CEA Industries Inc. Common Stock (BNC) Q4 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the CEA Industries, Inc. Q4 and Full Year 2021 and earnings conference call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, CEA Industries CEO, Tony McDonald. Sir, the floor is yours.

Thank you, and good afternoon. Welcome to CEA Industries Fourth Quarter and Full Year 2021 Earnings Call. My name is Tony McDonald, I'm the company's Chairman and CEO, and I'm joined today by our Chief Financial Officer, Ian Patel. 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 our 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 our Form 10-K, which we filed with the SEC. Please refer to our SEC filings for a more detailed discussion of the risks and uncertainties associated with our business. Please note that we filed our annual report on Form 10-K and issued a press release announcing fourth quarter and full year 2021 results earlier today. These documents can be found on our website at www.ceaindustries.com/investor-relations. If you would like to be on our e-mail distribution list, send an e-mail to info@ceaindustries.com. While we will highlight some key information contained in the press release, the primary purpose of this call is to provide an update on our recently updated strategic and organic growth plans and our key operating metrics. In the fourth quarter of last year, we changed the name of our company from Surna Inc. to CEA Industries, Inc. Earlier in the year, we renamed our subsidiary business that designs, engineers and provides equipment for indoor cultivation facilities to Surna Cultivation Technologies. We updated the Surna name to better reflect all of our capabilities and product and service offerings and to make the company more readily identifiable on social media to potential customers. We changed the name of our parent company to CEA Industries, Inc. to more accurately represent our business to the investor community. As we have previously announced, we have set out 3 key pillars of our corporate strategy for growing the company and increasing shareholder value. One, pursue aggressive organic growth; two, seek strategic relationships, mergers and acquisitions to add to our existing business; and three, pursue an uplifting to a national exchange and seek additional growth capital. Last month, we achieved the long-held goal of conducting a substantial capital raise end uplisting our stock to trade on the NASDAQ Exchange. As noted in our press release at the time, we raised $24 million for the purposes of pursuing our strategic goals and for general working capital. It is our intention to move aggressively to use this enhanced capital base to achieve the other 2 components of our corporate strategy, specifically to, first, pursue aggressive organic growth. We serve a market for the construction and expansion of controlled environment agriculture facilities and businesses that is projected to grow at a 20-plus percent compound annual growth rate for the foreseeable future. Our primary vertical market of cannabis cultivation facilities has been joined by the similarly rapidly growing urban indoor farming market to create 2 market opportunity segments that we are positioned to serve. With our enhanced capital resources, we are now better positioned to preserve the growth we are confident we can achieve. Second, to seek strategic relationships, mergers and acquisitions to add to our existing business. We enjoy wide brand recognition in the indoor cultivation industry because of our over 15-year longevity in the market and the large number of cultivation projects we have served, including over 200 projects for commercial facilities. Our core expertise is engineering the environmental controls of these facilities, which is a sophisticated engineering challenge due to the high humidity and heat load within these facilities. Not only are the load type, but the environmental conditions within these facilities must be held within limits that the facilities managers request. Engineering to meet these limits requires us to consider all of the primary components within the facility, lighting, irrigation, HVACD, fertigation,, sensors, controls, CO2 dosing, monitoring and alarms, facility physical limits such as power availability and energy consumption. We believe that the expertise gained in working with many of the primary components provides us with a uniquely well-informed view of the efficacy of the primary components on offer in the marketplace. We further believe that this knowledge will help us make wise choices of which products to pursue for strategic relationships and which providers to potentially merge with or acquire. For smaller component providers, we believe that our publicly traded platform and our existing sales and marketing reach will make us an attractive partner. With over 15 years serving the CEA industry. We also believe that we enjoy a very broad network of contacts within the industry that can help us source acquisition targets. And in January, we appointed an executive to lead our corporate development efforts. We believe that all of these elements will come together to produce a steady stream of acquisitions for our platform. On May 4, 2021, we filed a press release that updated our organic growth strategy, which consists of 3 components: new markets, new products and services and new trade name. New markets. The market we have historically served is for indoor cannabis cultivation, which is forecasted to continue to grow aggressively for the foreseeable future. While that is still a strong and growing market in which we are well known, respected, continue to serve, we also have begun to serve the noncannabis controlled environment agriculture market, in particular, the indoor food farming market. The skills, products and services we have developed can be readily applied to this market, and indeed, we have served a few such facilities over the years. In the first quarter, we entered into a contract with a noncannabis facility and have proposals out with several others, and we believe that we can be successful serving this market. In 2022, we will increase our marketing efforts to this sector. New products and services. We continue to expand our product and service range from exclusively environmental control to include most of the CEA technical infrastructure and from facility selection to full life cycle support after construction. In addition, we are increasing our product and service range in each product category. Unlike our competition that normally only has one solution to offer no matter the application, our subsidiary, Surna Cultivation Technologies acts as technology-agnostic engineers and assesses each customer application, offering alternative designs and a range of carefully curated technologies. Since the announcement in May, we have executed on this initiative, announcing several new products and services. To highlight a few of these in the first quarter of 2021, we announced our partnership with Anden Dehumidifiers. In the second quarter, we announced the expansion of our chiller product line with EcoChill products and the addition of our preventive maintenance services. Early in the third quarter, we expanded our product offerings with the addition of our EnviroPro Air Handlers line, benching and racking options and the introduction of our architectural design services that allows us to reach potential clients earlier in the design and decision process. Along with these additions, we are actively pursuing additional products that will further up our strategy that we believe will allow us to exceed our customers' demand and requirements. In particular, let me focus on our recently added architectural design services. Providing these services allows our sales reps to engage with prospective customers much earlier in the facility design process. This early engagement provides the opportunity to develop a relationship with the prospect where we can offer our rapidly expanding product and service lines, which we believe will allow us to increase the revenue from any given project. At this time, I will ask Ian to cover recent financial highlights from the year ended December 31, 2021, as presented in the associated earnings press release released earlier today.

