THE
OFFERING
Common
stock offered:
|
|
5,811,138
shares (assuming no exercise of the over-allotment
option).
|
|
|
|
Warrants
offered:
|
|
Warrants to purchase up to 5,811,138
shares of common stock. Subject
to certain ownership limitations, the warrants are
immediately exercisable and tradable and expire on the fifth anniversary of the date of issuance. Each warrant will have
an exercise price of $ 5.00 for a share of common stock. To better understand the terms of the warrants, you should carefully
read the “Description of the Securities” section of this prospectus. You should also read the form of warrant, which is filed
as an exhibit to the registration statement that includes this prospectus.
|
|
|
|
Common
stock to be outstanding after this offering:
|
|
7,415,340
shares (or 8,287,010 shares if the underwriters exercise their over-allotment option in full).
If the warrants are exercised in full, then there will be 13,226,478 shares outstanding (or
14,969,818 shares if the underwriters exercise their over-allotment option in full).
|
|
|
|
Over-allotment
option:
|
|
We
have granted a 45-day option to the representative of the underwriters to purchase up to 871,670 additional shares of common stock,
representing 15% of the shares of common stock sold in the offering and/or up to 871,670 additional warrants, representing 15%
of the warrants sold in the offering. The securities may be purchased separately.
The
purchase price to be paid per additional share of common stock by the underwriters shall be equal to the public offering price of
one share of common stock less the underwriting discount, and the purchase price to be paid per additional warrant by the underwriters
shall be $0.0093.
|
|
|
|
Use
of proceeds:
|
|
We
estimate that the net proceeds to us from this offering will be approximately $21,805,500,
or approximately $25,153,500 if the underwriters exercise their over-allotment
option in full).
We
intend to use a portion of the net proceeds of this offering for redemption of 1,650 shares of our Series B Preferred Stock, and
the remaining proceeds for working capital and other general corporate purposes. See “Use of Proceeds.”
|
|
|
|
Risk
factors:
|
|
You
should read the “Risk Factors” section of this prospectus beginning on page 9 for a discussion of factors to consider
carefully before deciding to invest in shares of our common stock and warrants.
|
|
|
|
Nasdaq symbols:
|
|
CEAD
CEADW
|
Our shares of common stock
outstanding after this offering is based on 1,604,202 shares outstanding as of February 10, 2022, adjusted for the reverse split
of the common stock that took effect on January 27, 2022. Unless we indicate otherwise or the context otherwise requires, all information
in this prospectus:
|
●
|
assumes
no exercise by the underwriters of their over-allotment option to purchase additional shares of common stock and/or warrants to purchase shares of common stock to cover over-allotments;
|
|
|
|
|
●
|
assumes
no exercise of the representative’s warrants to be issued to the representative of the underwriters in this offering;
|
|
|
|
|
●
|
assumes
no exercise of any of the warrants sold in the offering, including any per-funded warrants in lieu of the shares of common stock
offered;
|
|
|
|
|
●
|
gives
effect to the 1-for- 150 reverse stock split with respect to our common stock;
|
|
|
|
|
●
|
gives
effect to the redemption of the Series A Preferred Stock, which took effect on November 4,
2021;
|
|
|
|
|
●
|
excludes 532,688 shares of common stock and 532,688 warrants issuable upon the conversion of 1,650 shares of our
Series B Preferred Stock;
|
|
|
|
|
●
|
excludes
219,090 shares of common stock issuable upon the exercise of outstanding exercisable options at a weighted exercise price of $10.51
per share;
|
|
|
|
|
●
|
excludes
227,719 shares of common stock issuable upon the exercise of outstanding warrants at a weighted exercise price of $9.59 per share;
and
|
|
|
|
|
●
|
excludes
610,415 shares of common stock reserved for future issuance pursuant to our 2017 and 2021 equity incentive plans.
|
Market
and Industry Data
Unless
otherwise indicated, information contained in this prospectus concerning our industry, competitive position and the markets in which
we operate is based on information from independent industry and research organizations, other third-party sources and management estimates.
Management estimates are derived from publicly available information released by independent industry analysts and other third-party
sources, as well as data from our internal research, and are based on assumptions we made upon reviewing such data, and our experience
in, and knowledge of, such industry and markets, which we believe to be reasonable. In addition, projections, assumptions and estimates
of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk
due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking
Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the
independent parties and by us.
SUMMARY
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The
following tables set forth our summary historical consolidated financial data as of, and for the periods ended on, the dates indicated.
The
summary consolidated statements of operations data for the years ended December 31, 2020 and 2019 are derived from our audited consolidated
financial statements and notes that are included elsewhere in this prospectus.
The
summary consolidated statements of operations data for the three and nine months ended September, 30, 2021 and 2020 and the summary consolidated
balance sheet data as of September 30, 2021, are derived from our unaudited interim consolidated financial statements and notes that
are included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements in accordance with generally
accepted accounting principles (GAAP) and on the same basis as the audited consolidated financial statements. Our historical results
are not necessarily indicative of our results in any future period and results from our interim period may not necessarily be indicative
of the results of the entire year. Pro forma share and per share amounts presented herein reflect the implementation of the 1-for-150
reverse stock split as if it had occurred at the beginning of the earliest period presented.
|
|
Historical
|
|
|
Historical
|
|
|
Historical
|
|
|
As Adjusted(1)
|
|
|
|
As of
December 31,
|
|
|
As of
December 31,
|
|
|
As of
September 30
|
|
|
As of
September 30
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2021
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
2,561,268
|
|
|
$
|
3,683,293
|
|
|
$
|
3,953,597
|
|
|
$
|
23,779,097
|
|
Total assets
|
|
|
4,047,318
|
|
|
|
4,813,266
|
|
|
|
4,908,956
|
|
|
|
24,734,456
|
|
Current liabilities
|
|
|
3,998,740
|
|
|
|
5,903,689
|
|
|
|
5,117,776
|
|
|
|
5,117,776
|
|
Total liabilities
|
|
|
4,402,949
|
|
|
|
6,146,964
|
|
|
|
5,672,322
|
|
|
|
5,672,322
|
|
Total temporary equity
|
|
|
-
|
|
|
|
-
|
|
|
|
2,596,447
|
|
|
|
616,447
|
|
Total shareholders (deficit) equity
|
|
|
(355,631
|
)
|
|
|
(1,333,698
|
)
|
|
|
(3,359,813
|
)
|
|
|
18,445,687
|
|
Total liabilities and shareholders (deficit) equity
|
|
$
|
4,047,318
|
|
|
$
|
4,813,266
|
|
|
$
|
4,908,956
|
|
|
$
|
24,734,456
|
|
(1) Gives effect to this offering and gives effect
to the cash redemption of 1,650 shares of our Series B Preferred Stock for approximately $2.0 million after the closing of the offering.
Assumes net proceeds to us from this offering of $21,805,500, based on a public offering price of $4.13 for each
share of common stock and warrant, on a one for one basis. See “Use of Proceeds.”
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding
future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” All statements other
than statements of historical facts contained in this prospectus may be forward-looking statements. These forward-looking statements
can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,”
“continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,”
“plans,” “may,” “will,” “would” or “should” or, in each case, their negative
or other variations or comparable terminology. They appear in a number of places throughout this prospectus, and include statements regarding
our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity,
prospects, growth, strategies, future acquisitions and the industry in which we operate.
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, including what is necessary to protect our staff and the staff of our customers in the conduct of our business;
|
|
|
|
|
●
|
the
overall impact of the COVID-19 pandemic on the business climate in our industry and the willingness of our customers to undertake
projects in light of economic uncertainties;
|
|
|
|
|
●
|
our
overall financial condition, including our reduced revenue and business disruption, due to the COVID-19 pandemic business and economic
response and its consequences;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
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
continuation of normal supply of products from our suppliers;
|
|
|
|
|
●
|
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 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.
|
These
factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.
Although
we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking
statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and
industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this
prospectus. The matters summarized under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus could cause
our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of
operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained
in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.
In
light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking
statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any
forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect new information,
future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not
intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be
viewed as historical data.
RISK
FACTORS
Investing
in our common stock and warrants involves significant risks. Certain factors may have a material adverse effect on our business, financial
condition, and results of operations. You should carefully consider the risks and uncertainties described below, in addition to other
information contained in this prospectus, including our consolidated financial statements and related notes. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe
are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs,
our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event,
the trading price of our common stock and/or warrants could decline, and you could lose part or all of your investment.
Risks
Relating to Our Business
Our
revenues have been limited, and we will need to obtain financing for future growth, and possibly our operations, which may not be available
to us.
Historically,
we have raised equity and debt capital to support our operations. We anticipate we will require additional cash resources to finance
our growth or other future developments, including for the launch of new products and services and for strategic investments or acquisitions
we may decide to pursue. As of December 31, 2020, we had a working capital deficit of approximately $2,220,000 and our cash balance was
$2,285,000, and as of September 30, 2021 we had a working capital deficit of approximately $1.2 million and our cash balance was $2.3
million. We will need additional funds to complete the overall development of our business plan to achieve a sustainable sales level
where ongoing operations can be funded from operations. The precise amount and timing of our funding needs cannot be determined accurately
at this time, and will depend on a number of factors, including market demand for our products and services, the success of our product
development efforts, the timing of receipts for customer payments, the management of working capital, and the continuation of normal
payment terms and conditions for our purchase of goods and services. The continuation of normal payment terms and conditions with our
customers and suppliers, including our ability to obtain advance payments from our customers, significantly impacts our ability to fund
our ongoing operations. Without the proceeds from this offering, we believe our current cash balances and cash flow from operations will
be insufficient to fund our operations and growth for the next 12 months.
This
offering and any future equity offering will result in dilution to our shareholders; obtaining borrowed capital may not be possible for
us.
To
the extent that we raise the equity in this offering and any future additional equity capital existing shareholders will experience a
dilution in the voting power and ownership of their common stock, and our earnings per share, if any, would be negatively impacted. Any
borrowings made to finance operations, which are difficult to obtain from most traditional banks due to the federal laws prohibiting
cannabis, could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest
rates on borrowings that are subject to interest rate fluctuations. The amount and timing of such additional financing needs will vary
principally depending on the timing of new product launches, investments and/or acquisitions, and the amount of cash flow from our operations.
If our resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain
a credit facility.
The
COVID-19 pandemic has adversely impacted, and may continue to adversely impact, the Company’s operations and financial results.
The
COVID-19 pandemic has resulted in significant economic uncertainty and disruption. The extent to which our business and financial results
are impacted will depend on numerous evolving factors which are uncertain and cannot be predicted, including: the duration and scope
of the pandemic; governmental, business and individuals’ actions taken in response; the effect on our customers and customers’
demand for our services and products; the effect on our suppliers and disruptions to the global supply chain; our ability to sell and
manufacture our products; disruptions to our operations resulting from the illness of any of our employees; restrictions or disruptions
to transportation, including reduced availability of ground or air transport; the ability of our customers to pay for our services and
products; and any closures of our facilities, our suppliers’ facilities, and our customers’ facilities. The effects of the
COVID-19 pandemic have resulted and will result in additional expenses and lost or delayed revenue. We have been experiencing disruptions
to our business as we implement modifications to travel, work locations and cancellation of events, among other modifications. In addition,
the change in macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange
rates, commodity and energy prices, and interest rates. All of the factors mentioned above are also expected to have an inflationary
pressure on our cost of goods. Even after the COVID-19 pandemic subsides, we may continue to experience adverse impacts to our business
and financial results due to any economic recession or depression that occurs, and due to any major public health crises that may occur
in the future.
Although
our current accounting estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual
conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular,
a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration,
as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. As a result,
our accounting estimates and assumptions may change over time in response to COVID-19. Such changes could result in future impairments
of goodwill, intangible assets, long-lived assets, incremental credit losses on accounts receivable, or excess and obsolete inventory.
Any of these events could amplify the other risks and uncertainties described in in this Annual Report and could have an adverse effect
on our business and financial results.
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
We
have determined that our ability to continue as a going concern is dependent on raising additional capital to fund our operations and
ultimately on generating future profits. Our independent registered public accounting firm has included a “going concern”
explanatory paragraph in its opinion on our financial statements, expressing substantial doubt that we can continue as an ongoing business
for the next 12 months. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.
If we are unable to successfully raise the capital we need, we may need to and believe we can reduce the scope of our business to fully
satisfy our future short-term liquidity requirements. If we cannot raise additional capital or reduce the scope of our business, we may
be otherwise unable to achieve our goals or continue our operations. While we believe that we will be able to raise the capital we need
to continue our operations, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity
issues or eliminate our operating losses.
Even
if we obtain more customers, there is no assurance that we will be able to convert our backlog into revenue or make a profit.
We
may be unable to convert the full contract value of our backlog in a timely manner, or at all. The performance of our obligations under
a sales contract, and the timing of our revenue recognition, is dependent upon our customers’ ability to secure funding and real
estate, obtain a license and then build their cultivation facility so they can use our services and take possession of the equipment
we provide. Our sales contracts currently are not time specific as to when our customers are required to take delivery of our services
and equipment. More recently, we determined that some of our new construction facility projects are becoming larger and more complex
and, as a result, delays were more likely due to licensing and permitting, lack of or delay in funding, staged facility construction,
and/or the shifting priorities of certain customers with multiple facility projects in progress at one time. Even if we obtain more customers,
or increase the average size of our projects, there is no guarantee that we will be able to generate a profit. Because we are a small
company with limited capital, limited products and services, and limited marketing activities, we may not be able to generate sufficient
revenue to operate profitably. If we cannot operate profitably, we may have to suspend or cease operations.
We
may extend credit to our customers in the future and, if we are unable to collect these accounts receivable, our future profitability
could be adversely impacted.
Historically,
we had little exposure to the collection risk on accounts receivable since we typically received payments from our customers in advance
of our performance of services or delivery of equipment. However, in certain situations, especially as we expand our products and services
offering for a customer’s entire facility lifecycle, we may extend credit to our customers in which case we are at risk for the
collection of account receivables. Accordingly, we will be at greater risk for the collection of account receivables. Our credit arrangements
are negotiated and may not protect us if a customer develops operational difficulty or incurs operating losses which could lead to a
bankruptcy. In these cases, we may lose most of the outstanding balance due. In addition, we are typically not able to insure our accounts
receivables. The risk is that we derive our revenue and profits from selling products and services to the emerging cannabis industry.
The failure of our customers to pay in full amounts due to us could negatively affect future profitability.
Because
we currently do not maintain effective internal controls over financial reporting, we may be unable to accurately report our financial
results or prevent fraud, and investor confidence and the market price of our common stock may, therefore, be adversely impacted.
Our
reporting obligations as a public company place significant requirements on our management, operational and financial resources, and
systems, and will continue to do so for the foreseeable future. Annually, we are required to prepare a management report on our management’s
assessment of the effectiveness of our internal control over financial reporting. Management has concluded that our internal control
over financial reporting is currently not effective and shall report such in management’s report in our annual report on Form 10-K.
In the event that our status with the U.S. Securities and Exchange Commission (“SEC”) changes to that of an accelerated filer
from a smaller reporting company, our independent registered public accounting firm will be required to attest to and report on our management’s
assessment of the effectiveness of our internal control over financial reporting. Under such circumstances, even if our management concludes
that our internal control over financial reporting is effective, our independent registered public accounting firm may still decline
to attest to our management’s assessment, or may issue a report that is qualified, if it is not satisfied with our controls, or
the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently
from us.
We
have identified a material weakness in our internal control over financial reporting and, if we do not remediate the material weakness
or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness
of our financial reporting may be adversely affected.
We
currently do 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 the limitation on the number of our 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. A material weakness is a deficiency or a combination of deficiencies in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements
will not be prevented or detected on a timely basis. If we are unable to achieve effective internal control over financial reporting,
or if our independent registered public accounting firm determines we continue to have a material weakness in our internal control over
financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of
our shares could decline, and our reputation may be damaged.
Our
inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial
condition.
Our
strategy envisions growing our business and expanding within the CEA industry. We plan to expand our product, sales, administrative and
marketing operations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative
resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our
business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise,
and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert
management attention. We cannot assure that we will be able to:
|
●
|
execute
on our business plan and strategy;
|
|
|
|
|
●
|
expand
our products effectively or efficiently or in a timely manner;
|
|
●
|
allocate
our human resources optimally;
|
|
|
|
|
●
|
meet
our capital needs;
|
|
|
|
|
●
|
identify
and hire qualified employees or retain valued employees; or
|
|
|
|
|
●
|
effectively
incorporate the components of any business or product line that we may acquire in our effort to achieve growth.
|
Our
inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating
results and financial condition.
Our
operating results may fluctuate significantly based on customer acceptance of our services and products, industry uncertainty, project
financing concerns, and the licensing and qualification of our prospective customers. As a result, period-to-period comparisons of our
results of operations are unlikely to provide a good indication of our future performance.
Management
expects that, under typical operating conditions, we will experience substantial variations in our revenues and operating results from
quarter to quarter. Our revenue recognition is dependent upon shipment of the equipment portions of our sales contracts, which, in many
cases, may be delayed while our customers complete permitting, prepare their facilities for equipment installation or obtain project
financing. Industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which
are out of our control, make it difficult for us to predict when we will recognize revenue. If customers are unable to obtain licensing,
permitting or financing, our sales and revenue will decline, resulting in a reduction in our operating income or possible increase in
losses. Also, because of the coronavirus responses and our own cost savings actions, we cannot predict the course of our revenues and
operating results with accuracy at this time.
Our
business is focused on providing engineering design, and equipment integration into CEA facilities. To date, the majority of our revenues
have been generated from clients that operate in the legal cannabis industry in the United States and Canada.
Although
we are implementing a plan to broaden our market reach beyond the legal cannabis industry and are placing sales efforts on expansion
into the rapidly growing non-cannabis CEA vertical farming segment, we continue to provide the majority of our facility engineering design
and equipment integration and solutions to facilities in the legal cannabis industry.
Now
that the non-cannabis CEA segment is gaining strong momentum in the agricultural industry, and since almost all of the equipment systems
that we sell originate in the general horticulture industry and are agnostic to the crop grown in a facility, we believe that the proportion
of non-cannabis revenues will increase over time, commensurate with our sales efforts and success. Notwithstanding our expansion plans,
a decrease in demand in the legal cannabis industry could have a material adverse effect on our revenues and the success of our business.
The
cannabis industry has been an emerging industry over the last several years, and cannabis has only been legalized in some states and
remains illegal in other states and under U.S. federal law, making it difficult to accurately forecast the demand for our engineering
and product solutions in this specific industry. Losing clients from the cannabis industry may have a material adverse effect on our
revenues and the success of our business.
The
cannabis industry is still in its early stages of development in the United States and while the vast majority of U.S. states now have
legal cannabis and it remains illegal under U.S. federal law, making it difficult to accurately predict and forecast the demand for our
engineering and product solutions. If the U.S. Department of Justice (“DOJ”) did take action against the cannabis industry,
we believe those of our clients operating in the legal cannabis industry would be lost to us.
In
our operations, we rely heavily upon the various U.S. federal governmental memos issued in the past, including the memorandum issued
by the DOJ on October 19, 2009, known as the “Ogden Memorandum”, the memorandum issued by the DOJ on August 29, 2013, known
as the “Cole Memorandum” and other guidance, in the attempt to keep our operations acceptable to those state and federal
entities that regulate, enforce, or choose to defer enforcement of certain current regulations regarding cannabis. By doing this, we
seek to avoid the many possible consequences of providing grow equipment to the cannabis industry as our customers continue to comply
with their state and local jurisdictional laws, rules and regulations and the interpretations of relevant authorities.
The
legal cannabis industry is not yet well-developed, and many aspects of this industry’s development and evolution cannot be accurately
predicted, and therefore, the loss of any of our current clients or our inability to capture new client contracts may have a material
adverse effect on our business. While we have attempted to identify our business risks in the legal cannabis industry, you should carefully
consider that there are other risks that cannot be foreseen or are not described in this prospectus, which could materially and adversely
affect our business and financial performance.
There
is heightened scrutiny by Canadian regulatory authorities related to the cannabis industry.
We
seek customers in the CEA Canadian market, some of which are cannabis growers. Therefore, our existing and future operations may become
the subject of heightened scrutiny by those regulators and other authorities in Canada that oversee the cannabis industry. As a result,
we may become subject to direct and indirect interaction with public officials in one or both the United States and Canada. No assurance
can be provided that any heightened scrutiny will not in turn lead to the imposition of restrictions on our ability to operate in Canada,
in addition to those described herein.
If
we do not successfully develop additional products and services, or if those products and services are developed but not successfully
commercialized, we could lose revenue opportunities.
Our
future success depends, in part, on our ability to expand our product and service offerings. We are currently investigating a number
of new and improved product opportunities, and we intend to collaborate with manufacturing partners to optimize these products for the
CEA and cannabis market. The processes of identifying and commercializing new products is complex and uncertain, and if we fail to accurately
predict customers’ changing needs and emerging technological trends our business could be harmed. We have already and may have
to continue to commit significant resources to commercializing new products before knowing whether our investments will result in products
the market will accept. We may be unable to differentiate our new products from those of our competitors, and our new products may not
be accepted by the market. There can be no assurance that we will successfully identify additional new product opportunities, develop
and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed
by others will not render our products or technologies obsolete or noncompetitive. Furthermore, we may not execute successfully on commercializing
those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a
lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in revenue and
earnings.
Our
future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially
harm our business.
Our
success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and
services and expanding our commercial customer base. There can be no assurance our sales efforts will be successful. There can be no
assurance that customers will purchase our services or products or that we will continue to expand our customer base. If we are unable
to effectively market or expand our product and service offerings, we will be unable to grow and expand our business or implement our
business strategy. This could materially impair our ability to increase sales and revenue, and materially and adversely affect our margins,
which could harm our business and cause our stock price to decline.
Our
suppliers could fail to fulfill our orders for parts used to assemble our products, which would disrupt our business, increase our costs,
harm our reputation, and potentially cause us to lose our market.
We
depend on third party suppliers around the world, including those in The People’s Republic of China, for materials used to assemble
our products. Any of these suppliers could fail to produce products to our specifications or in a workmanlike manner and may not deliver
the material or products on a timely basis. Our suppliers may also have to obtain inventories of the necessary parts and tools for production.
Any change in our suppliers’ approach to resolving production issues could disrupt our ability to fulfill orders and could also
disrupt our business due to delays in finding new suppliers, providing specifications and testing initial production.
Our
suppliers could experience uncontrollable delays in delivering our products.
We
have experienced some unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to
a significant increase in shipments to U.S. ports, less cargo being shipped by air,, unavailability of truckers and a general shortage
of containers. We expect this to continue for some time. These disruptions are also causing price increases, which may become an inflationary
force in the market place.
Equipment
failures or poor performance may negatively impact our business.
We
rely on third party manufacturers for equipment which we sell or lease. From time to time, such equipment may not perform to specifications
or to our customers’ satisfaction. Such equipment deficiencies may lead to down time impacting our revenue. Further, frequent downtime
at customers’ sites due to equipment failures may result in such customers generating less revenue increasing credit default risk.
In addition, these failures may also result in additional time spent by our personnel decreasing profit margins on certain ancillary
services.
International
trade disputes could result in tariffs and other protectionist measures that could adversely affect the Company’s business.
Tariffs
could increase the cost of our products and the components and raw materials that go into making them. These increased costs could adversely
impact the gross margin that we earn on sales of our products. Tariffs could also make our products more expensive for customers, which
could make our products less competitive and reduce customer demand. Countries may also adopt other protectionist measures that could
limit our ability to offer our products and services.
Our
inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our
financial condition, and our results of operations.
We
may be unable to obtain intellectual property rights to effectively protect our branding, products, and other intangible assets. Our
ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend
against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our
interests. If we are unable to secure intellectual property rights to effectively protect our branding, products, and other intangible
assets, our revenue and earnings, financial condition, or results of operations could be adversely affected.
We
also rely on non-disclosure and non-competition agreements to protect portions of our intellectual property portfolio. There can be no
assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not
otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop competitive
products with similar intellectual property.
We
may become subject to additional regulation of CEA facilities.
Our
engineering and design services and solutions are focused on CEA facilities that are able to grow a wide variety of crops such as leafy
greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables and
small fruits (such as strawberries, blackberries and raspberries), bell peppers, cucumbers, and tomatoes. Some of these crops and their
growing methodologies are subject to regulation by the United States Food and Drug Administration, environmental agencies, public utility
agencies and other federal, state or foreign agencies. Changes to any regulations and laws that complicate the design and engineering
of a subject CEA facility, such as waste water treatment and electricity-related mandates, make it possible that potential related zoning
and enforcement could decrease the demand for our services, and in turn negatively impact our revenues and business opportunities.
The
CEA industry is highly competitive, and we have less capital and resources than many of our competitors, which may give them an advantage
in developing and marketing services and products similar to ours or make our services and products obsolete.
There
are many competitors in the CEA industry, including some companies that focus on the cannabis industry. These companies generally offer
products and services similar or the same as those offered by us. There can be no guarantees that in the future other companies will
not enter this arena by developing products that are in direct competition with us or even superior in quality or price. The barriers
to entry into the CEA industry are not overly significant. Over time we anticipate growth in our competition. Some of our current and
future competition may have longer operating histories, greater name recognition, larger client bases and significantly greater financial,
technical, sales and marketing resources. One or more of these qualities may allow them to respond more quickly than us to market opportunities.
They may be able to devote greater resources to the marketing, promotion and sale of their products and/or services. Competitors may
also adopt more aggressive pricing policies and make more attractive offers to clients, employees, strategic partners, distribution channels
and advertisers. Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market
share.
While
we believe we are better positioned to meet the exacting demands of a controlled cultivation environment through precise temperature,
humidity, light, and process controls and to satisfy the evolving code and regulatory requirements being imposed at the state and local
levels, there can be no assurance that we will be able to successfully compete against these other contractors and suppliers.
We
will be required to attract and retain top quality talent to compete in the marketplace.
We
believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development,
sales and marketing, and finance personnel. Our ability to attract and retain personnel with the requisite credentials, experience and
skills will depend on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional
growth opportunities. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel
could limit our ability to increase sales of existing products and services and launch new product and service offerings.
We
are dependent upon certain key sales, managerial and executive personnel for our future success. If we lose any of our key personnel,
our ability to implement our business strategy could be significantly harmed.
We
depend on the industry knowledge, technical and financial skill, and network of business contacts of certain key employees. Our future
success will depend on the continued service of these key employees or our ability to engage others who are similarly situated in the
industry. While we may have employment agreements with certain of these key employees, they are free to terminate their employment with
us at any time, although they may be subject to certain restrictive covenants on their post-termination activities. We do not carry key-man
life insurance on the lives of our key employees. The departure of any one of our key employees could have a material adverse effect
on our ability to achieve our business objective and maintain the specialized services that we offer our customers.
System
security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services
provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely
affect our stock price.
Experienced
computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information
or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop
and deploy viruses, worms, and other malicious software programs that attack or otherwise exploit any security vulnerabilities of the
products that we may sell in the future, especially our recently launched SentryIQ® sensors, controls and automation platform. The
costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security
vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions,
delays, cessation of service and loss of existing or potential customers that may impede our engineering, sales, manufacturing, distribution
or other critical functions.
Portions
of our IT infrastructure may also experience interruptions, delays or cessations of service or produce errors in connection with systems
integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning
data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource intensive. Such disruptions
could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower profits, or lost customers resulting
from these disruptions could adversely affect our financial results, stock price and reputation.
We
incur significant costs as a result of being a public company, which will make it more difficult for us to achieve profitability.
As
a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements
applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented
by the SEC. These costs will make it more difficult for us to achieve profitability.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could
significantly affect our financial results.
U.S.
generally accepted accounting principles (“GAAP”) and related pronouncements, implementation guidelines and interpretations
with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, revenue recognition, stock-based
compensation, trade promotions, and income taxes are highly complex and involve many subjective assumptions, estimates and judgments
by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our
management could significantly change our reported results.
Our
ability to use net operating losses to offset future taxable income may be subject to limitations.
As
of December 31, 2020, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $19,322,000,
of which $11,196,261 will expire, if not utilized, in the years 2034 through 2037, however, NOLs generated subsequent to December 31,
2017 do not expire but may only be used against taxable income to 80%. In response to the novel coronavirus COVID-19, the Coronavirus
Aid, Relief, and Economic Security Act temporarily repealed the 80% limitation for NOLs arising in 2018, 2019 and 2020. It is uncertain
if and to what extent various states will conform to the newly enacted federal tax law. 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. We have experienced ownership changes in the past and we may experience additional ownership
changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership
change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future operating results
by effectively increasing our future tax obligations.
We
may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions
on our operations.
Part
of our business strategy includes pursuing synergistic acquisitions. We have expanded, and plan to continue to expand, our business by
making strategic acquisitions and regularly seeking suitable acquisition targets to enhance our growth. Material acquisitions, dispositions
and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing business; (ii) the
distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring additional indebtedness;
(iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize
than anticipated; (v) an increase in the scope and complexity of our operations; and (vi) the loss or reduction of control over certain
of our assets.
The
pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for
growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory
to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or
not we consummate such acquisitions.
Risks
Related to the Cannabis Industry
Cannabis
remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis, particularly against our customers,
would likely result in our inability to execute our business plan.
All
but three U.S. states have legalized, to some extent, cannabis for medical purposes. Thirty-seven states, the District of Columbia, Puerto
Rico and Guam have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes (medical states).
Eighteen of those states and the District of Columbia and Northern Mariana have also legalized cannabis for adults for non-medical purposes
(sometimes referred to as adult use). Ten additional states have legalized low-tetrahydrocannabinol (“THC”)/high-CBD extracts
for select medical conditions (CBD states).
Under
U.S. federal law, however, those activities are illegal. Cannabis, other than hemp (defined by the U.S. government as Cannabis sativa
L. with a THC concentration of not more than 0.3% on a dry weight basis), is a Schedule I controlled substance under the U.S. Controlled
Substances Act (21 U.S.C. § 801, et seq.) (the “CSA”),. Even in states or territories that have legalized cannabis to
some extent, the cultivation, possession, and sale of cannabis all violate the CSA and are punishable by imprisonment, substantial fines
and forfeiture. Moreover, individuals and entities may violate federal law if they aid and abet another in violating the CSA, or conspire
with another to violate the law, and violating the CSA is a predicate for certain other crimes, including money laundering laws and the
Racketeer Influenced and Corrupt Organizations Act. The U.S. Supreme Court has ruled that the federal government has the authority to
regulate and criminalize the sale, possession and use of cannabis, even for individual medical purposes, regardless of whether it is
legal under state law. For over six years, however, the U.S. government has not enforced those laws against companies complying with
state cannabis law and their vendors.
The
likelihood of any future adverse enforcement against companies complying with state cannabis laws remains uncertain. In 2018, then-U.S.
Attorney General Jeff Sessions rescinded the DOJ’s previous guidance (the Cole Memo) that had given federal prosecutors discretion
not to enforce federal law in states that legalized cannabis, as long as the state’s legal regime adequately addressed specified
federal priorities. The Sessions Memo, which remains in effect, states that each U.S. Attorney’s Office should follow established
principles that govern all federal prosecutions when deciding which cannabis activities to prosecute. As a result, federal prosecutors
could and still can use their prosecutorial discretion to decide to prosecute even state-legal cannabis activities. Since the Sessions
Memo was issued nearly three years ago, however, U.S. Attorneys have not targeted state law compliant entities. The policy of not prosecuting
companies complying with state cannabis laws is likely to continue under current U.S. Attorney General Merrick Garland. At his confirmation
hearing, Attorney General Garland stated that he did not see enforcement of federal cannabis law as a high priority use of resources
for the DOJ:
“This
is a question of the prioritization of our resources and prosecutorial discretion. It does not seem to me a useful use of limited resources
that we have, to be pursuing prosecutions in states that have legalized and that are regulating the use of marijuana, either medically
or otherwise. I don’t think that’s a useful use. I do think we need to be sure there are no end-runs around the state laws
that criminal enterprises are doing. So that kind of enforcement should be continued. But I don’t think it’s a good use of
our resources, where states have already authorized. That only confuses people, obviously, within the state.”
Additionally,
since 2014, versions of the U.S. omnibus spending bill have included a provision prohibiting the DOJ, which includes the Drug Enforcement
Administration, from using appropriated funds to prevent states from implementing their medical-use cannabis laws. In USA vs. McIntosh,
the U.S. Court of Appeals for the Ninth Circuit held that the provision prohibits the DOJ from spending funds to prosecute individuals
who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with such laws. The court noted that, if the
spending bill provision were not continued, prosecutors could enforce against conduct occurring during the statute of limitations even
while the provision was previously in force. Other courts that have considered the issue have ruled similarly, although courts disagree
about which party bears the burden of proof of showing compliance or noncompliance with state law.
While
the omnibus spending bill affords some protection to medical cannabis businesses, our policies do not prohibit our state-licensed cannabis
customers from engaging in the cannabis business for adult use that is permissible under state and local laws. Consequently, certain
of our customers currently (and may in the future) sell adult-use cannabis, if permitted by such state and local laws now or in the future,
and therefore may be outside any protections extended to medical-use cannabis under the spending bill provision. This could subject our
customers to greater and/or different federal legal and other risks as compared to businesses where cannabis is sold exclusively for
medical use, which could in turn materially adversely affect our business. Furthermore, any change in the federal government’s
enforcement posture with respect to state-licensed cannabis sales, including the enforcement postures of individual federal prosecutors
in judicial districts where we operate, would result in our inability to execute our business plan, and we would likely suffer significant
losses with respect to our customer base, which would adversely affect our operations, cash flow and financial condition.
While
President Biden’s campaign position on cannabis falls short of full legalization, he campaigned on a platform of relaxing enforcement
of cannabis proscriptions, including decriminalization generally. According to the Biden campaign website, it was stated: “A Biden
Administration will support the legalization of cannabis for medical purposes and reschedule cannabis as a CSA Schedule II drug so researchers
can study its positive and negative impacts. This will include allowing the VA to research the use of medical cannabis to treat veteran-specific
health needs.” He pledged to “decriminalize” cannabis, which could prompt his U.S. Attorney General to issue policy
guidance to U.S. Attorneys that they should not enforce federal cannabis prohibition against state law compliant entities and others
legally transacting business with them. While President Biden’s promise to decriminalize likely would mean that the federal government
would not criminally enforce the Schedule II status against state legal entities, and would expand opportunities for cannabis research
in the U.S., the implications of the potential re-scheduling are not entirely clear for state legal commercial cannabis operators. Although
the U.S. Attorney General could issue policy guidance to federal prosecutors that they should not interfere with cannabis businesses
operating in compliance with states’ laws, any such guidance would not have the force of law. The President alone cannot legalize
medical cannabis, and as states have demonstrated, legalizing medical cannabis can take many different forms. While rescheduling cannabis
to the CSA’s Schedule II would ease certain research restrictions, it would not make the state medical or adult-use programs federally
legal.
Furthermore,
while industry observers are hopeful that a Democrat-controlled Senate, along with a Biden presidency, will increase the chances of federal
cannabis policy reform, such as the Marijuana Opportunity Reinvestment and Expungement Act (or MORE Act), which was originally co-sponsored
by now Vice President Harris in the Senate, or banking reform, such as the SAFE Banking Act, which passed the House of Representatives
but has not yet passed the Senate, we cannot provide assurances about the content, timing or chances of passage of a bill legalizing
cannabis and the related aspects of the cannabis business. Accordingly, we cannot predict the timing of any change in federal law or
possible changes in federal enforcement. In the unlikely event that the federal government were to reverse its long-standing hands-off
approach to the state legal cannabis markets and start more broadly enforcing federal law regarding cannabis, we would likely be unable
to execute our business plan, and our business and financial results would be adversely affected.
We
are and will be subject to applicable anti-money laundering laws and regulations.
We
are subject to a variety of laws and regulations in the United States and Canada that involve money laundering, financial recordkeeping
and proceeds of crime, including the U.S. Currency and Foreign 125 Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy
Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and
the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by
governmental authorities in the United States, Canada and internationally. Further, under U.S. federal law, banks or other financial
institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service
could be found guilty of money laundering if certain other elements are met.
Despite
these laws, the FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis-related
businesses without risking FinCEN enforcement. It refers to and incorporates supplementary Cole Memo guidance issued to federal prosecutors
relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA on the same day.
Notwithstanding
former Attorney General Sessions’ revocation of the Cole Memo, the status of the FinCEN Memorandum has not been affected, nor has
the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally
intended for the Cole Memo and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum appears to remain in effect as a standalone
document which explicitly lists the eight enforcement priorities originally cited in the rescinded Cole Memo. Although the FinCEN Memorandum
remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance, it is unclear whether
the current administration will continue to follow the guidelines of the FinCEN Memorandum.
We
face risks related to civil asset forfeiture due to the regulatory environment of the cannabis industry in the United States.
Because
the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry, which are
either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement
and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could
still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture. As
a result, the equipment that we lease to our customers in the United States may be subject to such seizure and forfeiture. Additionally,
a broad interpretation of the law could potentially result in the seizure and forfeiture of proceeds we generate.
Public
Opinion and perception of the cannabis industry may have an adverse effect on our business reputation.
Government
policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in the United
States, Canada, or elsewhere. Public opinion and support for medical and adult-use marijuana has traditionally been inconsistent and
varies from jurisdiction to jurisdiction. While public opinion and support appears to be improving for legalizing medical and adult-use
marijuana, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical
marijuana as opposed to legalization in general). A negative shift in the public’s perception of cannabis in the United States
or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state
jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new state
jurisdictions into which we could expand. Any inability to fully implement our expansion strategy may have a material adverse effect
on our business, results of operations or prospects.
We
may have difficulty accessing bankruptcy courts.
Because
cannabis is illegal under federal law, federal bankruptcy protection is currently not available to parties who engage in the cannabis
industry or cannabis-related businesses. Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that
businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification
that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the CSA.
Therefore, we may not be able to seek the protection of the bankruptcy courts, and this could materially affect our business or our ability
to obtain credit.
Our
business efforts in Canada present opportunities, but no assurance can be given that our revenues and earnings will be improved on the
basis of our addressing the Canadian business.
In
addition to U.S. operations, we seek to sell products and services to CEA and cannabis growers in Canada, where medical and recreational
cannabis has been legal since 2018 across the country both federally and provincially (subject to certain restrictions relating to CBD).
We believe Canada, with its federal legal regime, represents a business opportunity for us, but we have noticed softening demand from
Canadian prospects due, in part, to limited capital being available for new facilities and an overbuilding of cultivation capacity following
federal legalization. As a result, Canada now appears to be in a period of correction. There can be no assurance that we will be able
to make any additional sales of products or services in Canada.
Variations
in state and local regulation and enforcement in states that have legalized cannabis may impose certain restrictions on cannabis-related
activities that may adversely impact our revenue and earnings.
Variations
exist among states that have legalized, decriminalized, or created medical cannabis programs. For example, Alaska and Colorado have limits
on the number of cannabis plants that can be grown by an individual in the home. In most states, the cultivation of cannabis for personal
use continues to be prohibited except by those states that allow small-scale cultivation by the individual in possession of cannabis
for medicinal purposes or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of cannabis
may indirectly and adversely affect our revenue and earnings.
The
cannabis industry could face strong opposition from other industries.
We
believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis
industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including recreational
marijuana as an alternative to alcohol, and medical marijuana as an alternative to various commercial pharmaceuticals. Many industries
that could view the emerging cannabis industry as an economic threat are well established, with vast economic and United States federal
and state lobbying resources. It is possible that companies within these industries could use their resources to attempt to slow or reverse
legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives that would be beneficial
to the cannabis industry could have a detrimental impact on our clients and, in turn on our operations.
Changing
legislation and evolving interpretations of law, which could negatively impact our clients and, in turn, our operations.
Laws
and regulations affecting the medical and adult-use marijuana industry are constantly changing, which could detrimentally affect our
clients involved in that industry and, in turn, our operations. Local, state and federal cannabis laws and regulations are often broad
in scope and subject to constant evolution and inconsistent interpretations, which could require our clients and ourselves to incur substantial
costs associated with modification of operations to ensure compliance. In addition, violations of these laws, or allegations of such
violations, could disrupt our clients’ business and result in a material adverse effect on our operations. In addition, it is possible
that regulations may be enacted in the future that will limit the amount of cannabis growth or related products that our commercial clients
are authorized to produce. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can it
determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have
on our operations.
The
fact that we provide products and services to companies in the cannabis industry may impact our ability to raise adequate capital for
future expansion, which could hinder our growth potential as well as our revenue and earnings.
A
very large percentage, if not all, of our customers are operating in an industry that is still illegal under U.S. federal law. With the
lingering uncertainty of federal enforcement, many potential investors, especially institutional investors, either refuse to invest in
the industry or are very reluctant to make such investments. Our inability to raise adequate capital for future expansion could substantially
hinder our growth potential as well as our revenue and earnings.
Our
success may be dependent on additional states legalizing recreational and/or medical cannabis use.
Continued
development of the recreational and medical cannabis markets is dependent upon continued legislative authorization of cannabis at the
state level for recreational and/or medical purposes. Any number of factors could slow or halt the progress. Furthermore, progress, while
encouraging, is not assured, and the process normally encounters setbacks before achieving success. While there may be ample public support
for legislative proposals, key support must be created in the relevant legislative committee or a bill may never advance to a vote. Numerous
factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of cannabis for recreational
and/or medical purposes, which would limit the overall available market for our products and services, which could adversely impact our
business, revenue and earnings.
Our
customers may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.
As
a result of the federal illegality of marijuana, many banks do not provide banking services to the cultivation and distribution segments
of the cannabis industry, the argument being that they would be accepting for deposit funds derived from the operation of a federally
illegal business. On February 14, 2014, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”)
released guidance to banks “clarifying Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to
provide services to marijuana-related businesses.” In addition, there have been legislative attempts to allow banks to transact
business with state-authorized cannabis businesses. While these are positive developments, there can be no assurance that legislation
will be successful, or that, even with the FinCEN guidance, banks will decide to do business with cannabis companies, or that, in the
absence of actual legislation, state and federal banking regulators will not strictly enforce current prohibitions on banks handling
funds generated from an activity that is illegal under federal law. Moreover, the FinCEN guidance may be rescinded or amended at any
time in order to reconcile the now conflicting guidance of the Sessions Memo. At present, few banks have taken advantage of the FinCEN
guidance, resulting in many cannabis businesses still operating on an all-cash basis. This makes it difficult for cannabis businesses
to manage their businesses, pay their employees and taxes, and having so much cash on hand also creates significant public safety issues.
Many ancillary businesses that service cannabis businesses have to deal with the unpredictability of their clients or customers not having
a bank account. The inability of our customers to open bank accounts and otherwise access the services of banks, including obtaining
credit, may make it more difficult and costly for them to operate and more difficult for such customers to purchase our products and
services, which could materially harm our business, revenue and earnings.
We
are subject to certain federal regulations relating to cash reporting.
The
BSA, enforced by FinCEN, requires us to report currency transactions in excess of $10,000, including identification of the customer by
name and social security number, to the Internal Revenue Service. This regulation also requires us to report certain suspicious activity,
including any transaction that exceeds $5,000 that we know, suspect or have reason to believe involves funds from illegal activity or
is designed to evade federal regulations or reporting requirements and to verify sources of funds. Substantial penalties can be imposed
against us if we fail to comply with this regulation. If we fail to comply with these laws and regulations, the imposition of a substantial
penalty could have a material adverse effect on our business, financial condition and results of operations.
State
and municipal governments in which our customers do business or seek to do business may have or may adopt laws that adversely affect
our ability to do business with such customers.
While
the federal government has the right to regulate and criminalize cannabis, state and municipal governments may adopt or amend additional
laws and regulations that further criminalize or adversely affect cannabis businesses. States that currently have laws that decriminalize
or legalize certain aspects of cannabis, such as medical marijuana, could in the future, reverse course and adopt new laws that further
criminalize or adversely affect cannabis businesses. Additionally, municipal governments in certain states may have laws that adversely
affect cannabis businesses, even though there are no such laws at the state level. For example, municipal governments may have zoning
laws that restrict where cannabis operations can be located and the manner and size of which they can expand and operate. These municipal
laws, like the federal laws, may adversely affect our customers’ ability to do business. Also, given the complexity and rapid change
of the federal, state and local laws pertaining to cannabis, our customers may incur substantial legal costs associated with complying
with these laws and in acquiring the necessary state and local licenses required by their business endeavors. All of the foregoing may
impact our customers’ ability to purchase our products and services, which may adversely affect our business, revenue and earnings.
Most,
if not all, of our customers are impacted by Section 280E of the Code, which limits certain expenses marijuana companies can deduct.
This negative impact could affect the financial condition of our customers, which in turn may negatively affect the ability of our customers
to purchase our products and services.
Section
280E of the Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking”
of Schedule I or II substances, as defined by the CSA. The Internal Revenue Service (the “IRS”) has subsequently applied
Section 280E to state-legal cannabis businesses since marijuana is still a Schedule I substance. Section 280E states that no deductions
should be allowed on any amount “in carrying on any trade or business if such trade or business consists of trafficking in controlled
substances.” Section 280E affects all businesses that engage in the cultivation, sale or processing of marijuana. This includes
cultivators, medical dispensaries, marijuana retail stores and infused product manufacturers, as well as marijuana-derived concentrates
and oil manufacturers. Because Section 280E limits certain deductions, it can have a dramatic effect on the profitability of these businesses,
which in turn may adversely affect their ability to purchase our products and services. Such result may adversely impact our revenue
and earnings.
