CEA Industries Inc. (NASDAQ:CEAD) Q3 2022 Results Conference Call November 14, 2022 4:15 PM ET
Company Participants
Tony McDonald – Chairman and Chief Executive Officer
Ian Patel – Chief Financial Officer
Operator
Good afternoon, ladies and gentlemen, and welcome to the CEA Industries Q3 2022 Earnings Conference Call. Joining us today are the company’s Chairman and CEO, Tony McDonald, as well as the company’s CFO, Ian Patel. [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 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 the company filed its quarterly report on Form 10-Q and issued a press release announcing third quarter 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. We generated strong revenue growth during the third quarter on a sequential and year-over-year basis as we benefited from our sales and marketing investments in the first half of 2022. We have also begun to experience improvements in our supply chain with fewer delays impacting sales relative to earlier in the year. That said, we remain vigilant of the potential challenges we face given the evolving macro environment. Subsequent to the quarter, we signed multiple new contracts with indoor produce farms located in New York and Florida for our engineering services, which are outside of our traditional cannabis vertical.
As I have mentioned on past calls, we recognize the growing opportunity to tap into the larger vertical agriculture market and these wins reflect our execution of that initiative. More recently, we entered into a significant new nonequity strategic alliance with Hydrobuilder Holdings LLC, leading omnichannel platform with 22 retail locations and 10 warehouses serving the indoor and outdoor CEA in hydroponics industry. This alliance will combine our industry-leading CEA systems engineering and technologies with Hydrobuilder Holdings expansive commercial-first omnichannel platform, creating a one-stop shop solution for cultivation companies across North America. I believe this will not only be a great value to our customers but will also be a great source of growth for both of our companies.
Turning to our cannabis vertical. Over the summer, 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 projects and services for its innovation facilities. In October, we signed a contract with one of Merida’s Connecticut-based clients to provide a suite of HVA systems that include our EnviroPro Air Handlers as well as heat recovery fan coils, dehumidifiers and circulating fans. Our partnership with Merida has quickly materialized with new business, and we look forward to continue growing this relationship as it presents a high-quality, high conversion sales channel for our business. We’re diligently working to grow our marketing efforts and brand awareness across both our cannabis and noncannabis verticals.
In addition to our sales and marketing investments highlighted last quarter, we recently started working with Agritecture, advisory services and technology firm, focused on climate-smart agriculture. Similar to our success with Merida, we believe this partnership will enable us to accelerate the growth of our sales pipeline in the vertical agriculture market.
On the product development front, we recently announced the introduction of a portfolio of water treatment solutions. We can now offer comprehensive water treatment solutions, including sampling, system design, equipment supplies and system integration, regardless of water chemistries in a specific location. Water treatment is just the latest step in bringing forth our vision of watering a comprehensive full suite of products to our customers.
Turning to M&A. We continue to patiently identify and evaluate opportunities within both the cannabis and traditional vertical agriculture market. Our judicious approach to M&A has been an effective strategy given how valuation multiples have compressed in both public and private markets. With our strong balance sheet, we can remain diligent in our pursuit of accretive opportunities that will bolster our service and product offerings, which we believe could accelerate our growth and profitability in the future. I will now hand it over to Ian Patel, our Chief Financial Officer, to discuss financial highlights for the third quarter.
Ian?
Ian Patel
Thanks, Tony, and good afternoon, everyone. Jumping right into our results. Q3 revenue increased 37% to $5.1 million compared to $3.7 million in the year ago period. The increase is primarily due to some recovery in the supply chain that enabled us to deliver products with fewer delays. Our net bookings in the third quarter were $2.2 million compared to $5.6 million in the same period in 2021.
Backlog at quarter end was $6.8 million compared to $9.9 million in the year ago quarter. The quarter end backlog is expected to convert to revenue over the next 18 months. The decrease in net bookings and backlog was primarily driven by fewer new orders to replace our backlog along with greater recognized revenue during the quarter.
Gross profit for the third quarter of 2022 was $600,000 or 11.8% of revenue compared to $700,000 or 20.2% of revenue for the same period in 2021. The decrease in gross margin was primarily driven by an increase in our variable costs, which include the cost of equipment, external engineering costs, shipping and handling and travel and warranty costs as a percentage of revenue as well as the reallocation of certain operating expenses to cost of goods sold. Operating expenses in Q3 2022 were $1.7 million compared to $1.2 million in the year ago quarter. The increase was primarily driven by higher SG&A in support of organic and inorganic growth initiatives as well as an increase in advertising and marketing expenses. Net loss for Q3 2022 was $1.0 million or negative $0.13 per share compared to net loss of $400,000 or negative $1.69 per share in the year ago quarter.
The net loss per share was lower than the year ago quarter due to the higher issued and outstanding share count as of Q3 2022 driven by our equity financing completed earlier this year. As of September 30, 2022, cash and cash equivalents were approximately $21.1 million compared to $2.2 million as of December 31, 2021. And while working capital increased by $16.4 million during this period.
The increase in cash was again driven by our financing completed earlier this year where we generated net proceeds of $21.7 million from the sale of our common stock and warrants. As of September 30, 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 plan to continue executing our organic and inorganic growth initiatives while expanding the business outside of cannabis. We are optimistic about the road ahead, but remain cautious given the inflationary environment and residual supply chain headwinds. As I mentioned earlier, our strong balance sheet enables us to be patient in our pursuit of M&A and we plan to execute an accretive transaction when the opportunities arise. The expansion of our partnerships and product lines, coupled with our investments in sales and marketing will continue to fuel our growth in the coming quarters.
We look forward to exiting the year with strong momentum, and we’ll provide further updates on our business initiatives during the next conference call.
Operator, at this time, we will open the floor for questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Tony McDonald
As we wait for people to enter the queue, I will field some questions received by e-mail and the webcast. Question regarding the alliance with Hydrobuilder, how should we think about the ramp of this partnership? Any benefit to Q4 or more so 2023?
Well, given that we formalized the alliance with Hydrobuilder just a couple of weeks ago, it is too early to expect the benefit in Q4. However, we do expect to see the partnership benefits next year as we collaborate on sales opportunities as our delivery pipeline can take many months.
Next question. Any update on R&D outside of the water solutions you mentioned earlier? Should we expect to see new products come out in 2023?
We are continuing to develop new generation products that complement our suite of offerings to provide a more comprehensive CEA solution for customers.
Next question. On the M&A front, can you provide some additional color on what you’re seeing in the market and the types of targets you’re evaluating? We have a couple of thoughts on that. First, we’re looking to partner with companies that are profitable and margin accretive to our business perfectly with deep roots in either the traditional cannabis or vertical ag industries.
Second, our valuation multiples have been coming down. Public markets typically see the first hit, which we’ve been experiencing all the year, but there was a delay in seeing that permeate into the private market. We are now seeing that multiple contraction in private transactions and expect to take advantage of that in 2023. 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.
Tony McDonald
Well, then this concludes today’s conference call. We look forward to presenting our fourth quarter and annual results in the new year.
Operator
An audio replay of this call will be available on ceaindustries.com/investors beginning on November 15 at 5:00 p.m. Eastern Time and will remain available until November 28, 2022. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
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