ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with our audited financial statements and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.” In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors.
Overview
We are a technology company pioneering the development of innovate energy wave solutions for industrial and other commercial enterprises. Our expertise in radio wave technologies and microwave technologies has led to multiple breakthroughs with applications both industrial and commercial. Our patented energy wave technology introduces a revolutionary approach to industrial processes by specific molecular targeting, which can be applied at precise and multiple locations in a system in ways that conventional single point heat sources cannot, resulting in improved efficiency, higher quality, and reduced processing time.
Our wholly-owned subsidiary, Two Trees Beverage Company, utilizes the SRAS, validating the use of this patented energy wave technology within the premium craft spirits industry. Our proprietary and patented molecular targeting system swiftly and sustainably transforms distillate to maturity, delivering traditional flavors in a fraction of the time with greatly reduced environmental impact and cost. Precision engineered to match traditional aging flavors and aromas, it has been used to produce over 50 SKUs and many award-winning products.
Recent Developments
Whiskey-as-a-Service
Among our accomplishments to start the year, we successfully launched our “Whiskey-as-a-Service” (“WaaS”) business model, offering use of the SRAS through a flexible technology license structure to enable customers to access this transformative technology with minimal upfront investment, while securing long-term, predictable revenue streams for the Company. We also offer on-site aging of bulk spirits.
We have signed new contracts with two companies for the construction and deployment of our proprietary SRAS and see excellent potential for multiple additional SRAS deployments by both customers within the next twelve months as well as by other third parties.
The first of these units is anticipated to be installed on site at one of the largest distilleries in the U.S. in the second quarter of 2026, with the second unit deployed approximately three months thereafter. The second contract is with a leading U.S. wholesaler and broker of bulk spirits for one SRAS unit at their facility, which is estimated to be installed in the third quarter of 2026.
Under both contracts, RFS will manufacture and assemble the SRAS units and provide ongoing machine servicing and maintenance in addition to the recurring monthly license payments from the customers for use of the SRAS units.
These contracts validate the economic and sustainability benefits of our SRAS units and provide us with attractive recurring revenue streams through licensing agreements and ancillary fees for ongoing machine servicing and maintenance.
Building on the momentum of our first two WaaS contracts, we signed a separate new agreement with an international spirits investment fund (the “Fund”) providing the Fund with limited exclusivity for the deployment of our SRAS units in three countries outside of the United States. To retain exclusivity, the Fund is required to deploy at least one SRAS unit annually in each of the three countries.
In 2025, we began aging tanker loads of distillate at our facility for one of our SRAS customers to fill immediate demand for aged spirits. In early 2026, we completed installation of a higher capacity SRAS at our Two Trees facility in order to increase existing production across our aging services and brand production.
Appointment of Chief Financial Officer
On March 10, 2025, we appointed David Stephens as our Chief Financial Officer, effective March 1, 2025. We entered into an employment agreement with Mr. Stephens for a term of three years with the following compensation terms:
A base salary of $120,000 in 2025; $150,000 in 2026; and $175,000 in 2027;
For the first two years of the term, a performance-based bonus of 15% of his then current base salary for any quarter that gross revenues increased a minimum of 25% from its prior year gross revenue for that corresponding quarter;
After the first two years of the term, an annual performance-based bonus based on prior year gross revenues, in a schedule as set forth in his employment agreement.
Asset Purchase Agreement
On January 27, 2025, Two Trees (the “Buyer”) and Brown Water Bourbon Xchange, LLC, a Kentucky limited liability company (the “Seller”) (collectively the “Parties”) entered into an Asset Purchase Agreement (the “Agreement”). According to the terms of the Agreement, the Seller sold to the Buyer 680 barrels of whiskey in exchange for 5,000,000 restricted shares of Common Stock of the Company (the “Shares”). On the same day, the Buyer and Seller closed the transaction.
Two Trees Beverage Company – New Uplifting Spirits Product Line
In July 2025, our award-winning subsidiary, Two Trees Beverage Company, launched Uplifting Spirits , a new product line focused on supporting community and charitable causes, debuting with Land of the Sky , a limited-edition straight bourbon whiskey aiding Hurricane Helene relief efforts. We are proud of this initiative and pleased to donate ten percent of Land of the Sky sales to relief efforts, including aiding Western North Carolina, where many of our teammates call home.
RF Specialties, LLC – Molecular Sawdust Drying Machine Update
We completed testing and are currently deploying our first Molecular Sawdust Drying System (“MSDS”) at a large lumber mill, which utilizes a proprietary molecular energy wave technology to adjust the moisture content of sawdust for production of wood pellets, an alternative green energy source.
