BNB Standard Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, which include additional information about our accounting policies, practices, and the transactions underlying our financial results, as well as with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Cautionary Statements” appearing elsewhere herein and the risks and uncertainties described or identified in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated from time to time in the Company’s filings with the SEC, and Part II, Item 1A of this Quarterly Report entitled “Risk Factors.”

Non-GAAP Financial Measures

To supplement our financial results on U.S. generally accepted accounting principles (“GAAP”) basis, we use non-GAAP measures including net bookings, backlog, as well as adjusted net income (loss) which reflects adjustments for certain non-cash expenses such as stock-based compensation, certain debt-related items and depreciation expense. We believe these non-GAAP measures are helpful in understanding our past performance and are intended to aid in evaluating our potential future results. The presentation of these non-GAAP measures should be considered in addition to our GAAP results and are not intended to be considered in isolation or as a substitute for financial information prepared or presented in accordance with GAAP. We believe these non-GAAP financial measures reflect an additional way to view aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. For purposes of this Quarterly Report, (i) “adjusted net income (loss)” and “adjusted operating income (loss)” mean GAAP net income (loss) and operating income (loss), respectively, after adjustment for non-cash equity compensation expense, debt-related items and depreciation expense, and (ii) “net bookings” means new sales contracts executed during the quarter for which we received an initial deposit, net of any adjustments including cancellations and change orders during the quarter.

Our backlog, remaining performance obligations and net bookings may not be indicative of future operating results, and our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in the backlog or remaining performance obligations will actually generate revenues or when the actual revenues will be generated.

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. 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.

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. 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.

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 primarily in the U.S., Canada. We recently have developed customers in the non-cannabis CEA market to expand our market reach. 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. 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. The part of the CEA industry focused on food related crops is also facing disruption from evolving market demand, competition, and reorganization, including the lack of growth capital and several noteworthy bankruptcies.

We support our clients by providing integrated mechanical, electrical, and plumbing (“MEP”) engineering design, proprietary and curated environmental control equipment, and automation offerings that serve the CEA industry. 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. 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. 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. Largely focused in the cannabis segment, our partnerships include relationships with new and existing growers, capital providers, consultants, independent contractors, and numerous other providers in the segment. These partnerships include agreements reached in 2022 with Merida Capital and Hydrobuilder Holdings LLC. In June 2022 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.

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. Since then, we have tested and solidified best practices from designing environmental control systems for CEA cultivation facilities.

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.

Shares of our common stock and warrants currently are traded on the Nasdaq Capital Markets under the ticker symbols “CEAD” and “CEADW”, respectively.

Impact of the COVID-19 Pandemic on Our Business

The impact of the government and the business economic response to the COVID-19 pandemic affected demand across the majority of our markets and disrupted workflow and completion schedules on projects. We believe we continue to have adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, costs, and working capital. Due to this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the long-term impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business. During the year ended December 31, 2022, and continuing into the current fiscal quarter, the Company experienced delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain. Consequently, our revenue recognition of some customer sales has been delayed until future periods when the shipment of orders can be completed.

Impact of Ukrainian Conflict

We believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting. 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. 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. 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. 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.

Our Bookings, Backlog and Revenue

During the three months ended September 30, 2023, we executed new sales contracts with a total contract value of $644,000. During this same period, we had cancellations of $279,000. After adjustments for these cancellations, our net bookings in the three months ended September 30, 2023 were $365,000, representing an increase of $160,000 (or 78%) from net bookings of $205,000 in the second quarter of 2023.

Our backlog at September 30, 2023 was $548,000, a decrease of $518,000, or 49%, from June 30, 2023. The decrease in backlog is the result of lower bookings in the fourth quarter of 2022 and the first nine months of 2023. Our backlog at September 30, 2023 includes booked sales orders of $353,000 (64% of the total backlog) from four customers that we do not expect to be realized until 2024, if at all. Included in the projected revenue is one booked sales order of $65,000 (12% of the total backlog) from one customer that we believe is at risk of cancellation based on conversations with this customer. We believe the sales orders in these portions of our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled by our customers. Therefore, investors should not view backlog as earned revenue.

