BNB Standard Corp 10-Q for FY2023 Q1
BNB Standard Corp (BNC)
About this 10-Q
BNB Standard Corp filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022 (FY2023 Q1).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.06M
- up 36.6% from $3.71M a year earlier
- Net loss
- $1.04M
- compared with a net loss of $407.91K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
FOR
THE QUARTERLY PERIOD ENDED
OR
Commission
File Number:
(formerly known as Surna Inc.)
(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 ☐
As of November 14, 2022, 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, 2022
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 subsidiary.
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; | |
| ● | the impact on our business and that of our customers of the current and future response by the government and business to the COVID-19 pandemic and other health crises, including what is necessary to protect our staff and the staff of our customers in the conduct of our business; | |
| ● | our overall financial condition, including the impact of higher interest rates and inflation, business disruption due to the COVID-19 pandemic, the Ukraine war, and the supply chains on which we depend; | |
| ● | the inherent uncertainty of product development; | |
| ● | regulatory, legislative and judicial developments, especially those related to changes in, and the enforcement of, cannabis laws; | |
| ● | increasing competitive pressures in the CEA (Controlled Environment Agriculture) industry; | |
| ● | the ability to effectively operate our business, including servicing our existing customers and obtaining new business; | |
| ● | our relationships with our 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 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 or development plans, including our expected level of capital expenses and working capital; | |
| ● | 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 growth strategy, including possible acquisitions; |
| ● | our ability to identify, complete and integrate potential strategic acquisitions; | |
| ● | future revenue being lower than expected; | |
| ● | our ability to convert our backlog into revenue in a timely manner, or at all; and | |
| ● | our intention not to pay dividends. |
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, 2021, 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, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $ | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other | ||||||||
| Total Current Assets | ||||||||
| Noncurrent Assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total Noncurrent Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Accrued equity compensation | ||||||||
| Other liabilities | ||||||||
| 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) | ||||||||
| TEMPORARY EQUITY | ||||||||
| Series B Redeemable Convertible Preferred Stock, $ par value; and issued and outstanding, respectively | ||||||||
| Total Temporary Equity | ||||||||
| SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Common stock, $ par value; and shares authorized, respectively; and shares issued and outstanding, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity (Deficit) | ( | ) | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
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)
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Advertising and marketing expenses | ||||||||||||||||
| Product development costs | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Goodwill impairment charges | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense), net | ||||||||||||||||
| Interest income (expense),net | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ||||||||||||||||
| Income (Loss) before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Convertible Preferred Series B Stock Redemption Value Adjustment | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Convertible preferred series B stock dividends | ( | ) | ( | ) | ( | ) | ||||||||||
| Deemed dividend on convertible preferred series B stock on down round | ( | ) | ||||||||||||||
| Net income (loss) available to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (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 (Deficit)
For the Three and Nine Months Ended September 30, 2022 and September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
| Common Stock | Additional | Shareholders’ | ||||||||||||||||||
| Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Equity (Deficit) | ||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Fair value of vested stock options granted to employees | - | |||||||||||||||||||
| Fair value of restricted stock units issued to directors | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional | Shareholders’ | ||||||||||||||||||
| Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Equity (Deficit) | ||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Fair value of vested stock options granted to employees | - | |||||||||||||||||||
| Fair value of vested stock options granted to directors | - | |||||||||||||||||||
| 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 | ||||||||||||||||||||
| Common shares and warrants issued for cash | ||||||||||||||||||||
| Common shares and warrants issued on conversion of series B preferred stock | ||||||||||||||||||||
| Dividends on series B preferred stock | - | ( | ) | ( | ) | |||||||||||||||
| Cashless exercise of prefunded warrants | ( | ) | ||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Shareholders’ Deficit | ||||||||||||||||||||||
| Series A Preferred Stock | Common Stock | Additional | ||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Shareholders’ Deficit | ||||||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Fair value of vested stock options granted to employees | - | - | ||||||||||||||||||||||||||
| Fair value of vested stock options granted to directors | - | - | ||||||||||||||||||||||||||
| Issuance of series B preferred stock and warrants, net | - | - | ||||||||||||||||||||||||||
| Accrued dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Adjustment to redemption value | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Serries A Preferred Stock | Common Stock | Additional | ||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Shareholders’ Deficit | ||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common shares issued in settlement of legal dispute | - | |||||||||||||||||||||||||||
| Fair value of vested stock options granted to employees | - | - | ||||||||||||||||||||||||||
| Fair value of vested stock options granted to directors | - | - | ||||||||||||||||||||||||||
| Issuance of series B preferred stock and warrants, net | - | - | ||||||||||||||||||||||||||
| Accrued dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Adjustment to redemption value | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
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)
| 2022 | 2021 | |||||||
For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and intangible asset amortization expense | ||||||||
| Share-based compensation | ||||||||
| Common stock issued for other expense | ||||||||
| Provision for doubtful accounts | ||||||||
| Provision for excess and obsolete inventory | ( | ) | ( | ) | ||||
| Loss on disposal of assets | ||||||||
| Amortization of ROU asset | ||||||||
| Goodwill impairment charges | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Deposits | ( | ) | ||||||
| Operating lease liability, net | ( | ) | ( | ) | ||||
| Accrued equity compensation | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from the sale of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Payment of dividends on series B preferred stock | ( | ) | ||||||
| Redemption of series B preferred stock | ( | ) | ||||||
| Cash proceeds on sale of common stock and warrants, net of expenses | ||||||||
| Payments on convertible notes payable | ||||||||
| Proceeds from issuances of convertible notes | ||||||||
| 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: | ||||||||
| Adjustment of carrying value of series B preferred stock to redemption value | $ | $ | ||||||
| Conversion of series B preferred stock | $ | $ | ||||||
| Subscription receivable - series B preferred stock | $ | $ | ||||||
| Options issued for accrued equity compensation | $ | $ | ||||||
| Accrued Series B dividend payable settled in shares of common stock | $ | $ | ||||||
| Deemed dividend on series B preferred stock arising on down round | $ | $ | ||||||
| Cashless exercise of prefunded warrants | $ | $ | ||||||
| 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, 2022
(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: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) air sanitation products, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) proprietary and third party controls systems and technologies used for environmental, lighting, and climate control, and (viii) preventive maintenance services, through our partnership with a certified service contractor network, for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada. Customers are those growers building new facilities and those expanding or retrofitting existing facilities. Currently, our revenue stream is derived primarily from supplying our products, services, and technologies to commercial indoor facilities ranging from several thousand to more than 100,000 square feet. 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.
Impact of the COVID-19 Pandemic on Our Business
The impact of the government and the business economic response to the COVID-19 pandemic has affected demand across the majority of our markets and disrupted workflow and completion schedules on projects. The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, and working capital.
