UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 000-54286
SURNA
INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
27-3911608 |
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
1780
55th Street, Boulder, Colorado |
|
80301 |
(Address
of principal executive offices) |
|
(Zip
code) |
(303)
993-5271
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the last 90 days. YES [X] NO
[ ]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). YES [X] NO
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer, “accelerated filer,” “non-accelerated
filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer |
[ ] |
Accelerated
Filer |
[ ] |
Non-accelerated
Filer |
[X] |
Smaller
Reporting Company |
[X] |
|
Emerging
Growth Company |
[ ] |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES [ ] NO
[X]
Securities
registered pursuant to Section 12(b) of the Exchange
Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
N/A |
|
N/A |
|
N/A |
As of
November 11, 2020, the number of outstanding shares of common stock
of the registrant was 236,526,638.
Surna
Inc.
Quarterly
Report on Form 10-Q
For
the Quarterly Period Ended September 30, 2020
Table
of Contents
In this Quarterly Report on Form 10-Q, unless otherwise indicated,
the “Company”, “we”, “us” or “our” refer to Surna Inc. and, where
appropriate, its wholly owned subsidiary.
CAUTIONARY STATEMENT
This
Quarterly Report on Form 10-Q, including “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in
Item 2, contains forward-looking statements that involve
substantial risks and uncertainties. These forward-looking
statements are not historical facts, but are based on current
management expectations that involve substantial risks,
uncertainties, and other factors, some of which are beyond our
control and difficult to predict and could cause actual results to
differ materially from those expressed in, or implied by, these
forward-looking statements. Forward-looking statements relate to
future events or our future financial performance. We generally
identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “could,”
“intends,” “target,” “projects,” “contemplates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative
of these terms or other similar words. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements including, but not limited to, any
projections of revenue, gross profit, earnings or loss, tax
provisions, cash flows or other financial items; any statements of
the plans, strategies or objectives of management for future
operations; any statements regarding current or future
macroeconomic or industry-specific trends or events and the impact
of those trends and events on us or our financial performance; any
statements regarding pending investigations, legal claims or tax
disputes; any statements of expectation or belief; and any
statements of assumptions underlying any of the
foregoing.
These
forward-looking statements are subject to known and unknown risks,
uncertainties, assumptions and other factors that could cause our
actual results of operations, financial condition, liquidity,
performance, prospects, opportunities, achievements or industry
results, as well as those of the markets we serve or intend to
serve, to differ materially from those expressed in, or suggested
by, these forward-looking statements. These forward-looking
statements are based on assumptions regarding our present and
future business strategies and the environment in which we operate.
Important factors that could cause those differences include, but
are not limited to:
|
● |
our
business prospects and the prospects of our existing and
prospective customers; |
|
|
|
|
● |
the
impact on our business and that of our customers of the current and
future response by the government and business to the COVID-19
pandemic, including what is necessary to protect our staff and the
staff of our customers in the conduct of our business; |
|
|
|
|
● |
the
overall impact of the COVID-19 pandemic on the business climate in
our industry and the willingness of our customers to undertake
projects in light of economic uncertainties; |
|
|
|
|
● |
our
overall financial condition, including our reduced revenue and
business disruption, due to the COVID-19 pandemic business and
economic response and its consequences; |
|
|
|
|
● |
the
inherent uncertainty of product development; |
|
|
|
|
● |
regulatory,
legislative and judicial developments, especially those related to
changes in, and the enforcement of, cannabis laws; |
|
|
|
|
● |
increasing
competitive pressures in our industry; |
|
|
|
|
● |
our
relationships with our customers and suppliers; |
|
|
|
|
● |
general
economic conditions or conditions that may adversely affect demand
for the products offered by us in the markets in which we
operate; |
|
|
|
|
● |
changes
in our business strategy or development plans, including our
expected level of capital expenses and working capital; |
|
|
|
|
● |
our
ability to attract and retain qualified personnel; |
|
|
|
|
● |
our
ability to raise equity and debt capital to fund our operations and
growth strategy, including possible acquisitions; |
|
|
|
|
● |
our
ability to identify, complete and integrate potential strategic
acquisitions; |
|
|
|
|
● |
future
revenue being lower than expected; |
|
|
|
|
● |
our
ability to convert our backlog into revenue in a timely manner, or
at all; and |
|
|
|
|
● |
our
intention not to pay dividends. |
Although
we believe that the assumptions on which these forward-looking
statements are based are reasonable, any of those assumptions could
prove to be inaccurate, and as a result, the forward-looking
statements based on those assumptions also could be inaccurate. In
light of these and other uncertainties, the inclusion of a
projection or forward-looking statement in this Quarterly Report on
Form 10-Q should not be regarded as a representation by us that our
plans and objectives will be achieved. These risks and
uncertainties include those described or identified in “Item 1A –
Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2019, as updated from time to time in the Company’s
filings with the U.S. Securities and Exchange Commission (the
“SEC”). You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this
Quarterly Report on Form 10-Q. Except as required by the federal
securities laws, we undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information,
future events or otherwise, to reflect events or circumstances
occurring after the date of this Quarterly Report on Form 10-Q. The
forward-looking statements and projections contained in this
Quarterly Report on Form 10-Q are excluded from the safe harbor
protection provided by Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”).
PART I — FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
Surna Inc.
Condensed
Consolidated Balance Sheets
|
|
September 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
2,072,312 |
|
|
$ |
922,177 |
|
Accounts
receivable (net of allowance for doubtful accounts of $164,823 and
$151,673, respectively) |
|
|
97,257 |
|
|
|
138,357 |
|
Inventory,
net |
|
|
521,650 |
|
|
|
1,231,243 |
|
Prepaid expenses and other |
|
|
757,498 |
|
|
|
269,491 |
|
Total Current
Assets |
|
|
3,448,717 |
|
|
|
2,561,268 |
|
Noncurrent
Assets |
|
|
|
|
|
|
|
|
Property and
equipment, net |
|
|
176,823 |
|
|
|
257,923 |
|
Goodwill |
|
|
631,064 |
|
|
|
631,064 |
|
Intangible assets,
net |
|
|
7,371 |
|
|
|
11,930 |
|
Deposits |
|
|
- |
|
|
|
51,000 |
|
Operating lease right-of-use asset |
|
|
392,263 |
|
|
|
534,133 |
|
Total
Noncurrent Assets |
|
|
1,207,521 |
|
|
|
1,486,050 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS |
|
$ |
4,656,238 |
|
|
$ |
4,047,318 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable
and accrued liabilities |
|
$ |
1,397,770 |
|
|
$ |
1,832,959 |
|
Deferred
revenue |
|
|
3,489,302 |
|
|
|
1,444,472 |
|
Accrued equity
compensation |
|
|
101,472 |
|
|
|
503,466 |
|
Current portion of operating lease liability |
|
|
253,392 |
|
|
|
217,843 |
|
Total Current
Liabilities |
|
|
5,241,936 |
|
|
|
3,998,740 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES |
|
|
|
|
|
|
|
|
Note payable and
accrued interest |
|
|
556,444 |
|
|
|
- |
|
Other
liabilities |
|
|
41,396 |
|
|
|
- |
|
Operating lease liability, net of current portion |
|
|
238,139 |
|
|
|
404,209 |
|
Total
Noncurrent Liabilities |
|
|
835,979 |
|
|
|
404,209 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES |
|
|
6,077,915 |
|
|
|
4,402,949 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note
7) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Preferred stock,
$0.00001 par value; 150,000,000 shares authorized; 42,030,331
shares issued and outstanding |
|
|
420 |
|
|
|
420 |
|
Common stock,
$0.00001 par value; 350,000,000 shares authorized; 236,526,638 and
228,216,638 shares issued and outstanding, respectively |
|
|
2,366 |
|
|
|
2,283 |
|
Additional paid in
capital |
|
|
26,082,733 |
|
|
|
25,326,593 |
|
Accumulated deficit |
|
|
(27,507,196 |
) |
|
|
(25,684,927 |
) |
Total
Shareholders’ Equity (Deficit) |
|
|
(1,421,677 |
) |
|
|
(355,631 |
) |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
|
$ |
4,656,238 |
|
|
$ |
4,047,318 |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
Surna Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Revenue, net |
|
$ |
1,634,669 |
|
|
$ |
5,524,105 |
|
|
$ |
5,127,018 |
|
|
$ |
11,505,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
1,108,758 |
|
|
|
3,943,758 |
|
|
|
3,869,758 |
|
|
|
7,987,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
525,911 |
|
|
|
1,580,347 |
|
|
|
1,257,260 |
|
|
|
3,518,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and
marketing expenses |
|
|
89,695 |
|
|
|
123,566 |
|
|
|
333,669 |
|
|
|
415,479 |
|
Product
development costs |
|
|
84,433 |
|
|
|
98,145 |
|
|
|
304,229 |
|
|
|
326,659 |
|
Selling, general and administrative expenses |
|
|
634,447 |
|
|
|
1,081,294 |
|
|
|
2,453,976 |
|
|
|
3,284,485 |
|
Total operating
expenses |
|
|
808,575 |
|
|
|
1,303,005 |
|
|
|
3,091,874 |
|
|
|
4,026,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(282,664 |
) |
|
|
277,342 |
|
|
|
(1,834,614 |
) |
|
|
(508,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
income, net |
|
|
13,621 |
|
|
|
(55,319 |
) |
|
|
29,018 |
|
|
|
(30,146 |
) |
Interest expense |
|
|
(1,396 |
) |
|
|
- |
|
|
|
(16,673 |
) |
|
|
- |
|
Total other
(expense) income |
|
|
12,225 |
|
|
|
(55,319 |
) |
|
|
12,345 |
|
|
|
(30,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income taxes |
|
|
(270,439 |
) |
|
|
222,023 |
|
|
|
(1,822,269 |
) |
|
|
(538,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
(270,439 |
) |
|
$ |
222,023 |
|
|
$ |
(1,822,269 |
) |
|
$ |
(538,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
per common share – basic and dilutive |
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic |
|
|
236,526,638 |
|
|
|
227,918,377 |
|
|
|
234,711,893 |
|
|
|
227,475,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, dilutive |
|
|
236,526,638 |
|
|
|
237,028,377 |
|
|
|
234,711,893 |
|
|
|
227,475,335 |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
Surna Inc.