Our backlog has declined for several quarters. The primary reason for the decline has been fewer new order bookings and contract cancellations.

The following table sets forth: (i) our beginning backlog (the remaining contract value of outstanding sales contracts for which we have received an initial deposit as of the previous period), (ii) our net bookings for the period (new sales contracts executed during the period for which we received an initial deposit, net of any adjustments including cancellations and change orders during the period), (iii) our recognized revenue for the period, and (iv) our ending backlog for the period (the sum of the beginning backlog and net bookings, less recognized revenue). Based on the current economic climate and our cost cutting measures, there is no assurance that we will be able to continue to obtain the level of bookings that we have had in the past and or fulfill our current backlog, and we may experience contract cancellations, project scope reductions and project delays.

Our recognized revenue for the quarters ended March 31, 2023, June 30, 2023, and September 30, 2023 in the table below, excludes $148,776, $55,959, and $29,400, respectively, in revenue arising from the forfeiture of non-refundable deposits from former customers on previously cancelled contracts. The contracts were removed from the backlog at the time of cancellation.

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. 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.

As has historically been the case for the Company at each quarter-end, there remains significant uncertainty regarding the timing of revenue recognition of our backlog as of September 30, 2023.

We have provided an estimate in our condensed consolidated financial statements for when we expect to recognize revenue on our remaining performance obligations (i.e., our Q3 2023 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts. There continues to be significant uncertainty regarding the timing of our recognition of revenue on our Q3 2023 backlog. Refer to the Revenue Recognition section of Note 1 in our condensed consolidated financial statements, included as part of this Quarterly Report for additional information on our estimate of future revenue recognition on our remaining performance obligations.

Our backlog, remaining performance obligations, and net bookings may not be indicative of future operating results, and our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in backlog or remaining performance obligations will generate revenues or when the revenues will be generated. Net bookings and backlog are considered non-GAAP financial measures, and therefore, they should be considered in addition to, rather than as a substitute for, our GAAP measures for recognized revenue, deferred revenue, and remaining performance obligations. Further, we can provide no assurance as to the profitability of our contracts reflected in remaining performance obligations, backlog and net bookings.

Results of Operations

Comparison of Three Months Ended September 30, 2023 and September 30, 2022

Revenues and Cost of Goods Sold

Revenue for the three months ended September 30, 2023 was $914,000, compared to $5,063,000 for the three months ended September 30 2022, representing a decrease of $4,149,000, or 82%. The decrease was primarily due to a decrease in bookings in the last 12 months. We believe the lower bookings are due to the suppression of capital expenditures in the cannabis market environment as a result of the prolonged effects of pricing and inflationary pressure, in addition to a reduced sales effort.

Cost of revenue decreased by $3,448,000, or 77%, from $4,466,000 for the three months ended September 30, 2022 to $1,018,000 for the three months ended September 30, 2023. The decrease was primarily due to a decrease in revenue and a decrease in variable costs, offset by higher fixed costs as a percentage of revenue, as discussed below.

During the three months ended September 30, 2023 we recognized a gross loss of $104,000 compared to a gross profit of $597,000 for the three months ended September 30, 2022, a decrease of 117%. Our gross profit margin decreased by 23.2 percentage points from a gross profit margin of 11.8% for the three months ended September 30, 2022 to a gross loss margin of 11.4% for the three months ended September 30, 2023 primarily due to lower revenue and an increase in fixed costs as a percentage of revenue, as described below. Additionally, total revenue in the three months ended September 30, 2023 includes $29,000 from forfeited, non-refundable deposits from former customers on previously cancelled contracts.

