CEA Industries(CEAD) - 2024 Q4 - Annual Report

Part I Item 1. Business CEA Industries offers CEA tech for cannabis, diversifying into e-cigarettes, facing industry challenges and regulatory risks - CEA Industries focuses on environmental control and technology solutions for the Controlled Environment Agriculture (CEA) industry, primarily serving cannabis cultivators[26][27][162] - The company is acquiring Fat Panda Ltd., a Canadian e-cigarette, vape device, and e-liquid manufacturer and retailer, for CAD$18,000,000 (approximately US$12,600,000), diversifying its business outside the CEA industry[29][32][540] - The CEA industry faces challenges including high energy costs, evolving waste regulations, inflationary pressures, labor shortages, and declining cannabis prices, leading to a decline in company activity and sales in 2024[28][42][169] Overview Surna Cultivation Technologies provides environmental control and tech solutions for the CEA industry, primarily serving cannabis cultivators - CEA Industries, through Surna Cultivation Technologies LLC, provides environmental control and other technologies and services to the Controlled Environment Agriculture (CEA) industry, aiming to optimize horticultural resources[26] - The company offers air handling equipment, air sanitation products, LED lighting, and benching/racking solutions, primarily to customers cultivating marijuana[162][163][16] Recent Developments – Acquisition of Fat Panda CEA Industries plans to acquire Fat Panda Ltd., a Canadian e-cigarette and vape product manufacturer and retailer, for CAD$18 million - CEA Industries has an agreement to acquire Fat Panda Ltd., a leading e-cigarette, vape device, and e-liquid manufacturer and retailer in central Canada, with 33 retail locations and an online platform[29][30][540] - The purchase price is CAD$18,000,000 (approximately US$12,600,000), payable in cash, securities (39,000 shares of common stock valued at CAD$700,000), and seller loans (CAD$2,060,000 in notes)[32][542] - The acquisition is subject to conditions including audited financial statements, due diligence, government approvals, lease continuation, and securing financing for a portion of the cash purchase price, with completion anticipated in the first half of fiscal year 2025[33][34][543][544] Our Current CEA Services and Equipment Solutions The company provides comprehensive services and equipment for the entire lifecycle of indoor agriculture facilities - The company aims to provide comprehensive services and equipment for the complete lifecycle of indoor agriculture facilities, including design, engineering, infrastructure technologies, installation advisory, training, and ongoing maintenance[35][36] Our CEA Customers and Prospects Customers are primarily new entrants to the CEA industry, including multi-facility operators, but not the largest publicly traded MSOs - Customers are primarily new entrants to the CEA industry, including multi-facility operators (MFOs), but the company currently does not have projects with the largest publicly traded Multi-State Operators (MSOs)[38] Competition in the CEA Market The company competes with various engineering and HVACD firms, differentiating with crop-specific climate control systems, facing increasing market competition - The company competes with national and local MEP engineering firms, HVACD contractors, and traditional HVACD equipment suppliers, differentiating itself with crop-specific climate control systems and engineering services for CEA facilities[39] - Increased competition is observed as more competitors enter the CEA market, potentially impacting the company's ability to secure new projects and requiring acceptance of lower gross margins[39] Intellectual Property The company protects its intellectual property through patents, trademarks, licenses, trade secrets, and contractual restrictions - The company relies on a combination of patent and trademark rights, licenses, trade secrets, and contractual restrictions to protect its intellectual property, including registered trademarks for its Surna brand and SentryIQ platform[40] Employees The company currently has 6 full-time employees and utilizes consultants, with future hiring dependent on business growth - The company currently has 6 active full-time employees and may utilize consultants and independent contractors, with future hiring dependent on business needs and growth[41] US Government Regulation in Relation to Cannabis The company operates in the federally illegal cannabis industry, facing evolving regulations and financial challenges due to federal prohibitions - The company provides services to the cannabis industry, which is federally illegal as a Schedule I controlled substance, despite state-level legalization for medical or recreational use[43][44] - Evolving federal enforcement policies and ongoing legislative considerations (e.g., MORE Act, States Reform Act, SAFER Banking Act) could significantly impact the cannabis industry and, consequently, the company's business[45][46][47] - Federal laws prohibit most federally chartered banks from accepting funds from marijuana businesses, leading to reliance on state-chartered banks and credit unions, and creating financial challenges for the industry[49][118] Item 1A. Risk Factors Investing in CEA Industries' securities involves significant risks, including limited revenues, working capital deficits, fluctuating operating results, supply chain disruptions, intense competition, and regulatory challenges in the cannabis industry - The company has historically had limited revenues, operated with a working capital deficit, and experienced fluctuating operating results, requiring external financing for growth and continued operations[56][57][58] - Significant risks include the inability to convert contract backlog into revenue due to customer financing, permitting, and construction delays, as well as supply chain disruptions and inflationary pressures affecting costs and margins[56][61][62] - The company's reliance on the cannabis industry exposes it to federal illegality, anti-money laundering laws, civil asset forfeiture, and difficulties for customers in accessing banking services and deducting business expenses under Section 280E of the Code[56][97][105][108][118][122] Summary Of Risk Factors Relating to our Current CEA Operations Key risks for CEA operations include limited revenues, working capital deficits, fluctuating results, backlog conversion challenges, cannabis regulatory exposure, and internal control weaknesses - Key risks for CEA operations include limited revenues, working capital deficit, fluctuating operating results, challenges in converting contract backlog to revenue, exposure to the cannabis industry's regulatory environment, and material weaknesses in financial reporting controls[56] Risks Relating to Our Current CEA Business The company's limited revenues necessitate additional financing, and inconsistent backlog conversion, along with internal control weaknesses, pose significant business risks - The company's limited revenues necessitate additional financing for growth and operations, which may not always be available, potentially leading to shareholder dilution or increased debt vulnerability[57][58][59] - Conversion of backlog into revenue is inconsistent and dependent on customer factors like funding, permits, and facility construction, with no guarantee of profitability even with increased customer base or project size[62] - Material weaknesses in internal controls over financial reporting, including insufficient accounting expertise, inadequate segregation of duties, and reliance on unverified spreadsheets, could adversely impact financial reporting accuracy and investor confidence[64][65] Risks Related to the Cannabis Industry The cannabis industry's federal illegality in the U.S. poses significant risks, including enforcement actions, financial service access difficulties, and regulatory uncertainties - Cannabis remains illegal under U.S. federal law, posing a risk that strict enforcement could prevent the company from executing its business plan and lead to significant losses from its cannabis industry clients[97][99][103] - The company is subject to anti-money laundering laws and civil asset forfeiture risks, and its