CID Holdco, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included in this filing. Some of the information contained in the following discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risks Relating to Our Business and Industry” or included elsewhere in this Report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this Annual Report on Form 10-K or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition, or results of operations. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments. 54 Overview CID Holdco, Inc. (the “Company”, or “CID Holdco”, or “CID”), formerly known as SEE ID Inc., dba Dot AI (the “Legacy Company” or “SEE ID”), was incorporated in Delaware with its headquarters in Las Vegas, Nevada. The Company helps businesses transform their operations by optimizing safety, security and efficiency of operations through real-time tracking of resources. Through the Company’s extensive research and development initiatives, the Company’s main focus includes areas such as Industrial IoT, Indoor & Outdoor tracking with seamless transitions, Passive RFID (including Bluetooth and 5G), Collision Avoidance, real-time locating system, Dolly Management, and related supported software applications. The Company is the developer of an asset tracking platform intended to push the limits of near real-time precision-based location technology. The Company’s platform leverages the technologies including the patented passive and active RFID tracking solutions, low power edge camera platforms utilizing artificial intelligence, enabling users to give accuracy to all mapping technologies in areas that are troublesome. Through its technological solutions, the Company serves multiple industries including construction, military, mining, retail, warehousing and manufacturing. The Company is headquartered in Las Vegas, NV with our management and administrative staff located in Bethesda, MD for East Coast customer engagements and government lobbying activity. We also manufacture hardware in Puerto Rico through our wholly owned subsidiary Dot Works. Our embedded development team and Design for Manufacturing (“DFM”) capability is built around our CTO in Worcester, MA and our core software team is in Bangalore, India. Throughout this Annual Report, unless otherwise noted or otherwise suggested by context, the “Company”, “we”, “us”, “our” refers to SEE ID and Dot Works, as applicable, prior to the consummation of the Business Combination (as defined below), and CID Holdco, SEE ID, and Dot Works, collectively, after the consummation of the Business Combination. Business Combination On June 18, 2025 (the “Closing Date”) the Company consummated the Business Combination transactions by and among the Company, ShoulderUp Technology Acquisition Corp (“SUAC” or “ShoulderUp”), ShoulderUp Merger Sub, Inc., SEI Merger Sub, Inc., and SEE ID, Inc. Pursuant to the Business Combination Agreement, on the Closing Date, (i) ShoulderUp Merger Sub merged with and into SUAC (the “ShoulderUp Merger”), with SUAC surviving the ShoulderUp Merger as a wholly-owned subsidiary of the Company; and (ii) simultaneously with the ShoulderUp Merger, SEI Merger Sub merged with and into SEE ID (“the SEE ID Merger”), with SEE ID surviving the SEE ID Merger as a wholly-owned subsidiary of the Company (the ShoulderUp Merger and the SEE ID Merger, together the “Mergers” and together with the other transactions contemplated by the Business Combination Agreement, the “Business Combination”). 55 In connection with the Business Combination, CID Holdco filed a registration statement on Form S-4 (File No. 333-282600) (as amended, the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC”). On June 18, 2025, the Registration Statement was declared effective by the SEC. At Closing, the assets and liabilities of Legacy Company were combined with the assets and liabilities ShoulderUp Technology Acquisition Corp on a historical cost basis. All Legacy Company Common Stock was exchanged for Common Stock of the Company based upon the exchange ratio as defined in the Business Combination Agreement as Aggregate Merger Consideration (13,000,000 CID Holdco shares) divided by the Company Fully Diluted Common Stock (159,915,641) or 8.129%. Stock options of Legacy Company were not exercised and remain outstanding after giving into effect the exchange ratio. In connection with the Business Combination, we incurred transaction costs, settled certain SUAC related party notes through the issuance of common shares, converted SAFE notes into Common Stock of the Company, and raised cash proceeds from PIPE investors. Additional information regarding the Business Combination and Reverse Recapitalization is provided in Note 3 to the consolidated financial statements. Factors Affecting Our Performance Acquiring New Customers We believe that we have a substantial opportunity to grow our customer base. We intend to drive new customer acquisition by continuing to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness, and drive adoption of our Dot Cloud platform. Our ability to attract new customers depends on a number of factors, including the effectiveness of our sales and marketing efforts, macroeconomic factors