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What changed in CEA Industries Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of CEA Industries Inc.'s 2022 and 2023 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 2023 report.

+284 added−405 removedSource: 10-K (2023-03-28) vs 10-K (2022-03-29)

Top changes in CEA Industries Inc.'s 2023 10-K

284 paragraphs added · 405 removed · 202 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeCannabis 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.
Biggest changeEven 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.
Any such 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. 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.
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, confidentiality procedures, and contractual restrictions with our employees and others to establish and protect our intellectual property rights.
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.
However, state laws do not supersede the prohibitions set forth in the federal drug laws. 17 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.
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.
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.
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.
We actively protect our inventions, new technologies, and product developments by maintaining trade secrets and, in limited circumstances, filing for patent protection. 16 Employees We currently have 31 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 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.
In 2014, Congress passed a spending bill containing a provision (the Rohrabacher-Farr amendment, now referred to as the Rohrabacher-Blumenauer Amendment) blocking federal funds and resources allocated under the 2015 appropriations bill from being used to “prevent such States from implementing their own State medical marijuana laws.” The Rohrabacher-Blumenauer Amendment, however, did not codify any federal protections for medical marijuana patients and producers operating within state law.
In 2014, Congress passed a spending bill containing a provision (the Rohrabacher-Farr amendment and sometimes referred to as the Rohrabacher-Blumenauer Amendment) blocking federal funds and resources allocated under the federal appropriations bills from being used to “prevent such States from implementing their own State medical marijuana laws.” The Rohrabacher-Blumenauer Amendment, however, did not codify any federal protections for medical marijuana patients and producers operating within state law.
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. 13 To enter into a contract, we require a 5-10% deposit and a signed contract.
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.
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 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 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.
Gross Margins and Revenue. Architectural and Engineering services fees can range from $10,000 to over $100,000, depending on the size of the project. Revenue from equipment sales on individual projects has been over $3,000,000 but most typically ranges from $500,000 to $1,500,000.
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.
Our Competition Our environmental control systems and our related engineering and design services compete with various national and local HVACD contractors and traditional HVACD equipment suppliers who traditionally resell, design, and implement climate control systems for commercial and industrial facilities, most of whom do not have the specific knowledge that we have about the complexities and challenges of CEA facilities.
We also compete with national and local HVACD contractors and traditional HVACD equipment suppliers who resell, design, and implement climate control systems for commercial and industrial facilities, but most of whom do not have the specific knowledge that we have about the complexities and challenges of CEA facilities.
We provide a comprehensive range of services and products as follows: 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 8 Service Solutions: Facility Design Services Our outsourced licensed architectural services provide facility design and layout to include space and workflow optimization, construction documents, and construction administration.
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.
We leverage our industry-leading experience to bring value-added solutions to our customers that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy evolving state and local construction code, permitting and regulatory requirements.
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.
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. We currently do not have projects with the largest, publicly traded firms (typically referred to as “MSOs,” or Multi-State Operators).
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.
Previously, 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. The Trump administration revised this policy but made no major changes in enforcement through Attorney General Jeffrey Sessions rescinding the Cole Memorandum.
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.
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.
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.
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 was continued for 2016, 2017, 2018, 2019 and 2020, and currently, now known as the Joyce Amendment, remains in effect through December 3, 2021.
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.
Since the technical infrastructure and requirements for growing any plant in a controlled environment are similar, we believe we can bring our engineering expertise and suite of products to this adjacent high growth market. 7 Our Services and Equipment Solutions Our goal is to develop relationships with our prospects and customers that will afford us the opportunity to provide comprehensive services and equipment for the complete lifecycle of indoor agriculture facilities.
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.
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, versus our competition, which only offers single solutions for each of their products. Brand Image .
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.
By offering most of the services and products that the prospect will need for their facility, we attempt to keep competitors out of the relationship. Sales, Contract, and Fulfillment Cycle The sales cycles for our new build commercial projects can vary significantly depending on the size and complexity of the project.
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.
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. They are thus a less risky prospect with a much higher likelihood of successfully completing a project.
We 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.
All of these efforts are uncertain, out of our control, and cannot be predicted at this time. The CEA Industry According to leading market research firms Headset and New Frontier Data, the North American cannabis industry is expected to experience compound annual growth on the order of 14%-15% from 2022 through 2025.
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.
While these delays have moderately improved in recent months, we, along with many other importers of goods across all industries, continue to experience severe congestion and extensive wait times for carriers at ports across the United States.
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.
We serve facilities ranging in size from 2,000 square feet to over 100,000 square feet. Most facilities are between 20,000 and 70,000 square feet. Customer type. Most of our customers are new entrants to the industry and have no other cultivation facilities.
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.
Impact of the COVID-19 Pandemic on Our Business The COVID-19 pandemic has prompted national, regional, and local governments, including those in the markets that the Company operates in, to implement preventative or protective measures to control its spread. As a result, there have been disruptions in business operations around the world, with an impact on our business.
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.
Among our objectives is to provide our customers with the most energy-efficient alternatives for their infrastructure. Energy and resource efficiency is a high priority to us as engineers, and our most senior engineering staff hold the LEED (Leadership in Energy and Environmental Design) credential.
CEA facilities are resource intensive, and a growing list of states have implemented building code changes that limit energy consumption in cultivation facilities. Energy and resource efficiency is a high priority to us as engineers, and the senior engineers on our team hold the Leadership in Energy and Environmental Design (“LEED”) credential.
Marketing Strategy Our marketing activities are focused on generating new leads and positioning us as a leader in the CEA facilities indoor cultivation market.
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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Item 1. Business Overview The Company is an industry leader in CEA (Controlled Environment Agriculture) facility design, technologies, and services. The CEA industry is one of the fastest-growing sectors of the United States’ economy and is defined by type of facility. The CEA industry is composed of any horticultural facility that is fully self-contained and has a controlled environment.
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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.
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Three facility types meet these criteria: ● Indoor facilities – environmentally sealed facilities for growing crops and that require artificial lighting. ● Vertical farms –cultivation facilities oriented vertically to minimize ground square footage. ● Greenhouses – facilities that are made of translucent materials to use natural sunlight on the crops.
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The CEA industry aims to optimize the use of horticultural resources such as water, energy, space, capital, and labor, to create an agriculture business that is more efficient and more productive than those that use traditional farming methods. Typically, the CEA industry is focused on indoor agriculture and vertical farming.
