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

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

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 ☒ NO ☐

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☒ NO ☐

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

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

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

As of ~~November 9, 2021,~~May 12, 2022, the number of outstanding shares of common stock of the registrant was ~~237,526,638~~7,784,444.

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

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:

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,~~2021, 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~~intended to be within the ~~safe harbor protection provided by~~meaning of “forward-looking statements” in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

	September 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
	(Unaudited)							(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	2,283,879		$	2,284,881		$	22,033,664		$	2,159,608
Accounts receivable (net of allowance for doubtful accounts of $186,073 and $165,098, respectively)		32,245			33,480
Accounts receivable (net of allowance for doubtful accounts of $159,744 and $181,942, respectively)								191,002			179,444
Other receivables								50,762			-
Inventory, net		480,354			327,109			1,005,918			378,326
Prepaid expenses and other		1,157,119			1,037,823			1,774,219			1,273,720
Total Current Assets		3,953,597			3,683,293			25,055,565			3,991,098
Noncurrent Assets
Property and equipment, net		98,967			147,732			77,239			77,346
Goodwill		631,064			631,064			631,064			631,064
Intangible assets, net		6,792			7,227			1,830			1,830
Deposits		24,183			-			14,747			14,747
Operating lease right-of-use asset		194,353			343,950			540,444			565,877
Total Noncurrent Assets		955,359			1,129,973			1,265,324			1,290,864

TOTAL ASSETS	$	4,908,956		$	4,813,266		$	26,320,889		$	5,281,962

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

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,674,088		$	1,784,961		$	1,389,028		$	1,345,589
Deferred revenue		3,059,525			3,724,189			5,485,416			2,839,838
Accrued equity compensation		108,945			128,434			83,625			83,625
Other liabilities		37,078			-			37,078			37,078
Current portion of operating lease liability		238,140			266,105			112,072			100,139
Total Current Liabilities		5,117,776			5,903,689			7,107,219			4,406,269

NONCURRENT LIABILITIES
Note payable and accrued interest		517,468			-
Other liabilities		37,078			74,156
Operating lease liability, net of current portion		-			169,119			459,482			486,226
Total Noncurrent Liabilities		554,546			243,275			459,482			486,226

TOTAL LIABILITIES		5,672,322			6,146,964			7,566,701			4,892,495

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			-
Series B Redeemable Convertible Preferred Stock, $0.00001 par value; 0 and 3,300 issued and outstanding, respectively								-			3,960,000
Total Temporary Equity		2,596,447			-			-			3,960,000

SHAREHOLDERS’ DEFICIT
Preferred stock; 150,000,000 shares authorized		-			-
Series A Preferred stock, $0.00001 par value; 42,030,331 shares issued and outstanding		420			420
Common stock, $0.00001 par value; 350,000,000 shares authorized; 237,526,638 and 236,526,638 shares issued and outstanding, respectively		2,376			2,366
SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred stock; 25,000,000 and 150,000,000 shares authorized, respectively								-			-
Common stock, $0.00001 par value; 200,000,000 and 850,000,000 shares authorized, respectively; 7,784,444 and 1,600,835 shares issued and outstanding, respectively								78			16
Additional paid in capital		25,017,065			26,107,159			48,958,618			25,211,017
Accumulated deficit		(28,379,674	)		(27,443,643	)		(30,204,508	)		(28,781,566	)
Total Shareholders’ Deficit		(3,359,813	)		(1,333,698	)
Total Shareholders’ Equity (Deficit)								18,754,188			(3,570,533	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	4,908,956		$	4,813,266
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)							$	26,320,889		$	5,281,962

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

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

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

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

							2022			2021
	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2021			2020			2022			2021
Cash Flows From Operating Activities:
Net loss	$	(936,031	)	$	(1,822,269	)	$	(1,422,942	)	$	(793,368	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and intangible asset amortization expense		54,973			90,867			8,556			18,377
Share-based compensation		51,055			252,757			92,517			6,342
Common stock issued for other expense		67,000			-			-			67,000
Provision for doubtful accounts		20,975			13,150			(22,168	)		-
Provision for excess and obsolete inventory		(13,764	)		(5,117	)		3,676			(4,371	)
Loss on disposal of assets		8,042			4,124			5,499			-
Amortization of ROU asset		149,597			141,871			25,433			49,051

Changes in operating assets and liabilities:
Accounts receivable		(19,740	)		27,950			10,610			6,748
Inventory		(139,481	)		714,709			(631,269	)		(187,679	)
Prepaid expenses and other		(119,296	)		(488,007	)		(551,261	)		(1,026,765	)
Accounts payable and accrued liabilities		(110,872	)		(397,181	)		43,438			5,354
Deferred revenue		(664,663	)		2,044,830			2,645,579			2,362,905
Accrued interest		3,268			-			-			718
Lease deposit		(24,183	)		-			-			(8,061	)
Operating lease liability, net		(197,085	)		(79,521	)		(14,811	)		(64,672	)
Accrued equity compensation		108,945			101,472			-			52,794
Net cash (used in)/provided by operating activities		(1,761,260	)		599,635			192,857			484,373

Cash Flows From Investing Activities
Purchases of property and equipment		(15,316	)		(3,500	)		(13,948	)		(12,326	)
Proceeds from the sale of property equipment		1,500			-
Net cash used in investing activities		(13,816	)		(3,500	)		(13,948	)		(12,326	)

Cash Flows From Financing Activities
Cash proceeds from sale of preferred stock and warrants, net of issuance costs		1,259,874			-
Payment of dividends on series B preferred stock								(35,984	)		-
Redemption of series B preferred stock								(1,980,000	)		-
Cash proceeds on sale of common stock and warrants, net of expenses								21,711,131			-
Proceeds from issuance of note payable		514,200			554,000			-			514,200
Net cash provided by financing activities		1,774,074			554,000			19,695,147			514,200

Net change in cash and cash equivalents		(1,002	)		1,150,135			19,874,056			986,247
Cash and cash equivalents, beginning of period		2,284,881			922,177			2,159,608			2,284,881
Cash and cash equivalents, end of period	$	2,283,879		$	2,072,312		$	22,033,664		$	3,271,128

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		$	-
Conversion of series B preferred stock							$	1,980,000		$	-
Deemed dividend on series B preferred stock arising on down round							$	439,999		$	-

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

CEA Industries Inc., formerly Surna Inc. (the “Company”), was incorporated in Nevada on October 15, ~~2009~~2009. We design, engineer and ~~operates under the trade name of Surna Cultivation Technologies. We are headquartered in Boulder, Colorado.~~

~~Surna Inc. is an engineering and design company focused on selling~~sell environmental control and other technologies ~~and services to~~for the Controlled Environment Agriculture ~~(CEA)~~(“CEA”) industry. ~~We leverage our experience~~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 vegetables, ornamentals, and small fruits (such as strawberries, blackberries and raspberries) to bell peppers, cucumbers, tomatoes and cannabis and hemp, some producers grow crops indoors in ~~this space~~response to ~~bring value-added technology solutions to our customers that help improve~~market dynamics or as part of their ~~overall crop quality and yield, optimize energy and water efficiency, and satisfy evolving state and local construction codes, permitting and regulatory requirements.~~preferred farming practice. In service of the CEA industry, our principal ~~service and product offerings~~technologies include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) LED lighting, benching and racking solutions for indoor cultivation, (v) automation and control devices, systems and technologies used for environmental, lighting and climate control, and (vi) preventive maintenance services for CEA ~~facilities.~~facilities Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada ~~and~~as well as 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 Louisville, 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.

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

~~In our~~economic response to the COVID-19 pandemic has affected demand across the majority of our markets and ~~the government~~disrupted work on projects. The COVID-19 pandemic is expected to have continued adverse effects on our sales, project implementation, supply chain infrastructure, operating margins, 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.working capital.

~~We are experiencing unexpected~~The resulting effects and ~~uncontrollable delays with our international supply of products and shipments~~uncertainties from vendors due to a significant increase in shipments to U.S. ports, less cargo being shipped by air, a general shortage of containers, and domestic truck driver availability. While these delays have moderately improved in recent months, we, along with many other importers of goods across all industries, continue to experience severe congestion and extensive wait times for carriers at ports across the United States. In addition, restrictions imposed by local, state and federal agencies due to the COVID-19 pandemic, ~~have led~~including the depth and duration of the disruptions to ~~reduced personnel of importers, government staff and others in our supply chain. We have been working diligently with our network of freight partners~~customers and suppliers, its future effect on our business, on our results of operations, and on our financial condition, cannot be predicted. We expect that the economic disruptions will continue to ~~expedite delivery dates~~have an effect on our business over the longer term. Despite this uncertainty, we continue to monitor costs and ~~provide solutions~~continue to take actions to reduce ~~further~~costs in order to mitigate the 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 to the ~~full extent~~best of our ability. However, these actions may not be sufficient in the long run to avoid reduced sales, increased losses and reduced operating cash flows in our business. During the three months ended March 31, 2022, the Company experienced significant delays in the receipt of equipment it had ordered to meet its customer orders due to disruption and delays in its supply chain arising from the long-term effects of the ~~impact on~~COVID-19 pandemic. Consequently, our ~~operational and financial performance will depend on~~revenue recognition of these customer sales has been delayed until future ~~developments, including~~periods when the ~~duration and spread~~shipment 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 cannotthese orders can be ~~predicted at this time.~~

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are available to be issued. The Company continues to experience recurring losses since its inception. As a result, in order to continue as a going concern, the Company has been reliant on the ability to obtain additional sources of financing to fund growth. As indicated in Note 9 – Shareholders Equity (Deficit) below, on February 15, 2022, the Company received approximately $22,000,000 in proceeds from completion of an equity offering. Based on management’s evaluation, the proceeds from the Offering will be more than sufficient to fund any deficiencies in working capital or cash flow from operations, and the Company is confident that it will be able to meet its obligations as they come due, and fund operations for at least 12 months after the date the consolidated financial statements are available to be issued. Accordingly, the conditions around liquidity and limited working capital necessary to fund operations have been addressed.

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 three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2021.~~2022. The balance sheet as of December 31, ~~2020~~2021 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.~~2021.

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

On January 17, 2022, the Company’s Board of Directors approved a reverse stock split at a ratio of one-for-one hundred and fifty. Such reverse stock split was implemented effective January 27, 2022. 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 demandpar value for the ~~Company’s products and services,~~Common Stock was not affected.

As a result of this reverse stock split, the ~~quality of product development efforts, management of working capital, and continuation of normal payment terms and conditions for purchase~~number of the Company’s ~~products. The Company believes its cash balances~~shares of common stock issued and ~~cash flow~~outstanding as of December 31, 2021, was reduced from ~~operations will be insufficient~~240,125,224 to ~~fund its operations~~1,600,835.

All Common Stock, warrants, options and per share amounts set forth herein are presented to give retroactive effect to the Reverse Split 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.all periods presented.

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.

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.~~amount of $250,000. As of March 31, 2022, the balance in the Company’s account was approximately $22,034,000, consequently $21,784,000 of this balance was not insured by the FDIC. The Company has not experienced any losses to date on depository accounts.

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 ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ there were warrants and options outstanding to purchase Company common stock and shares of convertible preferred stock and restricted stock units that were convertible into shares of the Company’s common stock. During the ~~three- and nine-month periods~~three-month period ended ~~September 30, 2021 and 2020,~~March 31, 2022, 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.

