UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED ~~JUNE~~SEPTEMBER 30, 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 55th Street, 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~~YES ☒ NoNO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes~~YES☒ NoNO ☐

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.

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	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~~YES ☐ NoNO ☒

As of ~~August~~November 9, 2021, the number of outstanding shares of common stock of the registrant was 237,526,638.

Surna Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended ~~June~~September 30, 2021

Table of Contents

	Page
Cautionary Statement	ii

PART I — FINANCIAL INFORMATION	1

Item 1. Financial Statements (Unaudited)	1

Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2021 and December 31, 2020	1

Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020	2

Condensed Consolidated Statements of Changes in Shareholders’ Deficit for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020	3

Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020	4

Notes to the Condensed Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2024

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3336

Item 4. Controls and Procedures	3336

PART II — OTHER INFORMATION	34

Item 1. Legal Proceedings	3437

Item 1A. Risk Factors	3437

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3437

Item 3. Defaults Upon Senior Securities	3437

Item 4. Mine Safety Disclosures	3437

Item 5. Other Information	3437

Item 6. Exhibits	3437

SIGNATURES	3538

EXHIBIT INDEX	3639

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 STATEMENT

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements 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 negative of these terms or other similar words. All statements, 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 current or future macroeconomic or industry-specific trends or events and the impact of those trends and events on us or our financial performance; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing.

These forward-looking statements are subject to 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.;~~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 “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 Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as 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 projections contained in this Quarterly Report on Form 10-Q 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)

	June 30,			December 31,			September 30,			December 31,
	2021			2020			2021			2020
	(Unaudited)						(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,643,463		$	2,284,881		$	2,283,879		$	2,284,881
Accounts receivable (net of allowance for doubtful accounts of $188,311 and $165,098, respectively)		234,450			33,480
Accounts receivable (net of allowance for doubtful accounts of $186,073 and $165,098, respectively)								32,245			33,480
Inventory, net		444,352			327,109			480,354			327,109
Prepaid expenses and other		1,986,977			1,037,823			1,157,119			1,037,823
Total Current Assets		4,309,242			3,683,293			3,953,597			3,683,293
Noncurrent Assets
Property and equipment, net		116,615			147,732			98,967			147,732
Goodwill		631,064			631,064			631,064			631,064
Intangible assets, net		6,937			7,227			6,792			7,227
Deposits		16,122			-			24,183			-
Operating lease right-of-use asset		245,037			343,950			194,353			343,950
Total Noncurrent Assets		1,015,775			1,129,973			955,359			1,129,973

TOTAL ASSETS	$	5,325,017		$	4,813,266		$	4,908,956		$	4,813,266

LIABILITIES AND SHAREHOLDERS’ DEFICIT

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,909,544		$	1,784,961		$	1,674,088		$	1,784,961
Deferred revenue		4,055,774			3,724,189			3,059,525			3,724,189
Accrued equity compensation		108,945			128,434			108,945			128,434
Other liabilities		37,078			-			37,078			-
Current portion of operating lease liability		261,187			266,105			238,140			266,105
Total Current Liabilities		6,372,528			5,903,689			5,117,776			5,903,689

NONCURRENT LIABILITIES
Note payable and accrued interest		516,172			-			517,468			-
Other liabilities		37,078			74,156			37,078			74,156
Operating lease liability, net of current portion		43,881			169,119			-			169,119
Total Noncurrent Liabilities		597,131			243,275			554,546			243,275

TOTAL LIABILITIES		6,969,659			6,146,964			5,672,322			6,146,964

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, $0.00001 par value; 150,000,000 shares authorized; 42,030,331 shares issued and outstanding		420			420
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			2,376			2,366
Additional paid in capital		26,324,331			26,107,159			25,017,065			26,107,159
Accumulated deficit		(27,971,769	)		(27,443,643	)		(28,379,674	)		(27,443,643	)
Total Shareholders’ Deficit		(1,644,642	)		(1,333,698	)		(3,359,813	)		(1,333,698	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	5,325,017		$	4,813,266		$	4,908,956		$	4,813,266

The accompanying notes are an integral part of these condensed consolidated financial statements.

Surna Inc.

Condensed Consolidated Statements of Operations

(in US Dollars except share numbers)

(Unaudited)

	2021			2020			2021			2020
	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020			2021			2020			2021			2020
Revenue, net	$	4,509,505		$	1,682,424		$	6,876,034		$	3,492,349		$	3,706,436		$	1,634,669		$	10,582,470		$	5,127,018

Cost of revenue		3,227,181			1,407,599			5,249,104			2,761,000			2,959,264			1,108,758			8,208,368			3,869,758

Gross profit		1,282,324			274,825			1,626,930			731,349			747,172			525,911			2,374,102			1,257,260

Operating expenses:
Advertising and marketing expenses		168,042			95,053			345,187			243,974			224,393			89,695			569,580			333,669
Product development costs		111,546			74,848			224,184			219,796			98,623			84,433			322,807			304,229
Selling, general and administrative expenses		886,758			710,536			1,627,231			1,819,529			866,699			634,447			2,493,930			2,453,976
Total operating expenses		1,166,346			880,437			2,196,602			2,283,299			1,189,715			808,575			3,386,317			3,091,874

Operating income/(loss)		115,978			(605,612	)		(569,672	)		(1,551,950	)
Operating loss														(442,543	)		(282,664	)		(1,012,215	)		(1,834,614	)

Other income (expense):
Other income (expense), net		150,518			1,077			43,518			15,397			35,934			13,621			79,452		$	29,018
Interest expense		(1,254	)		(8,982	)		(1,972	)		(15,277	)		(1,296	)		(1,396	)		(3,268	)	$	(16,673	)
Total other income (expense)		149,264			(7,905	)		41,546			120			34,638			12,225			76,184			12,345

Income/(loss) before provision for income taxes		265,242			(613,517	)		(528,126	)		(1,551,830	)
Loss before provision for income taxes														(407,905	)		(270,439	)		(936,031	)		(1,822,269	)

Income taxes		-			-			-			-			-			-			-			-

Net income/(loss)	$	265,242		$	(613,517	)	$	(528,126	)	$	(1,551,830	)
Net loss													$	(407,905	)	$	(270,439	)	$	(936,031	)	$	(1,822,269	)

Income/(loss) per common share – basic	$	0.00		$	(0.00	)	$	(0.00	)	$	(0.01	)
Convertible Preferred Series B Stock Redemption Value Adjustment													$	(2,262,847	)	$	-		$	(2,262,847	)	$	-
Convertible Preferred Series B Stock Dividends														(1,447	)		-			(1,447	)		-

Income/(loss) per common share – diluted	$	0.00		$	(0.00	)	$	(0.00	)	$	(0.01	)
Net Loss Available to Common Shareholders													$	(2,672,199	)	$	(270,439	)	$	(3,200,325	)	$	(1,822,269	)

Weighted average number of common shares outstanding, basic		237,449,715			236,526,638			236,990,726			233,794,550
Loss per common share – basic and dilutive													$	(0.01	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Weighted average number of common shares outstanding, diluted		240,828,867			236,526,638			236,990,726			233,794,550
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 are an integral part of these condensed consolidated financial statements.

Surna Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Deficit

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

(in US Dollars except share numbers)

(Unaudited)

	Number of Shares		Amount		Number of Shares		Amount		Number of Shares to be Issued			Amount			Additional Paid in Capital		Accumulated Deficit			Shareholders’ Deficit
	Preferred Stock				Common Stock																		Series A Preferred Stock				Common Stock					Additional
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares to be Issued			Amount			Additional Paid in Capital		Accumulated Deficit			Shareholders’ Deficit			Number of Shares		Amount		Number of Shares			Amount		Paid in Capital			Accumulated Deficit			Shareholders’ Deficit
Balance March 31, 2021		42,030,331	$	420		236,526,638	$	2,366		1,000,000		$	67,000		$	26,241,935	$	(28,237,011	)	$	(1,925,290	)
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		-		-		1,000,000		10		(1,000,000	)		(67,000	)		66,990		-			-
Fair value of vested restricted stock units awarded to employees
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
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
Fair value of vested stock options granted to employees		-		-		-				-			-			15,336		-			15,336
Fair value of vested stock options granted to directors		-		-		-				-			-			70		-			70
Net income		-		-		-				-			-			-		265,242			265,242
Balance June 30, 2021		42,030,331	$	420		237,526,638	$	2,376		-		$	-		$	26,324,331	$	(27,971,769	)	$	(1,644,642	)
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	)

	Preferred Stock				Common Stock																Series A Preferred Stock				Common Stock				Additional
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares to be Issued		Amount		Additional Paid in Capital		Accumulated Deficit			Shareholders’ Deficit			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	)		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			-		-		1,000,000		10		66,990			-			67,000
Fair value of vested stock options granted to employees		-		-		-				-		-		143,770		-			143,770			-		-		-		-		158,315			-			158,315
Fair value of vested stock options granted to directors		-		-		-				-		-		6,412		-			6,412			-		-		-		-		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		-		-		-				-		-		-		(528,126	)		(528,126	)		-		-		-		-		-			(936,031	)		(936,031	)
Balance June 30, 2021		42,030,331	$	420		237,526,638	$	2,376		-	$	-	$	26,324,331	$	(27,971,769	)	$	(1,644,642	)
Balance September 30, 2021																						42,030,331	$	420		237,526,638	$	2,376	$	25,017,065		$	(28,379,674	)	$	(3,359,813	)

