Item 2. Management’s Discussion and Analysis
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on
Form 10-Q (the “Quarterly 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 Quarterly 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.
As used in this Quarterly
Report, the terms “we”, “us”, “our” and “our company” mean CitroTech Inc.
Overview
We are a specialty chemical company focused on environmentally
friendly fire inhibitor products serving the wildland fire, residential and commercial property protection, and wood products industries
across the United States and Canada. Our fire inhibitor formulations are also used by the lumber and building materials industry for fire
retardant treatment applications.
The Company’s management team is highly experienced
at building and running companies, as well as commercializing and executing on strategic partnerships for the sale of products and services.
Since Mighty Fire Breaker LLC (“MFB Ohio”)
acquired from Mighty Fire Breaker LLC (“MFB California”) the MFB portfolio of intellectual property on April 13, 2022, our
management team has continued to develop and refine our product formulations. The Company has received significant third-party recognition
for these efforts, including twice receiving the EPA Safer Choice designation. Our product is the first and only fire inhibitor recognized
by the EPA as safe for the environment. We also are the first fire inhibitor to receive UL GREENGUARD Gold certification, which reflects
minimal impact on indoor air quality from toxic smoke over extended exposure. Our products have been adopted by fire departments throughout
the State of California.
31
CitroTech has been issued 31 patents and has 56
patents pending. We are expanding our patent portfolio and technology platform into additional markets that can benefit from environmentally
safe alternatives to legacy fire retardant and fire retardant-treated wood products. Using this technology, CitroTech has developed products
that help achieve Class-A fire rating for lumber and engineered wood products. We are in the initial phases of commercializing this product.
In April 2026, CitroTech and Hexion Inc. formed a 50/50 global joint venture named HexiTech LLC, a Delaware limited liability company
that will work to commercialize the CitroTech product into factory applied lumber and wood products. This venture will be the Company’s
primary go-to-market channel for this portion of the business.
The Company is also actively deploying proactive
wildfire defense systems on residential and commercial properties under the CitroSafe Systems brand. CitroSafe Systems are self-contained
sprinkler installations that utilize our patented CitroTech product. These systems deploy our fire inhibitor in advance of wildfires to
help prevent the advance of fires and reduce structural risk. In addition to protecting property owners from the ravages of wildfires,
this offering addresses a significant and growing insurance market disruption across the Western United States, where carriers have curtailed
or declined to write wildfire coverage on new construction and are cancelling or not renewing existing policies in the Wildland-Urban
Interface (“WUI”). WUI is the transitional zone between undeveloped land and built environments that is at elevated risk of
catastrophic wildfire loss. The Company is working with a large insurance broker to offer insurance coverage to customers who install
a CitroSafe proactive wildfire system, with policies underwritten by established insurance carriers. This program is currently in the
proof-of-concept phase.
Our management team consists of four individuals:
Wesley J. Bolsen, Chief Executive Officer; Andrew Hotsko, Chief Operating Officer; Nanuk Warman, Secretary and Chief Financial Officer;
and Anthony Newton, General Counsel.
Known Trends and Uncertainties
Growth in Fire Safety
We believe that fire safety benefits from several
growth drivers, including increasing fire severity, as measured by higher acres burned, longer fire seasons and a growing urban component
moving into the WUI, resulting in increased demand for specialty chemical fire inhibitors, thereby increasing production. We believe these
trends are prevalent in North America, as well as globally, and we expect these trends to continue driving growth in demand for fire retardants
and fire retardant treated lumber products. We have expanded our certified partner network to more than 20 organizations in the second
quarter of 2026 that will install systems and/or apply CitroTech product around homes and in the community.
We are working to grow our fire prevention and
protection business, which is primarily focused on expanding use of ground-applications for long-term fire retardants. This growth includes
use of ground assets in response to active fires (protection), as well as proactive treatments around critical infrastructure and known
high-risk areas (prevention). Fire prevention products can be used to help prevent fire ignitions and protect property from potential
fire danger by providing proactive retardant treatment in high-risk areas such as along roadsides, under power lines, along railroad rights-of-way,
and around residential neighborhoods and commercial infrastructure. Treating these areas ahead of the fire season can help to prevent
ignitions from equipment failures or sparks until a significant rainfall occurs. This prevention effort was proven by San Diego announcing
an expansion of their CitroTech treatment program during 2026 based on success seen in 2025. Although there is no certainty in wildfire
defense, when our CitroSafe system is installed, we fill it with our CitroTech product. Thereafter, we will conduct an annual inspection
of the system to help ensure it is ready to help defend against a wildfire. While there is no specific useful life for our product, if
the system has not been deployed since the third anniversary of the initial installation, or three years following an annual inspection,
in an abundance of caution we will recommend the customer replace the CitroTech product. In addition, we suggest spraying CitroTech in
areas surrounding the property that pose the greatest risk to help reduce the risk posed by dry vegetation, decks, garden bark, and fences.
We have invested and intend to continue investing
in the expansion of our fire retardant and lumber treatment business through product development and business development to grow our
customer base.
32
Weather Conditions and Climate Trends
Our business is highly dependent on the needs
of commercial entities, residential homeowners and fire departments to prevent fires and protect assets, as well as the use and expansion
of Class A Fire Retardant Treated lumber and wood products. As such, our financial condition and results of operations are significantly
impacted by weather, which impact the number and severity of fires in any given year. Typically, sales of our product are higher during
the summer months in the United States due to weather patterns that are generally correlated to a higher prevalence of wildfires due to
drought. We believe orders will generally peak during the late summer months, but with expanded fire seasons in the United States, ignitions
may continue through late fall or even into the winter months.
Results of Operations
We are developing and commercializing our
product lines. We have been focused historically on obtaining patents and various accreditations. To date, we do not have a
large customer base, having relied heavily on a few customers, for the commercialization and testing of our CitroTech product and
delivery system. We currently do not have an established retail product line nor recurring significant customer base.
The following summary of our results of operations
should be read in conjunction with our unaudited financial statements for six months ended June 30, 2026 and 2025, which are included
herein.
Our results of operations for the three months
ended June 30, 2026 and 2025 are summarized below:
Three Months Ended
June 30,
2026
2025
Change
%
Revenue
$ 280,666
$ 687,638
$ (406,972 )
(59% )
Operating expenses
3,774,815
3,705,276
69,539
2%
Other expense
408,405
8,886,380
(8,477,975 )
(95% )
Net loss
$ (3,902,554 )
$ (11,904,018 )
$ (8,001,464 )
(67% )
Revenue
Our revenue is generated through our subsidiary
Mighty Fire Breaker LLC ("MFB Ohio"), which acquired our fire suppression intellectual property portfolio in April 2022. Our
revenue is highly seasonal and event-driven, with demand concentrated in the Western United States during the traditional May to October
fire season, and is materially influenced by wildfire activity in any given period. During the three months ended June 30, 2026, revenue
decreased $407,000, or 59%, compared to the three months ended June 30, 2025. The rare situation of a devastating fire in both the Pacific
Palisades and Eaton Canyon, in the first quarter of 2025 added to system revenue in the first quarter of 2025 that was not seen in 2026.
In addition, revenue that was booked in the first half of 2025 related to CitroSafe systems is being shifted to our Certified Partners
for the installation of systems, with higher margin CitroTech chemical sales that are being put into the system mostly starting after
the end of the second quarter. This strategic shift will drive the installation of more systems with more CitroTech product and recurring
income in the future from a redeveloped control system. This accounts for some of the change in revenues from the prior year quarter.
Although the 50/50 joint venture with Hexion was formed in Q2 2026, no revenues were generated from the joint venture in the early days
of getting it established.
