CEA Industries Inc. (NASDAQ:CEAD) Q2 2022 Earnings Conference Call August 11, 2022 4:15 PM ET
Company Participants
Tony McDonald – Chairman and Chief Executive Officer
Ian Patel – Chief Financial Officer
Operator
Good afternoon, ladies and gentlemen and welcome to the CEA Industries’ Q2 2022 Earnings Conference Call. Joining us today are the company’s Chairman and CEO, Tony McDonald as well as the company’s CFO, Ian Patel. [Operator Instructions]
Before we begin, please be advised that this call may contain statements of a forward-looking nature relating to future events. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. These statements reflect CEA Industries’ current beliefs, and a number of important factors could cause actual results to differ materially from those expressed in this call, including the risk factors set forth in the company’s Form 10-K, which was filed with the SEC. Please refer to the SEC filings for a detailed discussion of the risks and uncertainties associated with their business. Also, please note that the company filed its quarterly report on Form 10-Q and issued a press release announcing second quarter results earlier today. These documents can be found on the Investor Relations section of the company’s website at ceaindustries.com. If you would like to be added to the company’s e-mail distribution list, please send an e-mail to info@ceaindustries.com.
It is now my pleasure to turn the floor over to Tony McDonald, Chairman and CEO of CEA Industries. Sir, the floor is yours.
Tony McDonald
Thank you, and good afternoon, everyone. As highlighted in our earnings press release, during the second quarter, we generated over 70% growth on the top line and nearly doubled gross margin compared to Q1. However, the current market environment is significantly different as compared to the prior year. Inflation and the effects of supply chain challenges continue to impact revenue and profitability. Nonetheless, we are navigating the environment and expect to continue driving growth and improving profitability in the second half of the year. Over the first half of 2022, we made significant investments in our sales, marketing and product development initiatives. Our Q2 results reflect these investments with a solid increase in quarter-over-quarter bookings. We not only expanded contracts with current customers, but also signed multiple new agreements throughout the quarter.
One specific contract I’d like to highlight is with Green Brothers Farm, a family-owned and operated farm that is developing a 26-acre site exclusively for indoor cannabis cultivation. We anticipate revenues of approximately $10 million over an estimated 2 to 3-year period. The initial contract valued at roughly $1.2 million is for the first phase of products and services, which is estimated to be completed by the end of the year. While we still have work to do to execute on our organic growth initiatives, we believe the early results from our investments in sales and marketing are encouraging. Also, during the second quarter, we established a partnership with Merida Capital, a cannabis-focused private equity firm to be the preferred provider of various products and services for Merida’s indoor cultivation facilities. Our subsidiary, Surna Cultivation Technologies has worked with Merida on several projects in the past, and our success in effectively building out their facilities is what ultimately drove this formal partnership.
We are excited to utilize our expertise in development, design and engineering to help them build the most efficient and state-of-the-art cultivation facilities in the market. As I have mentioned on past conference calls, we are intensely focused on identifying both organic and inorganic growth opportunities beyond our traditional cannabis end market, including the rapidly growing urban indoor farming market. We have also continued to make headway with expanding our offerings at the product level. In July, we launched our partnership with CleanLeaf for their odor control and air filtration products. We are excited about the pipeline we have in development, and we expect new product launches in the coming months.
While a few states this year had disappointing outcomes on cannabis legalization efforts, there are several states we look forward to serving as their cultivation licensing and rules and regulations are finalized, particularly on the East Coast. Rhode Island passed full legalization in May, and Maryland has full legalization on the ballot this November. New Jersey’s recreational sales began earlier this year, and the Cannabis Regulatory Commission is still accepting applications for recreational cannabis businesses. New York regulators have approved regulations that will govern adult-use sales. The portal to apply for a cultivation and license in New York is expected to go live this month. Mississippi started accepting applications for cultivators in June. This date has a low barrier of entry. So, we anticipate several new build-out opportunities. We have been actively marketing in all of these states through trade shows, social media, SCO and advertising, and we are currently pursuing several leads we have secured over the past few months.
At this time, I will pass it over to our Chief Financial Officer, Ian Patel, to cover our second quarter financial highlights before returning for closing remarks. Ian?
Ian Patel
Thanks, Tony. Good afternoon, everyone. Jumping right into our results, Q2 revenue was $3 million compared to $4.5 million in the year-ago period. The decrease was a result of supply chain and project delays, which impacted revenue recognition, and we expect to recognize this delayed revenue in the second half of the year. In addition, our backlog of approximately $10 million is also expected to be recognized over the next 18 months.
Our net bookings in the second quarter were $1.5 million compared to $900,000 in the same period in 2021. Backlog at quarter end increased 21% to $9.7 million compared to $8 million at the year ago quarter. The increase in both net bookings and backlog for Q2 were partially offset by a $2.3 million contract cancellation that resulted from a customer’s loss of funding. We didn’t lose any money in that transaction as the deposits we receive are nonrefundable.
