Zone Frontier Inc.: Form 10-Q for the period ended Dec 31, 2024

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.

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 Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024, or the Form 10-K, 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.

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 production of cleaning products that produce pure aqueous ozone for professional, industrial, or home use. We have a patented nanobubble technology using aqueous ozone that we believe is highly effective in cleaning, sanitizing, and deodorizing surfaces and high-touch areas.

We offer products and solutions that are marketed for janitorial and sanitation, ice machine cleaning, laundry, and industrial industries. Our products are used in many types of environments including retail establishments, distribution centers, factories, warehouses, restaurants, schools and universities, airports, healthcare, food service, and commercial buildings such as offices, malls, and stores.

Our mission is to become a leader in creating safe, clean spaces that are free from any chemical residue or skin irritants. We are currently expanding our distributor network, improving our production processes, and proving the effectiveness of our products in restaurants, airports, and hotels.

Recent Developments

On January 27, 2025, Clayton Adams, our Chief Executive Officer, entered into a note sale assignment and cancellation agreement with Travis Buchanan, our President, pursuant to which Mr. Adams sold and assigned $125,000 of the 20% original issue discount promissory note in the principal amount of $415,241.25 issued to Mr. Adams on December 24, 2024 to Mr. Buchanan for a purchase price of $100,000. Following such assignment, we issued a 20% original issue discount promissory note in the principal amount of $125,000 to Mr. Buchanan and a 20% original issue discount promissory note in the principal amount of $290,241.25 to Mr. Adams. These notes are due and payable on June 30, 2025 and accrue interest at a rate of 8% per annum; provided that upon an event of default (as defined in the notes), such interest rate shall increase to 15% per annum. The notes may be prepaid at any time without premium or penalty, are unsecured, and contain customary events of default for loans of this type.

In January 2025, we launched a unit offering pursuant to which we are offering to accredited investors, in a private placement transaction, up to 266,667 units, at a purchase price of $7.50 per unit, for gross proceeds of up to $2,000,000; provided that we may increase the offering to 533,333 units for gross proceeds of up to $4,000,000 if there are oversubscriptions. Each unit consists of a 12% unsecured promissory note in the principal amount of $7.50 and a warrant to purchase one share of class B common stock at an exercise price equal to the last closing price prior to the closing date; provided that such exercise price shall not exceed $1.50. The closing will occur, at our discretion, on or before March 1, 2025, at which time we will issue the notes and the warrants. Until closing, all subscription funds received by us will be held in a segregated account. The notes will bear interest at a rate of twelve percent (12%) per annum, payable quarterly, and will be due on the second anniversary of the date of issuance. The notes will provide that they may be prepaid at any time without premium or penalty, will be unsecured, and will contain customary events of default for loans of this type. The warrants will have a five-year term and will be exercisable on a cashless basis if the underlying shares are not freely tradable. In January 2025, we entered into subscription agreements with two accredited investors for the purchase of an aggregate of 53,334 units for an aggregate subscription price of $400,000.

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 of 1933, as amended, 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.

Results of Operations

Comparison of Three Months Ended December 31, 2024 and 2023

The following table sets forth key components of our results of operations for the three months ended December 31, 2024 and 2023, both in dollars and as a percentage of our revenue.

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Revenue. We generate revenue from sales of our cleaning products. Our revenue decreased by $1,137, or 0.44%, to $257,269 for the three months ended December 31, 2024 from $258,406 for the three months ended December 31, 2023. The decrease is primarily due additional discounts for our products that we offered to certain large customers.

Cost of sales. Our cost of sales consists of raw materials, components and labor. Our cost of sales increased by $63,521, or 48.22%, to $195,258 for the three months ended December 31, 2024 from $131,737 for the three months ended December 31, 2023. As a percentage of revenue, cost of sales increased from 50.98% for the three months ended December 31, 2023 to 75.90% for the three months ended December 31, 2024. This increase was primarily due to an increase in sales and increase in demo expenses due to a change in sales strategy of providing customers considering large orders demonstration equipment at no cost. Additionally, a business decision was made to sell $46,000 of inventory at cost to a former customer placing their first purchase order in over 9 months.

