Zone Frontier Inc 10-Q for FY2024 Q3
Zone Frontier Inc. (ZONE)
About this 10-Q
Zone Frontier Inc filed this 10-Q on June 10, 2024, covering the quarter ended March 31, 2024 (FY2024 Q3).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $313.92K
- down 49.5% from $621.41K a year earlier
- Net loss
- $520.67K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission File Number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of June 7, 2024, there were
CleanCore Solutions, Inc.
Quarterly Report on Form 10-Q
Period Ended March 31, 2024
TABLE OF CONTENTS
| PART I | ||
| FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 |
| Item 4. | Controls and Procedures | 28 |
| PART II | ||
| OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 30 |
| Item 1A. | Risk Factors | 30 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 |
| Item 3. | Defaults Upon Senior Securities | 30 |
| Item 4. | Mine Safety Disclosures | 30 |
| Item 5. | Other Information | 30 |
| Item 6. | Exhibits | 31 |
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CLEANCORE SOLUTIONS, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
1
CLEANCORE SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
| March 31, 2024 | June
30, | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Deferred offering costs | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use assets | ||||||||
| Intangibles | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Lease liability - current | ||||||||
| Note payable | ||||||||
| Due to related parties | ||||||||
| Total current liabilities | ||||||||
| Lease liability – non current | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ Equity | ||||||||
| Series Seed Preferred Stock, $ | ||||||||
| Class A Common Stock; $ | ||||||||
| Class B Common Stock; $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed unaudited financial statements.
2
CLEANCORE SOLUTIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
| Three Months Ended March 31, | Nine
Months Ended | |||||||||||||||||||
| 2024 (Successor) | 2023 (Successor) | Nine Months Ended (Successor) | October
17, | July 1, 2022 to October 16, 2022 (Predecessor) | ||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Sales | ||||||||||||||||||||
| Gross profit | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| General and administrative | ||||||||||||||||||||
| Advertising expense | ||||||||||||||||||||
| Depreciation expense | - | |||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ||||||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||
The accompanying notes are an integral part of these condensed unaudited financial statements.
3
CLEANCORE SOLUTIONS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| For the Three and Nine Months Ended March 31, 2024 | ||||||||||||||||||||||||||||||||||||
Series Seed Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Conversion of class A common stock into class B common stock | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Conversion of series seed preferred stock into class A common stock | ( | ) | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||||
| Stock based compensation – 2022 Equity Incentive Plan | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock based compensation – 2022 Equity Incentive Plan | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Conversion of class A common stock into class B common stock | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Conversion of series seed preferred stock into class A common stock | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||
| Stock based compensation – 2022 Equity Incentive Plan | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| For the Three and Nine Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
Series Seed Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid in | Members Capital | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Amount | Deficit | Equity (Deficit) | |||||||||||||||||||||||||||||||
| Predecessor | ||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Imputed interest | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at October 16, 2022 | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
| Successor | ||||||||||||||||||||||||||||||||||||||||
| Balance at October 17, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Issuance of series seed preferred stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of class A common stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of class B common stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of class B common stock upon exercise of warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued to consultants for services | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock based compensation – officers | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Stock based compensation – 2022 Equity Incentive Plan | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
CLEANCORE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine
Months Ended | ||||||||||||
| Nine Months Ended March 31, 2024 (Successor) | October 17, 2022 to March 31, 2023 (Successor) | July 1, 2022 to October 16, 2022 (Predecessor) | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Accretion of note payable discount | ||||||||||||
| Non cash interest expense | ||||||||||||
| Stock based compensation | ||||||||||||
| Non cash lease expense | ||||||||||||
| Imputed interest | ||||||||||||
| Provision for bad debt and write-off of on uncollectable accounts | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Inventory | ( | ) | ( | ) | ||||||||
| Due from related parties, net | ||||||||||||
| Prepaid expenses | ( | ) | ||||||||||
| Deferred revenue | ||||||||||||
| Accounts payable and accrued liabilities | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Cash used in acquisition | ( | ) | ||||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Payments for deferred offering costs | ( | ) | ( | ) | ||||||||
| Proceeds from issuance of series seed preferred stock | ||||||||||||
