CleanCore Solutions, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report. All periods presented on or prior to October 16, 2022 represent the operations of CleanCore Solutions, LLC, or CleanCore LLC, TetraClean Systems, LLC, or TetraClean, and Food Safety Technology L.L.C., or Food Safety, our predecessors companies, and all references to “predecessor” refer to the combined financial position and results of operations of CleanCore, TetraClean and Food Safety on and before such date. References to “successor” refer to the financial position and results of operations of our company subsequent to October 16, 2022. Use of Terms Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” refer to CleanCore Solutions, Inc., a Nevada corporation. Special Note Regarding Forward Looking Statements This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about: ● our goals and strategies; ● our future business development, financial condition and results of operations; ● expected changes in our revenue, costs or expenditures; ● growth of and competition trends in our industry; ● our expectations regarding demand for, and market acceptance of, our products and services; ● our expectations regarding our relationships with investors, institutional funding partners and other parties we collaborate with; ● fluctuations in general economic and business conditions in the market in which we operate; and ● relevant government policies and regulations relating to our industry. In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” included in our Prospectus, dated April 25, 2024 and filed with the Securities and Exchange Commission, or the SEC, on April 30, 2024, and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. 20 In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Overview We specialize in the development and manufacturing of cleaning products that produce pure aqueous ozone for professional, industrial, or home use. We have a patented nanobubble technology using aqueous ozone that we believe is highly effective in cleaning, sanitizing, and deodorizing surfaces and high-touch areas. We offer products and solutions that are marketed for janitorial and sanitation, ice machine cleaning, laundry, and industrial industries. Our products are used in many types of environments including retail establishments, distribution centers, factories, warehouses, restaurants, schools and universities, airports, healthcare, food service, and commercial buildings such as offices, malls, and stores. Our mission is to become a leader in creating safe, clean spaces that are free from any chemical residue or skin irritants. We are currently expanding our distributor network, improving our manufacturing processes, and proving the effectiveness of our products in restaurants, airports, and hotels. Recent Developments Initial Public Offering On April 25, 2024, we entered into an underwriting agreement with Boustead Securities, LLC, as the representative of the several underwriters named on Schedule 1 thereto, relating to our initial public offering of class B common stock. Under the underwriting agreement, we agreed to sell 1,250,000 shares of class B common stock to the underwriters, at a purchase price per share of $3.72 (the offering price to the public of $4.00 per share of class B common stock minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase up to 187,500 additional shares of class B common stock, at a purchase price of $3.72, pursuant to our registration statement on Form S-1 (File No. 333-274928) under the Securities Act of 1933, as amended, or the Securities Act. On April 30, 2024, the closing of the initial public offering was completed. We sold 1,250,000 shares of class B common stock for total gross proceeds of $5,000,000. After deducting the underwriting commission and expenses, we received net proceeds of approximately $4,239,500. On April 30, 2024, we also issued a class B common stock purchase warrant to the representative for the purchase of 87,500 shares of class B common stock at an exercise price of $5.00, subject to adjustments. The warrant will be exercisable at any time and from time to time, in whole or in part, during the period commencing on April 30, 2024 and ending on April 25, 2029 and may be exercised on a cashless basis under certain circumstances. Conversion of Convertible Notes On May 2, 2024, we issued an aggregate of 257,479 shares of class B common stock upon the conversion of the 10% original issue discount convertible promissory notes issued on January 30, 2024 described below, which included principal of $250,000 and accrued interest of $7,479. Debt Extension and Amendment On April 30, 2024, we and Burlington Capital, LLC, or Burlington, entered into an extension agreement which extended the maturity date of the promissory note issued on October 17, 2022, or the Original Note, described below to