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SURNA INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

May 15, 2014

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 Form 10-K, 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.

Liquidity and Capital resources

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.

On April 1, 2014, the Company commenced a Private Placement in the form of a 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 shares of common stock of the Company 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. Through May 13, 2014, the Company has raised $584,000. The conversion of the Notes will result in additional dilution to existing shareholders.

There is limited historical financial information about us upon which to base an evaluation of our performance. We are in a start-up stage of operations and through March 31, 2014 have not generated significant revenues and are subject to risks inherent in the establishment of a new business enterprise, including limited capital resources. As noted above, we have commenced selling a Private Placement for up to $5,000,000. Additionally, the Company has generated sales contracts totaling $642,000 through May 5, 2104. If the Company is not able 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.

As of December 31, 2013, our total current assets were $4,409 and our total current liabilities were $2,641,766, hence a working capital deficit of $2,637,357.

As of March 31, 2014, our total current assets were $61,746 and our total current liabilities were $2,653,427, hence a working capital deficit of $2,591,681.

Results of Operations



We are a start-up stage corporation and through March 31, 2014 have not generated or realized significant revenues from our business operations. To meet our initial need for cash we initially raised money from our public offering. Through March 31, 2014 our only other source for cash was investments by loans from our officers, shareholders or others in our company. As indicated above the Company has commenced the sale of a Private Placement for up to $5,000,000 and has generated sales contracts totaling $642,000 through May 12, 2014. If the Company is not able 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.

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Sale of a subsidiaries, merger and change in operating segments

Sale of Subsidiaries



Previously Surna Inc. had four operating subsidiaries: Surna Media Inc. ("Surna Media"), Surna Networks, Inc. ("Surna Networks",) Qoo Games Limited ("Qoo") and Trebor Resource Management Group, Inc. ("Trebor"). Surna Media's principal business is the development of web and mobile games and social networks. Surna Network's principal business is telecommunications services, IT support services and open-source software development. Qoo was intended to operate as the publisher of mobile games, including the iOS and Android operating systems. Trebor is a party to a Memorandum of Understanding ("MOU") with RMA Holdings, an entity formed under the laws of the Philippines ("RMA"). RMA and associated companies are in the mining and smelting business.

Surna Networks had been established to develop and provide a range of information technology and network services for potential customers, including game companies inside and outside of the PRC, but its business had focused solely on wholesale carrier services utilizing VoIP telecommunications, which is also referred to as International Simple Resale ("ISR"). Results of the ISR business were disappointing, and we did not foresee it being self-supporting or profitable without further significant investment. Upon further review we determined that it is not relevant to our core business or future plans, and that the best strategy was the sale or winding-up of this business line. On March 27, 2012, Surna Inc. sold Surna Networks Inc, for a total sales price of US$1.

Qoo Games Limited was incorporated in Hong Kong on February 21, 2012. It was intended that this company operate as the publisher of mobile games, including the iOS and Android operating systems, but this restructuring did not take place. Surna Media disposed of Qoo Games on January 24, 2014 at the sales consideration of HK$1 (par value of the shares) and there were no assets, liabilities or any transactions for Qoo Games during its existence.

Trebor is a party to a Memorandum of Understanding ("MOU") with RMA Holdings, an entity formed under the laws of the Philippines ("RMA"). RMA and associated companies are in the mining and smelting business with existing assets and operating permits for mineral extraction and refining in the Philippines. Effective March 25, 2014, we completed the issuance of a dividend of all of our ownership in Trebor Resource Management Group, Inc. ("Trebor"), a wholly owned subsidiary, to our shareholders, resulting in Trebor becoming a separate entity.

Surna Media, a wholly owned subsidiary, had been established to develop web and mobile based games and social media networks. Surna Media has total assets of $326 and total liabilities of $2,644,997. On May 14, 2014, the Company entered into a binding Letter of Intent to sell Surna Media to a combination of prior officers, directors and others. The sales price is $1.00 and the assumption of all liabilities of Surna Media. The Company has reported these assets and liabilities as held for sale. The sale is expected to close in the second quarter.

Merger



On March 26, 2014 we entered into a Merger Agreement with Safari Resource Group, Inc. ("Safari"), a Nevada Corporation, whereby we (Surna) become the sole surviving corporation of said Merger. It is our intention that: (i) the Merger shall qualify as a tax free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended, and related sections thereunder; and the parties intend this Agreement to qualify as a "plan of reorganization" within the meaning of Treasury Regulation Sections 1.368-2(g) and 1.368-3(a), and (ii) the Merger shall qualify as a transaction in securities exempt from registration or qualification under the Securities Act of 1933, as amended, and under the applicable securities laws of each state or jurisdiction where the SURNA Security Holders reside. The Merger was effective on March 31, 2014 and has been accounted for as among entities under common control.

