UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~[X]~~☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, ~~2017~~2021

~~[ ]~~☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-54286

SURNA INC.

(Exact name of registrant as specified in its charter)

Nevada

27-3911608

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1780 55^th~~St.~~55th Street, ~~Suite C,~~ Boulder, Colorado		80301
(Address of principal executive offices)		(Zip code)

(303)993-5271

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.YES ~~[X]~~ ☒ NO ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T ~~(SS~~(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).YES ~~[X]~~☒ NO ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large Accelerated Filer	~~[ ]~~☐	Accelerated Filer	~~[ ]~~☐
Non-accelerated Filer	~~[ ]~~☒	Smaller Reporting Company	~~[X]~~☒
~~(Do not check if smaller reporting company)~~		Emerging Growth Company	~~[ ]~~☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[ ]~~☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES ~~[ ]~~ ☐ NO ~~[X]~~ ☒

As of November ~~10, 2017, there were 191,265,919~~9, 2021, the number of outstanding shares of ~~the registrant’s~~ common stock ~~outstanding.~~of the registrant was 237,526,638.

~~TABLE OF CONTENTS~~Surna Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2021

Table of Contents

		Page
Cautionary ~~Note Regarding Forward-Looking Statements~~Statement		ii

PART I — FINANCIAL INFORMATION

Item 1. — Financial Statements (Unaudited)		~~F-1~~

~~Unaudited~~ Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020		~~F-1~~1

~~Unaudited~~ Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020		~~F-2~~2

~~Unaudited~~ Condensed Consolidated Statements of Changes in Shareholders’ ~~Equity (Deficit)~~Deficit for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020		~~F-3~~3

~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020		~~F-4~~4

Notes to the ~~Unaudited~~ Condensed Consolidated Financial Statements		~~F-5~~5

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations		124

Item 3. — Quantitative and Qualitative Disclosures About Market Risk		836

Item 4. — Controls and Procedures		836

PART II — OTHER INFORMATION

Item 1. — Legal Proceedings		937

Item 1A. Risk Factors	37

Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds		937

Item 3. — Defaults Upon Senior Securities		937

Item 4. — Mine Safety Disclosures		937

Item 5. — Other Information		937

Item 6. — Exhibits		937

SIGNATURES		1038

EXHIBIT INDEX		1139

In this Quarterly Report on Form 10-Q, unless otherwise indicated, the “Company”, “we”, “us” or “our” refer to Surna Inc. and, where appropriate, its wholly owned subsidiary.

CAUTIONARY ~~NOTE REGARDING FORWARD-LOOKING STATEMENTS~~STATEMENT

This Quarterly Report on Form 10-Q, ~~(this “Form 10-Q”)~~including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements ~~within~~that involve substantial risks and uncertainties. These forward-looking statements are not historical fact but are based on current management expectations that involve substantial risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the ~~meaning~~negative of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).these terms or other similar words. All statements, ~~contained in this Form 10-Q~~ other than statements of historical fact, are statements that could be deemed forward-looking statements including, but not limited to, any projections of revenue, gross profit, earnings or loss, tax provisions, cash flows or other financial items; any statements of the plans, strategies or objectives of management for future operations; any statements regarding ~~our~~current or future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about futuremacroeconomic or industry-specific trends or events and the impact of those trends ~~that we believe may affect~~and events on us or our financial ~~condition, results~~performance; any statements regarding pending investigations, legal claims or tax disputes; any statements of ~~operations, business strategy, short-term~~expectation or belief; and ~~long-term business operations and objectives, and financial needs.~~ any statements of assumptions underlying any of the foregoing.

These forward-looking statements are subject to ~~a number of~~known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. These forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we operate. Important factors that could cause those differences include, but are not limited to:

	●	our business prospects and the prospects of our existing and prospective customers;

	●	the impact on our business and that of our customers of the current and future response by the government and businesses to the COVID-19 pandemic;

	●	the overall impact of the COVID-19 pandemic on the supply chain and level of business activity in our industry, and the willingness of our customers to undertake projects in light of any economic uncertainties resulting from the pandemic;

	●	our overall financial condition;

	●	variations in our sales from reporting period to reporting period;

	●	the inherent uncertainty of product development and acceptance of our expanding product lines;

	●	regulatory, legislative and judicial developments, especially those related to changes in, and the enforcement of, cannabis laws;

	●	our ability to expand into and increasing competitive pressures in the more general CEA (Controlled Environment Agriculture) industry;

	●	the ability to effectively operate our business, including servicing our existing customers and obtaining new business;

	●	our relationships with our customers and suppliers;

	●	the continuation of normal payment terms and conditions with our customers and suppliers, including our ability to obtain advance payments from our customers;

	●	general economic conditions, our customers’ operations and access to capital, and market and business disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events, adversely affecting demand for the products and services offered by us in the markets in which we operate;

	●	changes in our business strategy or development plans, including our expected level of capital expenses and working capital;

	●	our ability to attract and retain qualified personnel;

	●	our ability to raise equity and debt capital to fund our operations and growth strategy, including possible acquisitions;

	●	our ability to identify, complete and integrate potential strategic acquisitions;

	●	future revenue being lower than expected;

	●	our ability to convert our backlog into revenue in a timely manner, or at all; and

	●	our intention not to pay dividends.

Although we believe that we use reasonable assumptions for these forward-looking statements, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in ~~the section entitled “Risk~~“Item 1A – Risk Factors” in ~~the~~our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2016,~~2020, as updated from time to time in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). ~~Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is~~You should not ~~possible for our management to predict all risks, nor can we assess the impact of all factors~~place undue reliance on ~~our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any~~these forward-looking statements, ~~we may make. In light~~which apply only as of ~~these risks, uncertainties, and assumptions,~~ the ~~future events and trends discussed in~~date of this Quarterly Report on Form ~~10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in~~10-Q. Except as required by the ~~forward-looking statements.~~

Wefederal securities laws, we undertake no obligation to revise or ~~publicly release the results of~~update any ~~revision to these~~ forward-looking statements, ~~except~~whether as ~~required by law. Given these risks~~a result of new information, future events or otherwise, to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The forward-looking statements and ~~uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.~~

~~Unless expressly indicated or the context requires otherwise, the terms “Surna,” the “Company,” “we,” “us,” and “our”~~projections contained in this Quarterly Report on Form 10-Q ~~refer to Surna Inc., a Nevada corporation, and, where appropriate, its wholly owned subsidiary.~~are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

iii

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Surna Inc.

Condensed Consolidated Balance Sheets

(in US Dollars except share numbers)

							September 30,			December 31,
	September 30, 2017			December 31, 2016			2021			2020
	Unaudited						(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,300,706		$	319,546		$	2,283,879		$	2,284,881
Accounts receivable (net of allowance for doubtful accounts of $93,000 and $91,000 respectively)		274,762			47,166
Notes receivable		-			157,218
Accounts receivable (net of allowance for doubtful accounts of $186,073 and $165,098, respectively)								32,245			33,480
Inventory, net		554,170			747,905			480,354			327,109
Prepaid expenses		182,623			84,976
Prepaid expenses and other								1,157,119			1,037,823
Total Current Assets		2,312,261			1,356,811			3,953,597			3,683,293

Noncurrent Assets
Property and equipment, net		77,676			93,565			98,967			147,732
Goodwill								631,064			631,064
Intangible assets, net		680,267			667,445			6,792			7,227
Deposits		51,000			-			24,183			-
Operating lease right-of-use asset								194,353			343,950
Total Noncurrent Assets		808,943			761,010			955,359			1,129,973

TOTAL ASSETS	$	3,121,204		$	2,117,821		$	4,908,956		$	4,813,266

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND SHAREHOLDERS’ DEFICIT

Current Liabilities
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,450,363		$	1,337,853		$	1,674,088		$	1,784,961
Deferred revenue		1,241,819			1,421,344			3,059,525			3,724,189
Amounts due shareholders		21,676			57,398
Convertible promissory notes, net		-			761,440
Convertible accrued interest		-			161,031
Derivative liability on warrants		265,760			477,814
Accrued equity compensation								108,945			128,434
Other liabilities								37,078			-
Current portion of operating lease liability								238,140			266,105
Total Current Liabilities		2,979,618			4,216,880			5,117,776			5,903,689

Noncurrent Liabilities
Amounts due shareholders-long term		-			11,985
NONCURRENT LIABILITIES
Note payable and accrued interest								517,468			-
Other liabilities								37,078			74,156
Operating lease liability, net of current portion								-			169,119
Total Noncurrent Liabilities		-			11,985			554,546			243,275

TOTAL LIABILITIES		2,979,618			4,228,865			5,672,322			6,146,964

SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred stock, $0.00001 par value; 150,000,000 shares authorized; 77,220,000 shares issued and outstanding		772			772
Common stock, $0.00001 par value; 350,000,000 shares authorized; 189,865,919 and 160,744,916 shares issued and outstanding, respectively		1,898			1,607
Commitments and Contingencies (Note 7)								-			-

TEMPORARY EQUITY
Series B Redeemable Convertible Preferred Stock, $0.00001 par value; 3,300 and 0 issued and outstanding, respectively								3,960,000			-
Series B Redeemable Convertible Preferred Stock Subscription Receivable								(1,365,000	)		-
Series B Redeemable Convertible Preferred Stock Accrued Dividends								1,447			-
Total Temporary Equity								2,596,447			-

SHAREHOLDERS’ DEFICIT
Preferred stock; 150,000,000 shares authorized								-			-
Series A Preferred stock, $0.00001 par value; 42,030,331 shares issued and outstanding								420			420
Common stock, $0.00001 par value; 350,000,000 shares authorized; 237,526,638 and 236,526,638 shares issued and outstanding, respectively								2,376			2,366
Additional paid in capital		18,027,715			12,222,789			25,017,065			26,107,159
Accumulated deficit		(17,888,799	)		(14,336,212	)		(28,379,674	)		(27,443,643	)
Total Shareholders’ Equity (Deficit)		141,586			(2,111,044	)
Total Shareholders’ Deficit								(3,359,813	)		(1,333,698	)

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIT)	$	3,121,204		$	2,117,821
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT							$	4,908,956		$	4,813,266

~~See~~The accompanying notes ~~to the unaudited~~are an integral part of these condensed consolidated financial statements.

~~F-1~~

Surna Inc.

Condensed Consolidated Statements of Operations ~~and Comprehensive Loss~~

~~(Unaudited)~~(in US Dollars except share numbers)

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Revenue $ 1,566,256 $ 1,170,760 $ 4,901,241 $ 5,560,837

Cost of revenue 1,175,047 753,624 3,668,698 3,742,321

Gross profit 391,209 417,136 1,232,543 1,818,516

Operating expenses:
Advertising and marketing expenses 168,476 45,177 484,418 155,172
Product development costs 60,145 75,144 250,228 275,370
Selling, general and administrative expenses 1,396,957 533,694 3,518,528 1,559,070
Total operating expenses 1,625,578 654,015 4,253,174 1,989,612

Operating income (loss) (1,234,369 ) (236,879 ) (3,020,631 ) (171,096 )

Other income (expense):
Interest and other income, net 1,016 10,576 3,808 19,060
Interest expense - (89,203 ) (41,233 ) (282,657 )
Amortization of debt discount on convertible promissory notes (10,037 ) (291,000 ) (63,157 ) (1,335,429 )
Loss on extinguishment of debt (228,428 ) - (643,428 ) -
(Loss) gain on change in derivative liabilities (6,660 ) (62,000 ) 212,054 (348,297 )
Total other income (expense) (244,109 ) (431,627 ) (531,956 ) (1,947,323 )

Loss before provision for income taxes (1,478,478 ) (668,506 ) (3,552,587 ) (2,118,419 )

Provision for income taxes - - - -

Net loss (1,478,478 ) (668,506 ) (3,552,587 ) (2,118,419 )

Other comprehensive income (expense) - - - -
Comprehensive loss $ (1,478,478 ) $ (668,506 ) $ (3,552,587 ) $ (2,118,419 )

Loss per common share – basic and dilutive $ (0.01 ) $ (0.00 ) $ (0.02 ) $ (0.02 )

Weighted average number of shares outstanding, both basic and dilutive 184,912,253 145,268,135 179,470,179 139,684,359

(Unaudited)

~~See~~


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Revenue, net	$	3,706,436		$	1,634,669		$	10,582,470		$	5,127,018

Cost of revenue		2,959,264			1,108,758			8,208,368			3,869,758

Gross profit		747,172			525,911			2,374,102			1,257,260

Operating expenses:
Advertising and marketing expenses		224,393			89,695			569,580			333,669
Product development costs		98,623			84,433			322,807			304,229
Selling, general and administrative expenses		866,699			634,447			2,493,930			2,453,976
Total operating expenses		1,189,715			808,575			3,386,317			3,091,874

Operating loss		(442,543	)		(282,664	)		(1,012,215	)		(1,834,614	)

Other income (expense):
Other income (expense), net		35,934			13,621			79,452		$	29,018
Interest expense		(1,296	)		(1,396	)		(3,268	)	$	(16,673	)
Total other income (expense)		34,638			12,225			76,184			12,345

Loss before provision for income taxes		(407,905	)		(270,439	)		(936,031	)		(1,822,269	)

Income taxes		-			-			-			-

Net loss	$	(407,905	)	$	(270,439	)	$	(936,031	)	$	(1,822,269	)

Convertible Preferred Series B Stock Redemption Value Adjustment	$	(2,262,847	)	$	-		$	(2,262,847	)	$	-
Convertible Preferred Series B Stock Dividends		(1,447	)		-			(1,447	)		-

Net Loss Available to Common Shareholders	$	(2,672,199	)	$	(270,439	)	$	(3,200,325	)	$	(1,822,269	)

Loss per common share – basic and dilutive	$	(0.01	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Weighted average number of common shares outstanding, basic and dilutive		237,526,638			236,526,638			237,171,327			234,711,893

The accompanying notes ~~to the unaudited~~are an integral part of these condensed consolidated financial statements.

~~F-2~~

Surna Inc.

Condensed Consolidated Statements of Changes in Shareholders’ ~~Equity (Deficit)~~Deficit

For the Three and Nine Months Ended September 30, ~~2017~~2021 and 2020

~~(Unaudited)~~(in US Dollars except share numbers)

(Unaudited)

Preferred Stock Common Stock
Number of Shares Amount Number of Shares outstanding Number of Shares to Be Issued Amount Additional Paid in Capital Accumulated Deficit Shareholders’ Deficit
Balance December 31, 2016 77,220,000 $ 772 160,744,916 - $ 1,607 $ 12,222,789 $ (14,336,212 ) $ (2,111,044 )
Common shares issued for conversion of debt and interest, net of unamortized debt discount - - 10,601,554 - 106 1,751,049 - 1,751,155
Value attributed to modification of warrants - - - - - 59,000 - 59,000
Common shares issued with convertible notes payable - - 250,000 - 3 39,127 - 39,129
Common shares issued for cash, net - - 16,781,250 - 168 2,684,832 - 2,685,000
Fair value of warrants issued and options granted for compensation - - - - - 415,570 - �� 415,570
Common shares issued as compensation for services - - 1,711,891 1,200,000 17 398,758 - 398,775
Common shares to be issued in settlement of restricted stock units awarded as compensation for consulting services - - - 200,000 - 20,500 - 20,500
Fair value of vested restricted stock units awarded to employees and directors - - - - - 218,677 - 218,677
Fair value of vested stock options granted to employees - - - - - 217,411 - 217,411
Other common shares - - (223,692 ) - (2 ) 2 - -
Net loss - - - - - - (3,552,587 ) (3,552,587 )
Balance September 30, 2017 77,220,000 $ 772 189,865,919 1,400,000 $ 1,898 $ 18,027,715 $ (17,888,799 ) $ 141,586


	Series A Preferred Stock				Common Stock					Additional
	Number of Shares		Amount		Number of Shares			Amount		Paid in Capital			Accumulated Deficit			Shareholders’ Deficit
Balance June 30, 2021		42,030,331	$	420		237,526,638	-	$	2,376	$	26,324,331		$	(27,971,769	)	$	(1,644,642	)
Common shares issued in settlement of restricted stock units and award of stock bonuses
Common shares issued in settlement of restricted stock units and award of stock bonuses, shares
Fair value of vested restricted stock units awarded to employees
Common shares issued in settlement of legal dispute
Common shares issued in settlement of legal dispute, shares
Common shares issued or to be issued on settlement of restricted stock units and award of stock bonuses
Common shares issued or to be issued on settlement of restricted stock units and award of stock bonuses, shares to be issued							-
Fair value of vested stock options granted to employees		-		-		-			-		14,545			-			14,545
Fair value of vested stock options accrued in 2019 and issued to employees and directors in 2020
Fair value of vested stock options granted to directors		-		-		-			-		14,762			-			14,762
Issuance of series B preferred stock and warrants, net		-		-		-			-		927,721			-			927,721
Accrued dividends		-		-		-			-		(1,447	)		-			(1,447	)
Adjustment to redemption value		-		-		-			-		(2,262,847	)		-			(2,262,847	)
Balance, shares to be issued
Fair value of vested stock options granted to employees and directors
Net loss		-		-		-			-		-			(407,905	)		(407,905	)
Balance September 30, 2021		42,030,331	$	420		237,526,638	-	$	2,376	$	25,017,065		$	(28,379,674	)	$	(3,359,813	)

	Series A Preferred Stock				Common Stock				Additional
	Number of Shares		Amount		Number of Shares		Amount		Paid in Capital			Accumulated Deficit			Shareholders’ Deficit
Balance December 31, 2020		42,030,331	$	420		236,526,638	$	2,366	$	26,107,159		$	(27,443,643	)	$	(1,333,698	)
Common shares issued in settlement of legal dispute		-		-		1,000,000		10		66,990			-			67,000
Fair value of vested stock options granted to employees		-		-		-		-		158,315			-			158,315
Fair value of vested stock options granted to directors		-		-		-		-		21,174			-			21,174
Issuance of series B preferred stock and warrants, net		-		-		-		-		927,721			-			927,721
Accrued dividends		-		-		-		-		(1,447	)		-			(1,447	)
Adjustment to redemption value		-		-		-		-		(2,262,847	)		-			(2,262,847	)
Net loss		-		-		-		-		-			(936,031	)		(936,031	)
Balance September 30, 2021		42,030,331	$	420		237,526,638	$	2,376	$	25,017,065		$	(28,379,674	)	$	(3,359,813	)

	Number of Shares		Amount		Number of Shares		Number of Shares to be Issued		Amount		Additional Paid in Capital		Accumulated Deficit			Shareholders’ Deficit
	Series A Preferred Stock				Common Stock
	Number of Shares		Amount		Number of Shares		Number of Shares to be Issued		Amount		Additional Paid in Capital		Accumulated Deficit			Shareholders’ Deficit
Balance June 30, 2020		42,030,331	$	420		236,526,638		-	$	2,366	$	26,058,307	$	(27,236,757	)	$	(1,175,664	)
Common shares issued or to be issued on settlement of restricted stock units and award of stock bonuses		-		-		-		-		-		-		-			-
Fair value of vested stock options granted to employees and directors		-		-		-		-		-		24,426		-			24,426
Net loss		-		-		-		-		-		-		(270,439	)		(270,439	)
Balance September 30, 2020		42,030,331	$	420		236,526,638		-	$	2,366	$	26,082,733	$	(27,507,196	)	$	(1,421,677	)

	Series A Preferred Stock				Common Stock
	Number of Shares		Amount		Number of Shares		Number of Shares to be Issued			Amount		Additional Paid in Capital			Accumulated Deficit			Shareholders’ Deficit
Balance December 31, 2019		42,030,331	$	420		228,216,638		1,560,000		$	2,283	$	25,326,593		$	(25,684,927	)	$	(355,631	)
Common shares issued in settlement of restricted stock units and award of stock bonuses		-		-		8,310,000		(1,560,000	)		83		(83	)		-			-
Fair value of vested restricted stock units awarded to employees		-		-		-		-			-		25,163			-			25,163
Fair value of vested stock options accrued in 2019 and issued to employees and directors in 2020		-		-		-		-			-		503,466			-			503,466
Fair value of vested stock options granted to employees and directors		-		-		-		-			-		227,594			-			227,594
Net loss		-		-		-		-			-		-			(1,822,269	)		(1,822,269	)
Balance September 30, 2020		42,030,331	$	420		236,526,638		-		$	2,366	$	26,082,733		$	(27,507,196	)	$	(1,421,677	)

~~See~~The accompanying notes ~~to the unaudited~~are an integral part of these condensed consolidated financial statements.

~~F-3~~

Surna Inc.

Condensed Consolidated Statements of Cash Flows

~~(Unaudited)~~(in US Dollars except share numbers)

For the Nine Months Ended
September 30,
2017 2016
Cash Flows from Operating Activities:
Net loss $ (3,552,587 ) $ (2,118,419 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and intangible asset amortization expense 34,087 43,870
Amortization of debt discounts on convertible notes 38,433 1,335,429
Amortization of original issue discount on notes payable 25,520 -
(Gain) loss on change in derivative liability (212,054 ) 348,297
Compensation paid in equity 1,270,933 4,028
Provision for doubtful accounts 1,715 44,127
Provision for excess and obsolete inventory 208,801 -
Loss on sale of assets other - 1,117
Loss on extinguishment of debt 643,428 -
Changes in operating assets and liabilities:
Accounts and note receivable (207,205 ) 186,945
Inventory (15,066 ) 345,316
Prepaid expenses (119,753 ) 17,211
Accounts payable and accrued liabilities 112,516 (864,937 )
Deferred revenue (179,525 ) 434,529
Accrued interest (10,574 ) 282,657
Deferred compensation - (25,600 )
Cash (used in) provided by operating activities (1,961,331 ) 34,570

Cash Flows From Investing Activities:
Cash disbursed for patent fees (16,454 ) (22,380 )
Purchase of property and equipment (14,566 ) (15,126 )
Proceeds from the sale of property and equipment - 32,600
Cash disbursed for lease deposit (51,000 ) -
Cash disbursed for note receivable - (80,000 )
Cash received from repayment of note receivable 157,218 100,000
Cash provided by investing activities 75,198 15,094

Cash Flows From Financing Activities:
Proceeds from exercise of stock options - 358
Cash proceeds from sale of common stock and warrants 2,685,000 -
Payments on convertible notes payable (270,000 ) -
Proceeds from issuance of notes payable 500,000 -
Payments on loans - (34,115 )
Payments on loans from shareholders (47,707 ) (111,009 )
Cash provided by (used in) financing activities 2,867,293 (144,766 )

Net change in cash and cash equivalents 981,160 (95,102 )
Cash and cash equivalents, beginning of period 319,546 330,557
Cash and cash equivalents, end of period $ 1,300,706 $ 235,455

Supplemental cash flow information:
Interest paid $ 44,150 $ -
Income tax paid $ - $ -

Non-cash investing and financing activities:
Conversions of promissory notes and accrued interest to common stock $ 1,205,856 $ 889,084
Derivative liability on convertible promissory notes and warrants $ - $ 673,050
Equipment issued in settlement of debt $ - $ 2,500

(Unaudited)

~~See~~


	For the Nine Months Ended September 30,
	2021			2020
Cash Flows From Operating Activities:
Net loss	$	(936,031	)	$	(1,822,269	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and intangible asset amortization expense		54,973			90,867
Share-based compensation		51,055			252,757
Common stock issued for other expense		67,000			-
Provision for doubtful accounts		20,975			13,150
Provision for excess and obsolete inventory		(13,764	)		(5,117	)
Loss on disposal of assets		8,042			4,124
Amortization of ROU asset		149,597			141,871

Changes in operating assets and liabilities:
Accounts receivable		(19,740	)		27,950
Inventory		(139,481	)		714,709
Prepaid expenses and other		(119,296	)		(488,007	)
Accounts payable and accrued liabilities		(110,872	)		(397,181	)
Deferred revenue		(664,663	)		2,044,830
Accrued interest		3,268			-
Lease deposit		(24,183	)		-
Operating lease liability, net		(197,085	)		(79,521	)
Accrued equity compensation		108,945			101,472
Net cash (used in)/provided by operating activities		(1,761,260	)		599,635

Cash Flows From Investing Activities
Purchases of property and equipment		(15,316	)		(3,500	)
Proceeds from the sale of property equipment		1,500			-
Net cash used in investing activities		(13,816	)		(3,500	)

Cash Flows From Financing Activities
Cash proceeds from sale of preferred stock and warrants, net of issuance costs		1,259,874			-
Proceeds from issuance of note payable		514,200			554,000
Net cash provided by financing activities		1,774,074			554,000

Net change in cash and cash equivalents		(1,002	)		1,150,135
Cash and cash equivalents, beginning of period		2,284,881			922,177
Cash and cash equivalents, end of period	$	2,283,879		$	2,072,312

Supplemental cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	-		$	-

Non-cash investing and financing activities:
Adjustment of carrying value of series B preferred stock to redemption value	$	2,262,847
Subscription receivable - series B preferred stock	$	1,365,000		$	-
Options issued for accrued equity compensation	$	128,434		$	-
Accrued dividends	$	1,447		$	-

The accompanying notes ~~to the unaudited~~are an integral part of these condensed consolidated financial statements.

