CEA Industries Inc.

Current report

Introduction

Current report

CEA Industries Inc. is the largest publicly-traded DAT focused exclusively on BNB, the native token of the BNB Chain ecosystem. We seek to continue to build and manage the largest corporate treasury of BNB to provide institutional-grade exposure to BNB Chain and to generate income on our eligible BNB holdings through active treasury management, derivatives, or through Airdrops. We may also generate returns through additional digital asset-related activities such as validation and staking services, lending, and other DeFi protocols in the future, though we have not staked or pledged any BNB through April 30, 2026 aside from BNB pledged for our debt obligations. At April 30, 2026, we held 515,544 BNB tokens with an aggregate fair value of $317.3 million, and digital assets, primarily BNB, represented 94.6% of our total assets, while our Retail and Industry segment operating businesses represent a significantly smaller portion of our overall assets based on economic exposure.

Current report

Our strategy is built around a simple thesis: BNB is a scarce, utility-driven digital asset that serves as a core economic asset within one of the most active, and growing, blockchain ecosystems in the world. We seek to provide public equity market investors with exposure to BNB through a Nasdaq-listed, SEC-reporting company that combines direct BNB ownership, public company governance, audited financial reporting, treasury controls, custody infrastructure, and capital markets access. We view BNB as a strategic treasury asset and intends to continue evaluating opportunities to acquire additional digital assets as part of its capital allocation strategy.

Current report

We believe our platform is differentiated from direct token ownership, private digital asset vehicles, exchange-traded products, and operating companies that hold digital assets as part of a diversified treasury strategy. Our objective is not merely to hold BNB passively, but to build the leading public company platform for BNB ownership, treasury management, and participation in the BNB ecosystem.

Current report

We acquired Fat Panda on June 6, 2025 and continue to operate its core retail nicotine vape operations in Canada.

Current report

We have prepared the discussion of our results of operations for the fiscal year ended April 30, 2026 by combining the Predecessor and Successor results of operations and cash flows during the year ended April 30, 2026 ("Combined Annual Period") and comparing the combined data to the results of operations and cash flows of the Predecessor for the year ended April 30, 2025. We believe that the discussion of our combined operational results, while on different bases of accounting related to the application of purchase accounting, is appropriate as we highlight operational changes for the Predecessor as well as accounting related items specific to the Successor.

Current report

Overview of DAT Strategy

Current report

Our DAT Strategy represents a significant departure from traditional corporate treasury strategies, which typically involve holding cash, cash equivalents, and short-term investments. Instead, our financial condition and results of operations are significantly influenced by changes in the market price of BNB. Digital asset markets have historically exhibited significant volatility and are subject to evolving regulatory frameworks and technological risks. As a result, fluctuations in the market price of BNB will have a material impact on our financial condition, results of operations, and the market price of our common stock. Investors should carefully consider the risks associated with our DAT Strategy described under "Part I, Item 1A –Risk Factors" in this Annual Report on Form 10-K.

Current report

On August 5, 2025, we launched the DAT Strategy following the closing of the PIPE Transaction that raised approximately $500.0 million in cash and digital assets, with up to $750.0 million of additional proceeds available through warrant exercises.

Current report

We operate the DAT Strategy through our wholly-owned subsidiary, CEA BRS LLC, a Delaware limited liability company, as a special purpose entity to hold and manage certain cryptocurrency assets in accordance with the DAT Strategy.

Current report

Our BNB holdings are held in custody through Ceffu, a non-U.S. institutional digital asset custody platform operating within the Binance ecosystem. Ceffu uses multi-party computation wallet infrastructure and maintains segregated account structures designed for institutional holders. While Ceffu operates as a separate entity from the Binance exchange, our custody arrangement creates concentration exposure to the broader Binance ecosystem. Disruptions to Ceffu’s operations, changes in its regulatory status, or adverse developments affecting the Binance ecosystem could materially impact our ability to access, transfer, or liquidate our BNB holdings.

