Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See the section titled “ Forward-Looking Statements .” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “ Risk Factors ” and elsewhere in this Annual Report.
Overview
We are a specialty chemical company that manufactures environmentally sustainable fire inhibitors and fire retardants as well as home systems for their deployment. Management is highly experienced at building and running companies, as well as commercializing and executing on strategic partnerships for the sale of products and services.
Since MFB Ohio acquired the MFB portfolio of intellectual property on April 13, 2022, our management team has continued to develop and refine our product formulations. The Company has received significant third-party recognition for these efforts, including twice receiving the EPA Safer Choice designation, being the first and only fire inhibitor recognized by the EPA as safe for the environment, and receiving UL GREENGUARD Gold certification, which reflects minimal impact on indoor air quality from toxic smoke over extended exposure. Our products have been adopted by fire departments throughout the State of California.
We are expanding our patent portfolio and technology platform into additional markets that can benefit from environmentally safe alternatives to legacy fire retardant and fire retardant-treated wood products. CitroTech has developed wood coating products utilizing this technology and is in the initial phases of commercialization.
The Company is also actively deploying proactive wildfire defense systems on residential and commercial properties under the CitroSafe Systems brand. CitroSafe Systems are self-contained sprinkler installations that utilize our patented CitroTech product and are deployed in advance of wildfires to reduce structural risk. This offering addresses a significant and growing insurance market disruption across eleven western states, where carriers have curtailed or declined to write wildfire coverage on new construction and existing policies in the Wildland-Urban Interface, the transitional zone between undeveloped land and built environments that is at elevated risk of catastrophic wildfire loss. The Company is working with a large insurance broker to offer insurance coverage to customers who install a CitroSafe proactive wildfire system, with policies underwritten by established insurance carriers. This program is currently in the proof-of-concept phase.
Our management team consists of five individuals: Wesley J. Bolsen, Chief Executive Officer; Andrew Hotsko, Chief Operating Officer; Nanuk Warman, Secretary and Chief Financial Officer; Steve Conboy, Chief Technical Officer and Anthony Newton, General Counsel.
Known Trends and Uncertainties
Growth in Fire Safety
We believe that fire safety benefits from several growth drivers, including increasing fire severity, as measured by higher acres burned, longer fire seasons and a growing urban component moving into the Wildland Urban Interface (WUI), resulting in a need for higher quantity of specialty chemical fire inhibitors, thereby increasing production. We believe these trends are prevalent in North America, as well as globally, and we expect these trends to continue driving growth in demand for fire retardants and fire-retardant-treated lumber products.
We are working to grow our fire prevention and protection business, which is primarily focused on expanding use of ground-applications for long-term fire retardants. This growth includes use of ground assets in response to active fires (protection), as well as proactive treatments around critical infrastructure and known high-risk areas (prevention). Fire prevention products can be used to help prevent fire ignitions and protect property from potential fire danger by providing proactive retardant treatment in high-risk areas such as along roadsides, under power lines, along railroad rights-of-way, and around residential neighborhoods and commercial infrastructure. Treating these areas ahead of the fire season can help to prevent ignitions from equipment failures or sparks until a significant rainfall occurs. Although there is no certainty in wildfire defense, when our CitroSafe system is installed, we fill it with our CitroTech product. Thereafter, we will conduct an annual inspection of the system to help ensure it is ready to help defend a wildfire. While there is no specific useful life for our product, if the system has not been deployed since the third anniversary of the initial installation, or three years following an annual inspection, in an of we will remove and replace the CitroTech. In addition, we suggest spraying CitroTech in areas surrounding the property that pose the risk to help reduce the risk posed by dry vegetation, decks, garden bark, and fences.
We have invested and intend to continue investing in the expansion of our fire retardant and lumber treatment business through product development and business development to grow our customer base.
Weather Conditions and Climate Trends
Our business is highly dependent on the needs of commercial entities, residential homeowners and fire departments to prevent fires and protect assets, as well as the use and expansion of Class A Fire Retardant Treated lumber and wood products. As such, our financial condition and results of operations are significantly impacted by weather as well as environmental and other factors affecting climate change, which impact the number and severity of fires in any given year. Typically, sales of our product is higher during the summer months in the United States of America due to weather patterns that are generally correlated to a higher prevalence of wildfires. We believe orders will generally peak during the summer months, but with expanded fire seasons in the United States, ignitions may start in the late Spring and continue through late Fall of calendar year 2026.