| Proceeds from issuance of class A common stock | ||||||||||||
| Proceeds from issuance of class B common stock | ||||||||||||
| Proceeds from issuance of convertible debt notes | ||||||||||||
| Repayments of long term debt | ( | ) | ||||||||||
| Proceeds from issuance of loans from related parties | ||||||||||||
| Repayments of loans due to related parties | ( | ) | ||||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||||||
| Cash at beginning of period | ||||||||||||
| Cash at the end of period | $ | $ | $ | |||||||||
| Supplementary cash flow disclosure | ||||||||||||
| Interest paid | $ | $ | $ | |||||||||
| Unpaid deferred offering costs | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
5
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
1. Organization and Business
CC Acquisition Corp. was incorporated in the State of Nevada on August 23, 2022 for the sole purpose of acquiring substantially all of the assets of CleanCore Solutions, LLC, TetraClean Systems, LLC, and Food Safety Technologies, LLC, pursuant to an asset purchase agreement entered into by CC Acquisition Corp. with these three entities and their owners on October 17, 2022. On November 21, 2022, CC Acquisition Corp. changed its name to CleanCore Solutions, Inc. (“the Company” or “Successor”). Since the Company acquired substantially all of the assets of each of CleanCore Solutions, LLC, TetraClean Systems, LLC, and Food Safety Technologies, LLC, the business of these three entities is now operated by the Company, with no subsidiaries. The combined results of CleanCore Solutions, LLC, TetraClean Systems, LLC and Food Safety Technologies, LLC presented in these financial statements represent the predecessor entity of the Company (“Predecessor”).
The Company specializes in the development and manufacturing of cleaning products that produce pure aqueous ozone products for professional, industrial, or home use. The Company has a patented nanobubble technology using aqueous ozone that it believes is highly effective in cleaning, sanitizing, and deodorizing surfaces and high-touch areas.
The Company offers products and solutions that are marketed for janitorial and sanitation, ice machine cleaning, laundry, and industrial industries. Its 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.
The headquarters, principal address and records of the Company are located at 5920 South 118th Circle, Suite 2, Omaha, Nebraska.
Liquidity and Going Concern
The Company has incurred losses and negative
cash flows from operations. From acquisition through March 31, 2024, the Company has financed its operations primarily through investor
funding. As of March 31, 2024, the Company had cash of $
As noted above, the Company was formed in August 2022 and completed the acquisition in October 2022. Since the acquisition, the Company has invested in further developing the Company’s products, hiring key personnel, and engaging third party experts such as accountants and underwriters in connection with the Company’s initial public offering described below.
On April 25, 2024, the Company entered into
an underwriting agreement with Boustead Securities, LLC, as the representative of the several underwriters named on Schedule 1
thereto, relating to the Company’s initial public offering of class B common stock. Under the underwriting agreement, the
Company agreed to sell
6
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Despite the initial public offering, management believes that currently available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern for 12 months from the date of issuance of these unaudited condensed financial statements.
The Company will be dependent upon the raising of additional capital through equity and/or debt financing in order to implement its business plan and generate sufficient revenue in excess of costs. If the Company raises 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 the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These unaudited condensed financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
The accompanying unaudited condensed financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited interim financial statements as of and for the three and nine-month periods ended March 31, 2024 and 2023 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The interim financial statements are condensed and should be read in conjunction with the Company’s latest annual audited 2023 financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2024 or for any other future annual or interim period.
The results of the Predecessor represent the combined financial statements of the accounts of CleanCore Solutions, LLC, TetraClean Systems, LLC and Food Safety Technologies, LLC. These combined financial statements include the accompanying combined statements of operations for the period ended July 1 to October 16, 2022, combined statement of members’ equity as of June 30, 2022 and October 16, 2022, and combined statement of cash flows for the period July 1, 2022 to October 16, 2022. All intercompany balances and transactions among the combined entities have been eliminated. In the opinion of predecessor management, all adjustments considered necessary for a fair presentation have been included.
Use of Estimates
The preparation of the Company’s and Predecessor’s financial statements require management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure in the Company’s combined financial statements and accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates. Significant estimates and assumptions made by the Company are allowance for bad debt, useful lives of fixed assets, warranty liabilities, and allowance for inventory obsolescence.
Risks and Uncertainties
The Company is subject to a number of risks similar to other early-stage companies including, but not limited to, profitability, the need for additional financing to achieve its business strategy, ability to obtain regulatory approval, significant competition, and dependence on key individuals.
