CEA Industries(CEAD) - 2022 Q1 - Quarterly Report

Cautionary Statement The report contains forward-looking statements based on current management expectations, which involve substantial risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements based on current management expectations, which involve substantial risks and uncertainties that could cause actual results to differ materially[11] - Key risk factors include business prospects, impact of the COVID-19 pandemic, product development uncertainty, regulatory changes (especially cannabis laws), competitive pressures, operational effectiveness, customer and supplier relationships, general economic conditions, supply chain disruptions, changes in business strategy, ability to attract and retain personnel, capital raising ability, acquisition integration, future revenue, backlog conversion, and the company's intention not to pay dividends[12][14] PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents CEA Industries Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in shareholders' equity, and cash flows, along with detailed explanatory notes Condensed Consolidated Balance Sheets The balance sheets show a significant increase in total assets and a shift from shareholders' deficit to positive equity, primarily due to an equity offering Condensed Consolidated Balance Sheets | Metric | March 31, 2022 (Unaudited) ($) | December 31, 2021 ($) | | :----------------------------------- | :------------------------- | :------------------ | | ASSETS | | | | Cash and cash equivalents | $22,033,664 | $2,159,608 | | Total Current Assets | $25,055,565 | $3,991,098 | | Total Noncurrent Assets | $1,265,324 | $1,290,864 | | TOTAL ASSETS | $26,320,889 | $5,281,962 | | LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | | | | Total Current Liabilities | $7,107,219 | $4,406,269 | | Total Noncurrent Liabilities | $459,482 | $486,226 | | TOTAL LIABILITIES | $7,566,701 | $4,892,495 | | Total Temporary Equity | $- | $3,960,000 | | Total Shareholders' Equity (Deficit) | $18,754,188 | $(3,570,533) | - Total assets significantly increased from $5.28 million at December 31, 2021, to $26.32 million at March 31, 2022, primarily driven by a substantial increase in cash and cash equivalents due to an equity offering[19] - Shareholders' equity shifted from a deficit of $3.57 million to a positive equity of $18.75 million, reflecting the impact of the equity raise and the conversion of Series B Preferred Stock[19] Condensed Consolidated Statements of Operations The statements of operations reflect a decrease in revenue and gross profit, alongside a widening operating and net loss, primarily due to supply chain delays and increased operating expenses Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue, net | $1,744,427 | $2,366,529 | | Cost of revenue | $1,653,919 | $2,021,923 | | Gross profit | $90,508 | $344,606 | | Total operating expenses | $1,701,710 | $1,030,256 | | Operating loss | $(1,611,202) | $(685,650) | | Total other income (expense) | $188,260 | $(107,718) | | Loss before provision for income taxes | $(1,422,942) | $(793,368) | | Net loss | $(1,422,942) | $(793,368) | | Net Loss Available to Common Shareholders | $(1,898,925) | $(793,368) | | Loss per common share – basic and dilutive | $(0.41) | $(0.50) | | Weighted average number of common shares outstanding, basic and dilutive | 4,622,427 | 1,576,844 | - Revenue decreased by 26% year-over-year, from $2.37 million in Q1 2021 to $1.74 million in Q1 2022, primarily due to supply chain delays[23][201] - Gross profit declined by 74% to $90,508 in Q1 2022, with the gross profit margin decreasing from 14.6% to 5.2%, mainly due to increased fixed costs as a percentage of lower revenue[23][203] - Operating loss widened by 135% to $(1.61) million in Q1 2022, driven by a 65% increase in total operating expenses, particularly selling, general, and administrative expenses[23][207][211] - Net loss increased by 79% to $(1.42) million in Q1 2022, further impacted by convertible preferred stock dividends and a deemed dividend on down round[23][213] Condensed Consolidated Statements of Changes in Shareholders' Equity (Deficit) This statement details the conversion of a shareholders' deficit to positive equity, driven by significant common share and warrant issuances for cash and preferred stock conversion - Shareholders' deficit of $(3,570,533) at December 31, 2021, converted to a positive equity of $18,754,188 by March 31, 2022[25] - This significant change was primarily due to $21,711,131 from common shares and warrants issued for cash, and $1,980,000 from common shares and warrants issued on conversion of Series B preferred stock[25] - The company also recognized a net loss of $(1,422,942) and incurred dividends and deemed dividends on Series B preferred stock totaling $(475,983)[25] Condensed Consolidated Statements of Cash Flows The cash flow statements indicate a decrease in operating cash flow but a substantial increase in financing cash flow, primarily from an equity offering Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $192,857 | $484,373 | | Net cash used in investing activities | $(13,948) | $(12,326) | | 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, end of period | $22,033,664 | $3,271,128 | - Net cash provided by operating activities decreased from $484,373 in Q1 2021 to $192,857 in Q1 2022, primarily due to an increased net loss and higher working capital funding needs[27][221] - Net cash provided by financing activities significantly increased to $19,695,147 in Q1 2022, driven by $21,711,131 in cash proceeds from the sale of common stock and warrants, partially offset by the redemption of Series B preferred stock[27][224] Notes to the Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, significant transactions, and financial position, including business overview, lease accounting, inventory, and equity changes Note 1 – General This note outlines CEA Industries Inc.'s business in Controlled Environment Agriculture, details key accounting policies, and discusses the impact of the COVID-19 pandemic and a reverse stock split - CEA Industries Inc. designs, engineers, and sells environmental control and other technologies for the Controlled Environment Agriculture (CEA) industry, serving commercial growers in the U.S., Canada, and internationally[28] - The COVID-19 pandemic has caused significant delays in equipment receipt and revenue recognition, impacting sales, project implementation, supply chain, operating margins, and working capital, with continued adverse effects expected[29][30] - On January 27, 2022, the company implemented a one-for-one hundred and fifty reverse stock split, reducing outstanding common shares from 240,125,224 to 1,600,835[37] Revenue by Source | Revenue Source | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 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 | - As of March 31, 2022, the company's backlog (remaining performance obligations) was $11,179,000, with $2,217,000 (20%) not expected to be realized until 2023, if at all, due to significant uncertainties[65][68] Share-Based Compensation Expense | Share-Based Compensation Expense | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | 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 | $92,517 | $59,136 | - One customer accounted for 35% of revenue in Q1 2022, highlighting customer concentration risk[77] Note 2 – Leases This note details the company's lease accounting under ASC 842, including the new facility lease in Louisville, CO, and related financial metrics - The company adopted ASC 842 (Leases) as of January 1, 2019, electing the 'package of practical expedients' and the short-term lease exemption[84][85] - A new facility lease for 11,491 square feet in Louisville, CO, commenced November 1, 2021, with monthly rent of $10,055 starting February 2022, increasing 3% annually[88] Lease Metrics | Lease Metric | As of March 31, 2022 ($) | | :----------------------------------- | :------------------- | | Operating lease right-of-use asset | $540,444 | | Operating lease liability, current | $112,072 | | Operating lease liability, long-term | $459,482 | | Remaining lease term | 4.8 years | | Discount rate | 3.63% | Note 3 – Inventory This note provides a breakdown of inventory components, highlighting a significant increase in net inventory, particularly finished goods and inventory in transit Inventory Components | Inventory Component | March 31, 2022 ($) | December 31, 2021 ($) | | :----------------------------------- | :------------------- | :------------------ | | Finished goods | $913,887 | $272,199 | | Work in progress | $971 | $1,050 | | Raw materials | $186,115 | $196,456 | | Allowance for excess & obsolete inventory | $(95,055) | $(91,379) | | Inventory, net | $1,005,918 | $378,326 | - Net inventory increased significantly from $378,326 at December 31, 2021, to $1,005,918 at March 31, 2022, with finished goods seeing the largest increase[94] - The March 31, 2022, inventory balance includes $692,195 for inventory in transit, delivered to customers in April 2022[95] - Prepaid expenses included approximately $1,579,000 in advance payments for inventory as of March 31, 2022, up from $1,069,000 at December 31, 2021[95] Note 4 – Property and Equipment Note 4 provides a summary of the company's property and equipment, net of accumulated depreciation. It shows a slight decrease in net property and equipment and details the depreciation expense for the period Property and Equipment, Net | Property and Equipment | March 31, 2022 ($) | December 31, 2021 ($) | | :----------------------------------- | :------------------- | :------------------ | | Furniture and equipment | $271,056 | $274,472 | | Vehicles | $15,000 | $15,000 | | Total gross property and equipment | $286,056 | $289,472 | | Accumulated depreciation | $(208,817) | $(212,126) | | Property and equipment, net | $77,239 | $77,346 | - Depreciation expense for the three months ended March 31, 2022, was $8,556, allocated across cost of sales, inventory, and selling, general, and administrative expenses[98] Note 5 – Accounts Payable and Accrued Liabilities Note 5 details the components of accounts payable and accrued liabilities, showing a slight increase in total liabilities from the end of the previous year. Key components include accounts payable, accrued payroll, and product warranty accruals Accounts Payable and Accrued Liabilities | Liability Component | March 31, 2022 ($) | December 31, 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 | - Total accounts payable and accrued liabilities increased slightly to $1,389,028 at March 31, 2022, from $1,345,589 at December 31, 2021[99] Note 6 – Note Payable and Accrued Interest This note describes a note payable that was fully forgiven by the bank in November 2021, resulting in a gain on loan forgiveness recorded as Other Income - A $514,200 note payable, entered into on February 10, 2021, for working capital, was fully forgiven by the bank on November 30, 2021, including $2,832 in accrued interest[100][102] - The gain on loan forgiveness was recorded as Other Income in the Statement of Operations for the year ended December 31, 2021[102] Note 7 – Commitments and Contingencies This note outlines the company's commitments and contingencies, including a settled litigation with a former employee and ongoing litigation risks - The company settled litigation with a former employee in March 2021, issuing 6,667 shares of common stock (valued at $67,000) as part of a total $107,000 settlement cost, recognized in Other Expenses in 2021[104] - The company is subject to litigation matters and claims in the normal course of operations, with outcomes difficult to predict, and records liabilities for probable and estimable contingent losses[105] - Other commitments include inventory purchase agreements and indemnifications to various parties, including directors and officers[107] Note 8 – Temporary Equity This note details the Series B Convertible Preferred Stock, its classification as temporary equity, and its subsequent redemption and conversion into common stock and warrants - On September 28, 2021, the company sold 3,300 shares of Series B Convertible Preferred Stock for $3,000,000, with an 8% annual dividend and an initial conversion price of $8.55[108][109] - The Series B Preferred Stock was classified as temporary equity and adjusted to its redemption value of $3,960,000, resulting in a $2,262,847 non-cash redemption value adjustment in 2021[112] - On February 16, 2022, 1,650 shares were redeemed for $2.016 million cash, and the remaining 1,650 shares were converted into 362,306 common shares and 703,069 warrants[112][113] - A deemed dividend of $439,999 was recognized due to the conversion price being reduced from $8.55 to $3.0975 (75% of the public offering price of $4.13)[113] - As of March 31, 2022, no Preferred Shares remained outstanding[114] Note 9 – Stockholders' Equity (Deficit) This note details changes in stockholders' equity, including director remuneration, a reverse stock split, and a significant equity raise, along with authorized and outstanding share capital - In January 2022, the company issued non-qualified stock options and restricted stock units (RSUs) to directors as part of their compensation[115][116] - A one-for-one hundred and fifty reverse stock split was implemented on January 27, 2022, reducing outstanding common shares and retroactively adjusting all per share amounts[118][119] - The authorized capital was reduced to 200,000,000 shares of common stock and 25,000,000 shares of preferred stock[121] - On February 15, 2022, the company completed a public offering, receiving approximately $22 million in net proceeds from the sale of 5,811,138 common shares and 6,572,808 warrants[122] - As of March 31, 2022, 7,784,444 common shares were issued and outstanding, with no preferred shares outstanding[123] Note 10 – Equity Incentive Plans This note outlines the company's 2017 and 2021 Equity Incentive Plans, detailing authorized shares, award activity, and compensation expenses for stock options and RSUs - The 2017 Equity Incentive Plan authorized 333,333 shares for equity awards, with 148,905 options outstanding and 20,736 shares available as of March 31, 2022[124][125] - The 2021 Equity Incentive Plan authorized 666,667 shares, with 578,906 shares remaining available for future awards as of March 31, 2022[126][131] - During Q1 2022, 3,367 common shares were issued to new independent directors, and 21,167 non-qualified stock options were granted to employees, along with 6,250 non-qualified stock options to directors[129][130] - Unrecognized compensation expense for