CEA Industries Inc.

CEA Industries Inc. (the "Company") operates primarily in the Controlled Environment Agriculture (CEA) industry, focusing on providing environmental control and other technologies and services. The CEA industry aims to optimize horticultural resources like water, energy, space, capital, and labor for efficient and productive indoor agriculture and vertical farming. The Company's customers are predominantly cannabis cultivators, but it also serves facilities growing other crops such as leafy greens, microgreens, ethnic vegetables, small fruits, bell peppers, cucumbers, and tomatoes. The CEA industry faces challenges including high energy costs, water usage and conservation issues, evolving waste removal regulations, inflationary pressures, and labor shortages. For cannabis growers specifically, there are additional challenges such as rigorous quality standards and declining cannabis prices [Item 1].

The Company's core business model involves generating revenue through comprehensive services and equipment for the complete lifecycle of indoor agriculture facilities. This includes designing and engineering facilities, providing infrastructure technologies, advising on installation, offering training and start-up support, and providing preventative and ongoing maintenance services. The revenue stream is primarily derived from supplying products, services, and technologies to commercial indoor facilities, historically those growing cannabis. The Company offers both proprietary products and value-added reseller (VAR) products [Item 1].

The Company provides a comprehensive range of service solutions, including facility design and budgeting, equipment selection and specification, equipment installation advisory, and preventative maintenance services. Its product offerings include air handling equipment and systems, air sanitation products, LED lighting, and benching and racking solutions for indoor cultivation [Item 1]. The Company's proprietary intellectual property includes registered trademarks for its core Surna brand in the United States, European Union, and Canada, as well as the Surna logo and the combined Surna logo and name in the United States. It also recently secured trademark registration for its proprietary SCA platform, SentryIQ, in the United States and Canada [Item 1].

For the fiscal year ended December 31, 2024, the Company reported total revenue of $2,803,470 [Item 8, Consolidated Statements of Operations]. The gross loss for the year was $219,624 [Item 8, Consolidated Statements of Operations], resulting in a gross loss margin of 7.8% [Item 7]. Operating loss for the period was $3,172,084 [Item 8, Consolidated Statements of Operations]. The net loss for the year was $3,145,943 [Item 8, Consolidated Statements of Operations], leading to a basic and diluted loss per common share of $4.22 [Item 8, Consolidated Statements of Operations]. Cash and cash equivalents stood at $9,452,826 [Item 8, Consolidated Balance Sheets] as of December 31, 2024. The Company had no indebtedness [Item 7], total accounts payable and accrued liabilities of $550,477 [Item 8, Consolidated Balance Sheets], deferred revenue of $343,790 [Item 8, Consolidated Balance Sheets], and a current portion of operating lease liability of $135,651 [Item 8, Consolidated Balance Sheets]. Working capital as of December 31, 2024, was $9,064,000 [Item 7].

Comparing year-over-year, revenue decreased by $4,108,000, or 59%, from $6,910,951 in 2023 to $2,803,470 in 2024 [Item 7]. The gross profit margin shifted from a positive 7.8% in 2023 to a gross loss of 7.8% in 2024, a decrease of 15.7 percentage points [Item 7]. Net loss increased by $234,000, from $2,911,551 in 2023 to $3,145,943 in 2024 [Item 7]. Adjusted net loss increased by $348,000, or 13%, from approximately $2,698,000 in 2023 to approximately $3,046,000 in 2024 [Item 7]. Cost of revenue decreased by $3,346,000, or 53%, from $6,368,872 in 2023 to $3,023,094 in 2024 [Item 7]. Operating expenses decreased by 16% from $3,495,224 in 2023 to $2,952,460 in 2024 [Item 7]. Cash and cash equivalents decreased by $3,055,425 from $12,508,251 in 2023 to $9,452,826 in 2024 [Item 8, Consolidated Statements of Cash Flows].

During the reported period, the Company entered into an acquisition agreement on February 7, 2025, to acquire Fat Panda Ltd., a group of Manitoba corporations engaged in the manufacture, distribution, and retail sale of e-cigarettes, vape devices, and e-liquids in Canada [Item 1, Recent Developments]. The purchase price for Fat Panda is CAD$18,000,000 (approximately US$12,600,000), payable in cash, securities, and seller loans [Item 1, Recent Developments]. The Company also implemented a one-for-twelve reverse stock split, effective June 7, 2024, which proportionately adjusted all outstanding options, restricted stock units, and common stock purchase warrants [Item 2, Reverse Stock Split]. The Company also experienced delays in equipment receipt due to supply chain disruptions, delaying revenue recognition [Item 7].

The Company anticipates completing the acquisition of Fat Panda in the first half of fiscal year 2025 [Item 1, Recent Developments]. This acquisition is expected to include all assets of Fat Panda, such as retail outlet leases, intellectual property, inventory, government licenses and permits, franchise agreements, manufacturing facilities, and supply agreements. The current management and staff of Fat Panda are expected to continue employment, and the sellers will enter into non-competition agreements [Item 1, Recent Developments]. The purchase price of CAD$18,000,000 (approximately US$12,600,000) will be paid through an initial cash payment of CAD$13,900,000, issuance of 39,000 shares of common stock with an agreed aggregate value of CAD$700,000 (approximately CAD$18.00 per share), and notes to sellers totaling CAD$2,060,000. A CAD$100,000 due diligence deposit will also be released. The Company expects to borrow a portion of the cash purchase price, secured by Fat Panda's assets [Item 1, Recent Developments].

