CEA Industries Inc. — 2019 Q1 Form 10-Q Summary
Filing identity: The supplied filing is for Surna Inc. (ticker SRNA), not CEA Industries Inc. It covers the quarter ended March 31, 2019, and was signed May 13, 2019. 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 regulated indoor cannabis cultivation facilities in the U.S. and Canada. It does not produce or sell cannabis. The financial statements are unaudited and compare the three months ended March 31, 2019 with the same period in 2018.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Revenue | $1.771 million | $2.055 million |
| Gross profit / margin | $490,000 / 27.7% | $382,000 / approximately 18.6% |
| Operating expenses | $1.412 million | $2.287 million |
| Operating loss | $922,000 | $1.905 million |
| Net loss | $900,000; loss per share $0.004 | $1.884 million; loss per share $0.009 |
| Cash from operating activities | $212,000 provided | $1.525 million used |
| Cash and cash equivalents | $465,000 | $253,000 at December 31, 2018 |
| Working capital | $1.628 million deficit | $1.031 million deficit at December 31, 2018 |
| Total liabilities | $3.790 million | $2.559 million at December 31, 2018 |
| Indebtedness | No debt reported |
Revenue declined 14% year over year. Gross profit rose as cost of revenue fell 23%; management attributed the margin improvement to better equipment margins and lower project-management costs following personnel reductions. Operating expenses declined 38%, mainly due to lower SG&A, including reduced compensation and professional fees. The company recorded $356,000 of equity-based compensation in Q1 2019.
Current liabilities included $1.946 million of accounts payable and accrued liabilities, $1.071 million of deferred revenue, and $205,000 of current operating-lease liability. The company adopted the new lease standard in 2019 and reported total operating-lease liabilities of approximately $774,000 at March 31. Shareholders’ equity was a $350,000 deficit.
Material changes, outlook and risks
- Net bookings increased to $4.785 million from $1.838 million in Q4 2018; quarter-end backlog reached $11.543 million, up 35% from year-end. Backlog is not guaranteed revenue: 70% related to contracts with only engineering advances received, and the filing warns projects may be delayed, abandoned or canceled. Approximately 24% of Q1 backlog was not expected until 2021 and might never be recognized.
- Management estimated about 59% of Q1 backlog would be recognized during 2019. Revenue timing depends on customer financing, licenses, permits, real estate, construction and other factors outside Surna’s control.
- After quarter-end, Surna reported two $2.5 million expansion contracts with one multi-facility operator, with advance payments of $750,000 and $500,000, respectively. Management expected recognition in Q2–Q3 2019 and Q3 2019. These are forward-looking expectations, not Q1 recognized revenue.
- Management described plans to expand retrofit, lifecycle-service and controls offerings, pursue strategic acquisitions, and improve margins and cash generation. It said revenue may need to grow to $20–$40 million for a more sustainable position and indicated financing might be needed in the second half of 2019.
- Going concern: Management said cash and operating cash flow were expected to be insufficient for the next 12 months; the filing states substantial doubt about the company’s ability to continue as a going concern. Additional funding, higher revenue or expenditure reductions may be necessary, with no assurance financing will be available.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses involving accounting expertise and supervision, segregation of duties, and spreadsheet accuracy and completeness. Remediation may be constrained by company size and resources.
- Contingencies and related parties: Surna was litigating to cancel 6.75 million unsettled restricted stock units after the recipient failed to pay required withholding taxes. A related-party equipment and demonstration arrangement involved company insiders and a principal shareholder.
Key facts investors should verify
- Whether the intended issuer is Surna Inc. rather than CEA Industries Inc.
- The ability to raise capital and fund operations, given the going-concern warning, cash balance and working-capital deficit.
- How much backlog converts into collected revenue, particularly the engineering-only-paid contracts and projects deferred to 2021.
- Whether the post-quarter $5 million expansion contracts proceed on schedule and the reported advance payments are collected and applied as expected.
- Progress in remediating material weaknesses in financial-reporting controls and the outcome of the RSU litigation.