FiEE, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and involves numerous risks and uncertainties. Forward-looking statements may include, among others, statements relating to our ability to predict revenue and reduce costs related to our products or service offerings, our ability to forecast product and services sales volumes, the sufficiency of our capital resources and the availability of debt and equity financing, the continuing impact of uncertain global economic conditions on the demand for our products and services, our ability to maintain and scale adequate and secure software platform infrastructure, the impact of competition on demand for our products and services, our competitive position, our future financial position and results of operations, and our ability to grow in new and existing markets. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “strives,” “goal,” “estimates,” “forecasts,” “projects” or “anticipates” and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, competition; the effectiveness of our strategies; general economic conditions, including any impact from inflation; current geopolitical conditions including conflicts in the Middle East, the ongoing Russia-Ukraine War and geopolitical tensions between China and Taiwan; our ability to successfully implement our business strategy; the success of our initiatives to increase sales; changes in commodity, energy, labor and other costs; our ability to attract and retain management and employees; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Overview We historically delivered comprehensive WiFi/SaaS platform to make everyone’s connected home safe and supportive for life and work. We continue to grow and expand our SaaS operations as a digital service provider focused on integrating AI and data analytics into content creation and brand management. In addition to our SaaS solutions, we now also offer customized software development services and digital authentication services. As part of our ongoing strategic initiatives, we are actively planning to develop and integrate blockchain technology into our operations in the future. Through the acquisition of HGK, we have successfully applied blockchain technology to our digital authentication services. This advancement is aimed at enhancing the security, transparency, and efficiency of our services and systems. In line with our growth strategy, we are also targeting potential acquisitions in key sectors such as AI, hardware, and the Internet of Things (IoT). The acquisitions completed in 2025 have enabled us to strengthen our technological capabilities and expand our market presence. Additionally, we are exploring entry into the MCN business. Our goal is to serve as a bridge between influencers or content creators and the global market, facilitating valuable connections and expanding our reach in this rapidly evolving digital space. These strategic initiatives reflect our commitment to innovation and expansion, positioning us for long-term growth and success in emerging industries. 21 Key Factors Affecting Our Performance Generally, our gross margin depends on a number of factors, including the type of service and customer category. Digital content services tend to have higher gross margins but require ongoing investments; software development services have gross margins that vary based on project complexity; and digital authentication services, which leverage AI and blockchain technologies, have high gross margin potential. Our future growth is largely dependent on our ability to acquire new customers, which is crucial for expanding our SaaS - MCN digital services, software services, and digital authentication services. This will rely on the effectiveness of our marketing and sales efforts to reach teams and organizations across diverse industries. The success of our growth strategy, as well as our future prospects, hinges on our ability to attract and retain new customers. While we see a substantial market opportunity in the MCN business, continued investment in sales and marketing, research and development, and customer support will be essential to further grow our international customer base. In order to sustain and expand our existing customer base, we prioritize ensuring that our customers continue to derive value from our services. By building long-term, meaningful relationships, we aim to help customers leverage our services to establish stronger connections in the global marketplace. As they increasingly recognize the value we provide, we expect them to expand their usage and upgrade their service plans, driving revenue growth within our current customer base. This approach underpins our strategy to enhance both customer retention and revenue growth over time. 22 Results of Operations The following table sets forth certain financial data derived from our condensed consolidated statements of operations for the three months ended March 31, 2026 and 2025, presented in absolute dollars and as a percentage of revenues, with dollars and percentage change period over period: Three months ended March 31, Change 2026 2025 $ % Revenues $ 2,121,989 100.0 % $ 125 100.0 % $ 2,121,864 1,697,491.2 % Cost of revenue 627,745 29.6 750 600.0 626,995 83,599.3 Gross profit 1,494,244 70.4 (625 ) (500.0 ) 1,494,869 (239,179.0 ) Operating expenses: Selling and marketing 34,339 1.6 - - 34,339 N/A General and administrative 996,873 47.0 340,496 272,397.0 656,377 192.8 Research and development 36,587 1.7 30,000 24,000.0 6,587 22.0 Total operating expenses 1,067,799 50.3 370,496 296,397.0 697,303 188.2 Operating income (loss) 426,445 20.1 (371,121 ) (296,897.0 ) 797,566 (214.9 ) Total other income (expense) 61,900 2.9 (2,789 ) 2,231.0 64,689 (2,319.4 ) Income (loss) before income taxes 488,345 23.0 (373,910 ) (299,128.0 ) 862,255 (230.6 ) Income taxes 