Results of Operations
We are developing and commercializing our product lines. We have been focused historically on obtaining patents and various accreditations. To date, we do not have a large customer base, having relied heavily on a few customers, for the commercialization and testing of our CitroTech product and delivery system. We currently do not have an established retail product line nor recurring significant customer base. Therefore, period over period comparisons of our results of operations are not indicative of future results.
The following summary of our results of operations should be read in conjunction with our audited financial statements for the years ended December 31, 2025 and 2024, which are included herein.
Our results of operations for the years ended December 31, 2025 and 2024 are summarized below:
Years ended
December 31,
Change
Revenue
Operating expenses
Other expenses
Net loss
Revenue
Our revenue is associated with revenue from Mighty Fire Breaker LLC (“MFB Ohio”) which acquired intellectual property to fire suppression in April 2022. During the year ended December 31, 2025, revenue increased $1.6 million, or 195%, over the year ended December 31, 2024. This growth was driven by broader market adoption of our CitroTech product line, including sales of residential CitroSafe systems, commercial and fire department specialty chemical sales into municipalities such as San Diego, and direct spray application services for residential properties in response to heightened wildfire concerns following the January 2025 Los Angeles wildfires. Notably, customer concentration improved significantly, with no single customer representing more than 10% of revenue in 2025 compared to four customers exceeding that threshold in 2024, and our top five customers declining from 79.5% to 32.0% of total revenue. This diversification reflects our transition from early-stage project-based sales toward broader market penetration.
Our revenues consisted of the following:
Years ended
December 31,
Product sales
Product installation service
Product installation services commenced in the second quarter of 2024.
Our revenues from significant customers for the years ended December 31, 2025 and 2024, are as follows:
Years ended
December 31,
Number of customers (more than 10% of revenue)
Total revenue of top 5 customers
We do not have major sales from recurring customers for the years ended December 31, 2025 and 2024.
Operating Expenses
Years ended
December 31,
Change
Cost of revenue
Amortization and depreciation
General and administration
Advertising and marketing
Payroll and management compensation
Professional fees
Research and development expense
Total operating expenses
The increase in operating expenses was primarily attributed to increases in cost of revenue and payroll and management compensation.
Cost of revenue
Years ended
December 31,
Change
Cost of inventory
Freight and shipping
Consulting and advisory-related party
Royalty and sales commission-related party
Rent expense
Total cost of revenue
During the year ended December 31, 2025, the cost of revenue increased over the year ended December 31, 2024, primarily due to an increase in cost of inventory and rent.
Cost of inventory consists of product costs, direct labor, related supplies and direct testing of our CitroTech product and various components required for installation of CitroSafe (TM) systems. Cost of inventory increased during the year ended December 31, 2025, primarily due to an increase in product sales and supplies from increased sales.
Freight and shipping relate to costs for shipping products to customers.
Consulting and advisory services are to a related party company for services related to product installations.
Royalty and sales commissions increased in the year ended December 31, 2025, from more revenue. We recognized an allocated portion of consulting and direct labor costs associated with our revenue as royalty and sales cost of revenue in 2024 and during the first quarter of 2025. In March 2025, we entered into a new contract and there is no longer consulting and advisory royalty.
Rent expenses are warehouse and facility rent expenses. The increase in rent expense is primarily attributable to our relocation to a larger commercial facility for operations, warehousing, and customer-facing activities beginning in April 2025, along with the cancellation of a prior warehouse lease in May 2025.
Amortization and depreciation
Amortization and depreciation expenses are an amortization of patents and a depreciation of vehicle, and furniture and equipment.
General and administrative
General and administrative expenses are office, rent, travel, insurance, website, IT and other office related expenses. For the year ended December 31, 2025, we incurred increased expenditures on consulting and payroll fees, bad debt expenses, our website and IT development and travel as well as general office and insurance expenses from expansion of operations.
