Good afternoon, ladies and gentlemen and welcome to the Surna Inc. Q2 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions after the presentation. [Operator Instruction] It is now my pleasure to turn the floor over to your host, Surna’s CEO, Tony McDonald.

Sir, the floor is yours..

new markets, new products and services, and new trade name. The market we have historically served is for indoor cannabis cultivation, which is forecast to continue to grow aggressively for the foreseeable future.

While that is still a strong and growing market in which we are well-known, respected and continued to serve, we also have begun to serve the non-cannabis controlled environment agriculture market, in particular, the indoor food farming market. The skills, products and services we have developed can be readily applied to this market.

And indeed, we have served a few such facilities over the years. In the first quarter of this year, we entered into a contract with a non-cannabis facility and have proposals out with several others and we believe that we can be successful serving this market.

During the second quarter, we increased our marketing efforts to this sector and we are already seeing a response to these efforts. We continue to expand our product and service range from exclusively environmental control to include most of this CEA technical infrastructure and from facility selection to full lifecycle support after construction.

In addition, we are increasing our product and service range in each product category. Unlike our competition that normally only has one solution to offer, no matter the application, Surna acts as technology agnostic engineers and assesses each customer application, offering alternative designs and a range of carefully curated technologies.

Since the announcement in May, we have executed on this initiative, announcing several new products and services. To highlight a few of the new products and services we have just recently announced, in the first quarter of this year, we announced our partnership with Anden dehumidifiers.

In the second quarter, we announced the expansion of our chiller product line, with EcoChill products and the addition of our preventive maintenance services.

Early in this quarter, we expanded our product offerings with the addition of our EnviroPro air handler line and the introduction of our architectural design services that allows us to reach potential clients earlier in the design and decision process.

Along with these additions, we are actively pursuing additional products that will further our strategy that we believe will allow us to exceed our customers demanding requirements. In particular, let me focus on our recently added architectural design services.

Providing these services allows our sales reps to engage with prospective customers much earlier in the facility design process.

This early engagement provides the opportunity to develop a relationship with the prospect, where we can offer our rapidly expanding product and service lines, which we believe will allow us to increase the revenue from any given project.

Finally, to better reflect all of our capabilities and products and service offerings we are now operating as Surna cultivation technologies. As a reminder to everyone to reach our goals, we have set out three key pillars of our corporate strategy for growing the company and increasing shareholder value.

First, pursue aggressive organic growth; second, seek strategic relationships, mergers and acquisitions to add to our existing business; and three, pursue an uplisting to a national exchange and seek additional growth capital.

We serve a market for the construction and expansion of controlled environment agriculture, facilities and businesses that is projected to grow at a 20% plus compound annual growth rate for the foreseeable future.

Our primary vertical market of cannabis cultivation facilities has been joined by the similarly rapidly growing urban vertical farming market to create two market opportunities segments that we are positioned to serve.

We enjoy wide brand recognition in the indoor cultivation industry because of our longevity in the market segment, which is over 15 years and the large number of cultivation projects over 800, including over 200 projects were licensed to commercial facilities that we have served.

Our core expertise is engineering the environmental controls of these facilities, which is a sophisticated engineering challenge due to the high humidity and heat load within these facilities.

Not only are the low tide, but the environmental conditions within these within these facilities must be held within limits that the facilities managers request.

Engineering to meet these limits requires us to consider all of the primary components within the facility, lighting, irrigation, HVACD, fertigation, sensors, controls, carbon-dioxide dosing, monitoring and alarms. Facility physical limits such as power availability and energy consumption.

We believe that the expertise gained in working with many of the primary components provides us with uniquely well-informed view of the efficacy of the primary components on offer in the marketplace.

We further believe that this knowledge will help us make wise choices of which products to pursue for strategic relationships and which providers to potentially merge with or acquire. For smaller component providers, we believe that our publicly traded platform and our existing sales and marketing reach will make us an attractive partner.

In 2019, our revenue grew 60% year-over-year and we had our first ever cash flow positive year.

Despite the challenges brought on by the COVID-19 pandemic in the first half of 2020, we believe that our revenue growth in 2019 and then in the third quarter of 2020 through the second quarter of 2021 period validates our market opportunity and our business model.

We also recognized that the cost of being a small public company are substantial and require cash that could otherwise be used to sustain and grow with the business. There is only one solution to this issue, rapid revenue and margin growth.

We believe that we have growth opportunities, but we are capital constrained and must seek outside financing to pursue the growth we believe we can achieve. A capital raise is potentially dilutive to our existing shareholders and options holders, which includes our directors, officers, executives and all of our employees.

As such, our insiders’ interests are aligned with those of our external shareholders. And we do not take the prospect of dilution lightly. We do so with the firm conviction that with additional capital, we can create increased shareholder value. The company has not raised capital in over 3 years.

In that time, our management has operated the business with financial discipline, which included reducing headcount and deferring compensation as needed. In 2020, we focused particularly and successfully on reducing our fixed cost base. Despite this financial discipline, we achieve record revenue growth.

With more capital, we are confident that we can achieve much more. Uplisting to a national exchange will enhance our stock as a currency for both potential investors and for potential acquisition targets as well as enhancing our credibility in the eyes of potential customers. Uplisting will likely require a reverse split of our stock.

