Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – General
Description
of Business
Surna
Inc. (the “Company”) was incorporated in Nevada on October 15, 2009. The Company designs, engineers and manufactures
application-specific environmental control and air sanitation systems for commercial, state- and provincial-regulated indoor cannabis
cultivation facilities in the U.S. and Canada. Currently, the Company’s revenue stream is derived primarily from supplying
its products, services and technologies to commercial indoor cannabis cultivation facilities. Headquartered in Boulder, Colorado,
the Company’s engineering and technical team provides solutions that allow growers to meet the unique demands of an indoor
cannabis cultivation environment through precise temperature, humidity, light, and process controls, energy and water efficiency,
and satisfaction of the evolving code and regulatory requirements being imposed at the state and local levels. The Company’s
customers include those building new facilities and those expanding or retrofitting existing facilities. The Company’s objective
is to leverage its unique experience in this space in order to bring value-added climate control solutions to its customers that
help improve their overall crop quality and yield as well as optimize the resource efficiency of their controlled environment
(i.e., indoor and sealed greenhouses) cultivation facilities. The Company is not involved in the production or sale of cannabis.
Financial
Statement Presentation
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) for interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and
note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted.
In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2019. The balance sheet as of December 31, 2018 has been derived
from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for
complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained
in the Annual Report on Form 10-K for the year ended December 31, 2018. The notes to the unaudited condensed consolidated financial
statements are presented on a going concern basis.
Basis
of Consolidation and Reclassifications
The
condensed consolidated financial statements include the accounts of the Company and its controlled and wholly-owned subsidiary,
Hydro Innovations, LLC (“Hydro”). Intercompany transactions, profit, and balances are eliminated in consolidation.
The
Company has reclassified deferred rent liability to accounts payable and other accrued expenses for 2017. These reclassifications
have been applied consistently to the periods presented and had no impact on net loss, total assets and liabilities, or equity.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The
Company has experienced recurring losses since its inception. Since inception, the Company has financed its activities principally
through debt and equity financing, customer deposits and revenues from completed contracts. Management expects to incur additional
losses and cash outflows in the foreseeable future in connection with its operating activities. There can be no assurance that
the Company will be able to raise debt or equity financing in sufficient amounts, when and if needed, on acceptable terms or at
all. If results of operations for 2019 do not meet management’s expectations, or additional capital is not available, management
believes it has the ability to reduce certain expenditures. The precise amount and timing of the funding needs cannot be determined
accurately at this time, and will depend on a number of factors, including the market demand for the Company’s products
and services, the quality of product development efforts, management of working capital, and continuation of normal payment terms
and conditions for purchase of the Company’s products. The Company believes its cash balances and cash flow from operations
will be insufficient to fund its operations for the next 12 months. If the Company is unable to substantially increase revenues,
reduce expenditures, or otherwise generate cash flows from operations, then the Company will need to raise additional funding
to continue as a going concern. The foregoing factors raise substantial doubt about the Company’s ability to continue as
a going concern for a period of one year from the date the financial statements are issued. These condensed consolidated financial
statements do not include any adjustment that might result from the outcome of this uncertainty.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Use
of Estimates
Management
makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and that affect the reported amounts of revenue and expenses during the
reporting period. The Company bases its estimates on historical experience and on various other assumptions that it believes to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Key estimates
include: allocation of transaction prices to performance obligations under contracts with customers, standalone selling prices,
timing of expected revenue recognition on remaining performance obligations under contracts with customers, valuation of intangible
assets, valuation of equity-based compensation, valuation of deferred tax assets and liabilities, warranty accruals, inventory
allowances, and legal contingencies.
Goodwill
The
Company recorded goodwill in connection with its acquisition of Hydro in July 2014. Goodwill is reviewed for impairment annually
or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to
less than its carrying value. The Company performs a quantitative impairment test annually during the fourth quarter by comparing
the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying amount, goodwill is considered not impaired. An impairment charge would be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value. The Company determined that it has one reporting unit. The Company
concluded that no impairment relating to goodwill existed at March 31, 2019.
