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Income Taxes
 3 Months Ended
Jul. 31, 2025
Income Tax Disclosure [Abstract]  
Income Taxes

Note 14 – Income Taxes

 

For the period from June 7, 2025 to July 31, 2025 (Successor), the period from May 1, 2025 to June 6, 2025 (Predecessor) and the three months ended July 31, 2024 (Predecessor), the Company’s earnings before income taxes, income tax expense and effective income tax rate were as follows:

 

 

   Successor   Predecessor   Predecessor 
   Successor   Predecessor 
(thousands, except tax rate data)  Period June 7 through July 31   Period from May 1 through June 6,   Three Months Ended July 31, 
   2025   2025   2024 
(Loss) profit before income taxes   (5,908,498)   20,602    863,970 
Income tax (benefit) expense   (60,101)   1,589    155,547 
Effective income tax rate   1.02%   7.81%   18.00%

 

The change in the effective tax rate for the period June 7, 2025 to July 31, 2025 (Successor), compared to the predecessor period for May 1, 2025 to June 6, 2025 (Predecessor), and the three months ended July 31, 2024 (Predecessor), was primarily due to the impact of non-deductible transaction costs and the valuation allowances on the legacy business of CEA Industries Inc. United States operations.

 

The Company completed the acquisition of Fat Panda Ltd. and related entities, tax as Canadian corporations, during the quarter. For Canadian federal income tax purposes, the transaction was treated as a stock acquisition with no step-up in tax basis. As a result, the goodwill and intangible assets recorded for financial reporting purposes are not deductible for tax purposes. This created a deferred tax liability of $1.2 million, which is included in the Company’s net deferred tax position.

 

As of July 31, 2025, the Company has U.S. federal and state net operating losses (“NOLs”) related to the legacy CEA Industries, Inc. United States operations of approximately $33,054,000, of which $11,196,000 will expire, if not utilized, in the years 2034 through 2037, however, NOLs generated subsequent to December 31, 2017 do not expire but may only be used against taxable income to 80%. In addition, pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, use of the Company’s NOLs carryforwards may be limited in the event of cumulative changes in ownership of more than 50% within a three-year period. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited.  The securities sales we completed in September 2021 and February 2022 and the Private Placement Offering discussed in Note !7 Subsequent Events below will need to be evaluated for determination of any “ownership change” that we may have undergone during a determination period. If an ownership change has occurred, our ability to use our net operating loss carryforwards is materially limited and it would harm our future post tax results by effectively increasing our future tax obligations. 

 

 

CEA Industries Inc.

Notes to Condensed Consolidated Financial Statements

July 31, 2025

(in US Dollars except share numbers)

(Unaudited)

 

The Company must assess the likelihood that its net deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management’s judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance related to CEA Industries Inc. United States operations as of July 31, 2025. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its net deferred tax assets in the foreseeable future related to its United States operations. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of such valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans. Should the actual amounts differ from the Company’s estimates, the carrying value of the Company’s deferred tax assets could be materially impacted.

 

The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. The Company records uncertain tax positions on the basis of a two-step process in which: (i) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with the related tax authority. The Company currently has recorded a $200,000 tax reserve for uncertain tax positions in Canada.

 

On July 4, 2025, the President signed H.R. 1, the “One Big Beautiful Bill Act,” into law. The legislation includes several changes to federal tax law that generally allow for more favorable deductibility of certain business expenses beginning in 2025, including the restoration of immediate expense of domestic R&D expenditures, reinstatement of 100% bonus depreciation, and more favorable rules for determining the limitation on business interest expense.

 

The Act also includes certain changes to the US taxation of foreign activity, including changes to foreign tax credits, GILTI, FDII, and BEAT, amongst other changes. These changes are generally effective for tax years beginning after Dec. 31, 2025.

 

The Company is currently assessing the impact of the One Big Beautiful Bill but does not expect the passing of this legislation will have a material impact on the tax provision.