Filing summary
Entity and period: The filing is Surna Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2016. Although the request identifies CEA Industries Inc., the supplied filing names Surna Inc. as the registrant; verify the entity before relying on this summary. Surna develops and sells technologies and engineering services for controlled-environment agriculture, including indoor cannabis cultivation. It states that it does not produce or sell marijuana.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2.499 million | $819,063 |
| Cost of revenue | $1.410 million | $730,764 |
| Gross margin | $1.089 million; 44% | $88,299; 11% |
| Operating expenses | $723,681 | $967,845 |
| Operating income (loss) | $364,979 | $(879,546) |
| Net loss | $(746,214) | $(1.418) million |
| Basic loss per share | $(0.01) | $(0.01) |
| Cash from (used in) operations | $774,380 | $(1.012) million |
Revenue increased 205% year over year. Management attributed improved gross margin to price increases, better supplier pricing, a higher-margin sales mix, and reduced installation-project spending as the company exited that business. Operating expenses fell 25%, reflecting lower marketing, product development, and general and administrative costs. Despite operating income, net loss remained significant because net other expense was $1.111 million, including $422,668 of debt-discount amortization, $272,972 of interest expense, and a $421,717 loss from changes in derivative liabilities.
Financial position and liquidity
- Cash was $1.141 million at March 31, 2016, up from $330,557 at December 31, 2015. Cash increased by $810,266 during the quarter.
- Current assets were $2.751 million and current liabilities were $6.183 million, producing a working-capital deficit of $3.432 million. Total liabilities were $6.183 million; shareholders’ deficit was $2.654 million.
- Convertible promissory notes, net, totaled $1.876 million at quarter-end, with $345,387 of convertible accrued interest and $602,617 in derivative liabilities. The filing lists $2.885 million of future convertible-note principal payments, including $1.974 million in 2016.
- Operating cash generation benefited in part from higher deferred revenue and noncash expenses; the company reported that cash was insufficient to fund requirements for the next 12 months.
- Contractual payment obligations totaled $3.540 million. The company reported no material off-balance-sheet arrangements.
Outlook, risks, and notable items
- Going concern: The company reported recurring losses, an accumulated deficit of $11.810 million, and no established revenue base sufficient to cover operating costs. Continuation depends on increased sales, expenditure reductions if needed, and additional financing; management gave no assurance these plans would succeed and said failure to obtain capital could force cessation of operations.
- Business and market dependence: Management linked sales growth to continued expansion of state-regulated cannabis markets and the company’s ability to market products in that segment and other markets. One customer represented 30% of quarterly revenue. Four customers represented 69% of receivables; two vendors supplied 49% of material cost of revenue.
- Debt conversions and dilution: During Q1, $504,756 of note principal and interest converted into 11.045 million common shares. After quarter-end, another $384,260 converted into 6.844 million shares through May 12. Common shares outstanding were 138.414 million at March 31 and 145.258 million as of May 12.
- Related-party note: A Hydro acquisition note owed to CEO Stephen Keen and Vice President of Sales Brandy Keen had a balance of $194,514 in April 2016. The amended terms required an immediate $100,000 payment and monthly $5,000 installments on the remaining $94,514 beginning July 15, 2016.
- Management change: Stephen Keen planned to step down as president and CEO effective June 15, 2016, remain on the board, and become Director of Technology. COO Trent Doucet was appointed to succeed him.
- Controls and compliance: Management concluded disclosure controls were ineffective at March 31 because of material weaknesses involving accounting expertise, supervisory review, and segregation of duties. The company also disclosed that past federal corporate tax returns had not been filed and were being completed; examinations or penalties may be possible.
- Other contingencies: The company described ordinary-course loss contingencies but reported no material legal proceedings. It disclosed no defaults upon senior securities.
Key facts for investors to verify
- Confirm that this Surna Inc. filing is the intended filing for the requested company, CEA Industries Inc.
- Review the company’s near-term financing needs, note maturities, and ability to fund operations given the working-capital deficit and going-concern disclosure.
- Check subsequent cash payments and the status of the amended related-party Hydro note.
- Assess ongoing dilution from variable-price convertible notes, warrants, and subsequent conversions.
- Verify customer and supplier concentration, receivable collectability, and the basis for the increase in the doubtful-account allowance.
- Track remediation of material weaknesses, completion of overdue tax filings, and the CEO transition.