CEA Industries Inc. (BNC) Earnings Call Transcript & Summary

Welcome, everyone, to this session of our June 2025 Small Cap Conference. I'm Alex Hantman, and I serve as an equity research analyst here at Sidoti & Company. Today, we're pleased to be in conversation with CEO and Chairman, Tony McDonald of CEA Industries, ticker CEAD. During the fireside chat, please feel welcome to submit questions using the Zoom Q&A interface at the bottom of the screen. And with that, Tony, I'll turn it over to you for introductions.

Great. Thank you, Alex, and good morning, everyone, and thanks for attending our presentation. Today is our first investor conference since closing our acquisition of Fat Panda last week, and I'm very excited to share our news, and our updated investor deck with you. Our deck is available on our website or I think on this webinar as well. As a reminder, of course, I may be making forward-looking statements and full disclosure with respect to that is in the deck. So let me wind you back a little bit our history. CEA Industries goes back to 2006. The company went on to OTC as Surna Inc. And then uplisted to NASDAQ in 2022 as CEA Industries. Our historic business is our Surna subsidiary, which provides licensed mechanical engineering and sophisticated environmental control equipment to the indoor cultivation market, principally legal commercial-scale cannabis facilities throughout the U.S. and Canada. As that market declined, the Board sought new opportunities to grow our business. And after a lengthy search, we found a very attractive candidate in Fat Panda, which we acquired last week. As an integral part of the acquisition, we acquired all of Fat Panda's existing management team, principally their Co-Founder and President, Jordan Vedoya, who cofounded Fat Panda in 2013 and has been leading the company since that time. Jordan led Fat Panda's expansion to over 33 retail locations, generating CAD 38.5 million in revenue for fiscal year ended April 2024. Under his leadership, Fat Panda has more than doubled revenue and adjusted EBITDA from 2021 to 2024, and Jordan has overseen key acquisitions, established franchise agreements and remains an influential advocate in the vape industry. He's also active with the Canadian Vaping Association, which represents an advocates for more than 200 businesses nationwide. Jordan has a great story about how Fat Panda got started. In 2013, he and his cofounders were operating foster homes for at-risk youth. As lifelong smokers, he and the others wanted to encourage healthy positive habits in young people. That contradiction sparked a personal and professional shift. After exploring various smoking cessation tools without success, they discovered a small but passionate vaping community online. The products weren't widely available in Canada at the time, so they came to the U.S. to purchase their first kits. What struck me most wasn't just the product. It was the fact that for the first time in over a decade, didn't feel the urge to smoke cigarette. After seeing how quickly vaping helped them quit smoking, they recognized a broader opportunity. They wanted to help others transition away from traditional tobacco and believe they could do it in a way that combine product integrity, education and accessibility. So with $12,000 in savings, they opened their first store in Winnipeg. That initial location gross to over CAD 2 million in its first year, clear validation that they were addressing a real market need. Since then, Fat Panda has grown to 33 locations across Canada, built a proprietary product portfolio and developed a vertically integrated business model that gives the company strong operational control and consistent customer experience. Our acquisition of Fat Panda marks a significant milestone for CEA as we expand into the dynamic high-growth vape industry, which is benefiting from strong consumer demand. Fat Panda brings an established brand, experienced leadership and a highly profitable operating model that can be rapidly scaled with our access to capital and strategic support. Importantly, this acquisition exemplifies our commitment to identifying accretive opportunities that can unlock meaningful long-term value for our shareholders. I'd like to walk you through what this acquisition means for our company and why we believe we're well positioned for the future. CEA Industries now operates 2 distinct verticals, which include Fat Panda, a high-margin consumer platform in the regulated vape industry; and Surna, a facility design and equipment business for indoor and controlled environment agriculture facilities. While our strategic focus today is on accelerating consumer platform growth, we continue to evaluate the optimal path forward for Surna with capital discipline and shareholder value creation at the forefront. With 33 corporate-owned retail stores across Manitoba, Ontario and Saskatchewan, Fat Panda commands over 50% market share in the region. Its retail footprint is complemented by a comprehensive portfolio of products, including its own line of premium e-liquids manufactured in-house, along with a robust portfolio of trademarks and intellectual property. As one of Central Canada's first dedicated vaping product retailers, Fat Panda is focused exclusively