Condensed
Consolidated Statements of Changes in Shareholders’ Equity
(Deficit)
For
the Three and Nine Months Ended September 30, 2020 and
2019
(Unaudited)
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Number of
Shares to be Issued |
|
|
Amount |
|
|
Additional
Paid in Capital |
|
|
Accumulated
Deficit |
|
|
Shareholders’ Equity |
|
Balance June 30, 2020 |
|
|
42,030,331 |
|
|
|
420 |
|
|
|
236,526,638 |
|
|
|
- |
|
|
|
2,366 |
|
|
|
26,058,307 |
|
|
|
(27,236,757 |
) |
|
|
(1,175,664 |
) |
Fair value of vested stock options
granted to employees and directors |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24,426 |
|
|
|
- |
|
|
|
24,426 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(270,439 |
) |
|
|
(270,439 |
) |
Balance September 30, 2020 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
236,526,638 |
|
|
|
- |
|
|
$ |
2,366 |
|
|
$ |
26,082,733 |
|
|
$ |
(27,507,196 |
) |
|
$ |
(1,421,677 |
) |
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Number of
Shares to be Issued |
|
|
Amount |
|
|
Additional
Paid in Capital |
|
|
Accumulated
Deficit |
|
|
Shareholders’ Equity |
|
Balance December 31, 2019 |
|
|
42,030,331 |
|
|
|
420 |
|
|
|
228,216,638 |
|
|
|
1,560,000 |
|
|
$ |
2,283 |
|
|
$ |
25,326,593 |
|
|
$ |
(25,684,927 |
) |
|
$ |
(355,631 |
) |
Common shares issued or to be issued
on settlement of restricted stock units and award of stock
bonuses |
|
|
- |
|
|
|
- |
|
|
|
8,310,000 |
|
|
|
(1,560,000 |
) |
|
|
83 |
|
|
|
(83 |
) |
|
|
- |
|
|
|
- |
|
Fair value of vested restricted stock
units awarded to employees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,163 |
|
|
|
- |
|
|
|
25,163 |
|
Fair value of vested stock options
accrued in 2019 and issued to employees and directors in 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503,466 |
|
|
|
|
|
|
|
503,466 |
|
Fair value of vested stock options
granted to employees and directors |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
227,594 |
|
|
|
- |
|
|
|
227,594 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,822,269 |
) |
|
|
(1,822,269 |
) |
Balance September 30, 2020 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
236,526,638 |
|
|
|
- |
|
|
$ |
2,366 |
|
|
$ |
26,082,733 |
|
|
$ |
(27,507,196 |
) |
|
$ |
(1,421,677 |
) |
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Number of
Shares to be Issued |
|
|
Amount |
|
|
Additional
Paid in Capital |
|
|
Accumulated
Deficit |
|
|
Shareholders’
(Deficit) Equity
|
|
Balance June 30, 2019 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
227,656,638 |
|
|
|
- |
|
|
$ |
2,277 |
|
|
$ |
25,101,010 |
|
|
$ |
(25,106,941 |
) |
|
$ |
(3,234 |
) |
Common shares issued on settlement of
restricted stock units and award of stock bonuses |
|
|
- |
|
|
|
- |
|
|
|
560,000 |
|
|
|
- |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
Fair value of vested restricted stock
units awarded to employees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
48,427 |
|
|
|
- |
|
|
|
48,427 |
|
Fair value of vested stock options
granted to employees and consultants |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
57,705 |
|
|
|
- |
|
|
|
57,705 |
|
Fair value of vested incentive stock
bonuses awarded to employees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,821 |
|
|
|
- |
|
|
|
6,821 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
222,023 |
|
|
|
222,023 |
|
Balance September 30, 2019 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
228,216,638 |
|
|
|
- |
|
|
$ |
2,283 |
|
|
$ |
25,213,957 |
|
|
$ |
(24,884,918 |
) |
|
$ |
331,742 |
|
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
|
Amount |
|
|
Number of
Shares |
|
|
Number of
Shares to be Issued |
|
|
Amount |
|
|
Additional
Paid in Capital |
|
|
Accumulated
Deficit |
|
|
Shareholders’ Equity |
|
Balance December 31, 2018 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
224,989,794 |
|
|
|
1,000,000 |
|
|
$ |
2,250 |
|
|
$ |
24,538,027 |
|
|
$ |
(24,346,361 |
) |
|
$ |
194,336 |
|
Common shares issued on settlement of
restricted stock units and award of stock bonuses, vested
restricted stock units canceled |
|
|
- |
|
|
|
- |
|
|
|
2,240,000 |
|
|
|
(1,000,000 |
) |
|
|
23 |
|
|
|
(23 |
) |
|
|
- |
|
|
|
- |
|
Common shares issued as compensation
for services |
|
|
- |
|
|
|
- |
|
|
|
986,844 |
|
|
|
- |
|
|
|
10 |
|
|
|
74,990 |
|
|
|
- |
|
|
|
75,000 |
|
Fair value of vested restricted stock
units awarded to employees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
230,796 |
|
|
|
- |
|
|
|
230,796 |
|
Fair value of vested stock options
granted to employees and consultants |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
332,779 |
|
|
|
- |
|
|
|
332,779 |
|
Fair value of vested incentive stock
bonuses awarded to employees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37,388 |
|
|
|
- |
|
|
|
37,388 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(538,557 |
) |
|
|
(538,557 |
) |
Balance September 30, 2019 |
|
|
42,030,331 |
|
|
$ |
420 |
|
|
|
228,216,638 |
|
|
|
- |
|
|
$ |
2,283 |
|
|
$ |
25,213,957 |
|
|
$ |
(24,884,918 |
) |
|
$ |
331,742 |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
Surna Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2020 |
|
|
2019 |
|
Cash Flows From Operating
Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,822,269 |
) |
|
$ |
(538,557 |
) |
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and
intangible asset amortization expense |
|
|
90,867 |
|
|
|
129,723 |
|
Share-based
compensation |
|
|
252,757 |
|
|
|
675,963 |
|
Provision for
doubtful accounts |
|
|
13,150 |
|
|
|
43,130 |
|
Provision for
excess and obsolete inventory |
|
|
(5,117 |
) |
|
|
(213,556 |
) |
Loss on disposal
of assets |
|
|
4,124 |
|
|
|
115,359 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
27,950 |
|
|
|
60,436 |
|
Inventory |
|
|
714,709 |
|
|
|
213,271 |
|
Prepaid expenses
and other |
|
|
(488,007 |
) |
|
|
(568,031 |
) |
Operating lease
right-of-use asset |
|
|
62,350 |
|
|
|
- |
|
Accounts payable
and accrued liabilities |
|
|
(397,181 |
) |
|
|
213,044 |
|
Deferred
revenue |
|
|
2,044,830 |
|
|
|
1,633,195 |
|
Operating lease
liability, net |
|
|
- |
|
|
|
(13,856 |
) |
Accrued equity compensation |
|
|
101,472 |
|
|
|
- |
|
Net cash
provided by operating activities |
|
|
599,635 |
|
|
|
1,750,121 |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3,500 |
) |
|
|
(3,043 |
) |
Net cash used
in investing activities |
|
|
(3,500 |
) |
|
|
(3,043 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of note payable |
|
|
554,000 |
|
|
|
- |
|
Net cash
provided by financing activities |
|
|
554,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
1,150,135 |
|
|
|
1,747,078 |
|
Cash, beginning of period |
|
|
922,177 |
|
|
|
253,387 |
|
Cash, end of period |
|
$ |
2,072,312 |
|
|
$ |
2,000,465 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
- |
|
|
$ |
- |
|
Income taxes paid |
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
Surna Inc.
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 sells cultivation
technologies for controlled environment agriculture including: (i)
liquid-based process cooling systems and other climate control
systems, (ii) air handling equipment and systems, (iii) a
full-service engineering package for designing and engineering
commercial scale thermodynamic systems specific to cannabis
cultivation facilities, and (iv) automation and control devices,
systems and technologies used for environmental, lighting and
climate control. Our customers include commercial, state- and
provincial-regulated cannabis growers in the U.S. and Canada as
well as other international locations, including those growers
building new facilities and those expanding or retrofitting
existing facilities. Currently, our revenue stream is derived
primarily from supplying our products, services and technologies to
commercial indoor and hybrid sealed greenhouse facilities ranging
from several thousand to more than 100,000 square feet.
Headquartered in Boulder, Colorado, we leverage our experience in
this space to bring value-added climate control solutions to our
customers that help improve their overall crop quality and yield,
optimize energy and water efficiency, and satisfy the evolving
state and local codes, permitting and regulatory requirements.
Although our customers do, we neither produce nor sell cannabis or
its related products.
Impact of the COVID-19 Pandemic on Our Business
The
impact of the government and the business economic response to the
COVID-19 pandemic has affected demand across the majority of our
markets and disrupted work on projects. The COVID-19 pandemic is
expected to have continued adverse effects on our sales, project
implementation, operating margins, and working capital. As of the
date of this filing, uncertainty continues to exist concerning the
magnitude and duration of the economic impact of the COVID-19
pandemic.
In
response to the COVID-19 pandemic, in late March 2020 the Company
downsized operations to preserve cash resources, implementing
workforce reductions, reductions of salaried employee compensation
(including all executives and the CEO) and reduction of hours
worked, cutting costs and focusing its operations on
customer-centric sales and project management
activities.
Following
the receipt of loan funds in April 2020, the Company reinstated all
staff who previously had been placed on furlough. Staff receiving
salaries of $100,000 per year or less were restored to their full
salaries. All executives, including the CEO, had their compensation
reduced to the greater of $100,000 per year or 75% of their
previous salary level. The Company re-engaged its staff so as to be
able to fulfill its current customer contracts and any new sales
orders and to continue its marketing and selling efforts. Over the
course of the Summer 2020, the Company took further steps to adjust
its work force by furloughing several employees, making temporary
hourly and salary reduction adjustments, and then, in late
September 2020, in light of our then sales efforts, reinstating
continuing hourly employees to full-time status and restoring the
salaries of continuing salaried employees.
Due
to the speed with which the COVID-19 pandemic developed and the
resulting uncertainties, including the depth and duration of the
disruptions to customers and suppliers, its future effect on our
business, on our results of operations, and on our financial
condition, we cannot predict the overall effect on our business
over the longer term. Despite this uncertainty, we have undertaken
various plans to reduce costs so as to mitigate the impact of the
COVID-19 pandemic to the best of our ability, although they may not
be sufficient in the long-run for us to avoid reduced sales,
increased losses and reduced operating cash flows.
Refer
to Risk Factors, included in Part II, Item 1A of this
Quarterly Report on Form 10-Q below, for further discussion of the
possible impact of the COVID-19 pandemic on our
business.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Financial Statement Presentation
The
accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with accounting
principles generally accepted in the United States of America
(“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Pursuant to these rules and regulations, certain information and
note disclosures, normally included in financial statements
prepared in accordance with GAAP, have been condensed or omitted.
In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have
been included. Operating results for the nine months ended
September 30, 2020 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2020.
The balance sheet as of December 31, 2019 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,
2019. The notes to the unaudited condensed consolidated financial
statements are presented on a going concern basis.
Basis of Consolidation
The
condensed consolidated financial statements include the accounts of
the Company and its controlled and wholly owned subsidiary, Hydro
Innovations, LLC (“Hydro”). Intercompany transactions, profit, and
balances are eliminated in consolidation.
Going Concern
The
accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has experienced recurring losses since its inception. Since
inception, the Company has financed its activities principally
through debt and equity financing, customer deposits and revenues
from completed contracts. Management expects to incur additional
losses and cash outflows in the foreseeable future in connection
with its operating activities. Management believes that the
economic dislocations in the overall economy, in the near term,
will adversely impact our revenues, losses and cash flows. There
can be no assurance that the Company will be able to raise debt or
equity financing in sufficient amounts, when and if needed, on
acceptable terms or at all. If results of operations for 2020 do
not meet management’s expectations, or additional capital is not
available, management believes it has the ability to reduce certain
expenditures, although these reductions may not be sufficient to be
able to continue the Company’s operations. The precise amount and
timing of the funding needs cannot be determined accurately at this
time, and will depend on a number of factors, including the overall
economy, market demand for the Company’s products and services, the
quality of product development efforts, management of working
capital, and continuation of normal payment terms and conditions
for purchase of the Company’s products. The Company believes its
cash balances and cash flow from operations will be insufficient to
fund its operations for the next 12 months. If the Company is
unable to substantially increase revenues, reduce expenditures, or
otherwise generate cash flows from operations, then the Company
will need to raise additional funding to continue as a going
concern. The foregoing factors raise substantial doubt about the
Company’s ability to continue as a going concern for a period of
one year from the date the financial statements are issued. These
condensed consolidated financial statements do not include any
adjustment that might result from the outcome of this
uncertainty.
Use of Estimates
Management
makes estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and that affect
the reported amounts of revenue and expenses during the reporting
period. The Company bases its estimates on historical experience
and on various other assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results could differ from those estimates. Key estimates
include: allocation of transaction prices to performance
obligations under contracts with customers, standalone selling
prices, timing of expected revenue recognition on remaining
performance obligations under contracts with customers, valuation
of intangible assets, valuation of equity-based compensation,
valuation of deferred tax assets and liabilities, warranty
accruals, accounts receivable and inventory allowances, and legal
contingencies.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Income (Loss) Per Common Share
Basic
income (loss) per common share is computed by dividing net income
(loss) attributable to common stockholders by the weighted-average
number of common shares outstanding during the period without
consideration of common stock equivalents. Diluted net income
(loss) per common share is computed by dividing net income (loss)
by the weighted-average number of common shares outstanding and
potentially dilutive common stock equivalents, including stock
options, warrants and restricted stock units and other equity-based
awards, except in cases where the effect of the common stock
equivalents would be antidilutive. Potential common stock
equivalents consist of common stock issuable upon exercise of stock
options and warrants and the vesting of restricted stock units
using the treasury method.
