CitroTech Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements. The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. We caution that the factors described herein, and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our unaudited financial statements are stated in United States Dollars (USD) and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report. In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States Dollars and all references to “common shares” refer to the common shares in our capital stock. As used in this quarterly report, the terms “we”, “us”, “our” and “our company” mean General Enterprise Ventures, Inc. General Overview General Enterprise Ventures, Inc., was originally incorporated under the laws of the State of Nevada on March 14, 1990. When used in these notes, the terms “GEVI,” “Company,” “we,” “us” and “our” mean General Enterprise Ventures, Inc. and all entities included in our unaudited consolidated financial statements. In January 2021, Board of Directors of the Company approved redomiciling the Company in Delaware. On March 31, 2021, the Company formed General Entertainment Ventures, Inc. in Delaware as a wholly owned subsidiary of the Company (“GEVI”). The purpose of the formation of GEVI was to merge the Company into GEVI pursuant to Section 251(g) of the General Corporation Law of the State of Delaware. On April 10, 2021, after approval by the board of directors and shareholders of the Company, the Company was merged into GEVI pursuant to an Agreement and Plan of Merger dated as of the same date. GEVI is the accounting and legal acquiror of the Company. On June 3, 2021, after approval by the board of directors and shareholders of the Company, the Company was redomiciled to the State of Wyoming. On October 11, 2021, after approval by the board of directors and shareholders of the Company, the Company was renamed General Enterprise Ventures, Inc., in the State of Wyoming. 30 Table of Contents Corporate Changes Effective June 25, 2024, the Company formed and organized a wholly owned subsidiary, GEVI Insurance Holdings Inc., an Ohio corporation (“GEVI Insurance”), to enter the wildfire insurance markets utilizing the Company’s flame retardant and flame suppression product. Effective February 21, 2025, the Company formed MFB Insurance Company, Inc., a Hawaii corporation (“MFBI”) and organized it as a wholly owned subsidiary of GEVI Insurance to act as a captive insurance company to enter the wildfire insurance market. MFBI was formed to act as a captive insurance company to reinsure real property protected with the Company’s CitroTech product. MFBI is not currently able to reinsure real property. On July 8, 2025, the Company filed Articles of Amendment of the Company’s Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Wyoming for a 1-for-6 reverse stock split (the “Reverse Stock Split”) of the issued and outstanding shares of the Company’s Series A Preferred Stock (the “Series A Preferred”) and the Company’s Common Stock (the “Common Stock” ). The Board of Directors of the Company believes that the Reverse Stock Split is an effective means by which to increase the minimum bid price of the Company’s Common Stock proportionately by reducing the number of outstanding shares of Common Stock and put the Company in a position to uplist to the New York Stock Exchange American. In connection with filing the Amendment, the Company filed an Issuer Company-Related Action Notification with the Financial Industry Regulatory Authority (“FINRA”). FINRA approved the Reverse Stock Split on August 27, 2025, to be effective on August 28, 2025 (the “Effective Date”). On the Effective Date, each six (6) shares of the Company’s Series A Preferred and each six (6) shares of the Company’s Common Stock issued immediately prior to the Effective Date was reclassified and combined into one (1) share of Series A Preferred and one (1) share of Common Stock, respectively. No fractional shares were issued and, in lieu thereof, any holder of less than one (1) share of Series a Preferred or one (1) share of Common Stock was entitled to receive one whole share of the Series A Preferred or the Common Stock of the Company, respectively. The Reverse Stock Split will affect all shares of the Company’s Series A Preferred and Common Stock outstanding immediately prior to the Effective Date of the Reverse Stock Split. In addition, the Reverse Stock Split caused a reduction in the number of shares of Common Stock issuable upon the conversion of the Company’s Series C Convertible Preferred Stock outstanding immediately prior to the effectiveness of the Reverse Stock Split. Results of Operations The following summary of our results of operations should be read in conjunction with our unaudited interim financial statements for the three and nine months ended September 30, 2025 and 2024, which are included herein. The Company is in the early stages of developing and commercializing its product lines. Historically, the Company has focused on securing patents and obtaining various accreditations. To date, the Company’s commercialization efforts have relied on a limited number of customers primarily for testing and initial adoption of its CitroTech products and delivery systems. The