ITEM
1. FINANCIAL STATEMENTS
Surna
Inc.
Condensed
Consolidated Balance Sheets
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
302,854
|
|
|
$
|
330,557
|
|
Accounts
receivable (net of allowance for doubtful accounts of $85,000 and $40,873, respectively)
|
|
|
882,871
|
|
|
|
299,194
|
|
Notes
receivable
|
|
|
177,218
|
|
|
|
207,218
|
|
Inventory
|
|
|
833,069
|
|
|
|
1,261,802
|
|
Prepaid
expenses
|
|
|
149,564
|
|
|
|
193,969
|
|
Total
Current Assets
|
|
|
2,345,576
|
|
|
|
2,292,740
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
Assets
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
118,091
|
|
|
|
162,530
|
|
Intangible
assets, net
|
|
|
648,345
|
|
|
|
647,464
|
|
Total
Noncurrent Assets
|
|
|
766,436
|
|
|
|
809,994
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,112,012
|
|
|
$
|
3,102,734
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,476,079
|
|
|
$
|
2,066,803
|
|
Deferred
revenue
|
|
|
1,669,950
|
|
|
|
986,445
|
|
Current
portion long term debt
|
|
|
-
|
|
|
|
1,551
|
|
Amounts
due shareholders
|
|
|
60,945
|
|
|
|
216,995
|
|
Convertible
promissory notes, net
|
|
|
1,981,694
|
|
|
|
1,227,761
|
|
Convertible
accrued interest
|
|
|
396,854
|
|
|
|
201,257
|
|
Derivative
liability on conversion feature
|
|
|
-
|
|
|
|
472,967
|
|
Derivative
liability on warrants
|
|
|
225,405
|
|
|
|
139,192
|
|
Total
Current Liabilities
|
|
|
5,810,927
|
|
|
|
5,312,971
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
Liabilities
|
|
|
|
|
|
|
|
|
Amounts
due shareholders-long term
|
|
|
31,775
|
|
|
|
-
|
|
Convertible
promissory notes, net
|
|
|
-
|
|
|
|
523,822
|
|
Convertible
accrued interest
|
|
|
-
|
|
|
|
80,674
|
|
Vehicle
loan
|
|
|
-
|
|
|
|
32,564
|
|
Total
Noncurrent Liabilities
|
|
|
31,775
|
|
|
|
637,060
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,842,702
|
|
|
|
5,950,031
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.00001 par value; 150,000,000 shares authorized; 77,220,000 shares issued and outstanding
|
|
|
772
|
|
|
|
772
|
|
Common
stock, $0.00001 par value; 350,000,000 shares authorized; 145,268,135 and 125,839,862 shares issued and outstanding, respectively
|
|
|
1,452
|
|
|
|
1,259
|
|
Paid
in capital
|
|
|
9,780,598
|
|
|
|
8,214,271
|
|
Accumulated
deficit
|
|
|
(12,513,512
|
)
|
|
|
(11,063,599
|
)
|
Total
Shareholders’ Deficit
|
|
|
(2,730,690
|
)
|
|
|
(2,847,297
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
3,112,012
|
|
|
$
|
3,102,734
|
|
The
accompanying notes are integral to the unaudited condensed consolidated financial statement.
Surna
Inc.
