CEA INDUSTRIES INC. The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report, which include additional information about our accounting policies, practices, and the transactions underlying our financial results. In addition to historical information, this Annual Report contains 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 this Annual Report.
Please also refer to "Non-GAAP Financial Measures" discussed elsewhere in this Annual Report.
The following discussion should be read in conjunction with Item 1 - Business in
this Annual Report, and our consolidated financial statements and accompanying
notes to consolidated financial statements included in this Annual Report. Our
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is segregated into four sections, including:
Executive Overview. This section provides a summary of our operating performance and cash flows, industry trends and our strategic initiatives.
Critical Accounting Policies and Estimates. This section describes the accounting areas where management makes critical estimates to report our financial condition and results of operations.
Results of Operations. This section provides an analysis of our consolidated results of operations for the two comparative periods presented in our consolidated financial statements.
Liquidity, Capital Resources and Financial Position. This section provides an analysis of cash flow, contractual obligations, and certain other matters affecting our financial position.
29 Executive OverviewCEA Industries Inc. is a company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture ("CEA") industry. 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 customers include commercial, state- and provincial-regulated CEA growers in theU.S. andCanada as well as in other international locations. Customers are those growers building new facilities and those expanding or retrofitting existing facilities, with both ranging in size from several thousand to more than 100,000 square feet. 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. 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. 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. Our revenue for the year endedDecember 31, 2022 was approximately$11,283,000 compared to approximately$13,639,000 for the year endedDecember 31, 2021 , a decrease of$2,356,000 , or 17%. Overall, we had a net loss of approximately$5,497,000 for the year endedDecember 31, 2022 as compared to a net loss of approximately$1,338,000 for the year endedDecember 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 . 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.
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. The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, and working capital. 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. 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. During the year, the Company experienced significant delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain arising from the long-term effects of the COVID-19 pandemic. Consequently, our revenue recognition of these customer sales has been delayed until future periods when the shipment of these orders can be completed. 30
Impact of Ukrainian Conflict
Currently, we believe that the conflict betweenUkraine andRussia 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 toNorth America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from theUkraine orRussia , supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country's response. 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 inthe United States andCanada . 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. Revenue. Our 2022 revenue was approximately$11,283,000 . Our 2022 revenue represents a decrease of 17% compared to 2021. 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. Our 2022 gross margin was 10.1%, a decrease from 21.5% in 2021. This decrease was primarily due to lower revenue, an increase in our fixed cost base, and an increase in our variable costs as a percent of revenue including lower margins on equipment sales as described in Results of Operations below. Profitability. Our 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. 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. 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. More recently, inFebruary 2023 , we have taken steps to reduce our cost structure to better reflect the activity levels we are observing in the industry (as further described in Note 16 Subsequent Events). We believe these steps are necessary to protect our liquidity and our current cash balance, and we will continue to monitor this as we move through the year. 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. Our bookings decreased in 2022, and our backlog atDecember 31, 2022 , was$5,577,000 , a decrease of$5,241,000 , or 48%, from ourDecember 31, 2021 backlog. 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)$3,117,000 in project cancellations. The following table sets forth: (i) our beginning backlog (the remaining contract value of outstanding sales contracts for which we have received an initial deposit as of the previous period), (ii) our net bookings for the period (new sales contracts executed during the period for which we received an initial deposit, net of any adjustments including cancellations and change orders during the period), (iii) our recognized revenue for the period, and (iv) our ending backlog for the period (the sum of the beginning backlog and net bookings, less recognized revenue). Based on the current economic climate and our cost cutting measures, there is no assurance that we will be able to continue to obtain the level of bookings that we have had in the past and or fulfill our current backlog, and we may experience contract cancellations, project scope reductions and project delays. For the quarter ended December 31, March 31, June 30, September 30, December 31, 2021 2022 2022 2022 2022 Backlog, beginning balance$ 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. 