Kirsten Chapman - LHA Investor Relations Trent Doucet - Preseident & CEO.

Thank you for standing by. This is the conference operator. Welcome to the Surna Third Quarter 2016 Conference Call. As a reminder all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions [Operator Instruction].

I would now like to turn the conference over to Kirsten Chapman with LHA Investor Relations. Please go ahead..

Statements on this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such words as anticipate, believe, estimate, expect, intend and similar expressions as they relate to the company or to its management identify 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, outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including those discussed from time to time in Surna's filings with the Securities and Exchange Commission.

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, development activities, 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 or interview. 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 the 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 of 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 additional fees, stricter operational guide and unanticipated shutdowns. With that, it's my pleasure to introduce Surna's Chief Executive Officer, Trent Doucet. Please go ahead, Trent..

Thank you Kirsten, and thanks everyone for joining us today. We are incredible excited to speak with you today for several reasons. First, we're thrilled with the outcome of several state elections last week that will dramatically expand our market.

Second, we are making notable progress in our mission to be the leader in controlled environment and agriculture specializing in cannabis and expanding into indoor food production.

And third, even though our revenue was impacted by delays in customer readiness to accept equipment we improved our bottom line significantly and continue to strengthen our balance sheet. Finally, we are kicking off our largest trade show of the year this week. I'll review these items in greater detail and then answer some questions.

The medicinal and adult recreational marijuana markets are just beginning to emerge. Last week eight states expanded the legalization of cannabis. Four states initiated medicinal use and four states expanded use to incorporate adult recreational. This included California which in itself will increase the availability of nearly 40 million people.

This massive expansion creates the need for cultivation technologies like Surna's climate control and hybrid building to help the industry run efficiently and responsibly. As each state has a unique climate drilling environment and regulations and we believe our expertise will be a key for developing tailored solutions.

To date states have taken approximately 12 to 24 months to implement rules and regulations, issue licenses and began production. However it is possible the process may shorten for those medicinal states that are simply expanding into adult recreational use.

During the transition we will establish our regional sales force and continue to invest in production, engineering and development of new energy efficient technologies. When I became CEO in June I set some goals to help to ensure we further Surna's leadership position in the market.

We are committed to delivering exceptional customer service and after sales support and development. During the third quarter we have limited new installation procedures including outlines for installation site visits. We expect this will help us manage growth more responsibly.

Additionally we remain focused on innovation as most of you know Surna worked with University of Colorado Boulder's Engineering Department to construct the model of Surna's new hybrid building.

Additionally, we have the building design analyzed by a third party lead certified engineering consultant that estimates that Surna's hybrid building will consume an average of 60% less energy than typical indoor cultivation facility of similar size and production.

We are developing dynamic proactive management teams to optimize energy usage, maximize equipment of reliability and leverage intelligent equipment that can be easily automated to reliably cultivate crops. These innovations systems are expanding our current relationships and creating new opportunities to further partner with our customers.

We are testing different types of service contracts that will build the current revenue streams for the company. For example facilities management contracts will include quarterly and annual inspections of the equipment while providing regularly scheduled maintenance programs to ensure optimal performance.

File security services and audits to protect against harmful contaminants such as mold and mildew and remote monitoring and management enabling Surna or its clients the ability to monitor variables such as temperature, humidity, day night setting's, CO2, as well as a variety of equipment operating parameters from anywhere at any time.

Also we have entered in short agreement with Stephen Keen's new venture Sterling Farms which is in the process of getting its license and will be equipped to Surna's broad range climate control and lighting equipment.

Surna will use Sterling Farms to conduct tours and to leverage the facilities as a reference model for perspective customers as well as an R&D lab for ongoing product testing.

Lastly, we are focused on streamlining Surna business to maximize the profitability and growth potential, the results of which are evident this quarter, even though revenue was impacted by delays in customer readiness to accept the equipment. We have been able to significantly improve operating metrics.

Third quarter of 2016 revenue was 1.2 million compared to 3.6 million in third quarter of 2015. However, more efficient cost to supply chain management increased gross margin from 18.7% in Q3 of 2015 to 35.6% in the same quarter of 2016.

Operating expenses decreased 46% from 1.2 million in the third quarter of 2015 to $654,000 for the same quarter in 2016, reflecting reduced personnel cost and the company’s focus on cost containment, and lower production development cost.

And net loss improved by 61% from 1.3 million to $512,000 or a per share basis net loss of $0.01 of Q3 of 2015 to $0.00 in the third quarter of 2016. Year-to-date revenue was 5.6 million compared to 6.2 million compared to the year ago period.

