CitroTech Inc. 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following Management’s Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this Annual Report. The Management’s Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Annual Report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors including, but not limited to, those noted under “Risk Factors” in this Annual Report. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report, except as required by U.S. federal securities laws. 10 Table of Contents Overview The Company’s U.S. subsidiary, Mighty Fire Breaker LLC (“MFB”) is currently engaged in developing solutions to support the resolution of the insurance crisis in the western United States by use of it’s EPA approved CitroTech products. MFB has developed and patented addition intellectual property in this regard, such as a system for commercial properties and homes that puts fire inhibiting buffer zone around a property blocking blown in embers from igniting. The technology continues to work dry which unlike other products allows for early deployment and evacuation of people. It also has developed a job site trailer allowing for the fire protection of the property during the construction phase and the fire hardening of the inner construction and installation of our patented system during that phase. Hopefully allow the owner to get insurance to start the project. The company also is continuing its USDA approval process. It has sold products to various fire departments and continues to demonstrate market its products. Results of Operations The following summary of our results of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2023, and 2022, which are included herein. Our results of operations for the years ended December 31, 2023 and 2022 are summarized below: Years Ended December 31, 2023 2022 Change % Revenue $ 520,645 $ 62,732 $ 457,913 730 % Operating expenses 10,618,583 2,981,291 7,637,292 256 % Other expense 4,328 255 4,073 1597 % Net loss from continuing operations $ 10,102,266 $ 2,918,814 $ 8,248,944 283 % Income from discontinued operations - 13,016 (13,016 ) (* ) Loss on disposition of digital currency and digital currency assets - (2,030 ) 2,030 (* ) Net income from discontinued operations $ - $ 10,986 $ (10,986 ) (* ) Net loss $ (10,102,266 ) $ (2,907,828 ) $ (7,194,438 ) 247 % (*) not applicable. Revenue The Company’s revenue is associated with revenue from Mighty Fire Breaker, LLC (“MFB”) which was formed in April 2022. Revenue increased $458,000 over fiscal year 2022 due to MFBs EPA approval and the filing of additional patents. With the EPA approval, MFB started the marketing phase of the company’s evolution. MFB started selling directly to fire departments and launched its proactive wild-fire defense systems and is gaining momentum with commercial customers, along with attempting to influence the insurance industry to the benefit of consumers. The net loss for 2023 increased by $7.2 million as compared to 2022 primarily due to the increase in operating expenses, largely from stock-based compensation awards. 11 Table of Contents Operating Expenses Years Ended December 31, 2023 2022 Change % Cost of revenue $ 193,876 $ 56,338 $ 137,538 244 % Amortization and depreciation 248,510 803 247,707 (* ) General and administration 322,860 256,686 66,174 26 % Marketing 148,289 96,553 51,736 54 % Management compensation 180,000 2,100,000 (1,920,000 ) (91 %) Professional fees- related party 8,899,596 188,036 8,711,560 (* ) Professional fees 625,452 282,875 342,577 121 % $ 10,618,583 $ 2,981,291 $ 7,637,292 256 % (*) not relevant disclosure, due to large amount. Cost of revenue Years Ended December 31, 2023 2022 Change % Cost of inventory $ 101,978 $ 21,431 $ 80,547 376 % Freight and shipping 14,495 8,674 5,821 67 % Consulting and advisory 30,100 21,569 8,531 40 % Royalty and sales commission 47,304 4,664 42,640 914 % $ 193,877 $ 56,338 $ 137,539 244 % Cost of revenue increased 137,000 or 244% over fiscal year 2022, due to the start of MFB operations in April 2022 and having a full year of operations for MFB in 2023. The increase in 2023, is primarily due to increase in cost of inventory and royalty and sales commissions. Cost of inventory consists of the sales of product, related supplies and direct testing our CitroTech product and various components required to for installation of Mighty Firese Breaker proactive fire systems. Cost of inventory increased in 2023 primarily due to an increase in product sales and supplies by $44,000 and increased direct CitroTech testing of $37,000. Royality and sales commissions increased in 2023 from more revenue. The Company recognizes an allocated portion of consulting and direct labour costs associated with our revenue. Amortization and depreciation The increase in amortization and depreciation is due to the commencement of amortization on our intangible assets during fiscal year 2023. Management compensation Management compensation decreased in 2023 as compared to 2022, as the Company recorded $2,100,000 related to our Chief Executive Officer (CEO) for the issuance of 70,000,000 restricted stock awards. 12 Table of Contents Professional fees The increase in professional fees in 2023 of $9 million over 2022, is primarily due to the issuance of 1,200,000 shares of Convertible Series C Preferred Stock to a related party for consulting services rendered to the Company from October 2021 through July 2023. The Company valued the 1,200,000 shares of Convertible Preferred Stock, as if converted to 24,000,000 shares of common stock, using the quoted stock price of the Company’s common stock at approval date (November 1, 2022), resulting in a value of $8,640,000. On November 1, 2022, the Company’s Board of Directors approved the issuance of 250,000 shares of common stock to each of the two independent directors for their board services in support of the Company. During the year ended December 31, 2023, the Company valued the 500,000 shares of common stock at the market value of the Company’s common stock at approval date for the amount of $180,000. Other expense Other expense consists of interest expense. Income from discontinued operations For 2022, income from discontinued operations of $13,016 was the result of the net income from the operations of crypto mining and the disposition of crypto mining which the Company implemented a plan to divest its crypto mining operations to focus its resources on the MFB acquisition. The loss on disposition of digital currency and digital currency assets of $2,030 was the result of a loss on disposition of the Company’s digital currency assets, including equipment and digital currency. Liquidity and Capital Resources December 31, December 31, 2023 2022 Change Cash $ 549,755 $ 55,434 $ 494,321 Current Assets $ 1,218,056 $ 170,319 $ 1,047,737 Current Liabilities 1,617,785 1,060,918 556,867 Working Capital (Deficiency) $ (399,729 ) $ (890,599 ) $ 490,870 The increase in working capital in 2023, was primarily the result of an increases in cash of $494,00, inventory of $116,000, accounts receivable of $427,000 and prepaid expenses of $11,000 offset by an increase in due to related parties of $410,000, promissory note of $120,000, convertible note of $19,000 and current portion of operating lease liability of $41,000 and a reduction in accounts payable and accrued liabilities of $33,000. As of December 31, 2023 and 2022, the current assets consisted of cash of $550,000 and $55,4000, inventory of $230,000 and $115,000, accounts receivable of $427,000 and $0, and prepaid expenses of $11,000 and 240, respectively. As of December 31, 2023 and 2022, the current liabilities consisted of accounts payable and accrued liabilities of $55,000 and $87,000, due to related parties of $1.3 million and $900,000, promissory note of $120,000 and $0, convertible note of $54,000 and $35,000, and current portion of operating lease liability of $80,000 and $39,000, respectively. 13 Table of Contents Cash Flows Years Ended December 31, 2023 2022 Cash (used in) operating activities $ (1,211,764 ) $ (708,450 ) Cash (used in) Investing Activities $ (4,015 ) $ (5,349 ) Cash provided by financing activities $ 1,710,100 $ 763,764 Net Change in Cash $ 494,321 $ 49,965 Cash Flows from Operating Activities We have not generated positive cash flows from operating activities. For 2023, net cash flows used in operating activities was $1.2 million, consisting of a net loss of $10 million, reduced by stock-based compensation of $9 million, non-cash lease expenses of $71,000, amortization and depreciation of $249,000 and increased by net changes in operating assets and liabilities of $396,000. For 2022, net cash flows used in operating activities were $708,000, consisting of a net loss of $3 million, reduced by stock-based compensation of $2.1 million, loss on disposition of digital currency and digital currency assets of $2,000, impairment loss on digital assets of $6,000, non-cash lease expense of $45,000, depreciation of $16,000 and reduced by an increase in changes in operating assets and liabilities of $31,000. Cash Flows from Investing Activities Cash flows from investing activities was from the purchase of equipment. Cash Flows from Financing Activities For 2023 financing cash flows, consisted of $308,000 received from a related party, $908,000 from issuance Convertible Series C Preferred Stock, $500,000 from stock subscriptions, $120,000 from promissory notes and repayments of $125,000 to a related party. For 2022, financing cash flows, consisted of $784,000 received from related parties, $35,000 from convertible note and repayments of $56,000 to a related party. Contractual Obligations Lease Agreements The Company has one lease classified as an operating lease for an office and warehouse purpose. The following table outlines maturities of our lease liabilities as of December 31, 2023: Year ended December 31, 2024 $ 85,792 2025 50,862 Thereafter - 136,654 Less: Imputed interest (6,471 ) Operating lease liabilities $ 130,183 Going Concern The accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally accepted in the United States, and (ii) assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated significant income to date. The Company is subject to the risks and uncertainties associated with a business with no substantive revenue, as well as limitations on its operating capital resources. These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. In light of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise capital and generate revenue and profits in the future. 14 Table of Contents Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements. Our most critical accounting policies and estimates relate to the following: ● Revenue Recognition ● Incremental borrowing rate for Right of Use Assets ● Share based compensation Revenue Recognition Revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied. Our performance obligation generally of products used for lumber products for fire prevention. Revenue is recognized at a point in time, that is which the risks and rewards of ownership of the products transfer from the Company to the customer. All of our performance obligations under the terms of contracts with our customers have an original duration of one year or less. Incremental borrowing rate for Right of Use Assets As the Company’s operating leases typically do not provide an implicit rate, the Company estimates its incremental borrowing rate. The assessment of the Company’s incremental borrowing rate involves judgment regarding the cost of borrowing funds on a collateralized basis over a similar term and in a similar economic environment. Share-Based Compensation The Company accounts for employee and non-employee stock awards under ASC 718, Compensation – Stock Compensation, whereby equity instruments issued to employees for services are recorded based on the fair value of the instrument issued and those issued to nonemployees are recorded based on the fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable. Equity grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service. Off-balance sheet arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a “smaller reporting company,” this item is not required. 15 Table of Contents