year ended December 31, 2023, as compared to an operating loss of $5,724,000 for the year ended December 31, 2022, a decrease of $2,771,000, or 48%.
Impact of the COVID-19 Pandemic on Our Business The impact of the government and the business economic response to the COVID-19 pandemic has affected demand across the majority of our markets and disrupted workflow and completion schedules on projects.
Impact of the COVID-19 Pandemic on Our Business The impact of the government and the business economic response to the COVID-19 pandemic affected demand across the majority of our markets and disrupted workflow and completion schedules on projects. We believe we continue to have adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, costs, and working capital.
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.
As of December 31, 2023, we had working capital of $12,110,000, compared to a working capital of $14,724,000 as of December 31, 2022. We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.
During the year, the Company experienced significant delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain arising from the long-term effects of the COVID-19 pandemic.
During the year ended December 31, 2022, and continuing into the current fiscal quarter, the Company experienced delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain.
Our adjusted net income (loss) is our GAAP net income (loss) after addback for our non-cash equity compensation expenses, debt-related items, goodwill impairment charges, and depreciation expense. Historically, one of the most significant financial challenges we face is the inconsistent and unpredictable revenue we generate quarter-over-quarter, and our revenue and cash flow remain difficult to predict.
Historically, one of the most significant financial challenges we face is the inconsistent and unpredictable revenue we generate quarter-over-quarter, and our revenue and cash flow remain difficult to predict.
Investing Activities Cash used in investing activities for the year ended December 31, 2022 was $28,000, compared to cash used in investing activities of $57,000 for the year ended December 31, 2021.
Investing Activities Cash provided by investing activities for the year ended December 31, 2023 was less than $1,000, compared to $28,000 cash used in investing activities for the year ended December 31, 2022. The change was related to lower purchases of property and equipment.
We are likely to continue to face inflationary increases on the cost of products and our operations, which may adversely affect our margins and financial results and the pricing of our service and product supply contracts.
We believe that we will continue to face inflationary increases in the cost of products and our operations, which will adversely affect our margins and financial results and the pricing of our service and product supply contracts. Inflation is reflected in higher wages, increased pricing of equipment, delivery and transportation costs, and general operational expenses.
As of December 31, 2022, we had no off-balance sheet arrangements. During 2022 and 2021, we did not engage in any off-balance sheet financing activities. Recent Developments Refer to Note 16 - Subsequent Events of our consolidated financial statements, included as part of this Annual Report, for the more significant events occurring since December 31, 2022.
Recent Developments Refer to Note 15 - Subsequent Events of our consolidated financial statements, included as part of this Annual Report, for the significant events occurring since December 31, 2023.
Because of the post-pandemic macro-economic and CEA industry economy that has developed during 2021 and 2022, and is continuing into 2023, we cannot predict the continuing level of working capital that we will have in the future.
Because of the challenges to the CEA industry economy and the specific challenges of our business, we cannot predict the continuing level of working capital that we will have in the future.
Additionally in the year ended December 31, 2022 as compared to the year ended December 31, 2021: (i) our travel costs increased by $161,000 (ii) our warranty expense increased by $122,000, (iii) excess and obsolete inventory expense increased by $75,000, and (iv) other variable costs were $60,000 higher.
Additionally in the year ended December 31, 2023 as compared to the year ended December 31, 2022: (i) our warranty expense decreased by $195,000, (ii) travel was down by $101,000, (iii) our outside engineering costs were down by $43,000, (iv) other variable costs decreased by $41,000, and (iv) shipping and handling expenses decreased by $26,000.
We continue to assess the need to record a warranty reserve at the time of sale based on historical claims and other factors. As of December 31, 2022, and December 31, 2021, we had an accrued warranty reserve amount of $180,457 and $186,605, respectively, which are included in accounts payable and accrued liabilities on our consolidated balance sheets. Income taxes.