The resulting effects and uncertainties from the COVID-19 pandemic, including the depth and duration of the disruptions to customers and suppliers, its future effect on our business, on our results of operations, and on our financial condition, cannot be predicted. We expect that the economic disruptions will continue to have an effect on our business over the longer term. Despite this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business. During the nine months ended September 30, 2022, the Company experienced significant delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain arising from the long-term effects of the COVID-19 pandemic. Consequently, our revenue recognition of these customer sales has been delayed until future periods when the shipment of these orders can be completed.
| 6 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Impact of Ukrainian Conflict
Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it has a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. As our operations are related only to the North American controlled environment agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks related to this conflict. We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflict will have any impact on our internal control over financial reporting. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the Ukrainian conflict.
Inflation
We anticipate that our business and financial position will be impacted by the current inflationary environment. To the extent that we, and our customers, use borrowed funds, we believe costs will increase for us and our customers. Access to capital will be impacted by increased interest rates and may affect our, and our customers’, ability to obtain capital. Inflation will also have an impact on the cost of supplies of goods and services that we use to complete our contracts for our customers. Depending on the terms of our contracts currently executed and in execution, we may not be able to pass on our increased costs, with the consequence of an adverse impact on our operating profit and overall margin.
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.
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. As indicated
in Note 8 – Shareholders Equity (Deficit) below, on February 15, 2022, the Company received approximately $
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, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022. The balance sheet as of December 31, 2021 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, 2021.
| 7 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
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
As a result of this reverse stock split, the number of the Company’s shares of common stock issued and outstanding as of December 31, 2021, was reduced from to .
All Common Stock, warrants, options and per share amounts set forth herein are presented to give retroactive effect to the Reverse Split for all periods presented.
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 and goodwill, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, accounts receivable and 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 may, from time to time, have deposits in financial institutions that exceed the federally insured amount of $
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.
| 8 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
During the nine months ended September 30, 2022 and September 30, 2021, there were warrants and options outstanding to purchase Company common stock and restricted stock units that were convertible into shares of the Company’s common stock.
As of September 30, 2022, and September 30, 2021, there were respectively, and , potentially dilutive equity instruments outstanding in respect of options outstanding to purchase Company common stock and restricted stock units that were convertible into shares of the Company’s common stock.
Goodwill
The Company recorded goodwill in connection with its acquisition of Hydro Innovations, LLC in July 2014. Goodwill is reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value. The Company performs a quantitative impairment test annually on December 31 by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The Company’s fair value is calculated using a market valuation technique whereby an appropriate control premium is applied to the Company’s market capitalization as calculated by applying its publicly quoted share price to the number of its common shares issued and outstanding. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has one reporting unit.
As
of June 30, 2022, the Company experienced a triggering event due to a drop in its stock price and performed a quantitative analysis for
potential impairment of its goodwill. As of June 30, 2022, the Company performed a quantitative analysis for potential impairment of
its goodwill, by comparing the Company’s fair value to its carrying value as of June 30, 2022. Based on this analysis, the Company
determined that its carrying value exceeded its fair value. As a result, the Company recorded a non-cash goodwill impairment charge of
$
Temporary Equity
Shares of preferred stock that are redeemable for cash or other assets are classified as temporary equity if they are redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the Company. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, net of issuance costs, which is subsequently adjusted to redemption value (including the amount for dividends earned but not yet declared or paid) at each balance sheet date if the instrument is currently redeemable or if it is probable that the instrument will become redeemable.
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.
The following table sets forth the Company’s revenue by source:
Schedule of Revenue by Source
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Equipment and systems sales | $ | $ | $ | $ | ||||||||||||
| Engineering and other services | ||||||||||||||||
| Shipping and handling | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| 9 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
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.
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 the 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’s historical rates of return are insignificant as a percentage of sales and, as a result, the Company does not record a reserve for returns at the time the Company recognizes revenue. 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.
| 10 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
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.
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. As of September 30, 2022, and 2021, the Company had no contract assets.
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 timing of when the Company expects to recognize revenue is
generally less than one year. As of September 30, 2022, and December 31, 2021, deferred revenue, which was classified as a current liability,
was $
For
the three and nine months ended September 30, 2022, the Company recognized revenue of $
| 11 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
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.
The Company and its customers face various industry dynamics that make the timing and recognition of the Company’s revenue challenging. The Company’s ability to recognize revenue is driven by a customer’s ability to take possession of the sold equipment, which is predicated on completion of a customer’s cultivation facility. The Company’s customers are often first-time participants who face challenges associated with maintaining project funding, securing state and local licenses, and designing and installing complex equipment for the facility. Coordination of these efforts introduces uncertainty to the timing and completion of cultivation facilities, and all of these challenges are enhanced by the current economic environment. Global supply-chain delays and growing backlog challenges extend the duration, cost and timing uncertainty of many cultivation facility projects. In addition, as inflation-related cost increases affect the project returns that investors expect, many customers face funding uncertainty from initial investors. As a result of these challenges, the Company may experience contract cancellations, project scope reductions, and project delays from its customers, and there is no assurance that the Company will be able to fulfill its backlog.
As
of September 30, 2022, the Company’s remaining performance obligations, or backlog, was approximately $
The remaining performance obligations expected to be recognized through 2023 are as follows:
Schedule of Remaining Performance Obligations Expected to be Recognized
| 2022 | 2023 | Total | ||||||||||
| Remaining performance obligations related to engineering only paid contracts | $ | $ | $ | |||||||||
| Remaining performance obligations related to partial equipment paid contracts | ||||||||||||
| Total remaining performance obligations | $ | $ | $ | |||||||||
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 assesses the historical warranty claims on its manufactured products and, since 2016, warranty claims have been approximately
1% of annual revenue generated on these products. Based on the Company’s warranty policy, an accrual is established at 1% of the
trailing 18 months revenue. The Company continues to assess the need to record a warranty reserve at the time of sale based on historical
claims and other factors. As of September 30, 2022, and December 31, 2021, the Company had an accrued warranty reserve amount of $
| 12 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
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. During the nine months ended September 30, 2022, the valuation assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility ranged from % to %; expected term in years and risk-free interest rate ranged from % to %.
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.
Schedule of Share-based Compensation Costs
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| 13 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Included in the expense for the three and nine months ended September 30, 2022, is an accrual for $ and $, respectively, for the 2022 Annual Employee Incentive Compensation Plan. Included in the expense for the three and nine months ended September 30, 2021, is an accrual for $ and $, respectively, for the 2021 Annual Employee Incentive Compensation Plan.
Concentrations
Two
customers accounted for
Three
customers accounted for
Recently Issued Accounting Pronouncements
In September 2022, the FASB issued Update 2022-04, “Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”. The update was issued in response to requests from financial statement users for increased transparency surrounding the use of supplier finance programs. The amendments in Update 2022-04 require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this Update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires companies to apply ASC 606, “Revenue from Contracts with Customers” to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in ASC 805, which uses fair value. The guidance is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted, and the guidance should be applied prospectively. The impact of the standard on Company’s consolidated financial statements is dependent on the size and frequency of any future acquisitions the Company may complete.
| 14 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. The guidance is effective for interim and annual periods beginning after December 15, 2021. Early adoption is permitted. The guidance is to be applied prospectively to modifications or exchanges occurring on or after the effective date. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
In March 2020, the FAS issued ASU No. 2020-04 “Reference Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides 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. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
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
In February 2016 the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842” or the “new lease standard”). The Company adopted ASC 842 as of January 1, 2019, using the effective date method.
