Business Context and Reporting Period
This summary covers the Form 10-Q filed by Surna Inc. (Note: The input metadata referenced "CEA Industries Inc.", but the filing text identifies the registrant as Surna Inc.) for the quarterly period ended September 30, 2013. Surna Inc. is a Nevada corporation operating primarily through subsidiaries in Hong Kong and the People's Republic of China (PRC) as an online game developer and publisher. The company is classified as a Smaller Reporting Company and a non-accelerated filer. As of November 18, 2013, there were 99,375,000 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 | Balance Sheet (Sep 30, 2013) |
|---|---|---|---|
| Revenue | $10 | $46 | - |
| Net Loss | $(14,389) | $(175,723) | - |
| Operating Expenses | $14,399 | $175,769 | - |
| Cash and Cash Equivalents | - | - | $577 |
| Total Assets | - | - | $7,315 |
| Total Liabilities | - | - | $2,636,195 |
| Working Capital Deficit | - | - | $(2,635,549) |
| Accumulated Deficit | - | - | $(2,758,175) |
Liquidity and Debt: The company holds minimal cash ($577) and has significant liabilities, primarily consisting of $2,577,490 in amounts due to related parties (directors). These amounts are non-interest bearing, unsecured, and due on demand. The company has no long-term debt listed.
Material Changes vs. Prior Period
- Revenue Collapse: Revenue for the three months ended September 30, 2013, was $10, a drastic decrease from $111,030 in the same period in 2012. For the nine-month period, revenue dropped from $158,861 in 2012 to $46 in 2013.
- Expense Reduction: The net loss decreased significantly year-over-year (from $(84,983) to $(14,389) for the quarter) primarily due to a sharp reduction in General and Administrative expenses (from $182,332 to $11,066) and the cessation of product development costs.
- Asset Depreciation: Equipment, net of accumulated depreciation, decreased from $16,668 at year-end 2012 to $6,669 at September 30, 2013, reflecting continued depreciation with no new capital expenditures.
- Discontinued Operations: The company sold its Surna Networks subsidiary in March 2012. There were no results from discontinued operations in the current period, whereas the prior year included income of $11,607 from this segment.
Outlook, Risks, and Management Commentary
Going Concern Warning
Management and auditors have expressed substantial doubt about the company's ability to continue as a going concern. The company has a working capital deficit of over $2.6 million, minimal recurring revenue, and cumulative losses of $2.76 million since inception. Continuation is dependent on obtaining additional financing, which is not guaranteed.
Operational Status
- Game Development: Development of the "Ori-Princess" role-playing game was suspended indefinitely in November 2012. The "Ori-Princess: Spring Cleaning" mobile game generated only $69 in sales through September 2013.
- Collection Issues: The company is attempting to recover approximately $158,730 in licensing fees owed by a PRC publisher (Kunlun) for the game "Serica." To date, collection efforts have been unsuccessful, and the revenue was reversed on the balance sheet.
- Failed Acquisition: A proposed share exchange to acquire "Six Gun City, Inc." (an Old West theme park) expired in August 2013 without closing.
Risks and Contingencies
- Internal Controls: The company identified a material weakness in internal controls due to a lack of segregation of duties and the absence of a formalized accounting manual.
- Concentration Risk: 100% of current revenue is derived from Apple's AppStore. The company relies heavily on related party advances for working capital.
- Regulatory Environment: Operations in the PRC are subject to significant political, economic, and legal risks, including restrictions on foreign ownership of online game copyrights.
Investor Verification Checklist
- Capital Adequacy: Verify if the company has secured the additional financing required to cover its $2.6 million working capital deficit and ongoing operational losses.
- Related Party Debt: Confirm the terms and repayment status of the $2.58 million owed to directors, which is due on demand.
- Revenue Recovery: Assess the likelihood of recovering the $158,730 in unpaid licensing fees from Kunlun Wanwei Information Technology.
- Product Pipeline: Evaluate the status of suspended game projects and the viability of the "Ori-Princess" mobile title as a revenue generator.
- Internal Controls: Review any updates regarding the remediation of the material weakness in internal financial reporting controls.