Item 7. Management’s Discussion and Analysis
ITEM 7. 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 our 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, 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, particularly in the sections titled “Risk Factors” and “ Special
Note Regarding Forward-Looking Statements. ”
Overview
We specialize in the development and production
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 production processes, and proving the effectiveness of our products in restaurants, airports, and hotels.
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 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;
● 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
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● 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 growth 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 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.
Results of Operations
The following table sets forth key components
of our results of operations for the years ended June 30, 2025 and 2024, both in dollars and as a percentage of revenue.
Years Ended June 30,
2025
2024
Amount
% of Revenue
Amount
% of Revenue
Revenue
$ 2,072,834
100.00 %
$ 1,604,973
100.00 %
Cost of sales
1,086,369
52.41 %
809,161
50.42 %
Gross profit
986,465
47.59 %
795,812
49.58 %
Operating expenses:
General and administrative
7,081,299
341.62 %
2,471,480
153.99 %
Advertising expense
92,598
4.47 %
116,007
7.23 %
Depreciation and amortization expense
198,909
9.60 %
155,059
9.66 %
Loss from operations
(6,386,341 )
(308.10 )%
(1,946,734 )
(121.29 )%
Interest expense, net
356,054
17.18 %
335,008
20.87 %
Foreign exchange gain
120
0.01 %
-
-
Net loss
$ (6,742,275 )
(325.27 )%
$ (2,281,742 )
(142.17 )%
Revenue . We generate revenue from
sales of our cleaning products. Our revenue increased by $467,861, or 29.15%, to $2,072,834 for the year ended June 30, 2025 from $1,604,973
for the year ended June 30, 2024. The increase is primarily driven by sales to a new customer, KBS, as described above. As of June 30,
2025, we recognized $876,568 in revenue from KBS under an approximately $1.4 million purchase order issued by KBS.
Cost of sales . Our cost of sales
consists of raw materials, components, labor, demo expenses and warranty reserves. Our cost of sales increased by $277,208, or 34.26%,
to $1,086,369 for the year ended June 30, 2025 from $809,161 for the year ended June 30, 2024. As a percentage of revenue, cost of sales
increased from 50.42% for the year ended June 30, 2024 to 52.41% for the year ended June 30, 2025. The increase is the result of higher
year-over-year revenue and an increase in indirect costs such as demo expense, R&D, and warranty reserve.
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Gross profit . As a result of the
foregoing, our gross profit increased by $190,653, or 23.96%, to $986,465 for the year ended June 30, 2025 from $795,812 for the year
ended June 30, 2024. As a percentage of revenue, gross profit decreased from 49.58% for the year ended June 30, 2024 to 47.59% for the
year ended June 30, 2025.
General and administrative expenses . Our
general and administrative expenses consist primarily of personnel expenses, including employee salaries and bonuses plus related payroll
taxes, stock based compensation expense, professional advisor fees, bad debts, rent expense, insurance and other expenses incurred in
connection with general operations. Our general and administrative expenses increased by $4,609,819, or 186.52%, to $7,081,299 for the
year ended June 30, 2025 from $2,471,480 for the year ended June 30, 2024. As a percentage of revenue, our general and administrative
expenses increased from 153.99% for the year ended June 30, 2024 to 341.62% for the year ended June 30, 2025. This increase was primarily
due to increases of $2,532,272 in non-cash stock compensation expense, $351,071 in payroll and benefits related to an increase in headcount,
$1,022,152 in professional and consulting fees, $261,250 of intangibles impairment, and $223,376 in director and officer insurance. The
increase in professional fees and director and officer insurance is directly related to our listing on NYSE American in April 2024, as
fiscal 2025 includes a full year of such fees.
Advertising expenses . Our advertising
expenses consist of vendor trade shows and various trade publications. Our advertising expenses decreased by $23,409, or 20.18%,
to $92,598 for the year ended June 30, 2025 from $116,007 for the year ended June 30, 2024. As a percentage of revenue, our advertising
expenses decreased from 7.23% for the year ended June 30, 2024 to 4.47% for the year ended June 30, 2025. Such a decrease was primarily
due to a decrease in trade shows attended in fiscal 2025.
Depreciation and amortization expense . We
incurred depreciation and amortization expense of $198,909, or 9.60% of revenue, for the year ended June 30, 2025, as compared to $155,059,
or 9.66% of revenue, for the year ended June 30, 2024. The increase is due to amortization expense associated with additional intangibles
acquired with the asset acquisition of Sanzonate in April 2025.
Interest expense, net . We
incurred interest expense, net, of $356,054, or 17.18% of revenue, for the year ended June 30, 2025, as compared to $335,008, or 20.87%
of revenue, for the year ended June 30, 2024. The increase is primarily due to an increase in note payables.
Net loss . As a result
of the cumulative effect of the factors described above, we had a net loss of $6,742,275 for the year ended June 30, 2025, as compared
to $2,281,742 for the year ended June 30, 2024, an increase of $4,460,533, or 195.49%.
Liquidity and Capital Resources
Our company has incurred losses and negative cash
flows from operations. From October 17, 2022 (the date of the acquisition) through June 30, 2025, we have financed our operations primarily
through private investor funding and an initial public offering. As of June 30, 2025, we had cash and cash equivalents of $1,460,997.
For the year ended June 30, 2025, we had a net loss of $6,742,275 and cash used in operating activities of $2,337,659.
Management believes that currently available resources
will not be sufficient to fund our planned expenditures over the next 12 months, which raises substantial doubt about our company’s
ability to continue as a going concern for 12 months from the balance sheet date as of June 30, 2025.
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 our class B 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. The accompanying consolidated 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 consolidated 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.
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Summary of Cash Flow
The following table provides detailed information
about our net cash flow for the years ended June 30, 2025 and 2024.