33
Our revenues consisted of the following:
Three Months Ended
June 30,
2026
2025
Products sale
$ 205,673
$ 446,785
Product installation service
74,993
240,853
$ 280,666
$ 687,638
Our revenues from significant customers for the three
months ended June 30, 2026 and 2025, are as follows:
Three months ended
June 30,
2026
2025
Number of customers (more than 10% of revenue)
3
3
Total revenue of top 5 customers
71.9%
78.4%
Our revenue is currently project- and event-driven
rather than subscription- or contract-based, and we do not currently have a meaningful base of recurring customers. The decrease in our
top-five customer concentration to 71.9% in the three months ended June 30, 2026, from 78.4% in the comparable 2025 period, reflects both
the absence of the Pacific Palisades and Eaton Canyon fire deployments that drove revenue in the prior period and the early-stage nature
of our commercial customer base. We expect customer concentration to remain elevated until our channel partner program and recurring utility
and structural-protection customer relationships further mature.
Operating Expenses
Three Months Ended
June 30,
2026
2025
Change
%
Cost of revenue
$ 271,628
$ 371,392
$ (99,764 )
(27% )
Amortization and depreciation
123,850
77,107
46,743
61%
General and administrative
218,290
270,227
(51,937 )
(19% )
Advertising and marketing
210,792
152,608
58,184
38%
Payroll and management compensation
2,061,328
2,334,698
(273,370 )
(12% )
Professional fees
691,860
457,968
233,892
51%
Research and development expense
197,067
41,276
155,791
377%
Total operating expenses
$ 3,774,815
$ 3,705,276
$ 69,539
2%
The increase in operating expenses was primarily
attributed to increases in professional fees, research and development costs, and advertising and marketing, partially offset by decreases
in management compensation and cost of revenue.
34
Cost of revenue
Three Months Ended
June 30,
2026
2025
Change
%
Cost of inventory
$ 207,418
$ 304,791
$ (97,373 )
(32% )
Freight and shipping
5,629
5,899
(270 )
(5% )
Rent expense
58,581
60,702
(2,121 )
(3% )
Total cost of revenue
$ 271,628
$ 371,392
$ (99,764 )
(27% )
During the three months ended June 30, 2026, the cost
of revenue decreased over the three months ended June 30, 2025, primarily due to a decrease in cost of inventory.
Cost of inventory consists of product costs, direct
labor, related supplies, and direct testing of our CitroTech product and the various components required for installation of CitroSafe™
systems. Cost of inventory decreased during the three months ended June 30, 2026, compared to the comparable 2025 period, primarily due
to lower product sales volume.
Freight and shipping relate to costs for shipping
products to customers.
Rent expenses are warehouse and facility rent expenses.
Amortization and depreciation
Amortization and depreciation expenses are from
the amortization of patents and technology and the depreciation of vehicles, furniture and equipment.
General and administrative
General and administrative expenses are office, rent,
travel, insurance, website, IT, public listing fees, and other office related expenses. For the three months ended June 30, 2026,
we incurred decreased expenditures on our website and IT development and general office offset by an increase in insurance and public
listing fees.
Advertising and marketing
The increase in advertising and marketing during the
three months ended June 30, 2026, over the three months ended June 30, 2025, is primarily due to supporting revenue growth in addition
to investor relations activities after being uplisted to the NYSE American. This includes rebranding efforts around the official company
name change to CitroTech Inc. from General Enterprise Ventures Inc as well as the product labels moving from Mighty Fire Breaker to CitroTech
and the conversion of relevant website and marketing materials.
Professional fees
The professional fees during the three months ended
June 30, 2026, primarily included stock-based compensation of $283,000 to advisors to our subsidiary MFB, and various professional
fees for accounting and audit related to SEC filings, legal on patents and other consulting services in 2026. The professional fees during
the three months ended June 30, 2025, did not include stock-based compensation. Professional fees were for accounting and audit related
to SEC filings, legal on patents and other consulting services in 2025.
