0001482541 false Q3 --12-31 Yes Yes
0001482541 2022-01-01 2022-09-30 0001482541
CEAD:CommonStock0.00001ParValueMember 2022-01-01 2022-09-30
0001482541 CEAD:WarrantsToPurchaseCommonStockMember 2022-01-01
2022-09-30 0001482541 2022-11-14 0001482541 2022-09-30 0001482541
2021-12-31 0001482541 2022-07-01 2022-09-30 0001482541 2021-07-01
2021-09-30 0001482541 2021-01-01 2021-09-30 0001482541
us-gaap:SeriesAPreferredStockMember us-gaap:PreferredStockMember
2022-06-30 0001482541 us-gaap:CommonStockMember 2022-06-30
0001482541 us-gaap:AdditionalPaidInCapitalMember 2022-06-30
0001482541 us-gaap:RetainedEarningsMember 2022-06-30 0001482541
2022-06-30 0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2021-12-31 0001482541
us-gaap:CommonStockMember 2021-12-31 0001482541
us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001482541
us-gaap:RetainedEarningsMember 2021-12-31 0001482541
us-gaap:SeriesAPreferredStockMember us-gaap:PreferredStockMember
2021-06-30 0001482541 us-gaap:CommonStockMember 2021-06-30
0001482541 us-gaap:AdditionalPaidInCapitalMember 2021-06-30
0001482541 us-gaap:RetainedEarningsMember 2021-06-30 0001482541
2021-06-30 0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2020-12-31 0001482541
us-gaap:CommonStockMember 2020-12-31 0001482541
us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001482541
us-gaap:RetainedEarningsMember 2020-12-31 0001482541 2020-12-31
0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2022-07-01 2022-09-30 0001482541
us-gaap:CommonStockMember 2022-07-01 2022-09-30 0001482541
us-gaap:AdditionalPaidInCapitalMember 2022-07-01 2022-09-30
0001482541 us-gaap:RetainedEarningsMember 2022-07-01 2022-09-30
0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2022-01-01 2022-09-30 0001482541
us-gaap:CommonStockMember 2022-01-01 2022-09-30 0001482541
us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-09-30
0001482541 us-gaap:RetainedEarningsMember 2022-01-01 2022-09-30
0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2021-07-01 2021-09-30 0001482541
us-gaap:CommonStockMember 2021-07-01 2021-09-30 0001482541
us-gaap:AdditionalPaidInCapitalMember 2021-07-01 2021-09-30
0001482541 us-gaap:RetainedEarningsMember 2021-07-01 2021-09-30
0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2021-01-01 2021-09-30 0001482541
us-gaap:CommonStockMember 2021-01-01 2021-09-30 0001482541
us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-09-30
0001482541 us-gaap:RetainedEarningsMember 2021-01-01 2021-09-30
0001482541 us-gaap:SeriesAPreferredStockMember
us-gaap:PreferredStockMember 2022-09-30 0001482541
us-gaap:CommonStockMember 2022-09-30 0001482541
us-gaap:AdditionalPaidInCapitalMember 2022-09-30 0001482541
us-gaap:RetainedEarningsMember 2022-09-30 0001482541
us-gaap:SeriesAPreferredStockMember us-gaap:PreferredStockMember
2021-09-30 0001482541 us-gaap:CommonStockMember 2021-09-30
0001482541 us-gaap:AdditionalPaidInCapitalMember 2021-09-30
0001482541 us-gaap:RetainedEarningsMember 2021-09-30 0001482541
2021-09-30 0001482541 2022-02-14 2022-02-15 0001482541 2021-12-30
0001482541 2022-01-01 2022-06-30 0001482541
CEAD:TwoThousandAndTwentyThreeMember
CEAD:BookedSalesOrdersFromSeveralCustomersMember 2022-09-30
0001482541 CEAD:OneCustomerMember 2022-09-30 0001482541
srt:MinimumMember 2022-01-01 2022-09-30 0001482541
srt:MaximumMember 2022-01-01 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneAnnualEmployeeIncentiveCompensationPlanMember
2022-07-01 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneAnnualEmployeeIncentiveCompensationPlanMember
2022-01-01 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneAnnualEmployeeIncentiveCompensationPlanMember
2021-07-01 2021-09-30 0001482541
CEAD:TwoThousandTwentyOneAnnualEmployeeIncentiveCompensationPlanMember
2021-01-01 2021-09-30 0001482541
us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerOneMember 2022-07-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerTwoMember 2022-07-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerOneMember 2022-01-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerTwoMember 2022-01-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerThreeMember 2022-01-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerOneMember 2021-07-01
2021-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerTwoMember 2021-07-01
2021-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerThreeMember 2021-07-01
2021-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerOneMember 2021-01-01
2021-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerTwoMember 2021-01-01
2021-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:SalesRevenueNetMember CEAD:CustomerThreeMember 2021-01-01
2021-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:AccountsReceivableMember CEAD:CustomerOneMember 2022-01-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:AccountsReceivableMember CEAD:CustomerTwoMember 2022-01-01
2022-09-30 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:AccountsReceivableMember CEAD:CustomerThreeMember
2022-01-01 2022-09-30 0001482541
us-gaap:CustomerConcentrationRiskMember
us-gaap:AccountsReceivableMember CEAD:CustomerOneMember 2021-01-01
2021-12-31 0001482541 us-gaap:CustomerConcentrationRiskMember
us-gaap:AccountsReceivableMember CEAD:CustomerTwoMember 2021-01-01
2021-12-31 0001482541 CEAD:EquipmentAndSystemsSalesMember
2022-07-01 2022-09-30 0001482541
CEAD:EquipmentAndSystemsSalesMember 2021-07-01 2021-09-30
0001482541 CEAD:EquipmentAndSystemsSalesMember 2022-01-01
2022-09-30 0001482541 CEAD:EquipmentAndSystemsSalesMember
2021-01-01 2021-09-30 0001482541
CEAD:EngineeringAndOtherServicesMember 2022-07-01 2022-09-30
0001482541 CEAD:EngineeringAndOtherServicesMember 2021-07-01
2021-09-30 0001482541 CEAD:EngineeringAndOtherServicesMember
2022-01-01 2022-09-30 0001482541
CEAD:EngineeringAndOtherServicesMember 2021-01-01 2021-09-30
0001482541 us-gaap:ShippingAndHandlingMember 2022-07-01 2022-09-30
0001482541 us-gaap:ShippingAndHandlingMember 2021-07-01 2021-09-30
0001482541 us-gaap:ShippingAndHandlingMember 2022-01-01 2022-09-30
0001482541 us-gaap:ShippingAndHandlingMember 2021-01-01 2021-09-30
0001482541 CEAD:TwoThousandAndTwentyTwoMember 2022-09-30 0001482541
CEAD:TwoThousandAndTwentyThreeMember 2022-09-30 0001482541
us-gaap:CostOfSalesMember 2022-07-01 2022-09-30 0001482541
us-gaap:CostOfSalesMember 2021-07-01 2021-09-30 0001482541
us-gaap:CostOfSalesMember 2022-01-01 2022-09-30 0001482541
us-gaap:CostOfSalesMember 2021-01-01 2021-09-30 0001482541
CEAD:AdvertisingAndMarketingExpensesMember 2022-07-01 2022-09-30
0001482541 CEAD:AdvertisingAndMarketingExpensesMember 2021-07-01
2021-09-30 0001482541 CEAD:AdvertisingAndMarketingExpensesMember
2022-01-01 2022-09-30 0001482541
CEAD:AdvertisingAndMarketingExpensesMember 2021-01-01 2021-09-30
0001482541 CEAD:ProductDevelopmentCostsMember 2022-07-01 2022-09-30
0001482541 CEAD:ProductDevelopmentCostsMember 2021-07-01 2021-09-30
0001482541 CEAD:ProductDevelopmentCostsMember 2022-01-01 2022-09-30
0001482541 CEAD:ProductDevelopmentCostsMember 2021-01-01 2021-09-30
0001482541 us-gaap:SellingGeneralAndAdministrativeExpensesMember
2022-07-01 2022-09-30 0001482541
us-gaap:SellingGeneralAndAdministrativeExpensesMember 2021-07-01
2021-09-30 0001482541
us-gaap:SellingGeneralAndAdministrativeExpensesMember 2022-01-01
2022-09-30 0001482541
us-gaap:SellingGeneralAndAdministrativeExpensesMember 2021-01-01
2021-09-30 0001482541 CEAD:NewFacilityLeaseMember 2021-07-28
0001482541 CEAD:NewFacilityLeaseMember 2021-07-24 2021-07-28
0001482541 2021-01-01 2021-12-31 0001482541
us-gaap:FurnitureAndFixturesMember 2022-09-30 0001482541
us-gaap:FurnitureAndFixturesMember 2021-12-31 0001482541
us-gaap:VehiclesMember 2022-09-30 0001482541 us-gaap:VehiclesMember
2021-12-31 0001482541 us-gaap:PropertyPlantAndEquipmentMember
2022-01-01 2022-09-30 0001482541 CEAD:InventoryMember
us-gaap:PropertyPlantAndEquipmentMember 2022-01-01 2022-09-30
0001482541 CEAD:SeriesBRedeemableConvertiblePreferredStockMember
us-gaap:InvestorMember 2021-09-28 0001482541 2021-09-26 2021-09-28
0001482541 2021-11-01 2021-11-04 0001482541
us-gaap:SeriesBPreferredStockMember 2022-01-01 2022-09-30
0001482541 us-gaap:SeriesBPreferredStockMember 2021-01-01
2021-12-31 0001482541 us-gaap:SeriesBPreferredStockMember
2022-02-14 2022-02-16 0001482541 us-gaap:CommonStockMember
us-gaap:SeriesBPreferredStockMember 2022-02-14 2022-02-16
0001482541 us-gaap:WarrantMember
us-gaap:SeriesBPreferredStockMember 2022-02-14 2022-02-16
0001482541 CEAD:WarrantOneMember CEAD:IndefiniteTermMember
us-gaap:SeriesBPreferredStockMember 2022-02-14 2022-02-16
0001482541 CEAD:PreFundedConversionWarrantsMember
us-gaap:SeriesBPreferredStockMember 2022-02-16 0001482541
us-gaap:WarrantMember 2022-02-14 2022-02-16 0001482541
us-gaap:WarrantMember 2022-02-16 0001482541
us-gaap:SeriesBPreferredStockMember 2022-02-16 0001482541
us-gaap:SeriesBPreferredStockMember 2022-02-15 0001482541
us-gaap:SeriesBPreferredStockMember srt:MaximumMember 2022-02-16
0001482541 us-gaap:SeriesBPreferredStockMember srt:MinimumMember
2022-02-16 0001482541 CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember 2022-01-01
2022-01-03 0001482541
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember 2022-01-01
2022-01-03 0001482541 us-gaap:RestrictedStockUnitsRSUMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember 2022-01-17
0001482541 us-gaap:RestrictedStockUnitsRSUMember
CEAD:JanuarySeventeernTwoThousandTwentyTwoMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember 2022-01-17
0001482541 us-gaap:RestrictedStockUnitsRSUMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember
CEAD:JanuarySeventeernTwoThousandTwentyThreeMember 2022-01-17
0001482541 us-gaap:RestrictedStockUnitsRSUMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember
CEAD:TwoDirectorsMember 2022-01-12 2022-01-17 0001482541
srt:DirectorMember 2021-08-18 2021-08-20 0001482541
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember 2021-08-18
2021-08-20 0001482541 srt:BoardOfDirectorsChairmanMember
CEAD:NonQualifiedStockOptionsMember 2021-01-01 2021-12-31
0001482541 srt:DirectorMember 2022-01-15 2022-01-17 0001482541
srt:DirectorMember us-gaap:RestrictedStockUnitsRSUMember 2022-01-15
2022-01-17 0001482541 us-gaap:RestrictedStockUnitsRSUMember
2022-01-15 2022-01-17 0001482541 CEAD:AuditCommitteeChairmanMember
2022-01-15 2022-01-17 0001482541 CEAD:CommitteeChairmanMember
2022-01-15 2022-01-17 0001482541 srt:DirectorMember 2022-01-01
2022-09-30 0001482541 2021-12-29 0001482541
srt:BoardOfDirectorsChairmanMember 2022-09-30 0001482541
us-gaap:CommonStockMember 2022-02-14 2022-02-15 0001482541
us-gaap:WarrantMember 2022-02-14 2022-02-15 0001482541
us-gaap:WarrantMember 2022-02-15 0001482541 us-gaap:WarrantMember
CEAD:UnderwritersMember 2022-02-14 2022-02-15 0001482541
us-gaap:WarrantMember CEAD:UnderwritersMember 2022-02-15 0001482541
2022-06-20 2022-06-21 0001482541 2022-06-21 0001482541
CEAD:TwoThousandAndSeventeenEquityPlanMember 2022-01-01 2022-09-30
0001482541 CEAD:TwoThousandAndSeventeenEquityPlanMember 2022-09-30
0001482541 CEAD:TwoThousandTwentyOneEquityPlanMember 2021-03-22
0001482541 CEAD:TwoThousandTwentyOneEquityPlanMember 2022-01-01
2022-09-30 0001482541 CEAD:TwoThousandTwentyOneEquityPlanMember
CEAD:EmployeesMember 2022-01-01 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneEquityPlanMember CEAD:DirectorsMember
2022-01-01 2022-09-30 0001482541 CEAD:TwentyOneEmployeesMember
CEAD:TwoThousandTwentyOneEquityIncentivePlanMember 2022-03-30
2022-04-02 0001482541 CEAD:TwoThousandTwentyOneEquityPlanMember
2022-09-30 0001482541 CEAD:TwoThousandTwentyOneEquityPlanMember
us-gaap:RestrictedStockMember 2022-01-01 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneEquityPlanMember
CEAD:NonQualifiedStockOptionMember 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneEquityPlanMember
CEAD:IncentiveStockOptionMember 2022-09-30 0001482541
CEAD:TwoThousandTwentyOneEquityPlanMember
us-gaap:RestrictedStockUnitsRSUMember 2022-09-30 0001482541
CEAD:EmployeesMember 2022-01-01 2022-09-30 0001482541
CEAD:ThreeNewEmployeesMember 2022-01-01 2022-09-30 0001482541
CEAD:CheifFinancialOfficerMember 2022-01-01 2022-09-30 0001482541
CEAD:TwentyOneEmployeesMember 2022-01-01 2022-09-30 0001482541
CEAD:ThreeFormerEmployeeMember 2022-01-01 2022-09-30 0001482541
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
CEAD:EmployeesAndConsultantsMember 2022-01-01 2022-09-30 0001482541
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
CEAD:EmployeesAndConsultantsMember 2021-01-01 2021-09-30 0001482541
srt:DirectorMember CEAD:TwoThousandAndSeventeenEquityPlanMember
2022-01-01 2022-09-30 0001482541 srt:DirectorMember
CEAD:TwoThousandAndSeventeenEquityPlanMember 2021-01-01 2021-09-30
0001482541 srt:DirectorMember
CEAD:TwoThousandAndTwentyOnePlanMember
CEAD:NonQualifiedStockOptionsMember 2022-01-02 2022-01-03
0001482541 CEAD:TwoThousandAndTwentyOneEquityPlanMember
CEAD:NonQualifiedStockOptionsMember 2022-01-02 2022-01-03
0001482541 CEAD:DirectorsMember
CEAD:TwoThousandTwentyOneEquityPlanMember
us-gaap:RestrictedStockUnitsRSUMember 2022-01-16 2022-01-17
0001482541 CEAD:DirectorsMember
CEAD:TwoThousandTwentyOneEquityPlanMember
us-gaap:RestrictedStockUnitsRSUMember 2022-01-17 0001482541
CEAD:DirectorsMember CEAD:TwoThousandTwentyOneEquityPlanMember
us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-09-30
0001482541
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
CEAD:DirectorsMember 2022-01-01 2022-09-30 0001482541
CEAD:EmployeesAndConsultantsMember
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2021-12-31 0001482541 CEAD:EmployeesAndConsultantsMember
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2022-01-01 2022-09-30 0001482541 CEAD:EmployeesAndConsultantsMember
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2022-09-30 0001482541 CEAD:DirectorsMember
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2021-12-31 0001482541 CEAD:DirectorsMember
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2022-01-01 2022-09-30 0001482541 CEAD:DirectorsMember
CEAD:NonQualifiedStockOptionsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2022-09-30 0001482541
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
CEAD:EmployeesAndConsultantsMember 2021-12-31 0001482541
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
CEAD:EmployeesAndConsultantsMember 2022-01-01 2022-09-30 0001482541
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
CEAD:EmployeesAndConsultantsMember 2022-09-30 0001482541
CEAD:DirectorsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2021-12-31 0001482541 CEAD:DirectorsMember
CEAD:TwoThousandAndSeventeenEquityPlanAndTwoThousandAndTwentyOneEquityPlanMember
2022-09-30 0001482541 CEAD:TwoThousandAndSeventeenEquityPlanMember
CEAD:EmployeesDirectorsandConsultantsMember
us-gaap:RestrictedStockUnitsRSUMember 2021-12-31 0001482541
CEAD:TwoThousandAndSeventeenEquityPlanMember
CEAD:EmployeesDirectorsandConsultantsMember
us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-09-30
0001482541 CEAD:TwoThousandAndSeventeenEquityPlanMember
CEAD:EmployeesDirectorsandConsultantsMember
us-gaap:RestrictedStockUnitsRSUMember 2022-09-30 0001482541
CEAD:IndefiniteLifeMember 2022-09-30 0001482541
CEAD:WarrantsRangeMember 2022-09-30 0001482541
CEAD:WarrantsRangeMember 2022-01-01 2022-09-30 0001482541
CEAD:WarrantsRangeOneMember 2022-09-30 0001482541
CEAD:WarrantsRangeOneMember 2022-01-01 2022-09-30 0001482541
CEAD:WarrantsRangeTwoMember 2022-09-30 0001482541
CEAD:WarrantsRangeTwoMember 2022-01-01 2022-09-30 0001482541
CEAD:WarrantsRangeThreeMember 2022-09-30 0001482541
CEAD:WarrantsRangeThreeMember 2022-01-01 2022-09-30 0001482541
us-gaap:SeriesBPreferredStockMember
CEAD:SecuritiesPurchaseAgreementMember 2021-09-27 2021-09-28
0001482541 us-gaap:SeriesBPreferredStockMember
CEAD:SecuritiesPurchaseAgreementMember 2021-09-28 0001482541
us-gaap:SeriesBPreferredStockMember
CEAD:SecuritiesPurchaseAgreementMember srt:MaximumMember 2021-09-28
0001482541 us-gaap:PrivatePlacementMember
CEAD:PlacementAgentWarrantsMember 2021-09-28 0001482541
CEAD:TwoThousandTwentyTwoInvestorWarrantsMember 2022-02-15
0001482541 CEAD:TwoThousandTwentyTwoInvestorWarrantsMember
2022-02-13 2022-02-15 0001482541
CEAD:TwoThousandTwentyTwoOverAllotmentWarrantsMember 2022-02-15
0001482541 CEAD:TwoThousandTwentyTwoOverAllotmentWarrantsMember
2022-02-13 2022-02-15 0001482541
CEAD:TwoThousandTwentyTwoUnderwriterWarrantsMember 2022-02-15
0001482541 CEAD:TwoThousandTwentyTwoUnderwriterWarrantsMember
2022-02-13 2022-02-15 0001482541 us-gaap:CommonStockMember
2022-02-14 2022-02-16 0001482541
CEAD:SeriesBPreferredSharesPreFundedConversionWarrantsMember
2022-02-14 2022-02-16 0001482541
CEAD:SeriesBPreferredSharesPreFundedConversionWarrantsMember
2022-02-16 0001482541
CEAD:SeriesBPreferredSharesPreFundedConversionWarrantsMember
2022-06-21 0001482541
CEAD:SeriesBPreferredSharesPreFundedConversionWarrantsMember
2022-06-20 2022-06-21 0001482541
CEAD:SeriesBPreferredSharesConversionWarrantsMember 2022-02-14
2022-02-16 0001482541
CEAD:SeriesBPreferredSharesConversionWarrantsMember 2022-02-16
0001482541 CEAD:ConsultingAgreementMember 2022-01-01 2022-09-30
iso4217:USD xbrli:shares iso4217:USD xbrli:shares utr:sqft
xbrli:pure
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED
SEPTEMBER 30,
2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number:
001-41266
CEA INDUSTRIES INC.
