AmeriCrew (ACRU) 10-Q2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2023

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:

Commission File Number: 000-56176

Issuer's telephone number: (201) 387-7700

Securities registered pursuant to Section 12(b) of the Act: None

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. Yes ☒ No ☐

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 May 12, 2023, the issuer had 15,784,424 shares of its common stock, $0.001 par value per share, outstanding.

AMERICREW, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements.

AMERICREW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICREW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICREW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICREW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICREW, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Change in Fiscal Year

We changed our fiscal year-end from December 31 to September 30, effective September 30, 2022. Our results of operations, cash flows, and all transactions impacting shareholders deficit presented in this Form 10-Q are for the three and six months ended March 31, 2023 and 2022, unless otherwise noted.

NOTE 2 – Business, Basis of Presentation and Significant Accounting Policies

Business

Americrew, Inc. (the “Company”, or “PhoneBrasil”) was organized in New Jersey as Donald Utz Engineering, Inc. in 1991. The Company later changed its name to PhoneBrasil International, Inc. and further filed a Registration of Alternate Name in the State of New Jersey for the use of the name PhoneBrasil International, Inc. (“we” or the “Company”).

The Company subsequently became inactive and ceased operations. On February 14, 2020, the Superior Court of New Jersey Equity Division appointed Custodian Ventures, LLC as the custodian for PhoneBrasil International, Inc., f/k/a Utz Technologies, Inc., Civil Action No. C-2-20, finding that Custodian Ventures, LLC had exhausted all reasonable means of serving the Summons and Complaint in the action to the officers and directors of PhoneBrasil International, Inc., f/k/a Utz Technologies, Inc., and thereby deemed to have served the Summons and Complaint pursuant to Rule 4:4-4(b)(3) and the officers and directors failed to answer or respond in the time allotted by Rule 1:20-6.2. There was no opposition. 

On September 15, 2020, the Company issued 18,000,000 shares of $0.00001 par value common stock to Custodian Ventures, LLC in return for a reduction of $5,000 of the interest-free demand loans issued to the Company by Custodian Ventures, LLC. 

On September 30, 2020, the Company filed a Restated Certificate of Incorporation which increased the authorized shares to 300,000,000 shares of common stock and 10,000,000 shares of preferred stock each with a par value of $0.000001 per share. The preferred shares are convertible to common shares at a ratio of 30 to 1.

The increase in the shares the Company is authorized to issue was made because Management believed that it would better position the Company in its efforts to make acquisitions of viable business entities on a stock for stock basis. The Board of Directors further believed it would benefit the shareholders to have a substantial number of unreserved shares available for issuance so that adequate shares may be available for the possible business combination or acquisition. 

On October 5, 2020, the Company issued 10,000,000 shares of Series A Preferred Stock to Custodian Ventures, LLC in return for a reduction of $10,000 of related party debt that had been extended to the Company. 

Effective December 9, 2020, DR Shell LLC, a Delaware limited liability company (the “Buyer”) purchased from Custodian Ventures LLC (the "Seller"), 18,000,000 shares of the common stock of the Company, representing approximately 62% of the outstanding Common Stock of the Company, and (ii) 10,000,000 shares of Series A Convertible Preferred Stock of the Company, for a total purchase price of $245,000, paid in cash. The funds were provided by the Buyer’s members. The shares were acquired pursuant to a Stock Purchase Agreement, dated December 9, 2020 (the “SPA”), by and among the Seller, the Buyer, and David Lazar, then Chief Executive Officer of the Company and managing director of Custodian Ventures, LLC. Additionally, under the terms of the SPA, Mr. Lazar forgave $41,229 in related-party loans.

As a result of the transaction, Mr. Ross DiMaggio, the manager of the Buyer, acquired control of the Company. 

Under the terms of the SPA, effective December 9, 2020, Mr. Lazar resigned as the Chief Executive Officer, Treasurer, and Secretary of the Company, and Mr. DiMaggio was appointed as the sole director, Chief Executive Officer, Treasurer, and Secretary of the Company. 

On August 12, 2021, the Company executed a Share Exchange Agreement with Mikab Corporation ("Mikab"). The Company exchanged 94.2% of the outstanding PhoneBrasil Common Stock for the capital stock of Mikab. 

On September 13, 2021, the Company increased the authorized common stock to 1,650,000,000 shares. 