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
1,891,472
|
|
|
$
|
1,677,950
|
|
|
$
|
4,390,077
|
|
|
$
|
2,548,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
1,576,920
|
|
|
|
1,326,769
|
|
|
|
2,986,864
|
|
|
|
2,009,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
314,552
|
|
|
|
351,181
|
|
|
|
1,403,213
|
|
|
|
539,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
and marketing expenses
|
|
|
29,031
|
|
|
|
92,480
|
|
|
|
42,534
|
|
|
|
175,454
|
|
Product
development costs
|
|
|
93,947
|
|
|
|
128,454
|
|
|
|
200,226
|
|
|
|
309,443
|
|
Selling,
general and administrative expenses
|
|
|
490,771
|
|
|
|
821,020
|
|
|
|
1,094,670
|
|
|
|
1,624,762
|
|
Total
operating expenses
|
|
|
613,749
|
|
|
|
1,041,954
|
|
|
|
1,337,430
|
|
|
|
2,109,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(299,197
|
)
|
|
|
(690,773
|
)
|
|
|
65,783
|
|
|
|
(1,570,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
2,319
|
|
|
|
-
|
|
|
|
8,484
|
|
|
|
-
|
|
Interest
expense
|
|
|
(61,709
|
)
|
|
|
(128,299
|
)
|
|
|
(334,681
|
)
|
|
|
(288,559
|
)
|
Amortization
of debt discount on convertible promissory notes
|
|
|
(480,533
|
)
|
|
|
(584,248
|
)
|
|
|
(903,202
|
)
|
|
|
(1,011,048
|
)
|
(Loss)
gain on change in derivative liabilities
|
|
|
135,420
|
|
|
|
426,710
|
|
|
|
(286,297
|
)
|
|
|
474,873
|
|
Total
other (expense)
|
|
|
(404,503
|
)
|
|
|
(285,837
|
)
|
|
|
(1,515,696
|
)
|
|
|
(824,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before provision for income taxes
|
|
|
(703,700
|
)
|
|
|
(976,610
|
)
|
|
|
(1,449,913
|
)
|
|
|
(2,395,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(703,700
|
)
|
|
|
(976,610
|
)
|
|
|
(1,449,913
|
)
|
|
|
(2,395,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (expense)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Comprehensive
loss
|
|
$
|
(703,700
|
)
|
|
$
|
(976,610
|
)
|
|
$
|
(1,449,913
|
)
|
|
$
|
(2,395,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share – basic and dilutive
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, both basic and dilutive
|
|
|
143,516,260
|
|
|
|
122,707,813
|
|
|
|
136,889,845
|
|
|
|
118,680,260
|
|
The
accompanying notes are integral to the unaudited condensed consolidated financial statements.
Surna
Inc.
Condensed
Consolidated Statements of Changes in Shareholders’ Deficit
For the Six Months Ended June 30, 2016
(Unaudited)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Paid
in Capital
|
|
|
Accumulated
Deficit
|
|
|
Comprehensive
Income (Loss)
|
|
|
Shareholders’
Deficit
|
|
Balance
December 31, 2015
|
|
|
77,220,000
|
|
|
$
|
772
|
|
|
|
125,839,862
|
|
|
$
|
1,259
|
|
|
$
|
8,214,271
|
|
|
$
|
(11,063,599
|
)
|
|
$
|
-
|
|
|
$
|
(2,847,297
|
)
|
Common
shares issued pursuant to conversion of debt and accrued interest, net of unamortized debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
17,888,828
|
|
|
|
179
|
|
|
|
888,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
889,084
|
|
Reclassification
of derivative liability to equity pursuant to conversion of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
673,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
673,050
|
|
Common
shares issued to employees as compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
46,045
|
|
|
|
-
|
|
|
|
4,028
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,028
|
|
Issuance
of common shares in connection with exercises of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,493,400
|
|
|
|
14
|
|
|
|
344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
358
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,449,913
|
)
|
|
|
-
|
|
|
|
(1,449,913
|
)
|
Balance
June 30, 2016
|
|
|
77,220,000
|
|
|
$
|
772
|
|
|
|
145,268,135
|
|
|
$
|
1,452
|
|
|
$
|
9,780,598
|
|
|
$
|
(12,513,512
|
)
|
|
$
|
-
|
|
|
$
|
(2,730,690
|
)
|
The
accompanying notes are integral to the unaudited condensed consolidated financial statements.