Preferred Stock Common Stock
Number of Shares Amount Number of Shares Amount Number of Shares to be Issued Amount Additional Paid in Capital Accumulated Deficit Shareholders’ Deficit
Balance March 31, 2020 42,030,331 420 236,526,638           - - $ 2,366 $ 25,984,402 $ (26,623,240 ) $ (636,052 )
Fair value of vested restricted stock units awarded to employees - - - - - - 6,291 - 6,291
Fair value of vested stock options granted to employees and directors - - - - - - 67,614 - 67,614
Net loss - - - - - - - (613,517 ) (613,517 )
Balance June 30, 2020 42,030,331 $ 420 236,526,638 - - $ 2,366 $ 26,058,307 $ (27,236,757 ) $ (1,175,664 )
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 )

Preferred Stock Common Stock
Number of Shares Amount Number of Shares Amount 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 granted to employees and directors - - - - - - 706,634 - 706,634
Net loss - - - - - - - (1,551,830 ) (1,551,830 )
Balance June 30, 2020 42,030,331 $ 420 236,526,638 - - $ 2,366 $ 26,058,307 $ (27,236,757 ) $ (1,175,664 )
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 )

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Surna Inc.
Condensed Consolidated Statements of Cash Flows
(in US Dollars except share numbers)
(Unaudited)
2021 2020
For the Six Months Ended June 30,
2021 2020
Cash Flows From Operating Activities:
Net loss $ (528,126 ) $ (1,551,830 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and intangible asset amortization expense 37,180 60,987
Share-based compensation 21,748 731,797
Common stock issued for other expense 67,000 -
Provision for doubtful accounts 23,213 3,150
Provision for excess and obsolete inventory (10,945 ) 191,446
Loss on disposal of assets 8,042 4,124
Amortization of ROU asset 98,913 93,996

Changes in operating assets and liabilities:
Accounts receivable (224,183 ) 51,886
Inventory (106,299 ) 235,197
Prepaid expenses and other (949,152 ) 72,811
Accounts payable and accrued liabilities 124,583 (90,178 )
Deferred revenue 331,585 (576,483 )
Accrued interest 1,972 1,047
Other liabilities - 20,241
Lease deposit (16,122 ) 51,000
Operating lease liability, net (130,156 ) (106,363 )
Accrued equity compensation 108,945 (433,566 )
Net cash used in operating activities (1,141,802 ) (1,240,739 )

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

Cash Flows From Financing Activities
Proceeds from issuance of note payable 514,200 554,000
Net cash provided by financing activities 514,200 554,000

Net change in cash and cash equivalents (641,418 ) (686,739 )
Cash and cash equivalents, beginning of period 2,284,881 922,177
Cash and cash equivalents, end of period $ 1,643,463 $ 235,438

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

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 are an integral part of these condensed consolidated financial statements.
4

Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Note 1 – General

Description of Business

Surna Inc. (the “Company”) was incorporated in Nevada on October 15, 2009 and operates under athe trade name of Surna Cultivation Technologies. We are headquartered in Boulder, Colorado.
Surna Inc. is an engineering and design ~~engineer and sell~~company focused on selling environmental control and other technologies ~~for~~and services to the Controlled Environment Agriculture (CEA) industry. The CEA industry is one of the fastest-growing sectors of the United States’ economy. From leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetablesWe leverage our experience in this space to bring value-added technology solutions to our customers that help improve their overall crop quality and ~~small fruits (such as strawberries, blackberries~~yield, optimize energy and ~~raspberries) to bell peppers, cucumbers, tomatoes,~~water efficiency, and ~~cannabis, some producers grow crops indoors in response to market dynamics or as part of their preferred farming practice.~~satisfy evolving state and local construction codes, permitting and regulatory requirements. In service of the CEA industry, our principal ~~technologies~~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, ~~(ii)~~(iii) air handling equipment and systems, ~~(iii) a full-service engineering package~~(iv) LED lighting, benching and racking solutions for ~~designing and engineering commercial scale thermodynamic systems specific to~~indoor cultivation, ~~facilities, and (iv)~~(v) automation and control devices, systems and technologies used for environmental, lighting and climate ~~control.~~control, and (vi) preventive maintenance services for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada ~~as well as~~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 industry, ranging from several thousand to more than 100,000square feet. Headquartered in Boulder, 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. 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 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 ~~many~~ 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, ~~and~~ a general shortage of ~~containers.~~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 continuing to navigate the financial, operational, and 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 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.

5

Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)

Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted 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. 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 ~~six~~three and nine months ended ~~June~~September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. The balance sheet as of December 31, 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, 2020. The notes to the unaudited condensed consolidated financial statements are presented on a going concern basis.

Basis of 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, 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. Since inception, the Company has financed its activities principally through debt and equity financing, customer deposits and revenues from completed contracts. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities. Management believes that the economic dislocations in the overall economy, in the near term, will impact our revenues, losses and cash flows. 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. 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 quality of product development efforts, management of working capital, and 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 12 months. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will 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 the date the financial statements are issued. These condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Use of Estimates

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 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. Key estimates include: allocation of 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, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, accounts receivable and inventory allowances, and legal contingencies.

6

Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)

Cash, Cash Equivalents and Restricted Cash

All highly liquid investments with original maturities of three months or less at the date of purchase are considered to be cash equivalents. The Company may, from time to time, have deposits in financial institutions that exceed the federally insured amount. The Company has not experienced any losses to date on depository accounts.
~~During the six months ended June 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 June 30, 2021 was $~~0.

Income (Loss) Per Common Share

Basic income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration of common stock equivalents. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares 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 be antidilutive. Potential common stock equivalents consist of common stock issuable upon exercise of stock options and warrants and the vesting of restricted stock units using the treasury method.

During the ~~six~~nine months ended ~~June~~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-months period ended June 30, 2020~~three- and ~~the six-months~~nine-month periods ended ~~June~~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 included in the calculations of loss per share because such inclusion would have been anti-dilutive. ~~However, during the three-month period ended June 30, 2021, we realized a net profit and therefore included~~ ~~3,379,152~~ ~~potential common stock equivalents in respect of our outstanding stock options using the treasury method.~~

As of ~~June~~September 30, 2021, and 2020, there were respectively, ~~24,686,800~~116,683,201 and ~~45,819,600~~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 ~~six~~nine months ended ~~June~~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 ~~June~~September 30, 2021 and concluded that 0no impairment relating to goodwill existed at ~~June~~September 30, 2021.

7
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.
7
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~

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~~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.

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.

8
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~
For the three and ~~six~~nine months ended ~~June~~September 30, 2021, the Company recognized revenue of $~~1,193,251~~283,452 and $~~3,073,616~~3,357,068, respectively, related to the deferred revenue at January 1, 2021. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company recognized revenue of $~~205,170~~9,141 and $~~1,064,875~~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.

9
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
As of ~~June~~September 30, 2021, the Company’s remaining performance obligations, or backlog, was $~~7,987,000~~9,881,000, of which $~~2,038,000~~1,161,000, or 2612%, 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 ~~downturn~~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 ~~June~~September 30, 2021, includes booked sales orders of $~~1,282,000~~1,250,000 from several customers that the Company does not expect to be realized until ~~2022, if at all.~~late 2022. The Company believes ~~that several~~the sales orders in this portion of ~~its current contracts~~our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled ~~in the short term.~~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 $ 762,000 $ 1,276,000 $ 2,038,000
Remaining performance obligations related to partial equipment paid contracts 5,943,000 6,000 $ 5,949,000
Total remaining performance obligations $ 6,705,000 $ 1,282,000 $ 7,987,000
9
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~
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
June 30,

For the Six Months Ended
June 30,

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2021 2020 2021 2020 2021 2020 2021 2020
Equipment and systems sales $ 4,245,897 $ 1,486,948 $ 6,409,365 $ 3,093,894 $ 3,523,948 $ 1,481,961 $ 9,933,313 $ 4,575,855
Engineering and other services 172,648 157,086 353,731 288,677 110,538 114,160 464,269 402,837
Shipping and handling 90,960 38,390 112,938 109,778 71,950 38,548 184,888 148,326
Total revenue $ 4,509,505 $ 1,682,424 $ 6,876,034 $ 3,492,349 $ 3,706,436 $ 1,634,669 $ 10,582,470 $ 5,127,018

Accounting 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 ~~six~~nine months ended ~~June~~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 ~~151.68~~150.2% to 152.51%; expected term in years 10 and risk-free interest rate ranged from ~~1.2~~0.55%% to 1.49%.
10
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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:
Schedule of Share-based Compensation Costs
For the Three Months Ended June 30, For the Six Months Ended June 30,
2021 2020 2021 2020
Share-based compensation expense included in:
Cost of revenue $ 15,809 $ 8,558 $ 29,944 $ 17,116
Advertising and marketing expenses 6,818 2,088 13,292 5,000
Product development costs 7,335 4,343 14,029 10,888
Selling, general and administrative expenses 41,595 92,353 73,428 265,227
Total share-based compensation expense included in consolidated statement of operations $ 71,557 $ 107,342 $ 130,693 $ 298,231

10
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~

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 ~~six~~nine months ended ~~June~~September 30, 2021, is an accrual for $~~56,151~~0 and $108,945, respectively, for the 2021 Annual Employee Incentive Compensation Plan. Included in the expense for the three and ~~six~~nine months ended ~~June~~September 30, 2020, is an accrual for $~~33,436~~31,575 and $~~69,897~~101,472, respectively, for the 2020 Annual Employee Incentive Compensation Plan.