on one thing, delivering high-quality vape products. This singular focus enabled them to build out a best-in-class catalog of hundreds of devices and a wide array of flavors, carefully curated to meet the needs of new users, seasoned customers and everyone in between. Their customer-first mindset is a core part of the company's DNA, considering factors like ergonomics, nicotine history and device familiarity and how they stock and serve. Turning to manufacturing. For over a decade, Fat Panda has developed proprietary formulations for their e-liquids and invested heavily in in-house production. These in-house products are exclusive to Fat Panda stores and select wholesale partners in markets where they don't have a retail presence. This has created stickiness with customers, strong brand equity and meaningful margin benefits. Their vertical integration extends into warehousing and logistics as well. Fat Panda's Winnipeg headquarters serves as the central distribution hub, handling weekly shipments to every store while supporting their e-commerce platform. Fat Panda's omnichannel presence is another major strength. In addition to in-store traffic, their national e-commerce platform continues to grow its loyal high repeat customer base. The operation is lean, run by a single employee and fully integrated into their centralized logistics system, creating operating leverage while ensuring a consistent brand experience. Let me take a step back and spend a moment on the category. Canada represents one of the most attractive global markets for nicotine vapor with strong per capita spending, leading penetration levels and accelerating category adoption. In 2023, Canada led the world in per capita vape spending and posted 13% year-over-year vapor growth, outpacing the global average of 8%. The market continues to exhibit strong fundamentals, high spend per user, a premium product mix and one of the highest vape penetration rates among developed markets, all of which point to a durable and highly valuable consumer base. These dynamics support a robust and expanding total addressable market for scaled operators like Fat Panda. On the regulatory front, Canada provides a supportive environment. The Tobacco and Vaping Products Act sets high standards for product quality, labeling, marketing and age restrictions. Fat Panda operates fully within these guardrails, turning what could be a headwind into a competitive moat. In fact, their alignment with regulation and ability to consistently meet these requirements is one of the reasons they've sustained such strong growth while others in the market have struggled. Let's touch now on the competition. Being the first mover gave Fat Panda a solid head start. They established their presence in a largely empty market back in 2013. And by the time competitors entered, the Fat Panda brand had already become synonymous with vaping in the region. In many cases, the only real competition to a Fat Panda store was the next Fat Panda store down the street. That said, they remain vigilant. Management constantly monitors 4 regional competitors with notable share and remains opportunistic about exploring partnerships, acquisitions or retail innovation where it makes sense. From a growth standpoint, we see multiple levers. First, there's clear white space to drive organic growth through retail expansion in underserved markets. Second, we are actively pursuing M&A opportunities to expand our geographic footprint and customer base. And third, we're optimizing the current store network by reinvesting in high-performing formats and improving operational efficiency across the board. The financials reflect this discipline. Based on preliminary and unaudited financials for fiscal year 2024, Fat Panda generated CAD 38.5 million in revenue, CAD 8 million in adjusted EBITDA and 39% gross margins. Revenue grew 14% year-over-year in fiscal '24. Operating expenses reduced 11% and net income increased by 126%. These are the kinds of trends we like to see, not just growth but profitable growth driven by sound fundamentals. We're incredibly excited about the synergies between Fat Panda and CEA Industries. Fat Panda has lacked the capital and resources to fully execute their plans and deliver on their growth objectives. And CEA brings the capital access and public company platform to help Fat Panda fully execute its growth objectives and deliver long-term shareholder value. We're also thrilled to welcome Jordan Vedoya and his entire experienced team to the CEA family. Jordan will continue to lead Fat Panda through this next phase of growth and his experience scaling the company over the last decade will be invaluable as we take this business to the next level. In short, this is exactly the kind of acquisition we set out to find, one that aligns with our strategy, enhances our financial profile and unlocks new pathways to growth. We look forward to providing updates as we execute on our plan and deliver unmatched value to our customers, partners and shareholders alike. And I have one final piece of exciting news to share. This morning, we issued a press release announcing our new ticker symbol, V-A-P-E, VAPE, which will be effective tomorrow morning. This concludes our prepared comments and open up for questions, Alex.

