CEA Industries Inc. (identified in the filing as Surna Inc.) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing was signed August 10, 2021. The registrant is named Surna Inc. in the filing; investors should confirm the relationship to CEA Industries Inc.
Business context
Surna designs, engineers and sells environmental-control systems, equipment and services for controlled-environment agriculture (CEA), with most historical customers in cannabis cultivation. It does not grow or sell cannabis. The company said it was expanding toward broader CEA markets, additional facility infrastructure products and maintenance services.
Financial results and position
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 | Comparison period |
|---|---|---|---|
| Revenue | $4.510 million | $6.876 million | $1.682 million and $3.492 million, respectively, in 2020 |
| Gross profit / margin | $1.282 million / 28% | $1.627 million / 24% | $0.275 million / 16% and $0.731 million / 21%, respectively |
| Operating income (loss) | $0.116 million | $(0.570) million | $(0.606) million and $(1.552) million, respectively |
| Net income (loss) | $0.265 million | $(0.528) million | $(0.614) million and $(1.552) million, respectively |
| Operating cash flow | Not presented as a quarterly figure | $(1.142) million | $(1.241) million for the first half of 2020 |
Q2 revenue rose 168% year over year; first-half revenue rose 97%. First-half gross margin improved three percentage points, though management cited lower equipment margins and higher variable costs as offsets. Q2 net income included approximately $138,000 of Employee Retention Credit income and $12,000 of sublease income. First-half other income also included a $107,000 former-employee litigation settlement expense.
- Cash and liquidity: Cash was $1.643 million at June 30, down from $2.285 million at December 31, 2020. Working-capital deficit was $2.063 million, versus $2.220 million at year-end. Prepaid expenses were $1.987 million, including $1.873 million of inventory advances.
- Liabilities and borrowing: Total liabilities were $6.970 million, including $4.056 million deferred revenue and $0.516 million of note payable and accrued interest. The $514,200 bank loan bears 1% interest, is due February 2026 and may be forgivable if specified conditions are satisfied.
- Cash flows: First-half investing cash outflow was $14,000 and financing inflow was $514,200; cash decreased $641,000 overall.
- Backlog: Remaining performance obligations were $7.987 million at quarter-end. Management estimated $6.705 million, about 84%, would be recognized in the remainder of 2021, but stressed timing and realization were uncertain. $2.038 million related to contracts with engineering advances only; $1.282 million of orders were not expected until 2022, if at all.
Material changes, outlook and risks
- Management attributed revenue growth to higher equipment sales, including newer product offerings, and comparison with a COVID-19-affected 2020 period. Q2 revenue also benefited from fulfilling orders delayed by suppliers in Q1.
- Q2 net bookings were $919,000, down from $5.497 million in Q1; quarter-end backlog fell 42% from Q1. The filing reports customer cancellations and warns that projects may be delayed, reduced or abandoned.
- Management stated that available cash and operating cash flow would be insufficient to fund operations for the next 12 months. The filing concludes substantial doubt exists about the company’s ability to continue as a going concern; additional financing, increased revenue or other cash generation is needed. Financing may not be available on acceptable terms and equity issuance could be dilutive.
- COVID-19-related port congestion, container shortages and supply-chain staffing constraints were delaying international shipments. The company said the duration and full effect were not predictable.
- Customer project financing, licensing, permitting, construction and facility readiness affect both backlog conversion and revenue timing. Customer concentration is significant: three customers represented 66% of Q2 revenue; two customers represented 88% of accounts receivable at June 30.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses involving accounting expertise and supervision, segregation of duties, and spreadsheet controls. The company said it hired a CFO and intended to improve staffing, systems and controls, while noting remediation may not be economically feasible.
- After quarter-end, Surna agreed to terminate its Boulder lease, vacate by November 15, 2021, and lease a smaller Louisville facility beginning November 1, 2021 through January 2027.
- No formal revenue or earnings guidance was provided. The company described growth plans involving broader CEA markets, product and service expansion, strategic transactions and a potential national-exchange uplisting; it noted an uplisting would require a reverse stock split.
Important facts for investors to verify
- Confirm the registrant’s identity and corporate relationship: this filing is for Surna Inc., although the request names CEA Industries Inc.
- Assess whether the company can fund operations beyond the next 12 months and what financing or dilution may be required.
- Track backlog conversion, cancellations and the expected timing of the $7.987 million remaining performance obligations; backlog is not assured revenue.
- Review cash use, working-capital needs, inventory advances, customer receivables and customer concentration.
- Monitor gross margins, equipment pricing and supply-chain delays, as well as progress in remediating the disclosed control weaknesses.
- Confirm the status and terms of the potentially forgivable bank loan and the financial effects of the post-quarter lease changes.