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 MARCH 31, JUNE 30, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-54286

 

CEA INDUSTRIES INC.

(formerly known as Surna Inc.)

(Exact name of registrant as specified in its charter)

 

Nevada 27-3911608

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

385 South Pierce Avenue, Suite C

Louisville, Colorado 80027

 80027
(Address of principal executive offices) (Zip code)

 

(303) 993-5271

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.00001 par value CEAD Nasdaq Capital Markets
Warrants to purchase common stock CEADW Nasdaq Capital Markets

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller 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 May 12,August 10, 2022, the number of outstanding shares of common stock of the registrant was 7,784,4447,953,974.

 

 

 

 

CEA Industries Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31,June 30, 2022

 

Table of Contents

 

 Page
Cautionary Statementii
  
PART I — FINANCIAL INFORMATION 
  
Item 1. Financial Statements (Unaudited) 
  
Condensed Consolidated Balance Sheets as of March 31,June 30, 2022 and December 31, 20211
  
Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31,June 30, 2022 and June 30, 20212
  
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Three and Six Months Ended March 31,June 30, 2022 and June 30, 20213
  
Condensed Consolidated Statements of Cash Flows for the ThreeSix Months Ended March 31,June 30, 2022 and June 30, 20214
  
Notes to the Condensed Consolidated Financial Statements5
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations2526
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk3436
  
Item 4. Controls and Procedures3436
  
PART II — OTHER INFORMATION 
  
Item 1. Legal Proceedings3537
  
Item 1A. Risk Factors3537
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds3537
  
Item 3. Defaults Upon Senior Securities3537
  
Item 4. Mine Safety Disclosures3537
  
Item 5. Other Information3537
  
Item 6. Exhibits3537
  
SIGNATURES3638
  
EXHIBIT INDEX3739

 

i

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

 

CAUTIONARY STATEMENT

 

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

 

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

 

 our business prospects and the prospects of our existing and prospective customers;
   
 the impact on our business and that of our customers of the current and future response by the government and business to the COVID-19 pandemic and other health crises, including what is necessary to protect our staff and the staff of our customers in the conduct of our business;
   
 our overall financial condition, including our reduced revenuethe impact of higher interest rates and inflation, business disruption due to the COVID-19 pandemic, businessthe Ukraine war, and economic response and its consequences;the supply chains on which we depend;
   
 the inherent uncertainty of product development;
   
 regulatory, legislative and judicial developments, especially those related to changes in, and the enforcement of, cannabis laws;
   
 increasing competitive pressures in the CEA (Controlled Environment Agriculture) industry;
   
 the ability to effectively operate our business, including servicing our existing customers and obtaining new business;
   
 our relationships with our customers and suppliers;
   
 the continuation of normal payment terms and conditions with our customers and suppliers, including our ability to obtain advance payments from our customers;
   
 general economic conditions, our customers’ operations and access to capital, and market and business disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events, adversely affecting demand for the products and services offered by us in the markets in which we operate;

 

ii

 

 the continuation of normal supply of products from our suppliers;suppliers and our ability to complete contracts, some of which depend on other actors for a comprehensive project completion;
   
 changes in our business strategy or development plans, including our expected level of capital expenses and working capital;
   
 our ability to attract and retain qualified personnel;
   
 our ability to raise equity and debt capital, as needed from time to time, to fund our operations and growth strategy, including possible acquisitions;

 our ability to identify, complete and integrate potential strategic acquisitions;
   
 future revenue being lower than expected;
   
 our ability to convert our backlog into revenue in a timely manner, or at all; and
   
 our intention not to pay dividends.

 

Although we believe that we use reasonable assumptions for these forward-looking statements, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated from time to time in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are intended to be within the meaning of “forward-looking statements” in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

 

iii

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CEA Industries Inc.

Condensed Consolidated Balance Sheets

(in US Dollars except share numbers)

 March 31, December 31,  June 30,  December 31, 
 2022  2021  2022  2021 
  (Unaudited)      (Unaudited)    
ASSETS                
Current Assets                
Cash and cash equivalents $22,033,664  $2,159,608  $20,611,388  $2,159,608 
Accounts receivable (net of allowance for doubtful accounts of $159,744 and $181,942, respectively)  191,002   179,444 
Accounts receivable (net of allowance for doubtful accounts of $172,760 and $181,942, respectively)  140,473   179,444 
Other receivables  50,762   -   78,943   - 
Inventory, net  1,005,918   378,326   401,757   378,326 
Prepaid expenses and other  1,774,219   1,273,720   2,887,593   1,273,720 
Total Current Assets  25,055,565   3,991,098   24,120,154   3,991,098 
Noncurrent Assets                
Property and equipment, net  77,239   77,346   84,687   77,346 
Goodwill  631,064   631,064   -   631,064 
Intangible assets, net  1,830   1,830   1,830   1,830 
Deposits  14,747   14,747   14,747   14,747 
Operating lease right-of-use asset  540,444   565,877   514,816   565,877 
Total Noncurrent Assets  1,265,324   1,290,864   616,080   1,290,864 
                
TOTAL ASSETS $26,320,889  $5,281,962  $24,736,234  $5,281,962 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                
                
CURRENT LIABILITIES                
Accounts payable and accrued liabilities $1,389,028  $1,345,589  $1,044,536  $1,345,589 
Deferred revenue  5,485,416   2,839,838   5,935,270   2,839,838 
Accrued equity compensation  83,625   83,625   46,373   83,625 
Other liabilities  37,078   37,078   37,078   37,078 
Current portion of operating lease liability  112,072   100,139   113,999   100,139 
Total Current Liabilities  7,107,219   4,406,269   7,177,256   4,406,269 
                
NONCURRENT LIABILITIES                
Operating lease liability, net of current portion  459,482   486,226   432,496   486,226 
Total Noncurrent Liabilities  459,482   486,226   432,496   486,226 
                
TOTAL LIABILITIES  7,566,701   4,892,495   7,609,752   4,892,495 
                
Commitments and Contingencies (Note 7)  -   -   -   - 
                
TEMPORARY EQUITY                
Series B Redeemable Convertible Preferred Stock, $0.00001 par value; 0 and 3,300 issued and outstanding, respectively  -   3,960,000   -   3,960,000 
Total Temporary Equity  -   3,960,000   -   3,960,000 
                
SHAREHOLDERS’ EQUITY (DEFICIT)                
Preferred stock; 25,000,000 and 150,000,000 shares authorized, respectively  -   - 
Common stock, $0.00001 par value; 200,000,000 and 850,000,000 shares authorized, respectively; 7,784,444 and 1,600,835 shares issued and outstanding, respectively  78   16 
Common stock, $0.00001 par value; 200,000,000 and 850,000,000 shares authorized, respectively; 7,953,974 and 1,600,835 shares issued and outstanding, respectively  80   16 
Additional paid in capital  48,958,618   25,211,017   49,091,496   25,211,017 
Accumulated deficit  (30,204,508)  (28,781,566)  (31,965,094)  (28,781,566)
Total Shareholders’ Equity (Deficit)  18,754,188   (3,570,533)  17,126,482   (3,570,533)
                
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) $26,320,889  $5,281,962  $24,736,234  $5,281,962 

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

1
 

CEA Industries Inc.

Condensed Consolidated Statements of Operations

(in US Dollars except share numbers)

(Unaudited)

 

 2022  2021  2022  2021  2022  2021 
 For the Three Months Ended March 31,  For the Three Months Ended June 30,  

For the Six Months Ended

June 30,

 
 2022  2021  2022  2021  2022  2021 
Revenue, net $1,744,427  $2,366,529  $3,014,885  $4,509,505  $4,759,312  $6,876,034 
                        
Cost of revenue  1,653,919   2,021,923   2,708,646   3,227,181   4,362,565   5,249,104 
                        
Gross profit  90,508   344,606   306,239   1,282,324   396,747   1,626,930 
                        
Operating expenses:                        
Advertising and marketing expenses  251,015   177,145   309,690   168,042   560,705   345,187 
Product development costs  138,918   112,638   56,577   111,546   195,495   224,184 
Selling, general and administrative expenses  1,311,777   740,473   1,080,094   886,758   2,391,871   1,627,231 
Goodwill impairment charges  631,064   -   631,064   - 
Total operating expenses  1,701,710   1,030,256   2,077,425   1,166,346   3,779,135   2,196,602 
                        
Operating loss  (1,611,202)  (685,650)
Operating income (loss)  (1,771,186)  115,978   (3,382,388)  (569,672)
                        
Other income (expense):                        
Other income (expense), net  185,000   (107,000)  -   150,518   185,000  $43,518 
Interest income (expense),net  3,260   (718)  10,600   (1,254)  13,860  $(1,972)
Total other income (expense)  

188,260

   (107,718)  10,600   149,264   198,860   41,546 
                        
Loss before provision for income taxes  (1,422,942)  (793,368)
Income (Loss) before provision for income taxes  (1,760,586)  265,242   (3,183,528)  (528,126)
                        
Income taxes  -   -   -   -   -   - 
                        
Net loss $(1,422,942) $(793,368)
Net income (loss) $(1,760,586) $265,242  $(3,183,528) $(528,126)
                        
Convertible preferred series B stock dividends  (35,984)  -   -   -   (35,984)  - 
Deemed dividend on convertible preferred series B stock on down round  

(439,999

)  -   -   -   (439,999)  - 
                        
Net Loss Available to Common Shareholders $(1,898,925) $(793,368)
Net income (loss) available to common shareholders $(1,760,586) $265,242  $(3,659,511) $(528,126)
                        
Loss per common share – basic and dilutive $(0.41) $(0.50)
Income (loss) per common share – basic $(0.23) $0.17  $(0.59) $(0.33)
                        
Weighted average number of common shares outstanding, basic and dilutive  4,622,427   1,576,844 
Income/(loss) per common share – diluted $(0.23) $0.17  $(0.59) $(0.33)
                
Weighted average number of common shares outstanding, basic  7,801,211   1,582,998   6,220,600   1,579,938 
                
Weighted average number of common shares outstanding, diluted  7,801,211   1,605,526   6,220,600   1,579,938 

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

 

2
 

 

CEA Industries Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

For the Three and Six Months Ended March 31,June 30, 2022 and June 30, 2021

(in US Dollars except share numbers)

(Unaudited)

 

  

Number of

Shares

  Amount  

Paid in

Capital

  

Accumulated

Deficit

  

Shareholders’

Deficit

 
  Common Stock  Additional       
  

Number of

Shares

  Amount  

Paid in

Capital

  

Accumulated

Deficit

  

Shareholders’

Deficit

 
Balance December 31, 2021- 1,600,835  $   16 -$25,211,017  $(28,781,566) $(3,570,533)
Fair value of vested stock options granted to employees  -   -   32,938   -   32,938 
Fair value of vested stock options granted to directors  -   -   29,656   -   29,656 
Common shares issued in settlement of restricted stock units issued to directors  3,367   0   24,994   -   24,994 
Fair value of restricted stock units issued to directors  -   -   4,928   -   4,928 
Issuance of common shares to round up partial shares following reverse split  6,798   0   0       0 
Common shares and warrants issued for cash  5,811,138   58   21,711,073   -   21,711,131 
Common shares and warrants issued on conversion of series B preferred stock  362,306   4   1,979,996   -   1,980,000 
Dividends on series B preferred stock  -   -   (35,984)  -   (35,984)
Net loss- -   - - -   (1,422,942)  (1,422,942)
Balance March 31, 2022- 7,784,444  $78 -$48,958,618  $(30,204,508) $18,754,188 
                 
  Common Stock          
  Number of Shares  Amount  Additional Paid in Capital  Accumulated Deficit  Shareholders’ Deficit 
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 

 

  

Number of

Shares

  Amount  

Number of

Shares

  Amount  

Number of

Shares to

be Issued

  Amount  

Additional

Paid in

Capital

  

Accumulated

Deficit

  

