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CI

CEA Industries Inc. (CEAD)·Q1 2017 Earnings Summary

Executive Summary

  • Q1 2017 revenue declined 36% year over year to $1.59M, with gross margin down to 27% (from 44% YoY) as project mix and timing shifted; sequentially, revenue fell from $2.02M in Q4 2016 while gross profit remained relatively stable due to mix .
  • Operating expenses rose 41% to $1.02M, driven by personnel, a stock-based retention bonus to the new board chair, and higher investor relations costs; net loss widened to $1.00M (vs. $0.75M YoY), EPS $(0.01) .
  • Backlog increased to ~$3.79M, but ~78% lacked the second equipment deposit, creating cancellation/delay risk; management expects a substantial portion to be recognized in 2H17 and highlighted California and Canada as key growth drivers .
  • Liquidity improved via $2.23M equity raise and debt conversions, but management disclosed the $1.97M cash balance is not sufficient for the next 12 months, implying need for additional capital in 2H17; agreements with Stephen Keen and Sterling Pharms aim to accelerate R&D and sales demos .
  • No Q1 earnings call; prior quarter call emphasized regulatory momentum (California, Canada), next-gen equipment, and recurring service strategies as catalysts for estimate revisions and medium-term thesis .

What Went Well and What Went Wrong

What Went Well

  • Strengthened balance sheet: converted ~$2.76M of 10% convertible notes and raised $2.23M equity, reducing leverage and funding sales expansion .
  • Backlog growth and earlier contract capture: executed ~$3.79M in sales contracts with a strategy to lock in engineering deposits earlier to accelerate project onboarding .
  • Strategic agreements to support R&D and sales: three-year consulting agreement with founder Stephen Keen and equipment/testing/demonstration agreement with Sterling Pharms to showcase Surna technology and gather performance data .
  • Management quote (Q4 call): “California’s recreational approval alone is a game-changer…backlog…up substantially,” indicating regulatory catalysts and pipeline strength .

What Went Wrong

  • Top-line and margin pressure: revenue down 36% YoY to $1.59M; gross margin compressed to 27% (vs. 44% YoY) due to project mix and timing between proprietary and third-party equipment .
  • Operating cost inflation: SG&A up 44% to $0.82M (personnel, stock bonus of ~$0.131M to chair, investor relations), lifting total OpEx 41% to $1.02M and widening operating loss .
  • Liquidity runway: despite improved working capital, management disclosed $1.97M cash is insufficient for the next 12 months; upcoming ~$0.54M note maturity in Nov-2017 raises execution and financing risk .
  • Backlog quality risk: ~78% of Q1 backlog lacked the second deposit for proprietary equipment; substantial portion of revenue recognition expected to slip to 2H17 .

Financial Results

MetricQ3 2016Q4 2016Q1 2017
Revenue ($USD)$1,170,760 $2,019,026 $1,593,092
Gross Margin (%)35.6% 23.9% 27%
Gross Profit ($USD)$417,136 $483,546 $428,336
Total Operating Expenses ($USD)$654,015 $845,367 $1,017,954
Operating Income (Loss) ($USD)$(236,879) $(361,821) $(589,618)
Net Loss ($USD)$(668,506) $(1,154,194) $(1,000,829)

EPS comparison (Q1 YoY):

MetricQ1 2016Q1 2017
Diluted EPS ($USD)$(0.01) $(0.01)

KPIs and Balance Sheet:

MetricQ3 2016Q4 2016Q1 2017
Backlog (Sales Under Contract, $USD)$4.074M $2.6M $3.790M
Deferred Revenue ($USD)$1,420,974 $1,421,344 $924,861
Cash and Equivalents ($USD)$235,455 $319,546 $1,969,145
Working Capital ($USD)$(4.15)M $(2.86)M ~$43,000

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2017None disclosedNo formal numeric guidance; substantial portion of backlog expected to be recognized in 2H17 n/a
Gross MarginFY/Q1 2017None disclosedCommentary on margin variability by mix of proprietary vs. third-party equipment n/a
OpExFY/Q1 2017None disclosedHigher SG&A due to personnel, stock bonus, IR costs n/a
LiquidityFY 2017n/aCash of ~$1.97M insufficient for next 12 months; additional capital needed in 2H17 n/a