During
the three and nine months ended September 30, 2020 and 2019, there
were warrants and options outstanding to purchase Company common
stock and restricted stock units that were convertible into shares
of the Company’s common stock. During the three month period ended
September 30, 2020 and the nine month periods ended September 30,
2020 and 2019, the Company incurred a net loss and consequently the
common share equivalents of these potentially dilutive equity
instruments have not been included in the calculations of loss per
share because such inclusion would have been anti-dilutive. As of
September 30, 2020, and 2019, there were respectively, 44,007,500
and 61,054,000, potentially dilutive equity instruments outstanding
in respect of warrants and options outstanding to purchase Company
common stock and restricted stock units that were convertible into
shares of the Company’s common stock.
Goodwill
The
Company recorded goodwill in connection with its acquisition of
Hydro Innovations, LLC in July 2014. Goodwill is reviewed for
impairment annually or more frequently when events or changes in
circumstances indicate that fair value of the reporting unit has
been reduced to less than its carrying value. The Company performs
a quantitative impairment test annually on December 31 by comparing
the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds
its carrying amount, goodwill is considered not impaired. An
impairment charge would be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value. The
Company determined that it has one reporting unit.
During
the nine months ended September 30, 2020, the Company concluded
that the projected impact of the COVID-19 pandemic on its sales,
contract completion and revenues in the near term, together with
the volatility in its share price represented potential indicators
of impairment. Accordingly, the Company performed an interim
impairment analysis at September 30, 2020, and concluded that no
impairment relating to goodwill existed at September 30,
2020.
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. When estimating the selling price, the
Company uses various observable inputs. The best observable input
is the Company’s actual selling price for the same good or service,
however, this input is generally not available for the Company’s
contracts containing multiple performance obligations. For
engineering services, the Company estimates the standalone selling
price by reference to certain physical characteristics of the
project, such as facility size and mechanical systems involved,
which are indicative of the scope and complexity of the mechanical
engineering services to be provided. For equipment sales, the
standalone selling price is determined by forecasting the expected
costs of the equipment and then adding an appropriate margin, based
on a range of acceptable margins established by management.
Depending on the nature of the performance obligations, the Company
may use a combination of different methods and observable inputs if
certain performance obligations have highly variable or uncertain
standalone selling prices. Once the selling prices are determined,
the Company applies the relative values to the total contract
consideration and estimates the amount of the transaction price to
be recognized as each performance obligation is
fulfilled.
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 and nine months ended September 30, 2020, the Company
recognized revenue of $9,141 and $1,074,016, respectively, related
to the deferred revenue at January 1, 2020. For the three and nine
months ended September 30, 2019, the Company recognized revenue of
$3,242 and $473,682, respectively, related to the deferred revenue
at January 1, 2019.
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
September 30, 2020, the Company’s remaining performance
obligations, or backlog, was $8,198,000, of which $2,870,000, or
35%, 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. The reasons include the customer being dissatisfied with
the quality or timeliness of the Company’s engineering services,
delay or abandonment of the project because of the customer’s
inability to obtain project financing or licensing, or other
reasons such as a challenging business climate including an overall
post-COVID-19 economic downturn, or change in business direction.
After the customer has made an advance payment for a portion of the
equipment to be delivered under the contract (“partial equipment
paid contracts”), the Company is typically better able to estimate
the timing of revenue recognition since the risks and delays
associated with licensing, permitting and project funding are
typically mitigated once the initial equipment payment is received.
There is significant uncertainty regarding the timing of the
Company’s recognition of revenue on its remaining performance
obligations, and there is no certainty that these will result in
actual revenues. The backlog at September 30, 2020, includes booked
sales orders of $673,000 from several customers that the Company
does not expect to be realized until 2022, if at all. Given the
present economic uncertainty arising from the impact of the novel
coronavirus COVID-19, the Company believes that several of its
current contracts may be delayed or canceled.
The
remaining performance obligations expected to be recognized through
2022 are as follows:
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
Total |
|
Remaining performance
obligations related to engineering only paid contracts |
|
$ |
24,000 |
|
|
$ |
2,287,000 |
|
|
$ |
559,000 |
|
|
$ |
2,870,000 |
|
Remaining
performance obligations related to partial equipment paid
contracts |
|
|
3,453,000 |
|
|
|
1,761,000 |
|
|
|
114,000 |
|
|
$ |
5,328,000 |
|
Total remaining
performance obligations |
|
$ |
3,477,000 |
|
|
$ |
4,048,000 |
|
|
$ |
673,000 |
|
|
$ |
8,198,000 |
|
The
following table sets forth the Company’s revenue by
source:
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Equipment and systems
sales |
|
$ |
1,481,961 |
|
|
$ |
5,103,984 |
|
|
$ |
4,575,855 |
|
|
$ |
10,344,788 |
|
Engineering and other services |
|
|
114,160 |
|
|
|
355,475 |
|
|
|
402,837 |
|
|
|
951,270 |
|
Shipping and
handling |
|
|
38,548 |
|
|
|
64,646 |
|
|
|
148,326 |
|
|
|
209,670 |
|
Total
revenue |
|
$ |
1,634,669 |
|
|
$ |
5,524,105 |
|
|
$ |
5,127,018 |
|
|
$ |
11,505,728 |
|
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
nine months ended September 30, 2020, the valuation assumptions
used to determine the fair value of each option award on the date
of grant were: expected stock price volatility ranged from 121.64%
to 122.48%; expected term in years 5 and risk-free interest rate
ranged from .2% to 1.67%.
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. While the Company grants stock options
to nonemployees, the adoption of ASU 2018-07 has not had a material
impact on its consolidated results of operations, cash flows and
financial position.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
following is a summary of share-based compensation expenses
included in the condensed consolidated statements of operations for
the three and nine months ended September 30, 2020 and
2019:
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Share-based compensation expense
included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
6,833 |
|
|
$ |
2,801 |
|
|
$ |
23,949 |
|
|
$ |
7,964 |
|
Advertising and marketing
expenses |
|
|
2,500 |
|
|
|
840 |
|
|
|
7,500 |
|
|
|
2,520 |
|
Product development costs |
|
|
5,444 |
|
|
|
420 |
|
|
|
16,332 |
|
|
|
1,260 |
|
Selling,
general and administrative expenses |
|
|
41,221 |
|
|
|
108,892 |
|
|
|
306,448 |
|
|
|
664,219 |
|
Total
share-based compensation expense included in consolidated statement
of operations |
|
$ |
55,998 |
|
|
$ |
112,953 |
|
|
$ |
354,229 |
|
|
$ |
675,963 |
|
Included
in the expense for the three and nine months ended September 30,
2020, is an accrual for $31,575 and $101,472, respectively, in
respect of the 2020 Annual Employee Incentive Compensation
Plan.
Concentrations
Two
customers accounted for 39% and 30% of the Company’s revenue for
the three months ended September 30, 2020 and three customers
accounted for 18%, 17% and 11% of the Company’s revenue for the
nine months ended September 30, 2020. One customer accounted for
70% and 57% of the Company’s revenue for the three and nine months
ended September 30, 2019, respectively.
Four
customers accounted for 32%, 23%, 21% and 10% of the Company’s
accounts receivable for the nine months ended September 30, 2020.
For the nine months ended September 30, 2019, three customers
accounted for 50%, 19% and 12% of the Company’s accounts
receivable.
Recently Issued Accounting Pronouncements
In
March 2020, the FAS issued ASU No. 2020-04 “Reference Reform
(Topic 848) Facilitation of the Effects of Reference Rate Reform on
Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides
optional guidance for a limited period of time to ease the
potential burden in accounting for (or recognizing the effects of)
reference rate reform on financial reporting. The amendments are
effective for the Company as of March 12, 2020 through December 31,
2022. The Company does not expect this ASU to have a material
impact on its consolidated results of operations, cash flows and
financial position.
In
January 2020, the FASB issued ASU No. 2020-01,
Investments—Equity Securities (Topic 321), Investments—Equity
Method and Joint Ventures (Topic 323), and Derivatives and Hedging
(Topic 815)—Clarifying the Interactions between Topic 321, Topic
323, and Topic 815 (a consensus of the Emerging Issues Task
Force). This update clarifies whether an entity should consider
observable transactions that require it to either apply or
discontinue the equity method of accounting for the purposes of
applying the measurement alternative and how to account for certain
forward contracts and purchased options to purchase securities. For
public entities, this guidance is effective for fiscal years
beginning after December 15, 2020. The Company does not expect this
ASU to have a material impact on its consolidated results of
operations, cash flows and financial position.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic
740) – Simplifying the Accounting for Income Taxes, which
simplifies the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments
also improve consistent application of and simplify GAAP for other
areas of Topic 740 by clarifying and amending existing guidance.
ASU 2019-12 is effective for fiscal years beginning after December
15, 2020. Early adoption is permitted. The Company does not expect
this ASU to have a material impact on its consolidated results of
operations, cash flows and financial position.
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
adoption of this ASU has not had a material impact on the Company’s
consolidated results of operations, cash flows and financial
position.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 replaces the incurred loss
impairment methodology with a methodology that reflects expected
credit losses and requires consideration of a broader range of
reasonable and supportable information to inform credit loss
estimates. For trade and other receivables, loans and other
financial instruments, the Company will be required to use a
forward-looking expected loss model rather than the incurred loss
model for recognizing credit losses which reflects losses that are
probable. 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. In November 2019, the FASB issued ASU 2019-11,
Codification Improvements to Topic 326, Financial Instruments –
Credit Losses, to clarify, correct errors in, or improve the
codification of Topic 326 and make the codification easier to
understand and easier to apply by eliminating inconsistencies and
providing clarifications. ASU 2016-13 is effective for fiscal years
beginning after December 15, 2019. Entities may early adopt the
amendments within this ASU but not prior to the fiscal years
beginning after December 15, 2018. The adoption of this ASU has not
had a material impact on the Company’s consolidated results of
operations, cash flows and financial position.
Other
accounting standards that have been issued or proposed by FASB that
do not require adoption until a future date are not expected to
have a material impact on the financial statements upon adoption.
The Company does not discuss recent pronouncements that are not
anticipated to have an impact on or are unrelated to its financial
condition, results of operations, cash flows or
disclosures.
Note
2 – Leases
In
February 2016 the FASB issued ASU 2016-02, Leases (Topic
842)(“ASC 842” or the “new lease standard”). The Company
adopted ASC 842 as of January 1, 2019, using the effective date
method.
The
new standard provides a number of optional practical expedients in
transition. The Company has elected to apply the “package of
practical expedients” which allow the Company to not reassess: (i)
whether existing or expired arrangements contain a lease, (ii) the
lease classification of existing or expired leases, or (iii)
whether previous initial direct costs would qualify for
capitalization under the new lease standard. The Company has also
elected to apply the short-term lease exemption for all leases with
an original term of less than 12 months, for purposes of applying
the recognition and measurements requirements in the new lease
standard.
Upon
adoption, the Company recognized its lease for manufacturing and
office space (the “Facility Lease”) on the balance sheet as an
operating lease right-of-use asset in the amount of $714,416 and as
a lease liability of $822,374. The Facility Lease commenced
September 29, 2017 and continues through August 31, 2022. The
Company has the option to renew the Facility Lease for an
additional five years. However, the renewal option to extend the
Facility Lease is not included in the right-of-use asset or lease
liability as the option is not reasonably certain of exercise. The
Company regularly evaluates the renewal option and when it is
reasonably certain of exercise, the Company will include the
renewal period in its lease term.
Beginning
September 1, 2018, and each subsequent September 1 during the term,
the monthly rent under the Facility Lease will increase by 3%.
Total rent under the current building lease is charged to expense
over the term of the lease on a straight-line basis, resulting in
the same monthly rent expense throughout the lease. The difference
between the rent expense amount and the actual rent paid is
recorded to operating lease liability on the Company’s condensed
consolidated balance sheets.