Surna
Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,449,913
|
)
|
|
$
|
(2,395,053
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and intangible asset amortization expense
|
|
|
29,360
|
|
|
|
30,548
|
|
Amortization
of debt discounts
|
|
|
1,003,591
|
|
|
|
1,011,049
|
|
Amortization
of original issue discount on notes payable
|
|
|
40,806
|
|
|
|
-
|
|
Gain
on change in derivative liability
|
|
|
286,297
|
|
|
|
(474,873
|
)
|
Employee
compensation paid in stock
|
|
|
4,028
|
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
44,127
|
|
|
|
-
|
|
Gain
on sale of assets other
|
|
|
1,850
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and note receivable
|
|
|
(627,804
|
)
|
|
|
(423,813
|
)
|
Inventory
|
|
|
428,733
|
|
|
|
(305,435
|
)
|
Prepaid
expenses
|
|
|
44,405
|
|
|
|
(272,348
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(590,724
|
)
|
|
|
317,080
|
|
Deferred
revenue
|
|
|
683,505
|
|
|
|
1,015,122
|
|
Accrued
interest
|
|
|
189,713
|
|
|
|
267,858
|
|
Deferred
compensation
|
|
|
(25,600
|
)
|
|
|
-
|
|
Other
|
|
|
(2,213
|
)
|
|
|
-
|
|
Cash
provided by (used in) operating activities
|
|
|
60,161
|
|
|
|
(1,229,865
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchase
of intangible assets
|
|
|
(3,813
|
)
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(15,126
|
)
|
|
|
(15,089
|
)
|
Proceeds
from the sale of property and equipment
|
|
|
31,000
|
|
|
|
-
|
|
Cash
disbursed for note receivable
|
|
|
(20,000
|
)
|
|
|
(135,000
|
)
|
Cash
received on note receivable
|
|
|
50,000
|
|
|
|
-
|
|
Cash
provided by (used in) investing activities
|
|
|
42,061
|
|
|
|
(150,089
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuances of convertible promissory notes
|
|
|
-
|
|
|
|
911,250
|
|
Proceeds
from exercises of stock options
|
|
|
358
|
|
|
|
-
|
|
Payments
on loans
|
|
|
(34,115
|
)
|
|
|
(3,681
|
)
|
Payments
on loans from shareholders
|
|
|
(96,168
|
)
|
|
|
-
|
|
Payments
to related parties
|
|
|
-
|
|
|
|
(72,076
|
)
|
Cash
(used in) provided by financing activities
|
|
|
(129,925
|
)
|
|
|
835,493
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(27,703
|
)
|
|
|
(544,461
|
)
|
Cash,
beginning of period
|
|
|
330,557
|
|
|
|
689,963
|
|
Cash,
end of period
|
|
$
|
302,854
|
|
|
$
|
145,502
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
1,833
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financial activities:
|
|
|
|
|
|
|
|
|
Conversions
of promissory note balances to common stock
|
|
$
|
889,905
|
|
|
$
|
-
|
|
Derivative
liability on convertible promissory notes and warrants
|
|
$
|
673,050
|
|
|
$
|
-
|
|
The
accompanying notes are integral to the unaudited condensed consolidated financial statements.
Surna
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
June
30, 2016
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company:
Surna
Inc. (“Company” “We” “Us” or “Our”) incorporated in the State of Nevada on October
15, 2009. On March 26, 2014, we acquired Safari Resource Group, Inc. (“Safari”), a Nevada corporation, whereby we
became the sole surviving corporation after the acquisition of Safari. On July 25, 2014, we acquired 100% of the membership interest
in Hydro Innovations, LLC, a Colorado limited liability company (“Hydro”), pursuant to which Hydro became a wholly-owned
subsidiary of the Company.
We
engineer and manufacture innovative technology and products that address the energy and resource intensive nature of indoor cultivation.
Our focus lies in supplying industrial solutions to commercial indoor cannabis cultivation facilities. Our engineering team is
tasked with creating novel energy and resource efficient solutions, including our signature liquid-cooled climate control platform.
Our engineers continuously seek to create technologies that allow growers to easily meet the highly specific demands of a cannabis
cultivation environment through temperature, humidity, light, and process control. Our objective is to provide intelligent solutions
that improve the quality, control, and overall yield and efficiency of indoor cannabis cultivation. We are headquartered in Boulder,
Colorado.
The
Company’s operations exclude the production or sale of marijuana.
Financial
Statement Presentation:
The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting
principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally
included in financial statements prepared in accordance with GAAP, have been condensed or omitted. GAAP requires management to
make estimates and assumptions that affect reported amounts and related disclosures. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2016. The balance sheet as of December 31, 2015 has been derived from the audited financial statements
at that date, but does not include all of 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, 2015. The notes to the unaudited condensed consolidated financial statements are presented on
a continuing basis unless otherwise noted.
Basis
of Consolidation and Reclassifications:
The
condensed consolidated financial statements include the accounts of the Company and its controlled and wholly-owned
subsidiary.
Intercompany transactions, profits, and balances are eliminated in consolidation.
Certain
reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications
have been applied consistently to the periods presented. The reclassifications had no impact on net loss or total assets and liabilities.
Use
of Estimates:
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates. In addition, any change in these estimates or their related assumptions
could have an adverse effect on our operating results. Key estimates include: valuation of derivative liabilities, valuation of
intangible assets, and valuation of deferred tax assets and liabilities.
