Filing summary: Surna Inc. Form 10-Q, quarter ended March 31, 2013
Entity discrepancy: The request identifies CEA Industries Inc., but the supplied filing is for Surna Inc., a Nevada company focused on online and mobile game development. Confirm that this is the intended filing before relying on the summary.
Business context and reporting period
This unaudited quarterly report compares the three months ended March 31, 2013 with the same period in 2012. Surna operated in online and mobile games and social networks development, primarily through subsidiaries in Hong Kong and the PRC. Its telecommunications subsidiary had been sold in March 2012.
Financial results and liquidity
- Revenue: $22, versus $47,831 in Q1 2012. The 2013 amount came entirely from Apple’s App Store; the company reported one customer platform as representing 100% of revenue.
- Profitability: Gross profit was $22, compared with $47,831. Operating expenses were $92,191, down from $209,750. Operating and net loss were both $92,168, compared with a $161,919 continuing-operations loss and $150,312 net loss in Q1 2012. The earlier net loss included $11,607 of income from discontinued operations. Basic and diluted loss per share was reported as ($0.00).
- Cash flow: Operating activities provided $3,139, versus using $762 in Q1 2012. The positive 2013 operating cash flow included a $94,363 increase in amounts due to related parties. There were no investing or financing cash flows. Cash increased by $6 to $1,203, after a $3,133 foreign-exchange effect.
- Balance sheet and liquidity: At March 31, cash was $1,203, accounts receivable $22, total current assets $1,225, and total assets $14,560, including $13,335 of net equipment. Current liabilities and total liabilities were $2,547,117; the working capital deficit was $2,545,892. Stockholders’ deficit was $2,532,557.
- Debt and obligations: The filing reports $2,466,224 due to related parties, up from $2,371,861 at December 31, 2012. These director advances and accrued salaries are unsecured, non-interest-bearing, and due on demand. The filing does not identify separate interest-bearing debt.
- Margins: The reported gross profit equaled revenue because cost of revenue was zero; given revenue of only $22, the gross-margin percentage is not a meaningful indicator of operating performance.
Material changes and management commentary
- Revenue fell sharply year over year, while operating expenses and losses declined. Management attributed the company’s minimal recurring revenue to its startup-stage operations.
- The company reported $2,674,620 in cumulative losses since inception and stated it cannot predict if or when it will become profitable. Management expects to rely primarily on debt or equity financing.
- Management and the filing’s going-concern note stated that substantial doubt exists about the company’s ability to continue as a going concern without additional financing. The financial statements include no adjustments for the outcome of this uncertainty.
- Sales of the mobile game Ori-Princess: Spring Cleaning totaled $22 through March 31, 2013. Development of the Ori-Princess role-playing game had been suspended indefinitely. Surna reported no collection to date of amounts owed under the Serica licensing arrangement, and collection efforts had not succeeded. It also reported that a contractor had not delivered work product for Qia Ke Zhong Shi.
- The company had reversed previously recognized licensing revenue associated with the Kunlun arrangement because it had been unable to collect the amounts. A former-employee settlement required payments totaling HK$80,000 (reported as $10,257); the full amount was accrued at quarter-end.
Risks, contingencies, and controls
- Management cited limited financial resources, dependence on additional financing, competition, the difficulty of launching successful games, and PRC regulatory, political, economic, and currency risks. Equity financing could dilute existing shareholders.
- All Q1 2013 revenue came through Apple’s App Store, and the related $22 receivable was from the primary customer. The filing says alternative buyers may be available, but does not report diversified revenue sources.
- Management concluded disclosure controls and procedures were not effective due to a material weakness: inadequate segregation of duties and the absence of a comprehensive formal accounting procedures manual. No material changes in internal control were reported during the quarter.
- The company reported no outstanding litigation as of March 31, 2013. The filing says it was not then a party to litigation.
Important facts for investors to verify
- Confirm the issuer and filing match the intended company: the supplied document names Surna Inc., not CEA Industries Inc.
- Verify available financing, the status and terms of related-party advances, and the company’s ability to meet obligations due on demand.
- Check whether any amounts owed under the Kunlun/Serica licensing arrangement were recovered and whether further revenue reversals or impairments occurred.
- Review subsequent revenue, cash balances, operating cash burn, and progress or commercial prospects for the games described.
- Assess the status of the disclosed material weaknesses in financial reporting controls and any remediation.
- Confirm the reported balance-sheet figures and the MD&A presentation: the balance sheet lists total assets of $14,560, while the MD&A contains a sentence describing $1,225 as “total assets,” which corresponds to current assets in the balance sheet.