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 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. 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. 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 actually generate revenues or when the actual 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.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted inthe 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 its 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. For information regarding our critical accounting policies as well as recent accounting pronouncements, see Note 2 of our consolidated financial statements. Our management has discussed the development and selection of critical accounting estimates with the Board of Directors and the Board of Directors has reviewed our disclosure relating to critical accounting estimates in this Annual Report. We believe the following are the more significant judgments and estimates used in the preparation of our consolidated financial statements. Allowance for accounts receivable. Accounts receivables are recorded at the invoiced amount or based on revenue earned for items not yet invoiced, and generally do not bear interest. An allowance for doubtful accounts is established, as necessary, based on past experience and other factors, which, in management's judgment, deserve current recognition in estimating bad debts. Based on its review, we establish or adjust the allowance for specific customers and the accounts receivable portfolio as a whole. As ofDecember 31, 2022 , andDecember 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. Inventory is stated at the lower of cost or net
realizable value. The inventory is valued based on a first-in, first-out
("FIFO") basis. Lower of cost or net realizable value is evaluated by
considering obsolescence, excessive levels of inventory, deterioration and other
factors. Adjustments to reduce the cost of inventory to its net realizable
value, if required, are made for estimated excess, obsolescence or impaired
inventory. Excess and obsolete inventory is charged to cost of revenue and a new
lower-cost basis for that inventory is established; subsequent changes in facts
and circumstances do not result in the restoration or increase in that newly
established cost basis. As of December 31, 2022 , and December 31, 2021 , the
allowance for excess and obsolete inventory was $70,907 and $91,379 ,
respectively.
The Company recorded goodwill in connection with its acquisition ofHydro Innovations, LLC inJuly 2014 .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 onDecember 31 by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The Company's fair value is calculated using a market valuation technique whereby an appropriate control premium is applied to the Company's market capitalization as calculated by applying its publicly quoted share price to the number of its common shares issued and outstanding. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired. 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 ofJune 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. As ofJune 30, 2022 , the Company performed a quantitative analysis for potential impairment of its goodwill, by comparing the Company's fair value to its carrying value as ofJune 30, 2022 . Based on this analysis, the Company determined that its carrying value exceeded its fair value. As a result, the Company recorded a non-cash goodwill impairment charge of$631,064 atJune 30, 2022 . No income tax benefit related to this goodwill impairment charge was recorded atJune 30, 2022 . Product warranty. We warrant the products that we manufacture for a warranty period equal to the lesser of 12 months from start-up or 18 months from shipment. Our warranty provides for the repair, rework, or replacement of products (at our option) that fail to perform within stated specification. Our third-party suppliers also warrant their products under similar terms, which are passed through to our customers. We assess the historical warranty claims on our manufactured products and, since 2016, warranty claims have been approximately 1% of annual revenue generated on these products. We continue to assess the need to record a warranty reserve at the time of sale based on historical claims and other factors. As ofDecember 31, 2022 , andDecember 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. We account for deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of our assets and liabilities result in a deferred tax asset, we perform an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a net deferred tax asset is recorded when it is more likely than not that some portion or all of the net deferred tax asset will not be realized. 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 ofDecember 31, 2022 , andDecember 31, 2021 . Based on the available evidence, we believe it is more likely than not that we will be unable to utilize our net deferred tax assets in the foreseeable future. We intend to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. 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. We recognize the cost resulting from all share-based compensation arrangements, including stock options, restricted stock awards and restricted stock units that we grant under our equity incentive plan in our consolidated financial statements based on their grant date fair value. The expense is recognized over the requisite service period or performance period of the award. The service inception date is typically the grant date, but the service inception date may be prior to the grant date. Awards with a graded vesting period based on service are expensed on a straight-line basis for the entire award. Awards with performance-based vesting conditions which require the achievement of a specific company financial performance goal at the end of the performance period and required service period are recognized over the performance period. Each reporting period, we reassess the probability of achieving the respective performance goal. If the goals are not expected to be met, no compensation cost is recognized, and any previously recognized amount recorded is reversed. If the award contains market-based vesting conditions, the compensation cost is based on the grant date fair value and expected achievement of market condition and is not subsequently reversed if it is later determined that the condition is not likely to be met or is expected to be lower than initially expected. 