(formerly
known as Surna Inc.)
(Exact
name of registrant as specified in its charter)
Nevada |
|
27-3911608 |
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
385 South Pierce Avenue,
Suite C
Louisville,
Colorado
80027
|
|
80027 |
(Address
of principal executive offices) |
|
(Zip
code) |
(303)
993-5271
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Exchange
Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
Common Stock, $0.00001 par value |
|
CEAD |
|
Nasdaq Capital Markets |
Warrants to purchase common stock |
|
CEADW |
|
Nasdaq Capital Markets |
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the last 90 days.
YES ☒ NO
☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
YES ☒ NO
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “non-accelerated
filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer |
☐ |
Accelerated
Filer |
☐ |
Non-accelerated Filer |
☒ |
Smaller
Reporting Company |
☒ |
|
|
Emerging
Growth Company |
☐ |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES ☐
NO ☒
As of
November 14, 2022, the number of outstanding shares of common stock
of the registrant was
7,953,974.
CEA
Industries Inc.
Quarterly
Report on Form 10-Q
For
the Quarterly Period Ended September 30, 2022
Table
of Contents
In this Quarterly Report on Form 10-Q, unless otherwise indicated,
the “Company”, “we”, “us” or “our” refer to CEA Industries Inc.
and, where appropriate, its wholly owned
subsidiary.
CAUTIONARY STATEMENT
This
Quarterly Report on Form 10-Q, including “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in
Item 2, contains forward-looking statements that involve
substantial risks and uncertainties. These forward-looking
statements are not historical fact but are based on current
management expectations that involve substantial risks,
uncertainties, and other factors, some of which are beyond our
control and difficult to predict and could cause actual results to
differ materially from those expressed in, or implied by, these
forward-looking statements. Forward-looking statements relate to
future events or our future financial performance. We generally
identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “could,”
“intends,” “target,” “projects,” “contemplates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative
of these terms or other similar words. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements including, but not limited to, any
projections of revenue, gross profit, earnings or loss, tax
provisions, cash flows or other financial items; any statements of
the plans, strategies or objectives of management for future
operations; any statements regarding current or future
macroeconomic or industry-specific trends or events and the impact
of those trends and events on us or our financial performance; any
statements regarding pending investigations, legal claims or tax
disputes; any statements of expectation or belief; and any
statements of assumptions underlying any of the
foregoing.
These
forward-looking statements are subject to known and unknown risks,
uncertainties, assumptions and other factors that could cause our
actual results of operations, financial condition, liquidity,
performance, prospects, opportunities, achievements or industry
results, as well as those of the markets we serve or intend to
serve, to differ materially from those expressed in, or suggested
by, these forward-looking statements. These forward-looking
statements are based on assumptions regarding our present and
future business strategies and the environment in which we operate.
Important factors that could cause those differences include, but
are not limited to:
|
● |
our
business prospects and the prospects of our existing and
prospective customers; |
|
|
|
|
● |
the
impact on our business and that of our customers of the current and
future response by the government and business to the COVID-19
pandemic and other health crises, including what is necessary to
protect our staff and the staff of our customers in the conduct of
our business; |
|
|
|
|
● |
our
overall financial condition, including the impact of higher
interest rates and inflation, business disruption due to the
COVID-19 pandemic, the Ukraine war, and the supply chains on which
we depend; |
|
|
|
|
● |
the
inherent uncertainty of product development; |
|
|
|
|
● |
regulatory,
legislative and judicial developments, especially those related to
changes in, and the enforcement of, cannabis laws; |
|
|
|
|
● |
increasing
competitive pressures in the CEA (Controlled Environment
Agriculture) industry; |
|
|
|
|
● |
the
ability to effectively operate our business, including servicing
our existing customers and obtaining new business; |
|
|
|
|
● |
our
relationships with our customers and suppliers; |
|
|
|
|
● |
the
continuation of normal payment terms and conditions with our
customers and suppliers, including our ability to obtain advance
payments from our customers; |
|
|
|
|
● |
general
economic conditions, our customers’ operations and access to
capital, and market and business disruptions including severe
weather conditions, natural disasters, health hazards, terrorist
activities, financial crises, political crises or other major
events, or the prospect of these events, adversely affecting demand
for the products and services offered by us in the markets in which
we operate; |
|
|
|
|
● |
the
supply of products from our suppliers and our ability to complete
contracts, some of which depend on other actors for a comprehensive
project completion; |
|
|
|
|
● |
changes
in our business strategy or development plans, including our
expected level of capital expenses and working capital; |
|
|
|
|
● |
our
ability to attract and retain qualified personnel; |
|
|
|
|
● |
our
ability to raise equity and debt capital, as needed from time to
time, to fund our operations and growth strategy, including
possible acquisitions; |
|
● |
our
ability to identify, complete and integrate potential strategic
acquisitions; |
|
|
|
|
● |
future
revenue being lower than expected; |
|
|
|
|
● |
our
ability to convert our backlog into revenue in a timely manner, or
at all; and |
|
|
|
|
● |
our
intention not to pay dividends. |
Although
we believe that we use reasonable assumptions for these
forward-looking statements, any of those assumptions could prove to
be inaccurate, and as a result, the forward-looking statements
based on those assumptions also could be inaccurate. In light of
these and other uncertainties, the inclusion of a projection or
forward-looking statement in this Quarterly Report on Form 10-Q
should not be regarded as a representation by us that our plans and
objectives will be achieved. These risks and uncertainties include
those described or identified in “Item 1A – Risk Factors” in our
Annual Report on Form 10-K for the year ended December 31, 2021, as
updated from time to time in the Company’s filings with the U.S.
Securities and Exchange Commission (the “SEC”). You should not
place undue reliance on these forward-looking statements, which
apply only as of the date of this Quarterly Report on Form 10-Q.
Except as required by the federal securities laws, we undertake no
obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise,
to reflect events or circumstances occurring after the date of this
Quarterly Report on Form 10-Q. The forward-looking statements and
projections contained in this Quarterly Report on Form 10-Q are
intended to be within the meaning of “forward-looking statements”
in Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”).
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CEA Industries Inc.
Condensed
Consolidated Balance Sheets
(in US Dollars except share numbers)
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CEA Industries Inc.
Condensed
Consolidated Statements of Operations
(in US Dollars except share numbers)
(Unaudited)
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CEA Industries Inc.
Condensed
Consolidated Statements of Changes in Shareholders’ Equity
(Deficit)
For
the Three and Nine Months Ended September 30, 2022 and September
30, 2021
(in US Dollars except share numbers)
(Unaudited)
|
|
Common
Stock |
|
|
Additional |
|
|
|
|
|
Shareholders’ |
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Paid in
Capital |
|
|
Accumulated
Deficit |
|
|
Equity
(Deficit) |
|
Balance December 31, 2021 |
- |
|
1,600,835 |
|
|
$ |
16 |
|
|
$ |
25,211,017 |
|
|
$ |
(28,781,566 |
) |
|
$ |
(3,570,533 |
) |
Fair value of vested stock options
granted to employees |
|
|
- |
|
|
|
- |
|
|
|
208,672 |
|
|
|
- |
|
|
|
208,672 |
|
Fair value of vested stock options
granted to directors |
|
|
- |
|
|
|
- |
|
|
|
29,656 |
|
|
|
- |
|
|
|
29,656 |
|
Common shares issued in settlement of
restricted stock units issued to directors |
|
|
3,367 |
|
|
|
0 |
|
|
|
24,994 |
|
|
|
- |
|
|
|
24,994 |
|
Fair value of restricted stock units
issued to directors |
|
|
- |
|
|
|
- |
|
|
|
17,418 |
|
|
|
- |
|
|
|
17,418 |
|
Issuance of common shares to round up
partial shares following reverse split |
|
|
6,798 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
Common shares and warrants issued for
cash |
|
|
5,811,138 |
|
|
|
58 |
|
|
|
21,711,073 |
|
|
|
- |
|
|
|
21,711,131 |
|
Common shares and warrants issued on
conversion of series B preferred stock |
|
|
362,306 |
|
|
|
4 |
|
|
|
1,979,996 |
|
|
|
- |
|
|
|
1,980,000 |
|
Dividends on series B preferred
stock |
|
|
- |
|
|
|
- |
|
|
|
(35,984 |
) |
|
|
- |
|
|
|
(35,984 |
) |
Cashless exercise of prefunded warrants |
|
|
169,530 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
Net loss |
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,225,578 |
) |
|
|
(4,225,578 |
) |
Balance September 30, 2022 |
- |
|
7,953,974 |
|
|
$ |
80 |
|
|
$ |
49,146,840 |
|
|
$ |
(33,007,144 |
) |
|
$ |
16,139,776 |
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Amount |
|
|
Paid
in Capital |
|
|
Accumulated Deficit |
|
|
Shareholders’ Deficit |
|
|
|
Series A
Preferred Stock |
|
|
Common
Stock |
|
|
Additional |
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Amount |
|
|
Paid in
Capital |
|
|
Accumulated
Deficit |
|
|
Shareholders’ Deficit |
|
Balance June 30, 2021 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
237,526,638 |
|
|
$ |
2,376 |
|
|
$ |
26,324,331 |
|
|
$ |
(27,971,769 |
) |
|
$ |
(1,644,642 |
) |
Fair value of vested stock options
granted to employees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,545 |
|
|
|
- |
|
|
|
14,545 |
|
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 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(407,905 |
) |
|
|
(407,905 |
) |
Balance September 30, 2021 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
237,526,638 |
|
|
$ |
2,376 |
|
|
$ |
25,017,065 |
|
|
$ |
(28,379,674 |
) |
|
$ |
(3,359,813 |
) |
|
|
Serries A
Preferred Stock |
|
|
Common
Stock |
|
|
Additional |
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Amount |
|
|
Paid in
Capital |
|
|
Accumulated
Deficit |
|
|
Shareholders’ Deficit |
|
Balance December 31, 2020 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
236,526,638 |
|
|
$ |
2,366 |
|
|
$ |
26,107,159 |
|
|
$ |
(27,443,643 |
) |
|
$ |
(1,333,698 |
) |
Common shares issued in settlement of
legal dispute |
|
|
- |
|
|
|
- |
|
|
|
1,000,000 |
|
|
|
10 |
|
|
|
66,990 |
|
|
|
- |
|
|
|
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 |
|
|
|
237,526,638 |
|
|
$ |
2,376 |
|
|
$ |
25,017,065 |
|
|
$ |
(28,379,674 |
) |
|
$ |
(3,359,813 |
) |
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CEA Industries Inc.