On November 16, 2021, the Company filed a Second Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Amendment”) with the New Jersey Secretary of State pursuant to the New Jersey Business Corporation Act (the “NJBCA”). The Amendment made the following changes: 

Following the Mikab acquisition (the "Acquisition"), in 2021 the Company changed its domicile from New Jersey to Delaware. 

Under guidance of Accounting Standards Codification ("ASC") 805-10-55-11 through 15, Mikab has been identified as the acquirer for accounting purposes.

AmeriCrew and Mikab (together, the "Company") are each service companies engaged in the business of building a national infrastructure involving the installation of rural wireless telecommunication cables, upgrading wireless communications towers and other above-ground infrastructure and, going forward, providing planning, installation, maintenance and upgrade services with respect to electronic vehicle (EV) charging stations.

The Company provides specialty infrastructure contracting services to market participants in the telecommunications and clean energy industries throughout the United States. A proportion of the Company’s workforce is staffed through a unique in-house program through which the Company hires and trains military veterans to provide construction and maintenance services to customers.

The Company’s operations are predominantly focused on its telecommunications infrastructure services business and clean energy industries in the geographic area of New Jersey and Indiana.

The Company’s chief operating decision maker has been identified as the Chief Operating Officer, who reviews consolidated results when making decisions about allocating resources and assessing the performance of the Company. The Chief Operating Officer determined the Company operates under one reportable segment with four business units: Wireless, Fiber Clean Energy and Workforce Development.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) “FASB Accounting Standard Codification™” (the “Codification”) which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States.

From an accounting perspective, the condensed consolidated financial statements of the combined entity represent a continuation of the financial statements of the accounting acquirer/legal acquiree. As such, the historical cost bases of assets and liabilities of the acquiring entity (the accounting acquirer/legal acquiree) are maintained in the consolidated financial statements of the merged company and the assets and liabilities (if any) of the acquired entity (the legal acquirer) are accounted for under the acquisition method. Results of operations of the acquired entity (the legal acquirer) are included in the financial statements of the combined company only from the acquisition date.

Going Concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve months following the date these financial statements are issued.

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. Historically, the Company has raised capital through private placements of convertible debt and warrants and obtaining short-term loans from related parties, to finance working capital needs, and may attempt to raise capital through the sale of common stock or other securities and obtaining additional loans from related parties. There can be no assurance that the Company will be successful in raising future capital.

The Company had $67,226 in cash on hand as of May 12, 2023. The Company will need to raise additional capital to fund its operations for the next twelve months and to repay its short-term debt and the convertible promissory notes. A total of $2,485,000 of the senior secured promissory notes mature between October 4, 2023, and December 30, 2023 and a total of $838,000 of the senior secured promissory notes mature between September 30, 2024 and December 29, 2024. In addition, the Company owes $464,078 to the estate of a family member of its Chief Operating Officer which is due January 1, 2025.

Our liquidity is primarily derived from financing transactions and revenue from our contracts with customers, although management anticipates a larger proportion of our capital resources to be derived from financing transactions in future periods, particularly as we seek growth capital to fund our acquisition efforts in the next twelve months.

The Company is reliant upon completing one or more securities offerings in the future to continue its operations as planned and to meet its financial obligations as they become due. Because the Company was only able to raise $2,485,000 of the up to $15,000,000 sought in its prior private placement offerings which closed as of December 31, 2021, the Company launched a second offering of $7 million of convertible notes and warrants in August 2022, of which $838,000 was raised in 2022; this second offering expired on March 31, 2023. We will therefore require additional capital in order to execute our business plan.

We believe substantial doubt exists about the Company’s ability to continue as a going concern for twelve months from the date of issuance of our financial statements. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities as of the reporting date of these condensed consolidated financial statements. The most significant estimates relate to income taxes and contingencies. The Company bases its estimates on historical experience, known or expected trends, and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these condensed consolidated financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

Principles of Consolidation

These condensed consolidated financial statements include the accounts of AmeriCrew, Mikab Corporation and AmeriCrew CE Services, LLC. These companies are the operating units of AmeriCrew and generate all of the revenues for AmeriCrew. AmeriCrew CE Services, LLC was formed on March 29, 2021, as a subsidiary of Mikab. All intercompany transactions are eliminated in consolidation.

Management’s Representation of Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company uses the same accounting policies in preparing quarterly and annual consolidated financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, consolidated, or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to fairly present the financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the period ended September 30, 2022, as presented in the Company’s Transition Annual Report on Form 10-KT for the nine month transition period ended September 30, 2022 filed with the SEC on January 30, 2023 as amended.