Accounts Receivable
Accounts receivable is comprised of trade accounts
receivables from the Company’s customers. Accounts receivable are recorded at the invoiced amount and do not bear interest. The
Company established an allowance for bad debt of accounts receivables based on a percentage assigned to aged days outstanding categories.
The Predecessor established the allowance for bad debt based on various factors including credit profiles of the Company’s customers,
historical payments, outstanding balances and current economic trends, and performed this analysis periodically. The Company recorded
an allowance for doubtful accounts of $
7
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Inventory
Inventory consists of parts, work in progress
and finished goods. The Company and its Predecessor value parts and finished goods at the lower of the actual costs or net realizable
value. The Company and its Predecessor value work in progress at cost. The Company and Predecessor periodically review inventory for
obsolete and potentially impaired items. As of March 31, 2024 and June 30, 2023, the Company had an allowance for inventory obsolescence
of $
Leases
The Company accounts for leases in accordance with Accounting Standards Codification (ASC) Topic 842 (Topic 842), Leases. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the right-of-use asset value is derived from the calculation of the lease liability. Operating leases are included in right-of-use assets, current lease liabilities, and noncurrent lease liabilities in the balance sheet.
Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and probable amounts the lessee will owe under a residual value guarantee. Variable lease payments are recognized as lease expenses as incurred, and generally relate to variable payments made based on the level of services provided by the landlords of our leases. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term within general and administrative expenses in the statement of operations.
The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments because the Company does not have the information necessary to determine the rate implicit in the lease. The Company’s lease term includes any option to extend the lease when it is reasonably certain to be exercised based on consideration of all relevant factors. Leases with an initial term of 12 months or less are not recorded on the balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Business Combinations
Business combinations are accounted for using the acquisition method. The fair value of total purchase consideration is allocated to the fair values of identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount being classified as goodwill. All assets, liabilities and contingent liabilities acquired or assumed in a business combination are recorded at their fair values at the date of acquisition. Determining the fair value of assets acquired and liabilities assumed 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. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. At the conclusion of the measurement period, any subsequent adjustments are reflected in the statements of operations. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the Company’s statements of operations.
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. The Company’s trademarks are deemed to have an indefinite life. The estimated useful life of the acquired technology
is
8
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Impairment of Goodwill
The Company evaluates goodwill for impairment annually, as of June 30, or more frequently when indicators of impairment exist. The Company considers 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 it’s carrying amount, including goodwill. If the Company concludes that it is more likely than not that the fair value of the reporting unit is less than it’s carrying amount, the Company performs a quantitative impairment test. In performing the quantitative impairment test, the Company compares 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, the Company will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value.
The Company performed its first evaluation of goodwill on October 1, 2023. Based on the analysis, the Company did not recognize an impairment loss during the period ended March 31, 2024. Subsequent evaluations will be performed annually on June 30, per the Company’s policy.
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. The Company did not recognize impairment losses during the periods ended March 31, 2024 and 2023.
Deferred Offering Costs
In accordance with ASC 340-10-S99-1 and SEC Accounting
Bulletin Topic 5A, specific incremental costs incurred by the Company directly attributable to a proposed offering of securities have
been deferred and will be charged against the gross proceeds of the offering. These offering costs include fees paid to underwriters,
attorney, accountants as well as printers and other third parties directly related to the offering. Costs such as management salaries
or other general administrative expenses that are not incremental to the offering are not included in the deferred costs. As of March
31, 2024 and June 30, 2023, the Company had $
Patent Costs
Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain. These costs are included in general and administrative expenses.
Advertising Costs
The Company reports as expense the cost of advertising
and promoting its services as incurred. Such amounts are totaled $
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. The Company’s 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. The Company accounts for forfeitures of stock-based awards as they occur.
9
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Revenue Recognition
The Company generates revenues from sales of its products and recognizes revenue as control of its products is transferred to its customers, which is generally at the time of shipment based on the contractual terms with the Company’s customers.
The Company provides customer programs and incentive offerings, including growth incentives and volume-based incentives. These customer programs and incentives are considered variable consideration. The Company includes 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 the Company’s 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. Refer to Note 7 for warranty reserve.