The system offers scalable, flexible solutions for any tonnage of sawdust, catering to diverse pellet manufacturing needs. It utilizes patented technology to adjust moisture content as required, optimizing it to precise specifications. The system features precision automation for controlling temperature and drying parameters, ensuring consistent high-quality output. This adaptable system enhances safety and productivity, achieving uniform results with minimal downtime. The Company is also targeting applications of this process in engineered wood products, adhesives, wood forest products and food and beverages.
Results of Operations
Fiscal Year Ended December 31, 2025 compared to Year Ended December 31, 2024
For the Years ended December 31,
Revenue
Two Trees Distilling
RF Specialties
Total
Cost of Revenue
Two Trees Distilling
RF Specialties
Total
Gross profit (loss)
Two Trees Distilling
RF Specialties
Total
Revenue. Revenue for the year ended December 31, 2025 was $2,214,542 compared to $2,364,093 for the year ended December 31, 2024. Revenue of $1,350,114 in 2025 is attributable to the Two Trees business, compared to $1,324,823 in 2024, and $864,428 of revenue in 2025 attributable to product and service income from RFS, compared to $1,039,270 in 2024. The $25,291 increase revenue in the Two Trees business was primarily attributable to increased WaaS revenue which contributed $222,300 of revenue during the current year, which was partially offset by a decline in brand sales of approximately $150,000 and a decrease in bulk sales of $70,000.
In February 2025, we executed contracts with two customers related to the lease of an aggregate of three SRAS that are expected to begin producing revenue to the Company in the second half of 2026. We began building the machines for these customers in early 2025, and we expect to drive significant growth in revenue and gross profit in our Two Trees Distilling business from this new revenue stream going forward.
The $174,842 decrease in revenue of our RFS business is primarily due to significant non-recurring service revenue from RF Specialties during the prior year ended, December 31, 2024, totaling $520,000, partially offset by revenue from milestones reached on the development and installation of the MSDS in the year ended December 31, 2025.
We expect our RFS business to complete full installation of the MSDS in the first half of 2026, and to expand the number of systems installed at lumber mills across the southeast United States throughout 2026.
Cost of Sales. Cost of sales for the year ended December 31, 2025 was $2,564,857 compared to $1,490,064 for the year ended December 31, 2024. Cost of sales for the Company’s Two Trees Distilling operations was $1,331,901 in 2025 compared to $917,458 in 2024, with the increase driven an inventory impairment of $140,067, cost of goods sold from sale of barrels of approximately $168,000, increased input costs for our brand products, and new costs associated with our WaaS revenue. The Company’s RF Specialties business incurred costs of sales of $1,232,956 in 2025 as compared to $572,606 in 2024, due to the costs associated with the MSDS contract ongoing since November 2024. Gross profit for the year ended December 31, 2024 benefitted significantly from one-time service revenue of $520,000 in the RF Specialties business.
Operating Expenses . The Company reported operating expenses of $3,386,049 consisting primarily of legal, accounting, payroll, and general business-related expenses for the year ended December 31, 2025 compared to $2,376,693 for the year ended December 31, 2024. The $1,067,256 increase in operating expenses was primarily attributable to increased salaries and wages from a full year of officer contracts compared to the year ended December 31, 2024. Selling, general and administrative expenses was $2,302,274 and $1,853,335 for the years ended December 31, 2025 and 2024, respectively, and included legal, accounting and audit fees related to our public company reporting obligations, including stock-based compensation of $639,885 and $71,938, respectively due to new equity awards to employees and consultants in the current year. Operating expenses included salary and wages expense of $763,929 and $175,827 for the years ended December 31, 2025 and 2024, respectively. Operating expenses included depreciation and amortization expense of $319,846 and $289,631 for the years ended December 31, 2025 and 2024, respectively, and a loss of $57,900 on disposal of assets to a related party for the year ended December 31, 2024.
Total Other Income/Expense . Total other expense was $61,626 for the year ended December 31, 2025 compared to the total other expense of $118,453 for the year ended December 31, 2024. The decrease was primarily due to a loss on note receivable impairment in the year ended December 31, 2024, partially offset by increased interest expense in the year ended December 31, 2025.
Liquidity and Capital Resources
We believe that if we do not raise additional capital over the next 12 months following the filing of this annual report, we may be required to suspend or cease the implementation of our business plans.