Company currently does not have an established retail product line or a significant recurring customer base. As a result, period-over-period comparisons of operating results may not be indicative of future performance. The following summary of our results of operations should be read in conjunction with our audited financial statements for the three and nine months ended September 30, 2025 and 2024, which are included herein. Our results of operations for the three months ended September 30, 2025 and 2024 are summarized below: Three Months Ended September 30, 2025 2024 Change % Revenue $ 288,212 $ 107,042 $ 181,170 169 % Operating expenses 4,525,910 668,405 3,857,505 577 % Other expense 3,691,510 93,875 3,597,635 3,832 % Net loss $ (7,929,208 ) $ (655,238 ) $ (7,273,970 ) 1,110 % 31 Table of Contents Revenue The Company’s revenue is associated with revenue from MFB Ohio which acquired intellectual property to fire suppression in April 2022. During the three months ended September 30, 2025, the revenue increased $181,170 from the three months ended September 30, 2024, largely due to the adoption of our technology by the marketplace, including the sale of homebased wildfire defense systems, commercial and fire department chemical sales, and directly spraying residential properties due to the wildfire concerns. Our revenues consisted of the following: Three Months Ended September 30, 2025 2024 Products sale $ 91,598 $ 68,542 Product installation service 196,614 38,500 $ 288,212 $ 107,042 Product installation services commenced in the second quarter of 2024. Our revenues from significant customers for the three months ended September 30, 2025 and 2024, are as follows: Three months ended September 30, 2025 2024 Number of customers (more than 10% revenue) 6 4 Total revenue of top 5 customers 79.6 % 82.1 % We do not have major sales from recurring customers for the three months ended September 30, 2025 and 2024. Operating Expenses Three Months Ended September 30, 2025 2024 Change % Cost of revenue $ 575,603 $ 165,437 $ 410,166 248 % Amortization and depreciation 90,054 63,647 26,407 41 % General and administration 349,403 130,008 219,395 169 % Advertising and marketing 232,569 142,797 89,772 63 % Payroll and management compensation 2,437,089 25,000 2,412,089 9648 % Professional fees 841,192 141,516 699,676 494 % Total operating expenses $ 4,525,910 $ 668,405 $ 3,857,505 577 % The increase in operating expenses was primarily attributed to increases in cost of revenue, professional fees and payroll and management compensation. 32 Table of Contents Cost of revenue Three Months Ended September 30, 2025 2024 Change % Cost of inventory $ 494,144 $ 98,637 $ 395,507 401 % Freight and shipping 15,665 1,171 14,494 1,238 % Consulting and advisory-related party - 5,800 (5,800 ) (100 %) Royalty and sales commission-related party - 20,456 (20,456 ) (100 %) Rent expense 65,794 39,373 26,421 67 % Total cost of revenue $ 575,603 $ 165,437 $ 410,166 248 % During the three months ended September 30, 2025, the cost of revenue increased over the three months ended September 30, 2024, primarily due to an increase in cost of inventory and rent expense. Cost of inventory consists of product costs, direct labor, related supplies and direct testing of our CitroTech product and various components required to for installation of Mighty Fire Breaker proactive wildfire defense systems. Cost of inventory increased during the three months ended September 30, 2025, primarily due to an increase in labor, product sales and supplies from increased sales. Freight and shipping relate to costs for shipping products to customers. Consulting and advisory services are to a related party company for services related to product installations. The Company recognized an allocated portion of consulting and direct labor costs associated with our revenue as royalty and sales cost of revenue during 2024. In March 2025, the Company entered into a new management contract and is no longer paying for consulting, advisory and royalty fees. Rent expenses are warehouse rent expenses. The increase in rent expense is primarily because the Company leased a larger commercial space for office, retail and warehousing from April 2025. Amortization and depreciation Amortization and depreciation expenses are an amortization of patents and a depreciation of vehicle, and furniture and equipment. General and administrative General and administrative expenses are office, rent, travel, insurance, website, IT and other office related expenses. For the three months ended September 30, 2025, the Company incurred increased expenditures on our website and IT development and travel as well as general office and insurance expenses from expansion of operations. Advertising and marketing The increase in advertising and marketing during the three months ended September 30, 2025, over the three months ended September 30, 2024, is primarily due to support revenue growth. Professional fees The professional fees during the three months ended September 30, 2025, primarily included various professional fee for accounting and audit related to SEC filing, legal on patents and other consulting services in 2025. The professional fees during the three months ended September 30, 2024, primarily included accounting and audit related to SEC filing, legal on patents and other consulting services in 2024. The increase in professional fees during the three months ended September 30, 2025, over the three months ended September 30, 2024, is primarily due to an increase in consulting fees. In addition, on August 19, 2025, the Company withdrew the registration statement, as a result, the Company expensed deferred offering costs. 