Concentrations

Three customers accounted for 2838%, 2723%, and 11% of the Company’s revenue for the three months ended ~~June~~September 30, 2021 and three customers accounted for 1825%, 1812% and 1312% of the Company’s revenue for the ~~six~~nine months ended ~~June~~September 30, 2021. ~~Three~~Two customers accounted for 21%, 2139% and 1530% of the Company’s revenue for the three months ended ~~June~~September 30, 2020 and ~~two~~three customers accounted for 1618%, 17% and 1011% of the Company’s revenue for the ~~six~~nine months ended ~~June~~September 30, 2020.

~~Two~~Three customers accounted for 7740%, 26% and 1122% of the Company’s accounts receivable as of ~~June~~September 30, 2021. As of ~~June~~September 30, 2020, ~~three~~four customers accounted for 4132%, 3523%, 21% and 1910% of the Company’s accounts receivable.

Recently Issued Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of 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 a lack of explicit guidance in the FASB Codification. The guidance is effective for interim and annual periods beginning after December 15, 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 anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.
11
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)

In August 2020, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU No.~~Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and ~~Hedging—~~Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) ~~which simplifies the~~ (“ASU 2020-06”) to simplify accounting for ~~convertible~~certain financial instruments. ~~The guidance removes certain accounting~~ASU 2020-06 eliminates the current models ~~which separate the embedded~~that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the ~~host contract~~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. ~~Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No.~~ASU 2020-06 is effective ~~for fiscal years~~January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning ~~after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020.~~on January 1, 2021. The Company ~~does not expect this~~early adopted ASU ~~to have a material impact on~~2020-06 effective January 1, 2021. The early adoption of ASU 2020-06 impacted the Company’s accounting for the issuance of its ~~consolidated results of operations, cash flows and financial position.~~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 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force). This update clarifies whether an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative and how to account for certain forward contracts and purchased options to purchase securities. For public entities, this guidance is effective for fiscal years beginning after December 15, 2020. The Company does not expect this 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 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 amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The 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 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 are unrelated to its financial condition, results of operations, cash flows or disclosures.

11
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~
Note 2 – Leases

In February 2016 the FASB issued ASU 2016-02, Leases (Topic 842)(“ASC 842” or the “new lease standard”). The Company 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 apply the “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 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.

12
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, 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 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 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 %
12 13

Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)

~~The lease cost, cash flows and other information related to the Facility Lease were as follows:~~
~~Schedule of Lease Cost~~
For the
Six Months Ended
June 30, 2021
Operating lease cost $ 108,444
Operating cash outflow from operating lease $ 139,688
As of June 30, 2021
Operating lease right-of-use assset $ 245,037
Operating lease liability, current $ 261,187
Operating lease liability, long-term $ 43,881

Remaining lease term 1.2 years
Discount rate 5.00 %
Future annual minimum lease payments on the Facility Lease as of ~~June~~September 30, 2021 were as follows:
Schedule of Future Annual Minimum Lease Payments
Years ended December 31,
2021 (excluding the six months ended June 30, 2021) 142,177
2021 (excluding the nine months ended September 30, 2021) 71,710
2022 170,891 170,891
Total minimum lease payments 313,068 242,601
Less imputed interest (8,000 ) (4,461 )
Present value of minimum lease payments $ 305,068 $ 238,140

On April 30, 2021, the Company entered into an agreement to sublease approximately 6,900 square feet of its office and manufacturing space. The sublease commenced on April 30, 2021 and will continue on a month-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 Lease Agreement with its current landlord. Rent ~~will~~was initially be charged at $5,989 per month ~~increasing~~and increased to $11,978 per month effective July 1, 2021. The Sublessor ~~will~~is also be responsible for its prorated share of utilities and other related costs. This new sublease does not change the 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 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.

~~As referenced in~~ ~~Note 12 - Subsequent Events~~~~, on~~On July 27, 2021, the Company entered into a Lease Termination Agreement with its current ~~landlord.~~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 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.

~~As referenced in~~ ~~Note 12 - Subsequent Events~~~~, on~~On July 28, 2021, the Company entered into an agreement to lease 11,491 square feet of office and manufacturing ~~space.~~space in Louisville, CO. The lease commences on November 1, 2021 and continues through January 31, 2027
13
~~Surna Inc.~~
~~Notes~~. The Company has the option to ~~Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~renew the lease for an additional 60-month period.

Note 3 – Inventory

Inventory consisted of the following:
Schedule of Inventory
June 30, December 31, September 30, December 31,
2021 2020 2021 2020
Finished goods $ 321,171 $ 201,778 $ 319,335 $ 201,778
Work in progress 3,068 4,231 2,595 4,231
Raw materials 202,213 214,145 237,704 214,145
Allowance for excess & obsolete inventory (82,100 ) (93,045 ) (79,281 ) (93,045 )
Inventory, net $ 444,352 $ 327,109 $ 480,354 $ 327,109

Overhead expenses of $~~17,574~~17,674 and $17,974 were included in the inventory balance as of ~~June~~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 $~~1,873,000~~879,000 and $916,000 in advance payments for inventory for the periods ended ~~June~~September 30, 2021, and December 31, 2020, respectively.

Note 4 – Property and Equipment

Property and equipment consisted of the following:
Schedule of Property and Equipment
June 30, December 31, September 30, December 31,
2021 2020 2021 2020
Furniture and equipment $ 296,851 $ 398,422 $ 296,851 $ 398,422
Vehicles 15,000 15,000 15,000 15,000
Leasehold improvements 215,193 215,193 215,193 215,193
527,044 628,615 527,044 628,615
Accumulated depreciation (410,429 ) (480,883 ) (428,076 ) (480,883 )
Property and equipment, net $ 116,615 $ 147,732 $ 98,967 $ 147,732

Depreciation expense was $~~36,891~~54,538 for the ~~six~~nine months ended ~~June~~September 30, 2021. For the ~~six~~nine months ended ~~June~~September 30, 2021, $~~2,985~~4,721 was allocated to cost of sales and $~~746~~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
June 30, December 31,
2021 2020
Accounts payable $ 1,090,806 $ 918,639
Sales commissions payable 81,287 48,263
Accrued payroll liabilities 293,929 288,071
Product warranty accrual 154,103 173,365
Other accrued expenses 289,419 356,623
Total $ 1,909,544 $ 1,784,961

14
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~
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 $514,200, for working capital purposes.

The loan amount bears interest at 1% and 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 and certain other terms and conditions are met. If any portion of the loan is not forgiven, payments will commence 10 months following the end of the 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 instruments, insolvency, dissolution or termination of the business as a going concern and bankruptcy.

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, interest of $~~1,254~~1,296 and $~~1,972~~3,268 was accrued, respectively, in respect of this note payable.
15
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)

Note 7 – 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.~~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 ~~six~~nine months ended ~~June~~September 30, 2021. As of ~~June~~September 30, 2021, $~~20,000~~35,000 has been paid in respect of the $40,000 cash portion of the settlement and the remaining $~~20,000~~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 ~~six~~nine months ended ~~June~~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 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.

Leases

The Company has a lease agreement for its manufacturing and office space. Refer to Note 2 Leases above.
15
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~

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 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 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 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 Company has received net proceeds of approximately $1,260,000 in the quarter and will receive the remaining $1,365,000 pursuant to the terms of 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 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, $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 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 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 an eligible market (as defined in the Purchase Agreement), and, if the number of authorized shares of common stock is reduced in connection with such reverse stock split, the subsequent increase of the authorized shares of capital stock of the Company within established limits, at any time prior to June 30, 2022, and (iv) an amendment to the articles of incorporation to change the corporate name of the Company to CEA Industries Inc. If these amendments are completed by December 7, 2021, then the remaining $1,365,000 funds held in escrow will be released to the Company.
Accordingly, as of September 30, 2021, these funds were disclosed as Series B Redeemable Convertible Stock Subscription Receivable on the Company’s consolidated balance sheet
Note 9 – Stockholders’ Deficit
Preferred Stock
As of September 30, 2021, and December 31, 2020, the Company 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 Company has 42,030,331 shares issued and outstanding at the end of both periods.
Series B Preferred Stock
On September 28, 2021, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which the Investor purchased from the Company 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 (“Series B Preferred Stock”), and a warrant to purchase up to 28,947,368 shares of common stock of the Company (“Investor Warrant”), for an aggregate purchase price of $3,000,000 (“Consideration”).
As a result of the 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 with a par value of $0.00001 per share.
Effective December 31, 2020, 236,526,638 shares 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 a legal settlements further described in Note 7 – Commitments and Contingencies – litigation above.
Consequently, effective September 30, 2021, 237,526,638 shares of common stock were issued and outstanding.
Note 810 – Equity Incentive Plans

2017 Equity Incentive Plan

Under the Company’s 2017 Equity Incentive Plan, as may be modified and amended by the Company from time to time (the “2017 Equity Plan”), the Board of 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. If 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.