Great. Tony, thank you very much for giving us some very good background. So maybe I'll start with the recent news and start to try to understand why now? Why was it the right time to buy Fat Panda and to change the ticker to VAPE? And how does that sort of build upon where you were going to create future success?

Good question. What the Board and I saw was that the business that we were serving, the regulated cannabis market throughout the U.S. and Canada was essentially gotten the saturated beginning to slow down. In the U.S., you're not seeing new states coming online. So much of the growth that had driven and been exciting in the industry in the 2010s has kind of come to an end. And our business was -- the Surna business was principally capital equipment into new facilities. So they looked like diminishing opportunities for growth of that business. And so we looked around for, okay, what now? We have a public company with some cash, no debt, well managed with respect to our filings and a business that is perhaps leaning towards decline, okay? What are our growth opportunities? So we looked around at a whole bunch of things, and we found Fat Panda, which was very exciting, both financially and with its fundamentals and growth opportunities. And we see it as a platform for roll-up in the future.

Yes, great context. And I think that leads in. We have a number of questions about growth opportunities. So maybe we could start a little bit on geographic expansion. Are you thinking about coming from Canada into the U.S.? And how do we think about the sort of online versus offline growth opportunities?

Yes. Good question. For the near term, we will be principally focused on the Canadian market, not the U.S. market. And part of that's driven by the regulatory environment where vape is in an uncertain regulatory environment in the U.S., but it is in a much more established regulatory environment in Canada, where Health Canada regulates the products. And the provinces move around a little bit on the regulation, but it's fundamentally, it's a stable regulatory environment. So our focus will be in Canada, where we think there's plenty of opportunity to grow.

Makes sense. And in terms of product expansion, right, I think, what is more stable perhaps in the U.S., oral pouches and things like that. Is there any consideration around product expansion for you guys?

Certainly. We tend to be opportunistic in every way with the established platform that we have. So certainly, products, organic, inorganic growth, yes, we understand our mandate, which is to grow this company aggressively.

Makes sense. And could you talk a little bit -- you mentioned M&A and inorganic growth. So could you talk about the pipeline and just how you're thinking about what sorts of businesses might be a fit and build on your Fat Panda acquisition?

Sure. Well, what you find is that the industry up in Canada is perhaps unsurprisingly, highly fragmented. There are a lot of smaller operators, onesie, twosies, mom-and-pop type operations. There's a couple of larger ones, but by and large, they're pretty small. And what Fat Panda has been able to do is build what we think is probably the largest such company in Canada. And of course, what that gives you is the advantage of infrastructure and scale. And so the ability to have a more attractive cost base in that platform where you can add on either organically, continue to build out more stores or inorganically and add stores onto your platform, but at an improved cost base operationally, so you can harvest value from the incremental revenue and margin.

Got it. And could you talk a little bit about capitalization of some of these growth plans? Do you feel that you're well capitalized? Or how do you think about going forward?

I think that over time, we'll be interested in some more capitalization for sure. We need to take out a bridge note that we have in place here by the end of the year. And we have also announced in our 8-K that we'd be -- we may file an ATM, at-the-market offering, in the not-too-distant future. So depending on the opportunities that arise, we may well seek additional capitalization, but we can grow some through organic cash flow.

Noted. Maybe we could turn to Surna, right? So I think you have a history there. And could you give us a little bit more color around how you see that business continuing to grow? Or maybe you think about sort of spinning it off. But yes, some color around Surna plans.

Sure. The company -- Surna is down to a much lower cost base. We've actually reduced most of the employees that were in that business. There are several remaining. Oddly enough, it continues to -- it's had a pretty good year so far and has a nice pipeline of projects. But I would say that we will certainly be looking at that business from a strategic perspective and saying, is this really -- in our wheelhouse is the best use of our capital and management attention.

And is there any sort of synergy between the 2 businesses? Or is kind of integration pretty disparate at this point?

Yes, I think they serve completely different markets really. So there's really not much synergy there that would immediately come to mind.

Makes sense. Maybe we could talk a little bit about trends in the stock price. So I think, obviously, Fat Panda takes you in a very different direction. What do you think -- the Street might have underappreciated previously and maybe could look forward to in terms of some near-term milestones?

Sure. Well, over the last couple of years, we had announced that we were in a strategic review process. So I think the market rightly viewed us as, okay, figuring out where you're going to go now, recognizing that the market that we had been serving was perhaps lost some of its luster. And I think if we look at some of the folks who were in a similar -- serving a similar market, there are some pretty ugly outcomes accrued. And we reduced our spending, held on to cash as we were going through a strategic review and then have decided essentially to pivot in this direction.

Makes sense. And what do you think is sort of the stickiness for Fat Panda, right? You've made this acquisition. You've taken a fork in the road. Do you have a lot of same-store loyalty or customer retention models at work? Or is that something that you're going to develop over time?

Well, I think that's one of the things that's really attractive about Fat Panda is they've done such a great job with their branding. As we noted in the presentation, they had a big first-mover advantage. They were passionate advocates for the product, for people who were similarly situated themselves trying to get off of combustion cigarettes, the traditional cigarettes, and this was a product that added a lot of value to their lives, and they wanted to share that with others and did so very successfully. So they brought that. And then they were really good at expanding and they invested in the expansion of the company. And they also did a really great job. And one of my first impressions was you walk into the stores, and it gives you a bit of an Apple Store feel. It's clean, it's well lit. It's attractive retail layout, displays and the like. And so it gives you, you walk in, you have a -- it's a good feel when you walk in, nice folks behind the counter, friendly environment. So they've done a really good job at that. And I think that really gives them an advantage over time, which I think has been borne out in their results.

Yes, certainly. And I guess in terms of the quality of the revenue as well, right, is there sort of interest in trying to get folks involved with memberships? I've seen some interesting models, particularly for consumer brands like a Fat Panda and a near sort of recurring purchase model like this.