33 Table of Contents Payroll and management compensation During the three months ended September 30, 2025, management compensation primality included stock-based management compensation of $1.8 million to our management and cash payments of $379,000 to our management, and payroll to our employees of $240,000. During the three months ended September 30, 2024, there was management compensation of $25,000. Other Expenses For the three months ended September 30, 2025 and 2024, the other income and expenses consisted of $1.3 million and $94,000 interest expenses related to convertible notes payable issued in 2025 and 2024, respectively, change in fair value of derivative liability related to convertible notes payable issued in 2025 and 2024 of $1.7 million gain and $0, respectively, and loss on settlement of debt from conversion of debt of $4.1 million and $0, respectively. Settlement of debt in 2025 is conversion of convertible notes issued in 2025. Net loss The net loss for the three months ended September 30, 2025, increased by approximately $7.3 million as compared to the three months ended September 30, 2024 primarily due to the increase in operating expenses and other expense offset by the increase in revenue. Our results of operations for the nine months ended September 30, 2025 and 2024 are summarized below: Nine months ended September 30, 2025 2024 Change % Revenue $ 1,945,232 $ 738,729 $ 1,206,503 163 % Operating expenses 12,659,025 4,844,042 7,814,983 161 % Other expenses 20,022,838 977,039 19,045,799 1949 % Net loss $ (30,736,631 ) $ (5,082,352 ) $ (25,654,279 ) 505 % Revenue The Company’s revenue is associated with revenue from MFB Ohio which acquired intellectual property to fire suppression in April 2022. During the nine months ended September 30, 2025, the revenue increased $1.2 million from the nine months ended September 30, 2024, largely due to the adoption of our technology by the marketplace, including the sale of homebased wildfire defense systems, commercial and fire department chemical sales, and directly spraying residential properties due to the wildfire concerns. Our revenues consisted of the following: Nine months ended September 30, 2025 2024 Products sale $ 1,142,865 $ 672,829 Product installation service 802,367 65,900 $ 1,945,232 $ 738,729 Product installation services commenced in the second quarter of 2024. 34 Table of Contents Our revenues from significant customers for the nine months ended September 30, 2025 and 2024, are as follows: Nine months ended September 30, 2025 2024 Number of customers (more than 10% revenue) 1 3 Total revenue of top 5 customers 37.9 % 95.5 % We do not have major sales from recurring customers for the nine months ended September 30, 2025 and 2024. Operating Expenses Nine months ended September 30, 2025 2024 Change % Cost of revenue $ 1,599,255 $ 437,637 $ 1,161,618 265 % Amortization and depreciation 241,700 190,247 51,453 27 % General and administration 872,109 388,746 483,363 124 % Advertising and marketing 489,673 450,777 38,896 9 % Payroll and management compensation 5,410,210 50,000 5,360,210 10,720 % Professional fees 4,046,078 3,326,635 719,443 22 % Total operating expenses $ 12,659,025 $ 4,844,042 $ 7,814,983 161 % The increase in operating expenses was primarily attributed to increases in cost of revenue and payroll and management compensation. Cost of revenue Nine months ended September 30, 2025 2024 Change % Cost of inventory $ 1,315,378 $ 233,362 $ 1,082,016 464 % Freight and shipping 21,724 9,321 12,403 133 % Consulting and advisory-related party 4,000 16,200 (12,200 ) (75 %) Royalty and sales commission-related party 91,290 83,192 8,098 10 % Rent expense 166,863 95,562 71,301 75 % Total cost of revenue $ 1,599,255 $ 437,637 $ 1,161,618 265 % During the nine months ended September 30, 2025, the cost of revenue increased over the nine months ended September 30, 2024, primarily due to an increase in cost of inventory, rent and royalty and sales commissions. Cost of inventory consists of product costs, direct labor, related supplies and direct testing of our CitroTech product and various components required to for installation of Mighty Fire Breaker proactive wildfire defense systems. Cost of inventory increased during the nine months ended September 30, 2025, primarily due to an increase in product sales and supplies from increased sales. Freight and shipping relate to costs for shipping products to customers. Consulting and advisory services are to a related party company for services related to product installations. Royalty and sales commissions increased in the nine months ended September 30, 2025, from more revenue. The Company recognized an allocated portion of consulting and direct labor costs associated with our revenue as royalty and sales cost of revenue in 2024 and during the first quarter of 2025. In March 2025, the Company entered into a new contract and there is no longer consulting and advisory and royalty. 