~~F-4~~

Surna Inc.

Notes to ~~Unaudited~~ Condensed Consolidated Financial Statements

September 30, ~~2017~~2021

(in US Dollars except share numbers)

~~NOTE~~(Unaudited)

Note 1 ~~- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~– General

~~Company:~~Description of Business

Surna Inc. (the “Company”) was incorporated in Nevada on October 15, ~~2009. On March 26, 2014,~~2009 and operates under the ~~Company acquired Safari Resource Group,~~trade name of Surna Cultivation Technologies. We are headquartered in Boulder, Colorado.

Surna Inc. ~~(“Safari”), a Nevada corporation, whereby~~is an engineering and design company focused on selling environmental control and other technologies and services to the ~~Company became the sole surviving corporation after the acquisition of Safari.~~Controlled Environment Agriculture (CEA) industry. We leverage our experience in this space to bring value-added technology solutions to our customers that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy evolving state and local construction codes, permitting and regulatory requirements. In ~~July 2014, the Company acquired 100%~~service of the ~~membership interests~~CEA industry, our principal service and product offerings include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) LED lighting, benching and racking solutions for indoor cultivation, (v) automation and control devices, systems and technologies used for environmental, lighting and climate control, and (vi) preventive maintenance services for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in ~~Hydro Innovations, LLC, a Texas limited liability company (“Hydro”), pursuant to which Hydro became a wholly-owned subsidiary of~~ the ~~Company. The Company engineers~~U.S. and ~~manufactures innovative technology~~Canada and other international locations. Customers are those growers building new facilities and those expanding or retrofitting existing facilities. Currently, our revenue stream is derived primarily from supplying our products, ~~that address the energy~~services and ~~resource intensive nature of indoor cultivation. The Company is focused on supplying industrial solutions~~technologies to commercial indoor facilities operating in the cannabis ~~cultivation facilities.~~ industry, ranging from several thousand to more than 100,000square feet. Although most of our customers do, we neither produce nor sell cannabis or its related products.

Impact of the COVID-19 Pandemic on Our Business

The ~~Company’s engineering team~~COVID-19 pandemic has prompted national, regional, and local governments, including those in the markets that the Company operates in, to implement preventative or protective measures to control its spread. As a result, there have been disruptions in business operations around the world, with an impact on our business.

In our response to the COVID-19 pandemic and the government and business response, the Company took and continues to take measures to adjust its operations as necessary. In early 2020 the Company took measures to reduce expenses in light of reduced orders and to preserve cash, many of which were reversed by the end of the year when orders picked up and the overall business climate improved. Because the pandemic continues in different parts of the world and in different ways in the United States, the Company continues to actively monitor its operations and sales efforts and will make adjustments to its operations as necessary.

We are experiencing unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to a significant increase in shipments to U.S. ports, less cargo being shipped by air, a general shortage of containers, and domestic truck driver availability. While these delays have moderately improved in recent months, we, along with many other importers of goods across all industries, continue to experience severe congestion and extensive wait times for carriers at ports across the United States. In addition, restrictions imposed by local, state and federal agencies due to the COVID-19 pandemic have led to reduced personnel of importers, government staff and others in our supply chain. We have been working diligently with our network of freight partners and suppliers to expedite delivery dates and provide solutions to reduce further impact and delays. However, we are unable to determine the full impact of these delays and how long they will continue as they are out of our control.

While the Company is ~~tasked with creating novel energy~~continuing to navigate the financial, operational, and ~~resource efficient solutions,~~personnel challenges presented by the COVID-19 pandemic, the full extent of the impact on our operational and financial performance will depend on future developments, including the ~~Company’s proprietary liquid-cooled climate control platform. The Company’s engineers continuously seek~~duration and spread of the pandemic, the potential uncertainty related to ~~create technologies that allow growers~~and proliferation of new strains, and related actions taken by the U.S. government, state and local government officials, and international governments to ~~meet the specific demands~~prevent disease spread, all of ~~a cannabis cultivation environment through temperature, humidity, light, and process control. The Company’s objective is to provide intelligent solutions that improve the quality,~~which are uncertain, out of our control and ~~overall crop yield and efficiency of indoor cannabis cultivation. The Company is headquartered~~ cannot be predicted at this time.

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(in ~~Boulder, Colorado. The Company does not cultivate or distribute cannabis.~~US Dollars except share numbers)

(Unaudited)

Financial Statement ~~Presentation:~~Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted ~~accounting principles~~ in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. ~~GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures.~~ In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, ~~2017~~2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017.~~2021. The balance sheet as of December 31, ~~2016~~2020 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020. The notes to the unaudited condensed consolidated financial statements are presented on a going concern ~~basis unless otherwise noted.~~basis.

~~F-5~~

Basis of ~~Presentation:~~Consolidation and Reclassifications

The condensed consolidated financial statements include the accounts of the Company and its controlled and wholly owned subsidiary, Hydro Innovations, LLC (“Hydro”). Intercompany transactions, profit, and balances are eliminated in consolidation.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going ~~concern.~~concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced recurring losses since its inception. ~~The Company incurred a net loss of approximately $3,553,000 for the nine months ended September 30, 2017, and had an accumulated deficit of approximately $17,889,000 as of September 30, 2017.~~ Since inception, the Company has financed its activities principally through debt and equity financing, customer deposits and ~~customer deposits.~~revenues from completed contracts. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities.

~~The Company’s consolidated financial statements have been presented on a going concern basis, which contemplates~~ Management believes that the ~~realization of assets and the satisfaction of liabilities~~economic dislocations in the ~~normal course of business.~~

The Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate to support the Company’s cost structure. In the first quarter of 2017, the Company extinguished convertible promissory notesoverall economy, in the ~~principal amount of $510,000 through the issuance of shares of its common stock (See Note 2)~~near term, will impact our revenues, losses and raised $2,685,000 in a private placement of the Company’s common stock and attached warrants to accredited investors (see Note 6). In the third quarter of 2017, the Company extinguished notes payable in the principal amount of $537,000 through the issuance of shares of its common stock (See Note 3).

~~The Company will likely need to raise debt and equity financing in the future in order to continue its operations and achieve its growth targets, however, there~~cash flows. There can be no assurance that ~~such financing~~the Company will be ~~available~~able to raise debt or equity financing in sufficient amounts, ~~and on acceptable terms,~~ when and if needed, on acceptable terms or at all. If results of operations for 2021 do not meet management’s expectations, or additional capital is not available, management believes it has the ability to reduce certain expenditures. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including the overall economy, market demand for the Company’s products and services, the ~~success~~quality of product development efforts, ~~the timing of receipts for customer deposits, the~~ management of working capital, and ~~the~~ continuation of normal payment terms and conditions for purchase of ~~goods and services.~~the Company’s products. The Company believes its cash balances and cash flow from operations will ~~not~~ be ~~sufficient~~insufficient to fund its operations ~~and growth~~ for the next ~~twelve~~12 months. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will ~~likely~~ need to raise additional funding to continue as a going concern. The foregoing factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from ~~investors or through other avenues.~~

~~Basis of Consolidation and Reclassifications:~~

~~The~~the date the financial statements are issued. These condensed consolidated financial statements do not include any adjustment that might result from the ~~accounts~~outcome of ~~the Company and its controlled and wholly-owned subsidiary. Intercompany transactions, profits, and balances are eliminated in consolidation.~~this uncertainty.

Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented. The reclassifications had no impact on net loss or total assets and liabilities.

Use of ~~Estimates:~~Estimates

~~The preparation of financial statements in conformity with GAAP requires management to make~~Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of ~~revenues~~revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. ~~In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.~~ Key estimates include: ~~valuation~~allocation of ~~derivative liabilities,~~transaction prices to performance obligations under contracts with customers, standalone selling prices, timing of expected revenue recognition on remaining performance obligations under contracts with customers, valuation of intangible assets, ~~and~~valuation of equity-based compensation, valuation of deferred tax assets and ~~liabilities.~~liabilities, warranty accruals, accounts receivable and inventory allowances, and legal contingencies.

~~F-6~~

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

~~Warrants Issued~~ (in ~~Connection~~US Dollars except share numbers)

(Unaudited)

Cash, Cash Equivalents and Restricted Cash

All highly liquid investments with ~~Financings:~~

original maturities of three months or less at the date of purchase are considered to be cash equivalents. The Company ~~generally accounts for warrants issued~~may, from time to time, have deposits in ~~connection with financings as a component of equity, unless there is a possibility~~financial institutions that exceed the Company may have to settle the warrants in cash. For warrants issued with the deemed possibility of a cash settlement, the Company records the fair value of the issued warrants as a liability at each reporting date and records changes in the estimated fair value as a non-cash gain or loss in the condensed consolidated statements of operations. The fair values of have been determined using the Black Scholes Merton Option Pricing valuation model, or the Black-Scholes Model. The Black-Scholes Model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of judgment on the part of the Company.

~~Fair value measurements~~

federally insured amount. The Company ~~evaluates assets and liabilities subject~~has not experienced any losses to ~~fair value measurements~~date on a recurring basis to determine the appropriate level to classify them for each reporting period. There have been no transfers between fair value measurements levels during the three months ended September 30, 2017. The carrying amounts for cash, accounts receivable and accounts payable, accrued expenses and other current liabilities approximate fair value due to their short-term nature.depository accounts.

The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

	●	~~Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.~~
	●	Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
	●	Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

~~The following table sets forth the Company’s assets and liabilities that were measured at fair value as of September 30, 2017 and December 31, 2016 by level within the fair value hierarchy:~~

As of September 30, 2017 As of December 31, 2016
Level I Level
II Level
III Fair
Value Level I Level
II Level
III Fair
Value
Financial liabilities:
Derivative liabilities - warrants $ – $ – $ 265,760 $ 265,760 $ – $ - $ 477,814 $ 477,814
Total financial assets (liabilities) $ - $ - $ 265,760 $ 265,760 $ - $ - $ 477,814 $ 477,814

~~The estimated fair value of the derivative liability associated with the Company’s warrants is calculated using the Black-Scholes option pricing model.~~

~~Net~~ Income (Loss) Per Common Share

~~In accordance with ASC Topic 280 – “Earnings Per Share”, the basic loss~~Basic income (loss) per common share is computed by dividing net ~~loss available~~income (loss) attributable to common stockholders by the ~~weighted average~~weighted-average number of common shares ~~outstanding.~~outstanding during the period without consideration of common stock equivalents. Diluted ~~loss~~net income (loss) per common share is computed ~~similar to basic loss per common share except that~~by dividing net income (loss) by the ~~denominator is increased to include the~~weighted-average number of ~~additional~~ common shares ~~that~~outstanding and potentially dilutive common stock equivalents, including stock options, warrants and restricted stock units and other equity-based awards, except in cases where the effect of the common stock equivalents would ~~have been outstanding if the potential~~be antidilutive. Potential common ~~shares had been issued and if the additional common shares were dilutive. As of September 30, 2017, there are approximately 19,143,050 shares~~stock equivalents consist of common stock issuable upon ~~the~~ exercise of ~~certain outstanding~~stock options and warrants and the vesting of ~~certain~~restricted stock units using the treasury method.

During the nine months ended September 30, 2021 and 2020, there were warrants and options outstanding to purchase Company common stock and shares of convertible preferred stock and restricted stock units that were convertible into shares of the Company’s common stock. During the three- and nine-month periods ended September 30, 2021 and 2020, the Company incurred a net loss and consequently the common share equivalents of these potentially dilutive equity instruments have not been ~~excluded from~~included in the ~~computation~~calculations of ~~diluted net~~ loss per share because ~~the effect~~such inclusion would have been anti-dilutive.

As of September 30, 2021, and 2020, there were respectively, 116,683,201 and 44,007,500, potentially dilutive equity instruments outstanding in respect of shares of convertible preferred stock and warrants and options outstanding to purchase Company common stock.

Goodwill

The Company recorded goodwill in connection with its acquisition of Hydro Innovations, LLC in July 2014. Goodwill is reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value. The Company performs a quantitative impairment test annually on December 31 by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has one reporting unit.

During the nine months ended September 30, 2021, the Company concluded that the projected impact of the COVID-19 pandemic on its sales, contract completion and revenues in the near term, together with the volatility in its share price during the quarter represented potential indicators of impairment. Accordingly, the Company performed an interim impairment analysis at September 30, 2021 and concluded that no impairment relating to goodwill existed at September 30, 2021.

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(in US Dollars except share numbers)

(Unaudited)

Temporary Equity

Shares of preferred stock that are redeemable for cash or other assets are classified as temporary equity if they are redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the issuer. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, net of issuance costs, which is subsequently adjusted to redemption value (including the amount for dividends earned but not yet declared or paid) at each balance sheet date if the instrument is currently redeemable or if it is probable that the instrument will become redeemable.

The Company determined it is probable the Series B Preferred Stock will become redeemable at the option of the holder. As a result, on September 30, 2021, the Company adjusted carrying value of the Series B Preferred Stock to its redemption value of $3,960,000 and recorded a $2,262,847 non-cash redemption value adjustment. This redemption value adjustment is treated as similar to a dividend on the preferred stock for GAAP purposes, accordingly, the redemption value adjustment is therefore added to the “Net Loss” to arrive at “Net Loss Attributable to Common Shareholders’” on the Company’s Consolidated Statements of Operations. In addition, as the Company does not have a balance of retained earnings, the redemption value adjustment was recorded against additional paid-in capital.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers and all the related amendments (“ASC 606” or the “revenue standard”) to all contracts and elected the modified retrospective method.

Under the revenue standard, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Most of the Company’s contracts contain multiple performance obligations that include engineering and technical services as well as the delivery of a diverse range of climate control system equipment and components, which can span multiple phases of a customer’s project life cycle from facility design and construction to equipment delivery and system installation and start-up.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, the Company allocates the transaction price to each performance obligation based on standalone selling price. When estimating the selling price, the Company uses various observable inputs. The best observable input is the Company’s actual selling price for the same good or service, however, this input is generally not available for the Company’s contracts containing multiple performance obligations. For engineering services, the Company estimates the standalone selling price by reference to certain physical characteristics of the project, such as facility size and mechanical systems involved, which are indicative of the scope and complexity of the mechanical engineering services to be provided. For equipment sales, the standalone selling price is determined by forecasting the expected costs of the equipment and then adding an appropriate margin, based on a range of acceptable margins established by management. Depending on the nature of the performance obligations, the Company may use a combination of different methods and observable inputs if certain performance obligations have highly variable or uncertain standalone selling prices. Once the selling prices are determined, the Company applies the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as each performance obligation is fulfilled.

The Company recognizes revenue for the sale of goods when control transfers to the customer, which primarily occurs at the time of shipment. The Company’s historical rates of return are insignificant as a percentage of sales and, as a result, the Company does not record a reserve for returns at the time the Company recognizes revenue. The Company has elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value added, and certain excise taxes) that are assessed by a governmental authority in connection with a specific revenue-producing transaction and collected by the Company from the customer. Accordingly, the Company recognizes revenue net of sales taxes. The revenue and cost for freight and shipping is recorded when control over the sale of goods passes to the Company’s customers.

The Company also has performance obligations to perform certain engineering services that are satisfied over a period of time. Revenue is recognized from this type of performance obligation as services are rendered based on the percentage completion towards certain specified milestones.

~~F-7~~8

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(in US Dollars except share numbers)

(Unaudited)

The Company offers assurance-type warranties for its products and products manufactured by others to meet specifications defined by the contracts with customers and does not have any material separate performance obligations related to these warranties. The Company maintains a warranty reserve based on historical warranty costs.

Applying the practical expedient in ASC 606-10-32-18, which the Company has elected, the Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Accordingly, the remaining performance obligations related to customer contracts does not consider the effects of the time value of money.

Applying the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs include certain sales commissions and incentives, which are included in selling, general and administrative expenses, and are payable only when associated revenue has been collected and earned by the Company.

The Company does not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed. Contract liabilities consist of advance payments and deferred revenue.

For the three and nine months ended September 30, 2021, the Company recognized revenue of $283,452 and $3,357,068, respectively, related to the deferred revenue at January 1, 2021. For the three and nine months ended September 30, 2020, the Company recognized revenue of $9,141 and $1,074,016, respectively, related to the deferred revenue at January 1, 2020.

Remaining performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations that the Company has not performed under its customer contracts. The Company has elected not to use the optional exemption in ASC 606-10-50-14, which exempts an entity from such disclosures if a performance obligation is part of a contract with an original expected duration of one year or less. Accordingly, the information disclosed about remaining performance obligations includes all customer contracts, including those with an expected duration of one year or less.

Industry uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the Company’s control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance obligations. There are risks that the Company may not realize the full contract value on customer projects in a timely manner or at all, and completion of a customer’s cultivation facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes for customers to complete a project, which corresponds to when the Company is able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays that are typical in completing any construction project.

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

~~Recent~~ (in US Dollars except share numbers)

(Unaudited)

As of September 30, 2021, the Company’s remaining performance obligations, or backlog, was $9,881,000, of which $1,161,000, or 12%, was attributable to customer contracts for which the Company has only received an initial advance payment to cover the allocated value of the Company’s engineering services (“engineering only paid contracts”). There is the risk that the equipment portion of these engineering only paid contracts will not be completed or will be delayed. These reasons include the customer being dissatisfied with the quality or timeliness of the Company’s engineering services, delay or abandonment of the project because of the customer’s inability to obtain project financing or licensing, or other reasons such as a challenging business climate including an overall post-Covid-19 economic disruption or change in business direction. After the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial equipment paid contracts”), the Company is typically better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. There is significant uncertainty regarding the timing of the Company’s recognition of revenue on its remaining performance obligations, and there is no certainty that these will result in actual revenues. The backlog at September 30, 2021, includes booked sales orders of $1,250,000 from several customers that the Company does not expect to be realized until late 2022. The Company believes the sales orders in this portion of our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled by our customers.

The remaining performance obligations expected to be recognized through 2022 are as follows:

Schedule of Remaining Performance Obligations Expected to be Recognized

	2021		2022		Total
Remaining performance obligations related to engineering only paid contracts	$	112,000	$	1,049,000	$	1,161,000
Remaining performance obligations related to partial equipment paid contracts		3,091,000		5,629,000	$	8,720,000
Total remaining performance obligations	$	3,203,000	$	6,678,000	$	9,881,000

The following table sets forth the Company’s revenue by source:

Schedule of Revenue by Source

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Equipment and systems sales	$	3,523,948	$	1,481,961	$	9,933,313	$	4,575,855
Engineering and other services		110,538		114,160		464,269		402,837
Shipping and handling		71,950		38,548		184,888		148,326
Total revenue	$	3,706,436	$	1,634,669	$	10,582,470	$	5,127,018

Accounting ~~Pronouncements:~~for Share-Based Compensation

The Company recognizes the cost resulting from all share-based compensation arrangements, including stock options, restricted stock awards and restricted stock units that the Company grants under its equity incentive plan in its condensed consolidated financial statements based on their grant date fair value. The expense is recognized over the requisite service period or performance period of the award. Awards with a graded vesting period based on service are expensed on a straight-line basis for the entire award. Awards with performance-based vesting conditions, which require the achievement of a specific company financial performance goal at the end of the performance period and required service period, are recognized over the performance period. Each reporting period, the Company reassesses the probability of achieving the respective performance goal. If the goals are not expected to be met, no compensation cost is recognized and any previously recognized amount recorded is reversed. If the award contains market-based vesting conditions, the compensation cost is based on the grant date fair value and expected achievement of market condition and is not subsequently reversed if it is later determined that the condition is not likely to be met or is expected to be lower than initially expected.

The grant date fair value of stock options is based on the Black-Scholes Option Pricing Model (the “Black-Scholes Model”). The Black-Scholes Model requires judgmental assumptions including volatility and expected term, both based on historical experience. The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected term of the option. The Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options granted throughout the year. During the nine months ended September 30, 2021, the valuation assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility ranged from 150.2% to 152.51%; expected term in years 10 and risk-free interest rate ranged from 0.55%to 1.49%.

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(in US Dollars except share numbers)

(Unaudited)

The grant date fair value of restricted stock and restricted stock units is based on the closing price of the underlying stock on the date of the grant.

The Company has elected to reduce share-based compensation expense for forfeitures as the forfeitures occur since the Company does not have historical data or other factors to appropriately estimate the expected employee terminations and to evaluate whether particular groups of employees have significantly different forfeiture expectations.

The following is a summary of share-based compensation expenses included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020:

Schedule of Share-based Compensation Costs

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Share-based compensation expense included in:
Cost of revenue	$	-	$	6,833	$	29,944	$	23,949
Advertising and marketing expenses		-		2,500		13,292		7,500
Product development costs		-		5,444		14,029		16,332
Selling, general and administrative expenses		29,307		41,221		102,735		306,448
Total share-based compensation expense included in consolidated statement of operations	$	29,307	$	55,998	$	160,000	$	354,229

Included in the expense for the three and nine months ended September 30, 2021, is an accrual for $0 and $108,945, respectively, for the 2021 Annual Employee Incentive Compensation Plan. Included in the expense for the three and nine months ended September 30, 2020, is an accrual for $31,575 and $101,472, respectively, for the 2020 Annual Employee Incentive Compensation Plan.

Concentrations

Three customers accounted for 38%, 23%, and 11% of the Company’s revenue for the three months ended September 30, 2021 and three customers accounted for 25%, 12% and 12% of the Company’s revenue for the nine months ended September 30, 2021. Two customers accounted for 39% and 30% of the Company’s revenue for the three months ended September 30, 2020 and three customers accounted for 18%, 17% and 11% of the Company’s revenue for the nine months ended September 30, 2020.

Three customers accounted for 40%, 26% and 22% of the Company’s accounts receivable as of September 30, 2021. As of September 30, 2020, four customers accounted for 32%, 23%, 21% and 10% of the Company’s accounts receivable.

Recently Issued Accounting Pronouncements

In May ~~2017,~~2021, the FASB issued ASU 2021-04, Issuer’s Accounting ~~Standards Update (ASU) No. 2017-09,~~~~Compensation – Stock Compensation (Topic 718) – Scope~~for Certain Modifications or Exchanges of ~~Modification Accounting~~Freestanding Equity-Classified Written Call Options. ,This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to ~~clarify when to account for~~ a ~~change to~~lack of explicit guidance in the ~~terms or conditions of a share-based payment award as a modification. Under the new standard, modification~~FASB Codification. The guidance is ~~required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The amendments are~~ effective for ~~all entities for~~interim and annual periods beginning after December 15, ~~2017, including interim periods within those annual periods, and will be applied prospectively.~~2021. Early adoption is permitted. The guidance is to be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company ~~is currently evaluating~~anticipates that the ~~effect that adopting~~adoption of this ~~new accounting~~ guidance will not have a material impact on its consolidated financial statements.

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(in US Dollars except share numbers)

(Unaudited)

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company early adopted ASU 2020-06 effective January 1, 2021. The early adoption of ASU 2020-06 impacted the Company’s accounting for the issuance of its Series B Redeemable Convertible Preferred Stock as further discussed in Note 8 Temporary Equity Series B Redeemable Convertible Preferred Stock below.

