Katie O’Block - VP of Marketing Stephen Keen - Chief Executive Officer Dough McKinnon - Chief Financial Officer.

Good day everyone. Welcome to the Surna Q3 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will be answering questions previously submitted via email as well as taking some real time questions via Twitter. I will be your host this afternoon. My name is Katie O’Block.

On behalf of the entire Surna team, I would like to thank you for taking the time to join our conference call today. On the call with me are Stephen Keen, Surna’s CEO and Dough McKinnon, Surna’s CFO. We will begin with approximately 15 to 20 minutes of prepared remarks, followed by questions and answers.

We’ll be answering questions submitted prior to the call via email as well as questions submitted to us real time via Twitter that are directed towards @surnainc or marked with the hashtag #surnaconferencecall. A transcript of this call will be provided on our Web site for reference later this week.

We do have some items to cover before beginning the call. You can find these statements at the bottom of every press release we send out. Statements in this interview and this call may be forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995.

Words such as anticipate, believe, estimate, expect, intend and similar expressions as they relate to the Company or its management identifies forward-looking statements. These statements are based on current expectations, estimates, and projections about the Company's business, based in part on assumptions made by management.

These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.

Therefore, actual outcomes and results may probably differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in Surna's filings with the SEC.

In addition, such statements could be affected by risks and uncertainties related to Surna's product demand, market and customer acceptance of its equipment and other goods, ability to obtain financing to expand its operations, ability to attract qualified personnel, competition, pricing, and development difficulties, and general industry and market conditions and growth rates, and general economic conditions.

Any forward-looking statements speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events and/or circumstances after the date of this release.

With regard to Cannabis, the use, possession, and cultivation and distribution of Cannabis, is prohibited by Federal Law. This includes medical and recreational Cannabis, although certain states have legalized medical and recreational Cannabis.

Companies and individuals involved in this sector are still at risk of being prosecuted by federal authorities. Further the landscape in the Cannabis industry changes rapidly, what was law last week is not law today and what is law today may not be law next week.

This means that at any time the City, County or State where Cannabis is permitted can change the current laws and/or the federal government can supersede those laws and take prosecutorial actions.

Given the uncertain legal nature the Cannabis industry, it is imperative that our investors understand that the Cannabis industry is a high risk investment.

A change in the current laws or enforcement policy can negatively affect the status and operation of our business; require addition fees, stricter operational guidelines and unanticipated shutdowns. With that, I would like to introduce Stephen Keen, Surna’s Chief Executive Officer..

Thanks Katie. Thanks everyone for being on the call today. There have been many changes made in the operations of the Company that will move us towards profitability. We’ll see some impact in Q4, but most will be evident in Q1 and Q2 of 2016. Some of our contracts that weren’t completed in Q3 will be completed in Q4, or negotiated up to a year ago.

These contracts do not include the price increases to our products and engineering services that happened shortly after me taking over as CEO. I’d like to kick off this call today by talking about our achievements and developments of the Company through Q3. Our first replay for preorders has been sold out.

Although the contract has been signed for the order, I’d like to remind everyone that we do not recognize revenue until orders are shipped out to the customers, therefore revenue these reflector orders will not be recognized until later quarters. The Q3 results do not include reflector sales.

We will be not be recognizing revenues until late quarters as the customers have had delayed unrelated to Surna and the customer requested deliveries of reflector in early Q1 of 2016, which we were able to accommodate.

The rollout of this project has been done very carefully and methodically in order to make sure that we are delivering the best quality products possible. The reflectors have very complicated assembly with over 50 custom parts that all have to fit together with minimal tolerances.

The quality and safety testing of the reflectors done with oversight from our safety certification partner ETL Testing Labs. As we roll out this new product, instead of pushing our sales team to get more units sold, I’ve asked for the time to allow our engineers to oversee the manufacturing and integration of this system.

We’re happy with the progress that’s being made and with the overall product. We just closed on our fall advanced season, Marijuana business daily showed a very strong sell for us, we’re following up with contacts made at the show at this time.

Over the course of 2015, we determined that the majority of our referrals to our business come from industry consultants. As such we scheduled a tour for 40 industry consultants in one of our Nevada facilities. This Nevada facility has 42,000 square feet and 450 tons of cooling, this tour had a very positive response.

Recently the Board appointed Trent Doucet at Chief Operating Officer on November 11th after Bryon Jorgenson’s return to Minnesota for personal reasons. Trent has been working with the Company as a consultant prior to Bryon’s departure, a number of positive changes have come about for Trent’s for advisement.

The appointment of Trent as COO in the board was a natural fit. I would let Dough talk about Surna’s recently released 10-Q and accompanying financials..

Thank you, Stephen.

I’d also like to thank everybody on the call today for your time and your interest in Surna and I hate to say it but now for the boring part, I’m going to read the numbers that’s part of the press release and the 10-Q to satisfy our reporting obligations and then try to get into what the numbers mean and then maybe add some transparency to those.

For the nine months ended September 30, 2015, the Company reported gross revenues of $6.2 million compared to $1.2 million for the same period in 2014. That’s an increase of 413%. Revenue for the three months ended September 2015 were $3.6 million up from $1.6 million in just the prior quarter and $860,000 revenue during the same period during 2014.

Similarly, deferred revenue increased to $1.4 million from $400,000 at year-end, a 265% increase. Deferred revenue represents contracts that are in progress, as the Company does not recognize revenue until the contract is completed. The net loss for the three and nine months ended September. 30, 2015 was $1.3 million and $3.7 million respectively.

In the first nine months of 2015, the Company spent $533,000 in product development costs, and this is primarily related to the Surna Reflector. Marketing and branding expenses totaled $150,000 and $324,000 for the three and nine months ended September. 30, 2015.

General and administrative expenses remained essentially flat with $846,000 in Q3 compared to $821,000 in Q2.

The Company finished the third quarter of the balance sheet that included liquid assets and that’s defined as cash, accounts receivable, inventory and prepaid assets totaling $3.3 million which is an increase of 137% over last year’s amount of $1.4 million.

Now let’s start breaking this down and see what it means for the Company, let’s start with revenues. We’ve been on an exponential growth curve since the last quarter of 2014. The Company reported gross revenues of $6.2 million for the nine months ended compared to $1.2 million for the same period in 2014, that’s an increase of over 400%.

Then if you take a look at quarter numbers, the quarter-over-quarter revenues have increased from $633,000 in Q4 of last year to $830,000 in Q1 up to $1.7 million in Q2 and $3.6 million in the last Q. That means we are doubling our revenue quarter-over-quarter for this year. Now let’s take a look at Surna’s losses.

The net loss which is the very bottom line loss is comprised of loss from operations less other losses and for the three months ended September 30, 2015 it was $1.3 million and $3.7 respectively. Now with that being said, let’s go a little bit further and let me break down that a little bit.

So, if you understand what’s going on for the other or below the line expense really consists of interest expense on convertible notes, debt discount on convertible notes and gain or loss on derivative liability from convertible notes.

Although these numbers can be quite large and skew the bottom lines, they’re all the result of issuing convertible notes that are non-cash expenses. So let me say it again, these are all non-cash expenses. So to take a look at the Company, let’s look at the more meaningful loss from operations, it’s not the bottom line but loss from operations.

From this we see the Company is continuing towards profitability. Losses for the past four quarters have decreased from $2.4 million in Q4 of last year to $880,000 in Q1 then down to $691,000 in Q2 and down to $540,000 in Q3.

Looking at the balance sheet, similar to the revenue growth, deferred revenues have increased to $1.5 million up from $400,000 at year end, again a 265% increase. Now deferred revenue represents signed contracts, these are actually signed contracts that are in some form of completion.

So the Company does not recognize revenue until equipment is shipped and contracts are completed. What this means for the Company is that barring any extraordinary event the deferred revenue is revenue, just $1.5 million revenues sitting on the books waiting to be recognized in future income statements.

The last thing I’d like to talk about on our balance sheet is that we finished the third quarter with the balance sheet that included liquid assets and again when I said liquid assets that means cash, accounts receivable, inventory and prepaid assets totaling $3.3 million compared to $1.4 million at year end.

That’s about 2.5 times the amount at year end. Surna continues its emphasis on technology portfolios. Surna has invested 534,000 during the first nine months in 2015. We now have a total of 13 provisions patents.

These provisional patents are a combinations of both utility and design patent applications that provide coverage around our core Company technologies. We also believe that product and brand awareness is key to the Company, so on the first nine months of 2015 we spent 324,000 in advertising and marketing compared to only 78,000 in 2014.

The last thing I’d like to point out is our G&A expense. One thing that’s key to building a Company is building a proper infrastructure. From an infrastructure and G&A standpoint, we are pretty much flat all the way from Q4 over the last quarter of 2014 through our last Q of 2015.

Our Q4 2014 G&A expense was 888,000, Q1 was 804,000, Q2 was 821,000 and Q3 was 847,000. As you can see G&A has a negligible increase in this during the period when revenue increased over 400%. As a result we believe the infrastructure we have in place can accommodate our rapid growth, but only nominal additions to G&A costs.

So that’s it for a summary of the numbers in the Q, and I’d like to pass it back to Stephen for further comments..

Thanks Dough. Now I want to talk about what coming up for Surna in the beginning of 2016. As discussed some of these points in my letter to shareholders back in October, but this call I’m not permitted [ph] to speak directed to you. Cannabis political environments is going to see a lot of action over the next year.