Under
the Facility Lease, the landlord agreed to pay the Company or the
Company’s contractors for tenant improvements made by the Company
not to exceed $100,000, which were used for normal tenant
improvements. The Company determined that these improvements were
not specialized and could be utilized by a subsequent tenant and,
as such, the improvements were considered assets of the lessor. As
of January 1, 2019, the unamortized amount of tenant improvement
allowance of $81,481 was treated as a reduction in measuring the
right-of-use asset.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 non-lease component. For the Facility Lease, the
Company has not elected the accounting policy to include both the
lease and non-lease 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 Nine Months Ended September 30, |
|
|
|
2020 |
|
Operating lease cost |
|
$ |
162,667 |
|
Operating cash outflow from operating
lease |
|
$ |
98,716 |
|
|
|
|
|
|
|
|
|
As
of September 30,
2020 |
|
Operating lease right-of-use
assset |
|
$ |
392,263 |
|
Operating lease liability,
current |
|
$ |
253,392 |
|
Operating lease liability,
long-term |
|
$ |
238,139 |
|
|
|
|
|
|
Remaining lease term |
|
|
1.9
years |
|
Discount rate |
|
|
5.00 |
% |
Future
annual minimum lease payments on the Facility Lease as of September
30, 2020 were as follows:
2020 (excluding the nine months ended
September 30, 2020) |
|
$ |
62,218 |
|
2021 |
|
|
281,864 |
|
2022 |
|
|
170,891 |
|
Total minimum lease payments |
|
|
514,973 |
|
Less imputed
interest |
|
|
(23,442 |
) |
Present
value of minimum lease payments |
|
$ |
491,531 |
|
During
the nine months ended September 30, 2020, the Company entered into
an agreement with its landlord to apply its rent deposit of $52,600
to rent payments due during the period. The deposit required on the
lease will be reduced to approximately $32,000 and will be payable
in 12 monthly installments from January through December of 2021.
Further, the landlord also agreed to defer payment of fifty percent
of the three months of lease payments (base rent only) for the
period July to September 2020. The deferred lease payments amount
to approximately $30,000 and will be payable in 12 monthly
installments from January to December 2021.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Inventory
Inventory
consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
Finished goods |
|
$ |
346,553 |
|
|
$ |
1,041,369 |
|
Work in progress |
|
|
5,785 |
|
|
|
3,851 |
|
Raw materials |
|
|
235,571 |
|
|
|
257,399 |
|
Allowance for
excess & obsolete inventory |
|
|
(66,259 |
) |
|
|
(71,376 |
) |
Inventory,
net |
|
$ |
521,650 |
|
|
$ |
1,231,243 |
|
Overhead
expenses of $19,262 and $31,831 were included in the inventory
balance as of September 30, 2020, and December 31, 2019,
respectively.
Advance
payments on inventory purchases are recorded in prepaid expenses
until title for such inventory passes to the Company. Prepaid
expenses included approximately $681,000 and $164,000 in advance
payments for inventory for the periods ended September 30, 2020,
and December 31, 2019, respectively.
Note
4 – Property and Equipment
Property
and equipment consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
Furniture and
equipment |
|
$ |
398,422 |
|
|
$ |
389,090 |
|
Vehicles |
|
|
15,000 |
|
|
|
15,000 |
|
Leasehold
improvements |
|
|
215,193 |
|
|
|
215,193 |
|
|
|
|
628,615 |
|
|
|
619,283 |
|
Accumulated
depreciation |
|
|
(451,792 |
) |
|
|
(361,360 |
) |
Property and
equipment, net |
|
$ |
176,823 |
|
|
$ |
257,923 |
|
Depreciation
expense was $90,432 and $110,254 for the nine months ended
September 30, 2020, and December 31, 2019, respectively. For the
nine months ended September 30, 2020, $4,118 was allocated to cost
of sales and $1,029 was allocated to inventory with the remainder
recorded as selling, general and administrative expense. For the
nine months ended December 31, 2019, $4,206 was allocated to cost
of sales and $1,051 was allocated to inventory with the remainder
recorded as selling, general and administrative expense.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
5 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the
following:
|
|
September 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
Accounts payable |
|
$ |
697,847 |
|
|
$ |
1,299,015 |
|
Sales commissions payable |
|
|
33,523 |
|
|
|
69,532 |
|
Accrued payroll liabilities |
|
|
424,890 |
|
|
|
169,052 |
|
Product warranty accrual |
|
|
181,401 |
|
|
|
185,234 |
|
Other accrued
expenses |
|
|
60,109 |
|
|
|
110,127 |
|
Total |
|
$ |
1,397,770 |
|
|
$ |
1,832,959 |
|
Note
6 – Note Payable and Accrued Interest
On
April 22, 2020, the Company entered into a note payable with its
current bank in the principal amount of $554,000, for working
capital purposes.
The
loan amount bears interest at 1% and was initially due on April 20,
2022. Subsequently, the term of the loan may now potentially be
extended to April 20, 2025. The loan may be repaid in advance
without penalty. The loan is also potentially forgivable in full
provided proceeds are used for payment of payroll expenses, rent,
utilities and mortgage interest and certain other terms and
conditions are met. The loan has typical default provisions,
including for change of ownership, general lender insecurity as to
repayment, non-payment of amounts due, defaults on other debt
instruments, insolvency, dissolution or termination of the business
as a going concern and bankruptcy.
During
the three and nine months ended September 30, 2020, interest of
$1,397 and $2,444 was accrued respectively, in respect of this note
payable.
Note
7 – Commitments and Contingencies
Litigation
As of
December 31, 2019, there were 6,750,000 restricted stock units that
had not been settled due to a dispute with a former employee over
the required withholding taxes to be paid to the Company for
remittance to the appropriate tax authorities. The Company
commenced an arbitration action against the former employee
regarding the dispute. The former employee also made claims in the
arbitration action against the Company for unpaid wages. As stated
in a pleading in the arbitration, on March 9, 2020, the Company
issued the former employee 6,750,000 shares of the Company’s common
stock in settlement of these restricted stock units after taking
measures to mitigate the Company’s exposure to penalties and
liability for the failure to properly withhold income taxes The
Arbitrator issued an interim award of approximately $10,000 in the
Company’s favor and a finding against the former employee.
Effective June 9, 2020, the Arbitrator issued his final award in
the Company’s favor in the Colorado arbitration. The Arbitrator
found against the former employee and awarded the Company costs of
$33,985, with interest at 8% per year. Effective July 22, 2020, the
Colorado Court confirmed the Arbitration award and entered a final
judgement in favor of the Company and against the former employee.
The Company is pursuing collection of this debt. This former
employee continues to pursue separate litigation against the
Company for recovery of alleged consulting fees owed to him for the
2015 calendar year prior to his appointment as an executive officer
of the Company and discovery is ongoing in this case and the
parties have filed dispositive motions that they are in the process
of briefing.
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.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 enters into
commitments to purchase inventory and may also provide
indemnifications of varying scope and terms to customers, vendors,
lessors, business partners, and other parties with respect to
certain matters, including, but not limited to, losses arising out
of the Company’s breach of such agreements, services to be provided
by the Company, or from intellectual property infringement claims
made by third parties. In addition, the Company has entered into
indemnification agreements with its directors and certain of its
officers and employees that will require the Company to, among
other things, indemnify them against certain liabilities that may
arise by reason of their status or service as directors, officers,
or employees. The Company maintains director and officer insurance,
which may cover certain liabilities arising from its obligation to
indemnify its directors and certain of its officers and employees,
and former officers, directors, and employees of acquired
companies, in certain circumstances.
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 nine months ended September 30, 2020, the Company issued shares
of its common stock under the 2017 Equity Plan as
follows:
|
● |
1,000,000
shares to an employee in settlement of certain RSUs that vested
December 31, 2019; |
|
|
|
|
● |
560,000
shares pursuant to a special incentive stock bonus approved by the
Board for the period ended December 31, 2019; and |
|
|
|
|
● |
6,750,000
shares in settlement of restricted stock units to a former employee
after taking measures to mitigate the Company’s exposure to
penalties and liability for the failure to properly withhold income
taxes.as further discussed in Note 7 – Commitments and
Contingencies, Litigation above. |
As of
September 30, 2020, awards related to 21,711,000 shares remain
outstanding.
The
total unrecognized compensation expense for unvested non-qualified
stock options at September 30, 2020, was $30,839, which will be
recognized over approximately 6 months.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Non-Qualified
Stock Options
A
summary of the non-qualified stock options granted to employees and
consultants under the 2017 Equity Plan during the nine months ended
September 30, 2020, are presented in the table below:
|
|
Number of Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019 |
|
|
10,135,000 |
|
|
$ |
0.096 |
|
|
|
7.7 |
|
|
$ |
- |
|
Granted |
|
|
6,616,900 |
|
|
$ |
0.070 |
|
|
|
10.0 |
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(2,440,900 |
) |
|
$ |
0.100 |
|
|
|
4.4 |
|
|
|
|
|
Outstanding, September 30,
2020 |
|
|
14,311,000 |
|
|
$ |
0.084 |
|
|
|
8.5 |
|
|
$ |
- |
|
Exercisable, September 30,
2020 |
|
|
12,311,000 |
|
|
$ |
0.083 |
|
|
|
8.5 |
|
|
$ |
- |
|
Outstanding
vested and expected to vest, September 30, 2020 |
|
|
14,311,000 |
|
|
$ |
0.084 |
|
|
|
8.5 |
|
|
$ |
- |
|
During
the three and nine months ended September 30, 2020, 1,812,100 and
2,440,900 non-qualified stock options expired unexercised,
respectively, following the departure of seven former
employees.
A
summary of non-vested non-qualified stock options activity for
employees and consultants under the 2017 Equity Plan for the nine
months ended September 30, 2020, are presented in the table
below:
|
|
Number of Options |
|
|
Weighted Average Grant-Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|
Grant-Date Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2019 |
|
|
2,000,000 |
|
|
$ |
0.075 |
|
|
$ |
- |
|
|
$ |
149,534 |
|
Granted |
|
|
6,616,900 |
|
|
$ |
0.059 |
|
|
|
|
|
|
$ |
387,199 |
|
Vested |
|
|
(6,616,900 |
) |
|
$ |
0.059 |
|
|
|
|
|
|
$ |
387,199 |
|
Forfeited |
|
|
- |
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
Expired |
|
|
- |
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
Nonvested, September 30,
2020 |
|
|
2,000,000 |
|
|
$ |
0.075 |
|
|
$ |
- |
|
|
$ |
149,534 |
|
For
the nine months ended September 30, 2020 and 2019, the Company
recorded $171,624 and $332,779 as compensation expense related to
vested options issued to employees and consultants, net of
forfeitures, respectively.
During
the nine months ended September 30, 2020, the Company issued
6,616,900 stock options to employees and consultants valued at
$269,340 in respect of the 2019 annual equity incentive award that
had been accrued for in full in the Company’s financial statements
at December 31, 2019.
A
summary of the non-qualified stock options granted to directors
under the 2017 Equity Plan during the nine months ended September
30, 2020, are presented in the table below:
|
|
Number of Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value ($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019 |
|
|
900,000 |
|
|
$ |
0.135 |
|
|
|
7.6 |
|
|
$ |
- |
|
Granted |
|
|
6,500,000 |
|
|
$ |
0.057 |
|
|
|
8.5 |
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Outstanding, September 30,
2020 |
|
|
7,400,000 |
|
|
$ |
0.067 |
|
|
|
7.7 |
|
|
$ |
- |
|
Exerciseable, September 30,
2020 |
|
|
6,400,000 |
|
|
$ |
0.070 |
|
|
|
8.0 |
|
|
$ |
- |
|
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
A
summary of non-vested non-qualified stock options activity for
directors under the 2017 Equity Plan for the nine months ended
September 30, 2020, are presented in the table below:
|
|
Number of Options |
|
|
Weighted Average Grant-Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
Grant-Date Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
6,500,000 |
|
|
|
0.057 |
|
|
|
|
$ |
373,000 |
|
Vested |
|
|
(5,500,000 |
) |
|
|
0.063 |
|
|
|
|
$ |
344,000 |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
|
$ |
- |
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
|
$ |
- |
|
Nonvested, September 30,
2020 |
|
|
1,000,000 |
|
|
|
0.029 |
|
|
|
|
$ |
29,000 |
|
During
the nine months ended September 30, 2020 and 2019, the Company
incurred $55,970 and $0, respectively, as compensation expense
related to 1,500,000 and 0 vested options, respectively, issued to
directors.
Effective
January 2, 2020, the Company issued 4,000,000 fully vested stock
options to directors valued at $234,126 in respect of a 2019
special equity award that had been accrued for in full in the
Company’s financial statements at December 31, 2019.
Further
on January 2, 2020, the Company issued an additional 500,000 fully
vested, non-qualified stock options under the 2017 Equity Plan
valued at $29,266 to directors. The options have a term of 5 years
and have an exercise price equal to the closing price of the
Company’s common stock on The OTC Markets on the day immediately
preceding the grant date of $.0.07.
