Business context and reporting period
This is Surna Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020, filed August 11, 2020. Surna designs, engineers, and sells climate-control, equipment, and related services for controlled-environment agriculture, including cannabis cultivation; it does not produce or sell cannabis. The request identifies CEA Industries Inc., but the filing itself names Surna Inc. as the registrant. Verify that this is the intended filing.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.682 million | $4.210 million | $3.492 million | $5.982 million |
| Gross profit / margin | $275,000 / 16% | $1.448 million / 34% | $731,000 / 21% | $1.938 million / 32% |
| Operating income (loss) | $(606,000) | $136,000 | $(1.552) million | $(786,000) |
| Net income (loss) | $(614,000) | $140,000 | $(1.552) million | $(761,000) |
| Operating cash flow | Not separately provided | Not separately provided | $(1.241) million | $1.672 million |
At June 30, cash was $235,000, down from $922,000 at December 31, 2019. Current assets were $1.320 million and current liabilities $2.919 million, resulting in a $1.599 million working-capital deficit. Total liabilities were $3.783 million, compared with assets of $2.607 million; shareholders’ deficit was $1.176 million. The company reported a $554,000 bank note payable, bearing 1% interest, for working capital; possible loan forgiveness and an extension of the maturity are conditional. Lease liabilities totaled $516,000, split between current and noncurrent amounts.
Material changes versus prior periods
- Q2 revenue fell 60% year over year; six-month revenue declined 42%. Management attributed the weaker business environment and project disruption in part to COVID-19 and customers’ financing, licensing, and construction delays.
- Gross margin contracted to 16% in Q2 and 21% for the first half, from 34% and 32%, respectively. Management cited higher variable costs as a share of revenue and a $186,000 Q2 charge for excess and obsolete inventory related to a delayed or potentially canceled customer project.
- Q2 moved from prior-year operating income and net income to losses. First-half net loss more than doubled year over year, while operating cash flow swung from $1.672 million provided to $1.241 million used.
- Backlog fell 37% from March 31 to $5.592 million at June 30. Q2 net bookings were negative $1.601 million after four contract cancellations totaling $2.296 million in remaining value; one customer separately terminated a contract with $1.984 million of work outstanding.
- Cash fell by $687,000 in the first half, as operating cash outflow was partly offset by the $554,000 note proceeds. Inventory, deferred revenue, and accrued equity compensation also declined from year-end.
Outlook, commentary, risks, and unusual items
- Going concern and financing: Management said cash and expected operating cash flow would be insufficient for the next 12 months and that financing would be needed within six months. The filing states 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.
- Backlog uncertainty: Of $5.592 million backlog, $3.024 million (54%) related to engineering-only-paid contracts, and $1.658 million was not expected to be realized until 2022, if at all. Management estimated about $2.4 million, or 44%, of June-end backlog could be recognized in the remainder of 2020, while emphasizing substantial uncertainty and cancellation risk.
- Post-quarter developments: In July, Surna entered sales contracts totaling approximately $3.1 million, including a $2.8 million largest-ever contract; management expected most of the amount to be recognized as 2020 revenue. These are subsequent contracts, not Q2 recognized revenue.
- COVID-19 and operations: Management expected near-term adverse effects on sales, project implementation, margins, and working capital. The company reduced compensation, furloughed staff, and moved hourly employees to part-time status during the period. It also negotiated use of its $51,000 rent deposit and a deferral of roughly $30,000 of lease payments.
- Controls and governance: Management concluded disclosure controls were ineffective at June 30 because of a previously reported material weakness, including insufficient accounting expertise and review, inadequate segregation of duties, and weaknesses in spreadsheet controls. Remediation may be constrained by company size and resources.
- Legal and other items: A court confirmed an arbitration award in Surna’s favor against a former employee, including $33,985 plus 8% interest, which the company could seek to collect. Separate litigation over alleged consulting fees remained ongoing. No goodwill impairment was recorded after an interim assessment. The company reported no material off-balance-sheet arrangements.
- Strategy: Management described plans to broaden lower- and mid-cost offerings, grow automation and controls products, pursue retrofit and expansion work, and improve margins and cash discipline. It provided no firm financial guidance or quantified profitability target.
Important facts for investors to verify
- Confirm the registrant: the supplied filing is for Surna Inc. (ticker SRNA), not CEA Industries Inc.
- Assess near-term funding needs, financing availability, and the terms and potential forgiveness of the $554,000 note.
- Track cash burn, working-capital deficit, payables, and the company’s stated going-concern uncertainty.
- Test whether July contracts and remaining backlog convert to collected revenue on schedule, particularly engineering-only-paid and 2022 orders.
- Review the causes and sustainability of the sharp gross-margin decline and the inventory reserve increase.
- Monitor remediation of the disclosed control weaknesses, potential dilution, and resolution of the remaining legal claim.