Gross profit. As a result of the foregoing, our gross profit decreased by $64,658, or 51.04%, to $62,011 for the three months ended December 31, 2024 from $126,669 for the three months ended December 31, 2023. As a percentage of revenue, gross profit decreased from 49.02% for the three months ended December 31, 2023 to 24.10% for the three months ended December 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, stock based compensation expense, professional advisor fees, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our general and administrative expenses increased by $590,851, or 184.46%, to $911,173 for the three months ended December 31, 2024 from $320,322 for the three months ended December 31, 2023. As a percentage of revenue, our general and administrative expenses increased from 123.96% for the three months ended December 31, 2023 to 354.17% for the three months ended December 31, 2024. This increase was primarily due to $149,403 stock compensation expense, $111,098 of additional wage and benefit expense related to the addition of three employees, $224,135 of additional professional fees such as accounting and legal, and a $69,101 increase in director and officer insurance.

Advertising expenses. Our advertising expenses consist of vendor trade shows and various trade publications. Our advertising expenses increased by $50,274, or 204.11%, to $74,905 for the three months ended December 31, 2024 from $24,631 for the three months ended December 31, 2023. As a percentage of revenue, our advertising expenses increased from 9.53% for the three months ended December 31, 2023 to 29.12% for the three months ended December 31, 2024. Such an increase was primarily due to a significant increase in our public relations activities.

Depreciation and amortization expense. We incurred depreciation and amortization expense of $39,928, or 15.52% of revenue, for the three months ended December 31, 2024, as compared to $38,646, or 14.96% of revenue, for the three months ended December 31, 2023.

Interest expense, net. We incurred interest expense, net, of $41,035, or 15.95% of revenue, for the three months ended December 31, 2024, as compared to $87,869, or 34.00% of revenue, for the three months ended December 31, 2023. The decrease is primarily due to interest expense for the 2024 period being offset by interest income of $7,256 from an interest-bearing money market account opened in the fourth quarter of fiscal 2024.

Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $1,005,030 for the three months ended December 31, 2024, as compared to $344,799 for the three months ended December 31, 2023, an increase in loss of $660,231, or 191.48%.

Comparison of Six Months Ended December 31, 2024 and 2023

The following table sets forth key components of our results of operations for the six months ended December 31, 2024 and 2023, both in dollars and as a percentage of our revenue.

Revenue. Our revenue increased by $38,078, or 6.52%, to $622,168 for the six months ended December 31, 2024 from $584,090 for the six months ended December 31, 2023. The increase is primarily due to an increase in sales with our largest customer, representing an 80% increase for the comparable six month period.

Cost of sales. Our cost of sales increased by $90,345, or 31.78%, to $374,657 for the six months ended December 31, 2024 from $284,312 for the six months ended December 31, 2023. As a percentage of revenue, cost of sales increased from 48.68% for the six months ended December 31, 2023 to 60.22% for the six months ended December 31, 2024. This increase was primarily due to an increase in sales and increase in demo expenses due to a change in sales strategy of providing customers considering large orders demonstration equipment at no cost. Additionally, a business decision was made to sell $46,000 of inventory at cost to a former customer placing their first purchase order in over 9 months.

Gross profit. As a result of the foregoing, our gross profit decreased by $52,267, or 17.44%, to $247,511 for the six months ended December 31, 2024 from $299,778 for the six months ended December 31, 2023. As a percentage of revenue, gross profit decreased from 51.32% for the six months ended December 31, 2023 to 39.78% for the six months ended December 31, 2024.

General and administrative expenses. Our general and administrative expenses increased by $997,191, or 120.12%, to $1,827,387 for the six months ended December 31, 2024 from $830,196 for the six months ended December 31, 2023. As a percentage of revenue, our general and administrative expenses increased from 142.13% for the six months ended December 31, 2023 to 293.71% for the six months ended December 31, 2024. This increase was primarily due to $223,833 stock compensation expense, a $470,804 increase in professional and consulting fees, and a $138,304 increase in director and officer insurance.

