CEA Industries Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. CEA Industries designs and sells engineering, environmental-control equipment, and related services for controlled-environment agriculture, primarily commercial indoor growers.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5.06 million | $3.71 million | $9.82 million | $10.58 million |
| Gross profit / margin | $0.60 million / 11.8% | $0.75 million / 20.2% | $0.99 million / 10.1% | $2.37 million / 22.4% |
| Operating loss | $1.06 million | $0.44 million | $4.44 million | $1.01 million |
| Net loss | $1.04 million | $0.41 million | $4.23 million | $0.94 million |
Q3 basic and diluted loss per share was $0.13, versus $1.69 in 2021; nine-month loss per share was $0.69, versus $2.02. Share counts were affected by the 1-for-150 reverse split and the February 2022 equity offering.
- Cash and liquidity: Cash was $21.08 million at September 30, 2022, versus $2.16 million at December 31, 2021. Working capital was $15.96 million, compared with a $0.42 million deficit. Management stated the February offering proceeds were expected to fund operations for at least 12 months after issuance of the statements.
- Cash flow, nine months: $0.74 million used in operating activities; $0.03 million used in investing; $19.70 million provided by financing. Operating cash use included substantial contributions from customer advances/deferred revenue and increased payables.
- Debt and obligations: No borrowing balance is presented on the September 30 balance sheet. Operating lease liabilities totaled $0.52 million, of which $0.12 million was current. Deferred revenue was $4.44 million; accounts payable and accrued liabilities were $2.26 million.
- Capital raise: February 2022 common-stock-and-warrant offering generated approximately $21.71 million net. At September 30, 7.95 million common shares were outstanding and 7.62 million warrants were outstanding.
Changes versus comparable periods
- Q3 revenue increased 37% year over year, reflecting improved product delivery and fewer supply-related fulfillment delays, but gross profit declined 20% and gross margin fell 8.4 percentage points.
- Nine-month revenue decreased 7%, primarily because supply-chain delays postponed fulfillment and revenue recognition. Gross margin fell 12.3 percentage points to 10.1%, amid higher fixed and variable costs, including equipment and warranty costs.
- Nine-month operating expenses rose 61%, including a $631,000 non-cash goodwill impairment charge, higher personnel, marketing, professional-fee and insurance costs, and growth-related spending.
- Backlog at September 30 was $6.83 million, down 30% from June 30, as Q3 recognized revenue exceeded net bookings. Q3 net bookings were $2.20 million, up 43% from Q2.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management cited margin-improvement efforts including disciplined pricing, better fixed-cost absorption, and lower-cost supplier alternatives.
- Management reported continuing supply-chain and delivery uncertainty, customer project delays, funding and licensing challenges, and possible cancellations or scope reductions. Backlog is not guaranteed revenue; approximately $157,000 was identified as at risk of cancellation.
- The filing gives inconsistent timing detail for backlog: the financial-statement note says $4.271 million is expected in 2023, while MD&A says $3.621 million (53% of backlog) is not expected until 2023. The filing text does not reconcile these values.
- Inflation may raise labor, equipment and other costs that may not be recoverable under existing contracts. Supplier product-quality issues increased warranty costs; a customer nonpayment risk contributed to bad-debt expense.
- Other unusual items included the $631,000 goodwill impairment and $185,000 insurance-settlement income during the nine months. The company reported no material subsequent events through issuance.
- Two customers generated 77% of Q3 revenue; three customers generated 66% of nine-month revenue. Three customers represented 93% of accounts receivable at quarter-end.
- Disclosure controls and procedures were not effective at September 30 because of a previously identified material weakness involving accounting staffing and expertise, segregation of duties, and spreadsheet controls. Management described remediation plans but cautioned that remediation may not be economically feasible.
- The company reported recurring losses and an accumulated deficit of $33.01 million. It also disclosed that approximately $20.83 million of its cash exceeded FDIC insurance limits.
Important facts for investors to verify
- Reconcile the conflicting 2023 backlog amounts and assess conversion, delays and cancellation exposure.
- Track whether gross margins recover and whether supplier-quality and warranty issues are contained.
- Monitor operating cash use, customer advances, receivable collectability and customer concentration.
- Review dilution from outstanding warrants and equity awards, and progress remediating the material weakness in financial controls.