Recent
Accounting Pronouncements:
In
May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This
additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides
clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications,
(ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also
specifies when a contract should be considered “completed” for purposes of applying the transition guidance. The effective
date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance
previously issued in 2014, which is effective for interim and annual periods beginning on or after December 15, 2017. The Company
has not yet determined the impact that this new guidance will have on its consolidated financial statements.
In
April 2016, accounting guidance was issued pertaining to identifying performance obligations in contracts with customers and improving
the operability and understandability of licensing implementation guidance. The guidance is effective for interim and annual periods
beginning on or after December 15, 2017. The Company has not yet determined the impact of this new guidance on its consolidated
financial statements.
In
March 2016, accounting guidance was issued to improve the accounting for employee stock-based payments. The guidance simplifies
accounting for stock-based award transactions specific to income tax consequences, the classification of awards as equity or liabilities,
and the classification of award payments on the statement of cash flows. The guidance is effective for interim and annual periods
beginning on or after December 15, 2016. The Company is currently assessing the impact that the adoption of this new guidance
will have on its consolidated financial statements.
In
March 2016, accounting guidance was issued to clarify the application of previously issued revenue recognition guidance related
to whether an entity is a principal or an agent. More specifically, this new guidance clarifies that the analysis must focus on
whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance
about how to apply the control principle when services are provided and when goods or services are combined with other goods or
services. The guidance is effective for interim and annual periods beginning on or after December 15, 2017. The Company has not
yet determined the impact that this new guidance will have on its consolidated financial statements.
In
March 2016, accounting guidance was issued pertaining to accounting for derivatives and hedging activity. The guidance amends
existing GAAP by clarifying that a change in the counterparty to a derivative instrument that has been designated as a hedging
instrument does not, in and of itself, require de-designation of that hedging relationship, provided that all other hedge accounting
criteria continue to be met. The amendment improves prior guidance by eliminating diversity in practice. The guidance is effective
for interim and annual periods beginning on or after December 15, 2016. The guidance may be applied prospectively or using a modified
retrospective approach to adjust retained earnings. The Company is currently evaluating the impact of this guidance on its consolidated
financial statements.
In
March 2016, additional accounting guidance was issued pertaining to accounting for derivatives and hedging activity. The guidance
clarifies the steps required when assessing whether the economic characteristics and risks of call (put) options are clearly and
closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an
embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether
the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendment
improves prior guidance by eliminating diversity in practice in assessing embedded contingent call (put) options in debt instruments.
The guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently assessing
the impact that the adoption of this new guidance will have on its consolidated financial statements.
In
February 2016, accounting guidance was issued pertaining to leases to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The core principle of this guidance is that a lessee should recognize a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. The guidance is effective for
interim and annual periods beginning on or after December 15, 2018. The Company is currently evaluating the impact that the adoption
of this new guidance will have on its consolidated financial.
In
January 2016, accounting guidance was issued on the classification and measurement of financial assets and liabilities (equity
securities and financial liabilities) under the fair value option and the presentation and disclosure requirements for financial
instruments. The guidance modifies how an entity measures equity investments and presents changes in the fair value of financial
liabilities. Under the new guidance, an entity will have to measure at fair value those equity investments that do not result
in consolidation and are not accounted for under the equity method, and an entity will have to recognize any changes in fair value
in net income unless the investments qualify for the new practicality exception. That exception will apply to those equity investments
that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under
the guidance, and, as such, these investments may be measured at cost. The guidance will be effective on January 1, 2018. The
Company is currently assessing the impact that the adoption of this new guidance will have on its consolidated financial statements.
We
continually assess any new accounting pronouncements to determine their applicability to us. Where it is determined that a new
accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to our
financial statements and assure that there are proper controls in place to ascertain that our financial statements properly reflect
the change. We have evaluated all other GAAP issued through the date the condensed financials were issued and believe that the
adoption of these will not have a material impact on our financial statements.
NOTE
2 - GOING CONCERN
The
accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
In
the course of its development activities, the Company has sustained and continues to sustain losses. The Company cannot predict
if or when the Company will generate profits. The Company has a deficit in working capital of approximately $3,465,000 as of June
30, 2016. Additionally, the Company has generated cumulative net losses of approximately $12,514,000 during the period from inception
through June 30, 2016.