As of ~~September 30,~~March 31, 2022, and 2021, ~~and 2020,~~ there were respectively, ~~116,683,201~~8,021,057 and ~~44,007,500~~201,662, potentially dilutive equity instruments outstanding in respect of shares of convertible preferred stock and warrants and options outstanding to purchase Company common stock.

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

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the Company concluded that the projected impact of the COVID-19 pandemic on its sales, contract completion and revenues in the near term, together with the volatility in its share price during the quarter represented potential indicators of impairment. Accordingly, the Company performed an interim impairment analysis at ~~September 30, 2021~~March 31, 2022 and concluded that no impairment relating to goodwill existed at ~~September 30, 2021.~~

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.

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.

The Company accounts for revenue in accordance with ASC 606. Under the revenue standard, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Most of the Company’s contracts contain multiple performance obligations that include engineering and technical services as well as the delivery of a diverse range of climate control system equipment and components, which can span multiple phases of a customer’s project life cycle from facility design and construction to equipment delivery and system installation and start-up. The Company does not provide construction services or system installation services. Some of the Company’s contracts with customers contain a single performance obligation, typically engineering only services contracts.

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 components 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~~promise is fulfilled.

Generally, satisfaction occurs when control of the promised goods is transferred to the customer or as services are rendered or completed in exchange for consideration in an amount for which the Company expects to be entitled. 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.

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.

The Company typically receives customer payments in advance of its performance of services or transfers of goods. 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.

Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. The Companyreceives payments from customers based on the terms established in its contracts.

Contract assets include unbilled amounts where revenue recognized exceeds the amount billed to the customer and the right of payment is conditional, subject to completing a milestone, such as a phase of a project. The Company typically does not have material amounts of contract assets since revenue is recognized as control of goods isare transferred or as services are performed. As of March 31, 2022, and 2021, the Company had no contract assets.

Contract liabilities consist of advance payments in excess of revenue recognized. The Company’s contract liabilities are recorded as a current liability in deferred revenue in the consolidated balance sheets since the timing of when the Company expects to recognize revenue is generally less than one year. As of March 31, 2022, and December 31, 2021, deferred ~~revenue.~~revenue, which was classified as a current liability, was $5,485,416 and $2,839,838, respectively.

For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the Company recognized revenue of $~~283,452~~1,162,374 ~~and $3,357,068, respectively,~~ related to the deferred revenue at January 1, ~~2021.~~2022. For the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, the Company recognized revenue of $~~9,141~~1,880,634 ~~and $1,074,016, respectively,~~ related to the deferred revenue at January 1, ~~2020.~~2021.

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.

~~Notes~~ Further, based on the current economic climate, the uncertainty regarding the COVID-19 virus, and the Company’s recent cost cutting measures, there is no assurance that the Company will be able to ~~Condensed Consolidated Financial Statements~~

~~(Unaudited)~~fulfill its backlog, and the Company may experience contract cancellations, project scope reductions and project delays.

As of ~~September 30, 2021,~~March 31, 2022, the Company’s remaining performance obligations, or backlog, was $~~9,881,000~~11,179,000~~, of which $~~.~~1,161,000, or~~ 12%, was attributable to customer contracts for which the Company has only received an initial advance payment to cover the allocated value of the Company’s engineering services (“engineering only paid contracts”). There is the risk that the equipment portion of these engineering only paid contracts will not be completed or will be delayed. These reasons include the customer being dissatisfied with the quality or timeliness of the Company’s engineering services, delay or abandonment of the project because of the customer’s inability to obtain project financing or licensing, or other reasons such as a challenging business climate including an overall post-Covid-19 economic disruption or change in business direction. After the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial equipment paid contracts”), the Company is typically better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. There is significant uncertainty regarding the timing of the Company’s recognition of revenue on its remaining performance obligations, and there is no certainty that these will result in actual revenues. The backlog at ~~September 30, 2021,~~March 31, 2022, includes booked sales orders of $~~1,250,000~~2,217,000 from several customers that the Company does not expect to be realized until ~~late 2022. The~~2023, if at all. Given the present economic uncertainty arising from the impact of the novel coronavirus COVID-19, the Company believes ~~the sales orders in this portion~~that several of ~~our backlog have an elevated level of risk and~~its current contracts may ~~ultimately,~~ be delayed or ~~cancelled by our customers.~~canceled.

The remaining performance obligations expected to be recognized through ~~2022~~2023 are as follows:

The ~~following table sets forth~~Company warrants the products that it manufactures for a warranty period equal to the lesser of 12 months from start-up or 18 months from shipment. The Company’s warranty provides for the repair, rework, or replacement of products (at the Company’s ~~revenue by source:~~option) that fail to perform within stated specification. The Company’s third-party suppliers also warrant their products under similar terms, which are passed through to the Company’s customers.

The Company assesses the historical warranty claims on its manufactured products and, since 2016, warranty claims have been approximately 1% of ~~Revenue by Source~~annual revenue generated on these products. Based on the Company’s warranty policy, an accrual is established at 1% of the trailing 18 months revenue. The Company continues to assess the need to record a warranty reserve at the time of sale based on historical claims and other factors. As of March 31, 2022, and December 31, 2021, the Company had an accrued warranty reserve amount of $187,702 and $186,605, respectively, which are included in accounts payable and accrued liabilities on the Company’s consolidated balance sheets.

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

The grant date fair value of stock options is based on the Black-Scholes Option Pricing Model (the “Black-Scholes Model”). The Black-Scholes Model requires judgmental assumptions including volatility and expected term, both based on historical experience. The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected term of the option. The Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options granted throughout the year. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the valuation assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility ranged from ~~150.2~~158.21% to ~~152.51~~158.70%; expected term in years 10 and risk-free interest rate ranged from ~~0.55%~~1.52% to ~~1.49~~1.98%.

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

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

The following is a summary of share-based compensation expenses included in the condensed consolidated statements of operations for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Included in the expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, is an accrual for $052,794 ~~and $108,945, respectively,~~ for the 2021 ~~Annual Employee Incentive Compensation Plan. Included in the expense for the three and nine months ended September 30, 2020, is an accrual for $31,575~~ ~~and $101,472, respectively, for the 2020~~ Annual Employee Incentive Compensation Plan.

One customer accounted for 35% of the Company’s revenue for the three months ended March 31, 2022. Three customers accounted for 38%, 2316%, and 11% of the Company’s revenue for the three months ~~ended September 30, 2021 and three customers accounted for~~ 25%, 12~~% and~~ 12~~% of the Company’s revenue for the nine months ended September 30,~~March 31, 2021. ~~Two customers accounted for~~ 39~~% and~~ 30~~% of the Company’s revenue for the three months ended September 30, 2020 and three customers accounted for~~ 18%, 17~~% and~~ 11~~% of the Company’s revenue for the nine months ended September 30, 2020.~~

Three customers accounted for 4044%, 2619% and 2216% of the Company’s accounts receivable as of ~~September 30, 2021. As of September 30, 2020, four~~March 31, 2022. Two customers accounted for 3260%, 23%, 21% and 1031% of the Company’s accounts ~~receivable.~~receivable as of March 31, 2021.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires companies to apply ASC 606, “Revenue from Contracts with Customers” to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in ASC 805, which uses fair value. The guidance is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted, and the guidance should be applied prospectively. The impact of the standard on Company’s consolidated financial statements is dependent on the size and frequency of any future acquisitions the Company may complete.

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~~has not ~~have~~had a material impact on ~~its~~the Company’s consolidated financial statements.

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

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

~~In January 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.

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.

On July 28, 2021, the Company ~~recognized its~~entered into an agreement to lease ~~for~~11,491 square feet of office and manufacturing ~~and office~~ space (the ~~“Facility~~“New 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~~.Louisville, CO. The New Facility Lease commenced ~~September 29, 2017~~on November 1, 2021 and continues through ~~August~~January 31, ~~2022.~~2027. From November 2021 through January 2022, the monthly rent was abated. Beginning February 2022, the monthly rent is $10,055 and will increase by 3% annually every November through the end of the New Facility Lease term. Pursuant to the New Facility Lease, the Company made a security deposit of $14,747. The Company has the option to renew the New Facility Lease for an additional five ~~years~~years. Additionally, the Company pays the actual amounts for property taxes, insurance, and common area maintenance. The New Facility Lease agreement contains customary events of default, representations, warranties, and covenants.

Upon commencement of the New Facility Lease, the Company recognized on the balance sheet an operating lease right-of-use asset and lease liability in the amount of $582,838. ~~However,~~The lease liability was initially measured as the present value of the unpaid lease payments at commencement and the ROU asset was initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The renewal option to extend the New Facility Lease is not included in the right-of-use asset or lease liability, as the option is not reasonably certain ~~of exercise.~~to be exercised. 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.

~~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:

	As of September 30, 2021			As of March 31, 2022
Operating lease right-of-use assset	$	194,353
Operating lease right-of-use asset				$	540,444
Operating lease liability, current	$	238,140		$	112,072
Operating lease liability, long-term	$	-		$	459,482

Remaining lease term		.9 years			4.8 years
Discount rate		5.00	%		3.63	%

Future annual minimum lease payments on the Facility Lease as of ~~September 30, 2021 were~~March 31, 2022 are as follows:

~~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 was initially charged at $~~5,989~~ ~~per month and increased to $11,978~~ per month effective July 1, 2021. The Sublessor is also responsible for its prorated share of utilities and other related costs. This new sublease does not change the 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.

~~On July 27, 2021, the Company entered into a Lease Termination Agreement with its current landlord for the~~ ~~18,952~~ ~~square foot office and manufacturing facility in Boulder, CO, which was previously scheduled to expire on~~ ~~August 31, 2022~~. The termination provides for the Company to vacate the facility no later than November 15, 2021. In exchange for early termination from its lease obligation, the Company paid a nominal lease termination fee on July 28, 2021. The termination was also contingent upon a successor tenant executing a new lease with the landlord and the Company paying the remaining deferred rent and security deposit amounts (~~See Contractual Payment Obligations~~ ~~section). The landlord and successor tenant entered into a lease agreement on July 27, 2021. The remaining deferred rent and security deposit will be paid in conjunction with the final rent payment.~~

~~On July 28, 2021, the Company entered into an agreement to lease~~ ~~11,491~~ ~~square feet of office and manufacturing space in Louisville, CO. The lease commences on November 1, 2021 and continues through~~ ~~January 31, 2027. The Company has the option to renew the lease for an additional 60-month period.~~

	September 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Finished goods	$	319,335		$	201,778		$	913,887		$	272,199
Work in progress		2,595			4,231			971			1,050
Raw materials		237,704			214,145			186,115			196,456
Allowance for excess & obsolete inventory		(79,281	)		(93,045	)		(95,055	)		(91,379	)
Inventory, net	$	480,354		$	327,109		$	1,005,918		$	378,326

Overhead expenses of $~~17,674~~16,555 and $~~17,974~~13,589 were included in the inventory balance as of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, respectively.

~~Notes~~ for inventory in transit from one of our suppliers that was delivered to ~~Condensed Consolidated Financial Statements~~

Advance payments on inventory purchases are recorded in prepaid expenses until title for such inventory passes to the Company. Prepaid expenses included approximately $~~879,000~~1,579,000 and $~~916,000~~1,069,000 in advance payments for inventory for the periods ended ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, respectively.

