BNC 10-Q
CEA Industries Inc. (BNC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
FOR
THE QUARTERLY PERIOD ENDED
OR
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| ☒ | Smaller Reporting Company | ||
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
As of November 14, 2024, the number of outstanding shares of common stock of the registrant was .
CEA Industries Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2024
Table of Contents
| i |
In this Quarterly Report on Form 10-Q, unless otherwise indicated, the “Company”, “we”, “us” or “our” refer to CEA Industries Inc. and, where appropriate, its wholly owned subsidiaries.
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical fact but are based on current management expectations that involve substantial risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar words. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements including, but not limited to, any projections of revenue, gross profit, earnings or loss, tax provisions, cash flows or other financial items; any statements of the plans, strategies or objectives of management for future operations; any statements regarding current or future macroeconomic or industry-specific trends or events and the impact of those trends and events on us or our financial performance; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing.
These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. These forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we operate. Important factors that could cause those differences include, but are not limited to:
| ● | our business prospects and the prospects of our existing and prospective customers, including the decrease in new client contracts; | |
| ● | our overall financial condition, including declining revenues, the impact of higher interest rates and inflation, business disruption due to the COVID-19 pandemic, the Ukraine war, Israeli conflict, and the supply chains on which we depend:
| |
| ● | the impact on our business from our restructuring and cost containment actions taken in the first quarter of 2023 and continuing thereafter;
| |
| ● | the inherent uncertainty of product development and product selection to meet client requirements, meeting client expectations, and whether there are or will be warranty claims; | |
| ● | regulatory, legislative and judicial developments, especially those related to changes in, and the enforcement of, cannabis laws; | |
| ● | competitive pressures in the CEA (Controlled Environment Agriculture) industry and our engineering service and product supply position within the CEA and, in particular, the cannabis growers industry; | |
| ● | the ability to effectively operate our business, including servicing our existing customers and obtaining new business; | |
| ● | our relationships with our customers and suppliers and reliance on a limited number of customers and suppliers; | |
| ● | the continuation of normal payment terms and conditions with our customers and suppliers, including our ability to obtain advance payments from our customers; |
| ii |
| ● | general economic conditions, our customers’ operations and access to capital, and market and business disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events, adversely affecting demand for the products and services offered by us in the markets in which we operate; | |
| ● | the business disruptions that are happening in the CEA industry, including bankruptcies and shifting market demands, that are having an adverse impact on the demand for our engineering services and construction solutions and, consequently, our revenues;
| |
| ● | the supply of products from our suppliers and our ability to complete contracts, some of which depend on other actors for a comprehensive project completion; | |
| ● | changes in our business strategy and development plans, and in our plans for seeking strategic alternatives; | |
| ● | our ability to attract and retain qualified personnel; | |
| ● | our ability to raise equity and debt capital, as needed from time to time, to fund our operations and business strategy, including possible strategic alternatives and acquisitions; |
| ● | our ability to identify, complete and integrate potential strategic alternatives and acquisitions; | |
| ● | future revenue being lower than expected; | |
| ● | the substantial changes in the amount and current size of our backlog and our ability to convert backlog into revenue in a timely manner, or at all; | |
| ● | our intention not to pay regular dividends: and
| |
| ● | our ability to maintain our listing of the shares of common stock and common stock purchase warrants on NASDAQ and the price volatility and limited trading volumes of our securities in the public market. |
These factors should not be construed as exhaustive and should be read with the other cautionary statements in this report.
Although we believe that we use reasonable assumptions for these forward-looking statements, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those 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 U.S. Securities and Exchange Commission (the “SEC”). You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are intended to be within the meaning of “forward-looking statements” in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).
| iii |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CEA Industries Inc.
Condensed Consolidated Balance Sheets
(in US Dollars except share numbers)
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other | ||||||||
| Total Current Assets | ||||||||
| Noncurrent Assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total Noncurrent Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Current portion of operating lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Noncurrent Liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total Noncurrent Liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (Note 6) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock, $ par value; authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
CEA Industries Inc.
Condensed Consolidated Statements of Operations
(in US Dollars except share numbers)
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross (loss) profit | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Advertising and marketing expenses | ||||||||||||||||
| Product development costs | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense), net | ||||||||||||||||
| Interest income (expense), net | ||||||||||||||||
| Total other income (expense) | ||||||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share – basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
CEA Industries Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the Three and Nine Months Ended September 30, 2024 and September 30, 2023
(in US Dollars except share numbers)
(Unaudited)
| Common Stock | ||||||||||||||||||||
Number of Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Shareholders’ Equity | ||||||||||||||||
| Balance June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2024 | $ | | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock | ||||||||||||||||||||
Number of Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Shareholders’ Equity | ||||||||||||||||
| Balance December 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Fair value of vested stock options granted to employees, net of forfeitures for unvested stock options granted to employees | - | ( | ) | ( | ) | |||||||||||||||
| Common shares issued in settlement of restricted stock units issued to directors | ||||||||||||||||||||
| Fair value of restricted stock units issued to directors | - | |||||||||||||||||||
| Issuance of common shares to round up partial shares following reverse split | ( | ) | ||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | ||||||||||||||||||||
Number of Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Shareholders’ Equity | ||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Fair value of vested stock options granted to employees | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | ||||||||||||||||||||
Number of Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Shareholders’ Equity | ||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Fair value of vested stock options granted to employees | - | |||||||||||||||||||
| Common shares issued in settlement of restricted stock units issued to directors | ||||||||||||||||||||
| Fair value of restricted stock units issued to directors | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
CEA Industries Inc.