136,829 6.4 - - 136,829 N/A Net income (loss) $ 351,516 16.6 % $ (373,910 ) (299,128.0 )% $ 725,426 (194.0 )% Comparison of the three months ended March 31, 2026 to the three months ended March 31, 2025 The following table sets forth our revenues by product and the changes in revenues for the three months ended March 31, 2026, as compared to the three months ended March 31, 2025: Three Months Ended March 31, 2026 2025 $ Change % Change SaaS – MCN digital services $ 1,093,336 $ 125 $ 1,093,211 874,568.8 % Software services 589,959 - 589,959 N/A Digital authentication services 438,694 - 438,694 N/A Total $ 2,121,989 $ 125 $ 2,121,864 1,697,491.2 % 23 Revenues Our revenues increased by $2.1 million for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increase in revenues primarily reflects the Company’s strategic transition from legacy hardware operations to SaaS solutions, with a new business model focusing on integrating AI and big data into content creation and brand management. Notably, during March 2025, we successfully secured our first customer orders and generated initial sales, marking a critical milestone in the strategic pivot. Our target clients are individuals or entities seeking to grow their online presence as influencers or content creators. As of March 31, 2026, we onboarded approximately 818 customers, corresponding to SaaS – MCN digital service fees totaling $6.9 million, of which $6.4 million was recognized as revenue cumulatively, including $1.1 million recognized in the three months ended March 31, 2026. Building on this momentum, we introduced customized software services in July 2025. As of March 31, 2026, we secured contracts totaling $1.5 million for software services, a portion of which was recognized as revenue in the three months ended March 31, 2026 in accordance with the relevant revenue recognition models (over time or at a point in time, as applicable). During the three months ended March 31, 2026, we added five new customers, bringing the total number of customers for these services to 17 as of March 31, 2026. The related accounts receivable balance as of March 31, 2026 was $1.0 million. Through the acquisition of HGK in November 2025, we added the ability to provide digital authentication services. As of March 31, 2026, this business had generated cumulative revenue of $768 thousand, including $439 thousand recognized in the three months ended March 31, 2026, serving five corporate clients and 52 individual clients in total, with related accounts receivable amounting to $0.4 million. This business leverages AI and blockchain technology to provide authentication, certification, and display services for artworks, further diversifying our revenue streams. Cost of Revenue and Gross Margin Cost of revenue for the three months ended March 31, 2026 consisted primarily of direct labor costs; amortization of certain acquired intangible assets and software development costs; outsourced authentication service costs; and other costs attributable to the provision of service offerings. Cost of revenue for the three months ended March 31, 2025 consisted primarily of the cost of direct labor. The increase in gross profit was attributable to higher revenue in the three months ended March 31, 2026. Our gross margin can be affected by a number of factors, including fluctuation in labor cost, foreign exchange rates, sales returns, changes in average selling prices, end-user customer rebates and other channel sales incentives, changes in our cost of revenue due to fluctuations and increases in prices paid for components, overhead costs, inbound freight and duty/tariffs, conversion costs, and charges for excess or obsolete inventory. The following table presents revenues and gross margin, for the periods indicated: Three Months Ended March 31, 2026 2025 $ Change % Change Revenues $ 2,121,989 $ 125 $ 2,121,864 1,697,491.2 % Cost of revenue $ 627,745 $ 750 $ 626,995 83,599.3 % Gross margin 70.4 % -500.0 % 24 Gross margin increased significantly in the three months ended March 31, 2026, compared to the three months ended in the prior fiscal year period. In the three months ended March 31, 2025, the Company had just launched its SaaS-based MCN digital services in March 2025 and had not yet introduced customized software services or digital authentication services, resulting in minimal revenue and negative gross profit. Following the full-year development of our MCN digital services, the introduction of customized software services in July 2025, and the acquisition of HGK in November 2025 adding digital authentication services beginning in December 2025, the Company has transitioned to a higher-margin business model. The improvement in gross margin was primarily driven by our MCN digital services, which leverage AI and data analytics to reduce reliance on manual labor, resulting in higher margins compared to traditional service models. Selling and Marketing Selling and marketing expenses consist primarily of business promotion and corporate publicity expenses. The following table presents sales and marketing expenses for the periods indicated: Three Months Ended March 31, 2026 2025 $ Change % Change Selling and marketing $ 34,339 $ - $ 34,339 N/A Sales and marketing expenses increased by $34 thousand in the three months ended March 31, 2026, compared to the three months ended in the prior fiscal year period, primarily due to the Company’s business transformation. For the three months ended March 31, 2026, selling and marketing expenses primarily reflected costs related to the expansion of our three core business lines—MCN digital services, software development services, and digital authentication services—as well as corporate branding initiatives. For the three months ended March 31, 2025, the Company had just launched its new business lines and had not yet incurred any selling and marketing expenses. General and Administrative General and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, information technology (“IT”), professional fees, facility allocations, and other general corporate expenses. The following table presents general and administrative expenses, for the periods indicated: Three Months Ended March 31, 2026 2025 $ Change % Change General and administrative $ 996,873 $ 340,496 $ 656,377 192.8 % General and administrative expenses increased by $656 thousand, or 192.8%, to $997 thousand for the three months ended March 31, 2026, compared to $340 thousand for the three months ended March 31, 2025. The increase was primarily attributable to certain non-recurring professional service fees incurred during the quarter, including legal and advisory fees related to strategic initiatives. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, and other factors. 25 Research and Development Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes, IT, and other consulting fees. Research and development expenses are recognized as they are incurred. Our research and development organization is focused on enhancing our ability to introduce innovative and easy-to-use products and services. The following table presents research and development expenses, for the periods indicated: Three Months Ended March 31, 2026 2025 $ Change % Change Research and development $ 36,587 $ 30,000 $ 6,587 22.0 % Research and development expenses increased by approximately $7 thousand in the three months ended March 31, 2026, compared to the three months ended in the prior fiscal year period. The increase primarily reflects ongoing enhancements and optimizations to our system during the current period. Research and development expenses may fluctuate depending on the timing and number of development activities and could vary significantly as a percentage of revenues, depending on actual revenues achieved in any given year. Liquidity and Capital Resources The Company’s operations have historically been primarily financed through the issuance of Common Stock and Preferred Stock. Since inception, the Company has incurred significant losses and negative cash flows from operation and an accumulated deficit of $95.3 million. The Company began generating operating profit in the fourth quarter of 2025 and has continued to do so thereafter During the three months ended March 31, 2026, the Company reported a net income of $352 thousand. As of March 31, 2026, we had cash of $4.6 million as compared to $3.1 million on December 31, 2025. On March 31, 2026, we had no outstanding borrowings and a positive working capital of $3.3 million. Our ability to maintain adequate levels of liquidity depends in part on our ability to generate cash from operations and our ability to raise additional funds through equity or debt financing. We are evaluating options related to our liquidity and will continue to monitor our costs in relation to our sales and adjust our cost structure accordingly. Our historical cash outflows have primarily been associated with: (1) cash used for operating activities such as personnel costs, cost of services, general office expenses, professional service fees, and other working capital needs; (2) cash used for research and development and sales and marketing initiatives; (3) capital expenditures related to the acquisition of property, equipment and software; (4) cash used to repay our debt obligations and related interest expense; and (5) cash used for acquisitions. Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows. Our condensed consolidated financial statements as of March 31, 2026 were prepared under the assumption that we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt exists about our ability to continue as a going concern, and we will require additional liquidity to continue operations beyond the next 12 months. Our condensed consolidated financial statements as of March 31, 2026 do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if we were unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or part of their investment. 26 Cash Flows The following table presents our cash flows for the periods presented: For the Three Months Ended March 31, 2026 2025 Cash provided by (used in) operating activities $ 66,588 $ (371,058 ) Cash used in investing activities (518,047 ) - Cash provided by financing activities 1,974,993 350,000 Effect of foreign exchange rate changes on cash (28,085 ) - Net increase (decrease) in cash $ 1,495,449 $ (21,058 ) Cash Flows from Operating Activities. Cash provided by operating activities of $67 thousand during the three months ended March 31, 2026 reflected our net income of $352 thousand, adjusted for non-cash expenses, consisting primarily of $344 thousand in depreciation and amortization expense. Sources of cash were primarily from decreases in other receivables of $1.1 million and increases in accounts payable of $106 thousand. Uses of cash were primarily from increases in accounts receivable of $1.0 million, decreases in contract liabilities of $829 thousand, and decreases in income tax payable of $116 thousand. Cash used in operating activities of $371 thousand during the three months ended March 31, 2025 reflected our net loss of $374 thousand, adjusted for non-cash expenses, consisting primarily of $60 thousand in depreciation and amortization expense. Uses of cash included a decrease in accounts payable of $43 thousand and other assets of $88 thousand. Sources of cash included decrease of prepaid expenses and other current assets of $40 thousand. Cash Flows from Investing Activities. During the three months ended March 31, 2026, cash used in investing activities consisted of $0.5 million for the purchase of property. During the three months ended March 31, 2025, the Company had no cash flows generated or used by investing activities. Cash Flows from Financing Activities. Cash provided from financing activities during the three months ended March 31, 2026 consisted of gross proceeds from issuance of Common Stock of $2.0 million, partially offset by payment of deferred financing costs of $25 thousand. Cash provided from financing activities during the three months ended March 31, 2025 primarily consisted of proceeds from the issuance of convertible note of $300 thousand. Future Liquidity Needs Our primary short-term needs for capital, which are subject to change, include: ● upgrades to our IT infrastructure to enhance our capabilities and improve overall productivity; ● support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources; and ● the continued advancement of research and development activities. 