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2016)Previous Mentions (Q4 2016)Current Period (Q1 2017)Trend
Regulatory/MacroNevada-driven timing; state legalization expanding; backlog rising California recreational “game-changer”; Canada legalization prospects; pipeline growth Focus on California and Canada as 2017 priorities Positive momentum; sales focus in CA/Canada
Backlog & Contract MilestonesBacklog increased; FOB shipping to accelerate revenue recognition Backlog $2.6M; contracts non-cancelable but timing variable Backlog $3.79M; strategy to secure engineering deposit earlier; 78% lacks equipment deposit Backlog up but with quality/timing risk
Product/Tech RoadmapHybrid building energy efficiencies; reflector to production Next-gen dehumidifiers/air handlers; beta automation/control systems Sterling Pharms equipment/testing; data-driven improvements Continued R&D and validation
Recurring ServicesEarly concepts for service contracts Facilities mgmt, biosecurity, remote monitoring proposed Demo facility tours; performance data to support sales Building recurring and sales enablement
Supply Chain/MarginsImproved margins via supplier pricing; mix impact Margin variability by mix; Q4 adjustments Gross margin down to 27% on mix/timing Mix-driven variability persists

Management Commentary

  • “Both the medicinal and recreational segments of the cannabis cultivation market are growing rapidly…We believe the positive trends are continuing in 2017” (CEO Trent Doucet) .
  • “California’s recreational approval alone is a game-changer…Canada…planning to introduce legislation to legalize recreational marijuana…we announced our sixth deal in Canada…expect to ship and recognize $835,000 in Q3 2017” .
  • “We are finalizing our next generation dehumidifiers and air handlers…entering a beta-testing phase with dynamic proactive management systems to optimize energy usage” .
  • On Sterling Pharms: “Surna has agreed to lease equipment…in exchange [they] will test equipment, provide market data…open its facility to tours to potential Surna customers” .
  • Q1 commentary: revenue decline attributed to earlier-stage contract policy changes and “heightened uncertainty” post U.S. presidential election; margin variability driven by project design and mix of proprietary vs. third-party equipment .

Q&A Highlights (Prior Quarter Call)

  • Policy risk: Management noted easing tensions and emphasized support for state rights, mitigating some federal uncertainty .
  • Margin dynamics: Q4 margins lower than Q3 due to year-end adjustments (warranty, inventory reserve), with structural improvements (FOB shipping, supplier pricing) supporting longer-term margin trajectory .
  • Sterling Pharms arrangement: perpetual equipment lease updates, Surna-only grow data, and reference-site tours to drive sales .

Estimates Context

  • Wall Street consensus (S&P Global Capital IQ) for CEAD/Surna Q1 2017 was unavailable via our SPGI integration (missing CIQ mapping); therefore, we cannot assess beat/miss versus consensus for revenue or EPS. We attempted to fetch “Primary EPS Consensus Mean” and “Revenue Consensus Mean” for Q1 2017, but the dataset returned no mapping for CEAD [GetEstimates error].
  • Given the absence of consensus data, investors should anchor on company disclosures for Q1 actuals and monitor any sell-side initiation to establish forward benchmarks .

Key Takeaways for Investors

  • Near-term: Expect lumpy revenue recognition with substantial 2H17 weighting; backlog quality warrants scrutiny given deposit mix; watch for execution on California/Canada projects as catalysts .
  • Margins: Continue to expect variability by project mix; scale in proprietary equipment and supplier pricing remain key levers to stabilize gross margin .
  • Liquidity: Despite improved balance sheet, management signaled the need for additional capital in 2H17; monitor financing timing, terms, and potential dilution .
  • Strategic progress: Keen/ Sterling agreements provide R&D validation and a live demo venue, which should enhance pipeline conversion and product iteration .
  • Regulatory catalysts: California recreational and Canada legalization could expand addressable market; prior call commentary suggests meaningful opportunity set .
  • Risk management: Contract structure (engineering deposits earlier; FOB shipping) helps mitigate revenue timing risk, but project delays remain a structural feature of the market .
  • Monitoring list: Backlog conversion, deposit mix, SG&A discipline post chair appointment/IR spend, and progress on next-gen equipment/automation are the critical operational indicators .