and their impact on our customers’ businesses, and the success of our efforts to expand internationally. Expanding Within Our Existing Customer Base We believe that there is a significant opportunity to expand sales to existing customers following their initial adoption of our Dot Cloud. We will expand our customer base by selling more applications and expanding use of existing applications across geographies and divisions. Our ability to expand within our customer base will depend on a number of factors, including our customers’ satisfaction, pricing, competition, macroeconomic factors, and changes in our customers’ spending levels. While there are many factors involved in this expansion, the Customer Success department will be the key internal driver to retention and expansion of customer revenue. At this juncture, it is not a significant part of our operational expense but will be built out as our bookings increase and our channel support requirements come online. Investments in Innovation and Future Growth Our market leadership is supported by continuous innovation in our Dot Cloud, our inventions in IoT data collection and our advances in applying AI to our customer problem sets. We will continuously invest in adding new applications and methods to our solutions. As such, spending on research and development will always be an important part of our strategy. However, the driving force that will fuel our company is market growth. Our recent pivot to move most of our spending to Sales and Marketing shows a commitment to our go-to-market strategy. We recognize the need to increase adoption and expand brand awareness as we increase market share. Adding additional compliance and oversight resources as we grow, and especially as we adapt to operating as a public entity, is a natural and essential step. In addition, our small operations team will continue to grow as the demand increases from our maturing sales pipeline. 56 Components of Results of Operations Revenue We will provide access to our Dot Cloud through subscription arrangements, where the customer is charged a per-subscription fee for access for a specified term. Subscription agreements will contain multiple service elements for one or more of our cloud-based Applications via mobile app(s) or a website that enables data collection and provides access to the cellular network, IoT devices (which we also refer to as connected devices), and support services delivered over the term of the arrangement. Our subscription contracts will typically have an initial term of three to five years and are generally non-cancellable and non-refundable, subject to limited exceptions under our standard terms of service and other exceptions for public sector customers, who are often subject to annual budget appropriations cycles. Our Connected Dot Cloud and IoT devices are highly integrated with the subscription service and together will represent a single performance obligation. Revenues attributable to this combined performance obligation are recognized over time as the services are delivered. We also provide professional services including onboarding (implementation) services, marketing services, and product consulting. These services were evaluated to be distinct and are treated as separate performance obligations from the subscription services. Revenue related to these services are recognized over time as services are performed. Currently, revenues are primarily related to the delivery of hardware products such as bridges, labels and gateways to customers. We also provide feasibility study reports to customers seeking to gain insight into how data driven tracking could improve their business, which is recognized upon acceptance of the feasibility report. Allocation of Overhead Costs Overhead costs that are not directly attributable to a specific functional group are allocated based on relative usage. These costs include expenses related to warehouse lease and cloud hosting services. Cost of Goods Sold Cost of goods sold consists primarily of cellular-related costs, third-party cloud infrastructure expenses, customer support costs, warranty charges, employee-related costs directly associated with our customer support and operations, including salaries, employee benefits and share-based compensation, amortization of internal-use software development, certain cloud computing implementation costs, expenses related to shipping and handling, packaging, fulfillment, warehousing, write-downs of excess and obsolete inventory, and allocated overhead costs. As our customers expand and increase the use of our Dot Cloud driven by additional IoT devices and Applications, our cost of goods sold may vary from quarter to quarter as a percentage of our revenue due to the timing and extent of these expenses. We intend to continue to invest additional resources in our Dot Cloud and customer support and operations personnel as we grow our business. The level and timing of investment in these areas will affect our cost of goods sold in the future. Operating Expenses Research and development Research and development expenses consist primarily of employee-related costs, including salaries, employee benefits and share-based compensation, depreciation and other expenses related to prototyping IoT devices, product initiatives, software subscriptions, hosting used in research and development, and allocated overhead costs. We continue to focus our research and development efforts on adding new features and products and enhancing the utility of our Dot Cloud. We capitalize the portion of our internal-use software development costs that meets the criteria for capitalization. We expect our research and development expenses to generally increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance our Dot Cloud. Our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. 