May 9, 2024 . On May 31, 2024, Burlington and Walker Water LLC, or WW, entered into an allonge, assignment and agreement, or the Assignment Agreement, pursuant to which Burlington agreed to transfer $633,840.00 of the Original Note to WW. The Assignment Agreement also provided that we would make a payment of $900,000 on May 31, 2024 to Burlington to reduce the principal amount of the Original Note. 21 In conjunction with the Assignment Agreement, we issued an amended and restated promissory note to Burlington. The note has a new principal amount of $3,196,881, accrues interest at 8.5% per annum from October 17, 2022 (the date of the Original Note), which shall increase to 10% upon an event of default, and requires quarterly payments in the amount of $100,000 over the course of the next two and a half years, with a final payment of $1,396,881 due on April 1, 2027. The note may be prepaid at any time with no pre-payment penalty and contains customary events of default for a note of this type. Pursuant to the Assignment Agreement, we also issued a promissory note to WW in the principal amount of $633,840. The note accrues interest at 8.5% per annum from October 17, 2022 (the date of the Original Note), which shall increase to 10% upon an event of default, and is due on December 31, 2024. The note may be prepaid at any time with no pre-payment penalty and contains customary events of default for a note of this type. Principal Factors Affecting Our Financial Performance Our operating results are primarily affected by the following factors: ● our ability to acquire new customers or retain existing customers; ● our ability to stay ahead of our value-proposition to end consumers; ● our ability to continue innovating our technology to meet consumer demand; ● industry demand and competition; and ● market conditions and our market position. Emerging Growth Company We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to: ● have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; ● comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); ● submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and ● disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. In addition, Section 107 of the JOBS Act also provides that an emerging grow th company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our total annual gross revenues are $1.235 billion or more, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our class B common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. 22 Results of Operations Comparison of Three Months Ended March 31, 2024 and 2023 The following table sets forth key components of our results of operations for the three months ended March 31, 2024 and 2023, both in dollars and as a percentage of our revenues. Three Months Ended March 31, 2024 2023 Amount % of Revenue Amount % of Revenue Revenue $ 313,920 100.00 % $ 621,406 100.00 % Cost of sales 173,184 55.17 % 368,528 59.31 % Gross profit 140,736 44.83 % 252,878 40.69 % Operating expenses: General and administrative 559,398 178.20 % 502,446 80.86 % Advertising expense 17,737 5.65 % 2,210 0.36 % Depreciation expense 178 0.06 % - - Loss from operations (436,577 ) (139.07 )% (251,778 ) (40.52 )% Interest expense 84,093 26.79 % 71,979 11.58 % Net loss $ (520,670 ) (165.86 )% $ (323,757 ) (52.10 )% Revenue . We generate revenue from sales of our cleaning products. Our revenue decreased by $307,486, or 49.48%, to $313,920 for the three months ended March 31, 2024 from $621,406 for the three months ended March 31, 2023. The decrease is primarily due to a large one time order of $393,229 in March 2023 that was not repeated this year. Cost of sales . Our cost of sales consists of raw materials, components and labor. Our cost of sales decreased by $195,344, or 53.01%, to $173,184 for the three months ended March 31, 2024 from $368,528 for the three months ended March 31, 2023. As a percentage of revenue, cost of sales decreased from 59.31% for the three months ended March 31, 2023 to 55.17% for the three months ended March 31, 2024. This improvement is due to increased pricing the company implemented in May 2023. Gross profit . As a result of the foregoing, our gross profit decreased by $112,142, or 44.35%, to $140,736 for the three months ended March 31, 2024 from $252,878 for the three months ended March 31, 2023. As a percentage of revenue, gross profit increased from 40.69% for the three months ended March 31, 2023 to 44.83% for the three months ended March 31, 2024. General and administrative expenses . Our general and administrative expenses consist primarily of personnel expenses, including employee salaries and bonuses plus related payroll taxes, professional advisor fees, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our general and administrative expenses increased by $56,952, or 11.33%, to $559,398 for the three months ended March 31, 