Condensed
Consolidated Statements of Cash Flows
(in US Dollars except share numbers)
(Unaudited)
|
|
2022 |
|
|
2021 |
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2022 |
|
|
2021 |
|
Cash Flows From Operating
Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,225,578 |
) |
|
$ |
(936,031 |
) |
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and
intangible asset amortization expense |
|
|
24,731 |
|
|
|
54,973 |
|
Share-based
compensation |
|
|
280,739 |
|
|
|
51,055 |
|
Common stock issued
for other expense |
|
|
- |
|
|
|
67,000 |
|
Provision for
doubtful accounts |
|
|
93,500 |
|
|
|
20,975 |
|
Provision for
excess and obsolete inventory |
|
|
(5,332 |
) |
|
|
(13,764 |
) |
Loss on disposal of
assets |
|
|
4,489 |
|
|
|
8,042 |
|
Amortization of ROU
asset |
|
|
76,917 |
|
|
|
149,597 |
|
Goodwill impairment
charges |
|
|
631,064 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
8,801 |
|
|
|
(19,740 |
) |
Inventory |
|
|
(230,966 |
) |
|
|
(139,481 |
) |
Prepaid expenses
and other |
|
|
171,582 |
|
|
|
(119,296 |
) |
Accounts payable
and accrued liabilities |
|
|
910,523 |
|
|
|
(107,604 |
) |
Deferred
revenue |
|
|
1,595,644 |
|
|
|
(664,663 |
) |
Deposits |
|
|
- |
|
|
|
(24,183 |
) |
Operating lease
liability, net |
|
|
(65,157 |
) |
|
|
(197,085 |
) |
Accrued equity compensation |
|
|
(14,065 |
) |
|
|
108,945 |
|
Net cash used
in operating activities |
|
|
(743,108 |
) |
|
|
(1,761,260 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities |
|
|
|
|
|
|
|
|
Purchases of
property and equipment |
|
|
(30,348 |
) |
|
|
(15,316 |
) |
Proceeds from the sale of property and equipment |
|
|
2,250 |
|
|
|
1,500 |
|
Net cash used
in investing activities |
|
|
(28,098 |
) |
|
|
(13,816 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities |
|
|
|
|
|
|
|
|
Payment of
dividends on series B preferred stock |
|
|
(35,984 |
) |
|
|
- |
|
Redemption of
series B preferred stock |
|
|
(1,980,000 |
) |
|
|
- |
|
Cash proceeds on
sale of common stock and warrants, net of expenses |
|
|
21,711,131 |
|
|
|
- |
|
Payments on
convertible notes payable |
|
|
|
|
|
|
1,259,874 |
|
Proceeds from issuances of convertible notes |
|
|
|
|
|
|
514,200 |
|
Net cash
provided by financing activities |
|
|
19,695,147 |
|
|
|
1,774,074 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents |
|
|
18,923,941 |
|
|
|
(1,002 |
) |
Cash and cash
equivalents, beginning of period |
|
|
2,159,608 |
|
|
|
2,284,881 |
|
Cash and cash
equivalents, end of period |
|
$ |
21,083,549 |
|
|
$ |
2,283,879 |
|
|
|
|
|
|
|
|
|
|
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 |
|
Conversion of series B preferred stock |
|
$ |
1,980,000 |
|
|
$ |
- |
|
Subscription receivable - series B preferred stock |
|
$ |
- |
|
|
$ |
1,365,000 |
|
Options issued for accrued equity compensation |
|
$ |
- |
|
|
$ |
128,434 |
|
Accrued Series B dividend payable settled in shares of common
stock |
|
$ |
- |
|
|
$ |
1,447 |
|
Deemed
dividend on series B preferred stock arising on down round |
|
$ |
439,999 |
|
|
$ |
- |
|
Cashless
exercise of prefunded warrants |
|
$ |
2 |
|
|
$ |
- |
|
Options issued
for accrued equity compensation liability |
|
$ |
78,938 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CEA Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Note
1 – Nature of
Operations and Significant Accounting
Policies
Description of
Business
CEA
Industries Inc., formerly Surna Inc. (the “Company”), was
incorporated in Nevada on October 15, 2009. We design, engineer and
sell environmental control and other technologies for the
Controlled Environment Agriculture (“CEA”) industry. The CEA
industry is one of the fastest-growing sectors of the United
States’ economy. From leafy greens (kale, Swiss chard, mustard,
cress), microgreens (leafy greens harvested at the first true leaf
stage), ethnic vegetables, ornamentals, and small fruits (such as
strawberries, blackberries and raspberries) to bell peppers,
cucumbers, tomatoes and cannabis and hemp, more and more producers
consider or act to grow crops indoors in response to market
dynamics or as part of their preferred farming practice. In service
of the CEA industry, we provide: (i) architectural design and
licensed engineering of commercial scale thermodynamic systems
specific to cultivation facilities, (ii) liquid-based process
cooling systems and other climate control systems, (iii) air
handling equipment and systems, (iv) air sanitation products, (v)
LED lighting, (vi) benching and racking solutions for indoor
cultivation, (vii) proprietary and third party controls systems and
technologies used for environmental, lighting, and climate control,
and (viii) preventive maintenance services, through our partnership
with a certified service contractor network, for CEA facilities.
Our customers include commercial, state- and provincial-regulated
CEA growers in the U.S. and Canada. Customers are those growers
building new facilities and those expanding or retrofitting
existing facilities. Currently, our revenue stream is derived
primarily from supplying our products, services, and technologies
to commercial indoor facilities ranging from several thousand to
more than 100,000 square feet. Headquartered in Louisville,
Colorado, we leverage our experience in this space to bring
value-added climate control solutions to our customers that help
improve their overall crop quality and yield, optimize energy and
water efficiency, and satisfy the evolving state and local codes,
permitting and regulatory requirements. Although most of our
customers do, we neither produce nor sell cannabis or its related
products.
Impact of the COVID-19
Pandemic on Our Business
The
impact of the government and the business economic response to the
COVID-19 pandemic has affected demand across the majority of our
markets and disrupted workflow and completion schedules on
projects. The COVID-19 pandemic is expected to have continued
adverse effects on our sales, project implementation, supply chain
infrastructure, operating margins, and working capital.
The
resulting effects and uncertainties from the COVID-19 pandemic,
including the depth and duration of the disruptions to customers
and suppliers, its future effect on our business, on our results of
operations, and on our financial condition, cannot be predicted. We
expect that the economic disruptions will continue to have an
effect on our business over the longer term. Despite this
uncertainty, we continue to monitor costs and continue to take
actions to reduce costs in order to mitigate the impact of the
COVID-19 pandemic to the best of our ability. However, these
actions may not be sufficient in the long run to avoid reduced
sales, increased losses, and reduced operating cash flows in our
business. During the nine months ended September 30, 2022, the
Company experienced significant delays in the receipt of equipment
it had ordered to meet its customer orders due to disruption and
delays in its supply chain arising from the long-term effects of
the COVID-19 pandemic. Consequently, our revenue recognition of
these customer sales has been delayed until future periods when the
shipment of these orders can be completed.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Impact of Ukrainian
Conflict
Currently,
we believe that the conflict between Ukraine and Russia does not
have any direct impact on our operations, financial condition, or
financial reporting. We believe the conflict will have only a
general impact on our operations in the same manner as it has a
general impact on all businesses that have their operations limited
to North America resulting from international sanction and embargo
regulations, possible shortages of goods and goods incorporating
parts that may be supplied from the Ukraine or Russia, supply chain
challenges, and the international and US domestic inflationary
results of the conflict and government spending for and funding of
our country’s response. As our operations are related only to the
North American controlled environment agricultural industry,
largely within the cannabis space, we do not believe we will be
targeted for cyber-attacks related to this conflict. We have no
operations in the countries directly involved in the conflict or
are specifically impacted by any of the sanctions and embargoes, as
we principally operate in the United States and Canada. We do not
believe that the conflict will have any impact on our internal
control over financial reporting. Other than general securities
market trends, we do not have reason to believe that investors will
evaluate the company as having special risks or exposures related
to the Ukrainian conflict.
Inflation
We
anticipate that our business and financial position will be
impacted by the current inflationary environment. To the extent
that we, and our customers, use borrowed funds, we believe costs
will increase for us and our customers. Access to capital will be
impacted by increased interest rates and may affect our, and our
customers’, ability to obtain capital. Inflation will also have an
impact on the cost of supplies of goods and services that we use to
complete our contracts for our customers. Depending on the terms of
our contracts currently executed and in execution, we may not be
able to pass on our increased costs, with the consequence of an
adverse impact on our operating profit and overall
margin.
Financial Statement
Presentation
The
preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America (“GAAP”) requires management to make estimates and
assumptions that affect reported amounts and related
disclosures.
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business within one year after the date the consolidated financial
statements are available to be issued. The Company continues to
experience recurring losses since its inception. As a result, in
order to continue as a going concern, the Company has been reliant
on the ability to obtain additional sources of financing to fund
growth. As indicated in Note 8 – Shareholders Equity (Deficit)
below, on February 15, 2022, the Company received approximately
$22,000,000 in
proceeds from completion of an equity offering. Based on
management’s evaluation, the proceeds from the Offering will be
more than sufficient to fund any deficiencies in working capital or
cash flow from operations, and the Company is confident that it
will be able to meet its obligations as they come due, and fund
operations for at least 12 months after the issuance of these
consolidated financial statements. Accordingly, the conditions
around liquidity and limited working capital necessary to fund
operations have been addressed.
Interim Financial
Statements
The
accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with accounting
principles generally accepted in the United States of America
(“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Pursuant to these rules and regulations, certain information and
note disclosures, normally included in financial statements
prepared in accordance with GAAP, have been condensed or omitted.
In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have
been included. Operating results for the nine months ended
September 30, 2022 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2022.
The balance sheet as of December 31, 2021 has been derived from the
audited financial statements at that date but does not include all
the information and footnotes required by GAAP for complete
financial statements. For further information, refer to the
consolidated financial statements and notes thereto contained in
the Annual Report on Form 10-K for the year ended December 31,
2021.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Principles of
Consolidation
The
condensed consolidated financial statements include the accounts of
the Company and its controlled and wholly owned subsidiaries, Hydro
Innovations, LLC (“Hydro”) and Surna Cultivation Technologies LLC
(“SCT”). Intercompany transactions, profit, and balances are
eliminated in consolidation.
Reverse Stock
Split
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.
As a
result of this reverse stock split, the number of the Company’s
shares of common stock issued and outstanding as of December 31,
2021, was reduced from 240,125,224
to 1,600,835.
All
Common Stock, warrants, options and per share amounts set forth
herein are presented to give retroactive effect to the Reverse
Split for all periods presented.
Use of
Estimates
Management
makes estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and that affect
the reported amounts of revenue and expenses during the reporting
period. The Company bases its estimates on historical experience
and on various other assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results could differ from those estimates. Key estimates
include: allocation of transaction prices to performance
obligations under contracts with customers, standalone selling
prices, timing of expected revenue recognition on remaining
performance obligations under contracts with customers, valuation
of intangible assets and goodwill, valuation of equity-based
compensation, valuation of deferred tax assets and liabilities,
warranty accruals, accounts receivable and inventory allowances,
and legal contingencies.
Cash, Cash
Equivalents, and Restricted Cash
All highly liquid investments with original maturities of three
months or less at the date of purchase are considered to be cash
equivalents. The Company may, from time to time, have deposits in
financial institutions that exceed the federally insured amount of
$250,000. As of September 30,
2022, the balance in the Company’s account was approximately
$21,084,000, consequently
$20,834,000 of this balance was
not insured by the FDIC. 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.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
During
the nine months ended September 30, 2022 and September 30, 2021,
there were warrants and
options outstanding to purchase Company common stock and restricted
stock units that were convertible into shares of the Company’s
common stock.
As of
September 30, 2022, and September 30, 2021, there were
respectively,
7,881,160 and
777,888, potentially dilutive equity instruments outstanding
in respect of options
outstanding to purchase Company common stock and restricted stock
units that were convertible into shares of the Company’s common
stock.
Goodwill
The
Company recorded goodwill in connection with its acquisition of
Hydro Innovations, LLC in July 2014. Goodwill is reviewed for
impairment annually or more frequently when events or changes in
circumstances indicate that fair value of the reporting unit has
been reduced to less than its carrying value. The Company performs
a quantitative impairment test annually on December 31 by comparing
the fair value of the reporting unit with its carrying amount,
including goodwill. The Company’s fair value is calculated using a
market valuation technique whereby an appropriate control premium
is applied to the Company’s market capitalization as calculated by
applying its publicly quoted share price to the number of its
common shares issued and outstanding. If the fair value of the
reporting unit exceeds its carrying amount, goodwill is considered
not impaired. An impairment charge would be recognized for the
amount by which the carrying amount exceeds the reporting unit’s
fair value. The Company determined that it has one reporting
unit.
As of
June 30, 2022, the Company experienced a triggering event due to a
drop in its stock price and performed a quantitative analysis for
potential impairment of its goodwill. As of June 30, 2022, the
Company performed a quantitative analysis for potential impairment
of its goodwill, by comparing the Company’s fair value to its
carrying value as of June 30, 2022. Based on this analysis, the
Company determined that its carrying value exceeded its fair value.
As a result, the Company recorded a non-cash goodwill impairment
charge of $631,064 at
June 30, 2022. No income tax benefit related to this goodwill
impairment charge was recorded at June 30, 2022.
Temporary
Equity
Shares
of preferred stock that are redeemable for cash or other assets are
classified as temporary equity if they are redeemable, at the
option of the holder, at a fixed or determinable price on a fixed
or determinable date or upon the occurrence of an event that is not
solely within the control of the Company. Redeemable equity
instruments are initially carried at the fair value of the equity
instrument at the issuance date, net of issuance costs, which is
subsequently adjusted to redemption value (including the amount for
dividends earned but not yet declared or paid) at each balance
sheet date if the instrument is currently redeemable or if it is
probable that the instrument will become redeemable.
Revenue
Recognition
On
January 1, 2018, the Company adopted Accounting Standards Update
(“ASU”) 2014-09 (Topic 606), Revenue from Contracts with
Customers and all the related amendments (“ASC 606” or the
“revenue standard”) to all contracts and elected the modified
retrospective method.
The
following table sets forth the Company’s revenue by
source:
Schedule of Revenue by
Source
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Equipment and systems
sales |
|
$ |
4,941,380 |
|
|
$ |
3,523,948 |
|
|
$ |
9,375,093 |
|
|
$ |
9,933,313 |
|
Engineering and other services |
|
|
104,434 |
|
|
|
110,538 |
|
|
|
382,559 |
|
|
|
464,269 |
|
Shipping and
handling |
|
|
17,265 |
|
|
|
71,950 |
|
|
|
64,739 |
|
|
|
184,888 |
|
Total
revenue |
|
$ |
5,063,079 |
|
|
$ |
3,706,436 |
|
|
$ |
9,822,391 |
|
|
$ |
10,582,470 |
|
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Revenue Recognition Accounting Policy Summary
The
Company accounts for revenue in accordance with ASC 606. Under the
revenue standard, a performance obligation is a promise in a
contract with a customer to transfer a distinct good or service to
the customer. Most of the Company’s contracts contain multiple
performance obligations that include engineering and technical
services as well as the delivery of a diverse range of climate
control system equipment and components, which can span multiple
phases of a customer’s project life cycle from facility design and
construction to equipment delivery and system installation and
start-up. The Company does not provide construction services or
system installation services. Some of the Company’s contracts with
customers contain a single performance obligation, typically
engineering only services contracts.
A
contract’s transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. When there are multiple
performance obligations within a contract, the Company allocates
the transaction price to each performance obligation based on the
standalone selling price. When estimating the selling price, the
Company uses various observable inputs. The best observable input
is the Company’s actual selling price for the same good or service,
however, this input is generally not available for the Company’s
contracts containing multiple performance obligations. For
engineering services, the Company estimates the standalone selling
price by reference to certain physical characteristics of the
project, such as facility size and mechanical systems involved,
which are indicative of the scope and complexity of the mechanical
engineering services to be provided. For equipment sales, the
standalone selling price is determined by forecasting the expected
costs of the equipment and components and then adding an
appropriate margin, based on a range of acceptable margins
established by management. Depending on the nature of the
performance obligations, the Company may use a combination of
different methods and observable inputs if certain performance
obligations have highly variable or uncertain standalone selling
prices. Once the selling prices are determined, the Company applies
the relative values to the total contract consideration and
estimates the amount of the transaction price to be recognized as
each promise is fulfilled.
Generally,
satisfaction occurs when control of the promised goods is
transferred to the customer or as services are rendered or
completed in exchange for consideration in an amount for which the
Company expects to be entitled. The Company recognizes revenue for
the sale of goods when control transfers to the customer, which
primarily occurs at the time of shipment. The Company’s historical
rates of return are insignificant as a percentage of sales and, as
a result, the Company does not record a reserve for returns at the
time the Company recognizes revenue. The Company has elected to
exclude from the measurement of the transaction price all taxes
(e.g., sales, use, value added, and certain excise taxes) that are
assessed by a governmental authority in connection with a specific
revenue-producing transaction and collected by the Company from the
customer. Accordingly, the Company recognizes revenue net of sales
taxes. The revenue and cost for freight and shipping is recorded
when control over the sale of goods passes to the Company’s
customers.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
The
Company also has performance obligations to perform certain
engineering services that are satisfied over a period of time.
Revenue is recognized from this type of performance obligation as
services are rendered based on the percentage completion towards
certain specified milestones.
The
Company offers assurance-type warranties for its products and
products manufactured by others to meet specifications defined by
the contracts with customers and does not have any material
separate performance obligations related to these warranties. The
Company maintains a warranty reserve based on historical warranty
costs.