Advertising expenses. Our advertising expenses increased by $95,659, or 375.80%, to $121,114 for the six months ended December 31, 2024 from $25,455 for the six months ended December 31, 2023. As a percentage of revenue, our advertising expenses increased from 4.36% for the six months ended December 31, 2023 to 19.47% for the six months ended December 31, 2024. Such an increase was primarily due to a significant increase in our public relations activities.

Depreciation and amortization expense. We incurred depreciation and amortization expense of $79,750, or 12.82% of revenue, for the six months ended December 31, 2024, as compared to $77,208, or 13.22% of revenue, for the six months ended December 31, 2023.

Interest expense, net. We incurred interest expense, net, of $80,369, or 12.92% of revenue, for the six months ended December 31, 2024, as compared to $149,012, or 25.51% of revenue, for the six months ended December 31, 2023. The decrease is primarily due to interest expense for the 2024 period being offset by interest income of $24,409 from an interest-bearing money market account opened in the fourth quarter of fiscal 2024.

Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $1,861,109 for the six months ended December 31, 2024, as compared to $782,093 for the six months ended December 31, 2023, an increase in loss of $1,079,016, or 137.97%.

Liquidity and Capital Resources

Our company has incurred losses and negative cash flows from operations. From October 17, 2022 (the date of the acquisition) through December 31, 2024, we have financed our operations primarily through private investor funding and an initial public offering. As of December 31, 2024, we had cash and cash equivalents of $560,489, a net loss for the six months ended December 31, 2024 of $1,861,109 and cash used in operating activities of $1,662,330.

Despite our 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 financial statements.

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. The accompanying 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 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 December 31, 2024.

Net cash used in operating activities was $1,662,330 for the six months ended December 31, 2024, as compared to $234,156 for the six months ended December 31, 2023. For the six months ended December 31, 2024, our net loss of $1,861,109, offset by stock-based compensation of $331,802, were the primary drivers of net cash used in operating activities. For the six months ended December 31, 2023, our net loss of $782,093, offset by a non-cash interest expense of $141,211 and stock-based compensation of $107,972, were the primary drivers of net cash used in operating activities.

Net cash used in investing activities was $9,065 for the six months ended December 31, 2024, as compared to $1,015 for the nine months ended December 31, 2023. The net cash used in investing activities for both periods consisted entirely of purchases of property and equipment.

Net cash provided by financing activities was 215,273 for the six months ended December 31, 2024, as compared to net cash used in financing activities of $113,318 for the six months ended December 31, 2023. Net cash provided by financing activities for the six months ended December 31, 2024 consisted of proceeds from an advance on subscription of $300,000 and proceeds from the issuance of related party notes of $232,193, offset by payments of notes payable of $316,920, , while net cash used in financing activities for the six months ended December 31, 2023 consisted of payments for deferred offering costs of $124,824, offset by proceeds from the issuance of loans from related parties of $11,506.

Debt

Please see Notes 10 and 11 to our unaudited condensed financial statements above for a description of the terms of our outstanding debt.

Contractual Obligations

Our principal commitments consist mostly of obligations under the loans described in Notes 10 and 11 to our unaudited condensed financial statements above. We also have a non-cancellable operating lease commitment for our office facility expiring in 2028 as described in Note 14 to the unaudited condensed financial statements above. Other than the foregoing, at December 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.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Form 10-K.

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 rules and forms of the Securities and Exchange Commission, 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 technical expertise with United States generally accepted accounting principles, or U.S. GAAP, to identify, evaluate, and account for complex transactions, including identification of related party transactions, and review valuation reports prepared by external specialists.

Changes in Internal Control over Financial Reporting

In preparing our financial statements as of and for the three months ended December 31, 2024, 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.

As disclosed in the Form 10-K, our management has identified the steps necessary to address the material weaknesses, and in the first quarter of fiscal year 2025, we continued to implement the following remedial procedures. 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 December 31, 2024. 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.

PART II

OTHER INFORMATION