Effective
June 24, 2020, the Company issued 2,000,000 non-qualified
stock options under the 2017 Equity Plan, valued at $39,600, to
newly appointed directors. The options vested 50% upon grant and
50% on April 1, 2021, if the Director remains on the Board up to
that time. The options have a term of 5 years and have an exercise
price equal to the closing price of the Company’s common stock on
The OTC Markets on the day immediately preceding the grant date of
$.029.
Restricted
Stock Units
A
summary of the RSUs awarded to employees, directors and consultants
under the 2017 Equity Plan during the nine months ended September
30, 2020, are presented in the table below:
|
|
Number of Units |
|
|
Weighted Average Grant-Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019 |
|
|
7,550,000 |
|
|
$ |
0.128 |
|
|
$ |
- |
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
|
|
Vested and settled
with share issuance |
|
|
(6,750,000 |
) |
|
$ |
0.121 |
|
|
|
|
|
Forfeited/canceled |
|
|
(800,000 |
) |
|
$ |
0.184 |
|
|
|
|
|
Outstanding, September 30,
2020 |
|
|
- |
|
|
|
|
|
|
$ |
- |
|
For
the nine months ended September 30, 2020 and 2019, the Company
recorded $25,163 and $230,796, respectively, as compensation
expense related to vested RSUs issued to employees, directors and
consultants. The total intrinsic value of RSUs vested and settled
with share issuance was $199,125 for the nine months ended
September 30, 2020.
Effective
April 30, 2020, 800,000 RSUs vested. However, the holder elected to
cancel the RSUs.
Surna
Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
9 – Warrants
Effective
June 18, 2020, 500,000 warrants expired unexercised. The warrants
were issued on June 19, 2017 with an exercise price of
$0.35.
The
following table summarizes information with respect to outstanding
warrants to purchase common stock during the nine months ended
September 30, 2020:
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
Warrants |
|
|
Exercise |
|
|
Remaining Life |
|
|
Intrincic |
|
|
|
Outstanding |
|
|
Price |
|
|
In
Months |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December
31, 2019 |
|
|
39,109,000 |
|
|
$ |
0.24 |
|
|
|
9 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(16,812,500 |
) |
|
$ |
(0.26 |
) |
|
|
- |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2020 |
|
|
22,296,500 |
|
|
$ |
0.22 |
|
|
|
5 |
|
|
$ |
0 |
|
The
following table summarized information about warrants outstanding
at September 30, 2020.
|
|
|
|
|
|
Weighted Average Life
of |
|
|
|
|
Warrants |
|
|
Outstanding
Warrants |
|
Exercise
price |
|
|
Outstanding |
|
|
In
Months |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
14,734,000 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25 |
|
|
|
7,562,500 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,296,500 |
|
|
|
5 |
|
Note
10 – Income Taxes
As of
September 30, 2020, the Company had U.S. federal and state net
operating losses (“NOLs”) of approximately $18,177,000, which will
expire, if not utilized, in the years 2034 through 2037, however,
NOLs generated subsequent to December 31, 2017 do not expire but
may only be used against taxable income to 80%. However, in
response to the novel coronavirus COVID-19, the Coronavirus Aid,
Relief, and Economic Security Act temporarily repealed the 80%
limitation for NOLs arising in 2018, 2019 and 2020. Pursuant to
Section 382 of the Internal Revenue Code of 1986, as amended, use
of the Company’s NOLs carryforwards may be limited in the event of
cumulative changes in ownership of more than 50% within a
three-year period.
The
Company must assess the likelihood that its net deferred tax assets
will be recovered from future taxable income, and to the extent the
Company believes that recovery is not likely, the Company
establishes a valuation allowance. Management’s judgment is
required in determining the Company’s provision for income taxes,
deferred tax assets and liabilities, and any valuation allowance
recorded against the net deferred tax assets. The Company recorded
a full valuation allowance as of September 30, 2020, and December
31, 2019. Based on the available evidence, the Company believes it
is more likely than not that it will not be able to utilize its net
deferred tax assets in the foreseeable future.
Note
11 – Subsequent Events
In
accordance with ASC 855, Subsequent Events, the Company has
evaluated all subsequent events through the date the financial
statements were available to be issued. No material subsequent
events occurred after September 30, 2020, other than as set out
below:
On
October 28, 2020, the Company applied to the lender of its $554,000
loan for forgiveness of the full amount of the principal under the
loan terms. Final determination of the amount to be forgiven, if
any, is expected in the first quarter of fiscal year
2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with our
unaudited condensed consolidated financial statements and related
notes included elsewhere in this Quarterly Report, which include
additional information about our accounting policies, practices,
and the transactions underlying our financial results, as well as
with our audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2019, as
filed with the SEC. In addition to historical information, the
following discussion and other parts of this Quarterly Report
contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from
those anticipated by such forward-looking information due to the
factors discussed under “Cautionary Statements” appearing elsewhere
herein and the risks and uncertainties described or identified in
“Item 1A – Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2019, as updated from time to time in the
Company’s filings with the SEC, and Part II, Item 1A of this
Quarterly Report entitled “Risk Factors.”
Non-GAAP Financial Measures
To
supplement our financial results on U.S. generally accepted
accounting principles (“GAAP”) basis, we use non-GAAP measures
including net bookings, backlog, as well as adjusted net income
(loss) which reflects adjustments for certain non-cash expenses
such as stock-based compensation, certain debt-related items and
depreciation expense. We believe these non-GAAP measures are
helpful in understanding our past performance and are intended to
aid in evaluating our potential future results. The presentation of
these non-GAAP measures should be considered in addition to our
GAAP results and are not intended to be considered in isolation or
as a substitute for financial information prepared or presented in
accordance with GAAP. We believe these non-GAAP financial measures
reflect an additional way to view aspects of our operations that,
when viewed with our GAAP results, provide a more complete
understanding of factors and trends affecting our business. For
purposes of this Quarterly Report, (i) “adjusted net income (loss)”
and “adjusted operating income (loss)” mean GAAP net income (loss)
and operating income (loss), respectively, after adjustment for
non-cash equity compensation expense, debt-related items and
depreciation expense, and (ii) “net bookings” means new sales
contracts executed during the quarter for which we received an
initial deposit, net of any adjustments including cancellations and
change orders during the quarter.
Our
backlog, remaining performance obligations and net bookings may not
be indicative of future operating results, and our customers may
attempt to renegotiate or terminate their contracts for a number of
reasons, including delays in or inability to obtain project
financing or licensing or abandonment of the project entirely.
Accordingly, there can be no assurance that contracts included in
the backlog or remaining performance obligations will actually
generate revenues or when the actual revenues will be
generated.
Overview
We
design, engineer and sell cultivation technologies for controlled
environment agriculture including: (i) liquid-based process cooling
systems and other climate control systems, (ii) air handling
equipment and systems, (iii) a full-service engineering package for
designing and engineering commercial scale thermodynamic systems
specific to cannabis cultivation facilities, and (iv) automation
and control devices, systems and technologies used for
environmental, lighting and climate control. Our customers include
commercial, state- and provincial-regulated cannabis growers in the
U.S. and Canada as well as other international locations, including
those growers building new facilities and those expanding or
retrofitting existing facilities. Currently, our revenue stream is
derived primarily from supplying our products, services and
technologies to commercial indoor and hybrid sealed greenhouse
facilities ranging from several thousand to more than 100,000
square feet.
Headquartered
in Boulder, Colorado, we leverage our experience in this space to
bring value-added climate control solutions to our customers that
help improve their overall crop quality and yield, optimize energy
and water efficiency, and satisfy the evolving state and local
codes, permitting and regulatory requirements. Although our
customers do, we neither produce nor sell cannabis or any of its
related products.
Shares
of our common stock are traded on the OTC Markets under the ticker
symbol “SRNA.”
Impact
of the COVID-19 Pandemic on Our Business
The
impact of the government and the business economic response to the
COVID-19 pandemic has affected demand across the majority of our
markets and disrupted work on projects. The COVID-19 pandemic is
expected to have continued adverse effects on our sales, project
implementation, operating margins, and working capital. As of the
date of this filing, uncertainty continues to exist concerning the
magnitude and duration of the economic impact of the COVID-19
pandemic.
In
response to the COVID-19 pandemic, in late March 2020 the Company
downsized operations to preserve cash resources, implementing
workforce reductions, reductions of salaried employee compensation
(including all executives and the CEO) and reduction of hours
worked, cutting costs and focusing its operations on
customer-centric sales and project management
activities.
Following
the receipt of loan funds in April 2020, the Company reinstated all
staff who previously had been placed on furlough. Staff receiving
salaries of $100,000 per year or less were restored to their full
salaries. All executives, including the CEO, had their compensation
reduced to the greater of $100,000 per year or 75% of their
previous salary level. The Company re-engaged its staff so as to be
able to fulfill its current customer contracts and any new sales
orders and to continue its marketing and selling efforts. Over the
course of the Summer 2020, the Company took further steps to adjust
its work force by furloughing several employees, making temporary
hourly and salary reduction adjustments, and then, in late
September 2020, in light of our then sales efforts, reinstating
continuing hourly employees to full-time status and restoring the
salaries of continuing salaried employees.
Due
to the speed with which the COVID-19 pandemic developed and the
resulting uncertainties, including the depth and duration of the
disruptions to customers and suppliers, its future effect on our
business, on our results of operations, and on our financial
condition, we cannot predict the overall effect on our business
over the longer term. Despite this uncertainty, we have undertaken
various plans to reduce costs so as to mitigate the impact of the
COVID-19 pandemic to the best of our ability, although they may not
be sufficient in the long-run for us to avoid reduced sales,
increased losses and reduced operating cash flows.
Refer
to Risk Factors, included in Part II, Item 1A of this
Quarterly Report on Form 10-Q below, for further discussion of the
possible impact of the COVID-19 pandemic on our
business.
Our
Growth Strategy
We
believe there are fundamentally three ways to grow a business: (i)
increase the number of customers, (ii) increase the average revenue
per order, or (iii) increase the frequency of orders. Our growth
strategy is threefold:
1.
Sell proverbial “Chevys.” In addition to “Cadillac” -level
products, sell “Chevy” or equivalent products to satisfy a wider
range of points along the demand curve. Anticipated result:
Increase the number of customers.
We
have a sales and marketing program that generates many prospective
customer relationships. However, our limited range of higher cost
products, mostly chilled water systems, reduces the number of
customer prospects who can afford to buy from us. In 2018 we
started an aggressive effort to broaden our product and service
offerings to provide a wider range of HVAC technical solutions (see
chart below). In 2018 we began to offer stamped mechanical plan
sets and our first 4-pipe chilled water systems. In 2019 we
broadened our engineering services to include full MEP (Mechanical,
Electrical, and Plumbing) design services. We also began to offer
our SentryIQ Controls System. And in 2020 we added new products to
include: split system DX (direct expansion) with integrated
dehumidification, packaged DX systems with modulating hot gas
reheat, heat recovery chiller/boiler for 4-pipe systems, and we
recently added our StrataAir™ racking airflow solution to address
customer needs for multi-level cultivation facilities. These
various systems provide solutions to answer a broader range of
technical and cost constraints and we will continue to develop and
offer new solutions to our customers’ problems, so that a broader
group of growers can take advantage of our engineering expertise
and capabilities. We believe these new products and services will
increase our addressable market and increase sales, further
leveraging our investment in sales and marketing.
The
success of our product development initiative can be seen in the
following table, which documents the number of commercial-scale
projects (over $100,000 sales) that have included one or more of
our new products:
Year |
|
Percent
using New Products |
2018 |
|
35% |
2019 |
|
76% |
2020 |
|
(through
Q3): 100% |

2.
Sell proverbial “steering wheels.” Sell our customers the automated
facilities control systems they need—directly. Anticipated result:
Increase average order size.
Growing
live plants indoors in a controlled environment is a technically
demanding business, and a failed crop can cost a grower significant
foregone revenue. We believe our licensed professional engineers
are some of the industry’s leading experts in the design of such
facilities, and we seek to extend that leadership into more
advanced technology products.
Last
year we introduced our SentryIQ™ control system. If our climate
control design and products are the proverbial car, then SentryIQ™
is the proverbial steering wheel—one is needed to direct the car
where to go. Before SentryIQ™, we had to send our customers
elsewhere for controls to regulate their cultivation environments,
but we now have the ability to capture that revenue. To date, we
have signed nine contracts for controls systems with an aggregate
value of approximately $1,200,000.