35 Table of Contents Rent expenses are warehouse rent expenses. The increase in rent expense is primarily because the Company leased a larger commercial space for office, retail and warehousing from April 2025 and the cancelation of one of our warehouse leases in May 2025. Amortization and depreciation Amortization and depreciation expenses are an amortization of patents and a depreciation of vehicle, and furniture and equipment. General and administrative General and administrative expenses are office, rent, travel, insurance, website, IT and other office related expenses. For the nine months ended September 30, 2025, the Company incurred increased expenditures on our website and IT development and travel as well as general office and insurance expenses from expansion of operations. Advertising and marketing The increase in advertising and marketing during the nine months ended September 30, 2025, over the nine months ended September 30, 2024, is primarily due to support revenue growth. Professional fees The professional fees during the nine months ended September 30, 2025, primarily included stock-based compensation of $2.4 million to a related party consultant (TC Special Investments, LLC (“TCSI”)) and various professional fees for accounting and audit related to SEC filings, legal on patents and other consulting services in 2025. The professional fees during the nine months ended September 30, 2024, primarily included stock-based management compensation of $1.4 million to advisors to our subsidiary MFB and stock-based compensation of $1 million to various consultants for IT service for software development, legal on patents and other consulting services in 2024. TCSI’s consulting services to the Company include sales and business development, customer relationship management, strategy optimization, investor relations, underwriter interface, coordinating outside counsel and other business aspects at the request of the Board of Directors. In addition to TCSI, stock-based compensation was remitted to certain individuals with fire retardant and flame suppression industry experience, who provided guidance and insight to the Company’s management and Board of Directors with respect to the fire retardant and flame suppression industry, business development connections, and oversight during the testing and recognition processes. Payroll and management compensation During the nine months ended September 30, 2025, management compensation primality included stock-based management compensation of $4.1 million to our management and cash payments of $845,000 to our management, and payroll to our employees of $466,000. During the nine months ended September 30, 2024, management compensation primality included cash payment of $50,000 to our former CEO. Other Expenses For the nine months ended September 30, 2025 and 2024, the other expenses consisted of interest expense related to convertible notes payable issued in 2025 and 2024 of $2.6 million and interest expense related to convertible notes issued in 2022 and 2023 and promissory notes issued in 2024 of $94,000, respectively, change in fair value of derivative liability related to convertible notes payable issued in 2025 and 2024 of $2.0 million and $0, respectively, financing expense of $8.7 million and $0, respectively, and loss on settlement of debt of $6.8 million and $882,000, respectively. Settlement of debt in 2025 is conversion of convertible notes issued in 2024 and 2025 and settlement of debt in 2024 is settlement of notes payable and convertible note issued in 2022. Financing expense is 4 million warrants granted to a financial advisor and 69,007 shares of Series C Convertible Preferred stock issued to a Series A Preferred Shareholder in 2025. The 4 million warrants were subsequently cancelled by the financial advisor in August, 2025. 36 Table of Contents Net loss The net loss for the nine months ended September 30, 2025, increased by approximately $25.7 million as compared to the nine months ended September 30, 2024 primarily due to the increase in operating expenses and other expense offset by the increase in revenue. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have incurred significant operating losses and negative cash flows from our operations. Our net loss was $30.7 million and $5.1 million for the nine months ended September 30, 2025 and 2024, respectively. During the nine months ended September 30, 2025, we completed a debt offering and an equity offering which generated net proceeds of approximately $3.7 million and $5.7 million respectively. Working capital September 30, December 31, 2025 2024 Change % Current assets $ 7,258,534 $ 1,617,478 $ 5,641,056 349 % Current liabilities $ 2,973,628 $ 2,161,883 $ 811,745 38 % Working capital (deficiency) $ 4,284,906 $ (544,405 ) $ 4,829,311 (887 %) As of September 30, 2025 and December 31, 2024, the current assets consisted of cash of $6.2 million and $775,000, respectively, inventory of $467,000 and $325,000, respectively accounts receivable of $508,000 and $317,000, respectively, prepaid expenses and other current assets of $87,000 and $74,000, respectively, and deferred offering costs of $0 and $126,000, respectively. As of September 30, 2025 and December 31, 2024, the current liabilities consisted of accounts payable and accrued liabilities of $705,000 and $187,000, respectively, deferred revenue of $6,000 and $0, respectively, convertible notes net of discount of $63,0000 and $196,000, respectively, convertible note – related parties of $1.8 million and $577,000, respectively, due to related parties of $161,000 and $0, respectively, financing loan of $48,000 and $97,000, respectively, derivative liability of $0 and $1.1 million, respectively, and current portion of operating lease liability of $143,000 and $50,000, respectively. The increase in working capital in 2025 was primarily due to an increase in cash from equity and debt offering offset by an increase in convertible notes. Cash Flows For the nine months ended September 30, 2025 and 2024 Nine months ended September 30, 2025 2024 Change Cash used in operating activities $ (3,386,432 ) $ (1,319,815 ) $ (2,066,617 ) Cash used in investing activities $ (221,670 ) $ - $ (221,670 ) Cash provided by financing activities $ 9,028,943 $ 1,079,189 $ 7,949,754 Net Change in cash $ 5,420,841 $ (240,626 ) $ 5,661,467 37 Table of Contents Operating Activities We have not generated positive cash flows from operating activities. For the nine months ended September 30, 2025, net cash flows used in operating activities consisted of a net loss of $30.7 million, reduced by stock-based compensation of $6.8 million, financing expense of $8.7 million, non-cash lease expenses of $123,000, amortization and depreciation of $242,000, amortization of debt discount of $2.2 million, loss on settlement of debt of $6.8 million and changes in derivative liability of $2.0 million, and increased by net changes in operating assets and liabilities of $328,000. For the nine months ended September 30, 2024, net cash flows used in operating activities consisted of a net loss of $5.1 million, reduced by stock-based compensation of $2.6 million, non-cash lease expenses of $60,000, amortization and depreciation of $190,000, loss on settlement of debt of $882,000 and increased by net changes in operating assets and liabilities of $1,000. Investing Activities For the nine months ended September 30, 2025, the cash flows used in investing activities were $222,000, which was related to the purchase of property and equipment. The Company did not use any funds for investing activities during the nine months ended September 30, 2024. Financing Activities For the nine months ended September 30, 2025, net cash provided by financing activities consisted of $5.7 million from the issuance of Series C Convertible Preferred Stock, $3.7 million from the issuance of convertible promissory notes and associated warrants, $71,000 deferred offering cost payment, repayment of a financing loan of $216,000 and repayments to related party of $25,000. The basic terms of the convertible promissory notes issued in 2025 are: (i) a 12-month term; (ii) interest of 10% per annum, compounded annually; and (iii) voluntary conversion during the term at a conversion price of $2.40 for each dollar of principal amount. The associated warrants are exercisable for a period of 5 years from the issuance date, for an aggregate of up to 848,963 shares at an exercise price of $3.00. For the nine months ended September 30, 2024, net cash provided by financing activities consisted of $165,000 proceed from issuance Series C Preferred Stock, $1.0 million from convertible promissory notes and warrants, $57,000 deferred offering cost payment and $60,000 repayment of loan - related party. Contractual Obligations Convertible notes In first quarter 2025, the Company entered into eleven (11) subscription agreements for convertible notes ($2,075,000) and warrants (432,296 shares of common stock). The material terms of this convertible note indebtedness are, (i) a 12-month maturity; (ii) 10% interest per annum, capitalized on the maturity date; (iii) conversion rights in the amount of the principal, either (x) divided by 2.40 or (y) a 30% discount to the price sale of its Common Stock pursuant to a registration statement filed with the SEC and listing of the Common Stock on national securities exchange; and (iv) warrant coverage for five years at the rate of 1.25 shares of Common Stock for each dollar of principal, at an exercise price of $3.00 per share. 38 Table of Contents Convertible notes – related party On December 31, 2024, the Company issued convertible note of $577,000 to a related party, in exchange for the amount due to related party. The convertible note has a term of twelve (12) months, at an interest rate of 10% per annum. The outstanding principal amount of convertible note and unpaid interest is convertible at a fixed conversion price of $2.16. In February 2025, the Company entered into one (1) subscription agreement for convertible notes ($2,000,000) and warrants (416,667 shares of common stock) with a related party. The convertible notes have a term of twelve (12) months, at an interest rate of 10% per annum and warrants are with a term of five (5) years, at exercise price of $3.00 per share. The outstanding principal amount of convertible notes and unpaid interest is convertible at a fixed conversion price of $2.40. The obligations of the Company under the convertible note are secured by a pledge of the Company’s membership interests in MFB Ohio. In the event of a default, the related party could proceed against the equity of MFB Ohio pledged to collateralize the convertible note. MFB Ohio owns the Company’s intellectual property portfolio. 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 September 30, 2025: Year ending December 31, 2025 - remaining three months $ 47,430 2026 195,412 2027 203,228 2028 211,357 2029 219,812 Thereafter 55,486 932,725 Less: Imputed interest (133,595 ) Operating lease liabilities $ 799,130 Financing loans The Company had a financing loan for the purchase of vehicle in September 2025. A repayment of loan schedule is $2,021 per month for 60 months, beginning October 2025, with an interest rate of 11.33%. The Company had a financing loan for the purchase of vehicle in September 2025. A repayment of loan schedule is $2,083 per month for 48 months, beginning October 2025, with an interest rate of 11.90%. Liquidity The Company has incurred losses since inception and incurred a net loss of $30.7 million during the nine months ended September 30, 2025. However, in September 2025, the Company completed an equity offering which generated net proceeds of $5.4 million. Additionally, in October 2025, the Company completed an equity offering which generated net proceeds of $2.7 million. The Company’s existing cash resources are expected to provide sufficient funds to carry out the Company’s planned operations through fiscal year 2026. To continue operations beyond such time frame, the Company may be required to raise additional funds by completing additional equity or debt offerings or increasing revenue. There can be no assurance that the Company will be successful in acquiring additional funding, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years. 39 Table of Contents Contingencies Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. In consultation with its legal counsel as appropriate, our management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is likely, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Critical Accounting Estimates Our unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require management to make estimates, judgments and assumptions that affect the amounts reported in our unaudited consolidated financial statements and accompanying notes. We believe our most critical accounting estimates relate to the following: · Fair value of convertible notes · Fair value of warrant to purchase common stock While our estimates and assumptions are based on our knowledge of current events and on actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of the Company’s significant accounting policies, refer to Note 2 of Notes to Unaudited Consolidated Financial Statements. Fair Value of Convertible Notes The Company determined that the conversion feature, embedded in convertible notes, met the definition of a liability in accordance with ASC Topic No. 815-40, Derivatives and Hedging - Contracts in Entity’s Own Stock and therefore bifurcated the embedded conversion option once the note become convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and “day 1” derivative loss for the excess amount of debt discount and amortized to interest expense over the term of the note. For the conversion feature classified as a liability, the Company uses a Binomial Lattice valuation model to value the derivative instrument at inception and on subsequent valuation dates. The use of this valuation model requires the input of highly subjective assumptions. Any change to these inputs could produce significantly higher or lower fair value measurements. Fair Value of Warrant to Purchase Common Stock The Company has issued warrants to investors in our debt offerings. We evaluate all warrants issued to determine the appropriate classification under ASC 480 and ASC 815. In addition to determining classification, we evaluate these instruments to determine if such instruments meet the definition of a derivative. For warrants that are determined to be equity-classified, we estimate the fair value at issuance and record the amounts to additional paid in capital (potentially on a relative fair value basis if issued in a basket transaction with other financial instruments). Warrants that are equity-classified are not subsequently remeasured unless modified or required to be reclassified as liabilities. The classification of all outstanding warrants, including whether such instruments should be recorded as equity, is evaluated at the end of each reporting period. 40 Table of Contents The warrants are valued using a Black Scholes valuation model. The use of this valuation model requires the input of highly subjective assumptions. Any change to these inputs could produce significantly higher or lower fair value measurements. 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 3. Quantitative and Qualitative Disclosures About Market Risk. As a “smaller reporting company”, we are not required to provide the information required by this Item.