	September 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Furniture and equipment	$	296,851		$	398,422		$	271,056		$	274,472
Vehicles		15,000			15,000			15,000			15,000
Leasehold improvements		215,193			215,193			-			-
		527,044			628,615
Property and equipment, gross								286,056			289,472
Accumulated depreciation		(428,076	)		(480,883	)		(208,817	)		(212,126	)
Property and equipment, net	$	98,967		$	147,732		$	77,239		$	77,346

Depreciation expense was $~~54,538~~8,556 for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, $~~4,721~~1,214 was allocated to cost of sales, ~~and~~ $~~1,180~~304 was allocated to inventory with the remainder recorded as selling, general, and administrative expense.

	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Accounts payable	$	864,558	$	918,639	$	729,040	$	616,056
Sales commissions payable		40,758		48,263		9,107		27,592
Accrued payroll liabilities		255,462		288,071		266,456		322,873
Product warranty accrual		172,868		173,365		187,702		186,605
Other accrued expenses		340,442		356,623		196,723		192,463
Total	$	1,674,088	$	1,784,961	$	1,389,028	$	1,345,589

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~~On November 30, 2021, the ~~three~~ Company received notice from the bank that its loan received on February 10, 2021, in the principal amount of $514,200and ~~nine months ended September 30, 2021,~~all accrued interest of $~~1,296~~2,832 ~~and $3,268~~, was ~~accrued, respectively,~~fully forgiven. This gain on loan forgiveness was recorded as Other Income in ~~respect~~the Statement of ~~this note payable.~~Operations during the year ended December 31, 2021.

~~As of December 31, 2019, there were~~ ~~6,750,000~~ ~~restricted stock units that had not been~~The Company settled ~~due to~~ a ~~dispute~~litigation 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. Effectiveeffective March 30, 2021, ~~this separate litigation has now been settled. While~~which included the ~~Company disputed the merits~~issuance 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~~6,667 shares of common stock of the ~~Company.~~Company, as part of the settlement. These shares were issued on April 8, 2021, as “restricted securities,” subject to a lock-up agreement of six months, without registration rights, and pursuant to a private placement ~~exemption and were valued at $67,000~~.exemption. 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~~Other Expenses during the ~~nine months~~year ended ~~September 30,~~December 31, 2021. ~~As of September 30, 2021, $35,000~~ ~~has been paid in respect of the $40,000~~ ~~cash portion of the settlement and the remaining $5,000~~ ~~is included in accounts payables and accrued liabilities.~~ The issuance of the ~~1,000,000~~6,667 shares of common stock ~~valued~~(valued at $67,000) has been recognized in common stock issued during the ~~nine months~~year ended ~~September 30,~~December 31, 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.

The Company has a lease agreement for its manufacturing and office space. Refer to Note 2 Leases above.

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.

On September 28, 2021, ~~Surna Inc. (the “Company”)~~the Company sold to an institutional investor (the “Investor”), 3,300shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”), stated value $1,000per 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 inon September 28, 2021, and the ~~quarter and will receive the remaining~~balance of approximately $1,365,000 ~~pursuant to the terms of the escrow.~~on November 4, 2021.

The Series B Preferred Stock ~~has~~had an annual dividend of 8% and ~~has~~ an initial common stock conversion price of $~~0.057~~8.55. The conversion rate iswas 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, iswas sold at a price below the then conversion price.

The Series B Preferred Stock iswas mandatorily convertible on the third anniversary of its issuance. All conversions of the Series B Preferred Stock ~~are~~were 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.~~

Probability of Redemption: As it was considered probable the Series B Preferred stock ~~will~~would become redeemable outside of the Company’s control, the Series B Preferred stock ~~needs to be~~was disclosed as temporary equity and ~~restated at the balance sheet date at~~was initially adjusted as of September 30, 2021 to its redemption value of 120% of 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.~~adjustment during 2021. 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’~~Shareholders” on the Company’s Consolidated Statements of Operations. In addition, since the Company ~~does~~did not have a balance of retained earnings, the redemption value adjustment was recorded against additional paid-in capital.

On February 16, 2022, the Company redeemed 1,650 shares of its Series B ~~Redeemable Convertible~~Preferred Stock ~~Subscription Receivable~~for payment of $2.016 million in cash, which included both principal and accrued dividends of approximately $36,000.

OfOn February 16, 2022, the ~~net proceeds~~remaining 1,650 shares of the Company’s Series B Preferred Stock were converted into 362,306 shares of common stock and 703,069 warrants; 170,382 of the warrants vested immediately, have an indefinite term and an exercise price of $~~2,624,874~~0.01 ~~receivable under~~(“pre-funded conversion warrants”), the ~~Securities Purchase Agreement relating to~~balance of 532,688 warrants also vested immediately, have a term of 5 years and have an exercise price of $5.00. The initial common stock conversion price for the shares of Series B Preferred Stock was $8.55. However, the terms of the Series B preferred stock ~~and related warrants,~~were such that the stock conversion price was to be reduced to 75% of the offering price in any subsequent qualified public offering of Company equity instruments, if lower than the common stock conversion price of $~~1,365,000~~8.55. The Company’s public offering that closed on February 15, 2022, was ~~put into escrow pending~~completed at an offering price of $4.13. Accordingly, the ~~completion~~initial common stock conversion price for the shares of ~~i) an amendment~~ Series B Preferred Stock was reduced from $8.55 to $3.0975, representing 75% of the ~~Articles~~offering price of ~~Incorporation~~ $4.13. As a result, the Company recognized a deemed dividend of $439,999 to ~~increase~~Series B Shareholders in respect of the ~~number of authorized~~additional shares of common stock to ~~850,000,000~~ ~~shares, (ii)~~ and warrants they received on the ~~redemption~~conversion of ~~the outstanding~~their shares of Series AB Preferred ~~Stock of~~stock. As the Company ~~for common stock at~~does not have a balance of retained earnings, 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.~~deemed dividend was recorded against additional paid-in capital.

~~Accordingly,~~The Company has no remaining Preferred Shares outstanding as of ~~September 30, 2021, these funds were disclosed as Series B Redeemable Convertible Stock Subscription Receivable on the Company’s consolidated balance sheet~~March 31, 2022.

~~As of September 30, 2021, and December 31, 2020, the Company has~~ ~~150,000,000~~ ~~shares authorized at a $0.00001~~ ~~par value.~~

~~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.~~

On ~~September 28, 2021,~~January 3, 2022, the Company ~~entered into~~issued 3,125 non-qualified stock options under the 2021 Equity Incentive Plan to each of two existing directors. The options had an exercise price of $4.80, vested immediately and had a ~~Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to~~term ending at the earlier of five years after the date on which the ~~Investor purchased from~~optionee’s continuous service ends, or the tenth anniversary on which the option was granted.

On January 17, 2022, the Company ~~3,300~~ ~~shares~~issued an RSU grant 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~~3,367 shares of common stock 2021 Equity Incentive Plan to each of two new directors, 1,684 shares of common stock vested immediately on grant date and the remaining 1,683 shares of common stock will vest on January 17, 2023, if the recipient remains in service as an independent director. 1,684 shares of common stock were issued to each of the ~~Company (“Investor Warrant”),~~two new directors in settlement of the RSUs that vested immediately.

On January 17, 2022, the Board of Directors revised the previously adopted compensation plan. This plan supersedes the plan adopted on August 20, 2021. The Plan is effective retroactively for ~~an aggregate purchase price~~the current independent directors and for independent directors elected or appointed after the Effective Date. 3,367 restricted stock units in respect of $this plan were issued on January 17, 2022. Cash fees were paid on January 21, 2022.

On January 17, 2022, the Company’s Board of Directors approved a reverse stock split at a ratio of one-for-one hundred and fifty. The reverse stock split was implemented effective January 27, 2022. The par value for the Common Stock was not affected.

As a result of this reverse stock split, the ~~PIPE Financing, referenced above and described in~~ ~~Note 8~~,number of the ~~Company has~~ ~~3,300~~ ~~shares issued and outstanding as of September 30, 2021.~~

~~As of September 30, 2021, and December 31, 2020, the Company was authorized to issue~~ ~~350,000,000~~Company’s shares of common stock ~~with a par value of $0.00001~~ ~~per share.~~

~~Effective~~issued and outstanding at December 31, ~~2020,~~2021 was reduced from ~~236,526,638~~240,125,244 ~~shares of common stock were issued~~to 1,600,835. All Common Stock, warrants, options and ~~outstanding.~~per share amounts set forth herein are presented to give retroactive effect to the Reverse Split for all periods presented.

In connection with the ~~nine months ended September 30, 2021, we issued~~aforementioned reverse stock split, the Company’s Board of Directors approved the reduction of the authorized capital of the Company to ~~1,000,000~~ 200,000,000shares of common stock ~~valued at $~~and ~~67,000~~ 25,000,000~~as part~~ shares of ~~a legal settlements further described in~~ ~~Note 7 – Commitments and Contingencies – litigation above.~~preferred stock.

On February 10, 2022, the Company signed a firm commitment underwriting agreement for the public offering of shares of common stock and warrants, which closed on February 15, 2022. The Company received net proceeds of approximately $22 million for the sale of 5,811,138 shares of common stock and 6,572,808 warrants, each warrant to purchase one share of common stock for five years, exercisable immediately, at an exercise price of $5.00. The Company also issued to the representative of the underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.1625, during the period commencing August 9, 2022, and expiring on February 10, 2027.

As of March 31, 2022, the Company had 200,000,000 shares authorized at a $.00001 par value. Effective March 31, 2022, ~~237,526,638~~7,784,444 shares of common stock were issued and outstanding.NaN shares of preferred stock are issued and outstanding.

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~~333,333 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 three months ended March 31, 2022, no shares or options were issued and 13,333 options were cancelled under the 2017 Plan.

As of March 31,2022, of the 333,333 shares authorized under the 2017 Plan for equity awards, 163,692 shares have been issued, awards related to 148,905 options remain outstanding, and 20,736 shares remain available for future equity awards.

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~~666,667 shares of common stock. The 2021 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), non-qualified stock options, stock appreciation rights (“SARs”), restricted stock awards and restricted stock unit awards and other equity linked awards to our employees, consultants and directors. If an equity award (i) expires or otherwise terminates without having been exercised in full or (ii) is settled in cash (i.e., the holder of the award receives cash rather than stock), such expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of common stock that may be issued pursuant to this Plan.

~~During the nine months ended September 30, 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 $90,255~~ ~~in unrecognized compensation expense for unvested non-qualified stock options at September 30, 2021 which will be recognized over approximately~~ 3 ~~years.~~

During the three months ended March 31, 2022, the Company issued 3,367 shares of its common stock to two new independent directors under the 2021 Equity Incentive Plan, pursuant to the Director Compensation plan adopted in January 2022.

During the three months ended March 31, 2022, the Company granted awards for 21,167 non-qualified stock options to employees under the 2021 Equity Incentive Plan as described below.

During the three months ended March 31, 2022, the Company granted awards for 6,250 non-qualified stock options to directors under the 2021 Equity Incentive Plan, pursuant to the Director Compensation plan adopted in August of 2021.

As of March 31,2022, of the 666,667 shares authorized under the 2021 Equity Plan, 10,170 relate to restricted shares issued, 33,408 relate to outstanding non-qualified stock options, 40,816 relate to outstanding incentive stock options, 3,367 relate to outstanding restricted stock units and 578,906 shares remain available for future equity awards.

There was $222,707 in unrecognized compensation expense for unvested non-qualified stock options, incentive stock options and restricted stock units at March 31, 2022 which will be recognized over approximately 3 years.

A summary of the non-qualified stock options and incentive stock options granted to employees and consultants under the 2017 and 2021 Equity ~~Plan~~Plans during the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, are presented in the table below:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		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	$	-
Outstanding, December 31, 2021											158,174		$	10.99		7.6	$	-
Granted		3,035,800		$	0.085		10.0	$	-		21,167		$	3.55		9.8	$	4,650
Exercised		-									-		$	-		-	$	-
Forfeited		(287,000	)	$	0.122		6.6	$	-		(13,333	)	$	9.15		0.0	$	-
Expired		-									-		$	-		-	$	-
Outstanding, September 30, 2021		16,999,800		$	0.083		7.9	$	-
Exercisable, September 30, 2021		15,249,800		$	0.085		7.7	$	-
Outstanding, March 31, 2022											166,007		$	10.18		8.2	$	4,650
Exercisable, March 31, 2022											118,828		$	11.89		7.6	$	610

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we issued a total of ~~3,035,800~~21,167 stock options to employees as follows:

A summary of non-vested non-qualified stock options activity for employees and consultants under the 2017 and 2021 Equity ~~Plan~~Plans for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, are presented in the table below:

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

Nonvested, December 31, 2020		-		$	-	$	-	$	-
Nonvested, December 31, 2021											41,846		$	7.65	$	-	$	320,122
Granted		3,035,800		$	0.082	$	-	$	-		21,167		$	3.51	$	-	$	74,296
Vested		(1,285,800	)	$	0.112	$	66,412	$	-		(4,167	)	$	4.50	$	-	$	(18,751	)
Forfeited		-						$	-		(11,667	)	$	9.01	$	-	$	(105,120	)
Expired		-						$	-		-		$	-	$	-	$	-
Nonvested, September 30, 2021		1,750,000		$	0.061	$	-	$	104,800
Nonvested, March 31, 2022											47,179		$	5.73	$	-	$	270,547

For the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020,~~ the Company recorded $~~29,881~~32,939 and $~~171,624~~0 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 and the 2021 Equity Plan, during the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, are presented in the table below:

~~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~~three months ended ~~September 30, 2021,~~March 31, 2022, are presented in the table below:

	Number of Options			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value			Grant-Date Fair Value		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		$	-
Nonvested, December 31, 2021												-		$	-	$	-		$	-
Granted		230,770			0.065	$	(1,154	)	$	-		6,250		$	4.80	$	(14,313	)	$	29,688
Vested		(1,230,770	)	$	0.036	$	(29,846	)	$	-		(6,250	)	$	4.80	$	14,313		$	(29,688	)
Forfeited		-										-		$	-	$	-		$	-
Expired		-										-		$	-	$	-		$	-
Nonvested, September 30, 2021		-				$	-		$	-
Nonvested, March 31, 2022												-				$	-		$	-

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020,~~ the Company incurred $~~21,174~~29,656 and $~~55,970~~6,342, respectively, as compensation expense related to ~~1,230,770~~6,250 and ~~1,521,352~~3,333 vested options, respectively, issued to directors.

Effective ~~June 24, 2020~~, January 3, 2022, 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~~6,250 non-qualified stock options under the 2021 Equity Plan to its then current 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.

~~There has been no activity related~~Effective January 17,2022, the Company issued 6,734 restricted stock units (RSUs) under the 2021 Equity Plan to newly appointed directors. 3,367 of these RSUs ~~during~~vested upon grant and the ~~nine months ended September 30, 2021.~~remining 3,367 will vest on January 17, 2023.

The Company recorded $~~25,163~~ 29,923during the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2022, as compensation expense related to vested RSUs issued to ~~employees, directors and consultants.~~directors.

~~Effective April 30, 2020,~~ ~~800,000~~ ~~RSUs vested. However, the holder elected to cancel the RSUs.~~

The following table summarizes information with respect to outstanding warrants to purchase common stock during the ~~nine~~three months ended ~~September 30, 2021:~~March 31, 2022:

The following table summarizes information about warrants outstanding at ~~September 30, 2021:~~March 31, 2022:

Q3 2021 ~~7,562,500~~ ~~warrants issued in connection with our Q2 2018 unit offering expired unexercised.~~Warrants Issued to Series B Preferred Stockholder

~~Effective~~On September 28, 2021, ~~we issued~~the Company entered into a Securities Purchase Agreement with an institutional investor, pursuant to which the investor purchased from the Company ~~28,947,368~~3,300 ~~warrants~~shares of convertible Series B Preferred Stock with a stated value of $1,000 per share, or $3,300,000 of stated value in the aggregate, and a warrant to purchase up to 192,982 shares of common stock of the Company for an aggregate purchase price of $3,000,000. The warrant is exercisable until September 28, 2024, at an exercise price of $~~0.063~~9.45, subject to adjustment for stock splits, stock dividends and other typical adjustments and changes in capitalization, including mergers and acquisitions and distribution of rights.

In connection with the sale of the shares of convertible Series B Preferred Stock described above, the Company issued 34,737 ~~and a~~ 3~~-year term~~warrants to the ~~Holders~~placement agent and its designees. Half of ~~our Series B redeemable convertible preferred~~the warrants were issued on September 28, 2021, and the second half were issued on November 3, 2021, and are exercisable commencing February 28, 2022 and May 3, 2022, respectively, until September 28, 2024 and November 3, 2024, respectively. The exercise price per share of the warrants is $10.40, subject to adjustment for stock splits, stock dividends and other typical adjustments and changes in capitalization, including mergers and acquisitions and distribution of rights.

On February 15, 2022, the Company issued 5,811,138 investment units for aggregate gross proceeds of $24,000,000, or $4.13 per unit. Each unit consisted of one share of the Company’s common stock and one warrant for the purchase of one share of the Company’s common stock. The warrants vested immediately, had a term of ~~5,210,526~~5 years ~~warrants with~~and an exercise price of $~~0.0693~~5.00.

Further on February 15, 2022, in connection the Company’s issuance of 5,811,138 investment units for aggregate gross proceeds of $24,000,000, or $4.13 per unit as described above, a further 761,670 warrants were issued in connection with the subscription for substantially all of the available 15% overallotment warrants. The warrants were acquired for consideration of $0.01 per warrant, vested immediately, had a term of 5 years and a an exercise price of $35.00~~-year term to~~.

Further on February 15, 2022, in connection the ~~placement agent in respect~~Company’s issuance of 5,811,138 investment units for aggregate gross proceeds of $24,000,000, or $4.13 per unit described above, the Company also issued representatives of the ~~sale~~underwriters 290,557 warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $5.1625, during the period commencing August 9, 2022, and expiring on February 10, 2027.

On February 16, 2022, in connection with the conversion of 1,650 shares of Series B Preferred Stock into 362,306 shares of the Company’s common stock, the Series B ~~redeemable convertible preferred stock.~~ Preferred Shareholder was issued with 170,382 pre-funded conversion warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $0.01, vested immediately and had an indefinite life.

Further on February 16, 2022, in connection with the conversion of 1,650 shares of Series B Preferred Stock into 362,306 shares of the Company’s common stock, the Series B Preferred Shareholder was also issued with 532,688 Series B Preferred shares conversion warrants. Each warrant entitled the holder to purchase one share of common stock at an exercise price of $5.00, vested immediately and had a term of 5 years.

As of ~~September 30, 2021,~~March 31, 2022, the Company has U.S. federal and state net operating losses (“NOLs”) of approximately $~~20,260,000~~22,514,000, of which $~~11,196,261~~11,196,000 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 ~~80%~~80%. In response to the novel coronavirus COVID-19, the Coronavirus Aid, Relief, and Economic Security Act temporarily repealed the ~~80%~~80% limitation for NOLs arising in 2018, 2019 and 2020. ~~Pursuant~~

In addition, 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 ~~50%~~50% within a three-year period. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period.

~~Notes~~, the corporation’s ability to ~~Condensed Consolidated Financial Statements~~

use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. Our sale of securities, both in September ~~30,~~ 2021

~~(Unaudited)~~ and February 2022, will need to be considered for determination of any “ownership change” that we have undergone during a determination period. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future bottom-line operating results by effectively increasing our future tax obligations

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. 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.

The ~~company~~Company entered into a manufacturer representative agreement with RSX Enterprises (“RSX”) 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~~had an initial term through December 31, 2021 with automatic one-year renewal terms unless prior notice is given 90 days prior to each annual expiration. During the three months ended ~~September 30, 2021,~~March 31, 2022, the Company paid $~~26,873~~7,555 in commissions under this agreement.

In accordance with ASC 855, Subsequent Events, the Company has evaluated all subsequent events through the date the financial statements were available to be issued. No material subsequent events occurred after ~~September 30, 2021,~~March 31, 2022, other than as set out below:

On ~~November 3,~~April 1, 2022, 31,793 non-qualified stock options were issued to 21 employees in respect of the Company’s 2021 ~~we increased our authorized capital to one billion shares~~Annual Incentive Awards. The options vested immediately, have a term of ~~capital stock,~~10 years and an exercise price of ~~which~~ ~~850,000,000~~ ~~are designated as common stock and~~ ~~150,000,000~~ ~~are designated as preferred stock.~~

~~On November 3, 2021, we were authorized to redeem the outstanding Series A Preferred Stock, which was completed on November 4, 2021.~~

~~On November 4, 2021, we received the remaining~~ $~~1,365,000~~2.51 ~~from escrow~~. The expense in ~~relation to the Series B Preferred Stock.~~respect of this issuance had been fully in fully accrued in 2021.

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,~~2021, 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,~~2021, 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.”

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.

~~Surna Inc.~~CEA Industries is an engineering and design company focused on selling environmental control and other technologies and services to the Controlled Environment Agriculture ~~(CEA)~~(“CEA”) industry. WeThe CEA industry uses technology-based methods to grow crops in a way that provides protection from the outdoor elements; these methods have traditionally included indoor agriculture and vertical farming. The CEA industry aims to optimize the use of horticultural resources such as water, energy, space, capital and labor, to create an agriculture business that is more efficient and more productive than traditional farming methods.

Headquartered in Colorado, we leverage our experience in ~~this space~~the CEA industry to bring our customers a variety of value-added technology solutions ~~to our customers~~ that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements. ~~In service~~We do this by offering our customers a variety of ~~the CEA industry, our~~ principal service and product offerings that include: (i) architectural design and licensed engineering of commercial scale thermodynamic systems specific to cultivation facilities, (ii) liquid-based process cooling systems and other climate control systems, (iii) air handling equipment and systems, (iv) LED lighting, benching and racking solutions for indoor cultivation, (v) automation and control devices, systems and technologies used for environmental, lighting and climate control, and (vi) preventive maintenance services for CEA facilities. Our customers include commercial, state- and provincial-regulated CEA growers in the U.S. and Canada and other international locations. Customers are those growers building new facilities and those expanding or retrofitting existing facilities.

Currently, our revenue stream is derived primarily from supplying our products, services and technologies to commercial indoor facilities operating in the cannabis ~~industry, ranging~~industry. Our customers include state and provincial-regulated CEA growers located in the U.S., Canada and other international locations. They are focused on building new CEA facilities and expanding or retrofitting existing CEA facilities. Our customers operate CEA facilities that range in size from several thousand square feet to more than 100,000 square feet.

Headquartered in Colorado, we leverage our experience in this space to bring value-added climate control solutions to our customers that help improve their overall crop quality and yield, optimize energy and water efficiency, and satisfy the evolving state and local codes, permitting and regulatory requirements.