The
Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue
as a going concern. The ability of the Company to continue as a going concern depends on it obtaining the adequate capital to
fund operating losses until it becomes profitable. Management plans to continue as a going concern to achieve a profitable level
of operations including generating cash through increased product sales, reducing planned expenditures, if necessary, and raising
capital from investors. While management plans to take the steps necessary to extend the time period over which the then-available
resources would be able to fund the operations, management cannot provide any assurances that the Company will be successful in
accomplishing any of its plans. Additionally, there can be no assurance that, if such efforts are successful, the terms and conditions
of such financing will be favorable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
During
the year ended December 31, 2015, we raised a total of approximately $1,781,000 in connection with issuances of three series of
convertible promissory notes. During the year ended December 31, 2014, we raised approximately $2,962,000 in connection with issuances
of two series of convertible promissory notes. The Company has been in discussion with several investment firms and is evaluating
the Company’s options for additional funding. The ability of the Company to continue as a going concern is dependent upon
its ability to successfully accomplish its plans and eventually secure other sources of financing and attain profitable operations.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
NOTE
3 - NOTES RECEIVABLE
On
April 26, 2016, the Company entered into a non-binding letter of intent (“LOI”) to acquire substantially all of the
assets of a third party (“Seller”). Per the terms of the Agreement, Company and Seller shall endeavor to close the
transaction on or before August 31, 2016, which was extended to September 30, 2016 (“Exclusivity Period”). During
the Exclusivity Period, the Company is required to provide the Seller a loan in the amount of $20,000 per month, up to a maximum
of $80,000. A payment of $20,000 was made during the three-month period ended June 30, 2016.
NOTE
4 - CONVERTIBLE PROMISSORY NOTES
During
the six months ended June 30, 2016, approximately $890,000 of the convertible promissory notes were converted into 17,888,828
shares of the Company’s common stock. The remaining balance as of June 30, 2016 was approximately $1,982,000 after debt
discounts of approximately $555,000.
NOTE
5
- SUBSEQUENT EVENTS
There
have been no significant events occurring after June 30, 2016.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related notes included elsewhere in this Form 10-Q, 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, 2015, as filed with the Securities
and Exchange Commission (the “SEC”). In addition to our historical unaudited condensed consolidated financial information,
the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results
could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”
Overview
Surna
develops, designs, and distributes cultivation technologies for controlled environment agriculture (“CEA”). The Company’s
customers include state-regulated cannabis cultivation facilities as well as traditional indoor agricultural facilities, including
organic herb and vegetable producers. Surna’s technologies include a comprehensive line of optimized lighting, environmental
control, air sanitation, and cultivation facilities. These technologies are designed to meet the specific environmental conditions
required for CEA and dramatically reduce energy and water consumption.
In
addition, Surna offers mechanical design services specific to hydronic cooling, including mechanical equipment and piping design.
Recent
Developments
No
recent developments
.
Critical
Accounting Policies and Significant Judgments and Estimates
This
discussion and analysis of our financial condition and results of operations is based upon our interim unaudited condensed consolidated
financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States
of America. Certain accounting policies are particularly important to the understanding of our financial positions and results
of operations and require the application of significant judgment by our management or can be materially affected by changes from
period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent
degree of uncertainty. In applying these policies, management uses their judgment to determine the appropriate assumptions to
be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business
plans and projected financial results, the terms of existing contracts, observance of trends in the industry, information provided
by our customers, and information available from other outside sources, as appropriate. For information regarding the Company’s
critical accounting policies as well as recent accounting pronouncements, see Note 1 to the consolidated financial statements.
Results
of Operations
The
following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes
included in this report
Comparison
of the Three Months Ended June 30, 2016 and 2015
Revenues
and Cost of Goods Sold
Revenue
for the three months ended June 30, 2016 was approximately $1,891,000 as compared to $1,678,000 (13% increase) for the three months
ended June 30, 2015. The increase in revenue is due to progress and ongoing legal and regulatory developments in an increasing
number of states that permit and regulate cannabis cultivation and use for medical or recreational purposes. Our current and future
revenue plan is dependent on the continued and increasing legality of the cannabis industry and our ability to effectively market
our indoor agriculture products to this key segment as well as expand our reach to other markets.