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Crops grown in CEA facilities include: leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables, ornamentals and small fruits (such as strawberries, blackberries and raspberries), bell peppers, cucumbers, tomatoes, cannabis and hemp.
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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.
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Historically, we have primarily served customers growing cannabis in indoor facilities and we are currently pursuing our strategy to broaden our reach to serve other indoor farming including vertical farms.
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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 provide full-service licensed architectural and mechanical, electrical, and plumbing (MEP) engineering services, carefully curated heating, ventilation and air conditioning (“HVACD”) equipment, proprietary controls systems, air sanitation, lighting, and benching and racking products.
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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.
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Our team (including both internal employees and outside partnerships) of project managers, licensed professional architects and engineers, technology and horticulture specialists and systems integrations experts help our customers by precisely designing for their unique applications. Through our partnership with a certified service contractor network, we provide maintenance services to assist in a smooth build-out and ensure optimal facility performance.
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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.
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Our revenue stream derives primarily from supplying our products, services and technologies to commercial indoor facilities ranging from several thousand to more than 100,000 square feet. CEA facility operators face multiple headwinds from high energy costs, water usage and waste materials, and, in the case of cannabis growing, increasingly rigorous quality standards and declining cannabis prices.
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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.
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To be competitive, among other things, our customers must develop innovative ways to meet the demands of their business and reduce energy costs, 90% of which are typically related to their HVACD (50%) and lighting systems (40%).
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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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HVACD systems have historically been and continue to be our primary area of expertise and energy efficiency is high on our list of considerations when engineering environmental control systems. We often have the advantage of early engagement with our customers at the pre-build and construction phases and the corresponding opportunity to build longer-term relationships with our existing customers.
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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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During 2021, we added architectural services to our offerings in an attempt to engage with the customer at an even earlier stage. Going forward, we plan to leverage our existing customer relationships by introducing them to our expanded design services along with our expanded product offerings.
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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 these efforts will generate incremental revenue and make us “stickier” to our customers. 6 We have three core assets that we believe are important to our going-forward business strategy and that will contribute to our future growth.
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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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First, we have a well-known brand name in the industry along with multi-year relationships with customers and others developed over our fifteen years of service to the industry.
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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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This length of service and broad network of industry contacts will benefit not only our organic growth initiatives, but also provide us with unique insight into other industry providers who may be appropriate for acquisition or joint efforts. Second, we have specialized engineering know-how and experience gathered from designing environmental control systems for over 200 commercial CEA cultivation facilities.
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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.
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Third, we have an expanding line of proprietary and curated environmental control systems and other core technology components needed to build a CEA facility. Our website is www.ceaindustries.com, which contains a description of our Company and products. In addition, we also maintain a branded technology product website at www.surna.com .
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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.
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The content of our websites is not incorporated herein by reference. Shares of our common stock and warrants to purchase shares of our common stock are traded on The Nasdaq Capital Market under the ticker symbols “CEAD” and “CEADW”.
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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.
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In response to the COVID-19 pandemic and the associated government and business response, the Company took and continues to take measures to adjust its operations as necessary. In early 2020 the Company responded to reduced orders by reducing expenses in an effort to preserve cash.
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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.
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Many expenses, including travel, marketing, headcount, work hours, and compensation were reduced, deferred, or eliminated while still allowing us to meet our customer obligations and develop new business. As 2020 progressed and our sales rebounded, and we were able to obtain additional funds through a forgivable bank loan, we restored our workforce and compensation.
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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.
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Many of these expense reductions were reversed by the end of 2021 when orders picked up and the overall business climate improved. Because the pandemic continues in different parts of the world and in different ways in the United States, the Company continues to actively monitor its operations.
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Our Services and Equipment Solutions Our goal is to develop relationships with our prospects and customers that will afford us the opportunity to provide comprehensive services and equipment for the complete lifecycle of indoor agriculture facilities.
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We are experiencing 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, compounded by a reduction in cargo being shipped by air, a general shortage of containers, and a shortage of domestic truck driver availability.
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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.
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In addition, restrictions imposed by local, state and federal agencies due to the COVID-19 pandemic have led to reduced personnel of importers, government staff and others in our supply chain. We have been working diligently with our network of freight partners and suppliers to expedite delivery dates and provide solutions to reduce further impact and delays.
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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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While the Company is continuing to navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, the potential uncertainty related to (and proliferation of) new strains, and related actions taken by federal, state, local and international government officials, to prevent and manage the spread of COVID-19.
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Cannabis is a Schedule I controlled substance and is illegal under federal law.
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More U.S. states are legalizing either medical or recreational use of cannabis products, and sometimes both. Although the market is aware of how the cannabis sector is growing, it seems to be less aware of the non-cannabis CEA market, particularly the vertical farming segment which is growing nearly as fast as the cannabis market.
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The Trump administration revised this policy but made no major changes in enforcement through Attorney General Jeffrey Sessions rescinding the Cole Memorandum. Although President Biden stood for decriminalization and descheduling during his campaign, his administration has not formulated an explicit policy on cannabis.
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Our extensive experience with CEA facilities brings extra value to our customers as we advise them on the design of their facility to maximize its productivity and return on investment.
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The Biden administration has implemented pardons for past federal cannabis possession convictions and encouraged governors to do the same. Also, in May 2021 the Drug Enforcement Administration approved licensed facilities to grow cannabis for the purpose of medical research, and on December 2, 2022, President Biden signed the Medical Marijuana and Cannabidiol Research Expansion Act.
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We have professional engineers (PEs) on our staff to provide licensed, professional Mechanical, Electrical, and Plumbing (MEP) engineering services to all non-cannabis customers, and to cannabis customers that are in cannabis-legal states and provinces. Our engineers perform mechanical engineering, and we outsource electrical and plumbing engineering to several vendors with whom we have long-term, trusted relationships.
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This act is “the first standalone marijuana-related bill approved by both chambers of the United States Congress” and allows medical marijuana research. The act requires the Drug Enforcement Administration to register researchers and suppliers of cannabis for medical research in a timely manner, who will then be able to legally manufacture, distribute, dispense and possess the substance.
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We believe we are among the most experienced engineering firms serving the cannabis growing CEA industry and we have leading edge, sophisticated engineering capabilities. We provide these services to facilities from several thousand to over 100,000 square feet in size.
