UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2023

OR

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

Commission File Number: 000-54286001-41266

SURNACEA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

(303)993-5271

(Registrant’s telephone number, including area code)

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

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 [X] ☒ NO [  ]☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YES [X] ☒ 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. (Check one):

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 [X] ☒

As of November 10, 2017, there were 191,265,919May 15, 2023, the number of outstanding shares of the registrant’s common stock outstanding.of the registrant was 8,076,372.

TABLE OF CONTENTSCEA Industries Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2023

Table of Contents

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 NOTE REGARDING FORWARD-LOOKING STATEMENTSSTATEMENT

This Quarterly Report on Form 10-Q, (this “Form 10-Q”)including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements withinthat 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 meaningnegative of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).these terms or other similar words. All statements, contained in this Form 10-Q 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 ourcurrent or future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about futuremacroeconomic or industry-specific trends or events and the impact of those trends that we believe may affectand events on us or our financial condition, resultsperformance; any statements regarding pending investigations, legal claims or tax disputes; any statements of operations, business strategy, short-termexpectation or belief; and long-term business operations and objectives, and financial needs. any statements of assumptions underlying any of the foregoing.

These forward-looking statements are subject to a number ofknown 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:

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

Although we believe that we use reasonable assumptions for these forward-looking statements, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Risk“Item 1A – Risk Factors” in theour Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, as updated from time to time in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It isYou should not possible for our management to predict all risks, nor can we assess the impact of all factorsplace undue reliance on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in anythese forward-looking statements, we may make. In lightwhich apply only as of these risks, uncertainties, and assumptions, the future events and trends discussed indate of this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in10-Q. Except as required by the forward-looking statements.

Wefederal securities laws, we undertake no obligation to revise or publicly release the results ofupdate any revision to these forward-looking statements, exceptwhether as required by law. Given these risksa 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 uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless expressly indicated or the context requires otherwise, the terms “Surna,” the “Company,” “we,” “us,” and “our”projections contained in this Quarterly Report on Form 10-Q referare intended to Surna Inc., a Nevada corporation, and, where appropriate, its wholly owned subsidiary.be within the meaning of “forward-looking statements” in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Surna

CEA Industries Inc.

Condensed Consolidated Balance Sheets

(in US Dollars except share numbers)

SeeThe accompanying notes to the unauditedare an integral part of these condensed consolidated financial statements.

SurnaCEA Industries Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)(in US Dollars except share numbers)

(Unaudited)

See

The accompanying notes to the unauditedare an integral part of these condensed consolidated financial statements.

SurnaCEA Industries Inc.

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

For the NineThree Months Ended September 30, 2017March 31, 2023 and March 31, 2022

(Unaudited)(in US Dollars except share numbers)

(Unaudited)

SeeThe accompanying notes to the unauditedare an integral part of these condensed consolidated financial statements.

SurnaCEA Industries Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)(in US Dollars except share numbers)

(Unaudited)

See

The accompanying notes to the unauditedare an integral part of these condensed consolidated financial statements.

CEA Industries Inc.

Surna Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2017March 31, 2023

(in US Dollars except share numbers)

NOTE(Unaudited)

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES– Nature of Operations and Significant Accounting Policies