Cost
of revenue for the three months ended June 30, 2016 was approximately $1,577,000 (or 19% increase) as compared to $1,327,000 for
the three months ended June 30, 2015. Gross margin decreased to 17% from 21% a year ago due to several factors including: (i)
a warranty charge of approximately $455,000 the Company recorded during the three-months end June 30, 2016 for an estimated cost
to replace a customer’s system (ii) offset by price increases that took effect late in the third quarter of 2015, negotiation
of favorable pricing with key suppliers in the fourth quarter of 2015, a sales mix that consisted of high margin products and
reduced spend on installation projects as Surna exits that business.
Operating
expenses for the three months ended June 30, 2016 were approximately $614,000 as compared to $1,042,000 (41% decrease) for the
three months ended June 30, 2015. The decrease in advertising and marketing expenses from $93,000 to $29,000 (69% decrease) was
due to a heavier emphasis on advertising in the prior year and a focus on reigning in costs in the current year. The decrease
in product development costs from $129,000 to $94,000 (27% decrease) was due to the product life cycle of the Surna reflector
product, which has moved from development stage in the first quarter of 2015 to production stage in the first quarter of 2016.
The decrease in general and administrative expenses from $821,000 to $491,000 (40% decrease) is due to reductions in personnel
as well as a focus on cost containment.
We
incurred net other expenses of $405,000 for the three months ended June 30, 2016 compared to $286,000 (42% increase) for the three
months ended June 30, 2015. The increase was due in part to smaller gain on the change in derivative liabilities, which was offset
by marginal decrease in the interest expense and amortization of debt discount on convertible promissory notes. The derivative
liability gains for the three months ended June 30, 2016 decreased because the remaining convertible promissory notes converted
in April 2016 caused the remaining life to decrease. With the shorter remaining life, the beneficial conversion feature fair value
decrease. The interest expense and amortization of debt discount on convertible promissory notes for the three months ended June
30, 2016 was marginally less than the same period 2015. The decrease is due the fact that a significant number of the convertible
promissory notes converted in the first quarter and second quarter of 2016.
For
the three months ended June 30, 2016 and 2015, we had no federal taxable income due to utilization of net operating loss carryforwards
for the current quarter and operating losses in the second quarter of 2015.
Overall,
we realized a net operating loss of approximately $704,000 for the three months ended June 30, 2016 as compared to a net operating
loss of approximately $977,000 for the three months ended June 30, 2015.
Comparison
of the Six Months Ended June 30, 2016 and 2015
Revenue
for the six months ended June 30, 2016 was approximately $4,390,000 as compared to $2,549,000 (72% increase) for the six months
ended June 30, 2015. The increase in revenue is due to progress and ongoing legal and regulatory developments in an increasing
number of states that permit and regulate cannabis cultivation and use for medical or recreational purposes. Our current and future
revenue plan is dependent on the continued and increasing legality of the cannabis industry and our ability to effectively market
our indoor agriculture products to this key segment as well as expand our reach to other markets.
Cost
of revenue for the six months ended June 30, 2016 was approximately $2,987,000 (or 49% increase) as compared to $2,010,000 for
the six months ended June 30, 2015. Gross margin increased to 32% from 21% a year ago due to several factors including: (i) a
warranty charge of approximately $455,000 the Company recorded during the three-month end June 30, 2016 for an estimated cost
to replace a customer’s system (ii) offset by price increases that took effect late in the third quarter of 2015, negotiation
of favorable pricing with key suppliers in the fourth quarter of 2015, a sales mix that consisted of high margin products and
reduced spending on installation projects as Surna exits that business.
Operating
expenses for the six months ended June 30, 2016 were approximately $1,337,000 as compared to $2,110,000 (37% decrease) for the
six months ended June 30, 2015. The decrease in advertising and marketing expenses from $176,000 to $43,000 (76% decrease) was
due to a heavier emphasis on advertising in the prior year and a focus on reigning in costs in the current year. The decrease
in product development costs from $309,000 to $200,000 (35% decrease) was due to the product life cycle of the Surna reflector
product, which has moved from development stage in the first quarter of 2015 to production stage in the first quarter of 2016.
The decrease in general and administrative expenses from $1625,000 to $1,095,000 (33% decrease) is due to reductions in personnel
as well as a focus on cost containment.
We
incurred net other expenses of $1,516,000 for the six months ended June 30, 2016 compared to $825,000 (84% increase) for the six
months ended June 30, 2015. The increase in total other expense was due in part to loss on change in derivative liabilities and
an increase in interest expense, which were offset by a marginal decrease in amortization of debt discount on convertible promissory
notes. Stock price increases during the first quarter of 2016 drove a loss on change in derivatives of approximately $422,000,
which was offset by an approximate gain of $135,000 during the second quarter of 2016, as compared to an approximate gain of $475,000
for the six months ended June 30, 2015.
