CEA Industries Inc. — Q1 2022 Form 10-Q
Business context and period. CEA Industries, formerly Surna Inc., designs, engineers and sells environmental-control equipment, systems and services for controlled-environment agriculture, primarily commercial indoor growers. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / prior balance |
|---|---|---|
| Revenue | $1.744 million | $2.367 million |
| Gross profit and margin | $91,000; 5.2% | $345,000; 14.6% |
| Operating loss | $1.611 million | $686,000 |
| Net loss | $1.423 million | $793,000 |
| Net loss available to common shareholders | $1.899 million | $793,000 |
| Basic and diluted loss per share | $0.41 | $0.50 |
| Cash from operating activities | $193,000 | $484,000 |
| Cash from investing activities | $(14,000) | $(12,000) |
| Cash from financing activities | $19.695 million | $514,000 |
| Cash and cash equivalents, March 31 | $22.034 million | $2.160 million at Dec. 31, 2021 |
| Working capital | $17.948 million | $(415,000) at Dec. 31, 2021 |
| Total liabilities | $7.567 million | $4.892 million at Dec. 31, 2021 |
The company reported no outstanding note payable at quarter-end; its former $514,200 bank loan had been forgiven in November 2021. Lease liabilities totaled approximately $572,000, including current and long-term portions. Cash rose primarily because of the February equity offering, which generated approximately $21.7 million net, partly offset by a $2.016 million Series B preferred-stock redemption payment. Operating cash flow was supported by a $2.646 million increase in deferred revenue, while the company still reported a net loss.
Material changes and notable items
- Revenue fell 26% year over year, mainly because supplier and shipping delays prevented completion and shipment of customer orders. Gross margin declined 9.4 percentage points to 5.2%, with fixed costs representing a larger share of lower revenue.
- Operating expenses increased 65% to $1.702 million, including higher employee costs, professional fees, insurance, board fees and investor-relations expenses. The operating loss increased 135%.
- Net loss increased 79%. Q1 2022 included $185,000 of insurance-settlement income; Q1 2021 included $107,000 of expense related to a former-employee litigation settlement.
- On February 15, the company completed an offering of common shares and warrants, receiving approximately $21.7 million net. It issued 5.811 million common shares in the offering and also issued warrants. Series B preferred stock was fully redeemed or converted in February; conversion generated 362,306 common shares and warrants, and a $440,000 deemed dividend. The company had 7,784,444 common shares outstanding at March 31.
- Backlog was $11.179 million at March 31, up 3% from December 31. Q1 net bookings were $2.105 million, down 47% from Q4 2021. Backlog included $2.217 million of orders not expected to be realized until 2023, if at all.
Outlook, risks and controls
The filing provides no formal revenue or earnings guidance. Management said the equity offering proceeds were expected to fund working-capital needs and operations for at least 12 months after the financial statements became available to be issued. Management’s strategy includes organic growth through broader product and service offerings and pursuing selected acquisitions; the filing does not quantify expected results.
- Management cited continuing supply-chain and shipping delays, inflation in product and labor costs, and COVID-19-related uncertainty. Delayed equipment receipts postponed revenue recognition during the quarter.
- Backlog is not earned revenue and may be delayed, reduced or canceled. Customer financing, licensing, permitting, real-estate, construction and power availability can affect project completion and revenue timing. Management stated there was no certainty that backlog would convert to revenue.
- One customer accounted for 35% of Q1 2022 revenue. Three customers represented 44%, 19% and 16% of accounts receivable at March 31.
- Approximately $21.784 million of quarter-end cash was above the FDIC-insured limit. The company also reported exposure to customer collection risk and possible inflation-related margin pressure.
- Management concluded disclosure controls and procedures were not effective at March 31 because of a material weakness in financial reporting controls: limited accounting personnel and segregation of duties, and insufficient controls over spreadsheets. Management described remediation plans but said remediation may not be economically feasible given the company’s size and resources.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. It noted potential limitations on use of approximately $22.514 million of tax net operating losses if ownership-change rules apply.
Important facts for investors to verify
- Whether supply-chain delays ease and the company converts backlog into shipments, recognized revenue and cash collections, particularly the $2.217 million expected in 2023.
- Whether net bookings recover and gross margins improve as management’s pricing, cost and supplier initiatives take effect.
- The fully diluted share count and potential dilution from the substantial outstanding warrant and equity-award overhang; the filing reports 7.794 million warrants outstanding at March 31.
- Whether operating cash flow can become sustainable without continued reliance on customer advances or external financing.
- Progress in remediating the disclosed financial-reporting control weakness, and any further updates to customer concentration, liquidity and tax-attribute risks.