CEA Industries Inc. Common Stock Q2 FY2022 earnings call

Key Points - Generated over 70% top line growth in Q2 and nearly doubled gross margin from Q1. - Made significant investments in sales, marketing, and product development initiatives, with solid Q2 quarter-over-quarter bookings. - Highlighted a contract with Green Brothers Farm for indoor cannabis cultivation with anticipated revenues of ~$10M over 2-3 years. - Established a partnership with Merida Capital as the preferred provider for their indoor cultivation facilities. - Launched partnership with CleanLeaf for odor control and air filtration products. - Noted progress in states with cannabis legalization efforts like Rhode Island, Maryland, New Jersey, New York, and Mississippi.

In Q2, revenue was $3 million compared to $4.5 million in the year-ago period. Net bookings were $1.5 million vs $900,000 in the same period in 2021. Backlog at quarter end increased 21% to $9.7 million vs $8 million at the year-ago quarter. Gross profit for Q2 2022 was $300,000 or 10.2% of revenue compared to $1.3 million or 28.4% of revenue in the same period in 2021.

Forward-Looking - Expect to continue driving growth and improving profitability in the second half of the year. - Backlog of approximately $10 million is expected to be recognized over the next 18 months. - Plan to execute on both organic and inorganic growth initiatives, with a focus on navigating the macro environment and seeking accretive M&A opportunities.

Risks - Supply chain challenges and inflation impacting revenue and profitability. - Customer cancellation due to loss of funding, such as the $2.3 million contract cancellation in Q2. - Cost of capital increase causing a lag between asset valuation decline and private seller expectations affecting M&A and project considerations.

Q: Could you please discuss if the Canna Conferences that you have been attending have led the signed projects and increased quoting activity?

A: We have been actively quoting from leads we have received from several trade shows such as NECANN, Vermont and Chicago; CWCBE, New York; Indoor Ag Tech Summit, New York; and more. We are active in projects all across North America.

Q: Recognizing that you are beginning to see the benefit of sales and marketing in your new bookings, when will the improved sales and marketing translate to higher revenue?

A: Our sales and marketing investments are focused on driving new bookings, but revenue is driven by ability to deliver products on those projects which is affected by supply chain, with initiatives in place to mitigate supply chain delays like diversifying supplier network.

Q: You have consistently mentioned M&A initiatives this year, but we haven’t seen anything materialize. What are some of the impediments you are facing to get a deal done?

A: Our business isn’t as simple as some of the other comps out there. Our targets are more difficult to locate due to the various natures of the businesses. Ian Patel added that the cost of capital has gone up over the last several months, causing a lag between asset valuations and private seller expectations.

Q: Can you expand on the large client cancellation in Q2? Are there other large deals that have been booked in the past that are at risk going forward?

A: Generally, any project of any size can be canceled, and historically there are number of cancellations every quarter. This was the only cancellation of this scale in the past few years. Ian Patel added that with interest rates and cost of capital up, smaller private investors are rethinking projects, but customer concentration is with well-capitalized companies with longer term plans so backlog isn't completely immune but less concerned about cancellations due to that.