Condensed Consolidated Statements of Cash Flows
(in US Dollars except share numbers)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and intangible asset amortization expense | ||||||||
| Share-based compensation | ||||||||
| Provision for doubtful accounts (bad debt recovery) | ( | ) | ( | ) | ||||
| Provision for excess and obsolete inventory | ||||||||
| Loss on disposal of assets | ||||||||
| Operating lease expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Operating lease liability, net | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Proceeds from the sale of property and equipment | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows From Financing Activities | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Options issued for accrued equity compensation liability | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Note 1 – Nature of Operations and Significant Accounting Policies
Description of Business
CEA Industries Inc., formerly Surna Inc. (the “Company”), was incorporated in Nevada on October 15, 2009. We design, engineer and sell environmental control and other technologies for the Controlled Environment Agriculture (“CEA”) industry. The CEA industry is one of the fastest-growing sectors of the United States’ economy. From leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables, ornamentals, and small fruits (such as strawberries, blackberries and raspberries) to bell peppers, cucumbers, tomatoes and cannabis and hemp, more and more producers consider or act to grow crops indoors in response to market dynamics or as part of their preferred farming practice. In service of the CEA industry, we provide CEA facilities with (i) air handling equipment and systems, (ii) air sanitation products, (iii) LED lighting, and (iv) benching and racking solutions for indoor cultivation. Headquartered in Louisville, Colorado, we leverage our experience in this space to bring value-added climate control solutions to our customers 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. Although most of our customers do, we neither produce nor sell cannabis or its related products.
We are evaluating merger and acquisition opportunities and other alternatives for our future. As part of that evaluative process, we are also considering the legal procedure and practical steps for dissolving ourselves, which would include a distribution of cash assets after creditors and other corporate obligations have been accounted for and satisfied. For any plan of dissolution, management and the board of directors will need to formulate and adopt a plan of dissolution. Certain transaction opportunities, depending on their structure, and any plan of dissolution will require shareholder approval through a proxy solicitation process.
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 see adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, costs, and working capital.
Due to this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the long-term impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business. During the year ended December 31, 2023 and the nine months ended September 30, 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.
Impact of War 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 conflicts 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 our Company as having special risks or exposures related to the conflicts.
| 6 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Inflation
Our operations are being influenced by the inflation 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.
Financial Statement Presentation
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024. The balance sheet information as of December 31, 2023 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2023.
Liquidity
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements
are available to be issued. The Company continues to experience recurring losses since its inception. As a result, in order to continue
as a going concern, the Company has been reliant on the ability to obtain additional sources of financing to fund growth. On February
15, 2022, the Company received approximately $
| 7 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
However, we are continuing to evaluate merger and acquisition opportunities and other alternatives for our future. As part of that evaluative process, and as disclosed in the Form 8-K filed on April 10, 2024, we are also considering the legal procedure and practical steps for dissolving ourselves, which would include a distribution of cash assets after creditors and other corporate obligations have been accounted for and satisfied. For any plan of dissolution, management and the board of directors will need to formulate and adopt a plan of dissolution. Certain transaction opportunities, depending on their structure, and any plan of dissolution will require shareholder approval through a proxy solicitation process.
In the event it is decided to implement a plan of dissolution, we then will not be continuing as a going concern for at least 12 months from the date of issuance of the financial statements thereafter. Accordingly, at such time, it would be management’s position that the Company would be in substantial doubt about its ability to continue as a going concern for at least 12 months from the date of issuance of those financial statements.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its controlled and wholly owned subsidiaries, Hydro Innovations, LLC (“Hydro”) and Surna Cultivation Technologies LLC (“SCT”). Intercompany transactions, profit, and balances are eliminated in consolidation.
Reverse Stock Split
On
May 7, 2024, the Company’s Board of Directors approved a reverse stock split at a ratio of
As a result of the reverse stock split, all outstanding options, restricted stock units, and common stock purchase warrants were proportionately adjusted as to number of securities and exercise prices.
Use of Estimates
Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could 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 as it applies to impairment analysis, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, inventory allowances, and legal contingencies.
Cash, Cash Equivalents, and Restricted Cash
All
highly liquid investments with original maturities of three months or less at the date of purchase are considered to be cash equivalents.
The Company maintains deposits in financial institutions that exceed the federally insured amount of $
| 8 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
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 receivables by 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. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
As
of September 30, 2024, and December 31, 2023, the allowance for doubtful accounts was $
Basic income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration of common stock equivalents. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding and potentially dilutive common stock equivalents, including stock options, warrants and restricted stock units and other equity-based awards, except in cases where the effect of the common stock equivalents would be antidilutive. Potential common stock equivalents consist of common stock issuable upon exercise of stock options and warrants and the vesting of restricted stock units using the treasury method.
As of September 30, 2024 and 2023, there were respectively, and , potentially dilutive equity instruments outstanding in respect of warrants and stock options that were convertible into shares of the Company’s common stock. Of these potentially dilutive equity instruments outstanding, and related to warrants outstanding at September 30, 2024 and 2023, respectively, issued in connection with the sale of our shares of series B Preferred stock and common stock. The remaining and potentially dilutive equity instruments outstanding as of September 30, 2024 and 2023, respectively, related to options that were convertible into shares of the Company’s common stock that had been issued to our directors and staff as compensation.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“ASC 606” or the “revenue standard”) to all contracts and elected the modified retrospective method.
Revenue Recognition Accounting Policy Summary
The Company accounts 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 the Company’s 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. The Company does not provide construction services or system installation services. Some of the Company’s contracts with customers contain a single performance obligation, typically engineering only services contracts.
| 9 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
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, the Company allocates the transaction price to each performance obligation based on standalone selling price. When estimating the selling price, the Company uses various observable inputs. The best observable input is the Company’s actual selling price for the same good or service, however, this input is generally not available for the Company’s contracts containing multiple performance obligations. For engineering services, the Company estimates 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, the Company 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, the Company applies the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as each promise is fulfilled.
Generally, satisfaction occurs when control of the promised goods is transferred to the customer or as services are rendered or completed in exchange for consideration in an amount for which the Company expects to be entitled. The Company recognizes revenue for the sale of goods when control transfers to the customer, which primarily occurs at the time of shipment. The Company has 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 the Company from the customer. Accordingly, the Company recognizes revenue net of sales taxes. The revenue and cost for freight and shipping is recorded when control over the sale of goods passes to the Company’s customers.
The Company also has 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.
The Company offers 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. The Company maintains a warranty reserve based on historical warranty costs.