unvested options and RSUs totaled $222,707 at March 31, 2022, to be recognized over approximately 3 years[132] Stock Option Activity (Employees/Consultants) | Stock Option Activity (Employees/Consultants) | Number of Options | Weighted Average Exercise Price ($) | | :----------------------------------- | :---------------- | :------------------------------ | | Outstanding, December 31, 2021 | 158,174 | $10.99 | | Granted | 21,167 | $3.55 | | Forfeited | (13,333) | $9.15 | | Outstanding, March 31, 2022 | 166,007 | $10.18 | | Exercisable, March 31, 2022 | 118,828 | $11.89 | Stock Option Activity (Directors) | Stock Option Activity (Directors) | Number of Options | Weighted Average Exercise Price ($) | | :----------------------------------- | :---------------- | :------------------------------ | | Outstanding, December 31, 2021 | 50,872 | $10.02 | | Granted | 6,250 | $4.80 | | Outstanding, March 31, 2022 | 57,122 | $9.44 | | Exerciseable, March 31, 2022 | 57,122 | $9.44 | Note 11 – Warrants This note provides a comprehensive summary of outstanding warrants to purchase common stock, detailing their issuance, exercise prices, and remaining terms Warrant Activity | Warrant Activity | Number Outstanding | Weighted Average Exercise Price ($) | | :----------------------------------- | :----------------- | :------------------------------ | | Outstanding at December 31, 2021 | 227,719 | $9.59 | | Issued | 7,566,435 | $4.89 | | Outstanding at March 31, 2022 | 7,794,154 | $5.03 | - A total of 7,566,435 warrants were issued in Q1 2022, primarily from the public offering (5,811,138 investor warrants, 761,670 overallotment warrants, 290,557 underwriter warrants) and the conversion of Series B Preferred Stock (170,382 pre-funded conversion warrants, 532,688 conversion warrants)[151][152][153][154][156] - As of March 31, 2022, 7,794,154 warrants were outstanding, with a weighted average exercise price of $5.03 and a weighted average remaining life of 58 months (excluding 170,382 indefinite life warrants)[146][147] Note 12 – Income Taxes This note discusses the company's income tax position, including U.S. federal and state net operating losses (NOLs) and the full valuation allowance against deferred tax assets - As of March 31, 2022, the company had approximately $22,514,000 in U.S. federal and state net operating losses (NOLs)[157] - The use of NOLs may be limited by Section 382 of the Internal Revenue Code due to cumulative ownership changes exceeding 50% within a three-year period, which the company's recent securities sales will need to be considered for[158] - A full valuation allowance was recorded against net deferred tax assets as of March 31, 2022, as management believes it is more likely than not that the company will not be able to utilize these assets in the foreseeable future[158] Note 13 – Related Party Transactions This note discloses a manufacturer representative agreement with RSX Enterprises, a related party with a significant ownership interest held by a current director - The company has a manufacturer representative agreement with RSX Enterprises, in which a current director, James R. Shipley, holds a significant ownership interest[159] - Under this agreement, RSX acts as a non-exclusive representative for the company in North America, and $7,555 in commissions were paid during the three months ended March 31, 2022[160] Note 14 – Subsequent Events This note reports subsequent events after March 31, 2022, specifically the issuance of non-qualified stock options to employees in April 2022 - On April 1, 2022, 31,793 non-qualified stock options were issued to 21 employees under the 2021 Annual Incentive Awards, with immediate vesting, a 10-year term, and an exercise price of $2.51[161] - The expense for these options had been fully accrued in 2021[161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, covering business overview, strategic initiatives, and detailed financial analysis Non-GAAP Financial Measures This section explains the company's use of non-GAAP measures like net bookings and backlog to supplement GAAP results, adjusting for non-cash expenses - The company uses non-GAAP measures such as net bookings, backlog, and adjusted net income (loss) to supplement GAAP results, adjusting for non-cash expenses like stock-based compensation, debt-related items, and depreciation[165] - Net bookings represent new sales contracts executed during the quarter with initial deposits, net of adjustments. Backlog and remaining performance obligations may not be indicative of future operating results due to potential renegotiations or terminations[165][166] Overview This overview describes CEA Industries Inc. as an engineering and design company providing environmental control technologies to the Controlled Environment Agriculture (CEA) industry - CEA Industries Inc. is an engineering and design company providing environmental control and