Shareholders’

Deficit

 
  

Series A

Preferred Stock

  Common Stock          
  

Number of

Shares

  Amount  

Number of

Shares

  Amount  

Number of

Shares to

be Issued

  Amount  

Additional

Paid in

Capital

  

Accumulated

Deficit

  

Shareholders’

Deficit

 
Balance December 31, 2020  42,030,331  $   420   1,576,844  $    16   -      $26,107,159  $(27,443,643) $   (1,336,048)
Balance  42,030,331  $   420   1,576,844  $    16   -      $26,107,159  $(27,443,643) $   (1,336,048)
Common shares to be issued in settlement of legal dispute  -   -   -   -   6,667   67,000   -   -   67,000 
Fair value of vested stock options granted to employees  -   -   -   -   -   -   128,434   -   128,434 
Fair value of vested stock options granted to directors  -   -   -   -   -   -   6,342   -   6,342 
Net loss  -   -   -   -   -   -   -   (793,368)  (793,368)
Balance March 1, 2021  42,030,331  $420   1,576,844  $16   6,667  $67,000  $  26,241,935  $(28,237,011) $(1,927,640)
Balance  42,030,331  $420   1,576,844  $16   6,667  $67,000  $  26,241,935  $(28,237,011) $(1,927,640)
  Common Stock           
  Number of Shares  Amount  Additional Paid in Capital  Accumulated Deficit  Shareholders’ Deficit 
Balance December 31, 2021 - 1,600,835  $16  -$25,211,017  $(28,781,566) $(3,570,533)
Fair value of vested stock options granted to employees - -   -  - 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   0   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   0   0       0 
Common shares and warrants issued for cash  5,811,138   58   21,711,073   -   21,711,131 
Common shares and warrants issued on conversion of series B preferred stock  362,306   4   1,979,996   -   1,980,000 
Dividends on series B preferred stock  -   -   (35,984)  -   (35,984)
Cashless exercise of prefunded warrants  169,530   2   (2)  -   - 
Net loss  -   -   -   (3,183,528)  (3,183,528)
Balance June 30, 2022 - 7,953,974  $80  -$49,091,496  $(31,965,094) $17,126,482 

  Number of Shares  Amount  Number of Shares  Amount  Number of Shares to be Issued  Amount  Additional Paid in Capital  Accumulated Deficit  Shareholders’ Deficit 
  Preferred Stock  Common Stock           
  Number of Shares  Amount  Number of Shares  Amount  Number of Shares to be Issued  Amount  Additional Paid in Capital  Accumulated Deficit  Shareholders’ Deficit 
Balance March 31, 2021  280,202  $420   1,576,844  $2,366              6,667  $67,000  $26,241,935  $(28,237,011) $(1,925,290)
Common shares issued in settlement of legal dispute  -   -   6,667   10   (6,667)  (67,000)  66,990   -   - 
Fair value of vested stock options granted to employees  -   -   -       -   -   15,336   -   15,336 
Fair value of vested stock options granted to directors  -   -   -       -   -   70   -   70 
Net income  -   -   -       -   -   -   265,242   265,242 
Balance June 30, 2021  280,202  $420   1,583,511  $2,376   -  $-  $26,324,331  $(27,971,769) $(1,644,642)

  Preferred Stock  Common Stock           
  Number of Shares  Amount  Number of Shares  Amount  Number of Shares to be Issued  Amount  Additional Paid in Capital  Accumulated Deficit  Shareholders’ Deficit 
Balance December 31, 2020  280,202  $420   1,576,844  $2,366                     -  $-  $26,107,159  $(27,443,643) $(1,333,698)
Common shares issued in settlement of legal dispute  -   -   6,667   10           66,990   -   67,000 
Fair value of vested stock options granted to employees  -   -   -       -   -   143,770   -   143,770 
Fair value of vested stock options granted to directors  -   -   -       -   -   6,412   -   6,412 
Net loss  -   -   -       -   -   -   (528,126)  (528,126)
Net Income loss  -   -   -       -   -   -   (528,126)  (528,126)
Balance June 30, 2021  280,202  $420   1,583,511  $2,376   -  $-  $26,324,331  $(27,971,769) $(1,644,642)

 

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

3
 

CEA Industries Inc.

Condensed Consolidated Statements of Cash Flows

(in US Dollars except share numbers)

(Unaudited)

 

  2022  2021 
  For the Three Months Ended March 31, 
  2022  2021 
Cash Flows From Operating Activities:        
Net loss $(1,422,942) $(793,368)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and intangible asset amortization expense  8,556   18,377 
Share-based compensation  92,517   6,342 
Common stock issued for other expense  -   67,000 
Provision for doubtful accounts  (22,168)  - 
Provision for excess and obsolete inventory  3,676   (4,371)
Loss on disposal of assets  5,499   - 
Amortization of ROU asset  25,433   49,051 
         
Changes in operating assets and liabilities:        
Accounts receivable  10,610   6,748 
Inventory  (631,269)  (187,679)
Prepaid expenses and other  (551,261)  (1,026,765)
Accounts payable and accrued liabilities  43,438   5,354 
Deferred revenue  2,645,579   2,362,905 
Accrued interest  -   718 
Lease deposit  -   (8,061)
Operating lease liability, net  (14,811)  (64,672)
Accrued equity compensation  -   52,794 
Net cash (used in)/provided by operating activities  192,857   484,373 
         
Cash Flows From Investing Activities        
Purchases of property and equipment  (13,948)  (12,326)
Net cash used in investing activities  (13,948)  (12,326)
         
Cash Flows From Financing Activities        
Payment of dividends on series B preferred stock  (35,984)  - 
Redemption of series B preferred stock  (1,980,000)  - 
Cash proceeds on sale of common stock and warrants, net of expenses  21,711,131   - 
Proceeds from issuance of note payable  -   514,200 
Net cash provided by financing activities  19,695,147   514,200 
         
Net change in cash and cash equivalents  19,874,056   986,247 
Cash and cash equivalents, beginning of period  2,159,608   2,284,881 
Cash and cash equivalents, end of period $22,033,664  $3,271,128 
         
Supplemental cash flow information:        
Interest paid $-  $- 
Income taxes paid $-  $- 
         
Non-cash investing and financing activities:        
Conversion of series B preferred stock $1,980,000  $

-

 
Deemed dividend on series B preferred stock arising on down round $

439,999

  $- 

  2022  2021 
  For the Six Months Ended June 30, 
  2022  2021 
Cash Flows From Operating Activities:        
Net loss $(3,183,528) $(528,126)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and intangible asset amortization expense  16,697   37,180 
Share-based compensation  225,396   21,748 
Common stock issued for other expense  -   67,000 
Provision for doubtful accounts  (9,182)  23,213 
Provision for excess and obsolete inventory  (34,417)  (10,945)
Loss on disposal of assets  4,060   8,042 
Amortization of ROU asset  51,061   98,913 
Goodwill impairment charges  631,064   - 
         
Changes in operating assets and liabilities:        
Accounts receivable  48,153   (224,183)
Inventory  10,986   (106,299)
Prepaid expenses and other  (1,692,816)  (949,152)
Accounts payable and accrued liabilities  (317,453)  124,583 
Deferred revenue  3,095,431   331,585 
Accrued interest  -   1,972 
Deposits  -   (16,122)
Operating lease liability, net  (39,870)  (130,156)
Accrued equity compensation  (37,251)  108,945 
Net cash used in operating activities  (1,231,669)  (1,141,802)
         
Cash Flows From Investing Activities        
Purchases of property and equipment  (13,948)  (15,316)
Proceeds from the sale of property and equipment  2,250   1,500 
Net cash used in investing activities  (11,698)  (13,816)
         
Cash Flows From Financing Activities        
Payment of dividends on series B preferred stock  (35,984)  - 
Redemption of series B preferred stock  (1,980,000)  - 
Cash proceeds on sale of common stock and warrants, net of expenses  21,711,131   - 
Proceeds from issuance of note payable  -   514,200 
Net cash provided by financing activities  19,695,147   514,200 
         
Net change in cash and cash equivalents  18,451,780   (641,418)
Cash and cash equivalents, beginning of period  2,159,608   2,284,881 
Cash and cash equivalents, end of period $20,611,388  $1,643,463 
         
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  $- 

 

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

 

4
 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

Note 1 – General

 

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, somemore 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, our principal technologies include: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, (v) automation and control devices,(vii) proprietary controls systems and technologies used for environmental, lighting, and climate control, and (vi)(viii) preventive maintenance services, through our partnership with a certified service contractor network, for CEA facilitiesfacilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada as well as other international locations. Customers are those growers building new facilities and those expanding or retrofitting existing facilities. Currently, our revenue stream is derived primarily from supplying our products, services, and technologies to commercial indoor facilities ranging from several thousand to more than 100,000 square feet. Headquartered in 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 workworkflow 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 threesix months ended March 31,June 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.

 

Impact of Ukrainian Conflict

Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. As our operations are related only to the North American controlled 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.

5

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

Inflation

We anticipate that our business and financial position will be impacted by the current inflationary environment. To the extent that we use borrowed funds, we believe our costs will increase. Access to capital for our business and our business plan will also be impacted by increased interest rates and may affect our 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 98 – 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 date theissuance of these consolidated financial statements are available to be issued.statements. Accordingly, the conditions around liquidity and limited working capital necessary to fund operations have been addressed.

Interim Financial Statements

 

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 threesix months ended March 31,June 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.

 

5

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 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.

6

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

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 March 31,June 30, 2022, the balance in the Company’s account was approximately $22,034,00020,611,000, consequently $21,784,00020,361,000 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.

 

During the threesix months ended March 31,June 30, 2022 and 2021, there were warrants and options outstanding to purchase Company common stock and shares of convertible preferred stock and restricted stock units that were convertible into shares of the Company’s common stock. During the three-monththree-months period ended March 31, 2022,June 30, 2020 and the six-months periods ended June 30, 2021 and 2020, the Company incurred a net loss and consequently the common share equivalents of these potentially dilutive equity instruments have not been included in the calculations of loss per share because such inclusion would have been anti-dilutive. However, during the three-month period ended June 30, 2021, we realized a net profit and therefore included 22,528 potential common stock equivalents in respect of our outstanding stock options using the treasury method.

 

67
 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

As of March 31,June 30, 2022, and 2021, there were respectively, 8,021,0577,882,061 and 201,662164,579, potentially dilutive equity instruments outstanding in respect of shares of convertible preferred stock and warrants and 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.

 

During the three months ended March 31,As of June 30, 2022, the Company concluded that the projected impact of the COVID-19 pandemic on its sales, contract completion and revenues in the near term, together with the volatilityexperienced a triggering event due to a drop in its sharestock price during the quarter representedand performed a quantitative analysis for potential indicatorsimpairment of impairment. Accordingly,its goodwill. As of June 30, 2022, the Company performed an interima 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 $631,064at March 31, 2022 and concluded that noJune 30, 2022. No income tax benefit related to this goodwill impairment relating to goodwill existedcharge was recorded at March 31,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 issuer.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.

7

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

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.