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It also creates a mechanism for FDA approval of drugs derived from the cannabis plant and “protects doctors who may now discuss the harms and benefits of using cannabis and cannabis derivatives.” It also requires the Department of Health and Human Services to investigate the medical utility of cannabis and barriers that exist to conducting research, and requires the U.S.
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Over time the size and sophistication of projects we have served has grown increasingly large, a trend we expect will continue as the industry builds ever larger facilities.
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Attorney General to conduct an annual review to ensure that cannabis is being adequately produced for research purposes.
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Our licensed MEP engineering services provide stamped drawings that our customers need to obtain building permits and to build their facilities and specify equipment, and we can provide these services in any state or province.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThis 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. 24 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.
Biggest changeOur 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.
Furthermore, any change in the federal government’s enforcement posture with respect to state-licensed cannabis sales, including the enforcement postures of individual federal prosecutors in judicial districts where we operate, would result in our inability to execute our business plan, and we would likely suffer significant losses with respect to our customer base, which would adversely affect our operations, cash flow and financial condition.
Furthermore, any change in the federal government’s enforcement posture with respect to state-licensed cannabis sales, including the enforcement postures of individual federal prosecutors in judicial districts where we operate, could result in our inability to execute our business plan, and we would likely suffer significant losses with respect to our customer base, which would adversely affect our operations, cash flow and financial condition.
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.
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.
In addition, these failures may also result in additional time spent by our personnel, decreasing profit margins on certain ancillary services. 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.
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.
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.
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.
Therefore, we may not be able to seek the protection of the bankruptcy courts, and this could materially affect our business or our ability to obtain credit. 30 Our business efforts in Canada present opportunities, but no assurance can be given that our revenues and earnings will be improved on the basis of our addressing the Canadian business.
Therefore, we may not be able to seek the protection of the bankruptcy courts, and this could materially affect our business or our ability to obtain credit. Our business efforts in Canada present opportunities, but no assurance can be given that our revenues and earnings will be improved on the basis of our addressing the Canadian business.
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.
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 amount and timing of such additional financing needs will vary principally depending on the timing of new product launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain a credit facility.
The amount and timing of additional financing needs will vary principally depending on the timing of new product launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain a credit facility.
All of the foregoing may impact our customers’ ability to purchase our products and services, which may adversely affect our business, revenue and earnings. 32 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. Most, if not all, of our customers are impacted by Section 280E of the Code, which limits certain expenses marijuana companies can deduct.
We have a substantial number of options and warrants outstanding, which if exercised for shares of common stock, may put pressure on the market price of a share. We have sold to public and private investors a substantial number of warrants to purchase common stock from time to time over the next several years.
We have a substantial number of options and warrants outstanding, which if exercised for shares of common stock, may put pressure on the market price of a share. We have sold to public investors a substantial number of warrants to purchase common stock from time to time over the next several years.
Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results. 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. 18 Our ability to use net operating losses to offset future taxable income may be subject to limitations.
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.
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.
Risks Related to Our Common Stock Our common stock price may be volatile and may decrease substantially. The public trading prices of our securities fluctuate, in some cases substantially, and we expect that they will continue to do so.
Risks Related to Our Common Stock Our securities prices may be volatile and may decrease substantially. The public trading prices of our securities fluctuate, in some cases substantially, and we expect that they will continue to do so.
Moreover, such dilution could have a material adverse effect on the market price for the shares of our common stock. 35 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.
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.
We have experienced ownership changes in the past and we may experience additional ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control.
We have experienced ownership changes in the past and we may experience additional ownership changes in the future as a result of subsequent changes in our stock ownership, some of which may be outside of our control.
Our engineering and design services and solutions are focused on CEA facilities that are able to grow a wide variety of crops such as leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables and small fruits (such as strawberries, blackberries and raspberries), bell peppers, cucumbers, and tomatoes.
Our engineering and design services and solutions are focused on CEA facilities that are able to grow a wide variety of crops beyond that of cannabis, such as leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables and small fruits (such as strawberries, blackberries and raspberries), bell peppers, cucumbers, and tomatoes.
The failure of our customers to pay the full amounts due to us could negatively affect future profitability. 21 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.
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.
Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack or otherwise exploit any security vulnerabilities of the products that we may sell in the future, especially our recently launched SentryIQ® sensors, controls and automation platform.
Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack or otherwise exploit any security vulnerabilities of the products that we may sell in the future, especially our SentryIQ® sensors, controls and automation platform.
We may be unable to differentiate our new products from those of our competitors, and our new products may not be accepted by the market.
We may be unable to differentiate our products from those of our competitors, and our products may not be accepted by the market.
We currently do not maintain effective controls over certain aspects of the financial reporting process because: (i) we lack a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements, (ii) there is inadequate segregation of duties due to the limitation on the number of our accounting personnel, and (iii) we have insufficient controls and processes in place to adequately verify the accuracy and completeness of spreadsheets that we use for a variety of purposes including revenue, taxes, stock-based compensation and other areas, and place significant reliance on, for our financial reporting.
The Company did not maintain effective controls over certain aspects of the financial reporting process because: (i) we lack a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements, (ii) there is inadequate segregation of duties due to the limitation on the number of our accounting personnel, and (iii) we have insufficient controls and processes in place to adequately verify the accuracy and completeness of spreadsheets that we use for a variety of purposes including revenue, taxes, stock-based compensation and other areas, and place significant reliance on, for our financial reporting.
We have identified a material weakness 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.
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.
Accordingly, we cannot predict the timing of any change in federal law or possible changes in federal enforcement.
We cannot predict the timing of any change in federal law or possible changes in federal enforcement.
The processes of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We have already and may have to continue to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept.
The processes of identifying and commercializing products are complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We have already and may have to continue to commit significant resources to commercializing products before knowing whether our investments will result in products the market will accept.
The legal cannabis industry is not yet well-developed, and many aspects of this industry’s development and evolution cannot be accurately predicted, and therefore, the loss of any of our current clients or our inability to capture new client contracts may have a material adverse effect on our business.
The legal cannabis industry is not yet well or fully developed, and many aspects of this industry’s development and evolution cannot be accurately predicted. Therefore, the loss of any of our current clients or our inability to capture new client contracts will have a material adverse effect on our business.
These effects, among others, could have an adverse effect on your investment in our common stock. 34 Registration rights and Rule 144 sales contain risks for certain shareholders.
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.
If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future bottom-line operating results by effectively increasing our future tax obligations. We may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions on our operations.
