KIDZ AI Inc. 10-Q

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations References to the “Company,” “our,” “us” or “we” refer to Classover Holdings, Inc. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited financial statements and the notes related thereto. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors . CLASSOVER’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are an online enrichment class platform that offers over 40 courses taught by experienced, independent educators. Our program caters to children aged 4 to 17, providing personalized attention and a supportive learning environment. Unlike traditional classes, we give students the unique opportunity to explore their interest in-depth via interactive, live streaming courses with flexible time slots. Although we have incurred continuing losses from operations and net losses in the past few years, our business has experienced continuous growth in sales. Our total revenue decreased by $69,269, or 8%, from $885,285 for the three months ended March 31, 2024, to $816,016 for the three months ended March 31, 2025. Our gross profit decreased by $69,770, from $475,136 for the three months ended March 31, 2024, to $405,366 for the three months ended March 31, 2025. Gross profit margin decreased from 54% for the three months ended March 31, 2024 to 50% for the three months ended March 31, 2025. Business Model We understand that it is easier to learn when students are interested, so we highlight variety in our business model. Our platform offers a wide breadth of affordable enrichment programs including language, science, technology, engineering, arts, mathematics, music, and many more. Since our platform handles enrollments, record keeping, and many other tasks that usually take up educators’ time, our educator can focus on sharing knowledge about topics they love with our students. We analyze data gathered on our platform to better determine our students’ most relevant needs, helping us match them with relevant courses and learning paths, thereby driving higher satisfaction. Once a learner enrolls in a course, we strive to provide an effective learning experience through tutoring, assessments, Q&As, and interactive exercises. We provide time-based subscriptions and credit-based subscriptions to our online courses. For time-based subscriptions, we provide students with unlimited access to our courses for a specified period of time. For credit-based subscriptions, we offer our students the flexibility to take courses at any time up to the limit of their prepaid balance. Key Factors Affecting Our Performance Our results of operations and financial condition have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and elsewhere in the Form 10-Q. Ability to attract new registered users and paid subscribers Our business model is dependent upon our ability to grow and maintain a large user base, and it also requires that we grow and keep registered users and paid subscribers. As of March 31, 2025 and December 31, 2024, we have 65,614 and 61,387 registered users, respectively. "Registered users" are individuals who have signed up and created an account on our platform. This group includes all users who access our services, regardless of whether they have made a financial commitment to our offerings. Registered users may take advantage of free trials, access limited content, or use basic features available at no cost. While registered users do not directly contribute to subscription revenue, they play a crucial role in the overall revenue strategy by expanding the potential market. They provide a pool of potential customers who can be converted into paying customers through targeted marketing and engagement strategies. Additionally, registered users might generate revenue through advertisements, in-app purchases, or by upgrading to paid plans. 19 Table of Contents "Paid subscribers," on the other hand, include those registered users who have opted for a subscription plan and have made a financial commitment to access our premium content and features. Paid subscribers also encompass customers who purchase lesson credit packages, allowing them to access specific lessons or courses without committing to a recurring subscription. These subscribers typically pay either a recurring fee, which can be monthly, quarterly, or annually, depending on the subscription model, or a one-time fee for lesson credit packages. Paid subscribers are the primary source of revenue for the Company. The consistent and recurring nature of subscription payments ensures a steady revenue stream, while lesson credit packages offer flexibility and contribute additional non-recurring revenue. This combination supports the Company's operational costs, development, and expansion plans. Ability to retain existing paid subscribers and customer relationships Our ability to increase our revenues and profitability will depend on the ability to retain our existing customers as well as to convert registered users to paid subscribers. Ability to attract and retain high quality independent teacher contractors We believe that students are attracted to us largely because of the high quality and wide selection of enrichment and academic lessons offered by our high quality independent teacher contractors, and that continuing to attract and retain many high quality educator partners will be an important factor in attracting registered users and paid subscribers and increasing our revenue over time. We believe that our reach, reputation, and compensation packages provide an attractive value proposition for educators to partner with us to develop and distribute enrichment content. To be the platform of