The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the “package of practical expedients” which allow the Company to not reassess: (i) whether existing or expired arrangements contain a lease, (ii) the lease classification of existing or expired leases, or (iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new lease standard.
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, 2022
(in US Dollars except share numbers)
(Unaudited)
The lease cost, cash flows and other information related to the New Facility Lease were as follows:
Schedule of Lease Cost
| As of September 30, 2022 | ||||
| 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, 2022 | ||||
| Operating cash outflow from operating lease | $ | |||
Future annual minimum lease payments on the New Facility Lease as of September 30, 2022 are as follows:
Schedule of Future Annual Minimum Lease Payments
| Years ended December 31, | |||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | ||||
| 2023 | |||||
| 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:
Schedule of Inventory
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Finished goods | $ | $ | ||||||
| Work in progress | ||||||||
| Raw materials | ||||||||
| Allowance for excess & obsolete inventory | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
| 16 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(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:
Schedule of Property and Equipment
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Furniture and equipment | $ | $ | ||||||
| Vehicles | ||||||||
| property and equipment, gross | ||||||||
| 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:
Schedule of Accounts Payable and Accrued Liabilities
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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, 2022
(in US Dollars except share numbers)
(Unaudited)
Note 6 – Commitments and Contingencies
Litigation
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.
Note 7 – Temporary Equity
On
September 28, 2021, the Company sold to an institutional investor (the “Investor”), shares of Series B Convertible
Preferred Stock (“Series B Preferred Stock”), stated value $ per share, convertible into shares of common stock, for
an aggregate purchase price of $
| 18 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
The
Series B Preferred Stock had an annual dividend of
The
Series B Preferred Stock was mandatorily convertible on the third anniversary of its issuance. All conversions of the Series B Preferred
Stock were subject to a blocker provision of
On
February 16, 2022, the Company redeemed shares of its Series B Preferred Stock for payment of $
On
February 16, 2022, the remaining shares of the Company’s Series B Preferred Stock were converted into shares of common
stock and warrants; of the warrants vested immediately, had an indefinite term and an exercise price of $
The Company has no Preferred Shares outstanding as of September 30, 2022.
Note 8 – Stockholders’ Equity (Deficit)
As of September 30, 2022, the Company had shares of common stock and shares of preferred stock authorized at a $ par value. As of September 30, 2022, shares of common stock were issued and outstanding and no shares of preferred stock are issued and outstanding.
Directors Remuneration
On January 3, 2022, the Company issued non-qualified stock options under the 2021 Equity Incentive Plan to each of two existing directors. The options had an exercise price of $, vested immediately and had a term ending at the earlier of five years after the date on which the optionee’s continuous service ends, or the tenth anniversary on which the option was granted.
| 19 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
On January 17, 2022, the Company issued an RSU grant of shares of common stock 2021 Equity Incentive Plan to each of two new directors, shares of common stock vested immediately on grant date and the remaining shares of common stock will vest on January 17, 2023, if the recipient remains in service as an independent director. shares of common stock were issued on January 17, 2022 to each of the two new directors in settlement of the RSUs that vested immediately.
Revised Compensation Plan
On August 20, 2021, the Board of Directors revised the previously adopted equity-based compensation plan and adopted a new compensation plan for independent directors (the “Plan”). The Plan is effective retroactively for the current independent directors and for independent directors elected or appointed after the Effective Date of the Plan.
The
Company will pay its independent directors an annual cash fee of $
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.
The plan is divided into two phases: from the Effective Date of the Plan until February 9, 2022, the day prior to the uplisting of the Company to Nasdaq. (“Pre-uplist”) and from February 10, 2022, the uplist date forward (“Post-uplist”).
Pre-uplist
phase: The Company paid its independent directors an annual cash fee of $
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.
| 20 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
The
Company pays the Audit Committee Chairman an additional annual fee of $
The
Company pays the Chairmen of any other committees of the Board an additional annual fee of $
There is no additional compensation paid to members of any committee of the Board. Interested (i.e. Executive directors) serving on the Board do not receive compensation for their Board service.
Post-uplist
phase: The Company will pay its independent directors an annual cash fee of $
Each director is responsible for the payment of any and all income taxes arising with respect to the issuance of common stock and the vesting and settlement of RSUs.
The Company reimburses independent directors for out-of-pocket expenses incurred in attending Board and committee meetings and undertaking certain matters on the Company’s behalf.
All 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.
Employee directors do not receive separate fees for their services as directors.
Reverse Stock Split
On January 17, 2022, the Company’s Board of Directors approved a reverse stock split at a ratio of one-for-one hundred and fifty. The reverse stock split was implemented effective January 27, 2022. The par value for the Common Stock was not affected.
An additional 6,798 shares of common stock were issued to round up partial shares following the reverse spilt.
As a result of this reverse stock split, the number of the Company’s shares of common stock issued and outstanding at December 31, 2021 was reduced from to . All Common Stock, warrants, options and per share amounts set forth herein are presented to give retroactive effect to the Reverse Split for all periods presented.
Change in Authorized Share Capital
In connection with the aforementioned reverse stock split, the Company’s Board of Directors approved the reduction of the authorized capital of the Company to shares of common stock and shares of preferred stock.
Equity Raise
On
February 10, 2022, the Company signed a firm commitment underwriting agreement for the public offering of shares of common stock and
warrants, which closed on February 15, 2022. The Company received net proceeds of approximately $
| 21 |
CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Warrant Exercise
On
June 21, 2022, the Company issued shares of its common stock in connection with the cashless exercise of
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, 2022, no shares or options were issued, and options were cancelled under the 2017 Plan.
As of September 30, 2022, of the shares authorized under the 2017 Plan for equity awards, shares have been issued, awards related 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, 2022, the Company issued shares of its common stock to two new independent directors under the 2021 Equity Incentive Plan, pursuant to the Director Compensation plan adopted in January 2022.
During the nine months ended September 30, 2022, the Company granted awards for non-qualified stock options to newly hired employees and stock options were cancelled under the 2021 Equity Incentive Plan as described below.
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
During the nine months ended September 30, 2022, the Company granted awards for non-qualified stock options to directors under the 2021 Equity Incentive Plan, pursuant to the Director Compensation plan adopted in August of 2021.
On April 1, 2022, non-qualified stock options were issued to 21 employees in respect of the Company’s 2021 Equity Incentive Plan. The options vested immediately, have a term of years and an exercise price of $. The expense in respect of this issuance had been fully accrued in 2021.
As of September 30, 2022, of the shares authorized under the 2021 Equity Plan, relate to restricted shares issued, relate to outstanding non-qualified stock options, relate to outstanding incentive stock options, relate to outstanding restricted stock units and shares remain available for future equity awards.