Net Loss per Share of Common Stock
Basic net loss per class A and class B common
share is calculated by dividing the net loss distributed to class A and class B, respectively, by the weighted-average number of common
shares of each respective class outstanding during the period, without consideration for potentially dilutive securities. Diluted net
loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares
and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, stock options,
warrants, and convertible debt are considered to be potentially dilutive securities. As of March 31, 2024 and 2023, there
were
New Accounting Pronouncements
No recent accounting pronouncement or changes in accounting pronouncements have been issued or adopted that are of material significance, or have potential material significance, to the Company’s financial statements since those discussed in the Company’s fiscal year 2023 audited financial statements.
3. Disaggregated Revenue
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Janitorial and Sanitation | $ | $ | ||||||
| Ice System | ||||||||
| Commercial and Residential Laundry | ||||||||
| Other | ||||||||
| Total revenue | $ | $ | ||||||
10
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
| Nine Months Ended March 31, 2023 | ||||||||||||
Nine March
31, (Successor) | October 17, 2022 to March 31, 2023 (Successor) | July
1, 2022 to October 16, 2022 (Predecessor) | ||||||||||
| Janitorial and Sanitation | $ | $ | $ | |||||||||
| Ice System | ||||||||||||
| Commercial and Residential Laundry | ||||||||||||
| Other | ||||||||||||
| Total revenue | $ | $ | $ | |||||||||
The “Other” category of revenue consists primarily of sales of parts, accessories, shipping and handling, and equipment rental income.
4. Accounts Receivable, net
| March 31, 2024 | June 30, 2023 | |||||||
| Trade accounts receivable | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
5. Fair Value Measurements
ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs, other than quoted prices in active markets, that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company’s financial assets are subject to fair value measurements on a recurring basis. The Company’s remaining carrying amounts reported in the consolidated balance sheets of these financial assets are a reasonable estimate of fair value due to their short-term nature.
11
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
6. Inventory
| March 31, 2024 | June 30, 2023 | |||||||
| Parts | $ | $ | ||||||
| Finished goods | ||||||||
| Inventory reserve | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
The Company values inventory at the balance sheet
date using the weighted average method. The Company adjusted the inventory reserve to $
7. Accounts Payable and Accrued Expenses
| March 31, 2024 | June 30, 2023 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued payroll and related expenses | ||||||||
| Warranty reserve | ||||||||
| Other accrued expenses | ||||||||
| Total accounts payable and other accrued expenses | $ | $ | ||||||
8. Debt
In connection with the acquisition of the Predecessor
on October 17, 2022, the Company issued a promissory note in the principal amount of $
On
January 30, 2024, the Company issued three
9. Related Party Transactions
| March 31, 2024 | June 30, 2023 | |||||||
| Due to founder – credit card | $ | $ | ||||||
| Due to founders | ||||||||
| Total due to related parties | $ | $ | ||||||
12
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
As of March 31, 2024, the Company had a short
term amount due to Clayton Adams, one of its founders, in the amount of $
On October 4, 2022, the Company issued a promissory
note to each of Matthew Atkinson, the Company’s Chief Executive Officer, and Clayton Adams, the Company’s President at such
time, in the principal amount of $
On March 26, 2024, the Company entered into a
loan agreement with Clayton Adams, a significant stockholder, pursuant to which the Company issued a revolving credit note to Mr. Adams
in the principal amount of up to $
10. Stockholders’ Equity
The Company’s authorized capital stock
currently consists of
Series Seed Preferred Stock
Below is a summary of the terms of the series seed preferred stock.
Ranking. The series seed preferred stock ranks, as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, senior to the common stock.
Liquidation Rights. In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any deemed liquidation event (as defined in
the certificate of designation), before any payment shall be made to the holders of common stock by reason of their ownership thereof,
the holders of shares of series seed preferred stock shall be entitled to be paid out of the funds and assets available for distribution
to its stockholders, an amount per share equal to the greater of (a) $
Dividends. All dividends shall be declared pro rata on the common stock and series seed preferred stock on a pari passu basis according to the number of shares of common stock held by such holders. For this purpose, each holder of shares of series seed preferred stock is to be treated as holding the greatest whole number of shares of common stock then issuable upon conversion of all shares of series seed preferred stock held by such holder.