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $292,000, or 32% of total revenue, for the three months ended September 30, 2023 as compared to $373,000, or 7% of total revenue, for the three months ended September 30, 2022. The decrease of $81,000 was primarily due to a decrease in salaries and benefits (including stock-based compensation) of $78,000 and a decrease in fixed overhead of $3,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $726,000, or 80% of total revenue, during the three months ended September 30, 2023, as compared to $4,093,000, or 81% of total revenue, in the three months ended September 30, 2022. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $3,139,000 driven by lower revenue, partially offset by lower equipment margins, (ii) a decrease in warranty of $215,000, (iii) a decrease in other overhead of $48,000, (iv) a decrease in travel of $32,000, (v) a decrease in shipping and handling expense of $12,000, offset by (i) an increase in outside engineering costs of $58,000, and (ii) an increase in excess and obsolete inventory costs of $21,000.

We continue to focus on gross margin improvement through a combination of efforts, including more disciplined pricing, better absorption of our fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.

Operating Expenses

Operating expenses decreased to $703,000 for the three months ended September 30, 2023, from $1,656,000 for the three months ended September 30, 2022, a decrease of $953,000, or 58%. The operating expense decrease consisted of: (i) a decrease in selling, general and administrative expenses (“SG&A expenses”) of $611,000, (ii) a decrease in advertising and marketing expenses of $283,000, and (iii) a decrease in product development of $59,000. These decreases are the result of recent cost-cutting measures.

Our decrease in SG&A expenses for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, was primarily due to: (i) a decrease of $299,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) a decrease in accounting and other professional fees of $145,000, (iii) a decrease in bad debt expense of $107,000, (iv) a decrease in commissions and other sales related expense of $47,000, (v) a decrease of $33,000 for facility and office expenses, (vi) a decrease in travel of $22,000, offset by (i) an increase in investor relations expense of $24,000, and (ii) an increase in business taxes and licenses of $19,000.

The decrease in advertising and marketing expenses was primarily due to (i) a decrease in salaries and benefits (including stock compensation of $124,000, (ii) a decrease in advertising and promotion of $77,000, (iii) a decrease in trade show related expenses of $65,000, and (iv) a reduction in outside services and other marketing expenses of $17,000.

The decrease in product development costs was due to (i) a decrease in salaries and benefits (including stock-based compensation) of $55,000, and (ii) a decrease in travel of $4,000.

Operating Income (Loss)

We recognized an operating loss of $807,000 for the three months ended September 30, 2023, as compared to an operating loss of $1,059,000 for the three months ended September 30, 2022, a decrease of $252,000 or 24%. The operating loss for the three months ended September 30, 2023 included $15,000 of non-cash, stock-based compensation, and $7,000 of depreciation expense, compared to $79,000 of non-cash, stock-based compensation, and $7,000 of depreciation expense for the three months ended September 30, 2022. Excluding these non-cash items, our operating loss decreased by $189,000.

Other Income (Expense)

We recognized other income (net) of $8,000 for the three months ended September 30, 2023, compared to other income (net) of $17,000 for the three months ended September 30, 2022. Other income for both the three months ended September 30, 2023 and the three months ended September 30, 2022 primarily consisted of interest income on a money market account.

Net Income (Loss)

Overall, we recognized a net loss of $799,000 for the three months ended September 30, 2023, as compared to a net loss of $1,042,000 for the three months ended September 30, 2022, a decrease of $243,000 or 23%. The net loss for the three months ended September 30, 2023 included $15,000 of non-cash, stock-based compensation, and $7,000 of depreciation expense, compared to $79,000 of non-cash, stock-based compensation, $7,000 of depreciation expense for the three months ended September 30, 2022. Excluding these non-cash items, our net loss decreased by $180,000.

Comparison of Nine Months Ended September 30, 2023 and September 30, 2022

Revenues and Cost of Goods Sold

Revenue for the nine months ended September 30, 2023 was $6,660,000, compared to $9,822,000 for the nine months ended September 30 2022, representing a decrease of $3,162,000, or 32%. The decrease was primarily due to a decrease in bookings over the past 12 months. We believe the lower bookings are due to the suppression of capital expenditures in the cannabis market environment as a result of the prolonged effects of pricing and inflationary pressure, in addition to a reduced sales effort.