There was $ in unrecognized compensation expense for unvested non-qualified stock options, incentive stock options and restricted stock units at September 30, 2022 which will be recognized over approximately.
Non-Qualified and Incentive Stock Options
Schedule of Stock Option Activity
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | $ | - | |||||||||||||
| Exercised | $ | - | $ | - | ||||||||||||
| Forfeited | ( | ) | $ | $ | - | |||||||||||
| Expired | $ | - | $ | - | ||||||||||||
| Outstanding, September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2022 | $ | $ | ||||||||||||||
During the nine months ended September 30, 2022, we issued a total of stock options to employees as follows:
| ● | stock options were issued to four new employees. The vesting of these options ranges from immediate to , have a term of years and exercise prices ranging from $ to $. | |
| ● | stock options were issued to our newly appointed Chief Financial Officer. . The options have a term of years and an exercise price of $. | |
| ● | stock options were issued to 21 employees in respect of the Company’s 2021 Annual Incentive Awards which vested immediately. The options have a term of years and an exercise price of $. | |
| ● | During the nine months ended September 30, 2022, fully vested stock options and unvested stock options were forfeited following the departure of three former employees. |
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Summary of Non-vested Non-qualified Stock Option Activity
| | Number of Options | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value | Grant-Date Fair Value | ||||||||||||
| | ||||||||||||||||
| Nonvested, December 31, 2021 | $ | $ | $ | |||||||||||||
| Granted | $ | $ | - | $ | ||||||||||||
| Vested | ( | ) | $ | $ | - | $ | ( | ) | ||||||||
| Forfeited | ( | ) | $ | $ | - | $ | ( | ) | ||||||||
| Expired | $ | $ | - | $ | ||||||||||||
| Nonvested, September 30, 2022 | $ | $ | $ | |||||||||||||
For the nine months ended September 30, 2022 and September 30, 2021, the Company recorded $ and $ as compensation expense related to vested options issued to employees and consultants, net of forfeitures, respectively.
Schedule of Stock Option Activity
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | $ | - | |||||||||||||
| Exercised | $ | - | $ | - | ||||||||||||
| Forfeited/Cancelled | $ | - | $ | - | ||||||||||||
| Expired | $ | - | $ | - | ||||||||||||
| Outstanding, September 30, 2022 | $ | $ | ||||||||||||||
| Exerciseable, September 30, 2022 | $ | $ | ||||||||||||||
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Summary of Non-vested Non-qualified Stock Option Activity
| | Number of Options | Weighted Average Grant-Date Fair Value | Aggregate Intrinsic Value | Grant-Date Fair Value | ||||||||||||
| | ||||||||||||||||
| Nonvested, December 31, 2021 | $ | $ | $ | |||||||||||||
| Granted | $ | $ | - | $ | ||||||||||||
| Vested | ( | ) | $ | $ | - | $ | ( | ) | ||||||||
| Forfeited | $ | $ | - | $ | - | |||||||||||
| Expired | $ | $ | - | $ | - | |||||||||||
| Nonvested, September 30, 2022 | $ | $ | ||||||||||||||
During the nine months ended September 30, 2022 and September 30, 2021, the Company incurred $ and $ respectively, as compensation expense related to and vested options, respectively, issued to directors.
Effective January 3, 2022, the Company issued non-qualified stock options under the 2021 Equity Plan to its then current directors. The options vested upon grant. The options have a term of years and an exercise price equal to the closing price of the Company’s common stock on The OTC Markets on the day immediately preceding the grant date.
Restricted Stock Units
Effective January 17, 2022, the Company issued restricted stock units (RSUs) under the 2021 Equity Plan to newly appointed directors. of these RSUs vested upon grant and the remining will vest on January 17, 2023.
The Company recorded $ during the nine months ended September 30, 2022, 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, 2021 | $ | $ | ||||||||||
| Granted | $ | $ | - | |||||||||
| Vested and settled with share issuance | ( | ) | $ | $ | - | |||||||
| Forfeited/canceled | $ | $ | - | |||||||||
| Outstanding, September 30, 2022 | $ | $ | ||||||||||
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Note 10 - Warrants
The following table summarizes information with respect to outstanding warrants to purchase common stock during the nine months ended September 30, 2022:
Schedule of Outstanding Warrants to Purchase Common Stock
| Weighted | Weighted | |||||||||||||||||||
| Average | Average | Aggregate | ||||||||||||||||||
| Warrants | Exercise | Remaining Life | Intrinsic | |||||||||||||||||
| Outstanding | Exercisable | Price | In Months | Value | ||||||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||||||
| Granted | $ | * | $ | |||||||||||||||||
| Exercised | ( | ) | ( | ) | $ | * | $ | ( | ) | |||||||||||
| Expired | - | |||||||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||||||
| * |
The following table summarizes information about warrants outstanding at September 30, 2022:
Schedule of Warrants Outstanding
| 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, 2022
(in US Dollars except share numbers)
(Unaudited)
Q1 2022 Investor Warrants
On
February 15, 2022, the Company issued investment units for aggregate gross proceeds of $
Q1 2022 Overallotment Warrants
Further
on February 15, 2022, in connection the Company’s issuance of investment units for aggregate gross proceeds of $
Q1 2022 Underwriter Warrants
Further
on February 15, 2022, in connection the Company’s issuance of investment units for aggregate gross proceeds of $
Q1 2022 Series B Preferred Shares Pre-Funded Conversion Warrants
On February 16, 2022, in connection with the conversion of shares of Series B Preferred Stock into shares of the Company’s common stock, the Series B Preferred Shareholder was issued with pre-funded conversion warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $, vested immediately and had an indefinite life.
On June 21, 2022, the holder of all pre-funded conversion warrants exercised all of their warrants on a cashless basis and received shares of the Company’s common stock as a result of the exercise.
No pre-funded conversion warrants remained outstanding at September 30, 2022.
Q1 2022 Series B Preferred Shares Conversion Warrants
Further on February 16, 2022, in connection with the conversion of shares of Series B Preferred Stock into shares of the Company’s common stock, the Series B Preferred Shareholder was also issued with Series B Preferred shares conversion warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $, vested immediately and had a term of years.
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CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(in US Dollars except share numbers)
(Unaudited)
Note 11 – Income Taxes
As
of September 30, 2022, 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 50% within a three-year period. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. Our sale of securities, both in September 2021 and February 2022, will need to be considered for determination of any “ownership change” that we have undergone during a determination period. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future bottom-line operating results by effectively increasing our future tax obligations
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, 2022 and December 31, 2021. 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 12 – Related Party Transactions
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, a current director of the Company, 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, 2022, the Company paid $
Note 13 – 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 and determined no material subsequent events occurred after September 30, 2022 for which disclosure was required.
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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, 2021, 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, 2021, 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 is an engineering and design company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry. The CEA industry uses technology-based methods to grow crops in a way that provides protection from the outdoor elements; these methods have traditionally included indoor agriculture and vertical farming. 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 traditional farming methods.