~~During the six months ended June 30, 2021, the Company issued no shares of its common stock under the 2017 Equity Plan.~~
~~During the six months ended June 30, 2021, the Company granted awards for~~ ~~3,035,800~~ ~~non-qualified stock options as described below.~~
~~As of June 30, 2021, of the~~ ~~50,000,000~~ ~~shares authorized under the 2017 Plan for equity awards,~~ ~~24,553,818~~ ~~shares have been issued, awards related to~~ ~~24,686,800~~ ~~options remain outstanding, and~~ ~~759,382~~ ~~shares remain available for future equity awards.~~
~~There was $104,800~~ ~~in unrecognized compensation expense for unvested non-qualified stock options and RSUs at June 30, 2021 which will be recognized over approximately~~ 3 ~~years.~~
~~Non-Qualified Stock Options~~
~~A summary of the non-qualified stock options granted to employees and consultants under the 2017 Equity Plan during the six months ended June 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

Outstanding, December 31, 2020 14,251,000 $ 0.083 8.3 $ -
Granted 3,035,800 $ 0.085 10.0 $ -
Exercised -
Forfeited -
Expired -
Outstanding, June 30, 2021 17,286,800 $ 0.084 8.1 $ -
Exercisable, June 30, 2021 15,536,800 $ 0.086 7.9 $ -
16
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~
~~During the six months ended June 30, 2021, we issued a total of~~ ~~3,035,800~~ ~~stock options 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 ~~year and an exercise price of $0.061~~.
~~A summary of non-vested non-qualified stock options activity for employees and consultants under the 2017 Equity Plan for the three months ended June 30, 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 - $ - $ - $ -
Granted 3,035,800 $ 0.082 $ - $ 248,678
Vested (1,285,800 ) $ 0.112 $ - $ 143,878
Forfeited - $ -
Expired - $ -
Nonvested, June 30, 2021 1,750,000 $ 0.061 $ 6,125 $ 104,800
~~For the six months ended June 30, 2021 and June 30, 2020, the Company recorded $15,336~~ ~~and $153,680~~ ~~as compensation expense related to vested options issued to employees and consultants, net of forfeitures, respectively.~~
~~A summary of the non-qualified stock options granted to directors under the 2017 Equity Plan during the six months ended June 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)

Outstanding, December 31, 2020 7,400,000 $ 0.067 7.5 $ -
Granted -
Exercised -
Forfeited/Cancelled -
Expired -
Outstanding, June 30, 2021 7,400,000 $ 0.067 7.0 $ -
Exerciseable, June 30, 2021 7,400,000 $ 0.067 7.0 $ -
~~A summary of non-vested non-qualified stock options activity for directors under the 2017 Equity Plan for the six months ended June 30, 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 $ 35,500 $ 29,000
Granted -
Vested (1,000,000 ) $ 0.029 $ (29,000 )
Forfeited -
Expired -
Nonvested, June 30, 2021 - $ - $ -
17
~~Surna Inc.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(in US Dollars except share numbers)~~
~~(Unaudited)~~
~~During the six months ended June 30, 2021 and June 30, 2020, the Company incurred $6,412~~ ~~and $49,488, respectively, as compensation expense related to~~ ~~1,000,000~~ ~~and~~ ~~1,521,352~~ ~~vested options, respectively, issued to directors.~~
~~Effective June 24, 2020~~, ~~the Company issued~~ 2 ~~million non-qualified stock options under the 2017 Equity Plan to 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.~~
~~Restricted Stock Units~~
~~A summary of the RSUs awarded to employees, directors and consultants under the 2017 Equity Plan during the six months ended June 30, 2021, are presented in the table below:~~
~~Schedule of Restricted Stock Units Activity~~
~~Number of~~
~~Units~~
~~Weighted~~
~~Average~~
~~Grant-Date~~
~~Fair Value~~
~~Aggregate~~
~~Intrinsic~~
~~Value~~
~~Outstanding, December 31, 2020~~ - - $ -
~~Granted~~ - -
~~Vested and settled with share issuance~~ - -
~~Forfeited/canceled~~ - -
~~Outstanding, June 30, 2021~~ - - $ -
~~For the six months ended June 30, 2021 and June 30, 2020, the Company recorded $~~0 ~~and $25,163, respectively, 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.~~
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, subject to and effective upon stockholder approval.~~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.

~~The~~During the nine months ended September 30, 2021, the Company 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 and 230,770 were issued under the 2021 Equity Plan.
As of September 30, 2021, of the 50,000,000 shares authorized 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, 230,770 relate to outstanding options and 99,769,230 shares remain available for future equity awards.
There was ~~approved by stockholders~~$90,255 in unrecognized compensation expense for unvested non-qualified stock options at ~~the Annual General Meeting of Stockholders held on July 22, 2021.~~September 30, 2021 which will be recognized over approximately 3 years.

18 19

Surna Inc.
~~Surna Inc.~~
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
Non-Qualified Stock Options
A summary of the non-qualified stock options granted to employees and consultants under the 2017 Equity Plan during the nine months 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

Outstanding, December 31, 2020 14,251,000 $ 0.083 8.3 $ -
Granted 3,035,800 $ 0.085 10.0 $ -
Exercised -
Forfeited (287,000 ) $ 0.122 6.6 $ -
Expired -
Outstanding, September 30, 2021 16,999,800 $ 0.083 7.9 $ -
Exercisable, September 30, 2021 15,249,800 $ 0.085 7.7 $ -
During the nine months ended September 30, 2021, we issued a total of 3,035,800 stock options to 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 activity for employees and consultants under the 2017 Equity Plan for the nine months ended September 30, 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 - $ - $ - $ -
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 nine months ended September 30, 2021 and September 30, 2020, the Company recorded $29,881 and $171,624 as compensation expense related to vested options issued to employees and consultants, net of forfeitures, respectively.
20
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)
A summary of the non-qualified stock options granted to directors under the 2017 Equity Plan and the 2021 Equity Plan, during the nine months 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)

Outstanding, December 31, 2020 7,400,000 $ 0.067 7.5 $ -
Granted 230,770 $ 0.065 10.0 $ -
Exercised -
Forfeited/Cancelled -
Expired -
Outstanding, September 30, 2021 7,630,770 $ 0.067 6.8 $ -
Exerciseable, September 30, 2021 7,630,770 $ 0.067 6.8 $ -
During the 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 Equity Plan and the 2021 Equity Plan, for the nine months ended September 30, 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 - $ - $ -
During the nine months ended September 30, 2021 and September 30, 2020, the Company incurred $21,174 and $55,970, respectively, as compensation expense related to 1,230,770 and 1,521,352 vested options, respectively, issued to directors.
Effective June 24, 2020, the Company issued 2 million non-qualified stock options under the 2017 Equity Plan to 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 ~~9 –~~11 - Warrants

The following table summarizes information with respect to outstanding warrants to purchase common stock during the ~~six~~nine months ended ~~June~~September 30, 2021:
Schedule of Outstanding Warrants to Purchase Common Stock
Number
Weighted
Average
Exercise
Weighted Average Remaining Life
Aggregate
Intrincic

Outstanding Price In Months Value

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

Issued - - - -

Exercised - - - -

Expired (7,562,500 ) $ 0.03 - $ 0

Outstanding at June 30, 2021 0 $ 0.00 0 $ 0
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, ~~75,625,000~~ 7,562,500warrants 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 $0.063 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 1012 – Income Taxes

As of ~~June~~September 30, 2021, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $~~19,850,000~~20,260,000, of which $11,196,261 will expire, if not utilized, in the years 2034 through 2037, however, NOLs generated subsequent to December 31, 2017 do not expire but may only be used against taxable income to 8080%%. In response to the novel coronavirus COVID-19, the Coronavirus Aid, Relief, and Economic Security Act temporarily repealed the 8080%% limitation for NOLs arising in 2018, 2019 and 2020. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, use of the Company’s NOLs carryforwards may be limited in the event of cumulative changes in ownership of more than 5050%% within a three-year period.
22
Surna Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(in US Dollars except share numbers)
(Unaudited)

The Company must assess the likelihood that its net deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management’s judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of ~~June~~September 30, 2021 and December 31, 2020. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its net deferred tax assets in the 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 judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.

Note 1113 – Related Party Transactions

The company entered into a manufacturer representative agreement with RSX Enterprises in 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. ~~The~~During the three months ended September 30, 2021, the Company ~~has not~~ paid ~~or accrued any~~$26,873 in commissions under ~~the agreement as of June 30, 2021.~~this agreement.
Note 1214 – 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 ~~June~~September 30, 2021, other than as set out below:

On ~~July 27,~~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 ~~Company entered into a Lease Termination Agreement with its current landlord for the~~ ~~18,952~~ ~~square foot office and manufacturing facility in Boulder, CO,~~outstanding Series A Preferred Stock, which was ~~previously scheduled to expire~~completed 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,~~4, 2021.

On ~~July 28,~~November 4, 2021, we received the ~~Company entered into an agreement~~remaining $1,365,000 from escrow in relation 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.~~Series B Preferred Stock.

19 23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this 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, 2020, as filed with the SEC. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and 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 Company’s filings with the SEC, and Part II, Item 1A of this Quarterly Report entitled “Risk Factors.”