Company:Description of Business

CEA Industries Inc., formerly Surna Inc. (the “Company”), was incorporated in Nevada on October 15, 2009. On March 26, 2014,We design, engineer and sell environmental control and other technologies for the Company acquired Safari Resource Group, Inc.Controlled Environment Agriculture (“Safari”CEA”), a Nevada corporation, whereby the Company became the sole surviving corporation after the acquisition of Safari. In July 2014, the Company acquired 100% industry. The CEA industry is one of the membership interests in Hydro Innovations, LLC, a Texas limited liability company (“Hydro”), pursuant to which Hydro became a wholly-owned subsidiaryfastest-growing sectors of the Company. The Company engineersUnited States’ economy. From leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables, ornamentals, and manufactures innovative technologysmall fruits (such as strawberries, blackberries and raspberries) to bell peppers, cucumbers, and tomatoes and cannabis and hemp, more and more producers consider or act to grow crops indoors in response to market dynamics or as part of their preferred farming practice. In service of the CEA industry, we provide: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) air sanitation products, that address(v) LED lighting, (vi) benching and racking solutions for indoor cultivation, (vii) proprietary and third party controls systems and technologies used for environmental, lighting, and climate control, and (viii) preventive maintenance services, through our partnership with a certified service contractor network, for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the energyU.S. and resource intensive nature of indoor cultivation. The CompanyCanada. Customers are those growers building new facilities and those expanding or retrofitting existing facilities. Currently, our revenue stream is focused onderived primarily from supplying industrial solutionsour products, services, and technologies to commercial indoor cannabis cultivation facilities. The Company’s engineering team is tasked with creating novelfacilities 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 resource efficient solutions,water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements. Although most of our customers do, we neither produce nor sell cannabis or its related products.

Impact of the COVID-19 Pandemic on Our Business

The impact of the government and the business economic response to the COVID-19 pandemic has affected demand across the majority of our markets and disrupted workflow and completion schedules on projects. The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, and working capital.

The resulting effects and uncertainties from the COVID-19 pandemic, including the Company’s proprietary liquid-cooled climate control platform. The Company’s engineers continuously seekdepth and duration of the disruptions to create technologiescustomers and suppliers, its future effect on our business, on our results of operations, and on our financial condition, cannot be predicted. We expect that allow growersthe 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 year ended December 31, 2022, and continuing into the current fiscal quarter, the Company experienced delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain. Consequently, our revenue recognition of some customer sales has been delayed until future periods when the specific demandsshipment of orders can be completed.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

Impact of Ukrainian Conflict

Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition, or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it has a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. As our operations are related only to the North American controlled environment agricultural industry, largely within the cannabis cultivation environment through temperature, humidity, light,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 process control. The Company’s objectiveembargoes, as we principally operate in the United States and Canada. We do not believe that the conflict will have any impact on our internal control over financial reporting. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the Ukrainian conflict.

Inflation

Recently, our operations have started to be influenced by the inflation existent in the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate. We are likely to continue to face inflationary increases on the cost of products and our operations, which may adversely affect our margins and financial results and the pricing of our service and product supply contracts. Inflation is reflected in higher wages, increased pricing of equipment and other products that we have contracted to provide intelligent solutionsto 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 improve the quality, controlwill permit us to adjust pricing if inflation and overall crop yieldprice increase pressures on us will impact our ability to perform our contracts and efficiency of indoor cannabis cultivation. The Company is headquartered in Boulder, Colorado. The Company does not cultivate or distribute cannabis.maintain our margins.

Financial Statement Presentation:Presentation

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

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted accounting principles 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. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. 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 ninethree months ended September 30, 2017March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2023. The balance sheet information as of December 31, 20162022 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, 2016. The notes to the unaudited condensed consolidated financial statements are presented on a going concern basis unless otherwise noted.2022.

Basis of Presentation:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced recurring losses since its inception. The Company incurred a net loss of approximately $3,553,000 for the nine months ended September 30, 2017, and had an accumulated deficit of approximately $17,889,000 as of September 30, 2017. Since inception, the Company has financed its activities principally through debt and equity financing and customer deposits. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities.

The Company’s consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate to support the Company’s cost structure. In the first quarter of 2017, the Company extinguished convertible promissory notes in the principal amount of $510,000 through the issuance of shares of its common stock (See Note 2) and raised $2,685,000 in a private placement of the Company’s common stock and attached warrants to accredited investors (see Note 6). In the third quarter of 2017, the Company extinguished notes payable in the principal amount of $537,000 through the issuance of shares of its common stock (See Note 3).