Voting Rights. The holders of series
seed preferred stock shall have the right to
13
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Conversion Rights. Each share of
series seed preferred stock shall be convertible at the option of the holder thereof into such number of shares of class A common stock
as is determined by dividing $
On September 16, 2022, the Company issued an
aggregate of
On September 30, 2022, the Company issued
On July 16, 2023,
On February 5, 2024,
On February 7, 2024,
As of March 31, 2024,
Common Stock
The Company has two classes of authorized common stock — class A common stock and class B common stock. The rights of the holders of the class A common stock and class B common stock are identical, except with respect to voting and conversion. Each share of class A common stock is entitled to ten votes per share and is convertible into one share of class B common stock. Each share of class B common stock is entitled to one vote per share. As of March 31, 2024, all of the outstanding class A common stock was held by one of the Company’s founders.
On August 26, 2022, the Company issued an aggregate
of
On October 14, 2022, the Company issued an aggregate
of
On November 29, 2022, the Company issued
On November 29, 2022, the Company issued
On April 1, 2023, the Company issued
On June 1, 2023, an aggregate of
14
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
On July 16, 2023, the Company issued
On July 17, 2023, the Company issued
On July 24, 2023, the Company issued
On February 5, 2024, the Company issued
On
February 6, 2024, the Company issued
On February 7, 2024, the Company issued
As of March 31, 2024, there were
2022 Equity Incentive Plan
On September 16, 2022, the Company’s board
of directors adopted the Company’s 2022 Equity Incentive Plan, which was adopted by stockholders on November 18, 2022, which reserved
a total of
Incentive awards authorized under the 2022 Plan include, but are not limited to, nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and stock appreciation rights. If an incentive award granted under the 2022 Plan expires, terminates, is unexercised for forfeited, the surrendered shares will become available for future awards under the 2022 Plan.
The Company’s employees and advisors were awarded options under the 2022 Plan. Therefore, an allocation of the share-based compensation was made to the Company.
Stock Options
As of March 31, 2024, the Company has issued
options to purchase an aggregate of
15
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Warrants
On October 14, 2022 and November 29,
2022, the Company issued warrants for the purchase of
On October 17, 2022, the Company issued
a warrant for the purchase of
Stock-based Compensation
Stock options are granted at the fair market value of the underlying common stock on the date of grant. The Company recognizes compensation expense for these awards using the straight-line recognition method over the vesting period.
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Expected life of awards | ||||
The risk-free interest rate is based on U.S.
government issues with a remaining term equal to the expected life of the awards. The determination of expected volatility is based on
historical volatility of an appropriate industry sector index. The weighted average expected term was estimated for options using the
average of the vesting term and contractual term of the awards. The weighted-average fair value of total awards granted during the period
ended March 31, 2024 was $
| Warrants | Stock Options | Weighted Average Remaining Life (years) | Weighted Average Exercise Price | |||||||||||||
| Beginning balance | $ | |||||||||||||||
| Granted | - | |||||||||||||||
| Granted | ||||||||||||||||
| Cancelled | - | - | - | |||||||||||||
| Forfeited | - | - | ||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Outstanding, June 30, 2023 ( | $ | |||||||||||||||
| Granted | - | - | - | - | ||||||||||||
| Cancelled | ( | ) | - | ( | ) | ( | ) | |||||||||
| Forfeited | - | - | ||||||||||||||
| Outstanding, March 31, 2024 ( | - | $ | ||||||||||||||
The intrinsic value and total cash received of
awards exercised for the period ending June 30, 2023 was $
16
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
11. Net loss per share
| Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Basic and diluted net loss per share | Class A | Class B | Class A | Class B | ||||||||||||
| Numerator | ||||||||||||||||
| Allocation of undistributed loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted average number of shares used in per share computation | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Nine Months Ended March 31, 2024 | ||||||||
| Basic and diluted net loss per share | Class A | Class B | ||||||
| Numerator | ||||||||
| Allocation of undistributed loss | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Weighted average number of shares used in per share computation | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| Period from October 17, 2022 to March 31, 2023 | ||||||||
| Basic and diluted net loss per share | Class A | Class B | ||||||
| Numerator | ||||||||
| Allocation of undistributed loss | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Weighted average number of shares used in per share computation | ||||||||
| $ | ( | ) | $ | ( | ) | |||
12. Commitments and Contingencies
Legal Proceedings
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings or claims that it believes will have a material adverse effect on its business, financial condition or operating results.
Retirement Plans
The Successor does not maintain a defined contribution plan or any other type of retirement plan for its employees.