One of the notes issued to sellers, in the principal amount of CAD$1,030,000, is convertible into the Company's common stock at a conversion rate of USD$19.00 per share [Item 1, Recent Developments]. At closing, CAD$1,375,000 of the cash purchase price will be held in escrow for 120 days for working capital adjustment, and CAD$1,240,000 will be held in escrow for 18 months for possible indemnity claims. Additionally, the purchase price will be reduced by CAD$112,500, and this amount will be held in escrow for 18 months for employee obligation claims under Canadian employment law [Item 1, Recent Developments].

The Company continues to experience softening demand in its current CEA markets and an inability to replace its project backlog. As a result, it has taken steps during 2023, 2024, and early 2025 to reduce operating costs and general and administrative expenses to align with observed industry activity levels. These cost reductions have been partially offset by higher professional fees related to the potential acquisition [Item 7]. The Company plans to continuously monitor its contract terms and may add clauses to adjust pricing if inflation and price increase pressures impact its ability to perform contracts and maintain margins [Item 7].

The Company expects to need additional funds in the longer term for business plan development, including the Fat Panda acquisition and other strategic assets, as well as for ongoing operating expenses. The precise amount and timing of funding needs depend on demand for products and services, product development success, customer payment timing, working capital management, and normal payment terms with customers and suppliers [Item 1A].

The Company currently intends to retain future earnings, if any, to repay indebtedness and fund its business, and does not anticipate paying any cash dividends on its common stock in the foreseeable future [Item 5]. Any future decision on dividends will be at the Board's discretion, considering business, operating results, financial condition, cash needs, expansion plans, and legal or contractual limitations [Item 5].

The Company faces several material risks, including its historical limited revenues and working capital deficit, with operating results fluctuating significantly. Converting its contract backlog into revenue is uncertain and inconsistent, dependent on customer financing, permits, and facility construction, and there is no assurance that all contracts will generate revenue or profit [Item 1A]. The Company has material weaknesses in internal controls over financial reporting, stemming from a lack of sufficient accounting expertise, inadequate segregation of duties, and insufficient controls over spreadsheet accuracy, which could adversely affect financial reporting accuracy and investor confidence [Item 1A]. Supply chain disruptions, international trade disputes, tariffs, and inflationary pressures on product and labor costs are expected to continue, potentially harming margins and the ability to fulfill orders [Item 1A]. Reliance on a limited number of customers and suppliers poses a significant risk, as the loss of a primary customer or inability to find replacement suppliers could materially impact financial results [Item 1A]. Equipment failures or poor performance from third-party manufacturers could lead to downtime, reduced revenue, increased credit default risk for customers, and potential breach of contract or warranty claims against the Company [Item 1A]. The CEA industry is highly competitive, with new entrants and larger competitors potentially impacting the Company's ability to secure new projects and maintain gross margins [Item 1A]. The Company's future success depends on attracting and retaining top talent, and the loss of key sales, managerial, or executive personnel could significantly harm its business strategy [Item 1A]. Cybersecurity risks, including data breaches and system disruptions, could lead to reduced revenue, increased expenses, reputational damage, and potential liability to clients [Item 1A]. The Company's ability to use its U.S. federal and state net operating losses (NOLs) of approximately $31,985,000 [Item 13] to offset future taxable income may be limited by Section 382 of the Internal Revenue Code if an "ownership change" occurs, effectively increasing future tax obligations [Item 1A]. The ongoing acquisition of Fat Panda involves risks such as disruption of existing business, distraction of management, increased indebtedness, and the possibility that anticipated benefits may not be fully realized or may take longer than expected [Item 1A].

Management's message to shareholders emphasizes the Company's current focus on selling environmental control and other technologies and services to the Controlled Environment Agriculture (CEA) industry, primarily serving cannabis cultivators, while also pursuing opportunities in other crop cultivation. A key strategic priority is the acquisition of Fat Panda Ltd., a Canadian e-cigarette and vape products manufacturer and retailer, with the acquisition anticipated to be completed in the first half of fiscal year 2025 [Item 1]. This acquisition, valued at CAD$18,000,000 (approximately US$12,600,000), is expected to diversify the Company's operations and revenue streams [Item 1]. Another strategic priority is to manage the challenging business environment in the CEA industry, characterized by softening demand and an inability to replace project backlog, by continuing to reduce operating costs and general and administrative expenses [Item 7]. Management also highlights the ongoing need for additional funds to support business development and operations, including the Fat Panda acquisition, and acknowledges the difficulty in predicting future revenue and cash flow due to market uncertainties [Item 1A]. The Company intends to retain future earnings for debt repayment and business funding, and does not anticipate paying cash dividends in the foreseeable future [Item 5].