Years Ended June 30,
2025
2024
Net cash used in operating activities
$ (2,337,659 )
$ (1,547,880 )
Net cash used in investing activities
(614,181 )
(10,438 )
Net cash provided by financing activities
2,374,967
3,181,735
Effect of exchange rate changes on cash and cash equivalents
21,259
-
Net increase (decrease) in cash
(555,614 )
1,623,417
Cash at beginning of year
2,016,611
393,194
Cash at end of year
$ 1,460,997
$ 2,016,611
Net cash used in operating activities was $2,337,659
for the year ended June 30, 2025, as compared to $1,547,880 for the year ended June 30, 2024. For the year ended June 30, 2025, our net
loss of $6,742,275, offset by non-cash stock based compensation of $3,203,230, were the primary drivers of net cash used in operating
activities. For the year ended June 30, 2024, our net loss of $2,281,741, offset by non-cash stock based compensation of $670,958, were
the primary drivers of net cash used in operating activities.
Net cash used in investing activities was $614,181
for the year ended June 30, 2025, as compared to $10,438 for the year ended June 30, 2024. The net cash used in investing activities for
the year ended June 30, 2025 consisted of $581,792 cash used in the acquisition of the assets of Sanzonate and purchases of property and
equipment of $32,389, while the net cash used investing activities for the year ended June 30, 2024 consisted entirely of purchases of
property and equipment.
Net cash provided by financing activities was
$2,374,967 for the year ended June 30, 2025, as compared to $3,181,735 for the year ended June 30, 2024. Net cash provided by financing
activities for the year ended June 30, 2025 consisted of proceeds from the issuance of promissory notes and warrants of $1,510,000, proceeds
from the issuance of original issue discount notes of $500,000, proceeds from the exercise of warrants of $403,171 and proceeds from related
party loans of $332,193, offset by payments of notes payable of $316,920 and payments for deferred offering costs of $53,477, while net
cash provided by financing activities for the year ended June 30, 2024 consisted of proceeds from the issuance of class B common stock
pursuant to the initial public offering of $4,233,875 (net of offering costs) and proceeds from the issuance of convertible notes of $225,000,
offset by payments for deferred offering costs of $587,573, repayments of notes of $480,667 and repayments of related party loans of $208,900.
Debt
Please see Notes 11 and 12 to the accompanying
consolidated financial statements for a description of the terms of our outstanding debt.
Contractual Obligations
Our principal commitments consist mostly of obligations
under the loans described in Notes 11 and 12 to the accompanying consolidated financial statements. We also have a non-cancellable operating
lease commitment for our office facility expiring in 2028 as described in Note 16 to the accompanying consolidated financial statements.
Other than the foregoing, as of June 30, 2025, 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.
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Critical Accounting Policies
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 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
revenues from sales of our products and recognize revenue as control of the products is transferred to 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 years ended June 30, 2025 and 2024, 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.
Asset Acquisitions . Acquisitions
of assets that do not meet the definition of a business are accounted for using the cost accumulation and allocation model. The cost accumulation
and allocation model requires us to measure the assets acquired based on their cost, which is then allocated to the assets on a relative
fair value basis. The cost of the assets includes direct acquisition-related costs such as fees paid to external advisors, attorneys,
and accountants. When the cost of the acquired assets is greater than the fair value of the group, the excess cost is allocated to the
nonfinancial assets acquired. Contingent consideration included in an asset acquisition is first assessed as to whether it qualifies as
a derivative instrument. If it does, we would measure the contingent consideration at fair value with changes in fair value reported in
earnings. If the contingent consideration is not a derivative instrument, we will recognize the contingent consideration when it is probable
and estimable and subsequent changes are recorded as adjustments to the carrying amount of the assets acquired. Determining the fair value
of assets acquired, for purposes of allocating cost based on their relative fair values, requires management to use significant judgment
and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection
of comparable companies. Estimates of fair value are based on assumptions believed to be reasonable, but are inherently uncertain and
unpredictable and, as a result, actual results may differ from those estimates.
Intangible Assets . Intangible assets
primarily consist of existing technology, distribution agreements, licenses, and trademarks obtained as a result of the acquisitions on
October 17, 2022 and April 15, 2025. 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 lives of the distribution agreements and licenses is 5 years.
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. As a result of the
analysis, we recognized an impairment loss of $261,250 in general and administrative expenses on our customer relationship intangible
asset during the year ended June 30, 2025. No other long-lived assets were determined to be impaired for the years ended June 30, 2025
and 2024. Subsequent evaluations will be performed annually on June 30, per our policy.
Impairment of Goodwill . We evaluate
goodwill for impairment annually, as of June 30, or more frequently when indicators of impairment exist. We consider qualitative factors
including market conditions, legal factors, operating performance indicators, and competition, among others, to determine whether it is
more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If we conclude that
it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative impairment
test. In performing the quantitative impairment test, we compare the fair value of its reporting unit to the carrying amount including
the goodwill of the reporting unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will
recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. We performed our
annual evaluation of goodwill on June 30, 2025. Based on the analysis, we did not recognize an impairment loss during the year ended June
30, 2025. Subsequent evaluations will be performed annually on June 30, per our policy.
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Stock-based Compensation . Compensation
expense is recognized for all share-based payments to employees and non-employees, including stock options, restricted stock awards, and
warrants, in the statements of operation based on the fair value of the awards that are granted. As necessary, 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 and warrants are estimated at the date of grant using the Black-Scholes option-pricing model. The fair value of restricted
stock awards is based on the fair market value of our class B common stock on the date of grant. Compensation expense for restricted stock
awards with performance-based vesting conditions is calculated based on the number of awards that are expected to vest during the performance
period if it is probable that the performance metrics will be achieved. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial statements begins
on page F-1 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.