57 Sales and marketing Sales and marketing expenses consist primarily of employee-related costs directly associated with our sales and marketing activities, including salaries, employee benefits and share-based compensation, and sales commissions. Sales and marketing expenses also include expenditures related to advertising, media, marketing, promotional costs, free trial expenses, brand awareness activities, business development, corporate partnerships, travel, conferences and events, professional services, and allocated overhead costs. We also have a heavy reliance on contracted services in these areas which are reflected in the department spend. We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness. As a result, we expect our sales and marketing expenses to increase in absolute dollars for the foreseeable future. Our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. General and administrative General and administrative expenses consist of employee-related costs for executive, finance, legal, human resources, facilities, and certain IT personnel, including salaries, employee benefits and share-based compensation, professional fees for external legal, accounting, recruiting and other consulting services, credit losses, allocated overhead costs, and unallocated lease costs. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future to support our growth and because of additional costs associated with legal, accounting, compliance, insurance, investor relations, and other areas associated with being a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. Interest expense Interest expense consists primarily of interest incurred for our short-term bridge loans. Change in fair value of SAFE agreements The change in the fair value of SAFE agreements represents the unrealized gains or losses resulting from the fluctuations in the estimated fair value of the outstanding SAFE agreements, or reevaluation of updated market conditions and company-specific factors. Transaction costs The Company accounts for transaction costs incurred in connection with the Business Combination that occurred in June 2025, and therefore transaction costs expensed were not a component of our results of operations during 2024. Costs that are directly attributable to the issuance of equity instruments, such as legal, accounting, and advisory fees related to the merger and recapitalization, are recorded as a reduction to additional paid-in capital. All other transaction costs have been expensed as incurred. Loss from extinguishment of debt Prior to the closing of the Business Combination, a lender provided the Company with a bridge loan in the aggregate principal amount of $2,850,000. Upon the closing of the Business Combination, the lender elected to convert a portion of the outstanding principal, totaling $2,456,500, into shares of the Company’s Common Stock. In connection with this conversion, the Company derecognized the related debt liability, issued shares of Common Stock, and recognized a loss on extinguishment of debt of $6,141,250, representing the excess of the fair value of the shares issued on the closing date over the carrying value of the debt extinguished. In addition, the Company assumed certain indebtedness of the SPAC in the principal amount of $1,400,000. A portion of this obligation, totaling $987,045, was subsequently repaid, and the Company recognized a gain on extinguishment of debt of $412,955. As a result of these transactions, the Company recognized a net loss on debt extinguishment of $5,728,295 upon the closing of the Business Combination. 58 Results of Operations Comparison of years ended December 31, 2025 and 2024 Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin Our total revenue, cost of goods sold, gross profit, and gross margin for the years ended December 31, 2025 and 2024 are summarized as follows: For the Years Ended December 31, 2025 2024 $ Change % Change Revenue $ 5,804,369 $ 172,661 $ 5,631,708 3,261.7 % Cost of goods sold 3,133,139 43,634 3,089,505 7,080.5 % Gross profit $ 2,671,230 $ 129,027 $ 2,542,203 1,970.3 % Gross margin % 46.0 % 74.7 % (28.7 )% (38.4 )% Revenue increased by $5.6 million, or 3,261.7%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase in revenue is primarily driven by higher hardware sales. Hardware implementation represents the initial step in a customer’s adoption of our SaaS subscription platform and contributed significantly to the overall growth in revenue. Cost of goods sold increased by $3.1 million, or 7,080.5%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was