CEA Industries Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. CEA designs, engineers and sells environmental-control equipment and services to controlled-environment agriculture customers, primarily commercial growers. Financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $0.914 million | $5.063 million | $6.660 million | $9.822 million |
| Gross profit (loss) | ($0.104 million) | $0.597 million | $0.828 million | $0.994 million |
| Gross margin | (11.4%) | 11.8% | 12.4% | 10.1% |
| Operating loss | ($0.807 million) | ($1.059 million) | ($1.958 million) | ($4.442 million) |
| Net loss | ($0.799 million) | ($1.042 million) | ($1.924 million) | ($4.226 million) |
| Basic and diluted loss per share | ($0.10) | ($0.13) | ($0.24) | ($0.69) |
Q3 revenue fell 82% year over year, mainly reflecting weaker bookings; the quarter produced a gross loss as lower sales left fixed costs less absorbed. Nine-month revenue fell 32%, while gross margin improved, principally because variable costs were lower as a percentage of revenue. Operating expenses declined 49% for the nine-month period, reflecting cost reductions and the absence of the prior-year $0.631 million goodwill impairment. The company reported no income-tax expense.
Cash, liquidity and capital structure
- Cash and cash equivalents were $13.343 million at September 30, down $5.294 million from December 31, 2022. Operating activities used $5.295 million over the first nine months; investing activity was negligible and there was no financing cash flow.
- Working capital was $13.083 million, versus $14.724 million at year-end 2022. Current assets were $14.254 million and current liabilities $1.171 million.
- Total liabilities were $1.461 million, principally deferred revenue and operating lease liabilities. The filing reports no borrowings; lease liabilities totaled approximately $0.414 million, including current and long-term portions.
- Deferred revenue fell to $0.475 million from $4.339 million at year-end. The company had $0.273 million of net receivables and $0.315 million of net inventory.
- Approximately $13.093 million of cash deposits were above the FDIC-insured amount. No cash dividends are anticipated.
Bookings, outlook and key risks
- Q3 net bookings were approximately $0.365 million (the backlog table rounds this to $0.366 million), compared with $0.205 million in Q2. Ending backlog was $0.548 million, down 49% from Q2. Management cautions backlog may be delayed, reduced, cancelled or never realized; $0.353 million was expected in 2024, if at all, and a $0.065 million order was considered at risk of cancellation.
- No formal revenue or earnings guidance is provided. Management says weaker customer capital spending, reduced sales effort, industry disruption, financing and licensing constraints, project delays, and supply-chain issues have pressured bookings and revenue. It is pursuing cost containment and margin improvement through disciplined pricing, better fixed-cost absorption and lower-cost suppliers.
- The board hired Roth Capital Partners in May 2023 to review strategic alternatives; there is no assurance of an outcome.
- On October 20, 2023, two customers sought $1.049 million in arbitration damages for alleged contract and warranty breaches. The company has not accrued a loss because the outcome and amount are uncertain and says it intends to defend the claims.
- Nasdaq granted a second compliance period through April 7, 2024, to regain the $1.00 minimum bid-price requirement; failure could result in delisting.
- Management concluded disclosure controls were ineffective at quarter-end due to material weaknesses, including limited accounting expertise and staffing, inadequate segregation of duties, and insufficient spreadsheet controls. Remediation is planned, but management notes resource constraints may impede it.
- Other risks include persistent operating cash use, high customer and receivables concentration, inflation, CEA-industry weakness, customer funding and project completion uncertainty, and potential dilution. At September 30, 7.624 million warrants were outstanding, alongside options and other equity awards.
Most important facts to verify
- Whether Q4 and subsequent bookings, revenue, and cash use stabilize, and how much of the $0.548 million backlog converts to revenue.
- Cash runway under continued operating outflows and the company’s ability to reduce costs without impairing sales or execution.
- Potential financial exposure and progress in the $1.049 million customer arbitration.
- Nasdaq bid-price compliance by April 7, 2024, and any developments from the strategic-alternatives review.
- Progress in remediating material weaknesses and the extent of dilution if warrants or other equity awards are exercised.