~~All~~ CEA ~~facility operators are facing multiple headwinds of~~growers currently face a challenging business environment that includes high energy costs, ~~issues about~~ water usage and conservation issues, and continuously evolving waste ~~materials, and, in the case of~~removal regulations. In addition to these issues, our cannabis growing customers face increasingly rigorous quality standards and declining cannabis ~~prices. To be competitive, among other things,~~prices in a growing industry whose standards are constantly evolving. A primary challenge for our customers ~~must develop~~involves finding innovative ways to ~~meet the demands of their business and~~ reduce energy costs. On average, 50% of our customers’ energy costs ~~90% of~~are driven by HVACD systems and another 40% by lighting systems.

We support our clients by providing integrated mechanical, electrical, and plumbing (“MEP”) engineering design, proprietary and curated environmental control equipment, and automation offerings that serve the CEA industry. In addition, we believe we are among the leading experts in engineering environmental control systems for CEA facilities, which is ~~typically related~~commonly viewed as the most challenging component of a CEA facility’s technical infrastructure. Over our 16 years in business, we have served over 200 commercial indoor CEA facilities. While a professional engineer (“PE”) license is not required in any other design component of a CEA facility, such a license is required for the design of a CEA facility’s environmental control equipment, and our senior engineers hold PE licenses.

We believe our customers partner with us because we have the reputation and experience to help them make cost-conscious and effective decisions on their ~~HVACD (50%~~environmental and climate control systems. Our clients are focused on their crops and rely on us to partner with them on ways to optimize their CEA facility. We are also mindful of the evolving and substantial environmental sustainability standards and concerns raised by governments, consumers and other stakeholders. CEA facilities are resource intensive, and a growing list of states have implemented building code changes that limit energy consumption in cultivation facilities. Energy and resource efficiency is a high priority to us as engineers, and the senior engineers on our team hold the Leadership in Energy and Environmental Design (“LEED”) credential. In addition, our CEO helped build a cleantech company, and ~~lighting systems (40%).~~is a published author in the energy efficient technologies space. We believe this sustainability-focused technical experience is a unique advantage that our customers value when working with us.

While the Company historically focused on HVACD systems, ~~have historically been our focus, but~~ in May of 2021, we announced an initiative to expand our product and service offerings to include most of the technical product and service infrastructure ofrequirements associated with building and retrofitting CEA facilities, as well as post-build recurring maintenance services. ~~We often have the advantage of~~Our engineering design services and consulting expertise facilitates early engagement with our customers at the pre-build and construction phases, and this enables us to better understand our customers’ goals at the ~~corresponding opportunity~~beginning of a project, and provide the associated infrastructure products and services to ~~build longer-term~~reach those goals. Through our prior engagements with customers, we have built long-term relationships with our existing customers, ~~and their facilities. Going forward, our~~which we plan is to leverage ~~our existing customer relationships~~ and ~~attempt to sell them additional products and services, thereby becoming “stickier” to our customers.~~build on in the future.

We have three core assets that we believe ~~are important to~~will support us as we pursue our ~~going-forward~~ business strategy. First, we ~~have multi-year~~enjoy strong relationships with ~~customers and others~~relevant stakeholders in the CEA ~~industry, notably~~industry. Largely focused in the cannabis ~~segment.~~segment, our partnerships include relationships with new and existing growers, capital providers, consultants, independent contractors, and numerous others. Second, ~~we have~~our experience in this industry over time has built up specialized engineering know-how and ~~experience gathered~~experience. We have been serving indoor cultivators since 2006 and designing CEA cultivation facilities since 2016. Since then, we have tested and solidified best practices from designing environmental control systems for CEA cultivation ~~facilities since 2016. Third,~~facilities. Finally, we have a line of proprietary environmental control products ~~which~~that support the specific growing environments that our customers want. We believe these products offer significant benefits to our customers and 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 ofexpanding 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.product slate.

Shares of our common stock and warrants are traded on the ~~OTC~~Nasdaq Capital Markets under the ticker symbol ~~“SRNA.”~~“CEAD” and “CEADW”, respectively.

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~~spread. As a result, there have been disruptions in business operations around the world, with an impact on our business.

In ~~our~~ response to the COVID-19 pandemic and the associated 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~~responded to ~~reduce~~reduced orders by reducing expenses in ~~light of reduced orders and~~an effort to preserve ~~cash, many~~cash. As 2020 progressed and our sales rebounded, and we were able to obtain additional funds through a forgivable bank loan, we restored our workforce increased our operations. Many of ~~which~~the expense reductions were reversed by the end of ~~the year~~2021 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.~~operations.

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~~compounded by a reduction in cargo being shipped by air, a general shortage of containers, and a shortage of 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~~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 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~~(and proliferation ofof) new strains, and related actions taken by ~~the U.S. government,~~federal, state, local and ~~local~~international government officials, ~~and international governments~~ to prevent ~~disease~~and manage the spread ~~all~~ of ~~which~~COVID-19. All of these efforts are uncertain, out of our control, and cannot be predicted at this time.

Currently, we believe that the conflict between Ukraine and Russia does not have any direct impact on our operations, financial condition or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations limited to North America resulting from international sanction and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine or Russia, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. As our operations are related only to the North American controlled agricultural industry, largely within the cannabis space, we do not believe we will be targeted for cyber-attacks. We have no operations in the countries directly involved in the conflict or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States and Canada. We do not believe that the conflict will have any impact on our internal control over financial reporting. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the Ukranian conflict.

Our strategy for growing the Company and increasing shareholder value is informed by two key pillars:

Pursue aggressive organic growth. According to New Frontier Data and Grandview Research, the legal cannabis market and the global indoor farming markets are forecasted to grow at a 15% annual rate for the foreseeable future. This is largely driven by the cannabis cultivation market we currently focus on, and the rapidly growing popularity of the vertical farming market.

We are well positioned to build our business by serving both of these segments, by servicing current and future customers to the CEA industry, and by expanding our customer base to include indoor farming growers. In May of 2021 we announced a series of pivots, to better enable the Company to grow organically:

Expansion to New Markets. We expanded our business development plan to include the pursuit of non-cannabis CEA facilities, which includes indoor cultivation farms and other CEA technology users outside of the cannabis industry. This expansion has approximately doubled our potential addressable market without any additional upfront retrofit costs to our Company.

Expansion of Product Offering. As previously noted, the Company historically focused on offering HVACD systems to help our existing CEA clients manage their environmental control issues. While significant, this offering represented approximately one third of the total slate of potential products and services required to help a grower build and maintain a CEA facility. We continue to believe that our clients want to focus on growing plants, while leaving the technical infrastructure buildout and maintenance to a more experienced partner. As part of our May 2021 initiative, we expanded our product and service offerings by including almost all of the primary technologies and services required to build and maintain a CEA facility. This expansion includes architectural design, lighting, benching, sensing & control systems, and CO₂ dosing and control. It also includes maintenance services and other post-build products and services that create more recurring revenue streams than the product set we traditionally offered.

~~The three key pillars~~For example, by offering Facility Selection & Design services, we plan to establish ‘pre-build’ customer relationships with prospects at the earliest opportunity in the lifecycle of the CEA facility. From there, we plan to offer nearly every piece of the technical infrastructure required in a facility, engaging with our ~~corporate strategy~~customers at the earliest possible moment to provide all products and services required for ~~growing~~ the ~~Company and increasing shareholder value are:~~buildout of their CEA facility. Once a CEA facility is built, our Preventive Maintenance Services will provide recurring revenue, as we maintain the productivity of the facility for the facility’s full life.

~~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 segmentsbelieve that we are uniquely positioned to ~~serve.~~

~~In May~~engineer all of ~~2021~~the complex components of a CEA facility into a more integrated and coordinated system, because of our dedicated engineering staff and our experience in over 800 projects including over 200 commercial facilities. We have built a wide network of technology vendors from which we ~~announced~~curate a ~~new strategy for~~selection of the best products. We are the leading experts in applying the most challenging component of the technical infrastructure, the environmental controls. As a result, we have the knowledge required to engineer the interactions among the required components. The reputation we have built and the relationships we have established as experts in the complex environmental control space positions us to engineer the interactions among the other key components. We believe this effort will grow revenues from our ~~organic growth, which included:~~existing platform in the future.

~~New markets. We decided to expand our business development plan to pursue non-cannabis CEA facilities, at least doubling our total addressable market.~~

~~New products & services~~. We decided to expand our product offerings from primarily environmental control to now offer all of the primary technologies and services required in a CEA facility: architectural design, lighting, benching, HVACD, sensing & control systems, CO₂ ~~dosing and control, water filtration & condensate reclamation, irrigation & fertigation systems, and wastewater treatment.~~

~~New trade name~~Corporate Name Rebrand. In ~~May~~November of 2021 we ~~adopted~~changed the ~~trade~~ name of our parent company from Surna ~~Cultivation Technologies. because we~~Inc. to CEA Industries Inc. We believe ~~that~~this name better demonstrates the ~~new~~breadth of both our newly expanded product offering and our ability to serve the broader CEA industry in segments beyond traditional cannabis cultivation. We believe this name will more clearly identify our business to prospects and make us easier to find on various social media and search ~~engines.~~engine platforms. In January 2022, we moved our environmental controls operations to Surna Cultivation Technologies LLC, a newly formed subsidiary of CEA Industries Inc., in order to separate our environmental controls business from other businesses we plan to pursue as we expand our product and service offerings.

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.

Seek strategic relationships, mergers, and acquisitions to add to our existing business. We ~~enjoy wide brand recognition~~have been involved in ~~the cannabis cultivation industry because of our longevity in the market segment (15 years) and the number of~~over 800 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 requires16 years. This experience has exposed us to ~~consider~~almost all of the ancillary and primary product and service components within ~~the facility:~~a CEA facility, including 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~~Exposure to these primary components ~~provides us with~~has built a uniquely well-informed view of the ~~efficacy of the many~~value contribution from various primary services and components on offer in the marketplace.

We ~~further~~ believe that this knowledge will help us ~~make wise choices of which~~identify opportunities to acquire products ~~to pursue~~and services for strategic relationships and ~~which providers~~potential acquisitions. As we evaluate the state of the CEA industry and the various industry participants, we see significant opportunity for the industry to ~~potentially merge with or acquire.~~create value through consolidation. As a growing industry, CEA has a significant need for capital and a recognition that not all companies can be funded for growth. We believe this positions us well as we identify partners whose business platforms are complementary to our business platform.

Finally, members of our team have extensive experience in identifying, evaluating and acquisitions that are accretive and create long-term value for our shareholders. We believe that assets on our platform can benefit our shareholders via synergies and scale economics. For ~~smaller~~certain component providers, we believe that our ~~publicly traded~~public stock and strong existing platform ~~and our existing sales~~of products, expertise, and marketing reach will make us an attractive ~~partner.~~

~~Pursue an uplisting to~~partner for 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.

~~During the first nine months of 2021, we entered into contracts with a~~potentially accretive, value over $100,000, which we refer to as major commercial-scale projects. These new contracts totaled $11,136,000, which consisted of $9,311,000 for new build projects (84%), $1,459,000 for retrofit projects (13%), and $366,000 for expansion projects (3%).creating partnership.