2024 from $502,446 for the three months ended March 31, 2023. As a percentage of revenue, our general and administrative expenses increased from 80.86% for the three months ended March 31, 2023 to 178.20% for the three months ended March 31, 2024. Such increase was primarily due increased internal payroll related to new positions added to facilitate future growth. Advertising expenses . Our advertising expenses consist of vendor trade shows and various trade publications. Our advertising expenses increased by $15,527, or 702.58%, to $17,737 for the three months ended March 31, 2024 from $2,210 for the three months ended March 31, 2023. Such increase was primarily due to an increase in trade show sponsorship expenses. Depreciation expense . We incurred depreciation expense of $178, or 0.06% of revenue, for the three months ended March 31, 2024, as compared to $0 for the three months ended March 31, 2023. 23 Interest expense . We incurred interest expense of $84,093, or 26.79% of revenue, for the three months ended March 31, 2024, as compared to $71,979, or 11.58% of revenue, for the three months ended March 31, 2023. Net loss . As a result of the cumulative effect of the factors described above, we had a net loss of $520,670 for the three months ended March 31, 2024, as compared to $323,757 for the three months ended March 31, 2023, an increase of $196,913, or 60.82%. Comparison of Nine Months Ended March 31, 2024 and 2023 The following table sets forth key components of our results of operations for the period from July 1, 2022 to October 16, 2022 (Predecessor), from October 17, 2022 to March 31, 2024 (Successor), and for the nine months ended March 31, 2024 (Successor). For the Nine Months Ended March 31, 2024 (Successor) Period from October 17, 2022 to March 31, 2023 (Successor) Period from July 1, 2022 to October 16, 2022 (Predecessor) Revenue $ 898,010 $ 1,470,175 $ 502,990 Cost of sales 457,495 999,556 351,740 Gross profit 440,515 470,619 151,250 Operating expenses: General and administrative 1,466,594 4,853,405 334,812 Advertising expense 43,191 12,814 4,621 Depreciation expense 388 - 6,143 Loss from operations (1,069,658 ) (4,395,600 ) (194,326 ) Interest expense 233,105 113,493 125,738 Net loss $ (1,302,763 ) $ (4,509,093 ) $ (320,064 ) We believe that reviewing our operating results for the nine months ended March 31, 2023, by combining the results of the successor period (October 17, 2022 to March 31, 2023) and the predecessor period (July 1, 2022 to October 16, 2022) is more useful in discussing our overall operating performance compared to the results of the nine months ended March 31, 2024 (successor). We do not see any potential risks associated with utilizing this combined presentation. Following are the combined results for the nine months ended March 31, 2024 and 2023, both in dollars and as a percentage of our revenues. Nine Months Ended March 31, 2024 (Successor) Pro Forma Combined Nine Months Ended March 31, 2023 Period from October 17, 2022 to March 31, Period from July 1, 2022 to October 16, Amount % of Revenue Amount % of Revenue 2023 (Successor) 2022 (Predecessor) Revenue $ 898,010 100.00 % $ 1,973,165 100.00 % $ 1,470,175 $ 502,990 Cost of sales 457,495 50.95 % 1,351,296 68.48 % 999,556 351,740 Gross profit 440,515 49.05 % 621,869 31.52 % 470,619 151,250 Operating expenses: General and administrative 1,466,594 163.32 % 5,188,217 262.94 % 4,853,405 334,812 Advertising expense 43,191 4.81 % 17,435 0.88 % 12,814 4,621 Depreciation expense 388 0.04 % 6,143 0.31 % - 6,143 Loss from operations (1,069,658 ) (119.11 )% (4,589,926 ) (232.62 )% (4,395,600 ) (194,326 ) Interest expense 233,105 25.96 % 239,231 12.12 % 113,493 125,738 Net loss $ (1,302,763 ) (145.07 )% $ (4,829,157 ) (244.74 )% $ (4,509,093 ) $ (320,064 ) 24 Revenue . Our revenue decreased by $1,075,155, or 54.49%, to $898,010 for the nine months ended March 31, 2024 from $1,973,165 for the nine months ended March 31, 2023. The reduced revenue was primarily due to decreases in the volume of products sold to our two largest customers, due to external factors that impacted their number of purchases, offset by increases in product prices. One of our largest historical customers chose to manufacture most of their own units beginning at the start of fiscal year 2023, rather than purchasing our products. The loss of this customer led to a major decline in sales for the nine months ended March 31, 2024. Our second largest historical customer was a larger buying group for several smaller regional groups, and their sales declined because a sales associate at our company, who had a close connection with such buying group, resigned in May 2023. We also experienced a $192,839 decrease in revenue due to our termination of a drop ship arrangement with a third party. Our product price increases occurred in March 2023, and an approximately 20% price