choice for educator partners, we continue to invest in increasing the size and engagement of our user base, improving recommendation and personalization features, and developing marketing capabilities that drive higher conversions. As of March 31, 2025 and December 31, 2024, we have 977 and 936 educator partners working with us, respectively. Operating Efficiency Our ability to maintain and increase profitability also depends on our ability to effectively control our costs and expenses. The significant component of our cost of revenues is the compensation expense to our educators. Our gross profit margin decreased from 54% for the three months ended March 31, 2024 to 50% for the three months ended March 31, 2025 due to the lack of consulting revenue stream in 2025 as consulting services were provided over the past nine months ended in 2024. We pay our educators based on the number of hours they teach. In addition, we initiated time limit on certain courses, which encouraged students to pick courses in a shorter period of time, which also lead to an increase in the number of students in each class. However, to ensure quality of our online courses, we generally maintain a student to teacher ratio within 6:1. Key Components of Results of Operations Revenues We have two predominant sources of revenue: (i) time-based subscriptions and (ii) credit-based subscriptions to our online courses. Customers are required to pay in advance to enroll for courses. In 2023, we started generating consulting revenue by providing marketing consulting services to a related party. Cost of revenues Cost of revenue consists of streaming services, third-party payment processing fees, and compensation for teachers and certain employees. 20 Table of Contents Selling expenses Selling expenses consist primarily of advertising costs on social media platforms such as Google and WeChat. General and administrative expenses General and administrative expenses consist primarily of (i) compensation for our management and administrative personnel, (ii) expenses in connection with operation supporting functions such as legal, accounting, consulting, and other professional service fees, and (iii) office rental, depreciation, and other administrative related expenses. Research and Development Expenses Our research and development expenses include compensation-related expenses to the outsourced subcontractors for maintenance of our online learning platform. Results of Operations The following table summarizes our results of operations for the years presented. The results below are not necessarily indicative of results to be expected for future periods. For the Three Months Ended March 31, 2025 2024 Variance % Revenues: Service revenues $ 816,016 $ 785,285 $ 30,731 4 % Consulting revenues (related party) - 100,000 (100,000 ) -100 % Total revenues 816,016 885,285 (69,269 ) -8 % Cost of revenues: Cost of revenues 410,650 410,149 501 0 % Total cost of revenues 410,650 410,149 501 0 % Gross profit 405,366 475,136 (69,770 ) -15 % Operating expenses: Selling and marketing 121,427 112,859 8,568 8 % General and administrative 573,539 508,902 64,637 13 % Research and development 6,307 18,492 (12,185 ) -66 % Total operating expenses 701,273 640,253 61,020 10 % (Loss) from operations $ (295,907 ) $ (165,117 ) $ (130,790 ) 79 % Interest and other expense (1,300 ) (1,972 ) 672 -34 % (Loss) before provision for income taxes (297,207 ) (167,089 ) (130,118 ) 78 % Provision for income taxes - - - 0 % Net (loss) $ (297,207 ) $ (167,089 ) $ (130,118 ) 78 % 21 Table of Contents Revenue The summary information by revenue stream are as follows: For the Three Months Ended March 31, 2025 2024 Variance % Revenues: Service revenues $ 816,016 $ 785,285 $ 30,731 4 % Consulting revenues (related party) - 100,000 (100,000 ) 100 % Total $ 816,016 $ 885,285 $ (69,269 ) -8 % Our total revenue decreased by $69,269, or 8% from $885,285 for the three months ended March 31, 2024, to $816,016 for the three months ended March 31, 2025. The decrease in the revenue in the first quarter of 2024 as compared to the first quarter of 2025 was primarily attributable to the absence of consulting revenue, partially offset by the increase in service revenues. In the fourth quarter of 2023, we added a new revenue stream by providing marketing consulting services to Genius Kid Class LLC, one of our related parties. Consulting revenue generated in the first quarter of 2024 was $100,000. Consulting services were provided over the past nine months. We completed our consulting service obligation by the end of 2024. We are uncertain about future growth of consulting revenue as we have not secured any new consulting contracts yet as of March 31, 2025.As a result, no consulting revenue was generated in the first quarter of 2025. Service revenues increased by $30,731, or 4%, from $785,285 for the three months ended March 31, 2024, to $816,016 for the three months ended March 31, 2025, driven by an increase in credit-based subscriptions and number of courses delivered during the first quarter of 2025. 22 Table of Contents Costs of Revenue For the Three Months Ended March 31, Variance Variance 2025 2024 Amount % Compensation $ 371,390 $ 368,275 $ 3,115 1 % Payment Processing Fee 16,809 20,469 (3,659 ) -18 % Streaming Services 22,450 21,405 1,045 5 % Total $ 410,650 $ 410,149 $ 501 0 % Cost of revenues increased slightly by $501, from $410,149 for the three months ended March 31, 2024, to $410,650 for the three months ended March 31, 2025. Compensation expense mainly comprises of wages for independent educators and certain employees directly involved in providing services. Compensation expense increased by $3,115, or 1%, from $368,275 for the three months ended March 31, 2024, to $371,390 for the three months ended March 31, 2025, driven by an increase in registered users and courses delivered during the first quarter of 2025. Additionally, we added competition classes , including AMC math competition preparation class and Math Kangaroo to our course portfolio. The cost of streaming service increased by $1,045, or 5%, from $21,405 for the three months March 31, 2024, to $22,450 for the three months ended March 31, 2025, due to the increase in total cost of revenue. The increase in streaming service expense is mainly attributable to increased class sessions provided during the first quarter of 2025. Gross profit margin Our gross profit and gross profit margin from the two revenue streams are summarized as follows: For the Three Months Ended March 31, 2025 2024 Variance Service revenues Gross profit 405,366 385,823 19,543 Gross margin 50 % 49 % 1 % Consulting revenues (related party) Gross profit 0 89,313 -89,313 Gross margin 0 % 89 % -89 % Total Gross profit 405,366 475,136 -69,770 Gross margin 50 % 54 % -4 % The total gross profit margin decreased from 54% for the three months ended March 31, 2024 to 50% for the three months ended March 31, 2025, as a result of decreased revenue during 2025. Our gross margin of service revenue increased from 49% for the three months ended March 31, 2024 to 50% for the three months ended March 31, 2025, mainly due to a higher growth rate in service revenue as compared to growth rate in related costs as the company’s continuous effort to optimize class size and class schedules. 23 Table of Contents Operating expenses During the three months ended March 31, 2025, we incurred total operating expenses of $701,273, an increase of $640,253, or 10%, as compared to a total of $558,863 during the three months ended March 31, 2024. Selling expenses increased by $8,568, or 8% from $121,427 for the three months ended March 31, 2024, to $112,859 for the three months ended March 31, 2025. Selling expenses include sales personnel payroll expenses, marketing and promotion expenses, and meals and entertainment expenses in relation to sales activities. There was an approximately 25% increase in our sales personnel payroll expenses from $91,341 for the three months ended March 31, 2024, to $114,025 for the three months ended March 31, 2025. The increase in sales personnel payroll expenses was primarily attributable to the implementation of a performance-based compensation model that aligns incentives more closely to the Company’s overall performance. As a result, our growth in service revenue has pushed up our sales personnel payroll expenses in 2025. The increase in selling expenses was partially offset by a decrease in marketing and promotional expenses. There was an approximately 64% decrease in our marketing and promotional expenses from $20,349 for the three months ended March 31, 2024 to $7,402 for the three months ended March 31, 2025. The reduction in marketing and promotional expenses from 2025 to 2024 was primarily achieved through the implementation of strategic cost saving measures, specifically the reduction of expenditures on social media companies and channels. Additionally, we engaged in collaborative partnerships with social influencers in the education sector to bolster audience engagement, leveraging their audience base for more targeted and impactful outreach efforts. Notably, the results delivered by our influencer partners are more promising as compared to traditional marketing, and more importantly, at a lower cost. General and administrative expenses increased by $63,468, or 13% from $508,902 for the three months ended March 31, 2024, to $573,539 for the three months ended March 31, 2025. Our general and administrative expenses include compensation related to the administrative personnel, amortization and depreciation expenses, rent, and other general expenses. The increase was primarily attributable to an increase in consulting expenses relating to our general operations. Other general expenses increased by $64,744, or 61% from $106,584 for the three months ended March 31, 2024, to $171,328 for the three months ended March 31, 2025. The increase was primarily attributable to a higher professional fee expenditures in 2025 when we incurred professional consulting fees and regulatory registration expenses as we prepared for a merger with Battery Future Acquisition Corp. (“BFAC”). Interest and other expenses for the three months ended March 31, 2025, was $1,300 as compared to $1,972 for the three months ended March 31, 2024. Provision for income taxes We had no income tax provision for the three months ended March 31, 2025 and 2024 as we made fully allowance on the deferred tax assets as we have determined that it is not more likely than not that the assets will be realized. Net Loss As a result of the combination of factors discussed above, our net loss increased from $167,089 for the three months ended March 31, 2024 to $297,207 for the three months ended March 31, 2025. 24 Table of Contents Liquidity and Capital Resources As of March 31, 2025, we had cash and cash equivalents of $80,416. Cash consists primarily of cash on hand and bank deposits. The Company maintains cash deposits with financial institutions that may exceed federally insured limits at times. The following table shows the breakout between cash on hand and bank deposits: March 31, 2025 December 31, 2024 Cash on hand $ 3,144 $ 3,144 Bank deposits 77,272 47,538 Total cash shown in the Statement of Cash Flows $ 80,416 $ 50,682 The accompanying consolidated financial statements have been prepared applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of March 31, 2025, the Company had cash of $80,416, current liabilities of $3,595,464, a working capital deficit of $3,509,780, and a stockholders’ deficit of $4,816,361, and a net loss of $297,207 For the three months ended March 31, 2025. These factors among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Business Combination with BFAC was consummated on April 4, 2025 and the Company received $1,075,936 from BFAC’s trust account at closing. In addition, the Company received an aggregate of $4,700,000 net proceed from a PIPE investor following the business combination. On April 30, 2025, the Company entered into an Equity Purchase Facility Agreement (the “EPFA”) with Solana Strategic Holdings LLC (“SSH”). Pursuant to the EPFA, subject to certain conditions precedent contained therein, the Company has the right to issue and sell to SSH, and SSH shall purchase from the Company, up to an aggregate of $400 million in newly issued shares of the Company’s Class B common stock. The Company has evaluated the significance and conditions of the trust account balance , the PIPE Financing, the EPFA, and concluded that the above financing plan is an effective mitigation plan that provides sufficient liquidity to support its continuous operations and to meet its payment obligations when liabilities fall due within the next twelve months from the date of issuance of these combined and consolidated financial statements. Accordingly, the factors raising the going concern uncertainty are alleviated. These financial statements do not include any adjustment relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish to pursue opportunities for investments, acquisitions, capital expenditures or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue additional equity or debt securities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. For the three months ended March 31, 2025 2024 Net cash (used in) operating activities $ (288,266 ) $ (189,685 ) Net cash (used in) investing activities - (128,554 ) Net cash provided by financing activities 318,000 100,000 Change in cash and cash equivalents 29,734 (218,239 ) Cash and cash equivalents, beginning of year 50,682 787,652 Cash and cash equivalents, end of year $ 80,416 $ 569,413 25 Table of Contents Operating Activities Net cash used in operating activities for the three months ended March 31, 2025, was primarily attributable to net loss of $297,207 and decrease in operating lease liabilities of $77,063 as we made payment under the lease contract and decrease in deferred revenues of $104,044. Cash outflow was partially offset by the non-cash amortization of operating lease right-of-use assets $75,221, depreciation and amortization expenses of $16,221, increase in due to related parties of $48,365, and increase in accrued liabilities and other payables of $37,171. Net cash used in operating activities for the three months ended March 31, 2024, was primarily attributable to net loss of $167,089, decrease in due to related party $88,144 as we repaid our related party for the amount due, and decrease in operating lease liabilities of $72,340 as we made payment under the lease contract. Cash outflow was partially offset by the non-cash amortization of operating lease right-of-use assets $72,304, stock compensation issued for consulting services $25,120 and increase in deferred revenues of $38,350 as we collected in advance from online class subscription. Investing Activities Net cash used in investing activities was $0 for the three months ended March 31, 2025, as compared to $128,554 for the three months ended March 31, 2024. The decrease was primarily due to no purchases of property and equipment in 2025, as compared to $128,554 of purchases in 2024. Financing Activities Net cash provided by financing activities was $318,000, for the three months ended March 31, 2025, an increase of $218,000, as compared to $100,000 net cash provided by financing activities for the three months ended March 31, 2024. The increase was mainly due to the issuance of promissory notes in the amount of $140,000 to the related party, and an advance of $178,000 from related party for the Company’s operating fund. Critical Accounting Policies and Estimates Accounting Principles —The consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). Principles of consolidation— The consolidated financial statements include the financial statements of the Company and its subsidiary. All significant intercompany transactions and balances between the Company and its subsidiary are eliminated upon consolidation. 26 Table of Contents Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions reflected in the consolidated financial statements include, but are not limited to, useful lives of property and equipment, valuation of deferred tax assets and liabilities, operating lease right-of-use assets and liabilities and deferred revenue. Actual results may differ materially from such estimates. Management believes that the estimates, and judgments upon which they rely, are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent that there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected. Revenue Recognition— The Company has three predominant sources of revenue: time-based subscriptions, credit-based subscriptions to our online courses, and marketing consulting services. Subscription Revenue Customers are required to pay in advance to enroll for course. For time-based subscriptions, we are obligated to provide students with unlimited access to our course for a specified term. For credit-based subscriptions, we offer our students the flexibility to take courses at any time up to the limit of their prepaid balance. Each contract of the online education service is accounted for as single performance obligation which is satisfied ratably over the service period. We charge fixed fees to the services contracts. The proceeds collected are initially recorded as deferred revenue. For credit-based subscriptions, revenues are recognized proportionately as the courses are delivered. For time-based subscriptions, revenues are recognized on a straight-line basis over the subscription period from the date in which the students activate the courses to the date of expiration. Refunds are provided to the students who decide to withdraw from the subscribed courses within the course offer period and a proportional refund is based on the percentage of untaken courses to the total courses purchased. Historically, the Company has not experienced material refunds. Consulting Revenue The Company also generates revenue from consulting services. The Company’s consulting program is designed to teach startup founders within the education sector how to market their product, refine their course content, infrastructure, and business models, achieve market fit and operating efficiency, and scale the startup into a high growth education business. The Company’s performance obligation is to provide consulting services to startup founders for a specific term. Customers are required to prepay full consulting service charge, which is fixed and determinable, at contract inception to secure program spot, and revenue is recognized overtime on a straight-line basis through the service term. Principal Agent Considerations— The Company makes its application available to be downloaded through third-party digital distribution service providers. Users who intend to enroll our courses are directed to third-party payment platforms before completing subscription with us. The Company evaluates the purchases via third-party payment processors to determine whether its revenues should be reported gross or net of fees retained by the payment processor. The Company is the principal in the transaction with the end user as a result of controlling, hosting, and integrating the delivery of the virtual items to the end user. The Company records revenue on a gross basis as a principal and records fees paid to third-party payment platforms as cost of revenues. Deferred Revenue— Deferred revenue mostly consists of payments we receive in advance of revenue recognition. Revenue is recognized over the life of the subscription, or as the delivery of the pre-purchased class sessions. The Company classifies deferred revenue as a short-term liability on the balance sheets as the longest subscription plan is for twelve months and the remaining session are expected to be delivered within twelve months or less. 27 Table of Contents Cost of Revenue— Cost of revenue predominantly consists of streaming services, third-party payment processing fees, and wages for teachers and certain employees engaged in producing the revenue. Property and Equipment— Property and equipment primarily includes computers and furniture are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over 5 years. Leasehold improvements are amortized over the lesser of the life of the lease or the estimated useful life of the leasehold improvements. Costs related to maintenance and repairs that do not extend the assets’ useful life are expensed as incurred. Income Taxes —The Company provides for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax reporting. The deferred tax asset or liability represents the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. A valuation allowance is established for any deferred tax asset for which it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized. The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with the asset and liability method. The first step is to evaluate the tax position for recognition by determining whether evidence indicates that it is more likely than not that a position will be sustained if examined by a taxing authority. The second step is to measure the tax benefit as the largest amount that is 50% likely of being realized upon settlement with a taxing authority. There were no amounts recorded at September 30, 2024 and 2023 related to uncertain tax positions. Fair Value of Financial Instruments —The Company accounts for certain assets and liabilities at fair value in accordance with the accounting guidance applicable to fair value measurements and disclosures. The carrying values of cash, cash equivalents, accounts payable, deferred revenues, interest payable, loan payable, due to related parties, operating lease liabilities and accrued liabilities and other payables are deemed to be reasonable estimates of their fair values because of their short-term nature. Research and Development Costs — Research and development expenses include compensation-related expenses to the outsourced subcontractors for maintenance of our online learning platform. Recent Issued Accounting Pronouncements For a detailed discussion on recent accounting pronouncements, see Note 2 to the consolidated financial statements included elsewhere in the Form 8-K. Contingencies— The Company records accruals for contingencies and legal proceedings expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated. If a loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss, would be disclosed. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements including arrangements that would affect the Company’s liquidity, capital resources, market risk support and credit risk support or other benefits. 28 Table of Contents 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 otherwise required under this item.