If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our post tax income by effectively increasing our future tax obligations. We may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions on our operations.
There can be no assurance that we will successfully identify additional new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
There can be no assurance that we will successfully identify additional product opportunities, develop and bring products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or non-competitive.
International trade disputes, tariffs, international shipping and domestic trucking issues all contribute to the challenges we face in obtaining the products we need for contract performance. We have experienced and may continue to experience inflationary effects on the cost of products, which may adversely affect our margins.
International trade disputes, tariffs, international shipping and domestic trucking issues all contribute to the challenges we face in obtaining the products we need for contract performance. We have experienced and are likely to continue to experience inflationary effects on the cost of products and labor, which is likely to adversely affect our margins.
The 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; 33 ● 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.
The 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.
To be able to compete successfully, we will need to offer a wide range of products, have adequate capital for expansion, supply and execution, and develop robust marketing. ● As we expand, we will need to attract top quality talent.
To be able to compete successfully, we will need to offer a wide range of products, have adequate capital for expansion, supply and execution, and develop robust marketing. ● We will need to attract and retain top quality employee talent.
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. Additionally, our operating results have fluctuated over the years.
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.
Material acquisitions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring additional indebtedness; (iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; (v) an increase in the scope and complexity of our operations; and (vi) the loss or reduction of control over certain of our assets. 27 The pursuit of acquisitions may pose certain risks to us.
Material acquisitions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring additional indebtedness; (iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; (v) an increase in the scope and complexity of our operations; (vi) the disruption of a significant reorganization of the company; and (vii) the loss or reduction of control over certain of our assets.
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.
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.
Delayed sales, lower profits, or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation. We incur significant costs as a result of being a public company, which will make it more difficult for us to achieve profitability.
Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower profits, or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation. We incur significant costs as a result of being a public company, which will make it more difficult for us to achieve profitability.
That only confuses people, obviously, within the state.” Additionally, since 2014, versions of the U.S. omnibus spending bill have included a provision prohibiting the DOJ, which includes the Drug Enforcement Administration, from using appropriated funds to prevent states from implementing their medical-use cannabis laws. In USA vs. McIntosh , the U.S.
Additionally, since 2014, versions of the U.S. omnibus spending bill have included a provision prohibiting the DOJ, which includes the Drug Enforcement Administration, from using appropriated funds to prevent states from implementing their medical-use cannabis laws. In USA vs. McIntosh , the U.S.
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.
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.
As of December 31, 2021, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $21,091,000, of which $11,196,000 will expire, if not utilized, in the years 2034 through 2037. However, the balance of $9,895,000 NOLs generated subsequent to December 31, 2017, do not expire but may only be used against taxable income to 80%.
As of December 31, 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%.
While public opinion and support appears to be improving for legalizing medical and adult-use marijuana, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical marijuana as opposed to legalization in general).
Public opinion and support for medical and adult-use marijuana has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be improving for legalizing medical and adult-use marijuana, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical marijuana as opposed to legalization in general).
We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory to us.
The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory to us.
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.
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.
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.
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.
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.
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 cannot assure that we will be able to: ● execute on our business plan and strategy; 22 ● 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.
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.
Department of Justice (“DOJ”) did take action against the cannabis industry, we believe those of our clients operating in the legal cannabis industry would be lost to us. 23 In our operations, we rely heavily upon the various U.S. federal governmental memos issued in the past, including the memorandum issued by the DOJ on October 19, 2009, known as the “Ogden Memorandum”, the memorandum issued by the DOJ on August 29, 2013, known as the “Cole Memorandum” and other guidance, in the attempt to keep our operations acceptable to those state and federal entities that regulate, enforce, or choose to defer enforcement of certain current regulations regarding cannabis.
In our operations, we rely heavily upon the various U.S. federal governmental memos issued in the past, including the memorandum issued by the DOJ on October 19, 2009, known as the “Ogden Memorandum”, the memorandum issued by the DOJ on August 29, 2013, known as the “Cole Memorandum” and other guidance, in the attempt to keep our operations acceptable to those state and federal entities that regulate, enforce, or choose to defer enforcement of certain current regulations regarding cannabis.
The cannabis industry is still in its early stages of development in the United States and while the vast majority of U.S. states now have legal cannabis and it remains illegal under U.S. federal law, making it difficult to accurately predict and forecast the demand for our engineering and product solutions. If the U.S.
While the majority of U.S. states now have legal cannabis, it remains illegal under U.S. federal law, making it difficult to accurately predict and forecast the demand for our engineering and product solutions. If the U.S.
Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and services and expanding our commercial customer base.
Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business. Our success depends on us achieving greater and broader acceptance of our products and services. This will require us to expand our commercial customer base and win larger contracts.
The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our engineering, sales, manufacturing, distribution or other critical functions. 26 Portions of our IT infrastructure may also experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time.
The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our engineering, sales, manufacturing, distribution or other critical functions.
Our business is focused on providing engineering design, and equipment integration into CEA facilities. 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. If we lose any of our key personnel, our ability to implement our business strategy could be significantly harmed.
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.
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.
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.
While there may be ample public support for legislative proposals, key support must be created in the relevant legislative committee, or a bill may never advance to a vote. Numerous factors impact the legislative process.
Furthermore, progress, while encouraging, is not assured, and the process normally encounters setbacks before achieving success. While there may be ample public support for legislative proposals, key support must be created in the relevant legislative committee, or a bill may never advance to a vote. Numerous factors impact the legislative process.
Losing clients from the cannabis industry may have a material adverse effect on our revenues and the success of our business.
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.
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.
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.
We may not be able to 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. 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.
We do not intend on paying dividends. 19 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.
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.
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.
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.
Public opinion against cannabis may have an adverse impact on our business. ● Public market trading of our common stock was infrequent on the OTCQB Marketplace. Effective February 10, 2022, trading commenced in the Company’s common stock and certain of the Company’s warrants on NASDAQ.
Public opinion against cannabis may have an adverse impact on our business. ● Effective February 10, 2022, trading commenced in the Company’s common stock and certain of the Company’s warrants on NASDAQ. There is no assurance that we will have an active trading market for our securities listed on NASDAQ.
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.
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.
The fact that we provide products and services to companies in the cannabis industry may impact our ability to raise adequate capital for future expansion, which could hinder our growth potential as well as our revenue and earnings.