The Company will likely need to raise debt and equity financing in the future in order to continue its operations and achieve its growth targets, however, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including market demand for the Company’s products and services, the success of product development efforts, the timing of receipts for customer deposits, the management of working capital, and the continuation of normal payment terms and conditions for purchase of goods and services. The Company believes its cash balances and cash flow from operations will not be sufficient to fund its operations and growth for the next twelve months. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will likely need to raise additional funding to continue as a going concern from investors or through other avenues.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

Basis(in US Dollars except share numbers)

(Unaudited)

Principles of Consolidation and Reclassifications:

The condensed consolidated financial statements include the accounts of the Company and its controlled and wholly-owned subsidiary.wholly owned subsidiaries, Hydro Innovations, LLC (“Hydro”) and Surna Cultivation Technologies LLC (“SCT”). Intercompany transactions, profits,profit, and balances are eliminated in consolidation.

Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented. The reclassifications had no impact on net loss or total assets and liabilities.

Use of Estimates:Estimates

The preparation of financial statements in conformity with GAAP requires management to makeManagement 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 revenuesrevenue 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. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results. Key estimates include: valuationallocation of derivative liabilities,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.

Warrants Issued in Connection with Financings:

The Company generally accounts for warrants issued in connection with financings as a component of equity, unless there is a possibility that the Company may have to settle the warrants in cash. For warrants issued with the deemed possibility of a cash settlement, the Company records the fair value of the issued warrants as a liability at each reporting date and records changes in the estimated fair value as a non-cash gain or loss in the condensed consolidated statements of operations. The fair values of have been determined using the Black Scholes Merton Option Pricing valuation model, or the Black-Scholes Model. The Black-Scholes Model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of judgment on the part of the Company.

Fair value measurements

The Company evaluates assets and liabilities, subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. There have been no transfers between fair value measurements levels during the three months ended September 30, 2017. The carrying amounts for cash,warranty accruals, accounts receivable and accounts payable, accrued expensesinventory allowances, and other current liabilities approximate fair value duelegal 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 their short-term nature.

be cash equivalents. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, usedCompany may, from time to time, have deposits in valuation techniques, are assigned a hierarchical level. The following arefinancial institutions that exceed the hierarchical levelsfederally insured amount of inputs to measure fair value:

The following table sets forth the Company’s assets and liabilities that were measured at fair value asaccounts was approximately $15,948,000, consequently approximately $15,698,000 of September 30, 2017 and December 31, 2016this balance was not insured by level within the fair value hierarchy:FDIC. The Company has not experienced any losses to date on depository accounts.

The estimated fair value of the derivative liability associated with the Company’s warrants is calculated using the Black-Scholes option pricing model.

Net Income (Loss) Per Common Share

In accordance with ASC Topic 280 – “Earnings Per Share”, the basic lossBasic income (loss) per common share is computed by dividing net loss availableincome (loss) attributable to common stockholders by the weighted averageweighted-average number of common shares outstanding.outstanding during the period without consideration of common stock equivalents. Diluted lossnet income (loss) per common share is computed similar to basic loss per common share except thatby dividing net income (loss) by the denominator is increased to include theweighted-average number of additional common shares thatoutstanding 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 have been outstanding if the potentialbe antidilutive. Potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2017, there are approximately 19,143,050 sharesstock equivalents consist of common stock issuable upon the exercise of certain outstandingstock options and warrants and the vesting of certainrestricted stock units using the treasury method.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

As of March 31, 2023, and March 31, 2022, there were respectively, 8,010,957 and 8,021,057, potentially dilutive equity instruments outstanding in respect of options outstanding to purchase Company common stock, warrants, and restricted stock units that havewere convertible into shares of the Company’s common stock. Of these potentially dilutive equity instruments outstanding, 7,623,772 as of March 31, 2023 and 7,794,154 as of March 31, 2022 related to warrants issued in connection with the sale of our shares of series B Preferred stock and common stock in prior periods. The remaining 387,185 potentially dilutive equity instruments outstanding as of March 31, 2023 and 226,903 as of March 31, 2022 related to options and restricted stock units issued to our directors and staff.