For
the six months ended June 30, 2016 and 2015, we had no federal taxable income due to utilization of net operating loss carryforwards
for the current quarter and operating losses in the second quarter of 2015.
Overall,
we realized a net operating loss of approximately $1,450,000 for the six months ended June 30, 2016 as compared to a net operating
loss of approximately $2,395,000 for the six months ended June 30, 2015.
Liquidity
and Capital Resources
The
following summarizes our cash flows:
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash
provided by (used in) operating activities
|
|
$
|
60,000
|
|
|
$
|
(1,230,000
|
)
|
Cash
flows provided by (used in) investing activities
|
|
|
42,000
|
|
|
|
(150,000
|
)
|
Cash
flows (used in) provided by financing activities
|
|
|
(130,000
|
)
|
|
|
835,000
|
|
Net
change in cash
|
|
$
|
(28,000
|
)
|
|
$
|
(545,000
|
)
|
We
have never reported net income. We incurred net losses for the six months ended June 30, 2016 and 2015 and have an accumulated
deficit of approximately $12,514,000 as of June 30, 2016. We had working capital deficits (current liabilities exceed current
assets) of approximately $3,465,000 and $3,020,000 as of June 30, 2016 and December 31, 2015, respectively. We have not been able
to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital
through private sales of common stock and debt securities. Our future success is dependent upon our ability to achieve profitable
operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue
and/or raise capital to support our operations. As of June 30, 2016 and December 31, 2015, we had a cash balance of approximately
$303,000 and $331,000, respectively.
Cash
Requirements
Our
ability to fund our growth and meet our obligations on a timely basis is dependent on our ability to match our available financial
resources to our growth strategy, which includes acquisitions for cash or a combination of cash and debt. The decisions we make
with regard to acquisitions drive the level of capital required and the level of our financial obligations. Management has determined
the Company’s June 30, 2016 cash balance of approximately $303,000 will not be sufficient to fund the Company’s operations
over the next twelve months. Based on management’s estimate for operational cash requirements and without modifications
to our existing payment obligations or receipt of additional funding, we will require additional capital to continue our operations
beyond November 2016.
If
we are unable to generate cash flow from operations or adjustment to our payment arrangements or from successfully raising sufficient
additional capital through future debt and equity financings or strategic and collaborative ventures with potential partners,
we would likely have to reduce the size and scope of our acquisitions.
We
have suffered recurring losses from operations. The continuation of our Company is dependent upon our Company attaining and maintaining
profitable operations and raising additional capital as needed. In this regard, we have raised additional capital through equity
offerings and loan transactions and, in the short term, will seek to raise additional capital in such manners to fund our operations.
Our officers and shareholders have not made any written or oral agreement to provide us additional financing. There can be no
assurance that we will be able to continue to raise capital on terms and conditions that are deemed acceptable to us.
Operating
Activities
Cash
provided by operations for the six months ended June 30, 2016 was approximately $60,000 compared to cash used in operations of
approximately $1,230,000 for the six months ended June 30, 2015.
The fluctuation was due to the reduction in the recorded
net loss.
Investing
Activities
Cash
provided by investing activities for the six months ended June 30, 2016 was approximately $42,000 compared to cash used by investing
activities of approximately $150,000 for the six months ended June 30, 2015. This fluctuation reflects the $135,000 of cash invested
in Agrisoft in 2015 and the $50,000 cash receipt against the note receivable from Agrisoft in 2016.
Financing
Activities
Cash
used in financing activities for the six months ended June 30, 2016 was approximately $130,000 compared to cash provided by financing
activities of approximately $836,000 for the six months ended June 30, 2015. No debt was issued in the current period compared
to the $911,250 of convertible promissory note issuances in the comparable prior year period.
Inflation
In
the opinion of management, inflation has not and will not have a material effect on our operations in the immediate future. Management
will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
Contractual
Payment Obligations
We
have obligations under notes payable and a non-cancelable operating lease. As of June 30, 2016, these contractual obligations
totaled approximately $3,176,000.
Off-Balance
Sheet Arrangements
There
are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources
that is material to investors.