Filing summary
Issuer and period: The supplied filing is Surna Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2020, filed November 12, 2020. This does not match the request metadata identifying CEA Industries Inc.; verify the issuer before relying on this summary. Surna designs and sells climate-control, engineering, equipment, and automation solutions for controlled-environment agriculture, including cannabis cultivation. It does not produce or sell cannabis.
Financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2020 vs. 2019 | $1.635 million vs. $5.524 million; down 70% | $5.127 million vs. $11.506 million; down 55% |
| Gross profit and margin | $526,000; 32%, versus $1.580 million; 29% | $1.257 million; 25%, versus $3.518 million; 31% |
| Operating income (loss) | $(283,000) vs. $277,000 | $(1.835) million vs. $(508,000) |
| Net income (loss) | $(270,000) vs. $222,000 | $(1.822) million vs. $(539,000) |
| Cash from operating activities | Not reported for the quarter | $600,000 vs. $1.750 million |
Quarterly gross margin improved year over year, while nine-month gross margin declined. Management attributed the nine-month decline largely to the fixed-cost burden against much lower revenue. Lower operating expenses did not prevent a larger operating loss.
Financial position and liquidity
- At September 30, 2020, cash was $2.072 million, total assets $4.656 million, total liabilities $6.078 million, and shareholders’ deficit $1.422 million.
- Current assets were $3.449 million against current liabilities of $5.242 million, a disclosed working-capital deficit of $1.793 million, compared with $1.437 million at year-end 2019.
- Current liabilities included $3.489 million of deferred revenue, generally customer advances for work or equipment not yet delivered. Cash from operations also benefited from a $2.045 million increase in deferred revenue and a $715,000 inventory reduction.
- The company received a $554,000 bank note in April 2020 for working capital, bearing 1% interest and potentially eligible for forgiveness. On October 28, it applied for full forgiveness; the decision was expected in the first quarter of 2021. Operating lease liabilities totaled about $492,000.
- Cash increased by $1.150 million during the first nine months, from $922,000 at December 31, 2019, reflecting operating cash flow and note proceeds. Investing activities used $3,500.
Changes, outlook, and risks
- Bookings and backlog: Third-quarter net bookings were $4.241 million, after cancellations, versus negative $1.601 million in the second quarter. Backlog was $8.198 million at September 30, up 29% from June 30. Management estimated approximately $3.477 million, or 42% of that backlog, would be recognized in the remainder of 2020, but emphasized timing and realization were uncertain.
- Backlog quality: $2.870 million, or 35%, was from contracts where Surna had received an advance for engineering services only; the equipment portion could be delayed or never proceed. Another $673,000 was not expected to be realized until 2022, if at all. Customers’ financing, licensing, permitting, construction, and project decisions affect conversion to revenue.
- COVID-19: Management said the pandemic had weakened demand and disrupted projects and expected continued adverse effects on sales, implementation, margins, and working capital. The company reduced staffing and compensation during 2020, later restoring some employees and salaries. It cautioned that cost measures might not prevent lower sales, increased losses, or reduced operating cash flow.
- Funding and going concern: Management stated cash and operating cash flow would be insufficient for the next 12 months and that financing would be needed within six months. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern; there is no assurance financing will be available on acceptable terms or at all.
- Other risks and contingencies: Revenue and backlog depend on concentrated customer relationships; two customers generated 69% of third-quarter revenue. Competition, cannabis regulation, customer and supplier risks, and the pandemic are cited risks. A former-employee dispute produced a $33,985 award in Surna’s favor, which it is pursuing to collect; separate litigation by the former employee over alleged consulting fees remained pending.
- Controls: Management concluded disclosure controls were ineffective at quarter-end because of a previously identified material weakness, including inadequate accounting staffing and segregation of duties and insufficient spreadsheet controls. Management described remediation plans but said resource constraints could impede remediation.
- Management strategy: The company described efforts to broaden lower-cost product offerings, sell controls and technology, pursue strategic partnerships, emphasize retrofit and expansion work, and improve margins and cash discipline. It provided no formal revenue or earnings guidance.
Key facts for investors to verify
- Confirm the issuer: the filing is for Surna Inc. (ticker SRNA), not CEA Industries Inc.
- Track whether financing is obtained and whether the $554,000 bank note is forgiven.
- Assess cash use, working-capital needs, and progress toward resolving the stated going-concern uncertainty.
- Monitor whether bookings convert into recognized revenue, especially engineering-only backlog and the $673,000 expected no earlier than 2022.
- Review progress on the material weakness in financial reporting controls and the concentration of revenue among major customers.