As of December 31, 2023, and December 31, 2022, we had an accrued warranty reserve amount of $191,000 and $180,000, respectively, which are included in accounts payable and accrued liabilities on our consolidated balance sheets. 32 Share-based compensation .
On February 15, 2022, we received the net proceeds from the offering of shares of common stock and warrants to purchase common stock in the amount of $21,711,000. 36 As of December 31, 2022, we had accounts receivable (net of allowance for doubtful accounts) of $3,000, inventory (net of excess and obsolete allowance) of $348,000, and prepaid expenses and other of $1,490,000 (including $1,176,000 in advance payments on inventory purchases).
On February 15, 2022, we received the net proceeds from the offering of shares of common stock and warrants to purchase common stock in the amount of $21,711,000.
Our third-party suppliers also warrant their products under similar terms, which are passed through to our customers. We assess the historical warranty claims on our manufactured products and, since 2016, warranty claims have been approximately 1% of annual revenue generated on these products.
We assess the historical warranty claims on our manufactured products and, since 2016, warranty claims have been approximately 1% of annual revenue generated on these products. We continue to assess the need to record a warranty reserve at the time of sale based on historical claims and other factors.
Additionally, we cannot predict that our future financial position will not deteriorate due to cancelled or delayed contract fulfillment, reduced sales and our ability to perform our contracts. As mentioned elsewhere, we have taken steps to conserve our cash resources by reducing staff and taking other cost cutting measures.
As mentioned elsewhere, we have taken steps to conserve our cash resources by reducing staff and taking other cost cutting measures and we will continue to evaluate further such measures in the future.
This revenue decrease was partly the result of our decreased net bookings in 2022 which dropped from $16,009,000 in 2021 to $6,042,000 in 2022, or 62%. Additionally, we experienced delays with our international supply of products and shipments from vendors which delayed contract fulfillment and revenue.
This revenue decrease was primarily the result of our decreased net bookings in 2023 which dropped from $6,042,000 in 2022 to $1,535,000 in 2023, or 75%.
These increases were offset by (i) a reduction of $103,000 in outside engineering costs and (ii) a decrease in shipping and handling of $42,000. Operating Expenses Operating expenses increased by 40% from $4,905,000 for the year ended December 31, 2021 to $6,869,000 for the year ended December 31, 2022, an increase of $1,964,000.
These decreases were offset by an increase in excess and obsolete inventory expense of $37,000. Operating Expenses Operating expenses decreased by 49% from $6,869,000 for the year ended December 31, 2022 to $3,495,000 for the year ended December 31, 2023, a decrease of $3,374,000.
As a result, effective February 10, 2022, trading of both shares of the Company’s common stock and certain of the Company’s warrants commenced on the Nasdaq. Capital Raising Since inception, we have incurred significant operating losses and have funded our operations primarily through issuances of equity securities, debt, and operating revenue.
In connection with the offering, we listed our common stock on the Nasdaq Capital Market under the symbol “CEAD” and our warrants under the symbol “CEADW”. As a result, effective February 10, 2022, trading started for both shares of the Company’s common stock and certain of the Company’s warrants commenced on Nasdaq.
During 2022, we had net bookings of $6,042,000, consisting of: (i) $8,962,000 of new sales contracts executed in 2022, (ii) $197,000 net positive changes orders, and (iii) $3,117,000 in project cancellations.
Our bookings decreased in 2023, and our backlog at December 31, 2023, was $435,000, a decrease of $5,142,000, or 92%, from our December 31, 2022 backlog. During 2023, we had net bookings of $1,535,000, consisting of: (i) $1,848,000 of new sales contracts executed in 2023, (ii) $59,000 in net positive changes orders, and (iii) $372,000 in project cancellations.
We warrant the products that we manufacture for a warranty period equal to the lesser of 12 months from start-up or 18 months from shipment. Our warranty provides for the repair, rework, or replacement of products (at our option) that fail to perform within stated specification.
Our warranty provides for the repair, rework, or replacement of products (at our option) that fail to perform within stated specification. Our third-party suppliers also warrant their products under similar terms, which are passed through to our customers.
