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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 JUNE 30, 2023

 

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.

(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 August 14, 2023, the number of outstanding shares of common stock of the registrant was 8,076,372.

 

 

 

 

 

 


CEA Industries Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2023

 

Table of Contents

 

  Page
Cautionary Statement ii
   
PART I — FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)  
   
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 2
   
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and June 30, 2022 3
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and June 30, 2022 4
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and June 30, 2022 5
   
Notes to the Condensed Consolidated Financial Statements 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
   
Item 4. Controls and Procedures 34
   
PART II — OTHER INFORMATION  
   
Item 1. Legal Proceedings 35
   
Item 1A. Risk Factors 35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
   
Item 3. Defaults Upon Senior Securities 35
   
Item 4. Mine Safety Disclosures 35
   
Item 5. Other Information 36
   
Item 6. Exhibits 36
   
SIGNATURES 37
   
EXHIBIT INDEX 38

 

i

 

 

In this Quarterly Report on Form 10-Q, unless otherwise indicated, the “Company”, “we”, “us” or “our” refer to CEA Industries Inc. and, where appropriate, its wholly owned subsidiary.

 

CAUTIONARY STATEMENT

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical fact but are based on current management expectations that involve substantial risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar words. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements including, but not limited to, any projections of revenue, gross profit, earnings or loss, tax provisions, cash flows or other financial items; any statements of the plans, strategies or objectives of management for future operations; any statements regarding current or future macroeconomic or industry-specific trends or events and the impact of those trends and events on us or our financial performance; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing.

 

These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. These forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we operate. Important factors that could cause those differences include, but are not limited to:

 

  our business prospects and the prospects of our existing and prospective customers;
     
 

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 impact on our business from our restructuring and cost containment actions taken in the first quarter of 2023 and continuing thereafter;

 

  the inherent uncertainty of product development and product selection to meet client requirements;
     
  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 and our engineering service and product supply position within the industry;
     
  the ability to effectively operate our business, including servicing our existing customers and obtaining new business;
     
  our relationships with our customers and suppliers;

 

ii

 

 

  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 business disruptions that are happening in the CEA industry, including bankruptcies and shifting market demands, that are having an adverse impact on the demand for our engineering services and construction solutions and, consequently, our revenues;
     
  the supply of products from our suppliers and our ability to complete contracts, some of which depend on other actors for a comprehensive project completion;
     
  changes in our business strategy and development plans, and in our plans for seeking strategic alternatives;
     
  our ability to attract and retain qualified personnel;
     
  our ability to raise equity and debt capital, as needed from time to time, to fund our operations and business strategy, including possible strategic alternatives and acquisitions;

 

  our ability to identify, complete and integrate potential strategic alternatives and acquisitions;
     
  future revenue being lower than expected;
     
  The substantial changes in the amount and current size of our backlog and our ability to convert backlog into revenue in a timely manner, or at all; and
     
  our intention not to pay dividends.

 

These factors should not be construed as exhaustive and should be read with the other cautionary statements in this report.

 

Although we believe that we use reasonable assumptions for these forward-looking statements, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated from time to time in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are intended to be within the meaning of “forward-looking statements” in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

 

iii

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CEA Industries Inc.

Condensed Consolidated Balance Sheets

(in US Dollars except share numbers)

 

   June 30,   December 31, 
   2023   2022 
    (Unaudited)      
ASSETS          
Current Assets          
Cash and cash equivalents  $14,197,485   $18,637,114 
Accounts receivable, net   293,767    2,649 
Inventory, net   397,155    348,411 
Prepaid expenses and other   520,256    1,489,921 
Total Current Assets   15,408,663    20,478,095 
Noncurrent Assets          
Property and equipment, net   53,225    68,513 
Intangible assets, net   1,830    1,830 
Deposits   14,747    14,747 
Operating lease right-of-use asset   409,981    462,874 
Total Noncurrent Assets   479,783    547,964 
           
TOTAL ASSETS  $15,888,446   $21,026,059 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
LIABILITIES          
Current Liabilities          
Accounts payable and accrued liabilities  $798,624   $1,207,258 
Deferred revenue   625,911    4,338,570 
Accrued equity compensation   -    89,970 
Current portion of operating lease liability   122,272    118,235 
Total Current Liabilities   1,546,807    5,754,033 
           
