CEA Industries Inc. (formerly Surna Inc.) — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021, with comparisons to FY2020. CEA Industries designs, engineers, and supplies equipment and services for controlled-environment agriculture (CEA), historically primarily for cannabis cultivation facilities. It does not grow or sell cannabis. The company began broadening its offerings toward non-cannabis indoor agriculture, including vertical farming, and added architectural design and preventive-maintenance services.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $13.64 million | $8.51 million |
| Gross profit / margin | $2.93 million / 21.5% | $1.55 million / 18.2% |
| Operating loss | $1.98 million | $2.36 million |
| Net loss | $1.34 million | $1.76 million |
| Net loss available to common shareholders | $3.69 million | $1.76 million |
| Net cash from (used in) operating activities | $(3.21) million | $0.82 million |
| Cash and cash equivalents at year-end | $2.16 million | $2.28 million |
| Working capital | $(0.42) million | $(2.22) million |
| Debt at year-end | No indebtedness reported | — |
| Backlog at year-end | $10.82 million | $8.45 million |
FY2021 revenue increased about 60% year over year. The GAAP net loss available to common shareholders includes a $2.26 million noncash Series B preferred-stock redemption-value adjustment and $67,000 of preferred dividends. Management reported adjusted net loss of $889,000 for FY2021 versus $1.24 million for FY2020; this is a non-GAAP measure. Three customers accounted for 44% of FY2021 revenue, including one customer at 24%.
Material changes versus FY2020
- Gross margin improved by approximately 3.3 percentage points, despite a 4.9-point decline in equipment margin; management attributed the overall improvement primarily to fixed costs being spread across higher revenue.
- Operating expenses rose 25% to $4.90 million, including higher selling and administrative, marketing, and product-development costs.
- Operating cash flow shifted from $818,000 provided in FY2020 to $3.21 million used in FY2021, largely reflecting working-capital changes, including reduced deferred revenue.
- Bookings increased: FY2021 net bookings were $16.01 million versus $7.41 million in FY2020. Year-end backlog rose 28% from FY2020.
- The company raised approximately $2.62 million net in September/November 2021 through Series B preferred stock and warrants. The preferred stock was recorded as temporary equity at a $3.96 million redemption value.
Outlook, risks, and unusual items
- Liquidity and outlook: After year-end, the company uplisted to Nasdaq on February 10, 2022, and closed a common-stock-and-warrant offering on February 15, 2022, receiving approximately $22 million in net proceeds. Management said the proceeds were expected to fund operations and growth plans for at least 12 months after the financial statements were issued. No quantified revenue or earnings guidance was provided.
- Backlog conversion: Revenue timing depends on customers obtaining financing, real estate, licenses, permits, and completing construction. Management cautioned that backlog may be delayed, reduced, canceled, or never recognized as revenue. About $1.66 million of year-end backlog was not expected until 2023, if at all.
- Supply chain and COVID-19: The company reported continuing shipping, port, container, and trucking delays, along with cost inflation, which could affect fulfillment and margins. The duration and financial impact were uncertain.
- Market and regulatory exposure: Most historical business served cannabis cultivators. Cannabis remains illegal under U.S. federal law; changes in enforcement, state rules, customer financing access, or cannabis-market economics could materially harm demand. Competition may also pressure pricing and margins.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2021, due to a material weakness involving limited accounting personnel and review, inadequate segregation of duties, and insufficient spreadsheet controls. The weakness was unchanged from 2020.
- Unusual items: FY2021 other income included $517,000 of bank-loan forgiveness and $138,000 of employee retention credits; a former-employee litigation settlement cost $107,000. The company reported no material pending legal proceedings.
- Capital structure after year-end: The company completed a 1-for-150 reverse stock split in January 2022. It subsequently redeemed half of its Series B preferred stock for approximately $2.02 million and converted the remainder into common shares and warrants.
Important facts for investors to verify
- Review the audited statements and preferred-stock terms to understand the distinction between the $1.34 million consolidated net loss and the $3.69 million loss available to common shareholders.
- Assess cash burn, working-capital needs, and use of the February 2022 offering proceeds, including whether the stated funding runway remains adequate.
- Track backlog conversion, cancellations, customer concentration, and the timing of the $1.66 million expected in 2023; backlog is not guaranteed revenue.
- Monitor remediation of the material weakness in financial reporting controls and any subsequent changes in management’s assessment.
- Confirm the current status and dilution impact of outstanding warrants, options, and shares issued in the 2022 offering and Series B transactions.
- Evaluate exposure to cannabis-law enforcement, supply disruptions, inflation, and customer financing and licensing risks.