During the three months ended ~~September 30, 2021,~~March 31, 2022, we executed new sales contracts with a total contract value of ~~$5,693,000.~~$2,347,000. During this same period, we had positive change orders of ~~$395,000~~$159,000 and cancellations of ~~$488,000.~~$401,000. The cancellations were based on discussions with customers who have abandoned their projects. After adjustments for these change orders and cancellations, our net bookings in the three months ended ~~September 30, 2021~~March 31, 2022 were ~~$5,600,000,~~$2,105,000, representing ~~an increase~~a decrease of ~~$4,680,000~~$1,888,000 (or ~~509%~~47%) from net bookings of ~~$919,000~~$3,993,000 in the ~~second~~fourth quarter of 2021.

Our backlog at ~~September 30, 2021~~March 31, 2022 was ~~$9,881,000,~~$11,179,000, an increase of ~~$1,894,000,~~$361,000, or ~~24%~~3%, from ~~June 30,~~December 31, 2021. The increase in backlog is the result of ~~our higher net bookings~~lower revenue in the ~~third~~first quarter. Our backlog at ~~September 30, 2021~~March 31, 2022 includes booked sales orders of ~~$1,250,000 (13%~~$2,217,000 (20% of the total backlog) from several customers that we do not expect to be realized until ~~late 2022.~~2023. We believe the sales orders in this portion of our backlog have an elevated level of risk and may, ultimately, be delayed or cancelled by our customers. Therefore, investors should not view backlog as earned revenue.

The following table sets forth: (i) our beginning backlog (the remaining contract value of outstanding sales contracts for which we have received an initial deposit 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).

The completion of a customer’s new build facility project is dependent upon the customer’s ability to secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the equipment. Accordingly, the time it takes for these customers to complete a new build project, which corresponds to when we are able to recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays that are typical in completing any construction project.

As has historically been the case for the Company at each quarter-end, there remains significant uncertainty regarding the timing of revenue recognition of our backlog as of September 30, 2021. As of September 30, 2021, 12% of our backlog was attributable to customer contracts for which we have only received an initial advance payment to cover our engineering services (“engineering only paid contracts”). There are always risks that the equipment portion of our engineering only paid contracts will not be completed or will be delayed, which could occur if the customer is dissatisfied with the quality or timeliness of our engineering services, there is a delay or abandonment of the project due to the customer’s inability to obtain project financing or licensing, or the customer determines not to proceed with the project due to economic factors, such as declining cannabis wholesale prices in the state.

In contrast, after the customer has made an advance payment for a portion of the equipment to be delivered under the contract (“partial equipment paid contracts”), we typically are better able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project funding are typically mitigated once the initial equipment payment is received. As of September 30, 2021, 88% of our backlog was attributable to partial equipment paid contracts.March 31, 2022.

We have provided an estimate in our condensed consolidated financial statements for when we expect to recognize revenue on our remaining performance obligations (i.e., our ~~Q3 2021~~Q1 2022 backlog), using separate time bands, with respect to engineering only paid contracts and partial equipment paid contracts. There continues to be significant uncertainty regarding the timing of our recognition of revenue on our ~~Q3 2021~~Q1 2022 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.

Comparison of Three Months Ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and 2020~~

Revenue for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~$3,706,000,~~$1,744,000, compared to ~~$1,635,000~~$2,367,000 for the three months ended ~~September 30, 2020,~~March 31, 2021, representing ~~an increase~~a decrease of ~~$2,072,000,~~$622,000, or ~~127%~~26%. The ~~increase~~decrease was primarily due to ~~equipment~~delays with our international supply of products and shipments from vendors which delayed contract fulfillment and revenue ~~which included several of~~recognition on existing contracts. As a result, even though our ~~new product offerings consisting of~~bookings were down, our ~~custom air handlers, SentryIQ™ controls products, our expanded dehumidifier offering and DX split systems, among others.~~ending backlog increased. The ~~increase~~supply chain impact was ~~also~~largely due to delays at U.S. ports, compounded by a ~~COVID-19-driven slowdown impacting revenue for the three months ended September 30, 2020.~~reduction in cargo shipped by air, a shortage of containers, and a shortage of domestic truck delivery availability.

Cost of revenue ~~increased~~decreased by ~~$1,851,000,~~$368,000, or ~~167%~~18%, from ~~$1,109,000~~$2,022,000 for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~$2,959,000~~$1,654,000 for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~increase~~decrease was primarily due to a decrease in revenue and an increase in ~~revenue and~~fixed costs as a ~~decrease in equipment margin~~percent of revenue as discussed below.

The gross profit for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~$747,000~~$91,000 compared to ~~$526,000~~$345,000 for the three months ended ~~September 30, 2020, an increase~~March 31, 2021, a decrease of ~~42%~~74%. Gross profit margin decreased by ~~twelve~~9.4 percentage points from ~~32%~~14.6% for the three months ended ~~September 30, 2020~~March 31, 2022 to ~~20%~~5.2% for the three months ended ~~September 30,~~March 31, 2021 primarily 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 costs as a percent of revenue, as described below.

Our fixed costs (which include engineering, service, manufacturing and project management salaries and benefits and manufacturing overhead) totaled ~~$337,000,~~$359,000, or 9%21% of total revenue, for the three months ended ~~September 30, 2021~~March 31, 2022 as compared to ~~$281,000,~~$337,000, or ~~17%~~14% of total revenue, for the three months ended ~~September 30, 2020.~~March 31, 2021. The increase of ~~$56,000~~$22,000 was primarily due to an increase in salaries and benefits (including stock-based compensation) of ~~$55,000.~~$33,000, offset by a decrease in overhead of $11,000.

Our variable costs (which include the cost of equipment, outside engineering costs, shipping and handling, travel and warranty costs) totaled ~~$2,622,000,~~$1,295,000, or 74% of total revenue, in the three months ended March 31, 2022 as compared to $1,685,000, or 71% of total revenue, in the three months ended ~~September 30, 2021 as compared to $827,000, or 51% of total revenue, in the three months ended September 30, 2020.~~March 31, 2021. The ~~increase~~decrease in variable costs was primarily due to: (i) ~~an increase~~a decrease in equipment costs of ~~$197,000 for excess and obsolete inventory expense primarily related to~~$376,000 driven by lower revenue, (ii) 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~~decrease in warranty expense of $64,000, offset by (iii) an increase in travel ~~expense~~expenses of ~~$36,000, (iv) an increase in shipping and handling costs of $7,000, offset by (v) a decrease in outside engineering of $14,000.~~$45,000.

We continue to focus on gross margin improvement through a combination of ~~among other things,~~efforts, including 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 increased to ~~$1,190,000~~$1,702,000 for the three months ended ~~September 30, 2021~~March 31, 2022, from ~~$809,000~~$1,030,000 for the three months ended ~~September 30, 2020,~~March 31, 2021, an increase of ~~$381,000,~~$671,000, or ~~47%~~65%. The operating expense increase consisted of: (i) an increase in selling, general and administrative expenses (“SG&A expenses”) of ~~$232,000,~~$571,000, (ii) an increase in advertising and marketing expenses of ~~$135,000,~~$74,000, and (iii) an increase in product development expenses of ~~$14,000.~~$26,000.

The increase in SG&A expenses for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the three months ended ~~September 30, 2020,~~March 31, 2021, was primarily due to: (i) an increase of ~~$78,000 for commissions,~~$384,000 in salaries and benefits (including stock-based compensation) and other employee related costs, (ii) an increase of ~~$73,000~~$87,000 for ~~investor relations expenses,~~accounting and other professional fees, (iii) an increase in ~~salaries, benefits~~insurance costs of $44,000, and ~~other employee related expenses of $56,000,~~ (iv) an increase of ~~$27,000~~$50,000 for ~~facility, office~~board fees and other expenses, (v) an increase for business taxes, licenses and fees of $17,000, (vi) an increase in fees paid to our Board members of $8,000, offset by (vii) a decrease in depreciation of $13,000, and (viii) a decrease in stock related compensation for employees, consultants and directors of $12,000.investor relations expenses.

The increase in marketing expenses was primarily due to (i) an increase in expenses for trade shows of $59,000, (ii) an increase in advertising and promotion of $46,000, (iii) an increase in salaries and benefits (including stock compensation) of $41,000, (iii) an increase in travel of $7,000, offset by (iv) a decrease in expenses related to web development and other outside services of $18,000.

~~The increase in product development costs was due to (i) an increase in material costs of $11,000, and (ii) an increase in salaries and benefits (including stock compensation) of $3,000.~~

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

We had other income (net) of $35,000 for the three months ended September 30, 2021 compared to other income (net) of $12,000 for the three months ended September 30, 2020. Other income for the three months ended September 30, 2021 consisted of rental income from the sub-lease of a portion of our facility. Other income for the three months ended September 30, 2020 was storage fees paid by a customer during the delay of their project.

Overall, we had a net loss of $408,000 for the three months ended September 30, 2021 as compared to a net loss of $270,000 for the three months ended September 30, 2020, an increase of $137,000, or 51%. The net loss for the three months ended September 30, 2021 included $29,000 of non-cash, stock-based compensation and $16,000 of depreciation and amortization expense, compared to $56,000 of non-cash, stock-based compensation and $28,000 of depreciation and amortization expense for the three months ended September 30, 2020. Excluding these non-cash items, our net loss increased by $177,000, or 95%.

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

Cost of revenue increased by $4,339,000, or 112%, from $3,870,000 for the nine months ended September 30, 2020 to $8,208,000 for the nine months ended September 30, 2021 primarily due to the increase in revenue.

The gross profit for the nine months ended September 30, 2021 was $2,374,000 compared to $1,257,000 for the nine months ended September 30, 2020, an increase of 89%. Gross profit margin decreased by two percentage points from 24.5% for the nine months ended September 30, 2020 to 22.4% for the nine months ended September 30, 2021 primarily due to an increase in variable costs as a percent of total revenue, offset by a decrease in fixed costs as a percent of total revenue.

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

~~Our variable costs (which include the cost of equipment, outside engineering costs, shipping~~$51,000, and handling, travel and warranty costs) totaled $7,177,000, or 68% of total revenue, in the nine months ended September 30, 2021 as compared to $3,006,000, or 59% of total revenue, in the nine months ended September 30, 2020. The increase in variable costs was primarily due to higher equipment costs as a result of higher revenue and a reduction in the selling price of our equipment resulting in lower equipment margins. Other factors included: (i) an increase in warranty of $167,000 which was partially the result of a reimbursement in 2020 from a customer for costs incurred in 2019 related to a failure later deemed to be non-warranty, (ii) an increase in ~~travel of $71,000, offset by (iii) a decrease in outside engineering services of $65,000, (iv) a decrease in~~ other variable costs of $29,000 related to project management consulting services incurred in 2020, (v) a $24,000 decrease in excess and obsolete inventory, and (vi) a decrease in shipping and handling of $9,000.

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 increased to $3,386,000 for the nine months ended September 30, 2021, from $3,092,000 for the nine months ended September 30, 2020, an increase of $294,000, or 10%. The operating expense increase consisted of: (i) an increase in advertising andpromotional marketing expenses of ~~$236,000, (ii) an increase in selling, general and administrative expenses (“SG&A expenses”) of $40,000, and (iii) an increase in product development expense of $19,000.~~

The increase in marketing expenses was primarily due to (i) an increase in advertising and promotion expense of $98,000, (ii) an increase in salaries and benefits (including stock compensation) of $86,000, (iii) an increase of $65,000 for expenses related to trade shows, offset by (iv) a decrease in outside services and other marketing expenses of $11,000.

