CEA Industries Inc. (as identified in request) — Filing identity discrepancy
The supplied filing is for Surna Inc. (OTC: SRNA), not CEA Industries Inc. Verify the issuer and ticker before relying on this summary. The unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparative periods are 2018 unless noted.
Business context
Surna designs, engineers and manufactures environmental-control and air-sanitation systems for regulated indoor cannabis cultivation facilities in the U.S. and Canada. It does not produce or sell cannabis. Revenue primarily comes from equipment sales and engineering services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.524m | $3.325m | $11.506m | $7.387m |
| Gross profit | $1.580m | $1.097m | $3.518m | $2.002m |
| Gross margin | 28.6% | 33.0% | 30.6% | 27.1% |
| Operating income (loss) | $0.277m | $(0.663)m | $(0.508)m | $(3.985)m |
| Net income (loss) | $0.222m | $(0.644)m | $(0.539)m | $(3.928)m |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $1.750m | $(1.717)m |
Q3 revenue increased 66% year over year, supported in part by $3.870m from two expansion projects for one multi-facility customer. Q3 gross margin declined year over year as larger projects included more standard, non-proprietary products and variable costs rose. Nine-month operating expenses declined 33%, largely reflecting lower stock-based compensation and personnel costs. The nine-month net loss narrowed 86%.
Financial position and liquidity
- At September 30, 2019, cash was $2.000m, versus $0.253m at December 31, 2018. Total assets were $5.303m and shareholders’ equity was $0.332m.
- Current liabilities were $4.511m, including $2.275m of deferred revenue and $2.022m of accounts payable and accrued liabilities. Working capital deficit was $0.771m.
- The company reported no indebtedness. Operating lease liabilities totaled $0.674m, including $0.213m current and $0.461m noncurrent.
- Nine-month operating cash flow of $1.750m included a $1.633m increase in deferred revenue, representing customer cash received before delivery or service. Operating cash flow therefore depended materially on customer advances and working-capital movements.
- Cash increased by $1.747m in the first nine months; investing used $0.003m and financing provided no cash.
Backlog, outlook and management commentary
- September 30 backlog was $10.143m, down 22% from June 30, after Q3 net bookings of $2.644m and record quarterly revenue of $5.524m. Management estimated about $3.3m, or 33%, of Q3-end backlog would convert to revenue in Q4 2019, but emphasized substantial timing and realization uncertainty.
- About 49% of backlog ($4.937m) was from contracts with only an initial payment for engineering; $0.619m was not expected to be realized until 2021, if at all. Backlog is not a guarantee of revenue or profitability.
- Management reported two post-quarter multi-facility-operator contracts totaling $1.2m and said it believed at least two additional contracts, each estimated above $1m, might be signed in Q4. These were expectations, not guaranteed bookings.
- The company launched its SentryIQ controls platform in April 2019 and reported seven contracts totaling about $0.687m through September 30. It also cited approximately $2.860m in contracts for custom ducted air-handling systems, of which $2.270m had been recognized as revenue.
- No formal revenue or earnings guidance was provided. Management said cash and operating cash flow were expected to be insufficient for the next 12 months and financing might be needed as soon as Q1 2020. It cited a 2021 goal of adding $10m–$20m in annual revenue through acquisitions and pursuing a Nasdaq listing; these are aspirational plans.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance of the financial statements, citing recurring losses and expected funding needs. It said expenditure reductions were possible if results or financing fell short.
Risks, contingencies and unusual items
- One customer accounted for 70% of Q3 revenue and 57% of nine-month revenue, creating significant customer concentration.
- Disclosure controls were deemed ineffective because of a previously identified material weakness, insufficient accounting personnel and supervisory review, inadequate segregation of duties, and weak spreadsheet controls.
- Litigation concerns 6.75m unsettled restricted stock units: Surna seeks cancellation after the recipient did not pay required withholding taxes; the recipient separately claims alleged 2015 consulting fees. The filing does not provide a clear quantified exposure.
- Management cited cannabis-law and licensing uncertainty, customer financing and construction delays, competition, and difficulty converting backlog into revenue. It also noted uninsured cash deposits above federal insurance limits.
- Common shares outstanding were 228.217m at September 30, versus 224.990m at December 31, 2018. Potential equity awards may add dilution.
Key facts investors should verify
- Confirm whether the intended issuer is Surna Inc. or CEA Industries Inc.; this filing identifies Surna Inc.
- Assess the going-concern warning, anticipated financing timing and available funding alternatives.
- Track whether backlog converts to revenue and cash, particularly engineering-only-paid contracts, and whether Q4 conversion matched management’s estimate.
- Monitor customer concentration and the timing, margins and collections associated with the large multi-facility customer projects.
- Review remediation of the material weakness and developments in the RSU-related litigation.
- Distinguish actual results from management’s prospective contract, acquisition, revenue-growth and Nasdaq-listing plans.