increase was applied to all products that we offer due to our market review of competitor pricing. During the nine months ended March 31, 2024, the decrease in revenue was due to an approximate 70% decrease in sales volume, offset by an approximate 15% increase to prices across all product lines. Cost of sales . Our cost of sales decreased by $893,801, or 66.14%, to $457,495 for the nine months ended March 31, 2024 from $1,351,296 for the nine months ended March 31, 2023. As a percentage of revenue, cost of sales decreased from 68.48% for the nine months ended March 31, 2023 to 50.95% for the nine months ended March 31, 2024. This decrease was primarily due to the price increases described above. Gross profit . As a result of the foregoing, our gross profit decreased by $181,354, or 29.16%, to $440,515 for the nine months ended March 31, 2024 from $621,869 for the nine months ended March 31, 2023. As a percentage of revenue, gross profit increased from 31.52% for the nine months ended March 31, 2023 to 49.05% for the nine months ended March 31, 2024. General and administrative expenses . Our general and administrative expenses decreased by $3,721,623, or 71.73%, to $1,466,594 for the nine months ended March 31, 2024 from $5,188,217 for the nine months ended March 31, 2023. As a percentage of revenue, our general and administrative expenses decreased from 262.94% for the nine months ended March 31, 2023 to 163.32% for the nine months ended March 31, 2024. Such decrease was primarily due to a reduction in stock option expense. Advertising expenses . Our advertising expenses increased by $25,756, or 147.73%, to $43,191 for the nine months ended March 31, 2024 from $17,435 for the nine months ended March 31, 2023. Such increase was primarily due to an increase in trade show sponsorship expenses. Depreciation expense . We incurred depreciation expense of $388, or 0.04% of revenue, for the nine months ended March 31, 2024, as compared to $6,143, or 0.31% of revenue, for the nine months ended March 31, 2023. Interest expense . We incurred interest expense of $233,105, or 25.96% of revenue, for the nine months ended March 31, 2024, as compared to $239,231, or 12.12% of revenue, for the nine months ended March 31, 2023. Net loss . As a result of the cumulative effect of the factors described above, we had a net loss of $1,302,763 for the nine months ended March 31, 2024, as compared to $4,829,157 for the nine months ended March 31, 2023, a decrease of $3,526,394, or 73.02%. Liquidity and Capital Resources Our company has incurred losses and negative cash flows from operations. To date, we have financed our operations primarily through revenue generated from operations, third party borrowings, private placements of our securities and advances from our founders. As of March 31, 2024, we had cash of $56,082, a net loss for the nine-month period ended of $1,302,763 and cash used in operating activities of $485,530. Our company was formed in August 2022 and completed the acquisition in October 2022. Since the acquisition, we have invested in further developing our products, hiring key personnel, and engaging third party experts such as accountants and underwriters in connection with our initial public offering described above. Despite the initial public offering, management believes that currently available resources will not be sufficient to fund our planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about our company’s ability to continue as a going concern for 12 months from the date of issuance of the accompanying unaudited condensed financial statements. 25 We will be dependent upon the raising of additional capital through equity and/or debt financing in order to implement our business plan and generate sufficient revenue in excess of costs. If we raise additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock. If we raise additional funds by issuing debt, we may be subject to limitations on its operations, through debt covenants or other restrictions. There is no assurance that we will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on our financial condition. Thes accompanying unaudited condensed financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should we be unable to continue as a going concern. The accompanying unaudited condensed financial statements have been prepared on a going concern basis under which our company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business. Summary of Cash Flow The following table provides detailed information about our net cash flow for the nine months ended March 31, 2024. Combined Nine Months Ended March 31, 2023 Nine Months Ended March 31, 2024 2023 Total Period from October 17, 2022 to March 31, 2023 (Successor) Period from July 1, to October 16, 2022 (Predecessor) Net cash used in operating activities $ (485,530 ) $ (286,318 ) $ (169,067 ) $ (117,251 ) Net