Current report

Key Drivers of Results of Operations

Current report

Our results of operations are influenced by several key factors, including: changes in the market price of BNB and other ancillary digital assets held by us; fair value adjustments recognized under applicable accounting standards, including our issued warrants treated as liabilities; the generation of Airdrop income; operating expenses associated with maintaining our public company infrastructure; and strategic decisions regarding the acquisition, holding, or disposition of digital assets. Because we hold a substantial quantity of digital assets, particularly BNB, changes in the market price of BNB may significantly affect our reported earnings. These fluctuations may not reflect changes in our operating performance but instead reflect market-driven changes in the value of our digital asset holdings.

Current report

Historically, our results of operations also included significant transactional expenses we incurred in connection with our acquisition of Fat Panda, the PIPE Transaction, and our shareholder advisory expenses in connection with our Board committee reconstitution and shareholder activism; however, we do not anticipate incurring such costs in connection with our ongoing operations.

Current report

BNB Holdings

Current report

During the period from June 7, 2025 through April 30, 2026, we accumulated 515,544 BNB. During this same period, the market price of BNB declined significantly by 28.9%, from $865.99 weighted-average price we paid per BNB, to $615.38 per BNB at April 30, 2026. As a result, the aggregate fair value of our BNB holdings decreased from our $446.5 million cost basis to $317.3 million, driven by market price volatility rather than changes in the quantity of BNB held. The decline in BNB market prices had a materially greater impact on the carrying value of digital assets than the operating results of our Retail and Industry business during the same period.

Current report

In addition to changes in the market value of BNB tokens, we recognized a substantial decrease in Airdrop-related income associated with those holdings. We maintain eligibility to receive Airdrops distributed within the Binance ecosystem for those BNB tokens we hold at Ceffu, however Airdrop activity has declined since we launched our DAT Strategy. This substantial decline in Airdrop-related income reflects reduced Airdrop activity within the Binance ecosystem during the current period. While airdrop income contributed positively to results, it did not offset the impact of the decline in BNB market prices during the period from June 7, 2025 through April 30, 2026.

Current report

In addition to Airdrops, a portion of our BNB treasury yield has historically been generated through participation in Binance Launchpool and HODLer Airdrops – platform programs through which BNB holders receive newly issued tokens by locking or holding BNB. Since we launched our DAT Strategy, the frequency and scale of these programs declined materially compared to historical program periods, contributing to a reduction in platform-delivered yield through April 30, 2026. Taken together with the decline in Airdrop activity described above, these trends reflect a broader moderation in yield generation during the period. We cannot predict the timing, frequency, or magnitude of future Launchpool or HODLer Airdrop allocations, and continued reduction in these programs may adversely affect our treasury yield and results of operations.

Current report

Warrant Liabilities

Current report

Our warrant liabilities were also a significant driver of our reported results of operations for the period, and we believe they will continue to contribute meaningful volatility to our earnings, independent of our underlying operating performance. During the period from June 7, 2025 through April 30, 2026, we recognized a non-cash gain of $282.9 million related to our stapled warrant liability, which was a primary driver of net income. Because the fair value of these out-of-the-money warrants generally fluctuate inversely with the trading price and volatility of our common stock and the underlying digital assets, as well as the passage of time and changes in our assumptions about warrant exercise behavior that can change significantly from period to period, the resulting fair value adjustments can produce substantial non-cash gains or losses that do not reflect our core operating performance, and we caution investors that our reported net income or loss for any given period may be disproportionately influenced by these mark-to-market changes rather than by the underlying profitability of our operating segments.

Current report

Digital Asset Market Conditions

Current report

Our treasury strategy is designed to accumulate and compound BNB over time, with a focus on growing the value of our digital asset holdings on a per-share basis as a key long-term measure of shareholder value creation. Digital asset markets are inherently cyclical, and short-term price fluctuations — while material to our GAAP-reported results in any given quarter — do not alter our management's conviction in the long-term trajectory of BNB and the broader Binance ecosystem. We believe our disciplined approach to treasury management positions the Company to benefit from market recoveries while managing risk through custody, yield optimization, and strategic capital allocation.

Current report

During the period from June 7, 2025 through April 30, 2026, digital asset markets experienced periods of significant price volatility. The market price of BNB fluctuated in response to a variety of factors, including macroeconomic conditions, investor sentiment toward digital assets, developments affecting cryptocurrency exchanges and blockchain networks, and regulatory developments in the United States and other jurisdictions. Because we hold a significant quantity of BNB, changes in the market price of BNB had, and will continue to have, a substantial impact on our balance sheet and results of operations. Investors should consider that fluctuations in our financial results during the period were driven primarily by changes in digital asset market prices and Airdrop yield rather than changes in our operating activities.

