Sparx Holdings Group, Inc. 10-Q

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Company Overview We are a fire protection technology company incorporated in the state of Nevada on June 30, 2021, and headquartered in Cranston, Rhode Island with a mission to provide fire protection to businesses and building owners that operate within infrastructures that cannot be reasonably protected by traditional fire sprinklers. Traditional fire sprinklers are primarily mechanical devices that contain a heat-sensitive element that could be in the form of a glass bulb or a fusible metal link that will rupture or melt at a certain temperature threshold, activating the sprinkler and allowing water to flow. Traditional sprinklers will not turn on all at once. Each one activates independently, on its own. We intend, with Sparx Technologies, LLC (“Sparx”), to pioneer the fire protection industry with a commercially available wireless electronic fire sprinkler network and develop the industry’s first commercially available wireless electronic fire sprinkler system that can be adaptable for a variety of different applications and customers. On August 29, 2022, we entered into and consummated a Patent License Agreement (“Agreement”) with Sparx Technologies, LLC, a limited liability company (“Licensor”). Licensor is solely owned and controlled by Ms. Cassandra DeNunzio, our CEO and director. Ms. DeNunzio is the sole and first named inventor under a provisional patent application with a Serial No. 63/304,302 filed with the United States Patent Office (“USPTO”) on January 28, 2022, relating to the fire protection industry and particularly a commercially available battery-operated wireless electronic fire sprinkler network. As a result of the Agreement, we adopted the existing operations and business plan of Sparx Technologies, LLC pursuant to the terms and conditions of the patent licensing agreement and ceased to be a shell company. In partial consideration for the exclusive license granted by Licensor to the Company, the Company paid Sparx Holdings, LLC, a limited liability company, controlled and solely owned by Ms. DeNunzio, a non-refundable license fee upon execution of the Agreement in the amount of One Hundred Million shares (100,000,000) of the Company’s common stock (the “Initial License Fee”). The Initial License Fee is consideration for the grant and continuation of the license pursuant to a five-year term. Licensor shall have no obligation or liability to return any portion of the Initial License Fee. The Company shall pay Licensor a royalty of fifty percent (50%) of Licensee’s Net Sales of all Licensed Products developed and sold by the Company. Ownership of the licensed technology prior to, during the course or as a result of the Agreement, will be the sole and exclusive property of Licensor. The scope of the provisional patent includes the following: A. System details for a fire sprinkler system that communicates wirelessly. B. Algorithm descriptions and flowcharts for power reduction which allow for the creation of a battery-powered wireless fire sprinkler product. C. Potential methods for fire detection and electronic sprinkler actuation. D. Explanations detailing the system architecture for a wireless fire sprinkler network. E. Device descriptions and functions for participating network devices. Our Chief Executive Officer and Director, Casandra DeNunzio has agreed to lend us equipment at no cost resulting in us having in-house capabilities to design and build innovative electronic fire protection products and solutions. Ms. DeNunzio has extensive industry knowledge, familiarity with local specifications and regulations, fire codes and expertise in the design and test engineering of fire detection, suppression, and extinguishment technology and their components and systems. We have available to us, the equipment, capabilities, and expertise to prototype electronic circuits, assemble simple printed circuit boards, benchtop test electrical assemblies with DC and AC power supplies, troubleshoot designs with multimeters, and create wiring harnesses. The Company has now begun to finalize the final components of a prototype stage, battery-operated wireless electronic sprinkler network, to be utilized in wireless fire suppression technology. The Company has named the system the, “Sparx™ Smart Sprinkler System.” The prototype is in the development stages and will require further bench testing and field testing in simulated fire scenarios, in order for the Company to move closer to being able to bring the system to market. -3- Table of Contents Third-Party Testing To effectively market our Sparx™ Smart Sprinkler System, third-party testing is necessary. UL and FM are two of the most common third-party entities in the United States that provide listing, approval, or certification services. UL is a reputable testing institute that is one of the largest public safety testing labs in the world, while FM also has an international reputation for testing and is well-regarded in the industry. In contrast to UL, FM is an insurance company that provides insurance coverage to customers that use products that they have approved or certified to their own testing standards. Our initial objective is to obtain UL Listing to fill an industry gap for providing adequate and reasonable sprinkler protection in storage and warehousing applications. We would also like to obtain FM Approval for the Sparx™ Smart Sprinkler System, but we believe that there may be additional testing with FM due to our product’s novelty in the fire sprinkler industry. Our plan is to first work with UL to see how our product performs in large-scale testing, before working with FM on a test program for FM Approval. The third-party testing required for our product will most likely include mechanical and electrical testing, as well as large-scale fire testing. Our product's first application will be focused on providing adequate suppression for a storage application that cannot be currently protected with reasonable water demand. We want to ensure that our