Headquartered in Colorado, we leverage our experience in the CEA industry to bring our customers a variety of value-added technology solutions that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements. We do this by offering our customers a variety of principal service and product offerings that include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) air sanitation products, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) proprietary and third party controls systems and technologies used for environmental, lighting and climate control, and (viii) preventive maintenance services, through our partnership with a certified service contractor network, for CEA facilities.
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Currently, our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities operating in the cannabis industry. Our customers include state and provincial-regulated CEA growers located in the U.S., Canada, and other international locations. They are focused on building new CEA facilities and expanding or retrofitting existing CEA facilities. Our customers operate CEA facilities that range in size from several thousand square feet to more than 100,000 square feet.
CEA growers currently face a challenging business environment that includes high energy costs, water usage and conservation issues, and continuously evolving waste removal regulations. 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. A primary challenge for our customers involves finding innovative ways to reduce energy costs. On average, 56% of our customers’ energy costs are driven by HVACD systems and another 38% by lighting systems, and 5% for water handling and CO2 injection.
We support our clients by providing integrated mechanical, electrical, and plumbing (“MEP”) engineering design, proprietary and curated environmental control equipment, and automation offerings that serve the CEA industry. In addition, we believe we are among the leading experts in engineering environmental control systems for CEA facilities, which is commonly viewed as the most challenging component of a CEA facility’s technical infrastructure. Over our 16 years in business, we have served over 200 commercial indoor CEA facilities. While a professional engineer (“PE”) license is not required in any other design component of a CEA facility, such a license is required for the design of a CEA facility’s environmental control equipment, and our senior engineers hold PE licenses.
We believe our customers partner with us because we have the reputation and experience to help them make cost-conscious and effective decisions on the design and engineering of their indoor cultivation facilities. Our clients are focused on their crops and rely on us to partner with them on ways to optimize their CEA facility. We are also mindful of the evolving and substantial environmental sustainability standards and concerns raised by governments, consumers and other stakeholders. CEA facilities are resource intensive, and a growing list of states have implemented building code changes that limit energy consumption in cultivation facilities. Energy and resource efficiency is a high priority to us as engineers, and the senior engineers on our team hold the Leadership in Energy and Environmental Design (“LEED”) credential. In addition, our CEO helped build a cleantech company, and is a published author in the energy efficient technologies space. We believe this sustainability-focused technical experience is a unique advantage that our customers value when working with us.
While the Company historically focused on HVACD systems, in May of 2021, we announced an initiative to expand our product and service offerings to include most of the technical product and service infrastructure requirements associated with building and retrofitting CEA facilities, as well as post-build recurring maintenance services. Our engineering design services and consulting expertise facilitates early engagement with our customers at the pre-build and construction phases, and this enables us to better understand our customers’ goals at the beginning of a project, and provide the associated infrastructure products and services to reach those goals. Through our prior engagements with customers, we have built long-term relationships with our existing customers, which we plan to leverage and build on in the future.
We have three core assets that we believe will support us as we pursue our business strategy. First, we enjoy strong relationships with relevant stakeholders in the CEA industry. Largely focused in the cannabis segment, our partnerships include relationships with new and existing growers, capital providers, consultants, independent contractors, and numerous others. This includes our recently announced marketing arrangement with Merida Capital, a cannabis-focused private equity firm, whereby Merida will use CEA Industries Inc. as its sole provider of certain products and services for its indoor cultivation facilities. This has already resulted in a recent new contract in October 2022 with one of Merida’s Connecticut based clients.
Second, our experience in this industry over time has built up specialized engineering know-how and experience. We have been serving indoor cultivators since 2006 and designing CEA cultivation facilities since 2016. Since then, we have tested and solidified best practices from designing environmental control systems for CEA cultivation facilities. Finally, we have a line of proprietary environmental control products that support the specific growing environments that our customers want. We believe these products offer significant benefits to our customers and we are in the process of expanding our product slate, including the October 2022 launch of our new portfolio of water treatment solutions that include sampling, system design, equipment supplies and system integration. We believe this will enable us to work with cultivators and provide the necessary technologies to purify water including reverse osmosis, carbon filtration, multi-media filtration, water softeners, and ultraviolet water treatment.
Shares of our common stock and warrants are traded on the Nasdaq Capital Markets under the ticker symbol “CEAD” and “CEADW”, respectively.
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Impact of the COVID-19 Pandemic on Our Business
The COVID-19 pandemic has prompted national, regional, and local governments, including those in the markets that the Company operates in, to implement preventative or protective measures to control its spread. As a result, there have been disruptions in business operations around the world, with an impact on our business.
In response to the COVID-19 pandemic and the associated government and business response, the Company took and continues to take measures to adjust its operations as necessary. Because the effects of the pandemic continue in different parts of the world and in different ways in the United States, the Company continues to actively monitor its operations.
We are experiencing uncontrollable delays with our international supply of products and shipments from vendors due to a significant increase in shipments to U.S. ports, compounded by a reduction in cargo being shipped by air, a general shortage of containers, and a shortage of domestic truck driver availability. While these delays have moderately improved in recent months, we, along with many other importers of goods across all industries, continue to experience severe congestion and extensive wait times for carriers at ports across the United States. In addition, restrictions imposed by local, state, and federal agencies due to the COVID-19 pandemic have led to reduced personnel of importers, government staff, and others in our supply chain. We have been working diligently with our network of freight partners and suppliers to expedite delivery dates and provide solutions to reduce further impact and delays. However, we are unable to determine the full impact of these delays and how long they will continue as they are out of our control.
While the Company is continuing to navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, the potential uncertainty related to (and proliferation of) new strains, and related actions taken by federal, state, local, and international government officials, to prevent and manage the spread of COVID-19. All of these efforts are uncertain, out of our control, and cannot be predicted at this time.
Impact of Ukrainian Conflict
Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks related to this conflict. We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflict will have any impact on our internal control over financial reporting. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the Ukrainian conflict.
Our Bookings, Backlog and Revenue
During the three months ended September 30, 2022, we executed new sales contracts with a total contract value of $2,378,000. During this same period, we had positive change orders of $91,000 and cancellations of $272,000. The cancellations were based on discussions with customers who were unable to attain or maintain funding, and subsequently abandoned their projects. After adjustments for these change orders and cancellations, our net bookings in the three months ended September 30, 2022 were $2,197,000, representing an increase of $663,000 (or 43%) from net bookings of $1,534,000 in the second quarter of 2022.
Our backlog at September 30, 2022 was $6,832,000, a decrease of $2,866,000, or 30%, from June 30, 2022. The decrease in backlog is the result of higher revenue in the third quarter. Our backlog at September 30, 2022 includes booked sales orders of $3,621,000 (53% of the total backlog) from several customers that we do not expect to be realized until 2023. Our backlog also contains a booked sales order of $157,000 (2% of the total backlog) from one customer that we believe is at risk of cancellation based on conversations with this customer. We believe the sales orders in these portions of our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled by our customers. Therefore, investors should not view backlog as earned revenue.
