Good afternoon, ladies and gentlemen and welcome to the Surna Inc. Q3 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..

Thank you and good afternoon. Welcome to Surna's third quarter 2021 earnings call. My name is Tony McDonald. I'm the Company's Chairman and CEO and I'm joined today by our Chief Financial Officer, Brian Knaley. Before we begin, please be advised this call may contain statements of a forward-looking nature relating to future events.

These forward-looking statements are subject to the inherit uncertainties in predicting future results and conditions.

These statements reflect our current beliefs and a number of important factors could cause actual results to differ materially from those expressed in this call, including the risk factors set forth in our Form 10-K, which we filed with the SEC in March.

Please refer to our SEC filings for more detailed discussion of the risks and uncertainties associated with our business. Please note that we filed our quarterly report on Form 10-Q and issued a press release announcing third quarter 2021 results earlier today. These documents can be found on our website at www.surna.com/investor-relations.

If you would like to be on our e-mail distribution list, send an e-mail to investor@surna.com. While we will highlight some key information contained in the press release, the primary purpose of this call is to provide an update on our recently updated strategic and organic growth plans and our key operating metrics.

On May 4thof this year, we filed a press release that's updated our organic growth strategy which consists of three components, new markets, new products and services and new trading. The market we have historically served is for indoor cannabis cultivation, which is forecast to continue to grow aggressively for the foreseeable future.

Well, that is still a strong in growing market in which we are well known, respected and continue 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 very readily applied to this market.

And indeed, we have served a few such facilities over the years. In the first quarter, we entered into a contract with a non-cannabis facility, and then proposals out with several others, and we believe that we can be successful serving this market. During the second and third quarters of this year, we increased our marketing efforts to this sector.

And we are already seeing a response to these efforts. New products and services. We continue to expand our product and service range from exclusively environmental control to include most of the 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, the matter [ph] 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've 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 eco chill products and the addition of our preventive maintenance services.

Early in the third quarter, we expanded our product offerings with the addition of our EnviroPro Mini Air Handler, line air handler line, Benching, and Racking options and the introduction of our architectural design services that allows us to reach potential clients earlier in the design 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 a rapidly expanding product and service lines, which we believe will allow us to increase the revenue from any given project.

Finally, do [ph] name to better reflect all of our capabilities and product and service offerings and to make the company more readily identifiable on social media. We are now operating as Surna Cultivation Technologies,.

As a reminder to everyone to reach our goal, we have set out three key pillars of our corporate strategy for growing the company in increasing shareholder value. First, pursue the aggressive organic growth.

Second, seeks strategic relationships, mergers and acquisitions to add to our existing business and finally, pursue an uplifting to international exchange and seek additional growth capital.

Pursuing additional aggressive organic growth, 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 percent compound annual growth rate for the foreseeable future.

Our primary vertical market cannabis cultivation facilities has been joined by the similarly rapidly growing urban indoor farming market to create two market opportunity segments that we are positioned to serve. Next, seeking strategic relationships, mergers and acquisitions to add to our existing business.

We enjoy wide brand recognition in the indoor cultivation industry. Because of our over 15 year longevity in the market, and the large number of cultivation projects we have served including over 200 projects for commercial facilities.

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 they low tie, but the environmental conditions 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, CO2 dosing, monitoring and alarms, built 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 a 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 [Technical Difficulty] think sales and marketing reach will make us an attractive partner. Finally pursuing enough listing to a national exchange and the growth supporting capital raise.

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 third quarter of 2021 period validates our market opportunity and our business model.

We also recognizes that the costs of being a small public company are substantial, and require cash that could otherwise be used to sustain and grow 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 include our officers, directors, 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 three years.

In that time, our management is operating the business with financial discipline, which included reducing headcount and deferring compensation as needed. In 2020, and again in 2021, we focused particularly and successfully on reducing our fixed cost base. Despite this financial discipline, we achieved 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 stuff.

As you may know, on July 22nd, 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 annual or 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 shelters. 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 Knaley to cover recent financial highlights from our second quarter as presented in the associated earnings press release released earlier today..

Thank you, Tony. Our third for demonstrated continued sales traction due to our execution against our organic growth strategy. Our bookings, which we will discuss a little later were the second highest in the company history and represent a significant increase over the second quarter.