The fact that we provide products and services to companies in the cannabis industry may impact our ability to raise adequate capital for future expansion, which could hinder our growth potential as well as our revenue and earnings. A very large percentage of our customers are operating in an industry that is still illegal under U.S. federal law.
If we do not successfully develop additional products and services, or if those products and services are developed but not successfully commercialized, we could lose revenue opportunities. Our future success depends, in part, on our ability to expand our product and service offerings.
If we do not successfully have additional products and services, or if those products and services are not successfully commercialized, we could lose revenue opportunities. Our future success depends, in part, on our ability to expand our product and service offerings. We intend to collaborate with manufacturing partners to optimize products for the CEA (including cannabis) market.
All but three U.S. states have legalized, to some extent, cannabis for medical purposes. Thirty-eight states, the District of Columbia, Puerto Rico and Guam have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes (medical states).
Thirty-seven states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes (medical states).
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.
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.
This could subject our customers to greater and/or different federal legal and other risks as compared to businesses where cannabis is sold exclusively for medical use, which could in turn materially adversely affect our business.
Certain of our customers may be outside any protections extended to medical-use cannabis under the spending bill provision and more recent medical-use and research laws. This could subject them to greater and/or different federal legal and other risks as compared to businesses where cannabis is sold exclusively for medical use, which could in turn materially adversely affect our business.
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. 29 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.
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.
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.
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.
We currently do not convert our backlog on a consistent basis quarter to quarter. ● Although our business is focused on the larger controlled environment agricultural sector and 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 touching, historically we have provided services and equipment to the cannabis industry segment.
We also will need to hire, train, supervise, and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention.
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.
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.
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.
Continued development of the recreational and medical cannabis markets is dependent upon continued legislative authorization of cannabis at the state level for recreational and/or medical purposes. Any number of factors could slow or halt the progress. Furthermore, progress, while encouraging, is not assured, and the process normally encounters setbacks before achieving success.
Our success may be dependent on additional states legalizing recreational and/or medical cannabis use. Continued development of the recreational and medical cannabis markets is dependent upon continued legislative authorization of cannabis at the state level for recreational and/or medical purposes. Any number of factors could slow or halt the progress.
They may be able to devote greater resources to the marketing, promotion and sale of their products and/or services. Competitors may also adopt more aggressive pricing policies and make more attractive offers to clients, employees, strategic partners, distribution channels and advertisers. Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market share.
One or more of these qualities may allow them to respond more quickly than us to market opportunities. They may be able to devote greater resources to the marketing, promotion and sale of their products and/or services. Competitors may also adopt more aggressive pricing policies and make more attractive offers to clients, employees, strategic partners, distribution channels and advertisers.
Notwithstanding our expansion plans, a decrease in demand in the legal cannabis industry could have a material adverse effect on our revenues and the success of our business.
While we are hopeful that the proportion of non-cannabis revenues will increase over time, a decrease in demand in the legal cannabis industry could have a material adverse effect on our revenues and the success of our business.
Changes to any regulations and laws that complicate the design and engineering of a subject CEA facility, such as waste water treatment and electricity-related mandates, make it possible that potential related zoning and enforcement could decrease the demand for our services, and in turn negatively impact our revenues and business opportunities. 25 The CEA industry is highly competitive, and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing services and products similar to ours or make our services and products obsolete.
Changes to any regulations and laws that complicate the design and engineering of a subject CEA facility, such as wastewater treatment and electricity-related mandates, make it possible that potential related zoning and enforcement could decrease the demand for our services, and in turn negatively impact our revenues and business opportunities.
As a result, the equipment that we lease to our customers in the United States may be subject to such seizure and forfeiture. Additionally, a broad interpretation of the law could potentially result in the seizure and forfeiture of proceeds we generate. Public opinion and perception of the cannabis industry may have an adverse effect on our business reputation.
As a result, the equipment that our customers acquire from us in the United States may be subject to such seizure and forfeiture. Additionally, a broad interpretation of the law could potentially result in the seizure and forfeiture of proceeds we generate from client payments who are subject to property seizure.
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.
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.
There is no assurance that we will have an active trading market for our securities listed on NASDAQ. If there is a market, the prices of our publicly traded securities may be volatile, and the price may decrease substantially.
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.
The court noted that, if the spending bill provision were not continued, prosecutors could enforce against conduct occurring during the statute of limitations even while the provision was previously in force.
The court noted that, if the spending bill provision were not continued, prosecutors could enforce against conduct occurring during the statute of limitations even while the provision was previously in force. Other courts that have considered the issue have ruled similarly, although courts disagree about which party bears the burden of proof of showing compliance or noncompliance with state law.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe 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 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.
While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Mine Safety Disclosures Not applicable. 36 PART II
While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Mine Safety Disclosures Not applicable. 27 PART II
Removed
Item 3. Legal Proceedings The Company settled a litigation with a former employee effective March 30, 2021. While the Company disputed the merits of the claims, the Company agreed to issue an aggregate of 6,667 shares of common stock of the Company, as part of the settlement.
Removed
These shares were issued on April 8, 2021, as “restricted securities,” subject to a lock-up agreement of six months, without registration rights, and pursuant to a private placement exemption. The settlement agreement also included mutual releases and no admission of liability.
Removed
The cost to the Company of this settlement, $107,000, in total, has been recognized in full in Other Expenses during the year ended December 31, 2021. The issuance of the 6,667 shares of common stock (valued at $67,000) has been recognized in common stock issued during the year ended December 31, 2021.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 36 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 37 Item 6. Selected Financial Data 38 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 51 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 39 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, 2021, we have granted under the 2021 Equity Plan, incentive stock options, non-qualified stock options, and a stock bonus award. 37 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 46,807 $ 7.43 613,057 Equity compensation plans not approved by shareholders (1) - - Total 46,807 $ 7.43 613,057 (1) Of the 666,667 Plan Shares allocated for issuance under the 2021 Equity Plan, as of December 31, 2021, 6,803 shares have been issued, non-qualified stock options over 5,991 shares were issued and outstanding, incentive stock options over 40,816 shares were issued and outstanding and securities in respect of the remaining 613,057 shares were available for future issuance.
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.
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, 2021, 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, 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 information for our 2017 Equity Plan as of December 31, 2021 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) 162,238 $ 11.70 7,403 Total 162,238 $ 11.70 7,403 (1) Of the 333,333 Plan Shares allocated for issuance under the 2017 Equity Plan, as of December 31, 2021, 163,692 shares have been issued, non-qualified stock options over 162,238 shares were issued and outstanding and securities in respect of the remaining 7,403 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, 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.
