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: