$SRNA Form 10-Q

Overview

Surna Inc. is a technology company that designs, manufactures, and distributes state-of-the-art systems for controlled environment agriculture (“CEA”). Our products offer growers improved process control while simultaneously reducing the energy and resources required to maximize crop yield. Currently, the Company’s revenues derive largely from supplying industrial-grade technology to state-regulated cannabis cultivation facilities with nominal revenue as well from other indoor agricultural producers including organic herb and vegetable producers. Ultimately, we plan to provide full-scale, energy-efficient solutions for all aspects of a CEA facility.

We have a team of more than ten engineers with expertise in electrical, mechanical, optical, and thermodynamic engineering, as well as extensive cultivation experience. That team enables Surna to offer energy-efficient, turnkey solutions that include facility design, equipment manufacturing, and installation of our comprehensive line of lighting, cooling, and dehumidification systems that are optimized for indoor operations. Because of our specific expertise, our products are easily tailored and uniquely suited for state-regulated cannabis cultivation. Moreover, our technology is particularly valuable to state-regulated cannabis producers because growing cannabis is an extremely resource-intensive endeavor, and our technology can make a significant impact on the bottom line and long-term sustainability of such a facility. Furthermore, we anticipate that the already substantial demand for CEA products designed for cannabis will continue to grow as more states and countries begin to permit and regulate cannabis use and cultivation.

Listing on the OTCQB

As at March 31, 2015, we had 119,682,768 shares of common stock issued and outstanding. Our common stock is currently trading on the OTCQB marketplace in the United States of America under the stock ticker symbol “SRNA.” On May 14, 2015, the last trading day prior to the date of this filing, the closing price of the common stock on the OTCQB was $0.08.

Critical Accounting Policies and Significant Judgments and Estimates

This management’s discussion and analysis of our financial condition and results of operations is based on our interim unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, revenue recognition, deferred revenue and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no significant changes in our critical accounting policies as discussed in our annual report on Form 10-K filed with the SEC on April 16, 2015.

Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes included in this report.

Comparison of the three months ended March 31, 2015 and 2014

Revenues and Cost of Goods Sold

We currently derive revenues from the sale of climate control systems and related products. Costs of goods sold consist of the following: raw materials needed for manufacturing of products; direct labor costs incurred, overhead costs, and freight costs.

We had no revenue and $47,086 in operating expenses (general and administrative expense) from continuing operations during the three months ended March 31, 2014. The revenue from sales of our climate control systems and related products commenced in the second quarter of 2014.

Our revenues from continuing operations for the three month period ended March 31, 2015 were $870,895 from sales of our climate control systems and related products. Our revenue is not yet sufficient to meet our operating requirements.

The net loss from operations for the three month period ended March 31, 2015 was $879,546 of which includes $82,974 for advertising and marketing, $180,989 for research and development, and $803,742 for general and administrative expenses. Additionally the Company had other expenses of $538,897 and nil for the three month period ended March 31, 2015 and 2014 respectively. The increase in other expenses consists of interest expenses of $160,260, amortization of debt discount on convertible notes of $426,800 and, gain on derivative liability of $48,163. The revenues from operations for the three months period ended March 31, 2014 were nil and the net loss from operations for the three months period ended March 31, 2014 was $53,607 which consists of $47,086 of general and administrative expenses and loss from discontinued operations of $6,521. Overall, the Company has realized a net loss of $1,418,443 for the three month period ended March 31, 2015 compared to a net loss of $53,607 for the three month period ended March 31, 2015.

There were no revenues or costs of sales for the Surna Media Entities which have been classified as discontinued operations in the statement of operations.

Income Tax Expenses

For the three months ended March 31, 2015 and 2014, we had no federal taxable income due to net losses and recorded a deferred tax asset and a valuation allowance to the extent that those assets are attributable to net operating losses. We recognized the valuation allowance because we are unsure as to the ability to use these assets in the near future due to continued operating losses.

For the three months ended March 31, 2015 and 2014, we incurred $Nil current income tax and future income tax expenses from continuing operations.

Liquidity and Capital Resources

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements.

The following table is a summary of statement of cash flow:

                                                   Three Months Ended
                                                      December 31,
                                                    2015           2014
Cash provided (used) in operating activities   $ (1,011,984 )   $ (60,668 )
Cash flows used in investing activities            (162,600 )     (10,000 )
Cash flows provided by financing activities         849,865       109,283
Net change in cash                             $   (324,719 )   $  39,367

We anticipate requiring additional capital for our research and development activities for the development of additional commercial products. We intend to raise additional capital through equity and debt financing as needed, though there cannot be any assurance that such funds will be available to us on acceptable terms, on an acceptable schedule, or at all. We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow.

The issuance of additional securities may result in a significant dilution in the equity interests of our current stockholders. Obtaining loans, assuming these loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available for use when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.

Due to the uncertainty of our ability to meet our current operating and capital expenses, our independent auditors included a note to our financial statements for the year ended December 31, 2014 regarding concerns about our ability to continue as a going concern. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, and achieving a profitable level of operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.

Promissory Notes and Sale of Common Stock

In the year ended December 31, 2014, we commenced two private placement offerings of debt and equity securities. We closed the first offering on October 16, 2014 after raising $1,324,283 by issuing Series 1 convertible notes of two-year terms at ten percent (10%) interest per annum that are convertible at the lesser of $1.00 per share or eighty percent (80%) of the prior thirty day weighted average market price per share (see Note 8 – Convertible Debt). The shares are subject to Rule 144 and a lockup agreement allowing limited sales of shares during the first year. Subsequent to the termination of our first offering, we began a second offering with Newbridge Securities Corporation acting on a “best efforts” basis as our placement agent. Through March 31, 2015, we raised $2,536,250 through a combination of issuance of shares of common stock, Series 2 convertible notes, and warrants (see Note 8 – Convertible Debt). Of the total, we raised $1,625,000 prior to December 31, 2014, and the additional $911,250 between January 1, 2015 and March 31, 2015.

In addition, related parties (officers and directors) advanced $288,186 in fiscal year 2014, and these advances are due on demand. The balance outstanding from these advances is $194,958 as of March 31, 2915.

Operating Activities

Cash used in operations for the quarter ended March 31, 2015 was $1,011,984 compared to $60,668 for the quarter ended March 31, 2014. The increase in the cash used in operations was primarily due to: (i) revenue generating activities in the first quarter of 2015 compared to the first quarter of 2014; (ii) effect of gains and losses due to changes in the fair market value of derivatives for the quarter ended March 31, 2015, compared to nil for the quarter ended March 31, 2014, and (iii) changes in operating assets and liabilities in the first quarter of 2015 compared to the first quarter of 2014.

Investing Activities

Cash used in investing activities for the quarter ended March 31, 2015 was $162,600 compared to cash used by investing activities of $10,000 for the quarter ended March 31, 2014. During the first quarter of fiscal 2015, cash used in investing activities was primarily comprised of loan to Agrisoft, Inc., and $2,600 in purchases related to property and equipment.

Financing Activities

Cash provided by financing activities for the quarter ended March 31, 2015 was $849,865 compared to $109,283 for the quarter ended March 31, 2014. The cash provided by financing activities in the first quarter of fiscal 2015 was primarily due to $911,250 gross proceeds received in connection with the issuance of units in the private placement consisting of promissory notes, common stock and warrants.

Foreign currency and foreign currency translation

Effective June 30, 2014, we have divested all our foreign operating subsidiaries.

As a result the foreign currency translation had no effect on the results of operations since June 30, 2014.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.