Noncurrent Liabilities          
Operating lease liability, net of current portion   319,247    376,851 
Total Noncurrent Liabilities   319,247    376,851 
           
TOTAL LIABILITIES   1,866,054    6,130,884 
           
Commitments and Contingencies (Note 6)   -    - 
           
SHAREHOLDERS’ EQUITY          
Preferred stock, $0.00001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding   -    - 
Common stock, $0.00001 par value; 200,000,000 authorized; 8,076,372 and 7,953,974 shares issued and outstanding, respectively   81    80 
Additional paid in capital   49,426,065    49,173,836 
Accumulated deficit   (35,403,754)   (34,278,741)
Total Shareholders’ Equity   14,022,392    14,895,175 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $15,888,446   $21,026,059 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

CEA Industries Inc.

Condensed Consolidated Statements of Operations

(in US Dollars except share numbers)

(Unaudited)

 

   2023   2022   2023   2022 
   For the Three Months Ended June 30,   For the Six Months Ended
June 30,
 
   2023   2022   2023   2022 
Revenue, net  $1,063,714   $3,014,885   $5,746,287   $4,759,312 
                     
Cost of revenue   985,021    2,708,646    4,814,318    4,362,565 
                     
Gross profit   78,693    306,239    931,969    396,747 
                     
Operating expenses:                    
Advertising and marketing expenses   33,091    309,690    235,414    560,705 
Product development costs   74    56,577    76,487    195,495 
Selling, general and administrative expenses   750,156    1,080,094    1,770,858    2,391,871 
Goodwill impairment charges   -    631,064    -    631,064 
Total operating expenses   783,321    2,077,425    2,082,759    3,779,135 
                     
Operating loss   (704,628)   (1,771,186)   (1,150,790)   (3,382,388)
                     
Other income (expense):                    
Other income (expense), net   2,074    -    7,778    185,000 
Interest income (expense), net   8,979    10,600    17,999    13,860 
Total other income (expense)   11,053    10,600    25,777    198,860 
                     
Loss before provision for income taxes   (693,575)   (1,760,586)   (1,125,013)   (3,183,528)
                     
Income taxes   -    -    -    - 
                     
Net loss  $(693,575)  $(1,760,586)  $(1,125,013)  $(3,183,528)
                     
Convertible preferred series B stock dividends   -    -    -    (35,984)
Deemed dividend on convertible preferred series B stock on down round   -    -    -    (439,999)
                     
Net loss available to common shareholders  $(693,575)  $(1,760,586)  $(1,125,013)  $(3,659,511)
                     
Loss per common share – basic and diluted  $(0.09)  $(0.23)  $(0.14)  $(0.59)
                     
Weighted average number of common shares outstanding, basic and diluted   8,076,372    7,801,211    8,074,064    6,220,600 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

CEA Industries Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the Three and Six Months Ended June 30, 2023 and June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

   Number of Shares   Amount  

Paid in

Capital

   Accumulated Deficit   Shareholders’ Equity 
   Common Stock   Additional         
   Number of Shares   Amount  

Paid in

Capital

   Accumulated Deficit   Shareholders’ Equity 
Balance March 31, 2023   8,076,372   $81   $49,410,899   $(34,710,179)  $14,700,801 
Fair value of vested stock options granted to employees   -    -    15,166    -    15,166 
Net loss   -    -    -    (693,575)   (693,575)
Balance June 30, 2023   8,076,372   $81   $49,426,065   $(35,403,754)  $14,022,392 

 

 

   Common Stock   Additional         
   Number of Shares   Amount    Paid in Capital   Accumulated Deficit   Shareholders’ Equity 
Balance December 31, 2022   7,953,974   $80   $49,173,836   $(34,278,741)  $14,895,175 
Fair value of vested stock options granted to employees   -    -    150,914    -   $150,914 
Common shares issued in settlement of restricted stock units issued to directors   122,398    1    (1)   -   - 
Fair value of restricted stock units issued to directors   -    -    101,316    -   $101,316 
Net loss   -    -    -    (1,125,013)  $(1,125,013)
Balance June 30, 2023   8,076,372   $81   $49,426,065   $(35,403,754)  $14,022,392 

 

