CEA Industries Inc. (NASDAQ:CEAD) Q1 2023 Earnings Call Transcript May 16, 2023
Operator: Good afternoon, ladies and gentlemen, and welcome to the CEA Industries Q1 2023 Earnings Conference Call. Joining us today are the company’s Chairman and CEO, Tony McDonald, as well as company’s CFO, Ian Patel. At this time, all participants have been placed on listen-only mode and we will open the floor for your questions at the end. [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 based on what we believe are reasonable assumptions, which ultimately could prove to be inaccurate and 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. The forward-looking statements that the company has made are intended to be within the meaning of forward-looking statements in Section 27A of the Securities Act of 1933 as amended. Also, please note that the company filed its quarterly report on Form 10-Q and issued a press release announcing first quarter results earlier today. These documents can be found on the Investor Relations section of the company’s website at ceaindustries.com. If you’d like to be added to the company’s email distribution list, please send an email 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: Well, thank you. And good afternoon, everyone. Our first quarter performance reflects the completion of several previously delayed projects, as well as the successful implementation of our strategic cost cutting initiatives. These resulted in double-digit revenue growth and material savings in operating expenses. Currently, we are moving in the right direction, though we remain mindful of the ongoing market conditions, and we will proceed cautiously in the periods ahead. As we mentioned on our last earnings call, the macroenvironment has continued to present challenges, affecting both operators and consumers over the past year. Within the cannabis industry specifically, operators have faced prolonged headwinds from pricing pressure and shrinking consumer walls as inflation persists.
As a result, capital expenditures in the sector have reduced significantly, resulting in delayed, paused or eliminated construction projects. These conditions have had an adverse impact on our projected bookings and revenue. To help offset the macroenvironment, we have sharpened focus on diversifying our customer base outside of cannabis, while actively evaluating our operations to identify and deliver efficiencies and cost savings. Specifically, we reduced our workforce in February, in conjunction with several other expense saving programs, which resulted in a 24% reduction of operating expenses compared to the year-ago period and a 9% reduction from fourth quarter of 2022. We plan to continue identifying savings opportunities as we assess each segment of our business to ensure efficiency and effectiveness without compromising the high level of service we provide to our customers.
Touching briefly on our customers, subsequent to quarter end, we signed two contracts, one within cannabis and the other in the vertical agriculture industry. I’d like to briefly highlight each. First, we signed our largest design contract in company history to provide architectural and engineering services to a southeast cannabis cultivator. We expect to complete construction on this 60,000 square foot cultivation and 20,000 square foot processing facility by the end of the year. Shortly after this project was signed, we announced another contract win with a vertical indoor egg farming company called Farm.One. Under the contract, we will leverage our indoor agriculture climate control technologies and mechanical engineering capabilities to deliver a holistic HVAC system design for their New York based vertical farming facility.
We’ve already begun working with our team to strategize on the most optimal HVAC equipment for their cultivation goals. Although we are navigating a challenging environment, we believe we’re well equipped to win more contracts and continue serving customers in both the cannabis and vertical agriculture industries. I’ll 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?
Ian Patel : Thanks, Tony. And good afternoon, everyone. Jumping right into our results, Q1 revenue increased to $4.7 million compared to $1.7 million in the year-ago period. The increase was primarily attributed to improvements in our supply chain and deployments of project work as we work through delayed projects from prior periods. Our net bookings in the first quarter were $800,000 compared to $2.1 million in the same period in 2022. Backlog at quarter end was $1.9 million compared to $11.2 million in the year-ago quarter. The decrease in net bookings and backlog was primarily driven by fewer capital projects and expenditures by cannabis operators. Gross profit for the first quarter of 2023 increased to $900,000 or 18.2% of revenue compared to $100,000 or 5.2% of revenue for the same period in 2022.
The increase in gross margin was primarily driven by higher revenue and a decrease in fixed costs as a percentage of revenue, which include the cost of services, engineering, manufacturing and project management. Operating expenses in the first quarter decreased 24% to $1.3 million compared to $1.7 million in the year-ago quarter. The decrease was primarily driven by lower product development expenses, as well as decreased personnel and marketing costs. It’s worth noting that our OpEx is down 9% from Q4 2022, reflecting the benefit of our recently implemented cost savings initiatives. We expect OpEx levels to further reduce in 2023 as we are intently focused on our bottom line. Net loss for the first quarter of 2023 improved to $400,000 or negative $0.05 per share compared to a net loss of $1.4 million or negative $0.41 per share in the year ago quarter.
As of March 31, 2023, cash and cash equivalents were $15.9 million compared to $18.6 million as of December 31, 2022, while working Capital decreased by $200,000 during the period. At March 31, 2023, we remain debt free. This concludes my prepared remarks. I’ll pass it back to you, Tony.
Tony McDonald : Thank you, Ian. As I mentioned, going forward, we will continue to focus on running a lean operation, while securing new wins in the cannabis and traditional agriculture verticals. We have robust liquidity position and we believe our cost saving initiatives and prudent approach to capital allocation will enable us to weather the challenging macroenvironment. Operator, at this time, we will open the floor for questions.
Operator: [Operator Instructions].
Q&A Session
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Operator: Looks like we did have a question come in from the lines. And the question is coming from Lance Simonson [ph], who’s a private investor. Lance, your line is live.
Operator: There are no other questions at this time.
Tony McDonald: Well, this concludes today’s conference call. We look forward to presenting our second quarter results in the coming months.
Operator: Thank you. An audio replay of this call will be available on ceaindustries.com/investors beginning on May 15 at 5:15 pm Eastern Time and will remain available until May 29, 2023. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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