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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 cancelations 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).
| For the quarter ended | ||||||||||||||||||||
| September 30, 2021 | December 31, 2021 | March 31, 2022 | June
30, 2022 | September 30, 2022 | ||||||||||||||||
| Backlog, beginning balance | $ | 7,987,000 | $ | 9,881,000 | $ | 10,818,000 | $ | 11,179,000 | $ | 9,698,000 | ||||||||||
| Net bookings, current period | $ | 5,600,000 | $ | 3,993,000 | $ | 2,105,000 | $ | 1,534,000 | $ | 2,197,000 | ||||||||||
| Recognized revenue, current period | $ | 3,706,000 | $ | 3,056,000 | $ | 1,744,000 | $ | 3,015,000 | $ | 5,063,000 | ||||||||||
| Backlog, ending balance | $ | 9,881,000 | $ | 10,818,000 | $ | 11,179,000 | $ | 9,698,000 | $ | 6,832,000 | ||||||||||
The Company and its customers face various industry dynamics that make the timing and recognition of the Company’s revenue challenging. The Company’s ability to recognize revenue is driven by a customer’s ability to take possession of the sold equipment, which is predicated on completion of a customer’s cultivation facility. The Company’s customers are often first-time participants who face challenges associated with maintaining project funding, securing state and local licenses, and designing and installing complex equipment for the facility. Coordination of these efforts introduces uncertainty to the timing and completion of cultivation facilities, and all of these challenges are enhanced by the current economic environment. Global supply-chain delays and growing backlog challenges extend the duration, cost and timing uncertainty of many cultivation facility projects. In addition, as inflation-related cost increases affect the project returns that investors expect, many customers face funding uncertainty from initial investors. As a result of these challenges, the Company may experience contract cancellations, project scope reductions, and project delays from its customers, and there is no assurance that the Company will be able to fulfill its backlog.
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, 2022.
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 2022 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 2022 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 Three Months Ended September 30, 2022 and September 30, 2021
Revenues and Cost of Goods Sold
Revenue for the three months ended September 30, 2022 was $5,063,000, compared to $3,706,000 for the three months ended September 30, 2021, representing an increase of $1,357,000, or 37%. The increase was primarily due to improvements in our supply chain and the ability to deliver products with fewer delays on contract fulfillment and revenue recognition on existing contracts. Additionally, revenue for the three months ended September 30, 2022 included contracts for several new product offerings that were not available the three months ended September 30, 2021.
Cost of revenue increased by $1,507,000, or 51%, from $2,959,000 for the three months ended September 30, 2021 to $4,466,000 for the three months ended September 30, 2022. The increase was primarily due to an increase in revenue and an increase in variable costs as a percent of revenue, as discussed below.
Our gross profit for the three months ended September 30, 2022 was $597,000 compared to $747,000 for the three months ended September 30, 2021, a decrease of 20%. Gross profit margin decreased by 8.4 percentage points from 20.2% for the three months ended September 30, 2021 to 11.8% for the three months ended September 30, 2022 primarily due to an increase in variable costs as a percent of revenue, as described below.
Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $373,000, or 7% of total revenue, for the three months ended September 30, 2022 as compared to $337,000, or 9% of total revenue, for the three months ended September 30, 2021. The increase of $36,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $47,000, a result of investing in future growth. This increase was partially offset by a decrease in overhead of $11,000.
Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $4,093,000, or 81% of total revenue, during the three months ended September 30, 2022 as compared to $2,622,000, or 71% of total revenue, in the three months ended September 30, 2021. The increase in variable costs was primarily due to: (i) an increase in equipment costs of $1,183,000 driven by higher revenue and lower equipment margins, (ii) an increase in warranty of $180,000, primarily due to product quality issues with a supplier’s product that were experienced by several of our customers, (iii) an increase in consulting fees of $52,000, (iv) an increase in travel of $43,000, and (v) an increase in excess and obsolete inventory expense of $29,000, partially offset by, (i) a reduction in shipping and handling costs of $11,000, and (ii) lower outside engineering fees of $6,000.
We continue to focus on gross margin improvement through a combination of efforts, including more disciplined pricing, better absorption of our fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.
Operating Expenses
Operating expenses increased to $1,656,000 for the three months ended September 30, 2022, from $1,190,000 for the three months ended September 30, 2021, an increase of $467,000, or 39%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $426,000, in support of our growth initiatives, (ii) an increase in advertising and marketing expenses of $80,000, partially offset by a decrease in product development of $40,000.
Our increase in SG&A expenses for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, was primarily due to: (i) an increase of $222,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) an increase in bad debt expense of $102,000, resulting from the risk of non-payment by a customer due to defective products from one of our suppliers, (iii) an increase in accounting fees of $102,000, partially due to potential acquisition evaluation costs, (iv) an increase of $70,000 for insurance, and (v) an increase in board fees of $23,000, partially offset by (i) a reduction in business taxes and licenses of $38,000, (ii) a decrease in referral fees and other sales related expenses of $33,000, and (iii) a decrease of $19,000 for investor relations expenses.
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The increase in marketing expenses was primarily due to (i) an increase in salaries and benefits (including stock-based compensation) of $44,000, (ii) an increase in advertising, outside services, and other marketing expenses of $32,000, and (iii) an increase in trade show expenses of $4,000.
The decrease in product development costs was due to (i) a decrease in salaries and benefits (including stock-based compensation) of $23,000, (ii) a decrease in R&D consulting and materials expense of $19,000, offset by, an increase in travel of $3,000.
Operating Income (Loss)
We recognized an operating loss of $1,059,000 for the three months ended September 30, 2022, as compared to an operating loss of $443,000 for the three months ended September 30, 2021, an increase of $616,000. The operating loss for the three months ended September 30, 2022 included $79,000 of non-cash, stock-based compensation, and $7,000 of depreciation expense, compared to $29,000 of non-cash, stock-based compensation and $16,000 of depreciation and amortization expense for the three months ended September 30, 2021. Excluding these non-cash items, our operating loss increased by $576,000.
Other Income (Expense)
We recognized other income (net) of $17,000 for the three months ended September 30, 2022, compared to other income (net) of $35,000 for the three months ended September 30, 2021. Other income for the three months ended September 30, 2022 primarily consisted of interest income on a money market account. Other income for the three months ended September 30, 2021 primarily consisted of rental income from the sub-lease of a portion of our previous facility in Boulder, CO.
Net Income (Loss)
Overall, we recognized a net loss of $1,042,000 for the three months ended September 30, 2022, as compared to a net loss of $408,000 for the three months ended September 30, 2021, an increase of $634,000. The net loss for the three months ended September 30, 2022 included $79,000 of non-cash, stock-based compensation, and $7,000 of depreciation expense, compared to $29,000 of non-cash, stock-based compensation and $16,000 of depreciation and amortization expense for the three months ended September 30, 2021. Excluding these non-cash items, our net loss increased by $594,000.