first application for testing is in line with the fire protection requirements for the average clear heights of the current proposed industrial developments for storage and warehousing. We plan to allocate a significant portion of available cash reserves towards conducting large-scale fire tests, which can be expensive due to the need for experienced personnel and state-of-the-art test labs that can handle fire hazards. Fire tests for high-storage heights must be conducted in at least three scenarios, as fires can originate directly under a single sprinkler head, between two sprinkler heads, or among four sprinkler heads. We estimate the cost of each large-scale fire test for high-storage heights to range anywhere from $250k to $1M. Following a test program with UL, we may decide to pursue FM Approval so we can sell our products to more customers, conduct performance-based design solutions for individual customers, or work towards conquering other challenging fire suppression applications. Additional Information The Company has recently launched a website, sparx-fire.com to provide development updates. The website has been designed by our sole officer, Cassandra DeNunzio. On or about January 4, 2023, the Company issued 75,000 shares of our Common Stock to a non-related party in exchange for their services related to designing a component of the battery-operated wireless electronic sprinkler network that is currently being developed by Sparx Technologies, LLC. As mentioned previously, the battery-operated wireless electronic sprinkler network, remains in the prototype stages of development On January 20, 2023, Sparx Technologies, LLC filed a utility patent application with the USPTO under 35 USC 111(a) for a Mesh Network Fire Suppression System and Associated Methods with Serial No. 18/099,584. A prior provisional application with Serial No. 63/304,302 was issued by the USPTO on January 28, 2022. In addition, an international patent application (PCT) was also filed with the USPTO on January 23, 2023, resulting in international patent pending status. An international application Serial No. PCT/US23/11314 was issued by the USPTO. The Company plans to commercialize Licensor’s wireless fire suppression technology into a fire protection/fire safety product line and seek approval from regulators. We plan to offer our advanced proprietary wireless sprinkler technology in the design, installation, and system integration to protect a variety of premises including commercial buildings and industrial sites from highly challenging fires. Our Approach We believe that there is a lot of room for innovation and opportunity to meet the fire protection needs of today's modern businesses and building owners. The design of fire sprinklers has not changed significantly over the last fifty or so years and still consists of mostly simple mechanical components 1 . Traditional sprinklers cultivated from 19 th century science use the same physical element to detect fires as they do to cause water to flow. Because the heat-sensitive operating element of traditional fire sprinklers shares two important primary functions, this technology can face significant complications. If a fire starts near the ground under a storage rack in a tall warehouse, significant fire spread can occur by the time a fire is detected at the ceiling, where sprinklers are commonly located. Because detection and activation are combined functions of traditional sprinkler technology, a single sprinkler could operate, and a phenomenon known as sprinkler skipping can occur that will cause sprinklers farther away from the fire origin to activate earlier than those that are closer and fire can continue to spread 2 . The patent pending technology in the product(s) we seek to offer, will allow for the decoupling of fire detection from sprinkler activation and will provide us with the ability to have greater control over sprinkler operations and respond to fires very early on in fire development. We believe that we can disrupt the fire sprinkler industry with our ability to leverage electronics and software in fire sprinkler system design by fundamentally changing the way the industry approaches fire suppression. In combination with Sparx Technologies, LLC, we intend to create a framework for fire protection that will allow for wireless communication and electronic detection and actuation of sprinklers. With this framework, we will be able to use the same basic hardware components, and program application-specific algorithms 3 tailored to the building, environment, and the structure and commodities the system is designed to protect. Our framework will allow us to make minimal, non-invasive changes when applying our technology from one customer-specific application to the next, allowing us to formulate solutions for various highly challenging fires quickly and effectively. Having the ability to pull additional levers with software and algorithms will give us the edge we need to deliver where traditional sprinklers cannot. We will be able to use software to change the way sprinklers respond to fires without redesigning the physical components of the sprinkler itself. This flexibility and adaptability will give Sparx an advantage when it comes to making design changes and expanding our product offerings. 1 Murphey, Dakota. “A History of Fire Sprinklers - IFSEC Global: Security and Fire News and Resources.” IFSEC Global | Security and Fire News and Resources. IFSEC Global | Security and Fire News and Resources, May 1, 2019. https://www.ifsecglobal.com/fire-news/a-history-of-fire-sprinklers/. 2 Xin, Yibing. “SMART Sprinkler for Highly Challenging Fires.” SFPE Europe , Issue 20 (Q4 2020). https://www.sfpe.org/publications/sfpeeuropedigital/sfpeeurope20. 