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 29, 2022, we had approximately 130 shareholders of record and approximately 13,370 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.” As of March 28, 2023, we had approximately 32 shareholders of record and approximately 12,181 shareholders who hold their shares in street name.

Item 7. Management's Discussion & Analysis

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

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Biggest changeThe increase in SG&A expenses for the year ended December 31, 2021 compared to the year ended December 31, 2020, was due primarily to: (i) an increase of $327,000 in salaries, benefits and other employee related costs, (ii) an increase of $184,000 in internal commissions and third-party referral fees, (iii) an increase in investor relations of $109,000, (iv) an increase in loss on fixed asset disposals of $63,000, (v) an increase of $52,000 for facility and office expenses, (vi) an increase in travel of $12,000, (vii) an increase in accounting and other professional fees of $8,000, offset by, (viii) a decrease of $75,000 for bad debt expense, (ix) a decrease in stock based compensation of $56,000, and (x) a decrease of $56,000 in depreciation. 46 The increase in marketing expenses were due primarily to: (i) an increase in advertising and promotion of $131,000, (ii) an increase of $125,000 for industry trade shows and events, (iii) an increase in salaries and benefits of $102,000, (iv) an increase of $13,000 for travel, offset by (v) a decrease of $15,000 in outside marketing services, and (vi) a decrease of $13,000 for web development and other marketing expenses.
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 .
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 system; (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.
We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans. Should the actual amounts differ from our estimates, the carrying value of our deferred tax assets could be materially impacted. Share-based compensation .
We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans. Should the actual amounts differ from our estimates, the carrying value of our deferred tax assets could be materially impacted. 33 Share-based compensation .
Commitments and contingencies . In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, customer disputes, government investigations and tax matters.
In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, customer disputes, government investigations and tax matters.
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 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. We have three core assets that we believe are important to our going-forward business strategy.
As of December 31, 2021, we had no off-balance sheet arrangements. During 2021 and 2020, 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, 2021.
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.
However, there continues to be significant uncertainty regarding the timing of our recognition of revenue in our Q4 2021 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 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.
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.
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 .
Management’s judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. We recorded a full valuation allowance as of December 31, 2021, and December 31, 2020.
Management’s judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. We recorded a full valuation allowance as of December 31, 2022, and December 31, 2021.
In service of the CEA, 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) preventive maintenance services for CEA facilities.
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 adjusted net income (loss) is our GAAP net income (loss) after addback for our non-cash equity compensation expenses, debt-related items 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.
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.
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, which we are in the process of expanding.
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.
Goodwill, defined as unidentified asset(s) acquired in conjunction with a business acquisition, is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We recorded goodwill in connection with our acquisition of Hydro Innovations in July 2014.
Goodwill, defined as unidentified asset(s) acquired in conjunction with a business acquisition, is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company recorded goodwill in connection with its acquisition of Hydro Innovations, LLC in July 2014.
There is significant uncertainty regarding the timing of our recognition on all remaining performance obligations as of December 31, 2021.
There is significant uncertainty regarding the timing of our recognition on all remaining performance obligations as of December 31, 2022.
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, 2021, and December 31, 2020, we had an accrued warranty reserve amount of $186,605 and $173,365, respectively, which are included in accounts payable and accrued liabilities on our consolidated balance sheets. Income taxes.
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.
Further, based on the current economic climate, the uncertainty regarding the COVID-19 virus, and the Company’s recent cost cutting measures, there is no assurance that the Company will be able to fulfill its backlog, and the Company may experience contract cancellations, project scope reductions and project delays.
Further, based on the current economic climate, and the Company’s recent cost cutting measures, there is no assurance that the Company will be able to fulfill its backlog, and the Company may experience contract cancellations, project scope reductions and project delays.
The fixed cost component represents engineering, manufacturing and project management salaries and benefits and manufacturing overhead that totaled $1,342,000, or 9.8% of total revenue, for the year ended December 31, 2021, as compared to $1,167,000, or 13.7% of total revenue, for the year ended December 31, 2020.
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.
As of December 31, 2021, and December 31, 2020, the allowance for doubtful accounts was $181,942 and $165,098, 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. 43 Excess and obsolete inventory .
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, 2021, we had a working capital deficit of $415,000, compared to a working capital deficit of $2,220,000 as of December 31, 2020. 47 We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business.
As of December 31, 2022, we had working capital of $14,724,000, compared to a working capital deficit of $415,000 as of December 31, 2021. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business.
As of December 31, 2021, 96% of our backlog was attributable to partial equipment paid contracts. 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 2021 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts.
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 2022 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 $9,371,000, or 68.7% of total revenue, in the year ended December 31, 2021, as compared to $5,795,000, or 68.1% of total revenue, in the year ended December 31, 2020.
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.
Significant non-cash items included: (i) a gain on note payable forgiveness of $517,000, (ii) stock-related compensation of $308,000, (iii) $68,000 for loss on disposal of assets, and (iv) depreciation and amortization expense of $65,000.
Significant non-cash items during 2021 included: (i) a gain on note payable forgiveness of $517,000, (ii) stock-related compensation of $391,000, (iii) amortization on an ROU asset of $205,000, (iv) $68,000 for loss on disposal of assets, and (iv) depreciation and amortization expense of $65,000.
The increase of $175,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $191,000, offset by a decrease of $16,000 in fixed overhead.
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.
Our 2021 adjusted net loss was approximately $889,000 compared to a 2020 adjusted net loss of approximately $1,239,000. Our adjusted net income (loss) is a key management metric and point of focus for us because it provides a proxy for the cash we generate from operations. Capital Resources.
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.
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.
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.
As of December 31, 2021, and December 31, 2020, the allowance for excess and obsolete inventory was $91,379 and $93,045, respectively. Goodwill impairment .
As of December 31, 2022, and December 31, 2021, the allowance for excess and obsolete inventory was $70,907 and $91,379, respectively. Goodwill impairment .
We expect this exposure to accounts receivable risk to increase as we pursue larger projects. As of December 31, 2021, we had no indebtedness, total accounts payable and accrued liabilities of $1,346,000, deferred revenue of $2,840,000, accrued equity compensation of $84,000, and the current portion of operating lease liability of $100,000.
