CEA Industries Inc. — 2018 Q1 Form 10-Q summary
Entity discrepancy: The supplied filing is for Surna Inc. (ticker SRNA), not CEA Industries Inc. It reports the quarter ended March 31, 2018, and was signed May 15, 2018. Confirm that this is the intended filing before relying on the figures below.
Business context and reporting period
Surna designs, engineers, and supplies environmental-control and air-sanitation systems for commercial indoor cannabis cultivation facilities. It says it does not produce or sell cannabis. The unaudited results cover the three months ended March 31, 2018; the comparative income and cash-flow figures are for Q1 2017.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Revenue | $2.055 million | $1.593 million; up 29% |
| Gross profit / margin | $382,000 / 19% | $428,000 / 27% |
| Operating expenses | $2.287 million | $1.018 million |
| Operating loss | $1.905 million | $590,000 |
| Net loss | $1.884 million | $1.001 million |
| Basic and diluted loss per share | $0.01 | $0.01 |
| Net cash used in operations | $1.525 million | $1.338 million |
| Cash at quarter-end | $881,000 | $2.468 million at Dec. 31, 2017 |
| Debt | No indebtedness reported | — |
Gross margin declined mainly because equipment costs rose faster than equipment revenue, alongside higher fixed costs. A one-time $413,000 equipment sale at a 2.5% gross margin reduced reported margin; management said revenue and gross margin excluding that sale would have been $1.642 million and 23%, respectively.
At March 31, current assets were $1.850 million and current liabilities were $2.181 million, producing a $330,000 working-capital deficit, versus a $308,000 surplus at year-end. Accounts payable and accrued liabilities were $1.548 million, and deferred revenue was $633,000. Cash fell by $1.587 million during the quarter; investing activities used $73,000, while financing provided $11,000.
Material changes and operating indicators
- Operating expenses rose 125%, led by higher stock-based compensation, salaries and benefits, consulting, professional fees, and marketing. Q1 stock-based compensation was $641,000, compared with $130,000 a year earlier.
- Commercial-scale project net bookings were approximately $4.624 million, up 88% from the prior quarter. Ending backlog reached $7.024 million, up 58% sequentially. These are company-defined non-GAAP measures, not recognized revenue; about 78% of ending backlog was from projects with only an initial deposit.
- The company issued shares for warrant exercises, compensation, and settlement of a commercial dispute. Common shares outstanding rose from 206.2 million at year-end to 215.0 million at quarter-end.
- Surna adopted ASC 606 using the modified retrospective method. Q1 revenue was $17,440 higher under the new standard than it would have been without adoption; the opening cumulative adjustment reduced deferred revenue and accumulated deficit by $56,912 each.
Outlook, risks, contingencies, and unusual items
- Going concern: Management said cash and operating cash flow would be insufficient for the next 12 months and that additional financing would be needed. It expected to raise financing in Q2 or Q3 2018; there is no assurance it could do so on acceptable terms. The filing says substantial doubt exists about the company’s ability to continue as a going concern.
- Management cited long sales cycles and project timelines of four months to two years. Customer financing, licensing, permitting, construction, and installation delays can postpone or prevent revenue recognition and may affect backlog conversion. Management said its repositioning investments could take four to 10 quarters to yield results.
- Management was targeting larger projects and growth in California and Canada. It noted uncertainty from U.S. federal cannabis prohibition and enforcement, and uncertainty about proposed Canadian recreational legalization. No formal revenue or earnings guidance is provided.
- The company reported a material weakness in internal controls and concluded disclosure controls were ineffective at March 31, 2018, citing staffing and accounting expertise limitations, inadequate segregation of duties, and insufficient spreadsheet controls.
- An IRS appeal concerns approximately $115,000 of penalties and interest for late Forms 5471. No liability was accrued; the appeal remained unresolved.
- Subsequent events included a proposed $400,000 repurchase of founders’ common shares conditional on completing at least $1.5 million of private financing; a company option to acquire founders’ preferred shares; and new compensation and employment arrangements for founder Brandy Keen, including 4.8 million RSUs. These arrangements were agreed after quarter-end.
Most important facts to verify
- Confirm the issuer: the filing identifies Surna Inc., not CEA Industries Inc.
- Verify whether the company obtained the financing it said it needed, and assess its current liquidity and going-concern status.
- Track conversion of the $7.024 million backlog, especially the deposit-only projects, into completed work and recognized revenue.
- Review the causes and sustainability of the gross-margin decline, operating-cost growth, and significant stock-based compensation.
- Check remediation of the disclosed material weakness and the outcome of the IRS penalty appeal.
- Review the terms, financing condition, share effects, and subsequent completion status of the founders’ repurchase, preferred-stock option, and compensation arrangements.