CEA Industries Inc. Common Stock (BNC) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the CEA Industries Q1 2022 Earnings Conference Call. [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 their Form 10-K, which was filed with the SEC. Please refer to their SEC filings for a more detailed discussion of the risks and uncertainties associated with their business. 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 First Quarter 2022 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. Please note that we filed our quarterly report on Form 10-Q and issued a press release announcing first quarter results earlier today. These documents can be found on our website at 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. We began the year with a focus on 2 strategic efforts. The first was that of pursuing organic growth through expanded product offerings and new target markets. To that end, we have several new products and services in development. We have proposals out with several other customers, and we'll continue the momentum we have achieved in expanding our product line. We've also identified organic growth opportunities by pursuing markets outside our traditional cannabis end market, including the rapidly growing urban indoor farming market. We continue to believe our skill set complements that opportunity. During the first quarter, we identified several leads with growers in the urban farming market, and we are confident that our efforts will lead to new opportunities outside of our traditional cannabis market. We have increased our sales and marketing efforts in expanding both our products and markets, and we will continue to pursue those opportunities. Our second strategic effort involve identifying partners that could benefit from our platform as we participate in industry consolidation that is accretive to shareholder value. Our industry experience and exposure to various components of the controlled environment build process provides us with a uniquely well informed view of the value contribution from the various services and products in the marketplace. All of this experience and industry knowledge will enable us to identify consolidation partners that can create value for our shareholders. To that end, we met with several potential partners during the first quarter of 2022, and we'll continue that effort throughout the year. Central to both of these strategic priorities was a public equity platform consisting of a capital base that provides liquidity to support the company's operations and the currency to pursue strategic actions. I'm pleased to note that during the first quarter, we made major progress on both fronts. First, we were able to successfully uplist our common shares and warrants to the NASDAQ Capital Markets, where we believe our securities will offer a more attractive investment opportunity for our current and future investors. Second, we succeeded in raising net proceeds of approximately $22 million from the sale of approximately 5.8 million shares of common stock and 6.6 million warrants. This capital provides us with the currency that enables us to execute our strategic plan to create shareholder value. We continue to execute on our strategic plan to expand our business through both organic growth and identifying M&A opportunities, and we are confident that these efforts will create strong results throughout the year. Operationally, we experienced some of the same supply chain challenges in the first quarter that we've identified over the last couple of quarters. Our recognized revenue during the first quarter was hampered by production and shipping delays experienced by some of our suppliers. Reductions in cargo shipped by air and sea, container shortages and domestic truck delivery options have all taken a toll on our suppliers and this resulted in delays to our ability to translate some of our contract backlog to revenue in accordance with the original time frame of the contracts. We do not believe this is a permanent issue for our business, and we continue to work with our customers, suppliers and shipping partners to manage through this. Nonetheless, this delay in revenue recognition was challenging for our gross margins, especially since a portion of our cost sold are fixed due to declines in revenue. In addition to supply chain-related disruptions, we did experience cost increases as well. First, we recognized higher labor and employment costs as we adjusted salaries to address the current inflationary pressure that we are seeing across the economy. We require our employees to manage our business amidst supply disruptions and coordinate amongst our customers, suppliers, transporters and other partners. And we believe that in order to keep employees focused on these challenges, market-level competitive salaries to keep pace with inflation are necessary. Secondly, we invested in future growth through the hiring of certain skilled new employees. We believe these employees will help support our growth as we venture into new products, services and market. Finally, we've recognized certain nonrecurring expenses in the first quarter associated with identifying and hiring certain numbers of our executive team. Collectively, these costs were necessary for retaining existing employees and building out the executive skill set necessary to support our organic growth and acquisition strategies. At this time, I will ask our CFO, Ian, to cover recent financial highlights from the quarter. Ian?

Thanks, Tony. As mentioned, the first quarter of 2022 was affected by supply chain disruptions that delayed our ability to recognize certain revenue items that we expected to recognize in the first quarter of 2022. Our March 31, 2022, backlog was approximately $11.2 million, an increase of $361,000 or 3% from our December 31, 2021, backlog. The increase in backlog is the result of lower revenue translated from backlog to revenue in the first quarter of 2022. Our Q1 2022 revenue was $1.7 million, representing a 26% decrease compared to our Q1 2021 revenue. 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 backlog to revenues in accordance with the original time frame of the contracts. Our Q1 2022 gross profit margin was 5.2% compared to 14.6% for the first quarter of 2021. The primary driver for this decrease in margin is lower recognized revenue off of a partially fixed cost base. Our operating loss for Q1 2022 was $1.6 million compared to $686,000 operating loss in Q1 2021. Our net loss for Q1 2022 was $1.4 million compared to a net loss of $793,000 in the year ago quarter. Again, the decline in profitability was driven by the lower revenue. Our Q1 2022 net bookings were approximately $2.1 million. This booking amount represents a 61% decrease as compared to our Q1 2021 net bookings. As of March 31, 2022, our cash position was approximately $22 million compared to $2.2 million as of December 31, 2021. The increase in cash was primarily the result of cash proceeds from the sale of common stock and warrants of approximately $21.7 million, offset by the redemption of Series B preferred stock and interest of $2 million. As previously stated, the purpose of this raise was to continue funding our growth strategy and for general corporate purposes. This concludes my prepared remarks. I'll pass it back to you, Tony.