For the period July 1, 2022 through October 16,
2022, the Predecessor maintained a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary
and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. Matching contributions
to the 401(k) plan are made for certain eligible employees to meet the non- discrimination provisions of the plan. During this period,
the Predecessor made a contribution of $
17
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Leases
The Company has a non-cancellable operating lease
commitment for its office facility expiring in 2028. Rent expense totaled $
| March 31, 2024 | ||||
| Operating lease cost | $ | |||
| Remaining lease term | ||||
| Discount rate | % | |||
The discount rate was determined using the Company’s external debt and was adjusted for collateralization, term and lease amount.
| Year Ending June 30, | Amount | |||
| 2024 (remainder) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total undiscounted cash flows | ||||
| Less amount representing interest | ( | ) | ||
| Present value of lease liabilities | ||||
| Less current portion | ( | ) | ||
| Noncurrent lease liabilities | $ | |||
13. Subsequent Events
The Company has evaluated events subsequent to March 31, 2024, to assess the need for potential recognition or disclosure. Such events were evaluated through June 10, 2024, the date these condensed financial statements were available to be issued. The following were noted:
Initial Public Offering
On April 25, 2024, the Company entered into an
underwriting agreement with Boustead Securities, LLC, as the representative (the “Representative”) of the several underwriters
named on Schedule 1 thereto (the “Underwriters”), relating to the Company’s initial public offering of class B common
stock. Under the Underwriting Agreement, the Company agreed to sell
On April 30, 2024, the closing of the initial
public offering was completed. The Company sold
On April 30, 2024, pursuant to the Underwriting
Agreement, the Company issued a class B common stock purchase warrant to the Representative for the purchase of
18
CLEANCORE SOLUTIONS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2024 AND 2023
Stock Conversions
On April 30, 2024, the Company issued
On May 15, 2024, the Company issued
Conversion of Convertible Notes
On May 2, 2024, the Company issued an aggregate
of
Equity Awards
On April 30, 2024, the Company granted a restricted stock award under
the 2022 Plan for
On April 30, 2024, the Company granted a restricted stock unit under
the 2022 Plan for
On April 30, 2024, the Company granted options
under the 2022 Plan to the Company’s three independent directors, each for the purchase of
On April 30, 2024, the Company granted an option under the 2022 Plan
for the purchase of
Debt Repayment
On May 29, 2024, the Company repaid the two promissory notes issued on October 4, 2022 in full (see Note 9).
Debt Extension and Amendment
On April 30, 2024, the Company and Burlington entered into an extension agreement which extended the maturity date of the promissory note issued on October 17, 2022 (the “Original Note”) to May 9, 2024 (see Note 8).
On May 31, 2024, Burlington and Walker Water
LLC (“WW”) entered into an allonge, assignment and agreement (the “Assignment Agreement”), pursuant to which
Burlington agreed to transfer $
In conjunction with the Assignment Agreement,
the Company issued an amended and restated promissory note to Burlington (the “Amended Note”). The Amended Note has a new
principal amount of $
Pursuant to the Assignment Agreement, the Company also issued a promissory
note to WW in the principal amount of $
19
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 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 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.
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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 (Successor) | Period from March 31, | 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 | ) | ||||||||
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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.
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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.
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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.
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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.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure information required to be disclosed in our reports that we file or furnish pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate to allow for timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level due to material weaknesses identified related to (1) the lack of a sufficient number of trained professionals with the expertise to design, implement, and execute a formal risk assessment process and formal accounting policies, procedures, and controls over accounting and financial reporting to ensure the timely and accurate recording of financial transactions while maintaining a segregation of duties; and (2) the lack of a sufficient number of trained professionals with the appropriate U.S. GAAP technical expertise to identify, evaluate, and account for complex transactions and review valuation reports prepared by external specialists.
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Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2024, we were privately owned and not subject to the internal control over financial reporting requirement of the Sarbanes Oxley Act.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In preparing our financial statements as of and for the three months ended March 31, 2024 and 2023, management identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified related to (1) the lack of a sufficient number of trained professionals with the expertise to design, implement, and execute a formal risk assessment process and formal accounting policies, procedures, and controls over accounting and financial reporting to ensure the timely and accurate recording of financial transactions while maintaining a segregation of duties; and (2) the lack of a sufficient number of trained professionals with the appropriate U.S. GAAP technical expertise to identify, evaluate, and account for complex transactions and review valuation reports prepared by external specialists.
We are planning on implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including formalizing our processes and internal control documentation and strengthening supervisory reviews by our financial management and hiring additional qualified accounting and finance personnel and engaging financial consultants to enable the implementation of internal control over financial reporting and segregating duties amongst accounting and finance personnel.
