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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

Note 15 – Income Taxes

 

For financial reporting purposes, there were no provisions for U.S. federal, state or international income taxes for the years ended December 31, 2021 or 2020 due to the Company’s net operating losses (“NOLs”) in such periods and full valuation allowance recorded against the net deferred tax assets.

 

The differences between income taxes expected at the U.S. federal statutory income tax rate and the reported provision for income taxes are summarized as follows:

 

   2021   2020 
Income taxes computed at the federal statutory rate  $(281,000)  $(369,000)
States taxes, net of federal benefits   (53,000)   (69,000)
Permanent differences   (124,000)   (136,000)
True-up adjustments   9,000    115,000 
Adjustment to net operating loss   (13,000)   (17,000)
Change in valuation allowance   462,000    476,000 
Reported income tax (benefit) expense  $-   $- 

 

The components of the net deferred tax assets as of December 31, 2021 and 2020 are as follows:

   2021   2020 
Deferred tax assets:          
Net operating losses  $5,262,000   $4,821,000 
Equity compensation   177,000    118,000 
Other deferred tax assets   141,000    169,000 
Total deferred tax assets   5,580,000    5,108,000 
Deferred tax liabilities:          
Other deferred tax liabilities   (78,000)   (68,000)
Total deferred tax liabilities   (78,000)   (68,000)
Net deferred tax assets before valuation allowance   5,502,000    5,040,000 
Less valuation allowance   (5,502,000)   (5,040,000)
Net deferred tax assets  $-   $- 

 

As of December 31, 2021, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $21,091,000, of which $11,196,000 will expire, if not utilized, in the years 2034 through 2037. The balance of $9,895,000 NOLs generated subsequent to December 31, 2017 do not expire but may only be used against taxable income to 80%. In response to the novel coronavirus COVID-19, the Coronavirus Aid, Relief, and Economic Security Act temporarily repealed the 80% limitation for NOLs arising in 2018, 2019 and 2020. A number of states in which we operate have not conformed to this newly enacted federal tax law. In addition, pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, use of the Company’s NOLs carryforwards may be limited in the event of cumulative changes in ownership of more than 50% within a three-year period. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited.

 

As further discussed in Note 16 Subsequent Events in our consolidated financial statements below, effective February 15, 2022, the Company received net proceeds of approximately $22 million in respect to the sale of 5,811,138 shares of its common stock together with 5,811,138 warrants. The Company issued a further 1,052,227 warrants to its placement agent: 290,557 in respect of their fees and 761,670 on the exercise of the substantial majority of the 15% overallotment available to them. The 290,557 warrants issued in respect of the placement agent’s fees vest after six months, have a term of 5 years and an exercise price of $5.1625. The 761,670 warrants issued in respect of the overallotment vest immediately, have a term of 5 years and an exercise price of $5.00.

 

These securities sales and our September 2021 securities sales will also have to be taken into account for determination of any “ownership change” that we have undergone during a determination period. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future bottom-line operating results by effectively increasing our future tax obligations.

 

 

CEA Industries Inc.

Notes to Consolidated Financial Statement

 

The Company must assess the likelihood that its net deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management’s judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of December 31, 2021 and 2020. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its net deferred tax assets in the foreseeable future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.

 

The Company is subject to examination by the IRS for the calendar year 2017 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company’s taxes or the Company’s net operating losses with respect to years under examination as well as subsequent periods. The Company has filed Colorado state income tax returns for years 2014 through 2020, Alaska, California and Connecticut state income tax returns for the years 2017 through 2020, Michigan state income tax returns for the years 2018 through 2020 and Alabama, District of Columbia, Massachusetts, Oklahoma and Texas state income taxes for the years 2019 and 2020.

 

The Company recognizes in its consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of operating expense. The Company does not believe there are any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date. There were no penalties or interest liabilities accrued as of December 31, 2021 or 2020, nor were any penalties or interest costs included in expense for the years ended December 31, 2021 and 2020.