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 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

WeSurna Inc. is an engineering and design ~~engineer and sell~~company focused on selling environmental control and other technologies ~~for~~and services to the Controlled Environment Agriculture (CEA) industry. ~~The CEA industry is one of~~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 ~~fastest-growing sectors of the United States’ economy. From leafy greens (kale, Swiss chard, mustard, cress), microgreens (leafy greens harvested at the first true leaf stage), ethnic vegetables~~evolving state and ~~small fruits (such as strawberries, blackberries~~local codes, permitting and ~~raspberries) to bell peppers, cucumbers, tomatoes, and cannabis, some producers grow crops indoors in response to market dynamics or as part of their preferred farming practice.~~regulatory requirements. In service of the 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, ~~(ii)~~(iii) air handling equipment and systems, ~~(iii) a full-service engineering package~~(iv) LED lighting, benching and racking solutions for ~~designing and engineering commercial scale thermodynamic systems specific to~~indoor cultivation, ~~facilities, (iv)~~(v) automation and control devices, systems and technologies used for environmental, lighting and climate control, and ~~(v)~~(vi) preventive maintenance services for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada ~~as well as~~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 industry, ranging from several thousand to more than 100,000 square feet.

Headquartered in ~~Boulder,~~ 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.

20 24

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 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 since 2016. Third, we have a line of proprietary environmental control products, which we are in the process of expanding.

We are an integrated provider of MEP (mechanical, electrical, plumbing) engineering design, proprietary environmental control equipment, and controls and automation offerings serving the CEA industry. Historically, nearly all of our customers have been in the cannabis cultivation business. We believe our 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 ~~many~~ 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, ~~and~~ a general shortage of ~~containers.~~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 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.

21 25

Our Corporate Strategy

The three key pillars of our corporate strategy for 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 existing business; and
3 – Pursue an uplisting to a national exchange and seek additional growth capital.

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 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.
~~Seek strategic relationships, mergers, and acquisitions to add to~~In May of 2021 we announced a new strategy for 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 engineering projects for licensed, commercial facilities) we have served. Our core expertise is engineering the environmental controls of these facilities,organic growth, which is a sophisticated engineering challenge due to the high humidity (latent heat) and heat load (sensible heat) within these facilities. Not only are the loads high, but the environmental conditions within these facilities must be held within limits that the facility’s managers request. Engineering to meet these limits requires us to consider all of the primary components within the facility: lighting, irrigation, HVACD, fertigation, sensors, controls, CO₂dosing, monitoring and alarms, facility physical limits such as power availability, and energy consumption. We believe that the expertise gained in working with many of the primary components provides us with a uniquely well-informed view of the efficacy of the 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.~~ 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 – Q2 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. There is only one solution to this issue, we believe: 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. We are aware that a capital raise is potentially dilutive to our existing shareholders and options holders, which include our directors, officers, executives, and all of our employees. The Company has not raised capital in over three years. In that time our management has operated the business with financial discipline, which included reducing headcount and deferring compensation as needed. Despite this financial discipline we achieved record revenue growth. With additional capital, we believe that we can achieve much more. Uplisting to a national exchange will enhance our stock as a currency for both potential investors and for potential acquisition targets, as well as enhancing our credibility in the eyes of potential customers. Uplisting will require a reverse split of our stock.
~~Our Updated Organic Growth Strategy~~
Our growth strategy over the last few years had three primary components: increase number of customers by expanding our product line, increase order size per customer by offering more products our customers need, and increase the number of sales opportunities by engaging in strategic relationships with other leading technology providers who could bring us customers. While we will continue to conduct these activities, we have recently updated and expanded our growth strategy in response to market opportunities and will execute it over the coming months.included:

~~Since the Company was founded in 2006 as Hydro Innovations, the story of Surna has been one of growth and change, from a garage start-up in Texas in 2006~~New markets. We decided to a publicly traded corporation serving one of the fastest growing industries in the world. Our markets and customers have likewise changed as controlled environment agriculture has grown to include many plants and types of facilities. As our customers grow and their needs expand ~~we intend to grow with them.~~
22
The Company’s primary expertise has been the engineering and supply of environmental control technologies to meet the sophisticated demands of indoor CEA facilities. Most, but not all, of our customers have historically been in the legal cannabis industry and we believe that we are the oldest and most experienced company providing such services and products to the industry. Mechanical engineering is the core of our expertise and we maintain our own staff of licensed professional engineers, enabling us to stamp drawings anywhere in the US and Canada.
~~In recent years we expanded our product line and as of this writing we now are selling the following products and services:~~
~~Changes in~~ our business ~~and markets~~
~~According~~development plan to leading cannabis market research firms like Headset and New Frontier Data, the North American cannabis industry is expected to experience compound annual growth on the order of 20%-25% over the foreseeable future. More US states are legalizing either medical or recreational use of cannabis products, and sometimes both. Although the market is well aware of how the cannabis sector is growing, it seems to be less aware of thepursue non-cannabis CEA market, particularly the vertical farming segment which is growing nearly as fast as the cannabis market. Since the technical infrastructure and requirements for growing any plant in a controlled environment are similar, we believe that we can bringfacilities, at least doubling our ~~engineering expertise to this other high growth~~total addressable market.

~~In light~~New products & services. We decided to expand our product offerings from primarily environmental control to now offer all of ~~these market changes we have updated our organic growth strategy which can be summarized as:~~ ~~New Markets, New Products~~the primary technologies and ~~Services, New Trade Name~~.
1. ~~New Markets~~ - we will increase the addressable markets we serve – from primarily cannabis to the broader CEA market, including greenhouse and vertical farming facilities. We have already worked on several such non cannabis projects.
2. ~~New Products and Services~~ - we will expand our product and service range – expanding from exclusively environmental control to include most of the CEA technical infrastructure (see table below) and from facility selection to full lifecycle support after construction. In addition, we will increase our product and service range in each product category. We already provide some of these products and services, as noted below. As we do with environmental control, we will act as technology-agnostic engineers and assess each customer application, offering alternative designs and a select range of curated technologies.
3. ~~New Trade Name~~ – as we announced on May 4, 2021, we have enhanced our branding to Surna Cultivation Technologies to capture the changes in our capabilities and markets and to make it easier for prospects to find us.
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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.

~~CEA Facility Technical Infrastructure~~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 business has provided us a wide network of technology vendors from which we curate a selection of the best products. In addition, we are the leading experts in applying the most challenging component of the technical infrastructure, the environmental controls, and we have the knowledge required to engineer the interactions among the required components. A professional engineer (PE) license is not required for the design of any other component in the facility and this engineering knowledge is one of our greatest strengths.

Sustainability – indoor cultivation facilities, like data centers, are resource intensive. Several US states have implemented building code changes that place limits on the energy consumption allowed within cultivation facilities, and we anticipate that more states will do the same. Among our objectives is to 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 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 in a position to lead the industry in sustainability initiatives which our 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 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 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 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 the environmental controls of these facilities, which is a sophisticated engineering challenge due to the high humidity (latent heat) and heat load (sensible heat) within these facilities. Not only are the loads high, but the environmental conditions within these facilities must be held closely within limits that the facility’s managers request. Engineering to meet these limits requires us to consider all of the primary components within the facility: lighting, irrigation, HVACD, fertigation, sensors, controls, CO₂dosing, monitoring and alarms, facility physical limits such as power availability, and energy consumption. We believe that the expertise gained in working with many of the primary components provides us with a uniquely well-informed view of the efficacy of the 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 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.

Our Commercial-Scale Projects

During the first ~~six~~nine months of 2021, we entered into ~~sales~~ contracts ~~for seven new build projects and one retrofit project, each~~ with a ~~contract~~ value over $100,000, which we refer to as major commercial-scale projects. These new contracts totaled ~~$5,597,000,~~$11,136,000, which consisted of ~~$5,433,000~~$9,311,000 for ~~the~~ new build projects ~~(97%~~(84%), $1,459,000 for retrofit projects (13%), and ~~$164,000~~$366,000 for ~~the retrofit project~~expansion projects (3%).

Our Bookings, Backlog and Revenue

During the three months ended ~~June~~September 30, 2021, we executed new sales contracts with a total contract value of ~~$1,053,000.~~$5,693,000. During this same period, we had positive change orders of ~~$85,000~~$395,000 and cancellations of ~~$219,000.~~$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 ~~June~~September 30, 2021 were ~~$919,000,~~$5,600,000, representing ~~a decrease~~an increase of ~~$4,578,000~~$4,680,000 (or ~~126%~~509%) from net bookings of ~~$5,497,000~~$919,000 in the ~~first~~second quarter of 2021.

Our backlog at ~~June~~September 30, 2021 was ~~$7,987,000, a decrease~~$9,881,000, an increase of ~~$3,590,000,~~$1,894,000, or ~~42%~~24%, from ~~March 31,~~June 30, 2021. The ~~decrease~~increase in backlog is the result of our ~~lower~~higher net bookings ~~and higher revenue~~ in the ~~second quarter. Revenue was higher primarily due to fulfilling orders which had delays in production and delivery by some of our suppliers in the first~~third quarter. Our backlog at ~~June~~September 30, 2021 includes booked sales orders of ~~$1,282,000 (16%~~$1,250,000 (13% of the total backlog) from several customers that we do not expect to be realized until ~~2022, if at all.~~late 2022. We believe the sales orders in this portion of our backlog have an elevated level of risk and may, ultimately, be ~~abandoned~~delayed or cancelled by our ~~customer or ultimately cancelled.~~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 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 For the quarter ended
June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021
Backlog, beginning balance $ 8,875,000 $ 5,592,000 $ 8,198,000 $ 8,448,000 $ 11,578,000 $          5,592,000 $         8,198,000 $ 8,448,000 $ 11,578,000 $         7,987,000
Net bookings, current period $ (1,601,000 ) $ 4,241,000 $ 3,637,000 $ 5,497,000 $ 919,000 $ 4,241,000 $ 3,637,000 $ 5,497,000 $ 919,000 $ 5,600,000
Recognized revenue, current period $ 1,682,000 $ 1,635,000 $ 3,387,000 $ 2,367,000 $ 4,510,000 $ 1,635,000 $ 3,387,000 $ 2,367,000 $ 4,510,000 $ 3,706,000
Backlog, ending balance $ 5,592,000 $ 8,198,000 $ 8,448,000 $ 11,578,000 $ 7,987,000 $ 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 ~~June~~September 30, 2021. As of ~~June~~September 30, 2021, ~~26%~~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.

