Item
10. Directors, Executive Officers and Corporate Governance
Information
about our Directors
The
Company currently has one vacancy on the Board of Directors (the “Board”). The Company’s current directors are
set forth below:
|
Name
|
|
Age
|
|
Positions
& Committees
|
|
Chris
Bechtel
|
|
58
|
|
Director;
Chief Executive Officer and President
|
|
Timothy
J. Keating
|
|
54
|
|
Chairman
of the Board; Audit Committee
|
|
Brandy
M. Keen
|
|
41
|
|
Director;
Vice President and Secretary
|
|
J.
Taylor Simonton
|
|
73
|
|
Director;
Audit Committee*
|
|
*Chairman
of the committee
|
Certain
information, as of April 23, 2018, with respect to the Company’s current directors, including their names, a brief
description of their recent business experience, including present occupations and employment, certain directorships that each
person holds, and the year in which each person became a director of the Company is set forth below. The business address of each
of the directors is 1780 55th Street, Boulder, Colorado 80301.
|
Name
and Year First Elected Director
|
|
Background
Information and Principal Occupation(s) During Past Five Years and Beyond
|
|
Chris
Bechtel (2017)
|
|
Mr.
Bechtel was appointed a director on May 31, 2017. On August 17, 2017, Mr. Bechtel was
appointed our Chief Executive Officer and President. Mr. Bechtel has over 30 years’
experience, as an executive, entrepreneur and consultant, managing and advising businesses
from start-ups to divisions of large Fortune 500 companies. Since 2015, Mr. Bechtel has
been the principal of Bechtel Consulting, LLC, which provides consulting services in
mergers and acquisitions, financial and investment analysis, capital markets, turnarounds
and special situations. Mr. Bechtel became involved in the cannabis industry about three
years ago as a private investor, consultant and advisor.
In
September 2017, Mr. Bechtel was appointed a director of Ravenquest BioMed Inc. (CSE: RQB) a Canadian diversified cannabis
company. In September 2014, Mr. Bechtel joined the advisory board of Supreme Pharmaceuticals, Inc., a Canadian publicly
traded company committed to becoming a leading supplier of affordable medical cannabis. Through its wholly-owned subsidiary
7ACRES, a federally licensed producer of medical cannabis pursuant to the
Access to Cannabis for Medical Purposes Regulations,
Supreme operates a 342,000 square-foot hybrid greenhouse facility. In November 2014, Mr. Bechtel was appointed as
an independent director and the chairman of Supreme, where he served in such positions until resigning in April 2016.
From October 2014 to April 2016, Mr. Bechtel also served as a director of ebbu, llc, a privately-held, Colorado-based
company offering a line of branded cannabis products and a bulk oil extraction service for cannabis producers.
In
1983, Mr. Bechtel co-founded Omni Laboratories, Inc., a privately-held company that provides geologic services for oil
and gas companies, where he was initially responsible for all business development activities, including a number of business
acquisitions. Mr. Bechtel became the sole owner of Omni in 1995, when he bought out his other partners. From January 1995
to September 2006, as President, Mr. Bechtel was responsible for leading the organic growth initiative as well as expanding
Omni’s service offerings, eventually employing 175 people with 14 laboratory locations in six countries. In September
2006, Mr. Bechtel sold Omni to Weatherford International, Inc. (NYSE: WFT), one of the largest global providers of innovative
mechanical solutions, technology and services for the drilling, completion and production sectors of the oil and gas industry.
In September 2006, Mr. Bechtel was appointed Group Vice President responsible for managing and growing the former Omni
business, which was renamed Weatherford Laboratories and, in 2011, he was promoted to lead the worldwide operations of
Weatherford’s Surface Logging Systems division. Mr. Bechtel retired from Weatherford in March 2015.
Mr.
Bechtel is a 1981 graduate of Michigan State University with a B.A. degree in Marketing.
|
|
Timothy
J. Keating (2017)
|
|
Mr.
Keating was appointed Chairman of the Board of Directors on March 14, 2017 and is a member
of the Audit Committee. Mr. Keating brings more than 32 years of Wall Street experience,
including 17 years as the principal owner of Keating Investments, LLC. Mr. Keating also
served on the Equity Capital Formation Task Force and is the chairman of the Denver chapter
of Harvard Alumni Entrepreneurs. Mr. Keating is currently the President of Keating Wealth
Management, LLC, a Denver-area financial planning and investment advisory firm serving
high net worth investors and their families.
Mr.
Keating served as the President, Chief Executive Officer and Chairman of the Board of Directors of Keating Capital, Inc.
from its inception in 2008 to 2015. Mr. Keating was a member of Keating Investments, LLC from its founding in 1997 to
July 1, 2014, when the members of Keating Investments sold 100% of their membership interests to BDCA Adviser, LLC. Mr.
Keating also served as a member of the Investment Committee of Keating Investments from 2008 to 2015. Mr. Keating served
as the President and Chief Executive Officer of Keating Investments from its founding in 1997 to 2015. Mr. Keating previously
served as the President of Keating Securities, LLC, formerly a wholly owned subsidiary of Keating Investments and a Financial
Industry Regulatory Authority, Inc. (“FINRA”) registered broker-dealer, from August 1999 to August 2008. Prior
to founding Keating Investments, Mr. Keating was a proprietary arbitrage trader and also head of the European Equity Trading
Department at Bear Stearns International Limited (London) from 1994 to 1997. From 1990 to 1994, Mr. Keating founded and
ran the European Equity Derivative Products Department for Nomura International Plc in London. Mr. Keating began his career
at Kidder, Peabody & Co., Inc. where he was active in the Financial Futures Department in both New York and London.
Mr.
Keating is a
cum laude
graduate of Harvard College with an A.B. in Economics.
|
|
Brandy
M. Keen (2015)
|
|
Ms.
Keen has served as the Vice President and Secretary since July 2017 and as a Director
since August 18, 2015. Ms. Keen co-founded Hydro Innovations, LLC in 2006 and served
as its Director of Operations until its acquisition by Surna in July 2014. From July
2014 to July 2017, Ms. Keen was the Company’s Vice President of Sales. Ms. Keen
also currently serves as a Senior Technical Advisor where she assists in developing climate
control, odor control mitigation and biosecurity solutions for our customers.