As of December 31, 2025 and 2024, our cash balance was $211,948 and $11,159, respectively. We anticipate that our current cash and cash generated from financing activities will be insufficient to satisfy our liquidity requirements for the next 12 months. To date, the Company has incurred operating losses since inception of $6,158,495. At December 31, 2025, the Company had a working capital deficit of $1,255,017. Subsequent to December 31, 2025, the Company has raised an additional $450,000 in proceeds from the sale of common stock.
The Company requires additional funding to meet its ongoing obligations and to fund anticipated operating losses. Management has expressed substantial doubt about our ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on raising capital to fund its initial business plan and ultimately to attain profitable operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.
We expect to incur marketing, professional, and administrative expenses as well as expenses associated with maintaining our filings with the Commission. We will require additional funds during this time and will seek to raise the necessary additional capital. If we are unable to obtain additional financing, we may be required to reduce the scope of our business development activities, which could harm our business plans, financial condition and operating results. Additional funding may not be available on favorable terms, if at all. The Company intends to continue to fund its business by way of equity or debt financing and advances from related parties. Any inability to raise capital as needed would have a material adverse effect on our business, financial condition, and results of operations.
Cash Flows
Cash Used in Operating Activities. Net cash used in operating activities for the years ended December 31, 2025 and 2024, was $1,574,124 and $781,970. The increase was attributable to an increase in net loss compared to the prior year as a result of increased operating expenses associated with the new businesses as described above.
Cash Used in Investing Activities. Net cash used in investing activities for the years ended December 31, 2025 and net cash provided by investing activities for the year ended December 31, 2024, was $872,247 and $6,990, respectively, related to purchases of equipment in developing larger in house SRAS unit to expand production capacity and the SRAS units for customers.
Cash Provided by Financing Activities. Net cash provided by financing activities for the years ended December 31, 2025 and 2024, was $2,647,160 and $685,008. Net cash provided by financing activities for the year ended December 31, 2025 consisted of $2,939,401 in proceeds from the sale of common stock, $150,000 in proceeds from related party notes payable, offset by repayments of notes payable to related parties and third parties of $105,500 and $336,741, respectively. Net cash provided by financing activities for the year ended December 31, 2024 consisted of $745,000 in proceeds from the sale of common stock, $155,500 in proceeds from related party notes payable, offset by repayments of notes payable to related parties and third parties of $32,500 and $182,982 respectively and repayments of preferred stock of $10.
Off Balance Sheet Arrangements
There are no off-balance sheet arrangements currently contemplated by management or in place that are reasonably likely to have a current or future effect on the business, financial condition, changes in financial condition, revenue or expenses, result of operations, liquidity, capital expenditures and/or capital resources.
Recent Accounting Standards
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures , which amends the existing segment reporting guidance (ASC Topic 280) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, an amount for other segment items by reportable segment and a description of its composition, the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The amendments in this update were effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
The Company adopted this standard on a retrospective basis within our annual report for the year ended December 31, 2025, which resulted in additional disclosures in our segment financial information footnote, primarily related to significant segment expenses that are regularly provided to the CODM and included within our reported measure of segment profit or loss. Refer to note 14 for these additional disclosures.
In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (DISE) , requiring additional disclosure of the nature of expenses included in the income statement. The new standard requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. The amendments in this update are effective for annual periods beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of this standard on its consolidated financial statements.
The Company has implemented all new accounting standards that are in effect and that may impact its financial statements and does not believe that there are any other new accounting standards that have been issued that might have a material impact on its financial position or results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments.
Revenue Recognition - Net sales from Two Trees include liquor and related products, less excise taxes and customer programs and incentives. Sales from RF Specialties, LLC will include product and services related to sustainable Radio Frequency applications to a wide range of industries including structural engineering, food & beverage, and manufacturing. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return. The Company also performs aging services for certain customers, with revenue recognized upon completion of the aged product. For service revenue within the Company’s radio frequency applications, the Company recognizes revenue as the services are provided to the customer. The Company’s contracts typically have a single performance obligation, and do not contain a significant financing component.
The Company recognizes deferred revenue for performance obligations not yet satisfied, primarily related to liquor sales not yet shipped and deposits received related to its aging system contracts.
Goodwill - Goodwill represents the excess of acquisition cost over the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it can conclude the assessment. If the Company concludes otherwise, the Company is required to perform a quantitative analysis to determine the amount of impairment. A quantitative analysis is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value to determine the amount of impairment, if any. The Company has determined that it has two reporting units. During the years ended December 31, 2025, and 2024, no impairment expense was recognized.
Impairment of Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. During the years ended December 31, 2025, and 2024, no impairment expense was recognized.