And there can be no assurances that we will be able to raise future capital on commercially reasonable terms, or at all. Contract Bookings. Our bookings decreased in 2022, and our backlog at December 31, 2022, was $5,577,000, a decrease of $5,241,000, or 48%, from our December 31, 2021 backlog.
Nonetheless, there remain risks and uncertainties regarding our ability to grow revenue and generate sufficient revenues and cash flows. And there can be no assurances that we will be able to raise future capital on commercially reasonable terms, or at all. Contract Bookings.
Net Loss Overall, we had a net loss of $5,497,000 for the year ended December 31, 2022, as compared to a net loss of $1,338,000 for the year ended December 31, 2021, an increase of $4,159,000.
The other income for 2022 primarily consisted of (i) $185,000 from an insurance settlement, and (ii) $35,000 for interest on a money market account. Net Loss Overall, we had a net loss of $2,912,000 for the year ended December 31, 2023, as compared to a net loss of $5,497,000 for the year ended December 31, 2022, a decrease of $2,585,000.
Commitments and Contingencies Litigation From time to time, in the normal course of our operations, we are subject to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations.
Regardless, we intend to generally defend the claims on the basis that we promptly addressed all problems, and that any issues with defective HVAC equipment are the responsibility of our third-party equipment manufacturer. From time to time, in the normal course of our operations, we are subject to litigation matters and claims.
Removed
First, we have multi-year relationships with customers and others in the CEA industry, notably in the cannabis segment. Second, we have specialized engineering know-how and experience gathered from designing environmental control systems for CEA cultivation facilities since 2016. Third, we have a line of proprietary and curated environmental control products.
Added
The following table summarizes results for the years ended December 31, 2023 and December 31, 2022. 2023 2022 $ Change % Change Revenue $ 6,911,000 $ 11,283,000 $ (4,372,000 ) (39 )% Net loss $ (2,912,000 ) $ (5,497,000 ) $ (2,585,000 ) (-47 )% Adjusted net loss $ (2,698,000 ) $ (4,526,000 ) $ (1,828,000 ) (-40 )% Our adjusted net income (loss) is our GAAP net income (loss) after addback for our non-cash equity compensation expenses, debt-related items, goodwill impairment charges, and depreciation expense.
Removed
Our revenue for the year ended December 31, 2022 was approximately $11,283,000 compared to approximately $13,639,000 for the year ended December 31, 2021, a decrease of $2,356,000, or 17%.
Added
We continue to experience softening demand in the markets we serve, and an inability to replace our backlog of projects. As a result, we have taken steps during 2023 and early 2024 to reduce our operating costs and general and administrative expenses to better reflect the activity levels we are observing in the industry.
Removed
Overall, we had a net loss of approximately $5,497,000 for the year ended December 31, 2022 as compared to a net loss of approximately $1,338,000 for the year ended December 31, 2021, an increase of $4,159,000, or 311%. Our 2022 adjusted net loss was $4,526,000 compared to a 2021 adjusted net loss of $889,000.
Added
Our recognized revenue for the quarters ended March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023 in the table below, excludes $149,000, $56,000, $29,000, and $0, respectively, in revenue arising from the forfeiture of non-refundable deposits from former customers on previously cancelled contracts. The contracts were removed from the backlog at the time of cancellation.
Removed
The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, and working capital.
Added
In accordance with ASU No. 2016-13 (as amended), Measurement of Credit Losses on Financial Instruments, which the Company adopted on a prospective basis effective January 1, 2023, an allowance for doubtful accounts is recorded against the Company’s receivables by applying an expected credit loss model.
Removed
The resulting effects and uncertainties from the COVID-19 pandemic, including the depth and duration of the disruptions to customers and suppliers, its future effect on our business, on our results of operations, and on our financial condition, cannot be predicted. We expect that the economic disruptions will continue to have an effect on our business over the longer term.

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