Filing summary
Entity and period: The supplied filing is Surna Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2018, not a filing identified as CEA Industries Inc. The company designs and supplies climate-control and air-sanitation systems and engineering services for indoor cannabis cultivation facilities; it says it does not produce or sell cannabis.
Financial performance and position
- Second-quarter revenue: $2.008 million, up 15% from $1.742 million a year earlier. Gross profit was $523,425 and gross margin was 26%, compared with $412,998 and 24% in Q2 2017.
- Second-quarter loss: Operating loss was $1.417 million versus $1.197 million; net loss was $1.401 million versus $1.073 million. The quarter included $853,000 of noncash stock compensation.
- First-half results: Revenue was $4.062 million, up 22% year over year; gross profit was $905,439, with a 22% margin versus 25%. Operating loss was $3.322 million and net loss was $3.284 million, compared with losses of $1.786 million and $2.074 million, respectively, in the first half of 2017. First-half stock compensation was $1.493 million.
- Cash flow: For the six months, operating cash use was $1.511 million, investing cash use was $144,000, and financing provided $816,000. Cash declined by $839,000 to $1.629 million.
- Liquidity and liabilities: Working capital was a $63,000 deficit, versus a $308,000 surplus at December 31, 2017. Current assets were $2.603 million and current liabilities $2.666 million. The company reported no indebtedness at June 30; deferred revenue was $1.413 million. Total liabilities were $2.782 million and shareholders’ equity $1.117 million.
- Equity: The company raised $1.210 million in a private placement of 7,562,500 units, each comprising a common share and warrant. It used $400,000 to repurchase 3,125,000 shares from co-founders. Common shares outstanding were 221,471,602 at June 30 and 222,471,602 as of August 13, 2018.
Changes, outlook, and risks
- Commercial-scale project net bookings were $8.584 million for the first half, versus $6.749 million for all of 2017. Ending backlog was $8.883 million, up 26% from the prior quarter; approximately 53% related to projects for which only an initial deposit had been received. Bookings and backlog are non-GAAP measures and may not convert to revenue or profit.
- Management attributed the first-half margin decline partly to a one-time equipment sale of $413,000 at a 2.5% gross margin. It said quarterly revenue timing remains exposed to project, construction, licensing, and financing delays.
- No formal revenue or earnings guidance is provided. Management focused on larger projects, particularly in California and Canada, and said cash and operating cash flow would be insufficient for the next 12 months. It indicated financing might be needed in Q4 2018 or Q1 2019; unavailable financing or inadequate cash generation could require spending cuts or reduced operations.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern for one year from issuance. The company had recurring losses, a $22.887 million accumulated deficit, and expected further losses and cash outflows.
- Key risks include U.S. federal cannabis prohibition despite legalization in some jurisdictions, dependence on customer financing and project completion, competition, and the need to raise capital. An IRS penalty and interest exposure of approximately $115,000 remained under appeal; no liability was accrued because management believed abatement was more likely than not.
- Disclosure controls were reported ineffective due to material weaknesses involving accounting expertise and supervision, segregation of duties, and spreadsheet controls. The filing reported no material change in internal control during the quarter.
- After quarter-end, a CFO was appointed in July 2018 with eligibility for up to 4 million shares subject to conditions. The company adopted ASC 606 in 2018; reported adoption effects on quarterly and first-half results were small.
Investor verification points
- Confirm the registrant’s identity: the filing names Surna Inc., while the request metadata names CEA Industries Inc.
- Track cash burn, liquidity, and the timing and terms of any additional financing, given the going-concern warning.
- Test whether the $8.883 million backlog converts to revenue and cash, especially the deposit-only projects and customer funding or licensing risks.
- Assess recurring margins and operating costs apart from the low-margin equipment sale and substantial noncash stock compensation.
- Review dilution from warrants, equity awards, related-party transactions, and the post-quarter CFO share incentives.
- Monitor remediation of the disclosed control weaknesses and the outcome of the IRS appeal.