Other Judgments and Assumptions
The
Company typically receives customer payments in advance of its
performance of services or transfers of goods. Applying the
practical expedient in ASC 606-10-32-18, which the Company has
elected, the Company does not adjust the promised amount of
consideration for the effects of a significant financing component
since the Company expects, at contract inception, that the period
between when the Company transfers a promised good or service to a
customer and when the customer pays for that good or service will
be one year or less. Accordingly, the remaining performance
obligations related to customer contracts does not consider the
effects of the time value of money.
Applying
the practical expedient in ASC 340-40-25-4, the Company recognizes
the incremental costs of obtaining contracts as an expense when
incurred since the amortization period of the assets that the
Company otherwise would have recognized is one year or less. These
costs include certain sales commissions and incentives, which are
included in selling, general and administrative expenses, and are
payable only when associated revenue has been collected and earned
by the Company.
Contract Assets and Contract Liabilities
Contract
assets reflect revenue recognized and performance obligations
satisfied in advance of customer billing. Contract liabilities
relate to payments received in advance of the satisfaction of
performance under the contract. The Company receives payments from
customers based on the terms established in its
contracts.
Contract
assets include unbilled amounts where revenue recognized exceeds
the amount billed to the customer and the right of payment is
conditional, subject to completing a milestone, such as a phase of
a project. The Company typically does not have material amounts of
contract assets since revenue is recognized as control of goods are
transferred or as services are performed. As of September 30, 2022,
and 2021, the Company had no contract assets.
Contract
liabilities consist of advance payments in excess of revenue
recognized. The Company’s contract liabilities are recorded as a
current liability in deferred revenue in the consolidated balance
sheets since the timing of when the Company expects to recognize
revenue is generally less than one year. As of September 30, 2022,
and December 31, 2021, deferred revenue, which was classified as a
current liability, was $4,435,481
and $2,839,838,
respectively.
For
the three and nine months ended September 30, 2022, the Company
recognized revenue of $125,731 and $2,318,935, respectively, related
to the deferred revenue at January 1, 2022. 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.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Remaining Performance Obligations
Remaining
performance obligations, or backlog, represents the aggregate
amount of the transaction price allocated to the remaining
obligations that the Company has not performed under its customer
contracts. The Company has elected not to use the optional
exemption in ASC 606-10-50-14, which exempts an entity from such
disclosures if a performance obligation is part of a contract with
an original expected duration of one year or less. Accordingly, the
information disclosed about remaining performance obligations
includes all customer contracts, including those with an expected
duration of one year or less.
The
Company and its customers face various industry dynamics that make
the timing and recognition of the Company’s revenue challenging.
The Company’s ability to recognize revenue is driven by a
customer’s ability to take possession of the sold equipment, which
is predicated on completion of a customer’s cultivation facility.
The Company’s customers are often first-time participants who face
challenges associated with maintaining project funding, securing
state and local licenses, and designing and installing complex
equipment for the facility. Coordination of these efforts
introduces uncertainty to the timing and completion of cultivation
facilities, and all of these challenges are enhanced by the current
economic environment. Global supply-chain delays and growing
backlog challenges extend the duration, cost and timing uncertainty
of many cultivation facility projects. In addition, as
inflation-related cost increases affect the project returns that
investors expect, many customers face funding uncertainty from
initial investors. As a result of these challenges, the Company may
experience contract cancellations, project scope reductions, and
project delays from its customers, and there is no assurance that
the Company will be able to fulfill its backlog.
As of
September 30, 2022, the Company’s remaining performance
obligations, or backlog, was approximately $6,832,000.
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, 2022, includes booked
sales orders of $4,271,000
from several customers that the Company does not expect to be
realized until 2023. Our backlog also contains a booked sales order
of $157,000
(2% of the total backlog) from one customer that we believe is at
risk of cancellation based on conversations with this customer.
Given the current supply chain and bottleneck issues that are still
being worked through by the Company’s supply chain partners, the
Company believes that some of its current contracts could be
delayed.
The
remaining performance obligations expected to be recognized through
2023 are as follows:
Schedule of Remaining Performance Obligations Expected to be
Recognized
|
|
2022 |
|
|
2023 |
|
|
Total |
|
Remaining performance obligations
related to engineering only paid contracts |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Remaining performance obligations related to partial equipment paid
contracts |
|
|
2,561,000 |
|
|
|
4,271,000 |
|
|
|
6,832,000 |
|
Total remaining
performance obligations |
|
$ |
2,561,000 |
|
|
$ |
4,271,000 |
|
|
$ |
6,832,000 |
|
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 September 30, 2022, and
December 31, 2021, the Company had an accrued warranty reserve
amount of $210,944
and $186,605,
respectively, which are included in accounts payable and accrued
liabilities on the Company’s consolidated balance
sheets.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
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, 2022, the valuation assumptions
used to determine the fair value of each option award on the date
of grant were: expected stock price volatility ranged from
158.21% to 158.70%; expected term in years 10 and risk-free interest rate ranged
from 1.52% to 2.73%.
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, 2022 and September
30, 2021:
Schedule of Share-based Compensation
Costs
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
For the Three Months Ended
September 30, |
|
|
For the Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Share-based compensation expense
included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
3,956 |
|
|
$ |
- |
|
|
$ |
9,851 |
|
|
$ |
29,944 |
|
Advertising and marketing
expenses |
|
|
2,457 |
|
|
|
- |
|
|
|
9,300 |
|
|
|
13,292 |
|
Product development costs |
|
|
2,481 |
|
|
|
- |
|
|
|
7,442 |
|
|
|
14,029 |
|
Selling,
general and administrative expenses |
|
|
69,637 |
|
|
|
29,307 |
|
|
|
240,083 |
|
|
|
102,735 |
|
Total
share-based compensation expense included in consolidated statement
of operations |
|
$ |
78,531 |
|
|
$ |
29,307 |
|
|
$ |
266,676 |
|
|
$ |
160,000 |
|
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Included
in the expense for the three and nine months ended September 30,
2022, is an accrual for $23,187
and $69,561,
respectively, for the 2022 Annual Employee Incentive Compensation
Plan. Included in the expense for the three and nine months ended
September 30, 2021, is an accrual for $0
and $108,945,
respectively, for the 2021 Annual Employee Incentive Compensation
Plan.
Concentrations
Two
customers accounted for 53% and 24% of the Company’s
revenue for the three months ended September 30, 2022 and three
customer accounted for 28%, 25%, and 13% of the Company’s
revenue for the nine months ended September 30, 2022. 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.
Three
customers accounted for 54%, 20%, and 19% of the Company’s
accounts receivable as of September 30, 2022. Two customers
accounted for 68% and 23% of the Company’s
accounts receivable as of December 31, 2021.
Recently Issued
Accounting Pronouncements
In
September 2022, the FASB issued Update 2022-04, “Supplier Finance
Programs (Subtopic 405-50): Disclosure of Supplier Finance Program
Obligations”. The update was issued in response to requests from
financial statement users for increased transparency surrounding
the use of supplier finance programs. The amendments in Update
2022-04 require that a buyer in a supplier finance program disclose
sufficient information about the program to allow a user of
financial statements to understand the program’s nature, activity
during the period, changes from period to period, and potential
magnitude. The amendments in this Update do not affect the
recognition, measurement, or financial statement presentation of
obligations covered by supplier finance programs. The amendments in
this Update are effective for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years,
except for the amendment on rollforward information, which is
effective for fiscal years beginning after December 15, 2023. Early
adoption is permitted. The Company does not expect this ASU to have
a material impact on its consolidated results of operations, cash
flows and financial position.
In
October 2021, the FASB issued ASU 2021-08, “Business
Combinations (Topic 805): Accounting for Contract Assets and
Contract Liabilities from Contracts with Customers”, which
requires companies to apply ASC 606, “Revenue from Contracts with
Customers” to recognize and measure contract assets and contract
liabilities from contracts with customers acquired in a business
combination. This creates an exception to the general recognition
and measurement principle in ASC 805, which uses fair value. The
guidance is effective for fiscal years beginning after December 15,
2022 and interim periods within those fiscal years. Early adoption
is permitted, and the guidance should be applied prospectively. The
impact of the standard on Company’s consolidated financial
statements is dependent on the size and frequency of any future
acquisitions the Company may complete.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
In
May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for
Certain Modifications or Exchanges of Freestanding
Equity-Classified Written Call Options. This guidance clarifies
and reduces diversity in an issuer’s accounting for modifications
or exchanges of freestanding equity-classified written call options
due to a lack of explicit guidance in the FASB Codification. The
guidance is effective for interim and annual periods beginning
after December 15, 2021. Early adoption is permitted. The guidance
is to be applied prospectively to modifications or exchanges
occurring on or after the effective date. The adoption of this
guidance has not had a material impact on the Company’s
consolidated financial statements.
In
March 2020, the FAS issued ASU No. 2020-04 “Reference Reform
(Topic 848) Facilitation of the Effects of Reference Rate Reform on
Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides
optional guidance for a limited period of time to ease the
potential burden in accounting for (or recognizing the effects of)
reference rate reform on financial reporting. The amendments are
effective for the Company as of March 12, 2020 through December 31,
2022. The adoption of this guidance has not had a material impact
on the Company’s consolidated financial statements.
Other
accounting standards that have been issued or proposed by FASB that
do not require adoption until a future date are not expected to
have a material impact on the financial statements upon adoption.
The Company does not discuss recent pronouncements that are not
anticipated to have an impact on or are unrelated to its financial
condition, results of operations, cash flows or
disclosures.
Note
2 – Leases
In
February 2016 the FASB issued ASU 2016-02, Leases (Topic
842) (“ASC 842” or the “new lease standard”). The Company
adopted ASC 842 as of January 1, 2019, using the effective date
method.
The
new standard provides a number of optional practical expedients in
transition. The Company has elected to apply the “package of
practical expedients” which allow the Company to not reassess: (i)
whether existing or expired arrangements contain a lease, (ii) the
lease classification of existing or expired leases, or (iii)
whether previous initial direct costs would qualify for
capitalization under the new lease standard. The Company has also
elected to apply the short-term lease exemption for all leases with
an original term of less than 12 months, for purposes of applying
the recognition and measurements requirements in the new lease
standard.
On
July 28, 2021, the Company entered into an agreement to lease
11,491 square feet of office and
manufacturing space (the “New Facility Lease”), in Louisville, CO.
The New Facility Lease
commenced on November 1, 2021 and continues through January 31,
2027. From November 2021 through January 2022, the monthly
rent was abated. Beginning February 2022, the monthly rent is
$10,055 and will increase by
3% annually every November
through the end of the New Facility Lease term. Pursuant to the New
Facility Lease, the Company made a security deposit of $14,747. The Company has the option
to renew the New Facility Lease for an additional five years.
Additionally, the Company pays the actual amounts for property
taxes, insurance, and common area maintenance. The New Facility
Lease agreement contains customary events of default,
representations, warranties, and covenants.
Upon
commencement of the New Facility Lease, the Company recognized on
the balance sheet an operating lease right-of-use asset and lease
liability in the amount of $582,838. The
lease liability was initially measured as the present value of the
unpaid lease payments at commencement and the ROU asset was
initially measured at cost, which comprises the initial amount of
the lease liability adjusted for lease payments made at or before
the lease commencement date, plus any initial direct costs incurred
less any lease incentives received. The renewal option to extend
the New Facility Lease is not included in the right-of-use asset or
lease liability, as the option is not reasonably certain to be
exercised. 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.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
The
lease cost, cash flows and other information related to the New
Facility Lease were as follows:
Schedule of Lease Cost
|
|
As of
September 30, 2022 |
|
Operating lease
right-of-use asset |
|
$ |
488,960 |
|
Operating lease liability,
current |
|
$ |
115,943 |
|
Operating lease liability,
long-term |
|
$ |
405,265 |
|
|
|
|
|
|
Remaining lease term |
|
|
4.3 years |
|
Discount rate |
|
|
3.63 |
% |
|
|
For the Nine
Months Ended September
30, 2022
|
|
Operating cash outflow
from operating lease |
|
$ |
80,437 |
|
Future
annual minimum lease payments on the New Facility Lease as of
September 30, 2022 are as follows:
Schedule of Future Annual Minimum Lease Payments
Years ended December 31, |
|
|
|
|
2022
(excluding the nine months ended September 30, 2022) |
|
|
$ |
30,767 |
|
2023 |
|
|
|
124,897 |
|
2024 |
|
|
|
128,643 |
|
2025 |
|
|
|
132,503 |
|
2026 |
|
|
|
136,473 |
|
Thereafter |
|
|
|
11,654 |
|
Total
minimum lease payments |
|
|
|
564,937 |
|
Less
imputed interest |
|
|
|
(43,729 |
) |
Present
value of minimum lease payments |
|
|
$ |
521,208 |
|
Note
3 – Inventory
Inventory
consisted of the following:
Schedule of
Inventory
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Finished goods |
|
$ |
389,290 |
|
|
$ |
272,199 |
|
Work in progress |
|
|
194 |
|
|
|
1,050 |
|
Raw materials |
|
|
311,186 |
|
|
|
196,456 |
|
Allowance for
excess & obsolete inventory |
|
|
(86,047 |
) |
|
|
(91,379 |
) |
Inventory,
net |
|
$ |
614,623 |
|
|
$ |
378,326 |
|
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Overhead
expenses of $14,986 and $13,589 were included in the
inventory balance as of September 30, 2022, and December 31, 2021,
respectively.
Advance
payments on inventory purchases are recorded in prepaid expenses
until title for such inventory passes to the Company. Prepaid
expenses included approximately $760,000 and $1,069,000 in advance
payments for inventory for the periods ended September 30, 2022,
and December 31, 2021, respectively.
Note
4 – Property and
Equipment
Property
and equipment consisted of the following:
Schedule of Property and Equipment
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Furniture and
equipment |
|
$ |
278,389 |
|
|
$ |
274,472 |
|
Vehicles |
|
|
15,000 |
|
|
|
15,000 |
|
property and equipment, gross |
|
|
293,389 |
|
|
|
289,472 |
|
Accumulated
depreciation |
|
|
(217,165 |
) |
|
|
(212,126 |
) |
Property and
equipment, net |
|
$ |
76,224 |
|
|
$ |
77,346 |
|
Depreciation
expense was $24,731 for the nine months
ended September 30, 2022. For the nine months ended September 30,
2022, $3,642 was allocated to cost of
sales, $911 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:
Schedule of Accounts Payable and Accrued
Liabilities
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Accounts payable |
|
$ |
1,360,380 |
|
|
$ |
616,056 |
|
Sales commissions payable |
|
|
35,229 |
|
|
|
27,592 |
|
Accrued payroll liabilities |
|
|
308,576 |
|
|
|
322,873 |
|
Product warranty accrual |
|
|
210,944 |
|
|
|
186,605 |
|
Other accrued
expenses |
|
|
340,982 |
|
|
|
192,463 |
|
Total |
|
$ |
2,256,111 |
|
|
$ |
1,345,589 |
|
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Note
6 – Commitments and
Contingencies
Litigation
From
time to time, in the normal course of its operations, the Company
is subject to litigation matters and claims. Litigation can be
expensive and disruptive to normal business operations. Moreover,
the results of complex legal proceedings are difficult to predict,
and the Company’s view of these matters may change in the future as
the litigation and events related thereto unfold. The Company
expenses legal fees as incurred. The Company records a liability
for contingent losses when it is both probable that a liability has
been incurred and the amount of the loss is known. An unfavorable
outcome to any legal matter, if material, could have an adverse
effect on the Company’s operations or its financial position,
liquidity or results of operations.
Leases
The
Company has a lease agreement for its manufacturing and office
space. Refer to Note 2 Leases above.
Other Commitments
In
the ordinary course of business, the Company enters into
commitments to purchase inventory and may also provide
indemnifications of varying scope and terms to customers, vendors,
lessors, business partners, and other parties with respect to
certain matters, including, but not limited to, losses arising out
of the Company’s breach of such agreements, services to be provided
by the Company, or from intellectual property infringement claims
made by third parties. In addition, the Company has entered into
indemnification agreements with its directors and certain of its
officers and employees that will require the Company to, among
other things, indemnify them against certain liabilities that may
arise by reason of their status or service as directors, officers,
or employees. The Company maintains director and officer insurance,
which may cover certain liabilities arising from its obligation to
indemnify its directors and certain of its officers and employees,
and former officers, directors, and employees of acquired
companies, in certain circumstances.