Disaggregation of Revenue
In accordance with ASC 606-10-50-5 through 6, the Company considered the appropriate level of disaggregated revenue information that depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Additionally, per the implementation guidance in ASC 606-10-55-90 through 91, the Company also considered (a) disclosures presented outside of the financial statements such as earnings releases and investor presentations, (b) information regularly reviewed by the Chief Operating Decision Maker for evaluating the financial performance of operating segments and (c) other information that is similar to the types of information identified in (a) and (b) and that is used by the Company or users of the Company’s financial statements to evaluate financial performance or make resource allocation decisions. Finally, we considered the examples of categories found in the guidance that might be appropriate, including: (a) type of good or service (major product lines), (b) geographical region (country or region), (c) market or type of customer (government or non-government customers), (d) type of contract (fixed-price or time-and-materials), (e) contract duration (short- or long-term), (f) timing of transfer of goods or services (point-in-time or over time) and (g) sales channels (direct to customers or through intermediaries).
Based on the aforementioned guidance and considerations, the Company determined that disaggregation of revenue by equipment sales, engineering and other services, shipping and handling, and forfeited non-refundable customer deposits was required.
| 10 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
The following table sets forth the Company’s revenue by source:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Equipment and systems sales | $ | $ | $ | $ | ||||||||||||
| Engineering and other services | ||||||||||||||||
| Shipping and handling | ||||||||||||||||
| Forfeited non-refundable customer deposits | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Other Judgments and Assumptions
The Company typically receives customer payments in advance of its performance of services or transfers of goods. Applying the practical expedient in ASC 606-10-32-18, which the Company has elected, the Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Accordingly, the remaining performance obligations related to customer contracts does not consider the effects of the time value of money.
Applying the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs include certain sales commissions and incentives, which are included in selling, general and administrative expenses, and are payable only when associated revenue has been collected and earned by the Company.
Contract Assets and Contract Liabilities
Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. The Company receives payments from customers based on the terms established in its contracts.
Contract
assets include unbilled amounts where revenue recognized exceeds the amount billed to the customer and the right of payment is conditional,
subject to completing a milestone, such as a phase of a project. The Company typically does not have material amounts of contract assets
since revenue is recognized as control of goods are transferred or as services are performed. Contract assets increased by $
| 11 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Contract
liabilities consist of advance payments in excess of revenue recognized. The Company’s contract liabilities are recorded as a current
liability in deferred revenue in the consolidated balance sheets since the Company generally expects to recognize revenue in less than
one year. Non-refundable customer deposits are recognized as revenue when previously abandoned customer contracts have been forfeited
and a period of three years has passed. As of September 30, 2024, and December 31, 2023, deferred revenue, which was classified as a
current liability, was $
For
the three and nine months ended September 30, 2024, the Company recognized revenue of $
Remaining Performance Obligations
Remaining performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations that the Company has not performed under its customer contracts. The Company has elected not to use the optional exemption in ASC 606-10-50-14, which exempts an entity from such disclosures if a performance obligation is part of a contract with an original expected duration of one year or less. Accordingly, the information disclosed about remaining performance obligations includes all customer contracts, including those with an expected duration of one year or less.
Industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the Company’s control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance obligations. There are risks that the Company 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 the Company is able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays that are typical in completing any construction project. Further, based on the current economic climate, t 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.
As
of September 30, 2024, the Company’s remaining performance obligations, or backlog, was approximately $
The remaining performance obligations expected to be recognized through 2024 are as follows:
| 2024 | Total | |||||||
| Remaining performance obligations related to partial equipment & engineering paid contracts | ||||||||
| Total remaining performance obligations | $ | $ | ||||||
| 12 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Product Warranty
The Company warrants the products that it manufactures for a warranty period equal to the lesser of 12 months from start-up or 18 months from shipment. The Company’s warranty provides for the repair, rework, or replacement of products (at the Company’s option) that fail to perform within stated specification. The Company’s third-party suppliers also warrant their products under similar terms, which are passed through to the Company’s customers.
The Company recognizes the cost resulting from all share-based compensation arrangements, including stock options, restricted stock awards and restricted stock units that the Company grants under its equity incentive plan in its condensed 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. 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, the Company reassesses 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 Option Pricing Model (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. The Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options granted throughout the year.
The grant date fair value of restricted stock and restricted stock units is based on the closing price of the underlying stock on the date of the grant.
The Company has elected to reduce share-based compensation expense for forfeitures as the forfeitures occur since the Company does not have historical data or other factors to appropriately estimate the expected employee terminations and to evaluate whether particular groups of employees have significantly different forfeiture expectations.
| 13 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Share-based compensation expense included in: | ||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||
| Advertising and marketing expenses | ||||||||||||||||
| Product development costs | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Total share-based compensation expense included in consolidated statement of operations | $ | $ | $ | $ | ||||||||||||
Concentrations
Two
customers accounted for
Three
customers accounted for
Recently Issued Accounting Pronouncements
In March 2024, the SEC issued a final rule under SEC Release Nos. 33-11275 and 34-99678, The Enhancement and Standardization of Climate-Related Disclosures for Investors, requires the disclosure of material Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics in annual reports and registration statements. In April 2024, the SEC announced its decision to voluntarily stay the new rules pending judicial review of certain legal challenges, and thus the timing and scope of the new rules remains unknown. However, the Company is continuing to evaluate the impact these rules will have on its consolidated financial statements and related disclosures.
In March 2024, the Financial Accounting Standards Board (FASB) issued ASU 2024-01 to clarify how an entity should determine whether a profits interest or similar award should be accounted for as a share-based payment arrangement or similar to a cash bonus or profit-sharing arrangement. The amendments are effective in annual periods beginning after December 15, 2024, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the new guidance and the impact on its future consolidated statements.
In December 2023, FASB issued Accounting Standards Update 2023-09, Improvements to Income Tax Disclosures (ASU 2023-09). ASU 2023-09 includes requirements that an entity disclose specific categories in the rate reconciliation and provide additional information for reconciling items that are greater than five percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate. The standard also requires that entities disclose income (or loss) from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) each disaggregated between domestic and foreign. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. The Company is currently assessing the impact of ASU 2023-09 on its disclosures.
| 14 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
In November 2023, the FASB issued Accounting Standards Update 2023-07, Improvements to Reportable Segment Disclosures (ASU 2023-07). ASU 2023-07 includes requirements that an entity disclose the title of the chief operating decision maker (CODM) and on an interim and annual basis, significant segment expenses and the composition of other segment items for each segment’s reported profit. The standard also permits disclosure of additional measures of segment profit. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently assessing the impact of ASU 2023-07 on its disclosures.