Significant Accounting Policies

The following is a summary of significant accounting policies followed in the preparation of the accompanying condensed consolidated financial statements.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at their full collectible value less an allowance for doubtful accounts for any receivables over six months old or which was deemed doubtful of collection. Accounts receivable balances that are still outstanding after the Company has used reasonable collection efforts are written off as uncollectible. From time to time, the Company uses its non-recourse factor arrangement to receive advances on approved invoices.

On January 28, 2022, Mikab entered into a non-recourse Factoring and Security Agreement (the “Factoring Agreement”) with Tower Cap LLC (the “Purchaser”), under which the Purchaser agreed to purchase selected Mikab accounts receivable (subject to a required reserve). The Purchaser retains the right to purchase such accounts as it deems appropriate. Under the Factoring Agreement, the amount advanced to Mikab varies by account debtor. The fees include interest ranging from 1.95% per month for accounts due in 30 days to 1.75% for accounts due in 90 days in addition to other fees which Mikab will be charged in the ordinary course of the relationship. The Purchaser also has a security interest (subject to that of the holders of the 2021 Notes described in Note 13) in all accounts receivable and other assets of Mikab.

Revenue Recognition

The Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers (“ASC 606”) as of January 1, 2019, using the modified retrospective method. This method allows the Company to apply ASC 606 to new contracts entered into after January 1, 2019, and to its existing contracts for which revenue earned through December 31, 2018, has been recognized under the guidance in effect prior to the effective date of ASC 606. The revenue recognition processes the Company applied prior to the adoption of ASC 606 aligned with the recognition and measurement guidance of the new standard, therefore adoption of ASC 606 did not require a cumulative adjustment to opening equity in 2019.

Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied, and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services.

Under the standard, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer; (ii) identifies the performance obligations within the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation.

Customers are billed as work is completed and accepted. Extended contracts are billed in segments as completed. The amount of unbilled work in process at the end of a period is immaterial to the financial statements taken as a whole. If a contract has been completed and accepted but not billed at the end of the year, the contract price is accrued as sales in the period completed.

Fixed assets, net

Fixed assets are carried at cost. Depreciation of the fixed assets is calculated on the straight-line method over estimated useful lives of five to fifteen years. Trucks and automobiles have estimated useful lives of seven to fifteen years, equipment has estimated useful lives of five to fifteen years and improvements have estimated useful lives of five to ten years.

Depreciation expense related to fixed assets amounted to approximately $25,600 and $16,600 for the six months ended March 31, 2023 and 2022, respectively.

The Company reviews its long-lived assets, consisting of fixed assets, for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group is considered to be unrecoverable, an impairment loss is recorded to adjust the carrying amounts to the estimated fair value. No impairment expenses were recorded for the three or six months ended March 31, 2023 and March 31, 2022.

Recapitalization Expenses

For the six months ended March 31, 2022, the Company recognized non-recurring costs, associated with the merger transaction described above, of approximately $240,000.

Income (Loss) per Share

We compute basic income (loss) per common share by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. We compute diluted income (loss) per common share by dividing net income (loss) available to common shareholders by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of warrants, and (3) the dilutive effect of other potentially dilutive securities. We exclude the potential dilutive effect of warrants and convertible instruments from the determination of diluted income (loss) per common share if the effect of including them would be antidilutive.

Income Tax

As a result of the stock transactions on August 12, 2021, the Company Subchapter S election has been terminated. As of that date forward the Company is be treated as a taxable C corporation. Separate short year tax returns for S and C Corporations were required to be filed for 2021.

The Company is a C Corporation for federal income tax purposes. Income taxes include U.S. federal, state, and local taxes, and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes. These differences are primarily related to the allowance for doubtful accounts, prepaid expenses, and various accruals. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement balances and the tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the years that include the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Deferred tax assets and liabilities are aggregated and shown as a net non-current amount on the accompanying consolidated balance sheet.

An uncertain tax position in a tax return is recognized in the consolidated financial statements when it is more likely than not that the position would be sustained upon examination by taxing authorities. A recognized tax position is then measured at the largest amount of benefit that has greater than a 50% likelihood of being realized upon ultimate settlement. Accounting provisions also require that a change in judgment that results in subsequent recognition, derecognition, or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the period in which the change occurs. The Company regularly evaluates the likelihood of recognizing the benefit from income tax positions taken in various federal and state filings by considering all relevant facts, circumstances, and information available.