In March 2020, the FAS issued ASU No. 2020-04 “Reference Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The Company does not expect this ASU to have a material impact on its consolidated results of operations, cash flows and financial position.

In January ~~2017,~~2020, the FASB issued ASU ~~2017-04,~~No. 2020-01, ~~Simplifying~~Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the ~~Test for Goodwill Impairment~~Interactions between Topic 321, Topic 323, and Topic 815 ~~(“ASU 2017-04”)~~(a consensus of the Emerging Issues Task Force). ~~ASU 2017-04 simplifies~~This update clarifies whether an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for ~~goodwill impairment by removing Step 2~~the purposes of applying the ~~goodwill impairment test, which requires a hypothetical~~measurement alternative and how to account for certain forward contracts and purchased options to purchase ~~price allocation. ASU 2017-04~~securities. For public entities, this guidance is effective for ~~annual or interim goodwill impairment tests in~~ fiscal years beginning after December 15, ~~2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.~~2020. The Company ~~is currently evaluating the effect that adopting~~does not expect this ~~new accounting guidance will~~ASU to have a material impact on its consolidated results of operations, cash flows and financial position. The adoption of this ASU has not had a material impact on the Company’s consolidated results of operations, cash flows and financial position.

In ~~May 2014,~~December 2019, the FASB issued ASU ~~2014-09~~2019-12, Income Taxes (Topic ~~606),~~~~Revenue from Contracts with Customers~~740) – Simplifying the Accounting for Income Taxes, .which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ~~new revenue recognition standard supersedes all~~amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing ~~revenue recognition~~ guidance. ~~Under this~~ ASU an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and its related amendments are2019-12 is effective for ~~reporting periods (including interim periods)~~fiscal years beginning after December ~~31, 2017.~~15, 2020. Early adoption is permitted. The ~~standard may be applied retrospectively~~adoption of this ASU has not had a material impact on the Company’s consolidated results of operations, cash flows and financial position.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to ~~each prior period presented~~have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or ~~retrospectively with~~are unrelated to its financial condition, results of operations, cash flows or disclosures.

Note 2 – Leases

In February 2016 the ~~cumulative effect recognized as of~~FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842” or the ~~date of adoption (“modified retrospective method”~~“new lease standard”). The Company ~~currently plans~~adopted ASC 842 as of January 1, 2019, using the effective date method.

The new standard provides a number of optional practical expedients in transition. The Company has elected to ~~adopt~~apply the ~~standard~~“package of practical expedients” which allow the Company to not reassess: (i) whether existing or expired arrangements contain a lease, (ii) the lease classification of existing or expired leases, or (iii) whether previous initial direct costs would qualify for capitalization under the ~~modified retrospective method effective~~new lease standard. The Company has also elected to apply the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new lease standard.

Upon adoption, the Company recognized its lease for manufacturing and office space (the “Facility Lease”) on the balance sheet as an operating lease right-of-use asset in the amount of $714,416 and as a lease liability of $822,374. The Facility Lease commenced September 29, 2017 and continues through August 31, 2022. The Company has the option to renew the Facility Lease for an additional five years. However, the renewal option to extend the Facility Lease is not included in the right-of-use asset or lease liability as the option is not reasonably certain of exercise. The Company regularly evaluates the renewal option and when it is reasonably certain of exercise, the Company will include the renewal period in its lease term.

Surna Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(in US Dollars except share numbers)

(Unaudited)

Beginning September 1, 2018, and each subsequent September 1 during the term, the monthly rent under the Facility Lease will increase by 3%. Total rent under the current building lease is charged to expense over the term of the lease on a straight-line basis, resulting in the same monthly rent expense throughout the lease. The difference between the rent expense amount and the actual rent paid is recorded to operating lease liability on the Company’s condensed consolidated balance sheets.

Under the Facility Lease, the landlord agreed to pay the Company or the Company’s contractors for tenant improvements made by the Company not to exceed $100,000, which were used for normal tenant improvements. The Company determined that these improvements were not specialized and could be utilized by a subsequent tenant and, as such, the improvements were considered assets of the lessor. As of January 1, ~~2018,~~2019, the unamortized amount of tenant improvement allowance of $81,481 was treated as a reduction in measuring the right-of-use asset.

Under the Facility Lease, the Company pays the actual amounts for property taxes and insurance, excludes such payments from lease contract consideration, and records such payments as incurred. The Company also pays the landlord for common area maintenance, which ~~will be reflected~~is considered a nonlease component. For the Facility Lease, the Company has not elected the accounting policy to include both the lease and nonlease components as a single component and account for it as the lease.

In determining the right-of-use asset and lease liability, the Company applied a discount rate to the minimum lease payments under the Facility Lease. ASC 842 requires the Company to use the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in ~~its financial statements~~a similar economic environment. Since the discount rate is not implicit in the lease agreement, we utilized an estimated incremental borrowing rate provided by the Company’s depository bank.

The lease cost, cash flows and other information related to the Facility Lease were as follows:

Schedule of Lease Cost

For the Nine
Months Ended
September 30,

2021
Operating lease cost $ 162,667
Operating cash outflow from operating lease $ 210,154

As of
September 30,
2021

Operating lease right-of-use assset $ 194,353
Operating lease liability, current $ 238,140
Operating lease liability, long-term $ -