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 onU.S. Treasury interest rates whose term is consistent with the expected term of the option. Allocation of transaction price; standalone selling price. 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. The best observable input is our actual selling price for the same good or service. For engineering services, we estimate the standalone selling price by reference to certain physical characteristics of the project, such as facility size and mechanical systems involved, which are indicative of the scope and complexity of the mechanical engineering services to be provided. For equipment sales, the standalone selling price is determined by forecasting the expected costs of the equipment and then adding an appropriate margin, based on a range of acceptable margins established by management. Depending on the nature of the performance obligations, we may use a combination of different methods and observable inputs if certain performance obligations have highly variable or uncertain standalone selling prices. Once the selling prices are determined, we apply the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as each performance obligation is fulfilled. Remaining performance obligations. The revenue standard requires certain quantitative and qualitative disclosures about our remaining performance obligations, which are defined as performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period, including (i) the aggregate amount of the transaction price allocated to the remaining performance obligations, and (ii) when we expect to recognize as revenue with respect to such amounts on either: (x) a quantitative basis using appropriate time bands for the duration of the remaining performance obligations, or (y) by using qualitative information. Industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of our control, make it difficult for us to predict when we will recognize revenue on our remaining performance obligations. There are risks that we may not realize the full contract value on customer projects in a timely manner or at all, and completion of a customer's cultivation 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 customers to complete a 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 significant price 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. 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. There is significant uncertainty regarding the timing of our recognition on all remaining performance obligations as ofDecember 31, 2022 . Customer contracts for which we have only received an initial advance payment to cover the allocated value of our engineering services ("engineering only paid contracts") carry enhanced risks that the equipment portion of these contracts will not be completed or will be delayed, which could occur if the customer is dissatisfied with the quality or timeliness of our engineering services or there is a delay or abandonment of the project due to the customer's inability to obtain project financing or licensing. In contrast, after the customer has made an advance payment for a portion of the equipment to be delivered under the contract ("partial equipment paid contracts"), we are typically better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. 34 Commitments and contingencies. In 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. 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. Results of Operations
Comparison of Years ended
Revenues and Cost of Goods Sold
Revenue for the year endedDecember 31, 2022 was$11,283,000 compared to$13,639,000 for the year endedDecember 31, 2021 , a decrease of$2,356,000 , or 17%. 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. Our revenue conversion is largely dependent on customer-centric factors-outside of our control-such as industry uncertainty, project financing concerns, the licensing and qualification of our prospective customers, and other reasons such as a challenging business climate including an overall post-COVID-19 economic downturn, which makes it difficult for us to predict when we will recognize revenue on our backlog.
Cost of revenue decreased by
The gross profit for the year endedDecember 31, 2022 was$1,145,000 compared to$2,926,000 for the year endedDecember 31, 2021 . Gross profit margin decreased by 11.4 percentage points from 21.5% for the year endedDecember 31, 2021 to 10.1% for the year endedDecember 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. 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 endedDecember 31, 2022 , as compared to$1,342,000 , or 9.8% of total revenue, for the year endedDecember 31, 2021 . The increase of$230,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of$249,000 , offset by a decrease of$19,000 in fixed overhead. The 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 endedDecember 31, 2022 , as compared to$9,371,000 , or 68.7% of total revenue, in the year endedDecember 31, 2021 . In the year endedDecember 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. Additionally in the year endedDecember 31, 2022 as compared to the year endedDecember 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. 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 endedDecember 31, 2021 to$6,869,000 for the year endedDecember 31, 2022 , an increase of$1,964,000 . The 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 endedDecember 31, 2022 compared to the year endedDecember 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 .