Thank you, Ian. The first quarter of 2022 proved challenging as we managed through timing of revenue, inflation and supply chain issues. Nonetheless, we are confident that our organic growth strategy is gaining traction in the market and will continue to bear fruit through the rest of the year. The CEA Industries 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'll field some questions received by e-mail and the webcast. First question. As you mentioned, costs have gone up in response to inflation. Does the company have pricing power to pass those costs on to customers? Or can we expect a permanent contraction in gross margins? No. Our gross -- our margin compression was caused by reduced revenue due to shipping delays combined with an increase in fixed costs we incurred to facilitate growth that we expect to realize later in the year. Next question. Can you offer an update on what you're seeing in the M&A and consolidation space? We obviously can't get into specifics, but there's a lot of opportunity out there, and it ranges in terms of business opportunities. Getting scale in the current landscape is difficult. And as capital becomes more expensive, this trend will only continue. Companies that we were talking to understand that and are eager to find ways to work together. We are continuing to evaluate partnerships and remain disciplined in that process. Next question. Did you lose any contracts you had previously signed due to inability to ship product? No, we did not. We have heard that delays in shipping product has been a recurring theme that's not unique to our company or our industry. It's something we're all working through. Do we have any questions, operator?

Yes, we did have a couple of questions from the lines, if you're ready to take them now, Tony?

Yes.

First question is coming from [ Mark Swiss ].

I'm a private shareholder. My question is about bookings. And on January 4, there was a press release that indicates there was a $3.4 million contract with [ Ares Holdings ] signed that day. Yet bookings are quite a bit less than that single contract. How is that?

Mark, I don't have a -- I don't have information at the fingertips on that. I think that project was from Q4, but I...

I've got a signed date on January 4. So I'm not sure -- and I don't think it was in the fourth quarter either. So I'm just curious, I thought maybe it got canceled.

No, we've not had a cancellation on that. I don't recall exactly when it was signed, but there's nothing on a cancellation on that contract.

And we did have another question from Andrew Scott.

It's Andrew Scott from ThinkEquity. Just out of curiosity, I understand a lot of guys got hit with supply chain issues in Q1, midway through Q2. Are you seeing any bounce back in those orders? Or are you still seeing delays and disruptions in the supply chain?

Ian, do you want to speak to that?

Yes, sure. We are seeing a bounce back in the orders. I think, obviously, this has been a pretty volatile quarter with the Ukranian conflict and interest rates going up. But that sort of challenge that we saw initially has bounced somewhat. We're looking towards building back up our pipeline. But obviously, it's going to be something you have to continue to work harder moving forward. Funding for projects, we'll remain cautious as the Fed's recent interest rate decisions change the cost of capital. But we're working through it, and we continue to be confident that we'll get through that.

All right. But you are seeing a bounce back in Q2 or...

Correct.

Okay. All right. That's good. And how about...

Of course, at the end of the quarter, we were in a strong backlog position as well.

Yes, that's what I wanted to ask, and I think this will help, especially with the prior question. A backlog on bookings are different. I missed that a little bit. Can you give us an idea of what the backlog was at the end of Q1?

What, $11.2 million? Is that right, Ian?

Correct, yes. It was $11.2 million at the end of Q1.

So it sounds like some of the bookings just slipped into Q2. Okay. And then how much cash did you have at the end of Q1? And then if you could just let me know what that is per cash value per share. We should get an idea on intrinsic value.

Yes, end of cash -- end of quarter cash balance was $22 million. That implies a cash value per share of about $2.83.

And there were no other questions from the lines at this time.

Thank you, operator. Well, this will conclude today's conference call. We look forward to presenting our second quarter results later in the year. Thank you for your continued interest in CEA Industries.

An audio replay of this call will be available on ceaindustries.com/investors beginning on May 13 at 4 p.m. Eastern, and will remain available until June 2, 2022. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.