Remaining lease term .9 years
Discount rate 5.00 %
13
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Future annual minimum lease payments on the Facility Lease as of and for the three months ended March 31, 2018. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated financial statements, and is working with a consultant to assess the effectsSeptember 30, 2021 were as follows:
Schedule of ~~the new standard on its internal processes, customer contracts, and future revenues.~~Future Annual Minimum Lease Payments
Years ended December 31,
2021 (excluding the nine months ended September 30, 2021) 71,710
2022 170,891
Total minimum lease payments 242,601
Less imputed interest (4,461 )
Present value of minimum lease payments $ 238,140
~~NOTE 2 – CONVERTIBLE PROMISSORY NOTES~~
~~In the first quarter of 2017,~~On April 30, 2021, the Company entered into ~~note conversion~~an agreement to sublease approximately 6,900 square feet of its office and ~~warrant amendment agreements (each an “Agreement”~~manufacturing space. The sublease commenced on April 30, 2021 and together, the “Agreements”) to: (i) amend the convertible promissory notes – series 2 (“Original Notes”) to reduce the conversion price of such holder’s Original Note and simultaneously cause the conversion of the outstanding amount under such Original Note into shares of common stock of the Company (“Conversion Shares”); and (ii) reduce the exercise price of the original warrant (“Original Warrants” and together with the amended notes and the amended warrants, the “Amendments”). Each Agreement was privately negotiated so the terms vary. Pursuant to the Agreements, the Original Notes were amended to reflectwill continue on a ~~reduced conversion price per share between $0.09 and $0.22. Additionally, pursuant to the Agreements~~,the Original Warrants were amended to reflect a reduced exercise price per share between $0.30 and $0.35, except for one Original Warrant to reflect a reduced exercise price of $0.15 per share. The term of one Original Warrant was also extended.
Pursuant to the Agreements, in the first quarter of 2017, the Company (i) converted Original Notes with an aggregate outstanding principal amount of $510,000 and accrued interest of $134,553 in exchange for the issuance of 5,001,554 sharesmonth-to-month basis until either party gives 30-days’ notice. Unless 30-days’ notice is provided sooner, this sublease will end upon termination of the Company’s ~~common stock,~~Lease Agreement with its current landlord. Rent was initially charged at $5,989 per month and ~~(ii) amended Original Warrants~~increased to ~~reduce their exercise price. In~~$11,978 per month effective July 1, 2021. The Sublessor is also responsible for its prorated share of utilities and other related costs. This new sublease does not change the ~~first quarter~~Company’s legal relationship or financial obligations with its landlord. The Company continues to be responsible for all the remaining financial obligations under its existing lease with the landlord. Accordingly, entering into the new sublease did not impact the carrying value of ~~2017,~~the Company’s operating lease right of use asset or operating lease liability. Moreover, after an initial two-month transitional period, the rental rate per square foot under the new sublease is identical to the rental rate per square foot for the Company’s existing lease with its landlord which indicates that there is no impairment to the carrying value of the Company’s operating lease right of use asset.
On July 27, 2021, the Company entered into a Lease Termination Agreement with its current landlord for the 18,952 square foot office and manufacturing facility in Boulder, CO, which was previously scheduled to expire on August 31, 2022. The termination provides for the Company to vacate the facility no later than November 15, 2021. In exchange for early termination from its lease obligation, the Company paid a nominal lease termination fee on July 28, 2021. The termination was also ~~made~~contingent upon a successor tenant executing a new lease with the landlord and the Company paying the remaining deferred rent and security deposit amounts (See Contractual Payment Obligations section). The landlord and successor tenant entered into a lease agreement on July 27, 2021. The remaining deferred rent and security deposit will be paid in conjunction with the final rent payment.
On July 28, 2021, the Company entered into an agreement to lease 11,491 square feet of office and manufacturing space in Louisville, CO. The lease commences on November 1, 2021 and continues through January 31, 2027. The Company has the option to renew the lease for an additional 60-month period.
Note 3 – Inventory
Inventory consisted of the following:
Schedule of Inventory
September 30, December 31,
2021 2020
Finished goods $ 319,335 $ 201,778
Work in progress 2,595 4,231
Raw materials 237,704 214,145
Allowance for excess & obsolete inventory (79,281 ) (93,045 )
Inventory, net $ 480,354 $ 327,109
Overhead expenses of $17,674 and $17,974 were included in the inventory balance as of September 30, 2021, and December 31, 2020, respectively.
14
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Advance payments on inventory purchases are recorded in prepaid expenses until title for such inventory passes to the Company. Prepaid expenses included approximately $879,000 and $916,000 in advance payments for inventory for the periods ended September 30, 2021, and December 31, 2020, respectively.
Note 4 – Property and Equipment
Property and equipment consisted of ~~$314,150~~the following:
Schedule of Property and Equipment
September 30, December 31,
2021 2020
Furniture and equipment $ 296,851 $ 398,422
Vehicles 15,000 15,000
Leasehold improvements 215,193 215,193
527,044 628,615
Accumulated depreciation (428,076 ) (480,883 )
Property and equipment, net $ 98,967 $ 147,732
Depreciation expense was $54,538 for the nine months ended September 30, 2021. For the nine months ended September 30, 2021, $4,721 was allocated to ~~settle convertible promissory notes~~cost of sales and $1,180 was allocated to inventory with the remainder recorded as selling, general and administrative expense.
Note 5 – Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
Schedule of Accounts Payable and Accrued Liabilities
September 30, December 31,
2021 2020
Accounts payable $ 864,558 $ 918,639
Sales commissions payable 40,758 48,263
Accrued payroll liabilities 255,462 288,071
Product warranty accrual 172,868 173,365
Other accrued expenses 340,442 356,623
Total $ 1,674,088 $ 1,784,961
Note 6 – Note Payable and Accrued Interest
On February 10, 2021, the Company entered into a note payable with its current bank in the principal amount of ~~$270,000~~$514,200, for working capital purposes.
The loan amount bears interest at 1% and ~~accrued~~is due on February 5, 2026. The loan may be repaid in advance without penalty. The loan is also potentially forgivable in full provided proceeds are used for payment of payroll expenses, rent, utilities and mortgage interest ~~of $44,150. As of June 30, 2017, the Company had no convertible notes outstanding.~~
~~The Company has accounted for the Agreements as debt extinguishment where by the difference between the reacquisition price~~and certain other terms and conditions are met. If any portion of the ~~debt and~~loan is not forgiven, payments will commence 10 months following the ~~net carrying amount~~end of the ~~extinguished~~24-week deferral period. The loan has typical default provisions, including for change of ownership, general lender insecurity as to repayment, non-payment of amounts due, defaults on other debt ~~was recognized~~instruments, insolvency, dissolution or termination of the business as a ~~loss during the first quarter of 2017. The following details the calculation of the loss on extinguishment of the notes payable – series 2 in the first quarter of 2017:~~going concern and bankruptcy.
~~F-8~~
Carrying amount of debt
Principal converted $ 510,000
Accrued interest converted 134,553
Unamortized debt discount (5,398 )
Total carrying amount of debt 639,155
Reacquisition price of debt
Fair value of shares of common stock issued 995,155
Warrant modification value 59,000
Total reacquisition price of debt 1,054,155
Loss on extinguishment of debt $ (415,000 )
~~NOTE 3 – PROMISSORY NOTES~~
On February 9, 2017, the Company entered into a securities purchase agreement with two accredited investors pursuant to which the Company issued promissory notes in the aggregate original principal amount of $537,500. In addition, each investor received 125,000 shares, an aggregate of 250,000 shares, of the Company’s common stock. The notes were unsecured, had an interest rate of 6%, per annum and were originally due and payable, with all accrued interest, on November 9, 2017. The total proceeds were approximately $500,000 with an original issue discount of approximately $37,500. The Company allocated the cash proceeds amount between the debt and shares issued on a relative fair value basis. Based on relative fair value, the Company allocated approximately $461,000 and $39,000 to the promissory notes and the shares of common stock, respectively. The original issue discount of $37,500 and fair value of the shares issued of $39,000 were amortized and expensed over the life of the loans. ForDuring the three and nine months ended September 30, ~~2017, the amortization expense~~2021, interest of $1,296 and $3,268 was ~~approximately $11,000 and approximately $50,000, respectively. In the event~~accrued, respectively, in respect of a default under the terms of the promissory notes, the interest rate automatically increases to 18% per annum, until such time as the default event is cured. The events of default included suspension from trading of the Company’s common stock, failure to pay principal or interest when due, commencement of bankruptcy or insolvency proceedings or a change of control.this note payable.
On August 8, 2017, the Company executed an amendment (the “Amendment”) with the holders of the promissory notes, each in the original principal amount of $268,750. The Amendment provides for each of the holder’s notes to convert its principal into 2,800,000 shares, or 5,600,000 shares in the aggregate, of the Company’s common stock, at a price per share of approximately $0.096. The Company’s closing share price on August 7, 2017 was $0.135. In connection with this Amendment, the holders also agreed to surrender to the Company the portion of the promissory notes representing the accrued interest as the consideration for this Amendment, which approximates $16,900 in total. The transactions contemplated by the Amendment closed on August 22, 2017.
The Company has accounted for the Amendment as debt extinguishment whereby the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt was recognized as a loss during the third quarter of 2017. The following details the calculation of the loss on extinguishment of the notes payable in the third quarter of 2017:
Carrying amount of debt
Principal converted $ 537,500
Accrued interest converted 15,904
Unamortized debt discount (25,832 )
Total carrying amount of debt 527,572
Reacquisition price of debt
Fair value of shares of common stock issued 756,000
Loss on extinguishment of debt $ (228,428 )
15
~~F-9~~
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Note 7 – Commitments and Contingencies
~~NOTE 4 – COMMITMENTS AND CONTINGENCIES~~
Litigation
As of December 31, 2019, there were 6,750,000 restricted stock units that had not been settled due to a dispute with a former employee over the required withholding taxes to be paid to the Company for remittance to the appropriate tax authorities. The Company commenced an arbitration action against the former employee regarding the dispute. The former employee also made claims in the arbitration action against the Company for unpaid wages. As stated in a pleading in the arbitration, on March 9, 2020, the Company issued the former employee 6,750,000 shares of the Company’s common stock in settlement of these restricted stock units after taking measures to mitigate the Company’s exposure to penalties and liability for the failure to properly withhold income taxes. The Arbitrator issued an interim award of approximately $10,000 in the Company’s favor and a finding against the former employee. Effective June 9, 2020, the Arbitrator issued his final award in the Company’s favor in the Colorado arbitration. The Arbitrator found against the former employee and awarded the Company costs of $33,985, with interest at 8% per year. Effective July 22, 2020, the Colorado Court confirmed the Arbitration award and entered a final judgement in favor of the Company and against the former employee. The Company pursued collection of this debt and has now collected the debt owed. This former employee continued to pursue separate litigation against the Company for recovery of alleged consulting fees owed to him for the 2015 calendar year prior to his appointment as an executive officer of the Company. Effective March 30, 2021, this separate litigation has now been settled. While the Company disputed the merits of the claims, the Company has agreed and will be obliged to pay $40,000 over eight months and to issue upon execution of the settlement agreement an aggregate of 1,000,000 shares of common stock of the Company. These shares were issued on April 8, 2021 as “restricted securities,” subject to a lock-up agreement of six months, without registration rights, and pursuant to a private placement exemption and were valued at $67,000. The settlement agreement also included mutual releases and no admission of liability. The cost to the Company of this settlement, $107,000, in total, has been recognized in full in other expenses during the nine months ended September 30, 2021. As of September 30, 2021, $35,000 has been paid in respect of the $40,000 cash portion of the settlement and the remaining $5,000 is included in accounts payables and accrued liabilities. The issuance of the 1,000,000 shares of common stock, valued at $67,000 has been recognized in common stock issued during the nine months ended September 30, 2021.
From time to time, in the normal course of its operations, the Company is subject to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict, and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a liability for contingent losses when it is both probable that a liability has been incurred and the amount of the loss ~~can be reasonably estimated.~~is known. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.
~~Internal Revenue Service Penalties~~Leases
The Company has been penalized by the Internal Revenue Service for failure to file its Foreign Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, for the years 2009 through 2014 on a timely basis. The penalties approximate $115,000. The Company’s request that the penalties be abated was initially denied by the Internal Revenue Service. The Company is appealing and believes the likelihood of abatement is high based on reasonable cause. However, there can be no assurance of any abatement until the Internal Revenue Service acts upon the appeal.
~~Stock Options of Former CEO~~
In March 2017, a former CEO of the Company requested to exercise an option to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $.00024 per share. The stock option expired in March 2017.~~The Company’s Board of Directors (the “Board”) has not approved the request for the issuance of the common stock under the stock option.~~
~~New Building Lease~~
~~On June 27, 2017, the Company executed~~ a lease ~~to be effective September 29, 2017,~~agreement for its manufacturing and office space. ~~The term~~Refer to Note 2 Leases above.
Other Commitments
In the ordinary course of business, the Company enters into commitments to purchase inventory and may also provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the ~~lease commenced~~ Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers and employees, and former officers, directors, and employees of acquired companies, in certain circumstances.
16
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September ~~29, 2017~~30, 2021
(in US Dollars except share numbers)
(Unaudited)
Note 8 – Temporary Equity
Series B Redeemable Convertible Preferred Stock
On September 28, 2021, Surna Inc. (the “Company”) sold to an institutional investor (the “Investor”), 3,300 shares of Series B Convertible Preferred Stock, stated value $1,000 per share, currently convertible into 57,894,738 shares of common stock, and ~~continues through August 31, 2022.~~a warrant to purchase up to 28,947,368 shares of common stock (“Investor Warrant”), for an aggregate purchase price of $3,000,000 (“Consideration”). The Company will ~~occupy its current space at a rate~~receive net proceeds of ~~$12,967 per month until January 1, 2018. On January 2, 2018,~~approximately $2,625,000. The Company has received net proceeds of approximately $1,260,000 in the ~~space~~quarter and will ~~be expanded and~~receive the monthly rental rate will increase to $18,979 until August 31, 2018. Beginning September 1, 2018, the monthly rent will increase by 3% each year through the end of the lease. Pursuant to the lease, the Company made a security deposit of $51,000 on July 31, 2017 and received a $100,000 allowance for leasehold improvements. No leasehold improvements have been made as of September 30, 2017.
~~The following is a schedule by years of the minimum future lease payments on the building lease as of September 30, 2017.~~
Year ending December 31:
2017 $ 38,901
2018 230,026
2019 236,926
2020 244,034
2021 251,355
Later years 170,888
Total future minimum lease payments $ 1,172,130
~~F-10~~
~~NOTE 5 – RELATED PARTY TRANSACTIONS~~
~~Keen Consulting Agreement~~
On May 10, 2017, the Board approved a three-year consulting agreement between the Company and Stephen Keen, a principal shareholder of the Company and a former officer and director. Under the consulting agreement, Mr. Keen will provide certain consulting services to the Company including research and development, new product design and innovations, existing product enhancements and improvements, and other technology advancements with respect to the Company’s business and products in exchange for an annual consulting fee of $30,000. The consulting agreement also includes certain activity restrictions which prohibit Mr. Keen from competing with the Company. In connection with the execution of this consulting agreement, Mr. Keen resigned as a director of the Company on May 10, 2017. Mr. Keen’s employment with the Company ceased as of April 28, 2017. Pursuantremaining $1,365,000 pursuant to the terms of ~~this agreement,~~the escrow.
The Series B Preferred Stock has an annual dividend of 8% and has an initial common stock conversion price of $0.057. The conversion rate is subject to adjustment in various circumstances, including stock splits, stock dividends, pro rata distributions, fundamental transactions and upon a triggering event and subject to reset if the common stock of the Company ~~paid Mr. Keen $7,500 and $12,500 for~~sold in any subsequent equity transaction, including a qualified offering, is sold at a price below the ~~three and nine months ended September 30, 2017, respectively.~~
~~Sterling Pharms Equipment Agreement~~
~~On May 10, 2017,~~then conversion price. The Series B Preferred Stock is mandatorily convertible on the Board approved a three-year equipment, demonstration and product testing agreement between the Company and Sterling Pharms, LLC (“Sterling”), an entity controlled by Mr. Keen, which operates a Colorado-regulated cannabis cultivation facility currently under construction. Under this agreement, the Company has agreed to provide to Sterling certain lighting, environmental control, and air sanitation equipment for use at the Sterling facility in exchange for a quarterly fee of $16,500. Also, under this agreement, Sterling has agreed to allow the Company and its existing and prospective customers to have access to the Sterling facility for demonstration tours in a working environment, which the Company believes will assist it in the salethird anniversary of its products. Sterling has also agreed to monitor, test and evaluate the Company’s products installed at the Sterling facility and to collect data and provide feedback to the Company on the energy and operational efficiency and efficacyissuance. All conversions of the ~~installed products, which the Company intends~~Series B Preferred Stock are subject to use to improve, enhance and develop new or additional product features, innovations and technologies. In consideration for access to the Sterling facility to conduct demonstration tours and for the product testing and data to be provided by Sterling, thea blocker provision of 4.99%. The Company will ~~pay Sterling a quarterly fee~~reserve 200% of ~~$12,000.~~
As of September 30, 2017, Sterling Pharms had accepted substantially all the equipment under the agreement, but is in the process of completing the installation of the equipment. Pursuant to the terms of this agreement, the respective payments will begin upon the delivery and installation of the equipment.
In September 2017, the Company received a deposit from Sterling of $78,310 to purchase equipment unrelated to the lease. The Company purchased on behalf of Sterling additional equipment of $23,520 which is included in Other Receivables.
~~Independent Director Compensation Plan~~
On August 8, 2017, the Board approved a compensation plan for the Company’s independent directors effective for the election or appointment of independent directors on or after May 31, 2017. Under this compensation plan, the Company will pay the independent directors an annual fee of $60,000, payable quarterly in advance on the first business day of each quarter, covering any regular or special meetings of the Board or any committee thereof attended in person, any telephonic meeting of the Board or any committee thereof in which the director participated, any non-meeting consultations with the Company’s management, and any other services provided by them as a director (other than services as the Chairman of the Board and lead independent director and the Chairman of the Company’s Audit Committee). The annual fee is paid 50% in cash and 50% in shares of the Company’s common stock, with the number of shares of common stock into which the Series B Preferred Stock and Investor Warrant may be converted or exercised.
Pending completion of an amendment to the certificate of incorporation to increase the number of authorized shares of common stock and redeem the outstanding Series A Preferred Stock, as required by the Investor, $1,365,000 of the Consideration was placed in escrow. The Company filed a Schedule 14C to affect the amendment and expects the amendment process to be ~~determined based~~completed in early November, at which time the escrowed amount will be released to the Company. If the amendment process is not achieved by December 7, 2021, then the Company will redeem, at 120% of the stated value of $1,000 per share, 1,650 shares of the Series B Preferred Stock, and pay the dividend amount due thereon at 8% to the date of redemption. The Series B Preferred Stock will be redeemed at the demand by the holders, at 120% of the stated value of $1,000, at any time after the earlier of (x) the consummation by the Company of a qualified offering, or (y) the first anniversary of the issuance of the Series B Preferred Shares.
The Investor was granted a right of participation in future private offerings and has agreed to a 180-day lock-up in connection with a qualified offering. A “qualified offering” is the first public offering after the sale of the Series B Preferred Stock in which the common stock of the Company is listed on a national exchange.
The Investor Warrant may be exercised until September 28, 2024, at an initial exercise price of $0.063, subject to adjustment. The Investor Warrant provides for cashless exercise if the underlying shares of common stock are not registered for resale, and all issuances of common stock upon exercise are subject to a 4.99% blocker provision.
The Company granted the Investor registration rights for the shares of common stock underlying the Series B Preferred Stock and the Investor Warrants. The Company must file a registration statement no later than 180 days after the date of a qualified offering and have it effective in 45 days if there is no Securities and Exchange Commission (“SEC”) review, or if there is a review, within 75 days. The Company must keep the registration statement effective until all the shares registered have been sold or may be sold under Rule 144, without regard to volume and holding period restrictions.
The Company engaged ThinkEquity LLC (“ThinkEquity”) as its placement agent and paid a total cash fee of 9%, or $270,000, and its expenses, less prepaid expenses, and issued to ThinkEquity and its designees a warrant to purchase up to an aggregate of 5,210,526 shares of common stock. The exercise price of the warrant initially will be $0.0693 per share, subject to typical adjustment provisions, and exercisable for a term of three years. The warrant has registration rights.
17
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Probability of Redemption: As it was considered probable the Series B Preferred stock will become redeemable outside of the Company’s control, the Series B Preferred stock needs to be disclosed as temporary equity and restated at the balance sheet date at its redemption value of 120% the stated value of $1,000 per share, or $3,960,000. As a result, on September 30, 2021, the Company adjusted the carrying value of the Series B Preferred Stock to its redemption value of $3,960,000 and recorded a $2,262,847 non-cash redemption value adjustment. This redemption value adjustment is treated as similar to a dividend on the ~~closing price~~preferred stock for GAAP purposes; accordingly, the redemption value adjustment is therefore added to the “Net Loss” to arrive at “Net Loss Attributable to Common Shareholders’” on the Company’s Consolidated Statements of Operations. In addition, since the Company does not have a balance of retained earnings, the redemption value adjustment was recorded against additional paid-in capital.
Series B Redeemable Convertible Stock Subscription Receivable
Of the net proceeds of $2,624,874 receivable under the Securities Purchase Agreement relating to the Series B preferred stock and related warrants, $1,365,000 was put into escrow pending the completion of i) an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock to 850,000,000 shares, (ii) the redemption of the outstanding shares of Series A Preferred Stock of the Company for common stock at the rate of 1 share of common stock for each 100 shares of preferred stock that is currently issued and outstanding, (iii) the authorization of a reverse stock split of the common stock in connection with the listing of the common stock on ~~the date of issuance.~~
~~The Company pays the Chairman of the Board and lead independent director~~ an additional annual fee of $15,000, payable quarterly in advance. The Company pays the Audit Committee Chairman an annual fee of $15,000, payable quarterly in advance, for his services as the Audit Committee Chairman. There is no additional compensation paid to members of the Audit Committee.
~~F-11~~
~~At the time of initial election or appointment, each director also receives an equity retention award~~eligible market (as defined in the ~~form~~Purchase Agreement), and, if the number of ~~non-qualified stock options to purchase~~authorized shares of common stock is reduced in connection with such reverse stock split, the subsequent increase of the authorized shares of ~~common~~capital stock ~~or a combination thereof.~~
~~Employment Agreement with Current Chief Executive Officer~~
~~On September 6, 2017, the Board approved an employment agreement between~~of the Company ~~and its current Chief Executive Officer (“the CEO”), which included the grant of certain restricted stock units.~~
The initial term of the employment agreement commenced on August 17, 2017, the date of the CEO’s appointment, and will continue until December 31, 2019. However, the Company and the CEO may terminate the employment agreement,within established limits, at any time ~~with or without cause, by providing the other party with 30-days’~~ prior ~~written notice. In the event the CEO’s employment is terminated by the Company during the initial term without cause, the CEO will be entitled~~ to ~~receive his base salary for~~June 30, 2022, and (iv) an ~~additional 30 days. Following the initial term, the Company and the CEO may extend the employment agreement for additional one-year terms by mutual written agreement.~~
The CEO will receive an annualized base salary of $180,000. Beginning December 31, 2017 and for each six-month period through December 31, 2019, the CEO will also be eligible to receive a special bonus of 1,000,000 shares of the Company’s common stock, provided the Board has determined, in its sole discretion, that the CEO’s performance has been average or better for such special bonus period.
~~The Board also granted the CEO a total of 3,000,000 restricted stock units, which vest based on the CEO’s continued service and subject~~amendment to the ~~following performance thresholds: (i) 1,500,000 restricted stock units will vest on March 31, 2019 if~~articles of incorporation to change the ~~Company achieves 2018 revenue of $18,000,000, and (iii) 1,500,000 restricted stock units will vest on March 31, 2020 if the Company achieves 2019 revenue of $25,000,000.~~
In consideration of the grant of the restricted stock units and the eligibility for the special bonus, the CEO agreed to terminate and cancel the non-qualified stock options to purchase 900,000 shares of the Company’s common stock, which were granted to him as an equity retention award in connection with his appointment to the Board on August 8, 2017.
In the event of a change of control involving the Company, (i) any restricted stock units not already vested will become vested (other than those restricted stock units that were previously forfeited due to failure to meet the performance threshold), and (ii) any remaining special bonuses related to any bonus period ending after the date of the change of control will become due and payable, provided the CEO continues to provide services to the Company on the date immediately preceding the date of the change of control.
On August 8, 2017, the CEO was awarded 600,000 shares of the Company’s common stock in consideration of services rendered to the Company prior to his appointment as a director. These shares were fully vested at the time of the award.
~~Resignation of Former Chief Executive Officer~~
On August 17, 2017, the Company’s then current Chief Executive Officer (the “Previous CEO”) notified the Board of his resignation, including his resignation as a director, effective August 17, 2017.
On August 17, 2017, the Company and the Previous CEO entered into an employment agreement pursuant to which the Previous CEO will continue his employment as the Company��s Vice President Business Development – West Coast, a non-executive officer position. The Previous CEO will focus his efforts and use his industry knowledge to assist the Company in developing the significant market opportunities resulting from the recent legalization of cannabis for recreational use in the State of California. The initial term of the employment agreement commences on August 17, 2017 and continues until March 31, 2018. The employment agreement may be extended beyond the initial term upon the mutual agreementcorporate name of the Company ~~and~~to CEA Industries Inc. If these amendments are completed by December 7, 2021, then the ~~Previous CEO.~~remaining $1,365,000 funds held in escrow will be released to the Company.
~~On August 17, 2017, the Board also granted the Previous CEO a total~~Accordingly, as of ~~9,000,000 restricted stock units, which vest in twelve (12) equal installments (750,000 restricted stock units per installment) commencing~~September 30, 2021, these funds were disclosed as Series B Redeemable Convertible Stock Subscription Receivable on the ~~first business day~~Company’s consolidated balance sheet
Note 9 – Stockholders’ Deficit
Preferred Stock
As of ~~January 2018~~September 30, 2021, and ~~continuing on the first business day of each of the next eleven (11) calendar months, provided that the Previous CEO is employed by~~December 31, 2020, the Company ~~on such vesting date or, if~~has 150,000,000 shares authorized at a $0.00001 par value.
Series A Preferred Stock
As of September 30, 2021, and December 31, 2020, the ~~initial term under~~Company has 42,030,331 shares issued and outstanding at the ~~employment agreement has expired, the Previous CEO has not materially breached any non-competition, non-solicitation and other post-termination~~end of ~~employment obligations.~~both periods.
~~F-12~~
Series B Preferred Stock
~~NOTE 6 – SHAREHOLDERS’ EQUITY~~
~~Private Placement~~
~~In March 2017,~~On September 28, 2021, the Company entered into a Securities Purchase Agreement ~~(the “Agreement”~~(“Purchase Agreement”) with ~~certain accredited investors~~an institutional investor (the ~~“Investors”~~“Investor”)~~. The~~, pursuant to which the Investor purchased from the Company ~~issued an~~3,300 shares of Series B Preferred Stock with a stated value of $1,000 per share, or $3,300,000 of stated value in the aggregate ~~of 16,781,250 investment units (the “Units”~~(“Series B Preferred Stock”), ~~for aggregate gross proceeds of $2,685,000. Each Unit consisted of one share of the Company’s common stock~~ and ~~one warrant for the purchase of one share of the Company’s common stock; however, one investor declined receipt of the~~a warrant to purchase ~~468,750 shares of the Company’s common stock.~~
Pursuant to each of the warrants, the holder thereof may, subject to the terms of the warrant, at any time on or after six months after the date of the warrant and on or prior to the close of business on the date that is the third anniversary of the date of the warrant, purchase up to the number of shares of the Company’s common stock as set forth in the respective warrant. The exercise price per share of the common stock under each warrant is $0.26, subject to adjustment as provided in the warrant. Each warrant is callable at the Company’s option commencing six months from the date of the warrant, provided the Company’s common stock trades at a volume weighted average price (“VWAP”) of $0.42 or greater (subject to adjustment) for five consecutive trading days (the “Call Condition”). Commencing at any time after the date on which the Call Condition is satisfied, the Company has the right, upon 30 days’ notice to the holder given not later than 30 trading days after the date on which the Call Condition is satisfied, to redeem the number of warrant shares specified in the applicable Call Condition at a price of $0.01 per warrant share, subject to the terms of the warrant.
~~Equity Issued as Compensation for Services~~
~~Warrants Issued to Former Director~~
On May 31, 2017, in connection with the resignation of a former director, the Company agreed to issue the former director three individual warrants to purchase: (i) 900,000 shares (“Warrant 1”), (ii) 460,525 shares (“Warrant 2”), and (iii) 460,525 shares (“Warrant 3”) (collectively, the “Warrants”) of the Company’s common stock for a period of five years. Warrant 1 was granted on June 20, 2017, is fully vested, and can be exercised beginning December 21, 2017 at an exercise price of $0.114 per share with the option for a cashless exercise. Warrants 2 and 3 were granted on June 20, 2017, are fully vested, and can be exercised beginning December 21, 2017 at an exercise price of $0.0005 per share with the option for a cashless exercise. The Company recorded approximately $207,000 of compensation expense for the fair value the Warrants on the grant date. The fair value of the Warrants at the date of grant was determined using the Black-Scholes Option Pricing Model. The assumptions used in the Black-Scholes Option Pricing Model were term of the Warrants of 5 years, volatility rate of 119.96%, quarterly dividends 0%, and a risk-free interest rate of 1.77%.
~~Warrants Issued to Investment Bank~~
On June 18, 2017, for services rendered in connection with the conversion of the Original Notes, the Company issued to an investment bank or its designees a warrant (“Banker Warrant”) to purchase, at an exercise price $0.35 per share, 500,000 shares of the Company’s common stock for a period of three years. The Banker Warrants were fully vested on the date of issuance and may be exercised beginning December 20, 2017. The Company recorded approximately $55,000 of expense for the fair value the Banker Warrant on the date of issuance. The fair value of the Banker Warrants at date of issuance was determined using the Black-Scholes Option Pricing Model. The assumptions used in the Black-Scholes Option Pricing Model were term of the Banker Warrant of 3 years, volatility rate of 120.02%, rate of quarterly dividends 0% and a risk-free interest rate of 1.52%.
~~F-13~~
~~Common Shares Issued to Employee~~
~~During the first quarter of 2017, the Company issued to an employee 40,000~~28,947,368 shares of common stock ~~which were valued at approximately $9,000 on the date~~ of ~~issuance.~~
~~Common Shares Issued to Director~~
~~On March 14, 2017,~~ the Company ~~issued to its Chairman~~(“Investor Warrant”), for an aggregate purchase price of $3,000,000 (“Consideration”).
As a result of the ~~Board (the “Chairman”) 700,000~~PIPE Financing, referenced above and described in Note 8, the Company has 3,300 shares issued and outstanding as of September 30, 2021.
Common Stock
As of September 30, 2021, and December 31, 2020, the Company was authorized to issue 350,000,000 shares of common stock ~~as an equity retention award. These~~with a par value of $0.00001 per share.
Effective December 31, 2020, 236,526,638 shares ~~were valued, using the closing price for the Company’s~~of common stock were issued and outstanding.
18
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
During the nine months ended September 30, 2021, we issued 1,000,000 shares of common stock, valued at $67,000 as part of ~~the date~~a legal settlements further described in Note 7 – Commitments and Contingencies – litigation above.
Consequently, effective September 30, 2021, 237,526,638 shares of ~~ratification for total value of $122,000, which was expensed as compensation.~~common stock were issued and outstanding.
Note 10 – Equity Incentive Plans
~~2014 Stock Ownership~~2017 Equity Incentive Plan
As of December 31, 2016, the Company had non-qualified stock options to purchase 6,177,600 shares of the Company’s common stock, with an exercise price of $0.00024, outstanding under the 2014 Stock Ownership Plan of Safari Resource Group, Inc. (the “2014 Stock Plan”). Upon the adoption ofUnder the Company’s 2017 Equity Incentive Plan, as may be modified and amended by the Company from time to time (the “2017 Equity Plan”), ~~there will be no further awards under the 2014 Stock Plan.~~
In March 2017, in a private transaction, certain principal shareholders of the Company, assigned to the Previous CEO, non-qualified stock options to purchase 3,088,800 shares of the Company’s common stock outstanding under the 2014 Stock Plan. The principal shareholders informed the Company that they agreed to assign these options as an incentive (i) for the Previous CEO to complete the negotiations with the Company’s convertible noteholders to convert their notes into shares of the Company’s common stock, and (ii) for the Previous CEO to complete a private placement of the Company’s common stock. The Previous CEO thereupon delivered a purported notice of exercise of the options to the Company just prior to the expiration of the options. The Company erroneously reported in its Form 10-K for the year ended December 31, 2016 that the common stock underlying these options had been issued during the three months ended March 31, 2017. Prior to the Company’s acceptance of the notice of exercise and issuances of these shares in response thereto, in May 2017, the Previous CEO and the principal shareholders entered into a rescission agreement to nullify the March 2017 assignment transaction. Pursuant to their terms, the options have expired.
In March 2017, a former CEO of the Company, holding non-qualified options to 3,088,800 shares of the Company’s common stock outstanding under the 2014 Stock Plan, requested to exercise options with respect to 3,000,000 shares at an exercise price of $.00024 per share.~~The Board has not approved the request for the issuance of the common stock underlying these exercised options. All of these options expired in March 2017.~~
~~As of September 30, 2017, there are no options outstanding under the 2014 Stock Plan.~~
~~2017 Equity Incentive Plan~~
~~On August 1, 2017,~~ the Board adopted and approved the 2017 Equity Plan in order to attract, motivate, retain, and reward high-quality executives and other employees, officers, directors, consultants, and other persons who provide services to the Company by enabling such persons to acquire an equity interest in the Company. Under the 2017 Equity Plan, the Boardof Directors (the “Board”) (or the compensation committee of the Board, if one is established) may award stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock unit awards (“RSUs”), shares granted as a bonus or in lieu of another award, and other stock-based performance awards. The 2017 Equity Plan allocates 50,000,000 shares of the Company’s common stock (“Plan Shares”) for issuance of equity awards under the 2017 Equity Plan. AsIf any shares subject to an award are forfeited, expire, or otherwise terminate without issuance of such shares, the shares will, to the extent of such forfeiture, expiration, or termination, again be available for awards under the 2017 Equity Plan.
2021 Equity Incentive Plan
On March 22, 2021, the Board approved the 2021 Equity Incentive Plan (the “2021 Equity Plan”), which was approved by the stockholders on July 22, 2021. The 2021 Equity Plan permits the Board to grant awards of up to 100,000,000 shares of common stock. The 2021 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), non-qualified stock options, stock appreciation rights (“SARs”), restricted stock awards and restricted stock unit awards and other equity linked awards to our employees, consultants and directors. If an equity award (i) expires or otherwise terminates without having been exercised in full or (ii) is settled in cash (i.e., the holder of the award receives cash rather than stock), such expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of common stock that may be issued pursuant to this Plan.
During the nine months ended September 30, ~~2017,~~2021, the Company ~~has~~issued no shares of its common stock.
During the nine months ended September 30, 2021, the Company granted awards for 3,266,570 non-qualified stock options as described below. Of the total awards granted, 3,035,800 were under the 2017 Equity Plan ~~awards in~~and 230,770 were issued under the ~~form restricted~~2021 Equity Plan.
As of September 30, 2021, of the 50,000,000 shares ~~for services rendered by independent directors and consultants, non-qualified stock options and RSUs.~~
Equity-based compensation costs are classified in the Company’s consolidated financial statements in the same manner as if such compensation was paid in cash. The following is a summary of equity-based compensation costsauthorized under the 2017 Plan for equity awards, 24,553,818 shares have been issued, awards related to 24,399,800 options remain outstanding, and 1,046,382 shares remain available for future equity awards. As of September 30, 2021, of the 100,000,000 shares authorized under the 2021 Equity Plan, ~~included~~230,770 relate to outstanding options and 99,769,230 shares remain available for future equity awards.
There was $90,255 in ~~the Company’s consolidated statements of operations for the three and nine months ended September 30, 2017:~~
~~F-14~~
Three months Nine months
Equity-based compensation expense included in:
Cost of revenue $ 38,104 $ 38,104
Advertising and marketing expenses 7,259 7,259
Product development costs 2,640 2,640
Selling, general and administrative expenses 578,151 877,856
Total equity-based compensation expense included in consolidated statement of operations $ 626,154 $ 925,859
Equity-based compensation expense is reduced for forfeitures as the forfeitures occur since the Company does not have historical data or other factors to appropriately estimate the expected employee terminations and to evaluate whether particular groups of employees have significantly different forfeiture expectations.
~~The total~~ unrecognized compensation expense for unvested ~~equity-based compensation awards~~non-qualified stock options at September 30, ~~2017, was $1,304,660,~~2021 which will be recognized over approximately ~~2.25~~3 years. This unrecognized compensation expense does not include the potential future compensation expense related to equity awards which are subject to vesting based on certain revenue and bookings thresholds for 2017, 2018 and 2019 being satisfied (the “Performance-based Awards”). As of September 30, 2017 and the grant date, the Company has determined that the likelihood of performance levels being obtained is remote.
~~Restricted Stock Awards~~
On August 8, 2017, the CEO was awarded 600,000 shares of restricted stock under the 2017 Equity Plan in consideration of services rendered to the Company prior to his appointment as a director. These restricted shares were fully vested at the time of the award and the value attributable to these shares, which were issued in August 2017, was $84,000 as calculated using the fair value of the Company’s common stock on August 7, 2017. See Note 5 – Related Party Transactions – Employment Agreement with Current Chief Executive Officer.
On August 8, 2017, the Company awarded 111,113 restricted shares under the 2017 Equity Plan to independent directors in lieu of the payment of cash fees earned during the second quarter of 2017. These restricted shares were fully vested at the time of the award. The value attributable to these shares, which were issued in August 2017, was $15,000 as calculated using the fair value of the Company’s common stock on August 7, 2017. As of September 30, 2017, the independent directors are owed cash fees of $15,000 which will be paid in the form of fully vested restricted shares in November 2017.
On August 8, 2017, the Company awarded 260,778 restricted shares under the 2017 Equity Plan to a consultant who provided corporate and financial services to the Company. These restricted shares were awarded in lieu of cash fees earned for the April, May, June and July 2017 and were fully vested at the time of the award. The value attributable to these shares, which were issued in August 2017, was $35,000 as calculated using the fair value of the Company’s common stock on August 7, 2017. As of September 30, 2017, the consultant is owed cash fees of $15,000 which will be paid in the form of fully vested restricted shares in November 2017.
On September 6, 2017, the Company awarded 1,200,000 restricted shares under the 2017 Equity Plan to an employee as compensation. These restricted shares were fully vested at the time of the award. The value attributable to these shares, which were issued in October 2017, was $134,280 as calculated using the fair value of the Company’s common stock on September 6, 2017. These shares are reflected as shares to be issued in the Company’s Statement of Changes in Shareholders’ Equity (Deficit).
19
~~F-15~~
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Non-Qualified Stock Options
On August 8, 2017, the Board granted to certain independent directors non-qualified stock options, under the 2017 Equity Plan, to purchase a total of 1,800,000 shares of the Company’s common stock at an exercise price of $0.135 per share for a period of ten years. These options vest 50% on date of grant and the remaining 50% on March 1, 2018, provided they are still serving as a director on such date. On August 17, 2017, one of these independent directors was appointed the CEO and, in consideration of the grant of the restricted stock units and the eligibility for the special bonus, the CEO agreed to terminate and cancel the non-qualified stock options to purchase 900,000 shares of the Company’s common stock previously granted to him.
During the third quarter of 2017, the Board granted to certain employees non-qualified stock options, under the 2017 Equity Plan, to purchase a total of 12,355,000 shares of the Company’s common stock at an exercise price equal to the closing market price of the Company’s common stock on the day before the grant. The terms of the options are summarized as follows:
~~(a)~~ Non-qualified stock options to purchase 1,805,000 shares at an exercise price of $0.135 per share granted to certain employees on August 8, 2017, which vest based on the employee’s continued service over 2.75 years, as follows: (i) 661,672 options will vest if the employee remains employed at various dates during 2017, (ii) 571,665 options will vest if the employee remains employed at various dates during 2018, and (iii) 571,663 options will vest if the employee remains employed at various dates during 2019, and have a term of 10 years. As of September 30, 2017, non-qualified stock options to purchase 60,000 shares have expired.
~~(b)~~ Non-qualified stock options to purchase 1,300,000 shares at an exercise price of $0.121 per share granted to a former employee on August 17, 2017, which were fully vested on the grant date and have a term of three years.
~~(c)~~ Non-qualified stock options to purchase 1,200,000 shares at an exercise price of $0.135 per share granted to certain employees on August 8, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i) 400,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for the year end December 31, 2017, (ii) 400,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii) 400,000 options will vest if the Company achieves 2019 revenue of $25,000,000.
~~(d)~~ Non-qualified stock options to purchase 4,050,000 shares at an exercise price of $0.121 per share granted to certain employees on August 17, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i) 800,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for the year end December 31, 2017, (ii) 1,300,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii) 1,950,000 options will vest if the Company achieves 2019 revenue of $25,000,000.
~~(e)~~ Non-qualified stock options to purchase 4,000,000 shares at an exercise price of $0.112 per share granted to an employee on September 9, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i) 750,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for the year end December 31, 2017, (ii) 1,250,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii) 2,000,000 options will vest if the Company achieves 2019 revenue of $25,000,000.
~~The Company uses theBlack-Scholes~~ Option Pricing Model to determine the fair value of options granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility and the expected term of options. Changes in the subjective input assumptions can materially affect the fair value estimate. The expected stock price volatility assumptions are based on the historical volatility of the Company’s common stock over periods that are similar to the expected terms of grants and other relevant factors. The Company derives the expected term based on historical experience and other relevant factors concerning expected employee behavior with regard to option exercise. The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected term calculated at the date of grant. The Company has never paid any cash dividends on its common stock and the Company has no intention to pay a dividend at this time; therefore, the Company assumes that no dividends will be paid over the expected terms of option awards.
~~F-16~~
The Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options granted throughout the year. The valuation assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility 117.13% - 120.6%; expected term in years 5.0 - 7.5 and risk free interest rate 1.71% - 2.07%
A summary of the non-qualified stock options granted to employees and consultants under the2017 Equity Plan~~as of September 30, 2017, and changes~~ during the nine months ~~then~~ ended September 30, 2021, are presented in the table below:
Schedule of Stock Option Activity
Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value ($000) Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value