35
Payroll and management compensation
During the three months ended June 30, 2026, management
compensation decreased to $2.1 million from $2.3 million in the prior period. This decrease was primarily attributable to the buildout
of a full executive management team during 2025, including the appointment of a Chief Operating Officer, Chief Financial Officer, Chief
Technology Officer, and General Counsel. Compensation during 2026 and 2025, primarily included stock-based management compensation of
$1.3 million and $1.9 million, respectively. Payroll compensation to employees during 2026, was approximately $0.8 million as compared
to $0.4 million during 2025.
Research and development costs
We continue to invest heavily in the testing and certifications of CitroTech treated products as well as in advance of submitting formulas
for approval to apply product onto federal lands. We are spending on outside testing to ensure that our products can pass the rigorous
US Forest Service QPL testing as well as funding an additional product to be submitted to the US Forest Service for testing. We expect
to continue growing R&D spend over historical spend as we add additional product lines and invest in the future of the company. This
includes funded research programs with Texas A&M on new products that were not underway in 2025.
Other Expenses
For the three months ended June 30, 2026
and 2025, the other expenses consisted of interest expense primarily related to convertible notes payable issued in 2025 of $31,000
and convertible notes payable issued in 2025 and 2024 of $764,000, respectively, change in fair value of derivative liability
related to convertible notes payable issued in 2025 and 2024 of $0 and $3.0 million, respectively, financing expense of $361,000 and
$2.5 million, respectively, and loss on settlement of debt of $0 and $2.6 million, respectively. Settlement of debt in 2025 was
the conversion of convertible notes issued in 2024. Financing expense is from 69,007 shares of Series C Convertible Preferred stock
issued to BoltRock Holdings, LLC (“BRH”) in 2025.
Net loss
The net loss for the three months ended June 30, 2026
was approximately $3.9 million, a decrease of approximately $8.0 million as compared to the three months ended June 30, 2025, primarily
due to a significant reduction in other expenses, partially offset by lower revenue and higher operating expenses.
Our results of operations for the six months
ended June 30, 2026 and 2025 are summarized below:
Six months ended
June 30,
2026
2025
Change
%
Revenue
$ 625,581
$ 1,657,020
$ (1,031,439 )
(62% )
Operating expenses
8,566,876
8,133,114
433,762
5%
Other expenses
2,171,823
16,331,328
(14,159,505 )
(87% )
Net loss
$ (10,113,118 )
$ (22,807,422 )
$ (12,694,304 )
(56% )
36
Revenue
Our revenue is generated through our subsidiary
Mighty Fire Breaker LLC ("MFB Ohio"), which acquired our fire suppression intellectual property portfolio in April 2022. Our
revenue is highly seasonal and event-driven, with demand concentrated in the Western United States during the traditional May to October
fire season, and is materially influenced by wildfire activity in any given period. During the six months ended June 30, 2026, revenue
decreased $1.0 million, or 62%, compared to the six months ended June 30, 2025. The rare situation of a devastating fire in both the Pacific
Palisades and Eaton Canyon in the first six months of 2025 added to system revenue in the first half of 2025 that was not seen in the
first half of 2026.
Our revenues consisted of the following:
Six months ended
June 30,
2026
2025
Products sale
$ 409,069
$ 1,051,267
Product installation service
216,512
605,753
$ 625,581
$ 1,657,020
Our revenues from significant customers for the six
months ended June 30, 2026 and 2025, are as follows:
Six months ended
June 30,
2026
2025
Number of customers (more than 10% of revenue)
3
1
Total revenue of top 5 customers
52.5%
40.7%
Our revenue is project- and event-driven rather than
subscription- or contract-based, and we do not currently have a meaningful base of recurring customers. The increase in our top-five customer
concentration to 52.5% in the six months ended June 30, 2026, from 40.7% in the comparable 2025 period, reflects both the absence of the
Pacific Palisades and Eaton Canyon deployments that drove revenue in the prior period and the early-stage nature of our commercial customer
base. We expect customer concentration to remain elevated until our channel partner program and recurring utility and structural-protection
customer relationships further mature.
Operating Expenses
Six months ended
June 30,
2026
2025
Change
%
Cost of revenue
$ 497,205
$ 988,652
$ (491,447 )
(50% )
Amortization and depreciation
249,534
151,646
97,888
65%
General and administrative
628,246
473,398
154,848
33%
Advertising and marketing
348,392
257,104
91,288
36%
Payroll and management compensation
5,168,695
3,008,121
2,160,574
72%
Professional fees
1,396,212
3,204,886
(1,808,674 )
(56% )
Research and development expense
278,592
49,307
229,285
465%
Total operating expenses
$ 8,566,876
$ 8,133,114
$ 433,762
5%
The increase in operating expenses was primarily attributed
to increases in management compensation offset by a decrease in cost of revenue and professional fees.
37
Cost of revenue
Six months ended
June 30,
2026
2025
Change
%
Cost of inventory
$ 372,848
$ 821,234
$ (448,386 )
(55% )
Freight and shipping
8,090
6,059
2,031
34%
Consulting and advisory-related party
–
4,000
(4,000 )
(100% )
Royalty and sales commission-related party
–
56,290
(56,290 )
(100% )
Rent expense
116,267
101,069
15,198
15%
Total cost of revenue
$ 497,205
$ 988,652
$ (491,447 )
(50% )
During the six months ended June 30, 2026, the cost
of revenue decreased over the six months ended June 30, 2025, primarily due to a decrease in cost of inventory.
Cost of inventory consists of product costs, direct
labor, related supplies, and direct testing of our CitroTech product and the various components required for installation of CitroSafe™
systems. Cost of inventory decreased during the six months ended June 30, 2026, compared to the comparable 2025 period, primarily due
to lower product sales volume.
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.
We did not have royalty and sales commissions to a
related party in the six months ended June 30, 2026. During the first quarter of 2025, we recognized $56,000 as an allocated portion of
consulting and direct labor costs associated with our revenue as royalty and sales cost of revenue. In March 2025, we entered into a new
contract under which the consulting and advisory royalty arrangement was terminated.
Rent expenses are warehouse and facility rent expenses.
The increase in rent expense is primarily attributable to our relocation to a larger commercial facility for operations, warehousing,
and customer-facing activities beginning in April 2025, along with the cancellation of a prior warehouse lease in May 2025.
Amortization and depreciation
Amortization and depreciation expenses are from the
amortization of patents and technology and the depreciation of vehicle, and furniture and equipment.
General and administrative
General and administrative expenses are office, rent,
travel, insurance, website, IT, public listing fees, and other office related expenses. For the six months ended June 30, 2026, we
incurred increased expenditures on public listing fee, our website and IT development and travel as well as general office and insurance
expenses from expansion of operations.
38
Advertising and marketing
The increase in advertising and marketing during the
six months ended June 30, 2026, over the six months ended June 30, 2025, is primarily due to supporting revenue growth in addition to
investor relations activities after being uplisted to the NYSE American. This includes rebranding efforts around the official company
name change to CitroTech Inc. from General Enterprise Ventures Inc as well as the product labels moving from Mighty Fire Breaker to CitroTech
and the conversion of relevant website and marketing materials. We attended and helped to fund events in the wildfire industry to expose
leaders in the fire industry to the CitroTech product, which we believe will lead to sales in the future.
Professional fees
The professional fees during the six months ended
June 30, 2026, primarily included stock-based compensation of $443,000 to advisors, and various professional fees for accounting and audit
related to SEC filings, legal on patents and other consulting services in 2026. In addition, we had expenses related to the formation
of the HexiTech Joint Venture between CitroTech and Hexion that were a one-time expense. The professional fees during the six months ended
June 30, 2025, primarily included stock-based management compensation of $2.3 million, of which $2.1 million was 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.
TCSI’s consulting services to us 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 industry experience, who provided guidance and insight to our management and Board
of Directors with respect to the fire retardant and fire inhibitor industry, business development connections, and oversight during the
testing and recognition processes.
Payroll and management compensation
During the six months ended June 30, 2026, management
compensation increased to $5.2 million from $3.0 million in the prior period. This increase was primarily attributable to the buildout
of a full executive management team during 2025, including the appointment of a Chief Operating Officer, Chief Financial Officer, Chief
Technology Officer, and General Counsel. Compensation during 2026, primarily included stock-based management compensation of $3.4 million,
and payroll to management of $0.8 million and employees of approximately $1.1 million. The significant increase in stock-based compensation
reflects the transition from a single-executive structure in the first quarter of 2025. Compensation during 2025, primarily included stock-based
management compensation of $2.3 million and payroll to management of $0.5 million and employees of $0.2 million.
Research and development costs
We continue to invest heavily in the testing and certifications of CitroTech treated products as well as in advance of submitting formulas
for approval to apply product onto federal lands. We expect to continue growing R&D spend over historical spend as we add additional
product lines and invest in the future of the company. This includes funded research programs with Texas A&M on new products that
were not underway in 2025.
Other Expenses
For the six months ended June 30, 2026
and 2025, the other expenses consisted of interest expense primarily related to convertible notes payable issued in 2025 of $973,000
and convertible notes payable issued in 2025 and 2024 of $1.2 million, respectively, change in fair value of derivative liability
related to convertible notes payable issued in 2025 and 2024 of $0 and $3.8 million, respectively, financing expense of $0.4 million
and $8.7 million, respectively, and loss on settlement of debt of $847,000 and $2.6 million, respectively. Settlement of debt in
2026 is the conversion of convertible notes issued in 2025. Settlement of debt in 2025 is conversion of convertible notes issued in
2024. Financing expense is from 4 million warrants granted to a financial advisor and 69,007 shares of Series C Convertible
Preferred stock issued to BRH in 2025.
39
Net loss
The net loss for the six months ended June 30, 2026
was approximately $10.1 million, a decrease of approximately $12.7 million as compared to the six months ended June 30, 2025, primarily
due to a significant reduction in other expenses, partially offset by lower revenue and higher operating expenses.
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 $10.1 million and $22.8 million for the six months
ended June 30, 2026 and 2025, respectively. During fiscal year 2025, we completed a debt offering in February and an equity offering in
September and October which generated net proceeds of approximately $3.7 million and $8.1 million, respectively.
Working capital
June 30,
December 31,
2026
2025
Change
Current assets
$ 3,682,667
$ 7,415,426
$ (3,732,759 )
Current liabilities
420,088
2,169,626
(1,749,538 )
Working capital
$ 3,262,579
$ 5,245,800
$ (1,983,221 )
As of June 30, 2026 and December 31, 2025, the
current assets consisted of cash of $2.5 million and $6.3 million, respectively, inventory of $579,000 and $621,000, respectively, accounts
receivable of $165,000 and $209,000, respectively, and prepaid expenses and other current assets of $419,000 and $317,000, respectively.
As of June 30, 2026 and December 31, 2025, the
current liabilities consisted of accounts payable and accrued liabilities of $222,000 and $316,000, respectively, deferred revenue of
$21,000 and $3,000, respectively, due to related parties of $5,000 and $168,000, respectively, convertible notes net of discount of $0
and $219,000, respectively, convertible note – related party of $0 and $1.3 million, respectively, current portion of financing
loan of $15,000 and $30,000 respectively, and current portion of operating lease liability of $157,000 and $148,000, respectively.
The decrease in working capital in 2026 was primarily
due to a decrease in cash of $3.7 million for operating activities, offset by a decrease in convertible debt due to conversions into common
stock.
