CEA Industries(CEAD) - 2022 Q3 - Quarterly Report

Cautionary Statement This section warns that the report contains forward-looking statements subject to substantial risks and uncertainties, and investors should not place undue reliance on them - This report contains forward-looking statements that involve substantial risks and uncertainties, which could cause actual results to differ materially from expectations[11] - Key factors that could cause differences include business prospects, the impact of the COVID-19 pandemic and other health crises, overall financial condition (including higher interest rates and inflation), regulatory changes, competitive pressures in the CEA industry, and supply chain disruptions[12][14] - Investors should not place undue reliance on these forward-looking statements, which are valid only as of the report date, and the company undertakes no obligation to update them[15] PART I — FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and an assessment of internal controls and procedures Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in shareholders' equity, and cash flows, along with detailed notes explaining accounting policies and specific financial items Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, highlighting significant increases in cash and a shift from shareholder deficit to positive equity | Metric | Sep 30, 2022 (Unaudited) ($) | Dec 31, 2021 ($) | | :--------------------------------- | :----------------------- | :------------------- | | Cash and cash equivalents | $21,083,549 | $2,159,608 | | Total Current Assets | $22,877,453 | $3,991,098 | | Total Assets | $23,459,214 | $5,281,962 | | Total Current Liabilities | $6,914,173 | $4,406,269 | | Total Liabilities | $7,319,438 | $4,892,495 | | Total Shareholders' Equity (Deficit) | $16,139,776 | $(3,570,533) | - Cash and cash equivalents increased significantly by $18,923,941 from December 31, 2021, to September 30, 2022[19] - Total Shareholders' Equity shifted from a deficit of $(3,570,533) at December 31, 2021, to a positive $16,139,776 at September 30, 2022[19] Condensed Consolidated Statements of Operations This statement details the company's revenues, costs, and net income or loss over specific periods, showing trends in profitability and operational efficiency | Metric | Three Months Ended Sep 30, 2022 ($) | Three Months Ended Sep 30, 2021 ($) | Nine Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2021 ($) | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue, net | $5,063,079 | $3,706,436 | $9,822,391 | $10,582,470 | | Cost of revenue | $4,465,888 | $2,959,264 | $8,828,453 | $8,208,368 | | Gross profit | $597,191 | $747,172 | $993,938 | $2,374,102 | | Operating income (loss) | $(1,059,133) | $(442,543) | $(4,441,521) | $(1,012,215) | | Net income (loss) | $(1,042,050) | $(407,905) | $(4,225,578) | $(936,031) | | Net income (loss) available to common shareholders | $(1,042,050) | $(2,672,199) | $(4,701,561) | $(3,200,325) | | Income (loss) per common share – basic and diluted | $(0.13) | $(1.69) | $(0.69) | $(2.02) | | Weighted average number of common shares outstanding, basic and diluted | 7,953,974 | 1,583,511 | 6,804,741 | 1,581,142 | - Revenue increased by 37% for the three months ended September 30, 2022, but decreased by 7% for the nine months ended September 30, 2022, compared to the prior year periods[23] - Gross profit decreased by 20% for the three months and 58% for the nine months ended September 30, 2022, primarily due to increased variable costs and lower equipment margins[23] Condensed Consolidated Statements of Changes in Shareholders' Equity (Deficit) This statement outlines the changes in the company's equity, primarily driven by new share issuances and conversions, despite a reported net loss - Shareholders' Equity (Deficit) increased from $(3,570,533) at December 31, 2021, to $16,139,776 at September 30, 2022[19][24] - This increase was primarily driven by $21,711,131 from common shares and warrants issued for cash and $1,980,000 from the conversion of Series B preferred stock during the nine months ended September 30, 2022[24] - The company recognized a net loss of $(4,225,578) for the nine months ended September 30, 2022[24] Condensed Consolidated Statements of Cash Flows This statement details the inflows and outflows of cash from operating, investing, and financing activities, showing a significant increase in cash from financing | Metric | Nine Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2021 ($) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(743,108) | $(1,761,260) | | Net cash used in investing activities | $(28,098) | $(13,816) | | Net cash provided by financing activities | $19,695,147 | $1,774,074 | | Net change in cash and cash equivalents | $18,923,941 | $(1,002) | | Cash and cash equivalents, end of period | $21,083,549 | $2,283,879 | - Net cash provided by financing activities increased substantially to $19,695,147 for the nine months ended September 30, 2022, primarily due to $21,711,131 from the sale of common stock and warrants[28][259] - Cash used in operating activities decreased by $1,018,000, from $(1,761,000) in 2021 to $(743,000) in 2022[28][254] Notes to the Condensed Consolidated Financial Statements These notes provide essential details on the company's business, the impact of external events like COVID-19, accounting adjustments, revenue sources, and significant customer relationships - CEA Industries Inc. designs, engineers, and sells environmental control and other technologies for the Controlled Environment Agriculture (CEA) industry, primarily serving commercial indoor cannabis facilities in the U.S. and Canada[31][195] - The COVID-19 pandemic has caused significant delays in equipment receipt and revenue recognition due to supply chain disruptions, and the company anticipates continued adverse effects on sales, project implementation, and operating margins[33] - A goodwill impairment charge of $631,064 was recorded at June 30, 2022, due to a drop in the company's stock price, indicating that its carrying value exceeded its fair value[52] Revenue by Source | Source | Three Months Ended Sep 30, 2022 ($) | Three Months Ended Sep 30, 2021 ($) | Nine Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2021 ($) | | :--------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equipment and systems sales | $4,941,380 | $3,523,948 | $9,375,093 | $9,933,313 | | Engineering and other services | $104,434 | $110,538 | $382,559 | $464,269 | | Shipping and handling | $17,265 | $71,950 | $64,739 | $184,888 | | Total revenue | $5,063,079 | $3,706,436 | $9,822,391 | $10,582,470 | - Remaining performance obligations (backlog) as of September 30, 2022, was approximately $6,832,000, with $4,271,000 not expected to be realized until 2023 and $157,000 at risk of cancellation[73][74] - Customer concentration is significant, with two customers accounting for 53% and 24% of revenue for the three months ended September 30, 2022, and three customers accounting for 54%, 20%, and 19% of accounts receivable as of September 30, 2022[85][86] 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 performance and condition, discussing key operational highlights, the impact of external factors, and a detailed comparison of financial results for the three and nine months ended September 30, 2022, versus 2021. It also covers liquidity, capital resources, and critical accounting estimates - The company uses non-GAAP measures like net bookings and backlog, and adjusted net income (loss) to supplement GAAP results, cautioning that backlog may not be indicative of future operating results due to potential renegotiations or cancellations[190][191][216] - Net bookings for Q3 2022 were $2,197,000, a 43% increase from Q2 2022, while backlog at September 30, 2022, was $6,832,000, a 30% decrease from June 30, 2022, due to higher revenue recognition[209][210] Backlog and Net Bookings Trend | Metric | September 30, 2021 ($) | December 31, 2021 ($) | March 31, 2022 ($) | June 30, 2022 ($) | September 30, 2022 ($) | | :----------------------------- | :------------------- | :------------------ | :----------------- | :---------------- | :------------------- | | Backlog, beginning balance | $7,987,000 | $9,881,000 | $10,818,000 | $11,179,000 | $9,698,000 | | Net bookings, current period | $5,600,000 | $3,993,000 | $2,105,000 | $1,534,000 | $2,197,000 | | Recognized revenue, current period | $3,706,000 | $3,056,000 | $1,744,000 | $3,015,000 | $5,063,000 | | Backlog, ending balance | $9,881,000 | $10,818,000 | $11,179,000 | $9,698,000 | $6,832,000 | - For the three months ended September 30, 2022, revenue increased by 37% to $5,063,000, but gross profit decreased by 20% to $597,000, and net loss increased by $634,000 to $1,042,000, primarily due to increased variable costs and operating expenses[218][220][224][231] - For the nine months ended September 30, 2022, revenue decreased by 7% to $9,822,000, gross profit decreased by 58% to $994,000, and net loss increased by 351% to $4,226,000, largely due to supply chain delays, higher fixed and variable costs, and a $631,000 goodwill impairment charge[232][234][239][243][247] - Cash and cash equivalents increased by $18,924,000 to $21,084,000 as of September 30, 2022, primarily from a $21,711,000 equity offering, significantly improving working capital from a deficit to a surplus of $15,963,000[248][250][262] 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 - The company is a smaller reporting company and is therefore not required to provide quantitative and qualitative disclosures about market risk[271] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting, including insufficient accounting expertise, inadequate segregation of duties, and reliance on unverified spreadsheets. The company plans to remediate these issues but acknowledges economic feasibility challenges - Disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting[272] - Identified material weaknesses include a lack of sufficient accounting expertise, inadequate segregation of duties, and insufficient controls over the accuracy and completeness of spreadsheets used for financial reporting[273] - The company intends to improve its financial organization and systems but notes that remediating these deficiencies may not be economically feasible due to its size and financial resources[274] PART II — OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information and exhibits required for the report 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[277] Item 1A. Risk Factors This section refers readers to the risk factors detailed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent SEC filings, emphasizing that those factors could materially affect the business - Readers should review the risk factors contained in the Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent SEC filings, as these factors could materially and adversely affect the company's business, financial condition, and results of operations[278] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported for the period[279] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - No defaults upon senior securities were reported for the period[280] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[281] Item 5. Other Information No other information is required to be reported under this item - No other information was reported under this item[282] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, which are incorporated by reference or filed herewith - The section lists the exhibits filed with the Form 10-Q, which are either incorporated by reference or filed herewith[283] SIGNATURES This section provides the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report on November 14, 2022 - The report is signed by Anthony K. McDonald, Chief Executive Officer and President, and Ian K. Patel, Chief Financial Officer, on November 14, 2022[287] EXHIBIT INDEX This index provides a comprehensive list of all exhibits accompanying the Form 10-Q, including various certifications and Inline XBRL documents - The Exhibit Index provides a detailed list of all exhibits accompanying the Form 10-Q, including certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents[289]