Yes. They've done a little bit of that. We'll be taking a look at that. There are restrictions around things you can do with respect to marketing in Canada, much as there are in the U.S. So within those bounds, there may well be opportunities for that, but we've not dug into that super hard just yet.

Okay. Maybe we're getting some more questions around sort of the regulatory environment. So maybe we could talk a little bit about those bounds. And what's sort of within the potential playbook, but what maybe you're not quite able to do in Canada or the U.S. at this time?

Sure. There -- I mean, well, for starters, it's an age-gated product. So you make sure that only people in the appropriate age can come in your stores. And the fact that the Fat Panda has been quite diligent about that has been borne out from their -- you can look it up on Health Canada's site, they've done a really good job at that. So staying in the bounds there and just staying in the general bounds of you can't go out there and market on a broader scale to folks. You can do it once people opt in on their app. So you could reach out to folks that way. The U.S., I'm less certain about the -- what you could do on the marketing side. We haven't really looked at that.

Got it. And most of the marketing that you're doing, is that in-house from the Fat Panda team? Or are those sort of third-party partnered sales that you're working through?

It's generally all in-house. And again, you're restricted. They're not buying billboards or broadscale ads. So you could -- the marketing they're doing is generated in-house. It's really what you need.

And are you able to talk a little bit about the sales that are sort of online versus offline? Basically, the e-commerce exposure of the business versus retail?

Yes. It's -- we think this is a vector for some pretty strong growth at minimal incremental costs. So we're particularly optimistic about what could be done in their e-commerce channel, where they put for some effort, but we think could be sharpened up as you compared to -- if you got to do a bricks-and-mortar play, yes, you can open a store and not a terrible cost. But certainly, it's less expensive to do it on an e-commerce basis, and they've built a pretty decent infrastructure, but we think that there's a considerable room to grow that as well.

And -- okay. So I think that was some great color online. And on the store side, right, are those -- are you committed to company-owned stores? Or are you also thinking about franchising or licensing or something like that?

Yes. They've had a mixed bag of experience on the franchise. They have done a couple of franchises. They don't have any franchises presently, but that is certainly something that we will look at again to say, okay, what did you learn? What worked and what didn't when you were -- when you did these previously. So it's certainly an option. Of course, it's capital lighter than your own stores. But for whatever reason, it hasn't been completely successful for them, okay, well, how come? And is this an avenue that we should pursue more aggressively?

Got it. That makes sense. We have another question here around the supply chain and sort of what's produced and manufactured in-house, so to speak, or contract manufacturing from the e-liquids to the vape products and sort of everything in between.

Except for their in-house product, which they manufacture there at their warehouse, where they have one of the few folks in Canada who has a license to do that, which is heavily regulated. They have a license to do that. Aside from that, it's all bought from larger scale vendors, some large companies that are in the space.

Got it. Okay. So for folks who are newer to the name, they're excited now that you've pulled the trigger on acquisition. They understand the margins and growth potential here. Could you talk a little bit about some of the moats for you guys to operate in and kind of preserve and continue your growth?

Yes. I think there's a couple come to mind right away. Again, you've got a company that's got a big first-mover advantage and has a really well-established name and presence and brand. So that gives you kind of a covering, if you will, in the marketplace. Second is the scale that they've been able to achieve. And so you've got that platform that is not running 1 store, but is running 33 stores and a substantial e-commerce operation. So you've got much better economies of scale that you can add incremental revenue on top of at a minimal incremental operational cost. So I think that's a pretty big advantage when you compare it to the other players in a highly fragmented industry. And third, of course, is -- as a public company, we have access to capital raising and stock to potentially make acquisitions. So I think 3 of those compared to the other differentiate us quite a good deal from the other players in that market.

Yes. And you also -- you have cash flows. So could you talk a little bit about kind of capital allocation for growth versus any thoughts you might have around a dividend or other distribution?

Yes. I think we've been pretty clear throughout. We're not -- dividends are not on the radar while -- certainly while we want to be in a high-growth phase.

Makes sense. Well, we're almost out of time. So maybe we could end with kind of a brief summary of the value proposition for folks who they might be looking across vape and e-cigarette opportunities, and they might be newer to you guys and excited.

Sure. I think it's -- what makes this interesting is strong fundamental growth in the market with an established player that's in a position to grow and acquire in a highly fragmented market. That has the infrastructure, the experience, the management capability with the existing management team and now with the capital access from a PubCo to be able to do that aggressively. That's really the bet we're making.

Makes sense. Well, great overview. And with that, we are out of time. So I'd like to thank you, Tony, for sharing the CEA Industries' story with us. And I'll also thank everybody listening for spending time with us today.

Yes. Thanks, everybody, for showing up.