Cash Flows
For the six months ended June 30, 2026 and 2025
Six months ended
June 30,
2026
2025
Change
Cash used in operating activities
$ (3,842,728 )
$ (1,925,535 )
$ 1,917,193
Cash provided by (used in) investing activities
1,773
(167,744 )
169,517
Cash provided by financing activities
91,666
3,645,234
(3,553,568 )
Net Change in cash
$ (3,749,289 )
$ 1,551,955
$ (5,301,244 )
40
Operating Activities
We have not generated positive cash flows from operating
activities.
For the six months ended June 30, 2026, net cash flows
used in operating activities consisted of a net loss of $10.1 million, reduced by stock-based compensation of $4.2 million, non-cash lease
expenses of $78,000, amortization and depreciation of $250,000, amortization of debt discount of $892,000, loss on settlement of debt
of $847,000, loss on disposal of equipment of $32,000, and increased by bad debt recovery of $20,000, and net changes in operating assets
and liabilities of $33,000.
For the six months ended June 30, 2025, net cash flows
used in operating activities consisted of a net loss of $22.8 million, reduced by stock-based compensation of $13.3 million, non-cash
lease expenses of $86,000, amortization and depreciation of $151,000, amortization of debt discount of $1.0 million, loss on settlement
of debt of $2.6 million and changes in derivative liability of $3.8 million, and increased by net changes in operating assets and liabilities
of $110,000.
Investing Activities
For the six months ended June 30, 2026 and 2025, the
net cash flows provided by (used in) investing activities consisted of the purchase of equipment of $11,000 and $168,000 and sales of
equipment of $12,500 and $0, respectively.
Financing Activities
For the six months ended June 30, 2026, net cash provided
by financing activities consisted of $96,000 capital contribution from a related party and proceeds from the exercise of warrants of $25,000,
and repayment of a financing loan of $30,000.
For the six months ended June 30, 2025, net cash
provided by financing activities consisted of $260,000 proceeds from the issuance of Series C Convertible Preferred Stock, $3.7 million
from the issuance of convertible promissory notes and associated warrants, $59,000 deferred offering cost payment, and repayment of loans
of $241,000.
Contractual Obligations
Financing loans
We had a financing loan for the purchase of a vehicle
in September 2025. The loan repayment is $2,021 per month for 60 months, beginning October 2025, with an interest rate of 11.33%.
Lease Agreements
We have one lease classified as an operating lease
for office and warehouse purposes. The following table outlines maturities of our lease liabilities as of June 30, 2026:
Year ending December 31,
2026 (remaining six months)
$ 98,654
2027
203,228
2028
211,357
2029
219,812
2030
55,486
788,537
Less: Imputed interest
(94,886 )
Operating lease liabilities
$ 693,651
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Liquidity
We have incurred losses since inception and incurred
a net loss of $10.1 million during the six months ended June 30, 2026. However, in September 2025, we completed an equity offering
which generated net proceeds of $5.4 million. Additionally, in October 2025, we completed an equity offering which generated net
proceeds of $2.7 million.
Our existing cash resources, if necessary, could
provide sufficient funds to carry out our planned operations through fiscal year 2026. To more rapidly grow our revenue and continue
operations beyond such time frame, we will be required to raise additional funds by completing additional equity or debt offerings or
increasing revenue. We may also raise capital through public or private offerings of equity or debt securities or by entering into a credit
facility. There can be no assurance that we will be successful in acquiring additional funding, that our projections of its future working
capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years.
Contingencies
Certain conditions may exist as of the date the financial
statements are issued, which may result in a loss to us, 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, evaluate 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 consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), which require management to
make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.
For a discussion of our critical accounting estimates,
refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 31, 2025, filed with the SEC on March 30, 2026 (the “Annual Report”). There have been no material changes
to our critical accounting estimates as described in that Annual Report.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
We are a smaller reporting
company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required
to provide the information specified under this item.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.