CEA Industries Inc. (identified in the filing as Surna Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing names Surna Inc. as the registrant; investors should verify the relationship to CEA Industries Inc. The financial statements are unaudited.
Business context
Surna designs, engineers and sells climate-control, air-handling, automation and related systems and services for controlled-environment agriculture, primarily serving regulated cannabis cultivators. It does not produce or sell cannabis.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparator |
|---|---|---|
| Revenue | $1.810 million | $1.771 million; up 2% |
| Gross profit / margin | $457,000 / 25% | $490,000 / 28% |
| Operating loss | $946,000 | $922,000 |
| Net loss | $938,000 | $900,000 |
| Cash used in operating activities | $728,000 | Cash provided of $212,000 |
| Cash and cash equivalents | $194,000 at March 31 | $922,000 at December 31, 2019 |
| Working capital | Deficit of $1.705 million | Deficit of $1.437 million at December 31, 2019 |
At March 31, total assets were $3.256 million, total liabilities $3.892 million and shareholders’ deficit $636,000. The company reported no indebtedness at quarter-end; current liabilities included $2.133 million of accounts payable and accrued liabilities and $1.153 million of deferred revenue. Lease liabilities totaled approximately $569,000. No investing or financing cash flows were reported for the quarter.
Changes and operating indicators
- Revenue increased modestly, but gross profit fell 7% and gross margin declined three percentage points, primarily as variable costs rose as a share of revenue.
- Operating expenses were down 1%, but operating and net losses widened. Excluding stock-based compensation and depreciation, management said operating loss increased 40% and net loss 45% year over year.
- Net bookings were $1.127 million, down 64% from Q4 2019. Backlog was $8.875 million at March 31, down 7% from year-end. Management estimated about $5.535 million, or 62% of that backlog, for recognition during the remainder of 2020, while warning timing and realization were uncertain.
- Engineering-only-paid contracts comprised 71% of backlog; the filing identifies project financing, licensing, permitting and construction delays as risks to conversion. A further $975,000 of backlog was not expected to be realized until 2022, if at all.
Outlook, risks and unusual items
- Going concern: Management said cash and operating cash flow would be insufficient for the next 12 months and expected financing would be needed within six months. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- COVID-19: The company cited adverse effects on customer demand, sales, margins, working capital and contract timing. It warned that contracts could be delayed or canceled and that the full impact was not predictable.
- Subsequent financing and cost actions: On April 22, 2020, the company obtained a $554,000 bank loan at 1% interest, potentially forgivable subject to conditions. It initially reinstated furloughed staff, but on June 8 furloughed several employees, reduced remaining salaried employees’ pay by a further 25%, and moved hourly employees to part-time.
- Contract cancellation and receivable: On June 1, a customer terminated a contract with $1.984 million of remaining work after ceasing operations for lack of funding. An associated $81,008 receivable was written off after quarter-end.
- Controls and dilution: Management concluded disclosure controls were ineffective as of March 31 due to previously identified internal-control weaknesses, including insufficient accounting staffing, inadequate segregation of duties and spreadsheet-control deficiencies. Common shares outstanding rose to 236.5 million from 228.2 million at year-end; the quarter included settlement of 6.75 million RSUs and substantial equity compensation.
- Legal matter: In June, an arbitrator issued a final award in the company’s favor against a former employee and awarded the company $33,985 plus interest. Separate litigation over alleged consulting fees remained ongoing.
Important facts for investors to verify
- Whether the filing’s registrant, Surna Inc., is the intended company and how it relates to CEA Industries Inc.
- Cash needs, financing availability and the status and terms of the $554,000 loan, including whether forgiveness conditions are met.
- Whether backlog converts to revenue and cash, especially engineering-only-paid contracts, long-dated orders and contracts exposed to customer funding or licensing risks.
- The effects of COVID-19, including the terminated contract, receivable write-off, staffing actions and any further cancellations or delays.
- Progress in remediating ineffective disclosure controls, and potential dilution from outstanding equity awards and share issuances.