We expect this exposure to accounts receivable risk to increase as we pursue larger projects. As of December 31, 2022, we had no indebtedness, total accounts payable and accrued liabilities of $1,207,000, deferred revenue of $4,339,000, accrued equity compensation of $90,000, and the current portion of operating lease liability of $118,000.
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.
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 .
Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations. Contractual Payment Obligations Refer to Note 3 – Leases of our consolidated financial statements, which are included as part of this Annual Report for further details on our obligations under a lease for our manufacturing and office space.
Contractual Payment Obligations Refer to Note 3 – Leases of our consolidated financial statements, which are included as part of this Annual Report for further details on our obligations under a lease for our manufacturing and office space.
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. 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.
The increase was primarily attributable to: (i) an increase in cash used for working capital of $4,300,000, (ii) an increase in non-cash operating charges of $146,000, offset by, (iii) a decrease in net loss of $421,000.
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.
Cost of revenue increased by $3,751,000 from $6,961,000 for the year ended December 31, 2020 to $10,713,000 for the year ended December 31, 2021. The factors impacting this change are discussed below. The gross profit for the year ended December 31, 2021 was $2,926,000 compared to $1,553,000 for the year ended December 31, 2020.
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.
Summary of Cash Flows The following summarizes our cash flows for the years ended December 31, 2021 and 2020: For the Years Ended December 31, 2021 2020 Net cash used in operating activities $ (3,207,000 ) $ 818,000 Net cash used in investing activities (57,000 ) (9,000 ) Net cash provided by financing activities 3,139,000 554,000 Net decrease in cash $ (125,000 ) $ 1,363,000 Operating Activities We incurred a net loss for the year ended December 31, 2021 of $1,338,000 compared to a net loss for the year ended December 31, 2020 of $1,759,000.
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.
In the year ended December 31, 2021, as compared to the prior year, our cost of equipment increased by $3,821,000 primarily due to the increase in revenue and a decrease in our equipment margin of 4.9 percentage points.
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.
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. 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.
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.
For the quarter ended December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 Backlog, beginning balance $ 8,198,000 $ 8,448,000 $ 11,578,000 $ 7,987,000 $ 9,881,000 Net bookings, current period $ 3,637,000 $ 5,497,000 $ 919,000 $ 5,600,000 $ 3,993,000 Recognized revenue, current period $ 3,387,000 $ 2,367,000 $ 4,510,000 $ 3,706,000 $ 3,056,000 Backlog, ending balance $ 8,448,000 $ 11,578,000 $ 7,987,000 $ 9,881,000 $ 10,818,000 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.
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.
The operating loss included $324,000 of non-cash, stock-based compensation expenses and $58,000 for depreciation and amortization in the year ended December 31, 2021, as compared to $406,000 for stock-based compensation and $114,000 of depreciation and amortization for the year ended December 31, 2020. Excluding these non-cash items, our operating loss decreased by $247,000.
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.
Investing Activities Cash used in investing activities for the year ended December 31, 2021 was $57,000, compared to cash used in investing activities of $9,000 for the year ended December 31, 2020. The change was related to purchases of property and equipment.
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.
Gross Margin . Our 2021 gross margin was 21.5%, an increase from 18.2% in 2020. This increase was primarily due to our fixed cost base, offset by, a lower margin on equipment sales as described in Results of Operations below. 41 Profitability .
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 .
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. The best observable input is our actual selling price for the same good or service.
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.
Overall, we had a net loss of approximately $1,338,000 for the year ended December 31, 2021 as compared to a net loss of approximately $1,759,000 for the year ended December 31, 2020, a decrease of $421,000, or 24%. Our 2021 adjusted net loss was $889,000 compared to a 2020 adjusted net loss of $1,239,000.
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.
We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and certain of our officers and employees, and former officers, directors, and employees of acquired companies, in certain circumstances. 50 Off-Balance Sheet Arrangements We are required to disclose any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Off-Balance Sheet Arrangements We are required to disclose any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
We had an accumulated deficit of $28,782,000 as of December 31, 2021. Cash used in operations for the year ended December 31, 2021 was $3,207,000 compared to cash provided by operations of $818,000 for the year ended December 31, 2020, an increase in cash usage of $4,025,000.
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.
As discussed elsewhere in this Annual Report, we have taken steps during 2021 to focus on the Company’s core strategy and reduce our operating costs and general and administrative expenses to manage these challenges. We have also taken steps to address overall liquidity via the Offering (as further described in Note 16 Subsequent Events).
All of these challenges remain a source of further uncertainty to our business, and as discussed elsewhere in this Annual Report, we have taken steps during 2022 to focus on the Company’s core strategy and reduce our operating costs and general and administrative expenses to manage these challenges.
Financing Activities For the years ended December 31, 2021 and 2020, cash from financing activities was $3,139,000 and $554,000, respectively. Cash flows from financing activities during the year ended December 31, 2021, was the result of cash proceeds from the sale of preferred stock and warrants (net of issuance costs) of $2,625,000.
Cash flows from financing activities during the year ended December 31, 2021, was the result of cash proceeds from the sale of preferred stock and warrant (net of issuance costs) of $2,625,000 and proceeds from a note payable of $514,000. See Note 8 – Note Payable and Accrued Interest .
This section provides an analysis of cash flow, contractual obligations, and certain other matters affecting our financial position. 38 Executive Overview CEA Industries Inc. is a technology, engineering, and services provider to the global controlled environment agriculture (CEA) industry. The CEA industry is one of the fastest-growing sectors of the United States’ economy.
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.
Gross profit margin increased by approximately 3 percentage points from 18.2% for the year ended December 31, 2020 to 21.5% for the year ended December 31, 2021. This decrease was primarily due to our fixed cost base, offset by a lower margin on equipment sales. Our revenue cost structure is comprised of both fixed and variable components.
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.
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.
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.
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. Because of the economic situation that developed during 2021, we cannot predict the continuing level of working capital that we will have in the future.
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.
Operating Loss We had an operating loss of $1,979,000 for the year ended December 31, 2021, as compared to an operating loss of $2,363,000 for the year ended December 31, 2020, a decrease of $384,000, or 16%.
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%.
The net loss included $391,000 of non-cash, stock-based compensation costs and depreciation and amortization expense of $58,000 in the year ended December 31, 2021, as compared to non-cash, stock-based compensation expense of $406,000 and depreciation and amortization of $114,000 in the year ended December 31, 2020. Excluding these non-cash items, our net loss decreased by $351,000.
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.