Advertising and marketing
The decrease in advertising and marketing during the year ended December 31, 2025, over the year ended December 31, 2024, is primarily due to 83,333 shares of Series C Convertible Preferred Stock, valued at $500,000 for a NASCAR sponsorship in 2024. Other than this NASCAR expense, the advertising and marketing increased to support revenue growth.
Professional fees
The professional fees during the year ended December 31, 2025, primarily included stock-based compensation to consultants of $2.6 million, of which $2.1 million was to a related party consultant (TC Special Investments, LLC (“TCSI”)), and various professional fees for accounting and audit related to SEC filings, legal on patents and other consulting services in 2025. The professional fees during the year ended December 31, 2024, primarily included stock-based management compensation of $1.4 million to advisors to our subsidiary MFB and stock-based compensation of $1.0 million to various consultants for IT service for software development, legal related to patents and other consulting services in 2024.
TCSI’s consulting services to us include sales and business development, customer relationship management, strategy optimization, investor relations, underwriter interface, coordinating outside counsel and other business aspects at the request of the Board of Directors. In addition to TCSI, stock-based compensation was remitted to certain individuals with fire retardant and industry experience, who provided guidance and insight to our management and Board of Directors with respect to the fire retardant and fire inhibitor industry, business development connections, and oversight during the testing and recognition processes.
Payroll and management compensation
During the year ended December 31, 2025, management compensation increased to $9.9 million from $75,000 in the prior year. This increase was primarily attributable to the buildout of a full executive management team during 2025, including the appointment of a Chief Operating Officer, Chief Financial Officer, Chief Technology Officer, and General Counsel. Compensation primarily included stock-based management compensation of $7.8 million, cash payments of $1.3 million to management, and payroll to employees of $745,000. The significant increase in stock-based compensation reflects the transition from a single-executive structure in 2024, when management compensation consisted solely of a $75,000 cash payment to our former CEO, to a fully staffed leadership team necessary to support our growth and commercialization objectives.
Research and development costs
We continue to invest heavily in the testing and certifications of CitroTech treated products as well as in advance of submitting formulas for approval to apply product onto federal lands. We expect to continue growing R&D spend over historical spend as we add additional product lines and invests in the future of the company.
Other Expenses
For the years ended December 31, 2025 and 2024, the other expenses consisted of interest expense related to convertible notes payable issued in 2025 and 2024 of $2.8 million and convertible notes payable issued in 2024 of $258,000, respectively, change in fair value of derivative liability related to convertible notes payable issued in 2025 and 2024 of $2.0 million and $410,000, respectively, financing expense of $8.7 million and $0, respectively, and loss on settlement of debt of $6.8 million and $909,000, respectively. Settlement of debt in 2025 is the conversion of convertible notes issued in 2024 and 2025. The settlement of debt in 2024 is settlement of notes payable and convertible note issued in 2022. Financing expense is from 4 million warrants granted to a financial advisor and 69,007 shares of Series C Convertible Preferred stock issued to a Series A Preferred shareholder in 2025.
Net loss
The net loss for the year ended December 31, 2025, increased by approximately $30.0 million as compared to the year ended December 31, 2024 primarily due to the increase in operating expenses and other expense offset by the increase in revenue.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant operating losses and negative cash flows from our operations. Our net loss was $36.8 and $6.9 million for the years ended December 31, 2025 and 2024, respectively. During fiscal year 2025, we completed a debt offering in February and an equity offering in September and October which generated net proceeds of approximately $3.7 million and $8.1 million, respectively.
Working capital
December 31,
December 31,
Change
Current assets
Current liabilities
Working capital (deficiency)
As of December 31, 2025 and 2024, the current assets consisted of cash of $6.3 million and $775,000, respectively, inventory of $621,000 and $325,000, respectively, accounts receivable of $209,000 and $317,000, respectively, prepaid expenses and other current assets of $317,000 and $74,000, respectively, and deferred offering costs of $0 and $126,000, respectively.