Gross profit for the second quarter of 2022 was $300,000 or 10.2% of revenue compared to $1.3 million or 28.4% of revenue for the same period in 2021. The decrease in gross margin was primarily driven by lower revenue as portion of our cost of goods sold are fixed. Operating expenses in Q2 were $2.1 million compared to $1.2 million in the year ago quarter. The increase was primarily related to $620,000 non-cash goodwill impairment charge related to the decline in our stock price, with the balance driven by increased investments in marketing and headcount.
Net loss for Q2 2022 was $1.8 million or negative $0.23 per share compared to net income of $300,000 or $0.17 per share in the year ago quarter. As of June 30, 2022, cash and cash equivalents were approximately $20.6 million compared to $2.2 million as of December 31, 2021, while working capital increased by $17.4 million during this period. The increase in cash was primarily driven by net proceeds from the sale of our common stock and warrants of approximately $21.7 million in February 2022. As of June 30, 2022, we remain debt-free.
This concludes my prepared remarks. And I’ll pass it back to you, Tony.
Tony McDonald
Thank you, Ian. Looking to the back half of the year, we plan to execute on both our organic and inorganic growth initiatives. With a strong balance sheet in hand, we have the ability to be patient and diligent in our pursuit of M&A opportunities. The macro environment has certainly presented its share of challenges. However, it also provides us with the opportunity to acquire accretive businesses at attractive multiples, which will only strengthen our financial profile and position us to accelerate growth and profitability in the quarters ahead.
At this time, I would like to ask our operator to provide instructions for the Q&A session and open the floor for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
Tony McDonald
As we wait for the people to enter the queue, I will field some questions received via e-mail and the webcast. First question, could you please discuss if the Canna Conferences that you have been attending have led the signed projects and increased quoting activity? Also, could you add some color and please discuss regional new project activity and describe the regions or states that you are most excited about in the upcoming year? And lastly, how is the CEA and indoor food grow market growing as a percentage of your revenue versus cannabis grows?
We have been actively quoting from leads we have received from several trade shows such as: NECANN, Vermont and Chicago; CWCBE, New York; Indoor Ag Tech Summit, New York; and more. We are active in projects all across North America. And as I mentioned earlier in the call recently signed a $1.2 million contract with Green Brothers in California with a multiyear potential of $10 million total as well as several projects in the Midwest. The states we are looking forward to in the near future are, of course, New York, New Jersey and Mississippi and we have been targeting those states for some time now. Regarding the indoor or CEA indoor food market, we see the indoor ag market is much like the cannabis market was in its beginning days. So as a percentage of revenue for us right now is fairly small. But we believe the indoor ag market will blossom as cannabis did, which is why we are enacting several state and marketing initiatives towards that market.
Another question. Recognizing that you are beginning to see the benefit of sales and marketing in your new bookings, when will the improved sales and marketing translate to higher revenue?
Our sales and marketing investments are focused on driving new bookings, which are contracts. What drives revenue is the ability to deliver products on those projects which comes down to the supply chain. We have discussed these issues in the past and have several initiatives in place to mitigate the effects of supply chain delays, such as diversifying our supplier network. But candidly, a lot of that is out of our control.
Second question or third question, you have consistently mentioned M&A initiatives this year, but we haven’t seen anything materialize. What are some of the impediments you are facing to get a deal done?
Our business isn’t as simple as some of the other comps out there. Our targets are more difficult to locate due to the various natures of the businesses. Ian?
Ian Patel
Just to add to that as the cost of capital has gone up over the last several months, we are seeing a bit of a lag between the decline in asset valuations and private seller expectations. We are still focused on getting a deal done, but we are also mindful in making sure we are patient so that our acquisitions are ultimately creating long-term value.
Tony McDonald
Thank you. Another question, can you expand on the large client cancellation in Q2? Are there other large deals that have been booked in the past that are at risk going forward? Well, generally, any project of any size can be canceled, and indeed, historically, we have a number of cancellations every quarter. This is the only cancellation of this scale in the past few years. Ian?
Ian Patel
Yes. Again, as interest rates and ultimately, the cost of capital has gone up, smaller private investors are eager to make sure they are generating returns and in the casualty of that projects start to get reconsidered. Keep in mind though a lot of our customer concentration is with well-capitalized companies that do have longer term plans in place. That doesn’t mean our backlog is immune to cancellations, but we do feel less concerned about cancellations because of that.
Tony McDonald
That concludes our pre-submitted questions. Operator, are there any questions from the lines at this time?
Operator
There were no questions from the lines at this time.
Tony McDonald
Well, thank you very much. This concludes today’s conference call. We look forward to presenting our third quarter results in mid-November.
Operator
An audio replay of this call will be available on ceaindustries.com/investors, beginning on August 12 at 4:00 p.m. Eastern Time and will remain available until August 26, 2022. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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