Revenue . Our 2021 revenue was approximately $13,639,000. Our 2021 revenue represents an increase of 60% compared to 2020. One of our MFO customers accounted for 24% of our 2021 revenue. We believe, among other things, that we need to build a diversified sales pipeline of MFOs, which we believe will increase our consistency and predictability of revenue.
Included in our 2022 revenue were two projects with one of our MFO customers which accounted for 54% of our total revenue. We believe, among other things, that we need to build a diversified sales pipeline of MFOs, which we believe will increase our consistency and predictability of revenue. Gross Margin .
The increase in product development costs was primarily due to (i) an increase for consulting of $56,000, and (ii) an increase in material costs of $26,000.
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.
Liquidity, Capital Resources and Financial Position Cash and Cash Equivalents As of December 31, 2021, we had cash and cash equivalents of $2,160,000, compared to cash and cash equivalents of $2,285,000 as of December 31, 2020, a decrease of 5%.
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.
The $125,000 decrease in cash and cash equivalents during the year ended December 31, 2021 was primarily the result of cash used in our operating activities and cash provided by our financing activities. Our cash is held in bank depository accounts with certain financial institutions. We currently have deposits with financial institutions that exceed the federally insured amount.
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.
Additionally in the year ended December 31, 2021 as compared to the year ended December 31, 2020: (i) our travel costs increased by $82,000 and, (ii) our outside engineering costs increased by $38,000, which were offset by (iii) a reduction in warranty expense of $275,000, (iv) a reduction in excess and obsolete inventory expense of $39,000, (v) a decrease in other overhead of $28,000 and, (vi) decreased shipping and handling costs of $23,000.
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.
Historically, nearly all of our customers have been in the cannabis cultivation business. We believe our employees have more experience than most other MEP firms serving this industry. Our customers engage us for their environmental and climate control systems because they want experts to design their facilities, and they come to us because of our reputation.
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.
As of December 31, 2021, we had accounts receivable (net of allowance for doubtful accounts) of $179,000, inventory (net of excess and obsolete allowance) of $378,000, and prepaid expenses and other of $1,274,000 (including $1,069,000 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. 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).
An accrual for a loss contingency is recognized when it is probable that an asset has been impaired, or a liability has been incurred and the amount of loss can be reasonably estimated. 45 Results of Operations Comparison of Years ended December 31, 2021 and 2020 Revenues and Cost of Goods Sold Revenue for the year ended December 31, 2021 was $13,639,000 compared to $8,514,000 for the year ended December 31, 2020, an increase of $5,125,000, or 60%.
An accrual for a loss contingency is recognized when it is probable that an asset has been impaired, or a liability has been incurred and the amount of loss can be reasonably estimated.
The 2020 income was primarily due to loan forgiveness of $557,000 and income from a legal judgement of $35,000. Net Loss Overall, we had a net loss of $1,338,000 for the year ended December 31, 2021, as compared to a net loss of $1,759,000 for the year ended December 31, 2020, a decrease of $421,000.
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.
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.
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.
Our bookings increased in 2021, and our backlog at December 31, 2021, was $10,818,000, an increase of $2,370,000, or 28%, from our December 31, 2020 backlog. During 2021, we had net bookings of $16,009,000, consisting of: (i) $13,543,000 of new sales contracts executed in 2021, (ii) $3,863,000 net positive changes orders, and (iii) $1,397,000 in project cancellations.
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.
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. As of December 31, 2021, we had an accumulated deficit of $28,781,566, a working capital deficit of $415,171, and negative stockholders’ equity of $3,570,533.
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.
Other Income (Expense) Our other income (net) increased by $37,000 from $604,000 for the year ended December 31, 2020, to $641,000 for the year ended December 31, 2021.
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.
This revenue increase was partly the result of our increased net bookings in 2021 which grew from $7,405,000 in 2020 to $16,009,000 in 2021, or 116%.
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.
Operating Expenses Operating expenses increased by 25% from $3,916,000 for the year ended December 31, 2020 to $4,905,000 for the year ended December 31, 2021, an increase of $989,000.
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.
We perform a quantitative impairment test annually during the fourth quarter by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired.
Goodwill is reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value. The Company performs a quantitative impairment test annually on December 31 by comparing the fair value of the reporting unit with its carrying amount, including goodwill.
An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. We completed this assessment as of December 31, 2021 and concluded that no impairment existed. Product warranty .
An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has one reporting unit. As of June 30, 2022, the Company experienced a triggering event due to a drop in its stock price and performed a quantitative analysis for potential impairment of its goodwill.
We plan to use these funds to accelerate our organic growth through key employee hires and key investments in product development (such as our controls and preventative maintenance) as well as seek accretive growth through acquisitions and expand our geographic footprint. 49 Inflation We have experienced and are likely to continue to face inflationary increases on the cost of products, which may adversely affect our margins.
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.
The effects of the COVID-19 pandemic on our business presented major challenges for us in 2021 and we expect this to be a source of further uncertainty to our business.
The effects of the COVID-19 pandemic presented major challenges for the Company in both 2020 and 2021. We continue to experience business disruptions in a post-COVID environment, in the form of softening demand in the markets we serve, continued supply chain delays, inflation, and a broader macroeconomic slowdown.
Removed
From leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables, ornamentals, and small fruits (such as strawberries, blackberries and raspberries) to bell peppers, cucumbers, tomatoes, and cannabis, some producers grow crops indoors in response to market dynamics or as part of their preferred farming practice.
Added
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%.
Removed
We leverage our reputation and know-how against the many local contractors and MEP engineers who collectively constitute our largest competitors. The three key pillars of our corporate strategy for growing the Company and increasing shareholder value are: 1. Pursue Organic growth .
Added
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.
Removed
We serve a market for the construction and expansion of controlled environment agriculture (CEA) facilities and businesses that is projected to grow at a 20%+ compound annual growth rate for the foreseeable future.
Added
The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, and working capital.
Removed
Our primary vertical market of cannabis cultivation facilities has been joined by the similarly rapidly growing urban vertical farming market to create two market opportunity segments that we are positioned to serve. In May of 2021 we announced a new strategy for our organic growth, which included: New markets.
Added
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.
Removed
Expanding our business development plan to pursue non-cannabis CEA facilities, at least doubling our total addressable market. New products & services. Expanding our product offerings from primarily environmental control to now offer all of the primary technologies and services required in a CEA facility.
Added
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.

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