The increase in SG&A expenses for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was due primarily to: (i) an increase of $148,000 for commissions, (ii) an increase in salaries, benefits and other employee related costs of $107,000, (iii) an increase of $98,000 for investor relations expenses, (iv) an increase in facilities, office and other expenses of $32,000, (v) an increase in business taxes, licenses and fees of $19,000, offset by (vi) a decrease of $204,000 in stock related compensation expense to employees, consultants and directors, (vii) a decrease in bad debt of $70,000, (viii) a decrease of $37,000 for depreciation, (ix) a decrease of $27,000 in accounting and other professional fees, and (x) a decrease in cash paid for directors’ fees of $15,000.$23,000.

The increase in product development costs was due to an increase in ~~materials costs of $35,000 offset by a decrease in~~ salaries and benefits (including ~~stock~~stock-based compensation) of ~~$17,000.~~$26,000.

We ~~had~~recognized an operating loss of ~~$1,012,000~~$1,611,000 for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, as compared to an operating loss of ~~$1,835,000~~$686,000 for the ~~nine~~three months ended ~~September 30, 2020, a decrease~~March 31, 2021, an increase of ~~$822,000,~~$926,000, or ~~45%~~135%. The operating loss for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 included ~~$160,000~~$93,000 of non-cash, stock-based compensation and ~~$49,000~~$7,000 of depreciation and amortization expense, compared to ~~$354,000~~$59,000 of non-cash, stock-based compensation and ~~$86,000~~$17,000 of depreciation and amortization expense for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. Excluding these non-cash items, our operating loss ~~decreased~~increased by ~~$591,000,~~$902,000, or ~~42%~~148%.

We ~~had~~recognized other income (net) of ~~$76,000~~$188,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022, compared to other ~~income~~expense (net) of ~~$12,000~~$108,000 for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. Other income for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 primarily consisted of income from an insurance settlement of ~~$138,000 related to~~$185,000. Other expense for the ~~Employee Retention Credit as part~~three months ended March 31, 2021 consisted of ~~the CARES act, $48,000 for rental income from the sub-lease of a portion of our facility, offset by~~ $107,000 ~~in expense~~ related to the settlement of litigation with a former employee and $3,000 for interest expense. Other income for the nine months ended September 30, 2020 consisted of approximately $24,000 in storage fees charged to a customer due to the delay of their project, offset by interest expense.employee.

Overall, we ~~had~~recognized a net loss of ~~$936,000~~$1,423,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022, as compared to a net loss of ~~$1,822,000~~$793,000 for the ~~nine~~three months ended ~~September 30, 2020, a decrease~~March 31, 2021, an increase of ~~$886,000,~~$630,000, or ~~49%~~79%. The net loss for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 included $160,000 of non-cash, stock-based compensation, $67,000 of other stock-based expense (related to the settlement of litigation with a former employee), and $49,000 of depreciation expense, compared to $354,000$93,000 of non-cash, stock-based compensation and ~~$86,000~~$7,000 of depreciation and amortization expense, compared to $126,000 of non-cash, stock-based compensation and $17,000 of depreciation and amortization expense for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. Excluding these non-cash items, our net loss ~~decreased~~increased by ~~$722,000,~~$673,000, or ~~52%~~104%.

As of ~~September 30, 2021,~~March 31, 2022, we had cash and cash equivalents of ~~$2,284,000,~~$22,034,000, compared to cash and cash equivalents of ~~$2,285,000~~$2,160,000 as of December 31, ~~2020, a nominal decrease.~~2021. The ~~$1,000 decrease~~$19,874,000 increase in cash and cash equivalents during the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, was primarily the result of cash ~~used in our operating activities of $1,761,000, offset by~~ proceeds from the sale of ~~Series~~common stock and warrants of $21,711,000, offset by the redemption of series B preferred stock and ~~warrants (net~~interest of ~~issuance costs) of $1,260,000 via a PIPE financing concluded in September 2021 and proceeds from a note payable of $514,000.~~$2,016,000. Our cash is held in bank depository accounts in certain financial institutions. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we held deposits in financial institutions that exceeded the federally insured amount. During the nine months ended September 30, 2021, the Company transferred a balance of $180,000 into a new bank account which was to be used for the sole purpose of paying certain warranty claims. The balance on this restricted bank account as of September 30, 2021 was $0.

As of ~~September 30, 2021,~~March 31, 2022, we had accounts receivable (net of allowance for doubtful accounts) of ~~$32,000,~~$191,000, inventory (net of excess and obsolete allowance) of ~~$480,000,~~$1,006,000 (including $692,000 of inventory in transit), and prepaid expenses of ~~$1,143,000~~$1,774,000 (including ~~$879,000~~$1,579,000 in advance payments on inventory purchases). While we typically require advance payment before we commence engineering services or ship equipment to our customers, we have made exceptions requiring us to record accounts receivable, which carry a risk of non-collectability especially since most of our customers are funded on an as-needed basis to complete facility construction. We expect our exposure to accounts receivable risk to increase as we continue to pursue larger projects.

As of ~~September 30, 2021,~~March 31, 2022, we had total accounts payable and accrued expenses of ~~$1,674,000,~~$1,389,000, deferred revenue of ~~$3,060,000,~~$5,485,000, accrued equity compensation of ~~$109,000,~~$84,000, other current liabilities of $37,000 and the current portion of operating lease liability of ~~$238,000.~~$112,000. As of ~~September 30, 2021,~~March 31, 2022, we had a working capital ~~deficit~~ of ~~$1,164,000,~~$17,948,000, compared to a working capital deficit of ~~$2,220,000~~$415,000 as of December 31, ~~2020.~~2021. The ~~decrease~~increase in our working capital ~~deficit~~ was primarily related to (i) ~~a decrease~~an increase in ~~deferred revenue~~cash of ~~$665,000,~~$19,874,000, (ii) an increase in inventory of ~~$153,000,~~$628,000, (iii) ~~a decrease in accounts payable and accrued liabilities of $110,000, and (iv)~~ an increase in prepaid expenses and other assets of ~~$106,000.~~$551,000, offset by (iv) an increase in deferred revenue of $2,646,000.

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.

The following summarizes our approximate cash flows for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2021			2020			2022			2021
Net cash used in operating activities	$	(1,761,000	)	$	600,000
Net cash provided by operating activities							$	193,000		$	484,000
Net cash used in investing activities		(14,000	)		(4,000	)		(14,000	)		(12,000	)
Net cash provided by financing activities		1,774,000			554,000			19,695,000			514,000
Net decrease in cash	$	(1,000	)	$	1,150,000
Net increase in cash							$	19,874,000		$	986,000

We incurred a net loss for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 of ~~$936,000~~$1,423,000 and have an accumulated deficit of ~~$28,380,000~~$30,205,000 as of ~~September 30, 2021.~~March 31, 2022.

Cash ~~used in~~provided by operations for the nine months ended ~~September 30, 2021~~March 31, 2022 was ~~$1,761,000~~$193,000 compared to ~~cash provided by operations of $600,000~~$484,000 for the ~~nine~~three months ended ~~September 30, 2020, an increase in cash usage~~March 31, 2021, a decrease of ~~$2,361,000.~~$291,000.

The ~~increase~~decrease in cash ~~used in~~provided by operating activities during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 as compared to the three months ended March 31, 2021, was primarily attributable to: (i) ~~a decrease~~an increase in net loss of $630,000, (ii) an increase in cash used to fund working capital of ~~$3,087,000, (ii) a decrease in net loss of $886,000,~~$361,000, and (iii) a decrease ~~of $160,000~~ in non-cash operating ~~charges.~~charges of $22,000.

The ~~significant changes~~increase in working capital was related to: (i) ~~a decrease~~an increase in ~~deferred revenue (which represents~~ cash ~~received from customers in advance~~ of ~~the performance of services or the delivery of equipment) of $665,000,~~$19,874,000, (ii) an increase in inventory of ~~$153,000,~~$628,000, (iii) ~~a decrease in accounts payable and accrued liabilities of $111,000, and (iv)~~ an increase in prepaid expenses and other assets of ~~$106,000.~~$551,000, offset by (iv) an increase in deferred revenue of $2,646,000.

The ~~significant change~~decrease in non-cash operating charges was due to (i) a decrease in ~~share-based compensation~~amortization of ~~$202,000,~~ROU asset of $24,000, (ii) a decrease in ~~depreciation and amortization expense~~the allowance for doubtful accounts of ~~$36,000,~~$22,000, and (iii) an increase in other share-based compensation of ~~$67,000.~~$19,000.

The $14,000 cash used in investing activities during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 was related to the purchase of property and equipment. Cash used in investing activities during the three months ended March 31, 2021 was related to the purchase of property and equipment of $15,000, offset by proceeds from the sale of property equipment of $1,000. Cash used in investing activities during the nine months ended September 30, 2020 was related to the purchase of property and equipment of $4,000.$12,000.

Cash flows from financing activities during the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, was the result of cash proceeds from the sale of ~~preferred~~common stock and ~~warrant~~warrants (net of issuance costs) of ~~$1,260,000. Additionally,~~$21,711,000, offset by a cash payment of $2,016,000 for the ~~Company entered into a note payable with its current bank in the principal amount~~redemption of $514,000, for working capital purposes. During the nine months ended September 30, 2020, the Company entered into a note payable with its current bank in the principal amount of $554,000, for working capital purposes.

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 commonpreferred 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.related interest.

On February 10, 2022, the Company signed 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~~firm commitment underwriting agreement for the ~~first~~ public offering ~~after~~of shares of common stock and warrants, which closed on February 15, 2022. The Company received net proceeds of approximately $21,711,000 for the sale of ~~the Series B Preferred Stock in which the~~5,811,138 shares of common stock and 6,572,808 warrants, each warrant to purchase one share of common stock for five years, exercisable immediately, at an exercise price of $5.00. The Company also issued to the representative of the ~~Company is listed~~underwriters 290,557 warrants, each warrant to purchase one share of common stock at an exercise price of $5.16, during the period commencing August 9, 2022, and expiring on ~~a national exchange.~~February 10, 2027.

The ~~Investor Warrant may~~net proceeds from the offering will be ~~exercised until September 28, 2024, at an initial exercise price of $0.063, subject~~used to ~~adjustment. The Investor Warrant provides~~advance the Company’s organic growth and new product initiatives, to pursue select acquisitions, and for ~~cashless exercise if the underlying shares of~~general corporate and working capital purposes. In connection with this offering, we received approval to list our 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~~on the ~~Investor registration rights for~~Nasdaq Capital Market under 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.

Our condensed consolidated financial statements for the nine months ended September 30, 2021, have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent registered public accounting firm included in its audit opinion on our consolidated financial statements for the year ended December 31, 2020, a statement that there is substantial doubt as to our ability to continue as a going concern,symbol “CEAD” and our ~~consolidated financial statements for~~warrants under the ~~year ended December 31, 2020 were prepared assuming that we would continue as~~symbol “CEADW”. 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 allresult, effective February 10, 2022, trading of our cash flow needs. If we are not able to generate positive cash flow from operations or find alternative sources of cash, our business and shareholders will be materially and adversely affected. Based on our current assessment of our business, there is substantial doubt about our ability to continue as a going concern for a period of one year from the date our condensed consolidated financial statements for the nine months ended September 30, 2021, are issued. Our condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

The Company is subject to a number of risks similar to those of other similar stage and situated companies, including general economic conditions; its customers’ operations and prospects for and ability to obtain project financing; market and business disruptions, that include the effects of the COVID-19 pandemic and government response; dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research, development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events and obtaining adequate financing to fulfill Company business development plans and activities and generating a level of revenues adequate to support the Company’s cost structure.