Note
7 – Temporary
Equity
On
September 28, 2021, the Company sold to an institutional investor
(the “Investor”), 3,300 shares of
Series B Convertible Preferred Stock (“Series B Preferred Stock”),
stated value $1,000 per
share, convertible into shares of common stock, for an aggregate
purchase price of $3,000,000
(“Consideration”). The Company received net proceeds of
approximately $1,260,000 on September 28, 2021,
and the balance of approximately $1,365,000
on November 4, 2021.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
The
Series B Preferred Stock had an annual dividend of 8% and an initial common
stock conversion price of $8.55. The conversion
rate was 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, was sold at a price
below the then conversion price.
The
Series B Preferred Stock was mandatorily convertible on the third
anniversary of its issuance. All conversions of the Series B
Preferred Stock were subject to a blocker provision of 4.99%.
Probability of
Redemption: As it was considered probable the Series B Preferred
stock would become redeemable outside of the Company’s control, the
Series B Preferred stock was disclosed as temporary equity and was
initially adjusted as of September 30, 2021 to its redemption value
of 120% of the stated value of $1,000 per share, or
$3,960,000. As a result, the Company recorded a $2,262,847
non-cash redemption value adjustment during 2021. This redemption
value adjustment is treated as similar to a dividend on the
preferred stock for GAAP purposes; accordingly, the redemption
value adjustment was 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 did not have a balance of retained earnings, the redemption
value adjustment was recorded against additional paid-in
capital.
On
February 16, 2022, the Company redeemed 1,650
shares of its Series B Preferred Stock for payment of $2.016
million in cash, which included both principal and accrued
dividends of approximately $36,000.
On
February 16, 2022, the remaining 1,650
shares of the Company’s Series B Preferred Stock were converted
into 362,306 shares
of common stock and 703,069 warrants; 170,382 of the
warrants vested immediately, had an indefinite term and an exercise
price of $0.01
(“pre-funded conversion warrants”), the balance of 532,688 warrants
also vested immediately, have a term of 5 years and have an exercise price of
$5.00. The initial common
stock conversion price for the shares of Series B Preferred Stock
was $8.55.
However, the terms of the Series B preferred stock were such that
the stock conversion price was to be reduced to 75% of
the offering price in any subsequent qualified public offering of
Company equity instruments, if lower than the common stock
conversion price of $8.55.
The Company’s public offering that closed on February 15, 2022, was
completed at an offering price of $4.13. Accordingly, the
initial common stock conversion price for the shares of Series B
Preferred Stock was reduced from $8.55 to
$3.0975,
representing 75% of
the offering price of $4.13. As a result, the
Company recognized a deemed dividend of $439,999 to Series B
Shareholders in respect of the additional shares of common stock
and warrants they received on the conversion of their shares of
Series B Preferred stock. As the Company does not have a balance of
retained earnings, the deemed dividend was recorded against
additional paid-in capital.
The
Company has no Preferred Shares outstanding as of September 30,
2022.
Note
8 – Stockholders’
Equity (Deficit)
As of
September 30, 2022, the Company had 200,000,000 shares
of common stock and 25,000,000 shares
of preferred stock authorized at a $.00001 par value. As of
September 30, 2022, 7,953,974
shares of common stock were issued and outstanding and no shares of
preferred stock are issued and outstanding.
Directors Remuneration
On
January 3, 2022, the Company issued 3,125 non-qualified
stock options under the 2021 Equity Incentive Plan to each of two
existing directors. The options had an exercise price of $4.80, vested immediately and had a
term ending at the earlier of five years after the date on which
the optionee’s continuous service ends, or the tenth anniversary on
which the option was granted.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
On
January 17, 2022, the Company issued an RSU grant of 3,367 shares of
common stock 2021 Equity Incentive Plan to each of two new
directors, 1,684 shares of common stock vested
immediately on grant date and the remaining 1,683 shares of common stock will
vest on January 17, 2023, if the recipient remains in service as an
independent director. 1,684 shares of common stock were
issued on January 17, 2022 to each of the two new directors in
settlement of the RSUs that vested immediately.
Revised Compensation Plan
On
August 20, 2021, the Board of Directors revised the previously
adopted equity-based compensation plan and adopted a new
compensation plan for independent directors (the “Plan”). The Plan
is effective retroactively for the current independent directors
and for independent directors elected or appointed after the
Effective Date of the Plan.
The
Company will pay its independent directors an annual cash fee of
$15,000, payable quarterly in advance
on the first business day of each calendar quarter, retroactive
commencing July 1, 2021, as 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. In addition, on the first business day of
January each year after the Effective Date, each independent
director will receive a grant of Non-Qualified Stock Options valued
at $15,000. As part
of the retroactive compensation, each independent director on the
Board as of the Effective Date will receive an additional grant of
Non-Qualified Stock Options valued at $7,500 for service in
2021.
On January 17, 2022, the Board of Directors revised the previously
adopted compensation plan. This plan supersedes the plan adopted on
August 20, 2021. The Plan is effective retroactively for the
current independent directors and for independent directors elected
or appointed after the Effective Date.
The
plan is divided into two phases: from the Effective Date of the
Plan until February 9, 2022, the day prior to the uplisting of the
Company to Nasdaq. (“Pre-uplist”) and from February 10, 2022, the
uplist date forward (“Post-uplist”).
Pre-uplist
phase: The Company paid its independent directors an annual cash
fee of $15,000, payable quarterly in advance
on the first business day of each quarter, as consideration for
their participation in: (i) any regular or special meetings of the
Board or any committee thereof attended in person, (ii) any
telephonic meeting of the Board or 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, the Chairman of the Company’s Audit
Committee, and the Committee Chairman).
At
the time of initial election or appointment, each independent
director received an equity retention award in the form of
restricted stock units (“RSUs”). The aggregate value of the RSUs at
the time of grant was to be $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 was 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, each
independent director will also receive an equity retention award in
the form of RSUs. The aggregate value of the RSUs at the time of
grant will be $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.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
The
Company pays the Audit Committee Chairman an additional annual fee
of $10,000, payable quarterly in
advance, for services as the Audit Committee Chairman.
The
Company pays 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.
There
is no additional compensation paid to members of any committee of
the Board. Interested (i.e. Executive directors) serving on the
Board do not receive compensation for their Board
service.
Post-uplist
phase: The Company will pay its independent directors an annual
cash fee of $25,000, payable quarterly in
advance on the first business day of each quarter. All other terms
remain the same.
Each
director is responsible for the payment of any and all income taxes
arising with respect to the issuance of common stock and the
vesting and settlement of RSUs.
The
Company reimburses independent directors for out-of-pocket expenses
incurred in attending Board and committee meetings and undertaking
certain matters on the Company’s behalf.
All
independent directors, Messrs. Shipley, Etten, Reisner, and
Mariathasan are subject to the Plan.
Each
independent director is responsible for the payment of any and all
income taxes arising with respect to the issuance of any equity
awarded under the plan, including the exercise of any non-qualified
stock options.
Employee
directors do not receive separate fees for their services as
directors.
Reverse Stock Split
On
January 17, 2022, the Company’s Board of Directors approved a
reverse stock split at a ratio of one-for-one hundred and fifty.
The reverse stock split was implemented effective January 27, 2022.
The par value for the Common Stock was not affected.
An
additional 6,798 shares of common stock were issued to round up
partial shares following the reverse spilt.
As a
result of this reverse stock split, the number of the Company’s
shares of common stock issued and outstanding at December 31, 2021
was reduced from 240,125,244
to 1,600,835.
All Common Stock, warrants, options and per share amounts set forth
herein are presented to give retroactive effect to the Reverse
Split for all periods presented.
Change in Authorized Share Capital
In
connection with the aforementioned reverse stock split, the
Company’s Board of Directors approved the reduction of the
authorized capital of the Company to 200,000,000 shares
of common stock and 25,000,000 shares
of preferred stock.
Equity Raise
On
February 10, 2022, the Company signed a firm commitment
underwriting agreement for the public offering of shares of common
stock and warrants, which closed on February 15, 2022. The Company
received net proceeds of approximately $22 million
for the sale of 5,811,138
shares of common stock and 6,572,808 warrants, each
warrant to purchase one share of common stock for five years, exercisable immediately, at
an exercise price of $5.00. The Company also
issued to the representative of the underwriters 290,557
warrants, each warrant to purchase one share of common stock at an
exercise price of $5.1625, during the period commencing
August 9, 2022, and expiring on February 10, 2027.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Warrant Exercise
On
June 21, 2022, the Company issued 169,530 shares of its common
stock in connection with the cashless exercise of 170,382 prefunded
conversion warrants.
Note
9 – 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.
During
the nine months ended September 30, 2022, no shares or options were
issued, and 13,569 options were
cancelled under the 2017 Plan.
As of
September 30, 2022, of the 333,333
shares authorized under the 2017 Plan for equity awards,
163,692 shares have been issued, awards related to
148,669 options remain outstanding, and 20,972
shares remain available for future equity awards.
2021 Equity Incentive Plan
On
March 22, 2021, the Board approved the 2021 Equity Incentive Plan
(the “2021 Equity Plan”), which was approved by the stockholders on
July 22, 2021. The 2021 Equity Plan permits the Board to grant
awards of up to 666,667 shares of
common stock. The 2021 Equity Plan provides for the grant of
incentive stock options intended to qualify under Section 422 of
the Internal Revenue Code of 1986, as amended (the “Code”),
non-qualified stock options, stock appreciation rights (“SARs”),
restricted stock awards and restricted stock unit awards and other
equity linked awards to our employees, consultants, and directors.
If an equity award (i) expires or otherwise terminates without
having been exercised in full or (ii) is settled in cash
(i.e., the holder of the award receives cash rather than
stock), such expiration, termination or settlement will not reduce
(or otherwise offset) the number of shares of common stock that may
be issued pursuant to this Plan.
During
the nine months ended September 30, 2022, the Company issued
3,367 shares of its
common stock to two new independent directors under the 2021 Equity
Incentive Plan, pursuant to the Director Compensation plan adopted
in January 2022.
During
the nine months ended September 30, 2022, the Company granted
awards for 22,167 non-qualified
stock options to newly hired employees and 1,666 stock options were
cancelled under the 2021 Equity Incentive Plan as described
below.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
During
the nine months ended September 30, 2022, the Company granted
awards for 6,250 non-qualified
stock options to directors under the 2021 Equity Incentive Plan,
pursuant to the Director Compensation plan adopted in August of
2021.
On
April 1, 2022, 31,793 non-qualified stock options
were issued to 21 employees in respect of the Company’s 2021 Equity
Incentive Plan. The options vested immediately, have a term of
10 years and an exercise price
of $2.51. The expense in
respect of this issuance had been fully accrued in 2021.
As of
September 30, 2022, of the 666,667 shares
authorized under the 2021 Equity Plan, 10,170 relate to restricted
shares issued, 64,535 relate to
outstanding non-qualified stock options, 40,816 relate to
outstanding incentive stock options,
3,367 relate to outstanding restricted stock units and
547,779
shares remain available for future equity awards.
There
was $114,825 in
unrecognized compensation expense for unvested non-qualified stock
options, incentive stock options and restricted stock units at
September 30, 2022 which will be recognized over approximately
3
years.
Non-Qualified and Incentive Stock Options
A
summary of the non-qualified stock options and incentive stock
options granted to employees and consultants under the 2017 and
2021 Equity Plans during the nine months ended September 30, 2022,
are presented in the table below:
Schedule of Stock Option
Activity
|
|
Number of Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2021 |
|
|
158,174 |
|
|
$ |
10.99 |
|
|
|
7.60 |
|
|
$ |
- |
|
Granted |
|
|
53,960 |
|
|
$ |
2.90 |
|
|
|
9.50 |
|
|
$ |
- |
|
Exercised |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Forfeited |
|
|
(15,235 |
) |
|
$ |
8.58 |
|
|
|
9.30 |
|
|
$ |
- |
|
Expired |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Outstanding,
September 30, 2022 |
|
|
196,899 |
|
|
$ |
8.95 |
|
|
|
7.90 |
|
|
$ |
- |
|
Exercisable,
September 30, 2022 |
|
|
149,719 |
|
|
$ |
9.92 |
|
|
|
7.50 |
|
|
$ |
- |
|
During
the nine months ended September 30, 2022, we issued a total of
53,960 stock options to employees as
follows:
|
● |
7,167 stock options were issued to
four new employees. The vesting of these options ranges from
immediate to three years, have a term of
10 years and exercise prices
ranging from $1.42 to $6.90. |
|
● |
15,000 stock options were issued to
our newly appointed Chief Financial Officer. The options vest as follows: 2,000
vested immediately, 3,000 on March 11, 2023, 5,000 on March 11,
2024, and 5,000 on March 11, 2025. The options have a term
of 10 years and an exercise price
of $2.20. |
|
● |
31,793 stock options were issued to
21 employees in respect of the Company’s 2021 Annual Incentive
Awards which vested immediately. The options have a term of
10 years and an exercise price
of $2.51. |
|
● |
During
the nine months ended September 30, 2022, 3,568 fully vested
stock options and 11,667 unvested stock
options were forfeited following the departure of three former
employees. |
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
A
summary of non-vested non-qualified stock options activity for
employees and consultants under the 2017 and 2021 Equity Plans for
the nine months ended September 30, 2022, are presented in the
table below:
Summary of Non-vested Non-qualified Stock
Option Activity
|
|
Number of Options |
|
|
Weighted Average Grant-Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|
Grant-Date Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31,
2021 |
|
|
41,846 |
|
|
$ |
7.65 |
|
|
$ |
- |
|
|
$ |
320,122 |
|
Granted |
|
|
53,960 |
|
|
$ |
2.86 |
|
|
$ |
- |
|
|
$ |
153,054 |
|
Vested |
|
|
(36,960 |
) |
|
$ |
2.68 |
|
|
$ |
- |
|
|
$ |
(97,811 |
) |
Forfeited |
|
|
(11,667 |
) |
|
$ |
9.01 |
|
|
$ |
- |
|
|
$ |
(105,120 |
) |
Expired |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Nonvested,
September 30, 2022 |
|
|
47,179 |
|
|
$ |
5.73 |
|
|
$ |
- |
|
|
$ |
270,245 |
|
For
the nine months ended September 30, 2022 and September 30, 2021,
the Company recorded $129,733 and $29,881 as compensation expense
related to vested options issued to employees and consultants, net
of forfeitures, respectively.
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, 2022, are presented in the table
below:
Schedule of Stock Option
Activity
|
|
Number of Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value ($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2021 |
|
|
50,872 |
|
|
$ |
10.02 |
|
|
|
6.6 |
|
|
$ |
- |
|
Granted |
|
|
6,250 |
|
|
$ |
4.80 |
|
|
|
9.3 |
|
|
$ |
- |
|
Exercised |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Forfeited/Cancelled |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Expired |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Outstanding,
September 30, 2022 |
|
|
57,122 |
|
|
$ |
9.44 |
|
|
|
6.2 |
|
|
$ |
- |
|
Exerciseable,
September 30, 2022 |
|
|
57,122 |
|
|
$ |
9.44 |
|
|
|
6.2 |
|
|
$ |
- |
|
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
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, 2022, are presented in the
table below:
Summary of Non-vested Non-qualified Stock Option
Activity
|
|
Number of Options |
|
|
Weighted Average Grant-Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|
Grant-Date Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2021 |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Granted |
|
|
6,250 |
|
|
$ |
4.80 |
|
|
$ |
- |
|
|
$ |
29,656 |
|
Vested |
|
|
(6,250 |
) |
|
$ |
4.80 |
|
|
$ |
- |
|
|
$ |
(29,656 |
) |
Forfeited |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Expired |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Nonvested,
September 30, 2022 |
|
|
- |
|
|
|
|
|
|
$ |
- |
|
|
$ |
- |
|
During
the nine months ended September 30, 2022 and September 30, 2021,
the Company incurred $29,656 and $21,174 respectively, as
compensation expense related to 6,250 and
8,205 vested
options, respectively, issued to directors.