Comparison of Nine Months Ended September 30, 2022 and September 30, 2021
Revenues and Cost of Goods Sold
Revenue for the nine months ended September 30, 2022 was $9,822,000, compared to $10,582,000 for the nine months ended September 30, 2021, representing a decrease of $760,000, or 7%. The decrease was primarily due to delays experienced earlier in the year with our international supply of products and shipments from vendors which delayed contract fulfillment and revenue recognition on existing contracts. The supply chain impact was largely due to delays at U.S. ports, compounded by a reduction in cargo shipped by air, a shortage of containers, and a shortage of domestic truck delivery availability.
Cost of revenue increased by $620,000, or 8%, from $8,208,000 for the nine months ended September 30, 2021 to $8,828,000 for the nine months ended September 30, 2022. The increase was primarily due to an increase in both fixed costs and variable costs as discussed below.
Gross profit for the nine months ended September 30, 2022 was $994,000 compared to $2,374,000 for the nine months ended September 30, 2021, a decrease of 58%. Gross profit margin decreased by 12.3 percentage points from 22.4% for the nine months ended September 30, 2021 to 10.1% for the nine months ended September 30, 2022 primarily due to lower revenue, higher fixed costs, and an increase in variable costs as a percent of revenue, as described below.
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Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $1,181,000, or 12% of total revenue, for the nine months ended September 30, 2022 as compared to $1,032,000, or 10% of total revenue, for the nine months ended September 30, 2021. The increase of $150,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $153,000.
Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $7,647,000, or 78% of total revenue, in the nine months ended September 30, 2022 as compared to $7,177,000, or 68% of total revenue, in the nine months ended September 30, 2021. The increase in variable costs was primarily due to: (i) an increase in warranty of $162,000, primarily due to quality issues with a supplier’s product that were experienced by several of our customers, (ii) an increase in travel of $140,000, (iii) an increase in equipment costs of $74,000 primarily as a result of lower margins, (iv) an increase in excess and obsolete inventory expense of $61,000, (v) an increase in other variable costs of $57,000, and (vi) an increase in outside engineering fees of $12,000, offset by a decrease in shipping and handling of $34,000.
We continue to focus on gross margin improvement through a combination of efforts, including more disciplined pricing, better absorption of our fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.
Operating Expenses
Operating expenses increased to $5,435,000 for the nine months ended September 30, 2022, from $3,386,000 for the nine months ended September 30, 2021, an increase of $2,049,000, or 61%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $1,191,000, in support of our growth initiatives, and (ii) an increase in advertising and marketing expenses of $296,000, (iii) a goodwill impairment charge of $631,000, offset by a decrease in product development of $68,000.
The increase in SG&A expenses for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, was primarily due to: (i) an increase of $760,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) an increase in accounting and other professional fees of $216,000, (iii) an increase in insurance costs of $189,000, (iv) a $73,000 increase for board fees, (v) an increase of $70,000 in bad debt expense, and (vi) an increase in travel of $63,000, offset by (i) a decrease of $80,000 for commissions, referral fees, and other sales related expenses, (ii) a decrease in business taxes and licenses of $69,000, and (iii) a decrease in depreciation of $29,000.
The increase in marketing expenses was primarily due to (i) an increase in salaries and benefits (including stock-based compensation) of $137,000, (ii) an increase in advertising, outside services, and other promotional marketing expenses of $117,000, and (iii) an increase in trade show expenses of $42,000.
The decrease in product development costs was due to (i) a decrease in salaries and benefits (including stock-based compensation) of $47,000, and (ii) a decrease in R&D materials and service expenses of $35,000, offset by an increase in travel of $14,000.
As further discussed in Note 1, on June 30, 2022, we performed a quantitative analysis for potential impairment of our goodwill, by comparing the Company’s fair value to its carrying value as of June 30, 2022. Based on this analysis, the Company determined that its carrying value exceeded its fair value. As a result, the Company recorded a non-cash goodwill impairment charge of $631,000 at June 30, 2022. No income tax benefit related to this goodwill impairment charge was recorded at June 30, 2022.
Operating Income (Loss)
We recognized an operating loss of $4,442,000 for the nine months ended September 30, 2022, as compared to an operating loss of $1,012,000 for the nine months ended September 30, 2021, an increase of $3,429,000, or 339%. The operating loss for the nine months ended September 30, 2022 included $267,000 of non-cash, stock-based compensation, $20,000 of depreciation expense, and $631,000 for a non-cash goodwill impairment charge, compared to $160,000 of non-cash, stock-based compensation and $49,000 of depreciation and amortization expense for the nine months ended September 30, 2021. Excluding these non-cash items, our operating loss increased by $2,720,000, or 339%.
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Other Income (Expense)
We recognized other income (net) of $216,000 for the nine months ended September 30, 2022, compared to other income (net) of $76,000 for the nine months ended September 30, 2021. Other income for the nine months ended September 30, 2022 consisted of income from an insurance settlement of $185,000 and interest income of $25,000. Other income for the nine months ended September 30, 2021 primarily consisted of income of $138,000 related to the Employee Retention Credit as part of the CARES act, $48,000 for rental income from the sub-lease of a portion of our facility, offset by $107,000 in expense related to the settlement of litigation with a former employee.
Net Income (Loss)
Overall, we recognized a net loss of $4,226,000 for the nine months ended September 30, 2022, as compared to a net loss of $936,000 for the nine months ended September 30, 2021, an increase of $3,290,000, or 351%. The net loss for the nine months ended September 30, 2022 included $267,000 of non-cash, stock-based compensation, $20,000 of depreciation expense, and $631,000 for a non-cash goodwill impairment charge, compared to $227,000 of non-cash, stock-based compensation and $49,000 of depreciation and amortization expense for the nine months ended September 30, 2021. Excluding these non-cash items, our net loss increased by $2,648,000.
Financial Condition, Liquidity and Capital Resources
Cash, Cash Equivalents
As of September 30, 2022, we had cash and cash equivalents of $21,084,000, compared to cash and cash equivalents of $2,160,000 as of December 31, 2021. The $18,924,000 increase in cash and cash equivalents during the nine months ended September 30, 2022, was primarily the result of cash proceeds from the sale of common stock and warrants of $21,711,000, offset by the redemption of series B preferred stock and interest of $2,016,000, and cash used in operations of $743,000. Our cash is held in bank depository accounts in certain financial institutions. During the nine months ended September 30, 2022, we held deposits in financial institutions that exceeded the federally insured amount.
As of September 30, 2022, we had accounts receivable (net of allowance for doubtful accounts) of $77,000, inventory (net of excess and obsolete allowance) of $615,000, and prepaid expenses of $1,102,000 (including $760,000 in advance payments on inventory purchases). While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability especially since most of our customers are funded on an as-needed basis to complete facility construction. We expect our exposure to accounts receivable risk to increase as we continue to pursue larger projects.