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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 ~~June~~September 30, 2021, ~~74%~~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 Q2Q3 2021 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts. ~~We estimate that we will recognize approximately 84% of our Q2 2021 backlog during the remainder of 2021, or $6.7 million. However, there~~There continues to be significant uncertainty regarding the timing of our recognition of revenue on our Q2Q3 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 ~~June~~September 30, 2021 and 2020

Revenues and Cost of Goods Sold

Revenue for the three months ended ~~June~~September 30, 2021 was ~~$4,510,000,~~$3,706,000, compared to ~~$1,682,000~~$1,635,000 for the three months ended ~~June~~September 30, 2020, representing an increase of ~~$2,827,000,~~$2,072,000, or ~~168%~~127%. The increase was primarily due to equipment revenue which included several of our 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 ~~June~~September 30, 2020.

Cost of revenue increased by ~~$1,820,000,~~$1,851,000, or ~~129%~~167%, from ~~$1,408,000~~$1,109,000 for the three months ended ~~June~~September 30, 2020 to ~~$3,227,000~~$2,959,000 for the three months ended ~~June~~September 30, 2021. The increase was primarily due to an increase in revenue ~~offset by an improved gross~~and a decrease in equipment margin as discussed below.

The gross profit for the three months ended ~~June~~September 30, 2021 was ~~$1,282,000~~$747,000 compared to ~~$275,000~~$526,000 for the three months ended ~~June~~September 30, 2020, an increase of ~~367%~~42%. Gross profit margin ~~increased~~decreased by twelve percentage points from ~~16%~~32% for the three months ended ~~June~~September 30, 2020 to ~~28%~~20% for the three months ended ~~June~~September 30, 2021 due to an increase in variable costs as a 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 ~~and variable~~ costs as a percent of revenue, as described ~~below, offset by a decrease in the selling price of our equipment resulting in a decreased equipment margin.~~below.

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled ~~$357,000,~~$337,000, or 8%9% of total revenue, for the three months ended ~~June~~September 30, 2021 as compared to ~~$283,000,~~$281,000, or 17% of total revenue, for the three months ended ~~June~~September 30, 2020. The increase of ~~$75,000~~$56,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of ~~$74,000.~~
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$55,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled ~~$2,870,000,~~$2,622,000, or ~~64%~~71% of total revenue, in the three months ended ~~June~~September 30, 2021 as compared to ~~$1,125,000,~~$827,000, or ~~67%~~51% of total revenue, in the three months ended ~~June~~September 30, 2020. The increase in variable costs was primarily due to: (i) ~~higher equipment costs of $1,887,000 resulting from~~ an increase of ~~nine percentage points~~$197,000 for ~~equipment costs as a percentage of total revenue , (ii) an increase in travel of $49,000, (iii) an increase in warranty expense of $23,000, offset by (iv) a decrease in~~ excess and obsolete inventory expense primarily related to 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 of 2020, (ii) an increase in warranty expense of ~~$202,000,~~$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 ~~services~~ 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 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 ~~$1,166,000~~$1,190,000 for the three months ended ~~June~~September 30, 2021 from ~~$880,000~~$809,000 for the three months ended ~~June~~September 30, 2020, an increase of ~~$286,000,~~$381,000, or ~~33%~~47%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of ~~$176,000,~~$232,000, (ii) an increase in advertising and marketing expenses of ~~$73,000,~~$135,000, and (iii) an increase in product development expenses of ~~$37,000.~~$14,000.

The increase in SG&A expenses for the three months ended ~~June~~September 30, 2021 compared to the three months ended ~~June~~September 30, 2020, was primarily due to: (i) an increase of ~~$93,000~~$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 ~~(ii)~~of $56,000, (iv) an increase of ~~$80,000 for commissions, (iii) an increase in accounting, consulting and other professional fees of $65,000, (iv) an increase in investor relations expenses of $37,000, (v) an increase of $14,000~~$27,000 for facility, office and other expenses, (v) an increase for business taxes, licenses and fees of $17,000, (vi) an increase in ~~loss on asset disposal~~fees paid to our Board members of $8,000, ~~(vii) an increase in travel of $7,000,~~ offset by ~~(viii)~~(vii) a decrease in ~~bad debt expense~~depreciation of ~~$61,000, (ix)~~$13,000, and (viii) a decrease in stock related compensation for employees, consultants and directors of ~~$51,000, (x) a decrease in depreciation of $12,000, and (xi) a decrease in business taxes and licenses of $4,000.~~$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 ~~$36,000, (ii)~~$46,000, (iii) an increase in salaries and benefits (including stock compensation) of ~~$31,000,~~$41,000, (iii) an increase in ~~expenses for trade shows~~travel of ~~$12,000,~~$7,000, offset by (iv) a decrease in expenses related to web development and other outside services ~~and other marketing expenses~~ of ~~$6,000.~~$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 ~~$27,000, (ii) an increase in material costs of $8,000, and (iii) an increase in travel of $2,000.~~$3,000.

Operating Income (Loss)

We had an operating ~~income~~loss of ~~$116,000~~$443,000 for the three months ended ~~June~~September 30, 2021, as compared to an operating loss of ~~$606,000~~$283,000 for the three months ended ~~June~~September 30, 2020, an increase of ~~$722,000,~~$160,000, or ~~119%~~57%. The operating ~~income~~loss for the three months ended ~~June~~September 30, 2021 included ~~$71,000~~$29,000 of non-cash, stock-based compensation and ~~$17,000~~$16,000 of depreciation and amortization expense, compared to ~~$107,000~~$56,000 of non-cash, stock-based compensation and ~~$29,000~~$28,000 of depreciation and amortization expense for the three months ended ~~June~~September 30, 2020. Excluding these non-cash items, our operating ~~income~~loss increased by ~~$674,000,~~$199,000, or ~~144%~~100%.

Other Income (Expense)

We had other income (net) of ~~$149,000~~$35,000 for the three months ended ~~June~~September 30, 2021 compared to other ~~expense~~income (net) of ~~$8,000~~$12,000 for the three months ended ~~June~~September 30, 2020. Other income for the three months ended ~~June~~September 30, 2021 ~~primarily~~ consisted of ~~$138,000 related to the Employee Retention Credit as part of the CARES act and $12,000 for~~ rental income from the sub-lease of a portion of our facility.
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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 ~~income~~loss of ~~$265,000~~$408,000 for the three months ended ~~June~~September 30, 2021 as compared to a net loss of ~~$614,000~~$270,000 for the three months ended ~~June~~September 30, 2020, an increase of ~~$879,000,~~$137,000, or ~~143%~~51%. The net ~~income~~loss for the three months ended ~~June~~September 30, 2021 included ~~$71,000~~$29,000 of non-cash, stock-based compensation and ~~$17,000~~$16,000 of depreciation and amortization expense, compared to ~~$107,000~~$56,000 of non-cash, stock-based compensation and ~~$29,000~~$28,000 of depreciation and amortization expense for the three months ended ~~June~~September 30, 2020. Excluding these non-cash items, our net ~~income~~loss increased by ~~$831,000,~~$177,000, or ~~174%~~95%.

Comparison of ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

Revenues and Cost of Goods Sold

Revenue for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$6,876,000,~~$10,582,000, compared to ~~$3,492,000~~$5,127,000 for the ~~six~~nine months ended ~~June~~September 30, 2020, representing an increase of ~~$3,384,000,~~$5,455,000, or ~~97% partially~~106% due to strong bookings in the first quarter of 2021 along with a COVID-19-driven slowdown impacting revenue for the ~~six~~nine months ended ~~June~~September 30, 2020.

Cost of revenue increased by ~~$2,488,000,~~$4,339,000, or ~~90%~~112%, from ~~$2,761,000~~$3,870,000 for the ~~six~~nine months ended ~~June~~September 30, 2020 to ~~$5,249,000~~$8,208,000 for the ~~six~~nine months ended ~~June~~September 30, 2021 primarily due to the increase in revenue.

The gross profit for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$1,627,000~~$2,374,000 compared to ~~$731,000~~$1,257,000 for the ~~six~~nine months ended ~~June~~September 30, 2020, an increase of ~~123%~~89%. Gross profit margin ~~increased~~decreased by ~~three~~two percentage points from ~~21%~~24.5% for the ~~six~~nine months ended ~~June~~September 30, 2020 to ~~24%~~22.4% for the ~~six~~nine months ended ~~June~~September 30, 2021 primarily due to ~~a decrease~~an increase in ~~fixed~~variable costs as a percent of total revenue, offset by a decrease in ~~the selling price of our equipment resulting in a decreased equipment margin and, an increase in other variable~~fixed costs as a percent of total ~~revenue as described below.~~revenue.

