Surna Earnings Impress: A Margin Improvement Story?

Surna Inc. (SRNA) a developer of innovative technologies and products that monitor, control and or address the energy and resource intensive nature of indoor cannabis cultivation, reported first quarter financial results today that surprised many investors. 

Business Highlights

• COO Trent Doucet will take over as CEO. Previous CEO Stephen Keen will lead innovation and product development for the company.
• Secured a contract for approximately $725,000 with Las Vegas cultivator Cloud 9 Wholesale for a facility that covers 30,000 square feet, which will require approximately 550 tons of cooling equipment for cultivation climate control.
• Received four design patents from the United States Patent and Trademark Office for its Surna Reflector products that deliver more direct light to the canopy while providing unique thermodynamic characteristics that improve heat transfer from the cultivation area. Surna now has eight pending patent applications and four issued patents.
• Surna said that they are nearing fulfillment of a purchase order for over 400 Reflectors for use in a commercial facility.

Financial Highlights

• Generated $2.5 million in revenue ($819,000 in the same period last year). The increase reflects the higher demand as new state programs open and as increased sales momentum
• Surna also saw gross margins increase to 43.6% from 10.8%, reflecting a better product mix and price point.
• Although revenue increased, operating expenses decreased to $724,000 ($968,000 in the same period last year). Management expects to see expenses increase as revenue increases but they continue to try and find ways to cut costs.
• The company only incurred $14,000 in advertising and marketing expenses. Advertising and marketing spend is expected to increase in the second half of the year when the company has a presence at large trade events.
• Product development costs decreased to $106,000, compared to $181,000 as the Reflector moved from R&D to production.
• SG&A expenses fell to $601,000 from $756,000, as management improved operating efficiencies, reduced personnel costs and focused on cost containment.
• Reported $365,000 in operating income (recorded an operating loss of $880,000 in the same period last year).
• Surna incurred a $746,000 net loss was $746,000

Liquidity Highlights

• As of March 31, 2016, Surna had $1.1 million in cash, compared to $331,000 at December 31, 2015. Deferred revenue was $1.4 million, up from $986,000.
• Deferred revenue represents contracts in progress, as the company recognizes revenue as products are shipped or services are performed.

Plans Going Forward

• According to the company, Surna is focused on execution. Its strategic priorities are expanding sales of core products including water chillers and dehumidifiers; commercializing reflector products; demonstrating its hybrid building concept in pilot form; capitalizing on the positive trends in the regulatory environment; and creating shareholder value.

Outlook

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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