In December 2022, the FASB issued ASU No. 2022-06, which defers the sunset date of Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) from December 31, 2022 to December 31, 2024. ASU No. 2022-06 was effective upon issuance. Topic 848 provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting, providing optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Note 2 – Leases
The Louisville Facility Lease
On
July 28, 2021, the Company entered into an agreement to lease
Upon
commencement of the New Facility Lease, the Company recognized on the balance sheet an operating lease right-of-use asset and lease liability
in the amount of $
| 15 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
The Company’s operating and finance right-of-use assets and lease liabilities are as follows:
| As of September 30, 2024 | ||||
| Operating lease right-of-use asset | $ | |||
| Operating lease liability, current | $ | |||
| Operating lease liability, long-term | $ | |||
| Remaining lease term | ||||
| Discount rate | % | |||
For the Nine Months Ended September 30, 2024 | ||||
| Cash paid for operating lease | $ | |||
Future annual minimum lease payments under non-cancellable operating leases as of September 30, 2024, were as follows:
| As of September 30, 2024 | ||||
| Years ended December 31, | ||||
| 2024 (excluding the nine months ended September 30, 2024) | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
Note 3 – Inventory
Inventory consisted of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Allowance for excess & obsolete inventory | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
| 16 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Overhead
expenses of $
Advance
payments on inventory purchases are recorded in prepaid expenses until title for such inventory passes to the Company. Prepaid expenses
included approximately $
Note 4 – Property and Equipment
Property and equipment consisted of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Furniture and equipment | $ | $ | ||||||
| Vehicles | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
Note 5 – Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accounts payable | $ | $ | ||||||
| Sales commissions payable | ||||||||
| Accrued payroll liabilities | ||||||||
| Product warranty accrual | ||||||||
| Other accrued expenses | ||||||||
| Total | $ | $ | ||||||
| 17 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Note 6 – Commitments and Contingencies
Litigation
On
October 20, 2023, Sweet Cut Grow, LLC and Green Ice, LLC (collectively, “Claimant”) a client of the Company with which it
had an equipment contract and engineering contract, filed a demand for arbitration asserting claims for breach of contract, breach of
warranty, and unjust enrichment, and a demand for $
As
further discussed in Note 12 Subsequent Events below, on or about April 17, 2024, Optima Consulting Services, LLC (the “Claimant”),
a client of the Company with which it had an equipment contract and engineering contract, advised the Company of a potential claim related
to work performed by the Company for Claimant and demanded mediation under the parties’ contract. On or about October 28, 2024,
Claimant informed the Company it was asserting claims for negligent/defective design and breach of warranty, and alleges its damages
exceed $
Given the current uncertainty around estimability and success of the Claims, we have not recorded an accrual for any potential loss related to these matters.
From time to time, in the normal course of its operations, the Company is 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 the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a liability for contingent losses when it is both probable that a liability has been incurred and the amount of the loss is known. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.
Leases
The Company has a lease agreement for its manufacturing and office space. Refer to Note 2 Leases above.
Other Commitments
In the ordinary course of business, the Company enters into commitments to purchase inventory and may also 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 the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers and employees, and former officers, directors, and employees of acquired companies, in certain circumstances.
| 18 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Note 7 – Stockholders’ Equity
As of September 30, 2024, the Company had shares of common stock and shares of preferred stock authorized at a $ par value.
As of September 30, 2024, shares of common stock were issued and outstanding and shares of preferred stock were issued and outstanding.
Reverse Stock Split
On
May 7, 2024, the Company’s Board of Directors approved a reverse stock split at a ratio of
As a result of the reverse stock split, all outstanding options, restricted stock units, and common stock purchase warrants were proportionately adjusted as to number of securities and exercise prices.
An additional shares of common stock were issued to round up partial shares following the reverse split. As a result of the stock split, immediately thereafter there were shares of common stock issued and outstanding.
Also, as a result of this reverse stock split, the number of the Company’s shares of common stock issued and outstanding at December 31, 2023 was reduced from to .
Directors Remuneration
On January 3, 2023, the Company issued an RSU grant of shares of common stock under the 2021 Equity Incentive Plan to each of its four independent directors. The RSUs were granted as an equity retention award pursuant to the Company’s compensation plan for independent directors effective January 17, 2022 and vested immediately on the grant date. A total of shares of the Company’s common stock were issued in settlement of the RSUs.
On January 2, 2024, the Company issued an RSU grant of shares of common stock under the 2021 Equity Incentive Plan to three of its four independent directors. Mr. Shipley declined to receive the RSUs which he was entitled to receive. The RSUs were granted as an equity retention award pursuant to the Company’s compensation plan for independent directors effective January 17, 2022 and vested immediately on the grant date. A total of shares of the Company’s common stock were issued in settlement of the RSUs.
Revised Compensation Plan for Directors
On January 17, 2022, the Board of Directors revised the previously adopted compensation plan. This plan supersedes the plan adopted on August 20, 2021. The Plan is effective retroactively for the current independent directors and for independent directors elected or appointed after the Effective Date.
At the time of initial election or appointment, each independent director received an equity retention award in the form of restricted stock units (“RSUs”). The aggregate value of the RSUs at the time of grant was to be $, with the number of shares underlying the RSUs to be determined based on the closing price of the Company’s common stock on the date immediately prior to the date of grant.
In addition, on the first business day of January each year, each independent director will also receive an equity retention award in the form of RSUs. The aggregate value of the RSUs at the time of grant will be $, with the number of shares underlying the RSUs to be determined based on the closing price of the Company’s common stock on the date immediately prior to the date of grant. These RSUs will be fully vested at date of grant.
| 19 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
There is no additional compensation paid to members of any committee of the Board. Directors who are also executives of the Company, serving on the Board, do not receive compensation for their Board service.
All the independent directors, Messrs. Shipley, Etten, Reisner, and Mariathasan are subject to the Plan.
Each independent director is responsible for the payment of any and all income taxes arising with respect to the issuance of any equity awarded under the plan, including the exercise of any non-qualified stock options.
