$SRNA Releases Form 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.You should read the following discussion and analysis of our financial condition and results of operations together with the information in our consolidated financial statements (unaudited) for the current period and our consolidated annual audited financial statements for the last fiscal year as filed on our Annual Report on Form 10-K for the year ended December 31, 2013, and the notes thereto and other financial information incorporated by reference. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of our last annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Surna Inc. (“we”, “us”, the “Company”, “Surna”) was incorporated in Nevada on October 15, 2009. Currently, we plan to acquire intellectual property and scalable operating companies and develop, produce and sell equipment for the legal marijuana industry with a focus on disruptive technology, equipment and related support services. In furtherance of our plans, on March 26, 2014 we entered into a Merger Agreement with Safari Resource Group, Inc. (“Safari”), a Nevada Corporation. Safari plans to introduce in the fourth quarter of 2014 its “Airstream” curved reflectors to be incorporated into grow lights to form an integral part of its proposed commercial line of leading-edge cannabis and indoor agriculture equipment products.

On March 31, 2014 we entered into a binding Membership Interest Purchase Agreement with Stephen Keen and Brandy Keen who are our substantial shareholders of our company and related parties, to acquire their 100% interest in Hydro Innovations, LLC (“Hydro”), a Colorado limited liability company. Hydro, is engaged in the business of designing, manufacturing and distributing proprietary, state-of-the-art indoor climate control systems such as chillers, lights, reflectors and irrigation systems for cannabis and other indoor agriculture markets. We completed this acquisition on of July 25, 2014 with an effective date of July 1, 2014.

Prior to our merger with Safari and acquisition of Hydro, we had been engaged in the development of web and mobile games and social networks, and telecommunications services, IT support services and open-source software development though our wholly owned subsidiary, Surna Media. Effective June 30, 2014, we sold Surna Media to a combination of prior officers, directors and others for $2,643,880 which was comprised of a payment of $1 in cash and the buyer’s assumption of all of the liabilities of Surna Media and its subsidiaries. As a result of this sale, we eliminated from our balance sheet all assets and liabilities associated with Surna Media and recorded a credit of $2,643,881 to our Additional Paid in Capital.

Results of Operations

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

Three Months Ended September 30, 2014 and September 30, 2013

Our revenues from continuing operations for the three month period ended September 30, 2014 were $859,488 from sales of our climate control systems and related products. The net loss from operations for the three month period ended September 30, 2014 was $459,238 of which includes $8,976 for depreciation, $140,394 for product development and $791,570 for general and administration expense. The revenues from discontinued operations for the three month period ended September 30, 2013 were $10 and the net loss from discontinued operations for the three months period ended September 30, 2013 was $14,389 of which includes $3,333 for depreciation and $11,066 for general and administration expense. Other income increased by $1,938,441 from $0 for the three months ended September 30, 2014 and 2013, respectively. The increase in other income is mainly due to a gain on change in derivative value.

Nine Months Ended September 30, 2014 and September 30, 2013

Our revenues from continuing operations for the nine month period ended September 30, 2014 were $1,206,047 from sales of our climate control systems and related products. The net loss from operations for the nine month period ended September 30, 2014 was $807,952 of which includes $14,389 for depreciation, $148,162 for product development and $1,191,104 for general and administration expense. The revenues from discontinued operations for the nine months period ended September 30, 2013 were $46 and the net loss from discontinued operations for the nine months period ended September 30, 2013 was $175,723 of which includes $9,999 for depreciation and $165,770 for general and administration expense. Other income increased by $118,502 in total, to $118,502 from $0 for the nine months ended September 30, 2014 and 2013 respectively. The increase in other income is mainly due to a gain on change in derivative value.

Liquidity and Capital resources

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital deficit (current assets less current liabilities) of $75,470 and $150,666 of cash as of September 30, 2014 and had a working capital deficit of $2,637,357 and no cash as of December 31, 2013. Although substantially improved, our current cash position is not sufficient to fund our cash requirements during the next twelve months, including operations and capital expenditures.

Net cash used in operating activities was $1,047,809 for the period ended September 30, 2014, compared to nil for the same period in 2013. The increase is primarily a result of increase in our net loss, amount due from related party, and accounts receivable and inventory and prepaid expenses, partially offset by a change in derivative liability, amortization of debt discount and accrued liability.

Net cash used by investing activities during the period ended September 30, 2014 was $112,360 compared to nil for the same period in 2013. The increase is a result of purchase of equipment, intangible assets and leasehold improvements.

Net cash provided by financing activities during the period ended September 30, 2014, was $1,310,835 compared to nil for the same period in 2013. Cash provided by financing activities were primarily a result of proceeds from a sale of convertible notes totaling $1,324,283.

Cash Requirements

We are a start-up company and have not yet generated significant revenues from our business operations. Our auditors have issued a going concern opinion; this means that our auditors believe there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital and/or increase sales and related profits.

We commenced a Private Placement of Convertible Notes (the “Notes”) for up to $5,000,000. The Notes have a term of two years with an annual interest rate of ten percent (10%). The Notes are convertible into our shares of common stock at a conversion rate equal to the lesser of $1.00 or eighty percent (80%) of the prior thirty day weighted average market price per share. The shares are subject to Rule 144 and a lockup agreement allowing limited sales of shares during the first year. On October 16, 2014, the Company closed the Private Placement in which it raised a total of $1,324,283 and filed a Form D with the SEC disclosing the closing of the private Placement. Subsequent to the closing, the Company entered into an agreement with Newbridge Securities Corporation to raise up to $3,000,000 in a combination of issuance of shares of common stock, convertible notes and warrants (see Note 8 to our unaudited condensed consolidated financial statements). The issuance of shares of common stock, conversion of the convertible notes and exercise of the warrants will result in additional dilution to existing shareholders.

If we are not able to raise sufficient capital from the Private Placement or generate sufficient sales and related profits, we may be unable to continue, develop or expand our operations.

Foreign currency and foreign currency translation

In prior periods, foreign currency has had an impact on our financial results ($6,946 in 2013 and $0 in 2012). The functional currency of the Company is the United States Dollar (“USD”). The functional currency of the Company’s operating subsidiary, Surna HK, is the Hong Kong Dollar (“HKD”).The functional currency of the Surna HK’s operating subsidiary in PRC, Flying Cloud, is the Renminbi (“RMB”), the PRC’s currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.

For financial reporting purposes, the consolidated financial statements of the Company are translated into the Company’s reporting currency, United States Dollars (“USD”). Balance sheet accounts are translated using the closing exchange rate in USD effect at the balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period.

Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) in stockholders’ equity.

As a result of the spin-off and sales of subsidiaries operating in the People’s Republic of China and Hong Kong, foreign currency will have limited effect on the results of future operations of the Company.

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.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. We currently have a working capital deficit of $75,470 (current assets less current liabilities) and although our revenues are increasing, the company has generated cumulative net losses of $3,482,830 during the period from inception through September 30, 2014.

In the course of our development activities, we have sustained and continue to sustain losses. These conditions raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on its ability to meet our obligations, to obtain additional financing as may be required until such time as it can generate sources of recurring revenues and to ultimately attain profitability. Although there can be no guarantee of us successfully obtaining additional ongoing financing, we have engaged in activities to address these financial concerns. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The report of our independent registered public accounting firm relating to the December 31, 2013 consolidated financial statements states that there is substantial doubt about tour ability to continue as a going concern.