The increase in advertising and marketing expenses was due primarily to: (i) an
increase in salaries and benefits (including equity-based compensation) of
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 . Operating Loss We had an operating loss of$5,724,000 for the year endedDecember 31, 2022 , as compared to an operating loss of$1,979,000 for the year endedDecember 31, 2021 , an increase of$3,745,000 , or 189%. 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 endedDecember 31, 2022 , as compared to$324,000 for stock-based compensation and$58,000 of depreciation and amortization for the year endedDecember 31, 2021 . Excluding these non-cash items, our adjusted operating loss increased by$3,156,000 . Other Income (Expense) Our other income (net) decreased by$414,000 from$641,000 for the year endedDecember 31, 2021 , to$227,000 for the year endedDecember 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. The other income for 2021 primarily consisted of (i)$517,000 for loan forgiveness, (ii)$138,000 for ERC credits, (iii)$66,000 in rental income from the sub-lease of a portion of our previous facility, (iv) a$16,000 gain on lease termination, (v) a$13,000 gain from a contract cancellation from 2018, offset by (vi) expense for a legal settlement of$107,000 . Net Loss Overall, we had a net loss of$5,497,000 for the year endedDecember 31, 2022 , as compared to a net loss of$1,338,000 for the year endedDecember 31, 2021 , an increase of$4,159,000 . 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 endedDecember 31, 2022 , as compared to non-cash, stock-based compensation expense of$391,000 and depreciation and amortization of$58,000 in the year endedDecember 31, 2021 . 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 ofDecember 31, 2022 , we had cash and cash equivalents of$18,637,000 , compared to cash and cash equivalents of$2,160,000 as ofDecember 31, 2021 . The increase in cash and cash equivalents during the year endedDecember 31, 2022 was primarily the result of cash proceeds from the sale of common stock and warrants of$21,711,000 , offset by the redemption of series B preferred stock and interest expense of$2,016,000 , and cash used in operations of$3,190,000 . Our cash is held in bank depository accounts in certain financial institutions. During the year endedDecember 31, 2022 , we held deposits in financial institutions that exceeded the federally insured amount.
On
36 As ofDecember 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). 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. We expect this exposure to accounts receivable risk to increase as we pursue larger projects.
As of
We currently intend to retain all available funds and any future earnings for use in the operation and expansion 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 cash flows for the years endedDecember 31, 2022 and 2021: For the Twelve Months EndedDecember 31, 2022 2021
Net cash used in operating 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
Cash used in operations for the year endedDecember 31, 2022 was$3,190,000 compared to cash used in operations of$3,207,000 for the year endedDecember 31, 2021 , a decrease in cash usage of$17,000 . 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 . Significant non-cash items during 2022 included: (i) a goodwill impairment charge of$631,000 , (ii) stock-related compensation of$314,000 , and (iii)$103,000 for the amortization on an ROU asset. Significant non-cash items during 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 . Investing Activities
Cash used in investing activities for the year endedDecember 31, 2022 was$28,000 , compared to cash used in investing activities of$57,000 for the year endedDecember 31, 2021 . The change was related to lower purchases of property and equipment. 37 Financing Activities For the years endedDecember 31, 2022 and 2021, cash from financing activities was$19,695,000 and$3,139,000 , respectively. Cash flows from financing activities during the year endedDecember 31, 2022 , was the result of cash proceeds from the sale of common stock and warrants (net of issuance costs) of$21,711,000 , offset by a cash payment of$2,016,000 for the redemption of series B preferred stock, including related interest. Cash flows from financing activities during the year endedDecember 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.
Common Stock Equity Offering
OnFebruary 10, 2022 , the Company signed a firm commitment underwriting agreement for the public offering of shares of common stock and warrants, which closed onFebruary 15, 2022 . 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 . 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 commencingAugust 9, 2022 , and expiring onFebruary 10, 2027 . The net proceeds from the offering will be used to advance the Company's organic growth and new product initiatives, to pursue select acquisitions, and for general corporate and working capital purposes. In connection with this offering, we received approval to list our common stock on theNasdaq Capital Market under the symbol "CEAD" and our warrants under the symbol "CEADW". As a result, effectiveFebruary 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. As ofDecember 31, 2022 , we had an accumulated deficit of$34,279,000 , working capital of$14,724,000 , and stockholders' equity of$14,895,000 . Inflation Recently, our operations have started to be influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate. 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. 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
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. Commitments and Contingencies Litigation From time to time, in the normal course of our operations, we are subject to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations. 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. 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. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. 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.
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 ofDecember 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
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