3 Our application specific algorithms will contain a set of instructions that govern which sprinklers are needed for operation and when those sprinklers must operate in the event of a fire. The instructions may be different for various applications depending on factors like building layout, ceiling heights, commodity, how the commodity is stored, etc. -4- Table of Contents Current Status of our Technology We cannot currently provide a specific estimate for when our Sparx™ Smart Sprinkler System will be ready for market release or when we will begin UL and/or FM testing. When we have a clear timeline for these efforts, we intend to notify our investors. As mentio ned above, we believe we are in the final stages of developing our initial prototype. Our goal is to have a complete prototype system, rather than just individual components, ready for further beta testing by the end of the year. We have been making significant strides towards the finalization of our "hub," a pivotal component of the patent-pending technology behind the Sparx™ Smart Sprinkler System. The Sparx™ Smart Sprinkler System comprises a hub that collects information, such as heat, carbon dioxide levels, flame presence, and smoke content from Sensing and Activation Units installed at each fire sprinkler in the system. The hub has the ability to force open traditional fire sprinklers that are integrated with our patent-pending activation technology. Presently, we are continuing to work on the development of the proprietary software embedded within the hub. This software is engineered to facilitate seamless communication with multiple Sensing and Activation Units and show the user if any alarms are present within the system. The hub itself is designed as a sleek touchscreen device which will be mounted on an electrical box containing important electronics, battery back-up power, and circuitry to provide effective system operation. The hub will be able to be mounted on walls or flat surfaces, offering users essential information related to the health and status of the Sparx™ Smart Sprinkler System, alerts, and pertinent data. Above is an image showcasing the current state of the touchscreen development for the hub. Liquidity and Capital Resources Our cash balance is $107,159 as of September 30, 2023 and $100,219 as of June 30, 2023. Our cash balance is not sufficient to fund our planned future operations for any substantive period of time. In order to implement our plan of operations for the next twelve-month period, we require further funding. After a twelve-month period, we may need additional financing but currently do not have any arrangements for such financing aside from the Regulation A, Tier II Offering which is currently active and underway. Information related to our offering circular can be found in our Offering Statement, initially filed with the SEC on March 31, 2023, and subsequently qualified by the Commission on April 11, 2023. Our Offering Statement was further supplemented on May 1, 2023, May 5, 2023, May 11, 2023 and May 16, 2023. If we need additional cash and cannot raise it, we will either have to scale back, or suspend operations until we do raise the cash we need. To date we have relied entirely on funds provided to us by our officers and directors, and until we have additional sources of funding, we intend to continue to rely upon our officers and directors to fund our operations. Currently we have one officer, Cassandra DeNunzio, and two Directors, Cassandra DeNunzio and Jeffrey DeNunzio. Assets Our total assets as of September 30, 2023, and June 30, 2023, were $107,159 and $100,219, respectively. Total assets were comprised of cash and cash equivalents. The Company’s Sparx™ Smart Sprinkler System prototype, is not recognized on the balance sheet. Revenues We have not generated any revenue to date. Operating Expenses Our general and administrative expenses were $36,930 for the three months ended September 30, 2023 and $14,775 for the three months ended September 30, 2022. Our Research and Development fees were $1,095 and $0 for the three months ended September 30, 2023 and September 30, 2022, respectively. Our total operating expenses were $38,025 and $14,775 for the three months ended September 30, 2023 and September 30, 2022 respectively. For both periods total operating expenses primarily consisted of General and Administrative Expenses. The variance in total operating expenses was primarily due to an increase in business activity for the period ended September 30, 2023. Net Loss We have recorded a net income/ loss of $(38,025) for the three months ended September 30, 2023, and a net income/ loss of $(14,775) for the three months ended September 30, 2022. The variance in net loss is attributable to an increase in the level of our overall operations. Until we are able to generate revenue to cover our operating expenses, we expect our net loss to continue to increase as we further our operations. Additional Paid-In Capital During the period ended September 30, 2023, the Company’s director, Jeffrey DeNunzio, paid expenses on behalf of the Company totaling $15,065. The Company’s director, Jeffrey DeNunzio, paid expenses on behalf of the company totaling $27,303 during the year ended June 30, 2023. These payments were made with no expectation of repayment and are posted as additional paid-in capital. The Company’s CEO, Cassandra DeNunzio, contributed cash totaling $4,001 to the Company during the year ended June 30, 2023. These contributions were made with no expectation of repayment and are posted as additional paid-in capital. Going Concern The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company demonstrates adverse conditions that raise substantial doubt about the Company's ability to continue as a going concern for one year following the issuance of these financial statements. These adverse conditions are negative financial trends, specifically ope rating loss, working capital deficiency, and other adverse key financial ratios. The Company has not established any source of revenue to cover its operating costs. Management plans to fund operating expenses with related party contributions to capital or from the sale of common stock pursuant to its active Regulation A Offering. There is no assurance that management's plan(s) will be successful. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item. -5- Table of Contents