2017 Equity Incentive Plan
Under the Company’s 2017 Equity Incentive Plan, as may be modified and amended by the Company from time to time (the “2017 Equity Plan”), the Board of Directors (the “Board”) (or the compensation committee of the Board, if one is established) may award stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock unit awards (“RSUs”), shares granted as a bonus or in lieu of another award, and other stock-based performance awards. The 2017 Equity Plan allocates shares of the Company’s common stock (“Plan Shares”) for issuance of equity awards under the 2017 Equity Plan. If any shares subject to an award are forfeited, expire, or otherwise terminate without issuance of such shares, the shares will, to the extent of such forfeiture, expiration, or termination, again be available for awards under the 2017 Equity Plan.
During the nine months ended September 30, 2024, no shares or options were issued and options were forfeited under the 2017 Plan.
As of September 30, 2024, of the shares authorized under the 2017 Plan for equity awards, shares have been issued, awards relating to options remain outstanding, and shares remain available for future equity awards.
2021 Equity Incentive Plan
On March 22, 2021, the Board approved the 2021 Equity Incentive Plan (the “2021 Equity Plan”), which was approved by the stockholders on July 22, 2021. The 2021 Equity Plan permits the Board to grant awards of up to shares of common stock. The 2021 Equity Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), non-qualified stock options, stock appreciation rights (“SARs”), restricted stock awards and restricted stock unit awards and other equity linked awards to our employees, consultants, and directors. If an equity award (i) expires or otherwise terminates without having been exercised in full or (ii) is settled in cash (i.e., the holder of the award receives cash rather than stock), such expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of common stock that may be issued pursuant to this Plan.
During the nine months ended September 30, 2024:
| - | The Company issued shares of its common stock in settlement of restricted stock units issued to three of its independent directors under the 2021 Equity Incentive Plan, pursuant to the Director Compensation plan adopted on January 17, 2022. | |
| - | non-qualified stock options were forfeited that had previously been issued under the 2021 Equity Incentive Plan. |
| 20 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
As of September 30, 2024, of the shares authorized under the 2021 Equity Plan, shares have been issued in settlement of restricted stock units, awards relating to non-qualified stock options, and incentive stock options remain outstanding, and shares remain available for future equity awards.
There was unrecognized compensation expense for unvested non-qualified options as of September 30, 2024.
Non-Qualified and Incentive Stock Options
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, December 31, 2023 | $ | $ | ||||||||||||||
| Granted | $ | - | $ | - | ||||||||||||
| Exercised | $ | - | $ | - | ||||||||||||
| Forfeited | ( | ) | $ | - | $ | - | ||||||||||
| Expired | $ | - | $ | - | ||||||||||||
| Outstanding, September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
| Number of Options | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value | Grant-Date Fair Value | |||||||||||||
| Nonvested, December 31, 2023 | $ | $ | ( | ) | $ | |||||||||||
| Granted | $ | $ | - | $ | - | |||||||||||
| Vested | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Forfeited | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Expired | $ | $ | - | $ | ||||||||||||
| Nonvested, September 30, 2024 | $ | $ | $ | |||||||||||||
For the nine months ended September 30, 2024 and September 30, 2023, the Company recorded $ and $ as compensation credit and expense related to vested options issued to employees and consultants, net of forfeitures of unvested options issued to employees and consultants, respectively.
| 21 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||
| Outstanding, December 31, 2023 | $ | $ | ||||||||||||||
| Granted | $ | - | $ | - | ||||||||||||
| Exercised | $ | - | $ | - | ||||||||||||
| Forfeited/Cancelled | $ | - | $ | - | ||||||||||||
| Expired | $ | - | $ | - | ||||||||||||
| Outstanding, September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
There were non-vested, non-qualified stock options issued to directors under the 2017 Equity Plan and the 2021 Equity Plan, for the nine months ended September 30, 2024.
During the nine months ended September 30, 2024 and September 30, 2023, the Company incurred compensation expense related to options issued to directors.
Restricted Stock Units
Effective January 2, 2024, the Company issued a total of restricted stock units (RSUs) under the 2021 Equity Plan to three of its independent directors. These RSUs vested upon grant.
During the nine months ended September 30, 2024 and September 30, 2023, the Company recorded $ and $, respectively, as compensation expense related to vested RSUs issued to directors.
| Number of Units | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value | ||||||||||
| Outstanding, December 31, 2023 | $ | $ | ||||||||||
| Granted | $ | $ | ||||||||||
| Vested and settled with share issuance | ( | ) | $ | $ | ||||||||
| Forfeited/canceled | $ | $ | ||||||||||
| Outstanding, September 30, 2024 | $ | $ | ||||||||||
| 22 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Note 9 - Warrants
The following table summarizes information with respect to outstanding warrants to purchase common stock during the nine months ended September 30, 2024:
| Weighted | Weighted | |||||||||||||||||||
| Average | Average | Aggregate | ||||||||||||||||||
| Warrants | Exercise | Remaining Life | Intrinsic | |||||||||||||||||
| Outstanding | Exercisable | Price | In Months | Value | ||||||||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Expired | ( | ) | ( | ) | $ | |||||||||||||||
| Outstanding at September 30, 2024 | $ | |||||||||||||||||||
The following table summarizes information about warrants outstanding at September 30, 2024:
| Warrants | Weighted Average | |||||||||||||
| Exercise price | Outstanding | Exercisable | Months Outstanding | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
Q3 2021 Warrants Issued to Series B Preferred Stockholder
On
September 28, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor, pursuant to which the investor
purchased from the Company shares of convertible Series B Preferred Stock with a stated value of $ per share, or $
Q3 2021 Warrants Issued to Series B Preferred Placement Agent
In
connection with the sale of the shares of convertible Series B Preferred Stock described above, the Company issued
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
Note 10 – Income Taxes
As
of September 30, 2024, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $
In
addition, pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, use of the Company’s NOLs carryforwards may
be limited in the event of cumulative changes in ownership of more than
The Company must assess the likelihood that its net deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management’s judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of September 30, 2024 and December 31, 2023. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its net deferred tax assets in the foreseeable future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.
Note 11 – Related Party Transactions
Agreements and Transaction with a Company Director
The Company entered into a manufacturer representative agreement with RSX Enterprises (“RSX”) in March 2021 to become a non-exclusive representative for the Company to assist in marketing and soliciting orders. James R. Shipley, one of our independent directors, has a significant ownership interest in RSX.