Revenue
Recognition
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 (Topic 606),
Revenue from Contracts
with Customers
and all the related amendments (“ASC 606” or the “revenue standard”) to all contracts
and elected the modified retrospective method.
Under
the revenue standard, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service
to the customer. Most of the Company’s contracts contain multiple performance obligations that include engineering and technical
services as well as the delivery of a diverse range of climate control system equipment and components, which can span multiple
phases of a customer’s project life-cycle from facility design and construction to equipment delivery and system installation
and start-up.
A
contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as,
the performance obligation is satisfied. When there are multiple performance obligations within a contract, the Company allocates
the transaction price to each performance obligation based on standalone selling price. The Company determines the standalone
selling price for each of the performance obligations at the inception of the contract and does not adjust the initial allocation
for future changes in any selling prices. When estimating the selling price, the Company uses various observable inputs. The best
observable input is the Company’s actual selling price for the same good or service, however, this input is generally not
available for the Company’s contracts containing multiple performance obligations. For engineering services, the Company
estimates the standalone selling price by reference to certain physical characteristics of the project, such as facility size
and mechanical systems involved, which are indicative of the scope and complexity of the mechanical engineering services to be
provided. For equipment sales, the standalone selling price is determined by forecasting the expected costs of the equipment and
then adding an appropriate margin, based on a range of acceptable margins established by management. Depending on the nature of
the performance obligations, the Company may use a combination of different methods and observable inputs if certain performance
obligations have highly variable or uncertain standalone selling prices. Once the selling prices are determined, the Company applies
the relative values to the total contract consideration and estimates the amount of the transaction price to be recognized as
each promise is fulfilled.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company recognizes revenue for the sale of goods when control transfers to the customer, which primarily occurs at the time of
shipment. The Company’s historical rates of return are insignificant as a percentage of sales and, as a result, the Company
does not record a reserve for returns at the time the Company recognizes revenue. The Company has elected to exclude from the
measurement of the transaction price all taxes (e.g., sales, use, value added, and certain excise taxes) that are assessed by
a governmental authority in connection with a specific revenue-producing transaction and collected by the Company from the customer.
Accordingly, the Company recognizes revenue net of sales taxes. The revenue and cost for freight and shipping is recorded when
control over the sale of goods passes to the Company’s customers.
The
Company also has performance obligations to perform certain engineering services that are satisfied over a period of time. Revenue
is recognized from this type of performance obligation as services are rendered based on the percentage completion towards certain
specified milestones.
The
Company offers assurance-type warranties for its products and products manufactured by others to meet specifications defined by
the contracts with customers and does not have any material separate performance obligations related to these warranties. The
Company maintains a warranty reserve based on historical warranty costs.
Applying
the practical expedient in ASC 606-10-32-18, which the Company has elected, the Company does not adjust the promised amount of
consideration for the effects of a significant financing component since the Company expects, at contract inception, that the
period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or
service will be one year or less. Accordingly, the remaining performance obligations related to customer contracts does not consider
the effects of the time value of money.
Applying
the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense
when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year or less.
These costs include certain sales commissions and incentives, which are included in selling, general and administrative expenses,
and are payable only when associated revenue has been collected and earned by the Company.
The
Company does not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as
services are performed. Contract liabilities consist of advance payments and deferred revenue.
For
the three months ended March 31, 2019, the Company recognized revenue of $393,756 related to the deferred revenue at January 1,
2019. For the three months ended March, 31, 2018, the Company recognized revenue of $826,083 related to the deferred revenue at
January 1, 2018.
Remaining
performance obligations, or backlog, represents the aggregate amount of the transaction price allocated to the remaining obligations
that the Company has not performed under its customer contracts. The Company has elected not to use the optional exemption in
ASC 606-10-50-14, which exempts an entity from such disclosures if a performance obligation is part of a contract with an original
expected duration of one year or less. Accordingly, the information disclosed about remaining performance obligations includes
all customer contracts, including those with an expected duration of one year or less.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Industry
uncertainty, project financing concerns, and the licensing and qualification of our prospective customers, which are out of the
Company’s control, make it difficult for the Company to predict when it will recognize revenue on its remaining performance
obligations. There are risks that the Company may not realize the full contract value on customer projects in a timely manner
or at all, and completion of a customer’s cultivation facility project is dependent upon the customer’s ability to
secure funding and real estate, obtain a license and then build their cultivation facility so they can take possession of the
equipment. Accordingly, the time it takes for customers to complete a project, which corresponds to when the Company is able to
recognize revenue, is driven by numerous factors including: (i) the large number of first-time participants interested in the
indoor cannabis cultivation business; (ii) the complexities and uncertainties involved in obtaining state and local licensure
and permitting; (iii) local and state government delays in approving licenses and permits due to lack of staff or the large number
of pending applications, especially in states where there is no cap on the number of cultivators; (iv) the customer’s need
to obtain cultivation facility financing; (v) the time needed, and coordination required, for our customers to acquire real estate
and properly design and build the facility (to the stage when climate control systems can be installed); (vi) the large price
tag and technical complexities of the climate control and air sanitation system; (vii) the availability of power; and (viii) delays
that are typical in completing any construction project.
As
of March 31, 2019, the Company’s remaining performance obligations, or backlog, was $11,543,000, of which $8,069,000, or
70%, was attributable to customer contracts for which the Company has only received an initial advance payment to cover the allocated
value of the Company’s engineering services (“engineering only paid contracts”). There is the risk that the
equipment portion of these engineering only paid contracts will not be completed or will be delayed; these reasons include the
customer being dissatisfied with the quality or timeliness of the Company’s engineering services, there is a delay or abandonment
of the project because of the customer’s inability to obtain project financing or licensing, or other reasons such as a
challenging business climate or change in business direction. After the customer has made an advance payment for a portion of
the equipment to be delivered under the contract (“partial equipment paid contracts”), the Company is typically better
able to estimate the timing of revenue recognition since the risks and delays associated with licensing, permitting and project
funding are typically mitigated once the initial equipment payment is received. There is significant uncertainty regarding the
timing of the Company’s recognition of revenue on its remaining performance obligations, and there is no certainty that
these will result in actual revenues.
The
remaining performance obligations expected to be recognized through 2021 are as follows:
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Remaining performance obligations related to engineering only paid contracts
|
|
$
|
3,933,000
|
|
|
$
|
1,346,000
|
|
|
$
|
2,790,000
|
|
|
$
|
8,069,000
|
|
Remaining performance obligations related to partial equipment paid contracts
|
|
$
|
2,907,000
|
|
|
$
|
542,000
|
|
|
$
|
25,000
|
|
|
$
|
3,474,000
|
|
Total remaining performance obligations
|
|
$
|
6,840,000
|
|
|
$
|
1,888,000
|
|
|
$
|
2,815,000
|
|
|
$
|
11,543,000
|
|
The
portion of remaining performance obligations that the Company does not expect to be realized until 2021 includes the sales contracts
that may be abandoned by the Company’s customers or ultimately cancelled.
The
following table sets forth the Company’s revenue by source:
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Equipment sales
|
|
$
|
1,492,530
|
|
|
$
|
1,751,636
|
|
Engineering and other services
|
|
|
222,409
|
|
|
|
243,691
|
|
Shipping and handling
|
|
|
56,291
|
|
|
|
59,401
|
|
Total revenue
|
|
$
|
1,771,230
|
|
|
$
|
2,054,728
|
|
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Accounting
for Share-Based Compensation
The
Company recognizes the cost resulting from all share-based compensation arrangements, including stock options, restricted stock
awards and restricted stock units that the Company grants under its equity incentive plan in its condensed consolidated financial
statements based on their grant date fair value. The expense is recognized over the requisite service period or performance period
of the award. Awards with a graded vesting period based on service are expensed on a straight-line basis for the entire award.