Cost of revenue decreased by $2,996,000, or 34%, from $8,828,000 for the nine months ended September 30, 2022 to $5,832,000 for the nine months ended September 30, 2023. The increase was primarily due to a decrease in revenue and a decrease in variable costs as a percentage of revenue, offset by an increase in fixed costs as a percentage of revenue.

Our gross profit for the nine months ended September 30, 2023 was $828,000 compared to $994,000 for the nine months ended September 30, 2022, a decrease of 17%. Gross profit margin increased by 2.3 percentage points from 10.1% for the nine months ended September 30, 2022 to 12.4% for the nine months ended September 30, 2023 primarily due to a decrease in variable costs as a percentage of revenue, offset by an increase in fixed costs as a percentage of revenue, as described below. Additionally, total revenue in the nine months ended September 30, 2023 includes $234,000 from forfeited, non-refundable deposits from former customers on previously cancelled contracts.

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $1,002,000, or 15% of total revenue, for the nine months ended September 30, 2023 as compared to $1,181,000, or 12% of total revenue, for the nine months ended September 30, 2022. The decrease of $179,000 was primarily due to a decrease in salaries and benefits (including stock-based compensation) of $145,000 and a decrease in fixed overhead of $34,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $4,830,000, or 73% of total revenue, during the nine months ended September 30, 2023, as compared to $7,647,000, or 78% of total revenue, in the nine months ended September 30, 2022. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $2,497,000 driven by lower revenue, (ii) a decrease in warranty expense of $197,000, (iii) a decrease in travel of $84,000, (iv) a decrease in other overhead of $42,000, (v) a decrease in outside engineering costs of $30,000, (vi) a decrease in shipping and handling expense of $20,000, offset by an increase in excess and obsolete inventory of $52,000.

We continue to focus on gross margin improvement through a combination of efforts, including more disciplined pricing, better absorption of our fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.

Operating Expenses

Operating expenses decreased to $2,786,000 for the nine months ended September 30, 2023, from $5,435,000 for the nine months ended September 30, 2022, a decrease of $2,649,000, or 49%. The operating expense decrease consisted of: (i) a decrease of $1,232,000 in selling, general and administrative (“SG&A expenses”) (ii) a decrease of $631,000 for goodwill impairment charges, (iii) a decrease in advertising and marketing expenses of $608,000, and (iv) a decrease in product development of $178,000. The decreases are a result of cost-cutting measures implemented this year.

Our decrease in SG&A expenses for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily due to: (i) a decrease of $671,000 in salaries and benefits (including stock-based compensation) and employee recruitment costs, (ii) a decrease in accounting and other professional fees of $315,000, (iii) a decrease in bad debt expense of $96,000, (iv) a decrease for commissions and other sales related expenses of $76,000, (v) a decrease in travel of $75,000, and (vi) a decrease of $68,000 for facility and office expenses, offset by (i) an increase in costs related to investor relations of $40,000, (ii) an increase in business taxes and licenses expense of $21,000, and (iii) an increase in board fees of $10,000.

The decrease in advertising and marketing expenses was primarily due to (i) a decrease in salaries and benefits (including stock compensation) of $230,000, (ii) a decrease in advertising and promotion of $165,000, (iii) a reduction in trade show related expenses of $107,000, (iv) a decrease in outside services and other marketing expenses of $106,000.

The decrease in product development costs was due to (i) a decrease in salaries and benefits (including stock-based compensation) of $143,000, (ii) a decrease in R&D consulting and materials expense of $21,000, and (iii) a decrease in travel of $14,000.

