BNB Standard Corp: Form 10-Q for the period ended Jun 30, 2024

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, 2023, 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, 2023, 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 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 aim to provide customers with a variety of value-added technology solutions that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements. We do this by offering our customers a variety of service and product offerings that include: (i) air handling equipment and systems, (ii) air sanitation products, (iii) LED lighting, and (iv) benching and racking solutions for indoor cultivation.

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.

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, as a result of the pandemic. 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 years ended December 31, 2023 and December 31, 2022, and continuing since then, the Company experienced delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain. Consequently, our revenue recognition of some customer sales has been delayed until future periods when the shipment of orders can be completed.

Impact of Ukrainian and Israeli Conflicts

We believe that the conflicts involving Ukraine and Israel do not have any direct impact on our operations, financial condition, or financial reporting. We believe the conflicts will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from countries involved in the conflicts, supply chain challenges, and the international and US domestic inflation resulting from the conflict and government spending in relation to the conflicts. 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 specifically targeted for cyber-attacks related to the conflicts. We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes specifically related to those conflicts, as we principally operate in the United States and Canada. We do not believe that the conflicts will have any impact on our internal control over financial reporting. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the conflicts.

Our Bookings, Backlog and Revenue

During the three months ended June 30, 2024, we executed new sales contracts with a total contract value of $1,625,000. During this same period, we had negative change orders of $172,000 and cancellations of $13,000. Consequently, our net bookings in the three months ended June 30, 2024 were $1,440,000, representing an increase of $1,137,000 (or 375%) from net bookings of $303,000 in the first quarter of 2024.

Our backlog at June 30, 2024 was $227,000, a decrease of $308,000, or 58%, from our backlog of $535,000 at March 31, 2024. The decrease in backlog is the result of fulfilling contract obligations and recording revenue against our prior backlog. While we expect to recognize all revenue from the remaining backlog in 2024, there is significant uncertainty regarding the timing of the Company’s recognition of revenue on its remaining performance obligations, and there is no certainty that these will result in actual revenues. Therefore, investors should not view backlog as earned revenue.

Our backlog has significantly declined since the January 1, 2023 backlog of $5,578,000. 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 June 30, 2023, September 30, 2023, December 31, 2023, March 31, 2024, and June 30, 2024, in the table below, excludes $56,000, $29,000, $0, $31,000, and $12,000, 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 June 30, 2024.

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 Q2 2024 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 Q2 2024 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 the Three Months Ended June 30, 2024 and June 30, 2023

Revenues and Cost of Goods Sold

Revenue for the three months ended June 30, 2024 was $1,761,000, compared to $1,064,000 for the three months ended June 30, 2023, representing an increase of $697,000, or 66%. The increase was primarily due to one contract for $1,200,000 that was booked and shipped (revenue recorded) in the second quarter of 2024, offset by overall fewer shipments as a result of lower bookings and backlog. In addition, we continue to satisfy our performance obligations on the prior backlog.

Cost of revenue increased by $596,000 or 61%, from $985,000 for the three months ended June 30, 2023 to $1,581,000 for the three months ended June 30, 2024. The increase was primarily due to an increase in revenue, along with a decrease in fixed and other variable costs, as discussed below.

During the three months ended June 30, 2024, we recognized a gross profit of $180,000 compared to a gross profit of $79,000 for the three months ended June 30, 2023, an increase of $101,000 or 128%. Our gross profit margin increased by 3 percentage points from 7% for the three months ended June 30, 2023 to 10% for the three months ended June 30, 2024 primarily due to higher revenue and a decrease in fixed costs as a percentage of revenue, as described below. Additionally, total revenue in the three months ended June 30, 2024 and June 30, 2023 included $12,000 and $56,000, respectively, 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 $207,000, or 12% of total revenue, for the three months ended June 30, 2024, as compared to $320,000, or 30% of total revenue, for the three months ended June 30, 2023. The decrease of $113,000 was due to a decrease in salaries and benefits (including stock-based compensation) of $96,000 and a decrease in fixed overhead of $17,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $1,374,000, or 78% of total revenue, during the three months ended June 30, 2024, as compared to $665,000, or 63% of total revenue, in the three months ended June 30, 2023. The increase in variable costs was primarily due to: (i) an increase in equipment costs of $746,000 driven by higher revenue and lower equipment margins, and (ii) an increase of $30,000 for outside engineering services, partially offset by (iii) a decrease in excess and obsolete inventory expense of $28,000, (iv) a decrease in warranty expense of $18,000 due to a reduction in the warranty accrual as a result of lower revenue during the past 18 months, (v) a decrease in travel of $17,000, and (vi) a decrease of $4,000 for shipping and handling expense and other.