Outstanding as of December 31, 2016 - $ - - -
Outstanding, December 31, 2020 14,251,000 $ 0.083 8.3 $ -
Granted 12,355,000 0.121 9.9 - 3,035,800 $ 0.085 10.0 $ -
Exercised - - - - -
Forfeited - - - - (287,000 ) $ 0.122 6.6 $ -
Expired (60,000 ) 0.135 9.9 - -
Outstanding as of September 30, 2017 12,295,000 0.121 9.9 -
Expected to vest as of September 30, 2017 3,045,000 0.129 9.9 -
Outstanding, September 30, 2021 16,999,800 $ 0.083 7.9 $ -
Exercisable, September 30, 2021 15,249,800 $ 0.085 7.7 $ -
~~As of~~During the nine months ended September 30, ~~2017,~~2021, we issued a total of ~~the~~3,035,800 stock options to ~~purchase 12,295,000 shares outstanding,~~employees as follows:
● 1,035,800 stock options were issued to 21 employees in respect of the Company’s 2020 Annual Incentive Awards. The options vested immediately, have a term of 10 years and an exercise price of $0.13.
● 2,000,000 stock options were issued to our newly appointed Chief Financial Officer. The options vest as follows: 250,000 vested immediately, 417,000 on June 30, 2022, 665,000 on June 30, 2023 and 668,000 on June 30, 2024. The options have a term of 10 years and an exercise price of $0.061.
● During the nine months ended September 30, 2021, 287,000 fully vested stock options were forfeited following the departure of 3 former employees.
A summary of non-vested non-qualified stock options ~~to purchase 9,250,000 shares~~activity for employees and consultants under the 2017 Equity Plan for the nine months ended September 30, 2021, are ~~performance-based and~~presented in the ~~Company has determined that~~table below:
Summary of Non-vested Non-qualified Stock Option Activity
Number of Options Weighted Average Grant-Date Fair Value Aggregate Intrinsic Value Grant-Date Fair Value

Nonvested, December 31, 2020 - $ - $ - $ -
Granted 3,035,800 $ 0.082 $ - $ -
Vested (1,285,800 ) $ 0.112 $ 66,412 $ -
Forfeited - $ -
Expired - $ -
Nonvested, September 30, 2021 1,750,000 $ 0.061 $ - $ 104,800
For the ~~likelihood of performance levels being obtained is remote as of the date of grant~~nine months ended September 30, 2021 and September 30, ~~2017. Based on~~2020, the ~~low level~~Company recorded $29,881 and $171,624 as compensation expense related to vested options issued to employees and consultants, net of ~~obtaining the performance level, the fair value of these performance-based options was negligible as of the grant date and~~ forfeitures, respectively.
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Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, ~~2017.~~2021
(in US Dollars except share numbers)
(Unaudited)
A summary of the non-qualified stock options granted to ~~the~~ directors under the2017 Equity Plan~~as of September 30, 2017,~~ and ~~changes~~the 2021 Equity Plan, during the nine months ~~then~~ ended September 30, 2021, are presented in the table below:
Schedule of Stock Option Activity
Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value ($000) Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value ($000)

Outstanding as of December 31, 2016 - $ - - -
Outstanding, December 31, 2020 7,400,000 $ 0.067 7.5 $ -
Granted 1,800,000 0.135 9.9 - 230,770 $ 0.065 10.0 $ -
Exercised - - - - -
Forfeited/Cancelled (900,000 ) 0.135 9.9 - -
Expired - - - - -
Outstanding and expected to vest as of September 30, 2017 900,000 0.135 9.9 -
Outstanding, September 30, 2021 7,630,770 $ 0.067 6.8 $ -
Exerciseable, September 30, 2021 7,630,770 $ 0.067 6.8 $ -
~~F-17~~
~~The total fair value of vested options issued to employees and directors and recorded as compensation expense was $303,000 and $371,000 for~~During the ~~three and~~ nine months ended September 30, 2021, we issued 230,770 non-qualified stock options to directors as retroactive compensation for the first half of 2021 under the 2021 Equity Plan.
A summary of non-vested non-qualified stock options activity for directors under the 2017 ~~respectively. Compensation expense~~Equity Plan and the 2021 Equity Plan, for the nine months ended September 30, ~~2017 includes $68,000 for cancelled options.~~2021, are presented in the table below:
Summary of Non-vested Non-qualified Stock Option Activity
Number of Options Weighted Average Grant-Date Fair Value Aggregate Intrinsic Value Grant-Date Fair Value

Nonvested, December 31, 2020 1,000,000 $ 0.029 $ 31,000 $ -
Granted 230,770 0.065 $ (1,154 ) $ -
Vested (1,230,770 ) $ 0.036 $ (29,846 ) $ -
Forfeited -
Expired -
Nonvested, September 30, 2021 - $ - $ -
~~Restricted Stock Units~~
~~On August 8, 2017,~~During the Company awarded 700,000 restricted stock units to the Chairman based on the retention agreement between the Company and the Chairman entered into in March 2017 prior to his appointment. These restricted stock units will vest on March 1, 2018, provided he remains a director on such date, and will be settled by the issuance of one share of common stock for each vested restricted stock unit.
On June 12, 2017, the Company entered into a consulting agreement for a sales and business development services. The consulting term ended on September 1, 2017. The consultant was compensated with an award of 200,000 restricted stock units, which vested on the following dates: 66,667 units on July 7, 2017, 66,667 units on August 4, 2017 and 66,666 units on September 1, 2017. Each vested restricted stock unit will be settled by the issuance of one share of common stock. The Company will account for these restricted stock units using the graded vesting method with the total value of the restricted stock units calculated on the date the shares of common stock are issued to the consultant. For accounting purposes, the restricted stock units will be revalued at each reporting date with the final value being the date the shares of common stock are issued to the consultant. The Company recorded an expense of $17,000 and $21,000 for the three and nine months ended September 30, 2017, respectively. The Company issued 200,000 shares of common stock to settle the vested restricted stock units on October 3, 2017 which are reflected as shares to be issued in the Company’s Statement of Changes in Shareholders’ Equity (Deficit).
~~During the third quarter of 2017, the Company also issued 12,700,000 restricted stock units to employees as follows:~~
~~(a)~~ On August 17, 2017, the Company granted 700,000 restricted stock units to certain employees which vest at various times during the first quarter of 2018, provided the employee remains employed as of the vesting date.
~~(b)~~ On August 17, 2017, the Company granted to the Previous CEO 9,000,000 restricted stock units, which vest in 12 equal installments (750,000 restricted stock units per installment) commencing on the first business day of January 2018 and continuing on the first business day of each of the next 11 calendar months, provided that the Previous CEO is employed by the Company on such vesting date or, if the initial term under the employment agreement has expired, the Previous CEO has not materially breached any non-competition, non-solicitation and other post-termination of his employment obligations.
~~(c)~~ On September 6, 2017, the Company granted 3,000,000 restricted stock units to the CEO, which vest based on the CEO’s continued service and subject to the following performance thresholds: (i) 1,500,000 restricted stock units will vest if the Company achieves 2018 revenue of $18,000,000, and (ii) 1,500,000 restricted stock units will vest if the Company achieves 2019 revenue of $25,000,000.
~~All of the foregoing restricted stock unit awards will be settled by the issuance of one share of common stock for each vested restricted stock unit.~~
A summary of the restricted stock units awarded to employees, directors and consultants under the 2017 Equity Plan as September 30, 2017 and changes during the period then ended, are presented in the table below:
Number of Units Weighted Average Grant-Date Fair Value

Unvested as of December 31, 2016 - $ -
Granted 13,600,000 0.122
Vested (1,828,000 ) 0.132
Forfeited - -
Unvested as of September 30, 2017 11,772,000 0.121
Expected to vest as of September 30, 2017 8,772,000 $ 0.123
~~F-18~~
As of September 30, 2017, of the unvested 11,772,000 restricted stock units, 3,000,000 restricted stock units are performance-based and the Company has determined that the likelihood of performance levels being obtained is remote as of the date of grant2021 and September 30, ~~2017. Based on~~2020, the ~~low level of obtaining the performance level, the fair value of these performance-based restricted stock units was negligible as of the grant date~~Company incurred $21,174 and ~~September 30, 2017.~~
.
~~The total fair value of the vested restricted stock units issued to employees, directors and consultants and recorded~~$55,970, respectively, as compensation expense ~~was $214,000~~related to 1,230,770 and ~~$239,000 for the three and nine months ended September 30, 2017, respectively.~~1,521,352 vested options, respectively, issued to directors.
~~NOTE 7 – SUBSEQUENT EVENTS~~
Unless disclosed elsewhere within the Notes to Unaudited Condensed Consolidated Financial Statements, the following significant subsequent events occurring after September 30, 2017 are discussed below.
Effective June 24, 2020~~Equity~~,
~~In October 2017,~~ the Company issued 1,400,000 shares of the Company’s common stock, which were classified as shares to be issued as of September 30, 2017, consisting of 1,200,000 restricted shares issued as compensation to an employee and 200,000 restricted units issued to a consultant as compensation which were settled by the issuance of 200,000 shares.
~~On October 10, 2017, the Board granted~~2 million non-qualified stock options under the 2017 Equity Plan to ~~certain~~newly appointed directors. The options vested 50% upon grant and 50% on April 1, 2021, if the Director remained on the Board up to that time. The options have a term of 5 years and have an exercise price equal to the closing price of the Company’s common stock on The OTC Markets on the day immediately preceding the grant date.
Effective August 20, 2021, the Company issued 230,770 non-qualified stock options under the 2021 Equity Plan to its directors. The options vested upon grant. The options have a term of 10 years and an exercise price equal to the closing price of the Company’s common stock on The OTC Markets on the day immediately preceding the grant date.
Restricted Stock Units
There has been no activity related to RSUs during the nine months ended September 30, 2021.
The Company recorded $25,163 during the nine months ended September 30, 2020, as compensation expense related to vested RSUs issued to employees, directors and consultants.
Effective April 30, 2020, 800,000 RSUs vested. However, the holder elected to cancel the RSUs.
21
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Note 11 - Warrants
The following table summarizes information with respect to outstanding warrants to purchase ~~175,000 shares~~common stock during the nine months ended September 30, 2021:
Schedule of Outstanding Warrants to Purchase Common Stock
Weighted Weighted Average
Average Remaining Aggregate
Number Exercise Life Intrincic
Outstanding Price In Months Value

Outstanding at December 31, 2020 7,562,500 $ 0.25 6 $ 0

Issued 34,157,894 $ 0.06 36 -

Exercised - - - -

Expired (7,562,500 ) $ 0.25 - $ 0

Outstanding at September 30, 2021 34,157,894 $ 0.06 36 $ 0
The following table summarizes information about warrants outstanding at September 30, 2021:
Schedule of Warrants Outstanding
Weighted Average Life of
Warrants Outstanding Warrants
Exercise price Outstanding In Months

0.063 28,947,368 36

0.069 5,210,526 36
34,157,894 36
Effective June 30, 2021, 7,562,500 warrants issued in connection with our Q2 2018 unit offering expired unexercised.
Effective September 28, 2021, we issued 28,947,368 warrants with an exercise price of ~~$0.105 per share,~~$0.063 and a 3-year term to the Holders of our Series B redeemable convertible preferred stock and 5,210,526 warrants with an exercise price of $0.0693 and a 3-year term to the placement agent in respect of the sale of the Series B redeemable convertible preferred stock. See Note 8.
Note 12 – Income Taxes
As of September 30, 2021, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $20,260,000, of which ~~vest over the next 2.75 years.~~
~~On October 10, 2017, the Board awarded an employee 200,000 restricted stock units, under the 2017 Equity Plan, which vest~~$11,196,261 will expire, if not utilized, in the ~~second quarter~~years 2034 through 2037, however, NOLs generated subsequent to December 31, 2017 do not expire but may only be used against taxable income to 80%. In response to the novel coronavirus COVID-19, the Coronavirus Aid, Relief, and Economic Security Act temporarily repealed the 80% limitation for NOLs arising in 2018, 2019 and 2020. Pursuant to Section 382 of ~~2018.~~
~~On November 7, 2017,~~ the ~~Board awarded an employee 200,000 restricted stock units, under~~Internal Revenue Code of 1986, as amended, use of the ~~2017 Equity Plan, which vest~~Company’s NOLs carryforwards may be limited in the ~~second quarter~~event of ~~2018.~~cumulative changes in ownership of more than 50% within a three-year period.
22
~~On November 7, 2017,~~Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
The Company must assess the ~~Board awarded a total of 104,896 restricted shares, which were immediately vested,~~likelihood that its net deferred tax assets will be recovered from future taxable income, and to the ~~independent directors in lieu of cash fees of $15,000 earned during the third quarter of 2017.~~
On November 7, 2017, the Board awarded a total of 143,707 restricted shares, which were immediately vested, to a consultant in lieu of cash fees of $20,500 earned in August, September and October of 2017.
~~Employment Agreement with Principal Shareholder~~
~~On October 10, 2017, the Board approved an employment agreement between~~extent the Company ~~and~~believes that recovery is not likely, the Company establishes a ~~principal shareholder,~~valuation allowance. Management’s judgment is required in determining the Company’s ~~Vice President, Secretary~~provision for income taxes, deferred tax assets and ~~Senior Technical Advisor.~~liabilities, and any valuation allowance recorded against the net deferred tax assets. The ~~employment agreement superseded~~Company recorded a full valuation allowance as of September 30, 2021 and ~~replaced an employment agreement between~~December 31, 2020. Based on the available evidence, the Company ~~and such principal shareholder dated July 25, 2014, which expired by~~believes it is more likely than not that it will not be able to utilize its terms on July 25, 2017. The initial term of the employment agreement commenced on October 1, 2017 and continues until December 31, 2019. However, the Company and such principal shareholder may terminate the employment agreement, at any time, with or without cause, by providing the other party with 30-days’ prior written notice. In the event such principal shareholder’s employment is terminated by the Company during the initial term without cause, such principal shareholder will be entitled to receive her base salary for an additional 30 days. Following the initial term, the Company and such principal shareholder may extend the employment agreement for additional one-year terms by mutual written agreement. Such principal shareholder will receive an annualized base salary of $150,000. During the initial term, such principal shareholder will be eligible to participatenet deferred tax assets in the ~~Company’s sales incentive program for sales personnel, as in effect~~foreseeable future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and ~~as amended from time to time by the Company (the “Sales Program”). In connection~~judgments about its future taxable income that are based on assumptions that are consistent with the ~~Sales Program, such principal shareholder will be entitled to a sales incentive equal to one-quarter of one percent (0.25%) of~~Company’s plans. Should the ~~revenue collected and earned~~actual amounts differ from the Company’s ~~sales, payable quarterly~~estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.
Note 13 – Related Party Transactions
The company entered into a manufacturer representative agreement with RSX Enterprises in ~~arrears. Subject~~March 2021 to become a non-exclusive representative for the Company to assist in marketing and soliciting orders. James R. Shipley, a current director of the Company, has a significant ownership interest in RSX.
Under the manufacturer representative agreement, RSX will act as a non-exclusive representative for the Company within the United States, Canada and Mexico and may receive a commission for qualified customer leads. The agreement has an initial term through December 31, 2021 with automatic one-year renewal terms unless prior notice is given 90 days prior to each annual expiration. During the three months ended September 30, 2021, the Company paid $26,873 in commissions under this agreement.
Note 14 – Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company has evaluated all subsequent events through the date the financial statements were available to be issued. No material subsequent events occurred after September 30, 2021, other than as set out below:
On November 3, 2021, we increased our authorized capital to one billion shares of capital stock, of which 850,000,000 are designated as common stock and 150,000,000 are designated as preferred stock.
On November 3, 2021, we were authorized to redeem the outstanding Series A Preferred Stock, which was completed on November 4, 2021.
On November 4, 2021, we received the remaining $1,365,000 from escrow in relation to the approval of the independent members of the Board, such principal shareholder may be eligible to participate in the 2017 Equity Plan. The independent members of the Board have not approved such principal shareholder’s participation in the 2017 Equity Plan, and such principal shareholder has not been granted, nor does such principal shareholder hold, any equity awards under thereunder.Series B Preferred Stock.
23
~~F-19~~