Thanks, Tony. 2021 saw continued momentum largely due to execution of our organic growth strategy. Our net bookings, which will be discussed in a bit more than doubled compared to 2020. Our revenue, which was $13.6 million for the full year represents a 60% increase over 2020. And despite the challenges presented by our pandemic-impacted supply chain was the second best in our history. Revenue was impacted in the quarter by disruptions in our supply chain, which delayed shipments and affected our ability to translate some of our contract pipeline to revenues in accordance with the original time frame of the contracts. Our 2021 gross profit margin was 21.5% compared to 18.2% for 2020, an increase of 330 basis points. The primary drivers of our increase in year-over-year margin were higher sales off of a fixed cost base, partially offset by a lower margin on equipment sales. Our operating loss for 2021 was $1.98 million compared to a $2.36 million operating loss in 2020. The 2021 operating loss included $382,000 of noncash expenses as compared to $520,000 in noncash expenses for the year ended December 31, 2020. Excluding these noncash items, our operating loss decreased by $24,000. Our net loss for 2021 was $1.34 million, which is $421,000 lower than our 2020 net loss of $1.76 million. Our 2021 net bookings were approximately $16 million, which included $3.9 million in change orders and were net of $1.4 million of cancellations. This booking amount represents a 116% increase as compared to our total 2020 net bookings. As previously stated, at $9.6 million, our net bookings in the second half of 2021 were the highest in the company's history and a 22% increase on the same figure for 2020. As of December 31, 2021, our cash position was $2.16 million compared to $2.28 million as of December 31, 2020. However, on February 15 of this year, we received net proceeds of approximately $22 million from the offering of shares of our common stock and warrants to purchase common stock. As previously stated, the purpose of this raise was to continue funding our growth strategy and for general corporate purposes. As a result, our current cash equivalents position as of March 15, 2022, and was approximately $21 million. During the third quarter of 2021, we issued Series B preferred shares as part of a $3.3 million PIPE financing with an investor. Those preferred shares had an annual 8% and an initial common stock conversion price of $8.55. On February 16, 2022, half of those Series B preferred shares were redeemed and the remaining half were converted to shares of common stock and warrants. Our redemption of Series B units and our $24 million capital raise were part of a larger effort to enhance our corporate platform in a way that promotes capital formation and to create a more liquid and valuable security for potential use of consideration and strategic transactions. The key element of that effort was the uplift of our stock and warrants from the over-the-counter market to the NASDAQ capital market. After completing that effort, our common stock and warrants began trading on the NASDAQ as of February 10, 2022. We're confident that this uplift will make the market for our securities more attractive and supportive for both our current and future investors. Overall, 2021 showed continued growth for the company as we increased our product and service offerings and continue to execute on our strategic plan.