As of December 31, 2025 and 2024, the current liabilities consisted of accounts payable and accrued liabilities of $316,000 and $187,000, respectively, due to related parties of $168,000 and $0, respectively, convertible notes net of discount of $219,000 and $196,000, respectively, convertible note – related party of $1.3 million and $577,000, respectively, current portion of financing loan of $30,000 and $97,000, respectively, derivative liability of $0 and $1.1 million, respectively, and current portion of operating lease liability of $148,000 and $50,000, respectively.
The increase in working capital in 2025 was primarily due to an increase in cash from equity and debt offering offset by an increase in convertible notes.
Cash Flows
For the years ended December 31, 2025 and 2024
Years ended
December 31,
Change
Cash used in operating activities
Cash provided by (used in) investing activities
Cash provided by financing activities
Net Change in cash
Operating Activities
We have not generated positive cash flows from operating activities.
For the year ended December 31, 2025, net cash flows used in operating activities consisted of a net loss of $36.8 million, reduced by stock-based compensation of $19.1 million, non-cash lease expenses of $161,000, amortization and depreciation of $329,000, bad debt expense of $346,000, amortization of debt discount of $2.4 million, loss on settlement of debt of $6.8 million, write-off of deferred offering costs of $197,000 and changes in derivative liability of $2.0 million, and increased by net changes in operating assets and liabilities of $464,000.
For the year ended December 31, 2024, net cash flows used in operating activities consisted of a net loss of $6.9 million, reduced by stock-based compensation of $3.1 million, non-cash lease expenses of $80,000, bad debt expense of $23,000, amortization and depreciation of $265,000, amortization of debt discount of $196,000, loss on settlement of debt of $909,000, and changes in derivative liability of $410,000, which were increased by net changes in operating assets and liabilities of $3,000.
Investing Activities
For the year ended December 31, 2025, the cash flows used in investing activities consisted of the purchase of property and equipment of $194,000 and acquisition of intangible assets of $100,000.
We did not use any funds for investing activities during the year ended December 31, 2024.
Financing Activities
For the year ended December 31, 2025, net cash provided by financing activities consisted of $8.3 million from the issuance of Series C Convertible Preferred Stock and warrants, $3.7 million from the issuance of convertible promissory notes and associated warrants, $71,000 deferred offering cost payment, repayment of a financing loan of $265,000 and repayments to related party of $25,000.
For the year ended December 31, 2024, net cash provided by financing activities consisted of $1.8 million in proceeds from the issuance of Series C Convertible Preferred Stock, $1.2 million from the issuance of convertible promissory notes and associated warrants in fourth quarter of 2024, $2,000 received from a related party, $126,000 deferred offering cost payment, repayment of a financing loan of $23,000, and $741,000 from a repayment of loan from a related party.
Contractual Obligations
Convertible notes
In first quarter 2025, we entered into eleven (11) subscription agreements for convertible notes ($2,075,000) and warrants (432,296 shares of common stock). The material terms of this convertible note indebtedness are, (i) a 12-month maturity; (ii) 10% interest per annum, capitalized on the maturity date; (iii) conversion rights in the amount of the principal, either (x) divided by 2.40 or (y) a 30% discount to the sale price of its Common Stock pursuant to a registration statement filed with the SEC and listing of the Common Stock on national securities exchange; and (iv) warrant coverage for five years at the rate of 1.25 shares of Common Stock for each dollar of principal, at an exercise price of $3.00 per share.
Subsequent to December 31, 2025 and through the date of this annual report, the note holders have converted all of their notes into shares of common stock.
Convertible notes – related party
In February 2025, we entered into one (1) subscription agreement for convertible notes ($2,000,000) and warrants (416,667 shares of common stock) with a related party. The convertible notes have a term of twelve (12) months, at an interest rate of 10% per annum and warrants are with a term of five (5) years, at exercise price of $3.00 per share. The outstanding principal amount of convertible notes and unpaid interest is convertible at a fixed conversion price of $2.40. Our obligations under the convertible note are secured by a pledge of the Company’s membership interests in MFB Ohio. In the event of a default, the related party could proceed against the equity of MFB Ohio pledged to collateralize the convertible note. MFB Ohio owns our intellectual property portfolio.
Financing loan
We had a financing loan for the purchase of vehicle in September 2025. The loan repayment is $2,021 per month for 60 months, beginning October 2025, with an interest rate of 11.33%.