There
may be difficulty enforcing certain of our commercial agreements and contracts.
Courts
will not enforce a contract deemed to involve a violation of law or public policy. Because cannabis remains illegal under U.S. federal
law, parties to contracts involving the state legal cannabis industry have argued that the agreement was void as federally illegal or
against public policy. Some courts have accepted this argument in certain cases, usually against the company trafficking in cannabis.
While courts have enforced contracts related to activities by state-legal cannabis companies, and the trend is generally to enforce contracts
with state-legal cannabis companies and their vendors, there remains doubt and uncertainty that we will be able to enforce our commercial
agreements in court for this reason. We cannot be assured that we will have a remedy for breach of contract, which would have a material
adverse effect on our business.
Due
to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate
our business, which may expose us to additional risk and financial liability.
Insurance
that is otherwise readily available, such as general liability and directors’ and officers’ insurance, is more difficult
for us to find, and more expensive, because we are product and service providers to companies in the cannabis industry. There are no
guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to
go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us
to additional risk and financial liabilities.
A
drop in the retail price of cannabis products may negatively impact our business.
The
fluctuations in economic and market conditions that impact the prices of commercially grown cannabis, such as increases in the supply
of cannabis and decreases in demand for cannabis, could have a negative impact on our clients that are cannabis producers, and therefore
could negatively impact our business.
Risks
Related to Our Common Stock
Our
common stock price may be volatile and may decrease substantially. Correspondingly, the market price of our warrants may also be volatile.
The
trading price of our common stock has fluctuated substantially, and we expect that it will continue to do so. The price of our common
stock, and correspondingly the price of the warrants, in the market on any particular day depends on many factors including, but not
limited to, the following:
|
●
|
price
and volume fluctuations in the overall stock market from time to time;
|
|
|
|
|
●
|
investor
demand for our shares;
|
|
●
|
significant
volatility in the market price and trading volume of companies related to the cannabis industry;
|
|
|
|
|
●
|
variations
in our operating results and market conditions specific to our business;
|
|
|
|
|
●
|
the
emergence of new competitors or new technologies;
|
|
|
|
|
●
|
operating
and market price performance of other companies that investors deem comparable;
|
|
|
|
|
●
|
changes
in our Board of Directors (the “Board”) or management;
|
|
|
|
|
●
|
sales
or purchases of our common stock by insiders, including sales of our common stock issued to employees, directors and consultants
under our equity incentive plan which were registered under the Securities Act of 1933, as amended (the “Securities Act”)
under our S-8 registration statement;
|
|
|
|
|
●
|
commencement
of, or involvement in, litigation;
|
|
|
|
|
●
|
changes
in governmental regulations, in particular with respect to the cannabis industry;
|
|
|
|
|
●
|
actual
or anticipated changes in our earnings, and fluctuations in our quarterly operating results;
|
|
|
|
|
●
|
market
sentiments about the cannabis industry;
|
|
|
|
|
●
|
general
economic conditions and trends; and
|
|
|
|
|
●
|
departures
of any of our key employees.
|
In
the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has
often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities
litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources
from our business.
In
addition, if the market for equity stocks of companies in our industry, or the stock market in general, experiences a loss of investor
confidence, the market price of our common stock could decline for reasons unrelated to our business, financial condition, or results
of operations. If any of the foregoing occurs, it could cause the price of our common stock to fall and may expose us to lawsuits that,
even if unsuccessful, could be costly to defend and a distraction to our Board of Directors and management.
Our
Board of Directors is authorized to reclassify any unissued shares of our preferred stock into one or more classes, which could convey
special rights and privileges to its owners.
Our
articles of incorporation permit our Board of Directors to reclassify any authorized but unissued shares of preferred stock into one
or more classes. Our Board of Directors will generally have broad discretion over the size and timing of any such classification, subject
to a finding that the classification and issuance of preferred stock is in our best interests. As of November 3, 2021, we are authorized
to issue up to 850,000,000 shares of common stock and 150,000,000 shares of preferred stock. As of November 30, 2021, we had 238,967,349
shares of common stock issued and outstanding and 3,300 shares of preferred stock issued and outstanding. In the event our Board of Directors
opts to classify a portion of our unissued shares of preferred stock into a class of preferred stock, those preferred shares would have
a preference over our common stock with respect to dividends and liquidation. The cost of any classification would be borne by our existing
common stockholders. The class voting rights of any preferred shares we may issue could make it more difficult for us to take some actions
that may, in the future, be proposed by the Board of Directors and/or the holders of our common stock, such as a merger, exchange of
securities, liquidation, or alteration of the rights of a class of our securities, if these actions were perceived by the holders of
preferred shares as not in their best interests. These effects, among others, could have an adverse effect on your investment in our
common stock.
On
January 27, 2022, we implemented a change in the authorized capital of the company and a reverse stock split. As a result of the change
in authorized capital, we are authorized to issue 200,000,000 shares of common stock and 25,000,000 shares of preferred stock.
Rule
144 contains risks for certain shareholders.
From
time to time, we issue shares on an unregistered basis, which may be eligible for resale under SEC Rule 144 promulgated under the Securities
Act. In the event there are shares outstanding that can be sold under Rule 144, there may be market pressure on our stock.
We
do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We
currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development
and growth of our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future. Any decision
to declare and pay dividends in the future will be made at the discretion of our Board taking into account various factors, including
our business, operating results and financial condition, current and anticipated cash needs, plans for expansion, any legal or contractual
limitations on our ability to pay dividends under our loan agreements or otherwise. As a result, if our Board does not declare and pay
dividends, the capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our
common stock, and you may have to sell some or all of your common stock to generate cash flow from your investment.
The
market price of our shares of common stock may be adversely affected by the sale of shares by our management or large stockholders.
Sales
of our shares of common stock by our officers or senior managers through 10b5-1 plans or otherwise or by large stockholders could adversely
and unpredictably affect the price of our common stock. Additionally, the price of our shares of common stock could be affected even
by the potential for sales by these persons. We cannot predict the effect that any future sales of our common stock, or the potential
for those sales, will have on our share price. Furthermore, due to relatively low trading volume of our stock, should one or more large
stockholders seek to sell a significant portion of their stock in a short period of time, the price of our stock may decline.
Risks
Related to this Offering
An
active, liquid trading market for our common stock and warrants does not currently exist and may not develop after this offering, and
as a result, you may not be able to sell your common stock or warrants at or above the public offering prices, or at all.
On February 11, 2022,
our common stock and warrants commenced trading on the Nasdaq Capital Market, under the symbols “CEAD” and “
CEADW”. Prior to that, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQB under the symbols
“CEAD” and “SRNA.” Trading on the OTCQB marketplace was infrequent and in limited volume. Although
our shares of common stock and warrants are now trading on Nasdaq, an active trading market for shares of our common stock and
warrants may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty
selling your shares of common stock and warrants at an attractive price, or at all. The public offering prices for our common stock and
warrants which are being sold in tandem, and the related exercise price of the warrants, were determined by negotiations between us and
the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering.
Consequently, you may not be able to sell your common stock or warrants at or above the public offering prices or at any other price
or at the time that you would like to sell. An inactive market may also impair our ability to raise capital and may impair our ability
to expand our business by using our equity as consideration in an acquisition.
We
are selling a substantial number of shares of our common stock and warrants to purchase common stock in this offering, which could cause
the price of our common stock to decline.
In
this offering, we will sell 5,811,138 shares of common stock (assuming no exercise by the underwriters of their over-allotment
option). Additionally, we are selling warrants to purchase up to 5,811,138 shares of common stock, which is equal to the
number of shares of common stock being sold in the offering (assuming no exercise by the underwriters of their overallotment option).
The existence of the potential additional shares of our common stock in the public market, or the perception that such additional shares
may be in the market, could adversely affect the price of our common stock. We cannot predict the effect, if any, that market sales of
those shares of common stock or the availability of those shares of common stock for sale will have on the market price of our common
stock. Any decline in the price of a share of common stock will also have a negative effect on the price in the market of a warrant.
There
is no assurance that a market for the warrants being sold in this offering will develop.
The warrants being sold
in this offering are listed on the Nasdaq Capital Market, however there is no assurance that any market will develop. Without
an active market, the liquidity of the warrants will be limited.
The warrants are speculative in nature.
The
warrants do not confer any rights of common
stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire
shares of common stock at a fixed price. Commencing on the date of issuance, holders of the warrants may exercise their right
to acquire the common stock and pay the stated exercise price per share.
In
the event that our common stock price does not exceed the exercise price of the warrants during the period when the warrants are
exercisable, the warrants may not have any value.
Until
holders of the warrants acquire shares of our common stock upon exercise thereof, holders of the warrants will have no rights with respect
to the shares of our common stock.
There
is no assurance that any of the warrants will be exercised and we will receive the exercise proceeds therefrom.
The
warrants have an exercise price above the price of a share of common stock and warrant in this offering. If the price of our common stock
does not exceed the warrant exercise price, then it is unlikely that the warrants will be exercised. The warrants will expire on the
fifth anniversary of their issuance, which if they expire without being exercised the company will not receive any proceeds therefrom.
Additionally
for the warrants to be exercised for cash, the company must keep an effective registration statement available for issuance of the common
stock on exercise of the warrants. If the company fails to maintain an effective registration statement, then the warrants may be exercised
on a cashless basis, and the company will not receive any cash amount from their exercise.
You
will incur immediate dilution in the net tangible book value of the shares you purchase in this offering.
The
public offering price of our common stock is higher than the net tangible book value per share of outstanding common stock prior to completion
of this offering. Based on our pro forma net tangible book value as of September 30, 2021, giving effect to the 1-for-150 reverse stock
split subsequent to September 30, 2021, and giving further effect to the issuance and sale of 5,811,138 shares of common stock
and warrants sold on a one for one basis by us at the public offering price of $4.13 per share and warrant, if you purchase our
common stock and warrants in this offering, you will suffer immediate dilution of approximately $1.38 per share in net tangible
book value. Dilution is the amount by which the offering price paid by purchasers of our common stock in this offering will exceed the
pro forma as adjusted net tangible book value per share of our common stock upon completion of this offering.
You
may be diluted by future issuances of preferred stock or additional common stock in connection with our incentive plans, acquisitions
or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock
price.
Our
articles of incorporation authorizes us to issue shares of our common stock and options, rights, warrants and appreciation rights relating
to our common stock for the consideration and on the terms and conditions established by our Board in its sole discretion. We could issue
a significant number of shares of common stock in the future in connection with investments or acquisitions. Any of these issuances could
dilute our existing stockholders, and such dilution could be significant. Moreover, such dilution could have a material adverse effect
on the market price for the shares of our common stock.
The
future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our
common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as
a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class
vote, even if the action were approved by the holders of our shares of our common stock.
The
future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable
to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common
stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion
price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase
common stock at the lower conversion price, causing economic dilution to the holders of common stock.
A
portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This
could cause the market price of our common stock to drop significantly, even if our business is doing well.
Subject
to certain exceptions, without the prior written consent of ThinkEquity LLC, as representative of the underwriters, we, during the period
ending 90 days after the date of this prospectus, and our officers and directors and our 5% or greater stockholders, during the period
ending 180 days after the date of this prospectus, have agreed not to: (1) offer, sell, contract to sell, pledge, grant any option to
purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities
convertible into, exchangeable for or that represent the right to receive shares of common stock; (2) file any registration statement
with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable
for common stock; or (3) enter into any swap or other arrangement that transfers, in whole or in part, any of the economic consequences
of ownership of common stock, subject to certain exceptions. ThinkEquity, in its sole discretion, may release the common stock and other
securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. See “Underwriting.”
The
market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline
in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of common
stock or other equity securities.
USE
OF PROCEEDS
We
estimate that the net proceeds to us from the sale of our common stock and warrants in this offering will be approximately $21,805,500
(or approximately $25,153,500 if the underwriters exercise their over-allotment option in full), after deducting underwriting
discounts and commissions and the estimated offering expenses payable by us.
We intend to use approximately
$2.0 million of the net proceeds to redeem 1,650 shares, or 50%, of our Series B Preferred Stock from our Series B investor.
We
intend to use the remaining net proceeds for working capital and other general corporate business purposes. The expected use of net proceeds
from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as
our plans and business conditions evolve and change. As a result, our management will have broad discretion over how these proceeds are
used. Proceeds held by us will be invested in short-term investments until needed for the uses described above.
MARKET
FOR OUR COMMON STOCK
On February 11, 2022, our
common stock and warrants commenced trading on the Nasdaq Capital Market, under the symbols “CEAD” and “ CEADW,”
respectively. Prior to that, the shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQB Marketplace under the
symbols “CEAD” and “SNRA,” and quoted on the predecessor to the OTCQB Marketplace since April 5, 2011.
Trading on the OTCQB Marketplace was infrequent and limited in volume, therefore the prices at which such transactions occurred
may not necessarily reflect the price that would be paid for our common stock in a more liquid market. We cannot assure you that
a liquid trading market for our common stock or warrants will develop or be sustained after this offering. You may not be able to sell
your shares quickly or at the market price if trading in our common stock is not active.
As of September 30, 2021,
there were approximately 130 record holders of our common stock.
See “Underwriting”
for more information regarding our arrangements with the underwriters and the factors considered in setting the public offering price.
DIVIDEND
POLICY
Since
our inception, we have not paid any dividends on our common stock, and we currently expect that, for the foreseeable future, all earnings,
if any, will be retained for use in the development and operation of our business. In the future, our Board may decide, at its discretion,
whether dividends may be declared and paid to holders of our common stock.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and capitalization as of September 30, 2021:
|
●
|
on
an actual basis;
|
|
|
|
|
●
|
on
a pro forma basis to give effect (i) to the redemption of the Series A Preferred Stock for 2,802 shares of common stock subsequent
to September 30, 2021, effective on November 4, 2021, (ii) to the
issuance of 6,803 shares to the CEO per the employment agreement dated November 24, 2021, (iii) to the forgiveness of the note payable
and related accrued interest by the Small Business Administration Payroll Protection Program on November 30, 2021, (iv) to the 1-for-150
reverse stock split subsequent to September 30, 2021, effective on January 27, 2022; (v) to the issuance of 7,719 shares of Common
Stock to our Series B Preferred Stock investor on December 30, 2021 as payment for the quarterly dividend payment; and (vi) to the
issuance of 3,367 shares in the aggregate to both our incoming directors on January 17, 2022; and
|
|
|
|
|
●
|
on
a pro forma as adjusted basis to give further effect to the issuance and sale by us in this offering of 5,811,138 shares of
our common stock and warrants at the public offering price of $4.13 per share and warrant on a one for one basis, after
deducting the underwriting discounts and commissions and estimated offering expenses that we expect to pay and the application of
approximately $2.0 million of net proceeds from this offering to redeem 1,650 shares of our Series B Preferred Stock as described
under “Use of Proceeds.”
|
This
table should be read in conjunction with, and is qualified in its entirety by reference to, “Use of Proceeds,” “Selected
Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
|
|
As of September 30, 2021
|
|
|
|
Actual
|
|
|
Pro forma
|
|
|
Pro forma as adjusted
|
|
Cash and cash equivalents (2)
|
|
$
|
2,283,879
|
|
|
$
|
2,260,381
|
|
|
$
|
22,085,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total current debt
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable and accrued interest
|
|
|
517,468
|
|
|
|
-
|
|
|
|
-
|
|
Total
long-term debt(1)
|
|
|
517,468
|
|
|
|
-
|
|
|
|
-
|
|
Temporary equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B redeemable convertible preferred stock, $0.00001 par value; 3,300 on
an actual and pro-forma basis and 1,650 on a pro-forma as adjusted basis issued and outstanding
|
|
|
3,960,000
|
|
|
|
3,960,000
|
|
|
|
1,980,000
|
|
Series B redeemable convertible preferred stock subscription receivable
|
|
|
(1,365,000
|
)
|
|
|
(1,365,000
|
)
|
|
|
(1,365,000
|
)
|
Series B redeemable convertible preferred stock accrued dividends
|
|
|
1,447
|
|
|
|
1,447
|
|
|
|
1,447
|
|
Total temporary equity
|
|
|
2,596,447
|
|
|
|
2,596,447
|
|
|
|
616,447
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock 150,000,000 shares authorized, $0.00001 par value; 42,030,331 issued
and outstanding as of September 30, 2021; 25,000,000 shares authorized and 0 shares issued and outstanding on a pro-forma and on
a pro-forma as adjusted basis
|
|
|
420
|
|
|
|
-
|
|
|
|
-
|
|
Common Stock $0.00001 par value: 350,000,000 shares authorized and 236,526,638 shares
issued and outstanding as of September 30, 2021; 200,000,000 shares authorized and 1,604,202 shares issued and outstanding on a pro
forma basis as of September 30, 2021; and 200,000,000 shares authorized and 7,415,340 issued and outstanding shares on a pro-forma
as adjusted basis as of September 30, 2021.
|
|
|
2,376
|
|
|
|
16
|
|
|
|
74
|
|
Additional paid in capital
|
|
|
25,017,065
|
|
|
|
25,067,471
|
|
|
|
46,872,913
|
|
Accumulated deficit
|
|
|
(28,379,674
|
)
|
|
|
(27,935,704
|
)
|
|
|
(27,935,704
|
)
|
Total shareholders’ equity
|
|
|
(3,359,813
|
)
|
|
|
(2,868,217
|
)
|
|
|
18,937,283
|
|
Total capitalization
|
|
$
|
(245,898
|
)
|
|
$
|
(271,770
|
)
|
|
$
|
19,553,730
|
|
(1) Gives effect to the forgiveness of the notes payable by the SBA on
November 30, 2021
(2) Gives effect to the Company’s payment of
income tax liabilities from stock issued as compensation to the CEO on November 24, 2021
The
information in the above table for the actual information and pro forma basis as of September 30, 2021:
|
●
|
assumes
no exercise by the underwriters of their over-allotment option;
|
|
|
|
|
●
|
assumes
no exercise of the representative’s warrants to be issued to the representative of the underwriters in
this offering;
|
|
|
|
|
●
|
assumes no exercise of any of the warrants sold in the
offering;
|
|
|
|
|
●
|
excludes
532,688 shares of common stock and 532,688 warrants issuable upon the conversion of 1,650 shares of our Series B Preferred
Stock;
|
|
|
|
|
●
|
excludes
219,090 shares of common stock issuable upon the exercise of outstanding exercisable options at
a weighted exercise price of $10.50 per share;
|
|
|
|
|
●
|
excludes
227,719 shares of common stock issuable upon the exercise of outstanding warrants at a weighted exercise price of $9.70 per share;
and
|
|
|
|
|
●
|
excludes
610,415 shares of common stock reserved for future issuance pursuant to our 2017 and 2021 equity incentive plans.
|
DILUTION
If
you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering
price per share of our common stock (assuming no value is attributed to the warrants) and the pro forma as adjusted net tangible book
value per share of our common stock immediately after the closing of this offering (assuming no value is attributed to the warrants).
Net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding
shares of common stock. Our net tangible book value of our common stock as of September 30, 2021 was $(1,401,222), or $(0.87)
per share. Our pro forma net tangible book value of our common stock as of September 30, 2021 was $(1,401,222), or $(0.87) per share.
After
giving further effect the net proceeds from our sale of 5,811,138 shares of common stock in this offering at the public offering
price of $4.13 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us,
our pro forma as adjusted net tangible book value as of September 30, 2021, would have been $20,404,278, or $2.75 per share
(assuming no value is attributed to the warrants). This represents an immediate increase in pro forma net tangible book value of $3.63
per share to our existing stockholders and an immediate dilution of $1.38 per share to investors purchasing common stock in
this offering.
We
calculate dilution per share to new investors by subtracting the pro forma net tangible book value per share from the public offering
price paid by the new investor. The following table illustrates the dilution to new investors on a per share basis:
Public offering price per share
|
|
$
|
4.13
|
|
Pro forma net tangible book value per share as of September 30, 2021
|
|
$
|
(0.87
|
)
|
Increase in pro forma net tangible book value per share attributable to this offering
|
|
$
|
3.63
|
|
Pro forma as adjusted net tangible book value per share after this offering
|
|
$
|
2.75
|
|
Dilution in pro forma net tangible book value per share in this offering
|
|
$
|
1.38
|
|
If
the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, the pro forma as adjusted
net tangible book value per share after giving effect to this offering would be $2.87 per share, representing an immediate increase
to existing stockholders of $3.74 per share, and immediate dilution to new investors in this offering of $1.26 per share.
The
following table summarizes, on the pro forma as adjusted basis described above as of September 30, 2021, the differences between the
existing shareholders and the new investors in this offering with respect to the number of shares, including shares represented by shares
purchased from us, the total consideration paid to us and the average price per share based on the public offering price of $4.13
per share before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
|
|
Shares Issued
|
|
|
Total Consideration
|
|
|
Average Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
Existing shareholders
|
|
|
1,604,202
|
|
|
|
21.63
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
New investors
|
|
|
5,811,138
|
|
|
|
78.37
|
%
|
|
$
|
24,000,000
|
|
|
|
100
|
%
|
|
$
|
4.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,415,340
|
|
|
|
100
|
%
|
|
$
|
24,000,000
|
|
|
|
100
|
%
|
|
$
|
4.13
|
|
The
foregoing calculations:
|
●
|
assumes
no exercise by the underwriters of their over-allotment option;
|
|
|
|
|
●
|
assumes
no exercise of the representative’s warrants to be issued to the representative of the underwriters in this offering;
|
|
|
|
|
●
|
assumes
no exercise of any of the warrants sold in the offering, including any per-funded warrants in lieu of the shares of common stock
offered;
|
|
|
|
|
●
|
on
a pro forma basis gives effect (i) to the redemption of the Series A Preferred Stock subsequent
to September 30, 2021, effective on November 4, 2021, (ii) to the issuance of 6,803 shares
to the CEO per the employment agreement dated November 24, 2021, (iii) to the forgiveness
of the note payable and related accrued interest by the Small Business Administration Payroll
Protection Program on November 30, 2021, (iv) to the 1-for-150 reverse stock split subsequent
to September 30, 2021, effective on January 27, 2022; (v) to the issuance of 7,719 shares
of Common Stock to our Series B Preferred Stock investor on December 30, 2021 as payment
for the quarterly dividend payment; and (vi) to the issuance of 3,367 shares in the
aggregate to both our incoming directors on January 17, 2022;
|
|
|
|
|
●
|
excludes
532,688 shares of common stock and 532,688 warrants issuable upon the conversion
of 1,650 shares of our Series B Preferred Stock;
|
|
|
|
|
●
|
excludes
219,090 shares of common stock issuable upon the exercise of outstanding exercisable options at a weighted exercise price of $10.50
per share;
|
|
|
|
|
●
|
excludes
227,719 shares of common stock issuable upon the exercise of outstanding warrants at a weighted exercise price of $9.70 per share;
and
|
|
|
|
|
●
|
excludes
610,415 shares of common stock reserved for future issuance pursuant to our 2017 and 2021 equity incentive plans.
|
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The
following tables set forth our summary historical consolidated financial data as of, and for the periods ended on, the dates indicated.
The
summary consolidated statements of operations data for the years ended December 31, 2020 and 2019 and the summary consolidated balance
sheet data as of December 31, 2020 and 2019 are derived from our audited consolidated financial statements and notes that are included
elsewhere in this prospectus.
The
summary consolidated statements of operations data for the three and nine months ended September 30, 2021 and 2020 and the summary consolidated
balance sheet data as of September 30, 2021 are derived from our unaudited interim consolidated financial statements and notes that are
included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements in accordance with generally
accepted accounting principles (GAAP) and on the same basis as the audited consolidated financial statements. Our historical results
are not necessarily indicative of our results in any future period and results from our interim period may not necessarily be indicative
of the results of the entire year. Pro forma share and per share amounts presented herein reflect the implementation of the 1-for-150
reverse stock split as if it had occurred at the beginning of the earliest period presented.
|
|
For
the Three Months Ended
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
For
the Fiscal Year Ended
|
|
|
For
the Fiscal Year Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Statement
of Operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,706,436
|
|
|
$
|
1,634,669
|
|
|
$
|
10,582,470
|
|
|
$
|
5,127,018
|
|
|
$
|
8,514,272
|
|
|
$
|
15,224,454
|
|
Cost
of Revenues
|
|
|
2,959,264
|
|
|
|
1,108,758
|
|
|
|
8,208,368
|
|
|
|
3,869,758
|
|
|
|
6,961,305
|
|
|
|
10,675,601
|
|
Gross
Profit
|
|
|
747,172
|
|
|
|
525,911
|
|
|
|
2,374,102
|
|
|
|
1,257,260
|
|
|
|
1,552,967
|
|
|
|
4,548,853
|
|
Operating
expenses
|
|
|
1,189,715
|
|
|
|
808,575
|
|
|
|
3,386,317
|
|
|
|
3,091,874
|
|
|
|
3,915,591
|
|
|
|
5,859,442
|
|
Income(loss)
from operations
|
|
|
(442,543
|
)
|
|
|
(282,664
|
)
|
|
|
(1,012,215
|
)
|
|
|
(1,834,614
|
)
|
|
|
(2,362,624
|
)
|
|
|
(1,310,589
|
)
|
Other
non-operating income (expense)
|
|
|
34,638
|
|
|
|
12,225
|
|
|
|
76,184
|
|
|
|
12,345
|
|
|
|
603,908
|
|
|
|
(27,977
|
)
|
Net
income (loss)
|
|
$
|
(407,905
|
)
|
|
$
|
(270,439
|
)
|
|
$
|
(936,031
|
)
|
|
$
|
(1,822,269
|
)
|
|
$
|
(1,758,716
|
)
|
|
$
|
(1,338,566
|
)
|
Income
(loss) per share, basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(1.12
|
)
|
|
$
|
(0.88
|
)
|
Weighted
average shares outstanding, basic and diluted
|
|
|
1,583,511
|
|
|
|
1,576,844
|
|
|
|
1,581,142
|
|
|
|
1,564,746
|
|
|
|
1,574,454
|
|
|
|
1,517,748
|
|
|
|
As
of
|
|
|
As
of
|
|
|
As
of
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
(Audited)
|
|
|
|
(Audited)
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
3,953,597
|
|
|
$
|
3,683,293
|
|
|
$
|
2,561,268
|
|
Total
assets
|
|
|
4,908,956
|
|
|
|
4,813,266
|
|
|
|
4,047,318
|
|
Current
liabilities
|
|
|
5,117,776
|
|
|
|
5,903,689
|
|
|
|
3,998,740
|
|
Total
liabilities
|
|
|
5,672,322
|
|
|
|
6,146,964
|
|
|
|
4,402,949
|
|
Total
temporary equity
|
|
|
2,596,447
|
|
|
|
-
|
|
|
|
-
|
|
Total
deficit
|
|
|
(3,359,813
|
)
|
|
|
(1,333,698
|
)
|
|
|
(355,631
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
4,908,956
|
|
|
$
|
4,813,266
|
|
|
$
|
4,047,318
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information
appearing elsewhere in this prospectus, which include additional information about our accounting policies, practices, and the transactions
underlying our financial results. In addition to historical information, this prospectus contains forward-looking information that involves
risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to
the factors discussed under “Cautionary Statements” appearing elsewhere in this prospectus and the risks and uncertainties
described or identified in “Risk Factors” in this prospectus.
Please
also refer to “Non-GAAP Financial Measures” discussed elsewhere in this prospectus.
The
following discussion should be read in conjunction with the Business section contained elsewhere in this prospectus, and our consolidated
financial statements and accompanying notes to consolidated financial statements included in this prospectus. Our Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is segregated into four sections, including:
Executive
Overview. This section provides a summary of our operating performance and cash flows, industry trends and our strategic initiatives.
Critical
Accounting Policies and Estimates. This section describes the accounting areas where management makes critical estimates
to report our financial condition and results of operations.
Results
of Operations. This section provides an analysis of our consolidated results of operations for the two comparative periods
presented in our consolidated financial statements.
Liquidity,
Capital Resources and Financial Position. This section provides an analysis of cash flow, contractual obligations, and
certain other matters affecting our financial position.
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 work on projects. The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation,
operating margins, and working capital. As of the date of this filing, uncertainty continues to exist concerning the magnitude and duration
of the economic impact of the COVID-19 pandemic.
In
response to the COVID-19 pandemic and its changing conditions the Company reduced its operational expenses to conserve its cash resources.
Many expenses, including travel, marketing, headcount, work hours, and compensation were reduced, deferred, or eliminated while still
allowing us to meet our customer obligations and develop new business. As the fiscal year progressed and our sales rebounded, and we
were able to obtain additional funds through a forgivable bank loan, we restored our workforce and compensation.
Due
to the speed with which the COVID-19 pandemic developed and the resulting uncertainties, 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 so as to mitigate the impact of the COVID-19 pandemic
to the best of our ability, although they may not be sufficient in the long-run for us to avoid reduced sales, increased losses and reduced
operating cash flows.
Executive
Overview
CEA
Industries Inc. is a technology, engineering, and services provider to the global 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 and small fruits (such as strawberries,
blackberries and raspberries) to bell peppers, cucumbers, tomatoes, and cannabis, some producers grow crops indoors in response to market
dynamics or as part of their preferred farming practice. In service of the CEA, our principal service and product offerings include:
(i) floor plans and architectural design of cultivation facilities, (ii) licensed mechanical, electrical, and plumbing (MEP) engineering
of commercial scale environmental control systems specific to cultivation facilities, (iii) process cooling systems and other climate
control systems, (iv) air handling equipment and systems, (v) LED lighting, benching and racking solutions for indoor cultivation, (vi)
automation and control devices, systems and technologies used for environmental, lighting and climate control, and (vii) preventive maintenance
services for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada as
well as in other international locations. Customers are those growers building new facilities and those expanding or retrofitting existing
facilities, with both ranging in size from several thousand to more than 100,000 square feet.
Historically,
our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities that grow
cannabis, but we have served facilities growing other crops and we intend to pursue such facilities more in the future.
We
have three core assets that we believe are important to our going-forward business strategy. First, we have multi-year relationships
with customers and others in the CEA industry, notably in the cannabis segment. Second, we have specialized engineering know-how and
experience gathered from designing environmental control systems for CEA cultivation facilities since 2016. Third, we have a line of
proprietary environmental control products, which we are in the process of expanding.
We
are an integrated provider of MEP (mechanical, electrical, plumbing) engineering design, proprietary environmental control equipment,
and controls and automation offerings serving the CEA industry. Historically, nearly all of our customers have been in the cannabis cultivation
business. We believe our employees have more experience than most other MEP firms serving this industry. Our customers engage us for
their environmental and climate control systems because they want experts to design their facilities, and they come to us because of
our reputation. We leverage our reputation and know-how against the many local contractors and MEP engineers who collectively constitute
our largest competitors.
The
three key pillars of our corporate strategy for growing the Company and increasing shareholder value are:
Organic
growth. We serve a market for the construction and expansion of controlled environment agriculture (CEA) facilities and businesses
that is projected to grow at a 20%+ compound annual growth rate for the foreseeable future. Our primary vertical market of cannabis cultivation
facilities has been joined by the similarly rapidly growing urban vertical farming market to create two market opportunity segments that
we are positioned to serve.
In
May of 2021 we announced a new strategy for our organic growth, which included:
New
markets. We decided to expand our business development plan to pursue non-cannabis CEA facilities, at least doubling our total addressable
market.
New
products & services. We decided to expand our product offerings from primarily environmental control to now offer all of the primary
technologies and services required in a CEA facility. Our primary objective in expanding our service and product offerings was to improve
our customers’ operations and sustainability, increase customer acquisition, and enhance our revenue and revenue recurrence. Our
expanded offering now include: architectural design, lighting, benching, HVACD, sensing & control systems, CO2 dosing
and control, water filtration & condensate reclamation, irrigation & fertigation systems, and wastewater treatment. We also now
offer preventative maintenance services on a recurring subscription basis for cultivation facilities.
New
trade name. In May of 2021 we adopted the trade name Surna Cultivation Technologies instead of Surna Inc. because we believe that the
new name will more clearly identify our business to prospects and make us easier to find on various social media and search engines.
Customer
Operations – first and foremost we seek to help our customers build the most effective and efficient facility possible. We
believe that we are uniquely positioned to engineer all of the complex components of a CEA facility into a holistic whole because of
our dedicated engineering staff and our experience including over 200 commercial facilities. Our 15 years in the business has provided
us a wide network of technology vendors from which we curate a selection of the best products. In addition, we are the leading experts
in applying the most challenging component of the technical infrastructure, the environmental controls, and we have the knowledge required
to engineer the interactions among the required components. A professional engineer (PE) license is required for all MEP engineering
work, and this engineering competence is one of our greatest strengths.
Sustainability
– indoor cultivation facilities, like data centers, are resource intensive. Several U.S. states have implemented building code
changes that place limits on the energy consumption allowed within cultivation facilities, and we anticipate that more states will do
the same. Among our objectives is to provide our customers with the most energy-efficient alternatives for their infrastructure. Energy
and resource efficiency is a high priority to us as engineers, and our most senior engineering staff hold the LEED (Leadership in Energy
and Environmental Design) credential. Our CEO previously helped build a cleantech company, has been involved in the cleantech industry
for over five years, and published a book on selling energy efficient technologies. We believe that we are in a position to lead the
industry in sustainability initiatives which our customers will highly value.
Customer
Acquisition – By offering Facility Selection & Design services we seek to build relationships with prospects at the earliest
opportunity in the lifecycle of the cultivation business. By expanding our offerings to include nearly every piece of the technical infrastructure
required in a facility we hope to engage at the earliest possible moment with the customer and earn the opportunity to provide all the
products and services required for the facility. Our post-start-up, lifecycle services will help us maintain a relationship with the
customer as long as the facility is in operation. Our observation is that our customers want to grow plants, not maintain the technical
infrastructure of complex systems, and we believe that they will accept our offer to do so, as some already have.
Revenue
and Revenue Recurrence – We believe that our revenue can be expanded by offering most of the primary technical infrastructure
components for a cultivation facility. For example, if we are able to provide all of the primary infrastructure components to a cultivation
facility, our revenue on a project could be up to 200% higher than if we provided the environmental controls systems alone. In the past
we did not have products or services to offer our customers after a facility was constructed. We have recently begun to offer preventative
maintenance services, and we believe that by expanding this service offering we will be able to gain long-term recurring revenue on a
subscription basis.
Seek
strategic relationships, mergers, and acquisitions to add to our existing business. We enjoy wide brand recognition in
the cannabis cultivation industry because of our longevity in the market segment (15 years) and the number of cultivation projects (over
200 commercial projects) we have served. Our core expertise is engineering the environmental controls of these facilities, which is a
sophisticated engineering challenge due to the high humidity (latent heat) and heat load (sensible heat) within these facilities. Not
only are the loads high, but the environmental conditions within these facilities must be held closely within limits that the facility’s
managers request. Engineering to meet these limits requires us to consider all of the primary components within the facility: lighting,
irrigation, HVACD, fertigation, sensors, controls, CO2 dosing, monitoring and alarms, facility physical limits such as power
availability, and energy consumption. We believe that the expertise gained in working with many of the primary components provides us
with a uniquely well-informed view of the efficacy of the many primary components on offer in the marketplace. We further believe that
this knowledge will help us make wise choices of which products to pursue for strategic relationships, and which providers to potentially
merge with or acquire. For smaller component providers we believe that our publicly traded platform and our existing sales and marketing
reach will make us an attractive partner.
Raise
capital and uplist to a senior exchange. In 2019 our revenue grew 59% year-over-year, and we had our first-ever cash flow positive
year. Despite the challenges brought on by the COVID-19 pandemic in the first half of 2020, we believe that our revenue growth in 2019
and then in the Q3 2020 – Q3 2021 period validates our market opportunity and our business model. We also recognize that the costs
of being a small public company are substantial and require cash that could otherwise be used to sustain and grow the business. We believe
that there is only one solution to this issue: rapid revenue and margin growth. We believe that we have growth opportunities, but we
are capital constrained and must seek outside financing to pursue the growth we believe we can achieve.
Revenue.
Our 2020 revenue was $8,514,000. Our 2020 revenue represents a decrease of 44% compared to 2019. One of our MFO customers accounted for
28% of our 2020 revenue. We believe, among other things, that we need to build a diversified sales pipeline of Multi Facility Operators
or MFO’s (MFOs), which we believe will increase our consistency and predictability of revenue.
Gross
Margin. Our 2020 gross margin was 18.2%, a decrease from 29.9% in 2019. This decrease was primarily due to our fixed cost
base, a lower margin on equipment sales, and an increase in variable costs as a percent of revenue as described in Results of Operations
below.
Profitability.
Our 2020 adjusted net loss was $1,239,000 compared to a 2019 adjusted net income of $92,000. Our adjusted net income (loss) is a key
management metric and point of focus for us because it provides a proxy for the cash we generate from operations.
Capital
Resources. Our working capital remains negative, and we have limited capital resources, which are impediments to the overall
viability of our business as planned. The effect of the COVID-19 response has presented further challenges for us in 2020. Without increasing
our current revenue and adding new sources of revenue, we cannot predict our future. As discussed elsewhere in this prospectus, we have
taken steps to reduce costs. We cannot predict how long our cost cutting measures will sustain the Company or how long the current economic
situation will last.
Contract
Bookings. Our bookings dropped significantly in the first half of 2020 but recovered in the second half, and our backlog
at December 31, 2020, was $8,448,000, a decrease of $1,110,000, or 12%, from our December 31, 2019 backlog. During 2020, we had net bookings
of $7,404,000, consisting of: (i) $10,343,000 of new sales contracts executed in 2020, (ii) $151,000 net positive changes orders, and
(iii) $3,089,000 in project cancellations.
The
following table sets forth: (i) our beginning backlog (the remaining contract value of outstanding sales contracts for which we have
received an initial deposit as of the previous period), (ii) our net bookings for the period (new sales contracts executed during the
period for which we received an initial deposit, net of any adjustments including cancellations and change orders during the period),
(iii) our recognized revenue for the period, and (iv) our ending backlog for the period (the sum of the beginning backlog and net bookings,
less recognized revenue). Based on the current economic climate and our cost cutting measures, there is no assurance that we will be
able to continue to obtain the level of bookings that we have had in the past and or fulfill our current backlog, and we may experience
contract cancellations, project scope reductions and project delays.
|
|
For
the quarter ended
|
|
|
|
December
31,
2019
|
|
|
March
31,
2020
|
|
|
June
30,
2020
|
|
|
September
30,
2020
|
|
|
December
31,
2020
|
|
Backlog,
beginning balance
|
|
$
|
10,143,000
|
|
|
$
|
9,558,000
|
|
|
$
|
8,875,000
|
|
|
$
|
5,592,000
|
|
|
$
|
8,198,000
|
|
Net
bookings, current period
|
|
$
|
3,134,000
|
|
|
$
|
1,127,000
|
|
|
$
|
(1,601,000
|
)
|
|
$
|
4,241,000
|
|
|
$
|
3,637,000
|
|
Recognized
revenue, current period
|
|
$
|
3,719,000
|
|
|
$
|
1,810,000
|
|
|
$
|
1,682,000
|
|
|
$
|
1,635,000
|
|
|
$
|
3,387,000
|
|
Backlog,
ending balance
|
|
$
|
9,558,000
|
|
|
$
|
8,875,000
|
|
|
$
|
5,592,000
|
|
|
$
|
8,198,000
|
|
|
$
|
8,448,000
|
|
As
has historically been the case at each quarter-end, there remains significant uncertainty regarding the timing of revenue recognition
of our backlog as of December 31, 2020. As of December 31, 2020, $2,643,000 of our backlog, or 31%, was attributable to customer contracts
for which we have only received an initial advance payment to cover our engineering services (“engineering only paid contracts”).
There are always risks that the equipment portion of our engineering only paid contracts will not be completed or will be delayed, which
could occur if the customer is dissatisfied with the quality or timeliness of our engineering services, there is a delay or abandonment
of the project due to the customer’s inability to obtain project financing or licensing, or the customer determines not to proceed
with the project due to economic factors, such as declining cannabis wholesale prices in the state.
We
have provided an estimate in our consolidated financial statements for when we expect to recognize revenue on our remaining performance
obligations (i.e., our Q4 2020 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment
paid contracts. However, there continues to be significant uncertainty regarding the timing of our recognition of revenue in our Q4 2020
backlog. Refer to the Revenue Recognition section of Note 2 in our consolidated financial statements, included as part of this
prospectus for additional information on our estimate of future revenue recognition on our remaining performance obligations.
Our
backlog, remaining performance obligations and net bookings may not be indicative of future operating results, and our customers may
attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing
or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in backlog or remaining
performance obligations will actually generate revenues or when the actual revenues will be generated. Net bookings and backlog are considered
non-GAAP financial measures, and therefore, they should be considered in addition to, rather than as a substitute for, our GAAP measures
for recognized revenue, deferred revenue and remaining performance obligations. Further, we can provide no assurance as to the profitability
of our contracts reflected in remaining performance obligations, backlog and net bookings.
Critical
Accounting Policies and Estimates
This
discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted 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. For information regarding our critical accounting policies as well as recent
accounting pronouncements, please see both Note 2 from our December 31, 2020 audited financial statements and Note 1 from our September
30, 2021 unaudited financial statements, respectively, included in the Index to Financial Statements section of this prospectus.
Results
of Operations
This
section includes a summary of our historical results of operations, followed by detailed comparisons of our results for (i) the three
months and the nine months ended September 30, 2021 and 2020 and (ii) the years ended December 31, 2020 and 2019. We have derived this
data from our interim and annual consolidated financial statements included elsewhere in this prospectus.
Nine
Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Financial
Overview
Our
revenue for the nine months ended September 30, 2021 was $10.6 million compared to $5.1 million for the same period last year, an increase
of $5.5 million, or 106%. We had a net loss of $0.9 million for the nine months ended September 30, 2021 as compared to a net loss of
$1.8 million for the same period last year, a decrease of $0.9 million, or 49%. Our adjusted net loss for the nine months ended September
30, 2021 was $0.7 million compared to $1.4 million for the same period last year, an decrease of $0.7 million, or 52%. Adjusted net income
(loss), a Non-GAAP metric, is defined as our GAAP net income (loss) after adjustment for our non-cash equity compensation expenses, other
non-cash equity expense, debt-related items and depreciation expense. The table below reflects this calculation. We consider this a key
financial metric as we focus on achieving breakeven on better operating cash flow. The GAAP financial measures most directly comparable
to adjusted net income (loss) is the GAAP net income (loss).
|
|
For
the nine months ended September 30, 2021:
|
|
(in
thousands of US Dollars)
|
|
2021
|
|
|
2020
|
|
GAAP
Net Income (Loss):
|
|
$
|
(936
|
)
|
|
$
|
(1,822
|
)
|
Non-Cash
Add Backs:
|
|
|
|
|
|
|
|
|
Stock
Based Compensation
|
|
|
227
|
|
|
|
354
|
|
Depreciation
& Amortization
|
|
|
49
|
|
|
|
86
|
|
Total
Non-Cash Add-Backs:
|
|
|
276
|
|
|
|
440
|
|
Adjusted
Net Income (Loss):
|
|
$
|
(660
|
)
|
|
$
|
(1,382
|
)
|
Revenues
and Cost of Goods Sold
Revenue
for the nine months ended September 30, 2021 was $10,582,000, compared to $5,127,000 for the nine months ended September 30, 2020, representing
an increase of $5,455,000, or 106% due to strong bookings in the first quarter of 2021 along with a COVID-19-driven slowdown impacting
revenue for the nine months ended September 30, 2020.
Cost
of revenue increased by $4,339,000, or 112%, from $3,870,000 for the nine months ended September 30, 2020 to $8,208,000 for the nine
months ended September 30, 2021 primarily due to the increase in revenue.
The
gross profit for the nine months ended September 30, 2021 was $2,374,000 compared to $1,257,000 for the nine months ended September 30,
2020, an increase of 89%. Gross profit margin decreased by two percentage points from 24.5% for the nine months ended September 30, 2020
to 22.4% for the nine months ended September 30, 2021 primarily due to an increase in variable costs as a percent of total revenue, offset
by a decrease in fixed costs as a percent of total revenue.
Our
fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead)
totaled $1,032,000, or 10% of total revenue, for the nine months ended September 30, 2021 as compared to $864,000, or 17% of total revenue,
for the nine months ended September 30, 2020. The increase of $168,000 was due to an increase in salaries and benefits (including stock-based
compensation) of $174,000, offset by a decrease in fixed overhead of $6,000.
Our
variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled
$7,177,000, or 68% of total revenue, in the nine months ended September 30, 2021 as compared to $3,006,000, or 59% of total revenue,
in the nine months ended September 30, 2020. The increase in variable costs was primarily due to higher equipment costs as a result of
higher revenue and a reduction in the selling price of our equipment resulting in lower equipment margins. Other factors included: (i)
an increase in warranty of $167,000 which was partially the result of a reimbursement in 2020 from a customer for costs incurred in 2019
related to a failure later deemed to be non-warranty, (ii) an increase in travel of $71,000, offset by (iii) a decrease in outside engineering
services of $65,000, (iv) a decrease in other variable costs of $29,000 related to project management consulting services incurred in
2020, (v) a $24,000 decrease in excess and obsolete inventory, and (vi) a decrease in shipping and handling of $9,000.