8

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

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

 Schedule of Revenue by Source

  2022  2021 
  

For the Three Months Ended

March 31,

 
  2022  2021 
Equipment and systems sales $1,642,572  $2,163,468 
Engineering and other services  86,049   181,083 
Shipping and handling  15,806   21,978 
Total revenue $1,744,427  $2,366,529 

  2022  2021  2022  2021 
  For the Three Months Ended June,  

For the Six Months Ended

June 30,

 
  2022  2021  2022  2021 
Equipment and systems sales $2,791,141  $4,245,897  $4,433,713  $6,409,365 
Engineering and other services  192,076   172,648   278,125   353,731 
Shipping and handling  31,668   90,960   47,474   112,938 
Total revenue $3,014,885  $4,509,505  $4,759,312  $6,876,034 

 

Revenue Recognition Accounting Policy Summary

 

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

 

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, the Company allocates the transaction price to each performance obligation based on standalone selling price. When estimating the selling price, the Company uses various observable inputs. The best observable input is the Company’s actual selling price for the same good or service, however, this input is generally not available for the Company’s contracts containing multiple performance obligations. For engineering services, the Company estimates the standalone selling price by reference to certain physical characteristics of the project, such as facility size and mechanical systems involved, which are indicative of the scope and complexity of the mechanical engineering services to be provided. For equipment sales, the standalone selling price is determined by forecasting the expected costs of the equipment and components and then adding an appropriate margin, based on a range of acceptable margins established by management. Depending on the nature of the performance obligations, the Company may use a combination of different methods and observable inputs if certain performance obligations have highly variable or uncertain standalone selling prices. Once the selling prices are determined, the Company applies the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as each promise is fulfilled.

 

Generally, satisfaction occurs when control of the promised goods is transferred to the customer or as services are rendered or completed in exchange for consideration in an amount for which the Company expects to be entitled. The Company recognizes revenue for the sale of goods when control transfers to the customer, which primarily occurs at the time of shipment. The Company’s historical rates of return are insignificant as a percentage of sales and, as a result, the Company does not record a reserve for returns at the time the Company recognizes revenue. The Company has elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value added, and certain excise taxes) that are assessed by a governmental authority in connection with a specific revenue-producing transaction and collected by the Company from the customer. Accordingly, the Company recognizes revenue net of sales taxes. The revenue and cost for freight and shipping is recorded when control over the sale of goods passes to the Company’s customers.

 

9

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 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.

8

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

 

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 March 31,June 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 March 31,June 30, 2022, and December 31, 2021, deferred revenue, which was classified as a current liability, was $5,485,4165,935,270 and $2,839,838, respectively.

 

For the three and six months ended March 31,June 30, 2022, the Company recognized revenue of $1,162,3741,030,830 and $2,193,204, respectively, related to the deferred revenue at January 1, 2022. For the three and six months ended March 31,June 30, 2021, the Company recognized revenue of $1,880,6341,193,251 and $3,073,616, respectively, related to the deferred revenue at January 1, 2021.

 

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.

 

10

Industry uncertainty, project financing concerns,

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

The Company and its customers face various industry dynamics that make the licensingtiming and qualification of our prospective customers, which are outrecognition 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’schallenging. The Company’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)a customer’s ability to take possession of the large numbersold equipment, which is predicated on completion of a customer’s cultivation facility. The Company’s customers are often first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtainingwho face challenges associated with maintaining project funding, securing state and local licensure and permitting; (iii) local and state government delays in approving licenses, and permits duedesigning and installing complex equipment for the facility. Coordination of these efforts introduces uncertainty to lackthe timing and completion of staff or the large numbercultivation facilities, and all 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 thatthese challenges are typical in completing any construction project. Further, based onenhanced by the current economic climate,environment. Global supply-chain delays and growing backlog challenges extend the duration, cost and timing uncertainty regardingof many cultivation facility projects. In addition, as inflation-related cost increases affect the COVID-19 virus,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 the Company’s recent cost cutting measures,project delays from its customers, and 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.backlog.

 

As of March 31,June 30, 2022, the Company’s remaining performance obligations, or backlog, was approximately $11,179,0009,698,000. 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 March 31,June 30, 2022, includes booked sales orders of $2,217,000 776,000from several customers that the Company does not expect to be realized until 2023, if2023. Our backlog also contains booked sales orders of $155,000 (2% of the total backlog) from two customers that we believe are at all.risk of cancellation based on conversations with these customers. Given the present economic uncertainty arising fromcurrent supply chain and bottleneck issues that are still being worked through by the impact of the novel coronavirus COVID-19,Company’s supply chain partners, the Company believes that several of its current contracts may be delayed or canceled.

9

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)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  2022  2023  Total 
Remaining performance obligations related to engineering only paid contracts $-  $-  $-  $-  $-  $- 
Remaining performance obligations related to partial equipment paid contracts  8,962,000   2,217,000  11,179,000   8,767,000   931,000   9,698,000 
Total remaining performance obligations $8,962,000  $2,217,000  $11,179,000  $8,767,000  $931,000  $9,698,000 

 

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 March 31,June 30, 2022, and December 31, 2021, the Company had an accrued warranty reserve amount of $187,702183,979 and $186,605, respectively, which are included in accounts payable and accrued liabilities on the Company’s consolidated balance sheets.

11

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 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 threesix months ended March 31,June 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 1.982.32%.

 

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.

 

10

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

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 March 31,June 30, 2022 and June 30, 2021:

 Schedule of Share-based Compensation Costs

  2022  2021 
  

For the Three Months Ended

March 31,

 
  2022  2021 
Share-based compensation expense included in:        
Cost of revenue $791  $14,135 
Advertising and marketing expenses  2,762   6,474 
Product development costs  -   6,694 
Selling, general and administrative expenses  88,964   31,833 
Total share-based compensation expense included in consolidated statement of operations $92,517  $59,136 

  2022  2021  2022  2021 
  For the Three Months Ended June 30,  For the Six Months Ended June 30, 
  2022  2021  2022  2021 
Share-based compensation expense included in:                
Cost of revenue $5,104  $15,809  $5,895  $29,944 
Advertising and marketing expenses  4,080   6,818   6,842   13,292 
Product development costs  4,961   7,335   4,961   14,029 
Selling, general and administrative expenses  81,482   41,595   170,446   73,428 
Total share-based compensation expense included in consolidated statement of operations $95,627  $71,557  $188,144  $130,693 

 

Included in the expense for the three and six months ended March 31,June 30, 2022, is an accrual for $46,374 and $46,374, respectively, for the 2022 Annual Employee Incentive Compensation Plan. Included in the expense for the three and six months ended June 30, 2021, is an accrual for $52,79456,151 and $108,945, respectively, for the 2021 Annual Employee Incentive Compensation Plan.

12

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

Concentrations

 

One customerTwo customers accounted for 3553% and 12% of the Company’s revenue for the three months ended March 31,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 3828%, 1627%, and 11% of the Company’s revenue for the three months March 31,ended June 30, 2021 and three customers accounted for 18%, 18% and 13% of the Company’s revenue for the six months ended June 30, 2021.

 

Three customers accounted for 4460%, 1925% and 1610% of the Company’s accounts receivable as of March 31,June 30, 2022. Two customers accounted for 6068%, and 3123% of the Company’s accounts receivable as of MarchDecember 31, 2021.

 

Recently Issued Accounting Pronouncements

 

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.

 

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.

 

11

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(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 Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

Note 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.

 

1213
 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

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.

 

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

Schedule of Lease Cost 

 

As of March 31,

2022

  

As of

June 30, 2022

 
Operating lease right-of-use asset $540,444  $514,816 
Operating lease liability, current $112,072  $113,999 
Operating lease liability, long-term $459,482  $432,496 
        
Remaining lease term  4.8 years   4.6 years 
Discount rate  3.63%  3.63%

  

For the Three

Months Ended

March 31, 2022

 
Operating cash outflow from operating lease $20,109 
  

For the

Six Months Ended

June 30, 2022

 
Operating cash outflow from operating lease $50,273 

 

1314
 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

Future annual minimum lease payments on the New Facility Lease as of March 31,June 30, 2022 are as follows:

Schedule of Future Annual Minimum Lease Payments  

Years ended December 31,      
2022 (excluding the three months ended March 31, 2022) $91,095 
2022 (excluding the six months ended June 30, 2022) $60,931 
2023 124,897   124,897 
2024 128,643   128,643 
2025 132,503   132,503 
2026 136,473   136,473 
Thereafter  11,654   11,654 
Total minimum lease payments 625,265   595,101 
Less imputed interest  (53,710)  (48,606)
Present value of minimum lease payments $571,555  $546,495 

 

Note 3 – Inventory

 

Inventory consisted of the following:

 Schedule of Inventory

 March 31, December 31,  June 30, December 31, 
 2022  2021  2022  2021 
Finished goods $913,887  $272,199  $228,378  $272,199 
Work in progress  971   1,050   195   1,050 
Raw materials  186,115   196,456   230,145   196,456 
Allowance for excess & obsolete inventory  (95,055)  (91,379)  (56,961)  (91,379)
Inventory, net $1,005,918  $378,326  $401,757  $378,326 

 

Overhead expenses of $16,55514,997 and $13,589 were included in the inventory balance as of March 31,June 30, 2022, and December 31, 2021, respectively.

 

The inventory balance at March 31,June 30, 2022 includes $692,19547,735 for inventory in transit from one of our suppliers that was delivered to our customerwarehouse in AprilJuly of 2022.

 

Advance payments on inventory purchases are recorded in prepaid expenses until title for such inventory passes to the Company. Prepaid expenses included approximately $1,579,0002,720,000 and $1,069,000 in advance payments for inventory for the periods ended March 31,June 30, 2022, and December 31, 2021, respectively.

 

1415
 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

Note 4 – Property and Equipment

 

Property and equipment consisted of the following:

Schedule of Property and Equipment 

  March 31,  December 31, 
  2022  2021 
Furniture and equipment $271,056  $274,472 
Vehicles  15,000   15,000 
Leasehold improvements  -   - 
Property and equipment, gross  286,056   289,472 
Accumulated depreciation  (208,817)  (212,126)
Property and equipment, net $77,239  $77,346 

  June 30,  December 31, 
  2022  2021 
Furniture and equipment $282,748  $274,472 
Vehicles  15,000   15,000 
Leasehold improvements  -   - 
Property and equipment, gross  297,748   289,472 
Accumulated depreciation  (213,061)  (212,126)
Property and equipment, net $84,687  $77,346 

 

Depreciation expense was $8,55616,697 for the threesix months ended March 31,June 30, 2022. For the threesix months ended March 31,June 30, 2022, $1,2142,428 was allocated to cost of sales, $304607 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 

  March 31,  December 31, 
  2022  2021 
Accounts payable $729,040  $616,056 
Sales commissions payable  9,107   27,592 
Accrued payroll liabilities  266,456   322,873 
Product warranty accrual  187,702   186,605 
Other accrued expenses  196,723   192,463 
Total $1,389,028  $1,345,589 

Note 6 – Note Payable and Accrued Interest

On February 10, 2021, the Company entered into a note payable with its current bank in the principal amount of $514,200, for working capital purposes.

The loan amount bears interest at 1% and is due on February 5, 2026. The loan may be repaid in advance without penalty. The loan is also potentially forgivable in full provided proceeds are used for payment of payroll expenses, rent, utilities and mortgage interest and certain other terms and conditions are met. If any portion of the loan is not forgiven, payments will commence 10 months following the end of the 24-week deferral period. The loan has typical default provisions, including for change of ownership, general lender insecurity as to repayment, non-payment of amounts due, defaults on other debt instruments, insolvency, dissolution or termination of the business as a going concern and bankruptcy.

On November 30, 2021, the Company received notice from the bank that its loan received on February 10, 2021, in the principal amount of $514,200and all accrued interest of $2,832, was fully forgiven. This gain on loan forgiveness was recorded as Other Income in the Statement of Operations during the year ended December 31, 2021.

  June 30,  December 31, 
  2022  2021 
Accounts payable $207,640  $616,056 
Sales commissions payable  21,613   27,592 
Accrued payroll liabilities  325,372   322,873 
Product warranty accrual  183,979   186,605 
Other accrued expenses  305,932   192,463 
Total $1,044,536  $1,345,589 

 

1516
 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

Note 76Commitments and Contingencies

 

Litigation

The Company settled a litigation with a former employee effective March 30, 2021, which included the issuance of 6,667 shares of common stock of the Company, as part of the settlement. These shares were issued on April 8, 2021, as “restricted securities,” subject to a lock-up agreement of six months, without registration rights, and pursuant to a private placement exemption. The settlement agreement also included mutual releases and no admission of liability. The cost to the Company of this settlement, $107,000, in total, has been recognized in full in Other Expenses during the year ended December 31, 2021. The issuance of the 6,667 shares of common stock (valued at $67,000) has been recognized in common stock issued during the year ended December 31, 2021.