Operating Income (Loss)

We recognized an operating loss of $1,958,000 for the nine months ended September 30, 2023, as compared to an operating loss of $4,442,000 for the nine months ended September 30, 2022, a decrease of $2,484,000 or 56%. The operating loss for the nine months ended September 30, 2023 included $177,000 of non-cash, stock-based compensation, and $20,000 of depreciation expense, compared to $267,000 of non-cash, stock-based compensation, $20,000 of depreciation expense, and $631,000 for a goodwill impairment charge for the nine months ended September 30, 2022. Excluding these non-cash items, our operating loss decreased by $1,763,000.

Other Income (Expense)

We recognized other income (net) of $34,000 for the nine months ended September 30, 2023, compared to other income (net) of $216,000 for the nine months ended September 30, 2022. Other income for the nine months ended September 30, 2023 consisted of interest income on a money market account of $26,000 and $8,000 for adjustments to our ERC credit and unclaimed property liability. Other income for the nine months ended September 30, 2022 primarily consisted of $185,000 for an insurance settlement, and interest income on a money market account.

Net Income (Loss)

Overall, we recognized a net loss of $1,924,000 for the nine months ended September 30, 2023, as compared to a net loss of $4,226,000 for the nine months ended September 30, 2022, a decrease of $2,302,000 or 54%. The net loss for the nine months ended September 30, 2023 included $177,000 of non-cash, stock-based compensation, and $20,000 of depreciation expense, compared to $267,000 of non-cash, stock-based compensation, $20,000 of depreciation expense, and $631,000 for a goodwill impairment charge for the nine months ended September 30, 2022. Excluding these non-cash items, our net loss decreased by $1,581,000.

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents

As of September 30, 2023, we had cash and cash equivalents of $13,343,000, compared to cash and cash equivalents of $18,637,000 as of December 31, 2022. The $5,294,000 decrease in cash and cash equivalents during the nine months ended September 30, 2023, was the result of cash used in operations. Our cash is held in bank depository accounts in a financial institution. During the nine months ended September 30, 2023, we held deposits in this financial institution that exceeded the federally insured amount.

As of September 30, 2023, we had accounts receivable (net of allowance for doubtful accounts) of $273,000, inventory (net of excess and obsolete allowance) of $315,000, and prepaid expenses and other assets of $324,000 (including $36,000 in advance payments on inventory purchases). While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability especially since most of our customers are funded on an as-needed basis to complete facility construction.

As of September 30, 2023, we had total accounts payable and accrued expenses of $572,000, deferred revenue of $475,000, and the current portion of operating lease liability of $124,000. As of September 30, 2023, we had working capital of $13,083,000, compared to working capital of $14,724,000 as of December 31, 2022. The decrease in our working capital was primarily related to (i) a decrease in cash of $5,294,000, (ii) a decrease in deferred revenue of $3,864,000, (iii) a decrease in prepaid and other expenses of $1,166,000, (iv) a decrease in accounts payable and accrued liabilities of $635,000, and (v) an increase in accounts receivable (net) of $270,000.

We currently intend to retain all available funds and any future earnings for use in the operation of our business. 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 post-pandemic macro-economic and CEA industry economy that has developed during 2021 and 2022, and is continuing into 2023, we cannot predict the continuing level of working capital that we will have in the future. 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.

Summary of Cash Flows

The following summarizes our approximate cash flows for the nine months ended September 30, 2023 and September 30, 2022:

31

Operating Activities

We incurred a net loss for the nine months ended September 30, 2023 of $1,924,000 and have an accumulated deficit of $36,203,000 as of September 30, 2023.

Cash used in operations for the nine months ended September 30, 2023 was $5,294,000 compared to cash used in operating activities of $743,000 for the nine months ended September 30, 2022, an increase in cash usage of $4,551,000.

The increase in cash used in operating activities during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, was primarily attributable to: (i) an increase in cash used to fund working capital of $6,136,000, (ii) a decrease in net loss of $2,302,000, and (iii) a decrease in non-cash operating charges of $717,000.