Current report

Our Retail and Industry Business

Current report

We operate our Fat Panda and industrial climate control systems businesses within our Retail and Industry segment. At April 30, 2026, Fat Panda operates 34 retail locations, including 30 Fat Panda branded stores and 4 Electric Fog branded outlets, along with an e-commerce platform. Fat Panda also manufactures a proprietary line of premium e-liquids in-house and maintains a portfolio of trademarks and related intellectual property. Revenue from our industrial climate control systems business represents a relatively small portion of consolidated revenue, totaling $1.7 million for the period from June 7, 2025 through April 30, 2026.

Current report

On June 11, 2026, the management of the Company, with the concurrence of the Audit Committee of the Board of Directors, concluded that the previously issued condensed consolidated financial statements included in the Company's quarterly reports on Form 10-Q for the (i) three months ended October 31, 2025, the period from June 7, 2025 through October 31, 2025 (the “Second Quarter Successor” period) and the period from May 1, 2025 through June 6, 2025, originally filed with the SEC on December 15, 2025 (the “Second Quarter Form 10-Q”) and (ii) three months ended January 31, 2026 and the period from June 7, 2025 through January 31, 2026 (the “Third Quarter Successor” period) and the period from May 1, 2025 through June 6, 2025, originally filed with the SEC on March 16, 2026 (the “Third Quarter Form 10-Q” and together with the Second Quarter 10-Q, the “Quarterly Reports on Form 10-Q”) should no longer be relied upon.

Current report

The conclusion was based on the identification of an error in the calculation of the weighted-average number of shares outstanding used in determining basic and diluted EPS. The error resulted in an understatement of basic and diluted weighted-average shares outstanding, which in turn understated or overstated basic and diluted EPS. For the three months ended October 31, 2025, basic and diluted weighted average number of shares were understated by 2,214,508 shares and as a result, basic and diluted EPS were overstated by $0.21. For the Second Quarter Successor period, basic weighted average shares were understated by 1,857,056 shares and diluted weighted average shares were understated by 857,057 shares and as a result, basic and diluted EPS were overstated by $0.45. For the three months ended January 31, 2026, basic and diluted weighted average number of shares were understated by 2,376,236 shares and as a result, basic and diluted EPS were understated by $0.08. For the Third Quarter Successor period, basic weighted average shares were understated by 21,806,662 shares and diluted weighted average shares were understated by 21,806,663 shares and as a result, basic EPS was overstated by $4.26 and diluted EPS was overstated by $4.21. The error did not impact the Company's net income (loss), total assets, total liabilities, stockholders’ equity, revenue, cash flows, or net income (loss) available to common stockholders in each affected period.

Current report

On June 23, 2026, we restated our previously issued unaudited condensed consolidated financial statements for the second and third fiscal quarters of 2026 resulting from an error in the computation of weighted-average shares used to compute basic and diluted earnings (loss) per share, which it deemed material on June 11, 2026.

Current report

On May 7, 2026, we received a letter from the Staff of Nasdaq notifying us that we no longer comply with Nasdaq Listing Rule 5620(a) for continued listing of shares of our common stock, due to our failure to hold an annual meeting within 12 months of our fiscal year end. As a result, we have submitted a plan to Nasdaq to regain compliance. If Nasdaq accepts our plan, Nasdaq can grant an exception of up to 180 calendar days from the fiscal year ended April 30, 2026, or until October 27, 2026, to allow the Company to regain compliance

Current report

Our plan of compliance with respect to the foregoing requirement setting forth, among other things, a proxy statement preparation and proxy solicitation timeline leading to our annual meeting of our shareholders. We cannot provide any assurance that the Staff will accept our plan of compliance. In the event our plan is not accepted, our securities may be subject to delisting and we will have the opportunity to appeal the Staff’s delisting determination to a hearings panel. We expect to organize an annual meeting in the coming weeks to regain compliance with the applicable Nasdaq Listing Rules.