While we are implementing these measures, we cannot assure you that these efforts will remediate our material weaknesses and significant deficiencies in a timely manner, or at all, or prevent restatements of our financial statements in the future. If we are unable to successfully remediate our material weaknesses, or identify any future significant deficiencies or material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, and the market price of our common stock may decline as a result.
In accordance with the provisions of the JOBS Act, we and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal control over financial reporting as of March 31, 2024, nor any period subsequent in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any unregistered equity securities during the three months ended March 31, 2024 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any shares of our common stock during the three months ended March 31, 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Resignation of Chairman and CEO
On June 7, 2024,
On June 10, 2024, we entered into a separation agreement and release of claims, or the Separation Agreement, with Mr. Moore providing for the separation of his employment with our company effective as of June 7, 2024. Under the Separation Agreement, we agreed to pay Mr. Moore a severance payment in the amount of $80,000, payable in $10,000 installments every two weeks consistent with our existing payroll practices, and agreed to pay all previously earned, accrued, and unpaid benefits from our company and its employee benefit plans. We also agreed to issue 20,000 shares of class B common stock to Mr. Moore on January 2, 2025.
Mr. Moore helped us complete our initial public offering and successfully list on NYSE American. We expect that Mr. Moore will continue as a trusted advisor to our company and assist us to build a broad base of customers and pursue strategic initiatives as needed. Under the planned advisory agreement with Mr. Moore, he would be entitled to receive a ten percent (10%) commission on revenues actually received during a two-year period from certain new clients that Mr. Moore introduces to us. The Separation Agreement also includes a customary mutual release of claims by Mr. Moore and our company, as well as customary confidentiality and mutual non-disparagement provisions.
Appointment of Chairman and CEO
On June 7, 2024, our Board of Directors, upon recommendation of the
Nominating and Corporate Governance Committee, appointed
Clayton Adams is one of our founders and previously served as our President, Chief Financial Officer and as a member of our board of directors from September 2022 until July 2023. Since January 2020, Mr. Adams has served as Principal at Bird Dog Capital LLC, where he leads various investments. Mr. Adams gained experience developing the growth of small companies as Chief Executive Officer of Carson Enterprises, Inc., a company engaged in landscaping and construction, from March 2009 to February 2019. At Carson Enterprises, Inc., Mr. Adams expanded the company and successfully sold the company in February 2019. Mr. Adams is also a member of the board of directors and serves on the audit, compensation and nominating committees of Signing Day Sports, Inc. Mr. Adams graduated from Red Oak High School in 2007. We believe that Mr. Adams is qualified to serve on our board of directors due to his experience in small-cap companies, scaling operations, and financial background.
Mr. Adams was appointed to serve until his successor is duly elected and qualified. There are no family relationships between Mr. Adams and our existing directors and officers. There are no arrangements or understandings between Mr. Adams and any other persons pursuant to which he was selected. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of certain loans to us from Mr. Adams. Except for those loans, there has been no transaction, nor is there any currently proposed transaction, between Mr. Adams and us that would require disclosure under Item 404(a) of Regulation S-K.
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ITEM 6. EXHIBITS.
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: June 10, 2024 | CLEANCORE SOLUTIONS, INC. | |
| /s/ Clayton Adams | ||
| Name: | Clayton Adams | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ David Enholm | ||
| Name: | David Enholm | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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Exhibit 31.1
CERTIFICATIONS
I, Clayton Adams, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of CleanCore Solutions, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: June 10, 2024
| /s/ Clayton Adams | |
Clayton Adams | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, David Enholm, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of CleanCore Solutions, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: June 10, 2024
| /s/ David Enholm | |
| David Enholm | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chief Executive Officer of CLEANCORE SOLUTIONS, INC. (the “Company”), DOES HEREBY CERTIFY that:
1. The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement on June 10, 2024.
| /s/ Clayton Adams | |
Clayton Adams | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to CleanCore Solutions, Inc. and will be retained by CleanCore Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chief Financial Officer of CLEANCORE SOLUTIONS, INC. (the “Company”), DOES HEREBY CERTIFY that:
1. The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement on June 10, 2024.
| /s/ David Enholm | |
| David Enholm | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to CleanCore Solutions, Inc. and will be retained by CleanCore Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.