Awards with performance-based vesting conditions, which require the achievement of a specific company financial performance goal
at the end of the performance period and required service period, are recognized over the performance period. Each reporting period,
the Company reassesses the probability of achieving the respective performance goal. If the goals are not expected to be met,
no compensation cost is recognized and any previously recognized amount recorded is reversed. If the award contains market-based
vesting conditions, the compensation cost is based on the grant date fair value and expected achievement of market condition and
is not subsequently reversed if it is later determined that the condition is not likely to be met or is expected to be lower than
initially expected.
The
grant date fair value of stock options is based on the Black-Scholes Option Pricing Model (the “Black-Scholes Model”).
The Black-Scholes Model requires judgmental assumptions including volatility and expected term, both based on historical experience.
The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected term of the option.
The Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected
stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant
dates. As such, the Company may use different assumptions for options granted throughout the year. During the three months ended
March 31, 2019, the valuation assumptions used to determine the fair value of each option award on the date of grant were: expected
stock price volatility 114.97%; expected term in years 5.1 and risk-free interest rate 2.37%.
The
grant date fair value of restricted stock and restricted stock units is based on the closing price of the underlying stock on
the date of the grant.
The
Company has elected to reduce share-based compensation expense for forfeitures as the forfeitures occur since the Company does
not have historical data or other factors to appropriately estimate the expected employee terminations and to evaluate whether
particular groups of employees have significantly different forfeiture expectations.
In
June 2018, the Financial Accounting Standards Board (“FASB”) adopted ASU 2018-07,
Compensation — Stock Compensation
(Topic 718) — Improvements to Nonemployee Share-Based Payment Accounting
, which expanded the scope of Topic 718 to include
all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that
Topic 718
applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in
its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that
Topic 718
does not apply to share-based
payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services
to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for the Company’s fiscal year beginning
January 1, 2019.
The
following is a summary of share-based compensation expenses included in the condensed consolidated statements of operations for
the three months ended March 31, 2019 and 2018:
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Share-based compensation expense included in:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
2,362
|
|
|
$
|
41,271
|
|
Advertising and marketing expenses
|
|
|
840
|
|
|
|
852
|
|
Product development costs
|
|
|
420
|
|
|
|
1,137
|
|
Selling, general and administrative expenses
|
|
|
352,109
|
|
|
|
597,361
|
|
Total share-based compensation expense included in consolidated statement of operations
|
|
$
|
355,731
|
|
|
$
|
640,621
|
|
Recently
Adopted Accounting Guidance
In
August 2018, the U.S. Securities and Exchange commission (“SEC”) issued Release No. 33-10532 that amends and clarifies
certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of
the annual disclosure requirement of changes in shareholders’ equity in Rule 3-04 of Regulation S-X to interim periods.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company also adopted other new accounting standards during the first quarter of 2019. The impact of these additional standards
is discussed in the respective Notes to these condensed consolidated financial statements.
Recent
Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820) — Disclosure Framework — Changes to
the Disclosure Requirements for Fair Value Measurement
, which modifies the disclosure requirements on fair value measurements
in
Topic 820
. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption
is permitted. The Company is currently assessing the impact of the ASU on its condensed consolidated results of operations, cash
flows and financial position.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
. ASU 2016-13 introduces an expected credit loss methodology for the impairment of financial assets
measured at amortized cost basis. This methodology reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates and replaces the probable, incurred loss model for those
assets. In November 2018, the FASB issued ASU 2018-19,
Codification Improvements to Topic 326, Financial Instruments –
Credit Losses,
which clarifies that receivables arising from operating leases are not within the scope of
Subtopic 326-20
,
but, instead, the impairment of receivables arising from operating leases are accounted for in accordance with
Topic 842, Leases
.
ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Entities may early adopt the amendments within this ASU but not prior to the fiscal years beginning after December 15, 2018, including
the interim periods within those fiscal years. The Company is currently evaluating the effect that adopting this new accounting
guidance will have on its consolidated results of operations, cash flows and financial position.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are
not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Note
2 – Leases
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASC 842” or the “new lease standard”).
The Company adopted ASC 842 as of January 1, 2019, using the effective date method. Consequently, financial information will not
be updated, and the disclosures required under the new lease standard will not be provided, for dates and periods prior to January
1, 2019.