We
continue to focus on gross margin improvement through a combination of, among other things, more disciplined pricing, better absorption
of our fixed costs as we convert our increased bookings into revenue, and the implementation over time of lower-cost supplier alternatives.
Operating
Expenses
Operating
expenses increased to $3,386,000 for the nine months ended September 30, 2021, from $3,092,000 for the nine months ended September 30,
2020, an increase of $294,000, or 10%. The operating expense increase consisted of: (i) an increase in advertising and marketing expenses
of $236,000, (ii) an increase in selling, general and administrative expenses (“SG&A expenses”) of $40,000, and (iii)
an increase in product development expense of $19,000.
The
increase in marketing expenses was primarily due to (i) an increase in advertising and promotion expense of $98,000, (ii) an increase
in salaries and benefits (including stock compensation) of $86,000, (iii) an increase of $65,000 for expenses related to trade shows,
offset by (iv) a decrease in outside services and other marketing expenses of $11,000.
The
increase in SG&A expenses for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was
due primarily to: (i) an increase of $148,000 for commissions, (ii) an increase in salaries, benefits and other employee related costs
of $107,000, (iii) an increase of $98,000 for investor relations expenses, (iv) an increase in facilities, office and other expenses
of $32,000, (v) an increase in business taxes, licenses and fees of $19,000, offset by (vi) a decrease of $204,000 in stock related compensation
expense to employees, consultants and directors, (vii) a decrease in bad debt of $70,000, (viii) a decrease of $37,000 for depreciation,
(ix) a decrease of $27,000 in accounting and other professional fees, and (x) a decrease in cash paid for directors’ fees of $15,000.
The
increase in product development costs was due to an increase in materials costs of $35,000 offset by a decrease in salaries and benefits
(including stock compensation) of $17,000.
Operating
Income (Loss)
We
had operating loss of $1,012,000 for the nine months ended September 30, 2021, as compared to an operating loss of $1,835,000 for the
nine months ended September 30, 2020, a decrease of $822,000, or 45%. The operating loss for the nine months ended September 30, 2021
included $160,000 of non-cash, stock-based compensation and $49,000 of depreciation expense, compared to $354,000 of non-cash, stock-based
compensation and $86,000 of depreciation expense for the nine months ended September 30, 2020. Excluding these non-cash items, our operating
loss decreased by $591,000, or 42%.
Other
Income (Expense)
We
had other income (net) of $76,000 for the nine months ended September 30, 2021 compared to other income (net) of $12,000 for the nine
months ended September 30, 2020. 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 and $3,000 for interest expense. Other income
for the nine months ended September 30, 2020 consisted of approximately $24,000 in storage fees charged to a customer due to the delay
of their project, offset by interest expense.
Net
Income (Loss)
Overall,
we had net loss of $936,000 for the nine months ended September 30, 2021 as compared to a net loss of $1,822,000 for the nine months
ended September 30, 2020, a decrease of $886,000, or 49%. The net loss for the nine months ended September 30, 2021 included $160,000
of non-cash, stock-based compensation, $67,000 of other stock-based expense (related to the settlement of litigation with a former employee),
and $49,000 of depreciation expense, compared to $354,000 of non-cash, stock-based compensation and $86,000 of depreciation expense for
the nine months ended September 30, 2020. Excluding these non-cash items, our net loss decreased by $722,000, or 52%.
Our
Bookings, Backlog and Revenue
During
the three months ended September 30, 2021, we executed new sales contracts with a total contract value of $5,693,000. During this same
period, we had positive change orders of $395,000 and cancellations of $488,000. The cancellations were based on discussions with customers
who have abandoned their projects. After adjustments for these change orders and cancellations, our net bookings in the three months
ended September 30, 2021 were $5,600,000, representing an increase of $4,680,000 (or 509%) from net bookings of $919,000 in the second
quarter of 2021.
Our
backlog at September 30, 2021 was $9,881,000, an increase of $1,894,000, or 24%, from June 30, 2021. The increase in backlog is the result
of our higher net bookings in the third quarter. Our backlog at September 30, 2021 includes booked sales orders of $1,250,000 (13% of
the total backlog) from several customers that we do not expect to be realized until late 2022. We believe the sales orders in this portion
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.
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,
2020
|
|
|
December
31,
2020
|
|
|
March
31,
2021
|
|
|
June
30,
2021
|
|
|
September
30,
2021
|
|
Backlog,
beginning balance
|
|
$
|
5,592,000
|
|
|
$
|
8,198,000
|
|
|
$
|
8,448,000
|
|
|
$
|
11,578,000
|
|
|
$
|
7,987,000
|
|
Net
bookings, current period
|
|
$
|
4,241,000
|
|
|
$
|
3,637,000
|
|
|
$
|
5,497,000
|
|
|
$
|
919,000
|
|
|
$
|
5,600,000
|
|
Recognized
revenue, current period
|
|
$
|
1,635,000
|
|
|
$
|
3,387,000
|
|
|
$
|
2,367,000
|
|
|
$
|
4,510,000
|
|
|
$
|
3,706,000
|
|
Backlog, ending balance
|
|
$
|
8,198,000
|
|
|
$
|
8,448,000
|
|
|
$
|
11,578,000
|
|
|
$
|
7,987,000
|
|
|
$
|
9,881,000
|
|
The
completion of a customer’s new build facility project is dependent upon the customer’s ability to secure funding and
real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the
time it takes for these customers to complete a new build project, which corresponds to when we are able to recognize revenue, is driven
by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business;
(ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government
delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where
there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed,
and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate
control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system;
(vii) the availability of power; and (viii) delays that are typical in completing any construction project.
As
has historically been the case for the Company at each quarter-end, there remains significant uncertainty regarding the timing of revenue
recognition of our backlog as of September 30, 2021. As of September 30, 2021, 12% of our backlog was attributable to customer contracts
for which we have only received an initial advance payment to cover our engineering services (“engineering only paid contracts”).
There are always risks that the equipment portion of our engineering only paid contracts will not be completed or will be delayed, which
could occur if the customer is dissatisfied with the quality or timeliness of our engineering services, there is a delay or abandonment
of the project due to the customer’s inability to obtain project financing or licensing, or the customer determines not to proceed
with the project due to economic factors, such as declining cannabis wholesale prices in the state.
In
contrast, after the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial
equipment paid contracts”), we typically are better able to estimate the timing of revenue recognition since the risks and delays
associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. As
of September 30, 2021, 88% of our backlog was attributable to partial equipment paid contracts.
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 2021 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
2021 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.
Financial
Condition, Liquidity and Capital Resources
Cash,
Cash Equivalents and Restricted Cash
As
of September 30, 2021, we had cash and cash equivalents of $2,284,000, compared to cash and cash equivalents of $2,285,000 as of December
31, 2020, a nominal decrease. The $1,000 decrease in cash and cash equivalents during the nine months ended September 30, 2021, was primarily
the result of cash used in our operating activities of $1,761,000, offset by proceeds from the sale of Series B preferred stock and warrants
(net of issuance costs) of $1,260,000 via a financing concluded in September 2021 and proceeds from a note payable of $514,000. Our cash
is held in bank depository accounts in certain financial institutions. During the nine months ended September 30, 2021, we held deposits
in financial institutions that exceeded the federally insured amount. During the nine months ended September 30, 2021, the Company transferred
a balance of $180,000 into a new bank account which was to be used for the sole purpose of paying certain warranty claims. The balance
on this restricted bank account as of September 30, 2021 was $0.
As
of September 30, 2021, we had accounts receivable (net of allowance for doubtful accounts) of $32,000, inventory (net of excess and obsolete
allowance) of $480,000, and prepaid expenses of $1,143,000 (including $879,000 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, 2021, we had total accounts payable and accrued expenses of $1,674,000, deferred revenue of $3,060,000, accrued equity
compensation of $109,000, other current liabilities of $37,000 and the current portion of operating lease liability of $238,000. As of
September 30, 2021, we had a working capital deficit of $1,164,000, compared to a working capital deficit of $2,220,000 as of December
31, 2020. The decrease in our working capital deficit was primarily related to (i) a decrease in deferred revenue of $665,000, (ii) an
increase in inventory of $153,000, (iii) a decrease in accounts payable and accrued liabilities of $110,000, and (iv) an increase in
prepaid expenses of $106,000.
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.
Summary
of Cash Flows
The
following summarizes our approximate cash flows for the nine months ended September 30, 2021 and 2020:
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net
cash used in operating activities
|
|
$
|
(1,761,000
|
)
|
|
$
|
600,000
|
|
Net
cash used in investing activities
|
|
|
(14,000
|
)
|
|
|
(4,000
|
)
|
Net
cash provided by financing activities
|
|
|
1,774,000
|
|
|
|
554,000
|
|
Net
decrease in cash
|
|
$
|
(1,000
|
)
|
|
$
|
1,150,000
|
|
Operating
Activities
We
incurred a net loss for the nine months ended September 30, 2021 of $936,000 and have an accumulated deficit of $28,380,000 as of September
30, 2021.
Cash
used in operations for the nine months ended September 30, 2021 was $1,761,000 compared to cash provided by operations of $600,000 for
the nine months ended September 30, 2020, an increase in cash usage of $2,361,000.
The
increase in cash used in operating activities during the nine months ended September 30, 2021 was primarily attributable to: (i) a decrease
in cash used to fund working capital of $3,087,000, (ii) a decrease in net loss of $886,000, and (iii) a decrease of $160,000 in non-cash
operating charges.
The
significant changes in working capital related to: (i) a decrease in deferred revenue (which represents cash received from customers
in advance of the performance of services or the delivery of equipment) of $665,000, (ii) an increase in inventory of $153,000, (iii)
a decrease in accounts payable and accrued liabilities of $111,000, and (iv) an increase in prepaid expenses of $106,000.
The
significant change in non-cash operating charges was due to (i) a decrease in share-based compensation of $202,000, (ii) a decrease in
depreciation and amortization expense of $36,000, and (iii) an increase in other share-based compensation of $67,000.
Investing
Activities
The
$14,000 cash used in investing activities during the nine months ended September 30, 2021 was related to the purchase of property and
equipment of $15,000, offset by proceeds from the sale of property equipment of $1,000. Cash used in investing activities during the
nine months ended September 30, 2020 was related to the purchase of property and equipment of $4,000.
Financing
Activities
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. Additionally, the Company entered into a note payable with its current bank
in the principal amount of $514,000, for working capital purposes. During the nine months ended September 30, 2020, the Company entered
into a note payable with its current bank in the principal amount of $554,000, for working capital purposes.
Series
B Preferred Stock Financing
On
September 28, 2021, Surna Inc. (the “Company”) sold to an institutional investor (the “Investor”), 3,300 shares
of Series B Convertible Preferred Stock, stated value $1,000 per share, currently convertible into 385,964 shares of common stock, and
a warrant to purchase up to 192,982 shares of common stock (“Investor Warrant”), for an aggregate purchase price of $3,000,000
(“Consideration”). The Company received net proceeds of approximately $2,625,000, paid in two closings.
The
Series B Preferred Stock has an annual dividend of 8% and has an initial common stock conversion price of $8.55. The conversion rate
is subject to adjustment in various circumstances, including stock splits, stock dividends, pro rata distributions, fundamental transactions
and upon a triggering event and subject to reset if the common stock of the Company sold in any subsequent equity transaction, including
a qualified offering, is sold at a price below the then conversion price. The Series B Preferred Stock is mandatorily convertible on
the third anniversary of its issuance. All conversions of the Series B Preferred Stock are subject to a blocker provision of 4.99%. The
Company will reserve 200% of the number of shares of common stock into which the Series B Preferred Stock and Investor Warrant may be
converted or exercised. On January 28, 2022, we agreed with the Series B investor to redeem 1,650 shares of our Series B Preferred Stock
for approximately $2.0 million following the closing of this offering, and at the completion of the offering, the Series B investor will
convert its remaining 1,650 shares of Series B Preferred Stock, plus accrued and unpaid dividends into the securities being offered hereby,
at a rate equal to 75% of the public offering price. The securities being issued to the Series B investor will be subject to a 90 day
lock-up.
The
Series B Preferred Stock agreements had several covenants to be performed by the Company, including to increase the authorized capital
of the Company, increase the reservation of shares of common stock to cover any conversions of the loan amount and exercise of the warrants,
and redeem the Class A Preferred Stock. On November 3, 2021, filed an amendment to its articles of incorporation increasing the authorized
capital to one billion shares of capital stock, of which 850,000,000 are designated as common stock and 150,000,000 are designated as
preferred stock. Also on November 3, 2021, we were authorized to redeem the outstanding Series A Preferred Stock, which was completed
on November 4, 2021. The Company also increased the number of shares reserved for conversion and exercise of the investor’s securities.
The
Investor was granted a right of participation in future private offerings and has agreed to a 90 day lock-up in connection with a qualified
offering. A “qualified offering” is the first public offering after the sale of the Series B Preferred Stock in which the
common stock of the Company is listed on a national exchange.
The
Investor Warrant may be exercised until September 28, 2024, at an initial exercise price of $9.45, subject to adjustment. The Investor
Warrant provides for cashless exercise if the underlying shares of common stock are not registered for resale, and all issuances of common
stock upon exercise are subject to a 4.99% blocker provision.
The
Company granted the Investor registration rights for the shares of common stock underlying the Series B Preferred Stock and the Investor
Warrants. The Company must file a registration statement no later than 180 days after the date of a qualified offering and have it effective
in 45 days if there is no Securities and Exchange Commission (“SEC”) review, or if there is a review, within 75 days. The
Company must keep the registration statement effective until all the shares registered have been sold or may be sold under Rule 144,
without regard to volume and holding period restrictions.
The
Company engaged ThinkEquity LLC (“ThinkEquity”) as its placement agent and paid a total cash fee of 9%, or $270,000, and
its expenses, less prepaid expenses, and issued to ThinkEquity and its designees a warrant to purchase up to an aggregate of 34,737 shares
of common stock. The exercise price of the warrant initially will be $10.40 per share, subject to typical adjustment provisions, and
exercisable for a term of three years. The warrant has registration rights.
Comparison
of Years ended December 31, 2020 and 2019
Financial
Overview
Our
revenue for the year ended December 31, 2020 was $8,514,000 compared to $15,224,000 for the year ended December 31, 2019, a decrease
of $6,710,000, or 44%. Overall, we had a net loss of $1,759,000 for the year ended December 31, 2020 as compared to a net loss of $1,339,000
for the year ended December 31, 2019, an increase of $420,000, or 31%. Our 2020 adjusted net loss was $1,239,000 compared to a 2019 adjusted
net income of $92,000. Our adjusted net income (loss) is our GAAP net income (loss) after addback for our non-cash equity compensation
expenses, debt-related items and depreciation expense. Historically, one of the most significant financial challenges we face is the
inconsistent and unpredictable revenue we generate quarter-over-quarter, and our revenue and cash flow remain difficult to predict.
Revenues
and Cost of Goods Sold
Revenue
for the year ended December 31, 2020 was $8,514,000 compared to $15,224,000 for the year ended December 31, 2019, a decrease of $6,710,000,
or 44%. This revenue decrease was partly the result of our decreased net bookings in 2020, which fell from $16,300,000 in 2019 to $7,405,000
in 2020, or 55%. We remain unable to consistently convert our backlog into revenue on a quarter-over-quarter basis. Our revenue conversion
is largely dependent on customer-centric factors—outside of our control—such as industry uncertainty, project financing concerns,
the licensing and qualification of our prospective customers, and other reasons such as a challenging business climate including an overall
post-COVID-19 economic downturn, which makes it difficult for us to predict when we will recognize revenue on our backlog.
Cost
of revenue decreased by $3,714,000 from $10,676,000 for the year ended December 31, 2019 to $6,961,000 for the year ended December 31,
2020.
The
gross profit for the year ended December 31, 2020 was $1,553,000 compared to $4,549,000 for the year ended December 31, 2019. Gross profit
margin decreased by approximately twelve percentage points from 29.9% for the year ended December 31, 2019 to 18.2% for the year ended
December 31, 2020. This decrease was primarily due to our fixed cost base, a lower margin on equipment sales, and an increase in variable
costs as a percent of revenue as described below.
Our
revenue cost structure is comprised of both fixed and variable components. The fixed cost component represents engineering, manufacturing
and project management salaries and benefits and manufacturing overhead that totaled $1,167,000, or 13.7% of total revenue, for the year
ended December 31, 2020 as compared to $1,426,000, or 9.4% of total revenue, for the year ended December 31, 2019. The decrease of $259,000
was primarily due to a decrease in salaries and benefits (including stock-based compensation) of $277,000, offset by an increase of $18,000
in fixed overhead. The variable cost component, which represents our cost of equipment, outside engineering costs, shipping and handling,
travel and warranty costs, totaled $5,795,000, or 68.1% of total revenue, in the year ended December 31, 2020 as compared to $9,250,000,
or 60.8% of total revenue, in the year ended December 31, 2019. In the year ended December 31, 2020 as compared to the prior year, our
cost of equipment decreased by $3,331,000 primarily due to the decrease in revenue and a decrease in our equipment margin of 3.5 percentage
points. Additionally in the year ended December 31, 2020 as compared to the year ended December 31, 2019: (i) our warranty costs increased
by $144,000, (ii) our excess and obsolete inventory and other variable overheads increased by $45,000, which were offset by (iii) a reduction
in outside engineering costs of $156,000, (iv) a reduction in shipping and handling costs of $89,000 and, (v) decreased travel of $69,000.
Operating
Expenses
Operating
expenses decreased by 33% from $5,859,000 for the year ended December 31, 2019 to $3,916,000 for the year ended December 31, 2020, a
decrease of $1,944,000. The operating expense decrease consisted primarily of: (i) a decrease in selling, general and administrative
expenses (“SG&A expenses”) of $1,567,000, (ii) a decrease in advertising and marketing expenses of $246,000 and, (iii)
a decrease in product development expenses of $131,000.
The
decrease in SG&A expenses for the year ended December 31, 2020 compared to the year ended December 31, 2019, was due primarily to:
(i) a decrease of $762,000 in stock-based compensation, (ii) a decrease of $191,000 in commissions, (iii) a decrease in travel of $122,000,
(iv) a decrease of $138,000 in accounting and other professional fees, (v) a decrease of $111,000 in loss on asset disposal, (vi) a decrease
of $69,000 in board fees, (vii) a decrease of $57,000 in salaries, benefits and other employee related costs, (viii) a decrease of $44,000
in bad debt expense, (ix) a decrease in depreciation of $40,000, (x) a decrease of $17,000 in facilities, insurance and office supplies
and, (xi) a decrease in investor relations costs of $15,000.
The
decrease in marketing expenses were due primarily to: (i) a decrease of $205,000 for industry trade shows and events, (ii) a decrease
in stock-based compensation of $26,000, (iii) a decrease of $17,000 in travel, (iv) a decrease of $15,000 in collateral and other marketing
expenses, offset by (v) an increase of $20,000 for web development.
The
decrease in product development costs was due to (i) a decrease in materials costs of $88,000, (ii) a decrease in stock-based compensation
of $23,000, (iii) a decrease in salaries and benefits of $12,000 and, (iv) a decrease in travel of $7,000.
Operating
Loss
We
had an operating loss of $2,363,000 for the year ended December 31, 2020, as compared to an operating loss of $1,311,000 for the year
ended December 31, 2019, an increase of $1,052,000, or 80%. The operating loss included $406,000 of non-cash, stock-based compensation
expenses and $114,000 for depreciation and amortization in the year ended December 31, 2020 as compared to $1,277,000 for stock-based
compensation and $154,000 of depreciation and amortization for the year ended December 31, 2019. Excluding these non-cash items, our
operating loss increased by $1,964,000.
Other
Income (Expense)
Our
other income (net) increased by $632,000 from other expense (net) of $28,000 for the year ended December 31, 2019 to other income (net)
of $604,000 for the year ended December 31, 2020. This change is primarily due to loan forgiveness of $557,000 and income from a legal
judgement of $35,000.
Net
Loss
Overall,
we had a net loss of $1,759,000 for the year ended December 31, 2020 as compared to a net loss of $1,339,000 for the year ended December
31, 2019, an increase of $420,000. The net loss included $406,000 of non-cash, stock-based compensation costs and depreciation and amortization
expense of $114,000 in the year ended December 31, 2020 as compared to non-cash, stock-based compensation expense of $1,277,000 and depreciation
and amortization of $154,000 in the year ended December 31, 2019. Excluding these non-cash items, our net loss increased by $1,332,000.
Liquidity,
Capital Resources and Financial Position
Cash
and Cash Equivalents
As
of December 31, 2020, we had cash and cash equivalents of $2,285,000, compared to cash and cash equivalents of $922,000 as of December
31, 2019, an increase of 148%. The $1,363,000 increase in cash and cash equivalents during the year ended December 31, 2020 was primarily
the result of cash provided by our operating and financing activities. Our cash is held in bank depository accounts in certain financial
institutions. We currently have deposits in financial institutions that exceed the federally insured amount.
As
of December 31, 2020, we had accounts receivable (net of allowance for doubtful accounts) of $33,000, inventory (net of excess and obsolete
allowance) of $327,000, and prepaid expenses and other of $1,038,000 (including $916,000 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 pursue
larger projects.
As
of December 31, 2020, we had no indebtedness, total accounts payable and accrued liabilities of $1,785,000, deferred revenue of $3,724,000,
accrued equity compensation of $128,000, and the current portion of operating lease liability of $266,000. As of December 31, 2020, we
had a working capital deficit of $2,220,000, compared to a working capital deficit of $1,437,000 as of December 31, 2019.
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.
Because
of the economic situation that developed during 2020, we cannot predict the continuing level of working capital that we will have in
the future. Additionally, we cannot predict that our future financial position will not deteriorate due to cancelled or delayed contract
fulfillment, reduced sales and our ability to perform our contracts.
Summary
of Cash Flows
The
following summarizes our cash flows for the years ended December 31, 2020 and 2019:
|
|
For
the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net
cash provided by operating activities
|
|
$
|
818,000
|
|
|
$
|
672,000
|
|
Net
cash used in investing activities
|
|
|
(9,000
|
)
|
|
|
(3,000
|
)
|
Net
cash provided by financing activities
|
|
|
554,000
|
|
|
|
-
|
|
Net
increase in cash
|
|
$
|
1,363,000
|
|
|
$
|
669,000
|
|
Operating
Activities
We
incurred a net loss for the year ended December 31, 2020 of $1,759,000 compared to a net loss for the year ended December 31, 2019 of
$1,339,000. We had an accumulated deficit of $27,444,000 as of December 31, 2020.
Cash
provided by operations for the year ended December 31, 2020 was $818,000 compared to cash provided by operations of $672,000 for the
year ended December 31, 2019, an increase of $146,000. The increase was primarily attributable to: (i) an increase in cash from working
capital of $1,370,000, offset by, (ii) a decrease in non-cash operating charges of $804,000, and (iii) an increase in net loss of $420,000.
Significant non-cash items included: (i) a gain on note payable forgiveness of $557,000, (ii) stock-related compensation of $277,000,
(iii) $190,000 for amortization of ROU asset, and (iv) depreciation and amortization expense of $120,000.
Investing
Activities
Cash
used in investing activities for the year ended December 31, 2020 was $9,000, compared to cash used in investing activities of $3,000
for the year ended December 31, 2019. The change related to purchases of property and equipment.
Financing
Activities
For
the years ended December 31, 2020 and 2019, cash from financing activities was $554,000 and $0, respectively. The cash from financing
activities was the result of a loan received from our bank on April 22, 2020 which was subsequently forgiven on December 11, 2020. See
Note 9 – Note Payable and Accrued Interest.
Going
Concern
Our
consolidated financial statements for the year ended December 31, 2020, have been presented on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent registered public accounting
firm included in its audit opinion on our consolidated financial statements for the year ended December 31, 2020, a statement that there
is substantial doubt as to our ability to continue as a going concern, and our consolidated financial statements for the year ended December
31, 2020 were prepared assuming that we would continue as a going concern. We have determined that our ability to continue as a going
concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations.
There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations
to address all of our cash flow needs. If we are not able to generate positive cash flow from operations or find alternative sources
of cash, our business and shareholders will be materially and adversely affected. The foregoing factors raise substantial doubt about
our ability to continue as a going concern for a period of one year from the date our condensed consolidated financial statements for
the year ended December 31, 2020, are issued. Our condensed consolidated financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
The
Company is subject to a number of risks similar to those of other similar stage and situated companies, including general economic conditions,
its customers’ operations and prospects for and ability to obtain project financing, and market and business disruptions, that
include the outbreak of COVID-19, dependence on key individuals, successful development, marketing and branding of products; uncertainty
of product development and generation of revenues; dependence on outside sources of financing; risks associated with research, development;
dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized
companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing
to fulfill its development activities and generating a level of revenues adequate to support the Company’s cost structure.
The
Company also will be affected by constraints on the availability of capital to its customers and prospects who have commenced, or are
contemplating, new or expanded cultivation facilities and the overall impact of the Covid-19 pandemic. The extent to which COVID-19 will
impact the Company’s business and financial results will depend on future developments, which are uncertain and cannot be predicted.
See Note 16. The duration and likelihood of operational success going forward resulting from the fiscal year 2020 measures of adjusting
the workforce reductions and cost-cutting measures are uncertain. If these actions do not meet management’s expectations, or additional
capital is not available, there is substantial doubt about the Company’s ability to continue as a going concern. Other factors
that will impact the Company’s ability to continue operations include the market demand for the Company’s products and services,
the ability to service its customers and prospects, potential contract cancellations, project scope reductions and project delays, the
Company’s ability to fulfill its backlog, the management of working capital, and the continuation of normal payment terms and conditions
for purchase of the Company’s products. The Company believes its cash balances and cash flow from operations will be insufficient
to fund its operations for the next twelve months. If the Company is unable to increase revenues, or otherwise generate cash flows from
operations, there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year from
the date the financial statements are issued. These consolidated financial statements do not include any adjustment that might result
from the outcome of this uncertainty.
Capital
Raising
Without
the proceeds from this offering, we believe our cash balances and cash flow from operations will be insufficient to fund our operations
for the next 12 months. If we are unable to increase revenues or otherwise generate cash flows from operations, we will need to raise
additional funding to continue as a going concern. Based on management’s estimate for our operational cash requirements, during
the first quarter of 2020, we took steps to downsize and reorient our operations to reduce costs. We will need to obtain financing in
order to continue our operations and achieve our growth strategies. There can be no assurance that we will be able to raise the necessary
financing, when and if needed, on acceptable terms or at all. If our operating results do not meet management’s expectations, or
additional capital is not available, management believes it can downsize or reorient operations to reduce certain expenditures. The precise
amount and timing of our financing needs cannot be determined accurately at this time, and will depend on a number of factors, including
the market demand for our products and services, management of working capital, and continuation of normal payment terms and conditions
for purchase of our products and services.
There
can be no assurance that the Company will be able to raise debt or equity financing in sufficient amounts, when and if needed, on acceptable
terms or at all. The Company’s ability to raise equity capital is also limited by the Company’s stock price, and any such
issuance could be highly dilutive to existing shareholders.
Inflation
In
the opinion of management, inflation has not had a material effect on our operations to date. However, it is possible that inflation
will have an impact going forward. .It is too early to determine if the impact from inflation will be material. Management will continue
to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
Contractual
Payment Obligations
Refer
to Note 4 – Leases of our consolidated financial statements, which are included as part of this prospectus for the further
details on our obligations under a lease for our manufacturing and office space.
Commitments
and Contingencies
Litigation
As
of December 31, 2019, there were 45,000 restricted stock units that had not been settled due to a dispute with a former employee over
the required withholding taxes to be paid to the Company for remittance to the appropriate tax authorities. The Company commenced an
arbitration action against the former employee regarding the dispute. The former employee also made claims in the arbitration action
against the Company for unpaid wages. As stated in a pleading in the arbitration, on March 9, 2020, the Company issued the former employee
45,000 shares of the Company’s common stock in settlement of these restricted stock units after taking measures to mitigate the
Company’s exposure to penalties and liability for the failure to properly withhold income taxes. The Arbitrator issued an interim
award of approximately $10,000 in the Company’s favor and a finding against the former employee. Effective June 9, 2020, the Arbitrator
issued his final award in the Company’s favor in the Colorado arbitration. The Arbitrator found against the former employee and
awarded the Company costs of $33,985, with interest at 8% per year. Effective July 22, 2020, the Colorado Court confirmed the Arbitration
award and entered a final judgement in favor of the Company and against the former employee. The Company pursued collection of this debt
and has now collected the debt owed. This former employee is continuing to pursue separate litigation against the Company for recovery
of alleged consulting fees owed to him for the 2015 calendar year prior to his appointment as an executive officer of the Company. The
Company strongly disputes the ongoing litigation and in the remote event of an adverse outcome, the amount of any settlement loss for
this case is not reasonably estimable as of the date of the issuance of these financial statements.
From
time to time, in the normal course of our operations, we are subject to litigation matters and claims. Litigation can be expensive and
disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and our view of
these matters may change in the future as the litigation and events related thereto unfold. An unfavorable outcome to any legal matter,
if material, could have an adverse effect on our operations or our financial position, liquidity or results of operations.
Other
Commitments
In
the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business
partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such
agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have
entered into indemnification agreements with our directors and certain of our officers and employees that will require us to, among other
things, indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees.
We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors
and certain of our officers and employees, and former officers, directors, and employees of acquired companies, in certain circumstances.
Off-Balance
Sheet Arrangements
We
are required to disclose any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on
our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures,
or capital resources that are material to investors. As of December 31, 2020, we had no off-balance sheet arrangements. During 2020 and
2019, we did not engage in any off-balance sheet financing activities.
BUSINESS
History
We
were founded as Hydro Innovations in Texas in 2006 by cultivators to provide environmental control equipment to indoor cultivation facilities.
The Company moved to Colorado in 2013 and was merged into a Nevada corporation named Surna Inc. in 2014. It then began trading on the
OTCQB exchange as SRNA until the Company’s name was changed to CEA Industries Inc. in November of 2021, when its trading symbol
was changed to CEAD.
Since
its inception, CEA Industries has been operating in the indoor agricultural sector, having served over 800 indoor cultivators with various
products and services and having provided environmental control engineering and equipment to over 200 commercial cultivation facilities.
We have licensed professional mechanical engineers on our staff and we can stamp drawings in any state or province. We believe we are
the oldest and most experienced firm serving this market. Our business has historically been in the U.S. and Canada, although we have
served several facilities outside North America.
Our
website is www.ceaindustries.com, which contains a description of our Company and products. In addition, we also maintain a branded
technology product website at www.surna.com. These websites and the information contained on the websites are not part of this
prospectus.
Overview
The
Company is an industry leader in CEA (Controlled Environment Agriculture) facility design, technologies, and services. The CEA industry
is one of the fastest-growing sectors of the United States’ economy and is defined by type of facility. The CEA industry is composed
of any horticultural facility that is fully self-contained and has a controlled environment. Three facility types meet these criteria:
● Indoor
facilities – environmentally sealed facilities for growing crops and that require artificial lighting.
● Vertical
farms – a cultivation facility that is oriented vertically to minimize ground square footage.
● Greenhouses
– facilities that are made of translucent materials to use natural sunlight on the crops.
Crops
grown in CEA facilities include: 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.
We
provide full-service licensed architectural and mechanical, electrical, and plumbing (MEP) engineering services, carefully curated HVACD
equipment, proprietary controls systems, lighting, and benching and racking products. Our team of project managers, licensed professional
architects and engineers, technology and horticulture specialists and systems integrations experts help our customers by precisely designing
for their unique applications. Through our partnership with a certified service contractor network we provide maintenance services to
assist in a smooth build-out and ensure optimal facility performance.
We
leverage our industry-leading experience to bring value-added solutions to our customers that help improve their overall crop quality
and yield, optimize energy and water efficiency, and satisfy evolving state and local construction codes, permitting and regulatory requirements.
Our revenue stream derives primarily from supplying our products, services and technologies to commercial indoor facilities ranging from
several thousand to more than 100,000 square feet.
All
CEA facility operators are facing multiple headwinds of high energy costs, issues about water usage and waste materials, and, in the
case of cannabis growing, increasingly rigorous quality standards and declining cannabis prices. To be competitive, among other things,
our customers must develop innovative ways to meet the demands of their business and reduce energy costs, 90% of which is typically related
to their HVACD (50%) and lighting systems (40%). HVACD systems have historically been our primary area of expertise. We often have the
advantage of early engagement with our customers at the pre-build and construction phases and the corresponding opportunity to build
longer-term relationships with our existing customers and their facilities. Going forward, our plan is to leverage our existing customer
relationships and attempt to sell them additional products and services, thereby becoming “stickier” to our customers, in
an effort to generate incremental revenue.
We
have three core assets that we believe are important to our going-forward business strategy and that will contribute to our future growth.
First, we have a well-known brand name in the industry along with multi-year relationships with customers and others developed over our
fifteen years of service to the industry. This length of service and broad network of industry contacts will benefit not only our organic
growth initiatives, but also provides us with unique insight into other industry providers who may be appropriate for acquisition or
joint efforts. Second, we have unique and specialized engineering know-how and experience gathered from designing environmental control
systems for over 200 commercial CEA cultivation facilities. Third, we have an expanding line of proprietary and curated environmental
control systems and other products that are needed to build a CEA facility.
The
CEA Industry
According
to leading market research firms like Headset and New Frontier Data, the North American cannabis industry is expected to experience compound
annual growth on the order of 20%-25% over the foreseeable future. More U.S. states are legalizing either medical or recreational use
of cannabis products, and sometimes both. Although the market is well aware of how the cannabis sector is growing, it seems to be less
aware of the non-cannabis CEA market, particularly the vertical farming segment which is growing nearly as fast as the cannabis market.
Since the technical infrastructure and requirements for growing any plant in a controlled environment are similar, we believe we can
bring our engineering expertise to this adjacent high growth market.
Our
Services and Equipment Solutions
Our
goal is to develop relationships with our prospects and customers that will afford us the opportunity to provide comprehensive services
and equipment for the complete lifecycle of indoor agriculture facilities. This lifecycle includes planning the business and the facility,
designing and engineering the facility, providing the many required infrastructure technologies, advising on and insuring proper installation
of the technologies, providing training and start-up support, and ultimately providing preventative and other ongoing services for insuring
proper maintenance and operations.
We
provide a comprehensive range of services and products as follows:
|
Service
Solutions
|
|
|
|
|
|
|
Facility
Design
|
|
|
|
|
|
|
|
Licensed
Architectural design, including space and operational planning
|
|
|
|
|
|
|
|
Licensed
Mechanical, Electrical, and Plumbing (MEP) engineering, including equipment layout and workflow
|
|
|
|
|
|
|
|
Assessing
equipment options based on facility requirements
|
|
|
|
|
|
|
|
Specifying/recommending
equipment for each facility
|
|
|
|
|
|
|
Equipment
Selection and Specifying
|
|
|
|
|
|
|
|
Identifying,
assessing and selecting equipment vendors
|
|
|
|
|
|
|
Equipment
Installation Advisory
|
|
|
|
|
|
|
|
Advising
contractors to insure proper cultivation equipment installation
|
|
|
|
|
|
|
Start-up
Services
|
|
|
|
|
|
|
|
Initial
equipment start-up
|
|
|
|
|
|
|
|
Operator
training
|
|
|
|
|
|
|
Lifecycle
Services
|
|
|
|
|
|
|
|
Preventative
Maintenance Services (Subscription)
|
|
|
|
|
|
Product
Solutions
|
|
|
|
|
|
|
Proprietary,
white-label environmental control products
|
|
|
|
|
|
|
Proprietary
Facility Control System
|
|
|
|
|
|
|
VAR
of Cultivation and Environmental Control Products
|
Service
Solutions: Facility Design Services
Our
licensed architectural services provide facility design and layout to include space and workflow optimization. Our extensive experience
with CEA facilities brings extra value to our customers as we advise them on the design of their facility to maximize its productivity
and ROI.
We
have professional engineers (PEs) on our staff to provide licensed, professional Mechanical, Electrical, and Plumbing (MEP) engineering
services to all non-cannabis customers, and to those customers in the cannabis growing industry that are in cannabis-legal states and
provinces. Our engineers perform mechanical engineering and we outsource electrical and plumbing engineering to several vendors with
whom we have long-term, trusted relationships. We believe we are the most experienced engineering firm serving the cannabis growing CEA
industry and we have leading edge, sophisticated engineering capabilities. We provide these services to facilities from several thousand
to over 100,000 square feet in size. Over time the size and sophistication of projects we have served has grown increasingly large, a
trend which we expect will continue as the industry builds ever larger facilities.
Our
licensed MEP engineering services provide stamped drawings that our customers need to obtain building permits and to build their facilities
and specify equipment, and we can provide these services in any state or province. Our technical experience and know-how in engineering
indoor cultivation facilities allow us to deliver to our customers practical solutions to complicated problems in four primary areas:
(i) precision climate and environmental controls, (ii) energy and water efficiency, (iii) building code and permitting, and (iv) construction
support services and start-up of their environmental control equipment. Our engineering design typically includes all mechanical components
of a climate control system: cooling and heating, dehumidification, ventilation, air sanitation, and odor control. We provide load calculations,
equipment specifications, and engineered systems drawings for both the cultivation and comfort cooling portions of our customers’
facilities. We also have experience in, or knowledge of, state and local permitting and code compliance for facilities in states and
provinces where cannabis has been legalized for either recreational or medical use or is expected to be legalized, and we provide stamped,
engineered drawings in all states and provinces where we operate. We provide a drawing package to our customers that allows them to obtain
a building permit that is code compliant, identifies construction materials and alternates, and provides construction administration
information for their general and sub-contractors to follow.
Service
Solutions: Equipment Selection and Specifying
Our
goal as engineers is to identify the best technical solutions in the market and to offer a curated range of technologies to our customers
to best meet the needs of their facilities. Our engineers assess each facility’s requirements and recommend the best equipment
options for the customer. Our product development and R&D groups search the market for the best technical solutions to offer our
customers. We offer a wide range of the best products in the market.
Service
Solutions: Equipment Installation Advisory
We
do not offer construction services or perform equipment installation. Typically, a facility owner hires a general contractor (GC) to
manage the project, and the GC hires sub-contractors in specific trades to conduct the installation of each sub-system, such as environmental
control equipment. Our role in the construction process is to work with the GC and sub-contractors to provide the equipment that the
customer has ordered at the required time and place. Then, during the construction process, our technical services employees are available
to advise the construction contractors, and we conduct multiple site visits to insure the quality of the installation.
Service
Solutions: Start-up Services
After
construction is completed our technical services employees will be on-site to inspect the installation and to conduct startup of the
systems that we have provided. We provide complete operator training for the facility personnel. After the facility is up and running,
we provide support as needed to include site visits and to insure that the facility is operating to its design specifications.
Service
Solutions: Lifecycle Services
CEA
facilities are technically sophisticated and require multiple sub-systems, including: environmental control, lighting, CO2
dosing and control, water conditioning and reclamation, and fertigation/irrigation. We believe that facility operators will eventually
want to focus on their core business of growing plants and not be distracted by the unrelated, but necessary and technical, work of maintaining
these mission-critical sub-systems.
In
the summer of 2021, we developed and began selling preventive maintenance (PM) services to meet this demand from our existing clients.
Sold on a recurring subscription basis to existing cultivation facilities, the PM services are sold by us and are provided by third-party
service companies located near the customer’s facility. We have developed a network of service companies who can provide this service
across most of the geography where our customers and prospects are located. The PM services product is important for our business for
three primary reasons: first, it provides recurring revenue. Second, it establishes a long-term relationship with the customer. Third,
it offers the opportunity to be sold independently of our existing engineering offering and to any of the several thousand existing cultivation
facilities.
Product
Solutions.
We
have historically been a provider of HVACD engineering and systems, and since 2019 we have broadened our product lines and now offer
a wide range of products and infrastructure technologies. Because many different technologies are required to operate an indoor cultivation
facility, our product strategy is to offer both proprietary (Surna Cultivation Technologies branded) and off the shelf products. Our
proprietary products are made by vendors on a contract manufacturing basis to our specifications. We offer a curated selection of products
and specify those that best meet the needs of our customer’s particular applications. Our product solutions can be divided into
three categories.
Product
Solutions: White-label environmental control products
Environmental
Control Systems. We offer a broad range of HVACD technologies, to include modular chilled water systems, custom air handling units, split
systems, packaged roof-top units, and self-contained and complex water chilled systems. We sell our proprietary products under the brand
names Surna, IsoStream, EnviroPro, EcoChill, StrataAir and SentryIQ. We have a national accounts relationship with Trane and we resell
their chillers under a joint label agreement. During 2019, we launched upgraded, white-labeled equipment lines of fan coils and air handlers.
In 2020 we introduced our first DX-based packaged systems. We offer various configurations of our Surna-branded fan coil units, which
provide greater efficiency, design flexibility and control for growers using modular chilled water systems. This expanded product line
allows us to serve customers across a wide range of application and budget requirements. We have chosen to offer white-label products
for two reasons. First, we can design the products to our own specifications, using our accumulated knowledge to develop products that
meet the particular and demanding challenges of indoor agriculture. Second, we can maintain better product margins by offering products
that are proprietary to us and are not otherwise available to potential competitors.
Product
Solutions: Proprietary Facility Control System
Sensing
and Control Systems. In 2018 we began to develop, and in 2019 began to offer, a branded, proprietary controls and monitoring system (consisting
of sensors, controllers, software, monitoring and a user interface). Branded as SentryIQ®, it is a sensors, controls and automation
(“SCA”) platform—a turnkey, single-vendor HVACD equipment and controls integration solution to new build projects as
well as existing facilities in the startup and operation phases. We have continued the rollout of SentryIQ® and to date we have
entered into seventeen contracts to implement our SentryIQ® SCA platform. This product line is important for tactical and strategic
reasons, and we hope to offer this as a standalone offering in the future. SentryIQ® is our highest-margin product, with margins
over 50%.
Cultivation
facilities must have SCA to operate their HVACD equipment. In simple form, SCA is the computerized thermostat in the room. The SCA also
functions as the “brains” in bringing multiple variables together for CEA grow operations. The occupant selects the desired
temperature set point, the wall thermostat (Sensor) detects the actual temperature, and when the space temperature deviates from the
desired set point the controller (Control) commands the environmental control components to supply heated, cooled, or dehumidified air
to bring the room temperature back to the set point. In the case of the indoor cultivation facilities, there are more environmental conditions
to monitor and control (such as temperature, relative humidity, CO2, lighting, vapor pressure deficit status, and more) than in a typical
residential home.
Indoor
CEA growers also need to vary and tightly control environmental conditions depending on the stage of plant growth (i.e., clone, vegetative
and flowering stages), the time of day, and the plant genetics. In a cultivation facility, the desired conditions change many times during
the plant’s growth cycle and even within a day, and this is most easily accomplished with a custom design, computerized environmental
control system (automation), similar to the most sophisticated building automation systems (BAS) found in commercial and process cooling
applications. This control system may also command lighting and CO2 dosing.
Our
SentryIQ® SCA package includes precision sensors to measure temperature, humidity, light, and CO2 levels—more accurately than
typical HVACD sensors and within tighter tolerance levels. Our controllers are purpose-built computers programmed by us to ensure our
industrial environmental control equipment follows the engineered sequences of operation to obtain desired set points. Our sensors connect
to our branded controllers through wires installed in the facility, and similarly they are wired to our HVACD equipment (e.g., chillers,
fan coils and dehumidifiers) to direct these pieces of equipment. The controllers also provide a custom user interface on a screen so
they can be easily programmed and controlled to achieve the customer’s environmental objectives and give the cultivator the ability
to access this data and react to alerts remotely.
We
entered this aspect of our business to satisfy our customer’s needs that we did not previously address and that historically was
provided by third-party controls contractors. Our entry into the SCA market helps both our customers’ and our businesses. Our customers
benefit because they are saved the extra work of finding and engaging an experienced CEA controls contractor, which allows them to get
their facility up and running more quickly by taking one decision off the table and thereby establishing a single point of responsibility
for controls implementation. We are also in a position to provide SCA because we know our proprietary equipment better than anyone, thereby
ensuring smooth integration with our equipment with no work scope shortcomings, what we refer to as “scope gap.”
From
a tactical perspective, and with limited incremental selling costs, our current sales team can now offer our SCA package to nearly every
prospect since every cultivation facility requires SCA technology. We believe this technology value-added solution gives us an opportunity
to achieve incremental project revenue at higher margins than we earn from our other equipment, typically on the order of 50% and more.
Strategically, through our SCA package, we are also able to deepen our long-term customer relationship by tethering us to the customer
through a controls interface (dashboard) to their facility. Future development will allow our customers to use artificial intelligence
(AI) by aggregating environment and growing data to optimize energy use, operating efficiency, and product quality and yield. While there
are several other total controls systems providers, we believe that our industry know-how, experience and reputation with climate control
environments gives us a compelling and competitive SCA offering.
Product
Solutions: VAR of Cultivation and Environmental Control Products
Some
of the technologies required in CEA facilities are non-proprietary and widely available, thus making it difficult to earn strong margins
on resale of these products. Products like pumps, valves, piping, etc. are commodities within the HVAC industry. However, we add value
by selecting, providing and integrating these products into our customer’s projects.
We
offer the following CEA-specific products as a reseller from trusted suppliers, for example: (i) lighting - we have partnered with a
third party to offer energy efficient, cost competitive LED lighting products at attractive margins; and (ii) benching and racking -
we offer benching and racking products via a partnership with a well-respected and widely used third party manufacturer.
