CEA Industries Inc. (NASDAQ:CEAD) Q4 2022 Earnings Call Transcript

CEA Industries Inc. (NASDAQ:CEAD) Q4 2022 Earnings Call Transcript March 28, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the CEA Industries Q4 And Full Year 2022 Earnings Conference Call. Joining us today are the company’s Chairman and CEO, Tony McDonald, as well as company’s CFO, 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 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 the company’s 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. Also, please note that the company filed its 10-K and issued a press release announcing fourth quarter results — full year results earlier today. These documents can be found on the Investor Relations section of the company’s website at ceaindustries.com. If you would like to be added to the company’s e-mail distribution list, please send an e-mail to info@ceaindustries.com. It is now my pleasure to turn the floor over to Tony McDonald, Chairman and CEO of CEA Industries. Sir, the floor is yours.

Tony McDonald: Thank you, and good afternoon, everyone. As we have seen across many industries, volatility in the macro environment has persisted, affecting both operators and consumers over the past year. The market environment for cannabis specifically has also continued to face headwinds as operators contend with pricing pressure and inflationary impacts on consumer walls. As a result, capital expenditures in the sector have slowed significantly, resulting in delayed reduced or eliminated cultivation facility construction projects, which has negatively impacted our project bookings and revenue. To navigate this environment, we have continued to focus on diversifying our customer base outside of cannabis, while proactively implementing cost saving initiatives to mitigate future supply chain and inflationary pressure on our business.

These initiatives included a reduction in force along with various operating expense savings. No stone was left unturned as we evaluated every line item of our business to identify opportunities for savings in response to the challenging environment. We did not take these actions lightly as they were a result of thorough review and diligent planning for the long-term viability of our business. Early signs have begun to show a positive trend as we — as evidenced by our double-digit sequential reduction in operating expenses in Q4. We expect to continue realizing OpEx savings and further improve both our working capital and liquidity positions throughout 2023 without compromising the high standard of service our customers expect. A great example of our higher standard was reflected by a new contract win that we announced in November, in which we signed our third consecutive contract with a Northeast cultivation facility.

Earlier in the year, we performed a mechanical engineering services for this 36,000 square foot cultivation and processing space, followed by a benching equipment and installation contract. Due to our exceptional work in the prior engagement, we have now been contracted to provide HVACD equipment for their flower veg mother clone and dry cure rooms, as well as cannabis processing rooms. These are the types of wins that reflect our quality of service as well as the potential growth opportunity within our existing customer base. Quickly reviewing a few other key developments in Q4. Earlier in 2022, we announced a formal partnership with Merida Capital, a cannabis focused private equity firm, in which Merida agreed to use us as its sole provider of certain products and services for its indoor cultivation facilities.

Since signing the agreement, we have signed two engineering contracts and one equipment contract with one of Merida’s Connecticut-based clients to provide engineering and a suite of HVAC systems. Late in the year the size of the facility nearly doubled, expanding the opportunity for equipment sales. As highlighted in our last conference call, in November, we entered into a non-equity strategic alliance with Hydrobuilder Holdings, a leading omni-channel platform with 22 retail locations and 10 warehouses, serving the indoor and outdoor CEA and hydroponics industry. Since entering the agreement, Hydrobuilder has introduced us to several opportunities for our services. In addition, we have been able to integrate their products and services into our offerings we started to offer a more complete design package for our customers.

Looking at our suite of products and services. In Q4, we announced a partnership with Evoqua Water Technologies to offer new innovative water treatment solutions. These include sampling, system design, equipment supply and system integration, along with providing the ability to treat and purify the water stream, so it can be reintroduced as a pure water source. Not only does this offer a financial benefit to the company, but an environmentally sustainable solution for water conservation, which is top of mind for many organizations that monitor their impact on the environment. Consistent with our strategic plan, we continue to pursue and win non-cannabis CEA opportunities. In Q4, we signed two engineering contracts for such facilities, both growing leafy greens and herbs.

That success has continued into this year as we signed two more contracts for engineering and equipment for non-cannabis facilities. I will now hand it over to Ian Patel, our Chief Financial Officer, to discuss financial highlights for the quarter before wrapping up with closing remarks. Ian?