The
new standard provides a number of optional practical expedients in transition. The Company has elected to apply the “package
of practical expedients” which allow the Company to not reassess: (i) whether existing or expired arrangements contain a
lease, (ii) the lease classification of existing or expired leases, or (iii) whether previous initial direct costs would qualify
for capitalization under the new lease standard. The Company has also elected to apply the short-term lease exemption for all
leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in
the new lease standard.
Upon
adoption, the Company recognized its lease for manufacturing and office space (the “Facility Lease”) on the balance
sheet as an operating lease right-of-use asset in the amount of $714,416 and as a lease liability of $822,374. The Facility Lease
commenced September 29, 2017 and continues through August 31, 2022. The Company has the option to renew the Facility Lease for
an additional five years. However, the renewal option to extend the Facility Lease is not included in the right-of-use asset or
lease liability as the option is not reasonably certain of exercise. The Company regularly evaluates the renewal option and when
it is reasonably certain of exercise, the Company will include the renewal period in its lease term.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Beginning
September 1, 2018 and each subsequent September 1 during the term, the monthly rent under the Facility Lease will increase by
3%. Total rent under the current building lease is charged to expense over the term of the lease on a straight-line basis, resulting
in the same monthly rent expense throughout the lease. The difference between the rent expense amount and the actual rent paid
is recorded to deferred rent on the Company’s condensed consolidated balance sheets. As of January 1, 2019, the remaining
deferred rent of $26,477 was reclassified to the operating lease liability under the new lease standard.
Under
the Facility Lease, the landlord agreed to pay the Company or the Company’s contractors for tenant improvements made by
the Company not to exceed $100,000, which were used for normal tenant improvements. The Company determined that these improvements
were not specialized and could be utilized by a subsequent tenant and, as such, the improvements were considered assets of the
lessor. As of January 1, 2019, the unamortized amount of tenant improvement allowance of $81,481 was treated as a reduction in
measuring the right-of-use asset.
Under
the Facility Lease, the Company pays the actual amounts for property taxes and insurance, excludes such payments from lease contract
consideration, and records such payments as incurred. The Company also pays the landlord for common area maintenance, which is
considered a nonlease component. For the Facility Lease, the Company has not elected the accounting policy to include both the
lease and nonlease components as a single component and account for it as the lease.
In
determining the right-of-use asset and lease liability, the Company applied a discount rate to the minimum lease payments under
the Facility Lease. ASC 842 requires the Company to use the rate of interest that the Company would have to pay to borrow on a
collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Since the discount
rate is not implicit in the lease agreement, we utilized an estimated incremental borrowing rate provided by the Company’s
depository bank.
The
lease cost, cash flows and other information related to the Facility Lease were as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
54,222
|
|
Operating cash outflow from operating lease
|
|
$
|
58,646
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
Operating lease right-of-use assset
|
|
$
|
670,269
|
|
Operating lease liability, current
|
|
$
|
204,604
|
|
Operating lease liability, long-term
|
|
$
|
569,202
|
|
|
|
|
|
|
Remaining lease term
|
|
|
3.4 years
|
|
Discount rate
|
|
|
5.00
|
%
|
Future
annual minimum lease payments on the Facility Lease as of March 31, 2019 were as follows:
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
178,284
|
|
2020
|
|
$
|
244,038
|
|
2021
|
|
$
|
251,360
|
|
2022
|
|
$
|
170,891
|
|
Total minimum lease payments
|
|
$
|
844,573
|
|
Less imputed interest
|
|
|
(70,767
|
)
|
Lease laibility
|
|
$
|
773,806
|
|
The
Company is also the lessor of certain equipment to a related party. See Note 6. The Company classifies this lease as an operating
lease. Income and cash flow generated by this lease for the three months ended March 31, 2019 were $18,300 and $0, respectively.