primarily attributable to higher materials costs, direct labor, and related manufacturing expenses associated with the growth in revenue. Our gross margin was 46.0% for the year ended December 31, 2025 compared to 74.7% for the year ended December 31, 2024. The decrease in gross margin is primarily attributable to a shift in revenue mix year over year, with a greater proportion of 2025 revenue generated from hardware sales. Research and Development Research and development expenses for the years ended December 31, 2025 and 2024 are summarized as follows: For the Years Ended December 31, 2025 2024 $ Change % Change Research and development $ 1,446,203 $ 850,261 $ 595,942 70.1 % Research and development expense increased by $0.6 million, or 70.1%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increases are primarily driven by our continued investment in innovation through engagement of software and hardware development contractors. 59 Sales and Marketing Sales and marketing expenses for the years ended December 31, 2025 and 2024 are summarized as follows: For the Years Ended December 31, 2025 2024 $ Change % Change Sales and marketing $ 3,671,865 $ 2,721,981 $ 949,884 34.9 % Sales and marketing expenses increased by $0.9 million, or 34.9%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase reflects our continued pivot toward the market and was primarily driven by higher spending on digital marketing services and additional modules and users in our customer relationship management software. General and Administrative General and administrative expenses for the years ended December 31, 2025 and 2024 are summarized as follows: For the Years Ended December 31, 2025 2024 $ Change % Change General and administrative $ 6,764,453 $ 1,563,328 $ 5,201,125 332.7 % General and administrative expense increased by $5.2 million, or 332.7%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increases are primarily due to additional labor costs pertaining to the ramp up of the business as well as incremental expenses related to operating as a public company. Other expenses – SAFE agreements The tables below summarize the change in the fair value of SAFE agreements and the SAFE agreements activity for the year ended December 31, 2025 and 2024: For the Years Ended December 31, 2025 2024 $ Change % Change Change in fair value of SAFE notes $ (17,368,415 ) $ (14,492,176 ) $ (2,876,239 ) 19.8 % For the Years Ended December 31, 2025 2024 SAFE agreements at fair value, beginning of period $ 23,334,626 $ 4,602,950 SAFE agreements issued for cash 23,752 4,239,500 Change in fair value 17,368,415 14,492,176 SAFE notes converted into shares (40,726,793 ) - SAFE agreements at fair value, end of period $ - $ 23,334,626 60 The decrease in the liability balance of SAFE agreements for the year ended December 31, 2025, compared to December 31, 2024, was primarily attributable to the conversion of the SAFE notes into company shares upon the closing of the Business Combination. Upon conversion, the related liabilities were reclassified to equity. Liquidity and Capital Resources Funding Requirements and Going Concern Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. To date, we have funded our operations primarily with proceeds from the issuance of shares of our Common Stock to PIPE investors contemporaneously with the close of the Business Combination, proceeds from bridge loans and other short-term borrowings. Our future capital requirements will depend on many factors, including, but not limited to, our growth, our ability to attract and retain customers, the continued market acceptance of our solution, the timing and extent of spending necessary to support our efforts to develop our Dot Cloud and meet our performance obligations related to subscription sales of the same, the expansion of sales and marketing activities, and the impact of macroeconomic conditions on us and our customers’ and partners’ businesses. Further, we may enter into arrangements to acquire or invest in businesses, products, services, and technologies. We will need to raise additional capital in the future to finance our operations and expand our business. In connection with the Company’s assessment of going concern considerations in accordance with the Financial Accounting Standards Board (“FASB”) ASC Topic 205-40, “ Presentation of Financial Statements — Going Concern, ” management anticipates the Company will continue to incur substantial operating losses for the next several years and will need to obtain additional near-term financing in order to continue its research and development activities. Our ability to continue as a going concern is dependent on its ability to raise additional capital to fund research and development activities and meet obligations on a timely basis. However, there can be no assurance that sufficient funding will be available to allow us to successfully continue our research and development activities and commercialize our products. If the Company is unable to obtain necessary funds through its business operations and the proceeds realized through the Business Combination, significant reductions in spending and the delay or