   Common Stock   Additional         
   Number of Shares   Amount   Paid in Capital   Accumulated Deficit   Shareholders’ Equity 
Balance March 31, 2022   7,784,444   $78   $48,958,618   $(30,204,508)  $18,754,188 
Fair value of vested stock options granted to employees   -    -    126,635    -    126,635 
Fair value of restricted stock units issued to directors   -    -    6,245    -    6,245 
Cashless exercise of prefunded warrants   169,530    2    (2)   -    - 
Net loss   -    -    -    (1,760,586)   (1,760,586)
Balance June 30, 2022   7,953,974   $80   $49,091,496   $(31,965,094)  $17,126,482 

 

   Common Stock   Additional         
   Number of Shares   Amount    Paid in Capital   Accumulated Deficit   Shareholders’ Equity 
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   -    -    159,573    -    159,573 
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    -    24,994    -    24,994 
Fair value of restricted stock units issued to directors   -    -    11,173    -    11,173 
Issuance of common shares to round up partial shares following reverse split   6,798    -    -         - 
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   -    -    -    (3,183,528)   (3,183,528)
Balance June 30, 2022   7,953,974   $80   $49,091,496   $(31,965,094)  $17,126,482 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

CEA Industries Inc.

Condensed Consolidated Statements of Cash Flows

(in US Dollars except share numbers)

(Unaudited)

 

   2023   2022 
   For the Six Months Ended
June 30,
 
   2023   2022 
Cash Flows From Operating Activities:          
Net loss  $(1,125,013)  $(3,183,528)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and intangible asset amortization expense   14,988    16,697 
Share-based compensation   162,260    225,396 
Provision for doubtful accounts   2,096    (9,182)
Provision for excess and obsolete inventory   60,574    (34,417)
Loss on disposal of assets   100    4,060 
Amortization of operating lease ROU asset   52,893    51,061 
Goodwill impairment charges   -    631,064 
           
Changes in operating assets and liabilities:          
Accounts receivable   (293,214)   48,153 
Inventory   (109,318)   10,986 
Prepaid expenses and other   969,665    (1,692,816)
Accounts payable and accrued liabilities   (408,634)   (317,453)
Deferred revenue   (3,712,659)   3,095,431 
Operating lease liability, net   (53,567)   (39,870)
Accrued equity compensation   -    (37,251)
Net cash provided by (used in) operating activities   (4,439,829)   (1,231,669)
           
Cash Flows From Investing Activities          
Purchases of property and equipment   -    (13,948)
Proceeds from the sale of property and equipment   200    2,250 
Net cash provided by (used in) investing activities   200    (11,698)
           
Cash Flows From Financing Activities          
Payment of dividends on series B preferred stock   -    (35,984)
Redemption of series B preferred stock   -    (1,980,000)
Net cash proceeds on sale of common stock and warrants, net of expenses   -    21,711,131 
Net cash provided by financing activities   -    19,695,147 
           
Net change in cash and cash equivalents   (4,439,629)   18,451,781 
Cash and cash equivalents, beginning of period   18,637,114    2,159,608 
Cash and  cash equivalents, end of period  $14,197,485   $20,611,388 
           
Supplemental cash flow information:          
Interest paid  $-   $- 
Income taxes paid  $-   $- 
           
Non-cash investing and financing activities:          
Unpaid purchases of equipment and other assets  $-   $16,400 
Conversion of series B preferred stock   -   $1,980,000 
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  $89,970   $83,625 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(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 faster-evolving 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, and 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 affected demand across the majority of our markets and disrupted workflow and completion schedules on projects. We believe we continue to see adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, costs, and working capital.

 

Due to this uncertainty, we continue to monitor costs and continue to take actions to reduce costs in order to mitigate the long-term impact of the COVID-19 pandemic to the best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses, and reduced operating cash flows in our business. During the year ended December 31, 2022, and continuing into the current fiscal quarter, the Company experienced delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain. Consequently, our revenue recognition of some customer sales has been delayed until future periods when the shipment of orders can be completed.

 

Impact of Ukrainian 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.

 

6

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

Inflation

 

Our operations are being influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build CEA facilities in which we operate. We believe that we will continue to face inflationary increases in the cost of products and our operations, which will adversely affect our margins and financial results and the pricing of our service and product supply contracts. Inflation is reflected in higher wages, increased pricing of equipment, delivery and transportation costs, and general operational expenses. As we move forward, we plan to continuously monitor our various contract terms and may decide to add clauses that will permit us to adjust pricing if inflation and price increase pressures on us will impact our ability to perform our contracts and maintain our margins.

 

Financial Statement Presentation

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures.