Operating Expenses

Operating expenses decreased to $657,000 for the three months ended June 30, 2024, from $783,000 for the three months ended June 30, 2023, a decrease of $126,000, or 16%. The operating expense decrease consisted of: (i) a decrease in selling, general and administrative expenses (“SG&A expenses”) of $97,000, and (ii) a decrease in advertising and marketing expenses of $29,000. These decreases are the result of our cost-cutting measures.

Our decrease in SG&A expenses for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, was primarily due to: (i) a decrease of $137,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) a decrease in facility and office expense of $13,000, and (iii) a decrease of $13,000 for accounting and other professional fees, partially offset by (iv) an increase of $33,000 for business taxes and licenses, primarily due to an increase in real estate taxes, and (v) an increase in investor relations expense of $32,000.

The decrease in advertising and marketing expenses was primarily due to (i) a decrease in advertising and promotion of $26,000, and (ii) a decrease in salaries and benefits of $3,000.

Operating Loss

We recognized an operating loss of $477,000 for the three months ended June 30, 2024, as compared to an operating loss of $705,000 for the three months ended June 30, 2023, a decrease of $228,000 or 32%. The operating loss for the three months ended June 30, 2024 included a credit of $7,000 for non-cash, stock-based compensation related to forfeiture of unvested stock options, and $4,000 of depreciation expense, compared to $15,000 of non-cash, stock-based compensation, and $7,000 of depreciation expense for the three months ended June 30, 2023. Excluding these non-cash items, our operating loss decreased by $202,000.

Other Income (Expense)

We recognized other income (net) of $7,000 for the three months ended June 30, 2024, compared to other income (net) of $11,000 for the three months ended June 30, 2023. Other income for the three months ended June 30, 2024 consisted of interest income on our money market account. Other income for three months ended June 30, 2023 primarily consisted of interest income on a money market account of $9,000 and an adjustment for unclaimed property of $2,000.

Net Loss

Overall, we recognized a net loss of $470,000 for the three months ended June 30, 2024, as compared to a net loss of $694,000 for the three months ended June 30, 2023, a decrease of $224,000 or 32%. The net loss for the three months ended June 30, 2024 included a credit of $7,000 for non-cash, stock-based compensation related to forfeiture of unvested stock options, and $4,000 of depreciation expense, compared to $15,000 of non-cash, stock-based compensation, $7,000 of depreciation expense for the three months ended June 30, 2023. Excluding these non-cash items, our net loss decreased by $198,000.

Comparison of the Six Months Ended June 30, 2024 and June 30, 2023

Revenues and Cost of Goods Sold

Revenue for the six months ended June 30, 2024 was $1,995,000, compared to $5,746,000 for the six months ended June 30, 2023, representing a decrease of $3,751,000, or 65%. The decrease was primarily due to a decrease in bookings in the last 18 months. We believe the lower bookings are due to the delay 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 by the Company.

Cost of revenue decreased by $2,844,000 or 59%, from $4,814,000 for the six months ended June 30, 2023, to $1,970,000 for the six months ended June 30, 2024. The decrease was primarily due to a decrease in revenue, along with a decrease in fixed and variable costs, as discussed below.

Our gross profit for the six months ended June 30, 2024 was $25,000 compared to $932,000 for the six months ended June 30, 2023, a decrease of $907,000 or 97%. Our gross profit margin decreased by 15 percentage points from 16% for the six months ended June 30, 2023, to 1% for the six months ended June 30, 2024, primarily due to lower revenue and an increase in fixed costs as a percentage of revenue, as described below. Additionally, total revenue in the six months ended June 30, 2024 and June 30, 2023 included $44,000 and $205,000, respectively, 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 $460,000, or 23% of total revenue, for the six months ended June 30, 2024, as compared to $710,000, or 12% of total revenue, for the six months ended June 30, 2023. The decrease of $250,000 was due to a decrease in salaries and benefits (including stock-based compensation) of $219,000 and a decrease in fixed overhead of $31,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $1,509,000, or 76% of total revenue, during the six months ended June 30, 2024, as compared to $4,104,000, or 71% of total revenue, in the six months ended June 30, 2023. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $2,424,000 driven by lower revenue and lower equipment margins, (ii) a decrease in warranty expense of $137,000 due to a reduction in the warranty accrual as a result of lower revenue during the past 18 months, (iii) a decrease in travel of $23,000, (iv) a decrease of $23,000 in excess and obsolete inventory expense, and (v) reduced shipping and handling and other expense of $14,000, partially offset by (vi) an increase of $26,000 for outside engineering services.

Operating Expenses

Operating expenses decreased to $1,426,000 for the six months ended June 30, 2024, from $2,083,000 for the six months ended June 30, 2023, a decrease of $657,000, or 32%. The operating expense decrease consisted of: (i) a decrease in selling, general and administrative expenses (“SG&A expenses”) of $358,000, (ii) a decrease in advertising and marketing expenses of $222,000, and (iii) a decrease in product development of $76,000. These decreases are the result of our cost-cutting measures.

Our decrease in SG&A expenses for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, was primarily due to: (i) a decrease of $332,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) a decrease in bad debt expense of $39,000, (iii) a decrease in facilities and offices expenses of $33,000, (iv) a reduction in commissions of $21,000, (v) a decrease of $10,000 for travel, and (vi) a decrease in insurance and other expenses of $9,000. These decreases were offset by (i) an increase of $28,000 for investor relations expenses, (ii) an increase of $28,000 in business taxes and licenses primarily due to an increase for real estate taxes, (iii) an increase of $17,000 for accounting and other professional fees, and (iv) an increase for loss on the disposal of fixed assets of $13,000.

The decrease in advertising and marketing expenses was primarily due to (i) a decrease in salaries and benefits (including stock compensation) of $133,000, (ii) a decrease in advertising and promotion of $74,000, (iii) a decrease in outside services and other marketing expenses of $13,000, and (iv) a reduction in trade show related costs of $2,000.

The decrease in product development costs was due to (i) a decrease in salaries and benefits (including stock-based compensation) of $70,000, (ii) a decrease of $4,000 for materials and other R&D costs, and (iii) a decrease in travel of $2,000.

Operating Loss

We recognized an operating loss of $1,401,000 for the six months ended June 30, 2024, as compared to an operating loss of $1,151,000 for the six months ended June 30, 2023, an increase of $250,000 or 22%. The operating loss for the six months ended June 30, 2024 included $69,000 of non-cash, stock-based compensation, and $10,000 of depreciation expense, compared to $162,000 of non-cash, stock-based compensation, and $13,000 of depreciation expense for the six months ended June 30, 2023. Excluding these non-cash items, our operating loss increased by $346,000. This increase in operating loss was primarily due to a significant decrease in revenue for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. Of the additional revenue for the six-month period in 2023, 80% was recorded in the second quarter. Additionally, we had higher fixed and variable costs as a percentage of revenue in 2024.

Other Income (Expense)

We recognized other income (net) of $14,000 for the six months ended June 30, 2024, compared to other income (net) of $26,000 for the six months ended June 30, 2023. Other income for the six months ended June 30, 2024 consisted of interest income on our money market account. Other income for six months ended June 30, 2023 primarily consisted of interest income on a money market account of $18,000 and an adjustment to our ERC credit and unclaimed property of $8,000.

Net Loss

Overall, we recognized a net loss of $1,387,000 for the six months ended June 30, 2024, as compared to a net loss of $1,125,000 for the six months ended June 30, 2023, an increase of $262,000 or 23%. The net loss for the six months ended June 30, 2024 included $69,000 of non-cash, stock-based compensation, and $10,000 of depreciation expense, compared to $162,000 of non-cash, stock-based compensation, $13,000 of depreciation expense for the six months ended June 30, 2023. Excluding these non-cash items, our net loss increased by $357,000. This increase in net loss was primarily due to a significant decrease in revenue for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. Of the additional revenue for the six-month period in 2023, 80% was recorded in the second quarter. Additionally, we had higher fixed and variable costs as a percentage of revenue in 2024.