Ms.
Keen has been designing and consulting for environmental systems in indoor agricultural facilities for over ten years.
At Hydro Innovations, she developed a sophisticated knowledge of the controlled environment agriculture industry and established
herself as an expert in the garden and indoor climate.
Ms.
Keen is often engaged as a speaker on climate control and energy efficiency by organizations such as National Cannabis
Industry Association, Cannabis World Congress and Business Exposition and CannaCon and is frequently cited in industry-related
publications. Ms. Keen is also a member of Denver’s Department of Public Health and Environment Cannabis Sustainability
Work Group, whose mission is to promote sustainability in the cannabis industry through education, the development and
dissemination of best practices, and the facilitation of dialogue between the cannabis industry, the community, and technical
experts.
Ms.
Keen is also a member of the technical advisory committee of the Founder’s Circle of Resource Innovations Institute,
an organization that promotes and quantifies energy and water conservation in the cannabis industry.
From
2004 to 2005, Ms. Keen was a customer service manager for Dynalyst Corporation, a manufacturer of circuit boards used
for testing of integrated circuits. From 1995 to 2004, Ms. Keen held a number of technical sales and account management
positions at Cerprobe Corp., a supplier of capital and consumable equipment in the semiconductor industry.
|
|
J.
Taylor Simonton (2017)
|
|
Mr.
Simonton was appointed a director on May 31, 2017 and is the chairman of the Audit Committee.
Mr. Simonton spent 35 years at PricewaterhouseCoopers, LLC (PwC), including 23 years
as a partner in the firm’s Assurance Services, before retiring in 2001. Mr. Simonton
was a partner for seven years in PwC’s National Professional Services Group, which
handles the firm’s auditing and accounting standards, SEC, corporate governance,
risk management and quality matters. He has extensive experience with SEC filings, including
assistance with over 100 initial public offerings during his PwC career.
In
May 2017, he was appointed an independent director, a member of the Audit Committee (elected its Chairman in May 2018)
and a member of the Governance Committee of Master Chemical Corporation (d/b/a Master Fluids Solutions), a developer and
marketer of specialty chemicals. In May 2014, he was elected an independent director and chair of the Audit Committee
of Advanced Emissions Solutions, Inc. (NASDAQ: ADES), an environmental technology and specialty industrial chemicals company,
where he currently also serves as a member of the Nominating & Governance Committee and a member of the Compensation
Committee. Since October 2013, Mr. Simonton has served as an independent director, chair of the Audit Committee and member
of the Nominating and Governance Committee of Escalera Resources Co., a natural gas exploration and development company
(OTC: ESCR) and a member of the Compensation Committee since July 2014.
From
May 2008 to July 2015, Mr. Simonton served as the lead independent director and chair of the Audit Committee of Crossroads
Capital, Inc. (f/k/a BDCA Venture, Inc. and Keating Capital, Inc.), a publicly-traded closed-end fund regulated as a business
development company under the Investment Company Act of 1940, where he also served as a member of the Valuation Committee
which he chaired from 2008 to 2011. From October 2008 to January 2014, Mr. Simonton served as an independent director
and chair of the Audit Committee of Zynex, Inc. (OTC: ZYXI), a company that primarily engineers, manufactures, markets
and sells its own design of electrotherapy medical devices used for pain management and rehabilitation. Mr. Simonton served
as a director from September 2005 to May 2013 of Red Robin Gourmet Burgers, Inc. (NASDAQ: RRGB), a casual dining restaurant
chain operator serving high quality gourmet burgers where he was a member of the Audit Committee, of which he was chair
from October 2005 until June 2009, and a member of the Nominating and Governance Committee. From January 2003 to February
2007, he also served as a director and the chair of the Audit Committee of Fischer Imaging Corporation, a public company
that designed, manufactured and marketed medical imaging systems.
Mr.
Simonton served for 10 years until 2015 on the Board of Directors of the Colorado Chapter of the National Association
of Corporate Directors (NACD), where he served over time as its Treasurer, President, and Chairman. He is a Board Leadership
Fellow, NACD’s highest director credential, and was honored as Colorado’s 2014 Outstanding Public Company
Director by the Denver Business Journal and NACD-Colorado.
He
is admitted as an expert witness in accounting, auditing, and corporate governance in U.S. District Court, Colorado Division.
Mr. Simonton is a 1966 graduate of the University of Tennessee - Knoxville with a B.S. in Accounting and is a Certified
Public Accountant, licensed in Colorado.
|
Each
of the directors on our Board of Directors was elected or appointed because he or she has demonstrated an ability to make meaningful
contributions to our business and affairs, has a reputation for honesty and ethical conduct, has strong communication and analytical
skills, and has skills, experience and background that are complementary to those of our other Board members. Mr. Keating has
extensive financing, investment banking and investor relations experience and other managerial experience with micro- and small-cap
public companies and helping those companies define their business strategies and implementing business plans. Mr. Simonton has
extensive financial reporting, SEC compliance and corporate governance experience. Ms. Keen has sales experience and has been
involved in the cannabis industry for many years, with an in-depth knowledge of indoor cannabis cultivation and climate control
systems. Mr. Bechtel has experience in building and leading emerging growth companies and has been a director or adviser to a
number of cannabis-related companies.
Director
Independence
The
Board annually determines each director’s independence, although we are not required to have any independent directors because
the common stock of the Company is not listed on a national exchange. We do not consider a director independent unless the Board
has determined that he has no material relationship with us. We intend to monitor the relationships of our directors and officers
through a questionnaire each director completes no less frequently than annually and updates periodically as information provided
in the most recent questionnaire changes.
In
order to evaluate the materiality of any such relationship, the Board uses the definition of director independence set forth in
Rule 5605(a)(2) promulgated by the Nasdaq Stock Market. The Board has determined that Messrs. Keating and Simonton are independent
directors. Mr. Bechtel and Ms. Keen are not independent directors as a result of their positions as executive officers.