Change in Operating Segments



On March 31, 2014, the Company merged with Safari Resource Group, Inc. ("Safari"). In merging with Safari we acquired a patented "Airstream" reflector which can be utilized in commercial indoor gardening activities and the right, title and interest to a product pipeline with numerous intellectual properties currently in development for use in the legal marijuana industry. On May 2, 2014, the Company filed a provisional patent application covering enhancements to its proprietary "Airstream" curved reflectors used in grow lights. The Airstream is a technological breakthrough designed to enable growers to increase production and ensure uniform growth rates and consistent quality plants, all while conserving energy.

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On March 31, 2014 we entered into a binding Membership Interest Purchase Agreement ("Purchase Agreement") with Hydro Innovations, LLC ("Hydro"), a Colorado limited liability company specializing in climate control systems and holds a provisional patent pending #61/940578 air conditioning condenser attachment for high efficiency liquid chillers (the "Chiller Patent"), the Trademarked "Heat Shield" brand and intellectual properties utilized in the legal marijuana industry. Since signing the Purchase Agreement, the Company has worked closely with Hydro Innovations and has already begun the consolidation and integration of the two companies' operations and financial management and control systems in anticipation of a successful transaction closing. The closing is expected to occur in the second quarter.

As a result of the Safari merger, divestiture of Surna Media and anticipated Hydro acquisition, the Company's thrust, and sole current reporting segment will be in the sale of equipment and related support services to the legal cannabis market. With numerous pieces of intellectual property, R&D, manufacturing and distribution out of its Boulder, Colorado headquarters, the Company is ramping up rapidly to gain market share and solidify a leading position in the highly fragmented legal cannabis equipment industry.

Mission and Strategy



Surna's mission is to: (1) acquire intellectual property and scalable operating companies and (2) develop, produce and sell equipment for the legal marijuana industry with a focus on disruptive technology, equipment and related support services.

The Company represents a pure play on explosive growth in the legal marijuana industry, while being agnostic as to the escalating proliferation of regulated, commodity cannabis growers & sellers, winners or losers; its business model excludes the production or sale of marijuana or marijuana-infused products. Fueled by powerful trends of increasing states' legislation favoring regulated medical and recreational marijuana markets, ArcView industry research projects the highly fragmented $2.3 billion US cannabis industry will increase over four-fold to $10.2 billion by 2018.

Surna is acquisitive, and our long term goal is to anchor this company by dominating the infrastructure, growing and support side of the global cannabis industry. By aggregating advanced technologies, IP and scalable operating companies to bring new technology to the cannabis marketplace while contributing to its dramatic growth, we advance our potential to enter other related, highly profitable industry sectors with a core base in a growth industry.

Surna seeks to acquire and develop disruptive technologies that cater to the legal cannabis industry. Our pending acquisition of Boulder, Colorado-based Hydro puts us at the forefront of the industry. It is a leading designer, manufacturer and distributor of proprietary, state-of-the-art indoor climate control systems such as chillers, lights, reflectors and irrigation systems for cannabis and other indoor agriculture markets.

Following six years of R&D, Hydro deploys advanced proprietary technologies into its growing line of products. Hydro's climate control "Bank Chillers" are priced significantly less than the competition (primarily conventional HVAC) with energy efficiency reducing consumption by about 30%. That is disruptive technology, and Hydro's rapidly growing revenue proves the market is hungry for innovation.

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Factors affecting results of our operations

The majority of our operations are carried out in the US and Canada. The Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments of each state. Currently, there are twenty states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical or recreational uses for cannabis. Many other states are considering legislation to similar effect, in addition to those that have adopted or are proposing to adopt recreational use of marijuana. As of the date of this writing, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law. However, several memorandums issued by the federal government assert current positions that there will be no federal intervention in marijuana activities when conducted under strict compliance with state or local laws. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our customers to invest in or buy products from us that may be used in connection with cannabis. As a result, active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company.

We currently depend on contract manufacturers to produce our products. These manufacturers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the units on a timely basis. Our manufacturers may also have to obtain inventories of the necessary parts and tools for production. Any change in manufacturers to resolve production issues could disrupt our ability to fulfill orders. Any change in manufacturers to resolve production issues could also disrupt our business due to delays in finding new manufacturers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders would harm our reputation and would potentially cause us to lose our market.

We need to obtain significant funding to successfully continue our business. We currently have no committed sources of large amounts of capital, and there can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all. Furthermore, the sale of additional equity or convertible debt securities may result in additional dilution to existing stockholders. If adequate additional funds are not available, we may be required to delay, reduce the scope of or eliminate material parts of the implementation of our business strategy. This limitation would impede our growth and could result in a contraction of our operations, which would reduce our operating income, product development activities and future business prospects.

Factors affecting our Common Stock

The limited trading market for our common stock results in limited liquidity for shares of our common stock and significant volatility in our stock price. Our shares of common stock are quoted on the OTCBB and OTCQB, but no assurance can be given that an active public trading market can be sustained. The OTCBB and OTCQB are generally regarded as a less efficient and less prestigious trading market than other national markets. We can provide no assurance regarding if or when our common stock will be quoted on another more prestigious exchange or market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of our common stock.