Under
the manufacturer representative agreement, RSX will act as a non-exclusive representative for the Company within the United States, Canada
and Mexico and may receive a commission for qualified customer leads. The agreement had an initial term through December 31, 2021 with
automatic one-year renewal terms unless notice is given 90 days prior to each annual expiration. During the nine months ended September
30, 2024 and September 30, 2023, the Company paid $
On
October 13, 2022, the Company entered into an agreement with Lone Star Bioscience, Inc. (Lone Star) to provide engineering design services.
Nicholas Etten, one of our independent directors, is the Chief Executive Officer of Lone Star. The balance due under this agreement totaled
$
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(in US Dollars except share numbers)
(Unaudited)
On
June 19, 2024, the Company engaged Nicholas J. Etten, a director of the Company, to provide services covering transaction sourcing and
evaluation, in the Company’s effort to arrange for a merger, acquisition, combination or other strategic transaction. Mr. Etten
has a background in corporate development and investment banking in multiple industries. Mr. Etten will be paid a weekly fee of $
Note 12 – Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company has evaluated all subsequent events through the date of issuance of these financial statements issued. No material subsequent events occurred after September 30, 2024, other than as set out below:
Litigation
On
or about April 17, 2024, Optima Consulting Services, LLC (the “Claimant”), a client of the Company with which it had an equipment
contract and engineering contract, advised the Company of a potential claim related to work performed by the Company for Claimant and
demanded mediation under the parties’ contract. On or about October 28, 2024, Claimant informed the Company it was asserting claims
for negligent/defective design and breach of warranty, and alleges its damages exceed $
Given the current uncertainty around estimability and success of the Claims, we have not recorded an accrual for any potential loss related to this matter.
Q3 2021 Warrants Issued to Series B Preferred Placement Agent
In
connection with the sale of the shares of convertible Series B Preferred Stock described above, the Company issued
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 by the Company has been food related crops, a segment that is also facing disruption from evolving market demand, competition, and reorganization, including the lack of growth capital and several noteworthy bankruptcies.
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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 year ended December 31, 2023, and the nine months ended September 30, 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.
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 September 30, 2024, we executed new sales contracts with a total contract value of $516,000. During this same period, we had no change orders or cancellations. Consequently, our net bookings in the three months ended September 30, 2024 were $516,000, representing a decrease of $924,000 (or 64%) from net bookings of $1,440,000 in the second quarter of 2024.
Our backlog at September 30, 2024 was $352,000, an increase of $125,000, or 55%, from our backlog of $227,000 at June 30, 2024. The increase in backlog is primarily the result of bookings in the third quarter that have not yet been fulfilled. While we expect to recognize all the 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.
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Our recognized revenue for the quarters ended September 30, 2023, December 31, 2023, March 31, 2024, June 30, 2024, and September 30, 2024, in the table below, excludes $29,000, $0, $31,000, $12,000, and $0, 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.
| For the quarter ended | ||||||||||||||||||||
| September 30, 2023 | December 31, 2023 | March 31, 2024 | June 30, 2024 | September 30, 2024 | ||||||||||||||||
| Backlog, beginning balance | $ | 1,066,000 | $ | 548,000 | $ | 435,000 | $ | 535,000 | $ | 227,000 | ||||||||||
| Net bookings, current period | 366,000 | 138,000 | 303,000 | 1,440,000 | 516,000 | |||||||||||||||
| Recognized revenue, current period | (884,000 | ) | (251,000 | ) | (203,000 | ) | (1,748,000 | ) | (391,000 | ) | ||||||||||
| Backlog, ending balance | $ | 548,000 | $ | 435,000 | $ | 535,000 | $ | 227,000 | $ | 352,000 | ||||||||||
The completion of a customer’s new build facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes for these customers to complete a new build project, which corresponds to when we are able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation systems; (vii) the availability of power; and (viii) delays that are typical in completing any construction project.
As has historically been the case for the Company at each quarter-end, there remains significant uncertainty regarding the timing of revenue recognition of our backlog as of September 30, 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 Q3 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 Q3 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.
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Results of Operations
Comparison of the Three Months Ended September 30, 2024 and September 30, 2023
Revenues and Cost of Goods Sold
Revenue for the three months ended September 30, 2024 was $391,000, compared to $914,000 for the three months ended September 30, 2023, representing a decrease of $523,000, or 57%. The decrease was primarily due to lower bookings and a reduced backlog over the past 18 months.
Cost of revenue decreased by $557,000 or 55%, from $1,018,000 for the three months ended September 30, 2023 to $461,000 for the three months ended September 30, 2024. The decrease was primarily due to a decrease in revenue, along with a decrease in fixed and other variable costs, as discussed below.
During the three months ended September 30, 2024, we recognized a gross loss of $70,000 compared to a gross loss of $104,000 for the three months ended September 30, 2023, a decrease of $34,000 or 33%. Our gross loss margin increased by 7 percentage points from 11% for the three months ended September 30, 2023 to 18% for the three months ended September 30, 2024 primarily due to lower revenue, an increase in fixed costs as a percent of revenue, offset by lower variable costs, as described below. Additionally, total revenue in the three months ended September 30, 2024 and September 30, 2023 included $0 and $29,000, 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 $183,000, or 47% of total revenue, for the three months ended September 30, 2024, as compared to $292,000, or 32% of total revenue, for the three months ended September 30, 2023. The decrease of $109,000 was due to a decrease in salaries and benefits of $91,000 and a decrease in fixed overhead of $18,000.
Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $278,000, or 71% of total revenue, during the three months ended September 30, 2024, as compared to $726,000, or 80% of total revenue, in the three months ended September 30, 2023. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $240,000 driven by lower revenue, (ii) a decrease of $70,000 for outside engineering services, (iii) a decrease in warranty expense of $56,000, due to a reduction in the warranty accrual as a result of lower revenue during the past 18 months, (iv) a decrease in excess and obsolete inventory expense of $52,000, (v) a reduction in travel of $22,000, and (vi) lower shipping and handling and other expenses of $8,000.
Operating Expenses
Operating expenses decreased to $677,000 for the three months ended September 30, 2024, from $703,000 for the three months ended September 30, 2023, a decrease of $26,000, or 4%. The operating expense decrease consisted of: (i) a decrease in selling, general and administrative expenses (“SG&A expenses”) of $5,000, and (ii) a decrease in advertising and marketing expenses of $21,000. These decreases are the result of our cost-cutting measures.