Our
Customers and Prospects
We
provide our services and products to customers who are building, upgrading, or expanding an indoor cultivation facility for any crop.
Our customers can be defined on a range of criteria.
New
construction or the retrofit of an existing facility. Nearly all of our business has historically been for new construction facilities
but we have done retrofit projects and we believe that over time more of such business will become available.
Existing
commercial retrofit projects represent a business opportunity in the CEA industry. The estimated 5,000+ existing cannabis producing
CEA facilities in North America are easier to identify than new build projects. We believe, based on evidence and our market knowledge,
that some of these exiting facilities are operating sub-optimally and have environmental control problems that our services and products
can help remediate. We also believe that the energy consumption of these facilities can be reduced, and we have commenced developing
services and products to help them realize savings. We believe that retrofit projects do not typically carry the financial uncertainties
associated with new build projects such as licensing, permitting and funding.
Crop,
either cannabis or non-cannabis. Nearly all of our projects have been for cannabis cultivation facilities as that has been the focus
of our sales and marketing efforts, but we have recently performed services for several non-cannabis facilities. As non-cannabis markets
are growing at a pace previously seen in the cannabis markets, we are actively pursuing this market.
Size
of facility. We serve facilities ranging in size from 2,000 square feet to over 100,000 square feet. Most facilities are between
20,000 and 70,000 square feet.
Customer
type. Most of our customers are new entrants into the industry and have no other cultivation facilities. Some customers have one
or more facilities which we classify as MFOs (multi-facility operators), and these are our favored prospects that we pursue aggressively
or who turn to us after we have served them on a previous facility. We currently do not have many projects with the largest, publicly
traded firms (typically referred to as “MSOs” for Multi-State Operators) although we are currently pursuing them as well.
MFOs
(Multi-Facility Owners). These are customers who already own cultivation facilities and they are our preferred customers for several
good reasons: they are likely already successful and cash-flowing, and they understand the challenges of building a new cultivation facility.
They are thus a less risky prospect with a much higher likelihood of successfully completing a project.
New
Entrants are often times investors coming from outside the CEA industry who are attracted by the growth opportunities available as the
CEA industry grows. We are particularly effective at winning business from such prospects because of our fifteen-year track record and
well-known brand name within the industry. However, the risks of a failed project with such prospects are higher because of the challenges
that must be overcome to successfully build and operate a CEA operation: ability to gain funding, ability to obtain licensure, ability
to find an appropriate facility, among many others.
Sales
and Marketing
We
have both marketing and sales organizations and employees. Marketing consists of a Vice-President of Marketing Communications and two
staff members. Our sales organization is comprised of a Vice-President of Sales and four sales representatives located across the country.
Our sales and marketing efforts focus on winning business from new entrants and smaller MFOs.
Marketing
Strategy
Our
marketing activities are focused on generating new leads and to position us as a leader in the CEA facilities indoor cultivation market.
We lead with our company value proposition of offering a wide range of proprietary and curated products and services, giving more options
to our customers to satisfy their individual applications and goals, versus our competition that only offers single solutions for each
of their products.
Brand
Image. We emphasize our 15-year presence serving the industry and our status as an industry pioneer that was founded by cultivators
to provide service to cultivators. We have also positioned ourselves as an engineering company that is, we believe, the most experienced
such firm serving the cannabis segment of the CEA industry. We are well-known in the industry because of the many projects we have performed
and because of our longevity serving the same. We reinforce our message and positioning with regular blog posts on our website, with
interviews of our technical people in certain industry magazines, with talks and presentations at trade shows, and with technical white
papers. Some of our engineers sit on industry technical standards groups. Many of our projects are referred to us by previous customers,
and we reap the benefits of a virtuous cycle of many past projects leading to new projects.
Internet.
Our marketing activities include a fresh, easy to navigate website that provides education through our SEO-optimized landing pages,
case studies, white papers, blogs and articles, advertising in various trade publications and digital outlets, social media and email
campaigns.
Paid
Referrals. We provide referral agreements to parties in the industry who are in a position to refer business to us.
Trade
Shows. We make regular appearances at trade shows. We are also frequent speakers or panel members at trade show educational events.
Our co-founder, Brandy Keen, is a well-known industry pioneer and authority who writes regular blog posts and is a sought-after speaker
at industry events.
Investor
Relations/Public Relations. We actively manage our public image to both the industry and to investors. For the industry we
regularly publish press releases with positive company news including new product releases and major project wins. For the investor community
we retain an Investor Relations firm to provide regular coverage of Company developments
Sales
Strategy
Our
sales strategy is to call on leads developed by our marketing efforts, leads referred by existing customers, networking at industry events
and trade shows, and developing relationships with potential prospects. Our sales cycle is long, ranging from several months to a year
from first contact with a prospect to signing a contract. In the organic growth strategy update we announced in May of 2021 we specifically
added architectural services to our offering. Typically, architectural services are the first that will be needed when a facility is
to be built. By selling our architectural services to a prospect we gain an early foothold in the relationship with the prospect. By
offering most of the services and products that the prospect will need for their facility, we attempt to keep competitors out of the
relationship.
Sales,
Contract, and Fulfillment Cycle
The
sales cycles for our new build commercial projects can vary significantly depending on the size and complexity of the project. From pre-sales
and technical advisory meetings to sales contract execution, to engineering and design services and equipment delivery, and all the way
through installation and startup of the installed system, the full cycle can range from three months to two years. Since we do not install
any of the products we sell, our customers are required to use third-party installation contractors, which adds to the variability of
the sales cycle.
When
a customer agrees to enter into a contract with us it can be for any or all of the following:
Architectural
design services;
MEP
engineering services; and
Equipment
provision.
To
enter into a contract we require a 5-10% deposit and a signed contract. We then require progress payments as architectural and/or engineering
work is completed, and before equipment is shipped. We generally do not ship equipment to a customer unless that equipment has been fully
paid. The sales and fulfillment cycle can be summarized as follows, with elapsed time from start:
Start:
Early meetings to understand goals and resources;
1-2
months: Proposal development and presentation;
3
months: Contract acceptance (requires 5-10% deposit);
3
months: Architectural and MEP engineering work begin;
4-5
months: Architectural and MEP engineering work completed and equipment selections finalized (services paid for before release of construction
drawings);
5
months: equipment ordered (40% deposit on equipment received prior to ordering);
6-18
months: construction project commences, equipment delivered as required (fully paid for before shipping); and
12-18
months: all equipment shipped and installed, project completed, operator training and system startup conducted.
Gross
Margins and Revenue.
Architectural
and Engineering services fees can range from $10,000 to over $100,000, depending on the size of the project. Revenue from equipment sales
on individual projects has been over $3,000,000 but most typically ranges from $500,000 to $1,500,000. Our target gross margin from equipment
sales ranges from 25% to 60%, with services margins ranging from 10% to 20%.
Our
Corporate Growth Strategy
Our
corporate strategy for growing the Company and increasing shareholder value are based on the following pillars.
Pursue
aggressive organic growth.
We
serve a market for the construction and expansion of CEA facilities and businesses that is projected to grow at a 20%+ compound annual
growth rate for the foreseeable future. Our primary vertical market of cannabis cultivation facilities has been joined by the similarly
rapidly growing urban vertical farming market to create two market opportunity segments that we are positioned to serve.
In
May of 2021 we announced a new strategy for our organic growth, which included the following elements.:
New
markets
Non-cannabis
CEA (vertical/urban farming). We have expanded our business development plan to pursue non-cannabis CEA facilities, at least doubling
our total addressable market. We have served several non-cannabis CEA facilities in the past and present and we have expanded our marketing
efforts to aggressively pursue this vertical market.
New
products & services
We
decided to expand our product offerings from primarily environmental control to now offer all of the primary technologies and services
required in a CEA facility: architectural design, lighting, benching, HVACD, sensing & control systems, CO2 dosing and
control, water filtration & condensate reclamation, irrigation & fertigation systems, and wastewater treatment.
New
trade name
In
May of 2021 we adopted the trade name Surna Cultivation Technologies instead of Surna Inc. because we believe that the new name will
more clearly identify our business to prospects and make us easier to find on various social media and search engines.
Seek
strategic relationships, mergers, and acquisitions to add to our existing business.
We
intend to grow our business through mergers, acquisitions, and strategic partnerships that serve our goal of being a leading and rapidly-growing
supplier to the CEA industry. Our strategy is to use our insight to select the right partners to align with and the right acquisition
targets to pursue.
Our
experience and engineering advantages. Our core expertise, developed over many years, is engineering the environmental controls of CEA
facilities, which is a sophisticated engineering challenge due to the high humidity (latent heat) and heat load (sensible heat) within
these facilities. Not only are the loads high, but the environmental conditions within these facilities must be held closely within limits
that the facility’s managers request. Engineering to meet these limits requires us to consider all of the primary components within
the facility: lighting, irrigation, HVACD, fertigation, sensors, controls, CO2 dosing, monitoring and alarms, facility physical
limits such as power availability, and energy consumption. This expertise uniquely informs our view on the requirements of CEA facilities.
Technical
advantages as a strategic partner and acquirer. We believe that the expertise gained in engineering many of the primary technical components
within a CEA facility provides us with a uniquely well-informed view of the efficacy of the many primary components on offer in the marketplace.
We further believe that this knowledge will help us make wise choices of which products to pursue for strategic relationships, and which
providers to potentially merge with or acquire.
Corporate
advantages as a strategic partner and acquirer. For smaller component providers we believe that our publicly traded platform and our
existing sales and marketing reach will make us an attractive partner. Our public status provides sources of capital and our sales and
marketing resources can help us bring other products to market.
Raise
capital and uplist to a senior exchange
In
2019 our revenue grew 60% year-over-year, and we had our first-ever cash flow positive year. Despite the challenges brought on by the
COVID-19 pandemic in the first half of 2020, we believe that our revenue growth in 2019 and then in the Q3 2020 – Q3 2021 period
validates our market opportunity and our business model. We also recognize that the costs of being a small public company are substantial
and require cash that could otherwise be used to sustain and grow the business. We believe that there is only one solution to this issue:
rapid revenue and margin growth. We believe that we have growth opportunities, but we are capital constrained and must seek outside financing
to pursue the growth we believe we can achieve.
Our
Competitive Advantages
Customer
Operations. First and foremost we seek to help our customers build the most effective and efficient facility possible. We believe
that we are uniquely positioned to engineer all of the complex components of a CEA facility into a holistic whole because of our dedicated
engineering staff and our experience in with over 800 cultivators including over 200 commercial facilities. Our 15 years in the business
has provided us a wide network of technology vendors from which we curate a selection of the best products. In addition, we are the leading
experts in applying the most challenging component of the technical infrastructure, the environmental controls, and we have the knowledge
required to engineer the interactions among the required components. A professional engineer (PE) license is required for all MEP engineering
work, and this engineering competence is one of our greatest strengths.
Sustainability.
Indoor cultivation facilities, like data centers, are resource intensive. Several U.S. states have implemented building code changes
that place limits on the energy consumption allowed within cultivation facilities, and we anticipate that more states will do the same.
Among our objectives is to provide our customers with the most energy-efficient alternatives for their infrastructure. Energy and resource
efficiency is a high priority to us as engineers, and our most senior engineering staff hold the LEED (Leadership in Energy and Environmental
Design) credential. Our CEO previously helped build a cleantech company, has been involved in the cleantech industry for over five years,
and published a book on selling energy efficient technologies. We believe that we are in a position to lead the industry in sustainability
initiatives which our customers will highly value.
Customer
Acquisition. By offering Facility Selection & Design services we seek to build relationships with prospects at the earliest opportunity
in the lifecycle of the cultivation business. By expanding our offerings to include nearly every piece of the technical infrastructure
required in a facility we hope to engage at the earliest possible moment with the customer and earn the opportunity to provide all the
products and services required for the facility. Our post-start-up, lifecycle services will help us maintain a relationship with the
customer as long as the facility is in operation. Our observation is that our customers want to grow plants, not maintain the technical
infrastructure of complex systems, and we believe that they will accept our offer to do so, as some already have.
Revenue
and Revenue Recurrence. We believe that our revenue can be expanded by offering most of the primary technical infrastructure components
for a cultivation facility. For example, if we are able to provide all of the primary infrastructure components to a cultivation facility,
our revenue on a project could be up to 200% higher than if we provided the environmental controls systems alone. In the past we did
not have products or services to offer our customers after a facility was constructed. We have recently begun to offer preventative maintenance
services, and we believe that by expanding this service offering we will be able to gain long-term recurring revenue on a subscription
basis.
Our
Competition
Our
environmental control systems and our related engineering and design services compete with various national and local HVACD contractors
and traditional HVACD equipment suppliers who traditionally resell, design, and implement climate control systems for commercial and
industrial facilities, most of whom do not have the specific knowledge that we have about the complexities and challenges of CEA facilities.
We have positioned ourselves to differ from these competitors by providing a broad range of engineering and design services and environmental
control systems, across most major HVACD solutions, including modular chilled water systems, custom air handling units, split systems,
packaged roof-top units, and self-contained and complex chilled-water systems, each tailored specifically for managing the distinct challenges
involved in CEA facilities. We believe our industry-specific applications and experience in the CEA market allow us to deliver the right
solution to our cultivation customers. Unlike many of our competitors, our solutions are designed specifically for cultivators to provide
tight temperature/humidity control, reduce bio-security risk, reduce energy requirements, and minimize maintenance complexity, costs
and downtime. However, we are seeing more competitors enter into the CEA market, trying to mimic the same types of crop-specific climate
control systems and engineering services that we offer. We believe this increased competition may adversely impact our ability to obtain
new facility projects from both MFOs and independent smaller growers and could require us to accept lower gross margins on our projects.
As
the cannabis segment of the CEA industry continues to mature and develop and legalization becomes more prevalent, we expect to see more
competition from agricultural product and service providers who seek to expand into this niche of the CEA market. Going forward, we intend
to expand our focus to include non-cannabis crops grown in controlled environments such as 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), bell peppers, cucumbers, and tomatoes. Companies already operating in the non-cannabis CEA industry may
have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical, sales
and marketing resources. These competitors may adopt more aggressive pricing policies and make more attractive offers to existing and
potential clients, employees, strategic partners, distribution channels and advertisers. Increased competition is likely to result in
price reductions, reduced gross margins and a potential loss of market share.
Intellectual
Property
We
rely on a combination of patent and trademark rights, licenses, trade secrets, and laws that protect intellectual property, confidentiality
procedures, and contractual restrictions with our employees and others to establish and protect our intellectual property rights. We
have several issued patents and pending patent applications; however, we do not believe that these issued and pending patents currently
provide us with any competitive advantage. We have registered trademark registrations around our core Surna brand (“Surna”)
in the United States and select foreign jurisdictions, as well as the Surna logo and the combined Surna logo and name in the United States.
Our Surna trademark is also registered in the European Union and Canada. Subject to ongoing use and renewal, trademark protection is
potentially perpetual. We actively protect our inventions, new technologies, and product developments by maintaining trade secrets and,
in limited circumstances, filing for patent protection.
Employees
We
currently have 30 active full-time employees and two part-time employees. However, we may engage, and have in the past utilized, the
services of consultants, independent contractors, and other non-employee professionals. Additional employees may be hired in the future
depending on need, available resources, and our achieved growth.
Government
Regulation
U.S.
Regulations
While
we do not generate any revenue from the direct sale of cannabis products, we have historically, and continue to, offer our services and
engineering solutions to indoor cultivators that are engaged in various aspects of the cannabis industry. Cannabis is a Schedule I controlled
substance and is illegal under federal law. Even in those states in which specific uses of marijuana has been legalized, such as medical
marijuana or for adult recreational purpose, its use remains a violation of federal laws.
A
Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of
safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule I controlled substances
as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If
the federal government decides to enforce the Controlled Substances Act with respect to cannabis, persons that are charged with distributing,
possessing with intent to distribute, or growing cannabis could be subject to fines and terms of imprisonment, the maximum being life
imprisonment and a $50 million fine. Any such change in the federal government’s enforcement of current federal laws could cause
significant financial damage to us. While we do not intend to harvest, manufacture, distribute or sell cannabis or cannabis products,
we may be irreparably harmed by a change in enforcement by the federal or state governments.
Previously,
the Obama administration took the position that it was not an efficient use of resources to direct federal law enforcement agencies to
prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. The Trump administration
revised this policy but made no major changes in enforcement through Attorney General Sessions rescinding the Cole Memorandum. The Department
of Justice will continue to enforce the Controlled Substances Act with respect to cannabis under established principles in setting their
law enforcement priorities to prevent:
|
●
|
the
distribution of cannabis products, such as marijuana, to minors;
|
|
●
|
criminal
enterprises, gangs and cartels receiving revenue from the sale of cannabis;
|
|
●
|
the
diversion of cannabis products from states where it is legal under state law to other states;
|
|
●
|
state-authorized
cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
|
|
●
|
violence
and the use of firearms in the cultivation and distribution of cannabis products;
|
|
●
|
driving
while impaired and the exacerbation of other adverse public health consequences associated with cannabis product usage;
|
|
●
|
the
growing of cannabis on public lands; and
|
|
●
|
cannabis
possession or use on federal property.
|
Since
the use of marijuana is illegal under federal law, most federally chartered banks will not accept deposit funds from businesses involved
with marijuana. Consequently, businesses involved in the marijuana industry generally bank with state-chartered banks and credit unions
to provide banking to the industry.
In
2014, Congress passed a spending bill containing a provision (the Rohrabacher-Farr amendment, now referred to as the Rohrabacher-Blumenauer
Amendment) blocking federal funds and resources allocated under the 2015 appropriations bill from being used to “prevent such States
from implementing their own State medical marijuana laws.” The Rohrabacher-Blumenauer Amendment, however, did not codify any federal
protections for medical marijuana patients and producers operating within state law. The Justice Department maintains that it can still
prosecute violations of the federal cannabis laws and continue cases already in the courts. The Rohrabacher-Blumenauer Amendment must
be re-enacted every year, and it was continued for 2016, 2017, 2018, 2019 and 2020, and currently, now known as the Joyce Amendment,
remains in effect through December 3, 2021. The continued re-authorization of the Joyce Amendment cannot be assured. If the Joyce Amendment
is no longer in effect, the risk of federal enforcement and override of state marijuana use and cannabis related laws would increase.
However, state laws do not supersede the prohibitions set forth in the federal drug laws.
In
order to participate in either the medical or the adult use aspects of the cannabis industry, all businesses and employees must obtain
licenses from the state and, for businesses, local jurisdictions as well. As an example, Colorado issues four types of business licenses
including cultivation, manufacturing, dispensing, and testing. In addition, all owners and employees must obtain an occupational license
to be permitted to own or work in a facility. All applicants for licenses undergo a background investigation, including a criminal record
check for all owners and employees.
Colorado
has also enacted stringent regulations governing the facilities and operations of cannabis businesses that are involved with the plant
and its products. All facilities are required to be licensed by the state and local authorities and are subject to comprehensive security
and surveillance requirements. In addition, each facility is subject to extensive regulations that govern its businesses practices, which
includes mandatory seed-to-sale tracking and reporting, health and sanitary standards, packaging and labeling requirements, and product
testing for potency and contaminants.
Laws
and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations.
Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or
allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. It is also possible
that regulations may be enacted in the future that will be directly applicable to our business. We cannot predict the nature of any future
laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative
policies and procedures, when and if promulgated, could have on our business.
Canadian
Regulations
Summary
of the Cannabis Act
On
October 17, 2018, the Cannabis Act came into force as law with the effect of legalizing adult recreational use of cannabis across Canada.
The Cannabis Act replaced the Access to Cannabis for Medicinal Purposes Regulations (“ACMPR”) and the Industrial Hemp Regulations,
both of which came into force under the Controlled Drugs and Substances Act (Canada) (the “CDSA”), which previously permitted
access to cannabis for medical purposes for only those Canadians who had been authorized to use cannabis by their health care practitioner.
The ACMPR replaced the Marihuana for Medical Purposes Regulations (Canada) (the “MMPR”), which was implemented in June 2013.
The MMPR replaced the Marihuana Medical Access Regulations (Canada) (the “MMAR”) which was implemented in 2001. The MMPR
and MMAR were initial steps in the Government of Canada’s legislative path towards the eventual legalization and regulating recreational
and medical cannabis.
The
Cannabis Act permits the recreational adult use of cannabis and regulates the production, distribution and sale of cannabis and related
oil extracts in Canada, for both recreational and medical purposes. Under the Cannabis Act, Canadians who are authorized by their health
care practitioner to use medical cannabis have the option of purchasing cannabis from one of the producers licensed by Health Canada
and are also able to register with Health Canada to produce a limited amount of cannabis for their own medical purposes or to designate
an individual who is registered with Health Canada to produce cannabis on their behalf for personal medical purposes.
Pursuant
to the Cannabis Act, subject to provincial regulations, individuals over the age of 18 are able to purchase fresh cannabis, dried cannabis,
cannabis oil, and cannabis plants or seeds and are able to legally possess up to 30 grams of dried cannabis, or the equivalent amount
in fresh cannabis or cannabis oil. The Cannabis Act also permits households to grow a maximum of four cannabis plants. This limit applies
regardless of the number of adults that reside in the household. In addition, the Cannabis Act provides provincial and municipal governments
the authority to prescribe regulations regarding retail and distribution, as well as the ability to alter some of the existing baseline
requirements of the Cannabis Act, such as increasing the minimum age for purchase and consumption.
Provincial
and territorial governments in Canada have made varying announcements on the proposed regulatory regimes for the distribution and sale
of cannabis for adult-use purposes. For example, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon and the Northwest
Territories have chosen the government-regulated model for distribution, whereas Saskatchewan and Newfoundland & Labrador have opted
for a private sector approach. Alberta, Ontario, Manitoba, Nunavut and British Columbia have announced plans to pursue a hybrid approach
of public and private sale and distribution.
In
connection with the new framework for regulating cannabis in Canada, the federal government has introduced new penalties under the Criminal
Code (Canada), including penalties for the illegal sale of cannabis, possession of cannabis over the prescribed limit, production of
cannabis beyond personal cultivation limits, taking cannabis across the Canadian border, giving or selling cannabis to a youth and involving
a youth to commit a cannabis-related offence.
On
July 11, 2018, the Canadian federal government published regulations in the Canada Gazette to support the Cannabis Act, including the
Cannabis Regulations, the new Industrial Hemp Regulations, along with proposed amendments to the Narcotic Control Regulations and certain
regulations under the Food and Drugs Act (Canada). The Industrial Hemp Regulations and the Cannabis Regulations, among other things,
outline the rules for the legal cultivation, processing, research, analytical testing, distribution, sale, importation and exportation
of cannabis and hemp in Canada, including the various classes of licenses that can be granted, and set standards for cannabis and hemp
products. The Industrial Hemp Regulations and the Cannabis Regulations include strict specifications for the plain packaging and labelling
and analytical testing of all cannabis products as well as stringent physical and personnel security requirements for all federally licensed
production sites. The Industrial Hemp Regulations and the Cannabis Regulations also maintain a distinct system for access to cannabis.
With the Cannabis Act now in force, cannabis has ceased to be regulated under the CDSA and is instead regulated under the Cannabis Act,
and both the ACMPR and the Industrial Hemp Regulations have been repealed effective October 17, 2018.
Additional
regulations were added in October 2019 governing the legal production and sale of three classes of cannabis, edibles, extracts and topicals.
A processing license will be required in order to manufacture, package and label cannabis edibles, extracts and topicals to consumers.
The licensing also has quality control and testing requirements for production to prevent contamination and address the risk of foodborne
illness associated with cannabis. Cannabis products will have THC and cannabidiol limits per unit.
Security
Clearances
The
Cannabis Regulations require that certain people associated with cannabis licensees, including individuals occupying a “key position”
directors, officers, large shareholders and individuals identified by the Minister of Health, must hold a valid security clearance issued
by the Minister of Health. Officers and directors of a parent corporation must be security cleared.
Under
the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized
crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who have histories
of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants)
are not precluded from participating in the legal cannabis industry, and the grant of security clearance to such individuals is at the
discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis.
Cannabis
Tracking System
Under
the Cannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis tracking system. The Cannabis Regulations
set out a national cannabis tracking system to track cannabis throughout the supply chain to help prevent diversion of cannabis into,
and out of, the illicit market. The Cannabis Regulations also provides the Minister of Health with the authority to make a ministerial
order that would require certain persons named in such order to report specific information about their authorized activities with cannabis,
in the form and manner specified by the Minister of Health.
Cannabis
Products
The
Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level permit the sale of dried cannabis,
cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as “pre-rolled” and in capsules.
The THC and cannabidiol content and serving size of cannabis products is limited by the Cannabis Regulations. These regulations also
cover labelling and packaging regulation and extensive prohibitions on representations that may be made with respect to cannabis products
covering areas such as health and cosmetic benefits, nutrition, comparisons to alcoholic beverages and diet benefits and dietary requirements.
MANAGEMENT
Information
about our Directors
The
Company’s current directors are set forth below:
Name
|
|
Age
|
|
Positions
& Committees
|
Anthony
K. McDonald
|
|
63
|
|
Chairman
of the Board; Chief Executive Officer and President
|
James
R. Shipley
|
|
65
|
|
Director;
Compensation Committee Chair; Audit Committee Member
|
Nicholas
J. Etten
|
|
52
|
|
Director; Nominating
Committee Chair; Audit Committee Member
|
Troy L. Reisner
|
|
55
|
|
Director; Audit
Committee Chair; Compensation Committee Member
|
Marion Mariathasan
|
|
47
|
|
Director; Nominating
Committee Member
|
Certain
information, as of the date of this prospectus, with respect to the Company’s current directors is set forth below. The business
address of each of the directors is 385 South Pierce Avenue, Suite C, Louisville, Colorado 80027.
Name
and Year First Elected Director
|
|
Background
Information and Principal Occupation(s) During Past Five Years and Beyond
|
|
|
|
Anthony
K. McDonald (2018)
|
|
Mr.
McDonald was appointed a director on September 12, 2018. On November 28, 2018, Mr. McDonald
was appointed our Chief Executive Officer and President. On June 24, 2020, Mr. McDonald was
appointed Chairman of the Board. Mr. McDonald has been involved in building businesses in
the cleantech, energy efficiency and heating, ventilation and air conditioning (“HVACD”)
industries over the past 10 years. From 2008 to 2018, Mr. McDonald led sales and business
development as Vice-President—Sales for Coolerado Corp., a manufacturer and marketer
of innovative, energy-efficient air conditioning systems for commercial, government, and
military use. Along with Coolerado’s CEO, Mr. McDonald was instrumental in growing
the business to become an INC. 600 high-growth company award winner and assisted in raising
$15 million of private funding from a cleantech investment fund. In 2015, Coolerado was acquired
by Seeley International, Australia’s largest air conditioning manufacturer and an innovative
global leader in the design and production of energy-efficient cooling and heating products,
where Mr. McDonald served as National Account Manager. He is also the founder and Managing
Partner of Cleantechsell.com and the author of Cleantech Sell: The Essential Guide To Selling
Resource Efficient Products In The B2B Market.
Prior
to joining Coolerado, Mr. McDonald spent over ten years in the private equity industry where he was involved in numerous transactions
in the technology, manufacturing, and power development industries. As a business development officer at several private equity acquisitions
groups Mr. McDonald identified, financed, or acquired numerous transactions with total enterprise value in excess of $200 million.
Mr.
McDonald was also a consultant to international banks with KMPG from 1994 to 1997 and served as a director for Keating Capital, Inc.,
a publicly traded business development company that made investments in pre-IPO companies. He previously served as a mentor for companies
in the Clean Tech Open competition.
Mr.
McDonald is a U.S. Army veteran and a graduate of the U.S. Military Academy at West Point, N.Y. where he earned a B.S. degree in
Engineering and Economics. He also received an M.B.A. degree from the Harvard Business School.
Among
the reasons for Mr. McDonald to be selected for service on the Board is his experience in sales, sales and operations management,
mergers and acquisitions, the HVACD industry, his in-depth knowledge of climate control systems and technologies.
|
James
R. Shipley (2020)
|
|
Mr.
Shipley was appointed a director on June 24, 2020. Mr. Shipley recently retired from AgTech
Holdings where he was the Chief Strategy Officer of GroAdvisor and the Vice-President of
Sales VividGro since 2017. Since 2017, Mr. Shipley has assisted in design and build consulting
along with supply chain management for cultivation operations in 12 states covering more
than 500,000 square feet of warehouse indoor cultivation and continues to consult independently
with operators in North America. From 2014 to 2017 Mr. Shipley, acting in several executive
roles, helped build multiple business lines for MJIC Inc. (now CNSX: MSVN ); these roles
included being a member of the board of directors, Chairman and President. Mr. Shipley is
currently president and a principal in RSX Enterprises Inc., a sales agency and marketing
firm that sells and markets equipment for use in controlled environment agriculture on behalf
of various manufacturers. Mr. Shipley has been active in the cannabis business, where he
has founded various summits such as the Marijuana Investor Summit and been involved in many
educational workshops and business expos. Previously, Mr. Shipley was an officer and chief
revenue officer with Carrier Access Corporation (CACS), a public company trading on Nasdaq.
Prior to Carrier Access, Mr. Shipley worked at Williams Companies in their telecommunications
divisions.
Mr.
Shipley was selected for service on the Board because of his experience in and commitment to the cannabis industry, his demonstrated
and consistent record of success as an executive and entrepreneur, and his extensive network of contacts in the cannabis industry.
|
|
|
|
Nicholas
J. Etten (2020)
|
|
Mr.
Etten was appointed a director on June 24, 2020. Mr. Etten joined Acreage Holdings in 2018
where he served as the Head of Government Affairs until 2021. Acreage is a vertically integrated,
multi-state operator of cannabis licenses and assets in the U.S. In 2017 he founded the Veterans
Cannabis Project where he continues to serve as Chairman. Veterans Cannabis Project (VCP)
is an organization dedicated to advocating on behalf of cannabis access issues for U.S. military
veterans. From 2015 to 2017, Mr. Etten set aside his career to provide care for his seriously
ill son. Mr. Etten’s career has been focused on the growth equity market, and prior
to Acreage, he held positions including Vice President of Global Business Development for
FreightWatch International, and Director of Corporate Development for Triple Canopy. Mr.
Etten was an investment professional at Trident Capital, where he focused on the cyber-security
space, and an investment banker at Thomas Weisel Partners. Mr. Etten served on active duty
as a U.S. Navy SEAL officer. He earned an MBA from the J.L. Kellogg Graduate School of Management
at Northwestern University, and a BS in political science from the United States Naval Academy.
Mr.
Etten was selected for service on the Board because of his experience in and commitment to the cannabis industry, his experience
with multi-site cannabis operators, his demonstrated and consistent record of success as an executive, and his extensive network
of contacts in the cannabis industry and investment banking world.
|
|
|
|
Troy
L. Reisner (2022)
|
|
Troy
Reisner was appointed as a director on January 17, 2022. Mr. Reisner is currently the Chief
Financial Officer at Keystone Tower Systems, Inc., headquartered in Denver, Colorado. Keystone
is a technology innovation and manufacturing company that is disrupting the commercial wind
tower industry by bringing automated manufacturing technology that will produce towers 10x
faster than current factories and the technology can be deployed on-site. At Keystone, Troy
leads the finance and accounting functions, including raising capital and corporate governance
matters, and serves as an executive team member. Prior to joining Keystone, Troy was a partner
with Deloitte, a Big 4 public accounting firm until his retirement. Troy spent over 30 years
with Deloitte in the accounting & auditing practice serving in St. Louis, Missouri and
Denver, Colorado. Troy was also part of Deloitte’s National Office in New York City
where he served as part of an exclusive M&A group. Troy brings significant cumulative
knowledge and expertise in accounting & auditing, including PCAOB auditing standards,
M&A transactions, financial due diligence, financial reporting, including expertise in
SEC rules, regulations & reporting, internal controls over financial reporting, and capital
market and corporate governance experience and expertise.
He
earned a B.S. degree in Accounting from Southern Illinois University at Edwardsville and practiced as a Certified Public Accountant
for over 30 years and is licensed (inactive) as a CPA in the State of Missouri.
Mr.
Reisner was selected for service on the Board because of his long experience in the accounting industry and his experience working
with public companies.
|
|
|
|
Marion
Mariathasan (2022)
|
|
Marion
Mariathasan was appointed as a director on January 17, 2022. Mr. Mariathasan is the CEO and
Co-Founder of Simplifya, the cannabis industry’s leading regulatory and operational
compliance software platform. The company’s suite of products takes the guesswork out
of confusing and continually changing state and local regulations. Featuring SOPs, badge
tracking, document storage, tailored reporting and employee accountability features, the
company’s Custom Audit software reduces the time clients spend on compliance by up
to 45 percent.
Mr.
Mariathasan is also a serial entrepreneur who has founded or advised numerous startups. He is currently an investor in 22 domestic
and international companies that range from cannabis companies to dating apps - four of which he serves as a board member.
Mr.
Mariathasan studied Architecture and Computer Science at the University of Kansas and Computer Information Systems with a minor in
Business Management from Emporia State University. Marion is a regular guest speaker at events such as Denver Start-Up Week, Colorado
University’s program on social entrepreneurship, various universities on the topic of entrepreneurship and the United Nations
Global Accelerator Initiative.
Mr.
Mariathasan was selected for service on the Board because of his experience in and commitment to the cannabis industry, his demonstrated
and consistent record of success as an executive and entrepreneur, and his extensive network of contacts in the cannabis industry.
|
Each
of the directors on our Board of Directors was elected or appointed because he has demonstrated an ability to make meaningful contributions
to our business and affairs and has skills, experience and background that are complementary to those of our other Board members.
Director
Independence
The
Nasdaq marketplace rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and
nominations committees be independent, or, if a listed company has no nominations committee, that director nominees be selected or recommended
for the board’s selection by independent directors constituting a majority of the board’s independent directors. The Nasdaq
marketplace rules further require that audit committee members satisfy independence criteria set forth in Rule 10A-3 under the Exchange
Act and that compensation committee members satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act.
Prior
to the completion of this offering, our Board undertook a review of the independence of our directors and considered whether any director
has a material relationship with us that could compromise that director’s ability to exercise independent judgment in carrying
out that director’s responsibilities. Our Board has affirmatively determined that each of Messrs. Shipley, Etten, Reisner and Mariathasan
qualify as an independent director, as defined under the applicable corporate governance standards of Nasdaq. These rules require that
our Audit Committee be composed of at least three members, one of whom must be independent on the date of listing on Nasdaq, a majority
of whom must be independent within 90 days of the effective date of the registration statement containing this prospectus, and all of
whom must be independent within one year of the effective date of the registration statement containing this prospectus.
Audit
Committee
Prior
to the commencement of this offering, our Board established an Audit Committee, which as of the date of this prospectus consists of three
independent directors, Mr. Reisner (Chairman), Mr. Shipley and Mr. Etten. The committee’s primary responsibilities include recommending
the selection of our independent registered public accounting firm; evaluating the appointment, compensation and retention of our registered
public accounting firm; receiving formal written statements from our independent registered public accounting firm regarding its independence,
including a delineation of all relationships between it and the Company; reviewing with such independent registered public accounting
firm the planning, scope and results of their audit of our financial statements; pre-approving the fees for services performed; reviewing
with the independent registered public accounting firm the adequacy of internal control systems; reviewing our annual financial statements
and periodic filings, and receiving our audit reports and financial statements. The Audit Committee also considers the effect on the
Company of any changes in accounting principles or practices proposed by management or the independent registered public accounting firm,
any changes in service providers, such as the accountants, that could impact the Company’s internal control over financial reporting,
and any changes in schedules (such as fiscal or tax year-end changes) or structures or transactions that required special accounting
activities, services or resources.
The
Board has determined that each of our Audit Committee members are independent of management and free of any relationships that, in the
opinion of the Board, would interfere with the exercise of independent judgment and are independent, as that term is defined under the
enhanced independence standards for audit committee members in the Exchange Act and the rules promulgated thereunder.
The
Board has determined that Mr. Reisner is an “audit committee financial expert,” as that term is defined in the rules promulgated
by the SEC pursuant to the Sarbanes-Oxley Act of 2012. The Board has further determined that each of the members of the Audit Committee
shall be financially literate and that at least one member of the committee has accounting or related financial management expertise,
as such terms are interpreted by the Board in its business judgment.
Compensation
Committee
Prior
to the commencement of this offering, our Board established a Compensation Committee, which as of the date of this prospectus consists
of two independent directors, Mr. Shipley (Chairman) and Mr. Resiner. The committee’s primary responsibilities include approving
corporate goals and objectives relevant to executive officer compensation and evaluate executive officer performance in light of those
goals and objectives, determining and approving executive officer compensation, including base salary and incentive awards, making recommendations
to the Board regarding compensation plans, and administering our stock plan.
Our
Compensation Committee determines and approves all elements of executive officer compensation. It also provides recommendations to the
Board with respect to non-employee director compensation. The Compensation Committee may not delegate its authority to any other person,
other than to a subcommittee.
The
Company compensation policies for executive officers has two fundamental objectives: (i) to provide a competitive total compensation
package that enables the Company to attract and retain highly qualified executives with the skills and experience required for the achievement
of business goals; and (ii) to align certain compensation elements with the Company’s annual performance goals. With respect to
each of the Company’s executive officers, the total compensation that may be awarded, including base salary, discretionary cash
bonuses, annual stock incentive awards, stock options, restricted stock units and other equity awards, and other benefits and perquisites
will be evaluated by the committee. Under certain circumstances, the committee may also award compensation payable upon termination of
the executive officer under an employment agreement or severance agreement (if applicable). The Board recognizes that its overall goal
is to award compensation that is reasonable when all elements of potential compensation are considered. The committee believes that cash
compensation in the form of base salary and discretionary cash bonuses provides our executives with short-term rewards for success in
operations, and that long-term compensation through the award of stock options, restricted stock units and other equity awards aligns
the objectives of management with those of our stockholders with respect to long-term performance and success. The Board also has historically
focused on the Company’s financial condition when making compensation decisions and approving performance objectives and compensation
has been weighted more heavily toward equity-based compensation. The committee will continue to periodically reassess the appropriate
weighting of cash and equity compensation in light of the Company’s expenditures in connection with commercial operations and its
cash resources and working capital needs.
Nominating
Committee
Prior
to the commencement of this offering, our Board established a Nominating Committee, which as of the date of this prospectus consists
of two independent directors, Mr. Etten (Chairman) and Mr. Mariathasan. The committee’s primary responsibilities include identifying
individuals qualified to serve on the Board as directors and on committees of the Board, establishing procedures for evaluating the suitability
of potential director nominees consistent with the criteria approved by the Board, reviewing the suitability for continued service as
a director when his or her term expires and at such other times as the committee deems necessary or appropriate, and determining whether
or not the director should be re-nominated, and reviewing the membership of the Board and its committees and recommending making changes,
if any.
In
evaluating director nominees, the Nominating Committee will generally consider the following factors:
|
●
|
the
appropriate size and composition of our Board of Directors;
|
|
|
|
|
●
|
whether
or not the person is an “independent” director as defined in Rule 5605(a)(2) promulgated by the Nasdaq Stock Market;
|
|
|
|
|
●
|
the
needs of the Company with respect to the particular talents and experience of its directors;
|
|
|
|
|
●
|
the
knowledge, skills and experience of nominees in light of prevailing business conditions and the knowledge, skills and experience
already possessed by other members of the Board of Directors;
|
|
|
|
|
●
|
familiarity
with national and international business matters and the requirements of the industry in which we operate;
|
|
|
|
|
●
|
experience
with accounting rules and practices;
|
|
|
|
|
●
|
the
desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members;
and
|
|
|
|
|
●
|
all
applicable laws, rules, regulations and listing standards, if applicable.
|
There
are no stated minimum criteria for director nominees, although the committee may consider such factors as it may deem are in the best
interests of the Company and its stockholders. The Nominating Committee also believes it is appropriate for certain key members of our
management to participate as members of the Board of Directors.
The
Nominating Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. Current
members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered
for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective.
If any member of the Board does not wish to continue in service, or if the Nominating Committee decides not to re-nominate a member for
re-election, the committee identifies the desired skills and experience of a prospective director nominee in light of the criteria above,
or determines to reduce the size of the Board. Research may also be performed to identify qualified individuals. To date, we have not
engaged third parties to identify or evaluate or assist in identifying potential nominees, nor do we anticipate doing so in the future.
Stockholder
Communications with Directors
Stockholders
may communicate with the Board by sending a letter to the Corporate Secretary, CEA Industries Inc., 385 South Pierce Avenue, Suite C,
Louisville, Colorado 80027. Each communication must set forth the name and address of the stockholder on whose behalf the communication
is sent and should indicate in the address whether the communication is intended for the entire Board, the non-employee directors as
a group or an individual director. Each communication will be screened by the Corporate Secretary or his designee to determine whether
it is appropriate for presentation to the Board or any specified director(s). Examples of inappropriate communications include junk mail,
spam, mass mailings, resumes, job inquiries, surveys, business solicitations and advertisements, as well as unduly hostile, threatening,
illegal, unsuitable, frivolous, patently offensive or otherwise inappropriate material. Communications determined to be appropriate for
presentation to the Board, or the director(s) to whom they are specifically addressed, will be submitted to the Board or such director(s)
on a periodic basis. Any communications that concern accounting, internal control or auditing matters will be handled in accordance with
procedures adopted by the Board of Directors.
Code
of Business Conduct and Ethics
Our
Board has adopted a Code of Business Conduct and Ethics, which is available for review on our website at www.ceaindustries.com and
is also available in print, without charge, to any stockholder who requests a copy by writing to us at CEA Industries Inc., 385 South
Pierce Avenue, Suite C, Louisville, Colorado 80027 Attention: Corporate Secretary. Each of our directors, employees and officers, including
our Chief Executive Officer, and all of our other principal executive officers, are required to comply with the Code of Business Conduct
and Ethics. There have not been any waivers of the Code of Business Conduct and Ethics relating to any of our executive officers or directors
in the past year.
Meetings
and Committees of the Board
Our
Board is responsible for overseeing the management of our business. We keep our directors informed of our business at meetings and through
reports and analyses presented to the Board and the committees of the Board. Regular communications between our directors and management
also occur outside of formal meetings of the Board and committees of the Board.
Board
Leadership Structure
The
Board may, but is not required to, select a Chairman of the Board who presides over the meetings of the Board and meetings of the stockholders
and performs such other duties as may be assigned to him by the Board. The positions of Chairman of the Board and Chief Executive Officer
may be filled by one individual or two different individuals. Currently the positions of Chairman of the Board and Chief Executive Officer
are held by Mr. McDonald.
Board’s
Role in Risk Oversight
While
risk management is primarily the responsibility of the Company’s management team, the Board is responsible for the overall supervision
of the Company’s risk management activities. The Board as a whole has responsibility for risk oversight, and each Board committee
has responsibility for reviewing certain risk areas and reporting to the full Board. The oversight responsibility of the Board and its
committees is enabled by management reporting processes that are designed to provide visibility to the Board about the identification,
assessment, and management of critical risks and management’s risk mitigation strategies in certain focus areas. These areas of
focus include strategic, operational, financial and reporting, succession and compensation and other areas.
The
Board oversees risks associated with their respective areas of responsibility. The Board oversees: (i) risks and exposures associated
with our business strategy and other current matters that may present material risk to our financial performance, operations, prospects
or reputation, (ii) risks and exposures associated with management succession planning and executive compensation programs and arrangements,
including equity incentive plans, and (iii) risks and exposures associated with director succession planning, corporate governance, and
overall board effectiveness.
Management
provides regular updates to the Board regarding the management of the risks they oversee at each regular meeting of the Board. We believe
that the Board’s role in risk oversight must be evaluated on a case-by-case basis and that our existing Board’s role in risk
oversight is appropriate. However, we continually re-examine the manners in which the Board administers its oversight function on an
ongoing basis to ensure that they continue to meet the Company’s needs.
Executive
Officers
Executive
officers are appointed by our Board and serve at its discretion. Set forth below is information regarding our executive officers as of
the date of this prospectus.
Name
|
|
Age
|
|
Positions
|
Anthony
K. McDonald
|
|
63
|
|
Chief
Executive Officer and President; Director
|
R.
Brian Knaley
|
|
51
|
|
Chief
Financial Officer
|
Mr.
McDonald’s biographical information is included with such information for the other members of our Board.
R.
Brian Knaley
|
|
Mr.
Knaley was appointed a Chief Financial Officer on June 24, 2021. Mr. Knaley has more than 25 years of financial leadership including
being a two-time public company CFO. He was most recently the CFO for Proximo Medical, a start-up company specializing in the commercialization
of medical devices where he provided strategic management of accounting and finance functions including financial control, cash maximization
and tax and regulatory compliance. Prior to Proximo, he served as Senior Vice President and Interim CFO of ViewRay, Inc., (Nasdaq:
VRAY), a global manufacturer of MRI-guided radiation therapy systems. At ViewRay he delivered strategic leadership for this publicly
listed company. Past positions also include CFO at ARC Group Worldwide, Inc. (Nasdaq: ARCW), a global manufacturer of precision metallurgic
products and advanced 3D printing, Vice President and Corporate Controller of Spectranetics Corp. (Nasdaq: SPNC), a vascular intervention
device maker. Other positions Mr. Knaley held were Corporate Controller for Arcelormittal USA (NYSE: MT), a steel and mining company
and Vice President Finance/Audit Manager for Caterpillar, Inc. (NYSE: CAT), a Fortune 100 corporation that designs, develops, engineers,
manufactures, markets, and sells machinery, engines, financial products, and insurance. Mr. Knaley holds a BA in Accounting from
Thomas More College and a CPA license in the State of Ohio.
|
COMPENSATION
Director
Compensation Program
On January 17, 2022, the Board
of Directors adopted a new compensation plan for independent directors.