other technologies to the Controlled Environment Agriculture (CEA) industry, primarily serving commercial indoor cannabis facilities[167][169] - The company offers architectural design, liquid-based process cooling, air handling, LED lighting, automation, and preventive maintenance services, leveraging its expertise to optimize crop quality, yield, and energy efficiency[168] - The company's core assets include strong relationships with CEA industry stakeholders, specialized engineering know-how from over 800 projects, and proprietary environmental control products[175] Impact of the COVID-19 Pandemic on Our Business This section discusses the ongoing impact of the COVID-19 pandemic, causing unexpected delays in product supply and shipments, with uncertain future financial and operational effects - The COVID-19 pandemic continues to cause unexpected and uncontrollable delays in international product supply and shipments from vendors, leading to severe congestion and extensive wait times at U.S. ports[179] - These disruptions have impacted the company's operations, and the full extent of the pandemic's financial and operational impact remains uncertain and unpredictable[180] Impact of Ukranian Conflict The company believes the Ukrainian conflict has no direct impact on its North American operations but anticipates general economic effects like supply chain challenges and inflation - The company believes the conflict between Ukraine and Russia has no direct impact on its operations, financial condition, or reporting, as its operations are limited to North America[181] - The conflict's general impact is expected to be similar to other businesses, including international sanctions, potential goods shortages, supply chain challenges, and inflationary pressures[181] Our Corporate Strategy The company's growth strategy focuses on aggressive organic expansion into non-cannabis CEA facilities and executing consolidation opportunities through strategic acquisitions - The company's growth strategy is based on two pillars: aggressive organic growth and executing on consolidation opportunities[182] - Organic growth initiatives include expanding into non-cannabis CEA facilities (doubling addressable market), broadening product and service offerings to cover nearly all technical infrastructure needs (e.g., architectural design, lighting, sensing & control, CO2 dosing, maintenance services), and rebranding to CEA Industries Inc. to reflect this broader focus[183][184][186][188] - The company aims to seek strategic relationships, mergers, and acquisitions to add to its existing business, leveraging its industry knowledge and public stock to identify complementary partners and create value through consolidation[189][190][191] Our Bookings, Backlog and Revenue This section analyzes net bookings, backlog, and revenue, highlighting a decrease in bookings and significant uncertainties in revenue recognition from backlog - Net bookings for the three months ended March 31, 2022, were $2,105,000, a 47% decrease from $3,993,000 in Q4 2021, after accounting for new contracts, positive change orders, and cancellations[192] - Backlog at March 31, 2022, increased by 3% to $11,179,000, with $2,217,000 (20%) of booked sales orders not expected to be realized until 2023, if at all, due to elevated risk[194] Bookings, Backlog and Revenue Trends | Metric | March 31, 2021 ($) | 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 | - Revenue recognition from backlog is subject to significant uncertainty due to factors like customer financing, licensing, facility construction, and supply chain delays[196][197] Results of Operations This section provides a detailed analysis of the company's revenues, costs, operating expenses, and net income (loss) for the period Revenues and Cost of Goods Sold Revenue decreased by 26% due to supply chain delays, leading to a 74% decline in gross profit and a reduced gross profit margin - Revenue for Q1 2022 decreased by $622,000 (26%) to $1,744,000 compared to $2,367,000 in Q1 2021, primarily due to international supply chain delays impacting contract fulfillment[201] - Cost of revenue decreased by $368,000 (18%) to $1,654,000, but gross profit decreased by 74% to $91,000, with gross profit margin falling from 14.6% to 5.2%[202][203] - The decline in gross profit margin was mainly due to fixed costs increasing as a percentage of lower revenue (21% in Q1 2022 vs. 14% in Q1 2021), despite a decrease in variable costs[203][204][205] Operating Expenses Total operating expenses increased by 65%, primarily driven by higher selling, general, and administrative expenses, including salaries and professional fees - Total operating expenses increased by $671,000 (65%) to $1,702,000 in Q1 2022 from $1,030,000 in Q1 2021[207] - This increase was driven by a $571,000 rise in selling, general and administrative (SG&A) expenses, a $74,000 increase in