~~Designation of Principal Financial and Accounting Officer~~
On October 16, 2017, Dean S. Skupen notified the Board of his resignation as the Company’s Director of External Reporting and designated Principal Financial and Accounting Officer. The Company’s Chief Financial Officer will serve as the Company’s new designated Principal Financial and Accounting Officer.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion ~~of our financial condition and results of operations~~ should be read in conjunction with ~~the~~our unaudited condensed consolidated financial statements and ~~the~~ related notes included elsewhere in this ~~Form 10-Q,~~Quarterly Report, which include additional information about our accounting policies, practices, and the transactions underlying our financial results, as well as with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020, as filed with the SEC. In addition to ~~our~~ historical ~~unaudited condensed consolidated financial~~ information, the following discussion ~~contains~~and other parts of this Quarterly Report contain forward-looking ~~statements~~information that ~~reflect our plans, estimates,~~involves risks and ~~beliefs.~~uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Cautionary Statements” appearing elsewhere herein and the risks and uncertainties described or identified in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated from time to time in the ~~forward-looking statements. Factors that could cause or contribute to these differences include those discussed below~~Company’s filings with the SEC, and ~~elsewhere in this Form 10-Q, particularly in~~ Part II, Item 1A of this Quarterly Report entitled “Risk Factors.”
~~Overview~~Non-GAAP Financial Measures
To supplement our financial results on U.S. generally accepted accounting principles (“GAAP”) basis, we use non-GAAP measures including net bookings, backlog, as well as adjusted net income (loss) which reflects adjustments for certain non-cash expenses such as stock-based compensation, certain debt-related items and depreciation expense. We ~~develop,~~believe these non-GAAP measures are helpful in understanding our past performance and are intended to aid in evaluating our potential future results. The presentation of these non-GAAP measures should be considered in addition to our GAAP results and are not intended to be considered in isolation or as a substitute for financial information prepared or presented in accordance with GAAP. We believe these non-GAAP financial measures reflect an additional way to view aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. For purposes of this Quarterly Report, (i) “adjusted net income (loss)” and “adjusted operating income (loss)” mean GAAP net income (loss) and operating income (loss), respectively, after adjustment for non-cash equity compensation expense, debt-related items and depreciation expense, and (ii) “net bookings” means new sales contracts executed during the quarter for which we received an initial deposit, net of any adjustments including cancellations and change orders during the quarter.
Our backlog, remaining performance obligations and net bookings may not be indicative of future operating results, and our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in the backlog or remaining performance obligations will actually generate revenues or when the actual revenues will be generated.
Overview
Surna Inc. is an engineering and design company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture (CEA) industry. We leverage our experience in this space to bring value-added technology solutions to our customers that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements. In service of the CEA industry, our principal service and product offerings include: (i) architectural design and ~~distribute~~licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) LED lighting, benching and racking solutions for indoor cultivation, (v) automation and control devices, systems and technologies used for ~~controlled environment agriculture (“CEA”).~~environmental, lighting and climate control, and (vi) preventive maintenance services for CEA facilities. Our customers include ~~state-regulated~~commercial, state- and provincial-regulated CEA growers in the U.S. and Canada and other international locations. Customers are those growers building new facilities and those expanding or retrofitting existing facilities. Currently, our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities operating in the cannabis ~~cultivation~~industry, ranging from several thousand to more than 100,000 square feet.
Headquartered in Colorado, we leverage our experience in this space to bring value-added climate control solutions to our customers that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements.
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All CEA facility operators are facing multiple headwinds of high energy costs, issues about water usage and waste materials, and, in the case of cannabis growing, increasingly rigorous quality standards and declining cannabis prices. To be competitive, among other things, our customers must develop innovative ways to meet the demands of their business and reduce energy costs, 90% of which is typically related to their HVACD (50%) and lighting systems (40%). HVACD systems have historically been our focus, but in May of 2021, we announced an initiative to expand our offerings to include most of the technical infrastructure of CEA facilities as well as ~~traditional indoor agricultural~~maintenance services. We often have the advantage of early engagement with our customers at the pre-build and construction phases and the corresponding opportunity to build longer-term relationships with our existing customers and their facilities. Going forward, our plan is to leverage our existing customer relationships and attempt to sell them additional products and services, thereby becoming “stickier” to our customers.
We have three core assets that we believe are important to our going-forward business strategy. First, we have multi-year relationships with customers and others in the CEA industry, notably in the cannabis segment. Second, we have specialized engineering know-how and experience gathered from designing environmental control systems for CEA cultivation facilities ~~including organic herb and vegetable producers. Our technologies include~~since 2016. Third, we have a ~~comprehensive~~ line of ~~application-specific lighting,~~proprietary environmental control ~~air sanitation, and cultivation facilities. These technologies~~products, which we are ~~designed to meet~~in the ~~specific~~process of expanding.
We are an integrated provider of MEP (mechanical, electrical, plumbing) engineering design, proprietary environmental ~~conditions required for CEA and reduce energy and water consumption. In addition, Surna offers mechanical design services specific to hydronic cooling, including mechanical~~control equipment, and ~~piping design.~~
~~Our standard~~controls and automation offerings serving the CEA ~~project consists~~industry. Historically, nearly all of ~~small chillers, fan-coils, and dehumidifiers,~~our customers have been in the ~~major equipment items which we manufacture. Other required equipment items typically consist of large chillers, pumps, air separators and expansion tanks which we purchase from outside vendors.~~cannabis cultivation business. We believe our ~~core competency~~employees have more experience than most other MEP firms serving this industry. Our customers engage us for their environmental and climate control systems because they want experts to design their facilities, and they come to us because of our reputation. We leverage our reputation and know-how against the many local contractors and MEP engineers who collectively constitute our largest competitors.
Shares of our common stock are traded on the OTC Markets under the ticker symbol “SRNA.”
Impact of the COVID-19 Pandemic on Our Business
The COVID-19 pandemic has prompted national, regional, and local governments, including those in the markets that the Company operates in, to implement preventative or protective measures to control its spread, but as a result, there have been disruptions in business operations around the world, with an impact on our business.
In our response to the COVID-19 pandemic and the government and business response, the Company took and continues to take measures to adjust its operations as necessary. In early 2020 the Company took measures to reduce expenses in light of reduced orders and to preserve cash, many of which were reversed by the end of the year when orders picked up and the overall business climate improved. Because the pandemic continues in different parts of the world and in different ways in the United States, the Company continues to actively monitor its operations and sales efforts and will make adjustments to its operations as necessary.
We are experiencing unexpected and uncontrollable delays with our international supply of products and shipments from vendors due to a significant increase in shipments to U.S. ports, less cargo being shipped by air, a general shortage of containers, and domestic truck driver availability. While these delays have moderately improved in recent months, we, along with many other importers of goods across all industries, continue to experience severe congestion and extensive wait times for carriers at ports across the United States. In addition, restrictions imposed by local, state and federal agencies due to the COVID-19 pandemic has led to reduced personnel of importers, government staff and others in our supply chain. We have been working diligently with our network of freight partners and suppliers to expedite delivery dates and provide solutions to reduce further impact and delays. However, we are unable to determine the full impact of these delays and how long they will continue as they are out of our control.
While the Company is continuing to ~~provide integration services~~navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, the potential uncertainty related to and proliferation of new strains, and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of our control and cannot be predicted at this time.
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Our Corporate Strategy
The three key pillars of our corporate strategy for ~~these equipment items delivering a fully engineered, turn-key, single-source solution~~growing the Company and increasing shareholder value are:
1 – Pursue aggressive organic growth; and
2 – Seek strategic relationships, mergers, and acquisitions to add to our ~~customers.~~existing business; and
3 – Pursue an uplisting to a national exchange and seek additional growth capital.
~~This integrated, single-sourced solution can create gross profit margin fluctuations depending on project design~~
Pursue aggressive organic growth. We serve a market for the construction and expansion of controlled environment agriculture (CEA) facilities and businesses that is projected to grow at a 20%+ compound annual growth rate for the mix between our proprietary equipment, which typically generates a higher gross profit margin, and the equipment manufactured by outside vendors. Further, quarterly fluctuations in gross profit margins can occur based on the timing of a project’s needs for our manufactured equipment versus third party manufactured equipment.
~~The demand for our integrated solution, including engineering design, proprietary equipment and third party manufactured equipment, is primarily based on the new construction~~foreseeable future. Our primary vertical market of cannabis cultivation facilities has been joined by the similarly rapidly growing urban vertical farming market to create two market opportunity segments that we are positioned to serve.
In May of 2021 we announced a new strategy for our organic growth, which included:
New markets. We decided to expand our business development plan to pursue non-cannabis CEA facilities, at least doubling our total addressable market.
New products & services. We decided to expand our product offerings from primarily environmental control to now offer all of the primary technologies and services required in a CEA facility: architectural design, lighting, benching, HVACD, sensing & control systems, CO₂ dosing and control, water filtration & condensate reclamation, irrigation & fertigation systems, and wastewater treatment.
New trade name. In May of 2021 we adopted the trade name Surna Cultivation Technologies. because we believe that the new name will more clearly identify our business to prospects and make us easier to find on various social media and search engines.
Our primary objective in expanding our service and product offerings is to improve our customers’ operations and sustainability, increase customer acquisition, and enhance our revenue and revenue recurrence.
Customer Operations – first and foremost we seek to help our customers build the most effective and efficient facility possible. We believe that we are uniquely positioned to engineer all of the complex components of a CEA facility into a holistic whole because of our dedicated engineering staff and our experience in over 800 projects including over 200 commercial facilities. Our 15 years in the ~~U.S. and Canada. Due to continued uncertainty~~business has provided us a wide network of technology vendors from which we curate a selection of the ~~cannabis industry following~~best products. In addition, we are the ~~U.S. Justice Department’s announcement~~leading experts in applying the most challenging component of ~~its opposition~~the technical infrastructure, the environmental controls, and we have the knowledge required to ~~legalized cannabis~~engineer the interactions among the required components. A professional engineer (PE) license is not required for the design of any other component in ~~early 2017, we believe there may be some delay in new cannabis~~the facility and this engineering knowledge is one of our greatest strengths.
Sustainability – indoor cultivation facilities, ~~by potential customers.~~
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~~Recent and anticipated regulatory~~like data centers, are resource intensive. Several US states have implemented building code changes ~~involving medicinal and/or recreational cannabis use in various jurisdictions, such as California, tend to be a leading indicator for~~that place limits on the ~~granting of licenses for new facility construction. As more new~~energy consumption allowed within cultivation facilities, ~~become licensed,~~and we ~~in turn have an expanded set of opportunities and customers to whom~~anticipate that more states will ~~can potentially sell~~do the same. Among our ~~systems.~~
For 2017, we are focused on: (i) new facility construction in California where recreational cannabis use was approved in November 2016, and (ii) in Canada where medicinal use is federally legal, and the federal government has signaled its intention to legalize recreational adult use in 2018.
Our marketing efforts are generally targeted to those persons who are actively seeking licenses to produce cannabis and, in many cases, our engineering services are needed for the completion of license applications. As such, the projects we quote may not advance to the contract stage due to either a failure of our prospect to receive licensure or to obtain project financing. In other cases, the successful licensee was either unknown to us at the time of application or elected to use a competing technology – rooftop duct system or traditional split air conditioning system – as opposed to our ductless hydronic system.
While our typical project sales contract is non-cancellable, there are risks that we may not realize the full contract value in a timely manner or at all. Completion of a sales contract is dependent upon our customers’ ability to secure, license and build their growing facility and take possession of the equipment. In order to address these risks, we have three key milestones built into our contracts.
● First, we provide our customer with engineering plans for which we require an upfront deposit before we begin our services. In many cases, the engineering phase is done as part of the license application or building permit process, represents on average approximately 10% of the total contract value, and takes approximately four to six weeks to complete. We previously required a larger initial deposit that covered engineering and initial equipment items; however, beginning in early 2017, we began offering our customers a lower initial deposit for engineering only. Our strategyobjectives is to ~~secure the sales contract and commence the engineering portion of the project earlier, which is important for a number of reasons: (i) we can assist~~provide our customers with the most energy-efficient alternatives for their infrastructure. Energy and resource efficiency is a high priority to us as engineers, and our most senior engineering staff hold the LEED (Leadership in Energy and ~~design plans as part of their licensing application process, (ii)~~Environmental Design) credential. Our CEO previously helped build a cleantech company, has been involved in the cleantech industry for over five years, and published a book on selling energy efficient technologies. We believe that we are ~~better positioned~~in a position to ~~utilize~~lead the industry in sustainability initiatives which our ~~technology~~customers will highly value.
Customer Acquisition – By offering Facility Selection & Design services we seek to build relationships with prospects at the earliest opportunity in the lifecycle of the cultivation business. By expanding our offerings to include nearly every piece of the technical infrastructure required in a facility we hope to engage at the earliest possible moment with the customer and earn the opportunity to provide all the products and services required for the ~~project at an earlier stage,~~facility. Our post-start-up, lifecycle services will help us maintain a relationship with the customer as long as the facility is in operation. Our observation is that our customers want to grow plants, not maintain the technical infrastructure of complex systems, and ~~(iii)~~we believe that they will accept our offer to do so, as some already have.
Revenue and Revenue Recurrence – We believe that our revenue can be expanded by offering most of the primary technical infrastructure components for a cultivation facility. For example, if we are able to ~~help reduce the customer’s time to market.~~
~~● Second, upon completion~~provide all of the primary infrastructure components to a cultivation facility, our revenue on a project could be up to 200% higher than if we provided the environmental controls systems alone. In the past we did not have products or services to offer our customers after a facility was constructed. We have recently begun to offer maintenance services, and we believe that by expanding this service offering we will be able to gain long-term recurring revenue on a subscription basis.
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Seek strategic relationships, mergers, and acquisitions to add to our existing business. We enjoy wide brand recognition in the cannabis cultivation industry because of our longevity in the market segment (15 years) and the number of cultivation projects (800+, including over 200 projects for commercial facilities) we have served. Our core expertise is engineering ~~phase, it may take our customer on average five months to complete~~ the ~~facility build-out, with possible delays~~environmental controls of these facilities, which is a sophisticated engineering challenge due to ~~financing or other aspects which~~the high humidity (latent heat) and heat load (sensible heat) within these facilities. Not only are ~~beyond our control. Customer delays in obtaining financing and completing facility build-out make~~ the ~~timing of completion of our sales contract unpredictable. For our protection, before we begin manufacturing our proprietary equipment items, we require an upfront deposit~~loads high, but the environmental conditions within these facilities must be held closely within limits that ~~brings~~ the ~~total~~facility’s managers request. Engineering to ~~approximately 50%~~meet these limits requires us to consider all of the ~~contract value.~~
~~● And third,~~primary components within the ~~last phase of our contract involves procurement~~facility: lighting, irrigation, HVACD, fertigation, sensors, controls, CO₂dosing, monitoring and ~~drop-ship delivery of third party manufactured equipment items~~alarms, facility physical limits such as power availability, and ~~commissioning~~energy consumption. We believe that the expertise gained in working with many of the ~~system after installation, performed by third parties, is completed. We undertake this step only upon payment~~primary components provides us with a uniquely well-informed view of the ~~third and final deposit~~efficacy of the ~~remaining 50%~~many primary components on offer in the marketplace. We further believe that this knowledge will help us make wise choices of which products to pursue for strategic relationships, and which providers to potentially merge with or acquire. For smaller component providers we believe that our publicly traded platform and our existing sales and marketing reach will make us an attractive partner.
Pursue an uplisting to a national exchange and a growth-supporting capital raise. We are seeking an uplist to a national securities exchange and plan to pursue a capital raise to provide us the resources to aggressively pursue the growth of the ~~contract value.~~business and to fulfill our corporate strategy. In 2019 our revenue grew 60% year-over-year, and we had our first-ever cash flow positive year. Despite the challenges brought on by the COVID-19 pandemic in the first half of 2020, we believe that our revenue growth in 2019 and then in the Q3 2020 – Q3 2021 period validates our market opportunity and our business model. We also recognize that the costs of being a small public company are substantial and require cash that could otherwise be used to sustain and grow the business. We believe that there is only one solution to this issue: rapid revenue and margin growth. We believe that we have growth opportunities, but we are capital constrained and must seek outside financing to pursue the growth we believe we can achieve.
~~Given~~Our Commercial-Scale Projects
During the ~~timing~~first nine months of 2021, we entered into contracts with a value over $100,000, which we refer to as major commercial-scale projects. These new contracts totaled $11,136,000, which consisted of $9,311,000 for new build projects (84%), $1,459,000 for retrofit projects (13%), and $366,000 for expansion projects (3%).
Our Bookings, Backlog and Revenue
During the ~~deliverables of our~~three months ended September 30, 2021, we executed new sales contracts we can experience large variances in quarterly revenue. Our revenue recognition is dependent upon shipment of the equipment portions of our sales contracts, which, in many cases, may be delayed while our customers complete permitting or preparation of their facilities for equipment installation.
~~As of September 30, 2017, the unearned~~with a total contract value of $5,693,000. During this same period, we had positive change orders of $395,000 and cancellations of $488,000. The cancellations were based on discussions with customers who have abandoned their projects. After adjustments for these change orders and cancellations, our net bookings in the three months ended September 30, 2021 were $5,600,000, representing an increase of $4,680,000 (or 509%) from net bookings of $919,000 in the second quarter of 2021.
Our backlog at September 30, 2021 was $9,881,000, an increase of $1,894,000, or 24%, from June 30, 2021. The increase in backlog is the result of our higher net bookings in the third quarter. Our backlog at September 30, 2021 includes booked sales orders of $1,250,000 (13% of the total backlog) from several customers that we do not expect to be realized until late 2022. We believe the sales orders in this portion of our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled by our customers. Therefore, investors should not view backlog as earned revenue.
The following table sets forth: (i) our beginning backlog (the remaining contract value of outstanding sales contracts for which we have received an initial deposit ~~increased to $4,311,000 (“Q3 2017 backlog”). Our Q3 2017 backlog consists of: (i) $1,972,000~~as of the previous period), (ii) our net bookings for the period (new sales contracts executed during the period for which we received an initial deposit, net of any adjustments including cancelations and change orders during the period), (iii) our recognized revenue for the period, and (iv) our ending backlog for the period (the sum of the beginning backlog and net bookings, less recognized revenue).
For the quarter ended
September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021
Backlog, beginning balance $ 5,592,000 $ 8,198,000 $ 8,448,000 $ 11,578,000 $ 7,987,000
Net bookings, current period $ 4,241,000 $ 3,637,000 $ 5,497,000 $ 919,000 $ 5,600,000
Recognized revenue, current period $ 1,635,000 $ 3,387,000 $ 2,367,000 $ 4,510,000 $ 3,706,000
Backlog, ending balance $ 8,198,000 $ 8,448,000 $ 11,578,000 $ 7,987,000 $ 9,881,000
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The completion of a customer’s new build facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes for these customers to complete a new build project, which corresponds to when we are able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays that are typical in completing any construction project.
As has historically been the case for the Company at each quarter-end, there remains significant uncertainty regarding the timing of revenue recognition of our backlog as of September 30, 2021. As of September 30, 2021, 12% of our backlog was attributable to customer contracts for which we have only received an initial advance payment to cover our engineering services (“engineering only paid contracts”). There are always risks that the equipment portion of our engineering only paid contracts will not be completed or will be delayed, which could occur if the customer is dissatisfied with the quality or timeliness of our engineering services, there is a delay or abandonment of the project due to the customer’s inability to obtain project financing or licensing, or the customer determines not to proceed with the project due to economic factors, such as declining cannabis wholesale prices in the state.
In contrast, after the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial equipment paid contracts”), we typically are better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. As of September 30, 2021, 88% of our backlog was attributable to partial equipment paid contracts.
We have provided an estimate in our condensed consolidated financial statements for when we expect to recognize revenue on our remaining performance obligations (i.e., our Q3 2021 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts. There continues to be significant uncertainty regarding the timing of our recognition of revenue on our Q3 2021 backlog. Refer to the Revenue Recognition section of Note 1 in our condensed consolidated financial statements, included as part of this Quarterly Report for additional information on our estimate of future revenue recognition on our remaining performance obligations.
Our backlog, remaining performance obligations and net bookings may not be indicative of future operating results, and our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including delays in or inability to obtain project financing or licensing or abandonment of the project entirely. Accordingly, there can be no assurance that contracts included in backlog or remaining performance obligations will generate revenues or when the revenues will be generated. Net bookings and backlog are considered non-GAAP financial measures, and therefore, they should be considered in addition to, rather than as a substitute for, our GAAP measures for recognized revenue, deferred revenue and remaining performance obligations. Further, we can provide no assurance as to the profitability of our contracts reflected in remaining performance obligations, backlog and net bookings.
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Results of Operations
Comparison of Three Months Ended September 30, 2021 and 2020
Revenues and Cost of Goods Sold
Revenue for the three months ended September 30, ~~2017, and (ii)~~2021 was $3,706,000, compared to $1,635,000 for the ~~remaining $2,339,000 is attributable~~three months ended September 30, 2020, representing an increase of $2,072,000, or 127%. The increase was primarily due to ~~prior quarters. About 45%~~equipment revenue which included several of our ~~Q3 2017 backlog (up~~new product offerings consisting of our custom air handlers, SentryIQ™ controls products, our expanded dehumidifier offering and DX split systems, among others. The increase was also due to a COVID-19-driven slowdown impacting revenue for the three months ended September 30, 2020.
Cost of revenue increased by $1,851,000, or 167%, from ~~30%~~$1,109,000 for the three months ended September 30, 2020 to $2,959,000 for the three months ended September 30, 2021. The increase was primarily due to an increase in ~~Q2 2017) is attributable~~revenue and a decrease in equipment margin as discussed below.
The gross profit for the three months ended September 30, 2021 was $747,000 compared to ~~projects~~$526,000 for ~~which we have not received a further deposit on our proprietary equipment and,~~the three months ended September 30, 2020, an increase of 42%. Gross profit margin decreased by twelve percentage points from 32% for the three months ended September 30, 2020 to 20% for the three months ended September 30, 2021 due to an increase in variable costs as a ~~result, there are potential risks~~percent of revenue principally driven by a one-time reversal of our excess and obsolete inventory reserve in 2020, offset by a decrease in fixed costs as a percent of revenue, as described below.
Our fixed costs (which include engineering, service, manufacturing and project ~~cancellation~~management salaries and benefits and manufacturing overhead) totaled $337,000, or ~~delay.~~9% of total revenue, for the three months ended September 30, 2021 as compared to $281,000, or 17% of total revenue, for the three months ended September 30, 2020. The increase of $56,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of $55,000.
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Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $2,622,000, or 71% of total revenue, in the three months ended September 30, 2021 as compared to $827,000, or 51% of total revenue, in the three months ended September 30, 2020. The increase in ~~our Q3 2017 backlog is attributable~~variable costs was primarily due to: (i) an increase of $197,000 for excess and obsolete inventory expense primarily related to ~~new contracts awarded~~a Q2 2020 charge for the delay and potential cancellation of one customer’s project which was subsequently reversed and revenue recognized in the third quarter ~~totaling $2,385,000, bringing~~of 2020, (ii) an increase in warranty expense of $64,000, (iii) an increase in travel expense of $36,000, (iv) an increase in shipping and handling costs of $7,000, offset by (v) a decrease in outside engineering of $14,000.
We continue to focus on gross margin improvement through a combination of, among other things, more disciplined pricing, better absorption of our ~~total new sales contracts awarded~~fixed costs as we convert our bookings into revenue, and the implementation over time of lower-cost supplier alternatives.
Operating Expenses
Operating expenses increased to $1,190,000 for the three months ended September 30, 2021 from $809,000 for the three months ended September 30, 2020, an increase of $381,000, or 47%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $232,000, (ii) an increase in advertising and marketing expenses of $135,000, and (iii) an increase in product development expenses of $14,000.
The increase in SG&A expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, was primarily due to: (i) an increase of $78,000 for commissions, (ii) an increase of $73,000 for investor relations expenses, (iii) an increase in salaries, benefits and other employee related expenses of $56,000, (iv) an increase of $27,000 for facility, office and other expenses, (v) an increase for business taxes, licenses and fees of $17,000, (vi) an increase in fees paid to our Board members of $8,000, offset by (vii) a decrease in depreciation of $13,000, and (viii) a decrease in stock related compensation for employees, consultants and directors of $12,000.
The increase in marketing expenses was primarily due to (i) an increase in expenses for trade shows of $59,000, (ii) an increase in advertising and promotion of $46,000, (iii) an increase in salaries and benefits (including stock compensation) of $41,000, (iii) an increase in travel of $7,000, offset by (iv) a decrease in expenses related to web development and other outside services of $18,000.
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The increase in product development costs was due to (i) an increase in material costs of $11,000, and (ii) an increase in salaries and benefits (including stock compensation) of $3,000.
Operating Income (Loss)
We had an operating loss of $443,000 for the three months ended September 30, 2021, as compared to an operating loss of $283,000 for the three months ended September 30, 2020, an increase of $160,000, or 57%. The operating loss for the three months ended September 30, 2021 included $29,000 of non-cash, stock-based compensation and $16,000 of depreciation and amortization expense, compared to $56,000 of non-cash, stock-based compensation and $28,000 of depreciation and amortization expense for the three months ended September 30, 2020. Excluding these non-cash items, our operating loss increased by $199,000, or 100%.
Other Income (Expense)
We had other income (net) of $35,000 for the three months ended September 30, 2021 compared to other income (net) of $12,000 for the three months ended September 30, 2020. Other income for the three months ended September 30, 2021 consisted of rental income from the sub-lease of a portion of our facility. Other income for the three months ended September 30, 2020 was storage fees paid by a customer during the delay of their project.
Net Income (Loss)
Overall, we had a net loss of $408,000 for the three months ended September 30, 2021 as compared to a net loss of $270,000 for the three months ended September 30, 2020, an increase of $137,000, or 51%. The net loss for the three months ended September 30, 2021 included $29,000 of non-cash, stock-based compensation and $16,000 of depreciation and amortization expense, compared to $56,000 of non-cash, stock-based compensation and $28,000 of depreciation and amortization expense for the three months ended September 30, 2020. Excluding these non-cash items, our net loss increased by $177,000, or 95%.
Comparison of Nine Months Ended September 30, 2021 and 2020
Revenues and Cost of Goods Sold
Revenue for the nine months ended September 30, ~~2017~~2021 was $10,582,000, compared to ~~$7,182,000. However, based~~$5,127,000 for the nine months ended September 30, 2020, representing an increase of $5,455,000, or 106% due to strong bookings in the first quarter of 2021 along with a COVID-19-driven slowdown impacting revenue for the nine months ended September 30, 2020.
Cost of revenue increased by $4,339,000, or 112%, from $3,870,000 for the nine months ended September 30, 2020 to $8,208,000 for the nine months ended September 30, 2021 primarily due to the increase in revenue.
The gross profit for the nine months ended September 30, 2021 was $2,374,000 compared to $1,257,000 for the nine months ended September 30, 2020, an increase of 89%. Gross profit margin decreased by two percentage points from 24.5% for the nine months ended September 30, 2020 to 22.4% for the nine months ended September 30, 2021 primarily due to an increase in variable costs as a percent of total revenue, offset by a decrease in fixed costs as a percent of total revenue.
Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled $1,032,000, or 10% of total revenue, for the nine months ended September 30, 2021 as compared to $864,000, or 17% of total revenue, for the nine months ended September 30, 2020. The increase of $168,000 was due to an increase in salaries and benefits (including stock-based compensation) of $174,000, offset by a decrease in fixed overhead of $6,000.
Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled $7,177,000, or 68% of total revenue, in the nine months ended September 30, 2021 as compared to $3,006,000, or 59% of total revenue, in the nine months ended September 30, 2020. The increase in variable costs was primarily due to higher equipment costs as a result of higher revenue and a reduction in the selling price of our equipment resulting in lower equipment margins. Other factors included: (i) an increase in warranty of $167,000 which was partially the result of a reimbursement in 2020 from a customer for costs incurred in 2019 related to a failure later deemed to be non-warranty, (ii) an increase in travel of $71,000, offset by (iii) a decrease in outside engineering services of $65,000, (iv) a decrease in other variable costs of $29,000 related to project management consulting services incurred in 2020, (v) a $24,000 decrease in excess and obsolete inventory, and (vi) a decrease in shipping and handling of $9,000.
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We continue to focus on gross margin improvement through a combination of, among other things, more disciplined pricing, better absorption of our fixed costs as we convert our increased bookings into revenue, and the implementation over time of lower-cost supplier alternatives.
Operating Expenses
Operating expenses increased to $3,386,000 for the nine months ended September 30, 2021, from $3,092,000 for the nine months ended September 30, 2020, an increase of $294,000, or 10%. The operating expense increase consisted of: (i) an increase in advertising and marketing expenses of $236,000, (ii) an increase in selling, general and administrative expenses (“SG&A expenses”) of $40,000, and (iii) an increase in product development expense of $19,000.
The increase in marketing expenses was primarily due to (i) an increase in advertising and promotion expense of $98,000, (ii) an increase in salaries and benefits (including stock compensation) of $86,000, (iii) an increase of $65,000 for expenses related to trade shows, offset by (iv) a decrease in outside services and other marketing expenses of $11,000.
The increase in SG&A expenses for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was due primarily to: (i) an increase of $148,000 for commissions, (ii) an increase in salaries, benefits and other employee related costs of $107,000, (iii) an increase of $98,000 for investor relations expenses, (iv) an increase in facilities, office and other expenses of $32,000, (v) an increase in business taxes, licenses and fees of $19,000, offset by (vi) a decrease of $204,000 in stock related compensation expense to employees, consultants and directors, (vii) a decrease in bad debt of $70,000, (viii) a decrease of $37,000 for depreciation, (ix) a decrease of $27,000 in accounting and other professional fees, and (x) a decrease in cash paid for directors’ fees of $15,000.
The increase in product development costs was due to an increase in materials costs of $35,000 offset by a decrease in salaries and benefits (including stock compensation) of $17,000.
Operating Income (Loss)
We had operating loss of $1,012,000 for the nine months ended September 30, 2021, as compared to an operating loss of $1,835,000 for the nine months ended September 30, 2020, a decrease of $822,000, or 45%. The operating loss for the nine months ended September 30, 2021 included $160,000 of non-cash, stock-based compensation and $49,000 of depreciation expense, compared to $354,000 of non-cash, stock-based compensation and $86,000 of depreciation expense for the nine months ended September 30, 2020. Excluding these non-cash items, our operating loss decreased by $591,000, or 42%.
Other Income (Expense)
We had other income (net) of $76,000 for the nine months ended September 30, 2021 compared to other income (net) of $12,000 for the nine months ended September 30, 2020. Other income for the nine months ended September 30, 2021 primarily consisted of income of $138,000 related to the Employee Retention Credit as part of the CARES act, $48,000 for rental income from the sub-lease of a portion of our facility, offset by $107,000 in expense related to the settlement of litigation with a former employee and $3,000 for interest expense. Other income for the nine months ended September 30, 2020 consisted of approximately $24,000 in storage fees charged to a customer due to the delay of their project, offset by interest expense.
Net Income (Loss)
Overall, we had net loss of $936,000 for the nine months ended September 30, 2021 as compared to a net loss of $1,822,000 for the nine months ended September 30, 2020, a decrease of $886,000, or 49%. The net loss for the nine months ended September 30, 2021 included $160,000 of non-cash, stock-based compensation, $67,000 of other stock-based expense (related to the settlement of litigation with a former employee), and $49,000 of depreciation expense, compared to $354,000 of non-cash, stock-based compensation and $86,000 of depreciation expense for the nine months ended September 30, 2020. Excluding these non-cash items, our net loss decreased by $722,000, or 52%.
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Financial Condition, Liquidity and Capital Resources
Cash, Cash Equivalents and Restricted Cash
As of September 30, 2021, we had cash and cash equivalents of $2,284,000, compared to cash and cash equivalents of $2,285,000 as of December 31, 2020, a nominal decrease. The $1,000 decrease in cash and cash equivalents during the nine months ended September 30, 2021, was primarily the result of cash used in our operating activities of $1,761,000, offset by proceeds from the sale of Series B preferred stock and warrants (net of issuance costs) of $1,260,000 via a PIPE financing concluded in September 2021 and proceeds from a note payable of $514,000. Our cash is held in bank depository accounts in certain financial institutions. During the nine months ended September 30, 2021, we held deposits in financial institutions that exceeded the federally insured amount. During the nine months ended September 30, 2021, the Company transferred a balance of $180,000 into a new bank account which was to be used for the sole purpose of paying certain warranty claims. The balance on this restricted bank account as of September 30, 2021 was $0.
As of September 30, 2021, we had accounts receivable (net of allowance for doubtful accounts) of $32,000, inventory (net of excess and obsolete allowance) of $480,000, and prepaid expenses of $1,143,000 (including $879,000 in advance payments on inventory purchases). While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability especially since most of our customers are funded on an as-needed basis to complete facility construction. We expect our exposure to accounts receivable risk to increase as we continue to pursue larger projects.
As of September 30, 2021, we had total accounts payable and accrued expenses of $1,674,000, deferred revenue of $3,060,000, accrued equity compensation of $109,000, other current liabilities of $37,000 and the current ~~status~~portion of operating lease liability of $238,000. As of September 30, 2021, we had a working capital deficit of $1,164,000, compared to a working capital deficit of $2,220,000 as of December 31, 2020. The decrease in our ~~outstanding sales contracts, we believe at least 50%~~working capital deficit was primarily related to (i) a decrease in deferred revenue of $665,000, (ii) an increase in inventory of $153,000, (iii) a decrease in accounts payable and accrued liabilities of $110,000, and (iv) an increase in prepaid expenses of $106,000.
We have never declared or paid any cash dividends on our ~~Q3 2017 backlog could be recognized as revenue in Q4 2017.~~
~~During Q3 2017, we began implementing a two-tiered sales model. The first tier involves direct sales efforts in various regions across the U.S. and Canada.~~common stock. We currently ~~have three employees assigned~~intend to ~~direct sales~~retain all available funds and one employee assigned to inside sales. The second tier involves utilization of our two technical advisors and their expertise to complement the direct sales efforts. In furtherance of this new model, our previous Chief Executive Officer shifted his focus to developing the California market (including his physical relocationany future earnings for use in the ~~state)~~operation and ~~he now serves as our Vice President of Business Development – West Coast. We expect his industry experience combined with his knowledge~~expansion of our business ~~to help us capture market share~~and do not anticipate paying any cash dividends in the ~~largest growth area in the U.S. We have also hired, or intend to hire, additional direct sales personnel~~foreseeable future.
Summary of Cash Flows
The following summarizes our approximate cash flows for the ~~East Coast, Pacific Northwest~~nine months ended September 30, 2021 and ~~other North American markets.~~2020:

For the Nine Months Ended
September 30,

2021 2020
Net cash used in operating activities $ (1,761,000 ) $ 600,000
Net cash used in investing activities (14,000 ) (4,000 )
Net cash provided by financing activities 1,774,000 554,000
Net decrease in cash $ (1,000 ) $ 1,150,000
Operating Activities
We ~~are continuing our efforts to increase our bookings~~incurred a net loss for the nine months ended September 30, 2021 of ~~new sales contracts~~$936,000 and ~~grow our revenue. Specifically, we are: (i) in the process~~have an accumulated deficit of upgrading our lead generation and business development system, (ii) overhauling our project management processes, (iii) continuing to build our direct sales team with more experienced personnel, (iv) reallocating sales territories to allow the sales personnel to focus on individual regional needs and to become more personally involved in their markets, and (v) implementing improved management information systems to increase sales pipeline visibility and the associated accountability for each direct salesperson. We also recently developed a sales quotation tool reducing the time it takes to prepare detailed system proposals. We anticipate this tool will also shorten the learning curve$28,380,000 as of our new sales personnel. We are realizing the benefits of a preferred pricing program recently received from one of our major equipment suppliers, who awarded us national account status. As new jurisdictions continue to ease regulation of cannabis and larger scale projects become more prevalent as the market matures and investment capital becomes more readily available, we believe we are well positioned to address the new challenges and opportunities the market presents.September 30, 2021.
Nonetheless, the ever-changing nature of our sales and the needs of our customers make it difficult for us to predict when we will recognize revenue. We continue to remain focused on increasing our sales contract backlog and quoting larger projects in an effort to increase revenue.
Since the second quarter of 2017, we have allocated more resources to improving our internal project management process in an effort to shorten the time period from the execution of a sales contract to commissioning of the customer’s system. Commissioning is the last step of the installation process of our system, where we require our customers to pay to have our representatives and representatives from our suppliers on site to initially start the system, balance the equipment, achieve the designed temperature and identify any installation issues. We have worked to improve our internal and external kick-off meetings for smoother transition from sales contact execution to project management and from project management to commissioning. Processes and documentation have been established and integrated with our CRM system to allow us to more efficiently identify and manage project execution.
For example, we created customer project launch documentation to ensure all necessary information is timely conveyed and received, project scheduling and timing is adhered to, invoice and billing systems are accurate, equipment delivery and installation are completed on time, and project commissioning meets our desires and those of our customer. We have also initiated a weekly project tracking update document depicting a visual representation of the current progress and milestones of each customer’s project, which is delivered to our sales and project management teams as well as the customer’s project and management teams. This tracking communicates current status, pending activities and next steps, supplier involvement and key issues needing attention. While we believe our efforts in improving project management can lead to earlier completion our customers’ projects, external factors outside of our control, such as the customers’ ability to secure, license, finance and build their growing facility, can significantly impact the delivery and customer installation of our equipment.
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Cash used in operations for the nine months ended September 30, 2021 was $1,761,000 compared to cash provided by operations of $600,000 for the nine months ended September 30, 2020, an increase in cash usage of $2,361,000.
The increase in cash used in operating activities during the nine months ended September 30, 2021 was primarily attributable to: (i) a decrease in cash used to fund working capital of $3,087,000, (ii) a decrease in net loss of $886,000, and (iii) a decrease of $160,000 in non-cash operating charges.
The significant changes in working capital related to: (i) a decrease in deferred revenue (which represents cash received from customers in advance of the performance of services or the delivery of equipment) of $665,000, (ii) an increase in inventory of $153,000, (iii) a decrease in accounts payable and accrued liabilities of $111,000, and (iv) an increase in prepaid expenses of $106,000.
The significant change in non-cash operating charges was due to (i) a decrease in share-based compensation of $202,000, (ii) a decrease in depreciation and amortization expense of $36,000, and (iii) an increase in other share-based compensation of $67,000.
Investing Activities
The $14,000 cash used in investing activities during the nine months ended September 30, 2021 was related to the purchase of property and equipment of $15,000, offset by proceeds from the sale of property equipment of $1,000. Cash used in investing activities during the nine months ended September 30, 2020 was related to the purchase of property and equipment of $4,000.
Financing Activities
Cash flows from financing activities during the nine months ended September 30, 2021, was the result of cash proceeds from the sale of preferred stock and warrant (net of issuance costs) of $1,260,000. Additionally, the Company entered into a note payable with its current bank in the principal amount of $514,000, for working capital purposes. During the nine months ended September 30, 2020, the Company entered into a note payable with its current bank in the principal amount of $554,000, for working capital purposes.
Series B Preferred Stock PIPE Financing
On September 28, 2021, Surna Inc. (the “Company”) sold to an institutional investor (the “Investor”), 3,300 shares of Series B Convertible Preferred Stock, stated value $1,000 per share, currently convertible into 57,894,738 shares of common stock, and a warrant to purchase up to 28,947,368 shares of common stock (“Investor Warrant”), for an aggregate purchase price of $3,000,000 (“Consideration”). The Company will receive net proceeds of approximately $2,625,000.
The Series B Preferred Stock has an annual dividend of 8% and has an initial common stock conversion price of $0.057. The conversion rate is subject to adjustment in various circumstances, including stock splits, stock dividends, pro rata distributions, fundamental transactions and upon a triggering event and subject to reset if the common stock of the Company sold in any subsequent equity transaction, including a qualified offering, is sold at a price below the then conversion price. The Series B Preferred Stock is mandatorily convertible on the third anniversary of its issuance. All conversions of the Series B Preferred Stock are subject to a blocker provision of 4.99%. The Company will reserve 200% of the number of shares of common stock into which the Series B Preferred Stock and Investor Warrant may be converted or exercised.
Pending completion of an amendment to the certificate of incorporation to increase the number of authorized shares of common stock and redeem the outstanding Series A Preferred Stock, as required by the Investor, a portion of the Consideration was placed in escrow. The Company filed a Schedule 14C to affect the amendment and expects the amendment process to be completed in early November, at which time the escrowed amount will be released to the Company. If the amendment process is not achieved by December 7, 2021, then the Company will redeem, at 120% of the stated value of $1,000 per share, 1,650 shares of the Series B Preferred Stock, and pay the dividend amount due thereon at 8% to the date of redemption. The Series B Preferred Stock will be redeemed at the demand by the holders, at 120% of the stated value of $1,000, at any time after the earlier of (x) the consummation by the Company of a qualified offering, or (y) the first anniversary of the issuance of the Series B Preferred Shares.
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The Investor was granted a right of participation in future private offerings and has agreed to a 180-day lock-up in connection with a qualified offering. A “qualified offering” is the first public offering after the sale of the Series B Preferred Stock in which the common stock of the Company is listed on a national exchange.
The Investor Warrant may be exercised until September 28, 2024, at an initial exercise price of $0.063, subject to adjustment. The Investor Warrant provides for cashless exercise if the underlying shares of common stock are not registered for resale, and all issuances of common stock upon exercise are subject to a 4.99% blocker provision.
The Company granted the Investor registration rights for the shares of common stock underlying the Series B Preferred Stock and the Investor Warrants. The Company must file a registration statement no later than 180 days after the date of a qualified offering and have it effective in 45 days if there is no Securities and Exchange Commission (“SEC”) review, or if there is a review, within 75 days. The Company must keep the registration statement effective until all the shares registered have been sold or may be sold under Rule 144, without regard to volume and holding period restrictions.
The Company engaged ThinkEquity LLC (“ThinkEquity”) as its placement agent and paid a total cash fee of 9%, or $270,000, and its expenses, less prepaid expenses, and issued to ThinkEquity and its designees a warrant to purchase up to an aggregate of 5,210,526 shares of common stock. The exercise price of the warrant initially will be $0.0693 per share, subject to typical adjustment provisions, and exercisable for a term of three years. The warrant has registration rights.
Going Concern
Our condensed consolidated financial statements for the nine months ended September 30, 2021, have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent registered public accounting firm included in its audit opinion on our consolidated financial statements for the year ended December 31, 2020, a statement that there is substantial doubt as to our ability to continue as a going concern, and our consolidated financial statements for the year ended December 31, 2020 were prepared assuming that we would continue as a going concern. We have determined that our ability to continue as a going concern is dependent on continuing to generate sales and raising additional capital to fund our operations and ultimately on generating future profitable operations. There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to generate positive cash flow from operations or find alternative sources of cash, our business and shareholders will be materially and adversely affected. Based on our current assessment of our business, there is substantial doubt about our ability to continue as a going concern for a period of one year from the date our condensed consolidated financial statements for the nine months ended September 30, 2021, are issued. Our condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
The Company is subject to a number of risks similar to those of other similar stage and situated companies, including general economic conditions; its customers’ operations and prospects for and ability to obtain project financing; market and business disruptions, that include the effects of the COVID-19 pandemic and government response; dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research, development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events and obtaining adequate financing to fulfill Company business development plans and activities and generating a level of revenues adequate to support the Company’s cost structure.
The Company also will be affected by constraints on the availability of capital to its customers and customer prospects who have commenced, or are contemplating, new or expanded cultivation facilities. The extent to which COVID-19 will impact the customer and Company business activities and financial results will depend on future developments, which are uncertain and cannot be predicted. Other factors that will impact the Company’s ability to continue operations include the market demand for the Company’s products and services, the ability to service its customers and prospects, potential contract cancellations, project scope reductions and project delays, the Company’s ability to fulfill its backlog, the management of working capital, and the continuation of normal payment terms and conditions for purchase of the Company’s products. The Company believes its cash balances and cash flow from operations will be insufficient to fund its operations for the next twelve months. If the Company is unable to increase revenues, or otherwise generate cash flows from operations, there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued. These consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
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~~Recent Developments~~Capital Raising
We believe our cash balances and cash flow from operations will be insufficient to fund our operations for the next 12 months. If we are unable to increase revenues or otherwise generate cash flows from operations, we will need to raise additional funding to continue as a going concern. We will need to obtain financing in order to continue our operations and achieve our growth strategies. There can be no assurance that we will be able to raise the necessary financing, when and if needed, on acceptable terms or at all. If our operating results do not meet management’s expectations, or additional capital is not available, management believes it can downsize or reorient operations to reduce certain expenditures. The precise amount and timing of our financing needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for our products and services, management of working capital, and continuation of normal payment terms and conditions for purchase of our products and services.
There can be no assurance that the Company will be able to raise debt or equity financing in sufficient amounts, when and if needed, on acceptable terms or at all. The Company’s ability to raise equity capital is also limited by the Company’s stock price, and any such issuance could be highly dilutive to existing shareholders.
Inflation
In the opinion of management, inflation has not had a material effect on our operations to date. Due to the pandemic, however, there is the possibility that we will face inflationary pressures in certain aspects of our business operations, such as equipment cost, in the future. Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
Contractual Payment Obligations
As of September 30, 2021, our contractual payment obligations consisted of a building lease. On January 2, 2018, the leased space was expanded to 18,600 square feet and the monthly rental rate increased to $18,979 and beginning September 1, 2018, the monthly rent will increase by 3% each year through the end of the lease. Refer to Note ~~3 -~~2 – ~~Promissory Notes, Note 6 -~~~~Shareholders’ Equity~~Leases, of the notes to the condensed consolidated financial statements, included as part of this Quarterly Report for a discussion of building lease.
During 2020, the Company entered into an agreement with its landlord to apply its rent deposit of $52,600 to rent payments due during the period. The deposit required on the lease was reduced to approximately $32,000 and is payable in 12 monthly installments from January through December of 2021. As of September 30, 2021, approximately $24,000 has been paid toward said deposit. Further, the landlord also agreed to defer payment of fifty percent of the three months of lease payments (base rent only) for the period July to September 2020. The deferred lease payments amount to approximately $30,000 and are payable in 12 monthly installments from January to December 2021. As of September 30, 2021, approximately $23,000 of the deferred rent has been paid back to the landlord.
Commitments and Contingencies
Refer to Note 7 – Commitments and Contingencies of the notes to the condensed consolidated financial statements, included as part of this Quarterly Report for a discussion of commitments and contingencies.
Off-Balance Sheet Arrangements
We are required to disclose any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. As of September 30, 2021, we had no off-balance sheet arrangements. During the nine months ended September 30, 2021, we did not engage in any off-balance sheet financing activities other than those included in the “Contractual Payment Obligations” discussed above and those reflected in Note 7 of our condensed consolidated financial statements.
35
Recent Developments
Refer to Note 12 -Subsequent Events of the ~~Notes~~notes to ~~Unaudited Condensed Consolidated Financial Statements,~~condensed consolidated financial statements, included ~~in Part I, Item 1~~as part of this Quarterly Report for ~~the more~~certain significant events occurring since September 30, ~~2017.~~2021.
Critical Accounting ~~Policies and Significant Judgments and~~ Estimates
This discussion and analysis of our financial condition and results of operations is based upon our ~~interim unaudited~~ condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United ~~States.~~States of America. Certain accounting policies are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. ~~For information regarding our critical accounting policies as well as recent accounting pronouncements, see Note 1~~Actual results could materially differ from those estimates. Key estimates include: allocation of transaction prices to ~~the consolidated financial statements.~~
~~Results~~performance obligations under contracts with customers, standalone selling prices, timing of ~~Operations~~
~~The following discussion should be read in conjunction~~expected revenue recognition on remaining performance obligations under contracts with ~~our condensed consolidated financial statements and the related notes included in this Form 10-Q.~~
~~Comparison~~customers, valuation of ~~the Three Months Ended September 30, 2017 and 2016~~
~~Revenues and Cost~~intangible assets, valuation of ~~Goods Sold~~
~~Revenue for the three months ended September 30, 2017 was $1,566,000 compared to $1,171,000 for the three months ended September 30, 2016, an increase of $395,000, or 34%.~~
~~Cost of revenue increased by 56% from $754,000 for the three months ended September 30, 2016 to $1,175,000 for the three months ended September 30, 2017.~~
The gross profit for the three months ended September 30, 2017 was $391,000 compared to $417,000 for the three months ended September 30, 2016. Gross profit margin decreased by 11 percentage points from 36% for the three months ended September 30, 2016 to 25% for the three months ended September 30, 2017. This decrease was caused by an unfavorable sales mix of lower margin products (i.e., equipment manufactured by outside vendors) and increased manufacturing overhead compared to the three months ended September 30, 2016.
Our cost of revenue cost structure is comprised of both a fixed and variable component. The fixed cost component represents engineering, manufacturing and project management salaries and benefits and manufacturing overhead that totaled $331,000, or 21% of total revenue, for the three months ended September 30, 2017 as compared to $258,000, or 22% of total revenue, for the three months ended September 30, 2016. The increase of $72,000 was due to an increase in salaries and benefits of approximately $33,000 and stock compensation of approximately $38,000. The variable cost component which represents our cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs of $844,000, or 54% of total revenue, in the three months ended September 30, 2017 as compared to $495,000, or 42% of total revenue, in the three months ended September 30, 2016. Variable costs for the three months ended September 30, 2017 were higher than the three months ended September 30, 2016 primarily because of higher equipment costs. Equipment costs of revenue increased 111% for the three months ended September 30, 2017 compared to an increase in revenue of 62% for the same period reflecting a change in product mix. Additionally, variable costs were favorably impacted by reductions in outside engineering and warranty costs totaling $70,000.
4
Operating expenses increased by 148% from $654,000 for the three months ended September 30, 2016 to $1,625,000 for the three months ended September 30, 2017, an increase of $971,000. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of $862,000, and (ii) an increase in advertising and marketing of $123,000, offset by (iii) a decrease in product development expense of $15,000.
The increase in SG&A expenses for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 is due primarily to: (i) an increase of $452,000 in equity-related employee compensation, (ii) an increase of $220,000 in salaries and benefits, (iii) an increase of $115,000 in legal and consulting fees, and (iv) an increase of $113,000 in cash and equity-based director fees.
The increase in marketing expenses have been primarily the result of: (i) our investment in re-branding the Surna name, including approximately $55,000 for the redevelopment of our website and marketing materials, (ii) our increased presence at industry trade shows and events resulting in increased expenses of $25,000, and (iii) marketing salaries and benefits (including equity related-compensation) which increased by approximately $24,000.
Other expenses decreased by 43% from $431,000 for the three months ended September 30, 2016 to $245,000 for the three months ended September 30, 2017. This decrease is primarily related to the decrease in the amortization of debt discount and interest expense on convertible promissory notes. The convertible promissory notes converted in the fourth quarter of 2016 and the first quarter of 2017. Therefore, in the three months ended September 30, 2017, we did not have the associated amortization of these debt discounts. However, we did incur a loss on extinguishment of debt of $228,000 in the three months ended September 30, 2017, due to the conversion of certain notes.
We realized an operating loss of $1,234,000 for the three months ended September 30, 2017 as compared to an operating loss of $237,000 for the three months ended September 30, 2016. However, we incurred $626,000 of non-cash, equity-based compensation, ~~expenses in the three months ended September 30, 2017 as compared to $0 for the three months ended September 30, 2016. Excluding these non-cash items, our operating loss increased by $371,000.~~
~~Overall, we realized a net loss~~valuation of $1,478,000 for the three months ended September 30, 2017 as compared to a net loss of $669,000 for the three months ended September 30, 2016, an increase of $809,000. However, we incurred $626,000 of non-cash, equity-based compensation expenses and $245,000 of non-cash, debt-related costs in the three months ended September 30, 2017 as compared to non-cash, debt-related costs of $353,000 in the three months ended September 30, 2016. Excluding these non-cash items, our net loss increased by $291,000.
~~Comparison of the Nine Months Ended September 30, 2017 and 2016~~
~~Revenues and Cost of Goods Sold~~
Revenue for the nine months ended September 30, 2017 was $4,901,000 compared to $5,561,000 for the nine months ended September 30, 2016, a decline of $660,000, or 12%. The decline in revenue is mainly attributable to the volume of new sales contracts and the timing of equipment delivery under our executed sales contracts. While new contracts increase our backlog, revenue recognition for the equipment portions of our sales contracts is delayed in many cases as our customers complete permitting or preparation of their facilities for equipment installation. The decline in revenue was also due to continuing uncertainty of the cannabis industry following the new Trump Administration’s announcement of its opposition to legalized cannabis, which we believe may be delaying new cannabis cultivation facility projects by potential customers.
Cost of revenue decreased by 2% from $3,742,000 for the nine months ended September 30, 2016 to $3,669,000 for the nine months ended September 30, 2017. The gross margin decreased by eight percentage points from 33% for the nine months ended September 30, 2016 to 25% for the nine months ended September 30, 2017. Our cost of revenue cost structure is comprised of both a fixed and variable component. The fixed cost component represents engineering, manufacturing and project management salaries and benefits totaled $897,000, or 18% of total revenue, for the nine months ended September 30, 2017 as compared to $830,000, or 15% of total revenue, for the nine months ended September 30, 2016. The increase of $67,000 was due to an increase in our engineering and project management salaries and benefits (including equity-related compensation) and other overhead of $150,000. The increase was offset by a decrease in manufacturing salaries and benefits of $83,000 (including equity-related compensation). The increase in fixed costs as a percentage of revenue also resulted from a 12% decline in revenue in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The variable cost component represents our cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs, which was $2,771,000, or 57% of total revenue, in the nine months ended September 30, 2017 as compared to $2,912,000, or 52% of total revenue, in the nine months ended September 30, 2016. The 2016 costs were higher due to a warranty charge of approximately $500,000 to replace a customer’s system. Equipment cost of revenue for 2017 increased by $186,000 and we increased our allowance for slow moving and obsolete inventory by $208,000 for specifically-built inventory sold to a customer, who would not accept delivery. We continue to attempt to reduce our variable costs through more competitive prices from our vendors and reduced warranty expenditures.
5
~~Operating expenses increased by 114% from $1,990,000 for the nine months ended September 30, 2016 to $4,253,000 for the nine months ended September 30, 2017.~~
The most significant component of our increased operating expenses in the nine months ended September 30, 2017 was SG&A expenses. SG&A expenses increased by $1,959,000, or 126%, from $1,559,000 for the nine months ended September 30, 2016 to $3,518,000 for the nine months ended September 30, 2017. The increase in SG&A expenses for the nine months ended September 30, 2017 compared to the prior period is due primarily to the following: (i) an increase of $717,000 for additional compensation to our independent directors (comprised of $459,000 for equity-related compensation for new directors, including $68,000 for cancelled options, $51,000 in cash retainer fees, and $207,000 for equity-related compensation to a previous director), (ii) an increase of $453,000 in equity-related compensation to employees, (iii) an increase of $368,000 in salaries and wages primarily related additional sales staff, (iv) an increase of $321,000 professional and consulting fees that included a one-time charge of $81,000 for a cash and equity-related compensation to an investment banking firm, and (v) an increase of $67,000 in travel expenses.
Marketing expenses increased by $329,000 from $155,000 in the nine months ended September 30, 2016 to $484,000 for the nine months ended September 30, 2017, an increase of 212%. We have invested in re-branding the Surna name, including approximately $153,000 for the redevelopment of our website and marketing materials. We have also increased our presence at industry trade shows, events and in publications resulting in increased expenses of approximately $105,000. Marketing salaries and benefits (including equity-based compensation) have increased $49,000.
Other expenses decreased by 73% from $1,947,000 for the nine months ended September 30, 2016 to $532,000 for the nine months ended September 30, 2017. This decrease was primarily related to a reduction in the amortization of debt discount on convertible promissory notes. The convertible promissory notes converted in the fourth quarter of 2016 and the first quarter of 2017. Therefore, the second and third quarter of 2017 did not have the associated amortization of these debt discounts. We did incur a loss on extinguishment of debt of $643,000 in the nine months ended September 30, 2017, due to conversion of certain notes. As of September 30, 2017, we had no long-term debt.
Overall, we realized a net loss of $3,553,000 for the nine months ended September 30, 2017 compared to a net loss of $2,118,000 for the nine months ended September 30, 2016, an increase of $1,434,000, or 68%.
~~Liquidity and Capital Resources~~
~~The following summarizes our cash flows:~~
For the Nine Months Ended
June 30,
2017 2016
Cash (used in) provided by operating activities $ (1,961,000 ) $ 35,000
Cash flows provided by investing activities 75,000 15,000
Cash flows provided by (used in) financing activities 2,867,000 (145,000 )
Net change in cash $ 981,000 $ (95,000 )
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We have never reported net income. We incurred net losses for the nine months ended September 30, 2017 and 2016 and have an accumulated deficit of $17,889,000 as of September 30, 2017. We had a deficit in working capital (current liabilities in excess of current assets) of $667,000 as of September 30, 2017 as compared to a working capital deficit of $2,860,000 as of December 31, 2016. This improvement in working capital during the nine months ended September 30, 2017 is primarily related to: (i) the $2,685,000 raised in a private placement of our common stock and attached warrants, (ii) the conversion to common stock of the convertible promissory notes and related interest payable, and (iii) the conversion of certain other notes. We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through private sales of common stock and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise sufficient capital to support our operations. As of September 30, 2017 and December 31, 2016, we had a cash balance of $1,301,000 and $320,000, respectively.
~~Our consolidated financial statements have been presented on a going concern basis, which contemplates the realization of~~deferred tax assets and ~~the satisfaction of~~ liabilities, in the normal course of business. Our independent registered public accounting firm included in its audit opinion on our financial statements for the year ended December 31, 2016 a statement that there is substantial doubt as to our ability to continue as a going concern.warranty accruals, accounts receivable and inventory allowances, and legal contingencies.
We will likely need to raise debt and/or equity financing during the first half of 2018 in order to continue our operations and achieve our growth targets. There can be no assurance however that we will be able to raise such financing in sufficient amounts or on acceptable terms, or at all.
If, as we move into the first half of 2018, we determine that our revenue and operating results are not satisfactory, we intend to explore various operating cost reductions. Even if we were able to reduce operating costs, we would still likely need to seek additional debt and/or equity financing. The precise amount and timing of the funding needs will depend on a number of factors, including the market demand for our products and services, the timing of our receipt of deposits from our customers under our sales contracts, our management of working capital, and the continuation of normal payment terms and conditions for purchase of goods and services.
~~Cash Requirements~~
As of September 30, 2017, our cash balance was $1,301,000, a decrease of 3.9% from our cash balance of $1,353,000 as of June 30, 2017. Nonetheless management has determined the current cash flow from operations may not be sufficient to fund our operations over the next twelve months. Based on management’s estimate for our operational cash requirements, we will likely require additional capital during the first half of 2018.
If we are unable to generate sufficient cash flow from operations, make adjustments to our payment arrangements or raise sufficient additional capital through future debt and equity financings or strategic and collaborative ventures with potential partners, we will likely have to reduce the size and scope of our operations. Our officers and shareholders have not made any written or oral agreement to provide us additional financing. There can be no assurance that we will be able to continue to raise capital on terms and conditions that are deemed acceptable to us, or at all.
~~Operating Activities~~
Cash used in operations for the nine months ended September 30, 2017 was $1,961,000 compared to cash provided by operations of $35,000 for the nine months ended September 30, 2016, a change of $1,996,000. The additional cash usage is primarily attributable to an increase in net loss of $1,434,000, which was offset by an increase in non-cash charges of $234,000, and additional cash used for working capital of $796,000. During the nine months ended September 30, 2017, significant non-cash items included: (i) equity-related compensation of $1,271,000, (ii) loss on extinguishment of debt of $643,000 and (iii) gain on the change in derivative liability of $212,000.
7
~~Investing Activities~~
Cash provided by investing activities for the nine months ended September 30, 2017 was approximately $75,000 compared to cash provided by investing activities of $15,000 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we received payments of approximately $157,000 on notes receivable offset by payments for deposits and investments in equipment and other assets of $82,000. During the nine months ended September 30, 2016 we received net payments of approximately $20,000 on notes receivable, had net proceeds of $33,000 from the sale of property and equipment, and invested in equipment and other assets totaling $38,000.
~~Financing Activities~~
Cash provided by financing activities for the nine months ended September 30, 2017 was $2,867,000 compared to cash used in financing activities of $145,000 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we completed a private placement for the sale of shares of our common stock, with attached warrants, resulting in net proceeds of $2,685,000. During the nine months ended September 30, 2017, also in the first quarter 2017 we issued two unsecured promissory notes for aggregate proceeds of $500,000 and made payments of $270,000 to extinguish the principal under our remaining convertible promissory notes.
~~Inflation~~
In the opinion of management, inflation has not and will not have a material effect on our operations in the immediate future. Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
~~Contractual Payment Obligations~~
As of September 30, 2017, our contractual payment obligations consisted of a building lease. On June 27, 2017, we executed a lease, to be effective September 29, 2017, for our manufacturing and office space. The term of the lease commenced September 29, 2017 and continues through August 31, 2022. We will occupy our current space at a rate of $12,967 per month until January 1, 2018. On January 2, 2018, the space will be expanded and the monthly rental rate will increase to $18,979 until August 31, 2018. Beginning September 1, 2018, the monthly rent will increase by 3% each year through the end of the lease.
~~Off-Balance Sheet Arrangements~~
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE ~~DISCLOSURE~~DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, ~~and~~therefore are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our ~~chief executive officer (“CEO”)~~Chief Executive Officer and ~~principal financial~~our Principal Financial and ~~accounting officer (“PFAO”),~~Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange ~~Act,~~Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our ~~CEO~~Chief Executive Officer and ~~PFAO~~Principal Financial and Accounting Officer concluded that ~~because~~as a result of ~~certain~~ material ~~weaknesses~~weakness in our internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 filed with the SEC, our disclosure controls and procedures ~~as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act~~ were not effective as of ~~as of~~ September 30, ~~2017.~~2021.
8
We did not maintain effective controls over certain aspects of the financial reporting process ~~because~~because: (i) we ~~lacked~~lack a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting ~~requirements. In addition,~~requirements, (ii) there ~~was~~is inadequate segregation of duties due to the limitation on the number of our accounting ~~personnel.~~personnel, and (iii) we have insufficient controls and processes in place to adequately verify the accuracy and completeness of spreadsheets that we use for a variety of purposes including revenue, taxes, stock-based compensation and other areas, and place significant reliance on, for our financial reporting.
We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. In Q2 2021, we began this process by hiring a Chief Financial Officer with a background in public reporting and controls. We are committed to continuing to improve our financial organization including, without limitation, expanding our accounting staff and improving our systems and controls to reduce our reliance on the manual nature of our existing systems. However, due to our size and ~~nature, segregation of all conflicting duties~~our financial resources, remediating the several identified weaknesses has not ~~always~~ been possible and may not be economically ~~feasible.~~feasible now or in the future.
Changes in Internal Control over Financial Reporting
~~For~~There were no changes identified in connection with our internal control over financial reporting during the nine months ended September 30, ~~2017, there has been no change in our internal control over financial reporting~~2021, that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
36
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are not ~~presently~~currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. We have and will continue to have commercial disputes arising in the ordinary course of our business.
Item 1A. Risk Factors
In addition to the information set forth in this Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including, without limitation, the risk factors and uncertainties contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not ~~presently~~ known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2017, we issued 5,600,000 unregistered shares of common stock, at a price per share of approximately $0.096 per share, in settlement of two promissory notes, each in the original principal amount of $268,750.None.
Item 3. Defaults ~~Upon~~upon Senior Securities
None.
Item 4. Mine Safety Disclosures
~~None.~~Not applicable
Item 5. Other Information
~~Regulation FD Disclosure.~~None.
~~Press Release Announcing Financial Results~~
On November 14, 2017, we issued a press release announcing our financial condition and results of operations for the three and nine months ended September 30, 2017. The press release is attached hereto as Exhibit 99.1.
The foregoing information, including the exhibits related thereto, is furnished in response to Item 2.02 of Form 8-K and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any disclosure document of the Company, except as shall be expressly set forth by specific reference in such document.
Item 6. Exhibits
The documents listed in the Exhibit Index of this Form 10-Q are incorporated by reference or are filed with this Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