 

From time to time, in the normal course of its operations, the Company is subject to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict, and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a liability for contingent losses when it is both probable that a liability has been incurred and the amount of the loss is known. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.

 

Leases

 

The Company has a lease agreement for its manufacturing and office space. Refer to Note 2 Leases above.

 

Other Commitments

 

In the ordinary course of business, the Company enters into commitments to purchase inventory and may also provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers and employees, and former officers, directors, and employees of acquired companies, in certain circumstances.

 

Note 87Temporary Equity

 

On September 28, 2021, the Company sold to an institutional investor (the “Investor”), 3,300shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”), stated value $1,000per share, convertible into shares of common stock, for an aggregate purchase price of $3,000,000(“Consideration”). The Company received net proceeds of approximately $1,260,000on September 28, 2021, and the balance of approximately $1,365,000on November 4, 2021.

 

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 of4.99%.

 

16

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

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%120% of the stated value of $1,000 $1,000 per share, or $3,960,000$3,960,000.. As a result, the Company recorded a $2,262,847non-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 is therefore added to the “Net Loss” to arrive at “Net Loss Attributable to Common ShareholdersShareholders” 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.

 

17

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

On February 16, 2022, the Company redeemed 1,650shares of its Series B Preferred Stock for payment of $2.016million in cash, which included both principal and accrued dividends of approximately $36,000.

 

On February 16, 2022, the remaining 1,650shares of the Company’s Series B Preferred Stock were converted into 362,306shares of common stock and 703,069warrants; 170,382of the warrants vested immediately, have an indefinite term and an exercise price of $0.01(“ (“pre-funded conversion warrants”), the balance of 532,688warrants also vested immediately, have a term of 5years 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% 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 $8.55to $3.0975, representing 75% 75% of the offering price of $4.13. As a result, the Company recognized a deemed dividend of $439,999to 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 remaining Preferred Shares outstanding as of March 31,June 30, 2022.

 

Note 98Stockholders’ Equity (Deficit)

As of June 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. Effective June 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.

 

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.

3,367The 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.

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.

18

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

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 thiscommon 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, were issued on January 17, 2022. Cashincluding the exercise of any non-qualified stock options.

Employee directors do not receive separate fees were paid on January 21, 2022.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.

17

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

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 6,572,808warrants, 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.

 

As of March 31,Warrant Exercise

On June 21, 2022, the Company hadissued 200,000,000 shares authorized at a $.00001 par value. Effective March 31, 2022, 7,784,444169,530 shares of its common stock were issued and outstanding.in connection with the cashless exercise of NaN170,382 shares of preferred stock are issued and outstanding.prefunded conversion warrants.

 

Note 109Equity 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 threesix months ended March 31,June 30, 2022, no shares or options were issued, and 13,333 options were cancelled under the 2017 Plan.

 

As of March 31,2022,June 30, 2022, of the 333,333 shares authorized under the 2017 Plan for equity awards, 163,692 shares have been issued, awards related to 148,905 options remain outstanding, and 20,736 shares remain available for future equity awards.

 

19

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

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.

 

18

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

During the threesix months ended March 31,June 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 threesix months ended March 31,June 30, 2022, the Company granted awards for 21,167 non-qualified stock options to newly hired employees under the 2021 Equity Incentive Plan as described below.

 

During the threesix months ended March 31,June 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 March 31,2022,June 30, 2022, of the 666,667 shares authorized under the 2021 Equity Plan, 10,170 relate to restricted shares issued, 33,40865,201 relate to outstanding non-qualified stock options, 40,816 relate to outstanding incentive stock options, 3,367 relate to outstanding restricted stock units and 578,906547,113 shares remain available for future equity awards.

 

There was $222,707168,766 in unrecognized compensation expense for unvested non-qualified stock options, incentive stock options and restricted stock units at March 31,June 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 threesix months ended March 31,June 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

  Number of Options  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term  Aggregate Intrinsic Value 
                   
Outstanding, December 31, 2021  158,174  $10.99   7.6  $        -   158,174  $10.99   7.60  $- 
Granted  21,167  $3.55   9.8  $

4,650

   52,960  $2.92   9.70  $- 
Exercised  -  $-   -  $-   -  $-   -  $- 
Forfeited  (13,333) $9.15   0.0  $-   (13,333) $9.15   9.50  $- 
Expired  -  $-   -  $-   -  $-   -  $- 
Outstanding, March 31, 2022  166,007  $10.18   8.2  $4,650 
Exercisable, March 31, 2022  118,828  $11.89   7.6  $610 
Outstanding, June 30, 2022  197,800  $8.95   8.20  $- 
Exercisable, June 30, 2022  150,621  $9.91   7.80  $- 

 

1920
 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

During the threesix months ended March 31,June 30, 2022, we issued a total of 21,16752,960 stock options to employees as follows:

 

 6,167 stock options were issued to three new employees. The vesting of these options ranges from immediate to three years, have a term of 10 years and an exercise priceprices ranging from $4.80 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 10years 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 threesix months ended March 31,June 30, 2022, 1,667 fully vested stock options and 11,667 unvested stock options were forfeited following the departure of one former employee.

 

A summary of non-vested non-qualified stock options activity for employees and consultants under the 2017 and 2021 Equity Plans for the threesix months ended March 31,June 30, 2022, are presented in the table below:

 Summary of Non-vested Non-qualified Stock Option Activity

 

Number of

Options

  

Weighted

Average

Grant-Date

Fair Value

  

Aggregate

Intrinsic

Value

  

Grant-Date

Fair Value

  Number of Options  Weighted Average Grant-Date Fair Value  Aggregate Intrinsic Value  Grant-Date Fair Value 
                         
Nonvested, December 31, 2021  41,846  $7.65  $        -  $320,122   41,846  $7.65  $ -  $320,122 
Granted  21,167  $3.51  $-  $74,296   52,960  $2.89  $-  $153,151 
Vested  (4,167) $4.50  $-  $(18,751)  (35,960) $2.72  $-  $97,674 
Forfeited  (11,667) $9.01  $-  $(105,120)  (11,667) $9.01  $-  $(105,118)
Expired  -  $-  $-  $-   -  $-  $-  $- 
Nonvested, March 31, 2022  47,179  $5.73  $-  $270,547 
Nonvested, June 30, 2022  47,179  $5.73  $-  $270,481 

 

For the threesix months ended March 31,June 30, 2022 and March 31,June 30, 2021, the Company recorded $32,93975,947 and $015,336 as compensation expense related to vested options issued to employees and consultants, net of forfeitures, respectively.

 

A summary of the non-qualified stock options granted to directors under the 2017 Equity Plan and the 2021 Equity Plan, during the threesix months ended March 31,June 30, 2022, are presented in the table below:

Schedule of Stock Option Activity 

  

Number of

Options

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term

  

Aggregate

Intrinsic

Value ($000)

 
             
Outstanding, December 31, 2021  50,872  $10.02   6.6  $       - 
Granted  6,250  $4.80   9.8  $- 
Exercised  -  $-   -  $- 
Forfeited/Cancelled  -  $-   -  $- 
Expired  -  $-   -  $- 
Outstanding, March 31, 2022  57,122  $9.44   6.7  $- 
Exerciseable, March 31, 2022  57,122  $9.44   6.7  $- 

  Number of Options  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term  Aggregate Intrinsic Value ($000) 
             
Outstanding, December 31, 2021  50,872  $10.02   6.6  $- 
Granted  6,250  $4.80   9.5  $- 
Exercised  -  $-   -  $- 
Forfeited/Cancelled  -  $-   -  $- 
Expired  -  $-   -  $- 
Outstanding, June 30, 2022  57,122  $9.44   6.5  $- 
Exerciseable, June 30, 2022  57,122  $9.44   6.5  $- 

21

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

A summary of non-vested non-qualified stock options activity for directors under the 2017 Equity Plan and the 2021 Equity Plan, for the threesix months ended March 31,June 30, 2022, are presented in the table below:

20

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

Summary of Non-vested Non-qualified Stock Option Activity 

 

Number of

Options

  

Weighted

Average

Grant-Date

Fair Value

  

Aggregate

Intrinsic

Value

  

Grant-Date

Fair Value

  Number of Options  Weighted Average Grant-Date Fair Value  Aggregate Intrinsic Value  Grant-Date Fair Value 
                         
Nonvested, December 31, 2021  -  $-  $-  $-   -  $-  $-  $- 
Granted  6,250  $4.80  $(14,313) $29,688   6,250  $4.80  $-  $29,656 
Vested  (6,250) $4.80  $14,313 $(29,688)  (6,250) $4.80  $-  $(29,656)
Forfeited  -  $-  $

-

  $-   -  $-  $-  $- 
Expired  -  $-  $-  $-   -  $-  $-  $- 
Nonvested, March 31, 2022  -      $-  $- 
Nonvested, June 30, 2022  -      $-  $- 

 

During the threesix months ended March 31,June 30, 2022 and March 31,June 30, 2021, the Company incurred $29,656 and $6,3426,412 respectively, as compensation expense related to 6,250 and 3,333 vested options, respectively, issued to directors.

 

Effective January 3, 2022, the Company issued 6,250 non-qualified stock options under the 2021 Equity Plan to its then current directors. The options vested upon grant. The options have a term of 10 years and an exercise price equal to the closing price of the Company’s common stock on The OTC Markets on the day immediately preceding the grant date.

 

Restricted Stock Units

 

Effective January 17,2022,17, 2022, the Company issued 6,734 restricted stock units (RSUs) under the 2021 Equity Plan to newly appointed directors.3,367 of these RSUs vested upon grant and the remining 3,367will vest on January 17, 2023.

 

The Company recorded $29,92336,168 during the threesix months ended March 31,June 30, 2022, as compensation expense related to vested RSUs issued to directors.

 Schedule of Restricted Stock Units Activity

 

Number of

Units

  

Weighted

Average

Grant-Date

Fair Value

  

Aggregate

Intrinsic Value

  Number of Units  Weighted Average Grant-Date Fair Value  

Aggregate

Intrinsic Value

 
                         
Outstanding, December 31, 2021  -  $-  $      -   -  $-  $- 
Granted  6,734  $7.42  $-   6,734  $7.42  $- 
Vested and settled with share issuance  (3,367) $7.42  $-   (3,367) $7.42  $- 
Forfeited/canceled  -  $-  $-   -  $-  $- 
Outstanding, March 31, 2022  3,367  $7.42  $- 
Outstanding, June 30, 2022  3,367  $7.42  $- 

 

2122
 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31,June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

 

Note 1110 - Warrants

 

The following table summarizes information with respect to outstanding warrants to purchase common stock during the threesix months ended March 31,June 30, 2022:

Schedule of Outstanding Warrants to Purchase Common Stock 

 

     Weighted    
    

Weighted

Average

 

Weighted

Average

Remaining

 Aggregate     Weighted Average Average Remaining Aggregate 
 Number Exercise Life Intrinsic  Number Exercise Life Intrinsic 
 Outstanding Price In Months Value  Outstanding Price In Months Value 
                  
Outstanding at December 31, 2021  227,719  $9.59   33  $         0   227,719  $9.59   33  $0 
                                
Issued  7,566,435  $4.89   58* $425,955 
Granted  7,566,435  $4.89   55  $212,978 
                                
Exercised  -   -   -   -   (170,382) $0.01   -* $212,978 
                                
Expired  -   -   -   -   -   -   -   - 
                                
Outstanding at March 31, 2022  7,794,154  $5.03   58* $425,955 
Outstanding at June 30, 2022  7,623,772  $5.14   55* $0 

*Excludes 170,382 warrants with an indefinite life.