Our
next step down this technology and innovation road will be the
eventual development of the equivalent of a self-driving car.
Growers will tell the control system what they want to achieve, and
the system will sense the environment and direct the climate
control system to achieve the grower’s goals. These systems will be
able to integrate data analytics—and eventually deploy artificial
intelligence—to optimize multiple variables to maximize the
grower’s profits. While we are in the early stages of development
of these technology-driven systems, we believe it is important for
us to become a player in this market because it expands our
addressable market for both sensors and software while offering the
possibility of higher margins and recurring revenue over
time.
3.
Add more proverbial “dealers.” Engage in one or more strategic
relationships with other technology leaders that serve our
industry. Anticipated result: Increase the number of
customers.
Strategic
relationships might include referral marketing agreements,
co-development of unique integrated solutions with best-in-class
partners, and acquisitions. To extend the automotive analogy,
engaging in these types of relationships is like adding more
dealers to sell our products, at little cost to us. During Q1 2020
we joined the GroAdvisor group (www.groadvisorworldwide.com)
and began joint marketing initiatives with the group. GroAdvisor is
a group of seven companies each with expertise in selected
technologies necessary to build a cultivation facility such as
lighting, buildings, modular grow rooms, fertigation, etc. Surna
provides its expertise in environmental controls to the group and
its prospective customers.
If
some of these strategic alliances are successful in driving
top-line revenue for us and our partners, over time these
relationships could develop into more exclusive arrangements or
evolve into possible acquisitions or a source of strategic capital
for us. There can be no assurance that we will be able to
successfully execute any of these strategic initiatives. Efforts
will be primarily focused on working with new strategic partners to
co-market each other’s products and services and possibly jointly
develop new and improved products and services with
cannabis-specific applications, as opposed to exclusively seeking
acquisitions.
Our
business plan has six key objectives in mind:
|
1. |
Reduce
prior reliance on new build facility projects which generate
inconsistent revenue and cash flow; |
|
|
|
|
2. |
Increase
emphasis on retrofit and expansion projects, especially from
multi-facility operators, which typically provide a more
predictable and accelerated completion and revenue
stream; |
|
|
|
|
3. |
Establish
revenue from “lifecycle” operational and facility management
offerings; |
|
|
|
|
4. |
Increase
our gross margin by shifting our focus to value-added technology
services and proprietary, customized equipment; |
|
|
|
|
5. |
Operate
with disciplined expense, cash and working capital management;
and |
|
|
|
|
6. |
Become
financially self-sustaining by attempting to achieve operating cash
flow breakeven and profitability. |
Our
Commercial-Scale Projects
During
the first nine months of 2020, we entered into sales contracts for
five new build projects and one expansion project, each with a
contract value over $100,000, which we refer to as commercial-scale
projects. These new contracts totaled $4,892,000, which consisted
of $4,354,000 for new build projects (89%) and $538,000 for an
expansion project (11%).
Our
Bookings, Backlog and Revenue
During
the three months ended September 30, 2020, we executed new sales
contracts with a total contract value of $4,374,000. However,
during this same period, we cancelled three sales contracts with a
total remaining contract value of $133,000. These cancellations
were based on discussions with customers who abandoned their
projects. After adjustments for these cancellations, our net
bookings in the three months ended September 30, 2020 were
$4,241,000, representing an increase of $5,842,000 (or 518%) from
net bookings of $(1,601,000) in the second quarter of
2020.
So
far in 2020, we have received a number of contract terminations. We
believe these have resulted, in large part, from uncertainty due to
the impact of the COVID19 pandemic and disruption in the capital
markets, that together have contributed to a slowdown in new
construction for cultivation facilities. However, retail sales of
cannabis products have continued their strong growth during 2020
and appear to be continuing. This gives us optimism that
cultivation facilities will continue to be built to meet the
growing demand for cannabis products.
As
the cultivation facility market matures and grows, we believe more
competitors are and will be entering the market. We believe this
competition will likely come from: (i) large equipment providers
who are more aggressively pursuing the cannabis market, and (ii)
local and national engineering firms who have elected to enter the
market which they had previously chosen not to serve because of the
nature of the industry.
Our
backlog at September 30, 2020 was $8,198,000, an increase of
$2,606,000, or 29%, from June 30, 2020. The increase in backlog is
the result of our higher net bookings in the third quarter. Our
backlog at September 30, 2020 includes booked sales orders of
$673,000 (8% of the total backlog) from several customers that we
do not expect to be realized until 2022, if at all. We believe the
sales orders in this portion of our backlog may be abandoned by our
customers or ultimately cancelled.
The
following table sets forth: (i) our beginning backlog (the
remaining contract value of outstanding sales contracts for which
we have received an initial deposit as of the previous period),
(ii) our net bookings for the period (new sales contracts executed
during the period for which we received an initial deposit, net of
any adjustments including cancelations and change orders during the
period), (iii) our recognized revenue for the period, and (iv) our
ending backlog for the period (the sum of the beginning backlog and
net bookings, less recognized revenue).
|
|
For the quarter ended |
|
|
|
September 30, 2019 |
|
|
December 31, 2019 |
|
|
March 31,
2020
|
|
|
June 30,
2020
|
|
|
September 30, 2020 |
|
Backlog, beginning
balance |
|
$ |
13,023,000 |
|
|
$ |
10,143,000 |
|
|
$ |
9,558,000 |
|
|
$ |
8,875,000 |
|
|
$ |
5,592,000 |
|
Net bookings, current period |
|
$ |
2,644,000 |
|
|
$ |
3,134,000 |
|
|
$ |
1,127,000 |
|
|
$ |
(1,601,000 |
) |
|
$ |
4,241,000 |
|
Recognized
revenue, current period |
|
$ |
5,524,000 |
|
|
$ |
3,719,000 |
|
|
$ |
1,810,000 |
|
|
$ |
1,682,000 |
|
|
$ |
1,635,000 |
|
Backlog, ending balance |
|
$ |
10,143,000 |
|
|
$ |
9,558,000 |
|
|
$ |
8,875,000 |
|
|
$ |
5,592,000 |
|
|
$ |
8,198,000 |
|
The
completion of a customer’s new build facility project is dependent
upon the customer’s ability to secure funding and real estate,
obtain a license and then build their cultivation facility so they
can take possession of the equipment. Accordingly, the time it
takes for these customers to complete a new build project, which
corresponds to when we are able to recognize revenue, is driven by
numerous factors including: (i) the large number of first-time
participants interested in the indoor cannabis cultivation
business; (ii) the complexities and uncertainties involved in
obtaining state and local licensure and permitting; (iii) local and
state government delays in approving licenses and permits due to
lack of staff or the large number of pending applications,
especially in states where there is no cap on the number of
cultivators; (iv) the customer’s need to obtain cultivation
facility financing; (v) the time needed, and coordination required,
for our customers to acquire real estate and properly design and
build the facility (to the stage when climate control systems can
be installed); (vi) the large price tag and technical complexities
of the climate control and air sanitation system; (vii) the
availability of power; and (viii) delays that are typical in
completing any construction project.
As
has historically been the case for the Company at each quarter-end,
there remains significant uncertainty regarding the timing of
revenue recognition of our backlog. As of September 30, 2020, 35%
of our backlog was attributable to customer contracts for which we
have only received an initial advance payment to cover our
engineering services (“engineering only paid contracts”). There are
always risks that the equipment portion of our engineering only
paid contracts will not be completed or will be delayed, which
could occur if the customer is dissatisfied with the quality or
timeliness of our engineering services, there is a delay or
abandonment of the project due to the customer’s inability to
obtain project financing or licensing, or the customer determines
not to proceed with the project due to economic factors, such as
declining cannabis wholesale prices in the state.
In
contrast, after the customer has made an advance payment for a
portion of the equipment to be delivered under the contract
(“partial equipment paid contracts”), we typically are better able
to estimate the timing of revenue recognition since the risks and
delays associated with licensing, permitting and project funding
are typically mitigated once the initial equipment payment is
received. As of September 30, 2020, 65% of our backlog was
attributable to partial equipment paid contracts.
We
have provided an estimate in our condensed consolidated financial
statements for when we expect to recognize revenue on our remaining
performance obligations (i.e., our Q3 2020 backlog), using separate
time bands, with respect to engineering only paid contracts and
partial equipment paid contracts. We estimate that we will
recognize approximately 42% of our Q3 2020 backlog during the
remainder of 2020, or $3.5 million. However, there continues to be
significant uncertainty regarding the timing of our recognition of
revenue on our Q3 2020 backlog. Refer to the Revenue
Recognition section of note 1 in our condensed consolidated
financial statements, included as part of this Quarterly Report for
additional information on our estimate of future revenue
recognition on our remaining performance obligations.
Our
backlog, remaining performance obligations and net bookings may not
be indicative of future operating results, and our customers may
attempt to renegotiate or terminate their contracts for a number of
reasons, including delays in or inability to obtain project
financing or licensing or abandonment of the project entirely.
Accordingly, there can be no assurance that contracts included in
backlog or remaining performance obligations will actually generate
revenues or when the actual revenues will be generated. Net
bookings and backlog are considered non-GAAP financial measures,
and therefore, they should be considered in addition to, rather
than as a substitute for, our GAAP measures for recognized revenue,
deferred revenue and remaining performance obligations. Further, we
can provide no assurance as to the profitability of our contracts
reflected in remaining performance obligations, backlog and net
bookings.
Results
of Operations
Comparison of Three Months Ended September 30, 2020 and
2019
Revenues
and Cost of Goods Sold
Revenue
for the three months ended September 30, 2020 was $1,635,000,
compared to $5,524,000 for the three months ended September 30,
2019, representing a decrease of $3,889,000, or 70%.
Cost
of revenue decreased by $2,835,000, or 72%, from $3,944,000 for the
three months ended September 30, 2019 to $1,109,000 for the three
months ended September 30, 2020.
The
gross profit for the three months ended September 30, 2020 was
$526,000 compared to $1,580,000 for the three months ended
September 30, 2019, a decrease of 67%. Gross profit margin
increased by 3 percentage points from 29% for the three months
ended September 30, 2019 to 32% for the three months ended
September 30, 2020 primarily due to a decrease in variable costs as
a percent of revenue offset by our fixed cost base as described
below.
Our
fixed costs (which include engineering, service, manufacturing and
project management salaries and benefits and manufacturing
overhead) totaled $281,000, or 17% of total revenue, for the three
months ended September 30, 2020 as compared to $332,000, or 6% of
total revenue, for the three months ended September 30, 2019. The
decrease of $51,000 was primarily due to a decrease in salaries and
benefits (including stock-based compensation) of
$54,000.
Our
variable costs (which include the cost of equipment, outside
engineering costs, shipping and handling, travel and warranty
costs) totaled $827,000, or 51% of total revenue, in the three
months ended September 30, 2020 as compared to $3,612,000, or 65%
of total revenue, in the three months ended September 30, 2019. The
decrease in variable costs was primarily due to lower equipment
costs as a result of lower revenue of $2,386,000. Other factors
included: (i) a decrease in excess and obsolete inventory of
$203,000 due to the reversal of the reserve recorded in Q2. The
reserve recorded in Q2 was related to the delay of one customer’s
project which was subsequently delivered in Q3, (ii) a decrease in
outside engineering services of $108,000, (iii) a decrease in
warranty costs of $66,000, partially the result of a credit from a
vendor for costs incurred in 2019, and (iv) a decrease in travel to
customer facilities of $12,000.
We
continue to focus on gross margin improvement through a combination
of, among other things, more disciplined pricing, better absorption
of our fixed costs as we convert our increased bookings into
revenue, and the implementation over time of lower-cost supplier
alternatives.
Operating
Expenses
Operating
expenses decreased to $809,000 for the three months ended September
30, 2020 from $1,303,000 for the three months ended September 30,
2019, a decrease of $494,000, or 38%. The operating expense
decrease consisted of: (i) a decrease in selling, general and
administrative expenses (“SG&A expenses”) of $447,000, (ii) a
decrease in advertising and marketing expenses of $34,000, and
(iii) a decrease in product development expense of
$14,000.