Effective
January 3, 2022, the Company issued 6,250
non-qualified stock options under the 2021 Equity Plan to its then
current directors. The options vested upon grant. The options have
a term of 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
Effective
January 17, 2022, the Company issued 6,734 restricted stock
units (RSUs) under the 2021 Equity Plan to newly appointed
directors. 3,367 of these
RSUs vested upon grant and the remining 3,367 will vest on
January 17, 2023.
The
Company recorded $42,413 during the nine
months ended September 30, 2022, as compensation expense related to
vested RSUs issued to directors.
Schedule of Restricted Stock Units
Activity
|
|
Number of Units |
|
|
Weighted Average Grant-Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2021 |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
Granted |
|
|
6,734 |
|
|
$ |
7.42 |
|
|
$ |
- |
|
Vested and settled
with share issuance |
|
|
(3,367 |
) |
|
$ |
7.42 |
|
|
$ |
- |
|
Forfeited/canceled |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
Outstanding, September 30,
2022 |
|
|
3,367 |
|
|
$ |
7.42 |
|
|
$ |
- |
|
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Note
10 - Warrants
The
following table summarizes information with respect to outstanding
warrants to purchase common stock during the nine months ended
September 30, 2022:
Schedule of Outstanding Warrants to Purchase
Common Stock
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
Warrants |
|
|
Exercise |
|
|
Remaining Life |
|
|
Intrinsic |
|
|
|
Outstanding |
|
|
Exercisable |
|
|
Price |
|
|
In Months |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
|
227,719 |
|
|
|
227,719 |
|
|
$ |
9.59 |
|
|
|
33 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
7,566,435 |
|
|
|
7,566,435 |
|
|
$ |
4.89 |
|
|
|
53 |
* |
|
$ |
177,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(170,382 |
) |
|
|
(170,382 |
) |
|
$ |
0.01 |
|
|
|
- |
* |
|
$ |
(177,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2022 |
|
|
7,623,772 |
|
|
|
7,623,772 |
|
|
$ |
5.14 |
|
|
|
52 |
|
|
$ |
0 |
|
* |
|
Includes
170,382 warrants with an indefinite life. |
The
following table summarizes information about warrants outstanding
at September 30, 2022:
Schedule of Warrants
Outstanding
|
|
|
Warrants |
|
|
Weighted Average |
|
Exercise
price |
|
|
Outstanding |
|
|
Exercisable |
|
|
Months Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
9.45 |
|
|
|
192,982 |
|
|
|
192,982 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.40 |
|
|
|
34,737 |
|
|
|
34,737 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00 |
|
|
|
7,105,496 |
|
|
|
7,105,496 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.16 |
|
|
|
290,557 |
|
|
|
290,557 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,623,772 |
|
|
|
7,623,772 |
|
|
|
55 |
|
Q3 2021 Warrants Issued to Series B Preferred
Stockholder
On
September 28, 2021, the Company entered into a Securities Purchase
Agreement with an institutional investor, pursuant to which the
investor purchased from the Company 3,300 shares of convertible
Series B Preferred Stock with a stated value of $1,000 per share, or $3,300,000 of stated value in the
aggregate, and a warrant to purchase up to 192,982 shares of common stock of
the Company for an aggregate purchase price of $3,000,000. The warrant is exercisable
until September 28, 2024, at an 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.
Q3 2021 Warrants Issued to Series B Preferred Placement
Agent
In
connection with the sale of the shares of convertible Series B
Preferred Stock described above, the Company issued 34,737 warrants to the
placement agent and its designees. Half of the warrants were issued
on September 28, 2021, and the second half were issued on November
3, 2021, and are exercisable commencing February 28, 2022 and May
3, 2022, respectively, until September 28, 2024 and November 3,
2024, respectively. The exercise price per share of the warrants is
$10.40, subject to
adjustment for stock splits, stock dividends and other typical
adjustments and changes in capitalization, including mergers and
acquisitions and distribution of rights.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Q1 2022 Investor Warrants
On
February 15, 2022, the Company issued 5,811,138 investment
units for aggregate gross proceeds of $24,000,000, or
$4.13 per unit. Each unit
consisted of one share of the Company’s common stock and one
warrant for the purchase of one share of the Company’s common
stock. The warrants vested immediately, have a term of 5 years and an exercise price of
$5.00.
Q1 2022 Overallotment Warrants
Further
on February 15, 2022, in connection the Company’s issuance of
5,811,138 investment units for
aggregate gross proceeds of $24,000,000, or
$4.13 per unit as described
above, a further 761,670 warrants were issued in
connection with the subscription for substantially all of the
available 15% overallotment warrants. The warrants were acquired
for consideration of $0.01 per warrant, vested
immediately, have a term of 5 years and an exercise price of
$5.00.
Q1 2022 Underwriter Warrants
Further
on February 15, 2022, in connection the Company’s issuance of
5,811,138 investment units for
aggregate gross proceeds of $24,000,000, or
$4.13 per unit described above,
the Company also issued representatives of the underwriters
290,557 warrants. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of
$5.1625, during the period commencing
August 9, 2022, and expiring on February 10, 2027.
Q1 2022 Series B Preferred Shares Pre-Funded Conversion
Warrants
On
February 16, 2022, in connection with the conversion of 1,650 shares of Series B
Preferred Stock into
362,306 shares of the Company’s common stock, the Series B
Preferred Shareholder was issued with 170,382 pre-funded conversion
warrants. Each warrant entitled the holder to purchase one share of
common stock at an exercise price of $0.01, vested immediately and had an
indefinite life.
On
June 21, 2022, the holder of all 170,382 pre-funded
conversion warrants exercised all of their warrants on a cashless
basis and received 169,530 shares of the
Company’s common stock as a result of the exercise.
No
pre-funded conversion warrants remained outstanding at September
30, 2022.
Q1 2022 Series B Preferred Shares Conversion
Warrants
Further
on February 16, 2022, in connection with the conversion of
1,650 shares of Series B Preferred Stock into
362,306 shares of the Company’s common stock, the Series B
Preferred Shareholder was also issued with
532,688 Series B Preferred shares conversion warrants. Each
warrant entitled the holder to purchase one share of common stock
at an exercise price of $5.00, vested immediately and had a
term of 5 years.
CEA
Industries Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2022
(in US Dollars except share numbers)
(Unaudited)
Note
11 – Income
Taxes
As of
September 30, 2022, the Company has U.S. federal and state net
operating losses (“NOLs”) of approximately $25,317,000, of which
$11,196,000
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.
In
addition, pursuant to Section 382 of the Internal Revenue Code of
1986, as amended, use of the Company’s NOLs carryforwards may be
limited in the event of cumulative changes in ownership of more
than 50% within a three-year period. In addition, under Section 382
of the Internal Revenue Code of 1986, as amended (the “Code”), and
corresponding provisions of state law, if a corporation undergoes
an “ownership change,” which is generally defined as a greater than
50% change, by value, in its equity ownership over a three-year period, the
corporation’s ability to use its pre-change net operating loss
carryforwards and other pre-change tax attributes to offset its
post-change income or taxes may be limited. Our sale of securities,
both in September 2021 and February 2022, will need to be
considered for determination of any “ownership change” that we have
undergone during a determination period. If an ownership change
occurs and our ability to use our net operating loss carryforwards
is materially limited, it would harm our future bottom-line
operating results by effectively increasing our future tax
obligations
The
Company must assess the likelihood that its net deferred tax assets
will be recovered from future taxable income, and to the extent the
Company believes that recovery is not likely, the Company
establishes a valuation allowance. Management’s judgment is
required in determining the Company’s provision for income taxes,
deferred tax assets and liabilities, and any valuation allowance
recorded against the net deferred tax assets. The Company recorded
a full valuation allowance as of September 30, 2022 and December
31, 2021. Based on the available evidence, the Company believes it
is more likely than not that it will not be able to utilize its net
deferred tax assets in the foreseeable future. The Company intends
to maintain valuation allowances until sufficient evidence exists
to support the reversal of such valuation allowances. The Company
makes estimates and judgments about its future taxable income that
are based on assumptions that are consistent with the Company’s
plans. Should the actual amounts differ from the Company’s
estimates, the carrying value of the Company’s deferred tax assets
could be materially impacted.
Note
12 – Related Party
Transactions
The
Company entered into a manufacturer representative agreement with
RSX Enterprises (“RSX”) in March 2021 to become a non-exclusive
representative for the Company to assist in marketing and
soliciting orders. James R. Shipley, a current director of the
Company, has a significant ownership interest in RSX.
Under
the manufacturer representative agreement, RSX will act as a
non-exclusive representative for the Company within the United
States, Canada and Mexico and may receive a commission for
qualified customer leads. The agreement had an initial term through
December 31, 2021 with automatic one-year renewal terms unless
notice is given 90 days prior to each annual expiration. During the
nine months ended September 30, 2022, the Company paid $9,884 in commissions under
this agreement.
Note
13 – Subsequent
Events
In
accordance with ASC 855, Subsequent Events, the Company has
evaluated all subsequent events through the date of issuance of
these financial statements issued and determined no material
subsequent events occurred after September 30, 2022 for which
disclosure was required.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our
unaudited condensed consolidated financial statements and related
notes included elsewhere in this Quarterly Report, which include
additional information about our accounting policies, practices,
and the transactions underlying our financial results, as well as
with our audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2021, as
filed with the SEC. In addition to historical information, the
following discussion and other parts of this Quarterly Report
contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from
those anticipated by such forward-looking information due to the
factors discussed under “Cautionary Statements” appearing elsewhere
herein and the risks and uncertainties described or identified in
“Item 1A – Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2021, as updated from time to time in the
Company’s filings with the SEC, and Part II, Item 1A of this
Quarterly Report entitled “Risk Factors.”
Non-GAAP Financial Measures
To
supplement our financial results on U.S. generally accepted
accounting principles (“GAAP”) basis, we use non-GAAP measures
including net bookings, backlog, as well as adjusted net income
(loss) which reflects adjustments for certain non-cash expenses
such as stock-based compensation, certain debt-related items and
depreciation expense. We believe these non-GAAP measures are
helpful in understanding our past performance and are intended to
aid in evaluating our potential future results. The presentation of
these non-GAAP measures should be considered in addition to our
GAAP results and are not intended to be considered in isolation or
as a substitute for financial information prepared or presented in
accordance with GAAP. We believe these non-GAAP financial measures
reflect an additional way to view aspects of our operations that,
when viewed with our GAAP results, provide a more complete
understanding of factors and trends affecting our business. For
purposes of this Quarterly Report, (i) “adjusted net income (loss)”
and “adjusted operating income (loss)” mean GAAP net income (loss)
and operating income (loss), respectively, after adjustment for
non-cash equity compensation expense, debt-related items and
depreciation expense, and (ii) “net bookings” means new sales
contracts executed during the quarter for which we received an
initial deposit, net of any adjustments including cancellations and
change orders during the quarter.
Our
backlog, remaining performance obligations and net bookings may not
be indicative of future operating results, and our customers may
attempt to renegotiate or terminate their contracts for a number of
reasons, including delays in or inability to obtain project
financing or licensing or abandonment of the project entirely.
Accordingly, there can be no assurance that contracts included in
the backlog or remaining performance obligations will actually
generate revenues or when the actual revenues will be
generated.
Overview
CEA
Industries is an engineering and design company focused on selling
environmental control and other technologies and services to the
Controlled Environment Agriculture (“CEA”) industry. The CEA
industry uses technology-based methods to grow crops in a way that
provides protection from the outdoor elements; these methods have
traditionally included indoor agriculture and vertical farming. The
CEA industry aims to optimize
the use of horticultural resources such as water, energy, space,
capital, and labor, to create an agriculture business that is more
efficient and more productive than traditional farming
methods.
Headquartered
in Colorado, we leverage our experience in the CEA industry to
bring our customers a variety of value-added technology solutions
that help improve their overall crop quality and yield, optimize
energy and water efficiency, and satisfy the evolving state and
local codes, permitting and regulatory requirements. We do this by
offering our customers a variety of principal service and product
offerings that include: (i) architectural design and licensed
engineering of commercial scale thermodynamic systems specific to
cultivation facilities, (ii) liquid-based process cooling systems
and other climate control systems, (iii) air handling equipment and
systems, (iv) air sanitation products, (v) LED lighting, (vi)
benching and racking solutions for indoor cultivation, (vii)
proprietary and third party controls systems and technologies used
for environmental, lighting and climate control, and (viii)
preventive maintenance services, through our partnership with a
certified service contractor network, for CEA
facilities.
Currently,
our revenue stream is derived primarily from supplying our
products, services and technologies to commercial indoor facilities
operating in the cannabis industry. Our customers include state and
provincial-regulated CEA growers located in the U.S., Canada, and
other international locations. They are focused on building new CEA
facilities and expanding or retrofitting existing CEA facilities.
Our customers operate CEA facilities that range in size from
several thousand square feet to more than 100,000 square
feet.
CEA
growers currently face a challenging business environment that
includes high energy costs, water usage and conservation issues,
and continuously evolving waste removal regulations. In addition to
these issues, our cannabis growing customers face increasingly
rigorous quality standards and declining cannabis prices in a
growing industry whose standards are constantly evolving. A primary
challenge for our customers involves finding innovative ways to
reduce energy costs. On average, 56% of our customers’ energy costs
are driven by HVACD systems and another 38% by lighting systems,
and 5% for water handling and CO2 injection.
We
support our clients by providing integrated mechanical, electrical,
and plumbing (“MEP”) engineering design, proprietary and curated
environmental control equipment, and automation offerings that
serve the CEA industry. In addition, we believe we are among the
leading experts in engineering environmental control systems for
CEA facilities, which is commonly viewed as the most challenging
component of a CEA facility’s technical infrastructure. Over our 16
years in business, we have served over 200 commercial indoor CEA
facilities. While a professional engineer (“PE”) license is not
required in any other design component of a CEA facility, such a
license is required for the design of a CEA facility’s
environmental control equipment, and our senior engineers hold PE
licenses.
We
believe our customers partner with us because we have the
reputation and experience to help them make cost-conscious and
effective decisions on the design and engineering of their indoor
cultivation facilities. Our clients are focused on their crops and
rely on us to partner with them on ways to optimize their CEA
facility. We are also mindful of the evolving and substantial
environmental sustainability standards and concerns raised by
governments, consumers and other stakeholders. CEA facilities are
resource intensive, and a growing list of states have implemented
building code changes that limit energy consumption in cultivation
facilities. Energy and resource efficiency is a high priority to us
as engineers, and the senior engineers on our team hold the
Leadership in Energy and Environmental Design (“LEED”) credential.
In addition, our CEO helped build a cleantech company, and is a
published author in the energy efficient technologies space. We
believe this sustainability-focused technical experience is a
unique advantage that our customers value when working with
us.
While
the Company historically focused on HVACD systems, in May of 2021,
we announced an initiative to expand our product and service
offerings to include most of the technical product and service
infrastructure requirements associated with building and
retrofitting CEA facilities, as well as post-build recurring
maintenance services. Our engineering design services and
consulting expertise facilitates early engagement with our
customers at the pre-build and construction phases, and this
enables us to better understand our customers’ goals at the
beginning of a project, and provide the associated infrastructure
products and services to reach those goals. Through our prior
engagements with customers, we have built long-term relationships
with our existing customers, which we plan to leverage and build on
in the future.
We
have three core assets that we believe will support us as we pursue
our business strategy. First, we enjoy strong relationships with
relevant stakeholders in the CEA industry. Largely focused in the
cannabis segment, our partnerships include relationships with new
and existing growers, capital providers, consultants, independent
contractors, and numerous others. This includes our recently
announced marketing arrangement with Merida Capital, a
cannabis-focused private equity firm, whereby Merida will use CEA
Industries Inc. as its sole provider of certain products and
services for its indoor cultivation facilities. This has already
resulted in a recent new contract in October 2022 with
one of Merida’s Connecticut based clients.
Second,
our experience in this industry over time has built up specialized
engineering know-how and experience. We have been serving indoor
cultivators since 2006 and designing CEA cultivation facilities
since 2016. Since then, we have tested and solidified best
practices from designing environmental control systems for CEA
cultivation facilities. Finally, we have a line of proprietary
environmental control products that support the specific growing
environments that our customers want. We believe these products
offer significant benefits to our customers and we are in the
process of expanding our product slate, including the October 2022
launch of our new portfolio of water treatment solutions that
include sampling, system design, equipment supplies and system
integration. We believe this will enable us to work with
cultivators and provide the necessary technologies to purify water
including reverse osmosis, carbon filtration, multi-media
filtration, water softeners, and ultraviolet water
treatment.