37 9

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
~~Date : November 14, 2017~~ SURNA INC.
(the “Registrant”)
~~By:~~
Dated: November 10, 2021 By: /s/ ~~Chris Bechtel~~Anthony K. McDonald
~~Chris Bechtel,~~ Anthony K. McDonald
Chief Executive Officer and President
(Principal Executive Officer)
Dated: November 10, 2021 By: /s/ ~~Paul Kelly~~Richard B. Knaley
~~Paul Kelly,~~ Richard B. Knaley
Chief Financial Officer ~~and Treasurer~~
(Principal Financial and Accounting Officer)
38
10
EXHIBIT INDEX
Exhibit ~~Number~~ ~~Description~~
31.1*Number Description of Exhibit
31.1 * Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*31.2 * Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Principal Executive ~~Officer and Principal Financial and Accounting~~ Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification of Principal Financial and Accounting, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Schema
101.CAL* Inline XBRL Taxonomy Calculation Linkbase
101.DEF* Inline XBRL Taxonomy Definition Linkbase
101.LAB* Inline XBRL Taxonomy Label Linkbase
101.PRE* Inline XBRL Taxonomy Presentation Linkbase

99.1**104 ~~Press Release, dated November [10], 2017, announcing financial condition~~Cover Page Interactive Data File (formatted as Inline XBRL and ~~results of operations.~~contained in Exhibit 101).
* Filed herewith.
**
101.INS* ~~XBRL Instance Document~~
101.SCH* ~~XBRL Taxonomy Extension Schema Document~~
101.CAL* ~~XBRL Taxonomy Extension Calculation Linkbase Document~~
101.DEF* ~~XBRL Taxonomy Extension Definition Linkbase Document~~
101.LAB* ~~XBRL Taxonomy Extension Label Linkbase Document~~
101.PRE* ~~XBRL Taxonomy Extension Presentation Linkbase Document~~Furnished herewith.
* Filed herewith.
** Furnished herewith.
11 39

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Revenue	$	1,566,256		$	1,170,760		$	4,901,241		$	5,560,837

Cost of revenue		1,175,047			753,624			3,668,698			3,742,321

Gross profit		391,209			417,136			1,232,543			1,818,516

Operating expenses:
Advertising and marketing expenses		168,476			45,177			484,418			155,172
Product development costs		60,145			75,144			250,228			275,370
Selling, general and administrative expenses		1,396,957			533,694			3,518,528			1,559,070
Total operating expenses		1,625,578			654,015			4,253,174			1,989,612

Operating income (loss)		(1,234,369	)		(236,879	)		(3,020,631	)		(171,096	)

Other income (expense):
Interest and other income, net		1,016			10,576			3,808			19,060
Interest expense		-			(89,203	)		(41,233	)		(282,657	)
Amortization of debt discount on convertible promissory notes		(10,037	)		(291,000	)		(63,157	)		(1,335,429	)
Loss on extinguishment of debt		(228,428	)		-			(643,428	)		-
(Loss) gain on change in derivative liabilities		(6,660	)		(62,000	)		212,054			(348,297	)
Total other income (expense)		(244,109	)		(431,627	)		(531,956	)		(1,947,323	)

Loss before provision for income taxes		(1,478,478	)		(668,506	)		(3,552,587	)		(2,118,419	)

Provision for income taxes		-			-			-			-

Net loss		(1,478,478	)		(668,506	)		(3,552,587	)		(2,118,419	)

Other comprehensive income (expense)		-			-			-			-
Comprehensive loss	$	(1,478,478	)	$	(668,506	)	$	(3,552,587	)	$	(2,118,419	)

Loss per common share – basic and dilutive	$	(0.01	)	$	(0.00	)	$	(0.02	)	$	(0.02	)

Weighted average number of shares outstanding, both basic and dilutive		184,912,253			145,268,135			179,470,179			139,684,359

	Preferred Stock				Common Stock
	Number of Shares		Amount		Number of Shares outstanding			Number of Shares to Be Issued		Amount			Additional Paid in Capital		Accumulated Deficit			Shareholders’ Deficit
Balance December 31, 2016		77,220,000	$	772		160,744,916			-	$	1,607		$	12,222,789	$	(14,336,212	)	$	(2,111,044	)
Common shares issued for conversion of debt and interest, net of unamortized debt discount		-		-		10,601,554			-		106			1,751,049		-			1,751,155
Value attributed to modification of warrants		-		-		-			-		-			59,000		-			59,000
Common shares issued with convertible notes payable		-		-		250,000			-		3			39,127		-			39,129
Common shares issued for cash, net		-		-		16,781,250			-		168			2,684,832		-			2,685,000
Fair value of warrants issued and options granted for compensation		-		-		-			-		-			415,570		-	��		415,570
Common shares issued as compensation for services		-		-		1,711,891			1,200,000		17			398,758		-			398,775
Common shares to be issued in settlement of restricted stock units awarded as compensation for consulting services		-		-		-			200,000		-			20,500		-			20,500
Fair value of vested restricted stock units awarded to employees and directors		-		-		-			-		-			218,677		-			218,677
Fair value of vested stock options granted to employees		-		-		-			-		-			217,411		-			217,411
Other common shares		-		-		(223,692	)		-		(2	)		2		-			-
Net loss		-		-		-			-		-			-		(3,552,587	)		(3,552,587	)
Balance September 30, 2017		77,220,000	$	772		189,865,919			1,400,000	$	1,898		$	18,027,715	$	(17,888,799	)	$	141,586

	As of September 30, 2017								As of December 31, 2016
	Level I		Level II		Level III		Fair Value		Level I		Level II		Level III		Fair Value
Financial liabilities:
Derivative liabilities - warrants	$	–	$	–	$	265,760	$	265,760	$	–	$	-	$	477,814	$	477,814
Total financial assets (liabilities)	$	-	$	-	$	265,760	$	265,760	$	-	$	-	$	477,814	$	477,814

	For the Nine Months Ended September 30,
	2021
Operating lease cost	$	162,667
Operating cash outflow from operating lease	$	210,154

	As of September 30, 2021
Operating lease right-of-use assset	$	194,353
Operating lease liability, current	$	238,140
Operating lease liability, long-term	$	-

Remaining lease term		.9 years
Discount rate		5.00	%

Years ended December 31,
2021 (excluding the nine months ended September 30, 2021)		71,710
2022		170,891
Total minimum lease payments		242,601
Less imputed interest		(4,461	)
Present value of minimum lease payments	$	238,140

Carrying amount of debt
Principal converted	$	510,000
Accrued interest converted		134,553
Unamortized debt discount		(5,398	)
Total carrying amount of debt		639,155
Reacquisition price of debt
Fair value of shares of common stock issued		995,155
Warrant modification value		59,000
Total reacquisition price of debt		1,054,155
Loss on extinguishment of debt	$	(415,000	)

Carrying amount of debt
Principal converted	$	537,500
Accrued interest converted		15,904
Unamortized debt discount		(25,832	)
Total carrying amount of debt		527,572
Reacquisition price of debt
Fair value of shares of common stock issued		756,000
Loss on extinguishment of debt	$	(228,428	)

Year ending December 31:
2017	$	38,901
2018		230,026
2019		236,926
2020		244,034
2021		251,355
Later years		170,888
Total future minimum lease payments	$	1,172,130

	Three months		Nine months
Equity-based compensation expense included in:
Cost of revenue	$	38,104	$	38,104
Advertising and marketing expenses		7,259		7,259
Product development costs		2,640		2,640
Selling, general and administrative expenses		578,151		877,856
Total equity-based compensation expense included in consolidated statement of operations	$	626,154	$	925,859

	~~(a)~~	Non-qualified stock options to purchase 1,805,000 shares at an exercise price of $0.135 per share granted to certain employees on August 8, 2017, which vest based on the employee’s continued service over 2.75 years, as follows: (i) 661,672 options will vest if the employee remains employed at various dates during 2017, (ii) 571,665 options will vest if the employee remains employed at various dates during 2018, and (iii) 571,663 options will vest if the employee remains employed at various dates during 2019, and have a term of 10 years. As of September 30, 2017, non-qualified stock options to purchase 60,000 shares have expired.

	~~(b)~~	Non-qualified stock options to purchase 1,300,000 shares at an exercise price of $0.121 per share granted to a former employee on August 17, 2017, which were fully vested on the grant date and have a term of three years.

	~~(c)~~	Non-qualified stock options to purchase 1,200,000 shares at an exercise price of $0.135 per share granted to certain employees on August 8, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i) 400,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for the year end December 31, 2017, (ii) 400,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii) 400,000 options will vest if the Company achieves 2019 revenue of $25,000,000.

	~~(d)~~	Non-qualified stock options to purchase 4,050,000 shares at an exercise price of $0.121 per share granted to certain employees on August 17, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i) 800,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for the year end December 31, 2017, (ii) 1,300,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii) 1,950,000 options will vest if the Company achieves 2019 revenue of $25,000,000.

	~~(e)~~	Non-qualified stock options to purchase 4,000,000 shares at an exercise price of $0.112 per share granted to an employee on September 9, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i) 750,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for the year end December 31, 2017, (ii) 1,250,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii) 2,000,000 options will vest if the Company achieves 2019 revenue of $25,000,000.

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)		Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding as of December 31, 2016		-		$	-		-		-
Outstanding, December 31, 2020											14,251,000		$	0.083		8.3	$	-
Granted		12,355,000			0.121		9.9		-		3,035,800		$	0.085		10.0	$	-
Exercised		-			-		-		-		-
Forfeited		-			-		-		-		(287,000	)	$	0.122		6.6	$	-
Expired		(60,000	)		0.135		9.9		-		-
Outstanding as of September 30, 2017		12,295,000			0.121		9.9		-
Expected to vest as of September 30, 2017		3,045,000			0.129		9.9		-
Outstanding, September 30, 2021											16,999,800		$	0.083		7.9	$	-
Exercisable, September 30, 2021											15,249,800		$	0.085		7.7	$	-

	●	1,035,800 stock options were issued to 21 employees in respect of the Company’s 2020 Annual Incentive Awards. The options vested immediately, have a term of 10 years and an exercise price of $0.13.
	●	2,000,000 stock options were issued to our newly appointed Chief Financial Officer. The options vest as follows: 250,000 vested immediately, 417,000 on June 30, 2022, 665,000 on June 30, 2023 and 668,000 on June 30, 2024. The options have a term of 10 years and an exercise price of $0.061.
	●	During the nine months ended September 30, 2021, 287,000 fully vested stock options were forfeited following the departure of 3 former employees.

	Number of Options			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value		Grant-Date Fair Value

Nonvested, December 31, 2020		-		$	-	$	-	$	-
Granted		3,035,800		$	0.082	$	-	$	-
Vested		(1,285,800	)	$	0.112	$	66,412	$	-
Forfeited		-						$	-
Expired		-						$	-
Nonvested, September 30, 2021		1,750,000		$	0.061	$	-	$	104,800

	~~(a)~~	On August 17, 2017, the Company granted 700,000 restricted stock units to certain employees which vest at various times during the first quarter of 2018, provided the employee remains employed as of the vesting date.

	~~(b)~~	On August 17, 2017, the Company granted to the Previous CEO 9,000,000 restricted stock units, which vest in 12 equal installments (750,000 restricted stock units per installment) commencing on the first business day of January 2018 and continuing on the first business day of each of the next 11 calendar months, provided that the Previous CEO is employed by the Company on such vesting date or, if the initial term under the employment agreement has expired, the Previous CEO has not materially breached any non-competition, non-solicitation and other post-termination of his employment obligations.

	~~(c)~~	On September 6, 2017, the Company granted 3,000,000 restricted stock units to the CEO, which vest based on the CEO’s continued service and subject to the following performance thresholds: (i) 1,500,000 restricted stock units will vest if the Company achieves 2018 revenue of $18,000,000, and (ii) 1,500,000 restricted stock units will vest if the Company achieves 2019 revenue of $25,000,000.

	Number of Units			Weighted Average Grant-Date Fair Value

Unvested as of December 31, 2016		-		$	-
Granted		13,600,000			0.122
Vested		(1,828,000	)		0.132
Forfeited		-			-
Unvested as of September 30, 2017		11,772,000			0.121
Expected to vest as of September 30, 2017		8,772,000		$	0.123

				Weighted		Weighted Average
				Average		Remaining		Aggregate
	Number			Exercise		Life		Intrincic
	Outstanding			Price		In Months		Value

Outstanding at December 31, 2020		7,562,500		$	0.25		6	$	0

Issued		34,157,894		$	0.06		36		-

Exercised		-			-		-		-

Expired		(7,562,500	)	$	0.25		-	$	0

Outstanding at September 30, 2021		34,157,894		$	0.06		36	$	0

				Weighted Average Life of
		Warrants		Outstanding Warrants
Exercise price		Outstanding		In Months

	0.063		28,947,368		36

	0.069		5,210,526		36
			34,157,894		36

	For the quarter ended
	September 30, 2020		December 31, 2020		March 31, 2021		June 30, 2021		September 30, 2021
Backlog, beginning balance	$	5,592,000	$	8,198,000	$	8,448,000	$	11,578,000	$	7,987,000
Net bookings, current period	$	4,241,000	$	3,637,000	$	5,497,000	$	919,000	$	5,600,000
Recognized revenue, current period	$	1,635,000	$	3,387,000	$	2,367,000	$	4,510,000	$	3,706,000
Backlog, ending balance	$	8,198,000	$	8,448,000	$	11,578,000	$	7,987,000	$	9,881,000

	For the Nine Months Ended
	June 30,
	2017			2016
Cash (used in) provided by operating activities	$	(1,961,000	)	$	35,000
Cash flows provided by investing activities		75,000			15,000
Cash flows provided by (used in) financing activities		2,867,000			(145,000	)
Net change in cash	$	981,000		$	(95,000	)

~~Date : November 14, 2017~~	SURNA INC.
	(the “Registrant”)
	~~By:~~
Dated: November 10, 2021	By:	/s/ ~~Chris Bechtel~~Anthony K. McDonald
		~~Chris Bechtel,~~ Anthony K. McDonald
		Chief Executive Officer and President
		(Principal Executive Officer)

Dated: November 10, 2021	By:	/s/ ~~Paul Kelly~~Richard B. Knaley
		~~Paul Kelly,~~ Richard B. Knaley
		Chief Financial Officer ~~and Treasurer~~
		(Principal Financial and Accounting Officer)

Exhibit ~~Number~~		~~Description~~
31.1*Number		Description of Exhibit

31.1 *		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.231.2		Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Principal Executive ~~Officer and Principal Financial and Accounting~~ Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Principal Financial and Accounting, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		Inline XBRL Instance Document

101.SCH*		Inline XBRL Taxonomy Schema

101.CAL*		Inline XBRL Taxonomy Calculation Linkbase

101.DEF*		Inline XBRL Taxonomy Definition Linkbase

101.LAB*		Inline XBRL Taxonomy Label Linkbase

101.PRE*		Inline XBRL Taxonomy Presentation Linkbase

99.1**104		~~Press Release, dated November [10], 2017, announcing financial condition~~Cover Page Interactive Data File (formatted as Inline XBRL and ~~results of operations.~~contained in Exhibit 101).

*	Filed herewith.
**
101.INS*		~~XBRL Instance Document~~

101.SCH*		~~XBRL Taxonomy Extension Schema Document~~

101.CAL*		~~XBRL Taxonomy Extension Calculation Linkbase Document~~

101.DEF*		~~XBRL Taxonomy Extension Definition Linkbase Document~~

101.LAB*		~~XBRL Taxonomy Extension Label Linkbase Document~~

101.PRE*		~~XBRL Taxonomy Extension Presentation Linkbase Document~~Furnished herewith.