 

The following table summarizes information about warrants outstanding at March 31,June 30, 2022:

Schedule of Warrants Outstanding 

   Warrants  Weighted Average 
Exercise price  Outstanding  Months Outstanding 
        
 9.45   192,982   30 
           
 10.40   34,737   31 
           
 5.00   7,105,496   59 
           
 5.16   290,557   59 
           
 0.01   170,382   Indefinite Life 
     7,794,154   58*
   Warrants  Weighted Average 
Exercise price  Outstanding  Months Outstanding 
        
 9.45   192,982   27 
           
 10.40   34,737   28 
           
 5.00   7,105,496   56 
           
 5.16   290,557   56 
           
     7,623,772   55 

 

*Excludes 170,382 warrants with an indefinite life. 

22

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

Q3 2021 Warrants Issued to Series B Preferred Stockholder

 

On September 28, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor, pursuant to which the investor purchased from the Company 3,300shares of convertible Series B Preferred Stock with a stated value of $1,000 per share, or $3,300,000 of stated value in the aggregate, and a warrant to purchase up to 192,982 shares of common stock of the Company for an aggregate purchase price of $3,000,000. The warrant is exercisable until September 28, 2024, at an exercise price of $9.45, subject to adjustment for stock splits, stock dividends and other typical adjustments and changes in capitalization, including mergers and acquisitions and distribution of rights.

 

23

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

Q3 2021 Warrants Issued to Series B Preferred Placement Agent

 

In connection with the sale of the shares of convertible Series B Preferred Stock described above, the Company issued 34,737 warrants to the placement agent and its designees. Half of the warrants were issued on September 28, 2021, and the second half were issued on November 3, 2021, and are exercisable commencing February 28, 2022 and May 3, 2022, respectively, until September 28, 2024 and November 3, 2024, respectively. The exercise price per share of the warrants is $10.40, subject to adjustment for stock splits, stock dividends and other typical adjustments and changes in capitalization, including mergers and acquisitions and distribution of rights.

 

Q1 2022 Investor Warrants

 

On February 15, 2022, the Company issued 5,811,138 investment units for aggregate gross proceeds of $24,000,000, or $4.13 per unit. Each unit consisted of one share of the Company’s common stock and one warrant for the purchase of one share of the Company’s common stock. The warrants vested immediately, had a term of 5 years and an exercise price of $5.00.

 

Q1 2022 Overallotment Warrants

 

Further on February 15, 2022, in connection the Company’s issuance of 5,811,138 investment units for aggregate gross proceeds of $24,000,000, or $4.13 per unit as described above, a further 761,670 warrants were issued in connection with the subscription for substantially all of the available 15% overallotment warrants. The warrants were acquired for consideration of $0.01 per warrant, vested immediately, had a term of 5 years and an exercise price of $5.00.

 

Q1 2022 Underwriter Warrants

 

Further on February 15, 2022, in connection the Company’s issuance of 5,811,138 investment units for aggregate gross proceeds of $24,000,000, or $4.13 per unit described above, the Company also issued representatives of the underwriters 290,557 warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $5.1625, during the period commencing August 9, 2022, and expiring on February 10, 2027.

 

Q1 2022 Series B Preferred Shares Pre-Funded Conversion Warrants

 

On February 16, 2022, in connection with the conversion of 1,650 shares of Series B Preferred Stock into 362,306 shares of the Company’s common stock, the Series B Preferred Shareholder was issued with 170,382 pre-funded conversion warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $0.01, vested immediately and had an indefinite life.

 

23

On June 21, 2022, the holder of all 170,382 pre-funded conversion warrants exercised all of their warrants on a cashless basis and received 169,530 shares of the Company’s common stock as a result of the exercise.

CEA Industries Inc.

Notes to Condensed Consolidated Financial StatementsNo pre-funded conversion warrants remained outstanding at June 30, 2022.

March 31, 2022

(in US Dollars except share numbers)

(Unaudited)

Q1 2022 Series B Preferred Shares Conversion Warrants

 

Further on February 16, 2022, in connection with the conversion of 1,650 shares of Series B Preferred Stock into 362,306 shares of the Company’s common stock, the Series B Preferred Shareholder was also issued with 532,688 Series B Preferred shares conversion warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $5.00, vested immediately and had a term of 5 years. years.

 

24

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2022

(in US Dollars except share numbers)

(Unaudited)

Note 1211Income Taxes

 

As of March 31,June 30, 2022, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $22,514,00024,275,000, of which $11,196,000will expire, if not utilized, in the years 2034 through 2037, however, NOLs generated subsequent to December 31, 2017 do not expire but may only be used against taxable income to 80%. In response to the novel coronavirus COVID-19, the Coronavirus Aid, Relief, and Economic Security Act temporarily repealed the 80% limitation for NOLs arising in 2018, 2019 and 2020.

 

In addition, pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, use of the Company’s NOLs carryforwards may be limited in the event of cumulative changes in ownership of more than 50%50% within a three-year period. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50%50% change, by value, in its equity ownership over a three-year period,, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. Our sale of securities, both in September 2021 and February 2022, will need to be considered for determination of any “ownership change” that we have undergone during a determination period. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future bottom-line operating results by effectively increasing our future tax obligations

 

The Company must assess the likelihood that its net deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management’s judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of March 31,June 30, 2022 and December 31, 2021. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its net deferred tax assets in the foreseeable future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.

Note 1312Related Party Transactions

 

The Company entered into a manufacturer representative agreement with RSX Enterprises (“RSX”) in March 2021 to become a non-exclusive representative for the Company to assist in marketing and soliciting orders. James R. Shipley, a current director of the Company, has a significant ownership interest in RSX.

 

Under the manufacturer representative agreement, RSX will act as a non-exclusive representative for the Company within the United States, Canada and Mexico and may receive a commission for qualified customer leads. The agreement had an initial term through December 31, 2021 with automatic one-year renewal terms unless prior notice is given 90 days prior to each annual expiration. During the threesix months ended March 31,June 30, 2022, the Company paid $7,5559,884 in commissions under this agreement.

 

Note 1413Subsequent Events

 

In accordance with ASC 855, Subsequent Events, the Company has evaluated all subsequent events through the date theof issuance of these financial statements were available to be issued. Noissued and determined no material subsequent events occurred after March 31,June 30, 2022 other than as set out below:

On April 1, 2022, 31,793 non-qualified stock options were issued to 21 employees in respect of the Company’s 2021 Annual Incentive Awards. 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 in fully accrued in 2021.for which disclosure was required.

 

2425
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, which include additional information about our accounting policies, practices, and the transactions underlying our financial results, as well as with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Cautionary Statements” appearing elsewhere herein and the risks and uncertainties described or identified in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated from time to time in the Company’s filings with the SEC, and Part II, Item 1A of this Quarterly Report entitled “Risk Factors.”

 

Non-GAAP Financial Measures

 

To supplement our financial results on U.S. generally accepted accounting principles (“GAAP”) basis, we use non-GAAP measures including net bookings, backlog, as well as adjusted net income (loss) which reflects adjustments for certain non-cash expenses such as stock-based compensation, certain debt-related items and depreciation expense. We believe these non-GAAP measures are helpful in understanding our past performance and are intended to aid in evaluating our potential future results. The presentation of these non-GAAP measures should be considered in addition to our GAAP results and are not intended to be considered in isolation or as a substitute for financial information prepared or presented in accordance with GAAP. We believe these non-GAAP financial measures reflect an additional way to view aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. For purposes of this Quarterly Report, (i) “adjusted net income (loss)” and “adjusted operating income (loss)” mean GAAP net income (loss) and operating income (loss), respectively, after adjustment for non-cash equity compensation expense, debt-related items and depreciation expense, and (ii) “net bookings” means new sales contracts executed during the quarter for which we received an initial deposit, net of any adjustments including cancellations and change orders during the quarter.

 

Our backlog, remaining performance obligations and net bookings may not be indicative of future operating results, and our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in the backlog or remaining performance obligations will actually generate revenues or when the actual revenues will be generated.

 

Overview

 

CEA Industries is an engineering and design company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (“CEA”) industry. The CEA industry uses technology-based methods to grow crops in a way that provides protection from the outdoor elements; these methods have traditionally included indoor agriculture and vertical farming. The CEA industry aims to optimize the use of horticultural resources such as water, energy, space, capital, and labor, to create an agriculture business that is more efficient and more productive than traditional farming methods.

 

Headquartered in Colorado, we leverage our experience in the CEA industry to bring our customers a variety of value-added technology solutions that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements. We do this by offering our customers a variety of principal service and product offerings that include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) air sanitation products, (v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (v) automation and control devices,(vii) proprietary controls systems and technologies used for environmental, lighting and climate control, and (vi)(viii) preventive maintenance services, through our partnership with a certified service contractor network, for CEA facilities.

26

 

Currently, our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities operating in the cannabis industry. Our customers include state and provincial-regulated CEA growers located in the U.S., Canada, and other international locations. They are focused on building new CEA facilities and expanding or retrofitting existing CEA facilities. Our customers operate CEA facilities that range in size from several thousand square feet to more than 100,000 square feet.

25

 

CEA growers currently face a challenging business environment that includes high energy costs, water usage and conservation issues, and continuously evolving waste removal regulations. In addition to these issues, our cannabis growing customers face increasingly rigorous quality standards and declining cannabis prices in a growing industry whose standards are constantly evolving. A primary challenge for our customers involves finding innovative ways to reduce energy costs. On average, 50% of our customers’ energy costs are driven by HVACD systems and another 40% by lighting systems.

 

We support our clients by providing integrated mechanical, electrical, and plumbing (“MEP”) engineering design, proprietary and curated environmental control equipment, and automation offerings that serve the CEA industry. In addition, we believe we are among the leading experts in engineering environmental control systems for CEA facilities, which is commonly viewed as the most challenging component of a CEA facility’s technical infrastructure. Over our 16 years in business, we have served over 200 commercial indoor CEA facilities. While a professional engineer (“PE”) license is not required in any other design component of a CEA facility, such a license is required for the design of a CEA facility’s environmental control equipment, and our senior engineers hold PE licenses.

 

We believe our customers partner with us because we have the reputation and experience to help them make cost-conscious and effective decisions on the design and engineering of their environmental and climate control systems.indoor cultivation facilities. Our clients are focused on their crops and rely on us to partner with them on ways to optimize their CEA facility. We are also mindful of the evolving and substantial environmental sustainability standards and concerns raised by governments, consumers and other stakeholders. CEA facilities are resource intensive, and a growing list of states have implemented building code changes that limit energy consumption in cultivation facilities. Energy and resource efficiency is a high priority to us as engineers, and the senior engineers on our team hold the Leadership in Energy and Environmental Design (“LEED”) credential. In addition, our CEO helped build a cleantech company, and is a published author in the energy efficient technologies space. We believe this sustainability-focused technical experience is a unique advantage that our customers value when working with us.

 

While the Company historically focused on HVACD systems, in May of 2021, we announced an initiative to expand our product and service offerings to include most of the technical product and service infrastructure requirements associated with building and retrofitting CEA facilities, as well as post-build recurring maintenance services. Our engineering design services and consulting expertise facilitates early engagement with our customers at the pre-build and construction phases, and this enables us to better understand our customers’ goals at the beginning of a project, and provide the associated infrastructure products and services to reach those goals. Through our prior engagements with customers, we have built long-term relationships with our existing customers, which we plan to leverage and build on in the future.

 

We have three core assets that we believe will support us as we pursue our business strategy. First, we enjoy strong relationships with relevant stakeholders in the CEA industry. Largely focused in the cannabis segment, our partnerships include relationships with new and existing growers, capital providers, consultants, independent contractors, and numerous others. Second, our experience in this industry over time has built up specialized engineering know-how and experience. We have been serving indoor cultivators since 2006 and designing CEA cultivation facilities since 2016. Since then, we have tested and solidified best practices from designing environmental control systems for CEA cultivation facilities. Finally, we have a line of proprietary environmental control products that support the specific growing environments that our customers want. We believe these products offer significant benefits to our customers and we are in the process of expanding our product slate.