Nominations
for Directors
The
Company has not established a nominating committee. Accordingly, the Board is responsible for identifying individuals qualified
to serve on the Board as directors and on committees of the Board, establishing procedures for evaluating the suitability of potential
director nominees consistent with the criteria approved by the Board, reviewing the suitability for continued service as a director
when his or her term expires and at such other times as the Board deems necessary or appropriate, and determining whether or not
the director should be re-nominated, and reviewing the membership of the Board and its committees and making changes, if any.
In
evaluating director nominees, the Board of Directors will generally consider the following factors:
|
|
●
|
the
appropriate size and composition of our Board of Directors;
|
|
|
|
|
|
|
●
|
whether
or not the person is an “independent” director as defined in Rule 5605(a)(2) promulgated by the Nasdaq Stock Market;
|
|
|
|
|
|
|
●
|
the
needs of the Company with respect to the particular talents and experience of its directors;
|
|
|
|
|
|
|
●
|
the
knowledge, skills and experience of nominees in light of prevailing business conditions and the knowledge, skills and experience
already possessed by other members of the Board of Directors;
|
|
|
|
|
|
|
●
|
familiarity
with national and international business matters and the requirements of the industry in which we operate;
|
|
|
|
|
|
|
●
|
experience
with accounting rules and practices;
|
|
|
|
|
|
|
●
|
the
desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by
new members; and
|
|
|
|
|
|
|
●
|
all
applicable laws, rules, regulations and listing standards, if applicable.
|
There
are no stated minimum criteria for director nominees, although the Board may consider such factors as it may deem are in the best
interests of the Company and its stockholders. The Board also believes it is appropriate for certain key members of our management
to participate as members of the Board of Directors.
The
Board identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members
of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered
for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new
perspective. If any member of the Board does not wish to continue in service, or if the Board decides not to re-nominate a member
for re-election, the Board identifies the desired skills and experience of a prospective director nominee in light of the criteria
above, or determines to reduce the size of the Board. Research may also be performed to identify qualified individuals. To date,
we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, nor do we anticipate doing
so in the future.
Stockholder
Communications with Directors
Stockholders
may communicate with the Board by sending a letter to the Corporate Secretary, Surna Inc., 1780 55th Street, Boulder, Colorado
80301. Each communication must set forth the name and address of the stockholder on whose behalf the communication is sent and
should indicate in the address whether the communication is intended for the entire Board, the non-employee directors as a group
or an individual director. Each communication will be screened by the Corporate Secretary or his or her designee to determine
whether it is appropriate for presentation to the Board or any specified director(s). Examples of inappropriate communications
include junk mail, spam, mass mailings, resumes, job inquiries, surveys, business solicitations and advertisements, as well as
unduly hostile, threatening, illegal, unsuitable, frivolous, patently offensive or otherwise inappropriate material. Communications
determined to be appropriate for presentation to the Board, or the director(s) to whom they are specifically addressed, will be
submitted to the Board or such director(s) on a periodic basis. Any communications that concern accounting, internal control or
auditing matters will be handled in accordance with procedures adopted by the Audit Committee.
Code
of Business Conduct and Ethics
Our
Board has adopted a Code of Business Conduct and Ethics, which is available for review on our website at
www.surna.com
and is also available in print, without charge, to any stockholder who requests a copy by writing to us at Surna Inc., 1780 55th
Street, Boulder, Colorado 80301, Attention: Corporate Secretary. Each of our directors, employees and officers, including our
Chief Executive Officer, Chief Financial Officer, and all of our other principal executive officers, are required to comply with
the Code of Business Conduct and Ethics. There have not been any waivers of the Code of Business Conduct and Ethics relating to
any of our executive officers or directors in the past year.
Meetings
and Committees of the Board
Our
Board is responsible for overseeing the management of our business. We keep our directors informed of our business at meetings
and through reports and analyses presented to the Board and the committees of the Board. Regular communications between our directors
and management also occur outside of formal meetings of the Board and committees of the Board.
Meeting
Attendance
Our
Board generally holds meetings on a quarterly basis, but may hold additional meetings as required. In 2017, the Board held eight
meetings. Except for one Board meeting missed by Ms. Keen, each of our directors attended 100% of the Board meetings that were
held during the periods when he or she was a director and 100% of the meetings of each committee of the Board on which he or she
served that were held during the periods that he served on such committee. We do not have a policy requiring that directors attend
our annual meetings of stockholders. We did not hold a 2017 annual meeting of stockholders.
Committees
of the Board of Directors
Our
Board established an Audit Committee on May 31, 2017. The Audit Committee operates pursuant to a charter approved by the Board,
a copy of which is available on our website at
www.surna.com
by written request to the Company at Surna Inc., 1780 55th
Street, Boulder, Colorado 80301, Attention: Corporate Secretary. The charter sets forth the responsibilities of the Audit Committee.
The Audit Committee’s responsibilities include recommending the selection of our independent registered public accounting
firm; evaluating the appointment, compensation and retention of our registered public accounting firm; receiving formal written
statements from our independent registered public accounting firm regarding its independence, including a delineation of all relationships
between it and the Company; reviewing with such independent registered public accounting firm the planning, scope and results
of their audit of our financial statements; pre-approving the fees for services performed; reviewing with the independent registered
public accounting firm the adequacy of internal control systems; reviewing our annual financial statements and periodic filings,
and receiving our audit reports and financial statements. In addition, the Audit Committee’s responsibilities include considering
the effect on the Company of any changes in accounting principles or practices proposed by management or the independent registered
public accounting firm, any changes in service providers, such as the accountants, that could impact the Company’s internal
control over financial reporting, and any changes in schedules (such as fiscal or tax year-end changes) or structures or transactions
that required special accounting activities, services or resources. The Audit Committee is presently comprised of two persons:
Messrs. Keating and Simonton. Each member of the Audit Committee is considered independent under the rules promulgated by the
Nasdaq Stock Market. Our Board has determined that Mr. Simonton is an “audit committee financial expert” as that term
is defined under Item 407 of Regulation S-K of the Securities Act of 1933, as amended (the “Securities Act”). Mr.
