CEA Industries Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. CEA Industries, formerly Surna Inc., designs and sells environmental-control equipment, engineering and related services for controlled-environment agriculture, primarily commercial indoor cultivation. Financial statements are unaudited.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3.015 million | $4.510 million | $4.759 million | $6.876 million |
| Gross profit / margin | $306,000 / 10.2% | $1.282 million / 28.4% | $397,000 / 8.3% | $1.627 million / 23.7% |
| Operating income (loss) | $(1.771) million | $116,000 | $(3.382) million | $(570,000) |
| Net income (loss) | $(1.761) million | $265,000 | $(3.184) million | $(528,000) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $(1.232) million | $(1.142) million |
- Q2 revenue fell 33% year over year; first-half revenue fell 31%. Management attributed the decline mainly to supply-chain and vendor shipment delays that postponed contract completion and revenue recognition.
- Gross margin contracted sharply, which management attributed to lower revenue, higher fixed costs as a share of revenue, and increased variable costs as a share of revenue. The company says it is pursuing more disciplined pricing, improved fixed-cost absorption and lower-cost suppliers.
- Operating expenses rose 78% in Q2 and 72% in the first half, including higher personnel, marketing and growth-related costs, and a $631,000 noncash goodwill impairment charge. The impairment followed a stock-price decline and a valuation test indicating carrying value exceeded fair value.
- Q2 other income was $11,000, versus $149,000 a year earlier. First-half other income of $199,000 included a $185,000 insurance settlement. No income tax expense or benefit was recorded in the periods presented.
Balance sheet, liquidity and capital
- At June 30, 2022, cash and cash equivalents were $20.611 million, compared with $2.160 million at December 31, 2021. Working capital was $16.943 million, versus a $415,000 deficit at year-end.
- First-half operating cash use was $1.232 million; investing cash use was $12,000; financing provided $19.695 million. Financing primarily reflected $21.711 million net proceeds from a February common-stock-and-warrant offering, offset by approximately $2.016 million to redeem Series B preferred stock and accrued dividends.
- The February offering sold 5.811 million common shares and warrants and raised approximately $22 million net. The company said proceeds were intended for organic growth, new products, selected acquisitions, working capital and general corporate purposes. Series B preferred shares were fully redeemed or converted; none remained outstanding at June 30.
- The balance sheet reports no borrowing debt; operating lease liabilities totaled $546,495, including $113,999 current and $432,496 long-term. The company reported no off-balance-sheet arrangements.
- Deferred revenue was $5.935 million, up from $2.840 million at year-end, reflecting customer payments received before performance. Prepaid expenses and other totaled $2.888 million, including $2.720 million in inventory advances.
- Approximately $20.361 million of the company’s June 30 bank deposits exceeded the stated FDIC insurance limit. Management stated offering proceeds should fund operations and obligations for at least 12 months after issuance of the statements, despite recurring losses.
Operating trends, outlook and risks
- Backlog was $9.698 million at June 30, down 13% from March 31. Q2 net bookings were $1.534 million, down 27% from Q1; Q2 cancellations totaled $2.288 million, which management said followed customers’ inability to obtain or maintain project funding.
- Management estimated $8.767 million of remaining performance obligations for 2022 and $931,000 for 2023. It cautioned that backlog is not earned revenue and may be delayed, reduced or cancelled. The backlog included $776,000 not expected to be realized until 2023 and $155,000 considered at risk of cancellation.
- Supply-chain congestion, equipment availability, inflation, higher wages and customer access to financing may delay projects and pressure margins. Customer facility completion, licensing and funding also affect when equipment can be accepted and revenue recognized. Management provided no formal revenue or earnings guidance.
- Customer concentration was significant: two customers represented 53% and 12% of Q2 revenue; one customer represented 47% of first-half revenue. Three customers represented 60%, 25% and 10% of accounts receivable at quarter-end.
- The company reported recurring losses and an accumulated deficit of $31.965 million. It maintains a full valuation allowance against deferred tax assets; use of approximately $24.275 million of tax net operating losses may be limited by ownership-change rules.
- Disclosure controls and procedures were deemed ineffective at June 30 due to a previously reported material weakness: insufficient accounting expertise and supervisory review, inadequate segregation of duties, and insufficient controls over spreadsheets used in financial reporting. Management described remediation plans, but noted resource constraints.
- The filing reported no material pending legal proceedings and no material subsequent events requiring disclosure. The company does not expect to pay common-stock dividends in the foreseeable future.
Important facts for investors to verify
- Whether supply deliveries, customer facility readiness and financing allow backlog to convert into revenue, and whether reported cancellation-risk orders are retained.
- Whether gross margins recover as revenue scales, pricing changes take effect and supplier costs are managed.
- Cash use, liquidity runway and the substantial concentration of uninsured bank deposits.
- Customer concentration, receivable collectability and the recoverability of advance inventory payments.
- Progress and cost of remediating the material weakness in financial reporting controls.
- Potential dilution from the outstanding warrants and equity awards; the filing reported 7.624 million warrants outstanding at June 30, 2022.