 

Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023. The balance sheet information as of December 31, 2022 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, 2022.

 

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.

 

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.

 

7
 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

Cash, Cash Equivalents, and Restricted Cash

 

All highly liquid investments with original maturities of three months or less at the date of purchase are considered to be cash equivalents. The Company may, from time to time, have deposits in financial institutions that exceed the federally insured amount of $250,000. As of June 30, 2023, the balance in the Company’s accounts was approximately $14,197,000, consequently approximately $13,947,000 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.

 

As of June 30, 2023, and June 30, 2022, there were respectively, 8,009,889 and 7,882,061, potentially dilutive equity instruments outstanding in respect of warrants options to purchase shares of the Company’s common stock and restricted stock units that were convertible into shares of the Company’s common stock. Of these potentially dilutive equity instruments outstanding, 7,623,772 related to warrants outstanding at both June 30, 2023 and June 30, 2022 issued in connection with the sale of our shares of series B Preferred stock and common stock. The remaining 386,117 and 252,289 potentially dilutive equity instruments outstanding as of June 30, 2023 and June 30, 2022, respectively, related to options to purchase shares of the Company’s common stock and restricted stock units that were convertible into shares of the Company’s common stock that had been issued to our directors and staff as compensation.

 

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. 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.

 

8

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

Temporary Equity

 

Shares of preferred stock that are redeemable for cash or other assets are classified as temporary equity if they are redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the 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

 

The following table sets forth the Company’s revenue by source:

 

   2023   2022   2023   2022 
  

For the Three Months Ended

June 30,

  

For the Six Months Ended

June 30,

 
   2023   2022   2023   2022 
Equipment and systems sales  $899,748   $2,791,141   $5,296,574   $4,433,713 
Engineering and other services   103,232    192,076    227,643    278,125 
Shipping and handling   4,775    31,668    17,335    47,474 
Miscellaneous   55,959    -    204,735    - 
Total revenue  $1,063,714   $3,014,885   $5,746,287   $4,759,312 

 

Miscellaneous revenue of $55,959 and $204,735 recognized during the three and six months ended June 30, 2023, respectively, represents non-refundable deposits, forfeited by former customers on previously cancelled contracts.

 

Revenue Recognition Accounting Policy Summary

 

The Company accounts for revenue in accordance with ASC 606. Under the revenue standard, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Most of the Company’s contracts contain multiple performance obligations that include engineering and technical services as well as the delivery of a diverse range of climate control system equipment and components, which can span multiple phases of a customer’s project life cycle from facility design and construction to equipment delivery and system installation and start-up. The Company does not provide construction services or system installation services. Some of the Company’s contracts with customers contain a single performance obligation, typically engineering only services contracts.

 

9

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, the Company allocates the transaction price to each performance obligation based on 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.

 

The Company also has performance obligations to perform certain engineering services that are satisfied over a period of time. Revenue is recognized from this type of performance obligation as services are rendered based on the percentage completion towards certain specified milestones.

 

The Company offers assurance-type warranties for its products and products manufactured by others to meet specifications defined by the contracts with customers and does not have any material separate performance obligations related to these warranties. The Company maintains a warranty reserve based on historical warranty costs.

 

Disaggregation of Revenue

 

In accordance with ASC 606-10-50-5 through 6, the Company considered the appropriate level of disaggregated revenue information that depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Additionally, per the implementation guidance in ASC 606-10-55-90 through 91, the Company also considered (a) disclosures presented outside of the financial statements such as earnings releases and investor presentations, (b) information regularly reviewed by the Chief Operating Decision Maker for evaluating the financial performance of operating segments and (c) other information that is similar to the types of information identified in (a) and (b) and that is used by the Company or users of the Company’s financial statements to evaluate financial performance or make resource allocation decisions. Finally, we considered the examples of categories found in the guidance that might be appropriate, including: (a) type of good or service (major product lines), (b) geographical region (country or region), (c) market or type of customer (government or non-government customers), (d) type of contract (fixed-price or time-and-materials), (e) contract duration (short- or long-term), (f) timing of transfer of goods or services (point-in-time or over time) and (g) sales channels (direct to customers or through intermediaries).

 

Based on the aforementioned guidance and considerations, the Company determined that disaggregation of revenue by sales, services, shipping and handling, and miscellaneous was required.