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 excluded fromreduced to less than its carrying value. The Company performs a quantitative impairment test annually on December 31 by comparing the computationfair value of dilutedthe reporting unit with its carrying amount, including goodwill. The Company’s fair value is calculated using a market valuation technique whereby an appropriate control premium is applied to the Company’s market capitalization as calculated by applying its publicly quoted share price to the number of its common shares issued and outstanding. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has one reporting unit.

As of June 30, 2022, the Company experienced a triggering event due to a drop in its stock price and performed a quantitative analysis for potential impairment of its goodwill. Based on this analysis, the Company determined that its carrying value exceeded its fair value. As a result, the Company recorded a non-cash goodwill impairment charge of $631,064 at June 30, 2022. No income tax benefit related to this goodwill impairment charge was recorded at June 30, 2022.

Temporary Equity

Shares of preferred stock that are redeemable for cash or other assets are classified as temporary equity if they are redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the Company. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, net loss per share becauseof issuance costs, which is subsequently adjusted to redemption value (including the effect would have been anti-dilutive.amount for dividends earned but not yet declared or paid) at each balance sheet date if the instrument is currently redeemable or if it is probable that the instrument will become redeemable.

Revenue Recognition

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

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

Schedule of Revenue by Source

Miscellaneous revenue of $148,776 represents non-refundable deposits, forfeited by former customers on previously cancelled contracts.

Revenue Recognition Accounting Policy Summary

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

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

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

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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.

Disaggregation of Revenue

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

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

Other Judgments and Assumptions

The Company typically receives customer payments in advance of its performance of services or transfers of goods. Applying the practical expedient in ASC 606-10-32-18, which the Company has elected, the Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Accordingly, the remaining performance obligations related to customer contracts does not consider the effects of the time value of money.

Applying the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs include certain sales commissions and incentives, which are included in selling, general and administrative expenses, and are payable only when associated revenue has been collected and earned by the Company.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

Recent (in US Dollars except share numbers)

(Unaudited)

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, 2023 and December 31, 2022, the Company had no contract assets.

Contract liabilities consist of advance payments in excess of revenue recognized. The Company’s contract liabilities are recorded as a current liability in deferred revenue in the consolidated balance sheets since the Company generally expects to recognize revenue in less than one year. Non-refundable customer deposits are recognized as revenue when previously abandoned customer contracts have been forfeited. As of March 31, 2023, and December 31, 2022, deferred revenue, which was classified as a current liability, was $1,102,601 and $4,338,570, respectively.

For the three months ended March 31, 2023, the Company recognized revenue of $3,852,906 related to the deferred revenue at January 1, 2023. For the three months ended March 31, 2022, the Company recognized revenue of $1,162,374 related to the deferred revenue at January 1, 2022.

Remaining Performance Obligations

Remaining performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations that the Company has not performed under its customer contracts. The Company has elected not to use the optional exemption in ASC 606-10-50-14, which exempts an entity from such disclosures if a performance obligation is part of a contract with an original expected duration of one year or less. Accordingly, the information disclosed about remaining performance obligations includes all customer contracts, including those with an expected duration of one year or less.

Industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the Company’s control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance obligations. There are risks that the Company may not realize the full contract value on customer projects in a timely manner or at all, and completion of a customer’s cultivation facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes for customers to complete a project, which corresponds to when the Company is able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays that are typical in completing any construction project. Further, based on the current economic climate, the uncertainty regarding the COVID-19 virus, and the Company’s recent cost cutting measures, there is no assurance that the Company will be able to fulfill its backlog, and the Company may experience contract cancellations, project scope reductions and project delays.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

As of March 31, 2023, the Company’s remaining performance obligations, or backlog, was approximately $1,869,000. 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, 2023, includes booked sales orders of $379,000 from three customers that the Company does not expect to be realized until 2024, if at all. This 2024 projected revenue amount contains a booked sales order of $279,000 (15% of the total backlog) from one customer that we believe is at risk of cancellation based on conversations with this customer. Given the current supply chain and bottleneck issues that are still being worked through by the Company’s supply chain partners, the Company believes that some of its current contracts could be delayed.