Our decrease in SG&A expenses for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was primarily due to: (i) a decrease of $133,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) a decrease for investor relations expense of $11,000, and (iii) a decrease of $9,000 for facility and office expense, partially offset by (iv) an increase of $134,000 for accounting and other professional fees, (v) a $7,000 increase for insurance, (vi) an increase in sales related expenses of $4,000 due to outside sales referral fees, and (vii) an increase of $3,000 for business taxes and licenses.
The decrease in advertising and marketing expenses was primarily due to (i) a decrease in advertising and promotion of $20,000, and (ii) a decrease of $1,000 for outside services and web development.
Operating Loss
We recognized an operating loss of $747,000 for the three months ended September 30, 2024, as compared to an operating loss of $807,000 for the three months ended September 30, 2023, a decrease of $60,000 or 7%. The operating loss for the three months ended September 30, 2024 included $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 September 30, 2023. Excluding these non-cash items, our operating loss decreased by $42,000.
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Other Income (Expense)
We recognized other income (net) of $6,000 for the three months ended September 30, 2024, compared to other income (net) of $8,000 for the three months ended September 30, 2023. Other income for both periods consisted of interest income from a money market account.
Net Loss
Overall, we recognized a net loss of $740,000 for the three months ended September 30, 2024, as compared to a net loss of $799,000 for the three months ended September 30, 2023, a decrease of $59,000 or 7%. The net loss for the three months ended September 30, 2024 included $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 September 30, 2023. Excluding these non-cash items, our operating loss decreased by $41,000.
Comparison of the Nine Months Ended September 30, 2024 and September 30, 2023
Revenues and Cost of Goods Sold
Revenue for the nine months ended September 30, 2024 was $2,386,000, compared to $6,660,000 for the nine months ended September 30, 2023, representing a decrease of $4,274,000, or 64%. 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 $3,401,000 or 58%, from $5,832,000 for the nine months ended September 30, 2023, to $2,431,000 for the nine months ended September 30, 2024. The decrease was primarily due to a decrease in revenue, along with a decrease in fixed and other variable costs, as discussed below.
Our gross loss for the nine months ended September 30, 2024 was $45,000 compared to a gross profit of $828,000 for the nine months ended September 30, 2023, a decrease of $873,000 or 105%. Our gross profit margin decreased by 14 percentage points from 12% for the nine months ended September 30, 2023, to a gross loss margin of 2% for the nine months ended September 30, 2024, primarily due to lower revenue and an increase in fixed and other variable costs as a percentage of revenue, as described below. Additionally, total revenue in the nine months ended September 30, 2024 and September 30, 2023 included $44,000 and $234,000, 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 $643,000, or 27% of total revenue, for the nine months ended September 30, 2024, as compared to $1,002,000, or 15% of total revenue, for the nine months ended September 30, 2023. The decrease of $359,000 was due to a decrease in salaries and benefits (including stock-based compensation) of $310,000 and a decrease in fixed overhead of $49,000.
Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $1,788,000, or 75% of total revenue, during the nine months ended September 30, 2024, as compared to $4,830,000, or 73% of total revenue, in the nine months ended September 30, 2023. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $2,664,000 driven by lower revenue and lower equipment margins, (ii) a decrease in warranty expense of $193,000 due to a reduction in the warranty accrual as a result of lower revenue during the past 18 months, (iii) a decrease of $74,000 in excess and obsolete inventory expense, (iv) a decrease of $45,000 for travel expenses, and (v) reduced outside engineering services expense of $44,000, and (vi) a decrease in shipping and handling and other variable costs of $22,000.
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Operating Expenses
Operating expenses decreased to $2,103,000 for the nine months ended September 30, 2024, from $2,786,000 for the nine months ended September 30, 2023, a decrease of $683,000, or 25%. The operating expense decrease consisted of: (i) a decrease in selling, general and administrative expenses (“SG&A expenses”) of $363,000, (ii) a decrease in advertising and marketing expenses of $243,000, and (iii) a decrease in product development of $77,000. These decreases are the result of our cost-cutting measures.
Our decrease in SG&A expenses for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, was primarily due to: (i) a decrease of $465,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) a decrease in facilities and offices expenses of $42,000, (iii) a decrease in bad debt expense of $38,000, (iv) a reduction in commissions and other sales related expenses of $17,000, (v) a decrease of $7,000 for travel, and (vi) a decrease in depreciation expense of $5,000. These decreases were offset by (i) an increase of $151,000 for accounting and other professional fees, (ii) an increase of $30,000 in business taxes and licenses primarily due to an increase for real estate taxes, (iii) an increase in investor relations expense of $17,000, and (iv) an increase for loss on the disposal of fixed assets of $12,000.
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 $94,000, (iii) a decrease in outside services and other marketing expenses of $14,000, 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 $2,148,000 for the nine months ended September 30, 2024, as compared to an operating loss of $1,958,000 for the nine months ended September 30, 2023, an increase of $190,000 or 10%. The operating loss for the nine months ended September 30, 2024 included $69,000 of non-cash, stock-based compensation, and $14,000 of depreciation expense, compared to $177,000 of non-cash, stock-based compensation, and $20,000 of depreciation expense for the nine months ended September 30, 2023. Excluding these non-cash items, our operating loss increased by $303,000. This increase in operating loss was primarily due to a significant decrease in revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023 as well as an increase in fixed and variable costs as a percent of revenue.
Other Income (Expense)
We recognized other income (net) of $20,000 for the nine months ended September 30, 2024, compared to other income (net) of $34,000 for the nine months ended September 30, 2023. Other income for the nine months ended September 30, 2024 consisted of interest income on our money market account. Other income for nine months ended September 30, 2023 primarily consisted of interest income on a money market account of $26,000 and an adjustment to our ERC credit and unclaimed property of $8,000.
Net Loss
Overall, we recognized a net loss of $2,127,000 for the nine months ended September 30, 2024, as compared to a net loss of $1,924,000 for the nine months ended September 30, 2023, an increase of $203,000 or 11%. The net loss for the nine months ended September 30, 2024 included $69,000 of non-cash, stock-based compensation, and $14,000 of depreciation expense, compared to $177,000 of non-cash, stock-based compensation, $20,000 of depreciation expense for the nine months ended September 30, 2023. Excluding these non-cash items, our net loss increased by $317,000. This increase in net loss was primarily due to a significant decrease in revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023 along with an increase in fixed and variable costs as a percent of revenue.