 

Shares of our common stock and warrants are traded on the Nasdaq Capital Markets under the ticker symbol “CEAD” and “CEADW”, respectively.

 

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Impact of the COVID-19 Pandemic on Our Business

 

The COVID-19 pandemic has prompted national, regional, and local governments, including those in the markets that the Company operates in, to implement preventative or protective measures to control its spread. As a result, there have been disruptions in business operations around the world, with an impact on our business.

 

In response to the COVID-19 pandemic and the associated government and business response, the Company took and continues to take measures to adjust its operations as necessary. In earlyThis included cost cutting efforts beginning in 2020, the Company responded to reduced orders by reducing expenses in an effort to preserve cash. As 2020 progressed and our sales rebounded, and wethat were able to obtain additional funds through a forgivable bank loan, we restored our workforce increased our operations. Many of the expense reductions weresubsequently reversed by the end of 2021 whenas orders picked up and the overall business climate improved. BecauseHowever, because the effects of the pandemic continuescontinue in different parts of the world and in different ways in the United States, the Company continues to actively monitor its operations.

 

We are experiencing unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to a significant increase in shipments to U.S. ports, compounded by a reduction in cargo being shipped by air, a general shortage of containers, and a shortage of domestic truck driver availability. While these delays have moderately improved in recent months, we, along with many other importers of goods across all industries, continue to experience severe congestion and extensive wait times for carriers at ports across the United States. In addition, restrictions imposed by local, state, and federal agencies due to the COVID-19 pandemic have led to reduced personnel of importers, government staff, and others in our supply chain. We have been working diligently with our network of freight partners and suppliers to expedite delivery dates and provide solutions to reduce further impact and delays. However, we are unable to determine the full impact of these delays and how long they will continue as they are out of our control.

 

While the Company is continuing to navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, the potential uncertainty related to (and proliferation of) new strains, and related actions taken by federal, state, local, and international government officials, to prevent and manage the spread of COVID-19. All of these efforts are uncertain, out of our control, and cannot be predicted at this time.

 

Impact of UkranianUkrainian Conflict

Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks.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 UkranianUkrainian conflict.

Our Corporate Strategy

Our strategy for growing the Company and increasing shareholder value is informed by two key pillars:

Pursue Organic Growth OpportunitiesExecute on Consolidation Opportunities

Pursue aggressive organic growth. According to New Frontier Data and Grandview Research, the legal cannabis market and the global indoor farming markets are forecasted to grow at a 15% annual rate for the foreseeable future. This is largely driven by the cannabis cultivation market we currently focus on, and the rapidly growing popularity of the vertical farming market.

We are well positioned to build our business by serving both of these segments, by servicing current and future customers to the CEA industry, and by expanding our customer base to include indoor farming growers. In May of 2021 we announced a series of pivots, to better enable the Company to grow organically:

Expansion to New Markets. We expanded our business development plan to include the pursuit of non-cannabis CEA facilities, which includes indoor cultivation farms and other CEA technology users outside of the cannabis industry. This expansion has approximately doubled our potential addressable market without any additional upfront retrofit costs to our Company.

Expansion of Product Offering. As previously noted, the Company historically focused on offering HVACD systems to help our existing CEA clients manage their environmental control issues. While significant, this offering represented approximately one third of the total slate of potential products and services required to help a grower build and maintain a CEA facility. We continue to believe that our clients want to focus on growing plants, while leaving the technical infrastructure buildout and maintenance to a more experienced partner. As part of our May 2021 initiative, we expanded our product and service offerings by including almost all of the primary technologies and services required to build and maintain a CEA facility. This expansion includes architectural design, lighting, benching, sensing & control systems, and CO2 dosing and control. It also includes maintenance services and other post-build products and services that create more recurring revenue streams than the product set we traditionally offered.

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For example, by offering Facility Selection & Design services, we plan to establish ‘pre-build’ customer relationships with prospects at the earliest opportunity in the lifecycle of the CEA facility. From there, we plan to offer nearly every piece of the technical infrastructure required in a facility, engaging with our customers at the earliest possible moment to provide all products and services required for the buildout of their CEA facility. Once a CEA facility is built, our Preventive Maintenance Services will provide recurring revenue, as we maintain the productivity of the facility for the facility’s full life.

We believe that we are uniquely positioned to engineer all of the complex components of a CEA facility into a more integrated and coordinated system, because of our dedicated engineering staff and our experience in over 800 projects including over 200 commercial facilities. We have built a wide network of technology vendors from which we curate a selection of the best products. We are the leading experts in applying the most challenging component of the technical infrastructure, the environmental controls. As a result, we have the knowledge required to engineer the interactions among the required components. The reputation we have built and the relationships we have established as experts in the complex environmental control space positions us to engineer the interactions among the other key components. We believe this effort will grow revenues from our existing platform in the future.

Corporate Name Rebrand. In November of 2021 we changed the name of our parent company from Surna Inc. to CEA Industries Inc. We believe this name better demonstrates the breadth of both our newly expanded product offering and our ability to serve the broader CEA industry in segments beyond traditional cannabis cultivation. We believe this name will more clearly identify our business to prospects and make us easier to find on various social media and search engine platforms. In January 2022, we moved our environmental controls operations to Surna Cultivation Technologies LLC, a newly formed subsidiary of CEA Industries Inc., in order to separate our environmental controls business from other businesses we plan to pursue as we expand our product and service offerings.

Seek strategic relationships, mergers, and acquisitions to add to our existing business. We have been involved in over 800 cultivation projects over 16 years. This experience has exposed us to almost all of the ancillary and primary product and service components within a CEA facility, including lighting, irrigation, HVACD, fertigation, sensors, controls, CO2 dosing, monitoring, facility power availability, and energy consumption. Exposure to these primary components has built a uniquely well-informed view of the value contribution from various primary services and components on offer in the marketplace.

We believe that this knowledge will help us identify opportunities to acquire products and services for strategic relationships and potential acquisitions. As we evaluate the state of the CEA industry and the various industry participants, we see significant opportunity for the industry to create value through consolidation. As a growing industry, CEA has a significant need for capital and a recognition that not all companies can be funded for growth. We believe this positions us well as we identify partners whose business platforms are complementary to our business platform.

Finally, members of our team have extensive experience in identifying, evaluating and acquisitions that are accretive and create long-term value for our shareholders. We believe that assets on our platform can benefit our shareholders via synergies and scale economics. For certain component providers, we believe that our public stock and strong existing platform of products, expertise, and marketing reach will make us an attractive partner for a potentially accretive, value creating partnership.

 

Our Bookings, Backlog and Revenue

 

During the three months ended March 31,June 30, 2022, we executed new sales contracts with a total contract value of $2,347,000.$3,869,000. During this same period, we had positivenegative change orders of $159,000$46,000 and cancellations of $401,000.$2,288,000. The cancellations were based on discussions with customers who havewere unable to attain or maintain funding, and subsequently abandoned their projects. After adjustments for these change orders and cancellations, our net bookings in the three months ended March 31,June 30, 2022 were $2,105,000,$1,534,000, representing a decrease of $1,888,000$571,000 (or 47%27%) from net bookings of $3,993,000$2,105,000 in the fourthfirst quarter of 2021.

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2022.

 

Our backlog at June 30, 2022 was $9,698,000, a decrease of $1,480,000, or 13%, from March 31, 2022 was $11,179,000, an increase of $361,000, or 3%, from December 31, 2021.2022. The increasedecrease in backlog is the result of lower net bookings and higher revenue in the firstsecond quarter. Our backlog at March 31,June 30, 2022 includes booked sales orders of $2,217,000 (20%$776,000 (8% of the total backlog) from several customers that we do not expect to be realized until 2023. Our backlog also contains booked sales orders of $155,000 (2% of the total backlog) from two customers that we believe are at risk of cancellation based on conversations with these customers. We believe the sales orders in this portionthese portions of our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled by our customers. Therefore, investors should not view backlog as earned revenue.

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The following table sets forth: (i) our beginning backlog (the remaining contract value of outstanding sales contracts for which we have received an initial deposit as of the previous period), (ii) our net bookings for the period (new sales contracts executed during the period for which we received an initial deposit, net of any adjustments including cancelations and change orders during the period), (iii) our recognized revenue for the period, and (iv) our ending backlog for the period (the sum of the beginning backlog and net bookings, less recognized revenue).

 

  For the quarter ended 
  June 30, 2021  September 30, 2021  December 31, 2021  March 31, 2022  June 30, 2022 
Backlog, beginning balance $11,578,000  $7,987,000  $9,881,000  $10,818,000  $11,179,000 
Net bookings, current period $919,000  $5,600,000  $3,993,000  $2,105,000  $1,534,000 
Recognized revenue, current period $4,510,000  $3,706,000  $3,056,000  $1,744,000  $3,015,000 
Backlog, ending balance $7,987,000  $9,881,000  $10,818,000  $11,179,000  $9,698,000 

  For the quarter ended 
  

March 31,

2021

  

June 30,

2021

  

September 30,

2021

  

December 31,

2021

  

March 31,

2022

 
Backlog, beginning balance $8,448,000  $11,578,000  $7,987,000  $9,881,000  $10,818,000 
Net bookings, current period $5,497,000  $919,000  $5,600,000  $3,993,000  $2,105,000 
Recognized revenue, current period $2,367,000  $4,510,000  $3,706,000  $3,056,000  $1,744,000 
Backlog, ending balance $11,578,000  $7,987,000  $9,881,000  $10,818,000  $11,179,000 

The completion of a customer’s new build facility project is dependent uponCompany and its customers face various industry dynamics that make the customer’s ability to secure fundingtiming and real estate, obtain a license and then build their cultivation facility so they can take possessionrecognition of the equipment. Accordingly, the time it takes for these customers to complete a new build project, which corresponds to when we are ableCompany’s revenue challenging. The Company’s ability to recognize revenue is driven by numerous factors including: (i)a customer’s ability to take possession of the large numbersold equipment, which is predicated on completion of a customer’s cultivation facility. The Company’s customers are often first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtainingwho face challenges associated with maintaining project funding, securing state and local licensure and permitting; (iii) local and state government delays in approving licenses, and permits duedesigning and installing complex equipment for the facility. Coordination of these efforts introduces uncertainty to lackthe timing and completion of staff orcultivation facilities, and all of these challenges are enhanced by the large numbercurrent economic environment. Global supply-chain delays and growing backlog challenges extend the duration, cost and timing uncertainty of pending applications, especially in states wheremany 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 cap onassurance that the number of cultivators; (iv) the customer’s needCompany will be able 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.fulfill its backlog.

 

As has historically been the case for the Company at each quarter-end, there remains significant uncertainty regarding the timing of revenue recognition of our backlog as of March 31,June 30, 2022.

 

We have provided an estimate in our condensed consolidated financial statements for when we expect to recognize revenue on our remaining performance obligations (i.e., our Q1Q2 2022 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts. There continues to be significant uncertainty regarding the timing of our recognition of revenue on our Q1Q2 2022 backlog. Refer to the Revenue Recognition section of Note 1 in our condensed consolidated financial statements, included as part of this Quarterly Report for additional information on our estimate of future revenue recognition on our remaining performance obligations.

 

Our backlog, remaining performance obligations, and net bookings may not be indicative of future operating results, and our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in backlog or remaining performance obligations will generate revenues or when the revenues will be generated. Net bookings and backlog are considered non-GAAP financial measures, and therefore, they should be considered in addition to, rather than as a substitute for, our GAAP measures for recognized revenue, deferred revenue, and remaining performance obligations. Further, we can provide no assurance as to the profitability of our contracts reflected in remaining performance obligations, backlog and net bookings.