Shares
of our common stock and warrants are traded on the Nasdaq Capital
Markets under the ticker symbol “CEAD” and “CEADW”,
respectively.
Impact
of the COVID-19 Pandemic on Our Business
The
COVID-19 pandemic has prompted national, regional, and local
governments, including those in the markets that the Company
operates in, to implement preventative or protective measures to
control its spread. As a result, there have been disruptions in
business operations around the world, with an impact on our
business.
In
response to the COVID-19 pandemic and the associated government and
business response, the Company took and continues to take measures
to adjust its operations as necessary. Because the effects of the
pandemic continue in different parts of the world and in different
ways in the United States, the Company continues to actively
monitor its operations.
We
are experiencing uncontrollable delays with our international
supply of products and shipments from vendors due to a significant
increase in shipments to U.S. ports, compounded by a reduction in
cargo being shipped by air, a general shortage of containers, and a
shortage of domestic truck driver availability. While these delays
have moderately improved in recent months, we, along with many
other importers of goods across all industries, continue to
experience severe congestion and extensive wait times for carriers
at ports across the United States. In addition, restrictions
imposed by local, state, and federal agencies due to the COVID-19
pandemic have led to reduced personnel of importers, government
staff, and others in our supply chain. We have been working
diligently with our network of freight partners and suppliers to
expedite delivery dates and provide solutions to reduce further
impact and delays. However, we are unable to determine the full
impact of these delays and how long they will continue as they are
out of our control.
While
the Company is continuing to navigate the financial, operational,
and personnel challenges presented by the COVID-19 pandemic, the
full extent of the impact of COVID-19 on our operational and
financial performance will depend on future developments, including
the duration and spread of the pandemic, the potential uncertainty
related to (and proliferation of) new strains, and related actions
taken by federal, state, local, and international government
officials, to prevent and manage the spread of COVID-19. All of
these efforts are uncertain, out of our control, and cannot be
predicted at this time.
Impact
of Ukrainian Conflict
Currently,
we believe that the conflict between Ukraine and Russia does not
have any direct impact on our operations, financial condition, or
financial reporting. We believe the conflict will have only a
general impact on our operations in the same manner as it is having
a general impact on all businesses that have their operations
limited to North America resulting from international sanction and
embargo regulations, possible shortages of goods and goods
incorporating parts that may be supplied from the Ukraine or
Russia, supply chain challenges, and the international and US
domestic inflationary results of the conflict and government
spending for and funding of our country’s response. As our
operations are related only to the North American controlled
agricultural industry, largely within the cannabis space, we do not
believe we will be targeted for cyber-attacks related to this
conflict. We have no operations in the countries directly involved
in the conflict or are specifically impacted by any of the
sanctions and embargoes, as we principally operate in the United
States and Canada. We do not believe that the conflict will have
any impact on our internal control over financial reporting. Other
than general securities market trends, we do not have reason to
believe that investors will evaluate the company as having special
risks or exposures related to the Ukrainian conflict.
Our
Bookings, Backlog and Revenue
During
the three months ended September 30, 2022, we executed new sales
contracts with a total contract value of $2,378,000. During this
same period, we had positive change orders of $91,000 and
cancellations of $272,000. The cancellations were based on
discussions with customers who were unable to attain or maintain
funding, and subsequently abandoned their projects. After
adjustments for these change orders and cancellations, our net
bookings in the three months ended September 30, 2022 were
$2,197,000, representing an increase of $663,000 (or 43%) from net
bookings of $1,534,000 in the second quarter of 2022.
Our
backlog at September 30, 2022 was $6,832,000, a decrease of
$2,866,000, or 30%, from June 30, 2022. The decrease in backlog is
the result of higher revenue in the third quarter. Our backlog at
September 30, 2022 includes booked sales orders of $3,621,000 (53%
of the total backlog) from several customers that we do not expect
to be realized until 2023. Our backlog also contains a booked sales
order of $157,000 (2% of the total backlog) from one customer that
we believe is at risk of cancellation based on conversations with
this customer. We believe the sales orders in these portions of our
backlog have an elevated level of risk and may, ultimately, be
delayed or cancelled by our customers. Therefore, investors should
not view backlog as earned revenue.
The
following table sets forth: (i) our beginning backlog (the
remaining contract value of outstanding sales contracts for which
we have received an initial deposit as of the previous period),
(ii) our net bookings for the period (new sales contracts executed
during the period for which we received an initial deposit, net of
any adjustments including cancelations and change orders during the
period), (iii) our recognized revenue for the period, and (iv) our
ending backlog for the period (the sum of the beginning backlog and
net bookings, less recognized revenue).
|
|
For
the quarter ended |
|
|
|
September
30, 2021 |
|
|
December
31, 2021 |
|
|
March
31, 2022 |
|
|
June
30,
2022 |
|
|
September
30, 2022 |
|
Backlog, beginning balance |
|
$ |
7,987,000 |
|
|
$ |
9,881,000 |
|
|
$ |
10,818,000 |
|
|
$ |
11,179,000 |
|
|
$ |
9,698,000 |
|
Net
bookings, current period |
|
$ |
5,600,000 |
|
|
$ |
3,993,000 |
|
|
$ |
2,105,000 |
|
|
$ |
1,534,000 |
|
|
$ |
2,197,000 |
|
Recognized revenue, current period |
|
$ |
3,706,000 |
|
|
$ |
3,056,000 |
|
|
$ |
1,744,000 |
|
|
$ |
3,015,000 |
|
|
$ |
5,063,000 |
|
Backlog, ending balance |
|
$ |
9,881,000 |
|
|
$ |
10,818,000 |
|
|
$ |
11,179,000 |
|
|
$ |
9,698,000 |
|
|
$ |
6,832,000 |
|
The
Company and its customers face various industry dynamics that make
the timing and recognition of the Company’s revenue challenging.
The Company’s ability to recognize revenue is driven by a
customer’s ability to take possession of the sold equipment, which
is predicated on completion of a customer’s cultivation facility.
The Company’s customers are often first-time participants who face
challenges associated with maintaining project funding, securing
state and local licenses, and designing and installing complex
equipment for the facility. Coordination of these efforts
introduces uncertainty to the timing and completion of cultivation
facilities, and all of these challenges are enhanced by the current
economic environment. Global supply-chain delays and growing
backlog challenges extend the duration, cost and timing uncertainty
of many cultivation facility projects. In addition, as
inflation-related cost increases affect the project returns that
investors expect, many customers face funding uncertainty from
initial investors. As a result of these challenges, the Company may
experience contract cancellations, project scope reductions, and
project delays from its customers, and there is no assurance that
the Company will be able to fulfill its backlog.
As
has historically been the case for the Company at each quarter-end,
there remains significant uncertainty regarding the timing of
revenue recognition of our backlog as of September 30,
2022.
We
have provided an estimate in our condensed consolidated financial
statements for when we expect to recognize revenue on our remaining
performance obligations (i.e., our Q3 2022 backlog), using separate
time bands, with respect to engineering only paid contracts and
partial equipment paid contracts. There continues to be significant
uncertainty regarding the timing of our recognition of revenue on
our Q3 2022 backlog. Refer to the Revenue Recognition
section of Note 1 in our condensed consolidated financial
statements, included as part of this Quarterly Report for
additional information on our estimate of future revenue
recognition on our remaining performance obligations.
Our
backlog, remaining performance obligations, and net bookings may
not be indicative of future operating results, and our customers
may attempt to renegotiate or terminate their contracts for a
number of reasons, including delays in or inability to obtain
project financing or licensing or abandonment of the project
entirely. Accordingly, there can be no assurance that contracts
included in backlog or remaining performance obligations will
generate revenues or when the revenues will be generated. Net
bookings and backlog are considered non-GAAP financial measures,
and therefore, they should be considered in addition to, rather
than as a substitute for, our GAAP measures for recognized revenue,
deferred revenue, and remaining performance obligations. Further,
we can provide no assurance as to the profitability of our
contracts reflected in remaining performance obligations, backlog
and net bookings.
Results
of Operations
Comparison of Three Months Ended September 30, 2022 and September
30, 2021
Revenues
and Cost of Goods Sold
Revenue
for the three months ended September 30, 2022 was $5,063,000,
compared to $3,706,000 for the three months ended September 30,
2021, representing an increase of $1,357,000, or 37%. The increase
was primarily due to improvements in our supply chain and the
ability to deliver products with fewer delays on contract
fulfillment and revenue recognition on existing contracts.
Additionally, revenue for the three months ended September 30, 2022
included contracts for several new product offerings that were not
available the three months ended September 30, 2021.
Cost
of revenue increased by $1,507,000, or 51%, from $2,959,000 for the
three months ended September 30, 2021 to $4,466,000 for the three
months ended September 30, 2022. The increase was primarily due to
an increase in revenue and an increase in variable costs as a
percent of revenue, as discussed below.
Our
gross profit for the three months ended September 30, 2022 was
$597,000 compared to $747,000 for the three months ended September
30, 2021, a decrease of 20%. Gross profit margin decreased by 8.4
percentage points from 20.2% for the three months ended September
30, 2021 to 11.8% for the three months ended September 30, 2022
primarily due to an increase in variable costs as a percent of
revenue, as described below.
Our
fixed costs (which include engineering, service, manufacturing and
project management salaries and benefits and manufacturing
overhead) totaled $373,000, or 7% of total revenue, for the three
months ended September 30, 2022 as compared to $337,000, or 9% of
total revenue, for the three months ended September 30, 2021. The
increase of $36,000 was primarily due to an increase in salaries
and benefits (including stock-based compensation) of $47,000, a
result of investing in future growth. This increase was partially
offset by a decrease in overhead of $11,000.
Our
variable costs (which include the cost of equipment, outside
engineering costs, shipping and handling, travel and warranty
costs) totaled $4,093,000, or 81% of total revenue, during the
three months ended September 30, 2022 as compared to $2,622,000, or
71% of total revenue, in the three months ended September 30, 2021.
The increase in variable costs was primarily due to: (i) an
increase in equipment costs of $1,183,000 driven by higher revenue
and lower equipment margins, (ii) an increase in warranty of
$180,000, primarily due to product quality issues with a supplier’s
product that were experienced by several of our customers, (iii) an
increase in consulting fees of $52,000, (iv) an increase in travel
of $43,000, and (v) an increase in excess and obsolete inventory
expense of $29,000, partially offset by, (i) a reduction in
shipping and handling costs of $11,000, and (ii) lower outside
engineering fees of $6,000.
We
continue to focus on gross margin improvement through a combination
of efforts, including more disciplined pricing, better absorption
of our fixed costs as we convert our bookings into revenue, and the
implementation over time of lower-cost supplier
alternatives.
Operating
Expenses
Operating
expenses increased to $1,656,000 for the three months ended
September 30, 2022, from $1,190,000 for the three months ended
September 30, 2021, an increase of $467,000, or 39%. The operating
expense increase consisted of: (i) an increase in selling, general
and administrative expenses (“SG&A expenses”) of $426,000, in
support of our growth initiatives, (ii) an increase in advertising
and marketing expenses of $80,000, partially offset by a decrease
in product development of $40,000.
Our
increase in SG&A expenses for the three months ended September
30, 2022 compared to the three months ended September 30, 2021, was
primarily due to: (i) an increase of $222,000 in salaries and
benefits (including stock-based compensation) and other employee
related costs, (ii) an increase in bad debt expense of $102,000,
resulting from the risk of non-payment by a customer due to
defective products from one of our suppliers, (iii) an increase in
accounting fees of $102,000, partially due to potential acquisition
evaluation costs, (iv) an increase of $70,000 for insurance, and
(v) an increase in board fees of $23,000, partially offset by (i) a
reduction in business taxes and licenses of $38,000, (ii) a
decrease in referral fees and other sales related expenses of
$33,000, and (iii) a decrease of $19,000 for investor relations
expenses.
The
increase in marketing expenses was primarily due to (i) an increase
in salaries and benefits (including stock-based compensation) of
$44,000, (ii) an increase in advertising, outside services, and
other marketing expenses of $32,000, and (iii) an increase in trade
show expenses of $4,000.
The
decrease in product development costs was due to (i) a decrease in
salaries and benefits (including stock-based compensation) of
$23,000, (ii) a decrease in R&D consulting and materials
expense of $19,000, offset by, an increase in travel of
$3,000.
Operating
Income (Loss)
We
recognized an operating loss of $1,059,000 for the three months
ended September 30, 2022, as compared to an operating loss of
$443,000 for the three months ended September 30, 2021, an increase
of $616,000. The operating loss for the three months ended
September 30, 2022 included $79,000 of non-cash, stock-based
compensation, and $7,000 of depreciation expense, compared to
$29,000 of non-cash, stock-based compensation and $16,000 of
depreciation and amortization expense for the three months ended
September 30, 2021. Excluding these non-cash items, our operating
loss increased by $576,000.
Other
Income (Expense)
We
recognized other income (net) of $17,000 for the three months ended
September 30, 2022, compared to other income (net) of $35,000 for
the three months ended September 30, 2021. Other income for the
three months ended September 30, 2022 primarily consisted of
interest income on a money market account. Other income for the
three months ended September 30, 2021 primarily consisted of rental
income from the sub-lease of a portion of our previous facility in
Boulder, CO.
Net
Income (Loss)
Overall,
we recognized a net loss of $1,042,000 for the three months ended
September 30, 2022, as compared to a net loss of $408,000 for the
three months ended September 30, 2021, an increase of $634,000. The
net loss for the three months ended September 30, 2022 included
$79,000 of non-cash, stock-based compensation, and $7,000 of
depreciation expense, compared to $29,000 of non-cash, stock-based
compensation and $16,000 of depreciation and amortization expense
for the three months ended September 30, 2021. Excluding these
non-cash items, our net loss increased by $594,000.
Comparison of Nine Months Ended September 30, 2022 and September
30, 2021
Revenues
and Cost of Goods Sold
Revenue
for the nine months ended September 30, 2022 was $9,822,000,
compared to $10,582,000 for the nine months ended September 30,
2021, representing a decrease of $760,000, or 7%. The decrease was
primarily due to delays experienced earlier in the year with our
international supply of products and shipments from vendors which
delayed contract fulfillment and revenue recognition on existing
contracts. The supply chain impact was largely due to delays at
U.S. ports, compounded by a reduction in cargo shipped by air, a
shortage of containers, and a shortage of domestic truck delivery
availability.
Cost
of revenue increased by $620,000, or 8%, from $8,208,000 for the
nine months ended September 30, 2021 to $8,828,000 for the nine
months ended September 30, 2022. The increase was primarily due to
an increase in both fixed costs and variable costs as discussed
below.
Gross
profit for the nine months ended September 30, 2022 was $994,000
compared to $2,374,000 for the nine months ended September 30,
2021, a decrease of 58%. Gross profit margin decreased by 12.3
percentage points from 22.4% for the nine months ended September
30, 2021 to 10.1% for the nine months ended September 30, 2022
primarily due to lower revenue, higher fixed costs, and an increase
in variable costs as a percent of revenue, as described
below.
Our
fixed costs (which include engineering, service, manufacturing and
project management salaries and benefits and manufacturing
overhead) totaled $1,181,000, or 12% of total revenue, for the nine
months ended September 30, 2022 as compared to $1,032,000, or 10%
of total revenue, for the nine months ended September 30, 2021. The
increase of $150,000 was primarily due to an increase in salaries
and benefits (including stock-based compensation) of
$153,000.
Our
variable costs (which include the cost of equipment, outside
engineering costs, shipping and handling, travel and warranty
costs) totaled $7,647,000, or 78% of total revenue, in the nine
months ended September 30, 2022 as compared to $7,177,000, or 68%
of total revenue, in the nine months ended September 30, 2021. The
increase in variable costs was primarily due to: (i) an increase in
warranty of $162,000, primarily due to quality issues with a
supplier’s product that were experienced by several of our
customers, (ii) an increase in travel of $140,000, (iii) an
increase in equipment costs of $74,000 primarily as a result of
lower margins, (iv) an increase in excess and obsolete inventory
expense of $61,000, (v) an increase in other variable costs of
$57,000, and (vi) an increase in outside engineering fees of
$12,000, offset by a decrease in shipping and handling of
$34,000.
