CEA Industries Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. The filing was signed March 28, 2023. CEA Industries sells engineering services, environmental-control equipment, and related products to controlled-environment agriculture customers, primarily cannabis cultivators. It does not grow or sell cannabis.
Financial performance and position
| Metric | FY2022 / year-end | FY2021 / comparison |
|---|---|---|
| Revenue | $11.28 million | $13.64 million; down 17% |
| Gross profit / margin | $1.14 million / 10.1% | $2.93 million / 21.5% |
| Operating loss | $5.72 million | $1.98 million |
| Net loss | $5.50 million | $1.34 million |
| Adjusted net loss (non-GAAP) | $4.53 million | $0.89 million |
| Net cash used in operations | $3.19 million | $3.21 million |
| Cash and cash equivalents | $18.64 million | $2.16 million |
| Working capital | $14.72 million | Deficit of $0.42 million |
| Indebtedness | No debt outstanding; operating lease liabilities totaled about $0.50 million | — |
FY2022 gross margin fell 11.4 percentage points, reflecting a higher fixed-cost base and higher variable costs as a share of revenue. Operating expenses rose 40% to $6.87 million, including a $0.63 million non-cash goodwill impairment charge. Other income included a $0.19 million insurance settlement. No income-tax expense was recorded.
Cash from operations remained negative. Year-end cash rose mainly because the February 2022 common-stock and warrant offering generated net proceeds of $21.71 million; financing cash flow also included $2.02 million to redeem half of the Series B preferred stock and related accrued dividends. Investing cash use was $0.03 million. The company reported an accumulated deficit of $34.28 million.
The company’s quarterly backlog table reports $1.46 million of revenue recognized in Q4 2022 and ending backlog of $5.58 million. The supplied filing text does not provide clear Q4-specific profit or cash-flow figures.
Material changes versus FY2021
- Net bookings declined 62%, from $16.01 million to $6.04 million. FY2022 bookings comprised $8.96 million of new contracts, $0.20 million of net positive change orders, and $3.12 million of cancellations.
- Backlog declined 48%, from $10.82 million at December 31, 2021 to $5.58 million at December 31, 2022. The filing says timing and conversion are uncertain; all year-end backlog was classified as partial-equipment-paid contracts and expected to be recognized in 2023, but realization is not assured.
- Revenue depended heavily on a limited customer base: two projects for one multi-facility operator represented 54% of FY2022 revenue. Three customers accounted for 64% in total.
- The company completed a public offering, listed its common stock and warrants on Nasdaq, redeemed or converted all Series B preferred stock, and implemented a 1-for-150 reverse stock split. Outstanding warrants totaled 7.62 million at year-end.
- Goodwill was written down to zero after a stock-price decline triggered an impairment test.
Outlook, commentary, risks, and unusual items
- Management gave no quantified revenue, earnings, or cash-flow guidance. It described demand as soft, cited weaker cannabis-market conditions, customer financing and licensing hurdles, construction delays, supply-chain disruption, and inflation, and said revenue and cash flow remain difficult to predict.
- On February 21, 2023, the company reduced its workforce by 32% and cut non-personnel costs to align expenses with activity and preserve liquidity. Management said it would continue monitoring liquidity and consider further actions as conditions warrant.
- Management stated that the 2022 offering proceeds were expected to fund operations for at least 12 months after the financial statements were issued. However, the company remained loss-making and cash-flow negative. At year-end, $18.39 million of its $18.64 million cash balance exceeded FDIC insurance limits; the filing also says the company held its funds at one bank and was evaluating banking arrangements.
- Key business risks include federal cannabis illegality and possible enforcement changes, customer access to financing and banking, project cancellations or delays, supplier dependence and shipping constraints, competition and margin pressure, customer concentration, and the possibility of needing additional capital. Future equity financing could dilute shareholders.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2022. The unchanged material weaknesses involved insufficient accounting expertise and supervisory review, inadequate segregation of duties, and insufficient review of spreadsheet-based reporting. Management said remediation may depend on available resources. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness; revenue recognition involving multiple performance obligations was identified as a critical audit matter.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements. The company does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether the $5.58 million year-end backlog converted to revenue, and whether further cancellations, scope reductions, or delays occurred.
- Cash, cash burn, and liquidity after the February 2023 workforce reduction; also verify the status of uninsured bank deposits and banking diversification.
- Customer concentration and the financial condition, financing, licensing, and project progress of major customers.
- Gross-margin recovery, cost reductions, and whether bookings and revenue diversified beyond cannabis-related customers.
- Progress in remediating the material weaknesses in financial reporting controls.
- Potential dilution from the 7.62 million warrants outstanding at year-end and subsequent share issuances; the filing reports 8,076,372 common shares outstanding as of March 28, 2023.