Simonton currently serves as Chairman of the Audit Committee. The Audit Committee held four meetings during 2017.
Board
Leadership Structure
The
Board may, but is not required to, select a Chairman of the Board who presides over the meetings of the Board and meetings of
the stockholders and performs such other duties as may be assigned to him by the Board. The positions of Chairman of the Board
and Chief Executive Officer may be filled by one individual or two different individuals. Currently the positions of Chairman
of the Board and Chief Executive Officer are separated. Our Board believes that this structure has allowed Mr. Bechtel, Chief
Executive Officer, to focus on our day-to-day business, while allowing Mr. Keating, our Chairman of the Board, to lead the Board
in its fundamental role of providing advice to and independent oversight (including risk oversight) of management.
Our
separated Chairman of the Board and Chief Executive Officer positions are augmented by our independent directors, who comprise
all of our Board committees and meet regularly in executive session without Mr. Bechtel, Ms. Keen or other members of our management
present to ensure that our Board maintains an appropriate level of independent oversight of management.
Board’s
Role in Risk Oversight
While
risk management is primarily the responsibility of the Company’s management team, the Board is responsible for the overall
supervision of the Company’s risk management activities. The Board as a whole has responsibility for risk oversight, and
each Board committee has responsibility for reviewing certain risk areas and reporting to the full Board. The oversight responsibility
of the Board and its committees is enabled by management reporting processes that are designed to provide visibility to the Board
about the identification, assessment, and management of critical risks and management’s risk mitigation strategies in certain
focus areas. These areas of focus include strategic, operational, financial and reporting, succession and compensation and other
areas.
The
Board and its committees oversee risks associated with their respective areas of responsibility. The full Board oversees: (i)
risks and exposures associated with our business strategy and other current matters that may present material risk to our financial
performance, operations, prospects or reputation, (ii) risks and exposures associated with management succession planning and
executive compensation programs and arrangements, including equity incentive plans, and (iii) risks and exposures associated with
director succession planning, corporate governance, and overall board effectiveness. The Audit Committee oversees overall policies
with respect to risk assessment and risk management, material pending legal proceedings involving the Company and other contingent
liabilities, any potential related party or conflict of interest transactions, as well as other risks and exposures that may have
a material impact on our financial statements.
Management
provides regular updates to the Board regarding the management of the risks they oversee at each regular meeting of the Board.
We believe that the Board’s role in risk oversight must be evaluated on a case-by-case basis and that our existing Board’s
role in risk oversight is appropriate. However, we continually re-examine the manners in which the Board administers its oversight
function on an ongoing basis to ensure that they continue to meet the Company’s needs.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our executive officers, directors
and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes
in ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) reports
filed by such persons.
Based
solely on our review of the copies of such reports furnished to us, we believe that during the fiscal year ended December 31,
2017, all executive officers, directors and greater than 10% beneficial owners of our common stock complied with the reporting
requirements of Section 16(a) of the Exchange Act.
Executive
Officers
Executive
officers are appointed by our Board and serve at its discretion. Set forth below is information regarding our executive officers
as of April 23, 2018.
|
Name
|
|
Age
|
|
Positions
|
|
Chris
Bechtel
|
|
58
|
|
Chief
Executive Officer and President; Director
|
|
Brandy
M. Keen
|
|
41
|
|
Vice
President and Secretary; Director
|
Mr.
Bechtel’s and Ms. Keen’s biographical information is included with such information for the other members of our Board.
Item
11. Executive Compensation
Director
Compensation Program
On
August 8, 2017, the Board approved a compensation plan for its independent directors, which was effective the election or appointment
of independent directors on or after May 31, 2017. Under the plan, the Company pays its independent directors an annual fee of
$60,000, payable quarterly in advance on the first business day of each quarter, covering any regular or special meetings of the
Board or any committee thereof attended in person, any telephonic meeting of the Board or any committee thereof in which the director
participated, any non-meeting consultations with the Company’s management, and any other services provided by them as a
director (other than services as the Chairman of the Board and lead independent director and the Chairman of the Audit Committee).
The annual fee is paid 50% in cash and 50% in shares of the Company’s common stock, with the number of shares to be determined
based on the closing price of the common stock on the date of issuance.
The
Company pays the Chairman of the Board and lead independent director an additional annual fee of $15,000, payable in cash quarterly
in advance. Mr. Keating is currently the Chairman of the Board and is presently designated as the lead independent director.
The
Company pays the Audit Committee Chairman, currently Mr. Simonton, an annual fee of $15,000, payable in cash quarterly in advance,
for his services as the Audit Committee Chairman. There is no additional compensation paid to members of the Audit Committee.
At
the time of initial election or appointment, each director also receives an equity retention award in the form of non-qualified
stock options (“Stock Options”) to purchase shares of common stock, shares of common stock (“Common Shares”),
or a combination thereof. The number of common shares underlying the Stock Options (“Option Shares”) and/or Common
Shares included in the equity retention award is determined by the Board. Vesting of the equity retention award is determined
by the Board, with a portion vesting upon grant and the remainder vesting over either a one- or two-year period following the
grant.
Each
director is responsible for the payment of any and all income taxes arising with respect to the grant of common stock or the exercise
of non-qualified stock options.
The
Company also reimburses directors for out-of-pocket expenses incurred in attending Board and committee meetings and undertaking
certain matters on the Company’s behalf.
Employee
directors do not receive separate fees for their services as directors.
Under
the Nevada Revised Statutes and pursuant to our charter and bylaws, as currently in effect, the Company may indemnify the Company’s
officers and directors for various expenses and damages resulting from their acting in these capacities. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our officers and directors pursuant to the foregoing provisions,
we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities
Act, and is therefore unenforceable.