The market price of our stock is likely to be highly volatile because for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on our stock price. As a result of the lack of trading activity, the quoted price for our common stock on the OTCBB and OTCQB are not necessarily a reliable indicator of its fair market value.

Our officers, directors and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 75% of our common stock. As a result of such ownership these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of our company or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of our company. This, in turn, could have a negative effect on the market price of our common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.

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On April 1, 2014, the Company commenced selling a Private Placement in the form of a 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 shares of common stock of the Company 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. Through May 13, 2014, the Company has raised $584,000. The conversion of the Notes will result in additional dilution to existing shareholders.

Changes in Directors and Officers

On July 17, 2013, Richard Clarke gave notice of his intention to resign as Director and Secretary, as well as a director and officer with any subsidiaries of the Company. His resignation was accepted by the Company as of July 17, 2013. In resigning Mr. Clarke had no disputes over our operations, policies, or practices.

On July 19, 2013, Charlie Rodriguez was appointed as a Director of the Company and Robert G. Clarke was appointed Director of the Company as well as President, Treasurer and Secretary and Chief Financial Officer. Mr. Clarke replaced Man-Chor Poon as Chief Financial Officer, principal financial officer and principal accounting officer. Mr. Clarke was selected for the foregoing positions as a result of his experience with public company operations.

On July 19, 2013, Ms. Cherry Ping-Wai Lim gave notice of her intention to resign as Director and principal executive officer. Her resignation was accepted by the Company as of July 19, 2013. In resigning Ms. Lim had no disputes over our operations, policies, or practices.

On March 24, 2014 Robert Grinberg was appointed as a Director of the Company.

On March 25, 2014, Tom Bollich was elected as Secretary of the corporation by unanimous written consent of the Board of Directors.

On March 26, 2014, Robert G. Clarke, Charlie Rodriquez and Robert Grinberg resigned their positions as directors of SURNA, Inc. and Robert Clarke resigned as President and Chief Executive Officer. In resigning Mr. Clarke, Rodriguez or Grinberg had no disputes over our operations, policies, or practices.

Also on March 26, 2014 Tom Bollich, Tae Darnell and Douglas McKinnon were elected by written consent of the majority of the shareholders as Directors. The members of the Board of Directors shall serve in his/her respective capacity until the next annual shareholder meeting until his/her successor shall have been elected and qualified.

On March 27, 2014, Tom Bollich was elected as Chief Executive Officer and Chairman of the Board of the corporation by unanimous written consent of the Board of Directors.

On April 3, 2014, Tae Darnell was elected as Vice President & General Counsel.

On April 16, 2014, Robert G. Clarke resigned his position as Chief Financial Officer. In resigning Mr. Clarke had no disputes over our operations, policies, or practices.

On April 16, 2014, Douglas Mckinnon was elected as Chief Financial officer.

The Company has not entered into any compensation arrangements with Mr. Bollich, Mr. Darnell and Mr. McKinnon as of the date of this report.

Taxation Nevada



Surna Inc. is incorporated in Nevada and as such is required to pay an annual fee to the Nevada Secretary of State of $165. Nevada has no corporate income taxes.

8 Federal



Surna, Inc. is a C-corporation. The Company has approximately $1,104,302 in Net Operating Loss carried forward for Federal income tax purposes expiring in years 2029 through 2033. The Company has not filed its past years' federal corporate income tax returns and may be subject to penalties for non-compliance.

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 Dollars ("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 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.

Going Concern



The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company currently has $2,591,683 working capital deficit (current liabilities exceeds current assets), minimal sources of recurring revenue and has generated cumulative net losses of $2,829,215 during the period from inception through March 31, 2014.

In the course of its development activities, the Company has sustained and continues to sustain losses. There is limited historical financial information about us upon which to base an evaluation of our performance. We are in a start-up stage of operations and have had not generated significant revenues through March 31, 2014 and are subject to risks inherent in the establishment of a new business enterprise, including limited capital resources. We have commenced selling a Private Place for up to $5,000,000 and have generated sales contracts totaling $642,000 through May 12, 2014. If the Company is 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. Through May 12, 2014, the Company has raised $584,000 from the Private Placement.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on its ability to meet its 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 the Company successfully obtaining additional ongoing financing, the Company has 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 the Company's independent registered public accounting firm relating to the December 31, 2013 consolidated financial statements states that there is substantial doubt about the Company's ability to continue as a going concern.

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Three Months Ended March 31, 2014 and March 31, 2013

Our revenues for the period ended March 31, 2014 were $5 which was from our online games. The net loss from operations for the period ended March 31, 2014 was $53,607 of which includes $3,333 for depreciation and $50,279 for general and administration expense. The revenues from continuing operations for the three months period ended March 31, 2013 were $22 and the net loss from continuing operations for the three months period ended March 31, 2013 was $92,169 of which includes $3,333 for depreciation and $88,858 for general and administration expense. The decrease in net loss for 2014 compared with the same period in 2013 was due to decrease in general and administrative expenses.


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Source: Edgar Glimpses