Thanks, Ian. The financial results just reported further reinforced validation of our business model and our market opportunity within CEA. We are confident that our organic growth strategy is gaining traction in the market and will continue to bear fruit in the second half of this year. The CEA industry's team greatly appreciates all of the support from our shareholders. This concludes today's prepared remarks, and we will open the floor for questions.

[Operator Instructions]

As we wait for people to enter the queue, I will field some questions received via e-mail and the webcast. To what do you attribute your second half bookings growth from 2021? We attribute this to the continued execution on our strategic plan, our expanded product and service offerings. Do we have any positive news on our future project pipeline? No, we don't offer any forward-looking guidance, but we do periodically offer press releases on recently completed contracts. Will you be providing guidance for future revenue and earnings? We have not historically, and we do not currently offer any guidance. That concludes the pre-submitted questions. Operator, are there any questions from the lines at this time.

The first question is coming from Alan Brochstein, Alan, please mount your affiliation and pose your question.

Congratulations, Tony. This is Alan from New Cannabis Ventures. I just wanted to ask with this cash that you now have. And I believe during the call you might have spoken about it. Can you talk about some of the potential acquisitions and timing of those acquisitions that you'd be contemplating?

I really couldn't speak to that, Alan. I appreciate your call and encouragement. I couldn't speak to anything directly other than to say that if you look at our stated intentions, the fact that we, in January, brought on Vice President of Corporate Development that we have these firmly in mind and are doing everything we can to fulfill our strategic objective of growing our platform.

Well, let me ask it a little differently. Do you think it would be limited to the United States? Are you looking at other markets outside of the United States?

We have stated in our public filings that we believe there are opportunities for us internationally. And of course, we've long operated in Canada. But beyond that geography that we do believe there are opportunities that lie outside North America and that we -- at some stage, we'll be interested in pursuing them.

And the next question is coming from Andrew Scott.

It's Andrew Scott of ThinkEquity. Congratulations, really excited to see what 2022 has in store with you. We know you guys are cashed up. A quick question for Ian. Do you know what the cash value per share is?

I don't know what the cash value per there is off hand, but let me get it today. Give me one second.

Sure because we still think the stock is really cheap. We're excited about the outlook for your growth prospects. There's a lot happening in your market. It's stock just looks really cheap. I know the fourth quarter was impacted by some supply chain disruptions, but we're really excited about what you guys can do in 2022. I'm going to drop off. But when you get the cash-per-share number, on a weighted basis. Please let us know and I'll drop off and let you free it up to other questions.

Yes. Thanks, Andrew. Actually, the answer to that is $2.66. So to your point, there's a lot of room here to run and we're looking forward to 2022 that's supported in that.

Thank you. And there were no other questions at this time.

Well, great. That concludes today's conference call. We look forward to presenting our first quarter results in May, and we thank you for your continued interest in CEA Industries.

An audio replay of this call will be available on ceaindustries.com/investor-relations beginning on March 30 at 4:00 p.m. Eastern Time and will remain available until May 6, 2022. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.