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents

As of June 30, 2024, we had cash and cash equivalents of $11,325,000, compared to cash and cash equivalents of $12,508,000 as of December 31, 2023. The $1,183,000 decrease in cash and cash equivalents during the six months ended June 30, 2024, was the result of cash used in operations. Our cash is held in bank depository accounts in a financial institution. During the six months ended June 30, 2024, we held deposits in this financial institution that exceeded the federally insured amount.

As of June 30, 2024, we had accounts receivable (net of allowance for doubtful accounts) of $32,000, contract assets (net of allowance for doubtful accounts) of $224,000, inventory (net of excess and obsolete allowance) of $24,000, and prepaid expenses and other assets of $615,000 (including $62,000 in advance payments on inventory purchases and a vendor credit for inventory returns of $144,000). 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 June 30, 2024, we had total accounts payable and accrued expenses of $886,000, deferred revenue of $393,000, and the current portion of operating lease liability of $131,000. As of June 30, 2024, we had working capital of $10,810,000, compared to working capital of $12,110,000 as of December 31, 2023. The decrease in our working capital was primarily related to (i) a decrease in cash of $1,183,000, (ii) a decrease in inventory (net) of $273,000, (iii) an increase in accounts payable and accrued liabilities of $262,000, partially offset by (iv) an increase in prepaid expenses and other assets of $302,000, and (v) a decrease in deferred revenue of $106,000.

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 challenges to the CEA industry economy and the specific challenges of our business, we cannot predict the continuing level of working capital that we will have in the future. As mentioned elsewhere, we have taken steps to conserve our cash resources by reducing staff and taking other cost-cutting measures and we will continue to evaluate further such measures in the future.

Summary of Cash Flows

The following summarizes our approximate cash flows for the six months ended June 30, 2024 and June 30, 2023:

Operating Activities

We incurred a net loss for the six months ended June 30, 2024 of $1,387,000 and have an accumulated deficit of $38,577,000 as of June 30, 2024.

Cash used in operations for the six months ended June 30, 2024 was $1,183,000 compared to cash used in operating activities of $4,440,000 for the six months ended June 30, 2023, a decrease of $3,257,000.

The decrease in cash used in operating activities during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, was primarily attributable to: (i) a decrease in cash used to fund working capital of $3,662,000, (ii) an increase in net loss of $262,000, and (iii) a decrease in non-cash operating charges of $143,000.

The decrease in our working capital was primarily related to (i) a decrease in cash of $1,183,000, (ii) a decrease in inventory (net) of $273,000, (iii) an increase in accounts payable and accrued liabilities of $262,000, partially offset by (iv) an increase in prepaid expenses and other assets of $302,000, and (v) a decrease in deferred revenue of $106,000.

The decrease in non-cash operating charges was primarily due to (i) a decrease of $93,000 for share-based compensation, (ii) a decrease in the provision for doubtful accounts of $39,000, and (iii) a decrease in the change to the provision for excess and obsolete inventory of $23,000.

Investing Activities

There were no cash flows from investing activities during the six months ended June 30, 2024. Cash provided by investing activities during the six months ended June 30, 2023 was less than $1,000.

Financing Activities

There were no cash flows from financing activities during the six months ended June 30, 2024 and June 30, 2023.

Inflation

Our operations are being influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build CEA facilities in which we operate. We believe that we will continue to face inflationary increases in the cost of products and our operations, which will adversely affect our margins and financial results and the pricing of our service and product supply contracts. Inflation is reflected in higher wages, increased pricing of equipment, delivery and transportation costs, and general operational expenses. As 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 June 30, 2024, 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 June 30, 2024, we had no off-balance sheet arrangements. During the six months ended June 30, 2024, 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, both of which positions are held by the same person, 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, 2023, filed with the SEC, our disclosure controls and procedures were not effective as of June 30, 2024.

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 in the future when our financial assets and our operations would support the requirements of additional personnel. We are committed to continuing to improve our financial organization, when we are able, 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 June 30, 2024, 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, 2023, 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.