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled ~~$694,000,~~$1,032,000, or 10% of total revenue, for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to ~~$582,000,~~$864,000, or 17% of total revenue, for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase of ~~$112,000~~$168,000 was due to an increase in salaries and benefits (including stock-based compensation) of ~~$120,000,~~$174,000, offset by a decrease in fixed overhead of ~~$8,000.~~$6,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled ~~$4,555,000,~~$7,177,000, or ~~66%~~68% of total revenue, in the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to ~~$2,179,000,~~$3,006,000, or ~~62%~~59% of total revenue, in the ~~six~~nine months ended ~~June~~September 30, 2020. The increase in variable costs was primarily due to higher equipment costs as a result of higher ~~revenue. The~~revenue and a reduction in the selling price of our equipment ~~resulted~~resulting in lower equipment margins. Other factors included: (i) an increase in warranty of ~~$103,000~~$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 ~~$35,000,~~$71,000, offset by (iii) a decrease in excess and obsolete inventory of $222,000 primarily related to a charge in 2020 for the delay and potential cancellation of one customer’s project which was subsequently recognized in the third quarter of 2020, (iv) a decrease in outside engineering services of ~~$51,000, (v)~~$65,000, (iv) a ~~$30,000~~ 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 ~~$16,000.~~$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 ~~decreased~~increased to ~~$2,197,000~~$3,386,000 for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~$2,283,000~~$3,092,000 for the ~~six~~nine months ended ~~June~~September 30, 2020, ~~a decrease~~an increase of ~~$87,000,~~$294,000, or 4%10%. The operating expense ~~decrease~~increase consisted of: (i) ~~a decrease~~an increase in advertising and marketing expenses of $236,000, (ii) an increase in selling, general and administrative expenses (“SG&A expenses”) of ~~$192,000, offset by (ii) an increase in advertising and marketing expenses of $101,000~~$40,000, and (iii) an increase in product development expense of ~~$4,000.~~
The decrease in SG&A expenses for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, was due primarily to: (i) a decrease of $192,000 in stock-related compensation expense to employees, consultants and directors, (ii) a decrease in bad debt expense of $61,000, (iii) a decrease in accounting, consulting and other professional fees of $27,000, (iv) a decrease of $24,000 for depreciation, (v) a decrease of $23,000 for cash fees paid to directors, (vi) a decrease of $20,000 in travel, offset by (vii) an increase in commissions of $70,000, (viii) an increase of $50,000 in salaries, benefits and other employee related costs, (ix) an increase of $25,000 for investor relations expenses and (x) an increase in facilities, office and other expenses of $10,000.
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$19,000.

The increase in marketing expenses was primarily due to (i) an increase in advertising and promotion expense of ~~$52,000,~~$98,000, (ii) an increase in salaries and benefits (including stock compensation) of ~~$45,000,~~$86,000, (iii) an increase of ~~$9,000 for web development, (iv) an increase~~$65,000 for expenses related to trade shows, ~~of $6,000,~~ offset by ~~(v)~~(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 ~~$24,000~~$35,000 offset by a decrease in salaries and benefits (including stock compensation) of ~~$20,000.~~$17,000.

Operating Income (Loss)

We had operating loss of ~~$570,000~~$1,012,000 for the ~~six~~nine months ended ~~June~~September 30, 2021, as compared to an operating loss of ~~$1,552,000~~$1,835,000 for the ~~six~~nine months ended ~~June~~September 30, 2020, a decrease of ~~$982,000,~~$822,000, or ~~63%~~45%. The operating loss for the ~~six~~nine months ended ~~June~~September 30, 2021 included ~~$131,000~~$160,000 of non-cash, stock-based compensation and ~~$33,000~~$49,000 of depreciation expense, compared to ~~$298,000~~$354,000 of non-cash, stock-based compensation and ~~$58,000~~$86,000 of depreciation expense for the ~~six~~nine months ended ~~June~~September 30, 2020. Excluding these non-cash items, our operating loss decreased by ~~$791,000,~~$591,000, or ~~66%~~42%.

Other Income (Expense)

We had other income (net) of ~~$42,000~~$76,000 for the ~~six~~nine months ended ~~June~~September 30, 2021 compared to other income (net) of ~~$100~~$12,000 for the ~~six~~nine months ended ~~June~~September 30, 2020. Other income for the ~~six~~nine months ended ~~June~~September 30, 2021 primarily consisted of income of $138,000 related to the Employee Retention Credit as part of the CARES act, ~~$12,000~~$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.~~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 ~~$528,000~~$936,000 for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to a net loss of ~~$1,552,000~~$1,822,000 for the ~~six~~nine months ended ~~June~~September 30, 2020, a decrease of ~~$1,024,000,~~$886,000, or ~~66%~~49%. The net loss for the ~~six~~nine months ended ~~June~~September 30, 2021 included ~~$131,000~~$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 ~~$33,000~~$49,000 of depreciation expense, compared to ~~$298,000~~$354,000 of non-cash, stock-based compensation and ~~$58,000~~$86,000 of depreciation expense for the ~~six~~nine months ended ~~June~~September 30, 2020. Excluding these non-cash items, our net loss decreased by ~~$899,000,~~$722,000, or ~~75%~~52%.
31
Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

As of ~~June~~September 30, 2021, we had cash and cash equivalents of ~~$1,643,000,~~$2,284,000, compared to cash and cash equivalents of $2,285,000 as of December 31, 2020, a ~~decrease of 28%.~~nominal decrease. The ~~$641,000~~$1,000 decrease in cash and cash equivalents during the ~~six~~nine months ended ~~June~~September 30, 2021, was primarily the result of cash used in our operating activities of ~~$1,141,000,~~$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 ~~six~~nine months ended ~~June~~September 30, 2021, we held deposits in financial institutions that exceeded the federally insured amount. During the ~~six~~nine months ended ~~June~~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 ~~June~~September 30, 2021 was $0.

As of ~~June~~September 30, 2021, we had accounts receivable (net of allowance for doubtful accounts) of ~~$234,000,~~$32,000, inventory (net of excess and obsolete allowance) of ~~$444,000,~~$480,000, and prepaid expenses of ~~$1,987,000~~$1,143,000 (including ~~$1,873,000~~$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.

29
As of ~~June~~September 30, 2021, we had total accounts payable and accrued expenses of ~~$1,910,000,~~$1,674,000, deferred revenue of ~~$4,056,000,~~$3,060,000, accrued equity compensation of $109,000, other current liabilities of $37,000 and the current portion of operating lease liability of ~~$261,000.~~$238,000. As of ~~June~~September 30, 2021, we had a working capital deficit of ~~$2,063,000,~~$1,164,000, compared to a working capital deficit of $2,220,000 as of December 31, 2020. The decrease in our working capital deficit was primarily related to (i) ~~an increase~~a decrease in ~~prepaid expenses~~deferred revenue of ~~$949,000,~~$665,000, (ii) ~~an increase in accounts receivable of $201,000, (iii)~~ an increase in inventory of ~~$117,000, offset by (iv)~~$153,000, (iii) a decrease in cash of $641,000, (iv) an increase in deferred revenue (which represents cash received from customers in advance of the performance of services or the delivery of equipment) of $332,000, and (v) an increase in accounts payable and accrued liabilities of ~~$125,000.~~$110,000, and (iv) an increase in prepaid expenses of $106,000.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Summary of Cash Flows

The following summarizes our approximate cash flows for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

For the Six Months Ended June 30,
For the Nine Months Ended
September 30,

2021 2020 2021 2020
Net cash used in operating activities $ (1,141,000 ) $ (1,241,000 ) $ (1,761,000 ) $ 600,000
Net cash used in investing activities (14,000 ) - (14,000 ) (4,000 )
Net cash provided by financing activities 514,000 554,000 1,774,000 554,000
Net decrease in cash $ (641,000 ) $ (687,000 ) $ (1,000 ) $ 1,150,000

Operating Activities

We incurred a net loss for the ~~six~~nine months ended ~~June~~September 30, 2021 of ~~$528,000~~$936,000 and have an accumulated deficit of ~~$27,972,000~~$28,380,000 as of ~~June~~September 30, 2021.
32

Cash used in operations for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$1,141,000~~$1,761,000 compared to cash ~~used in~~provided by operations of ~~$1,241,000~~$600,000 for the ~~six~~nine months ended ~~June~~September 30, 2020, ~~a decrease~~an increase in cash usage of ~~$100,000.~~$2,361,000.

The ~~decrease~~increase in cash used in operating activities during the ~~six~~nine months ended ~~June~~September 30, 2021 was primarily attributable to: (i) a decrease in ~~net loss of $1,024,000, (ii) a decrease of $840,000 in non-cash operating charges, and (iii) an increase in~~ cash used to fund working capital of ~~$84,000.~~
~~The significant change in non-cash operating charges was due to (i) a decrease in share-based compensation of $710,000,~~$3,087,000, (ii) a decrease in ~~the provision for excess and obsolete inventory~~net loss of ~~$202,000,~~$886,000, and (iii) ~~an increase~~a decrease of $160,000 in ~~other share-based compensation of $67,000.~~non-cash operating charges.

