Citrotech Inc. quarterly report, Q2 FY2022

Business Context and Reporting Period

This is General Enterprise Ventures, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2022, filed August 22, 2022. The filing is by General Enterprise Ventures, Inc., not an entity named Citrotech Inc.; CitroTech is the name associated with technology acquired through Mighty Fire Breaker LLC (MFB). Effective April 1, the company completed its exit from crypto mining and shifted its focus to MFB’s fire-prevention products and intellectual property.

Key Financial Results

All amounts are U.S. dollars. The three-month and six-month comparisons are to the corresponding 2021 periods.

Management attributes 2022 revenue to MFB, acquired in April. The filing reports no cost of revenue for the six-month period, but inventory remained unsold; a meaningful product margin is therefore not established. Second-quarter operating expenses included $2.1 million in noncash stock-based compensation for 70 million restricted common shares, $182,295 in professional fees, and $78,111 in general and administrative expense.

Financial Position, Liquidity and Debt

• At June 30, cash was $102,252, inventory $114,413, and current assets $216,665. Total assets were $4,482,551, including $4,195,353 of acquired intangible assets.
• Current liabilities were $518,924; the reported working-capital deficit was $302,259. Total liabilities were $576,908, including operating lease liabilities.
• Cash increased by $96,783 from year-end. Operating cash use of $274,274 and investing cash use of $2,707 were more than offset by $373,764 of financing inflows, principally related-party borrowing.
• The balance sheet reports $493,814 due to related parties at June 30, versus $372,349 at December 31, 2021. The notes separately state that unsecured, non-interest-bearing related-party demand loans were $445,966 at June 30. The filing does not clearly reconcile these amounts.

Material Changes and Unusual Items

• On April 13, the company acquired MFB and associated intellectual property for 1 million Series C preferred shares valued at $4.2 million, plus a royalty of 10% of pretax gross sales of MFB-family products. The acquired technology is described as having 19 patents.
• The company issued 70 million restricted shares to its president and a board member. The shares carry voting rights, and release is tied to achieving at least $100 million in gross revenue in each of 2023, 2024, 2025 and 2026. The company recorded $2.1 million of stock compensation.
• The company divested its crypto-mining equipment and digital currency holdings in April. Six-month discontinued operations included $13,016 of mining income and a $2,030 disposition loss.
• Common shares outstanding rose from 22,945,388 at year-end to 93,945,388 at June 30; the filing reports the same share count as of August 19. A holder converted 50,000 Series C preferred shares into 1 million common shares. Remaining Series C shares are convertible at 20 common shares per preferred share.
• A change in majority ownership occurred in April when Jan Ralston transferred 10 million Series A preferred shares to CEO Joshua Ralston. Series A shares carry 1,000 votes per share and are convertible into 1,000 common shares each.

Outlook, Risks and Controls

The filing provides no specific revenue, earnings, cash-flow or other financial guidance. Management says it intends to focus resources on MFB. It describes the product as tested and says it is undergoing testing at three U.S. government agencies; these are company statements, not reported commercial validation or future sales commitments.

Management states that the company has not generated significant income and has limited operating capital. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern, which depends on raising capital and generating future revenue and profits. There is no assurance those outcomes will occur.

Management concluded that disclosure controls were ineffective at June 30, citing four material weaknesses: no functioning audit committee, no board majority of outside directors, inadequate segregation of duties, and management dominated by one individual without adequate compensating controls. The filing says the company expects material dependence on third-party accounting consultants and warns that errors or restatements may result. Management reported no material changes to internal controls during the period. It reported no legal proceedings believed likely to have a material adverse effect and no material off-balance-sheet arrangements.

Important Facts for Investors to Verify

• Confirm the registrant’s identity and relationship to Citrotech, MFB and the CitroTech product and intellectual property.
• Reconcile the $493,814 balance-sheet related-party amount with the $445,966 loan balance in the notes, and review the terms and sources of further financing.
• Assess the MFB acquisition valuation, the 10% gross-sales royalty, product costs, commercial orders and evidence supporting product testing and market adoption.
• Review the dilution and governance implications of the 70 million restricted shares, their revenue-based release conditions, and the voting and conversion rights of preferred shares.
• Evaluate the going-concern warning, the working-capital deficit, and management’s plan and capacity to fund operations.
• Review remediation of the disclosed material weaknesses and the risk of financial reporting errors or restatement.
• Check the lease note: its current and noncurrent liability labels appear inconsistent with the balance-sheet presentation, although the reported total lease liability is approximately $67,961.