The
decrease in SG&A expenses for the three months ended September
30, 2020 compared to the three months ended September 30, 2019, was
due primarily to: (i) a decrease of $100,000 in commissions, (ii) a
decrease of $67,000 in stock-based compensation expense to
employees, consultants and directors, (iii) a decrease of $65,000
in accounting, consulting, investor relations and other
professional fees, (iv) a decrease in loss on asset disposal of
$57,000, (v) a decrease of $50,000 in salaries, benefits and other
employee related expenses, (vi) a decrease in travel of $47,000
(vii) a decrease in bad debt expense of $26,000, and (viii) a
decrease of $23,000 in board fees.
The
decrease in marketing expenses was primarily due to (i) a decrease
in expenses related to trade shows of $53,000, (ii) a decrease in
salaries and benefits (including stock-based compensation) of
$8,000, offset by (ii) an increase in web development, outside
marketing services and other marketing expenses of
$29,000.
The
decrease in product development costs was primarily due to a
decrease in salaries and benefits (including stock compensation) of
$17,000.
Operating
Income (Loss)
We
had an operating loss of $283,000 for the three months ended
September 30, 2020, as compared to operating income of $277,000 for
the three months ended September 30, 2019, a decrease of $560,000,
or 202%. The operating loss for the three months ended September
30, 2020 included $56,000 of non-cash, stock-based compensation and
$28,000 of depreciation expense, compared to $113,000 of non-cash,
stock-based compensation and $30,000 of depreciation expense for
the three months ended September 30, 2019. Excluding these non-cash
items, our operating loss increased by $619,000, or
147%.
Other
Income (Expense)
We
had other income (net) of $12,000 for the three months ended
September 30, 2020 compared to other expense (net) of $55,000 for
the three months ended September 30, 2019. The expense in 2019 was
for a one-time charge related to certain leased equipment which has
since ceased.
Net
Income (Loss)
Overall,
we had net loss of $270,000 for the three months ended September
30, 2020, as compared to net income of $222,000 for the three
months ended September 30, 2019, an increase of $492,000, or 222%.
The net loss for the three months ended September 30, 2020 included
$56,000 of non-cash, stock-based compensation and $28,000 of
depreciation expense, compared to $113,000 of non-cash, stock-based
compensation and $30,000 of depreciation expense for the three
months ended September 30, 2019. Excluding these non-cash items,
our net loss increased by $552,000, or 151%.
Comparison of Nine Months Ended September 30, 2020 and
2019
Revenues
and Cost of Goods Sold
Revenue
for the nine months ended September 30, 2020 was $5,127,000,
compared to $11,506,000 for the nine months ended September 30,
2019, representing a decrease of $6,379,000, or 55%.
Cost
of revenue decreased by $4,118,000, or 52%, from $7,988,000 for the
nine months ended September 30, 2019 to $3,870,000 for the nine
months ended September 30, 2020.
The
gross profit for the nine months ended September 30, 2020 was
$1,257,000 compared to $3,518,000 for the nine months ended
September 30, 2019, a decrease of 64%. Gross profit margin
decreased by 6 percentage points from 31% for the nine months ended
September 30, 2019 to 25% for the nine months ended September 30,
2020 primarily due to our fixed cost base offset by a decrease in
variable costs as a percent of revenue as described
below.
Our
fixed costs (which include engineering, service, manufacturing and
project management salaries and benefits and manufacturing
overhead) totaled $864,000, or 17% of total revenue, for the nine
months ended September 30, 2020 as compared to $1,009,000, or 9% of
total revenue, for the nine months ended September 30, 2019. The
decrease of $146,000 was primarily due to a decrease in salaries
and benefits (including stock-based compensation) of $162,000,
offset by an increase in fixed overhead of $16,000.
Our
variable costs (which include the cost of equipment, outside
engineering costs, shipping and handling, travel and warranty
costs) totaled $3,006,000, or 59% of total revenue, in the nine
months ended September 30, 2020 as compared to $6,978,000, or 61%
of total revenue, in the nine months ended September 30, 2019. The
decrease in variable costs was primarily due to lower equipment
costs, of $3,599,000, as a result of lower revenue and a slightly
higher margin on equipment sales. Other factors included: (i) a
decrease in warranty of $158,000 which was partially the result of
a reimbursement from a customer and a credit from a vendor for
costs incurred in 2019 related to a failure later deemed to be
non-warranty, (ii) a decrease in outside engineering costs of
$128,000, (iii) a decrease of $72,000 in shipping and handling,
(iv) a decrease of $36,000 in travel for client visits, offset by
(v) an increase in project management consulting of
$24,000.
We
continue to focus on gross margin improvement through a combination
of, among other things, more disciplined pricing, better absorption
of our fixed costs as we convert our increased bookings into
revenue, and the implementation over time of lower-cost supplier
alternatives.
Operating
Expenses
Operating
expenses decreased to $3,092,000 for the nine months ended
September 30, 2020, from $4,027,000 for the nine months ended
September 30, 2019, a decrease of $935,000, or 23%. The operating
expense decrease consisted of: (i) a decrease in selling, general
and administrative expenses (“SG&A expenses”) of $831,000, (ii)
a decrease in advertising and marketing expenses of $82,000 and
(iii) a decrease in product development expense of
$22,000.
The
decrease in SG&A expenses for the nine months ended September
30, 2020, compared to the nine months ended September 30, 2019, was
due primarily to: (i) a decrease of $343,000 in stock-based
compensation expense to employees, consultants and directors, (ii)
a decrease in commissions of $166,000, (iii) a decrease of $111,000
for loss on asset disposal, (iv) a decrease in accounting,
consulting, investor relations and other professional fees of
$86,000, (v) a decrease of $79,000 in travel, (vi) a decrease in
board fees of $47,000, (vii) a decrease of $39,000 in bad debt
expense, (viii) a decrease of $39,000 in depreciation, offset by
(ix) an increase in salaries, benefits and other employee related
costs of $80,000.
The
decrease in marketing expenses was primarily due to a decrease in
expenses related to trade shows of $125,000, offset by an increase
in web development, outside marketing services and other marketing
expenses of $42,000.
The
decrease in product development costs was primarily due to a
decrease in materials costs of $50,000 offset by an increase in
salaries and benefits (including stock-based compensation) of
$29,000.
Operating
Income (Loss)
We
had operating loss of $1,835,000 for the nine months ended
September 30, 2020, as compared to an operating loss of $508,000
for the nine months ended September 30, 2019, an increase of
$1,326,000, or 261%. The operating loss for the nine months ended
September 30, 2020 included $354,000 of non-cash, stock-based
compensation and $86,000 of depreciation expense, compared to
$661,000 of non-cash, stock-based compensation and $124,000 of
depreciation expense for the nine months ended September 30, 2019.
Excluding these non-cash items, our operating loss increased by
$1,672,000, or 604%.
Other
Income (Expense)
We
had other income (net) of $12,000 for the nine months ended
September 30, 2020 compared to other expense (net) of $30,000 for
the nine months ended September 30, 2019. Other expense for the
nine months ended September 30, 2019 consisted of expenses related
to a one-time charge for certain leased equipment which has since
ceased.
Net
Income (Loss)
Overall,
we had net loss of $1,822,000 for the nine months ended September
30, 2020 as compared to a net loss of $539,000 for the nine months
ended September 30, 2019, an increase of $1,283,000, or 238%. The
net loss for the nine months ended September 30, 2020 included
$354,000 of non-cash, stock-based compensation and $86,000 of
depreciation expense, compared to $661,000 of non-cash, stock-based
compensation and $124,000 of depreciation expense for the nine
months ended September 30, 2019. Excluding these non-cash items,
our net loss increased by $1,629,000, or 660%.
Financial
Condition, Liquidity and Capital Resources
Cash and Cash Equivalents
As of
September 30, 2020, we had cash and cash equivalents of $2,072,000,
compared to cash and cash equivalents of $922,000 as of December
31, 2019, an increase of 125%. The $1,150,000 increase in cash and
cash equivalents during the nine months ended September 30, 2020,
was the result of cash provided by our operating activities of
$600,000 together with proceeds from the issuance of a note payable
of $554,000. Our cash is held in bank depository accounts in
certain financial institutions. During the nine months ended
September 30, 2020, we held deposits in financial institutions that
exceeded the federally insured amount.
As of
September 30, 2020, we had accounts receivable (net of allowance
for doubtful accounts) of $97,000, inventory (net of excess and
obsolete allowance) of $522,000, and prepaid expenses of $757,000
(including $681,000 in advance payments on inventory purchases).
While we typically require advance payment before we commence
engineering services or ship equipment to our customers, we have
made exceptions requiring us to record accounts receivable, which
carry a risk of non-collectability especially since most of our
customers are funded on an as-needed basis to complete facility
construction. We expect our exposure to accounts receivable risk to
increase as we pursue larger projects.
As of September 30, 2020, we had a note payable of $554,000, total
accounts payable and accrued expenses of $1,398,000, deferred
revenue of $3,489,000, accrued equity compensation of $101,000 and
the current portion of operating lease liability of $253,000. As of
September 30, 2020, we had a working capital deficit of $1,793,000,
compared to a working capital deficit of $1,437,000 as of December
31, 2019. The increase in our working capital deficit was primarily
related to (i) an increase in deferred revenue (which represents
cash received from customers in advance of the performance of
services or the delivery of equipment) of $2,045,000, (ii) a
decrease in inventory (net of reserve for excess and obsolete
inventory of $710,000, (iii) a decrease in accounts receivable of
$41,000, offset by (iv) an increase in cash of $1,150,000, (v) an
increase in prepaid and other expenses of $488,000, (vi) a decrease
in accounts payable and accrued liabilities of $441,000 and, (vii)
a decrease in accrued equity compensation of $402,000.
We
have never declared or paid any cash dividends on our common stock.
We currently intend to retain all available funds and any future
earnings for use in the operation and expansion of our business and
do not anticipate paying any cash dividends in the foreseeable
future.
Summary of Cash Flows
The
following summarizes our approximate cash flows for the nine months
ended September 30, 2020 and 2019:
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2020 |
|
|
2019 |
|
Net cash provided by
operating activities |
|
$ |
600,000 |
|
|
$ |
1,750,000 |
|
Net cash used in investing
activities |
|
|
(4,000 |
) |
|
|
(3,000 |
) |
Net cash
provided by financing activities |
|
|
554,000 |
|
|
|
- |
|
Net increase in
cash |
|
$ |
1,150,000 |
|
|
$ |
1,747,000 |
|
Operating Activities
We
incurred a net loss for the nine months ended September 30, 2020 of
$1,822,000 and have an accumulated deficit of $27,507,000 as of
September 30, 2020.
Cash
provided by operations for the nine months ended September 30, 2020
was $600,000 compared to cash provided by operations of $1,750,000
for the nine months ended September 30, 2019, a decrease of
$1,150,000.
The
decrease in cash provided by operating activities during the nine
months ended September 30, 2020 was primarily attributable to: (i)
an increase in net loss of $1,283,000, and (ii) a decrease of
$395,000 in non-cash operating charges, offset by a $528,000
increase in cash used to fund working capital.
The
significant changes in working capital related to a $2,045,000
increase in deferred revenue, a $715,000 decrease in inventory, a
$488,000 increase in prepaid and other expenses, a $397,000
decrease in accounts payable and accrued expenses and a $101,000
increase in accrued equity compensation.
The
significant change in non-cash operating charges related to a
$423,000 decrease in the equity compensation issued, a $208,000
increase in the provision for excess and obsolete inventory, and a
$111,000 decrease for loss on asset disposal.
Investing Activities
The
cash used in investing activities for the nine months ended
September 30, 2020 was related to the purchase of property and
equipment.
Financing Activities
On
April 22, 2020, the Company entered into a note payable with its
current bank in the principal amount of $554,000, for working
capital purposes. The Company undertook no financing activities
during the nine months ended September 30, 2019.