The Company also will be affected by constraints on the availability of capital to its customers and customer prospects who have commenced, or are contemplating, new or expanded cultivation facilities. The extent to which COVID-19 will impact the customer and Company business activities and financial results will depend on future developments, which are uncertain and cannot be predicted. Other factors that will impact the Company’s ability to continue operations include the market demand for the Company’s products and services, the ability to service its customers and prospects, potential contract cancellations, project scope reductions and project delays, the Company’s ability to fulfill its backlog, the management of working capital, and the continuation of normal payment terms and conditions for purchaseboth shares of the Company’s ~~products. The Company believes its cash balances~~common stock 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 aboutcertain of the Company’s ~~ability to continue as a going concern for a period of one year from~~warrants commenced on 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.~~

We believe our cash balances and cash flow from operations will be insufficient to fund our operations for the next 12 months. If we are unable to increase revenues or otherwise generate cash flows from operations, we will need to raise additional funding to continue as a going concern. We will need to obtain financing in order to continue our operations and achieve our growth strategies. There can be no assurance that we will be able to raise the necessary financing, when and if needed, on acceptable terms or at all. If our operating results do not meet management’s expectations, or additional capital is not available, management believes it can downsize or reorient operations to reduce certain expenditures. The precise amount and timing of our financing needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for our products and services, management of working capital, and continuation of normal payment terms and conditions for purchase of our products and services.

There can be no assurance that the Company will be able to raise debt or equity financing in sufficient amounts, when and if needed, on acceptable terms or at all. The Company’s ability to raise equity capital is also limited by the Company’s stock price, and any such issuance could be highly dilutive to existing shareholders.Nasdaq.

InTo date, we have experienced and are likely to continue to face inflationary increases on the ~~opinion~~cost of ~~management,~~products, which may adversely affect our margins and financial results, and the pricing of our service and product supply contracts. The inflationary pressures are in both the larger economy and in the industries related to building renovations, retrofitting and new build facilities in which we operate. This inflation ~~has not had a material effect on our operations to date. Due to the pandemic, however, there~~ is ~~the possibility~~reflected in higher wages, increased pricing of equipment and other products that we have contracted to provide to our customers, and generally higher prices across all sectors of the economy. As we move forward, we plan to continuously monitor our various contract terms and may decide to add clauses that will ~~face inflationary pressures in certain aspects of our business operations, such as equipment cost, in the future. Management will continue~~permit us to ~~monitor~~adjust pricing if inflation and ~~evaluate the possible future effects of inflation~~price increase pressures on us will impact our ~~business~~ability to perform our contracts and ~~operations.~~maintain our margins.

As of ~~September 30, 2021,~~March 31, 2022, 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 September 30, 2021, approximately $24,000 has been paid toward said deposit. Further, the landlord also agreed to defer payment of fifty percent of the three months of lease payments (base rent only) for the period July to September 2020. The deferred lease payments amount to approximately $30,000 and are payable in 12 monthly installments from January to December 2021. As of September 30, 2021, approximately $23,000 of the deferred rent has been paid back to the landlord.

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.

We are required to disclose any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. As of ~~September 30, 2021,~~March 31, 2022, we had no off-balance sheet arrangements. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, 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.

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 ~~September 30, 2021.~~March 31, 2022.

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.

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.

Our management, with the participation of our Chief Executive Officer and our Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), 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~~2021 filed with the SEC, our disclosure controls and procedures were not effective as of ~~September 30, 2021.~~March 31, 2022.

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~~our limited 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.

There were no changes identified in connection with our internal control over financial reporting during the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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~~2021 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.

~~None.~~On February 16, 2022, the Company agreed to convert 1,650 shares of the Series B Preferred Stock into 362,306 shares of common stock and 703,069 warrants. Of the warrants, 170,382 are pre-funded warrants that vested immediately, have an indefinite term and an exercise price of $0.01, and the balance of 532,688 warrants also vested immediately, have a term of 5 years and have an exercise price of $5.00. Each warrant entitles the holder to purchase one share of common stock. The issuances were to an accredited investor pursuant to an exemption from registration of the Securities Act under Section 4(a)(2).

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).

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.

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
~~N/A~~Common Stock, $0.00001 par value	~~N/A~~CEAD	~~N/A~~Nasdaq Capital Markets
Warrants to purchase common stock	CEADW	Nasdaq Capital Markets

	Page
Cautionary Statement	ii

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	1

Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	2

Condensed Consolidated Statements of Changes in Shareholders’ ~~Deficit~~Equity (Deficit) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	3

Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022 and 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	2425

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3634

Item 4. Controls and Procedures	3634

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	3735

Item 1A. Risk Factors	3735

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3735

Item 3. Defaults Upon Senior Securities	3735

Item 4. Mine Safety Disclosures	3735

Item 5. Other Information	3735

Item 6. Exhibits	3735

SIGNATURES	3836

EXHIBIT INDEX	3937

	●	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~~business to the COVID-19 ~~pandemic;~~

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

	●	our overall financial ~~condition;~~

	●	~~variations in~~condition, including our ~~sales from reporting period~~reduced revenue and business disruption, due to ~~reporting period;~~the COVID-19 pandemic business and economic response and its consequences;

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

	●	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;

	●	the continuation of normal supply of products from our suppliers;

	●	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, as needed from time to time, 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.

	2022			2021
	For the Three Months Ended March 31,
	2022			2021
Revenue, net	$	1,744,427		$	2,366,529

Cost of revenue		1,653,919			2,021,923

Gross profit		90,508			344,606

Operating expenses:
Advertising and marketing expenses		251,015			177,145
Product development costs		138,918			112,638
Selling, general and administrative expenses		1,311,777			740,473
Total operating expenses		1,701,710			1,030,256

Operating loss		(1,611,202	)		(685,650	)

Other income (expense):
Other income (expense), net		185,000			(107,000	)
Interest income (expense),net		3,260			(718	)
Total other income (expense)		188,260			(107,718	)

Loss before provision for income taxes		(1,422,942	)		(793,368	)

Income taxes		-			-

Net loss	$	(1,422,942	)	$	(793,368	)

Convertible preferred series B stock dividends		(35,984	)		-
Deemed dividend on convertible preferred series B stock on down round		(439,999	)		-

Net Loss Available to Common Shareholders	$	(1,898,925	)	$	(793,368	)

Loss per common share – basic and dilutive	$	(0.41	)	$	(0.50	)

Weighted average number of common shares outstanding, basic and dilutive		4,622,427			1,576,844

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller Reporting Company	☒
		Emerging Growth Company	☐


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

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

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

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

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

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

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

Income taxes		-			-			-			-

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

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

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

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

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


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

		Number of Shares		Amount			Paid in Capital			Accumulated Deficit			Shareholders’ Deficit
		Common Stock					Additional
		Number of Shares		Amount			Paid in Capital			Accumulated Deficit			Shareholders’ Deficit
Balance December 31, 2021	-		1,600,835	$	16	-	$	25,211,017		$	(28,781,566	)	$	(3,570,533	)
Fair value of vested stock options granted to employees			-		-			32,938			-			32,938
Fair value of vested stock options granted to directors			-		-			29,656			-			29,656
Common shares issued in settlement of restricted stock units issued to directors			3,367		0			24,994			-			24,994
Fair value of restricted stock units issued to directors			-		-			4,928			-			4,928
Issuance of common shares to round up partial shares following reverse split			6,798		0			0						0
Common shares and warrants issued for cash			5,811,138		58			21,711,073			-			21,711,131
Common shares and warrants issued on conversion of series B preferred stock			362,306		4			1,979,996			-			1,980,000
Dividends on series B preferred stock			-		-			(35,984	)		-			(35,984	)
Net loss	-		-		-	-		-			(1,422,942	)		(1,422,942	)
Balance March 31, 2022	-		7,784,444	$	78	-	$	48,958,618		$	(30,204,508	)	$	18,754,188

	2022		2023		Total
Remaining performance obligations related to engineering only paid contracts	$	-	$	-	$	-
Remaining performance obligations related to partial equipment paid contracts		8,962,000		2,217,000		11,179,000
Total remaining performance obligations	$	8,962,000	$	2,217,000	$	11,179,000

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

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

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

Years ended December 31,
2022 (excluding the three months ended March 31, 2022)	$	91,095
2023		124,897
2024		128,643
2025		132,503
2026		136,473
Thereafter		11,654
Total minimum lease payments		625,265
Less imputed interest		(53,710	)
Present value of minimum lease payments	$	571,555

	●	~~1,035,800~~6,167 stock options were issued to ~~21 employees in respect~~three new employees. The vesting of ~~the Company’s 2020 Annual Incentive Awards. The~~these options ~~vested immediately,~~ranges from immediate to three years, have a term of 10 years and an exercise price ofranging from $~~0.13~~4.80 to $6.90.
	●	~~2,000,000~~15,000 stock options were issued to our newly appointed Chief Financial Officer. The options vest as follows: ~~250,000~~2,000 vested immediately, ~~417,000~~3,000 on ~~June 30, 2022,~~ ~~665,000~~March 11, 2023, 5,000 on ~~June 30, 2023~~March 11, 2024, and ~~668,000~~5,000 on ~~June 30, 2024.~~March 11, 2025. The options have a term of 10years and an exercise price of $~~0.061~~2.20.
	●	During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, ~~287,000~~1,667 fully vested stock options and 11,667 unvested stock options were forfeited following the departure of 3one former ~~employees.~~employee.

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

Outstanding, December 31, 2021		-		$	-	$	-
Granted		6,734		$	7.42	$	-
Vested and settled with share issuance		(3,367	)	$	7.42	$	-
Forfeited/canceled		-		$	-	$	-
Outstanding, March 31, 2022		3,367		$	7.42	$	-

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

Outstanding at December 31, 2021		227,719	$	9.59		33		$	0

Issued		7,566,435	$	4.89		58	*	$	425,955

Exercised		-		-		-			-

Expired		-		-		-			-

Outstanding at March 31, 2022		7,794,154	$	5.03		58	*	$	425,955

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

	0.063		28,947,368		36

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

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

	For the quarter ended
	March 31, 2021		June 30, 2021		September 30, 2021		December 31, 2021		March 31, 2022
Backlog, beginning balance	$	8,448,000	$	11,578,000	$	7,987,000	$	9,881,000	$	10,818,000
Net bookings, current period	$	5,497,000	$	919,000	$	5,600,000	$	3,993,000	$	2,105,000
Recognized revenue, current period	$	2,367,000	$	4,510,000	$	3,706,000	$	3,056,000	$	1,744,000
Backlog, ending balance	$	11,578,000	$	7,987,000	$	9,881,000	$	10,818,000	$	11,179,000

	~~SURNA~~CEA INDUSTRIES INC.
	(the “Registrant”)

Dated: ~~November 10, 2021~~May 12, 2022	By:	/s/ Anthony K. McDonald
		Anthony K. McDonald
		Chief Executive Officer and President
		(Principal Executive Officer)

Dated: ~~November 10, 2021~~May 12, 2022	By:	/s/ ~~Richard B. Knaley~~Ian K. Patel
		~~Richard B. Knaley~~Ian K. Patel
		Chief Financial Officer
		(Principal Financial and Accounting 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).