The
Company has entered into indemnification agreements with its directors and executive officers. The indemnification agreements
are intended to provide the Company’s directors the maximum indemnification permitted under the Nevada Revised Statutes,
unless otherwise limited by the Company’s charter and bylaws. Each indemnification agreement provides that the Company shall
indemnify the director or executive officer who is a party to the agreement (an “Indemnitee”), including the advancement
of legal expenses, if, by reason of his corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness
in any threatened, pending, or completed proceeding. Each indemnification agreement further provides that the applicable provisions
of the Company’s charter and bylaws regarding indemnification shall control in the event of any conflict with any provisions
of such indemnification agreements.
Director
Compensation Table
The
following table sets forth the compensation earned by or awarded or paid in 2017 to the individuals who served as our independent
directors during such period. While Mr. Bechtel received certain compensation as an independent director prior to his appointment
as our Chief Executive Officer, all such compensation received by Mr. Bechtel is disclosed in the Summary Executive Compensation
Table below.
|
Name
|
|
Fees
Earned
or Paid in
Cash
(1)
|
|
|
Stock
Awards
(2)
|
|
|
Total
|
|
|
Timothy
J. Keating
|
|
$
|
37,500
|
|
|
$
|
269,090
|
|
|
$
|
306,590
|
|
|
J.
Taylor Simonton
|
|
$
|
26,250
|
|
|
$
|
128,564
|
|
|
$
|
154,814
|
|
|
Morgan
Paxhia
(3)
|
|
$
|
-
|
|
|
$
|
189,592
|
|
|
$
|
189,592
|
|
(1)
Excludes reimbursement of out-of-pocket expenses.
(2)
Reflects the dollar amount of the grant date fair value of non-qualified stock options, restricted stock units and other
stock-based awards granted in 2017, measured in accordance with FASB Accounting Standards Codification (“ASC”) Topic
718 (“Topic 718”) without adjustment for estimated forfeitures. For a discussion of the assumptions used to calculate
the value of equity awards, refer to Note 16 to our consolidated financial statements for the fiscal year ended December 31, 2017
included in the Annual Report.
(3)
Mr. Paxhia resigned from the Board on May 31, 2017.
The
aggregate number of non-qualified stock options, restricted stock unit awards and warrants held as of December 31, 2017 by each
independent director are as follows:
|
Name
|
|
Shares
Underlying Non-Qualified Stock Options
|
|
|
Shares
Underlying Restricted Stock Units
|
|
|
Shares
Underlying Directors Warrants
|
|
|
Total
|
|
|
Timothy
J. Keating
|
|
|
–
|
|
|
|
700,000
|
|
|
|
–
|
|
|
|
700,000
|
|
|
J.
Taylor Simonton
|
|
|
900,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
900,000
|
|
|
Morgan
Paxhia
|
|
|
–
|
|
|
|
–
|
|
|
|
1,821,050
|
|
|
|
1,821,050
|
|
Executive
Compensation Philosophy and Objectives
The
Company has not established a compensation committee. Accordingly, the Board is responsible for setting compensation policies
for executive officers has two fundamental objectives: (i) to provide a competitive total compensation package that enables the
Company to attract and retain highly qualified executives with the skills and experience required for the achievement of business
goals; and (ii) to align certain compensation elements with the Company’s annual performance goals. The Board considers,
with respect to each of the Company’s executive officers, the total compensation that may be awarded, including base salary,
discretionary cash bonuses, annual stock incentive awards, stock options, restricted stock units and other equity awards, and
other benefits and perquisites. Under certain circumstances, the Board may also award compensation payable upon termination of
the executive officer under an employment agreement or severance agreement (if applicable). The Board recognizes that its overall
goal is to award compensation that is reasonable when all elements of potential compensation are considered. The Board believes
that cash compensation in the form of base salary and discretionary cash bonuses provides our executives with short-term rewards
for success in operations, and that long-term compensation through the award of stock options, restricted stock units and other
equity awards aligns the objectives of management with those of our stockholders with respect to long-term performance and success.
The
Board also has historically focused on the Company’s financial condition when making compensation decisions and approving
performance objectives. Because the Company has historically sought to preserve cash and currently does not operate at a profit,
overall compensation traditionally has been weighted more heavily toward equity-based compensation, a portion of which is earned
only upon the Company’s achievement of specified annual revenue goals. The Board will continue to periodically reassess
the appropriate weighting of cash and equity compensation in light of the Company’s expenditures in connection with commercial
operations and its cash resources and working capital needs.
Summary
Executive Compensation Table
The
following table summarizes compensation earned by or awarded or paid to our named executive officers for the years ended December
31, 2017 and 2016.
|
Name
and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
(1)
|
|
|
Option
Awards
(1)
|
|
|
Non-equity
Incentive Plan Compensation
|
|
|
Non-qualified
Deferred Compensation Earnings
|
|
|
All
Other Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
B. Keen - Director of Technology
(2)
|
|
2017
|
|
|
$
|
36,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,320
|
|
|
$
|
59,320
|
|
|
|
|
2016
|
|
|
$
|
110,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
110,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaron
Trent Doucet - Vice President of Business Development (former Chief Executive Officer)
(3)
|
|
2017
|
|
|
$
|
168,461
|
|
|
$
|
-
|
|
|
$
|
1,089,900
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
39,095
|
|
|
$
|
1,297,456
|
|
|
|
|
2016
|
|
|
$
|
125,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
34,600
|
|
|
$
|
160,4
00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brandy
M. Keen - Vice President and Secretary
(4)
|
|
2017
|
|
|
$
|
127,070
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,512
|
|
|
$
|
136,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Bechtel - Chief Executive Officer and President
(5)
|
|
2017
|
|
|
$
|
63,692
|
|
|
$
|
240,000
|
|
|
$
|
335,700
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95,400
|
|
|
$
|
734,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
C. Kelly (former Chief Financial Officer and Treasurer)
(6)
|
|
2017
|
|
|
$
|
92,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
92,000
|
|
(1)
Reflects the dollar amount of the grant date fair value of awards granted in 2017, measured in accordance with FASB Accounting
Standards Codification (“ASC”) Topic 718 (“Topic 718”) without adjustment for estimated forfeitures. For
a discussion of the assumptions used to calculate the value of equity awards, refer to Note 16 to our consolidated financial statements
for the fiscal year ended December 31, 2017 included in the Annual Report.
