SEC 10-Q Summary
Issuer and period: The filing identifies the registrant as Surna Inc., not CEA Industries Inc. It covers the quarter and nine months ended August 31, 2011; the financial statements are unaudited. The company described itself as a development-stage business.
Financial performance and condition
| Metric | Quarter ended August 31, 2011 | Nine months ended August 31, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $223 | $223 | $0 |
| Cost of revenue / gross loss | $3,472 / ($3,249) | $3,472 / ($3,249) | $0 / $0 |
| Total expenses | $31,471 | $58,572 | $1,991 / $11,317 |
| Net loss | ($34,720) | ($61,821) | ($1,991) / ($11,317) |
| Cash from operations | Not clearly presented for the quarter | ($53,632) | Cash-flow statement comparative column is inconsistently labeled |
- Margins: Gross loss was $3,249 on $223 of revenue, so gross margin was negative. The filing reports no operating profit or net profit.
- Balance sheet at August 31: Cash was $4,934; current assets were $7,435; equipment was $40,000; total assets were $47,435; current liabilities were $10,482; and stockholders’ equity was $36,953. The related-party advance was non-interest-bearing, unsecured, and due on demand.
- Liquidity and financing: Cash fell by $68,380 from November 30, 2010. Nine-month financing cash outflow was $14,748. Equipment valued at $40,000 was acquired through issuance of shares, a noncash transaction. No interest-bearing debt is shown.
- Equity: The company reported 79,375,000 common shares outstanding at August 31 and 99,175,000 as of October 7. A four-for-one stock dividend was recorded retroactively; authorized common shares were increased to 350 million.
Changes, outlook, and key risks
- Quarterly net loss rose to $34,720 from $1,991 a year earlier; nine-month loss rose to $61,821 from $11,317. Revenue remained minimal, although the statements record $223 while management says the company had not generated business-operation revenue.
- The company established Surna Networks, Inc. to pursue geospatial event-processing and network products. It said development was more complex than expected and shifted its strategy toward combining that work with social-media and game products.
- On September 1, 2011, after the reporting period, Surna completed its acquisition of Surna Media Inc. for 20 million restricted shares. The acquired group develops web and mobile games and social networks and has operations in China. The filing identifies the transaction as involving entities controlled by the company’s president and a director.
- Management estimated initial marketing costs of $15,000–$35,000 and further software development spending of $5,000–$20,000. It expected operations to require setup time and stated that additional funding might be needed; no additional financing arrangements beyond the public offering were in place.
- The filing states that accumulated losses of $101,547 and dependence on raising capital raise substantial doubt about the company’s ability to continue as a going concern. Management warned that inability to raise funds or generate sufficient revenue could force suspension or cessation of operations.
- Disclosure controls were reported ineffective because of inadequate segregation of duties and the absence of a comprehensive formal accounting procedures manual.
Investor verification priorities
- Confirm the issuer identity: the request names CEA Industries Inc., but the filing is for Surna Inc.
- Reconcile the filing’s financial inconsistencies: MD&A gives total assets of $7,435 despite the balance sheet reporting $40,000 of equipment and total assets of $47,435; liabilities are stated as both $10,482 and $10,480; the related-party advance is stated as both $2,952 and $2,942.
- Verify the cash-flow statement’s comparative-period labels and clarify the discrepancy between recorded revenue of $223 and management’s statement that no operating revenue had been generated.
- Review the completed Surna Media acquisition, its related-party terms, post-acquisition financial statements, and resulting dilution from the 20 million shares issued.
- Assess near-term cash needs, access to financing, and progress addressing the going-concern uncertainty and material weakness in controls.