 

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Results of Operations

 

Comparison of Three Months Ended March 31,June 30, 2022 and March 31,June 30, 2021

 

Revenues and Cost of Goods Sold

 

Revenue for the three months ended March 31,June 30, 2022 was $1,744,000,$3,015,000, compared to $2,367,000$4,510,000 for the three months ended March 31,June 30, 2021, representing a decrease of $622,000,$1,495,000, or 26%33%. The decrease was primarily due to delays with our international supply of products and shipments from vendors which delayed contract fulfillment and revenue recognition on existing contracts. As a result of this along with higher bookings, our ending backlog increased by 21% as compared to the three months ended June 30, 2021. The supply chain impact was largely due to delays at U.S. ports, compounded by a reduction in cargo shipped by air, a shortage of containers, and a shortage of domestic truck delivery availability.

Cost of revenue decreased by $519,000, or 16%, from $3,227,000 for the three months ended June 30, 2021 to $2,709,000 for the three months ended June 30, 2022. The decrease was primarily due to a decrease in revenue, partially offset by an increase in fixed costs and an increase in variable costs as a percent of revenue as discussed below.

The gross profit for the three months ended June 30, 2022 was $306,000 compared to $1,282,000 for the three months ended June 30, 2021, a decrease of 76%. Gross profit margin decreased by 18 percentage points from 28.4% for the three months ended June 30, 2021 to 10.2% for the three months ended June 30, 2022 primarily due to lower revenue, an increase in fixed costs, and an increase in variable costs as a percent of revenue, as described below.

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $450,000, or 15% of total revenue, for the three months ended June 30, 2022 as compared to $357,000, or 8% of total revenue, for the three months ended June 30, 2021. The increase of $92,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $73,000, and an increase in overhead of $19,000, both as a result of investing in future growth.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $2,259,000, or 75% of total revenue, in the three months ended June 30, 2022 as compared to $2,870,000, or 64% of total revenue, in the three months ended June 30, 2021. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $734,000 driven by lower revenue and lower equipment margins, partially offset by, (ii) an increase in travel expense of $51,000, (iii) an increase in warranty expenses of $45,000, and (iv) an increase in excess and obsolete inventory expense of $24,000.

We continue to focus on gross margin improvement through a combination of efforts, including more disciplined pricing, better absorption of our fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.

Operating Expenses

Operating expenses increased to $2,077,000 for the three months ended June 30, 2022, from $1,166,000 for the three months ended June 30, 2021, an increase of $911,000, or 78%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $193,000, in support of our growth initiatives, (ii) an increase in advertising and marketing expenses of $142,000, (iii) a decrease in product development of $55,000, and (iv) a non-cash goodwill impairment charge of $631,000.

The increase in SG&A expenses for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, was primarily due to: (i) an increase of $154,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) an increase in insurance costs of $75,000, (iii) an increase in accounting fees of $30,000, (iv) an increase of $30,000 for board fees, (v) an increase in travel expenses of $25,000, offset by (vi) lower commissions of $57,000, (vii) a decrease in depreciation and loss on asset disposals of $19,000, (viii) a decrease of $16,000 for business taxes and licenses, (ix) a decrease of $15,000 for investor relations and, (x) a decrease in bad debt expense of $10,000.

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The increase in marketing expenses was primarily due to (i) an increase in advertising, outside services, and other promotional marketing expenses of $70,000 (ii) an increase in salaries and benefits (including stock-based compensation) of $42,000, and (iii) an increase in trade show expenses of $30,000.

The decrease in product development costs was due to (i) a decrease in salaries and benefits (including stock-based compensation) of $50,000, (ii) a decrease in other R&D expense of $8,000, offset by, (iii) an increase in travel of $3,000.

As further discussed in Note 1, on June 30, 2022, we performed a quantitative analysis for potential impairment of our goodwill, by comparing the Company’s fair value to its carrying value as of June 30, 2022. Based on this analysis, the Company determined that its carrying value exceeded its fair value. As a result, the Company recorded a non-cash goodwill impairment charge of $631,000 at June 30, 2022. No income tax benefit related to this goodwill impairment charge was recorded at June 30, 2022.

Operating Income (Loss)

We recognized an operating loss of $1,771,000 for the three months ended June 30, 2022, as compared to operating income of $116,000 for the three months ended June 30, 2021, a loss increase of $1,887,000. The operating loss for the three months ended June 30, 2022 included $96,000 of non-cash, stock-based compensation, $7,000 of depreciation expense, and $631,000 for a non-cash goodwill impairment charge, compared to $72,000 of non-cash, stock-based compensation and $17,000 of depreciation and amortization expense for the three months ended June 30, 2021. Excluding these non-cash items, our operating loss increased by $1,242,000.

Other Income (Expense)

We recognized other income (net) of $11,000 for the three months ended June 30, 2022, compared to other income (net) of $149,000 for the three months ended June 30, 2021. Other income for the three months ended June 30, 2022 consisted of interest income on a money market account. Other income for the three months ended June 30, 2021 primarily consisted of $138,000 related to the Employee Retention Credit as part of the CARES act and $12,000 for rental income from the sub-lease of a portion of our facility.

Net Income (Loss)

Overall, we recognized a net loss of $1,761,000 for the three months ended June 30, 2022, as compared to net income of $265,000 for the three months ended June 30, 2021, a loss increase of $2,026,000. The net loss for the three months ended June 30, 2022 included $96,000 of non-cash, stock-based compensation, $7,000 of depreciation, and $631,000 for a non-cash goodwill impairment charge, compared to $72,000 of non-cash, stock-based compensation and $17,000 of depreciation and amortization expense for the three months ended June 30, 2021. Excluding these non-cash items, our net loss increased by $1,381,000.

Comparison of Six Months Ended June 30, 2022 and June 30, 2021

Revenues and Cost of Goods Sold

Revenue for the six months ended June 30, 2022 was $4,759,000, compared to $6,876,000 for the six months ended June 30, 2021, representing a decrease of $2,117,000, or 31%. The decrease was primarily due to delays with our international supply of products and shipments from vendors which delayed contract fulfillment and revenue recognition on existing contracts. As a result, even though our bookings were down, our ending backlog increased. The supply chain impact was largely due to delays at U.S. ports, compounded by a reduction in cargo shipped by air, a shortage of containers, and a shortage of domestic truck delivery availability.

 

Cost of revenue decreased by $368,000,$887,000, or 18%17%, from $2,022,000$5,249,000 for the threesix months ended March 31,June 30, 2021 to $1,654,000$4,363,000 for the threesix months ended March 31,June 30, 2022. The decrease was primarily due to a decrease in revenue, offset by an increase in fixed costs and an increase in fixedvariable costs as a percent of revenue as discussed below.

 

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The gross profit for the threesix months ended March 31,June 30, 2022 was $91,000$397,000 compared to $345,000$1,627,000 for the threesix months ended March 31,June 30, 2021, a decrease of 74%76%. Gross profit margin decreased by 9.415 percentage points from 14.6%23.7% for the threesix months ended March 31, 2022June 30, 2021 to 5.2%8.3% for the threesix months ended March 31, 2021June 30, 2022 primarily due to lower revenue, higher fixed costs, and an increase in fixedvariable costs as a percent of revenue, as described below.

 

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $359,000,$808,000, or 21%17% of total revenue, for the threesix months ended March 31,June 30, 2022 as compared to $337,000,$694,000, or 14%10% of total revenue, for the threesix months ended March 31,June 30, 2021. The increase of $22,000$114,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $33,000, offset by a decrease$106,000, and an increase in overhead of $11,000.$8,000, both as a result of investing in future growth.

 

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $1,295,000,$3,554,000, or 74%75% of total revenue, in the threesix months ended March 31,June 30, 2022 as compared to $1,685,000,$4,555,000, or 71%66% of total revenue, in the threesix months ended March 31,June 30, 2021. The decrease in variable costs was primarily due to: (i) a decrease in equipment costs of $376,000$1,110,000 driven by lower revenue and lower equipment margins, (ii) a decrease in warrantyshipping and handling expense of $64,000,$23,000, offset by (iii) an increase in travel expenses of $45,000.$96,000, and (iv) and increase in excess and obsolete inventory expense of $33,000.

 

We continue to focus on gross margin improvement through a combination of efforts, including more disciplined pricing, better absorption of our fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.

 

Operating Expenses

 

Operating expenses increased to $1,702,000$3,779,000 for the threesix months ended March 31,June 30, 2022, from $1,030,000$2,197,000 for the threesix months ended March 31,June 30, 2021, an increase of $671,000,$1,583,000, or 65%72%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $571,000,$765,000, in support of our growth initiatives, (ii) an increase in advertising and marketing expenses of $74,000, and$216,000, (iii) an increasea decrease in product development expenses of $26,000.$29,000, and (iv) a goodwill impairment charge of $631,000.

 

The increase in SG&A expenses for the threesix months ended March 31,June 30, 2022 compared to the threesix months ended March 31,June 30, 2021, was primarily due to: (i) an increase of $384,000$538,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) an increase in insurance costs of $87,000 for$120,000, (iii) an increase in accounting and other professional fees (iii)of $107,000, and (iv) an increase in insuranceof $53,000 for travel costs, of $44,000, and (iv)(v) an increase of $50,000 for board fees, (vi) an increase of $16,000 for facility and office expenses, (vii) an increase of $15,000 for investor relations, expenses.offset by (viii) a decrease in commissions of $47,000, (ix) a decrease in bad debt of $32,000, (x) a decrease in business taxes and licenses of $31,000, and (xi) a decrease in depreciation and loss on asset disposal of $24,000.

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The increase in marketing expenses was primarily due to (i) an increase in salaries and benefits (including stock-based compensation) of $51,000, and$93,000, (ii) an increase in advertising, outside services, and other promotional marketing expenses of $23,000.$83,000, and (iii) an increase in trade show expenses of $39,000.

 

The increasedecrease in product development costs was due to an increase(i) a decrease in R&D materials and service expenses of $72,000, (ii) a decrease in salaries and benefits (including stock-based compensation) of $26,000.$24,000, offset by (iii) an increase in R&D consulting services of $56,000, and (iv) an increase in travel costs of $11,000.

 

As further discussed in Note 1, on June 30, 2022, we performed a quantitative analysis for potential impairment of our goodwill, by comparing the Company’s fair value to its carrying value as of June 30, 2022. Based on this analysis, the Company determined that its carrying value exceeded its fair value. As a result, the Company recorded a non-cash goodwill impairment charge of $631,000 at June 30, 2022. No income tax benefit related to this goodwill impairment charge was recorded at June 30, 2022.

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Operating Income (Loss)

 

We recognized an operating loss of $1,611,000$3,382,000 for the threesix months ended March 31,June 30, 2022, as compared to an operating loss of $686,000$570,000 for the threesix months ended March 31,June 30, 2021, an increase of $926,000,$2,813,000, or 135%494%. The operating loss for the threesix months ended March 31,June 30, 2022 included $93,000$188,000 of non-cash, stock-based compensation, $14,000 of depreciation expense, and $631,000 for a non-cash goodwill impairment charge, compared to $131,000 of non-cash, stock-based compensation and $7,000 of depreciation and amortization expense, compared to $59,000 of non-cash, stock-based compensation and $17,000$33,000 of depreciation and amortization expense for the threesix months ended March 31,June 30, 2021. Excluding these non-cash items, our operating loss increased by $902,000,$2,144,000, or 148%529%.

 

Other Income (Expense)

 

We recognized other income (net) of $188,000$199,000 for the threesix months ended March 31,June 30, 2022, compared to other expenseincome (net) of $108,000$42,000 for the threesix months ended March 31,June 30, 2021. Other income for the threesix months ended March 31,June 30, 2022 primarily consisted of income from an insurance settlement of $185,000.$185,000 and interest income of $14,000. Other expenseincome for the threesix months ended March 31,June 30, 2021 primarily consisted of income of $138,000 related to the Employee Retention Credit as part of the CARES act, $12,000 for rental income from the sub-lease of a portion of our facility, offset by $107,000 in expense related to the settlement of litigation with a former employee.