The significant changes in working capital related to: (i) ~~an increase in prepaid expenses of $949,000, (ii) an increase in accounts receivable of $201,000, (iii) an increase in inventory of $117,000, offset by, (iv)~~ a decrease ~~in cash of $641,000, (iv) an increase~~ in deferred revenue (which represents cash received from customers in advance of the performance of services or the delivery of equipment) of ~~$332,000, and (v)~~$665,000, (ii) an increase in inventory of $153,000, (iii) a decrease in accounts payable and ~~other~~accrued liabilities of ~~$125,000.~~$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 ~~six~~nine months ended ~~June~~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. ~~The Company undertook no~~Cash used in investing activities during the ~~six~~nine months ended ~~June~~September 30, ~~2020.~~2020 was related to the purchase of property and equipment of $4,000.

Financing Activities

~~During~~Cash flows from financing activities during the ~~six~~nine months ended ~~June~~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 ~~$514,200,~~$514,000, for working capital purposes. During the ~~six~~nine months ended ~~June~~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.
30 33

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 ~~six~~nine months ended ~~June~~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 ~~six~~nine months ended ~~June~~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.

34
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.

31
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 ~~June~~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 2 – 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 ~~June~~September 30, 2021, approximately ~~$16,000~~$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 ~~June~~September 30, 2021, approximately ~~$15,000~~$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 ~~June~~September 30, 2021, we had no off-balance sheet arrangements. During the ~~six~~nine months ended ~~June~~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 to condensed consolidated financial statements, included as part of this Quarterly Report for certain significant events occurring since ~~June~~September 30, 2021.

Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United 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. Actual results could materially differ from those estimates. Key estimates include: allocation of 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, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, accounts receivable and inventory allowances, and legal contingencies.
32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, 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 and our Principal Financial and Accounting Officer, ~~which positions are currently held by the same person,~~ 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), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that as a result of material 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, 2020 filed with the SEC, our disclosure controls and procedures were not effective as of ~~June~~September 30, 2021.

We did not maintain effective controls over certain aspects of the financial reporting process because: (i) we 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, (ii) there is inadequate segregation of duties due to the limitation on the number of our accounting 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 our financial resources, remediating the several identified weaknesses has not been possible and may not be economically feasible now or in the future.

Changes in Internal Control over Financial Reporting

There were no changes identified in connection with our internal control over financial reporting during the ~~six~~nine months ended ~~June~~September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

33 36

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are not 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, 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 known to us or that we currently consider to be immaterial to our operations.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

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).
34 37

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.

SURNA INC.
(the “Registrant”)

Dated: ~~August~~November 10, 2021 By: /s/ Anthony K. McDonald
Anthony K. McDonald
Chief Executive Officer and President
(Principal Executive Officer)

Dated: ~~August~~November 10, 2021 By: /s/ ~~Anthony K. McDonald~~Richard B. Knaley
~~Anthony K. McDonald~~Richard B. Knaley
Chief Financial Officer
(Principal Financial and Accounting ~~Officer~~Officer)

35 38

EXHIBIT INDEX

Exhibit
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 * 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, 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
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith.
** Furnished herewith.

36 39

	2021			2020
	For the Six Months Ended June 30,
	2021			2020
Cash Flows From Operating Activities:
Net loss	$	(528,126	)	$	(1,551,830	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and intangible asset amortization expense		37,180			60,987
Share-based compensation		21,748			731,797
Common stock issued for other expense		67,000			-
Provision for doubtful accounts		23,213			3,150
Provision for excess and obsolete inventory		(10,945	)		191,446
Loss on disposal of assets		8,042			4,124
Amortization of ROU asset		98,913			93,996

Changes in operating assets and liabilities:
Accounts receivable		(224,183	)		51,886
Inventory		(106,299	)		235,197
Prepaid expenses and other		(949,152	)		72,811
Accounts payable and accrued liabilities		124,583			(90,178	)
Deferred revenue		331,585			(576,483	)
Accrued interest		1,972			1,047
Other liabilities		-			20,241
Lease deposit		(16,122	)		51,000
Operating lease liability, net		(130,156	)		(106,363	)
Accrued equity compensation		108,945			(433,566	)
Net cash used in operating activities		(1,141,802	)		(1,240,739	)

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

Cash Flows From Financing Activities
Proceeds from issuance of note payable		514,200			554,000
Net cash provided by financing activities		514,200			554,000

Net change in cash and cash equivalents		(641,418	)		(686,739	)
Cash and cash equivalents, beginning of period		2,284,881			922,177
Cash and cash equivalents, end of period	$	1,643,463		$	235,438

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


	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		$	-

	2021		2022		Total
Remaining performance obligations related to engineering only paid contracts	$	762,000	$	1,276,000	$	2,038,000
Remaining performance obligations related to partial equipment paid contracts		5,943,000		6,000	$	5,949,000
Total remaining performance obligations	$	6,705,000	$	1,282,000	$	7,987,000

	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020		2021		2020		2021		2020
Equipment and systems sales	$	4,245,897	$	1,486,948	$	6,409,365	$	3,093,894	$	3,523,948	$	1,481,961	$	9,933,313	$	4,575,855
Engineering and other services		172,648		157,086		353,731		288,677		110,538		114,160		464,269		402,837
Shipping and handling		90,960		38,390		112,938		109,778		71,950		38,548		184,888		148,326
Total revenue	$	4,509,505	$	1,682,424	$	6,876,034	$	3,492,349	$	3,706,436	$	1,634,669	$	10,582,470	$	5,127,018

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Share-based compensation expense included in:
Cost of revenue	$	15,809	$	8,558	$	29,944	$	17,116
Advertising and marketing expenses		6,818		2,088		13,292		5,000
Product development costs		7,335		4,343		14,029		10,888
Selling, general and administrative expenses		41,595		92,353		73,428		265,227
Total share-based compensation expense included in consolidated statement of operations	$	71,557	$	107,342	$	130,693	$	298,231

	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	%

	For the Six Months Ended
	June 30, 2021
Operating lease cost	$	108,444
Operating cash outflow from operating lease	$	139,688

		As of June 30, 2021
Operating lease right-of-use assset	$	245,037
Operating lease liability, current	$	261,187
Operating lease liability, long-term	$	43,881

Remaining lease term		1.2 years
Discount rate		5.00	%

Years ended December 31,
2021 (excluding the six months ended June 30, 2021)		142,177
2021 (excluding the nine months ended September 30, 2021)					71,710
2022		170,891			170,891
Total minimum lease payments		313,068			242,601
Less imputed interest		(8,000	)		(4,461	)
Present value of minimum lease payments	$	305,068		$	238,140

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, December 31, 2020		14,251,000	$	0.083		8.3	$	-
Granted		3,035,800	$	0.085		10.0	$	-
Exercised		-
Forfeited		-
Expired		-
Outstanding, June 30, 2021		17,286,800	$	0.084		8.1	$	-
Exercisable, June 30, 2021		15,536,800	$	0.086		7.9	$	-

	●	~~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 ~~year and an exercise price of $0.061~~.

	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	$	-	$	248,678
Vested		(1,285,800	)	$	0.112	$	-	$	143,878
Forfeited		-						$	-
Expired		-						$	-
Nonvested, June 30, 2021		1,750,000		$	0.061	$	6,125	$	104,800

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, December 31, 2020		14,251,000		$	0.083		8.3	$	-
Granted		3,035,800		$	0.085		10.0	$	-
Exercised		-
Forfeited		(287,000	)	$	0.122		6.6	$	-
Expired		-
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

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

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

Issued		-			-		-		-

Exercised		-			-		-		-

Expired		(7,562,500	)	$	0.03		-	$	0

Outstanding at June 30, 2021		0		$	0.00		0	$	0

				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											For the quarter ended
	June 30, 2020			September 30, 2020		December 31, 2020		March 31, 2021		June 30, 2021		September 30, 2020		December 31, 2020		March 31, 2021		June 30, 2021		September 30, 2021
Backlog, beginning balance	$	8,875,000		$	5,592,000	$	8,198,000	$	8,448,000	$	11,578,000	$	5,592,000	$	8,198,000	$	8,448,000	$	11,578,000	$	7,987,000
Net bookings, current period	$	(1,601,000	)	$	4,241,000	$	3,637,000	$	5,497,000	$	919,000	$	4,241,000	$	3,637,000	$	5,497,000	$	919,000	$	5,600,000
Recognized revenue, current period	$	1,682,000		$	1,635,000	$	3,387,000	$	2,367,000	$	4,510,000	$	1,635,000	$	3,387,000	$	2,367,000	$	4,510,000	$	3,706,000
Backlog, ending balance	$	5,592,000		$	8,198,000	$	8,448,000	$	11,578,000	$	7,987,000	$	8,198,000	$	8,448,000	$	11,578,000	$	7,987,000	$	9,881,000

	SURNA INC.
	(the “Registrant”)

Dated: ~~August~~November 10, 2021	By:	/s/ Anthony K. McDonald
		Anthony K. McDonald
		Chief Executive Officer and President
		(Principal Executive Officer)

Dated: ~~August~~November 10, 2021	By:	/s/ ~~Anthony K. McDonald~~Richard B. Knaley
		~~Anthony K. McDonald~~Richard B. Knaley
		Chief Financial Officer
		(Principal Financial and Accounting ~~Officer~~Officer)

Exhibit
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 *		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, 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

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).