CEA Industries Inc. / Surna Inc. — 2018 Form 10-K Summary
Entity and period: The request identifies CEA Industries Inc., but the filing itself is for Surna Inc. and its wholly owned subsidiary. It covers the fiscal year ended December 31, 2018; fourth-quarter figures are noted where disclosed.
Business context and reporting period
Surna designs, engineers, and supplies environmental-control and air-sanitation systems for regulated indoor cannabis cultivation facilities in the U.S. and Canada. It does not grow or sell cannabis. Its traditional revenue comes largely from project-based engineering and equipment sales. The company is pursuing broader product and lifecycle services, including retrofit work and sensors, controls, and automation, with the aim of adding higher-margin and more recurring revenue.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $9.582 million | $7.210 million |
| Cost of revenue | $7.132 million | $5.300 million |
| Gross profit / margin | $2.450 million / 25.6% | $1.910 million / 26.5% |
| Operating expenses | $7.270 million | $6.152 million |
| Operating loss | $(4.820) million | $(4.242) million |
| Net loss | $(4.744) million | $(4.919) million |
| Net cash used in operating activities | $(2.849) million | $(2.267) million |
- Revenue grew 33%; equipment sales were $8.288 million and engineering and other services were $1.041 million.
- Gross margin declined about 0.9 percentage points, primarily due to higher project-management costs, partly offset by improved engineering-services margin.
- Operating loss widened despite revenue growth. Excluding non-cash stock compensation, management reported operating loss increased from $2.1 million to $2.8 million. Net loss improved mainly because 2017 included a $643,000 loss on extinguishment of debt.
- Net bookings rose 52% to $13.7 million, while year-end backlog increased to $8.529 million from $4.5 million. Fourth-quarter bookings were $1.838 million and revenue was $2.195 million; both declined sequentially, by 45% and 34%, respectively.
- Management estimated that about 62% of year-end backlog would be recognized in 2019; approximately 31% was not expected to be recognized within 24 months and might never be recognized. About 82% of backlog had only an initial engineering advance payment, increasing completion and timing uncertainty.
Liquidity, capital and balance sheet
- Cash was $253,000 at year-end, down from $2.468 million. Working capital was negative $923,000, versus positive $308,000 a year earlier.
- Total liabilities were $2.559 million, including $1.809 million in accounts payable and accrued liabilities and $642,000 in deferred revenue. The company reported no debt obligations at year-end.
- Operating cash use was $2.849 million; investing cash use was $182,000; financing provided $816,000. The company raised $1.210 million in a 2018 private placement and spent $400,000 repurchasing common shares from related parties.
- Future minimum building-lease payments totaled $903,000 through August 2022. The company expected adoption of the new lease standard in 2019 to add approximately $822,000 of lease liabilities and $688,000 of right-of-use assets.
- The auditor issued an unmodified opinion but included a going-concern explanatory paragraph. Management said available cash and operating cash flow would not fund operations for the next 12 months and anticipated needing debt or equity financing in 2019; failure to obtain funding could require reduced operations.
Material changes, outlook and risks
- Management reported nearly 30% lower annualized payroll-related costs following reductions begun in late 2018, representing approximately $900,000 in annualized savings.
- Plans included expanding retrofit services, launching proprietary controls products, broadening equipment offerings, and developing lifecycle and potentially recurring services. These were plans, not assured results; the filing gives no formal consolidated revenue or earnings guidance.
- Management cited a $1 million-plus retrofit equipment order expected to be fulfilled and recognized in the second or third quarter of 2019. SCA sales were being quoted, but no SCA project contracts had been signed as of the filing date.
- Key risks include federal cannabis prohibition and changing enforcement, customer licensing, permitting and financing delays, cannabis-price weakness, backlog cancellations, customer and supplier concentration, competition, and the need for additional capital. The company also warned that future equity financing could dilute shareholders.
- Internal controls over financial reporting and disclosure controls were deemed ineffective due to insufficient accounting expertise and supervisory review, inadequate segregation of duties, and weak spreadsheet controls. The material weakness was unchanged from 2017.
- Unusual matters include litigation seeking cancellation of 6.75 million unsettled restricted stock units after the recipient failed to pay required withholding taxes, and related-party stock repurchases. No other material legal proceeding was reported.
Important facts for investors to verify
- Confirm the issuer identity: this filing is Surna Inc., notwithstanding the CEA Industries Inc. request metadata.
- Check subsequent filings for financing, cash runway, dilution, and progress toward operating cash-flow improvement.
- Track conversion and collectability of the $8.529 million backlog, especially engineering-only-paid contracts and delayed customer projects.
- Verify whether planned SCA, retrofit, and other new offerings launched, secured contracts, and achieved expected margins or recurring revenue.
- Review remediation of the material weakness and the outcome of the restricted-stock-unit litigation.