Current report

On May 22, 2026, we filed a complaint against the Asset Manager, in the United States District Court for the District of Delaware, regarding the Asset Management Agreement. The complaint seeks a declaration that the Asset Management Agreement is void from inception as unconscionable and orders all fees paid by us to the Asset Manager under the Asset Management Agreement since inception be returned to the Company. Alternatively, the complaint seeks a declaration that a liquidated damages clause in the Asset Management Agreement, which would accelerate nearly 20 years of future fees upon termination, is an unenforceable penalty.

Current report

Board and Executive Changes

Current report

On May 4, 2026, Anthony K. McDonald, our President and a member of our Board, resigned as our President and as a director of the Company. In exchange for a release of claims and Mr. McDonald’s agreement to certain covenants, including cooperation, Mr. McDonald will receive an aggregate of $0.3 million payable over 12 months and reimbursement for legal fees of up to $10,000. Mr. McDonald’s outstanding equity awards will remain in effect in accordance with their terms.

Current report

On June 10, 2026, Nicholas J. Etten, a member of the Board, resigned as a director of the Company. In exchange for a release of claims and Mr. Etten's agreement to certain covenants, including cooperation, Mr. Etten received a payment of $85,000 and will receive reimbursement for legal fees of up to $50,000. Mr. Etten's outstanding equity award will remain in effect in accordance with its terms.

Current report

Components of Results of Operation

Current report

Revenue

Current report

We earn revenues from the two operating businesses within our Retail and Industry segment:

Current report

●Retail sales of vaping products through our Fat Panda retail locations in Central Canada and e-commerce sales through Fat Panda's online platform and

Current report

●Sales of industrial climate control systems for the controlled environment agriculture industry.

Current report

Our revenues do not include any activities within our BNB Treasury Management segment, including the income we earn on our BNB holdings such as income earned from Airdrops.

Previous report

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Previous report

Please also refer to “Non-GAAP Financial Measures” discussed elsewhere in this Annual Report.

Previous 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:

Previous report

Executive Overview. This section provides a summary of our operating performance and cash flows, industry trends and our strategic initiatives.

Previous report

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.

Previous report

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.

Previous report

Liquidity, Capital Resources and Financial Position*.* This section provides an analysis of cash flow, contractual obligations, and certain other matters affecting our financial position.

Previous report

Executive Overview

Previous report

CEA Industries Inc. currently is focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry. Our service and product offerings include: (i) floor plans and architectural design of cultivation facilities, (ii) licensed mechanical, electrical, and plumbing (MEP) engineering of commercial scale environmental control systems specific to cultivation facilities, (iii) process cooling systems and other climate control systems, (iv) air handling equipment and systems, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) automation and control devices, systems and technologies used for environmental, lighting and climate control, and (viii) preventative maintenance services for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada 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.

Previous report

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.

Previous report

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.

Previous report

The following table summarizes results for the years ended December 31, 2024 and December 31, 2023.

Previous report

Our adjusted net income (loss) is our GAAP net income (loss) after addback for our non-cash equity compensation expenses, debt-related items, and depreciation expense. Historically, one of the most significant financial challenges we face is the inconsistent and unpredictable revenue we generate quarter-over-quarter, and our revenue and cash flow remain difficult to predict.

Previous report

Impact of the COVID-19 Pandemic on Our Business

Previous report

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. 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, 2024, , 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.

Previous report

Impact of Ukrainian and Israeli Conflicts

Previous report

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.

Previous report

Revenue. Our 2024 revenue was approximately $2,803,000. Our 2024 revenue represents a decrease of 59% compared to 2023 SeeResults of Operations on page 33 below.

Previous report

Gross Margin. Our 2024 gross loss margin was 7.8%, a decrease from a gross profit margin of 7.8% in 2023. This decrease was primarily due to lower revenue and an increase in our fixed cost base as a percent of revenue. SeeResults of Operationson page 33 below.

Previous report

Profitability. Our 2024 adjusted net loss was approximately $3,046,000, compared to a 2023 adjusted net loss of approximately $2,698,000, an increase of $348,000, or 13%. SeeResults of Operationson page 33 below. Our adjusted net income (loss) is a key management metric for us because it provides a proxy for the cash we generate from (use in) operations.