Going Concern
Our
condensed consolidated financial statements for the quarter ended
September 30, 2020, have been presented on a going concern basis,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Our independent
registered public accounting firm included in its audit opinion on
our consolidated financial statements for the year ended December
31, 2019, a statement that there is substantial doubt as to our
ability to continue as a going concern, and our consolidated
financial statements for the year ended December 31, 2019 were
prepared assuming that we would continue as a going concern. We
have determined that our ability to continue as a going concern is
dependent on raising additional capital to fund our operations and
ultimately on generating future profitable operations. There can be
no assurance that we will be able to raise sufficient additional
capital or eventually have positive cash flow from operations to
address all of our cash flow needs. If we are not able to generate
positive cash flow from operations or find alternative sources of
cash, our business and shareholders will be materially and
adversely affected. The foregoing factors raise substantial doubt
about our ability to continue as a going concern for a period of
one year from the date our condensed consolidated financial
statements for the quarter ended September 30, 2020, are issued.
Our condensed consolidated financial statements do not include any
adjustment that might result from the outcome of this
uncertainty.
Capital Raising
We
believe our cash balances and cash flow from operations will be
insufficient to fund our operations for the next 12 months. If we
are unable to substantially increase revenues or otherwise generate
cash flows from operations, we will need to raise additional
funding to continue as a going concern. Based on management’s
estimate for our operational cash requirements, we will need to
raise financing in the next six months in order to continue our
operations and achieve our growth targets. There can be no
assurance that we will be able to raise the necessary financing,
when and if needed, on acceptable terms or at all. If our operating
results do not meet management’s expectations, or additional
capital is not available, management believes it has the ability to
reduce certain expenditures, although these reductions may not be
sufficient to be able to continue the Company’s operations. The
precise amount and timing of our financing needs cannot be
determined accurately at this time, and will depend on a number of
factors, including the market demand for our products and services,
management of working capital, and continuation of normal payment
terms and conditions for purchase of our products and
services.
While
we made substantial improvement to our results in 2019, there is
significant work ahead for us to execute on our growth plan and
achieve fiscal self-sustainability. Historically, we have not been
able to generate consistent revenues quarter-over-quarter. While we
are pursuing new business opportunities with multi-facility
operators and expansion projects, as well as broadening our product
line, there is no assurance we will be successful booking any sales
related to these opportunities and converting such bookings into
cash and revenue. We also may not be able to achieve our growth and
financial goals until 2021 or later, if at all. Additionally, we
also have to factor in the economic consequences of the COVID-19
pandemic and the dislocation caused by the lock down and reduced
commercial activity now being experienced in the United States and
Canadian economies.
Inflation
In
the opinion of management, inflation has not and will not have a
material effect on our operations in the immediate future.
Management will continue to monitor inflation and evaluate the
possible future effects of inflation on our business and
operations.
Contractual Payment Obligations
As of
September 30, 2020, our contractual payment obligations consisted
of a building lease. On January 2, 2018, the leased space was
expanded to 18,600 square feet and the monthly rental rate
increased to $18,979 and beginning September 1, 2018, the monthly
rent will increase by 3% each year through the end of the lease.
Refer to Note 2 – Leases of the notes to the condensed
consolidated financial statements, included as part of this
Quarterly Report for a discussion of building lease.
During
the nine months ended September 30, 2020, the Company entered into
an agreement with its landlord to apply its rent deposit of $52,600
to rent payments due during the period. The deposit required on the
lease will be reduced to approximately $32,000 and will be payable
in 12 monthly installments from January through December of 2021.
Further, the landlord also agreed to defer payment of fifty percent
of the three months of lease payments (base rent only) for the
period July to September 2020. The deferred lease payments amount
to approximately $30,000 and will be payable in 12 monthly
installments from January to December 2021.
Commitments
and Contingencies
Refer
to Note 7 – Commitments and Contingencies of the notes to
the condensed consolidated financial statements, included as part
of this Quarterly Report for a discussion of commitments and
contingencies.
Off-Balance
Sheet Arrangements
We
are required to disclose any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on
our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital
expenditures, or capital resources that are material to investors.
As of September 30, 2020, we had no off-balance sheet arrangements.
During the nine months ended September 30, 2020, we did not engage
in any off-balance sheet financing activities other than those
included in the “Contractual Payment Obligations” discussed above
and those reflected in Note 6 of our condensed consolidated
financial statements.
Recent
Developments
Refer
to Note 11 - Subsequent Events of the notes to condensed
consolidated financial statements, included as part of this
Quarterly Report for certain significant events occurring since
September 30, 2020.
Critical
Accounting Estimates
This
discussion and analysis of our financial condition and results of
operations is based upon our condensed consolidated financial
statements, which have been prepared in conformity with accounting
principles generally accepted in the United States of America.
Certain accounting policies are particularly important to the
understanding of our financial position and results of operations
and require the application of significant judgment by our
management or can be materially affected by changes from period to
period in economic factors or conditions that are outside of our
control. As a result, they are subject to an inherent degree of
uncertainty. In applying these policies, management uses their
judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates are based on
our historical operations, our future business plans and projected
financial results, the terms of existing contracts, observance of
trends in the industry, information provided by our customers, and
information available from other outside sources, as appropriate.
Actual results could materially differ from those estimates. Key
estimates include: allocation of transaction prices to performance
obligations under contracts with customers, standalone selling
prices, timing of expected revenue recognition on remaining
performance obligations under contracts with customers, valuation
of intangible assets, valuation of equity-based compensation,
valuation of deferred tax assets and liabilities, warranty
accruals, accounts receivable and inventory allowances, and legal
contingencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We
are a smaller reporting company, as defined by Rule 12b-2 of the
Exchange Act, therefore are not required to provide the information
under this item.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and our Principal Financial and Accounting Officer, which positions
are currently held by the same person, has evaluated the
effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the
end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and Principal
Financial and Accounting Officer concluded that as a result of
material weakness in our internal control over financial reporting
as described in Item 9A of our Annual Report on Form 10-K for the
year ended December 31, 2019 filed with the SEC, our disclosure
controls and procedures were not effective as of September 30,
2020.
We
did not maintain effective controls over certain aspects of the
financial reporting process because: (i) we lack a sufficient
complement of personnel with a level of accounting expertise and an
adequate supervisory review structure that is commensurate with our
financial reporting requirements, (ii) there is inadequate
segregation of duties due to the limitation on the number of our
accounting personnel, and (iii) we have insufficient controls and
processes in place to adequately verify the accuracy and
completeness of spreadsheets that we use for a variety of purposes
including revenue, taxes, stock-based compensation and other areas,
and place significant reliance on, for our financial
reporting.
We
intend to take appropriate and reasonable steps to make the
necessary improvements to remediate these deficiencies. We are
committed to continuing to improve our financial organization
including, without limitation, expanding our accounting staff and
improving our systems and controls to reduce our reliance on the
manual nature of our existing systems. However, due to our size and
our financial resources, remediating the several identified
weaknesses has not been possible and may not be economically
feasible now or in the future.
Changes
in Internal Control over Financial Reporting
There
were no changes identified in connection with our internal control
over financial reporting during the three months ended September
30, 2020, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART II — OTHER
INFORMATION
Item 1. Legal
Proceedings
As of
December 31, 2019, there were 6,750,000 restricted stock units that
had not been settled due to a dispute with a former employee over
the required withholding taxes to be paid to the Company for
remittance to the appropriate tax authorities. The Company
commenced an arbitration action against the former employee
regarding the dispute. The former employee also made claims in the
arbitration action against the Company for unpaid wages. As stated
in a pleading in the arbitration, on March 9, 2020, the Company
issued the former employee 6,750,000 shares of the Company’s common
stock in settlement of these restricted stock units after taking
measures to mitigate the Company’s exposure to penalties and
liability for the failure to properly withhold income taxes The
Arbitrator issued an interim award of approximately $10,000 in the
Company’s favor and a finding against the former employee.
Effective June 9, 2020, the Arbitrator issued his final award in
the Company’s favor, in the Colorado arbitration. The Arbitrator
found against the former employee and awarded the Company costs of
$33,985, with interest at 8% per year. Effective July 22, 2020, the
Colorado Court confirmed the Arbitration award and entered a final
judgement in favor of the Company and against the former employee.
The Company is pursuing collection of this debt. This former
employee continues to pursue separate litigation against the
Company for recovery of alleged consulting fees owed to him for the
2015 calendar year prior to his appointment as an executive officer
of the Company and discovery is ongoing in this case and the
parties have filed dispositive motions that they are in the process
of briefing.
Other
than as set forth in the preceding paragraph, we are not currently
a party to any material legal proceedings, nor are we aware of any
pending or threatened litigation that would have a material adverse
effect on our business, operating results, cash flows, or financial
condition should such litigation be resolved unfavorably. We have
and will continue to have commercial disputes arising in the
ordinary course of our business.
Item 1A. Risk Factors
In
addition to the information set forth in this Form 10-Q, you should
also carefully review and consider the risk factors contained in
our other reports and periodic filings with the SEC, including,
without limitation, the risk factors and uncertainties contained
under the caption “Item 1A—Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2019 that could
materially and adversely affect our business, financial condition,
and results of operations. The risk factors discussed in that Form
10-K do not identify all risks that we face because our business
operations could also be affected by additional factors that are
not known to us or that we currently consider to be immaterial to
our operations. There have been no material changes in the
significant factors that may affect our business and operations as
described in “Item 1A—Risk Factors” of the Annual Report on 10-K
for the year ended December 31, 2019 other than as set out
below:
The COVID-19 pandemic has adversely impacted, and may continue to
adversely impact, the Company’s operations and financial
results.
The
COVID-19 pandemic has resulted in significant economic uncertainty
and disruption. The extent to which our business and financial
results are impacted will depend on numerous evolving factors which
are uncertain and cannot be predicted, including: the duration and
scope of the pandemic; governmental, business and individuals’
actions taken in response; the effect on our customers and
customers’ demand for our services and products; the effect on our
suppliers and disruptions to the global supply chain; our ability
to sell and manufacture our products; disruptions to our operations
resulting from the illness of any of our employees; restrictions or
disruptions to transportation, including reduced availability of
ground or air transport; the ability of our customers to pay for
our products; and any closures of our facilities, our suppliers’
facilities, and our customers’ facilities. The effects of the
COVID-19 pandemic have resulted and will result in additional
expenses and lost or delayed revenue. We have been experiencing
disruptions to our business as we implement modifications to
travel, work locations and cancellation of events, among other
modifications. In addition, the change in macroeconomic conditions
may impact the proper functioning of financial and capital markets,
foreign currency exchange rates, commodity and energy prices, and
interest rates. Even after the COVID-19 pandemic subsides, we may
continue to experience adverse impacts to our business and
financial results due to any economic recession or depression that
occurs, and due to any major public health crises that may occur in
the future.
Although
our current accounting estimates contemplate current and expected
future conditions, as applicable, it is reasonably possible that
actual conditions could differ from our expectations, which could
materially affect our results of operations and financial position.
In particular, a number of estimates have been and will continue to
be affected by the ongoing COVID-19 pandemic. The severity,
magnitude and duration, as well as the economic consequences of the
COVID-19 pandemic, are uncertain, rapidly changing and difficult to
predict. As a result, our accounting estimates and assumptions may
change over time in response to COVID-19. Such changes could result
in future impairments of goodwill, intangible assets, long-lived
assets, incremental credit losses on accounts receivable, or excess
and obsolete inventory. Any of these events could amplify the other
risks and uncertainties described in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2019, and could have an
adverse effect on our business and financial results.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior
Securities
None.
Item 4. Mine Safety
Disclosures
Not
applicable
Item 5. Other
Information
Item 6. Exhibits
The
documents listed in the Exhibit Index of this Form 10-Q are
incorporated by reference or are filed with this Form 10-Q, in each
case as indicated therein (numbered in accordance with Item 601 of
Regulation S-K).
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
SURNA
INC. |
|
(the
“Registrant”) |
|
|
|
Dated:
November 12, 2020 |
By: |
/s/
Anthony K. McDonald |
|
|
Anthony
K. McDonald |
|
|
Chief
Executive Officer and President |
|
|
(Principal
Executive Officer) |
Dated:
November 12, 2020 |
By: |
/s/
Anthony K. McDonald |
|
|
Anthony
K. McDonald |
|
|
Principal
Financial and Accounting Officer |
EXHIBIT INDEX
* |
Filed
herewith. |
** |
Furnished
herewith. |
Surna (QB) (USOTC:SRNA)
Historical Stock Chart
From Dec 2020 to Jan 2021
Surna (QB) (USOTC:SRNA)
Historical Stock Chart
From Jan 2020 to Jan 2021