The
Company will pay its independent directors an annual cash fee of $15,000, payable quarterly in advance on the first business day of each
calendar quarter, and is the cash consideration for their participation in: (i) any regular and special meetings of the Board and any
committee participation and meetings thereof that are attended in person, (ii) any telephonic and other forms of electronic meetings
of the Board or of any committee thereof in which the director is a member, (iii) any non-meeting consultations with the Company’s
management, and (iv) any other services provided by them in their capacities as directors (other than services as the Chairman of the
Board and as the Chairman of the committees of the board of directors). After the Company is listed on a national stock exchange the
annual cash fee will increase to $25,000. The Company also pays the Audit Committee Chairman an additional annual fee of $10,000, and
the Chairmen of any other committees of the Board an additional annual fee of $5,000, payable quarterly in advance, for services as a
committee chairman.
At
the time of initial election or appointment, each independent director will receive an equity retention award in the form of restricted
stock units (“RSUs”). The aggregate value of the RSUs at the time of grant will be $25,000, 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. Vesting of the RSUs will be as follows: (i) 50% at the time of grant, and (ii) 50% on the first anniversary of the grant date.
In addition, on the first business day of January each year following their initial election or appointment, each independent director
will receive an equity retention award in the form of RSUs. The aggregate value of the RSUs at the time of grant will be $25,000, 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. The board of directors or compensation committee
may grant other equity awards to directors in their discretion, under the terms of the Company incentive award plan
The
Company reimburses independent directors for out-of-pocket expenses incurred in attending Board of Director and committee meetings and
undertaking certain matters on the Company’s behalf.
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.
Employee
directors do not receive separate fees for their services as directors.
Under
the Nevada Revised Statutes and pursuant to our charter and bylaws, as currently in effect, the Company may indemnify the Company’s
officers and directors for various expenses and damages resulting from their acting in these capacities. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our officers and directors pursuant to the foregoing provisions, we
have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act,
and is therefore unenforceable.
The
Company has entered into indemnification agreements with its directors and executive officers. The indemnification agreements are intended
to provide the Company’s directors the maximum indemnification permitted under the Nevada Revised Statutes, unless otherwise limited
by the Company’s charter and bylaws. Each indemnification agreement provides that the Company shall indemnify the director or executive
officer who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of
his corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed
proceeding. Each indemnification agreement further provides that the applicable provisions of the Company’s charter and bylaws
regarding indemnification shall control in the event of any conflict with any provisions of such indemnification agreements.
Director
Compensation Table
The
following table sets forth the compensation earned by or awarded or paid in 2020 and 2021 to the individuals who served as our independent
directors during such period.
Name
|
|
Year
|
|
Fees Earned or Paid in Cash
|
|
|
Stock Awards
|
|
|
Option
Awards
(1) (2)
|
|
|
Total
|
|
James R. Shipley
|
|
2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,800
|
|
|
$
|
19,800
|
|
|
|
2021
|
|
$
|
7,500
|
|
|
|
|
|
|
$
|
7,500
|
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas J. Etten
|
|
2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,800
|
|
|
$
|
19,800
|
|
|
|
2021
|
|
$
|
7,500
|
|
|
|
|
|
|
$
|
7,500
|
|
|
$
|
15,000
|
|
(1)
Reflects the dollar amount of the grant date fair value of awards, measured in accordance with FASB Accounting Standards Codification
(“ASC”) Topic 718 (“Topic 718”) without adjustment for estimated forfeitures. For a discussion of the assumptions
used to calculate the value of equity awards, refer to Note 14 to our consolidated financial statements for the fiscal year ended December
31, 2020 included in this prospectus.
(2)
Reflects grants to each independent director on June 24, 2020 of non-qualified stock options to purchase 6,667 shares of the Company’s
common stock and on August 20th, 2021 of non-qualified stock options to purchase 769 shares of the Company’s common stock.
The
aggregate number of non-qualified stock options held as of December 31, 2020 and 2021 by each independent director are as follows:
Name
|
|
Year
|
|
Shares Underlying Non-Qualified Stock
Options
|
|
|
Shares Underlying Restricted Stock
Units
|
|
|
Total
|
|
James R. Shipley
|
|
2020
|
|
|
6,667
|
|
|
|
—
|
|
|
|
6,667
|
|
|
|
2021
|
|
|
7,436
|
|
|
|
|
|
|
|
7,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas J. Etten
|
|
2020
|
|
|
6,667
|
|
|
|
—
|
|
|
|
6,667
|
|
|
|
2021
|
|
|
7,436
|
|
|
|
|
|
|
|
7,436
|
|
Disclosure
Relating to Former Directors
Mr.
Keating was a Director of the Company until his resignation in March 2020. During the period from January 1, 2020 until his resignation,
Mr. Keating received $7,500 fees paid or earned in cash and stock option non-qualified stock options to purchase 1,667 shares of the
Company’s common stock valued at $14,625 in respect of the annual 2020 grant in recognition of his prior services to the Company.
Mr.
Simonton was a Director of the Company until his resignation in March 2020. During the period from January 1, 2020 until his resignation,
Mr. Simonton received $7,500 fees paid or earned in cash and stock option non-qualified stock options to purchase 1,667 shares
of the Company’s common stock valued at $14,625 in respect of the annual 2020 grant in recognition of his prior services to the
Company.
Executive
Compensation
Summary
Executive Compensation Table
The
following table summarizes compensation earned by or awarded or paid to our named executive officers for the years ended December 31,
2021, 2020 and 2019.
Name and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards (1)
|
|
|
Option
Awards (1)
|
|
|
Non-equity Incentive Plan Compensation
|
|
|
Non-qualified Deferred Compensation
Earnings
|
|
|
All Other Compensation
|
|
|
Total
|
|
Anthony K. McDonald
- Chief Executive Officer
|
|
|
2021
|
|
|
$
|
216,731
|
|
|
$
|
50,000
|
|
|
$
|
73,498
|
|
|
$
|
332,727
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49,383
|
|
|
$
|
722,339
|
|
and President (2)
|
|
|
2020
|
|
|
$
|
174,593
|
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
33,333
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,314
|
|
|
$
|
243,240
|
|
|
|
|
2019
|
|
|
$
|
180,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58,532
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,900
|
|
|
$
|
252,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard B. Knaley - Chief
Financial Officer and Treasurer (3)
|
|
|
2021
|
|
|
$
|
120,192
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
122,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,275
|
|
|
$
|
246,467
|
|
(1) Reflects
the dollar amount of the grant date fair value of awards granted in 2019, 2020 or 2021, measured in accordance with FASB Accounting Standards
Codification (“ASC”) Topic 718 (“Topic 718”) without adjustment for estimated forfeitures. For a discussion of
the assumptions used to calculate the value of equity awards, refer to Note 14 to our consolidated financial statements for the fiscal
year ended December 31, 2020 included in this prospectus.
(2) Mr.
McDonald was appointed Chief Executive Officer and President in November 2018. Amounts presented include all compensation for Mr. McDonald
for the full 2020 and 2021 years. Bonus includes cash bonus paid in recognition of services rendered and contributions to the Company’s
performance in 2020 and 2021. 2021 stock awards include 6,803 shares of common stock issued in relation to a new employment agreement
effective November 24, 2021. The 2021 option awards include incentive stock options to purchase 40,830 share of common stock and non-qualified
stock options to purchase 4,453 shares of common stock both awarded in the November 24,2021 employment agreement. Some of these options
are subject to certain vesting (see Outstanding Equity Awards table, below) 2020 option awards include non-qualified stock options to
purchase 1,791 shares of common stock awarded in February 2021, based on Mr. McDonald’s 2020 performance. The options vested and
became exercisable on the grant date. Other compensation in 2020 and 2021 includes (i) employer-paid portion of health plan benefits
($7,780 and $8,282, respectively), (ii) employer matching contributions under our 401(k) plan ($7,535 and $10,685, respectively), and
(iii) board pre-approved third party compensation expenses and associated taxes.
(3)
Mr. Knaley was appointed Chief Financial Officer and Treasurer in June 2021. Amounts presented include all compensation for Mr. Knaley
for 2021. Option awards include non-qualified stock options to purchase 13,333 shares of common stock awarded subject to his employment
agreement. Some of these options are subject to certain vesting. Other compensation includes the employer-paid portion of health plan
benefits.
Disclosure
Relating to Former Executives
Mr.
Bechtel was Chief Executive Officer and President from August 2017 until his resignation in November 2018. During the year ended December
31, 2019, Mr. Bechtel received salary of $7,561 in respect of services provided in the prior year.
Mr.
Smiens was Chief Financial Officer and Treasurer from July 2018, and Secretary from September 2018, until his termination of employment
in December 2018. During the year ended December 31, 2019, Mr. Smiens received salary of $18,454 in respect of services provided in the
prior year.
Outstanding
Equity Awards
The
following table sets forth certain information regarding outstanding equity awards held by our named executive officers as of December
31, 2020 and 2021.
Name and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards(1)
|
|
|
Option
Awards(1)
|
|
|
Non-equity Incentive Plan Compensation
|
|
|
Non-qualified Deferred Compensation
Earnings
|
|
|
All Other Compensation
|
|
|
Total
|
|
Anthony K. McDonald - Chief
|
|
|
2021
|
|
|
$
|
216,731
|
|
|
$
|
50,000
|
|
|
$
|
73,498
|
|
|
$
|
332,727
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49,383
|
|
|
$
|
722,339
|
|
Executive Officer and President
(2)
|
|
|
2020
|
|
|
$
|
174,593
|
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
33,333
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,314
|
|
|
$
|
243,240
|
|
Richard B. Knaley - Chief
Financial Officer and Treasurer (3)
|
|
|
2021
|
|
|
$
|
120,192
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
122,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,275
|
|
|
$
|
246,467
|
|
(1) Reflects the dollar amount of the
grant date fair value of awards granted in 2020 or 2021, measured in accordance with FASB Accounting Standards Codification (“ASC”)
Topic 718 (“Topic 718”) without adjustment for estimated forfeitures. For a discussion of the assumptions used to calculate
the value of equity awards, refer to Note 14 to our consolidated financial statements for the fiscal year ended December 31, 2021 included
in this Annual Report.
(2) Mr. McDonald was appointed Chief Executive
Officer and President in November 2018. Amounts presented include all compensation for Mr. McDonald for the full 2020 and 2021 years.
Bonus includes cash bonus paid in recognition of services rendered and contributions to the Company’s performance in 2020 and 2021.
2021 stock awards include 1,020,408 shares of common stock issued in relation to a new employment agreement effective November 24, 2021.
2021 option awards include incentive stock options to purchase 40,830 shares of common stock and non-qualified stock options to purchase
4,453 shares of common stock both awarded in the November 24,2021 employment agreement. Some of these options are subject to certain
vesting (see Outstanding Equity Awards table, below) 2020 option awards include non-qualified stock options to purchase 1,791 shares
of common stock awarded in February 2021, based on Mr. McDonald’s 2020 performance. The options vested and became exercisable on
the grant date. Other compensation in 2020 and 2021 includes (i) employer-paid portion of health plan benefits ($7,780 and $8,282, respectively),
(ii) employer matching contributions under our 401(k) plan ($7,535 and $10,685, respectively), and (iii) board pre-approved third party
compensation expenses and associated taxes. .
(3) Mr. Knaley was appointed Chief Financial
Officer and Treasurer in June 2021. Amounts presented include all compensation for Mr. Knaley for 2021. Option awards include non-qualified
stock options to purchase 13,333 shares of common stock awarded subject to his employment agreement. Some of these options are subject
to certain vesting (see Outstanding Equity Awards table, below). Other compensation includes the employer-paid portion of health plan
benefits.
Compensation
Arrangements with Named Executive Officers
Anthony
K. McDonald
On
November 24, 2021, the Company entered into an employment agreement with Mr. McDonald, the Company’s Chief Executive Officer and
President. The initial term of the employment agreement commenced on November 24, 2021, for a one year term that is automatically extended
for an additional three years upon completion by the Company of a “qualified offering.” After the initial term (as may be
extended), the employment agreement automatically renews for one year periods unless notice of non-renewal is given 90 days prior to
the end of the then expiring term. A qualified offering is (A) the closing of a sale of the securities of the Company, whether in a private
placement or pursuant to an effective registration statement under the Securities Act of 1933, or (B) the occurrence of an up-listing
event (i.e., having the Company’s stock quoted on an alternative trading platform from the Over-the-Counter (OTC) exchange to a
major stock exchange).
Mr.
McDonald will be paid an annualized base salary of $275,000 per year, which will automatically increase to $350,000 per year upon the
completion of a Qualified Offering. The base salary will be reviewed at least annually prior to the end of each calendar year to ascertain
whether, in the judgment of the board of directors, it should be increased for the next calendar year. Mr. McDonald is eligible to receive
an annual incentive bonus under the Company’s annual incentive compensation plan and policy for each full completed calendar year
of employment during the term as determined by the board of directors in its sole discretion. Mr. McDonald will be eligible for an annual
target bonus of fifty percent of the base salary. Payment of the annual bonus may be made in the form of cash, stock, or a combination
thereof, as determined in the sole discretion of the board of directors. Mr. McDonald will also receive an immediate cash amount of $50,000,
payable promptly after the signing of the employment agreement.
Mr.
McDonald, at the signing of the employment agreement was issued 6,803 shares of common stock, which has an aggregate fair market value
of $50,000, and was paid a gross up on that amount for federal state and local income tax. Mr. McDonald was awarded a stock option to
purchase 302 shares of common stock under the 2021 Stock Award Plan, that was approved by shareholders, with an exercise price of $7.35
per share, the price of a share of common stock on the day immediately prior to the signing of the employment agreement. The vesting
of the options is at the rate of one-third on each of the date of the signing of the employment agreement and the first and second anniversary
of the signing of the employment agreement. The option, once vested, is exercisable for ten years from the date the employment contract
was signed. Vesting will be accelerated upon a change of control of the Company and certain termination events.
Mr.
McDonald is entitled to participate in the Company employee benefit plans, including any group health and welfare insurance and profit
sharing and 401(k) plans that are sponsored generally by the Company for its employees, as may be offered from time to time. Notwithstanding
the foregoing, the Company may modify or terminate any employee benefit plan at any time. Mr. McDonald will be entitled to vacation,
personal days, sick days and expense reimbursement. If Mr. McDonald’s employment is terminated for cause, due to death, due to
disability or voluntary resignation, he will be paid his base salary to the date of termination, any unpaid annual bonus, COBRA benefits
and any unpaid expense reimbursement. If he is terminated without cause or he resigns for good reason, then he will be paid one year’s
base salary, and the annual bonus for that year. The employment agreement has typical activity restrictions for non-solicitation of customers
and employees of the Company and covenants for confidentiality, non-competition, inventions and protection of Company intellectual property.
Separately
from his prior employment agreement dated November 28, 2018, on January 2, 2020, the Board awarded Mr. McDonald a special one-time grant
of non-qualified stock options to purchase 6,667 shares of the Company’s common stock and a $20,000 cash bonus, in recognition
of his services as the Company’s Chief Executive Officer during 2019. These non-qualified stock options were immediately vested
on the date of grant, had a term of 10 years, and had an exercise price of $10.50 per share, the closing price of the Company’s
common stock on The OTC Markets on the day immediately preceding the grant date. Further, on February 16, 2021, Mr. McDonald was awarded
non-qualified stock options to purchase 1,791 shares of common stock under our 2017 Equity Incentive Plan. This grant was based on his
performance during 2020. The options vested and became exercisable on the grant date. The associated equity compensation expense was
accrued during 2020.
R.
Brian Knaley
On
June 28, 2021 the Company employed Mr. R. Brian Knaley as the Chief Financial Officer and Treasurer, and entered into an employment agreement,
which was approved by the Board on June 16, 2021. The initial term of the employment agreement commenced June 28, 2021 and will continue
until June 30, 2024. However, the Company and Mr. Knaley may terminate the employment, at any time, with or without cause, by providing
the other party with 30-days’ prior written notice. In the event Mr. Knaley’s employment is terminated by the Company during
the initial term without cause, Mr. Knaley will be entitled to receive his base salary for an additional 30 days. Following the initial
term, the Company and Mr. Knaley may extend the employment agreement for additional one-year terms by mutual written agreement.
Mr.
Knaley will receive an annualized base salary of $250,000. Upon uplisting of the Company to a national stock exchange (Nasdaq or NYSE),
his base salary will be increased to $275,000 annually. Mr. Knaley is also eligible to receive an annual incentive bonus. During 2021,
Mr. Knaley will be eligible for 50% of the incentive award allocated to executives. If a similar plan is in place for 2022 and subsequent
years, he will be eligible for 100% of the incentive award allocated to executives.
On
June 28, 2021, the Board granted Mr. Knaley non-qualified stock options to purchase 13,333 shares of the Company’s common stock,
which vest as follows: (i) 1,667 options vest and become exercisable on the grant date, (ii) 2,780 options vest and become exercisable
on June 30, 2022, if Mr. Knaley continues to be employed by the Company on that date, (iii) 4,433 options vest and become exercisable
on June 30, 2023, if Mr. Knaley continues to be employed by the Company on that date, and (iv) 4,453 options vest and become exercisable
on June 30, 2024, if Mr. Knaley continues to be employed by the Company on that date. The exercise price of these options will be based
on the closing price of the Company’s common stock on June 25, 2021. In the event of a change of control involving the Company,
any remaining special stock bonuses related to any period ending after the date of the change of control will become due and payable,
provided Mr. Knaley continues to provide services to the Company on the date immediately preceding the date of the change of control.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The
following describes certain agreements and transactions between the Company and its co-founders, Brandy and Stephen Keen (the “Co-founders”).
The Co-founders held various executive officer and director positions with the Company until May 2018. One of the Co-founders also was
a consultant to the Company until May 2018. The Co-founders are also shareholders of the Company. Based on information available to the
Company, the Co-founders did not own more than 10% of the Company’s outstanding common stock at any time during 2020 or 2019.
Equipment,
Demonstration and Product Testing Agreement. In May 2017, we entered into a three-year equipment, demonstration and product testing
agreement with a licensed cannabis cultivation company affiliated with Mr. Keen. Under this agreement, we agreed to lease the cultivation
company certain cultivation equipment in exchange for a quarterly fee of $16,500, which was increased to $18,330 to reflect additional
leased equipment requested by the cultivation company (the “Lease Fee”). In consideration for access to the cultivation facility
to conduct demonstration tours and for the product testing and data to be provided by the cultivation company, we agreed to pay the cultivation
company a quarterly fee of $12,000 (the “Demo and Testing Fee”).
The
parties each made their respective payments under this agreement through June 30, 2018. Thereafter, the cultivation company failed to
make any subsequent payments of the Lease Fee and, as a result, the Company did not pay the Demo and Testing Fee. During the second quarter
of 2019, we notified the cultivation company of its breach for non-payment of the Lease Fee. In February 2020, the parties mutually agreed
to terminate this agreement and release each other from all claims related to this agreement, including any unpaid Lease Fees or Demo
and Testing Fees. We also agreed to transfer the equipment to the cultivation company for no additional consideration.
Employment
Agreement. In May 2018, we entered into an employment agreement with Ms. Keen, which provided for an initial base salary of $150,000
per year and certain sales incentive. Pursuant to the employment agreement, we awarded 32,000 restricted stock units (“RSUs”)
to Ms. Keen that vested at certain dates in the future, subject to her continued employment. These RSU’s have now fully vested
and Ms. Keen continues her employment with the Company under this agreement.
On
January 7, 2021, the Company entered into a consulting agreement with RSX Enterprises, Inc. (“RSX”), a company controlled
by Mr. James R. Shipley, a director of the Company. RSX will provide consulting services to the Company focused on product offerings,
engineering requirements, key customer marketing outreach, and related matters, as mutually determined by the Company and RSX. The Company
will pay a monthly consulting fee of $6,500 for up to 50 hours per month for the various consulting activities undertaken and provide
for reimbursement of expenses. The term of the agreement is set for three months. Any intellectual property developed by RSX will belong
to the Company, and the contract provides for typical indemnification obligations and confidentiality provisions.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth the shares of our common stock beneficially owned by (i) each of our directors, (ii) each of our named executive
officers, (iii) all of our directors and executive officers as a group, and (iv) all persons known by us to beneficially own more than
5% of our outstanding common stock.
The
Company has determined the beneficial ownership shown on this table in accordance with the rules of the SEC. Under these rules, shares
are considered beneficially owned if held by the person indicated, or if such person, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares the power to vote, to direct the voting of and/or to dispose of or to direct
the disposition of such shares. A person is also deemed to be a beneficial owner of shares if that person has the right to acquire such
shares within 60 days through the exercise of any warrant, option or right or through conversion of a security. Except as otherwise indicated
in the accompanying footnotes, the information in the table below is based on information as of the date of this prospectus. Unless otherwise
indicated in the footnotes to the following table, each person named in the table has sole voting and investment power with respect to
shares of common and preferred stock and the address for such person is c/o CEA Industries Inc. 385 South Pierce Avenue, Suite C, Louisville,
CO 80027.
Name of Beneficial Owner
|
|
Number of Shares Owned Beneficially
Before Offering
|
|
|
Percentage
Before Offering (1)
|
|
|
Number of Shares Owned Beneficially
After Offering
|
|
|
Percentage
After Offering (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
K. McDonald (3)
|
|
|
64,984
|
|
|
|
4.1
|
%
|
|
|
64,984
|
|
|
|
0.9
|
%
|
James
R. Shipley (4)
|
|
|
10,561
|
|
|
|
0.7
|
%
|
|
|
10,561
|
|
|
|
0.1
|
%
|
Nicholas
J. Etten (5)
|
|
|
10,561
|
|
|
|
0.7
|
%
|
|
|
10,561
|
|
|
|
0.1
|
%
|
Marion
Mariathasan (6)
|
|
|
1,684
|
|
|
|
0.1
|
%
|
|
|
10,561
|
|
|
|
0.0
|
%
|
Troy L
Reisner (7)
|
|
|
1,684
|
|
|
|
0.1
|
%
|
|
|
10,561
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers who are not Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
Knaley (8)
|
|
|
1,667
|
|
|
|
0.1
|
%
|
|
|
1,667
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers and Directors as a Group
|
|
|
91,141
|
|
|
|
5.7
|
%
|
|
|
91,141
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% or More Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F.
Jansen (9)
|
|
|
85,024
|
|
|
|
5.3
|
%
|
|
|
85,024
|
|
|
|
1.1
|
%
|
(1) Based on a total of 1,604,202 shares of the Company’s
common stock issued and outstanding as of February 10, 2022.
(2) Based on a total of 7,415,340 shares,
after giving effect to the previously noted reverse split on January 27, 2022 of the Company as of February 10, 2022, and includes
the sale of 5,811,138 shares of common stock offered hereby, excluding the shares of common stock that may be sold under the overallotment
option and assuming no exercise of warrants issued in the offering.
(3) Includes 8,119 outstanding shares of common stock
and 56,865 shares of common stock issuable upon options that are currently exercisable. Excludes 30,194 shares of common stock issuable
upon the exercise of options that vest in the future.
(4) Represents 10,561 shares of common stock issuable
upon the exercise of currently exercisable options.
(5) Represents 10,561 shares of common stock issuable
upon the exercise of currently exercisable options.
(6) Excludes 1,684 shares of common stock issuable
upon vesting of a restricted stock unit.
(7) Excludes 1,684 shares of common stock issuable
upon vesting of a restricted stock unit.
(8) Excludes 13,333 shares of common stock issuable
upon exercise of options that vest in the future.
(9) Beneficial ownership based on Schedule 13G dated
May 25, 2018 filed by Mr. Jansen with the SEC, and share ownership reported by Mr. Jansen to the Company as of March 8, 2020. The address
for Mr. Jansen is 4910 Kaylan Court, Richmond, TX 77407.
DESCRIPTION
OF THE SECURITIES
General
The
following is a summary of information concerning capital stock of the Company and the securities we are offering. The summaries and descriptions
below do not purport to be complete statements of the relevant provisions of the Company’s articles of incorporation, as amended,
amended and restated by-laws, all of which are entirely qualified by these documents.
Common
Stock
Our
articles of incorporation, as amended, taking into account the 1 for 150 reverse split of the common stock and adjustment to the authorized
shares made on January 27, 2022, currently authorizes us to issue up to 200,000,000 shares of common stock.
Subject
to prior dividend rights of the holders of any shares of issued and outstanding preferred stock of the Company, holders of shares of
common stock are entitled to receive dividends when, as and if declared by the Board out of funds legally available for that purpose.
Each
share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of common stock do
not have cumulative voting rights. The holders of a majority of the shares of common stock present and entitled to vote in the election
of directors can elect all directors standing for election.
In
the event of any liquidation, dissolution or winding up of the Company, after the satisfaction in full of the liquidation preferences
of holders of any shares of issued and outstanding preferred stock, holders of shares of common stock are entitled to ratable distribution
of the remaining assets available for distribution to stockholders. The shares of common stock are not subject to redemption by operation
of a sinking fund or otherwise. Holders of shares of common stock are not currently entitled to pre-emptive rights.
The
issued and outstanding shares of common stock are fully paid and non-assessable. Any additional shares of common stock that the Company
may issue in the future will also be fully paid and non-assessable.
Preferred
Stock
Our articles of incorporation,
as amended, taking into account the adjustment to the authorized shares made on January 27, 2022, authorizes us to issue up to 25,000,000
shares of undesignated preferred stock, par value $0.00001 per share. We may issue preferred stock from time to time in one or more series,
without shareholder approval, when authorized by our Board. Our Board had authorized 3,300 shares of Series B Convertible Preferred Stock
(described below), all of which are issued and outstanding and upon redemption will be returned to the status of authorized but unissued
shares of preferred stock. No other shares of preferred stock are issued or are outstanding.
The
specific terms of any series of preferred stock will be governed by our articles of incorporation and by the certificate of designations
relating to that series. The Board has the right, without prior approval of the holders of common stock, subject to any rights of currently
issued preferred stock, to specify any and all terms of a series of preferred stock, including the rank, dividend and distribution rights,
voting rights, liquidation rights and redemption, conversion and preemption rights. The issuance of preferred stock could have the effect
of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our
common stock, or delaying or preventing a change in control of us, all without further action by our stockholders.
Series
B Preferred Stock
Rank.
The Series B Preferred Stock ranks superior to all other classes, including the Common Stock.
Dividends.
The Series B Preferred Stock carries a dividend rate of 8% per annum, payable quarterly, in cash, and at the Company’s election,
in certain circumstances and subject to blocker provisions, payable in shares of common stock.
Liquidation
Preference. Each holder of Series B Preferred Stock shall be entitled to receive, prior to all other classes of capital stock, including
the Common Stock, for each share thereof, out of assets of the Company legally available therefore, a preferential amount in cash, per
share, equal to the greater of (A) 120% of the Stated Value ($1,000) plus all accrued and unpaid dividends thereon, on the date of such
payment, and (B) the amount per share such holder would receive if such holder converted such Series B Preferred Stock into Common Stock
immediately prior to the date of such payment.
Voting.
The Series B Preferred Stock has no voting rights other than those provided by statute on matters affecting the rights and obligations
of the Series B Preferred Stock.
Conversion
Rights. The holders of the Series B Preferred Stock may convert the shares of Series B Preferred Stock into shares of Common Stock at
any time at an initial conversion price of $8.55. The conversion rate is subject to adjustment in various circumstances, including stock
splits, stock dividends, pro rata distributions, fundamental transactions and upon a triggering event and subject to reset if the Common
Stock of the Company sold in a subsequent equity transaction and in a Qualified Offering (i.e., the first public offering in which the
common stock is listed on a national exchange) is below the then conversion price. There are cash penalties imposed on the Company if
it fails to deliver timely the shares of Common Stock due upon a conversion. The Series B Preferred Stock is mandatorily convertible
on the third anniversary of its issuance. The Company is obligated to and has reserved shares of common stock for issuance on conversion
of the Series B Preferred Stock equal to 200% of the number of shares of common stock that may be issued on conversion of the Series
B Preferred Stock, and upon conversion, the Company will not use the reserved shares for issuance. On January 28, 2022, we agreed with
the Series B investor that it would convert 1,650 shares of Series B Preferred Stock, plus accrued and unpaid dividends into the securities
being offered hereby, at the completion of the offering, for 532,688 shares of common stock and/or pre-funded warrants and 532,688 warrants, at a rate equal to 75% of the public offering price of $4.13. The securities being issued to the Series
B investor will be subject to a 90-day lock-up, and are restricted securities, subject to the Series B investor’s registration
rights and ability to sell the securities under Rule 144.
Redemption
Rights. The holders of the Series B Preferred Stock have the right to cause their shares to be redeemed in full at the redemption price,
which is 120% of the stated value of $1,000. The redemption right may be exercised by the holders at any time after the earlier of (x)
the consummation by the Company of a Qualified Offering (as described above), or (y) the first anniversary of the issuance of the Series
B Preferred Shares. The redemption price is also reset upon a triggering event. On January 28, 2022, we agreed with the Series B investor
to redeem 1,650 shares of our Series B Preferred Stock for approximately $2.0 million following the closing of this offering.
Preemption
Rights. The Series B Preferred Stock does not have preemptive rights.
Warrants
to be Issued in this Offering
The
following is a brief summary of certain terms and conditions of the warrants to be issued in connection with this offering and are subject
in all respects to the provisions contained in the warrants.
Form.
The warrants will be issued in electronic book-entry form to the investors. You should review a copy of the form of warrant, which is
filed as an exhibit to the registration statement of which this prospectus forms a part, for a complete description of the terms and
conditions applicable to the warrants.
Exercisability.
The warrants are exercisable at any time after their original issuance, , and at any time up to the date that is five years after their
original issuance. The warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed
exercise notice and, at any time a registration statement registering the issuance of the shares of common stock underlying the warrants
under the Securities Act is effective and available for the issuance of such shares, by payment in full in immediately available funds
for the number of shares of common stock purchased upon such exercise. If a registration statement registering the issuance of the shares
of common stock underlying the warrants under the Securities Act is not effective or available, the holder may, in its sole discretion,
elect to exercise the warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of
shares of common stock determined according to the formula set forth in the warrant. No fractional shares of common stock will be issued
in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional
amount multiplied by the exercise price or round up to the next whole share.
Exercise
Limitation. A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would
beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise,
as such percentage ownership is determined in accordance with the terms of the warrants. However, any holder may increase or decrease
such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice from the holder to us.
Exercise Price. The exercise
price per whole share of common stock purchasable upon exercise of the warrants is $5.00 per share (approximately 121%
of public offering price of common stock) of common stock. The exercise price is also subject to appropriate adjustment in the event
of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common
stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.
Transferability.
Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange
Listing. The warrants offered in this offering are listed on The Nasdaq Capital Market under the symbol “CEADW”.
No assurance can be given that a trading market will develop.
Fundamental
Transactions. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization, recapitalization
or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets,
our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person
or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the warrants
will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders
would have received had they exercised the warrants immediately prior to such fundamental transaction.
Rights
as a Stockholder. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of our common
stock, the holder of a warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until
the holder exercises the warrant.
Series B Related Warrants
The
holder of the Series B Preferred Stock was sold, as part of the purchase of the Series B Preferred Stock, a warrant to purchase up to
192,283 shares of common stock, until September 28, 2024 at an initial exercise price of $9.45, subject to adjustment for stock splits,
stock dividends and other typical adjustments and changes in capitalization, including mergers and acquisitions and distribution of rights.
This warrant provides for cashless exercise if the underlying shares of common stock are not registered for resale by the holder. This
warrant is subject to the registration rights agreement described below. This warrant provides for various penalties payable by the Company
if it does not timely deliver the common stock issuable on exercise, and issuances upon exercise are subject to a 4.99% blocker provision.
The
Company also issued to ThinkEquity LLC and its designees placement agent warrants to purchase up to an aggregate of 34,737 shares of
common stock, as part of the compensation due to ThinkEquity LLC in acting as the placement agent for the transaction. Half of the warrants
were issued on September 28, 2021, and the second half were issued on November 3, 2021. The exercise price per share of the placement
agent warrants is $10.395, subject to adjustment for stock splits, stock dividends and other typical adjustments and changes in capitalization,
including mergers and acquisitions and distribution of rights. The warrants are exercisable for three years, until September 28, 2024
and November 3, 2024, respectively, based on the issuance date. The placement agent warrants have registration rights described below,
and may be included on the registration statement provided to the holder of the Series B Preferred Stock for registration of the common
stock underlying the preferred shares and the investor warrant.
Registration
Rights
The
Company entered into a registration rights agreement with the holder of the Series B Preferred Stock. Under the agreement, the Company
is obliged to register the common stock underlying and issuable upon conversion of the Series B Preferred Stock and exercise of the warrant
issued to the holder of the Series B Preferred Stock. The Company is obligated to file a registration statement for resale of the common
stock no later than 180 days after the date of a qualified offering, and have it effective 225 days after the Qualified Offering if there
is no SEC review of the resale registration statement, and if there is an SEC review, then 255 days after the date of the qualified offering.
The offering described in this prospectus is a qualified offering for the purposes of the registration obligations. The Company is to
keep the registration effective until all the shares registered have been sold or may be sold under Rule 144, without regard to volume
and holding period restrictions. Securities of other holders may not be included on any registration statement for the securities of
the holder of the Series B Preferred Stock, except those of holders of the warrants issued to ThinkEquity LLC and its designees, and
there are the typical cut back provisions for any limitation of the number of shares of common stock that may be included thereon due
to SEC policy. The registration rights agreement also has demand and piggyback registration rights. The registration rights agreement
provides for substantive cash penalties due to the Investor if any of the obligations to register shares are not fulfilled on a timely
basis. The registration rights agreement provides for typical securities indemnification to the holders in respect of the registration
statement.
The
warrants issued to ThinkEquity LLC also have registration rights. The holders of these warrants have one demand registration right, upon
the request of 51% of the warrants outstanding, and unlimited piggyback registration rights for 7 years after the issuance date. If there
is a demand for registration, the Company is obligated to file a registration statement within sixty days and use its reasonable best
efforts to have the registration statement declared effective promptly thereafter.
Authorized
but Unissued Shares
The
authorized but unissued shares of our common stock are available for future issuance without shareholder approval, subject to any limitations
imposed by the listing standards of The Nasdaq Capital Market. These additional shares may be used for a variety of corporate finance
transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred
stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or
otherwise.
Anti-takeover
provisions
We
are governed by the provisions of Nevada Revised Statutes 78.378 to 78.3793 because we are incorporated in Nevada, which prohibits a
person who owns in excess of ten percent (10%) of our outstanding voting stock from merging, consolidating or combining with us for a
period of three years after the date of the transaction in which the person acquired in excess of ten percent (10%) of our outstanding
voting stock, unless the merger, consolidation or combination is approved in a prescribed manner. Any provision in our Articles of Incorporation
or our Bylaws or Nevada law that has the effect of delaying or deterring a change in control could limit the opportunity for our Shareholders
to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for
our common stock.
Limitation
of Liability and Indemnification of Directors and Officers
Our
articles of incorporation and bylaws provide that our directors and officers will be indemnified by us to the fullest extent authorized
by Nevada law as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection
with their service for or on our behalf. In addition, our articles of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as directors, except for liability (i) for any appropriation by
a director, in violation of his or her duties, of any business opportunity of the Corporation, (ii) for acts or omissions which involve
intentional misconduct or a knowing violation of the law, (iii) with respect to illegal dividends or redemptions, or (iv) for any transaction
from which the director received an improper personal benefit. Our bylaws also permit us to secure insurance on behalf of any officer,
director or employee for any liability arising out of his or her actions, regardless of whether Nevada law would permit indemnification.
These
provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions
also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action,
if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
We believe that these provisions, insurance and the indemnity agreements are necessary to attract and retain talented and experienced
directors and officers.
There
is no pending litigation or proceeding involving any of our directors or officers where indemnification by us would be required or permitted.
We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock and warrants is Continental Stock Transfer & Trust Company, One State Street Plaza,
30th Floor, New York, New York, 10004, and their general telephone number is 212-509-4000.
SHARES
ELIGIBLE FOR FUTURE SALE
Future
sales of substantial amounts of our common stock and/or warrants in the public market, or the perception that such sales may occur, could
adversely affect market prices prevailing from time to time. The majority of the outstanding shares of common stock have been outstanding
for many years and will be available for sale at any time after this offering. Therefore, there may be sales of substantial amounts of
our common stock in the public market after the completion of this offering, which may adversely affect the prevailing market price and
our ability to raise equity capital in the future.
Upon
completion of this offering, excluding the shares of common stock and warrants to be issued to the Series B investor, 7,415,340
shares of common stock and 6,571,545 warrants will be outstanding. Of these shares, 5,811,138 shares of our common stock
(or 6,682,809 shares if the underwriters exercise in full their option to purchase additional shares) and all the 5,811,138
warrants sold in this offering will be freely transferable without restriction or further registration under the Securities Act,
except for any shares or warrants purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities
Act. Of the shares of common stock that will be outstanding, approximately 486,674 shares of common stock and approximately 760,407
warrants, exercisable for a like number of shares of common stock are “restricted shares” as defined in Rule 144. Restricted
shares may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration
under Rule 144. As a result of the 90 or 180-day lock-up period described below, the shares subject to lock-up arrangements will be available
for sale in the public market only after 90 or 180 days from the date of this prospectus (generally subject to resale limitations).
Rule
144
In
general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell
such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during
the 90 days preceding, the sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before
the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates
at the time of, or any time during the 90 days preceding, the sale, would be subject to additional restrictions, by which such person
would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of the following:
|
●
|
1%
of the number of shares of our common stock then outstanding, which will equal approximately
41,520 shares immediately after this offering; or
|
|
|
|
|
●
|
the
average weekly trading volume of our common stock on the Nasdaq Capital Market during the
four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale;
|
provided,
in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales
both by affiliates and by non-affiliates must also comply with the manner of sale and notice provisions of Rule 144 to the extent applicable.
Lock-up
Agreements
The
Company, each of our directors and executive officers, and our 5% and greater stockholders and the holders of our Series B Preferred
Stock, have agreed not to or are otherwise restricted in their ability to, subject to certain limited exceptions, offer, pledge, sell,
contract to sell, grant any option to purchase, or otherwise dispose of our common stock, warrants, or any securities convertible into
or exchangeable or exercisable for common stock, or to enter into any hedge or other arrangement or any transaction that transfers, directly
or indirectly, the economic consequence of ownership of the shares of our common stock, in the case of the Company and our 5% and greater
stockholders, for a period of 90 days after the date of this prospectus, and in the case of our directors and executive officers for
a period of 180 days after the date of this prospectus, without the prior written consent of ThinkEquity, as representative of the underwriters.
See “Underwriting—Lock-up Agreements.” The underwriters do not have any present intention or arrangement to release
any shares of our common stock subject to lock-up arrangements prior to the expiration of the 90- or 180-day lock-up period.
UNDERWRITING
We
have entered into an underwriting agreement, dated February 10, 2022, with ThinkEquity LLC, acting as the sole
book-running manager (sometimes referred to as the “Representative”). Subject to the terms and conditions of the
underwriting agreement, each of the underwriters named below have agreed to purchase, and we have agreed to sell to it, the number
of shares of common stock and warrants listed next to its name at the public offering price, less the
underwriting discounts and commissions, as set forth on the cover page of this prospectus and as indicated below:
Underwriters:
|
|
Number of Shares
and Warrants
|
ThinkEquity LLC
|
|
|
5,811,138
|
|
Total:
|
|
|
5,811,138
|
|
The underwriting agreement provides that the obligations of the underwriters
to pay for and accept delivery of the shares of common stock and warrants offered by this prospectus are subject to various conditions
and representations and warranties, including the approval of certain legal matters by its counsel and other conditions specified in the
underwriting agreement. The shares of common stock and warrants are offered by the underwriters, subject to prior sale, when, as and if
issued to and accepted by the underwriters. The underwriters reserve the right to withdraw, cancel or modify the offer to the public and
to reject orders in whole or in part. The underwriters are obligated to take and pay for all of the shares of common stock and warrants
offered by this prospectus if any such securities are taken.
We
have agreed to indemnify the underwriters and certain of their affiliates and controlling persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act), among others, against specified liabilities, including liabilities under the Securities
Act, and to contribute to payments the underwriters may be required to make in respect thereof.
Discounts
and Commissions
The
underwriters propose to offer the shares of common stock and warrants directly to the public at the public offering prices set forth
on the cover page of this prospectus. After the offering to the public, the offering prices and other selling terms may be changed by
the underwriters without changing the proceeds we will receive from the underwriters. Any shares and warrants sold by the underwriters
to securities dealers will be sold at the public offering price less a selling concession not in excess of $0.1652 per share.
The
following table summarizes the public offering price, underwriting commissions and proceeds before expenses to us. The underwriting commissions
are 7% of the public offering price. We have also agreed to pay a non-accountable expense allowance to the Representative equal to 1.0%
of the gross proceeds received at the closing of the offering.
|
|
Per Share and
Warrant
|
|
|
Total Without Over-Allotment Option
|
|
|
Total With Full Over-Allotment Option
|
|
Public offering price
|
|
$
|
4.13
|
|
|
$
|
24,000,000
|
|
|
$
|
27,600,000
|
|
Underwriting discount (7%)
|
|
$
|
0.2891
|
|
|
$
|
1,680,000
|
|
|
$
|
1,932,000
|
|
Non-accountable expense allowance (1%)
|
|
$
|
0.0413
|
|
|
$
|
240,000
|
|
|
$
|
240,000
|
|
Proceeds, before expenses, to us
|
|
$
|
3.7996
|
|
|
$
|
22,080,000
|
|
|
$
|
25,428,000
|
|
We
have also agreed to pay certain of the Representative’s expenses relating to the offering, including background checks of our directors
and executive officers, the fees and expenses of the Representative’s legal counsel and for the Representative’s use of Ipreo’s
book-building, prospectus tracking and compliance software for this offering, totaling $58,000.
Our
total estimated expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses,
but excluding underwriting discounts and commissions, are approximately $474,500.
Over-Allotment
Option
We have granted the Representative
an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the Representative
to purchase up to an aggregate of up to 871,670 additional shares of common stock, representing 15% of the shares of common
stock sold in the offering and/or up to 871,670 additional warrants, representing 15% of the warrants sold in the offering. The
purchase price to be paid per additional share of common stock shall be equal to the public offering price of one share of common stock,
less the underwriting discount and the purchase price to be paid per additional warrant shall be US$0.0093.
Representative’s
Warrants
Upon
closing of this offering, we have agreed to issue to the Representative, or its designees, as compensation warrants to purchase up to
290,557 shares of common stock (or 334,141 shares of common stock if the underwriter’s over-allotment option
is exercised in full), which is equal to 5% of the aggregate number of shares of common stock sold in this offering (the “Representative’s
Warrants”). The Representative’s Warrants will be exercisable at a per share exercise price of $5.1625, which is equal
to 125% of the public offering price per share and warrant in this offering. The Representative’s Warrants are exercisable at any
time and from time to time, in whole or in part, during the four year period commencing 180 days from the effective date of the registration
statement of which this prospectus is a part.
The
Representative’s Warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA
Rule 5110(e)(1). The Representative (or permitted assignees under Rule 5110(e)(2)) will not sell, transfer, assign, pledge, or hypothecate
these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180
days from the effective date of the registration statement. In addition, the warrants provide for registration rights upon request, in
certain cases. The one-time demand registration right provided will not be greater than five years from the effective date of the registration
statement in compliance with FINRA Rule 5110(g)(8)(C). The unlimited piggyback registration right provided will not be greater than seven
years from the effective date of the registration statement in compliance with FINRA Rule 5110(g)(8)(D). We will bear all fees and expenses
attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable
by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances
including in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise
price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.
Discretionary
Accounts
The
underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.
Lock-Up
Agreements
We,
our executive officers and directors, our 5% and greater stockholders, and holders of our Series B Preferred Stock, have agreed pursuant
to “lock-up” agreements not to, or are subject to other restrictions so that they may not, without the prior written consent
of the Representative, directly or indirectly, offer to sell, sell, pledge or otherwise transfer or dispose of any of shares of (or enter
into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any
time in the future of) our common stock, enter into any swap or other derivatives transaction that transfers to another, in whole or
in part, any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right
or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common
stock or securities convertible into or exercisable or exchangeable for shares of common stock or any other of our securities or publicly
disclose the intention to do any of the foregoing, subject to customary exceptions, for, with respect to the Company and our 5% and greater
stockholders, a period of 90 days from the date of this prospectus, and with respect to our executive officers and directors, a period
of 180 days from the date of this prospectus.
Right
of First Refusal
We
have granted the Representative a right of first refusal, for a period of eighteen (18) months from the closing of the offering, to act
as sole and exclusive investment banker, book-runner, financial advisor, underwriter and/or placement agent, at the Representative’s
sole and exclusive discretion, for each and every future public and private equity and debt offering, including all of our equity linked
financings (each, a “Subject Transaction”), or any successor (or any of our subsidiaries), on terms and conditions customary
to the Representative for such Subject Transactions.