The Company’s current recognition and presentation policies for this operating lease are substantially consistent with applicable
provisions under ASC 842.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Inventory
Inventory
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Finished goods
|
|
$
|
693,560
|
|
|
$
|
869,895
|
|
Work in progress
|
|
|
19,103
|
|
|
|
9,080
|
|
Raw materials
|
|
|
327,067
|
|
|
|
352,258
|
|
Allowance for excess & obsolete inventory
|
|
|
(299,439
|
)
|
|
|
(295,347
|
)
|
Inventory, net
|
|
$
|
740,291
|
|
|
$
|
935,886
|
|
Overhead
expenses of $30,097 and $34,000 were included in the inventory balance as of March 31, 2019 and December 31, 2018, respectively.
Note
4 – Property and Equipment
Property
and equipment consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Furniture and equipment
|
|
$
|
386,047
|
|
|
$
|
386,047
|
|
Equipment held for lease to related party
|
|
|
176,042
|
|
|
|
176,042
|
|
Vehicles
|
|
|
15,000
|
|
|
|
15,000
|
|
Leasehold improvements
|
|
|
215,193
|
|
|
|
215,193
|
|
|
|
|
792,282
|
|
|
|
792,282
|
|
Accumulated depreciation
|
|
|
(319,566
|
)
|
|
|
(271,961
|
)
|
Property and equipment, net
|
|
$
|
472,716
|
|
|
$
|
520,321
|
|
Note
5 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts payable
|
|
$
|
1,433,014
|
|
|
$
|
1,278,678
|
|
Sales commissions payable
|
|
|
47,889
|
|
|
|
56,277
|
|
Accrued payroll liabilities
|
|
|
167,422
|
|
|
|
127,915
|
|
Product warranty accrual
|
|
|
136,622
|
|
|
|
144,822
|
|
Other accrued expenses
|
|
|
160,817
|
|
|
|
309,395
|
|
Total
|
|
$
|
1,945,764
|
|
|
$
|
1,917,087
|
|
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 – Related Party Agreements and Transactions
Sterling
Pharms Equipment Agreement
In
May 2017, the Company and Sterling Pharms, LLC (“Sterling”), an entity controlled by Stephen Keen, which operates
a Colorado-licensed cannabis cultivation facility, entered into a three-year equipment, demonstration and product testing agreement.
Mr. Keen is a principal shareholder of the Company and was a former executive officer and director, and was formerly a consultant
to the Company. Brandy Keen, the spouse of Mr. Keen, is also a principal shareholder of the Company and previously served as an
executive officer and director of the Company, and is currently an employee of the Company. Under this agreement, the Company
provides Sterling with certain lighting, environmental control, and air sanitation equipment for use at the Sterling facility.
Additionally, under this agreement, Sterling allows the Company and its existing and prospective customers to have access to the
Sterling facility for demonstration tours in a working environment. 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.
The
quarterly equipment lease fee payable to Surna is $18,330 (the “Lease Fee”), and the quarterly demonstration and testing
fees payable to Sterling is $12,000 (the “Demo and Testing Fee”). As such, the Company is entitled to receive a net
payment of $6,330 from Sterling each quarter. This agreement commenced May 1, 2018 and expires April 30, 2021.
The
Company is treating the equipment rental arrangement and related Lease Fee payment as an operating lease. The equipment held for
lease has been recorded as property and equipment on the balance sheets and is depreciated over the term of the lease. The Lease
Fee is recorded as “Interest and other income, net” in the condensed consolidated statements of operations. For the
three months ended March 31, 2019, the Company recorded Lease Fees of $18,330. Lease Fees of $54,990 were included in accounts
receivable as of March 31, 2019.
The
Company records the Demo and Testing Fee as operating expenses in the condensed consolidated statements of operations. For the
three months ended March 31, 2019, the Company recorded Demo and Testing Fees of $12,000. Demo and Testing Fees of $36,000 were
included in accounts payable as of March 31, 2019.
Note
7 – Commitments and Contingencies
Litigation
There
are 6,750,000 restricted stock units that have not been settled due to the failure of the recipient to pay the required withholding
taxes based on the value of the underlying shares at the time of vesting. The Company has commenced litigation against the recipient
to have these restricted stock units canceled.