Gross margin which included the negative impact of the $455,000 warranty charge in the second quarter increased to 32.7% compared to 19.7%. And net loss was 1.9 million or $0.01 per share compared to 3.7 million or $0.03 per share. Regarding the balance sheet, cash was $235,000 as of September 30, 2016 compared to $331,000 at December 31, 2015.

However deferred revenue increased to 1.4 million up from $986,000.

On October 31st, Surna began private negotiations with certain holders of 10% convertible promissory notes and warrants with a view to converting those notes and meeting the terms of the warrants which will reduce outstanding indebtedness and make it more likely that holders would exercise the warrants.

Surna anticipates reporting on these results of the new negotiations when they’re completed. While we know there is much to do, we believe Surna has come a long way, we dramatically improved our infrastructure and are working to ramp our regional sales efforts. We continue to deliver equipment with differentiating propriety and patented technology.

We have a new relationship design to provide perspective customers with a reference model demonstrating how compelling or climate control equipment is when properly installed.

And we are developing dynamic proactive management systems to optimize energy usage, maximize equipment reliability and leverage intelligent equipment that can be easily automated to reliably cultivate crops, which we expect to create recurring revenue streams.

All of this positions us very well to capture the market share within the dramatically increasing cannabis market. We are committed to driving shareholder value, and with the market on the verge of such significant growth we could not be more enthusiastic about the opportunity.

Come see for yourself this week at the Marijuana Business Conference and Expo, which is one of the largest industry trade shows in Las Vegas, we're in booth 329. Kirsten, I’m ready for any questions. .

Thank you, Trent. Now for our first question. We are asked, are more resources or personnel planned to enhance marketing to newly added or broaden markets in states that recently passed forms of marijuana legalization.

If so, how aggressively would these be targeted?.

First I can't emphasize enough how excited we are about the growing market opportunity in anticipation of significant market expansion we have been actively restructuring operations so that Surna can support expected growth.

So, throughout the year we have been exhibiting at the largest trade shows and now our plan is to build our regional sales team in tune with their local legislation..

Thank you.

The next question asks, do you have firm prospects for any of these markets that were established in advance in a legalization?.

Well, first it's important to remember that that private cultivators purchasing equipment, it can take 12 months to 24 months for stage to fully come online. That said, we are seeing a lot of interest in the newly legalized market and expect that trend to continue. .

Great. A financial question came in.

How are negotiations going with the convertible debt holders? And what terms are you proposing?.

On October 31st Surna began private negotiations with certain holders of certain 10% convertible promissory notes and warrants. With the view to convert the notes and amend the terms of the warrants, which will reduce outstanding indebtedness and make it more likely that holders would exercise the warrants.

Surna anticipates reporting on the results of these negotiations when they are completed and as we are in ongoing negotiations we really can't discuss further. .

Next question asks why did your customers delay acceptance of your products is there a problem?.

No. I think it's important to understand that cannabis is an emerging market, and everyone is new to the business. Many of the cultivators who are building facilities have found the process to be longer than expected which has led to delays in readiness to accept equipment. .

And how are you promoting your brand?.

We have some very concerning short-term activities planned for the last quarter of 2016, as well as some long-term initiatives for 2017. We are exhibiting at the largest cannabis convention next week in Las Vegas as well as aggressively working our public relations campaign.

We're currently in development of a new branding campaign for 2017 that will better highlight Surna as the premier technology driven company in the space with the refreshed website, collateral and customer support process. And also in 2017 you will see us at the largest convention in California with several speaking engagements..

Thank you.

And the last question that we've received is what is happening with Stephen Keen's new cultivation facility and what is the relationship with Surna? And how are you going to leverage this opportunity?.

Okay, Stephen has started an exciting cultivation project called Sterling Farms, and it's in the process of getting his license now.

We're excited for the prospects of working with Sterling Farms, they will be equipped with Surna's full range of climate control and lighting equipment with the goal of creating an industry leading energy efficient facility.

We've entered into an agreement with Sterling Farms for Surna to conduct tours and leverage the facility as a reference model for perspective customers as well as R&D lab for ongoing product testing. We believe this to be highly beneficial to both companies but really the industry as a whole. .

Thank you, Trent. There are no more questions..

Thank you very much for joining us today. These are truly exciting times for our industry and I appreciate your interest in Surna. I look forward to speaking with you again next quarter, and hope to see some of you at the Marijuana Business Conference & Expo in Las Vegas later this week. Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..