cancellation of planned activities may be necessary. These actions would have a material adverse effect on our business, results of operations, and prospects. These conditions raise substantial doubt about our ability to continue as a going concern within one year from the date these consolidated financial statements are issued. As of December 31, 2025 and 2024, we had cash of $865,624 and $721,032, respectively, deficits in working capital of $1,730,095 and $1,215,988, respectively, and accumulative deficits of $61,451,334 and $24,733,263, respectively. Sources of Liquidity To date, we have funded our operations primarily through proceeds from the issuance of common shares to PIPE investors in connection with the closing of the Business Combination, totaling $10,837,643, proceeds from bridge loans and other short-term borrowings. In the future, we expect to finance our cash needs through a combination of equity, debt financings, and improvement of cash from operations derived from selling subscriptions to our platform. As part of its funding efforts, on June 18, 2025, the Company entered into a Standby Equity Purchase Agreement (“SEPA”) with New Circle Principal Investment LLC (“New Circle”), which provides the Company the right, but not the obligation, to direct New Circle from time to time to purchase up to $50 million of shares of the Company’s Common Shares during the commitment period ending June 18, 2028, at a discount of the volume-weighted average price (VWAP) over a defined pricing period. Under the SEPA, the Company may sell shares to New Circle at a price based on either: option 1 – 97% of the lowest daily VWAP over the three trading days following the purchase notice, or option 2 – the greater of 85% of the VWAP or the lowest sale price on a specific trading day determined by the timing of the notice. 61 Any purchase would be subject to certain limitations, including that New Circle shall not purchase any shares that would result in it and its affiliates beneficially owning more than 4.99% of the then outstanding voting power or number of shares of Common Stock or any shares that would exceed 19.99% of all shares of Common Stock of the Company outstanding on the date of the SEPA, unless Company shareholder approval was obtained allowing for issuances in excess of such amount (the “Exchange Cap”). The Exchange Cap will not apply under certain circumstances, including where the average purchase price of all applicable sales of Common Shares equals or exceeds the lower of (i) the Nasdaq Official Closing Price immediately preceding the Effective Date; or (ii) the average Nasdaq Official Closing Price for the five Trading Days immediately preceding the Effective Date. The Company had the option to satisfy the $350,000 commitment fee under the SEPA through the issuance of a variable number of shares of Common Stock or by payment in cash. On September 24, 2025, the Company paid the commitment fee through the issuance of 106,383 shares of Common Stock, valued at $3.29 per share, which was determined based on the closing price of the Common Stock on September 18, 2025, the date the Form S-1 was declared effective by the SEC. The commitment fee of $350,000 was expensed in September 2025. Before the Company elects to sell shares by issuing a purchase notice, the SEPA represents a purchased put option on the Company’s equity. Once the Company delivers a purchase notice under the SEPA, the related number of shares to be issued constitutes a forward contract to issue shares of Common Stock. As the feature is embedded in an equity host, meets the definition of a derivative, and does not qualify for the equity scope exception under ASC 815 Derivatives and Hedging , it must be bifurcated and accounted for separately as a derivative asset or liability, depending on changes in the underlying stock price relative to the pegged discounted VWAP. The derivative is measured at fair value, with changes in fair value recognized in net income. The fair value of the purchased put option was determined to be de minimis as of December 31, 2025, and therefore was not recorded on the Company’s balance sheet as of that date. On October 13, December 30, and December 31, 2025, the Company issued purchase notices for the sale of 30,000, 500,000, and 1,000,000 shares, respectively, at settlement prices of $2.62, $0.32, and $0.32 per share, resulting in total cash proceeds received in 2025 of $78,516, $159,500, and $317,000, respectively. The Company issued 30,000 shares in October 2025 and 1,000,000 shares in December 2025, with the remaining 500,000 shares settled and administratively issued in early January 2026. Because the shares were issued to New Circle at prices determined using a discounted VWAP formula, the cash proceeds received were below the fair value of the shares on the respective issuance dates. The Company measured the shares at their fair value on the date cash was received and recognized the difference between (i) the fair value of the shares issued and (ii) the proceeds calculated pursuant to the discounted VWAP pricing terms. This difference, totaling $246,184, was recorded as a loss on issuance of shares in the statement of operations. Subsequent