Currently we are looking to four states that have passed legalization and are going to be assigning licenses to cultivation centers in the first half of 2016. We’ll be seeing cultivation center licenses from Maryland, Oregon, Hawaii and Alaska.

The 2016 elections are also on the horizons states like Nevada, Arizona, Massachusetts, are all looking to be voting on recreational use. The majority of the cannabis industry is looking towards California as the largest revenue generator.

California has more than two times the population of Surna’s three largest markets, Colorado, Nevada, and Washington, and holds a tremendous potential for growth for Surna going forward. As conveyed to my letter to shareholders, my primary goal is to move Surna towards profitability.

Under previous management the Company’s main focus was top line revenue. With this direction from the previous CEO, Surna underbid large installations to secure the sale in an effort to gain brand awareness and market share. This accounted for a significant portion of our losses. We have ended offering Surna’s installation services.

We honor the commitments that are necessary when it comes to installations and have either sub-contracted or handed off completely other installation jobs.

Going forward, we are focusing on what we’re exceptionally good at which is engineering and product development and have partnered with local mechanical contractors with decades of experience in hydraulic [ph] installations who can with the support of our engineers help us ensure that all of our customers have an outstanding experience.

In an effort to further improve our gross margins, we have raised prices on our products and engineering services and we’ve also negotiated significant discounts from some of our existing suppliers. Going forward our future strategy is to capitalize even further on our knowledge we have by offering more engineering services.

We will also be offering compatible products to our systems to increase sales without increasing our manufacturing footprint. Our goal is to eventually offer every technology needed for successful cannabis growth.

As we enter the final months of 2015, we couldn’t be more proud and thankful to the entire Surna team, revenue growth has been exceptional and we couldn’t do it without our great people we have and continue to add to Surna. We’re also very thankful for our shareholders. We appreciate your trust and vision for Surna -- where Surna is headed.

We see tremendous opportunity in this thriving industry and Surna is right at the heart of where cannabis is heading. With that I’d like to conclude our presentation and now address questions that have come to us over the last few days via email and Twitter..

Thank you, Stephen and Dough. Ladies and gentlemen, at this time we’ll be answering questions which were submitted via email to Surna by current or potential shareholders or via Twitter mentioning @surnainc or by using the hashtag #surnaconferencecall, so if you haven’t submitted there is still time. So here is a question that came in from email.

Do you still confirm that you assume you will do revenue from sales of reflectors of about 7 million in 2016? Dough?.

I would say without confirming that number we are satisfied with the current sales. And once we ensure that our customers are delighted with their product by methodically rolling out the reflectors. We’ll have a better understanding of expected annual reflector sales just after the first of 2016..

Here is another question from email.

Given the rosy outlook for indoor cannabis cultivations thanks to the shifting sands of public and political opinion on legalizing cannabis consumption and production in many states, why has the Surna stock done so poorly? Stephen?.

We can’t really speak to market factors, but as we continue moving forward towards profitability I would expect to see positive impact on our stock price..

Question number three.

Why are margins lowest this quarter than last?.

Well, if you go back to the comment earlier on installations a significant loss in Q3 was due to installations. We are still fulfilling contracts that we previously signed, those contracts take three to 12 months to fulfill and we have continued -- and we have discontinued offering installation services..

Next question also from email.

What measures have been taken to move Surna towards profitability? We know that we’ve been talking a lot about that and what are some of the steps that have been taken?.

We have negotiated with existing vendors to reduce cost of our goods which is really important. We’ve increased pricing on our products and we’ve of course discontinued installation services. We’re working on internal processes to improve our productivity as well..

So in that how do you navigate being a technology Company while including the manufacturing?.

Part of our R&D process is developing a process for manufacturing, once our process is in place and our products are being sold at scale, we outsource the manufacturing..

And this one last question that came in via Twitter.

Since most of the R&D expenses in 2015 were related to the reflector, does this mean Surna will experience a significant drop in R&D going forward?.

We do have other products that we are developing, the hybrid building and also some other lighting sources that we’ve started on six months ago. So we will continue to have R&D expenses although the reflector R&D is coming to an end..

So that wraps up for us today keeping it nice and short and before the Thanksgiving break for you all. Ladies and gentlemen, thank you so much for your time and participation on today’s conference call. We appreciate all the questions that were submitted to us.

We’ll send out a press release next time we do that, you can make sure to get your questions in and we can get them answered. To receive future Company updates including announcements of future conference calls, please visit surna.com and click on Investor Relations.

You may also receive our monthly newsletter about trends in the industry or things that are going on here at Surna by signing up for our newsletter at surna.com/newsletter. This concludes today’s call. Happy Thanksgiving everyone you may now disconnect. Have a wonderful afternoon..