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Financial Condition, Liquidity and Capital Resources
Cash, Cash Equivalents
As of September 30, 2024, we had cash and cash equivalents of $10,295,000, compared to cash and cash equivalents of $12,508,000 as of December 31, 2023. The $2,213,000 decrease in cash and cash equivalents during the nine months ended September 30, 2024, was the result of cash used in operations. Our cash is held in bank depository accounts in a financial institution. During the nine months ended September 30, 2024, we held deposits in this financial institution that exceeded the federally insured amount.
As of September 30, 2024, we had accounts receivable (net of allowance for doubtful accounts) of $71,000, contract assets (net of allowance for doubtful accounts) of $224,000, inventory (net of excess and obsolete allowance) of $25,000, and prepaid expenses and other assets of $421,000 (including $128,000 in advance payments on inventory purchases). While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability especially since most of our customers are funded on an as-needed basis to complete facility construction.
As of September 30, 2024, we had total accounts payable and accrued expenses of $364,000, deferred revenue of $469,000, and the current portion of operating lease liability of $133,000. As of September 30, 2024, we had working capital of $10,071,000, 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 $2,213,000, (ii) a decrease in inventory (net) of $272,000, partially offset by (iii) a decrease in accounts payable and accrued liabilities of $261,000, (iv) an increase in prepaid expenses and other assets of $108,000, (v) an increase in accounts receivable of $53,000, and (v) a decrease in deferred revenue of $31,000.
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 nine months ended September 30, 2024 and September 30, 2023:
| For the Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (2,213,000 | ) | $ | (5,294,000 | ) | ||
| Net cash provided by (used in) investing activities | - | - | ||||||
| Net cash provided by (used in) financing activities | - | - | ||||||
| Net decrease in cash | $ | (2,213,000 | ) | $ | (5,294,000 | ) | ||
Operating Activities
We incurred a net loss for the nine months ended September 30, 2024 of $2,127,000 and have an accumulated deficit of $39,318,000 as of September 30, 2024.
Cash used in operations for the nine months ended September 30, 2024 was $2,213,000 compared to cash used in operating activities of $5,294,000 for the nine months ended September 30, 2023, a decrease of $3,081,000.
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The decrease in cash used in operating activities during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily attributable to: (i) a decrease in cash used to fund working capital of $3,496,000, (ii) an increase in net loss of $203,000, and (iii) a decrease in non-cash operating charges of $211,000.
The decrease in our working capital was primarily related to (i) a decrease in cash of $2,213,000, (ii) a decrease in inventory (net) of $272,000, partially offset by (iii) a decrease in accounts payable and accrued liabilities of $261,000, (iv) an increase in prepaid expenses and other assets of $108,000, (v) an increase in accounts receivable of $53,000, and (v) a decrease in deferred revenue of $31,000.
Investing Activities
There were no cash flows from investing activities during the nine months ended September 30, 2024. Cash provided by investing activities during the nine months ended September 30, 2023 was less than $1,000.
Financing Activities
There were no cash flows from financing activities during the nine months ended September 30, 2024 and September 30, 2023.
Inflation
Our operations are being influenced by the inflation 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 September 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 September 30, 2024, we had no off-balance sheet arrangements. During the nine months ended September 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.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
ITEM 4. CONTROLS AND PROCEDURES
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 September 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 September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
On October 20, 2023, Sweet Cut Grow, LLC and Green Ice, LLC (collectively, “Claimant”) a client of the Company with which it had an equipment contract and engineering contract, filed a demand for arbitration asserting claims for breach of contract, breach of warranty, and unjust enrichment, and demand for $1,049,280 in damages, plus interest (“Claims”). The Company continues to deny all the Claims and has asserted a counterclaim. The Company believes Claimant is owed nothing as the Company fulfilled all its obligations under the contracts to Claimant, and further, that the negligence of a third-party supplier is the basis of the Claims. We intend to generally defend the claims on the basis that we promptly addressed all problems, and that any issues with defective HVAC equipment are the responsibility of our third-party equipment manufacturer. The Company’s equipment contract with Claimant requires the parties to arbitrate their disputes under the rules of the American Arbitration Association (“AAA”). The arbitration will be heard in Denver, Colorado. The matter is in the preliminary phase. The parties will pay their own legal fees and expenses. The Company intends to defend itself vigorously, believing there are no merits to the claims as currently presented.
On or about April 17, 2024, Optima Consulting Services, LLC (the “Claimant”), a client of the Company with which it had an equipment contract and engineering contract, advised the Company of a potential claim related to work performed by the Company for Claimant and demanded mediation under the parties’ contract. On or about October 28, 2024, Claimant informed the Company it was asserting claims for negligent/defective design and breach of warranty, and alleges its damages exceed $2,000,000 (Claims”). The Company denies all the Claims and that Claimant is entitled to any damages. The Company believes Claimant is owed nothing as the Company fulfilled all its obligations under the contracts to Claimant and performed all work in line with all applicable standards. We intend to generally defend the Claims on the basis that all work was performed pursuant to the contract and any alleged issues that may have occurred were the result of actions by Claimant and/or third parties. If Claimant moves forward with its Claims, the Company’s equipment contract with Claimant requires the parties to arbitrate their dispute with the American Arbitration Association (“AAA”). The arbitration will be heard in Denver, Colorado. The matter is in the preliminary phase. The parties will pay their own legal fees and expenses. The Company intends to defend itself vigorously, believing there are no merits to the Claims as currently presented.
Given the current uncertainty around estimating the likelihood of success of claims and potential damages, we have not recorded an accrual for any potential loss related to these matters.
From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our customers. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The documents listed in the Exhibit Index of this Form 10-Q are incorporated by reference or are filed with this Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CEA INDUSTRIES INC. | ||
| (the “Registrant”) | ||
| Dated: November 14, 2024 | By: | /s/ Anthony K. McDonald |
| Anthony K. McDonald | ||
| Chief Executive Officer and President | ||
| (Principal Executive Officer) | ||
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EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
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