From
time to time, in the normal course of its operations, the Company is subject to litigation matters and claims. Litigation can
be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to
predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold.
The Company expenses legal fees as incurred. The Company records a liability for contingent losses when it is both probable that
a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter,
if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of
operations.
Leases
The
Company has a lease agreement for its manufacturing and office space. See Note 2.
Other
Commitments
In
the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors,
business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the
Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement
claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and certain
of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities
that may arise by reason of their status or service as directors, officers, or employees. The Company maintains director and officer
insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers
and employees, and former officers, directors, and employees of acquired companies, in certain circumstances.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
8 – Equity Incentive Plan
Under
the Company’s 2017 Equity Incentive Plan, as may be modified and amended by the Company from time to time (the “2017
Equity Plan”), the Board of Directors (the “Board”) (or the compensation committee of the Board, if one is established)
may award stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted
stock unit awards (“RSUs”), shares granted as a bonus or in lieu of another award, and other stock-based performance
awards. The 2017 Equity Plan allocates 50,000,000 shares of the Company’s common stock (“Plan Shares”) for issuance
of equity awards under the 2017 Equity Plan. If any shares subject to an award are forfeited, expire, or otherwise terminate without
issuance of such shares, the shares will, to the extent of such forfeiture, expiration, or termination, again be available for
awards under the 2017 Equity Plan.
During
the three months ended March 31, 2019, the Company issued shares of its common stock under the 2017 Equity Plan as follows:
|
●
|
197,370
shares of common stock to independent directors in lieu of cash director fees of $15,000 related to the fourth quarter of
2018;
|
|
|
|
|
●
|
789,474
shares of common stock to independent directors for 2019 director fees of $60,000 payable in equity;
|
|
|
|
|
●
|
1,000,000
shares to an employee in settlement of certain RSUs that vested in 2018; and
|
|
|
|
|
●
|
560,000
shares pursuant to a special incentive stock bonus approved the Board for the period ended December 31, 2018.
|
As
of March 31, 2019, awards related to 22,985,000 shares remain outstanding.
The
total unrecognized compensation expense for unvested non-qualified stock options, RSUs and stock bonus awards at March 31, 2019
was $529,808, which will be recognized over approximately 2.0 years. This unrecognized compensation expense does not include the
potential future compensation expense related to non-qualified stock options which are subject to vesting based on the achievement
of $25,000,000 in revenue for 2019 (the “Performance-based Awards”). As of March 31, 2019 and the grant date, the
Company has determined that the likelihood of performance levels being obtained is remote; therefore, no expense has been recognized.
The unrecognized compensation expense with respect to these Performance-based Awards at March 31, 2019 was $245,553.
Non-Qualified
Stock Options
A
summary of the non-qualified stock options granted to employees and consultants under the 2017 Equity Plan during the three months
ended March 31, 2019 are presented in the table below:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
10,560,000
|
|
|
$
|
0.104
|
|
|
|
8.4
|
|
|
$
|
-
|
|
Granted
|
|
|
2,000,000
|
|
|
$
|
0.080
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,333
|
)
|
|
$
|
0.105
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(16,667
|
)
|
|
$
|
0.105
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2019
|
|
|
12,535,000
|
|
|
$
|
0.100
|
|
|
|
8.4
|
|
|
$
|
-
|
|
Exercisable,
March 31, 2019
|
|
|
4,210,004
|
|
|
$
|
0.106
|
|
|
|
6.8
|
|
|
$
|
-
|
|
Outstanding
vested and expected to vest, March 31, 2019
|
|
|
10,135,000
|
|
|
$
|
0.096
|
|
|
|
8.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
options based on 2019 revenue thresholds - uncertain vesting as of March 31, 2019
|
|
|
2,400,000
|
|
|
$
|
0.116
|
|
|
|
8.4
|
|
|
$
|
-
|
|
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
A
summary of non-vested non-qualified stock options activity for employees and consultants
under the
2017 Equity Plan for the three months ended March 31, 2019
are presented in the table below: