CEA Industries Inc. (filing identifies registrant as Surna, Inc.) — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2015. The filing describes Surna as a designer, manufacturer, and distributor of climate-control systems and related products for controlled-environment agriculture, with much of its business serving state-regulated cannabis cultivation facilities. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.634 million | $0.859 million | $6.183 million | $1.206 million |
| Gross profit | $0.679 million | $0.482 million | $1.219 million | $0.546 million |
| Gross margin | 18.7% | 56.0% | 19.7% | 45.2% |
| Operating loss | $0.540 million | $0.459 million | $2.111 million | $0.808 million |
| Net income (loss) | $(1.335) million | $1.479 million | $(3.730) million | $(0.696) million |
| Cash used in operations | — | — | $1.297 million | $1.048 million |
- Revenue increased sharply year over year, but gross margin fell substantially as cost of revenue grew faster. The comparison is affected by Hydro Innovations becoming a subsidiary in July 2014.
- Q3 2015 other expense was $0.795 million, including $0.716 million of convertible-note discount amortization and $0.079 million of interest expense. For the nine months, these charges were $1.727 million and $0.367 million, respectively; a $0.475 million gain on derivative liabilities partly offset them.
- At September 30, cash was $0.979 million, current assets $3.564 million, current liabilities $3.606 million, and working capital deficit $41,669. Total liabilities were $5.243 million, compared with total assets of $4.355 million; stockholders’ deficit was $0.888 million.
- Cash provided by financing was $1.744 million for the nine months, primarily from debt and private placements. Cash declined by $1.297 million in operating activities and $0.158 million in investing activities; ending cash increased $0.289 million from year-end 2014.
- Convertible notes, net, were reported at $1.269 million, with $0.200 million of convertible accrued interest. The balance sheet also reports $0.189 million current long-term debt, $0.136 million shareholder promissory debt, and a $0.033 million vehicle loan. The filing describes secured notes bearing 2% interest per month; inventory, related customer payments, and a reserve of 8 million common shares secure these notes.
Changes, outlook, and risks
- The company reported a $3.730 million nine-month net loss and $9.498 million accumulated deficit. Management stated that revenue was not yet sufficient to meet operating requirements and that cash was insufficient for the next 12 months’ operating and capital needs.
- Management expects to seek additional debt or equity financing. It cautioned that financing may be unavailable or unacceptable, that equity issuance could dilute shareholders, and that inability to obtain funds could force the company to reduce or cease operations. The filing states that substantial doubt exists about the company’s ability to continue as a going concern.
- Common shares outstanding rose from 113.511 million at December 31, 2014 to 121.855 million at September 30, 2015, after note conversions and financing issuances, offset in part by cancellation of returned shares. The filing reports 77.220 million preferred shares outstanding as well.
- Customer and supplier concentration is significant: four customers represented 82% of receivables at September 30; one customer accounted for 12% of nine-month revenue; and three vendors accounted for 48% of nine-month purchases.
- Disclosure controls and procedures were reported ineffective, due to material weaknesses previously disclosed in the 2014 Form 10-K. Management said remediation steps were intended, but segregation of duties might not be economically feasible given the company’s size.
- The company cited regulatory and legal uncertainty affecting cannabis-related businesses, including possible civil claims under federal RICO law, as well as financing, growth, related-party transaction, and profitability risks. It reported no material pending litigation and no quantified financial guidance.
- Subsequent events included the COO’s planned departure effective at the end of October 2015 and appointment of a new COO on November 11, 2015.
Important facts to verify
- Confirm the issuer identity: the request names CEA Industries Inc., but the supplied 10-Q identifies the registrant as Surna, Inc.
- Reconcile the Q3 net loss: the financial statements report $1,335,422, while MD&A reports $1,333,422.
- Review the convertible-note and secured-note terms, maturities, discounts, collateral provisions, and potential dilution; reported debt carrying amounts and narrative financing totals may require reconciliation.
- Assess near-term liquidity, financing availability, and the going-concern uncertainty, alongside the sharp decline in gross margin and operating cash outflow.
- Evaluate customer/vendor concentration and the remediation status of the disclosed material weaknesses in financial reporting controls.