Previous report

Capital Resources. We continue to experience softening demand in the markets we serve, and an inability to replace our backlog of projects. As a result, we have taken steps during 2023, 2024, and early 2025 to reduce our operating costs and general and administrative expenses to better reflect the activity levels we are observing in the industry. The reductions have been offset by higher costs for professional fees related to a potential acquisition.

Previous report

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.

Previous report

Contract Bookings. Our bookings increased in 2024, and our backlog at December 31, 2024, was $490,000, an increase of $55,000, or 13%, from our December 31, 2023 backlog. The increase in bookings was primarily due to one large equipment contract of approximately $1,300,000 booked in the second quarter of 2024. During 2024, we had net bookings of $2,769,000, consisting of: (i) $2,874,000 of new sales contracts executed in 2023, (ii) $92,000 in net negative change orders, and (iii) $14,000 in project cancellations.

Previous report

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 fulfil our current backlog, and we may experience contract cancellations, project scope reductions and project delays.

Previous report

Our recognized revenue for the quarters ended December 31, 2023, March 31, 2024, June 30, 2024, September 30, 2024, and December 31, 2024 in the table below, excludes $0, $31,000, $12,000, $0, and $46, 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.

Previous report

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.

Previous report

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 2024 backlog). However, there continues to be significant uncertainty regarding the timing of our recognition of revenue in our Q4 2024 backlog. Refer to theRevenue 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.

Previous report

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.

Previous report

Critical Accounting Policies and Estimates

Previous report

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 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 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.

Previous report

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.

Previous report

Accounts receivable and allowance for accounts receivable. Accounts receivables are recorded at the invoiced amount or based on revenue earned for items not yet invoiced, and generally do not bear interest. In accordance with ASU No. 2016-13 (as amended),*Measurement of Credit Losses on Financial Instruments,*which the Company adopted on a prospective basis effective January 1, 2023, an allowance for doubtful accounts is recorded against the Company’s receivablesby applying an expected credit loss model. Each period, management assesses the appropriateness of the level of allowance for credit losses by considering credit risk inherent within its receivables as of the end of the period. The Company considers a receivable past due when a debtor has not paid us by the contractually specified payment due date. Account balances are written off against the allowance for credit losses if collection efforts are unsuccessful and the receivable balance is deemed uncollectible (debtor default), based on factors such as the debtor’s credit rating as well as the length of time the amounts are past due. As of December 31, 2024, and December 31, 2023, the allowance for doubtful accounts was $85,000 and $125,000, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Previous report

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, 2024, and December 31, 2023, the allowance for excess and obsolete inventory was $220,000 and $193,000, respectively.

Previous report

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 of December 31, 2024, and December 31, 2023, we had an accrued warranty reserve amount of $53,000 and $191,000, respectively, which are included in accounts payable and accrued liabilities on our consolidated balance sheets.

Previous report

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 on U.S. Treasury interest rates whose term is consistent with the expected term of the option.

Previous report

*Revenue Recognition.*We account for revenue in accordance with ASC 606. Under the revenue standard, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Most of our contracts contain multiple performance obligations that include engineering and technical services as well as the delivery of a diverse range of climate control system equipment and components, which can span multiple phases of a customer’s project life cycle from facility design and construction to equipment delivery and system installation and start-up. We do not provide construction services or system installation services. Some of our contracts with customers contain a single performance obligation, typically engineering only services contracts.

Previous report

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, however, this input is generally not available for our contracts containing multiple performance obligations. 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 components 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 promise is fulfilled.

Previous report

Generally, satisfaction occurs when control of the promised goods is transferred to the customer or as we recognize revenue for the sale of goods when control transfers to the customer, which primarily occurs at the time of shipment. We have elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value added, and certain excise taxes) that are assessed by a governmental authority in connection with a specific revenue-producing transaction and collected by us from the customer. Accordingly, we recognize revenue net of sales taxes. The revenue and cost for freight and shipping is recorded when control over the sale of goods passes to our customers.

Previous report

We also have performance obligations to perform certain engineering services that are satisfied over a period of time. Revenue is recognized from this type of performance obligation as services are rendered based on the percentage completion towards certain specified milestones.

Previous report

We offer assurance-type warranties for its products and products manufactured by others to meet specifications defined by the contracts with customers and does not have any material separate performance obligations related to these warranties. We maintain a warranty reserve based on historical warranty costs.