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Ian Patel: Thanks, Tony, and good afternoon, everyone. Jumping right into our results, Q4 revenue was $1.5 million compared to $3.1 million in the year ago period. The decrease was primarily attributed to supply chain and project delays as well as a reduction in size and number of signed contracts during 2022. Our net bookings in the fourth quarter were $206,000 compared to $4 million in the same period in 2021. Backlog at quarter end was $5.6 million compared to $10.8 million in the year ago quarter. The decrease in net bookings and backlog was primarily driven by fewer capital projects and expenditures by cannabis growers. Gross profit for the fourth quarter of 2022 was $200,000 or 10.3% of revenue compared to $600,000 or 18.1% of revenue for the same period in 2021.

The decrease in gross margin was primarily driven by lower revenue and higher variable costs, which includes the cost of equipment, external engineering, shipping and handling and travel and warranty costs. Operating expenses in the fourth quarter decreased 6% to $1.4 million compared to $1.5 million in the year ago quarter. It’s worth noting that our OpEx is also down 13% from Q3 2022, reflecting the early benefit of our various cost saving initiatives. Net loss for the fourth quarter of 2022 was $1.3 million, or negative $0.18 per share, compared to a net loss of $400,000 or negative $0.25 per share in the year ago quarter. The net loss per share improved year-over-year due to the higher issued and outstanding share count as of the fourth quarter 2022.

As of December 31, 2022, cash and cash equivalents were $18.6 million compared to $2.2 million as of December 31, 2021. While working capital increased by $15.1 million during this period, the increase was primarily driven by net proceeds from the sale of our common stock and warrants of approximately $22 million in February 2022. At December 31, 2022, we remain debt free. This concludes my prepared remarks. I’ll pass it back to you, Tony.

Tony McDonald: Thank you, Ian. Looking ahead, we will remain cautious with our spending and capital as we evaluate the lingering supply chain and inflationary environment. Our cost saving initiatives have already begun to produce benefits and between our efforts to further reduce expenses and diversify our customer base, we are confident in our ability to navigate this challenging period. Our strong capital position provides us both optionality and durability as we look to execute our organic and inorganic growth initiatives. Operator, at this time, we will open the floor for questions.

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Q&A Session

Tony McDonald: And as we wait for people to enter the queue, I’ll field some questions received via email and the webcast. First one, can you provide more color on how pricing pressure and headwinds affecting cannabis operators impacts our business? The first thought there is that CapEx projects are often one of the first to be delayed or cancelled when businesses face headwinds. As cannabis companies increasingly focused on their core operations, and turning cash flow positive, many have dialed back their CapEx plans which of course impacts our ability to book and forecast revenue in the future. That said, we believe our decision to diversify our end markets with vertical ag providers will bring more revenue stability, longer term.

Another question. In February, you announced a set of cost cut saving initiatives and a reduction in force to help right size the business given the challenging macro environment. How should we think about your OpEx run rate going forward? I would respond that we’re pleased with the double-digit sequential reduction in Q4 operating expenses and these savings have been carried into 2023. We aren’t providing guidance on our OpEx at this time, but know that we do expect lower OpEx from current levels as we move through 2023. Other question, what is your contingency plan, if the macro environment deteriorates further? How will you balance growth and profitability? I would say that we are intently focused on maximizing profitability and minimizing our cash burn.

As it stands today, we have ample runway to see through the current market environment with approximately $90 million of cash and equivalents on the balance sheet. We intend to preserve cash so that we are well-positioned to succeed as the industry improves and believe a strong cash position will allow us to take advantage of opportunities such as M&A that may come up in 2023 as the cannabis industry consolidates. That concludes the pre-submitted questions. Operator, are there any questions from the lines at this time?

Operator: There were no questions from the lines at this time.

Tony McDonald: Well, I thank you. This concludes today’s conference call. We look forward to presenting our first quarter results in the coming months.

Operator: An audio replay of this call will be available on ceandustries.com/investors beginning on March 28 at 4:30 p.m. Eastern Time, and will remain available until April 11, 2023. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.