As you may know, on July 22, we conducted an annual meeting of our shareholders, which we believe is the first such annual meeting that the company has hosted since going public in 2014. We provided proxy materials to our shareholders of record in April and we conducted our initial meeting on May 28.

However, at the time of that meeting, we did not have enough votes on certain resolutions. So, we delayed the meeting until July 22 so that we could solicit more votes from our shareholders. At the July 22 meeting, several items were approved by the shareholders, which we reported on Form 8-K on July 23.

At this time, I will ask Brian to cover recent financial highlights from our second quarter as presented in the Form 10-Q and the associated earnings press release from August 10..

Thank you, Tony. We are excited to report that during the second quarter, we had our second best quarter in our history in terms of both revenue and adjusted net income, with $4.5 million and $353,000 respectively. Revenue increased 168% as compared to the second quarter of 2020 and an increase of 91% over the first quarter of 2021.

Adjusted net income increased 174% as compared to the second quarter of 2020 and an increase of 154% over first quarter 2021. On a year-to-date basis through June 30, 2021, our revenue was $6.9 million versus $3.5 million for the same period last year, or a 97% increase. Adjusted net loss was $297,000 year-to-date through June 30, 2021.

This compares to adjusted net loss of $1.2 million for the same period last year or a 75% decrease year-over-year. Our second quarter 2021 gross profit margin was 28.4% compared to 16.3% for the second quarter of 2020, an increase of 12.1 percentage points.

Year-to-date through June 30, 2021, our gross profit margin was 23.7% compared to 20.9% for the same period last year, or an increase of 2.8 percentage points. In the second quarter of 2021, our operating income was $116,000. This compares to an operating loss of $606,000 in the second quarter of 2020 or a 119% improvement.

Net income in the second quarter of 2021 was $265,000 as compared to a net loss of $614,000 in the second quarter of 2020 or a 143% improvement. Year-to-date through June 30, 2021, our operating loss was $570,000 compared to $1.6 million for the same period last year, or a 63% decrease.

Our net loss year-to-date through June 30, 2021 was $528,000 compared to a net loss of $1.6 million for the same period last year, or a 66% decrease. As of June 30, 2021, our cash, cash equivalents and restricted cash was $1.6 million compared to $2.3 million as of June – as of December 31, 2020.

We used $1.1 million and cash flow for our operating activities through the second quarter of 2021. Our second quarter 2021 bookings which we define as a customer order with a signed contract coupled with an initial customer deposit for approximately $1 million. This is net of $219,000 of cancellations.

This booking amount represents a 157% increase as compared to the second quarter of 2020 and a 126% decrease as compared to our first quarter and 2021. Our lower bookings in the second quarter when compared to that of the first quarter of 2021 is a result of several significant project timelines delaying into the second half of 2021.

In summary, our second quarter improvements as compared to both 2020 and first quarter of 2021 were a result of our continued execution of our organic growth strategy..

Thank you, Brian. The financial results just reported further reinforce the validation of our business model and our market opportunity within CEA. We are confident that our organic growth strategy is gaining traction in the market and will bear fruit in the second half of this year.

The Surna team greatly appreciates all of the support from our shareholders. This concludes today’s prepared marks and we will open the floor for questions..

Thank you. [Operator Instructions].

As we wait for people to enter the queue, I will field some questions received via e-mail and the webcast. First question, in previous presentations, there was an annual sales forecast of $20 million to $40 million in revenue.

Has that changed for 2021? Answer, we do not and have not provided sales forecasts, but we have previously cited revenue goals for the company and for this year. Our goal is around $15 million of organic revenue.

Question, the relationship with our RSX Enterprises was announced earlier this year, has that relationship been productive? Answer, our relationship with RSX has proven to be very productive and several substantial projects have already been realized. We expect this relationship to continue to grow and become even more fruitful for us.

Question, since the Anden partnership began, have any new dehumidifier products been developed or is Surna co-branding the current Anden product lineup? Answer, Surna has partnered with the Anden to supply Anden dehumidifiers incorporated into Surna design systems. This partnership does not include co-development.

Question, what was the outcome of the recent proxy voting at the annual meeting? Answer, several resolutions were passed, those being the election of our current directors, the appointment of our auditors our performance equity plan, stay on pay in the 3-year advisory on executive pay.

Question, what is the status of the proposed increase in common stock authorization and the reverse stock split? Answer, shareholders did not elect to authorize an increase of our common stock or to conduct a reverse split. Question, Surna has addressed its opportunities by updating and expanding its product portfolio.

What is Surna’s primary opportunity today? Answer, our primary opportunity and focus is on recurring revenue streams. We have just initiated a preventative maintenance program and are nearly ready to initiate a holistic environmental monitoring program. Finally, we are developing a parts and service business line.

That concludes the pre-submitted questions.

Operator, are there any questions from the lines at this time?.

There were no questions from the lines at this time..

Thank you. Then this concludes today’s conference call. Thank you for your continued interest in Surna..

An audio replay of this call will be available tomorrow on surna.com/investor-relations until August 30, 2021. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..