cash used in investing activities (2,138 ) (2,007,882 ) (2,000,000 ) (7,882 ) Net cash provided by (used in) financing activities 150,556 2,608,761 2,733,983 (125,222 ) Net increase (decrease) in cash (337,112 ) 314,561 564,916 (250,355 ) Cash at beginning of period 393,194 263,506 - 263,506 Cash at end of period $ 56,082 $ 578,067 $ 564,916 $ 13,151 Net cash used in operating activities was $485,530 for the nine months ended March 31, 2024, as compared to $286,318 for the nine months ended March 31, 2023. For the nine months ended March 31, 2024, our net loss of $1,302,763 and an increase in inventory of $103,569, offset by an increase in accounts payable and accrued liabilities of $386,279, a non-cash interest expense of $223,783, stock-based compensation of $151,981, and depreciation and amortization of $115,885, were the primary drivers of net cash used in operating activities. For the nine months ended March 31, 2023, our net loss of $4,829,157 and a decrease in accounts receivable of $354,176, offset by stock-based compensation of $3,997,442 and an increase in accounts payable and accrued liabilities of $313,174, were the primary drivers of the net cash used in operating activities. Net cash used in investing activities was $2,138 for the nine months ended March 31, 2024, as compared to $2,007,882 for the nine months ended March 31, 2023. The net cash used in investing activities for the nine months ended March 31, 2024 consisted entirely of purchases of property and equipment. Net cash used in investing activities for the nine months ended March 31, 2023 consisted of cash used in connection with the acquisition of the assets of CleanCore LLC, TetraClean and Food Safety of $2,000,000 and purchases of property and equipment of $7,882. Net cash provided by financing activities was $150,556 for the nine months ended March 31, 2024, as compared to $2,608,761 for the nine months ended March 31, 2023. Net cash provided by financing activities for the nine months ended March 31, 2024 consisted of proceeds from the issuance of convertible notes of $225,000 and proceeds from related party loans of $50,014, offset by payments for deferred offering costs of $124,458, while net cash provided by financing activities for the nine months ended March 31, 2023 consisted of proceeds from the issuance of class B common stock of $1,650,000, proceeds from the issuance of series seed preferred stock of $1,000,000, proceeds from related party loans of $399,483 and proceeds from the issuance of class A common stock of $100, offset by repayments of loans due to related parties of $288,861, payments for deferred offering costs of $150,683 and repayments of long term debt of $1,278. Private Placement Between October 14, 2022 and November 29, 2022, we issued an aggregate of 660,921 shares of class B common stock for total gross proceeds of $1,150,000 and net proceeds of approximately $1,035,000 in a private placement transaction. 26 Promissory Note On October 17, 2022, we issued a promissory note in the principal amount of $3,000,000 to Burlington, which was amended pursuant to extension agreements on September 13, 2023 and December 17, 2023. The note bears interest at a rate of 7% per annum; provided that such interest rate increased to 10% per annum on September 13, 2023. The note is due on the earlier of (a) the closing of a firm commitment initial public offering and concurrent listing on a national securities exchange or (b) April 4, 2024. We may prepay the note at any time at any time without penalty. The note is unsecured and contains customary events of default. As of March 31, 2024, the outstanding principal balance of this note is $3,000,000 and it has accrued interest of $355,726. Convertible Promissory Notes On January 30, 2024, we issued three 10% original issue discount convertible promissory notes to three separate accredited investors in the principal amounts of $27,778, $111,111, and $111,111. The purchase prices of the notes were $25,000, $100,000 and $100,000, respectively. These notes accrue with simple interest on the outstanding principal amount at the rate of 12% per annum and the interest shall commence on the date of issuance and continue to accrue until paid in full or until the note is converted. The principal amounts and all accrued and unpaid interest automatically convert into class B common stock upon the closing of our initial public offering. Unless earlier converted into class B common stock, all unpaid interest and principal is due and payable on December 31, 2024, which date may be extended at the election of us by up to two additional 90-day periods. As of March 31, 2024, the outstanding principal balance of these notes is $250,000 and they have accrued interest of $4,545. Related Party Demand Notes On October 4, 2022, we issued a promissory note to each of Matthew Atkinson, our Chief Executive