We had a financing loan for the purchase of vehicle in September 2025. The loan repayment is $2,083 per month for 48 months, beginning October 2025, with an interest rate of 11.90%.
Lease Agreements
We have one lease classified as an operating lease for an office and warehouse purpose. The following table outlines maturities of our lease liabilities as of December 31, 2025:
Year ending December 31,
Thereafter
Less: Imputed interest
Operating lease liabilities
Liquidity
We have incurred losses since inception and incurred a net loss of $36.8 million during the year ended December 31, 2025. However, in September 2025, we completed an equity offering which generated net proceeds of $5.4 million. Additionally, in October 2025, we completed an equity offering which generated net proceeds of $2.7 million.
Our existing cash resources are expected to provide sufficient funds to carry out our planned operations through fiscal year 2026. To more rapidly grow, our revenue and continue operations beyond such time frame, we may be required to raise additional funds by completing additional equity or debt offerings or increasing revenue. We have had multiple conversations with banks who are willing to assist us with additional capital raises if necessary, which helps to minimize the risk. There can be no assurance that we will be successful in acquiring additional funding, that our projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. In consultation with its legal counsel as appropriate, our management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we, in consultation with legal counsel, evaluate the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is likely, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible , if determinable and material, would be . contingencies considered remote are generally not unless they involve guarantees, in which case the guarantees would be .
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), which require management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We believe our most critical accounting estimates relate to the following:
Incremental borrowing rate for Right of Use Assets
Fair Value of Convertible Notes
Fair Value of Warrant to Purchase Common Stock
While our estimates and assumptions are based on our knowledge of current events and on actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of the Company’s significant accounting policies, refer to Note 2 of Notes to Consolidated Financial Statements.
Incremental borrowing rate for Right of Use Assets
As the Company’s operating leases typically do not provide an implicit rate, the Company estimates its incremental borrowing rate. The assessment of the Company’s incremental borrowing rate involves judgment regarding the cost of borrowing funds on a collateralized basis over a similar term and in a similar economic environment.
Fair Value of Convertible Notes
The Company determined that the conversion feature, embedded in convertible notes, met the definition of a liability in accordance with ASC Topic No. 815-40, Derivatives and Hedging - Contracts in Entity’s Own Stock and therefore bifurcated the embedded conversion option once the note become convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and “day 1” derivative loss for the excess amount of debt discount and amortized to interest expense over the term of the note.
For the conversion feature classified as a liability, the Company uses a Binomial Lattice valuation model to value the derivative instrument at inception and on subsequent valuation dates. The use of this valuation model requires the input of highly subjective assumptions. Any change to these inputs could produce significantly higher or lower fair value measurements.
The underlying assumptions of Binomial Lattice model are as follows:
The short-term interest rates, including risk-free rate, are known and remain constant over time.
The absence of any arbitrage opportunities is assumed.
The stock price follows a continuous-time random walk, with the rate of variance proportional to the square of the stock price.
The distribution of possible stock prices at the end of any given finite interval is assumed to be lognormal.
The variance of the rate of return on the stock is constant.
No commissions or transaction costs are incurred when buying or selling the stock or option.
The option’s early exercise value is evaluated at each node of the lattice.
If applicable, the tax rate remains consistent for all transactions and market participants.
Fair Value of Warrant to Purchase Common Stock
The Company has issued warrants to investors in our debt offerings.
We evaluate all warrants issued to determine the appropriate classification under ASC 480 and ASC 815. In addition to determining classification, we evaluate these instruments to determine if such instruments meet the definition of a derivative.
For warrants that are determined to be equity-classified, we estimate the fair value at issuance and record the amounts to additional paid in capital (potentially on a relative fair value basis if issued in a basket transaction with other financial instruments). Warrants that are equity-classified are not subsequently remeasured unless modified or required to be reclassified as liabilities. The classification of all outstanding warrants, including whether such instruments should be recorded as equity, is evaluated at the end of each reporting period.
The warrants are valued using a Black Scholes valuation model. The use of this valuation model requires the input of highly subjective assumptions. Any change to these inputs could produce significantly higher or lower fair value measurements.
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 that is material to stockholders.