We
continue to focus on gross margin improvement through a combination
of efforts, including more disciplined pricing, better absorption
of our fixed costs as we convert our bookings into revenue, and the
implementation over time of lower-cost supplier
alternatives.
Operating
Expenses
Operating
expenses increased to $5,435,000 for the nine months ended
September 30, 2022, from $3,386,000 for the nine months ended
September 30, 2021, an increase of $2,049,000, or 61%. The
operating expense increase consisted of: (i) an increase in
selling, general and administrative expenses (“SG&A expenses”)
of $1,191,000, in support of our growth initiatives, and (ii) an
increase in advertising and marketing expenses of $296,000, (iii) a
goodwill impairment charge of $631,000, offset by a decrease in
product development of $68,000.
The
increase in SG&A expenses for the nine months ended September
30, 2022 compared to the nine months ended September 30, 2021, was
primarily due to: (i) an increase of $760,000 in salaries and
benefits (including stock-based compensation) and other employee
related costs, (ii) an increase in accounting and other
professional fees of $216,000, (iii) an increase in insurance costs
of $189,000, (iv) a $73,000 increase for board fees, (v) an
increase of $70,000 in bad debt expense, and (vi) an increase in
travel of $63,000, offset by (i) a decrease of $80,000 for
commissions, referral fees, and other sales related expenses, (ii)
a decrease in business taxes and licenses of $69,000, and (iii) a
decrease in depreciation of $29,000.
The
increase in marketing expenses was primarily due to (i) an increase
in salaries and benefits (including stock-based compensation) of
$137,000, (ii) an increase in advertising, outside services, and
other promotional marketing expenses of $117,000, and (iii) an
increase in trade show expenses of $42,000.
The
decrease in product development costs was due to (i) a decrease in
salaries and benefits (including stock-based compensation) of
$47,000, and (ii) a decrease in R&D materials and service
expenses of $35,000, offset by an increase in travel of
$14,000.
As
further discussed in Note 1, on June 30, 2022, we performed
a quantitative analysis for potential impairment of our goodwill,
by comparing the Company’s fair value to its carrying value as of
June 30, 2022. Based on this analysis, the Company determined that
its carrying value exceeded its fair value. As a result, the
Company recorded a non-cash goodwill impairment charge of $631,000
at June 30, 2022. No income tax benefit related to this goodwill
impairment charge was recorded at June 30, 2022.
Operating
Income (Loss)
We
recognized an operating loss of $4,442,000 for the nine months
ended September 30, 2022, as compared to an operating loss of
$1,012,000 for the nine months ended September 30, 2021, an
increase of $3,429,000, or 339%. The operating loss for the nine
months ended September 30, 2022 included $267,000 of non-cash,
stock-based compensation, $20,000 of depreciation expense, and
$631,000 for a non-cash goodwill impairment charge, compared to
$160,000 of non-cash, stock-based compensation and $49,000 of
depreciation and amortization expense for the nine months ended
September 30, 2021. Excluding these non-cash items, our operating
loss increased by $2,720,000, or 339%.
Other
Income (Expense)
We
recognized other income (net) of $216,000 for the nine months ended
September 30, 2022, compared to other income (net) of $76,000 for
the nine months ended September 30, 2021. Other income for the nine
months ended September 30, 2022 consisted of income from an
insurance settlement of $185,000 and interest income of $25,000.
Other income for the nine months ended September 30, 2021 primarily
consisted of income of $138,000 related to the Employee Retention
Credit as part of the CARES act, $48,000 for rental income from the
sub-lease of a portion of our facility, offset by $107,000 in
expense related to the settlement of litigation with a former
employee.
Net
Income (Loss)
Overall,
we recognized a net loss of $4,226,000 for the nine months ended
September 30, 2022, as compared to a net loss of $936,000 for the
nine months ended September 30, 2021, an increase of $3,290,000, or
351%. The net loss for the nine months ended September 30, 2022
included $267,000 of non-cash, stock-based compensation, $20,000 of
depreciation expense, and $631,000 for a non-cash goodwill
impairment charge, compared to $227,000 of non-cash, stock-based
compensation and $49,000 of depreciation and amortization expense
for the nine months ended September 30, 2021. Excluding these
non-cash items, our net loss increased by $2,648,000.
Financial
Condition, Liquidity and Capital Resources
Cash, Cash Equivalents
As of
September 30, 2022, we had cash and cash equivalents of
$21,084,000, compared to cash and cash equivalents of $2,160,000 as
of December 31, 2021. The $18,924,000 increase in cash and cash
equivalents during the nine months ended September 30, 2022, was
primarily the result of cash proceeds from the sale of common stock
and warrants of $21,711,000, offset by the redemption of series B
preferred stock and interest of $2,016,000, and cash used in
operations of $743,000. Our cash is held in bank depository
accounts in certain financial institutions. During the nine months
ended September 30, 2022, we held deposits in financial
institutions that exceeded the federally insured amount.
As of
September 30, 2022, we had accounts receivable (net of allowance
for doubtful accounts) of $77,000, inventory (net of excess and
obsolete allowance) of $615,000, and prepaid expenses of $1,102,000
(including $760,000 in advance payments on inventory purchases).
While we typically require advance payment before we commence
engineering services or ship equipment to our customers, we have
made exceptions requiring us to record accounts receivable, which
carry a risk of non-collectability especially since most of our
customers are funded on an as-needed basis to complete facility
construction. We expect our exposure to accounts receivable risk to
increase as we continue to pursue larger projects.
As of
September 30, 2022, we had total accounts payable and accrued
expenses of $2,256,000, deferred revenue of $4,436,000, accrued
equity compensation of $70,000, other current liabilities of
$37,000 and the current portion of operating lease liability of
$116,000. As of September 30, 2022, we had working capital of
$15,963,000, compared to a working capital deficit of $415,000 as
of December 31, 2021. The increase in our working capital was
primarily related to (i) an increase in cash of $18,924,000, and
(ii) an increase in inventory of $236,000, offset by (i) an
increase in deferred revenue of $1,596,000, (ii) an increase in
accounts payable and accrued liabilities of $911,000, (iii) a
decrease in prepaid expense and other assets of $172,000, and (iv)
a decrease in accounts receivable of $102,000.
We
have never declared or paid any cash dividends on our common stock.
We currently intend to retain all available funds and any future
earnings for use in the operation and expansion of our business and
do not anticipate paying any cash dividends in the foreseeable
future.
Summary of Cash Flows
The
following summarizes our approximate cash flows for the nine months
ended September 30, 2022 and September 30, 2021:
|
|
For the Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Net cash used in operating
activities |
|
$ |
(743,000 |
) |
|
$ |
(1,761,000 |
) |
Net cash used in investing
activities |
|
|
(28,000 |
) |
|
|
(14,000 |
) |
Net cash
provided by financing activities |
|
|
19,695,000 |
|
|
|
1,774,000 |
|
Net increase in
cash |
|
$ |
18,924,000 |
|
|
$ |
(1,000 |
) |
Operating Activities
We
incurred a net loss for the nine months ended September 30, 2022 of
$4,226,000 and have an accumulated deficit of $33,007,000 as of
September 30, 2022.
Cash
used in operations for the nine months ended September 30, 2022 was
$743,000 compared to $1,761,000 for the nine months ended September
30, 2021, a decrease of $1,018,000.
The
decrease in cash used in operating activities during the nine
months ended September 30, 2022 as compared to the nine months
ended September 30, 2021, was primarily attributable to: (i) an
increase in cash used to fund working capital of $3,539,000, (ii)
an increase in net loss of $3,290,000, and (iii) an increase in
non-cash operating charges of $768,000.
The
increase in our working capital was primarily related to (i) an
increase in cash of $18,924,000, and (ii) an increase in inventory
of $236,000, offset by (i) an increase in deferred revenue of
$1,596,000, (ii) an increase in accounts payable and accrued
liabilities of $911,000, (iii) a decrease in prepaid expense and
other assets of $172,000, and (iv) a decrease in accounts
receivable of $102,000.
The
increase in non-cash operating charges was primarily due to
goodwill impairment charges of $631,000 and an increase in
share-based compensation.
Investing Activities
The
$28,000 cash used in investing activities during the nine months
ended September 30, 2022 was related to the purchase of property
and equipment of $30,000, offset by proceeds from the sale of
property and equipment of $2,000. Cash used in investing activities
during the nine months ended September 30, 2021 of $14,000 was
related to the purchase of property and equipment of $15,000,
offset by proceeds from the sale of property and equipment of
$1,000.
Financing Activities
Cash
flows from financing activities during the nine months ended
September 30, 2022, was the result of cash proceeds from the sale
of common stock and warrants (net of issuance costs) of
$21,711,000, offset by a cash payment of $2,016,000 for the
redemption of series B preferred stock, including related interest.
Cash flows from financing activities during the nine months ended
September 30, 2021, was the result of cash proceeds from the sale
of preferred stock and warrant (net of issuance costs) of
$1,260,000 and proceeds from a note payable of $514,000.
During
the nine months ended September 30, 2021, the Company entered into
a note payable with its current bank in the principal amount of
$514,200, for working capital purposes.
Common Stock Equity Offering
On
February 10, 2022, the Company signed a firm commitment
underwriting agreement for the public offering of shares of common
stock and warrants, which closed on February 15, 2022. The Company
received net proceeds of approximately $21,711,000 for the sale of
5,811,138 shares of common stock and 6,572,808 warrants, each
warrant to purchase one share of common stock for five years,
exercisable immediately, at an exercise price of $5.00. The Company
also issued to the representative of the underwriters 290,557
warrants, each warrant to purchase one share of common stock at an
exercise price of $5.16, during the period commencing August 9,
2022, and expiring on February 10, 2027.
The
net proceeds from the offering will be used to advance the
Company’s organic growth and new product initiatives, to pursue
select acquisitions, and for general corporate and working capital
purposes. In connection with this offering, we received approval to
list our common stock on the Nasdaq Capital Market under the symbol
“CEAD” and our warrants under the symbol “CEADW”. As a result,
effective February 10, 2022, trading of both shares of the
Company’s common stock and certain of the Company’s warrants
commenced on the Nasdaq.
Inflation
To
date, we have experienced and are likely to continue to face
inflationary increases on the cost of products, which may adversely
affect our margins and financial results, and the pricing of our
service and product supply contracts. The inflationary pressures
are in both the larger economy and in the industries related to
building renovations, retrofitting and new build facilities in
which we operate. This inflation is reflected in higher wages,
increased pricing of equipment and other products that we have
contracted to provide to our customers, and generally higher prices
across all sectors of the economy. As we move forward, we plan to
continuously monitor our various contract terms and may decide to
add clauses that will permit us to adjust pricing if inflation and
price increase pressures on us will impact our ability to perform
our contracts and maintain our margins.
Contractual Payment Obligations
As of
September 30, 2022, our contractual payment obligations consisted
of a building lease. Refer to Note 2 – Leases of the
notes to the condensed consolidated financial statements, included
as part of this Quarterly Report for a discussion of building
lease.
Commitments
and Contingencies
Refer
to Note 6 – Commitments and Contingencies of the notes to
the condensed consolidated financial statements, included as part
of this Quarterly Report for a discussion of commitments and
contingencies.
Off-Balance
Sheet Arrangements
We
are required to disclose any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on
our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital
expenditures, or capital resources that are material to investors.
As of September 30, 2022, we had no off-balance sheet arrangements.
During the nine months ended September 30, 2022, we did not engage
in any off-balance sheet financing activities other than those
included in the “Contractual Payment Obligations” discussed above
and those reflected in Note 6 of our condensed consolidated
financial statements.
Recent
Developments
Refer
to Note 13 - Subsequent Events of the notes to condensed
consolidated financial statements, included as part of this
Quarterly Report for certain significant events occurring since
September 30, 2022.
Critical
Accounting Estimates
This
discussion and analysis of our financial condition and results of
operations is based upon our condensed consolidated financial
statements, which have been prepared in conformity with accounting
principles generally accepted in the United States of America.
Certain accounting policies are particularly important to the
understanding of our financial position and results of operations
and require the application of significant judgment by our
management or can be materially affected by changes from period to
period in economic factors or conditions that are outside of our
control. As a result, they are subject to an inherent degree of
uncertainty. In applying these policies, management uses their
judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates are based on
our historical operations, our future business plans and projected
financial results, the terms of existing contracts, observance of
trends in the industry, information provided by our customers, and
information available from other outside sources, as appropriate.
Actual results could materially differ from those estimates. Key
estimates include: allocation of transaction prices to performance
obligations under contracts with customers, standalone selling
prices, timing of expected revenue recognition on remaining
performance obligations under contracts with customers, valuation
of intangible assets, valuation of equity-based compensation,
valuation of deferred tax assets and liabilities, warranty
accruals, accounts receivable and inventory allowances, and legal
contingencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We
are a smaller reporting company, as defined by Rule 12b-2 of the
Exchange Act, therefore are not required to provide the information
under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and our Principal Financial and Accounting Officer, has evaluated
the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act),
as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on this evaluation, our Chief Executive Officer
and Principal Financial and Accounting Officer concluded that as a
result of material weakness in our internal control over financial
reporting as described in Item 9A of our Annual Report on Form 10-K
for the year ended December 31, 2021 filed with the SEC, our
disclosure controls and procedures were not effective as of
September 30, 2022.
We
did not maintain effective controls over certain aspects of the
financial reporting process because: (i) we lack a sufficient
complement of personnel with a level of accounting expertise and an
adequate supervisory review structure that is commensurate with our
financial reporting requirements, (ii) there is inadequate
segregation of duties due to our limited number of accounting
personnel, and (iii) we have insufficient controls and processes in
place to adequately verify the accuracy and completeness of
spreadsheets that we use for a variety of purposes including
revenue, taxes, stock-based compensation and other areas, and place
significant reliance on, for our financial reporting.
We
intend to take appropriate and reasonable steps to make the
necessary improvements to remediate these deficiencies. We are
committed to continuing to improve our financial organization
including, without limitation, expanding our accounting staff and
improving our systems and controls to reduce our reliance on the
manual nature of our existing systems. However, due to our size and
our financial resources, remediating the several identified
weaknesses has not been possible and may not be economically
feasible now or in the future.
Changes
in Internal Control over Financial Reporting
There
were no changes identified in connection with our internal control
over financial reporting during the three months ended September
30, 2022, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We
are not currently a party to any material legal proceedings, nor
are we aware of any pending or threatened litigation that would
have a material adverse effect on our business, operating results,
cash flows, or financial condition should such litigation be
resolved unfavorably. We have and will continue to have commercial
disputes arising in the ordinary course of our business.
Item 1A. Risk Factors
In
addition to the information set forth in this Form 10-Q, you should
also carefully review and consider the risk factors contained in
our other reports and periodic filings with the SEC, including,
without limitation, the risk factors and uncertainties contained
under the caption “Item 1A—Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2021 that could
materially and adversely affect our business, financial condition,
and results of operations. The risk factors discussed in that Form
10-K do not identify all risks that we face because our business
operations could also be affected by additional factors that are
not known to us or that we currently consider to be immaterial to
our operations.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not
applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The
documents listed in the Exhibit Index of this Form 10-Q are
incorporated by reference or are filed with this Form 10-Q, in each
case as indicated therein (numbered in accordance with Item 601 of
Regulation S-K).
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CEA
INDUSTRIES INC. |
|
(the
“Registrant”) |
|
|
|
Dated:
November 14, 2022 |
By: |
/s/
Anthony K. McDonald |
|
|
Anthony
K. McDonald |
|
|
Chief
Executive Officer and President |
|
|
(Principal
Executive Officer) |
|
|
|
Dated:
November 14, 2022 |
By: |
/s/
Ian K. Patel |
|
|
Ian
K. Patel |
|
|
Chief
Financial Officer |
|
|
(Principal
Financial and Accounting Officer) |
EXHIBIT INDEX
* |
Filed
herewith. |
** |
Furnished
herewith. |
CEA Industries (NASDAQ:CEAD)
Historical Stock Chart
From May 2023 to Jun 2023
CEA Industries (NASDAQ:CEAD)
Historical Stock Chart
From Jun 2022 to Jun 2023