Officer at such time, and Clayton Adams, our President at such time and current significant stockholder, in the principal amount of $104,450 each for a total of $208,900. These notes bear interest at a rate of 5% per annum beginning on the 30th day after issuance and are due on the 60th day following written demand from the holder. As of March 31, 2024, the outstanding principal balance of these notes is $208,900 and they have accrued interest of $ 15,567 . Related Party Revolving Loan On March 26, 2024, we entered into a loan agreement with Clayton Adams, a significant stockholder, pursuant to which we issued a revolving credit note to Mr. Adams in the principal amount of up to $500,000. Pursuant to the loan agreement and note, Mr. Adams agreed to provide advances to us upon request during the period commencing on the effective date of the registration statement relating to our initial public offering (April 25, 2024) and continuing until the second anniversary of such date, which is referred to as the maturity date. This note accrues simple interest on the outstanding principal amount at the rate of 8% per annum, with all principal and interest due on the maturity date; provided that upon an event of default (as defined in the note), such rate shall increase to 13%. We may prepay the note at any time without penalty or premium. The note is unsecured and contains customary events of default for a loan of this type. As of March 31, 2024, no advances have been made and the principal amount of this note is $0. Contractual Obligations Our principal commitments consist mostly of obligations under the loans described above. Other than indicated above, at March 31, 2024, we did not have other long-term debt obligations, capital (finance) lease obligations, operating lease obligations, purchase obligations or other long-term liabilities reflected on our statements of financial position. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 27 Critical Accounting Policies and Estimates The following discussion relates to critical accounting policies for our company. The preparation of financial statements in conformity with United States generally accepted accounting principles, or U.S. GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements: Revenue Recognition . We generate revenue from sales of our products and recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment based on the contractual terms with our customers. We provide customer programs and incentive offerings, including growth incentives and volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated every reporting period. For the periods ended March 31, 2024 and 2023, customer growth and volume-based incentives were minimal. Certain product sales include a 2-year manufacturer’s warranty that provides the customer with assurance that the product performs as intended. Such warranties are assurance-type warranties and are accounted for as contingencies under ASC 460-10. Impairment of Long-Lived Assets . Long-lived assets consist primarily of property and equipment and intangible assets. Long-lived assets are tested for impairment when events and circumstances indicate the assets might be impaired by first comparing the estimated future undiscounted cash flows of the asset or asset group to the carrying value. If the carrying value exceeds the estimated future undiscounted cash flows, an impairment loss is recognized based on the amount that the carrying value exceeds the fair value of the asset or asset group. We did not recognize impairment losses during the periods ended March 31, 2024 and 2023. Intangible Assets . Intangible assets primarily consist of existing technology, customer relationships, and trademarks obtained as a result of the acquisition on October 17, 2022. Intangible assets with definite lives are amortized based on their pattern of economic benefit over their estimated useful lives and reviewed periodically for impairment. Our trademarks are deemed to have an indefinite life. The estimated useful life of the acquired technology is 15 years while the estimated useful life of customer relationships is 5 years. Stock-based Compensation . Compensation expense is recognized for all share-based payments to employees and non-employees, including stock options and warrants, in the statements of operation based on the fair value of the awards that are granted. Our stock price at the date of grant was estimated using an acceptable valuation technique such as the probability-weighted expected return model. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Generally, measured compensation cost, net of actual forfeitures, is recognized on a straight-line basis over the vesting period of the related share-based compensation award. We account for forfeitures of stock-based awards as they occur. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.