 

10

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

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 June 30, 2023 and December 31, 2022, 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 Company generally expects to recognize revenue in less than one year. Non-refundable customer deposits are recognized as revenue when previously abandoned customer contracts have been forfeited. As of June 30, 2023, and December 31, 2022, deferred revenue, which was classified as a current liability, was $625,911 and $4,338,570, respectively.

 

For the three and six months ended June 30, 2023, the Company recognized revenue of $45,716 and $3,898,622, respectively, related to the deferred revenue at January 1, 2023 For the three and six months ended June 30, 2022, the Company recognized revenue of $1,030,830 and $2,193,204, respectively, related to the deferred revenue at January 1, 2022.

 

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.

 

11

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

Industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the Company’s control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance obligations. There are risks that the Company may not realize the full contract value on customer projects in a timely manner or at all, and completion of a customer’s cultivation facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes for customers to complete a project, which corresponds to when the Company is able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays that are typical in completing any construction project. Further, based on the current economic climate, t and the Company’s recent cost cutting measures, there is no assurance that the Company will be able to fulfill its backlog, and the Company may experience contract cancellations, project scope reductions and project delays.

 

As of June 30, 2023, the Company’s remaining performance obligations, or backlog, was approximately $1,066,000. The decline in backlog was primarily the result of lower bookings. The Company has entered into fewer and smaller new contracts. 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 June 30, 2023, includes booked sales orders of $250,000 from three customers that the Company does not expect to be realized until 2024, if at all. Our projected revenue amount contains a booked sales order of $279,000 (26% 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 contract fulfillment could be delayed for these reasons.

 

The remaining performance obligations expected to be recognized through 2024 are as follows:

  

   2023   2024   Total 
Remaining performance obligations related to engineering only paid contracts  $-   $-   $- 
Remaining performance obligations related to partial equipment paid contracts   816,000    250,000    1,066,000 
Total remaining performance obligations  $816,000   $250,000   $1,066,000 

 

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 June 30, 2023, and December 31, 2022, the Company had an accrued warranty reserve amount of $193,498 and $180,457, respectively, which are included in accounts payable and accrued liabilities on the Company’s consolidated balance sheets.

 

 

12

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(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 six months ended June 30, 2023, the valuation assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility of 152.23%; expected term in years of 10 and risk-free interest rate of 3.48%.

 

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 six months ended June 30, 2023 and June 30, 2022:

 

   2023   2022   2023   2022 
  

For the Three Months Ended

June 30,

  

For the Six Months Ended

June 30,

 
   2023   2022   2023   2022 
Share-based compensation expense included in:                    
Cost of revenue  $-   $5,104   $4,898   $5,895 
Advertising and marketing expenses   -    4,080    1,113    6,842 
Product development costs   -    4,961    3,570    4,961 
Selling, general and administrative expenses   15,166    81,482    152,679    170,446 
Total share-based compensation expense included in consolidated statement of operations  $15,166   $95,627   $162,260   $188,144 

 

13

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

Included in the expense for the three and six months ended June 30, 2022, is an accrual for $46,374 and $46,374, respectively, for the 2022 Annual Employee Incentive Compensation Plan. No accrual is being recorded in 2023.

 

Concentrations

 

Two customers accounted for 64%, and 10% of the Company’s revenue for the three months ended June 30, 2023. Three customers accounted for 44%, 23% and 14% of the Company’s revenue for the six months ended June 30, 2023. Two customers accounted for 53% and 12% of the Company’s revenue for the three months ended June 30, 2022 and one customer accounted for 47% of the Company’s revenue for the six months ended June 30, 2022.

 

Three customers accounted for 69%, 17%, and 12% of the Company’s accounts receivable as of June 30, 2023. Two customers accounted for 57% and 43% of the Company’s accounts receivable as of December 31, 2022.

 

Recently Issued Accounting Pronouncements

 

In March 2023, the FASB issued ASU 2023-01 to require entities to classify and account for leases with related parties on the basis of legally enforceable terms and conditions of the arrangement. The amendments are effective in periods beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.

 

In December 2022, the FASB issued ASU No. 2022-06, which defers the sunset date of Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) from December 31, 2022 to December 31, 2024. ASU No. 2022-06 was effective upon issuance. Topic 848 provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting, providing optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.

 

In September 2022, the FASB issued Update 2022-04, “Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”. The update was issued in response to requests from financial statement users for increased transparency surrounding the use of supplier finance programs. The amendments in Update 2022-04 require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.