(2)
Mr. Keen was appointed Director of Technology in June 2016. Mr. Keen previously served as Chief Executive Officer from August
2015 to June 2016. Mr. Keen’s employment ceased in April 2017, and he resigned as a director in May 2017. All amounts presented
include all compensation for Mr. Keen for the full 2017 and 2016 years. Other compensation includes consulting fees earned for
the period beginning May 10, 2017 through December 31, 2017 ($20,000), employer matching contributions under the Company’s
401(k) plan ($1,080), and employer-paid portion of insurance benefits ($2,240).
(3)
Mr. Doucet served as President and Chief Executive Officer from June 2016 to August 2017. From August 2017 until March 2018,
Mr. Doucet served as the Company’s Vice President of Business Development. Mr. Doucet previously served as Chief Operating
Officer from November 2015 to June 2016. All amounts presented include all compensation for Mr. Doucet for the full 2017 and 2016
years. Stock awards represent restricted stock units awarded in 2017 which are subject to vesting (see Outstanding Equity Awards
table, below). Other compensation for 2016 includes an apartment rent allowance paid to Mr. Doucet ($30,700) and employer-paid
portion of insurance benefits ($3,900). Other compensation for 2017 includes a moving allowance paid in connection with his relocation
to California ($28,000), a car allowance ($5,095) and employer-paid portion of insurance benefits ($6,000).
(4)
Ms. Keen was appointed Vice President and Secretary in July 2017. Ms. Keen previously served as Vice President of Sales
from July 2014 to July 2017. All amounts presented include all compensation for Ms. Keen for the full 2017 year. Other compensation
includes employer matching contributions under the Company’s 401(k) plan ($3,812) and employer-paid portion of health insurance
premiums ($5,700).
(5)
Mr. Bechtel was appointed Chief Executive Officer and President in August 2017. All amounts presented include all compensation
for Mr. Bechtel for the full 2017 year. Bonus represents incentive stock bonus earned in 2017 per his employment agreement. Stock
awards represent restricted stock units awarded in 2017 which are subject to vesting in 2018 and 2019 based on the Company’s
achievement of certain revenue thresholds (see Outstanding Equity Awards table, below). Other compensation includes consulting
fees paid in equity ($81,000) and employer-paid portion of insurance benefits ($1,900). Other compensation also includes compensation
earned or paid in his capacity as an independent director prior to his appointment as CEO: (i) cash fees of $10,000, and (ii)
cash fees of $2,500 paid in equity.
(6)
Mr. Kelly was appointed Chief Financial Officer and Treasurer in August 2017. Mr. Kelly resigned as Chief Financial Officer
and Treasurer in January 2018. As of the date of this Proxy Statemnt, the Company has not appointed a new Chief Financial Officer
and Treasurer.
Outstanding
Equity Awards
The
following table sets forth certain information regarding outstanding equity awards held by our named executive officers as of
December 31, 2017.
|
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
|
|
|
Option
Exercise Price
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock That Have Not Vested
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
(1)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
(1)
|
|
|
Stephen
B. Keen
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaron
Trent Doucet
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
9,000,000
|
|
|
$
|
2,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brandy
M. Keen
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Bechtel
(3)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,000,000
|
|
|
$
|
720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
C. Kelly
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
(1)
Calculated by multiplying the number of unvested shares by $0.24, the closing price per share of our common stock as reported
by the OTCQB on December 29, 2017 (which was the last business day of 2017).
(2)
On August 17, 2017, the Company granted to Mr. Doucet 9,000,000 restricted stock units, which vest in 12 equal installments
(750,000 units per installment) commencing on the first business day of January 2018 and continuing on the first business day
of each of the next 11 calendar months, provided that Mr. Doucet is employed by the Company on such vesting date or, if the initial
term under his employment agreement has expired, Mr. Doucet has not materially breached any non-competition, non-solicitation
and other post-termination of his employment obligations.
(3)
On September 6, 2017, the Company granted 3,000,000 restricted stock units to Mr. Bechtel, which vest based on his continued
service and subject to the following performance thresholds: (i) 1,500,000 units will vest if the Company achieves 2018 revenue
of $18,000,000, and (ii) 1,500,000 units will vest if the Company achieves 2019 revenue of $25,000,000.
Compensation
Arrangements with Named Executive Officers
The
following summarizes the employment agreement that the Company has entered into with Messrs. Bechtel and Doucet and Ms. Keen,
as of December 31, 2017. The Company does not have an employment agreement with Mr. Keen, however, see “Transactions with
Related Parties” above for a description of his consulting agreement with the Company.
Aaron
Trent Doucet
On
August 17, 2017, the Company and Mr. Doucet entered into an employment agreement pursuant to which Mr. Doucet will be employed
as the Company’s Vice President of Business Development, a non-executive officer position. Mr. Doucet will focus his efforts
and use his industry knowledge to assist the Company in developing the significant market opportunities resulting from the recent
legalization of cannabis for recreational use in in the State of California. The initial term of the employment commences on August
17, 2017 and continues until March 31, 2018. The employment agreement may be extended beyond the initial term upon the mutual
agreement of the Company and Mr. Doucet. The Company and Mr. Doucet did not elect to the renew the employment agreement, and his
employment ceased on March 31, 2018.
As
part of the employment agreement, Mr. Doucet was granted a total of 9,000,000 restricted stock units, which vest in twelve (12)
equal installments (750,000 restricted stock units per installment) commencing on the first business day of January 2018 and continuing
on the first business day of each of the next eleven (11) calendar months, provided that Mr. Doucet is employed by the Company
on such vesting date or, if the initial term under the employment agreement has expired, Mr. Doucet has not materially breached
any non-competition, non-solicitation and other post-termination of employment obligations.
Brandy
M. Keen
On
October 10, 2017, the Company entered into an employment agreement with Ms. Keen, the Company’s Vice President, Secretary
and Senior Technical Advisor. The initial term of the employment agreement commenced on October 1, 2017 and will continue until
December 31, 2019. However, the Company and Ms. Keen may terminate the employment agreement, at any time, with or without cause,
by providing the other party with 30-days’ prior written notice. In the event Ms. Keen’s employment is terminated
by the Company during the initial term without cause, Ms. Keen will be entitled to receive her base salary for an additional 30
days. Following the initial term, the Company and Ms. Keen may extend the employment agreement for additional one-year terms by
mutual written agreement.