The decrease in our working capital was primarily related to (i) a decrease in cash of $5,294,000, (ii) a decrease in deferred revenue of $3,864,000, (iii) a decrease in prepaid and other expense of $1,166,000, (iv) a decrease in accounts payable and accrued liabilities of $635,000, and (v) an increase in accounts receivable of $270,000.

The decrease in non-cash operating charges was primarily due to (i) a decrease in goodwill impairment charges of $631,000, (ii) a decrease in share-based compensation of $103,000, and (iii) a decrease in the provision for doubtful accounts of $96,000, offset by an increase in the provision for excess and obsolete inventory of $116,000.

Investing Activities

Cash used in investing activities during the nine months ended September 30, 2023 was $0. Cash used in investing activities during the nine months ended September 30, 2022 of $28,000 was primarily related to the purchase of property and equipment.

Financing Activities

There were no cash flows from financing activities during the nine months ended September 30, 2023.

Cash flows from financing activities during the nine months ended September 30, 2022, was the result of cash proceeds from the sale of common stock and warrants (net of issuance costs) of $21,711,000, offset by a cash payment of $2,016,000 for the redemption of series B preferred stock, including related dividends.

Common Stock Equity Offering

On February 15, 2022, the Company completed a public offering of shares of common stock and warrants. The Company received net proceeds of approximately $21,711,000 for the sale of 5,811,138 shares of common stock and 6,572,808 warrants, each warrant to purchase one share of common stock for five years, exercisable immediately, at an exercise price of $5.00, expiring February 10, 2027. The Company also issued to the representative of the underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.16, during the period commencing August 9, 2022, and expiring on February 10, 2027.

The net proceeds from the offering will be used for the Company’s operations, to pursue select acquisitions or strategic alternatives, and for general corporate and working capital purposes. In connection with the offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol “CEAD” and our warrants under the symbol “CEADW”. 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. See Item 5 below for discussion of the notice received from Nasdaq concerning a potential delisting.

Inflation

Recently, our operations have started to be influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate. We are likely to continue to face inflationary increases in 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. Inflation is reflected in higher wages, increased pricing of equipment and other products that we have contracted to provide to our customers, and generally higher prices across all sectors of the economy. As we move forward, we plan to continuously monitor our various contract terms and may decide to add clauses that will permit us to adjust pricing if inflation and price increase pressures on us will impact our ability to perform our contracts and maintain our margins.

Contractual Payment Obligations

As of September 30, 2023, our contractual payment obligations consisted of a building lease. Refer to Note 2 – Leases of the notes to the condensed consolidated financial statements, included as part of this Quarterly Report for a discussion of our building lease.

Commitments and Contingencies

Refer to Note 6 – Commitments and Contingencies of the notes to the condensed consolidated financial statements, included as part of this Quarterly Report for a discussion of commitments and contingencies.

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. As of September 30, 2023, we had no off-balance sheet arrangements. During the nine months ended September 30, 2023, we did not engage in any off-balance sheet financing activities other than those included in the “Contractual Payment Obligations” discussed above and those reflected in Note 6 of our condensed consolidated financial statements.

Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Actual results could materially differ from those estimates. Key estimates include: allocation of transaction prices to performance obligations under contracts with customers, standalone selling prices, timing of expected revenue recognition on remaining performance obligations under contracts with customers, valuation of intangible assets, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, accounts receivable and inventory allowances, and legal contingencies.

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, therefore are not required to provide the information under this item.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that as a result of material weaknesses in our internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC, our disclosure controls and procedures were not effective as of September 30, 2023.

We 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 our limited number of 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 intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. We are committed to continuing to improve our financial organization including, without limitation, expanding our accounting staff and improving our systems and controls to reduce our reliance on the manual nature of our existing systems. However, due to our size and our financial resources, remediating the several identified weaknesses has not been possible and may not be economically feasible now or in the future.

Changes in Internal Control over Financial Reporting

There were no changes identified in connection with our internal control over financial reporting during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the information set forth in this Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including, without limitation, the risk factors and uncertainties contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not known to us or that we currently consider to be immaterial to our operations.