Our revenue which was $3.7 million in the third quarter, represents a 127% increase over the third quarter of last year. Revenue was impacted in the quarter by disruptions in our supply chain, which delayed shipments into the fourth quarter.

Our third quarter 2021 gross profit margin was 20.2% compared to 32.2% for the third quarter of 2020, a decrease of 12 percentage points. The primary drivers for the decrease in year-over-year margin wherever reversal of our excess and obsolete inventory reserved and a credit received from a vendor in 2020.

Neither of these impacts recurred in 2021 If the prior year's gross profit is adjusted for these two items, we have actually improved by two percentage points year-over-year in the quarter. Operating loss for the quarter was $443,000. This represents a 57% increase as compared to the prior year.

Net loss was $408,000 in the third quarter, this represents a 51% increase as compared to last year. Adjusted net loss was $363,000 in the third quarter. This represented a 95% increase as compared to third quarter of last year.

The year-over-year comparison for operating loss, net loss and adjusted net loss were all negatively impacted in the third quarter of a non recurring benefits that came through our gross profit in 2020. On a year-to-date basis through September 30 2021, our revenue was $10.6 million versus $5.1 million for the same period last year or 106% increase.

Year-to-date through September 30 2021, our gross profit margin was 22.4% compared to 24.5% for the same period last year, or a decrease of 2.1 percentage points. Our year-to-date gross profit was impacted by the non-recurring credits received from vendors related to [indiscernible] in 2020.

Adjusting for those items, our gross profit margin would be flat as compared to prior year. Operating loss through September 30, 2021 was $1 million. This compares to an operating loss of $1.8 million for the same period last year were 45% decrease year-over-year. Net loss was $936,000 through September 30, 2021.

This compares to a net loss of $1.8 million for the - million dollars for the same period last year, or 49% decrease year-over-year. Adjusted net loss was $660,000 year-to-date through September 30, as compared to adjusted net loss of $1.4 million for the same period last year or 52% decrease year-over-year.

Our third quarter of 2021 bookings which we defined - which we define as a customer order with a signed contract coupled with an initial customer deposit were approximately $5.6 million and is net of $500,000 of cancellations.

This booking amount represents the 32% increase as compared to the third quarter of 2020 and a 509% increase as compared to our second quarter in 2021. As previously stated, this quarters booking amount represents the second highest in the company's history.

As of September 30, 2021, or cash, cash equivalents and restricted cash was $2.3 million as compared to $2.3 million as of December 31, 2020. We used $1.8 million in cash flow for our operating activities through the third quarter of 2021.

During the quarter, we completed a pipe financing and issued a series B preferred shares, and that proceeds were approximately 2.6 million after fees and an original issue discount. In summary, our third quarter improvements as compared to 2020 were 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 continue to 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 remarks, 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 by email and the webcast..

Question, your recent press release or preventative maintenance mentioned you have signed contracts.

Why is this important for you in your customers?.

Answer. We believe that our customers will benefit from our preventative maintenance for maximizing their uptime in optimal growth environment. For us, it is critical that we continue to support our customers throughout the project from concept to grow. We view these maintenance contracts as part of this continual..

Question.

Earlier in your remarks and in previous quarters, you state that you want to uplift, can you provide an update of where Surna is in these efforts?.

Answer. In this quarter we completed our pipe financing. This was a necessary first step to uplisting, it is still our intention to pursue an uplifting to national exchange..

Question. E remarks you stated that your supply was disrupted in the quarter.

How much from both the dollar perspective and timing has this disruption impacted you in the third quarter?.

Answer. Well, we won't go into specifics on the dollar front, we believe that the delays experienced in the third quarter from a revenue perspective will push into fourth quarter and possibly into the first quarter of 2022.

Operator, do we have any questions?.

[Operator Instructions][ And the first question today is coming from Mark Schweiss. Mark your line is live. Please announce your affiliation and pose your question..

Hi. I am just a private investor.

My question is has Surna ended its relationship with grill [ph] advisors?.

Mark, this Tony McDonald. Yes At this time we have..

Thank you..

Thanks for calling..

Thank you. There were no other questions in the queue at this time..

Thank you. This then concludes today's conference call. We look forward to presenting our fourth quarter and annual results next year. We thank you for your continued interest Surna..

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