to the year end through March 11, 2026, Edmund Nabrotzky, Chief Executive Officer of the Company, Charles Maddox, Chief Financial Officer and Chief Operating Officer of the Company, and Vijayan Nambiar, Chief Technology Officer of the Company loaned the Company an aggregate of $350,000 and may make additional loans to the Company up to an aggregate amount of $600,000 (collectively, the “Executive Loans”). The Executive Loans have been made, or will be made, on the terms and conditions of an unsecured, subordinated promissory note (the “Executive Notes”). The Executive Notes will accrue interest at a rate of 7.5% per annum, and will be paid in quarterly installments on July 1, 2026 , October 1, 2026 with a final payment by December 31, 2026. All of the Company’s obligations and payments under the Executive Notes are subordinated to the Company’s obligations under the loan agreement with J.J. Astor & Co. 62 Cash Flows Comparison of years ended December 31, 2025 and 2024 The following table shows a summary of our cash flow for the periods presented: For the Years Ended December 31, 2025 2024 Net cash (used in) operating activities $ (13,250,533 ) $ (3,290,008 ) Net cash (used in) investing activities (1,829,739 ) (834,220 ) Net cash provided by financing activities $ 15,224,864 $ 4,239,500 Operating Activities Our largest source of operating cash is investments made by our shareholders. Our primary uses of cash from operating activities are for employee-related expenditures, sales and marketing expenses, inventory purchases, and research & development activities. We generated negative cash flows from operations in the preceding two fiscal years. We have supplemented working capital through net proceeds from the sale of equity securities and bridge loans. Cash used in operating activities was $13.3 million for the year ended December 31, 2025. This consisted of a net loss of $36.7 million, adjusted for non-cash charges of $24.4 million and net changes in operating assets and liabilities of $1.0 million. The non-cash charges were primarily driven by a $17.4 million change in the fair value of SAFE notes and a $5.7 million loss on debt extinguishment. Changes in operating assets and liabilities were primarily attributable to increases in accounts receivable of $3.6 million and inventory of $1.4 million, partially offset by increases in accounts payable of $3.4 million and accrued expenses of $1.8 million. Cash used in operating activities was $3.3 million for the year ended December 31, 2024. This consisted of a net loss of $21.5 million, adjusted for non-cash charges of approximately $14.7 million and net changes in operating assets and liabilities of approximately $3.5 million. Non-cash charges were primarily driven by a $14.5 million change in the fair value of SAFE notes. Changes in operating assets and liabilities were primarily attributable to an increase in deferred revenue of $2.7 million. Investing Activities Cash used in investing activities was $1.8 million for the year ended December 31, 2025, which consisted of capital expenditures for internal-use software development costs of $1.2 million and equipment purchases of $0.6 million. Cash used in investing activities was $0.8 million for the year ended December 31, 2024, which consisted of capital expenditures for internal-use software development costs. Financing Activities Cash provided by financing activities was $15.2 million for the year ended December 31, 2025. This consisted primarily of proceeds from PIPE investments of $10.8 million and proceeds from the trust account of $5.6 million, as well as borrowings from short-term loans of $1.8 million, and bridge loans of $2.9 million. These inflows were partially offset by repayments of bridge and short-term loans totaling $1.4 million and the purchase of common stock of $5.0 million. Cash provided by financing activities was $4.2 million for the year ended December 31, 2024, which consisted of proceeds from issuance of SAFE agreements for cash. 63 Contractual Obligations and Commitments Our estimated future obligations consist of leases and non-cancelable purchase commitments as of December 31, 2025. For additional discussion on our leases and other commitments, refer to Note 13 – Leases and Note 17 – Commitments and Contingencies to our consolidated financial statements for the year ended December 31, 2025 included elsewhere in this Annual Report on Form 10-K. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to fully understanding and evaluating our financial condition and results of operations. Accounting for SAFE Agreements In accordance with FASB ASC 815 40, Contracts in Entity’s Own Equity , the Company determined the SAFE agreements are freestanding financial instruments and, accordingly, are classified as “liabilities” in the accompanying consolidated balance sheets. The SAFE agreements are carried at estimated fair value determined by the Company using a probability weighted expected return method. Accounting for Convertible Debt The Company accounts for its convertible debt instruments in accordance with ASC 480, Distinguishing Liabilities from Equity , and other applicable authoritative guidance. Management evaluates the terms of each instrument to determine the appropriate classification. The Company has concluded that its convertible debt instruments are properly classified as liabilities because they embody contractual obligations to repay principal and interest in cash and do not meet the criteria for equity classification. In addition, the instruments do not represent mandatorily redeemable equity shares or other freestanding equity instruments; rather, they represent debt arrangements with substantive repayment obligations. Accordingly, the instruments are recorded as liabilities on the consolidated balance sheets. In connection with the short-term borrowings, the Company paid loan initiation fees to the lender. These fees are accounted for as debt issuance costs and recorded as a direct deduction from the carrying amount of the related debt liability. The net carrying amount of the debt, after giving effect to these issuance costs, is accreted to the contractual repayment amount over the term of the loan using the effective interest method, with the amortization recognized as interest expense in the consolidated statements of operations. 64 Accounting for Warrants and Embedded Derivatives The Company’s convertible debt includes a conversion feature and an embedded call option. These features were evaluated to determine whether they require bifurcation from the host debt instrument. Management concluded that the features meet the definition of derivatives under ASC 815, Derivatives and Hedging , and therefore require separation from the host contract. The embedded call option permits the Company, upon a change in control, to call the instrument, representing an additional embedded derivative feature. In assessing the conversion feature, management determined that the number of shares issuable upon conversion is contingent upon stockholder approval to remove the 4.99% beneficial ownership limitation. Because this contingency represents an input that is not consistent with a fixed-for-fixed equity instrument under ASC 815-40-15-7, the conversion feature is not considered indexed to the Company’s common stock and does not qualify for equity classification. Accordingly, the embedded call option and conversion feature were combined and accounted for as a single embedded derivative liability measured at fair value, with changes in fair value recognized in earnings. The warrants issued in connection with the short-term loan are accounted for as a separate derivative liability. The warrants are measured at fair value at each reporting date, and changes in fair value are recognized in earnings. Accounting for Business Combination The transaction was accounted for as a reverse recapitalization in accordance with ASC 805, Business Combinations . Although ShoulderUp was the legal acquirer in the transaction, the Company was determined to be the accounting acquirer based on the evaluation of the relevant accounting guidance. Accordingly, the transaction was treated for accounting purposes as a reverse recapitalization of the Company. The historical financial statements of the Company became the historical financial statements of the combined entity, and the net assets of ShoulderUp were recorded at their historical carrying amounts. No goodwill or other intangible assets were recognized in connection with the transaction. The equity structure of the combined company was adjusted to reflect the shares issued in the transaction, and transaction costs were accounted for in accordance with applicable guidance. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers . Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We determine revenue recognition through the following steps: 4. Identification of the contract, or contracts, with a customer; 5. Identification of the performance obligations in the contract; 6. Determination of the transaction price; 7. Allocation of the transaction price to the performance obligations in the contract; and 8. Recognition of revenue when, or as, we satisfy a performance obligation. The Company primarily recognizes revenue from the sale and delivery of products. As it is still in the early stages of developing its software-as-a-service (SaaS) product, most revenue is derived from product sales, including bridges, gateways, and labels. 65 We also offer feasibility studies which allow customers to gain insight into how data driven tracking could improve their business. As part of our studies, off-the-shelf components are installed on customer-owned assets which enable data to be captured by our beta Zero Infrastructure Mesh (“ZIM”) technology network. These feasibility studies allow the refinement of our software protocols and provide essential information for the continued development of our solution. Customers receive the information captured in our feasibility study reports. Our contracts with customers include various performance obligations which are satisfied at a point in time or over time. In reaching this conclusion, we considered the context of the contract and the nature of our promises to provide the customers with products and services. The product performance obligations are satisfied at a point in time, as our