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

Schedule of Remaining Performance Obligations Expected to be Recognized

Accounting Pronouncements: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 three months ended March 31, 2023, the valuation assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility of 152.23%; expected term in years of 10 and risk-free interest rate of 3.48%.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

The grant date fair value of restricted stock and restricted stock units is based on the closing price of the underlying stock on the date of the grant.

The Company has elected to reduce share-based compensation expense for forfeitures as the forfeitures occur since the Company does not have historical data or other factors to appropriately estimate the expected employee terminations and to evaluate whether particular groups of employees have significantly different forfeiture expectations.

The following is a summary of share-based compensation expenses included in the condensed consolidated statements of operations for the three months ended March 31, 2023 and March 31, 2022:

Schedule of Share-based Compensation Costs

In May 2017,March 2023, the FASB issued Accounting Standards Update (ASU) No. 2017-09,Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting,ASU 2023-01 to clarify whenrequire entities to classify and account for a change toleases with related parties on the basis of legally enforceable terms orand conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions.arrangement. The amendments are effective for all entities for annualin periods beginning after December 15, 2017,2023, including interim periods within those annual periods, and will be applied prospectively. Early adoption is permitted.fiscal years. The Company is currently evaluating the effect that adoptingdoes not expect this new accounting guidance willASU to have a material impact on its consolidated results of operations, cash flows and financial position.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

In January 2017,December 2022, the FASB issued ASU 2017-04,SimplifyingNo. 2022-06, which defers the Test for Goodwill Impairmentsunset date of Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2017-04”2020-04”). from December 31, 2022 to December 31, 2024. ASU 2017-04 simplifiesNo. 2022-06 was effective upon issuance. Topic 848 provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for goodwill impairment(or recognizing the effects of) reference rate reform on financial reporting, providing optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.reference rate reform if certain criteria are met. The Company is currently evaluating the effect that adoptingdoes not expect this new accounting guidance willASU to have a material impact on its consolidated results of operations, cash flows and financial position.

In May 2014,September 2022, the FASB issued Update 2022-04, “Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”. The update was issued in response to requests from financial statement users for increased transparency surrounding the use of supplier finance programs. The amendments in Update 2022-04 require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.

In October 2021, the FASB issued ASU 2014-092021-08, “Business Combinations (Topic 606),Revenue805): Accounting for Contract Assets and Contract Liabilities from Contracts with CustomersCustomers”., 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 new revenue recognitionguidance 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 supersedes all existing revenue recognition guidance. Under thison Company’s consolidated financial statements is dependent on the size and frequency of any future acquisitions the Company may complete.

In March 2020, the FAS issued ASU an entity should recognize revenue when it transfers promised goods or servicesNo. 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 customersease the potential burden in an amount that reflectsaccounting for (or recognizing the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and its relatedeffects of) reference rate reform on financial reporting. The amendments are effective for reporting periods (including interim periods) beginning afterthe Company as of March 12, 2020 through December 31, 2017.2022. The standard may be applied retrospectivelyadoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to each prior period presentedhave 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 retrospectively withare unrelated to its financial condition, results of operations, cash flows or disclosures.

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(in US Dollars except share numbers)

(Unaudited)

Note 2 – Leases

In February 2016 the cumulative effect recognized as ofFASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842” or the date of adoption (“modified retrospective method”“new lease standard”). The Company currently plansadopted 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 adoptapply the standard“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 modified retrospective method effectivenew lease standard. The Company has also elected to apply the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new lease standard.

On July 28, 2021, the Company entered into an agreement to lease 11,491 square feet of office and manufacturing space (the “New Facility Lease”), in Louisville, CO. The New Facility Lease commenced on November 1, 2021 and continues through January 1, 2018,31, 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 be reflectedinclude the renewal period in its financial statementslease term.

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

Schedule of Lease Cost