CEA Industries Inc. (then Surna Inc.) — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; financial statements are unaudited. The company operated as Surna Inc. and traded on OTC Markets as SRNA at filing. It later changed its corporate name to CEA Industries Inc.
Business context and financial results
The company designs and supplies engineering, climate-control and other products and services for controlled environment agriculture, with most revenue then tied to commercial cannabis cultivation projects. It reported expanding offerings beyond HVACD into additional facility technologies and maintenance services.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.71 million | $1.63 million | $10.58 million | $5.13 million |
| Gross profit | $747,000 | $526,000 | $2.37 million | $1.26 million |
| Gross margin | 20% | 32% | 22.4% | 24.5% |
| Operating loss | $443,000 | $283,000 | $1.01 million | $1.83 million |
| Net loss | $408,000 | $270,000 | $936,000 | $1.82 million |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(1.76) million | $600,000 |
Financial position, liquidity and capital
- At September 30, 2021, cash was $2.28 million, total assets $4.91 million and total liabilities $5.67 million. Working capital was negative $1.16 million, improved from a $2.22 million deficit at December 31, 2020.
- Cash was essentially unchanged over the first nine months: $1.76 million used in operations and $14,000 used in investing were offset by $1.77 million of financing cash flow, including approximately $1.26 million net proceeds received from the Series B financing and $514,200 from a bank note.
- The bank note bears 1% interest, is due February 2026 and may be forgivable if specified use-of-proceeds and other conditions are met. The balance sheet reported $517,468 of note payable and accrued interest.
- The September Series B financing had $3.0 million purchase consideration and approximately $2.625 million expected net proceeds. $1.365 million remained in escrow at quarter-end and was received November 4, 2021, after required corporate amendments and Series A preferred redemption steps.
- Series B preferred stock carries an 8% annual dividend and conversion terms, alongside warrants. Its redemption provisions led to a $2.26 million non-cash redemption-value adjustment; this increased the loss attributable to common shareholders to $3.20 million for the nine months, versus GAAP net loss of $936,000.
- Deferred revenue was $3.06 million. Backlog was $9.88 million, including $1.16 million from engineering-only-paid contracts and $1.25 million of orders not expected to be realized until late 2022. Backlog is not guaranteed revenue.
Changes versus comparable periods
- Q3 revenue rose 127% year over year, primarily from higher equipment sales and comparison with a COVID-affected 2020 quarter. Nine-month revenue increased 106%, attributed to strong early-2021 bookings and the prior-year slowdown.
- Gross margin contracted to 20% in Q3 from 32%; management cited higher variable costs and a one-time reversal of an excess-inventory reserve in Q3 2020. Nine-month margin fell to 22.4% from 24.5%, with lower equipment margins and higher warranty and travel costs among the factors.
- Q3 operating expenses rose 47% to $1.19 million, including higher marketing, commissions and investor-relations expenses. Nine-month operating expenses rose 10% to $3.39 million, while the operating loss improved as revenue and gross profit grew.
- Q3 net loss increased 51% year over year. Nine-month net loss narrowed 49%, but the preferred-stock redemption adjustment materially increased the loss attributable to common shareholders.
- Nine-month operating cash flow shifted from $600,000 provided in 2020 to $1.76 million used in 2021, including the effect of lower deferred revenue and increased inventory and prepaid expenses.
Outlook, management commentary and risks
- Going concern: Management stated that cash and operating cash flow would be insufficient to fund operations for the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. Additional financing, higher revenue, cost reductions or other cash generation may be needed; financing availability and terms are uncertain and equity financing could dilute shareholders.
- Strategy: Management planned to pursue organic growth, broaden products and services to reach non-cannabis CEA markets, consider strategic relationships or acquisitions, and seek a national-exchange uplisting and growth capital. No specific revenue or earnings guidance was provided.
- Bookings and backlog: Q3 net bookings were $5.60 million, compared with $919,000 in Q2 2021; backlog rose 24% from the prior quarter. Management cautioned that projects may be delayed, reduced or cancelled because of customer financing, licensing, permitting, construction and other issues, and gave no assurance backlog will convert to revenue or profit.
- Operating risks: COVID-related international shipping congestion, container shortages and limited trucking capacity delayed supplies. Customer concentration was significant: three customers generated 72% of Q3 revenue, and three represented 88% of accounts receivable at quarter-end.
- Preferred-stock and dilution terms: Conversion-price adjustments, redemption provisions and common-stock issuance from preferred conversion and warrants could affect dilution and financing needs. At quarter-end, the preferred stock and other instruments included substantial potential common-share issuance.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness involving insufficient accounting personnel and supervision, inadequate segregation of duties, and weaknesses in spreadsheet verification. A CFO was hired, but management said remediation might not be economically feasible given company size and resources.
- Other items: The company recorded a $107,000 expense to settle former-employee litigation. It reported no material pending legal proceedings at the filing date. The Boulder facility lease was terminated early, with a move to a new facility scheduled for November 2021.
Most important facts for investors to verify
- Whether the company’s post-quarter receipt of the $1.365 million escrow balance and completion of corporate amendments and Series A redemption resolved the Series B financing conditions.
- Current cash runway, operating cash burn and funding requirements, given the stated going-concern uncertainty.
- Actual conversion of the $9.88 million backlog into revenue and cash, including the late-2022 orders and engineering-only-paid contracts.
- Whether gross margins recover and whether supply-chain delays, warranty costs and customer concentration change materially.
- Progress in remediating ineffective disclosure controls and internal-control weaknesses.
- The potential dilution, redemption cost and other consequences of Series B preferred stock and related warrants, as well as the terms and status of any uplisting or further capital raise.