Ms.
Keen will receive an annualized base salary of $150,000. During the initial term, Ms. Keen will be eligible to participate in
the Company’s sales incentive program for sales personnel, as in effect and as amended from time to time by the Company
(the “Sales Program”). In connection with the Sales Program, Ms. Keen will be entitled to a sales incentive equal
to one-quarter of one percent (0.25%) of the revenue collected and earned from the Company’s sales, payable quarterly in
arrears.
Subject
to the approval of the independent members of the Board, Ms. Keen may be eligible to participate in the Company’s Equity
Incentive Plan. The independent members of the Board have not approved Ms. Keen’s participation in the Equity Incentive
Plan, and Ms. Keen has not been granted, nor does Ms. Keen hold, any equity awards under the Equity Incentive Plan.
Chris
Bechtel
On
September 6, 2017, the Company entered into an employment agreement with Mr. Bechtel, the Company’s Chief Executive Officer
and President. The initial term of the employment agreement commenced on August 17, 2017, the date Mr. Bechtel was appointed as
the Chief Executive Officer and President, and will continue until December 31, 2019. However, the Company and Mr. Bechtel may
terminate the employment agreement, at any time, with or without cause, by providing the other party with 30-days’ prior
written notice. In the event Mr. Bechtel’s employment is terminated by the Company during the initial term without cause,
Mr. Bechtel will be entitled to receive his base salary for an additional 30 days. Following the initial term, the Company and
Mr. Bechtel may extend the employment agreement for additional one-year terms by mutual written agreement.
Mr.
Bechtel will receive an annualized base salary of $180,000. Beginning December 31, 2017 and for each six-month period through
December 31, 2019, Mr. Bechtel will also be eligible to receive a special bonus of 1,000,000 shares of the Company’s common
stock, provided the Board has determined, in its sole discretion, that Mr. Bechtel’s performance has been average or better
for such special bonus period.
The
Board also granted Mr. Bechtel a total of 3,000,000 restricted stock units, which vest based on Mr. Bechtel’s continued
service and subject to the following performance thresholds: (i) 1,500,000 restricted stock units will vest on March 31, 2019
if the Company achieves 2018 revenue of $18,000,000, and (ii) 1,500,000 restricted stock units will vest on March 31, 2020 if
the Company achieves 2019 revenue of $25,000,000.
In
consideration of the grant of the restricted stock units and the eligibility for the special bonus, Mr. Bechtel agreed to terminate
and cancel the non-qualified stock options to purchase 900,000 shares of the Company’s common stock, which were granted
to him as an equity retention award in connection with his appointment to the Board on August 8, 2017.
In
the event of a change of control involving the Company, (i) any restricted stock units not already vested will become vested (other
than those restricted stock units that were previously forfeited due to failure to meet the performance threshold), and (ii) any
remaining special bonuses related to any bonus period ending after the date of the change of control will become due and payable,
provided Mr. Bechtel continues to provide services to the Company on the date immediately preceding the date of the change of
control.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table sets forth the shares of our common stock beneficially owned by (i) each of our directors, (ii) each of our named
executive officers, (iii) all of our directors and executive officers as a group, and (iv) all persons known by us to beneficially
own more than 5% of our outstanding common stock. The Company has determined the beneficial ownership shown on this table in accordance
with the rules of the SEC. Under these rules, shares are considered beneficially owned if held by the person indicated, or if
such person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares
the power to vote, to direct the voting of and/or to dispose of or to direct the disposition of such shares. A person is also
deemed to be a beneficial owner of shares if that person has the right to acquire such shares within 60 days through the exercise
of any warrant, option or right or through conversion of a security. Except as otherwise indicated in the accompanying footnotes,
the information in the table below is based on information as of April 23, 2018. Unless otherwise indicated in the footnotes
to the following table, each person named in the table has sole voting and investment power with respect to shares of common and
preferred stock and the address for such person is c/o Surna Inc. 1780 55th Street, Boulder, Colorado 80301.
|
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Name
of Beneficial Owner
|
|
Number
of Shares
Owned Beneficially
(1)
|
|
|
Percentage
of Class
(2)
|
|
|
Number
of Shares
Owned
Beneficially
(1)
|
|
|
Percentage
of Class
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Bechtel
(4)
|
|
|
14,482,761
|
|
|
|
6.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
Timothy
J. Keating
|
|
|
1,553,025
|
|
|
|
0.7
|
%
|
|
|
-
|
|
|
|
-
|
|
|
Brandy
M. Keen
(5)
|
|
|
20,284,669
|
|
|
|
9.4
|
%
|
|
|
17,594,835
|
|
|
|
22.8
|
%
|
|
J.
Taylor Simonton
(6)
|
|
|
997,469
|
|
|
|
0.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officers who are not Directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officers and Directors as a Group
|
|
|
37,317,924
|
|
|
|
17.1
|
%
|
|
|
17,594,835
|
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
or More Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morgan
Paxhia
(7)
|
|
|
7,640,103
|
|
|
|
3.5
|
%
|
|
|
33,428,023
|
|
|
|
43.3
|
%
|
|
Stephen
B. Keen
(8)
|
|
|
3,579,834
|
|
|
|
1.7
|
%
|
|
|
17,594,834
|
|
|
|
22.8
|
%
|
(1)
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act.
(2)
Based on a total of 214,976,478 shares of the Company’s common stock issued and outstanding as of April 23, 2018.
(3)
Based on a total of 77,200,000 shares of the Company’s preferred stock issued and outstanding as of April 23, 2018.
(4)
Includes 2,850,000 shares of common stock issuable upon the exercise of warrants exercisable within 60 days after April 23,
2018.
(5)
Includes 3,579,834 shares of common stock held jointly with her spouse, Stephen B. Keen.