As of September 30, 2022, we had total accounts payable and accrued expenses of $2,256,000, deferred revenue of $4,436,000, accrued equity compensation of $70,000, other current liabilities of $37,000 and the current portion of operating lease liability of $116,000. As of September 30, 2022, we had working capital of $15,963,000, compared to a working capital deficit of $415,000 as of December 31, 2021. The increase in our working capital was primarily related to (i) an increase in cash of $18,924,000, and (ii) an increase in inventory of $236,000, offset by (i) an increase in deferred revenue of $1,596,000, (ii) an increase in accounts payable and accrued liabilities of $911,000, (iii) a decrease in prepaid expense and other assets of $172,000, and (iv) a decrease in accounts receivable of $102,000.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
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Summary of Cash Flows
The following summarizes our approximate cash flows for the nine months ended September 30, 2022 and September 30, 2021:
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (743,000 | ) | $ | (1,761,000 | ) | ||
| Net cash used in investing activities | (28,000 | ) | (14,000 | ) | ||||
| Net cash provided by financing activities | 19,695,000 | 1,774,000 | ||||||
| Net increase in cash | $ | 18,924,000 | $ | (1,000 | ) | |||
Operating Activities
We incurred a net loss for the nine months ended September 30, 2022 of $4,226,000 and have an accumulated deficit of $33,007,000 as of September 30, 2022.
Cash used in operations for the nine months ended September 30, 2022 was $743,000 compared to $1,761,000 for the nine months ended September 30, 2021, a decrease of $1,018,000.
The decrease in cash used in operating activities during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, was primarily attributable to: (i) an increase in cash used to fund working capital of $3,539,000, (ii) an increase in net loss of $3,290,000, and (iii) an increase in non-cash operating charges of $768,000.
The increase in our working capital was primarily related to (i) an increase in cash of $18,924,000, and (ii) an increase in inventory of $236,000, offset by (i) an increase in deferred revenue of $1,596,000, (ii) an increase in accounts payable and accrued liabilities of $911,000, (iii) a decrease in prepaid expense and other assets of $172,000, and (iv) a decrease in accounts receivable of $102,000.
The increase in non-cash operating charges was primarily due to goodwill impairment charges of $631,000 and an increase in share-based compensation.
Investing Activities
The $28,000 cash used in investing activities during the nine months ended September 30, 2022 was related to the purchase of property and equipment of $30,000, offset by proceeds from the sale of property and equipment of $2,000. Cash used in investing activities during the nine months ended September 30, 2021 of $14,000 was related to the purchase of property and equipment of $15,000, offset by proceeds from the sale of property and equipment of $1,000.
Financing Activities
Cash flows from financing activities during the nine months ended September 30, 2022, was the result of cash proceeds from the sale of common stock and warrants (net of issuance costs) of $21,711,000, offset by a cash payment of $2,016,000 for the redemption of series B preferred stock, including related interest. Cash flows from financing activities during the nine months ended September 30, 2021, was the result of cash proceeds from the sale of preferred stock and warrant (net of issuance costs) of $1,260,000 and proceeds from a note payable of $514,000.
During the nine months ended September 30, 2021, the Company entered into a note payable with its current bank in the principal amount of $514,200, for working capital purposes.
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Common Stock Equity Offering
On February 10, 2022, the Company signed a firm commitment underwriting agreement for the public offering of shares of common stock and warrants, which closed on February 15, 2022. The Company received net proceeds of approximately $21,711,000 for the sale of 5,811,138 shares of common stock and 6,572,808 warrants, each warrant to purchase one share of common stock for five years, exercisable immediately, at an exercise price of $5.00. The Company also issued to the representative of the underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.16, during the period commencing August 9, 2022, and expiring on February 10, 2027.
The net proceeds from the offering will be used to advance the Company’s organic growth and new product initiatives, to pursue select acquisitions, and for general corporate and working capital purposes. In connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol “CEAD” and our warrants under the symbol “CEADW”. As a result, effective February 10, 2022, trading of both shares of the Company’s common stock and certain of the Company’s warrants commenced on the Nasdaq.
Inflation
To date, we have experienced and are likely to continue to face inflationary increases on the cost of products, which may adversely affect our margins and financial results, and the pricing of our service and product supply contracts. The inflationary pressures are in both the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate. This inflation is reflected in higher wages, increased pricing of equipment and other products that we have contracted to provide to our customers, and generally higher prices across all sectors of the economy. As we move forward, we plan to continuously monitor our various contract terms and may decide to add clauses that will permit us to adjust pricing if inflation and price increase pressures on us will impact our ability to perform our contracts and maintain our margins.
Contractual Payment Obligations
As of September 30, 2022, 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 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, 2022, we had no off-balance sheet arrangements. During the nine months ended September 30, 2022, 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.
Recent Developments
Refer to Note 13 - Subsequent Events of the notes to condensed consolidated financial statements, included as part of this Quarterly Report for certain significant events occurring since September 30, 2022.
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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, 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 weakness 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, 2021 filed with the SEC, our disclosure controls and procedures were not effective as of September 30, 2022.
We did not maintain effective controls over certain aspects of the financial reporting process because: (i) we lack a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements, (ii) there is inadequate segregation of duties due to our limited number of accounting personnel, and (iii) we have insufficient controls and processes in place to adequately verify the accuracy and completeness of spreadsheets that we use for a variety of purposes including revenue, taxes, stock-based compensation and other areas, and place significant reliance on, for our financial reporting.
We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. We are committed to continuing to improve our financial organization including, without limitation, expanding our accounting staff and improving our systems and controls to reduce our reliance on the manual nature of our existing systems. However, due to our size and our financial resources, remediating the several identified weaknesses has not been possible and may not be economically feasible now or in the future.
Changes in Internal Control over Financial Reporting
There were no changes identified in connection with our internal control over financial reporting during the three months ended September 30, 2022, 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
We are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. We have and will continue to have commercial disputes arising in the ordinary course of our business.
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, 2021 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
None.
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, 2022 | By: | /s/ Anthony K. McDonald |
| Anthony K. McDonald | ||
| Chief Executive Officer and President | ||
| (Principal Executive Officer) | ||
| Dated: November 14, 2022 | By: | /s/ Ian K. Patel |
| Ian K. Patel | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
| 42 |
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Anthony K. McDonald, the Chief Executive Officer of CEA Industries Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of CEA Industries Inc. for the quarterly period ended September 30, 2022;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated November 14, 2022.
| By: | /s/ Anthony K. McDonald | |
Anthony K. McDonald Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Ian K. Patel, the Principal Financial and Accounting Officer of CEA Industries Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of CEA Industries Inc. for the quarterly period ended September 30, 2022;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated November 14, 2022.
| By: | /s/ Ian K. Patel | |
Ian K. Patel Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”) of CEA Industries Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Anthony K. McDonald, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| /s/ Anthony K. McDonald | ||
| Name: | Anthony K. McDonald, | |
| Chief Executive Officer | ||
| Date: | November 14, 2022 |
This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”) of CEA Industries Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Ian K. Patel, the Principal Financial and Accounting Officer of the Registrant, hereby certify, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| /s/ Ian K. Patel | ||
| Name: | Ian K. Patel, | |
| Chief Financial Officer | ||
| Date: | November 14, 2022 |
This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.