27 Our capital expenditures are largely discretionary and within our control. We expect that our product sales and the resulting operating loss, as well as the status of each of our product development programs, will significantly impact our cash management decisions. At March 31, 2026, we do not believe our current cash will be sufficient to fund working capital requirements, capital expenditures and operations during the next 12 months. Our ability to continue as a going concern will depend on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures and increase revenues. Based on these factors, management determined that there is substantial doubt regarding our ability to continue as a going concern. We will continue to monitor our costs in relation to our sales and adjust accordingly. Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment. Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control. Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot guarantee that such funding will be available in needed quantities or on terms favorable to us, if at all. As of March 31, 2026, we have U.S. federal net operating loss carry forwards of approximately $66.8 million available to reduce future U.S. federal taxable income. A valuation allowance has been established for the full amount of deferred tax assets recognized in our U.S. entity as management has concluded that it is more-likely than-not that the benefits from such assets will not be realized. As a result, as of March 31, 2026 and December 31, 2025, we recorded a valuation allowance against our net deferred tax assets to the extent that such assets were recognized in our U.S. entity. To support our strategic transition to SaaS solutions and the scaling of our AI-driven platform, management anticipates requiring approximately $10 million in total funding over the next three years. We plan to allocate (1) $4.0 million in 2026 to develop AI technology for content, build fan community and membership system, (2) $3.0 million in 2027 to enhance our SaaS system, and develop robust security for other intellectual property protection technologies, and (3) $3.0 million in 2028 to advance AI media development and expand content creation capabilities. To provide for such liquidity needs over the next three years, on May 9, 2025, we entered into the Helena Purchase Agreement with Helena, whereby we have the right to issue and sell to Helena, from time to time, and Helena shall purchase from us, up to $15,000,000 of the Common Stock. In no event shall the number of shares of Common Stock issuable to Helena cause the aggregate number of shares of Common Stock beneficially owned by Helena and its affiliates as a result of previous issuances and sales of Common Stock to Helena to exceed 9.99% of the then issued and outstanding Common Stock. The purchase price is based on 95% of the lowest VWAP during the three (3) Trading Days following Helena’s receipt of the shares. On May 9, 2025, the Company also entered into, and simultaneously closed the transactions under, a Securities Purchase Agreement with Cao Yu, whereby the Company sold 1,585,366 shares of the Company’s Common Stock to Cao Yu, for an aggregate purchase price of $2,600,000. On May 9, 2025, the Company also entered into, and simultaneously closed the transactions under, a Securities Purchase Agreement with Hu Bin, whereby the Company sold 853,659 shares of Common Stock to Hu Bin, for an aggregate purchase price of $1,400,000. On January 30, 2026, the Company entered into the 2026 Purchase Agreement with the Purchasers, pursuant to which the Company agreed to sell the Shares at an offering price of $5.07 per Share. The sales made pursuant to the 2026 Purchase Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act. The Closing occurred on March 31, 2026. 28 Commitments and Contractual Obligations During the three months ended March 31, 2026, except as otherwise disclosed in this Quarterly Report on Form 10-Q, there were no material changes to our capital commitments and contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of March 31, 2026. See Note 6 to the accompanying condensed consolidated financial statements for additional disclosure. Recent Accounting Standards See Note 2 to the accompanying condensed consolidated financial statements, for a full description of recent accounting standards, including the expected dates of adoption and estimated effects on the financial condition and results of operations, which are hereby incorporated by reference. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. Our critical accounting policy is revenue recognition, and no critical accounting estimates were identified, as described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10‑K for the year ended December 31, 2025. For the three months ended March 31, 2026, the Company’s critical accounting policy remains revenue recognition, and no critical accounting estimates were identified. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item. 29