customers do not consume the benefits until the products are delivered. Accordingly, the consideration related to the performance obligations are recognized on when control of the products are transferred to the customer which is upon acceptance. The estimates involved in revenue recognition pertain to determination of the stand-alone selling price. Management considered the data inputs for the stand-alone selling price and determined that the adjusted market assessment approach provided the best estimate of the stand-alone selling price and the total products and services to be delivered over the term of the contract. The estimates applied have been reasonable in the past and the likelihood of change in estimate to impact the stand-alone selling price is remote. The Company entered into an exclusivity agreement on November 8, 2024, and a partner agreement on December 18, 2024, with a major reseller. The exclusivity agreement grants the reseller the exclusive right to sell the Company’s products for one year, with automatic renewal for up to four additional one-year periods if specified sales targets are achieved. The partner agreement provides a 5% purchasing incentive based on the reseller’s quarterly growth in total solution purchases and requires the Company to contribute at least 1% of revenue toward marketing activities, paid as a rebate. Management concluded that the exclusivity agreement, partner agreement, and future product purchase orders should be combined and accounted for as a single contract under ASC 606, Revenue from Contracts with Customers . In November 2024, the Company received a $2,000,000 payment from the reseller for a five-year exclusivity right, including four successive one year automatic renewal periods, granting the reseller exclusive rights to distribute the Company’s products to its customers. Since exclusivity does not represent a distinct performance obligation under ASC 606, the payment was recorded as deferred revenue. Revenue will be recognized over the contract term in proportion to the products and services delivered, based on estimated total sales over the five-year period. These estimates will be reviewed quarterly and adjusted based on the reseller’s actual performance. If the reseller fails to meet sales targets and the agreement is terminated, any remaining deferred revenue will be recognized at that time. Under ASC 606, both the incentive and rebate represent variable consideration, as they depend on actual sales volume. Management will estimate expected sales and related rebates to determine the transaction price and recognize revenue accordingly. The purchasing incentive and marketing rebate are not separate performance obligations, and variable consideration related to these incentives will be included in revenue only when it is probable that no significant reversal will occur once uncertainties are resolved. The Company will accrue the incentive amount at the end of each quarter when sales revenue is finalized. 66 Internal-Use Software Development In accordance with FASB ASC Topic 350 40, Intangibles Goodwill and Other Internal Use Software , we capitalize software development costs incurred on new applications or enhancements to applications during the application development phase of software for internal use to provide services to customers. These capitalized costs include certain payroll and payroll related costs for employees and costs for outside consultants who are directly associated with and who devote time to internal use software projects. Costs incurred prior to the application development phase and after the market release are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life from the date the project is substantially complete and ready for its intended use. The estimated useful life is determined based on management’s judgment on how long the core technology and functionality serves internal needs and the customer base. Once projects are substantially complete, management will evaluate the useful lives of these assets on an annual basis and will test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. These costs are not yet amortized as our SaaS solution has not been deployed. Management considers use of estimates in determining the appropriate allocation of personnel costs (including fringe benefits and stock compensation) and software development consultants’ costs to software capitalization. Such costs were analyzed for reasonableness and the current basis (evaluation of project plans and stage) is determined to be the best estimate of the costs capitalized during the period. The estimates applied have been reasonable in the past and the likelihood of change in estimate to impact the software cost capitalized is remote. Recently Issued and Adopted Accounting Pronouncements We describe the recently issued accounting pronouncements that apply in Note 2 of the consolidated financial statements as of and for the year ended December 31, 2025. Emerging Growth Company Status Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised accounting standard at the time private companies adopt the new or revised standard. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. 67