 

Net Income (Loss)

 

Overall, we recognized a net loss of $1,423,000$3,184,000 for the threesix months ended March 31,June 30, 2022, as compared to a net loss of $793,000$528,000 for the threesix months ended March 31,June 30, 2021, an increase of $630,000,$2,655,000, or 79%503%. The net loss for the threesix months ended March 31,June 30, 2022 included $93,000$188,000 of non-cash, stock-based compensation, $14,000 of depreciation expense, and $631,000 for a non-cash goodwill impairment charge, compared to $198,000 of non-cash, stock-based compensation and $7,000 of depreciation and amortization expense, compared to $126,000 of non-cash, stock-based compensation and $17,000$33,000 of depreciation and amortization expense for the threesix months ended March 31,June 30, 2021. Excluding these non-cash items, our net loss increased by $673,000,$2,054,000, or 104%692%.

 

Financial Condition, Liquidity and Capital Resources

 

Cash, Cash Equivalents

 

As of March 31,June 30, 2022, we had cash and cash equivalents of $22,034,000,$20,611,000, compared to cash and cash equivalents of $2,160,000 as of December 31, 2021. The $19,874,000$18,452,000 increase in cash and cash equivalents during the threesix months ended March 31,June 30, 2022, was primarily the result of cash proceeds from the sale of common stock and warrants of $21,711,000, offset by the redemption of series B preferred stock and interest of $2,016,000.$2,016,000, and cash used in operations of $1,232,000. Our cash is held in bank depository accounts in certain financial institutions. During the threesix months ended March 31,June 30, 2022, we held deposits in financial institutions that exceeded the federally insured amount.

 

As of March 31,June 30, 2022, we had accounts receivable (net of allowance for doubtful accounts) of $191,000,$140,000, inventory (net of excess and obsolete allowance) of $1,006,000 (including $692,000 of inventory in transit),$402,000, and prepaid expenses of $1,774,000$2,888,000 (including $1,579,000$2,720,000 in advance payments on inventory purchases). While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability especially since most of our customers are funded on an as-needed basis to complete facility construction. We expect our exposure to accounts receivable risk to increase as we continue to pursue larger projects.

 

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As of March 31,June 30, 2022, we had total accounts payable and accrued expenses of $1,389,000,$1,045,000, deferred revenue of $5,485,000,$5,935,000, accrued equity compensation of $84,000,$47,000, other current liabilities of $37,000 and the current portion of operating lease liability of $112,000.$114,000. As of March 31,June 30, 2022, we had working capital of $17,948,000,$16,943,000, compared to a working capital deficit of $415,000 as of December 31, 2021. The increase in our working capital was primarily related to (i) an increase in cash of $19,874,000,$18,452,000, (ii) an increase in inventory of $628,000, (iii) an increase in prepaid expenses and other assets of $551,000,$1,614,000, (iii) a decrease in accounts payable and accrued liabilities of $301,000, offset by (iv) an increase in deferred revenue of $2,646,000.$3,095,000.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

 

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Summary of Cash Flows

 

The following summarizes our approximate cash flows for the threesix months ended March 31,June 30, 2022 and June 30, 2021:

 

 

For the Three Months Ended

March 31,

  

For the Six Months Ended

June 30,

 
 2022  2021  2022  2021 
Net cash provided by operating activities $193,000  $484,000 
Net cash used in operating activities $(1,232,000) $(1,141,000)
Net cash used in investing activities  (14,000)  (12,000)  (11,000)  (14,000)
Net cash provided by financing activities  19,695,000   514,000   19,695,000   514,000 
Net increase in cash $19,874,000  $986,000  $18,452,000  $(641,000)

 

Operating Activities

 

We incurred a net loss for the threesix months ended March 31,June 30, 2022 of $1,423,000$3,184,000 and have an accumulated deficit of $30,205,000$31,965,000 as of March 31,June 30, 2022.

 

Cash provided byused in operations for the ninesix months ended March 31,June 30, 2022 was $193,000$1,232,000 compared to $484,000$1,142,000 for the threesix months ended March 31,June 30, 2021, a decreasean increase of $291,000.$90,000.

 

The decreaseincrease in cash provided byused in operating activities during the threesix months ended March 31,June 30, 2022 as compared to the threesix months ended March 31,June 30, 2021, was primarily attributable to: (i) an increase in net loss of $630,000,$2,655,000, (ii) an increasea decrease in cash used to fund working capital of $361,000,$1,926,000, and (iii) a decreasean increase in non-cash operating charges of $22,000.$640,000.

 

The increase in our working capital was primarily related to:to (i) an increase in cash of $19,874,000,$18,452,000, (ii) an increase in inventory of $628,000, (iii) an increase in prepaid expenses and other assets of $551,000,$1,614,000, (iii) a decrease in accounts payable and accrued liabilities of $301,000, offset by (iv) an increase in deferred revenue of $2,646,000.$3,095,000.

 

The decreaseincrease in non-cash operating charges was primarily due to (i) a decrease in amortizationgoodwill impairment charges of ROU asset of $24,000, (ii) a decrease in the allowance for doubtful accounts of $22,000, and (iii) an increase in other share-based compensation of $19,000.$631,000.

 

Investing Activities

 

The $14,000$12,000 cash used in investing activities during the threesix months ended March 31,June 30, 2022 was related to the purchase of property and equipment. Cash used in investing activities during the three months ended March 31, 2021 was related to the purchase of property and equipment of $12,000.$14,000, offset by proceeds from the sale of property and equipment of $2,000. Cash used in investing activities during the six months ended June 30, 2021 of $14,000 was related to the purchase of property and equipment of $15,000, offset by proceeds from the sale of property and equipment of $1,000.

 

Financing Activities

 

Cash flows from financing activities during the threesix months ended March 31,June 30, 2022, was the result of cash proceeds from the sale of common stock and warrants (net of issuance costs) of $21,711,000, offset by a cash payment of $2,016,000 for the redemption of series B preferred stock, including related interest.

 

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During the six months ended June 30, 2021, the Company entered into a note payable with its current bank in the principal amount of $514,200, for working capital purposes.

Common Stock Equity Offering

 

On February 10, 2022, the Company signed a firm commitment underwriting agreement for the public offering of shares of common stock and warrants, which closed on February 15, 2022. The Company received net proceeds of approximately $21,711,000 for the sale of 5,811,138 shares of common stock and 6,572,808 warrants, each warrant to purchase one share of common stock for five years, exercisable immediately, at an exercise price of $5.00. The Company also issued to the representative of the underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.16, during the period commencing August 9, 2022, and expiring on February 10, 2027.

34

 

The net proceeds from the offering will be used to advance the Company’s organic growth and new product initiatives, to pursue select acquisitions, and for general corporate and working capital purposes. In connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol “CEAD” and our warrants under the symbol “CEADW”. As a result, effective February 10, 2022, trading of both shares of the Company’s common stock and certain of the Company’s warrants commenced on the Nasdaq.

 

Inflation

 

To date, we have experienced and are likely to continue to face inflationary increases on the cost of products, which may adversely affect our margins and financial results, and the pricing of our service and product supply contracts. The inflationary pressures are in both the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate. This inflation is reflected in higher wages, increased pricing of equipment and other products that we have contracted to provide to our customers, and generally higher prices across all sectors of the economy. As we move forward, we plan to continuously monitor our various contract terms and may decide to add clauses that will permit us to adjust pricing if inflation and price increase pressures on us will impact our ability to perform our contracts and maintain our margins.

 

Contractual Payment Obligations

 

As of March 31,June 30, 2022, our contractual payment obligations consisted of a building lease. Refer to Note 2Leases of the notes to the condensed consolidated financial statements, included as part of this Quarterly Report for a discussion of building lease.

 

Commitments and Contingencies

 

Refer to Note 76 – Commitments and Contingencies of the notes to the condensed consolidated financial statements, included as part of this Quarterly Report for a discussion of commitments and contingencies.

 

Off-Balance Sheet Arrangements

 

We are required to disclose any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. As of March 31,June 30, 2022, we had no off-balance sheet arrangements. During the threesix months ended March 31,June 30, 2022, we did not engage in any off-balance sheet financing activities other than those included in the “Contractual Payment Obligations” discussed above and those reflected in Note 76 of our condensed consolidated financial statements.

 

Recent Developments

 

Refer to Note 1213 - Subsequent Events of the notes to condensed consolidated financial statements, included as part of this Quarterly Report for certain significant events occurring since March 31,June 30, 2022.

 

Critical Accounting Estimates

 

This discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Actual results could materially differ from those estimates. Key estimates include: allocation of transaction prices to performance obligations under contracts with customers, standalone selling prices, timing of expected revenue recognition on remaining performance obligations under contracts with customers, valuation of intangible assets, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, accounts receivable and inventory allowances, and legal contingencies.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, therefore are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that as a result of material weakness in our internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC, our disclosure controls and procedures were not effective as of March 31,June 30, 2022.

 

We did not maintain effective controls over certain aspects of the financial reporting process because: (i) we lack a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements, (ii) there is inadequate segregation of duties due to our limited number of accounting personnel, and (iii) we have insufficient controls and processes in place to adequately verify the accuracy and completeness of spreadsheets that we use for a variety of purposes including revenue, taxes, stock-based compensation and other areas, and place significant reliance on, for our financial reporting.

 

We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. We are committed to continuing to improve our financial organization including, without limitation, expanding our accounting staff and improving our systems and controls to reduce our reliance on the manual nature of our existing systems. However, due to our size and our financial resources, remediating the several identified weaknesses has not been possible and may not be economically feasible now or in the future.

 

Changes in Internal Control over Financial Reporting

 

There were no changes identified in connection with our internal control over financial reporting during the three months ended March 31,June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. We have and will continue to have commercial disputes arising in the ordinary course of our business.

Item 1A. Risk Factors

In addition to the information set forth in this Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including, without limitation, the risk factors and uncertainties contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not known to us or that we currently consider to be immaterial to our operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 16, 2022, the Company agreed to convert 1,650 shares of the Series B Preferred Stock into 362,306 shares of common stock and 703,069 warrants. Of the warrants, 170,382warrants,170,382 are pre-funded warrants that vested immediately, have an indefinite term and an exercise price of $0.01, and the balance of 532,688 warrants also vested immediately, have a term of 5 years and have an exercise price of $5.00. Each warrant entitles the holder to purchase one share of common stock. The issuances were to an accredited investor pursuant to an exemption from registration of the Securities Act under Section 4(a)(2).

On June 21, 2022, the 170,382 pre-funded warrants described above were exercised on cashless basis and received 169,530 shares of the Company’s common stock upon exercise.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicableapplicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The documents listed in the Exhibit Index of this Form 10-Q are incorporated by reference or are filed with this Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 CEA INDUSTRIES INC.
 (the “Registrant”)
   
Dated: May 12,August 11, 2022By:/s/ Anthony K. McDonald
  Anthony K. McDonald
  Chief Executive Officer and President
  (Principal Executive Officer)
   
Dated: May 12,August 11, 2022By:/s/ Ian K. Patel
  Ian K. Patel
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

3638
 

 

EXHIBIT INDEX

 

Exhibit  
Number Description of Exhibit
   
31.1 * Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 * Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1** Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2** Certification of Principal Financial and Accounting, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 101.INS* Inline XBRL Instance Document
   
101.SCH* Inline XBRL Taxonomy Schema
   
101.CAL* Inline XBRL Taxonomy Calculation Linkbase
   
101.DEF* Inline XBRL Taxonomy Definition Linkbase
   
101.LAB* Inline XBRL Taxonomy Label Linkbase
   
101.PRE* Inline XBRL Taxonomy Presentation Linkbase
   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*Filed herewith.
**Furnished herewith.

 

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