advertising and marketing, and a $26,000 increase in product development costs[207] - The SG&A increase was primarily due to higher salaries and benefits ($384,000), accounting and professional fees ($87,000), insurance costs ($44,000), and board/investor relations expenses ($50,000)[208] Operating Income (Loss) The operating loss widened by 135% to $1.61 million, reflecting the impact of decreased gross profit and increased operating expenses - The operating loss increased by $926,000 (135%) to $1,611,000 in Q1 2022, compared to $686,000 in Q1 2021[211] - Excluding non-cash items (stock-based compensation and depreciation/amortization), the operating loss increased by $902,000 (148%)[211] Other Income (Expense) The company recognized significant other income in Q1 2022, primarily from an insurance settlement, a notable improvement from the prior year's litigation expense - The company recognized other income (net) of $188,000 in Q1 2022, a significant improvement from other expense (net) of $108,000 in Q1 2021[212] - This was primarily due to $185,000 in income from an insurance settlement in Q1 2022, contrasting with a $107,000 litigation settlement expense in Q1 2021[212] Net Income (Loss) The net loss increased by 79% to $1.42 million, further impacted by convertible preferred stock dividends and a deemed dividend - The net loss increased by $630,000 (79%) to $1,423,000 in Q1 2022, compared to $793,000 in Q1 2021[213] - Excluding non-cash items, the net loss increased by $673,000 (104%)[213] Financial Condition, Liquidity and Capital Resources This section analyzes the company's cash position, working capital, and capital resources, highlighting the impact of a recent equity offering on liquidity Cash, Cash Equivalents Cash and cash equivalents significantly increased due to an equity offering, leading to a substantial improvement in working capital - Cash and cash equivalents increased by $19,874,000 to $22,034,000 as of March 31, 2022, from $2,160,000 at December 31, 2021, primarily due to proceeds from a common stock and warrants offering[214] - Working capital significantly improved from a deficit of $415,000 at December 31, 2021, to a surplus of $17,948,000 at March 31, 2022, driven by the increase in cash, inventory, and prepaid expenses, partially offset by deferred revenue[217] - The company holds deposits exceeding the federally insured amount and faces increasing exposure to accounts receivable risk as it pursues larger projects[214][215] Summary of Cash Flows Cash provided by operations decreased, while cash from financing activities significantly increased due to the sale of common stock and warrants Summary of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $193,000 | $484,000 | | Net cash used in investing activities | $(14,000) | $(12,000) | | Net cash provided by financing activities | $19,695,000 | $514,000 | | Net increase in cash | $19,874,000 | $986,000 | - Cash provided by operations decreased by $291,000 to $193,000 in Q1 2022, primarily due to an increased net loss and higher working capital funding[220][221] - Cash flows from financing activities significantly increased to $19,695,000 in Q1 2022, driven by $21,711,000 from the sale of common stock and warrants, offset by Series B preferred stock redemption[224] Common Stock Equity Offering The company completed a public offering in February 2022, raising approximately $22 million in net proceeds to fund growth initiatives and general corporate purposes - On February 15, 2022, the company closed a public offering, raising approximately $21,711,000 in net proceeds from the sale of 5,811,138 common shares and 6,572,808 warrants[227] - The proceeds will fund organic growth, new product initiatives, select acquisitions, and general corporate/working capital purposes[228] - The company's common stock and warrants commenced trading on the Nasdaq Capital Market under symbols 'CEAD' and 'CEADW' respectively, effective February 10, 2022[228] Inflation The company is experiencing inflationary increases in product costs, which may adversely affect margins, and plans to monitor contract terms to mitigate impact - The company is experiencing inflationary increases in product costs, which may adversely affect margins and financial results, impacting wages, equipment pricing, and service contracts[229] - Management plans to monitor contract terms and may add clauses to adjust pricing to mitigate the impact of inflation[229] Contractual Payment Obligations The company's primary contractual payment obligation as of March 31, 2022, consists of a building lease, as detailed in Note 2 - As of March 31, 2022, the company's primary contractual payment obligation consisted of a building lease, detailed in Note 2 to the financial statements[230] Commitments and Contingencies The company's commitments and contingencies are discussed in Note 7 of the condensed consolidated financial statements - The company's commitments and contingencies are discussed in Note 7 of the condensed consolidated financial statements[231] Off-Balance Sheet Arrangements As of March 31, 2022, the company had no material off-balance sheet arrangements - As of March 31, 2022, the company had no material off-balance sheet arrangements[232] Recent Developments Significant events occurring after March 31, 2022, are detailed in Note 14 of the condensed consolidated financial statements - Significant events occurring after March 31, 2022, are detailed in Note 12 (likely a typo, should be Note 14) of the condensed consolidated financial statements[233] Critical Accounting Estimates Critical accounting estimates involve significant management judgment across areas such as revenue recognition, asset valuation, equity compensation, and legal contingencies - Critical accounting estimates involve significant management judgment and include allocation of transaction prices, standalone selling prices, timing of revenue recognition on remaining performance obligations, valuation of intangible assets, equity-based compensation, deferred tax assets/liabilities, warranty accruals, accounts receivable/inventory allowances, and legal contingencies[234] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, CEA Industries Inc. is not required to provide quantitative and qualitative disclosures about market risk under this item - The company is a smaller reporting company and is not required to provide disclosures about market risk[236] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting, including insufficient accounting expertise and segregation of duties - Disclosure controls and procedures were not effective as of March 31, 2022, due to material weaknesses in internal control over financial reporting[237] - Identified weaknesses include a lack of sufficient accounting expertise and supervisory review, inadequate segregation of duties, and insufficient controls over the accuracy and completeness of spreadsheets used for financial reporting[238] - The company intends to improve its financial organization, including expanding accounting staff and improving systems, but full remediation may not be economically feasible due to size and financial resources[239] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the three months ended March 31, 2022[240] PART II — OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, unregistered sales of equity securities, and exhibits Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings and is unaware of any pending or threatened litigation that would have a material adverse effect on its business - The company is not currently involved in any material legal proceedings, nor is it aware of any pending or threatened litigation that would materially adversely affect its business[242] Item 1A. Risk Factors This section refers readers to the comprehensive risk factors detailed in the company's Annual Report on Form 10-K and subsequent SEC filings for potential material adverse effects - Readers should review the risk factors in the Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent SEC filings, as they could materially and adversely affect the company's business, financial condition, and results of operations[243] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item details the unregistered sale of equity securities related to the conversion of Series B Preferred Stock into common stock and warrants under a private placement exemption - On February 16, 2022, 1,650 shares of Series B Preferred Stock were converted into 362,306 common shares and 703,069 warrants (including 170,382 pre-funded warrants and 532,688 conversion warrants)[244] - These issuances were made to an accredited investor under a private placement exemption from registration pursuant to Section 4(a)(2) of the Securities Act[244] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - None[245] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[246] Item 5. Other Information The company reported no other information for the period - None[246] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from executive officers and Inline XBRL documents - The exhibit index includes certifications from the Principal Executive Officer and Principal Financial and Accounting Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL documents[247][254] SIGNATURES The report was signed on May 12, 2022, by the Chief Executive Officer and President, and the Chief Financial Officer - The report was signed on May 12, 2022, by Anthony K. McDonald, Chief Executive Officer and President, and Ian K. Patel, Chief Financial Officer[252] EXHIBIT INDEX The Exhibit Index lists various certifications and Inline XBRL documents filed with the Form 10-Q - The Exhibit Index lists various certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104) filed with the Form 10-Q[254]