Exclusive Interview with CEA Industries Chairman and CEO Tony McDonald
Controlled environment agriculture company CEA Industries (NASDAQ: CEAD) is broadening its product line and looking to serve both cannabis and traditional agriculture clients. Chairman and CEO Tony McDonald checked in with New Cannabis Ventures for the first time since April to talk about how the company is growing and navigating the challenges currently facing the cannabis industry.
Listen to the entire interview or read the summary below:
A Growing Product Line
The company offers licensed architectural, mechanical, electrical and plumbing engineering services to clients in the U.S. and Canada. It also provides all of the environmental control equipment, including lighting and benching, as well as its own controls system: Sentry IQ. Most recently, CEA Industries added water preconditioning to its product line.
Historically, the company has operated primarily in the cannabis space. Now, it is expanding its reach to include traditional agriculture.
It plans to continue expanding its offerings to meet more of its customers’ needs. More products open the door to more cross selling opportunities. The team begins conversations about architecture services with its clients, which naturally leads to conversations about other products and services necessary to buildout out a cultivation facility. CEA Industries can provide those value-added products.
CEA Industries Customers
Facilities ranging from 20,000 to 70,000 square feet are typical for the company, though it has worked on smaller and larger projects. McDonald pointed out that the company may have the opportunity to help some smaller grows in states with social equity programs.
The company is also leveraging partnerships to grow its client pool. It recently announced a new partnership with Merida Capital Holdings. Through this agreement, CEA Industries will serve as the go-to provider of equipment and services for its partner’s indoor cultivation facilities.
While the company serves clients in Canada and the U.S., it has seen considerably less activity in the Canadian market this year. Some states, like New Jersey and Oklahoma, have gained some traction this year, but the slowdown in construction is affecting the U.S. as well.
The company uplisted to the NASDAQ earlier this year with the intention of leveraging the funding from its public offering to pursue organic growth and M&A. The macroenvironment has become more challenging since then. The company remains interested in M&A, but it is taking a judicious approach, according to McDonald. Any acquisition of interest would need to be accretive and cash flow and EBITDA-positive. The team wants companies that could fill a hole in its supply chain and diversify its revenue. Right now, the company’s business is tied to construction. It could be interested in deals that bring recurring revenue to the table.
Despite a tumultuous year, the company has maintained a stable team. The most recent addition to the team was made in March; Ian Patel joined the company as CFO.
CEA Industries is well-funded, but it is facing the challenge of a construction slow-down. Some states are overbuilt, and price compression is dampening appetite for building new facilities. Additionally, new states coming online are an important factor in construction growth, and there have not been many new markets recently. But McDonald points out that there are several states with cannabis on the ballot this fall.
Other major publicly traded supply companies, including Scotts Miracle-Gro, GrowGeneration and Hydrofarm, have taken significant hits on their revenue in this environment, according to McDonald. He acknowledged the challenges that the company and its competitors face, but he remains bullish on the long-term opportunities for controlled environment agriculture.
CEA Industries Funding
As of Q2, the company had $20.6 million in cash on its balance sheet with no debt. In this strong capital position, the team wants to make smart investments to drive organic and inorganic growth.
Although the company does have a strong balance sheet, it is trading below its cash value and its tangible book value. The company is not alone in its valuation in the public markets, according to McDonald. Although frustrated, he is hopeful that the markets will recognize the company’s value as they recover over time. The company has no immediate plans to raise more capital.
The company does not release guidance, but the team is hopeful for a stronger second half of the year, according to McDonald. New product offerings, like water preconditioning, and new partnerships, like the one with Merida Capital, will help drive the company’s growth. It does take time, anywhere from six months to two years, to realize the full value of a project, but the company continues to look for more projects to add to its backlog. CEA Industries is leveraging the strength of its history and its engineering team to weather the current storm and prepare for the time when construction picks up again.
To learn more, visit the CEA Industries website. Listen to the entire interview: