8-K
CEA Industries Inc. (BNC)
UNITEDSTATES
SECURITIES AND EXCHANGE COMMISSION
Washington,D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
February25, 2020
SURNAINC.
(Exact name of registrant as specified in its charter)
| Nevada | 000-54286 | 27-3911608 |
|---|---|---|
| (State<br> or other jurisdiction<br><br> of incorporation) | (Commission<br><br>File Number) | (I.R.S.<br> Employer <br><br>Identification No.) |
178055th Street, Suite C
Boulder,Colorado 80301
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (303) 993-5271
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| [ ] | Written<br> communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| [ ] | Soliciting<br> material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| [ ] | Pre-commencement<br> communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| [ ] | Pre-commencement<br> communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| N/A | N/A | N/A |
Item8.01 Other Events.
On February 25, 2020, the Company issued a press release announcing the issuance of a letter to shareholders from the Company’s Chief Executive Officer, Anthony K. McDonald. The Company also announced the date and time of an investor call to discuss Q4 2019 financial results, recent developments and the strategic initiatives described in the shareholder letter. The shareholder letter is attached as Exhibit 99.1 and the press release is attached as Exhibit 99.2.
Item9.01 Financial Statements and Exhibits.
| (a) | Not<br> applicable. |
|---|---|
| (b) | Not<br> applicable. |
| (c) | Not<br> applicable. |
| (d) | Exhibits. |
| Exhibit No. | Description |
| --- | --- |
| 99.1 | Shareholder Letter from the CEO dated February 25, 2020 |
| 99.2 | Press Release dated February 25, 2020 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date:<br> February 25, 2020 | SURNA INC. | |
|---|---|---|
| By: | /s/ Anthony K. McDonald | |
| Anthony<br> K. McDonald | ||
| President<br> and Chief Executive Officer |
EXHIBIT99.1
February 25, 2020
CEOLetter to Shareholders
Dear Surna Shareholders:
The past 15 months, since I stepped in as the manager of your company, have been a whirlwind. I have learned many things about the industry in general and about Surna in particular. Two industry challenges stand out as particularly good news. First, the United States and the world are going to need a lot of cannabis in the coming years. Second, growing cannabis indoors is extremely difficult to do well. I believe, sincerely, that Surna is well-positioned to help the industry meet these two challenges.
According to industry estimates, global retail sales of cannabis products are projected to grow at a compound annual rate of about 26%.^1^It stands to reason then, there will be corresponding growth in cultivation facilities, providing an increasing market for Surna’s products and services in North America, and possibly even internationally at some point in the future. Our revenue growth through the first three quarters of 2019 validated our belief that a growing and more sophisticated group of customers would desire our products.
2019Milestones
As I stated in last year’s letter, I will report information to you with the detail and candor I would expect if our roles were reversed. While Surna made great progress, it did not accomplish all management set out to do. So how did we do? Let’s take a look.
***Revenue.***Previously, Surna had inconsistent and unpredictable revenue, which had been flat for the preceding three years. Historically, we sold expensive “Cadillac” systems to a limited set of customers. Whenever a project was delayed or cancelled, which was often, our cash flow took a dramatic hit. In 2019, by sharp contrast, our revenue grew 56% year-over-year through Q3, and we had earned more revenue by the end of Q3 than we did in all of 2018. In 2019, we pursued three initiatives to address our historical issues:
| 1. | Focus on large multifacility operators (MFOs). MFOs have the financial and organizational<br> wherewithal to buy more and larger systems and they are less prone to project delays<br> and cancellations than the smaller (and riskier) cultivators that had been our primary<br> customers in the past. We enjoyed success in this effort, closing six projects with MFOs<br> (three with a single MFO), representing over $7 million, or over 60%, of our revenue<br> through Q3. However, we still have significant work ahead of us to fully fill our sales<br> pipeline with the dozen or so MFO customers that we believe are required to give us more<br> consistent and predictable revenue and cash flow. |
|---|---|
| 2. | Offer a broader range of products and services across the cultivation facility lifecycle*.* We fulfilled the first step of this goal with the introduction of our SentryIQ™<br> controls package. We also began offering full mechanical, electrical, and plumbing engineering<br> services, developed and sold a four-pipe environmental control system with Surna fan<br> coil units and custom air handlers, developed a proprietary destratification fan, and<br> performed facility retrofit services. Through Q3, our new custom air handlers alone generated<br> $2.3 million in revenue. |
| 3. | Enter strategic alliances to expand our marketing and sales reach*.* We were unsuccessful<br> in this endeavor, first because we did not prioritize it highly enough, and second because<br> we have yet to attract partners of the caliber we are seeking. |
^1^Arcview Market Research and BDS Analytics, The State of Legal Marijuana Markets, 6^th^ Edition, 2019 Update
CashBuilding and Dilution. We started 2019 with just over $250,000 in cash but, with a new discipline on cost control and strong sales growth, we were able to increase our cash to $2 million at the end of Q3. We were self-sustaining and generated $1.8 million in operating cash flows through Q3, and we did not require any outside capital. By contrast, in 2017 and 2018, Surna experienced losses and cash flow deficits that had to be financed with a series of dilutive capital raises. In 2019 we obsessively focused on financial discipline to achieve the goal of profitability and cash flow sustainability—in part of sheer necessity, and in part to simply validate that we had a financially viable business model. We do. We achieved our first two profitable quarters ever in Q2 and Q3.
Bottom line: We are in no way out of the woods. Though improved throughout the course of 2019, our working capital remains negative and is a constant threat to the viability of the business, so we must land more MFO and other contracts and we may have to raise capital again to fund our working capital needs and future growth.
InvestorRelations. Surna previously had limited investor relations activities. Now, we have a clear plan designed to create an actively traded, widely held, and fully valued stock over time—and in concert with achievement of our financial goals. In 2019 we took the required baby steps of hosting regular earnings calls and attending a select number of investor conferences. We will have more to share in this regard over the next few quarters.
In sum, we achieved much of what we set out to do in 2019.
Our2020 Growth Strategy
There are fundamentally three ways to grow a business: (i) increase the number of customers, (ii) increase the average revenue per order, or (iii) increase the frequency of orders.
For 2020, Surna’s operating goals are threefold:
| 1. | Chevys. In addition to “Cadillac” products, sell “Chevy” or equivalent products to satisfy a wider range of points along the demand curve. Anticipated result: Increase the number of customers*.* |
|---|---|
| Surna<br> has a sales and marketing program that generates many prospect relationships. However, our limited range of higher cost products,<br> mostly chilled water systems, reduces the number of customer prospects who can afford to buy from us. This year we will broaden<br> our product line to include lower- and mid-cost products, such as split systems and packaged roof top units, as well as other<br> technology solutions, so that customers can still take advantage of our engineering expertise and capabilities. We believe<br> these new products and services will increase our addressable market and increase sales, further leveraging our investment<br> in sales and marketing. | |
| 2. | Steering wheels. Sell our customers the automated facilities control systems they need—directly. Anticipated result: Increase average order size*.* |
| --- | --- |
| Growing<br> live plants indoors under total control is a technically demanding business, and a failed crop can cost a grower significant<br> revenue. We believe that Surna’s licensed professional engineers are the industry’s leading experts in the design<br> of such facilities, and we seek to extend that leadership into more advanced technology products. | |
| Last<br> year we introduced our SentryIQ™ control system. If our climate control design and products are the car, then SentryIQ™<br> is the steering wheel—you need one to direct the car where to go. Before SentryIQ™, we had to send customers<br> elsewhere for controls to regulate their cultivation environments, but now Surna can capture that revenue. | |
| Our<br> next step down this technology and innovation road will be the development of the equivalent of a self-driving car. Growers<br> will tell the control system what they want to achieve, and the system will sense the environment and direct the climate control<br> system to achieve the grower’s goals. These systems will integrate data analytics—and eventually deploy artificial<br> intelligence—to optimize multiple variables to maximize grower profits. Leading in this market is particularly valuable<br> because it expands our addressable market for both sensors and software while offering higher margins and the possibility<br> of recurring revenue. | |
| 3. | More dealers. Engage in one or more strategic relationships with other technology leaders that serve our industry. Anticipated result: Increase the number of customers*.* |
| Such<br> relationships might include referral marketing agreements, co-development of unique integrated solutions with best-in-class<br> partners, and acquisitions. To extend the automotive analogy, engaging in these types of relationships is like finding more<br> dealers to sell our products, at little cost to us. |
GrowOrganically, Strategically and Profitably
As I mentioned at the outset, the worldwide market for indoor-grown cannabis products is projected to grow substantially for the foreseeable future. Our goal is to continue growing, both organically and through strategic opportunities, while maintaining the financial discipline we implemented last year so that, ideally, we will only need to raise cash to fund growth or for strategic acquisitions.
Thank you for your continued support of Surna. I invite you to join our earnings call that will be conducted on Thursday, March 26, 2020 at 4:00 p.m. Eastern Time.
To access the investor call via telephone:
Dial-In Number: 1-973-528-0008
Access Code: 418277
To access the investor call via the Internet:
Webcast URL: https://www.webcaster4.com/Webcast/Page/2020/33335
Interested parties, with contact information supplied, may submit questions to the Company prior to the call to investor@surna.com. These questions, along with all live questions, will be answered in the time available.
I look forward to updating you on our continued progress.
Yours truly,
Anthony K. McDonald
President & CEO
ForwardLooking Statements
Thisletter may contain statements of a forward-looking nature relating to future events. These forward-looking statements are subjectto the inherent uncertainties in predicting future results and conditions. These statements reflect our current beliefs, and anumber of important factors could cause actual results to differ materially from those expressed in this letter, including thefactors set forth in “Risk Factors” set forth in our Form 10-K and Form 10-Q filed with the Securities and ExchangeCommission (“SEC”), and subsequent filings with the SEC. Please refer to our SEC filings for a more detailed discussionof the risks and uncertainties associated with our business, including but not limited to the risks and uncertainties associatedwith our business prospects and the prospects of our existing and prospective customers; the inherent uncertainty of product development;regulatory, legislative and judicial developments, especially those related to changes in, and the enforcement of, cannabis laws;increasing competitive pressures in our industry; and relationships with our customers and suppliers. Except as required by thefederal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result ofnew information, future events or otherwise. The reference to Surna’s website has been provided as a convenience, and theinformation contained on such website is not incorporated by reference into this letter.
EXHIBIT 99.2
FORIMMEDIATE RELEASE
SurnaIssues Shareholder Letter and Announces Q4 2019 Earnings Call
LetterDetails Strategic Plan and Vision for 2020
February25, 2020 – Boulder, Colorado – Surna Inc. (OTCQB: SRNA), a designer, engineer and manufacturer of environmental control and air sanitation systems for commercial, state- and provincial-regulated indoor cannabis cultivation facilities, announced today the issuance of a letter to shareholders from the Company’s Chief Executive Officer, Anthony K. McDonald.
The letter is available at Surna’s website www.surna.com/investor-relations.
The shareholder letter outlines a series of inter-related strategic initiatives that the Company intends to pursue during 2020, including: (i) broadening its product line, (ii) extending leadership into more advanced technology products, and (iii) engaging in more strategic relationships.
All shareholders and other interested parties are encouraged to read this letter.
The Company has announced that it has scheduled its Q4 2019 earnings call for Thursday, March 26, 2020 at 4:00 p.m. Eastern Time. The Company’s CEO, Mr. McDonald, will provide an update on Q4 2019 financial results, recent developments, and discuss the strategic initiatives described in the shareholder letter.
To access the investor call via telephone:
Dial-In Number: 1-973-528-0008
Access Code: 418277
To access the investor call via the Internet:
Webcast URL: https://www.webcaster4.com/Webcast/Page/2020/33335
Interested parties, with contact information supplied, may submit questions to the Company prior to the call to investor@surna.com. These questions, along with all live questions, will be answered in the time available.
For those unable to participate in the investor conference call at that time, a replay will be available on the investor relations section of our website at https://surna.com/investor-relations/ beginning on March 27, 2020 at 4:00 p.m. Eastern Time (and will remain available until April 28, 2020).
AboutSurna Inc.
Surna Inc. (www.surna.com) is a Boulder, Colorado-based company that designs, engineers and manufactures environmental control and air sanitation systems for commercial, state- and provincial-regulated indoor cannabis cultivation facilities in the U.S. and Canada. Our engineering and technical team provides energy and water efficient solutions that allow growers to meet the unique demands of a cannabis cultivation environment through precise temperature, humidity, and process controls and to satisfy the evolving code and regulatory requirements being imposed at the state, provincial and local levels. We have been involved in consulting, equipment sales and/or full-scale design for over 800 grow facilities since 2006 making us a trusted resource for indoor environmental design and control management for the cannabis industry.
ForwardLooking Statements
Thispress release and the shareholder letter may contain statements of a forward-looking nature relating to future events. These forward-lookingstatements are subject to the inherent uncertainties in predicting future results and conditions. These statements reflect ourcurrent beliefs, and a number of important factors could cause actual results to differ materially from those expressed in thispress release and shareholder letter, including the factors set forth in “Risk Factors” set forth in our Form 10-Kand Form 10-Q filed with the Securities and Exchange Commission (“SEC”), and subsequent filings with the SEC. Pleaserefer to our SEC filings for a more detailed discussion of the risks and uncertainties associated with our business, includingbut not limited to the risks and uncertainties associated with our business prospects and the prospects of our existing and prospectivecustomers; the inherent uncertainty of product development; regulatory, legislative and judicial developments, especially thoserelated to changes in, and the enforcement of, cannabis laws; increasing competitive pressures in our industry; and relationshipswith our customers and suppliers. Except as required by the federal securities laws, we undertake no obligation to revise or updateany forward-looking statements, whether as a result of new information, future events or otherwise. The reference to Surna’swebsite has been provided as a convenience, and the information contained on such website is not incorporated by reference intothis press release.
Statementabout Cannabis Markets
The use, possession, cultivation, and distribution of cannabis is prohibited by U.S. federal law. This includes medical and recreational cannabis. Although certain states have legalized medical and recreational cannabis, companies and individuals involved in the sector are still at risk of being prosecuted by federal authorities. Further, the landscape in the cannabis industry changes rapidly. This means that at any time the city, county, or state where cannabis is permitted can change the current laws and/or the federal government can supersede those laws and take prosecutorial action. Given the uncertain legal nature of the cannabis industry, it is imperative that investors understand that investments in the cannabis industry should be considered very high risk. A change in the current laws or enforcement policy can negatively affect the status and operation of our business, require additional fees, stricter operational guidelines and unanticipated shut-downs. Though our customers do, we neither produce nor sell cannabis.
SurnaMarketing
Jamie English
Managing Director of Marketing
jamie.english@surna.com
(303) 993-5271