(6)
Includes 900,000 shares of common stock issuable upon the exercise of options exercisable within 60 days after April 23, 2018.
(7)
Morgan Paxhia resigned as a director effective May 31, 2017. Includes 7,613,681 shares of common stock and 33,428,023 shares of
preferred stock owned by Demeter Capital Group LP (“Demeter”), 800 shares of common stock owned by Mr. Paxhia, and
460,525 shares of common stock issuable upon the exercise of warrants held by Poseidon Asset Management LLC (“Poseidon”)
which are exercisable within 60 days after April 23, 2018. Mr. Paxhia and his sister, Emily Paxhia, are the managing members
of Poseidon and in such capacities exercise voting and dispositive power over the securities beneficially owned by Poseidon. Poseidon
is the general partner and/or investment manager of Demeter and in such capacity exercises voting and dispositive power over the
securities beneficially owned by Demeter. The address for Mr. Paxhia, Ms. Paxhia, Poseidon and Demeter is 130 Frederick Street,
#102, San Francisco, CA 94117.
(8)
Includes 3,579,834 shares of common stock held jointly with his spouse, Brandy M. Keen. The address for Mr. Keen is 6914 Peace
Street, Frederick CO 80530.
Item
13. Certain Relationships and Related Transactions, and Director Independence
Transactions
with Related Parties
Amounts
Due to Stockholders
In
July of 2014, the Company issued a $250,000 unsecured promissory note (“Hydro Note”) to Ms. Keen and Stephen B. Keen
as part of the purchase price of Hydro Innovations, LLC (“Hydro”). Mr. Keen is a principal shareholder of the Company
and was a former executive officer and director, and is now a consultant to the Company (see below). Ms. Keen, the wife of Mr.
Keen, is also a principal shareholder of the Company and has been, and currently serves as, an executive officer and director
of the Company. The interest rate is 6% per annum. As of December 31, 2017, the Hydro Note had a balance of $6,927. Subsequent
to December 31, 2017, the balance of the Hydro Note was paid in full.
Stephen
Keen Consulting Agreement
On
May 10, 2017, the Board approved a three-year consulting agreement between the Company and Mr. Keen, a principal shareholder of
the Company and a former executive officer and director. Under the consulting agreement, Mr. Keen will provide certain consulting
services to the Company including research and development, new product design and innovations, existing product enhancements
and improvements, and other technology advancements with respect to the Company’s business and products in exchange for
an annual consulting fee of $30,000. The consulting agreement also includes certain activity restrictions which prohibit Mr. Keen
from competing with the Company. In connection with the execution of this consulting agreement, Mr. Keen’s employment with
the Company ceased as of April 28, 2017 and he resigned as a director of the Company on May 10, 2017.
Sterling
Pharms Equipment Agreement
On
May 10, 2017, the Board approved a three-year equipment, demonstration and product testing agreement between the Company and Sterling
Pharms, LLC (“Sterling”), an entity controlled by Mr. Keen, which operates a Colorado-regulated cannabis cultivation
facility currently under construction. Under this agreement, the Company agreed to provide to Sterling certain lighting, environmental
control, and air sanitation equipment for use at the Sterling facility in exchange for a quarterly fee of $16,500. Also, under
this agreement, Sterling agreed to allow the Company and its existing and prospective customers to have access to the Sterling
facility for demonstration tours in a working environment, which the Company believes will assist it in the sale of its products.
Sterling also agreed to monitor, test and evaluate the Company’s products installed at the Sterling facility and to collect
data and provide feedback to the Company on the energy and operational efficiency and efficacy of the installed products, which
the Company intends to use to improve, enhance and develop new or additional product features, innovations and technologies. In
consideration for access to the Sterling facility to conduct demonstration tours and for the product testing and data to be provided
by Sterling, the Company will pay Sterling a quarterly fee of $12,000. As of December 31, 2017, Sterling had accepted substantially
all the equipment under this agreement, but is in the process of completing the installation of the equipment. Pursuant to the
terms of this agreement, the respective payments will begin upon the delivery and installation of the equipment.
Subsequent
to the execution of this agreement, the Company and Sterling agreed to revise the equipment schedule to the original agreement
to include additional equipment purchased by the Company. On March 22, 2018, the Company and Sterling entered into an amendment
of the original agreement to include the additional leased equipment as discussed above and to increase the quarterly fee payable
to the Company to $18,330. The amendment of the original agreement also provided that, upon expiration of the initial three-year
term, either: (i) the leased equipment would be returned to the Company and the agreement would terminate, (ii) Sterling could
purchase the leased equipment at the agreed upon residual value of $81,827, or (iii) Sterling and the Company could agree to an
extension of the original agreement at mutually agreed to quarterly payments to and from the parties.
During
2017, except as discussed above, there have been no transactions in which the Company was or is a participant, and there are no
currently proposed transactions in which the Company is to be a participant, in which the amount involved exceeds the lesser of
$120,000 or 1% of the Company’s average assets at year-end for the last two completed fiscal years, and in which any director,
executive officer or beneficial holder of more than 5% of any class of our voting securities or member of such person’s
immediate family had or will have a direct or indirect material interest.
Company
Policy Regarding Related Party Transactions
The
Company has procedures in place for the review, approval and monitoring of transactions involving the Company and certain persons
related to the Company. For example, the Company has a code of business conduct and ethics that generally prohibits any employee,
officer or director from engaging in any transaction where there is a conflict between such individual’s personal interest
and the interests of the Company. Waivers to the code of business conduct and ethics can generally only be obtained from the Board
and are publicly disclosed as required by applicable law and regulations.
In
addition, the charter of the Audit Committee of our Board tasks the Audit Committee with reviewing all related party transactions
for potential conflict of interest situations on an ongoing basis (if such transactions are not reviewed and overseen by another
independent body of the Board). In accordance with that policy, the Audit Committee’s general practice is to review and
oversee any transactions that are reportable as related party transactions under the Financial Accounting Standards Board (“FASB”)
and SEC rules and regulations. Management advises the Audit Committee and the full Board on a regular basis of any such transaction
that is proposed to be entered into or continued and seeks approval.