Nasdaq
Capital Market
Our
shares of common stock and warrants are listed
on the Nasdaq Capital Market under the symbols “CEAD” and “CEADW.”
Price
Stabilization, Short Positions and Penalty Bids
In
order to facilitate the offering of our securities, the underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of our securities. In connection with the offering, the underwriters may purchase and sell our securities in the open
market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing
transactions. Short sales involve the sale by the underwriters of a greater number of securities than they are required to purchase in
the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase
additional securities in the offering. The underwriters may close out any covered short position by either exercising the over-allotment
option to purchase securities or purchasing securities in the open market. In determining the source of securities to close out the covered
short position, the underwriters will consider, among other things, the price of securities available for purchase in the open market
as compared to the price at which they may purchase securities through the over-allotment option to purchase securities. “Naked”
short sales are sales in excess of the over-allotment option to purchase securities. The underwriters must close out any naked short
position by purchasing securities in the open market. A naked short position is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of our securities in the open market after pricing that could adversely affect investors
who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of securities made by the underwriters
in the open market before the completion of the offering.
Similar
to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or
maintaining the market price of our securities or preventing or retarding a decline in the market price of our securities. As result,
the price of our securities may be higher than the price that might otherwise exist in the open market.
The
underwriters make no representation or prediction as to the direction or magnitude of any effect that the transactions described above
may have on the price of our securities. In addition, neither we nor the underwriters make any representation that the underwriters will
engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Electronic
Offer, Sale and Distribution of Securities
A
prospectus in electronic format may be made available on the websites maintained by the underwriters or selling group members, if any,
participating in the offering. The underwriters may agree to allocate a number of securities to underwriters and selling group members
for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriter and selling group members
that may make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information
on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this
prospectus or the registration statement of which this prospectus forms a part.
Other
Relationships
From
time to time, the underwriters and/or their affiliates may provide in the future, various advisory, investment and commercial banking
and other services to us in the ordinary course of business, for which they will receive customary fees and commissions. However, except
as disclosed in this prospectus, we have no present arrangements with the underwriters or any of their affiliates for any further services.
In connection with the offering of our Series B Preferred Stock in September 2021, we engaged the Representative as our placement agent,
and paid the Representative a total cash fee of 9% of the gross proceeds, equal to $270,000, and its expenses, less prepaid expenses,
and issued to the Representative and its designees warrants to purchase up to an aggregate of 34,737 shares of common stock, at an exercise
price per share of $10.395, subject to adjustment for stock splits, stock dividends and other typical adjustments and changes in capitalization,
including mergers and acquisitions and distribution of rights. The warrants are exercisable for three years, until September 28, 2024
and November 3, 2024, respectively, based on the issuance date. The warrants issued to the Representative in connection with the private
placement are deemed underwriting compensation by FINRA.
Pricing
of the Offering
The
public offering price was determined by negotiations between us and the Representative. Among the factors considered in determining the
public offering price were our future prospects and those of our industry in general, our sales, earnings and certain other financial
and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain
financial and operating information of companies engaged in activities similar to ours. Neither we nor the underwriters can assure investors
that an active trading market for the securities will develop or that, after the offering, the securities will trade in the public market
at or above the public offering price.
Offer
Restrictions Outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered
by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with
the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result
in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are
advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in
any jurisdiction in which such an offer or a solicitation is unlawful.
Canada
The
securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors,
as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted
clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale
of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements
of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies
for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies
for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s
province or territory for particulars of these rights or consult with a legal advisor.
China
The
information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s
Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region
and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly
to “qualified domestic institutional investors.”
European
Economic Area — Belgium, Germany, Luxembourg and Netherlands
The
information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under
the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a
“Relevant Member State”), from the requirement to produce a prospectus for offers of securities.
An
offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following
exemptions under the Prospectus Directive as implemented in that Relevant Member State:
|
●
|
to
legal entities that are authorized or regulated to operate in the financial markets or, if
not so authorized or regulated, whose corporate purpose is solely to invest in securities;
|
|
|
|
|
●
|
to
any legal entity that has two or more of (i) an average of at least 250 employees during
its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown
on its last annual unconsolidated or consolidated financial statements) and (iii) an annual
net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or
consolidated financial statements);
|
|
|
|
|
●
|
to
fewer than 100 natural or legal persons (other than qualified investors within the meaning
of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of
the Company or any underwriter for any such offer; or
|
|
|
|
|
●
|
in
any other circumstances falling within Article 3(2) of the Prospectus Directive, provided
that no such offer of securities shall result in a requirement for the publication by the
Company of a prospectus pursuant to Article 3 of the Prospectus Directive.
|
Hong
Kong
Neither
the information in this document nor any other document relating to the offer has been delivered for registration to the Registrar of
Companies in Hong Kong, and its contents have not been reviewed or approved by any regulatory authority in Hong Kong, nor have we been
authorized by the Securities and Futures Commission in Hong Kong. This document does not constitute an offer or invitation to the public
in Hong Kong to acquire securities. Accordingly, unless permitted by the securities laws of Hong Kong, no person may issue or have in
its possession for the purpose of issue, this document or any advertisement, invitation or document relating to the securities, whether
in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong
other than in relation to securities which are intended to be disposed of only to persons outside Hong Kong or only to “professional
investors” (as such term is defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“SFO”)
and the subsidiary legislation made thereunder) or in circumstances which do not result in this document being a “prospectus”
as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong (Cap. 32 of the Laws of Hong Kong) (the
“CO”) or which do not constitute an offer or an invitation to the public for the purposes of the SFO or the CO. The offer
of the securities is personal to the person to whom this document has been delivered by or on behalf of our company, and a subscription
for securities will only be accepted from such person. No person to whom a copy of this document is issued may issue, circulate or distribute
this document in Hong Kong or make or give a copy of this document to any other person. You are advised to exercise caution in relation
to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
No document may be distributed, published or reproduced (in whole or in part), disclosed by or to any other person in Hong Kong or to
any person to whom the offer of sale of the securities would be a breach of the CO or SFO.
Israel
The
securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the “ISA”),
nor have such securities been registered for sale in Israel. The securities may not be offered or sold, directly or indirectly, to the
public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the
offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness,
or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public
of the securities offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with
the Israeli securities laws and regulations.
United
Kingdom
Neither
the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services
Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as
amended (“FSMA”)) has been published or is intended to be published in respect of the securities. This document is issued
on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and
the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document,
except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not
be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in
the United Kingdom.
Any
invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the
issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be
communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to our Company.
In
the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters
relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial
Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high
net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together
“relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement
to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document
or any of its contents.
LEGAL
MATTERS
The
validity of the securities offered hereby will be passed upon for us by Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New
York. Dentons US LLP, New York, New York, is acting as counsel for the underwriters.
EXPERTS
The
consolidated financial statements of CEA Industries as of December 31, 2020 and 2019 and for the years then ended included in this prospectus
have been so included in reliance on the reports of Sadler, Gibb & Associates, LLC and ACM LLP, respectively, each an independent
registered public accounting firm, which are included herein, given on the authority of said firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the securities being offered by
this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth
in the registration statement or the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents
of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each
such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the
registration statement.
We
are subject to the information and periodic requirements of the Exchange Act and, in accordance therewith, file annual, quarterly and
current reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and information
statements and other information regarding registrants that file electronically with the SEC. The address is www.sec.gov. We also maintain
a website at www.ceaindustries.com. You may access our annual reports on Form 10-K, quarterly reports on Form10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free
of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The reference to our
website does not constitute incorporation by reference of the information contained on or accessible through our website, and you should
not consider the contents of our website in making an investment decision with respect to our common stock.
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders of Surna Inc.:
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheet of Surna Inc. (“the Company”) as of December 31, 2020, the related
consolidated statements of operations, changes in shareholders’ deficit, and cash flows for the year ended December 31, 2020 and
the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of
its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in
the United States of America.
Explanatory
Paragraph Regarding Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
3 to the financial statements, the Company has experienced losses since its inception, has a net working capital deficiency and has an
accumulated deficit, which creates substantial doubt about its ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
We
also have audited the adjustments to the 2019 consolidated financial statements to retrospectively apply the effect of the reverse stock
split, as described in Note 16. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged
to audit, review, or apply any procedures to the 2019 consolidated financial statements of the Company other than with respect to the
adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2019 consolidated financial statements
taken as a whole.
Critical
Audit Matters
The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical matters
below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue
Recognition – Contracts with Multiple Performance Obligations
Critical
Audit Matter Description
As
described in Note 2 to the financial statements, the Company’s contracts with customers often include the promise to transfer multiple
goods and services to a customer. Distinct promises within a contract are referred to as performance obligations and are accounted for
as separate units of account. Management assesses whether each promised good or service is distinct for the purpose of identifying the
performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments
about the individual promised goods or services and whether such goods or services are separable from the other aspects of the contractual
relationship. The Company’s performance obligations include various distinct goods and services such as equipment and various engineering
services. When multiple performance obligations are identified within a contract, management exercises judgement in allocating the transaction
price amongst the various performance obligations. In addition, when discounts are provided for a particular contract, the discount is
allocated to each performance obligation proportionally based upon the stand-alone selling price of each performance obligation.
We
determined that performing procedures related to the identification of performance obligations in revenue contracts and allocation of
the transaction price to the respective performance obligations is a critical audit matter as there was significant judgment by management
in identifying performance obligations in revenue contracts and allocating the consideration, which in turn led to a high degree of auditor
judgment, subjectivity and effort in performing procedures to evaluate whether performance obligations in revenue contracts were appropriately
identified by management and consideration was appropriately allocated.
How
the Critical Audit Matter Was Addressed in the Audit
Our
audit procedures related to the following:
|
●
|
We
gained an understanding of the internal controls related to the revenue recognition process, including controls related to the proper
identification of performance obligations and allocation of the transaction price to the various performance obligations.
|
|
●
|
We
examined revenue contracts, on a test basis, to test the accuracy and completeness of management’s identification of the performance
obligations.
|
|
●
|
We
evaluated management’s process for allocation of the transaction price to the identified performance obligations including
evaluating the reasonableness of management’s estimate of stand-alone selling prices.
|
/s/
Sadler, Gibb & Associates, LLC
We
have served as the Company’s auditor since 2020.
Draper,
UT
March
23, 2021, except for the reverse stock-split retrospectively presented in these financial statements described in Note 16, as to which
is dated January 28, 2022
Report of Independent Registered Public Accounting
Firm
Shareholders and Board of Directors
Surna Inc.
Boulder, Colorado
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance
sheet of Surna Inc. and subsidiary (the “Company”) as of December 31, 2019, the related consolidated statements of operations,
shareholders’ (deficit) equity, and cash flows for the year then ended, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2019, and the results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any
procedures to the adjustments to retrospectively present the reverse stock split described in Note 16 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments
were audited by other auditors.
Going Concern Uncertainty
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements,
the Company has suffered recurring losses from operations and has a working capital deficiency and a shareholders’ deficit as of
December 31, 2019 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 4 to the consolidated financial
statements, on January 1, 2019, the Company changed its method of accounting for leases due to the adoption of the Accounting Standards
Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards
of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides
a reasonable basis for our opinion.
/s/ ACM LLP
We served as the Company’s auditor from 2017
to 2020.
Greeley, Colorado
March 24, 2020
Surna
Inc.
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,284,881
|
|
|
$
|
922,177
|
|
Accounts
receivable (net of allowance for doubtful accounts of $165,098 and $151,673, respectively)
|
|
|
33,480
|
|
|
|
138,357
|
|
Inventory,
net
|
|
|
327,109
|
|
|
|
1,231,243
|
|
Prepaid
expenses and other
|
|
|
1,037,823
|
|
|
|
269,491
|
|
Total
Current Assets
|
|
|
3,683,293
|
|
|
|
2,561,268
|
|
Noncurrent
Assets
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
147,732
|
|
|
|
257,923
|
|
Goodwill
|
|
|
631,064
|
|
|
|
631,064
|
|
Intangible
assets, net
|
|
|
7,227
|
|
|
|
11,930
|
|
Deposits
|
|
|
-
|
|
|
|
51,000
|
|
Operating
lease right-of-use asset
|
|
|
343,950
|
|
|
|
534,133
|
|
Total
Noncurrent Assets
|
|
|
1,129,973
|
|
|
|
1,486,050
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
4,813,266
|
|
|
$
|
4,047,318
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,784,961
|
|
|
$
|
1,832,959
|
|
Deferred
revenue
|
|
|
3,724,189
|
|
|
|
1,444,472
|
|
Accrued
equity compensation
|
|
|
128,434
|
|
|
|
503,466
|
|
Other
liabilities
|
|
|
|
|
|
|
|
|
Current
portion of operating lease liability
|
|
|
266,105
|
|
|
|
217,843
|
|
Total
Current Liabilities
|
|
|
5,903,689
|
|
|
|
3,998,740
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Note
payable and accrued interest
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
74,156
|
|
|
|
-
|
|
Operating
lease liability, net of current portion
|
|
|
169,119
|
|
|
|
404,209
|
|
Total
Noncurrent Liabilities
|
|
|
243,275
|
|
|
|
404,209
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
6,146,964
|
|
|
|
4,402,949
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 11)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TEMPORARY EQUITY
|
|
|
|
|
|
|
|
|
Series B Redeemable
Convertible Preferred Stock, $0.00001 par value; 3,300 and 0 issued and outstanding, respectively
|
|
|
|
|
|
|
|
|
Series B Redeemable
Convertible Preferred Stock Subscription Receivable
|
|
|
|
|
|
|
|
|
Series B Redeemable
Convertible Preferred Stock Accrued Dividends
|
|
|
|
|
|
|
|
|
Total Temporary Equity
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.00001 par value; 150,000,000 shares authorized; 42,030,331 shares issued and outstanding
|
|
|
420
|
|
|
|
420
|
|
Common
stock, $0.00001 par value; 350,000,000 shares authorized; 1,576,844 and 1,521,444 shares issued and outstanding, respectively
|
|
|
16
|
|
|
|
15
|
|
Additional
paid in capital
|
|
|
26,109,509
|
|
|
|
25,328,861
|
|
Accumulated
deficit
|
|
|
(27,443,643
|
)
|
|
|
(25,684,927
|
)
|
Total
Shareholders’ Deficit
|
|
|
(1,333,698
|
)
|
|
|
(355,631
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
4,813,266
|
|
|
$
|
4,047,318
|
|
The
accompanying notes are an integral part of these consolidated financial statements
Surna
Inc.
Consolidated
Statements of Operations
|
|
2020
|
|
|
2019
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue,
net
|
|
$
|
8,514,272
|
|
|
$
|
15,224,454
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
6,961,305
|
|
|
|
10,675,601
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,552,967
|
|
|
|
4,548,853
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Advertising
and marketing expenses
|
|
|
430,012
|
|
|
|
675,703
|
|
Product
development costs
|
|
|
390,229
|
|
|
|
521,044
|
|
Selling,
general and administrative expenses
|
|
|
3,095,350
|
|
|
|
4,662,695
|
|
Total
operating expenses
|
|
|
3,915,591
|
|
|
|
5,859,442
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,362,624
|
)
|
|
|
(1,310,589
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
621,340
|
|
|
|
(27,977
|
)
|
Interest
expense
|
|
|
(17,432
|
)
|
|
|
-
|
|
Total
other income (expense)
|
|
|
603,908
|
|
|
|
(27,977
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(1,758,716
|
)
|
|
|
(1,338,566
|
)
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,758,716
|
)
|
|
$
|
(1,338,566
|
)
|
|
|
|
|
|
|
|
|
|
Convertible Preferred
Series B Stock Redemption Value Adjustment
|
|
|
|
|
|
|
|
|
Convertible Preferred
Series B Stock Dividends
|
|
|
|
|
|
|
|
|
Net Loss Available
to Common Shareholders
|
|
|
|
|
|
|
|
|
Loss
per common share – basic and dilutive
|
|
$
|
(1.12
|
)
|
|
$
|
(0.88
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and dilutive
|
|
|
1,574,454
|
|
|
|
1,517,748
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Surna
Inc.
Consolidated
Statements of Changes in Shareholders’ Deficit
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Issued
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Number
of Shares to be Issued
|
|
|
Amount
|
|
|
Additional
Paid in Capital
|
|
|
Accumulated
Deficit
|
|
|
Shareholders’
Deficit
|
|
Balance December 31, 2018
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,499,932
|
|
|
|
6,667
|
|
|
$
|
15
|
|
|
$
|
24,540,262
|
|
|
$
|
(24,346,361
|
)
|
|
$
|
194,336
|
|
Common shares issued on settlement of restricted
stock units and award of stock bonuses, vested restricted stock units canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
14,933
|
|
|
|
3,733
|
|
|
|
-
|
*
|
|
|
-
|
*
|
|
|
-
|
|
|
|
-
|
|
Common shares issued as compensation for services
|
|
|
-
|
|
|
|
-
|
|
|
|
6,579
|
|
|
|
-
|
|
|
|
-
|
*
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses, shares to be issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested stock options accrued
in 2019 and issued to employees and directors in 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in settlement of restricted
stock units and award of stock bonuses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in settlement of restricted
stock units and award of stock bonuses, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in settlement of legal
dispute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares to be issued in settlement of
legal dispute, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested restricted stock units
awarded to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
278,906
|
|
|
|
-
|
|
|
|
278,906
|
|
Fair value of vested stock options granted
to employees and consultants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
390,484
|
|
|
|
-
|
|
|
|
390,484
|
|
Fair value of vested incentive stock bonuses
awarded to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,209
|
|
|
|
-
|
|
|
|
44,209
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,338,566
|
)
|
|
|
(1,338,566
|
)
|
Balance December 31, 2019
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,521,444
|
|
|
|
10,400
|
|
|
$
|
15
|
|
|
$
|
25,328,861
|
|
|
$
|
(25,684,927
|
)
|
|
$
|
(355,631
|
)
|
Beginning balance, value
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,521,444
|
|
|
|
10,400
|
|
|
$
|
15
|
|
|
$
|
25,328,861
|
|
|
$
|
(25,684,927
|
)
|
|
$
|
(355,631
|
)
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses
|
|
|
-
|
|
|
|
-
|
|
|
|
55,400
|
|
|
|
(10,400
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Fair value of vested restricted stock units
awarded to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,163
|
|
|
|
-
|
|
|
|
25,163
|
|
Fair value of vested stock options accrued
in 2019 and issued to employees and directors in 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503,466
|
|
|
|
|
|
|
|
503,466
|
|
Fair value of vested stock options granted
to employees and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
252,020
|
|
|
|
-
|
|
|
|
252,020
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,758,716
|
)
|
|
|
(1,758,716
|
)
|
Balance December 31, 2020
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,576,844
|
|
|
|
-
|
|
|
$
|
16
|
|
|
$
|
26,109,509
|
|
|
$
|
(27,443,643
|
)
|
|
$
|
(1,333,698
|
)
|
Ending balance, value
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,576,844
|
|
|
|
-
|
|
|
$
|
16
|
|
|
$
|
26,109,509
|
|
|
$
|
(27,443,643
|
)
|
|
$
|
(1,333,698
|
)
|
*
|
represents an amount less than $1.
|
The
accompanying notes are an integral part of these consolidated financial statements.
Surna
Inc.
Consolidated
Statements of Cash Flows
|
|
2020
|
|
|
2019
|
|
|
|
For
the Twelve Months Ended
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,758,716
|
)
|
|
$
|
(1,338,566
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and intangible asset amortization expense
|
|
|
120,103
|
|
|
|
161,180
|
|
Gain
on forgiveness of note payable
|
|
|
(557,203
|
)
|
|
|
-
|
|
Share-based
compensation
|
|
|
277,183
|
|
|
|
788,599
|
|
Common
stock issued for other expense
|
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
13,425
|
|
|
|
32,651
|
|
Provision
for excess and obsolete inventory
|
|
|
21,669
|
|
|
|
(223,971
|
)
|
Loss
on disposal of assets
|
|
|
4,124
|
|
|
|
115,359
|
|
Amortization
of ROU Asset
|
|
|
190,183
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
91,452
|
|
|
|
39,179
|
|
Inventory
|
|
|
882,466
|
|
|
|
(71,386
|
)
|
Prepaid
expenses and other
|
|
|
(768,333
|
)
|
|
|
(141,143
|
)
|
Accounts
payable and accrued liabilities
|
|
|
26,157
|
|
|
|
23,830
|
|
Deferred
revenue
|
|
|
2,279,717
|
|
|
|
802,674
|
|
Accrued
interest
|
|
|
3,203
|
|
|
|
-
|
|
Lease
deposit
|
|
|
|
|
|
|
|
|
Operating
lease liability, net
|
|
|
(135,828
|
)
|
|
|
(20,039
|
)
|
Accrued
equity compensation
|
|
|
128,434
|
|
|
|
503,466
|
|
Net
cash provided by operating activities
|
|
|
818,036
|
|
|
|
671,833
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(9,332
|
)
|
|
|
(3,043
|
)
|
Proceeds
from the sale of property equipment
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(9,332
|
)
|
|
|
(3,043
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Cash
proceeds from sale of preferred stock and warrants, net of issuance costs
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of note payable
|
|
|
554,000
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
554,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
1,362,704
|
|
|
|
668,790
|
|
Cash,
beginning of period
|
|
|
922,177
|
|
|
|
253,387
|
|
Cash,
end of period
|
|
$
|
2,284,881
|
|
|
$
|
922,177
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Adjustment
of carrying value of series B preferred stock to redemption value
|
|
|
|
|
|
|
|
|
Subscription
receivable - series B preferred stock
|
|
|
|
|
|
|
|
|
Options
issued for accrued equity compensation
|
|
|
|
|
|
|
|
|
Accrued
dividends
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Surna
Inc.
Notes
to Consolidated Financial Statements
Note
1 – Description of Business
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 and small fruits (such as strawberries, blackberries and raspberries) to bell peppers, cucumbers,
tomatoes and cannabis and hemp, some producers grow crops indoors in response to market dynamics or as part of their preferred farming
practice. In service of the CEA industry, our principal technologies include: (i) liquid-based process cooling systems and other climate
control systems, (ii) air handling equipment and systems, (iii) a full-service engineering package for designing and engineering commercial
scale thermodynamic systems specific to cultivation facilities, and (iv) automation and control devices, systems and technologies used
for environmental, lighting and climate control. Our customers include commercial, state- and provincial-regulated CEA growers in the
U.S. and Canada as well as other international locations. 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 Boulder, 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 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 work on projects. The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation,
operating margins, and working capital. As of the date of this filing, uncertainty continues to exist concerning the magnitude and duration
of the economic impact of the COVID-19 pandemic.
In
response to the COVID-19 pandemic and its changing conditions the Company reduced its operational expenses to conserve its cash resources.
Many expenses, including travel, marketing, headcount, work hours, and compensation were reduced, deferred, or eliminated while still
allowing us to meet our customer obligations and develop new business. As the fiscal year progressed and our sales rebounded, and we
were able to obtain additional funds through a forgivable bank loan, we restored our workforce and compensation.
Due
to the speed with which the COVID-19 pandemic developed and the resulting uncertainties, 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 so as to mitigate the impact of the COVID-19 pandemic
to the best of our ability, although they may not be sufficient in the long-run for us to avoid reduced sales, increased losses and reduced
operating cash flows.
Refer
to Risk Factors, included in Part I, Item 1A of this Annual Report on Form 10-K above, for further discussion of the possible
impact of the COVID-19 pandemic on our business.
Note
2 – Basis of Presentation; Summary of Significant Accounting Policies
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.
As
further discussed in Note 3 Going Concern below, 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. The Company
has not generated sufficient revenue and has historically funded its operations through the sale of common stock, the issuance of debt
and the receipt of advance payments from customers. The Company is subject to risks, expenses and uncertainties similar to those encountered
by similarly situated companies.
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.
Such reverse stock split was implemented effective January 27, 2022. The par value for the Common Stock was not affected.
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
Surna
Inc.
Notes
to Consolidated Financial Statements
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its controlled and wholly owned subsidiary, Hydro Innovations,
LLC (“Hydro”). Intercompany transactions, profit, and balances are eliminated in consolidation.
Use
of Estimates
Management
makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and that affect the reported amounts of revenue and expenses during the reporting
period. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results could differ from those estimates. Key estimates include: allocation of transaction
prices to performance obligations under contracts with customers, standalone selling prices, timing of expected revenue recognition on
remaining performance obligations under contracts with customers, valuation of intangible assets as it applies to impairment analysis,
valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, inventory allowances, and
legal contingencies.
Cash
and Cash Equivalents
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. The Company has
not experienced any losses to date on depository accounts.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivables are recorded at the invoiced amount or based on revenue earned for items not yet invoiced, and generally do not bear interest.
An allowance for doubtful accounts is established, as necessary, based on past experience and other factors, which, in management’s
judgment, deserve current recognition in estimating bad debts. Based on the Company’s review, it establishes or adjusts the allowance
for specific customers and the accounts receivable portfolio as a whole. As of December 31, 2020, and December 31, 2019, the allowance
for doubtful accounts was $165,098 and $151,673, respectively. If the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be required.
Inventory
Inventory
is stated at the lower of cost or net realizable value. The inventory is valued based on a first-in, first-out (“FIFO”) basis.
Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other
factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence
or impaired inventory. Excess and obsolete inventory is charged to cost of revenue and a new lower-cost basis for that inventory is established
and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
As of December 31, 2020, and December 31, 2019, the allowance for excess and obsolete inventory was $93,045 and $71,376, respectively.
Property
and Equipment
Property
and equipment are stated at cost. For financial statement purposes, property and equipment are recorded at cost and depreciated using
the straight-line method over their estimated useful lives, which is generally five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of their useful lives or the life of the lease. Upon sale or retirement of assets, the cost and related
accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in operations.
Maintenance and repairs are charged to operations as incurred.
Long-lived
Assets
Long-lived
tangible assets, including property and equipment, are reviewed for impairment whenever events or changes in business circumstances indicate
the carrying value of the assets may not be recoverable. When such an event occurs, management determines whether there has been impairment
by comparing the anticipated undiscounted future net cash flows to the related asset’s carrying value. If an asset is considered
impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending
on the nature of the asset. The Company has not identified any indicators of impairment during the years ended December 31, 2020 and
2019.
Surna
Inc.
Notes
to Consolidated Financial Statements
Goodwill
and Intangible Assets
The
Company recorded goodwill in connection with its acquisition of Hydro in July 2014. Goodwill is reviewed for impairment annually on December
31st 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 during the fourth quarter by comparing
the fair value of the reporting unit with its carrying amount, including goodwill. 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. The Company completed this assessment
as of December 31, 2020 and concluded that no impairment existed.
Separable
identifiable intangibles consist of intellectual property such as patents and trademarks, and capitalized website costs. Except for trademarks,
which are not amortized, the Company’s separable identifiable intangible assets are subject to amortization on a straight-line
basis over their estimated useful lives. Trademarks are tested annually for impairment. Separable identifiable intangibles are also subject
to evaluation for potential impairment if events or circumstances indicate the carrying value may not be recoverable.
Fair
Value Measurement
The
Company records its financial assets and liabilities at fair value. The accounting standard for fair value provides a framework for measuring
fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the reporting date. The accounting standard establishes a three-tier hierarchy, which prioritizes the inputs used
in the valuation methodologies in measuring fair value:
Level
1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2 - inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability,
either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level
3 - inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value.
A
financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant
to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires management to make judgments and consider factors specific to the asset or liability.
Due
to their short-term nature, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses,
approximate fair value.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded
at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.
For stock-based derivative financial instruments, the Company uses the Black-Scholes Option Pricing Model (the “Black-Scholes Model”)
to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within
twelve months of the balance sheet date. As of December 31, 2020, and December 31, 2019, there were no derivative financial instruments.
Surna
Inc.
Notes
to Consolidated Financial Statements
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:
|
|
For
the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Equipment
and systems sales
|
|
$
|
7,730,371
|
|
|
$
|
13,692,863
|
|
Engineering
and other services
|
|
|
568,131
|
|
|
|
1,239,130
|
|
Shipping
and handling
|
|
|
215,770
|
|
|
|
292,461
|
|
Total
revenue
|
|
$
|
8,514,272
|
|
|
$
|
15,224,454
|
|
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 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.
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.
Surna
Inc.
Notes
to Consolidated Financial Statements
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 December 31, 2020, and 2019, 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 December 31, 2020, and December 31, 2019, deferred revenue, which was classified as a current liability,
was $3,724,189 and $1,444,472, respectively.
For
the year ended December 31, 2020, the Company recognized revenue of $1,103,447 related to the deferred revenue at January 1, 2020, or
76%. For the year ended December 31, 2019, the Company recognized revenue of $473,682 related to the deferred revenue at January 1, 2019,
or 74%.
Remaining
Performance Obligations
Remaining
performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations
that the Company has not performed under its customer contracts. The Company has elected not to use the optional exemption in ASC 606-10-50-14,
which exempts an entity from such disclosures if a performance obligation is part of a contract with an original expected duration of
one year or less. Accordingly, the information disclosed about remaining performance obligations includes all customer contracts, including
those with an expected duration of one year or less.
Industry
uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the Company’s
control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance obligations. There
are risks that the Company may not realize the full contract value on customer projects in a timely manner or at all, and completion
of a customer’s cultivation facility project is dependent upon the customer’s ability to secure funding and real estate,
obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes
for customers to complete a project, which corresponds to when the Company is able to recognize revenue, is driven by numerous factors
including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities
and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving
licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on
the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination
required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems
can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability
of power; and (viii) delays that are typical in completing any construction project. Further, based on the current economic climate,
the uncertainty regarding the COVID-19 virus, and the Company’s recent cost cutting measures, there is no assurance that the Company
will be able to fulfill its backlog, and the Company may experience contract cancellations, project scope reductions and project delays.
Surna
Inc.
Notes
to Consolidated Financial Statements
As
of December 31, 2020, the Company’s remaining performance obligations, or backlog, was $8,448,000, of which $2,643,000, or 31%,
was attributable to customer contracts for which the Company has only received an initial advance payment to cover the allocated value
of the Company’s engineering services (“engineering only paid contracts”). There is the risk that the equipment portion
of these engineering only paid contracts will not be completed or will be delayed. The reasons include the customer being dissatisfied
with the quality or timeliness of the Company’s engineering services, delay or abandonment of the project because of the customer’s
inability to obtain project financing or licensing, or other reasons such as a challenging business climate including an overall post-COVID-19
economic downturn, or change in business direction. After the customer has made an advance payment for a portion of the equipment to
be delivered under the contract (“partial equipment paid contracts”), the Company is typically better able to estimate the
timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated
once the initial equipment payment is received. There is significant uncertainty regarding the timing of the Company’s recognition
of revenue on its remaining performance obligations, and there is no certainty that these will result in actual revenues. The backlog
at December 31, 2020, includes booked sales orders of $390,000 from several customers that the Company does not expect to be realized
until 2022, if at all. Given the present economic uncertainty arising from the impact of the novel coronavirus COVID-19, the Company
believes that several of its current contracts may be delayed or canceled.
The
remaining performance obligations expected to be recognized through 2022 are as follows:
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
Remaining
performance obligations related to engineering only paid contracts
|
|
$
|
2,355,000
|
|
|
$
|
288,000
|
|
|
$
|
2,643,000
|
|
Remaining
performance obligations related to partial equipment paid contracts
|
|
|
5,703,000
|
|
|
|
102,000
|
|
|
$
|
5,805,000
|
|
Total
remaining performance obligations
|
|
$
|
8,058,000
|
|
|
$
|
390,000
|
|
|
$
|
8,448,000
|
|
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 December 31, 2020, and December 31, 2019, the Company had an accrued warranty reserve amount of $173,365
and $185,234, respectively, which are included in accounts payable and accrued liabilities on the Company’s consolidated balance
sheets.
Cost
of Sales
Cost
of sales includes product costs (material, direct labor and overhead costs), shipping and handling expense, outside engineering costs,
engineering, project management and service salaries and benefits, client visits and warranty.
Concentrations
Three
customers accounted for 28%, 11% and 10% of the Company’s revenue for the year ended December 31, 2020. One customer accounted
for 44% of the Company’s revenue for the year ended December 31, 2019.
The
Company’s accounts receivable from two customers made up 48% and 38%, respectively, of the total balance as of December 31, 2020.
The Company’s accounts receivable from three customers made up 59%, 16%, and 10%, respectively, of the total balance as of December
31, 2019.
Three
suppliers accounted for 27%, 25% and 12% of the Company’s purchases of inventory for the year ended December 31, 2020, and three
suppliers accounted for 30%, 17% and 12% of the Company’s purchases of inventory for the year ended December 31, 2019.
Surna
Inc.
Notes
to Consolidated Financial Statements
Product
Development
The
Company expenses product development costs as incurred. Internal product development costs are expensed as incurred, and third-party
product developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. For the
years ended December 31, 2020 and December 31, 2019, the Company incurred $390,229 and $521,044, respectively, on product development.
Accounting
for Share-Based Compensation
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 consolidated financial statements based on
their grant date fair value. For awards subject to service conditions, compensation expense is recognized over the vesting period on
a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are
recognized ratably from the service inception date to the vesting date for each tranche, based on the probability of vesting. The probability
of awards with future performance conditions is evaluated each reporting period and compensation expense is adjusted based on the probability
assessment.
Awards
are considered granted, and the service inception date begins, when mutual understanding of the key terms and conditions of the award
between the Company and the recipient has been established. For awards that provide discretion to adjust the amount of the award, the
service inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions of the
award between the Company and the recipient has not yet been established. For awards in which the service inception date precedes the
grant date, compensation cost is accrued beginning on the service inception date.
Subsequent
to December 31, 2020, the Company’s Board of Directors (the “Board”) approved annual incentive compensation awards
to certain employees payable in non-qualified stock options, based on the Company’s performance and each employee’s contributions
to such performance for the 2020 year. See Note 16. The non-qualified stock options were granted subsequent to December 31, 2020, were
not subject to an additional service requirement and were immediately vested at the date of the grant. The final amount of the annual
incentive compensation award, and number of non-qualified stock options granted, were determined, and communicated to the employee, subsequent
to December 31, 2020. The estimated compensation expense of $128,434 related to the 2020 incentive awards was accrued as of December
31, 2020. Since such incentive awards will be settled in non-qualified stock options, the accrued compensation expense has been classified
as a current liability until the number of non-qualified stock options is fixed pursuant to a grant by the Board. At that time, the incentive
award becomes equity-classified.
The
grant date fair value of stock options is based on the Black-Scholes Model. The Black-Scholes Model requires judgmental assumptions including
volatility and expected term, both based on historical experience. The risk-free interest rate is based on U.S. Treasury interest rates
whose term is consistent with the expected term of the option.
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.
Share-based
compensation costs (including expenses from the accrued compensation liabilities related to the annual incentive awards subsequently
settled in non-qualified stock options totaled $405,617 and $1,292,065 for the years ended December 31, 2020 and 2019, respectively.
Such share-based compensation costs are classified in the Company’s consolidated financial statements in the same manner as if
such compensation was paid in cash.
Surna
Inc.
Notes
to Consolidated Financial Statements
The
following is a summary of such share-based compensation costs included in the Company’s consolidated statements of operations for
the years ended December 31, 2020 and 2019:
|
|
For
the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Share-based
compensation expense included in:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
31,006
|
|
|
$
|
91,081
|
|
Advertising
and marketing expenses
|
|
|
8,333
|
|
|
|
33,977
|
|
Product
development costs
|
|
|
21,882
|
|
|
|
45,330
|
|
Selling,
general and administrative expenses
|
|
|
344,396
|
|
|
|
1,121,677
|
|
Total
share-based compensation expense included in consolidated statement of operations
|
|
$
|
405,617
|
|
|
$
|
1,292,065
|
|
Income
Taxes
The
Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company
determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets
and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The
Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized.
In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company
determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company
would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The
Company records uncertain tax positions on the basis of a two-step process in which: (i) the Company determines whether it is more likely
than not that the tax positions will be sustained on the basis of the technical merits of the position, and (ii) for those tax positions
that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more likely
than not to be realized upon ultimate settlement with the related tax authority.
Basic
and Diluted Net Loss per Common Share
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 periods
when losses are reported where the effect of the common stock equivalents would be antidilutive. Potential common stock equivalents consist
of common stock issuable upon exercise of stock options and warrants and the vesting of restricted stock units using the treasury method.
As of December 31, 2020, 194,757 potential common shares equivalents from warrants and options were excluded from the diluted EPS calculations
as their effect is anti-dilutive.
Commitments
and Contingencies
In
the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its
business, that cover a wide range of matters, including, among others, customer disputes, government investigations and tax matters.
An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred
and the amount of loss can be reasonably estimated.
Other
Risks and Uncertainties
To
achieve profitable operations, the Company must successfully develop, manufacture and market its products. There can be no assurance
that any such products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that
such products will be successfully marketed. These factors could have a material adverse effect upon the Company’s financial results,
financial position, and future cash flows.
Surna
Inc.
Notes
to Consolidated Financial Statements
The
Company is subject to risks common to similarly-situated companies including, but not limited to, general economic conditions, its 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, new technological
innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of
market acceptance of products, product liability, and the need to obtain additional financing. As a supplier of services and equipment
to cannabis cultivators, the Company is also subject to risks related to the cannabis industry. Although certain states have legalized
medical and/or recreational cannabis, U.S. federal laws continue to prohibit marijuana in all its forms as well as its derivatives. Any
changes in the enforcement of U.S. federal laws may adversely affect the implementation of state and local cannabis laws and regulations
that permit medical or recreational cannabis and, correspondingly, may adversely impact the Company’s customers. The Company’s
success is also dependent upon its ability to raise additional capital and to successfully develop and market its products. See Note
3.
Segment
Information
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the Company’s senior management team in deciding how to allocate resources and in assessing performance. The Company has one
operating segment that is dedicated to the manufacture and sale of its products.
Recently
Issued Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06: “Accounting for Convertible Instruments and Contracts In An Entity’s Own Equity”
(“ASU 2020-06”) ASU 2020-04 simplifies the accounting for certain convertible instruments by removing the separation
models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature. As a
result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded
conversion features. Additionally, ASU 2020-04 amends the diluted earnings per share calculation for convertible instruments by requiring
the use of the if-converted method. The treasury stock method is no longer available. Entities may adopt the ASU 2020-04 using either
a full or modified retrospective approach, and it is effective for interim and annual reporting periods beginning after December 15,
2021. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2020. The Company does not expect
this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which
simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also
improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12
is effective for fiscal years beginning after December 15, 2020. 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.
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
3 – Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business.
The
Company has experienced recurring losses since its inception. The Company incurred a net loss of approximately $1,759,000 for the year
ended December 31, 2020 and had an accumulated deficit of approximately $27,444,000 and a shareholders’ deficit of approximately
$1,334,000 as of December 31, 2020. Since inception, the Company has financed its activities principally through debt and equity financing,
advance payments from customers and revenues from completed contracts. Management expects to incur additional losses and cash outflows
in the foreseeable future in connection with its operating activities.
The
Company is subject to a number of risks similar to those of other similar stage and situated companies, including general economic conditions,
its customers’ operations and prospects for and ability to obtain project financing, and market and business disruptions, that
include the outbreak of COVID-19, dependence on key individuals, successful development, marketing and branding of products; uncertainty
of product development and generation of revenues; dependence on outside sources of financing; risks associated with research, development;
dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized
companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing
to fulfill its development activities and generating a level of revenues adequate to support the Company’s cost structure.
Surna
Inc.
Notes
to Consolidated Financial Statements
There
can be no assurance that the Company will be able to raise debt or equity financing in sufficient amounts, when and if needed, on acceptable
terms or at all. The Company’s ability to raise equity capital is also limited by the Company’s stock price, and any such
issuance could be highly dilutive to existing shareholders.
The
Company’s 2020 revenue of approximately $8,514,000 which represents a decrease of 44% over the prior year. The Company’s
revenue recognition on contracts continues to be unpredictable and inconsistent quarter-over-quarter, and the Company has incurred, and
expects to incur, additional operating expenses to support such growth. The Company generated approximately $818,000 in cash flow from
operating activities in 2020. However, as a result of the Company’s growth and its efforts to expand and upgrade its products,
the Company’s working capital deficit as of December 31, 2020 was approximately $2,220,000, compared to approximately $1,437,000
as of December 31, 2019.
The
Company also will be affected by constraints on the availability of capital to its customers and prospects who have commenced, or are
contemplating, new or expanded cultivation facilities and the overall impact of the COVID-19 pandemic. The extent to which COVID-19 will
impact the Company’s business and financial results will depend on future developments, which are uncertain and cannot be predicted.
See Note 16. The duration and likelihood of operational success going forward resulting from the fiscal year 2020 measures of adjusting
the workforce reductions and cost-cutting measures are uncertain. If these actions do not meet management’s expectations, or additional
capital is not available, there is substantial doubt about the Company’s ability to continue as a going concern for a period of
one year from the issuance of these financial statements. Other factors that will impact the Company’s ability to continue operations
include the market demand for the Company’s products and services, the ability to service its customers and prospects, potential
contract cancellations, project scope reductions and project delays, the Company’s ability to fulfill its backlog, the management
of working capital, and the continuation of normal payment terms and conditions for purchase of the Company’s products. The Company
believes its cash balances and cash flow from operations will be insufficient to fund its operations for the next twelve months. If the
Company is unable to increase revenues, or otherwise generate cash flows from operations, there is substantial doubt about the Company’s
ability to continue as a going concern for a period of one year from the date the financial statements are issued. These consolidated
financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Note
4 – 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. Consequently, financial information will not be updated,
and the disclosures required under the new lease standard will not be provided, for dates and periods prior to January 1, 2019.
The
new lease 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
June 27, 2017, the Company entered into a lease for its manufacturing and office space (the “Facility Lease”), which commenced
September 29, 2017 and continues through August 31, 2022. The Company occupied its 12,700 square foot space for $12,967 per month until
January 1, 2018. On January 2, 2018, the leased space was expanded to 18,600 square feet, and the monthly rental rate increased to $18,979
until August 31, 2018. Beginning September 1, 2018 and 2019, the monthly rent increased to $19,549 and $20,135, respectively. On each
September 1 through the end of the lease, the monthly rent will increase by 3%. Pursuant to the current lease, the Company made a security
deposit of $51,000 on July 31, 2017. The deposit of $1,600 paid to the previous owner of the property was forwarded to the current landlord.
The Company has the option to renew the Facility Lease for an additional five years.
During
2020, the Company entered into an agreement with its landlord to apply its rent deposit of $52,600 to rent payments due during the period.
The deposit required on the lease will be reduced to approximately $32,000 and will be payable in 12 monthly installments from January
through December of 2021. Further, the landlord also agreed to defer payment of fifty percent of the three months of lease payments (base
rent only) for the period July to September 2020. The deferred lease payments amount to approximately $30,000 and will be payable in
12 monthly installments from January to December 2021.
Total
rent under the Facility Lease is charged to expense over the term of the lease on a straight-line basis, resulting in the same monthly
rent expense throughout the lease. The difference between the rent expense amount and the actual rent paid is recorded to operating lease
liability on the Company’s condensed consolidated balance sheets. As of January 1, 2019, the remaining deferred rent of $26,477
was reclassified to the operating lease liability under the new lease standard.
Surna
Inc.
Notes
to Consolidated Financial Statements
Upon
adoption of the new lease standard, the Company recognized its lease for manufacturing and office space (the “Facility Lease”)
on the balance sheet as an operating lease right-of-use asset in the amount of $714,416 and as a lease liability of $822,374. The renewal
option to extend the Facility Lease is not included in the right-of-use asset or lease liability as the option is not reasonably certain
of exercise. The Company regularly evaluates the renewal option and when it is reasonably certain of exercise, the Company will include
the renewal period in its lease term.
Under
the Facility Lease, the landlord agreed to pay the Company or the Company’s contractors for tenant improvements made by the Company
not to exceed $100,000, which were used for normal tenant improvements. The Company determined that these improvements were not specialized
and could be utilized by a subsequent tenant and, as such, the improvements were considered assets of the lessor. As of January 1, 2019,
the unamortized amount of tenant improvement allowance of $81,481 was treated as a reduction in measuring the right-of-use asset.
Under
the Facility Lease, the Company pays the actual amounts for property taxes and insurance, excludes such payments from lease contract
consideration, and records such payments as incurred. The Company also pays the landlord for common area maintenance, which is considered
a non-lease component. For the Facility Lease, the Company has elected to exclude non-lease components from lease contract consideration.
In
determining the right-of-use asset and lease liability, the Company applied a discount rate to the minimum lease payments under the Facility
Lease. ASC 842 requires the Company to use the rate of interest that the Company would have to pay to borrow on a collateralized basis
over a similar term an amount equal to the lease payments in a similar economic environment. Since the discount rate is not implicit
in the lease agreement, we utilized an estimated incremental borrowing rate provided by the Company’s depository bank.
The
lease cost, cash flows and other information related to the Facility Lease were as follows:
|
|
For
the Year Ended
|
|
|
|
December
31, 2020
|
|
Operating
lease cost
|
|
$
|
216,889
|
|
Operating
cash outflow from operating lease
|
|
$
|
160,934
|
|
|
|
|
As
of
December
31, 2020
|
|
Operating
lease right-of-use asset
|
|
$
|
343,950
|
|
Operating
lease liability, current
|
|
$
|
266,105
|
|
Operating
lease liability, long-term
|
|
$
|
169,119
|
|
|
|
|
|
|
Remaining
lease term
|
|
|
1.7
years
|
|
Discount
rate
|
|
|
5.00
|
%
|
Future
annual minimum lease payments on the Facility Lease as of December 31, 2020 were as follows:
Years
ended December 31,
|
|
|
|
2021
|
|
|
281,864
|
|
2022
|
|
|
170,891
|
|
Total
minimum lease payments
|
|
|
452,755
|
|
Less
imputed interest
|
|
|
(17,531
|
)
|
Present
value of minimum lease payments
|
|
$
|
435,224
|
|
Surna
Inc.
Notes
to Consolidated Financial Statements
Note
5 – Inventory
Inventory
consisted of the following:
|
|
2020
|
|
|
2019
|
|
|
|
As
of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Finished
goods
|
|
$
|
201,778
|
|
|
$
|
1,041,369
|
|
Work
in progress
|
|
|
4,231
|
|
|
|
3,851
|
|
Raw
materials
|
|
|
214,145
|
|
|
|
257,399
|
|
Allowance
for excess & obsolete inventory
|
|
|
(93,045
|
)
|
|
|
(71,376
|
)
|
Inventory,
net
|
|
$
|
327,109
|
|
|
$
|
1,231,243
|
|
Overhead
expenses of $17,974 and $31,831 were included in the inventory balance as of December 31, 2020 and 2019, respectively.
Note
6 – Property and Equipment
Property
and equipment consisted of the following:
|
|
As
of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Furniture
and equipment
|
|
$
|
398,422
|
|
|
$
|
389,090
|
|
Vehicles
|
|
|
15,000
|
|
|
|
15,000
|
|
Leasehold
improvements
|
|
|
215,193
|
|
|
|
215,193
|
|
|
|
|
628,615
|
|
|
|
619,283
|
|
Accumulated
depreciation
|
|
|
(480,883
|
)
|
|
|
(361,360
|
)
|
Property
and equipment, net
|
|
$
|
147,732
|
|
|
$
|
257,923
|
|
Depreciation
expense amounted to $119,524 for the year ended December 31, 2020, of which $6,394 was allocated to cost of revenue. Depreciation expense
amounted to $157,860 for the year ended December 31, 2019, of which $7,010 was allocated to cost of revenue.
As
of December 31, 2018, the Company’s property and equipment, net included the gross cost of the equipment leased to a cultivation
company affiliated with one of the Co-founders of $176,042, and accumulated depreciation of $39,120. During the year ended December 31,
2019, the Company wrote-off the carrying value of the leased equipment. See Note 10.
Note
7 – Intangible Assets
Intangible
assets consisted of the following:
|
|
As
of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Patents
|
|
$
|
8,110
|
|
|
$
|
12,234
|
|
Website
development costs
|
|
|
22,713
|
|
|
|
22,713
|
|
Trademarks
|
|
|
1,830
|
|
|
|
1,830
|
|
|
|
|
32,653
|
|
|
|
36,777
|
|
Accumulated
amortization
|
|
|
(25,426
|
)
|
|
|
(24,847
|
)
|
Intangible
assets, net
|
|
$
|
7,227
|
|
|
$
|
11,930
|
|
Surna
Inc.
Notes
to Consolidated Financial Statements
Patents
when issued are amortized over 14 years, and web site development costs are amortized over five years. Trademarks are not amortized since
they have an indefinite life. Amortization expense for intangibles amounted to $579 and $3,320 for the years ended December 31, 2020
and 2019, respectively. During the years ended December 31, 2020 and 2019, the Company wrote-off $4,124 and $7,778, respectively, related
to patents that had been abandoned.
Note
8 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following:
|
|
2020
|
|
|
2019
|
|
|
|
As
of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts
payable
|
|
$
|
918,639
|
|
|
$
|
1,299,015
|
|
Sales
commissions payable
|
|
|
48,263
|
|
|
|
69,532
|
|
Accrued
payroll liabilities
|
|
|
288,071
|
|
|
|
169,052
|
|
Product
warranty accrual
|
|
|
173,365
|
|
|
|
185,234
|
|
Other
accrued expenses
|
|
|
356,623
|
|
|
|
110,127
|
|
Total
|
|
$
|
1,784,961
|
|
|
$
|
1,832,959
|
|
Accounts
payable and other accrued expenses includes $402,651 relating to a one-time warranty issue experienced on three customers’ projects.
The expenses related to parts and labor to repair units that had been delivered to these customers prior to year-end. Since the issue
is limited to these three projects and is not anticipated to reoccur in the future, we have made no adjustment to the ongoing 1% warranty
reserve that we accrue on all sales.
Note
9 – Note Payable and Accrued Interest
On
April 22, 2020, the Company entered into a note payable with its current bank in the principal amount of $554,000, for working capital
purposes.
The
loan amount was subject to interest at 1% and was initially due on April 20, 2022. Subsequently, the term of the loan was potentially
to be extended to April 20, 2025. The loan could be repaid in advance without penalty. The loan was also potentially forgivable in full
provided proceeds were used for payment of payroll expenses, rent, utilities and mortgage interest and certain other terms and conditions
were met. The loan had typical default provisions, including for change of ownership, general lender insecurity as to repayment, non-payment
of amounts due, defaults on other debt instruments, insolvency, dissolution or termination of the business as a going concern and bankruptcy.
During
the year ended December 31, 2020, interest of $3,203 was accrued in respect of this note payable.
On
December 11, 2020, the Company received notice from the bank that its loan received on April 22, 2020, in the principal amount of $554,000
and all accrued interest of $3,203, was fully forgiven. This gain on loan forgiveness was recorded as Other Income in the Statement of
Operations during the year.
As
further discussed in Note 16 Subsequent Events below, on February 10, 2021, we received funding based on a loan agreement entered
into on February 5, 2021 with its current bank in the principal amount of $514,200 for working capital purposes. Consistent with the
loan provisions, the Company will use the proceeds to meet payroll and benefit expenses as well as for rent and utilities. The loan amount
bears interest at 1% and is due on February 5, 2026. The loan may be repaid in advance without penalty. The loan has typical default
provisions, including for change of ownership, general lender insecurity as to repayment, non-payment of amounts due, defaults on other
debt instruments, insolvency, dissolution or termination of the business as a going concern and bankruptcy.
Note
10 – Related Party Agreements and Transactions
Agreements
and Transaction with Company’s Co-Founders
The
following describes certain agreements and transactions between the Company and its co-founders (the “Co-founders”). The
Co-founders held various executive officer and director positions with the Company until May 2018. One of the Co-founders also was a
consultant to the Company until May 2018. The Co-founders are also shareholders of the Company. Based on information available to the
Company, the Co-founders did not own more than 10% of the Company’s outstanding common stock at any time during 2019 or 2020.
Surna
Inc.
Notes
to Consolidated Financial Statements
Equipment,
Demonstration and Product Testing Agreement
In
May 2017, the Company entered into a three-year equipment, demonstration and product testing agreement with a licensed cannabis cultivation
company affiliated with one of the Co-founders. Under this agreement, the Company agreed to lease the cultivation company certain cultivation
equipment in exchange for a quarterly fee of $16,500, which was increased to $18,330 to reflect additional leased equipment requested
by the cultivation company (the “Lease Fee”). In consideration for access to the cultivation facility to conduct demonstration
tours and for the product testing and data to be provided by the cultivation company, the Company agreed to pay the cultivation company
a quarterly fee of $12,000 (the “Demo and Testing Fee”).
The
Company and the cultivation company each made their respective payments under this agreement through June 30, 2018. Thereafter, the cultivation
company failed to make any subsequent payments of the Lease Fee and, as a result, the Company did not pay the Demo and Testing Fee. During
the second quarter of 2019, the Company notified the cultivation company of its breach for non-payment of the Lease Fee. In February
2020, the parties mutually agreed to terminate this agreement and release each other from all claims related to this agreement, including
any unpaid Lease Fees or Demo and Testing Fees. The Company also agreed to transfer the equipment to the cultivation company for no additional
consideration.
During
the year ended December 31, 2018, the Company recorded Demo and Testing Fees of $32,000 as operating expenses in the consolidated statements
of operations. During the year ended December 31, 2018, the Company also recorded Lease Fees of $48,880 as “Other income, net”
in the consolidated statements of operations. As of December 31, 2018, unpaid Lease Fees of $36,660 were included in accounts receivable
and unpaid Demo and Testing Fees of $24,000 were included in accounts payable.
During
the third quarter of 2019, the Company determined that it was unlikely that any further payment of Lease Fees would be paid by the cultivation
company, and the Company: (i) wrote off the balance of the accounts receivable related to unpaid Lease Fees, with a corresponding charge
to “Other income, net” in the consolidated statements of operations, (ii) reversed the accounts payable related to the unpaid
Demo and Testing Fees, with a corresponding credit to operating expenses, and (iii) wrote-off the remaining carrying value of the leased
equipment of $107,581, which was included in property and equipment on the Company’s consolidated balance sheet. For the year ended
December 31, 2019, the net impact of the foregoing items on the consolidated statements of operations was a charge of $120,241.
Employment
Agreement
In
May 2018, the Company and one of the Co-founders entered into an employment agreement which provided for an initial base salary of $150,000
per year and certain sales incentive. Pursuant to the employment agreement, the Company awarded 32,000 restricted stock units (“RSUs”)
to the Co-founder that vested at certain dates in the future, subject to the co-founder’s continued employment. As of December
31, 2019: (i) the Company has issued 13,333 shares of common stock in settlement of vested RSUs, (ii) 6,667 shares of common stock in
settlement of RSUs that vested December 31, 2019 were issued subsequent to December 31, 2019, (iii) the parties mutually agreed to cancel
6,667 RSUs, and (iii) 5,333 RSUs vested on April 30, 2020, however, the holder elected to cancel the RSUs.
Consulting
Agreement
As
further discussed in Note 16 Subsequent Events below, on January 7, 2021, the Company entered into a consulting agreement with
RSX Enterprises, Inc. (RSX), a company controlled by Mr. James R. Shipley, a director of the Company. RSX will provide consulting services
to the Company focused on product offerings, engineering requirements, key customer marketing outreach, and related matters, as mutually
determined by the Company and RSX. The Company will pay a monthly consulting fee of $6,500 for up to 50 hours per month for the various
consulting activities undertaken and provide for reimbursement of expenses. The term of the agreement is set for three months. Any intellectual
property developed by RSX will belong to the Company, and the contract provides for typical indemnification obligations and confidentiality
provisions.
Surna
Inc.
Notes
to Consolidated Financial Statements
Note
11 – Commitments and Contingencies
Litigation
As
of December 31, 2019, there were 45,000 restricted stock units that had not been settled due to a dispute with a former employee over
the required withholding taxes to be paid to the Company for remittance to the appropriate tax authorities. The Company commenced an
arbitration action against the former employee regarding the dispute. The former employee also made claims in the arbitration action
against the Company for unpaid wages. As stated in a pleading in the arbitration, on March 9, 2020, the Company issued the former employee
45,000 shares of the Company’s common stock in settlement of these restricted stock units after taking measures to mitigate the
Company’s exposure to penalties and liability for the failure to properly withhold income taxes. The Arbitrator issued an interim
award of approximately $10,000 in the Company’s favor and a finding against the former employee. Effective June 9, 2020, the Arbitrator
issued his final award in the Company’s favor in the Colorado arbitration. The Arbitrator found against the former employee and
awarded the Company costs of $33,985, with interest at 8% per year. Effective July 22, 2020, the Colorado Court confirmed the Arbitration
award and entered a final judgement in favor of the Company and against the former employee. The Company pursued collection of this debt
and has now collected the debt owed. This former employee is continuing to pursue separate litigation against the Company for recovery
of alleged consulting fees owed to him for the 2015 calendar year prior to his appointment as an executive officer of the Company. The
Company strongly disputes the ongoing litigation and in the remote event of an adverse outcome, the amount of any settlement loss for
this case is not reasonably estimable as of the date of the issuance of these financial statements.
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 can be reasonably estimated. 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.
Other
Commitments
In
the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors,
business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of 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
12 – Preferred and Common Stock
Preferred
Stock
As
of December 31, 2020, and 2019, there were 42,030,331 shares of Series A preferred stock, par value $0.00001 per share, issued and outstanding.
The holders of Series A preferred stock have one vote per share of Series A preferred stock equivalent to one vote of the Company’s
common stock. The Series A preferred stock ranks senior to the Company’s common stock. The holders of shares of Series A preferred
stock are not entitled to receive dividends and have no conversion or preemptive rights. Upon liquidation, dissolution or winding up
of the Company’s business, after payment to the holders of any senior securities, the holders of Series A preferred stock are entitled
to receive a preferential cash payment per share of Series A preferred stock equal to the stated value of the preferred stock, prior
to any payment to the holders of common stock.
Common
Stock
During
the year ended December 31, 2020, the Company did not issue any shares of its common stock in a private, non-registered transaction.
During
the year ended December 31, 2019, the Company did not issue any shares of its common stock in a private, non-registered transaction.
Surna
Inc.
Notes
to Consolidated Financial Statements
During
the year ended December 31, 2020, the Company issued shares of its common stock under the 2017 Equity Plan as follows:
|
●
|
6,667
shares to an employee in settlement of certain RSUs that vested December 31, 2019;
|
|
|
|
|
●
|
3,733
shares pursuant to a special incentive stock bonus approved by the Board for the period ended December 31, 2019; and
|
|
|
|
|
●
|
45,000
shares in settlement of restricted stock units to a former employee after taking measures to mitigate the Company’s exposure
to penalties and liability for the failure to properly withhold income taxes, as further discussed in Note 11 – Commitments
and Contingencies, Litigation above.
|
During
the year ended December 31, 2019, the Company issued shares of its common stock under the Company’s 2017 Equity Plan as follows:
|
●
|
1,316
shares of common stock were issued to independent directors in lieu of cash director fees;
|
|
|
|
|
●
|
5,263
shares of common stock were issued to independent directors as the 2019 equity retainer fee;
|
|
|
|
|
●
|
7,467
shares of common stock were issued to certain employees in settlement of vested restricted stock units; and
|
|
|
|
|
●
|
7,467
shares of common stock were issued to certain employees as a stock incentive bonus.
|
Note
13 – Outstanding Warrants
The
following table summarizes information with respect to outstanding warrants to purchase common stock during the years ended December
31, 2020 and 2019:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
In
Months
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2018
|
|
|
266,735
|
|
|
$
|
37.50
|
|
|
|
21
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,008
|
)
|
|
$
|
(99.00
|
)
|
|
|
-
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December
31, 2019
|
|
|
260,727
|
|
|
$
|
36.00
|
|
|
|
9
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(210,310
|
)
|
|
$
|
(34.50
|
)
|
|
|
-
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2020
|
|
|
50,417
|
|
|
$
|
37.50
|
|
|
|
6
|
|
|
$
|
0
|
|
Surna
Inc.
Notes
to Consolidated Financial Statements
The
following table summarizes information about warrants outstanding at December 31, 2020.
|
|
|
|
|
|
Weighted
Average Life of
|
|
|
|
|
Warrants
|
|
|
Outstanding
Warrants
|
|
Exercise
price
|
|
|
Outstanding
|
|
|
In
Months
|
|
|
|
|
|
|
|
|
|
|
37.50
|
|
|
|
50,417
|
|
|
|
6
|
|
Series
2 Warrants
In
October 2014, the Company offered up to 60 investment units at a price per unit of $50,000. Each unit consisted of (i) 1,667 shares of
the Company’s common stock, (ii) a $50,000 10% convertible promissory note (“Series 2 Convertible Note”), and (iii)
warrants for the purchase of 333 shares of the Company’s common stock (“Series 2 Warrants”). As of December 31, 2018,
Series 2 Warrants to purchase 6,008 shares of common stock were outstanding, all of which expired unexercised during the year ended December
31, 2019.
Warrants
Issued to Investment Bank
Pursuant
to a certain agreement for services rendered in connection with the conversion of the Series 2 Convertible Notes, during the year ended
December 31, 2017, the Company issued to an investment bank or its designees a warrant (“Banker Warrant”) to purchase, at
an exercise price $52.50 per share, 3,333 shares of the Company’s common stock. The Banker Warrants were fully vested on the date
of issuance, were exercisable beginning December 20, 2017 and expired unexercised on June 20, 2020.
Q1
2017 Warrants
In
March 2017, the Company issued 111,875 investment units, for aggregate gross proceeds of $2,685,000, or $24.00 per unit. Each unit consisted
of 0.0067 of a share of the Company’s common stock and 0.0067 of a warrant for the purchase of one share of the Company’s
common stock (“Q1 2017 Warrants”); however, one investor declined receipt of the warrant to purchase 3,125 shares of the
Company’s common stock. Pursuant to the Q1 2017 Warrants, the holder thereof may at any time on or after six months after the issuance
date and on or prior to the close of business on the date that is the third anniversary of the issuance date, purchase up to the number
of shares of the Company’s common stock as set forth in the respective warrant. The exercise price per share of the common stock
under the Q1 2017 Warrants is $39.00, subject to customary adjustments as provided in the warrant. Each Q1 2017 Warrant was callable
at the Company’s option commencing six months from the issuance date, provided the closing price of the Company’s common
stock was $63.00 or greater for five consecutive trading days. Commencing at any time after the date on which such call condition was
satisfied, the Company had the right, upon 30 days’ notice to the holder, to redeem the warrant shares at a price of $1.50 per
warrant share. The holder could have exercised the warrant at any time (in whole or in part) prior to the redemption date at the exercise
price. These warrants expired unexercised in March 2020.
Q4
2017 Warrants
In
December 2017, the Company issued 98,227 investment units for aggregate proceeds of $1,768,080, or $18.00 per unit. Each unit consisted
of 0.0067 of a share of the Company’s common stock and 0.0067 of a warrant for the purchase of one share of the Company’s
common stock (“Q4 2017 Warrants”). The Q4 2017 Warrants had an exercise price of $30.00 per share, subject to customary adjustments
as provided in the warrant, and had a term of three years. The Q4 2017 Warrants were callable at the Company’s option, provided
the closing price of the Company’s common stock was $54.00 or greater for five consecutive trading days. Commencing at any time
after the date on which the call condition is satisfied, the Company had the right, upon notice to the holders, to redeem the shares
of common stock underlying each warrant at a price of $1.50 per share, but such redemption could not occur earlier than sixty-one (61)
days following the date of the receipt of notice by the holder. The holder could exercise the warrant at any time (in whole or in part)
prior to the redemption date at the exercise price. These warrants expired unexercised in December 2020.
Q2
2018 Warrants
In
June 2018, the Company completed a private placement offering of investment units, with each unit consisting of 0.0067 of a share of
the Company’s common stock and 0.0067 of a Q2 2018 Warrant. The Q2 2018 Warrants have an exercise price of $37.50 per share of
the common stock underlying each warrant, subject to customary adjustments as provided in the warrant. The Q2 2018 Warrants are exercisable
commencing July 1, 2018 until June 30, 2021. The Q2 2018 Warrants are callable at the Company’s option, beginning on July 1, 2019
until the expiration thereof on June 30, 2021, provided the closing price of the Company’s common stock is $60.00 (subject to adjustment
as provided in the warrant) or greater for five consecutive trading days. Commencing at any time after the date on which the call condition
is satisfied, the Company has the right, upon notice to the holders, to redeem the shares of common stock underlying each warrant at
a price of $1.50 per share, but such redemption may not occur earlier than sixty-one (61) days following the date of the receipt of notice
by the holder. The holder may exercise the warrant (in whole or in part) prior to the redemption date at the exercise price. As of December
31, 2020, Q2 2018 Warrants to purchase 50,417 shares of common stock were outstanding.
Surna
Inc.
Notes
to Consolidated Financial Statements
Note
14 – Equity Incentive Plan
On
August 1, 2017, the Board adopted and approved the Company’s 2017 Equity Incentive Plan (the “2017 Equity Plan”) in
order to attract, motivate, retain, and reward high-quality executives and other employees, officers, directors, consultants, and other
persons who provide services to the Company by enabling such persons to acquire an equity interest in the Company. Under the 2017 Equity
Plan, 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 333,333 shares of the
Company’s common stock (“Plan Shares”) for issuance of equity awards under the 2017 Equity Plan. As of December 31,
2020, the Company has granted, under the 2017 Equity Plan, awards in the form of RSAs for services rendered by independent directors
and consultants, non-qualified stock options, RSUs and stock bonus awards.
The
total unrecognized compensation expense for unvested non-qualified stock options at December 31, 2020 was $6,412, which will be recognized
over approximately 3 months.
Restricted
Stock Awards
As
of December 31, 2018, the Company had accrued fees owed to the Company’s independent directors totaling $15,000, which were payable
in equity. During the year ended December 31, 2019, the Company issued 1,316 shares of restricted stock, which were fully vested at the
time of the award, in settlement of these accrued fees.
During
the year ended December 31, 2019, the Company also awarded 5,263 shares of restricted stock under the 2017 Equity Plan to the Company’s
independent directors and consultants as an equity retainer fee for 2019. These restricted shares were fully vested at the time of the
award and the aggregate value attributable to these shares was $60,000, as calculated using the fair value of the Company’s common
stock on date the Board approved these awards.
Non-Qualified
Stock Options
The
Company uses the Black-Scholes Model to determine the fair value of options granted. Option-pricing models require the input of highly
subjective assumptions, particularly for the expected stock price volatility and the expected term of options. Changes in the subjective
input assumptions can materially affect the fair value estimate. The expected stock price volatility assumptions are based on the historical
volatility of the Company’s common stock over periods that are similar to the expected terms of grants and other relevant factors.
The Company derives the expected term based on an average of the contract term and the vesting period taking into consideration the vesting
schedules and future employee behavior with regard to option exercise. The risk-free interest rate is based on U.S. Treasury yields for
a maturity approximating the expected term calculated at the date of grant. The Company has never paid any cash dividends on its common
stock and the Company has no intention to pay a dividend at this time; therefore, the Company assumes that no dividends will be paid
over the expected terms of option awards.
The
Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock
price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such,
the Company may use different assumptions for options granted throughout the year. The valuation assumptions used to determine the fair
value of each option award on the date of grant were: expected stock price volatility 114.97% - 122.48%; expected term in 5 years and
risk-free interest rate 0.2% - 2.37%.
Surna
Inc.
Notes
to Consolidated Financial Statements
Employee
and Consultant Options
A
summary of the non-qualified stock options granted to employees and consultants under the 2017 Equity Plan during the years ended December
31, 2020 and 2019 are presented in the table below:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
70,400
|
|
|
$
|
15.60
|
|
|
|
8.4
|
|
|
$
|
-
|
|
Granted
|
|
|
13,333
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16,055
|
)
|
|
$
|
17.40
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(111
|
)
|
|
$
|
15.75
|
|
|
|
|
|
|
|
|
|
Outstanding, December
31, 2019
|
|
|
67,567
|
|
|
$
|
14.40
|
|
|
|
7.7
|
|
|
$
|
-
|
|
Granted
|
|
|
44,113
|
|
|
$
|
10.50
|
|
|
|
10.0
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(16,673
|
)
|
|
$
|
15.15
|
|
|
|
4.3
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
95,007
|
|
|
$
|
12.45
|
|
|
|
8.3
|
|
|
$
|
-
|
|
Exercisable,
December 31, 2020
|
|
|
95,007
|
|
|
$
|
12.45
|
|
|
|
8.3
|
|
|
$
|
-
|
|
A
summary of non-vested non-qualified stock options activity for employees and consultants under the 2017 Equity Plan for the years ended
December 31, 2020 and 2019 are presented in the table below:
|
|
Number
of
Options
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2018
|
|
|
48,889
|
|
|
$
|
12.90
|
|
|
$
|
-
|
|
|
$
|
628,756
|
|
Granted
|
|
|
13,333
|
|
|
$
|
9.75
|
|
|
|
|
|
|
$
|
130,120
|
|
Vested
|
|
|
(32,833
|
)
|
|
$
|
11.10
|
|
|
|
|
|
|
$
|
362,998
|
|
Forfeited
|
|
|
(16,056
|
)
|
|
$
|
15.30
|
|
|
|
|
|
|
$
|
246,344
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Nonvested, December 31, 2019
|
|
|
13,333
|
|
|
$
|
11.25
|
|
|
$
|
-
|
|
|
$
|
149,534
|
|
Granted
|
|
|
44,113
|
|
|
$
|
8.85
|
|
|
|
|
|
|
$
|
387,199
|
|
Vested
|
|
|
(57,446
|
)
|
|
$
|
9.30
|
|
|
|
|
|
|
$
|
536,733
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Nonvested, December
31, 2020
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2020 and 2019, the Company recorded $189,568 and $390,485 as compensation expense related to vested options
issued to employees and consultants, net of forfeitures, respectively. As of December 31, 2020, there was no unrecognized share-based
compensation related to unvested options.
As
of December 31, 2020, the Company had granted non-qualified options to purchase 68,333 shares which were performance-based. At December
31, 2020, non-qualified options to purchase 40,000 shares were forfeited due to the failure to satisfy the 2017, 2018 and 2019 revenue-based
performance thresholds and 28,333 shares were forfeited due to employee terminations. No compensation expense had been recognized with
respect to these performance-based awards since the likelihood of performance levels being obtained was determined to be remote.
Surna
Inc.
Notes
to Consolidated Financial Statements
Director
Options
A
summary of the non-qualified stock options granted to directors under the 2017 Equity Plan during the years ended December 31, 2020 and
2019 are presented in the table below:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
6,000
|
|
|
$
|
20.25
|
|
|
|
8.6
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, December
31, 2019
|
|
|
6,000
|
|
|
$
|
20.25
|
|
|
|
7.6
|
|
|
$
|
-
|
|
Granted
|
|
|
43,333
|
|
|
$
|
8.55
|
|
|
|
8.5
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
49,333
|
|
|
$
|
10.05
|
|
|
|
7.5
|
|
|
$
|
-
|
|
Exercisable,
December 31, 2020
|
|
|
42,667
|
|
|
$
|
10.95
|
|
|
|
8.0
|
|
|
$
|
-
|
|
A
summary of non-vested non-qualified stock options activity for directors under the 2017 Equity Plan for the years ended December 31,
2020 and 2019 are presented in the table below:
|
|
Number
of Options
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December
31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Nonvested, December
31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Granted
|
|
|
43,333
|
|
|
|
8.55
|
|
|
|
|
|
|
$
|
373,000
|
|
Vested
|
|
|
(36,667
|
)
|
|
|
9.45
|
|
|
|
|
|
|
$
|
344,000
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Nonvested,
December 31, 2020
|
|
|
6,666
|
|
|
|
4.35
|
|
|
$
|
5,800
|
|
|
$
|
29,000
|
|
During
the years ended December 31, 2020 and 2019, the Company incurred $62,452 and $0, respectively, as compensation expense related to 10,000
and 0 vested options, respectively, issued to directors. As of December 31, 2020, total unrecognized share-based compensation related
to unvested options was $6,412.
Effective
January 2, 2020, the Company issued 26,667 fully vested stock options to directors valued at $234,126 in respect of a 2019 special equity
award that had been accrued for in full in the Company’s financial statements at December 31, 2019.
Further
on January 2, 2020, the Company issued an additional 3,333 fully vested, non-qualified stock options under the 2017 Equity Plan valued
at $29,266 to directors. The options have a term of 5 years and have 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 of $10.50.
Effective
June 24, 2020, the Company issued 13,333 non-qualified stock options under the 2017 Equity Plan, valued at $39,600, to newly appointed
directors. The options vested 50% upon grant and 50% on April 1, 2021, if the Director remains on the Board up to that time. The options
have a term of 5 years and have 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 of $4.35.
As
of December 31, 2020, awards related to 144,340 shares remain issued and outstanding.
Surna
Inc.
Notes
to Consolidated Financial Statements
Restricted
Stock Units
A
summary of the RSUs awarded to employees, directors and consultants under the 2017 Equity Plan during the years ended December 31, 2020
and 2019 are presented in the table below:
|
|
Number
of
Units
|
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
65,782
|
|
|
$
|
21.00
|
|
|
$
|
730,185
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
and settled with share issuance
|
|
|
(7,467
|
)
|
|
$
|
27.15
|
|
|
|
|
|
Forfeited/canceled
|
|
|
(7,982
|
)
|
|
$
|
26.85
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
50,333
|
|
|
$
|
19.20
|
|
|
$
|
-
|
|
Outstanding,
December 31, 2019
|
|
|
50,333
|
|
|
$
|
19.20
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
and settled with share issuance
|
|
|
(45,000
|
)
|
|
$
|
18.15
|
|
|
|
|
|
Forfeited/canceled
|
|
|
(5,333
|
)
|
|
$
|
27.00
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
For
the years ended December 31, 2020 and 2019, the Company recorded $25,163 and $278,906 as compensation expense related to vested RSUs
issued to employees, directors and consultants. As of December 31, 2020, there was no unrecognized share-based compensation related to
unvested RSUs. The total intrinsic value of RSUs vested and settled with share issuance was $199,125 and $79,120 for the years ended
December 31, 2020 and 2019. During the year ended December 31, 2020, the total intrinsic value of RSUs vested and settled with share
issuance was $1,105,750, including the intrinsic value of $1,035,750 related to RSUs that had vested in 2018 but had not been settled
until 2020 due to a dispute with a former employee over the required withholding taxes to be paid to the Company for remittance to the
appropriate tax authorities as further discussed in Note 11 Commitments and Contingencies above.
Effective
April 30, 2020, 5,333 RSUs vested. However, the holder elected to cancel the RSUs.
Incentive
Stock Bonuses
The
Company has entered into certain “at-will” employment agreements with certain employees. Under these agreements, the employees
are eligible to receive special incentive stock bonuses, provided the Board has determined, in its sole discretion, that the employee’s
performance has been average or better for the applicable special bonus period. This special stock incentive bonus is payable only if
the employee continues in the employment of the Company.
For
accounting purposes, the Company treats these special incentive stock bonuses as vesting over each bonus’s service period based
on the fair value of the award at the time of grant. Even though these bonuses are subject to Board approval, the awards are vested over
each service period because it is more likely than not that the Board will approve the award based on the “average or better”
employee performance standard. Since the awards are denominated in shares of common stock, the fair value of the vested bonus is charged
to additional paid-in capital.
Surna
Inc.
Notes
to Consolidated Financial Statements
A
summary of the incentive stock bonus awards granted to employees under the 2017 Equity Plan during the years ended December 31, 2020
and 2019 are presented in the table below:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested,
December 31, 2018
|
|
|
11,200
|
|
|
$
|
16.80
|
|
|
$
|
124,320
|
|
Awarded
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
(11,200
|
)
|
|
$
|
16.80
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Unvested, December
31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Awarded
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Unvested,
December 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
For
the years ended December 31, 2020 and 2019, the Company recorded $0 and $44,209 as compensation expense related to vested stock bonus
awards issued to employees, net of forfeitures of $0 and $0, respectively. As of December 31, 2020, there was no unrecognized share-based
compensation related to unvested stock bonus awards. The total intrinsic value of stock bonus awards vested and settled with share issuance
was $0 and $58,240 for the years ended December 31, 2020 and 2019, respectively.
Note
15 – Income Taxes
For
financial reporting purposes, there were no provisions for U.S. federal, state or international income taxes for the years ended December
31, 2020 or 2019 due to the Company’s net operating losses (“NOLs”) in such periods and full valuation allowance recorded
against the net deferred tax assets.
The
differences between income taxes expected at the U.S. federal statutory income tax rate and the reported provision for income taxes are
summarized as follows:
|
|
2020
|
|
|
2019
|
|
Income
taxes computed at the federal statutory rate
|
|
$
|
(369,000
|
)
|
|
$
|
(281,000
|
)
|
States
taxes, net of federal benefits
|
|
|
(69,000
|
)
|
|
|
(53,000
|
)
|
Permanent
differences
|
|
|
(136,000
|
)
|
|
|
17,000
|
|
True-up
adjustments
|
|
|
115,000
|
|
|
|
199,000
|
|
Adjustment
to net operating loss
|
|
|
(17,000
|
)
|
|
|
(86,000
|
)
|
Change
in valuation allowance
|
|
|
476,000
|
|
|
|
204,000
|
|
Reported
income tax (benefit) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of the net deferred tax assets as of December 31, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
4,821,000
|
|
|
$
|
4,081,000
|
|
Equity
compensation
|
|
|
118,000
|
|
|
|
392,000
|
|
Other
deferred tax assets
|
|
|
169,000
|
|
|
|
149,000
|
|
Total
deferred tax assets
|
|
|
5,108,000
|
|
|
|
4,622,000
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Other
deferred tax liabilities
|
|
|
(68,000
|
)
|
|
|
(58,000
|
)
|
Total
deferred tax liabilities
|
|
|
(68,000
|
)
|
|
|
(58,000
|
)
|
Net
deferred tax assets before valuation allowance
|
|
|
5,040,000
|
|
|
|
4,564,000
|
|
Less
valuation allowance
|
|
|
(5,040,000
|
)
|
|
|
(4,564,000
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Surna
Inc.
Notes
to Consolidated Financial Statements
As
of December 31, 2020, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $19,322,000,
of which $11,196,261 will expire, if not utilized, in the years 2034 through 2037, however, NOLs generated subsequent to December 31,
2017 do not expire but may only be used against taxable income to 80%. In response to the novel coronavirus COVID-19, the Coronavirus
Aid, Relief, and Economic Security Act temporarily repealed the 80% limitation for NOLs arising in 2018, 2019 and 2020. 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.
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 December 31, 2020 and 2019. 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.
The
Company is subject to examination by the IRS for the calendar year 2016 and thereafter. These examinations may lead to ordinary course
adjustments or proposed adjustments to the Company’s taxes or the Company’s net operating losses with respect to years under
examination as well as subsequent periods. The Company has filed Colorado state income tax returns for years 2014 through 2019, Alaska,
California and Connecticut state income tax returns for the years 2017 through 2019, Michigan state income tax returns for the years
2018 and 2019 and Alabama, District of Columbia, Massachusetts, Oklahoma and Texas state income taxes in 2019.
The
Company recognizes in its consolidated financial statements the impact of a tax position, if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. The Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of operating expense. The Company does not believe there are any tax positions
for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within
twelve months of the reporting date. There were no penalties or interest liabilities accrued as of December 31, 2020 or 2019, nor were
any penalties or interest costs included in expense for the years ended December 31, 2020 and 2019.
Note
16 – Subsequent Events
In
accordance with ASC 855, Subsequent Events, the Company has evaluated all subsequent events through the date the financial statements
were available to be issued. The following events occurred after December 31, 2020.
The
Board approved annual incentive compensation awards to certain employees payable in non-qualified stock options, based on the Company’s
performance and each employee’s contributions to such performance for the 2020 year. A total of 6,905 non-qualified stock options
were granted under the 2017 Equity Plan subsequent to December 31, 2020, with an exercise price of $19.50 per share. These non-qualified
stock options were immediately vested at the date of the grant. The estimated compensation expense of $128,434 related to the 2020 incentive
awards was accrued as of December 31, 2020. The accrued compensation expense was classified as a current liability as of December 31,
2020.
As
further discussed in Note 10 Related Party Agreements and Transactions above, on January 7, 2021, the Company entered into a consulting
agreement with RSX Enterprises, Inc. (RSX), a company controlled by Mr. James R. Shipley, a director of the Company. RSX will provide
consulting services to the Company focused on product offerings, engineering requirements, key customer marketing outreach, and related
matters, as mutually determined by the Company and RSX. The Company will pay a monthly consulting fee of $6,500 for up to 50 hours per
month for the various consulting activities undertaken and provide for reimbursement of expenses. The term of the agreement is set for
three months. Any intellectual property developed by RSX will belong to the Company, and the contract provides for typical indemnification
obligations and confidentiality provisions.
As
further discussed in Note 9 Note Payable and Accrued Interest above, on February 10, 2021, we received funding based on a loan
agreement entered into on February 9, 2021 with our current bank in the principal amount of $514,200 for working capital purposes. Consistent
with the loan provisions, the Company will use the proceeds to meet payroll and benefit expenses as well as for rent and utilities. The
loan amount bears interest at 1% and is due on February 5, 2026. The loan may be repaid in advance without penalty. The loan has typical
default provisions, including for change of ownership, general lender insecurity as to repayment, non-payment of amounts due, defaults
on other debt instruments, insolvency, dissolution or termination of the business as a going concern and bankruptcy.
As
further discussed in Note 11 Commitments and Contingencies above, a former employee is pursuing litigation against the Company for recovery
of alleged consulting fees owed to him for the 2015 calendar year prior to his appointment as an executive officer of the Company. The
Company strongly disputes the ongoing litigation and in the remote event of an adverse outcome, the amount of any settlement loss for
this case is not reasonably estimable as of the date of the issuance of these financial statements.
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.
Such reverse stock split was implemented effective January 27, 2022. The par value for the Common Stock was not affected. In connection
with the aforementioned reverse stock split, the Company’s Board of Directors approved the reset of the authorized capital of the
Company to be 200,000,000 shares of common stock and 25,000,000 shares of preferred stock.
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.
On January 28, 2022, the Company
agreed with the Series B investor to redeem 1,650 shares of the Company’s Series B Preferred Stock for approximately $2.0 million
following the closing of the Company’s offering.
PART
I — FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
Surna
Inc.
Condensed
Consolidated Balance Sheets
(in
US Dollars except share numbers)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
2,283,879
|
|
|
$
|
2,284,881
|
|
Accounts receivable (net
of allowance for doubtful accounts of $186,073 and $165,098, respectively)
|
|
|
32,245
|
|
|
|
33,480
|
|
Inventory, net
|
|
|
480,354
|
|
|
|
327,109
|
|
Prepaid
expenses and other
|
|
|
1,157,119
|
|
|
|
1,037,823
|
|
Total Current Assets
|
|
|
3,953,597
|
|
|
|
3,683,293
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
98,967
|
|
|
|
147,732
|
|
Goodwill
|
|
|
631,064
|
|
|
|
631,064
|
|
Intangible assets, net
|
|
|
6,792
|
|
|
|
7,227
|
|
Deposits
|
|
|
24,183
|
|
|
|
-
|
|
Operating
lease right-of-use asset
|
|
|
194,353
|
|
|
|
343,950
|
|
Total Noncurrent Assets
|
|
|
955,359
|
|
|
|
1,129,973
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
4,908,956
|
|
|
$
|
4,813,266
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
1,674,088
|
|
|
$
|
1,784,961
|
|
Deferred revenue
|
|
|
3,059,525
|
|
|
|
3,724,189
|
|
Accrued equity compensation
|
|
|
108,945
|
|
|
|
128,434
|
|
Other liabilities
|
|
|
37,078
|
|
|
|
-
|
|
Current
portion of operating lease liability
|
|
|
238,140
|
|
|
|
266,105
|
|
Total Current Liabilities
|
|
|
5,117,776
|
|
|
|
5,903,689
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Note payable and accrued
interest
|
|
|
517,468
|
|
|
|
-
|
|
Other liabilities
|
|
|
37,078
|
|
|
|
74,156
|
|
Operating
lease liability, net of current portion
|
|
|
-
|
|
|
|
169,119
|
|
Total Noncurrent Liabilities
|
|
|
554,546
|
|
|
|
243,275
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,672,322
|
|
|
|
6,146,964
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 7)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TEMPORARY EQUITY
|
|
|
|
|
|
|
|
|
Series B Redeemable Convertible
Preferred Stock, $0.00001 par value; 3,300 and 0 issued and outstanding, respectively
|
|
|
3,960,000
|
|
|
|
-
|
|
Series B Redeemable Convertible
Preferred Stock Subscription Receivable
|
|
|
(1,365,000
|
)
|
|
|
-
|
|
Series
B Redeemable Convertible Preferred Stock Accrued Dividends
|
|
|
1,447
|
|
|
|
-
|
|
Total Temporary Equity
|
|
|
2,596,447
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock; 150,000,000
shares authorized
|
|
|
|
|
|
|
|
|
Series A Preferred stock,
$0.00001 par value; 42,030,331 shares issued and outstanding
|
|
|
420
|
|
|
|
420
|
|
Preferred stock; 150,000,000
shares authorized Series A Preferred stock, $0.00001 par value; 42,030,331 shares issued and outstanding
|
|
|
420
|
|
|
|
420
|
|
Common stock, $0.00001
par value; 350,000,000 shares authorized; 1,583,511 and 1,576,844 shares issued and outstanding, respectively
|
|
|
16
|
|
|
|
16
|
|
Additional paid in capital
|
|
|
25,019,425
|
|
|
|
26,109,509
|
|
Accumulated
deficit
|
|
|
(28,379,674
|
)
|
|
|
(27,443,643
|
)
|
Total Shareholders’
Deficit
|
|
|
(3,359,813
|
)
|
|
|
(1,333,698
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
4,908,956
|
|
|
$
|
4,813,266
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
Surna
Inc.
Condensed
Consolidated Statements of Operations
(in
US Dollars except share numbers)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue, net
|
|
$
|
3,706,436
|
|
|
$
|
1,634,669
|
|
|
$
|
10,582,470
|
|
|
$
|
5,127,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,959,264
|
|
|
|
1,108,758
|
|
|
|
8,208,368
|
|
|
|
3,869,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
747,172
|
|
|
|
525,911
|
|
|
|
2,374,102
|
|
|
|
1,257,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing
expenses
|
|
|
224,393
|
|
|
|
89,695
|
|
|
|
569,580
|
|
|
|
333,669
|
|
Product development costs
|
|
|
98,623
|
|
|
|
84,433
|
|
|
|
322,807
|
|
|
|
304,229
|
|
Selling,
general and administrative expenses
|
|
|
866,699
|
|
|
|
634,447
|
|
|
|
2,493,930
|
|
|
|
2,453,976
|
|
Total operating expenses
|
|
|
1,189,715
|
|
|
|
808,575
|
|
|
|
3,386,317
|
|
|
|
3,091,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(442,543
|
)
|
|
|
(282,664
|
)
|
|
|
(1,012,215
|
)
|
|
|
(1,834,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense),
net
|
|
|
35,934
|
|
|
|
13,621
|
|
|
|
79,452
|
|
|
$
|
29,018
|
|
Interest
expense
|
|
|
(1,296
|
)
|
|
|
(1,396
|
)
|
|
|
(3,268
|
)
|
|
$
|
(16,673
|
)
|
Total other income (expense)
|
|
|
34,638
|
|
|
|
12,225
|
|
|
|
76,184
|
|
|
|
12,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(407,905
|
)
|
|
|
(270,439
|
)
|
|
|
(936,031
|
)
|
|
|
(1,822,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(407,905
|
)
|
|
$
|
(270,439
|
)
|
|
$
|
(936,031
|
)
|
|
$
|
(1,822,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Series
B Stock Redemption Value Adjustment
|
|
$
|
(2,262,847
|
)
|
|
$
|
-
|
|
|
$
|
(2,262,847
|
)
|
|
$
|
-
|
|
Convertible
Preferred Series B Stock Dividends
|
|
|
(1,447
|
)
|
|
|
-
|
|
|
|
(1,447
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Available to
Common Shareholders
|
|
$
|
(2,672,199
|
)
|
|
$
|
(270,439
|
)
|
|
$
|
(3,200,325
|
)
|
|
$
|
(1,822,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
– basic and dilutive
|
|
$
|
(1.69
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
(1.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of common shares outstanding, basic and dilutive
|
|
|
1,583,511
|
|
|
|
1,576,844
|
|
|
|
1,581,142
|
|
|
|
1,564,746
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Surna
Inc.
Condensed
Consolidated Statements of Changes in Shareholders’ Deficit
For
the Three and Nine Months Ended September 30, 2021 and 2020
(in
US Dollars except share numbers)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,583,511
|
|
|
$
|
16
|
|
|
$
|
26,326,691
|
|
|
$
|
(27,971,769
|
)
|
|
$
|
(1,644,642
|
)
|
Common shares issued in settlement of restricted
stock units and award of stock bonuses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in settlement of restricted
stock units and award of stock bonuses, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested restricted stock units
awarded to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in settlement of legal
dispute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in settlement of legal
dispute, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses, shares to be issued
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested stock options granted
to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,545
|
|
|
|
-
|
|
|
|
14,545
|
|
Fair value of vested stock options accrued
in 2019 and issued to employees and directors in 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested stock options granted
to directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,762
|
|
|
|
-
|
|
|
|
14,762
|
|
Issuance of series B preferred stock and warrants,
net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
927,721
|
|
|
|
-
|
|
|
|
927,721
|
|
Accrued dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,447
|
)
|
|
|
-
|
|
|
|
(1,447
|
)
|
Adjustment to redemption value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,262,847
|
)
|
|
|
-
|
|
|
|
(2,262,847
|
)
|
Balance, shares to be
issued ending balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested
stock options granted to employees and directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(407,905
|
)
|
|
|
(407,905
|
)
|
Balance September 30, 2021
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,583,511
|
|
|
$
|
16
|
|
|
$
|
25,019,425
|
|
|
$
|
(28,379,674
|
)
|
|
$
|
(3,359,813
|
)
|
|
|
Series
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
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,576,844
|
|
|
$
|
16
|
|
|
$
|
26,109,509
|
|
|
$
|
(27,443,643
|
)
|
|
$
|
(1,333,698
|
)
|
Common shares issued in settlement of legal
dispute
|
|
|
-
|
|
|
|
-
|
|
|
|
6,667
|
|
|
|
-
|
*
|
|
|
67,000
|
|
|
|
-
|
|
|
|
67,000
|
|
Fair value of vested stock options granted
to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158,315
|
|
|
|
-
|
|
|
|
158,315
|
|
Fair value of vested stock options granted
to directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,174
|
|
|
|
-
|
|
|
|
21,174
|
|
Issuance of series B preferred stock and warrants,
net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
927,721
|
|
|
|
-
|
|
|
|
927,721
|
|
Accrued dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,447
|
)
|
|
|
-
|
|
|
|
(1,447
|
)
|
Adjustment to redemption value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,262,847
|
)
|
|
|
-
|
|
|
|
(2,262,847
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(936,031
|
)
|
|
|
(936,031
|
)
|
Balance September 30, 2021
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,583,511
|
|
|
$
|
16
|
|
|
$
|
25,019,425
|
|
|
$
|
(28,379,674
|
)
|
|
$
|
(3,359,813
|
)
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Number
of Shares to be Issued
|
|
|
Amount
|
|
|
Additional
Paid in Capital
|
|
|
Accumulated
Deficit
|
|
|
Shareholders’
Deficit
|
|
|
|
Series
A Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Number
of Shares to be Issued
|
|
|
Amount
|
|
|
Additional
Paid in Capital
|
|
|
Accumulated
Deficit
|
|
|
Shareholders’
Deficit
|
|
Balance June 30, 2020
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,576,844
|
|
|
|
-
|
|
|
$
|
16
|
|
|
$
|
26,060,657
|
|
|
$
|
(27,236,757
|
)
|
|
$
|
(1,175,664
|
)
|
Common shares issued or to be issued on settlement
of restricted stock units and award of stock bonuses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair value of vested stock options granted
to employees and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,426
|
|
|
|
-
|
|
|
|
24,426
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(270,439
|
)
|
|
|
(270,439
|
)
|
Balance September 30, 2020
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,576,844
|
|
|
|
-
|
|
|
$
|
16
|
|
|
$
|
26,085,083
|
|
|
$
|
(27,507,196
|
)
|
|
$
|
(1,421,677
|
)
|
|
|
Series
A Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Number
of Shares to be Issued
|
|
|
Amount
|
|
|
Additional
Paid in Capital
|
|
|
Accumulated
Deficit
|
|
|
Shareholders’
Deficit
|
|
Balance December 31, 2019
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,521,444
|
|
|
|
10,400
|
|
|
$
|
15
|
|
|
$
|
25,328,861
|
|
|
$
|
(25,684,927
|
)
|
|
$
|
(355,631
|
)
|
Common shares issued in settlement of restricted
stock units and award of stock bonuses
|
|
|
-
|
|
|
|
-
|
|
|
|
55,400
|
|
|
|
(10,400
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Fair value of vested restricted stock units
awarded to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,163
|
|
|
|
-
|
|
|
|
25,163
|
|
Fair value of vested stock options accrued
in 2019 and issued to employees and directors in 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
503,466
|
|
|
|
-
|
|
|
|
503,466
|
|
Fair value of vested stock options granted
to employees and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227,594
|
|
|
|
-
|
|
|
|
227,594
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,822,269
|
)
|
|
|
(1,822,269
|
)
|
Balance September 30, 2020
|
|
|
42,030,331
|
|
|
$
|
420
|
|
|
|
1,576,844
|
|
|
|
-
|
|
|
$
|
16
|
|
|
$
|
26,085,083
|
|
|
$
|
(27,507,196
|
)
|
|
$
|
(1,421,677
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Surna
Inc.
Condensed
Consolidated Statements of Cash Flows
(in
US Dollars except share numbers)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(936,031
|
)
|
|
$
|
(1,822,269
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and intangible
asset amortization expense
|
|
|
54,973
|
|
|
|
90,867
|
|
Share-based compensation
|
|
|
51,055
|
|
|
|
252,757
|
|
Common stock issued for
other expense
|
|
|
67,000
|
|
|
|
-
|
|
Provision for doubtful
accounts
|
|
|
20,975
|
|
|
|
13,150
|
|
Provision for excess and
obsolete inventory
|
|
|
(13,764
|
)
|
|
|
(5,117
|
)
|
Loss on disposal of assets
|
|
|
8,042
|
|
|
|
4,124
|
|
Amortization of ROU asset
|
|
|
149,597
|
|
|
|
141,871
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,740
|
)
|
|
|
27,950
|
|
Inventory
|
|
|
(139,481
|
)
|
|
|
714,709
|
|
Prepaid expenses and other
|
|
|
(119,296
|
)
|
|
|
(488,007
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(110,872
|
)
|
|
|
(397,181
|
)
|
Deferred revenue
|
|
|
(664,663
|
)
|
|
|
2,044,830
|
|
Accrued interest
|
|
|
3,268
|
|
|
|
-
|
|
Lease deposit
|
|
|
(24,183
|
)
|
|
|
-
|
|
Operating lease liability,
net
|
|
|
(197,085
|
)
|
|
|
(79,521
|
)
|
Accrued
equity compensation
|
|
|
108,945
|
|
|
|
101,472
|
|
Net cash (used in)/provided
by operating activities
|
|
|
(1,761,260
|
)
|
|
|
599,635
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(15,316
|
)
|
|
|
(3,500
|
)
|
Proceeds
from the sale of property equipment
|
|
|
1,500
|
|
|
|
-
|
|
Net cash used in investing
activities
|
|
|
(13,816
|
)
|
|
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Cash proceeds from sale
of preferred stock and warrants, net of issuance costs
|
|
|
1,259,874
|
|
|
|
-
|
|
Proceeds
from issuance of note payable
|
|
|
514,200
|
|
|
|
554,000
|
|
Net cash provided by
financing activities
|
|
|
1,774,074
|
|
|
|
554,000
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,002
|
)
|
|
|
1,150,135
|
|
Cash and cash equivalents,
beginning of period
|
|
|
2,284,881
|
|
|
|
922,177
|
|
Cash and cash equivalents,
end of period
|
|
$
|
2,283,879
|
|
|
$
|
2,072,312
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
2,262,847
|
|
|
|
|
|
Subscription
receivable - series B preferred stock
|
|
$
|
1,365,000
|
|
|
$
|
-
|
|
Options
issued for accrued equity compensation
|
|
$
|
128,434
|
|
|
$
|
-
|
|
Accrued
dividends
|
|
$
|
1,447
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Note
1 – General
Description
of Business
Surna
Inc. (the “Company”) was incorporated in Nevada on October 15, 2009 and operates under the trade name of Surna Cultivation
Technologies. We are headquartered in Boulder, Colorado.
Surna
Inc. is an engineering and design company focused on selling environmental control and other technologies and services to the Controlled
Environment Agriculture (CEA) industry. We leverage our experience in this space to bring value-added technology solutions to our customers
that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy evolving state and local construction
codes, permitting and regulatory requirements. In service of the CEA industry, our principal service and product offerings 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) LED lighting, benching and
racking solutions for indoor cultivation, (v) automation and control devices, systems and technologies used for environmental, lighting
and climate control, and (vi) preventive maintenance services for CEA facilities. Our customers include commercial, state- and provincial-regulated
CEA growers in the U.S. and Canada and other international locations. 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 operating in the cannabis industry, ranging from several thousand to more than 100,000 square feet. 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
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
our response to the COVID-19 pandemic and the government and business response, the Company took and continues to take measures to adjust
its operations as necessary. In early 2020 the Company took measures to reduce expenses in light of reduced orders and to preserve cash,
many of which were reversed by the end of the year when orders picked up and the overall business climate improved. Because the pandemic
continues in different parts of the world and in different ways in the United States, the Company continues to actively monitor its operations
and sales efforts and will make adjustments to its operations as necessary.
We
are experiencing unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to a significant
increase in shipments to U.S. ports, less cargo being shipped by air, a general shortage of containers, and 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 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 the U.S. government,
state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of our
control and cannot be predicted at this time.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Financial
Statement Presentation
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 three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2021. The balance sheet as of December 31, 2020 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, 2020. The notes to the unaudited condensed consolidated financial statements are presented on a going concern basis.
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.
Such reverse stock split was implemented effective January 27, 2022. The par value for the Common Stock was not affected.
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.
Basis
of Consolidation and Reclassifications
The
condensed consolidated financial statements include the accounts of the Company and its controlled and wholly owned subsidiary, Hydro
Innovations, LLC (“Hydro”). Intercompany transactions, profit, and balances are eliminated in consolidation.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced
recurring losses since its inception. Since inception, the Company has financed its activities principally through debt and equity financing,
customer deposits and revenues from completed contracts. Management expects to incur additional losses and cash outflows in the foreseeable
future in connection with its operating activities. Management believes that the economic dislocations in the overall economy, in the
near term, will impact our revenues, losses and cash flows. There can be no assurance that the Company will be able to raise debt or
equity financing in sufficient amounts, when and if needed, on acceptable terms or at all. If results of operations for 2021 do not meet
management’s expectations, or additional capital is not available, management believes it has the ability to reduce certain expenditures.
The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors,
including the overall economy, market demand for the Company’s products and services, the quality of product development efforts,
management of working capital, and continuation of normal payment terms and conditions for purchase of the Company’s products.
The Company believes its cash balances and cash flow from operations will be insufficient to fund its operations for the next 12 months.
If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then
the Company will need to raise additional funding to continue as a going concern. The foregoing factors raise substantial doubt about
the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued.
These condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
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, valuation of equity-based compensation,
valuation of deferred tax assets and liabilities, warranty accruals, accounts receivable and inventory allowances, and legal contingencies.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
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. The Company has
not experienced any losses to date on depository accounts.
Income
(Loss) Per Common Share
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.
During
the nine months ended September 30, 2021 and 2020, there were warrants and options outstanding to purchase Company common stock and shares
of convertible preferred stock and restricted stock units that were convertible into shares of the Company’s common stock. During
the three- and nine-month periods ended September 30, 2021 and 2020, the Company incurred a net loss and consequently the common share
equivalents of these potentially dilutive equity instruments have not been included in the calculations of loss per share because such
inclusion would have been anti-dilutive.
As
of September 30, 2021, and 2020, there were respectively, 777,888 and 293,383, potentially dilutive equity instruments outstanding in
respect of shares of convertible preferred stock and warrants and options outstanding to purchase Company 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. 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.
During
the nine months ended September 30, 2021, the Company concluded that the projected impact of the COVID-19 pandemic on its sales, contract
completion and revenues in the near term, together with the volatility in its share price during the quarter represented potential indicators
of impairment. Accordingly, the Company performed an interim impairment analysis at September 30, 2021 and concluded that no impairment
relating to goodwill existed at September 30, 2021.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
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 issuer. 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.
The
Company determined it is probable the Series B Preferred Stock will become redeemable at the option of the holder. As a result, on September
30, 2021, the Company adjusted carrying value of the Series B Preferred Stock to its redemption value of $3,960,000 and recorded a $2,262,847
non-cash redemption value adjustment. This redemption value adjustment is treated as similar to a dividend on the preferred stock for
GAAP purposes, accordingly, the redemption value adjustment is therefore added to the “Net Loss” to arrive at “Net
Loss Attributable to Common Shareholders’” on the Company’s Consolidated Statements of Operations. In addition, as
the Company does not have a balance of retained earnings, the redemption value adjustment was recorded against additional paid-in capital.
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.
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.
A
contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied. When there are multiple performance obligations within a contract, the Company allocates the transaction price
to each performance obligation based on standalone selling price. When estimating the selling price, the Company uses various observable
inputs. The best observable input is the Company’s actual selling price for the same good or service, however, this input is generally
not available for the Company’s contracts containing multiple performance obligations. For engineering services, the Company estimates
the standalone selling price by reference to certain physical characteristics of the project, such as facility size and mechanical systems
involved, which are indicative of the scope and complexity of the mechanical engineering services to be provided. For equipment sales,
the standalone selling price is determined by forecasting the expected costs of the equipment and 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 performance obligation is fulfilled.
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.
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.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
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.
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.
The
Company does not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services
are performed. Contract liabilities consist of advance payments and deferred revenue.
For
the three and nine months ended September 30, 2021, the Company recognized revenue of $283,452 and $3,357,068, respectively, related
to the deferred revenue at January 1, 2021. For the three and nine months ended September 30, 2020, the Company recognized revenue of
$9,141 and $1,074,016, respectively, related to the deferred revenue at January 1, 2020.
Remaining
performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations
that the Company has not performed under its customer contracts. The Company has elected not to use the optional exemption in ASC 606-10-50-14,
which exempts an entity from such disclosures if a performance obligation is part of a contract with an original expected duration of
one year or less. Accordingly, the information disclosed about remaining performance obligations includes all customer contracts, including
those with an expected duration of one year or less.
Industry
uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the Company’s
control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance obligations. There
are risks that the Company may not realize the full contract value on customer projects in a timely manner or at all, and completion
of a customer’s cultivation facility project is dependent upon the customer’s ability to secure funding and real estate,
obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes
for customers to complete a project, which corresponds to when the Company is able to recognize revenue, is driven by numerous factors
including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities
and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving
licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on
the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination
required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems
can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability
of power; and (viii) delays that are typical in completing any construction project.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
As
of September 30, 2021, the Company’s remaining performance obligations, or backlog, was $9,881,000, of which $1,161,000, or 12%,
was attributable to customer contracts for which the Company has only received an initial advance payment to cover the allocated value
of the Company’s engineering services (“engineering only paid contracts”). There is the risk that the equipment portion
of these engineering only paid contracts will not be completed or will be delayed. These reasons include the customer being dissatisfied
with the quality or timeliness of the Company’s engineering services, delay or abandonment of the project because of the customer’s
inability to obtain project financing or licensing, or other reasons such as a challenging business climate including an overall post-Covid-19
economic disruption or change in business direction. After the customer has made an advance payment for a portion of the equipment to
be delivered under the contract (“partial equipment paid contracts”), the Company is typically better able to estimate the
timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated
once the initial equipment payment is received. There is significant uncertainty regarding the timing of the Company’s recognition
of revenue on its remaining performance obligations, and there is no certainty that these will result in actual revenues. The backlog
at September 30, 2021, includes booked sales orders of $1,250,000 from several customers that the Company does not expect to be realized
until late 2022. The Company believes the sales orders in this portion of our backlog have an elevated level of risk and may, ultimately,
be delayed or cancelled by our customers.
The
remaining performance obligations expected to be recognized through 2022 are as follows:
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
Remaining performance obligations
related to engineering only paid contracts
|
|
$
|
112,000
|
|
|
$
|
1,049,000
|
|
|
$
|
1,161,000
|
|
Remaining performance
obligations related to partial equipment paid contracts
|
|
|
3,091,000
|
|
|
|
5,629,000
|
|
|
$
|
8,720,000
|
|
Total remaining performance
obligations
|
|
$
|
3,203,000
|
|
|
$
|
6,678,000
|
|
|
$
|
9,881,000
|
|
The
following table sets forth the Company’s revenue by source:
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Equipment and systems sales
|
|
$
|
3,523,948
|
|
|
$
|
1,481,961
|
|
|
$
|
9,933,313
|
|
|
$
|
4,575,855
|
|
Engineering and other services
|
|
|
110,538
|
|
|
|
114,160
|
|
|
|
464,269
|
|
|
|
402,837
|
|
Shipping and handling
|
|
|
71,950
|
|
|
|
38,548
|
|
|
|
184,888
|
|
|
|
148,326
|
|
Total revenue
|
|
$
|
3,706,436
|
|
|
$
|
1,634,669
|
|
|
$
|
10,582,470
|
|
|
$
|
5,127,018
|
|
Accounting
for Share-Based Compensation
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, 2021, 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 150.2% to
152.51%; expected term in years 10 and risk-free interest rate ranged from 0.55% to 1.49%.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
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.
The
following is a summary of share-based compensation expenses included in the condensed consolidated statements of operations for the three
and nine months ended September 30, 2021 and 2020:
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Share-based compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
-
|
|
|
$
|
6,833
|
|
|
$
|
29,944
|
|
|
$
|
23,949
|
|
Advertising and marketing expenses
|
|
|
-
|
|
|
|
2,500
|
|
|
|
13,292
|
|
|
|
7,500
|
|
Product development costs
|
|
|
-
|
|
|
|
5,444
|
|
|
|
14,029
|
|
|
|
16,332
|
|
Selling, general and
administrative expenses
|
|
|
29,307
|
|
|
|
41,221
|
|
|
|
102,735
|
|
|
|
306,448
|
|
Total share-based compensation
expense included in consolidated statement of operations
|
|
$
|
29,307
|
|
|
$
|
55,998
|
|
|
$
|
160,000
|
|
|
$
|
354,229
|
|
Included
in the expense for the three and nine months ended September 30, 2021, is an accrual for $0 and $108,945, respectively, for the 2021
Annual Employee Incentive Compensation Plan. Included in the expense for the three and nine months ended September 30, 2020, is an accrual
for $31,575 and $101,472, respectively, for the 2020 Annual Employee Incentive Compensation Plan.
Concentrations
Three
customers accounted for 38%, 23%, and 11% of the Company’s revenue for the three months ended September 30, 2021 and three customers
accounted for 25%, 12% and 12% of the Company’s revenue for the nine months ended September 30, 2021. Two customers accounted for
39% and 30% of the Company’s revenue for the three months ended September 30, 2020 and three customers accounted for 18%, 17% and
11% of the Company’s revenue for the nine months ended September 30, 2020.
Three
customers accounted for 40%, 26% and 22% of the Company’s accounts receivable as of September 30, 2021. As of September 30, 2020,
four customers accounted for 32%, 23%, 21% and 10% of the Company’s accounts receivable.
Recently
Issued Accounting Pronouncements
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 Company anticipates that the adoption of this guidance will
not have a material impact on its consolidated financial statements.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06,
Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s
Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates
the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies
the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard
also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s
own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for
all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis,
with early adoption permitted beginning on January 1, 2021. The Company early adopted ASU 2020-06 effective January 1, 2021. The early
adoption of ASU 2020-06 impacted the Company’s accounting for the issuance of its Series B Redeemable Convertible Preferred Stock
as further discussed in Note 8 Temporary Equity Series B Redeemable Convertible Preferred Stock below.
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 Company does not expect this ASU to have a material
impact on its consolidated results of operations, cash flows and financial position.
In
January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and
Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and
Topic 815 (a consensus of the Emerging Issues Task Force). This update clarifies whether an entity should consider observable transactions
that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative
and how to account for certain forward contracts and purchased options to purchase securities. For public entities, this guidance is
effective for fiscal years beginning after December 15, 2020. The Company does not expect this ASU to have a material impact on its consolidated
results of operations, cash flows and financial position. The adoption of this ASU has not had a material impact on the Company’s
consolidated results of operations, cash flows and financial position.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which
simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also
improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12
is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The adoption of this ASU has not had a
material impact on the Company’s consolidated results of operations, cash flows and financial position.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated
to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Note
2 – Leases
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.
Upon
adoption, the Company recognized its lease for manufacturing and office space (the “Facility Lease”) on the balance sheet
as an operating lease right-of-use asset in the amount of $714,416 and as a lease liability of $822,374. The Facility Lease commenced
September 29, 2017 and continues through August 31, 2022. The Company has the option to renew the Facility Lease for an additional five
years. However, the renewal option to extend the Facility Lease is not included in the right-of-use asset or lease liability as the option
is not reasonably certain of exercise. The Company regularly evaluates the renewal option and when it is reasonably certain of exercise,
the Company will include the renewal period in its lease term.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Beginning
September 1, 2018, and each subsequent September 1 during the term, the monthly rent under the Facility Lease will increase by 3%. Total
rent under the current building lease is charged to expense over the term of the lease on a straight-line basis, resulting in the same
monthly rent expense throughout the lease. The difference between the rent expense amount and the actual rent paid is recorded to operating
lease liability on the Company’s condensed consolidated balance sheets.
Under
the Facility Lease, the landlord agreed to pay the Company or the Company’s contractors for tenant improvements made by the Company
not to exceed $100,000, which were used for normal tenant improvements. The Company determined that these improvements were not specialized
and could be utilized by a subsequent tenant and, as such, the improvements were considered assets of the lessor. As of January 1, 2019,
the unamortized amount of tenant improvement allowance of $81,481 was treated as a reduction in measuring the right-of-use asset.
Under
the Facility Lease, the Company pays the actual amounts for property taxes and insurance, excludes such payments from lease contract
consideration, and records such payments as incurred. The Company also pays the landlord for common area maintenance, which is considered
a non lease component. For the Facility Lease, the Company has not elected the accounting policy to include both the lease and non lease
components as a single component and account for it as the lease.
In
determining the right-of-use asset and lease liability, the Company applied a discount rate to the minimum lease payments under the Facility
Lease. ASC 842 requires the Company to use the rate of interest that the Company would have to pay to borrow on a collateralized basis
over a similar term an amount equal to the lease payments in a similar economic environment. Since the discount rate is not implicit
in the lease agreement, we utilized an estimated incremental borrowing rate provided by the Company’s depository bank.
The
lease cost, cash flows and other information related to the Facility Lease were as follows:
|
|
For
the Nine
Months
Ended
September
30,
|
|
|
|
2021
|
|
Operating lease cost
|
|
$
|
162,667
|
|
Operating cash outflow from operating lease
|
|
$
|
210,154
|
|
|
|
As
of
September
30,
2021
|
|
Operating lease right-of-use asset
|
|
$
|
194,353
|
|
Operating lease liability, current
|
|
$
|
238,140
|
|
Operating lease liability, long-term
|
|
$
|
-
|
|
|
|
|
|
|
Remaining lease term
|
|
|
.9
years
|
|
Discount rate
|
|
|
5.00
|
%
|
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Future
annual minimum lease payments on the Facility Lease as of September 30, 2021 were as follows:
Years ended
December 31,
|
|
|
|
2021 (excluding the nine months ended September 30,
2021)
|
|
|
71,710
|
|
2022
|
|
|
170,891
|
|
Total minimum lease payments
|
|
|
242,601
|
|
Less imputed interest
|
|
|
(4,461
|
)
|
Present value of
minimum lease payments
|
|
$
|
238,140
|
|
On
April 30, 2021, the Company entered into an agreement to sublease approximately 6,900 square feet of its office and manufacturing space.
The sublease commenced on April 30, 2021 and will continue on a month-to-month basis until either party gives 30-days’ notice.
Unless 30-days’ notice is provided sooner, this sublease will end upon termination of the Company’s Lease Agreement with
its current landlord. Rent was initially charged at $5,989 per month and increased to $11,978 per month effective July 1, 2021. The Sublessor
is also responsible for its prorated share of utilities and other related costs. This new sublease does not change the Company’s
legal relationship or financial obligations with its landlord. The Company continues to be responsible for all the remaining financial
obligations under its existing lease with the landlord. Accordingly, entering into the new sublease did not impact the carrying value
of the Company’s operating lease right of use asset or operating lease liability. Moreover, after an initial two-month transitional
period, the rental rate per square foot under the new sublease is identical to the rental rate per square foot for the Company’s
existing lease with its landlord which indicates that there is no impairment to the carrying value of the Company’s operating lease
right of use asset.
On
July 27, 2021, the Company entered into a Lease Termination Agreement with its current landlord for the 18,952 square foot office and
manufacturing facility in Boulder, CO, which was previously scheduled to expire on August 31, 2022. The termination provides for the
Company to vacate the facility no later than November 15, 2021. In exchange for early termination from its lease obligation, the Company
paid a nominal lease termination fee on July 28, 2021. The termination was also contingent upon a successor tenant executing a new lease
with the landlord and the Company paying the remaining deferred rent and security deposit amounts (See Contractual Payment Obligations
section). The landlord and successor tenant entered into a lease agreement on July 27, 2021. The remaining deferred rent and security
deposit will be paid in conjunction with the final rent payment.
On
July 28, 2021, the Company entered into an agreement to lease 11,491 square feet of office and manufacturing space in Louisville, CO.
The lease commences on November 1, 2021 and continues through January 31, 2027. The Company has the option to renew the lease for an
additional 60-month period.
Note
3 – Inventory
Inventory
consisted of the following:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Finished goods
|
|
$
|
319,335
|
|
|
$
|
201,778
|
|
Work in progress
|
|
|
2,595
|
|
|
|
4,231
|
|
Raw materials
|
|
|
237,705
|
|
|
|
214,145
|
|
Allowance for excess
& obsolete inventory
|
|
|
(79,281
|
)
|
|
|
(93,045
|
)
|
Inventory, net
|
|
$
|
480,354
|
|
|
$
|
327,109
|
|
Overhead
expenses of $17,674 and $17,974 were included in the inventory balance as of September 30, 2021, and December 31, 2020, respectively.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Advance
payments on inventory purchases are recorded in prepaid expenses until title for such inventory passes to the Company. Prepaid expenses
included approximately $879,000 and $916,000 in advance payments for inventory for the periods ended September 30, 2021, and December
31, 2020, respectively.
Note
4 – Property and Equipment
Property
and equipment consisted of the following:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Furniture and equipment
|
|
$
|
296,851
|
|
|
$
|
398,422
|
|
Vehicles
|
|
|
15,000
|
|
|
|
15,000
|
|
Leasehold improvements
|
|
|
215,193
|
|
|
|
215,193
|
|
|
|
|
527,044
|
|
|
|
628,615
|
|
Accumulated depreciation
|
|
|
(428,076
|
)
|
|
|
(480,883
|
)
|
Property and equipment,
net
|
|
$
|
98,967
|
|
|
$
|
147,732
|
|
Depreciation
expense was $54,538 for the nine months ended September 30, 2021. For the nine months ended September 30, 2021, $4,721 was allocated
to cost of sales and $1,180 was allocated to inventory with the remainder recorded as selling, general and administrative expense.
Note
5 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts payable
|
|
$
|
864,558
|
|
|
$
|
918,639
|
|
Sales commissions payable
|
|
|
40,758
|
|
|
|
48,263
|
|
Accrued payroll liabilities
|
|
|
255,462
|
|
|
|
288,071
|
|
Product warranty accrual
|
|
|
172,868
|
|
|
|
173,365
|
|
Other accrued expenses
|
|
|
340,442
|
|
|
|
356,623
|
|
Total
|
|
$
|
1,674,088
|
|
|
$
|
1,784,961
|
|
Note
6 – Note Payable and Accrued Interest
On
February 10, 2021, the Company entered into a note payable with its current bank in the principal amount of $514,200, for working capital
purposes.
The
loan amount bears interest at 1% and is due on February 5, 2026. The loan may be repaid in advance without penalty. The loan is also
potentially forgivable in full provided proceeds are used for payment of payroll expenses, rent, utilities and mortgage interest and
certain other terms and conditions are met. If any portion of the loan is not forgiven, payments will commence 10 months following the
end of the 24-week deferral period. The loan has typical default provisions, including for change of ownership, general lender insecurity
as to repayment, non-payment of amounts due, defaults on other debt instruments, insolvency, dissolution or termination of the business
as a going concern and bankruptcy.
During
the three and nine months ended September 30, 2021, interest of $1,296 and $3,268 was accrued, respectively, in respect of this note
payable.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Note
7 – Commitments and Contingencies
Litigation
As
of December 31, 2019, there were 45,000 restricted stock units that had not been settled due to a dispute with a former employee over
the required withholding taxes to be paid to the Company for remittance to the appropriate tax authorities. The Company commenced an
arbitration action against the former employee regarding the dispute. The former employee also made claims in the arbitration action
against the Company for unpaid wages. As stated in a pleading in the arbitration, on March 9, 2020, the Company issued the former employee
45,000 shares of the Company’s common stock in settlement of these restricted stock units after taking measures to mitigate the
Company’s exposure to penalties and liability for the failure to properly withhold income taxes. The Arbitrator issued an interim
award of approximately $10,000 in the Company’s favor and a finding against the former employee. Effective June 9, 2020, the Arbitrator
issued his final award in the Company’s favor in the Colorado arbitration. The Arbitrator found against the former employee and
awarded the Company costs of $33,985, with interest at 8% per year. Effective July 22, 2020, the Colorado Court confirmed the Arbitration
award and entered a final judgement in favor of the Company and against the former employee. The Company pursued collection of this debt
and has now collected the debt owed. This former employee continued to pursue separate litigation against the Company for recovery of
alleged consulting fees owed to him for the 2015 calendar year prior to his appointment as an executive officer of the Company. Effective
March 30, 2021, this separate litigation has now been settled. While the Company disputed the merits of the claims, the Company has agreed
and will be obliged to pay $40,000 over eight months and to issue upon execution of the settlement agreement an aggregate of 6,667 shares
of common stock of the Company. These shares were issued on April 8, 2021 as “restricted securities,” subject to a lock-up
agreement of six months, without registration rights, and pursuant to a private placement exemption and were valued at $67,000. The settlement
agreement also included mutual releases and no admission of liability. The cost to the Company of this settlement, $107,000, in total,
has been recognized in full in other expenses during the nine months ended September 30, 2021. As of September 30, 2021, $35,000 has
been paid in respect of the $40,000 cash portion of the settlement and the remaining $5,000 is included in accounts payables and accrued
liabilities. The issuance of the 6,667 shares of common stock, valued at $67,000 has been recognized in common stock issued during the
nine months ended September 30, 2021.
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.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Note
8 – Temporary Equity
Series
B Redeemable Convertible Preferred Stock
On
September 28, 2021, Surna Inc. (the “Company”) sold to an institutional investor (the “Investor”), 3,300 shares
of Series B Convertible Preferred Stock, stated value $1,000 per share, currently convertible into 385,965 shares of common stock, and
a warrant to purchase up to 192,982 shares of common stock (“Investor Warrant”), for an aggregate purchase price of $3,000,000
(“Consideration”). The Company will receive net proceeds of approximately $2,625,000. The Company has received net proceeds
of approximately $1,260,000 in the quarter and will receive the remaining $1,365,000 pursuant to the terms of the escrow.
The
Series B Preferred Stock has an annual dividend of 8% and has an initial common stock conversion price of $8.55. The conversion rate
is subject to adjustment in various circumstances, including stock splits, stock dividends, pro rata distributions, fundamental transactions
and upon a triggering event and subject to reset if the common stock of the Company sold in any subsequent equity transaction, including
a qualified offering, is sold at a price below the then conversion price. The Series B Preferred Stock is mandatorily convertible on
the third anniversary of its issuance. All conversions of the Series B Preferred Stock are subject to a blocker provision of 4.99%. The
Company will reserve 200% of the number of shares of common stock into which the Series B Preferred Stock and Investor Warrant may be
converted or exercised.
Pending
completion of an amendment to the certificate of incorporation to increase the number of authorized shares of common stock and redeem
the outstanding Series A Preferred Stock, as required by the Investor, $1,365,000 of the Consideration was placed in escrow. The Company
filed a Schedule 14C to affect the amendment and expects the amendment process to be completed in early November, at which time the escrowed
amount will be released to the Company. If the amendment process is not achieved by December 7, 2021, then the Company will redeem, at
120% of the stated value of $1,000 per share, 1,650 shares of the Series B Preferred Stock, and pay the dividend amount due thereon at
8% to the date of redemption. The Series B Preferred Stock will be redeemed at the demand by the holders, at 120% of the stated value
of $1,000, at any time after the earlier of (x) the consummation by the Company of a qualified offering, or (y) the first anniversary
of the issuance of the Series B Preferred Shares.
The
Investor was granted a right of participation in future private offerings and has agreed to a 180-day lock-up in connection with a qualified
offering. A “qualified offering” is the first public offering after the sale of the Series B Preferred Stock in which the
common stock of the Company is listed on a national exchange.
The
Investor Warrant may be exercised until September 28, 2024, at an initial exercise price of $9.41, subject to adjustment. The Investor
Warrant provides for cashless exercise if the underlying shares of common stock are not registered for resale, and all issuances of common
stock upon exercise are subject to a 4.99% blocker provision.
The
Company granted the Investor registration rights for the shares of common stock underlying the Series B Preferred Stock and the Investor
Warrants. The Company must file a registration statement no later than 180 days after the date of a qualified offering and have it effective
in 45 days if there is no Securities and Exchange Commission (“SEC”) review, or if there is a review, within 75 days. The
Company must keep the registration statement effective until all the shares registered have been sold or may be sold under Rule 144,
without regard to volume and holding period restrictions.
The
Company engaged ThinkEquity LLC (“ThinkEquity”) as its placement agent and paid a total cash fee of 9%, or $270,000, and
its expenses, less prepaid expenses, and issued to ThinkEquity and its designees a warrant to purchase up to an aggregate of 34,737 shares
of common stock. The exercise price of the warrant initially will be $10.40 per share, subject to typical adjustment provisions, and
exercisable for a term of three years. The warrant has registration rights.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Probability
of Redemption: As it was considered probable the Series B Preferred stock will become redeemable outside of the Company’s control,
the Series B Preferred stock needs to be disclosed as temporary equity and restated at the balance sheet date at its redemption value
of 120% the stated value of $1,000 per share, or $3,960,000. As a result, on September 30, 2021, the Company adjusted the carrying value
of the Series B Preferred Stock to its redemption value of $3,960,000 and recorded a $2,262,847 non-cash redemption value adjustment.
This redemption value adjustment is treated as similar to a dividend on the preferred stock for GAAP purposes; accordingly, the redemption
value adjustment is therefore added to the “Net Loss” to arrive at “Net Loss Attributable to Common Shareholders’”
on the Company’s Consolidated Statements of Operations. In addition, since the Company does not have a balance of retained earnings,
the redemption value adjustment was recorded against additional paid-in capital.
Series
B Redeemable Convertible Stock Subscription Receivable
Of
the net proceeds of $2,624,874 receivable under the Securities Purchase Agreement relating to the Series B preferred stock and related
warrants, $1,365,000 was put into escrow pending the completion of i) an amendment to the Articles of Incorporation to increase the number
of authorized shares of common stock to 850,000,000 shares, (ii) the redemption of the outstanding shares of Series A Preferred Stock
of the Company for common stock at the rate of one 0.0067 share of common stock for each 100 shares of preferred stock that is currently
issued and outstanding, (iii) the authorization of a reverse stock split of the common stock in connection with the listing of the common
stock on an eligible market (as defined in the Purchase Agreement), and, if the number of authorized shares of common stock is reduced
in connection with such reverse stock split, the subsequent increase of the authorized shares of capital stock of the Company within
established limits, at any time prior to June 30, 2022, and (iv) an amendment to the articles of incorporation to change the corporate
name of the Company to CEA Industries Inc. If these amendments are completed by December 7, 2021, then the remaining $1,365,000 funds
held in escrow will be released to the Company.
Accordingly,
as of September 30, 2021, these funds were disclosed as Series B Redeemable Convertible Stock Subscription Receivable on the Company’s
consolidated balance sheet
Note
9 – Stockholders’ Deficit
Preferred
Stock
As
of September 30, 2021, and December 31, 2020, the Company has 150,000,000 shares authorized at a $0.00001 par value.
Series
A Preferred Stock
As
of September 30, 2021, and December 31, 2020, the Company has 42,030,331 shares issued and outstanding at the end of both periods.
Series
B Preferred Stock
On
September 28, 2021, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional
investor (the “Investor”), pursuant to which the Investor purchased from the Company 3,300 shares of Series B Preferred Stock
with a stated value of $1,000 per share, or $3,300,000 of stated value in the aggregate (“Series B Preferred Stock”), and
a warrant to purchase up to 192,982 shares of common stock of the Company (“Investor Warrant”), for an aggregate purchase
price of $3,000,000 (“Consideration”).
As
a result of the PIPE Financing, referenced above and described in Note 8, the Company has 3,300 shares issued and outstanding
as of September 30, 2021.
Common
Stock
As
of September 30, 2021, and December 31, 2020, the Company was authorized to issue 350,000,000 shares of common stock with a par value
of $0.00001 per share.
Effective
December 31, 2020, 1,576,844 shares of common stock were issued and outstanding.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
During
the nine months ended September 30, 2021, we issued 6,667 shares of common stock, valued at $67,000 as part of a legal settlements further
described in Note 7 – Commitments and Contingencies – litigation above.
Consequently,
effective September 30, 2021, 1,583,511 shares of common stock were issued and outstanding.
Note
10 – Equity Incentive Plans
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 333,333 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.
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 666,667 shares of common stock. The 2021 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, 2021, the Company issued no shares of its common stock.
During
the nine months ended September 30, 2021, the Company granted awards for 21,777 non-qualified stock options as described below. Of the
total awards granted, 20,239 were under the 2017 Equity Plan and 230,770 were issued under the 2021 Equity Plan.
As
of September 30, 2021, of the 333,333 shares authorized under the 2017 Plan for equity awards, 163,692 shares have been issued, awards
related to 162,665 options remain outstanding, and 6,976 shares remain available for future equity awards. As of September 30, 2021,
of the 666,667 shares authorized under the 2021 Equity Plan, 1,538 relate to outstanding options and 665,129 shares remain available
for future equity awards.
There
was $90,255 in unrecognized compensation expense for unvested non-qualified stock options at September 30, 2021 which will be recognized
over approximately 3 years.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Non-Qualified
Stock Options
A
summary of the non-qualified stock options granted to employees and consultants under the 2017 Equity Plan during the nine months ended
September 30, 2021, are presented in the table below:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2020
|
|
|
95,007
|
|
|
$
|
12.45
|
|
|
|
8.3
|
|
|
$
|
-
|
|
Granted
|
|
|
20,239
|
|
|
$
|
12.75
|
|
|
|
10.0
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,914
|
)
|
|
$
|
18.30
|
|
|
|
6.6
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September
30, 2021
|
|
|
113,332
|
|
|
$
|
12.45
|
|
|
|
7.9
|
|
|
$
|
-
|
|
Exercisable, September
30, 2021
|
|
|
101,665
|
|
|
$
|
12.75
|
|
|
|
7.7
|
|
|
$
|
-
|
|
During
the nine months ended September 30, 2021, we issued a total of 20,239 stock options to employees as follows:
|
●
|
6,906
stock options were issued to 21 employees in respect of the Company’s 2020 Annual Incentive Awards. The options vested immediately,
have a term of 10 years and an exercise price of $19.50.
|
|
●
|
13,333
stock options were issued to our newly appointed Chief Financial Officer. The options vest as follows: 1,667 vested immediately,
2,780 on June 30, 2022, 665,000 on June 30, 2023 and 668,000 on June 30, 2024. The options have a term of 10 years and an exercise
price of $9.15.
|
|
●
|
During
the nine months ended September 30, 2021, 1,914 fully vested stock options were forfeited following the departure of 3 former employees.
|
A
summary of non-vested non-qualified stock options activity for employees and consultants under the 2017 Equity Plan for the nine months
ended September 30, 2021, are presented in the table below:
|
|
Number
of Options
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
20,239
|
|
|
$
|
12.30
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
(8,572
|
)
|
|
$
|
16.80
|
|
|
$
|
66,412
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Nonvested, September 30, 2021
|
|
|
11,667
|
|
|
$
|
9.15
|
|
|
$
|
-
|
|
|
$
|
104,800
|
|
For
the nine months ended September 30, 2021 and September 30, 2020, the Company recorded $29,881 and $171,624 as compensation expense related
to vested options issued to employees and consultants, net of forfeitures, respectively.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
A
summary of the non-qualified stock options granted to directors under the 2017 Equity Plan and the 2021 Equity Plan, during the nine
months ended September 30, 2021, are presented in the table below:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2020
|
|
|
49,333
|
|
|
$
|
10.05
|
|
|
|
7.5
|
|
|
$
|
-
|
|
Granted
|
|
|
1,538
|
|
|
$
|
9.75
|
|
|
|
10.0
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2021
|
|
|
50,871
|
|
|
$
|
10.05
|
|
|
|
6.8
|
|
|
$
|
-
|
|
Exercisable, September 30, 2021
|
|
|
50,871
|
|
|
$
|
10.05
|
|
|
|
6.8
|
|
|
$
|
-
|
|
During
the nine months ended September 30, 2021, we issued 1,538 non-qualified stock options to directors as retroactive compensation for the
first half of 2021 under the 2021 Equity Plan.
A
summary of non-vested non-qualified stock options activity for directors under the 2017 Equity Plan and the 2021 Equity Plan, for the
nine months ended September 30, 2021, are presented in the table below:
|
|
Number
of Options
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2020
|
|
|
6,667
|
|
|
$
|
4.35
|
|
|
$
|
31,000
|
|
|
$
|
-
|
|
Granted
|
|
|
1,538
|
|
|
|
9.75
|
|
|
$
|
(1,154
|
)
|
|
$
|
-
|
|
Vested
|
|
|
(8,205
|
)
|
|
$
|
5.40
|
|
|
$
|
(29,846
|
)
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, September 30, 2021
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During
the nine months ended September 30, 2021 and September 30, 2020, the Company incurred $21,174 and $55,970, respectively, as compensation
expense related to 8,205 and 10,142 vested options, respectively, issued to directors.
Effective
June 24, 2020, the Company issued 13,333 non-qualified stock options under the 2017 Equity Plan to newly appointed directors.
The options vested 50% upon grant and 50% on April 1, 2021, if the Director remained on the Board up to that time. The options have a
term of 5 years and have 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.
Effective
August 20, 2021, the Company issued 1,538 non-qualified stock options under the 2021 Equity Plan to its directors. The options vested
upon grant. The options have a term of 10 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
There
has been no activity related to RSUs during the nine months ended September 30, 2021.
The
Company recorded $25,163 during the nine months ended September 30, 2020, as compensation expense related to vested RSUs issued to employees,
directors and consultants.
Effective
April 30, 2020, 5,333 RSUs vested. However, the holder elected to cancel the RSUs.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
Note
11 - Warrants
The
following table summarizes information with respect to outstanding warrants to purchase common stock during the nine months ended September
30, 2021:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
In
Months
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
50,417
|
|
|
$
|
37.50
|
|
|
|
6
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
227,719
|
|
|
$
|
9.00
|
|
|
|
36
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(50,417
|
)
|
|
$
|
37.50
|
|
|
|
-
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
227,719
|
|
|
$
|
9.00
|
|
|
|
36
|
|
|
$
|
0
|
|
The
following table summarizes information about warrants outstanding at September 30, 2021:
|
|
|
|
|
|
Weighted Average Life of
|
|
|
|
|
Warrants
|
|
|
Outstanding Warrants
|
|
Exercise price
|
|
|
Outstanding
|
|
|
In
Months
|
|
|
|
|
|
|
|
|
|
|
9.45
|
|
|
|
192,982
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.40
|
|
|
|
34,737
|
|
|
|
36
|
|
|
|
|
|
|
227,719
|
|
|
|
36
|
|
Effective
June 30, 2021, 50,417 warrants issued in connection with our Q2 2018 unit offering expired unexercised.
Effective
September 28, 2021, we issued 192,982 warrants with an exercise price of $9.45 and a 3-year term to the Holders of our Series B redeemable
convertible preferred stock and 34,737 warrants with an exercise price of $10.40 and a 3-year term to the placement agent in respect
of the sale of the Series B redeemable convertible preferred stock. See Note 8.
Note
12 – Income Taxes
As
of September 30, 2021, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $20,260,000,
of which $11,196,261 will expire, if not utilized, in the years 2034 through 2037, however, NOLs generated subsequent to December 31,
2017 do not expire but may only be used against taxable income to 80%. In response to the novel coronavirus COVID-19, the Coronavirus
Aid, Relief, and Economic Security Act temporarily repealed the 80% limitation for NOLs arising in 2018, 2019 and 2020. 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.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2021
(in
US Dollars except share numbers)
(Unaudited)
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, 2021 and December 31, 2020.
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
13 – Related Party Transactions
The
company entered into a manufacturer representative agreement with RSX Enterprises 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 has an initial term through December 31, 2021 with
automatic one-year renewal terms unless prior notice is given 90 days prior to each annual expiration. During the three months ended
September 30, 2021, the Company paid $26,873 in commissions under this agreement.
Note
14 – Subsequent Events
In
accordance with ASC 855, Subsequent Events, the Company has evaluated all subsequent events through the date the financial statements
were available to be issued. No material subsequent events occurred after September 30, 2021, other than as set out below:
On
November 3, 2021, we increased our authorized capital to one billion shares of capital stock, of which 850,000,000 are designated as
common stock and 150,000,000 are designated as preferred stock.
On
November 3, 2021, we were authorized to redeem the outstanding Series A Preferred Stock, which was completed on November 4, 2021.
On
November 4, 2021, we received the remaining $1,365,000 from escrow in relation to the Series B Preferred Stock.
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.
Such reverse stock split was implemented effective January 27, 2022. The par value for the Common Stock was not affected. In connection
with the aforementioned reverse stock split, the Company’s Board of Directors approved the reset of the authorized capital of the
Company to be 200,000,000 shares of common stock and 25,000,000 shares of preferred stock.
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.
On January 28, 2022, the Company
agreed with the Series B investor to redeem 1,650 shares of the Company’s Series B Preferred Stock for approximately $2.0 million
following the closing of the Company’s offering.
5,811,138
Shares of Common Stock
5,811,138
Warrants to Purchase Common Stock
CEA
Industries Inc.
PROSPECTUS
ThinkEquity
February 10, 2022
Through
and including March 7, 2022 (the 25th day after the date of this offering), all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s
obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
CEA Industries (NASDAQ:CEAD)
Historical Stock Chart
From Aug 2024 to Sep 2024
CEA Industries (NASDAQ:CEAD)
Historical Stock Chart
From Sep 2023 to Sep 2024