CEA Industries Inc. Warrant Q4 FY2022 earnings call

• Macro environment volatility has persisted, affecting cannabis industry with pricing pressure and inflation impacting consumers and operators, leading to slowed capital expenditures in cannabis sector negatively impacting project bookings and revenue.
• Focused on diversifying customer base outside cannabis and implementing cost-saving initiatives like reduction in force and operating expense savings, with early signs of positive trend in Q4 with double-digit sequential reduction in operating expenses.
• Announced new contract win in November with a Northeast cultivation facility, having signed consecutive contracts with them. Partnership with Merida Capital where Merida agreed to use them as sole provider for certain products/services for indoor cultivation facilities, with signed engineering and equipment contracts. Non-equity strategic alliance with Hydrobuilder Holdings, which introduced opportunities and allowed integration of products/services. Partnership with Evoqua Water Technologies to offer new water treatment solutions. Pursued and won non-cannabis CEA opportunities with signed engineering contracts for leafy greens and herbs facilities in Q4 and into 2023.

Q4 revenue was $1.5 million compared to $3.1 million in the year ago period. Gross profit for Q4 2022 was $200,000 or 10.3% of revenue compared to $600,000 or 18.1% of revenue in the same period in 2021. Operating expenses in Q4 decreased 6% to $1.4 million compared to $1.5 million in the year ago quarter. Net loss for Q4 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. Cash and cash equivalents as of December 31, 2022 were $18.6 million compared to $2.2 million as of December 31, 2021.

• Will remain cautious with spending and capital while evaluating lingering supply chain and inflationary environment.
• Cost-saving initiatives have begun to produce benefits, confident in navigating challenging period with efforts to further reduce expenses and diversify customer base.
• Strong capital position provides optionality and durability for executing organic and inorganic growth initiatives.

• Volatility in macro environment.
• Pricing pressure and headwinds affecting cannabis operators leading to slowed capital expenditures and impact on project bookings and revenue.
• Supply chain issues and inflationary pressure.

Q: Can you provide more color on how pricing pressure and headwinds affecting cannabis operators impacts our business?

A: 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.

Q: 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?

A: 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.

Q: What is your contingency plan, if the macro environment deteriorates further? How will you balance growth and profitability?

A: 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.