 

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires companies to apply ASC 606, “Revenue from Contracts with Customers” to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in ASC 805, which uses fair value. The guidance is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted, and the guidance should be applied prospectively. The impact of the standard on Company’s consolidated financial statements is dependent on the size and frequency of any future acquisitions the Company may complete.

 

14

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

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.

 

15

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

The lease cost, cash flows and other information related to the New Facility Lease were as follows:

 

  

As of

June 30, 2023

 
Operating lease right-of-use asset  $409,981 
Operating lease liability, current  $122,272 
Operating lease liability, long-term  $319,247 
      
Remaining lease term   3.6 years 
Discount rate   3.63%

 

   For the Six Months Ended June 30, 2023 
Operating cash outflow from operating lease  $62,138 

 

Future annual minimum lease payments on the New Facility Lease as of June 30, 2023 are as follows:

 

As of June 30, 2023    
     
Years ended December 31,    
2023 (excluding the six months ended June 30, 2023)  $62,759 
2024   128,643 
2025   132,503 
2026   136,473 
Thereafter   11,654 
Total minimum lease payments   472,032 
Less imputed interest   (30,513)
Present value of minimum lease payments  $441,519 

 

Note 3 – Inventory

 

Inventory consisted of the following:

 

   June 30,   December 31, 
   2023   2022 
Finished goods  $398,455   $270,555 
Work in progress   -    155 
Raw materials   130,180    148,608 
Allowance for excess & obsolete inventory   (131,480)   (70,907)
Inventory, net  $397,155   $348,411 

 

16

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(in US Dollars except share numbers)
(Unaudited)

 

Overhead expenses of $15,055 and $12,770 were included in the inventory balance as of June 30, 2023, and December 31, 2022, respectively.

 

Advance payments on inventory purchases are recorded in prepaid expenses until title for such inventory passes to the Company. Prepaid expenses included approximately $10,000 and $1,176,000 in advance payments for inventory for the periods ended June 30, 2023, and December 31, 2022, respectively.

 

Note 4 – Property and Equipment

 

Property and equipment consisted of the following:

 

   June 30,   December 31, 
   2023   2022 
Furniture and equipment  $275,994   $278,389 
Vehicles   15,000    15,000 
Property and equipment, gross   290,994    293,389 
Accumulated depreciation   (237,769)   (224,876)
Property and equipment, net  $53,225   $68,513 

 

Depreciation expense was $14,988 for the six months ended June 30, 2023. For the six months ended June 30, 2023, $1,749 was allocated to cost of sales, $437 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:

  

   June 30,   December 31, 
   2023   2022 
Accounts payable  $280,763   $311,162 
Sales commissions payable   2,061    25,951 
Accrued payroll liabilities   231,182    465,094 
Product warranty accrual   193,498    180,457 
Other accrued expenses   91,120    224,594 
Total  $798,624   $1,207,258 

 

17

 

 

CEA Industries Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2023
(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 – Stockholders’ Equity

 

As of June 30, 2023, the Company had 200,000,000 shares of common stock and 25,000,000 shares of preferred stock authorized at a $0.00001 par value.

 

As of June 30, 2023, 8,076,372 shares of common stock were issued and outstanding and no shares of preferred stock were 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.

 

On January 17, 2022, the Company issued an RSU grant of 3,367 shares of common stock under the 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 vested on January 17, 2023. 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 and a further 1,683 shares of common stock were issued to each of the two new directors on January 17, 2023 in settlement of the remainder.

 

On January 3, 2023, the Company issued an RSU grant of 29,758 shares of common stock under the 2021 Equity Incentive Plan to each of its four independent directors. The RSUs were granted as an equity retention award pursuant to the Company’s compensation plan for independent directors effective January 17, 2022 and vested immediately on the grant date. A total of 119,032 shares of the Company’s common stock were issued in settlement of the RSUs.

 

18

 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2023

(in US Dollars except share numbers)

(Unaudited)

 

Revised Compensation Plan

 

On January 17, 2022, the Board of Directors revised the previously adopted compensation plan. This plan superseded the plan adopted on August 20, 2021. The Plan was effective retroactively for the then 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 listing of the Company securities on 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.

 

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.

 

18

 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2023

(in US Dollars except share numbers)

(Unaudited)

 

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 split.

 

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 240,125,224 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.

 

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.

 

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 8 – 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.

 

19