CEA Industries Inc. (as requested) — filing summary
Registrant discrepancy: The supplied Form 10-Q identifies the registrant as Surna Inc. (OTC: SRNA), not CEA Industries Inc. Confirm that this is the intended filing. Reporting period: quarter and nine months ended September 30, 2018; filed November 14, 2018. Financial statements are unaudited.
Business context and reporting period
Surna designs and supplies environmental-control and air-sanitation systems, equipment, and engineering services for commercial indoor cannabis cultivation facilities. It does not grow or sell cannabis. Its revenue depends substantially on customers’ ability to obtain licenses, financing, and complete construction projects.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3.325 million | $1.566 million | $7.387 million | $4.901 million |
| Gross profit / margin | $1.097 million / 33% | $0.391 million / 25% | $2.002 million / 27% | $1.233 million / 25% |
| Operating loss | $0.643 million | $1.234 million | $3.966 million | $3.021 million |
| Net loss | $0.644 million | $1.478 million | $3.928 million | $3.553 million |
- Q3 revenue rose 112% year over year, and gross margin improved eight percentage points; management attributed the margin improvement to equipment-sales margins and better fixed-cost utilization.
- Nine-month revenue increased 51%, but operating loss widened 31% and net loss rose 11%. Nine-month operating expenses grew 40%, including higher stock-based compensation, salaries, professional fees, and marketing costs.
- Cash was $1.417 million at September 30, down $1.051 million from year-end 2017. Nine-month operating cash use was $1.717 million; investing cash use was $0.151 million; financing provided $0.816 million.
- The company reported no indebtedness. Current liabilities were $2.669 million against current assets of $2.593 million, a $76,000 working-capital deficit. Accounts payable and accrued liabilities were $2.114 million; deferred revenue was $555,000.
- Accumulated deficit was $23.531 million. Stock-based compensation was $2.067 million for the nine-month period, a significant non-cash expense.
Material changes and operating indicators
- Commercial-scale project net bookings were $11.609 million across 28 projects for the first nine months of 2018, versus $6.749 million across 21 projects for full-year 2017. Q3 bookings were $3.328 million, down 14% from Q2; Q3 recognized revenue increased 66% sequentially to $3.325 million.
- Backlog was $8.886 million at September 30, essentially unchanged from the prior quarter. About 65% related to projects for which Surna had received only an initial deposit, exposing conversion and timing to customer financing, licensing, and project-completion risks. The filing cautions that backlog may not result in revenue or profit.
- Cash financing included a $1.210 million private placement of common shares and warrants; $400,000 of those proceeds funded a share repurchase from co-founders. Common shares outstanding were 223.835 million at September 30 and 224.955 million as of November 14.
- A $413,000 equipment sale to a customer generated only a 2.5% gross margin; management described it as a one-time accommodation. The customer had entered into contracts totaling approximately $1.8 million during the first nine months.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated cash and operating cash flow would be insufficient for the next 12 months and that additional financing may be needed, potentially in the first or second quarter of 2019. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. No assurance of financing is given; expenditure reductions may be necessary.
- Market and execution: Management cited strength in California and Canada and pursued larger projects, while noting that federal U.S. cannabis prohibition, changing enforcement or laws, customer licensing and financing, and construction delays could adversely affect demand and revenue timing. No formal revenue or earnings guidance is provided.
- Controls: Management concluded disclosure controls were ineffective at September 30 due to material weaknesses, including insufficient accounting expertise and supervision, inadequate segregation of duties, and insufficient spreadsheet controls. Remediation may be constrained by company size and resources.
- Related parties: The company had equipment and demonstration/testing arrangements with an entity controlled by a principal shareholder, repurchased $400,000 of co-founders’ shares, and paid $5,000 for an option to buy their preferred shares. The subsequent-events note says the option exercise had been approved but not completed by the filing date.
- Other items: The IRS abated assessed penalties and interest related to late foreign-information returns. Surna adopted ASC 606 in 2018; the disclosed effect was modest, including $17,412 lower nine-month revenue and a $39,500 reduction in deferred revenue versus balances without adoption. The company expects the new lease standard to materially affect its balance sheet.
Important facts for investors to verify
- Whether the Surna Inc. filing is the intended filing for the requested company, CEA Industries Inc.
- Available cash, operating cash burn, financing needs, and progress toward raising capital or achieving positive cash flow.
- Whether backlog converts to shipments and recognized revenue, particularly the deposit-only projects, and whether project cancellations or delays occur.
- Gross-margin sustainability, including the impact of low-margin equipment sales and rising operating expenses and equity compensation.
- Share issuance, warrant terms, equity awards, and the status and terms of the related-party preferred-stock option.
- Remediation of disclosed control weaknesses and the expected balance-sheet impact of lease-accounting adoption.