Filing identity and reporting period
The supplied filing is Surna Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed April 15, 2014. It is not identified as a CEA Industries Inc. filing; the company-name mismatch should be verified. This is an annual report, not a standalone fourth-quarter report. The fiscal year was changed from November 30 to December 31 in 2012.
Business context
In 2013, Surna’s sole operating segment was online and mobile gaming through Surna Media and its subsidiaries, principally in China. The company described itself as a start-up with minimal sales; development of several games had been suspended, and its mobile game generated only $50 of 2013 revenue. Surna reported three part-time staff in Hong Kong.
Financial results and liquidity
| Metric (USD) | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $50 | $310 |
| Operating expenses | $193,207 | $779,282 |
| Operating loss | $(193,156) | $(778,972) |
| Net loss | $(193,156) | $(767,365) |
| Comprehensive loss | $(200,102) | $(767,365) |
| Cash from operating activities | $6,501 | $(1,548) |
| Cash at year-end | $752 | $1,197 |
| Total assets | $4,409 | $18,115 |
| Total liabilities | $2,641,766 | $2,455,370 |
Gross margin was $50 in 2013 and $310 in 2012, with no cost of revenue reported; given the very small revenue base, the resulting margin is not meaningful as an indicator of a scaled business. The 2012 net loss includes $11,607 of income from discontinued operations. The 2013 loss was substantially lower, alongside sharply lower general and administrative and product-development costs.
At December 31, 2013, current liabilities exceeded current assets by approximately $2.64 million. Amounts due to related parties were $2,571,428, non-interest-bearing, unsecured, and payable on demand; accrued liabilities were $70,338. The filing reports no conventional bank debt. Operating cash flow was positive despite the net loss, principally because related-party advances increased by $199,568. The company had no cash in interest-bearing accounts.
Material changes, outlook, and risks
- The independent auditor expressed substantial doubt about Surna’s ability to continue as a going concern. Management said continued operations depend on additional financing and ultimately recurring revenue and profitability; neither financing availability nor a return to positive cash flow was assured.
- Kunlun had not paid amounts due under a game licensing arrangement. The filing says previously recognized licensing revenue was reversed; collection efforts had not succeeded. The company reported $71 in year-end accounts receivable and said it considered it collectible.
- Revenue came from one customer in both 2013 and 2012, creating customer-concentration risk. The company reported no material legal proceedings at year-end and no litigation outstanding as of December 31, 2013.
- Management reported ineffective internal control over financial reporting, citing inadequate segregation of duties and the absence of a comprehensive accounting procedures manual. The auditor did not attest to internal-control effectiveness.
- Other stated risks include limited resources, potential dilution from future equity financing, strong competition, China-related regulatory and currency risks, limited intellectual-property protection, and lack of insurance. The company also disclosed that it had not filed prior-year U.S. federal corporate income tax returns and could face penalties.
- After year-end, Surna spun off Trebor Resource Management Group, entered a merger with Safari Resource Group, and agreed to acquire Hydro Innovations. Safari consideration included 77,220,000 common shares and 77,220,000 preferred shares; the filing describes a product pipeline of 14 intellectual properties. The Hydro transaction was subject to audit and valuation, with a stated $500,000 purchase price, partly payable in cash or Surna stock and partly by promissory note, plus a 10% commission on specified net revenue under a related license. These subsequent developments indicate a proposed shift beyond the 2013 gaming business and should not be treated as 2013 operating results.
Key facts for investors to verify
- Confirm the issuer identity: the supplied document names Surna Inc., not CEA Industries Inc.
- Review the audited financial statements, related-party balances, and the terms and collectability of amounts due from the game-licensing arrangement.
- Assess near-term funding needs, repayment demands on related-party advances, and the basis for management’s going-concern plans.
- Verify the completion, share issuance, valuation, financing, and continuing obligations associated with the Safari merger and Hydro acquisition, along with the Trebor spin-off.
- Check remediation of the disclosed material weakness and the status of unfiled federal tax returns.