The Company evaluates all significant tax positions. As of March 31, 2023, the Company does not believe that it has any significant tax positions that would result in additional tax liability, nor does it believe that there are any tax benefits that would increase or decrease within the next twelve months.

The Company’s policy is to include interest and penalties, if any, within the provision for taxes in the consolidated statement of operations. To date, there have been no interest or penalties charged in relation to unrecognized tax benefits.

The Company’s income tax returns are subject to examination by appropriate taxing authorities. As of March 31, 2023, the Company’s federal and state income tax returns for 2021 remain open.

New Accounting Standards

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases. Under this new guidance, lessees are required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard was effective for AmeriCrew in the annual reporting period beginning after December 31, 2021. The new standard was adopted as of January 1, 2022, using the modified retrospective approach. As of March 31, 2023, a right of use operating lease asset of $581,550, a right of use finance lease asset of $421,452, an operating lease liability of $624,834 and a finance lease liability of $421,452 are recorded on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and will be applied as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard on October 1, 2023.

NOTE 3 - Restatement

As result of errors identified in our previously filed consolidated financial statements for the year ended December 31, 2021, and our previously filed interim condensed consolidated financial statements for the three month period ended March 31, 2021, we have restated our prior condensed consolidated financial statements. Those errors and restatements are as follows. We corrected interest expense for the three months ended March 31, 2022, related to the valuation of warrants issued with notes payable and convertible debt. We also corrected certain clerical errors and presentation items in our condensed consolidated statement or operations and statement of changes in equity, for the three months ended March 31, 2022. Those are summarized as follows:

NOTE 4 - LOSS PER SHARE

The following table set forth the computation of the Company’s basic and dilutive loss per common share:

Securities that were excluded from loss per share as their effect would be anti-dilutive due to the net loss position that could potentially be dilutive in future periods are as follows:

NOTE 5 – RELATED PARTY TRANSACTIONS

Brian Weis, the Company’s Chief Operating Officer and his family members own entities which lease premises to AmeriCrew. Amounts paid for related party transactions for the six months ended March 31, 2023 and 2022 are as follows:

On September 30, 2022, the Company received a loan on equipment from Mr. Weis in the amount of $49,200. The Company has agreed to repay this loan over 24 months with 0% interest. The Company has recorded imputed interest expense at the current Applicable Federal Rates ("AFR").

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following at the dates indicated:

NOTE 7 – LEASING ARRANGEMENTS

Mikab leases a commercial building, from Mikab Properties (a related party as described in Note 5), under a 20-year lease beginning October 1, 2009 and ending September 30, 2029, payable in monthly installments of $6,500. Mikab is required to carry insurance and pay for all needed repairs, maintenance and real estate taxes.

There are three other premises Mikab leases that are under five-year lease agreements payable in monthly installments of approximately $3,300 to 29 Aladdin Avenue Realty LLC, approximately $1,300 to 75 Second Street Realty LLC and approximately $1,300 to Mikab Realty LLC. Each has a 3% annual increase for the term of the leases.

The Company has determined that its finance and operating lease right of use assets are valued at $421,452 and $581,550, respectively, as of March 31, 2023. The finance lease liability consists of $158,788 in current obligations and $262,664 non-current. The operating lease liability consists of $138,607 in current obligations and $486,227 non-current. The future minimum lease commitments are as follows as of March 31, 2023:

The following table summarizes supplemental information related to leases for the three and six months ended March 31, 2023 and 2022:

The following summarizes other supplemental information about the Company’s leases as of March 31, 2023:

NOTE 8 – CONCENTRATION OF CREDIT RISK

The Company maintains cash balances in several financial institutions. Such balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000 per institution. From time to time, the Company’s balances may exceed these limits.

The Company had four major customers, which accounted for 84% of all sales, with the customer with the most sales accounting for 29% of all sales, for the six months ended March 31, 2023. Accounts receivable due from those four customers accounted for 74% of accounts receivable, with the highest concentrated accounting for 22% of accounts receivable, as of March 31, 2023. For the six months ended March 31, 2022, two major customers accounted for 69% of all sales. Accounts receivable due from those two customers accounted for 44% of accounts receivable, with the highest concentrated accounting for 30% of accounts receivable, as of March 31, 2022.

The Company had four major customers, which accounted for 84% of all sales, with the customer with the most sales accounting for 29% of all sales, for the three months ended March 31, 2023. Accounts receivable due from those four customers accounted for 74% of accounts receivable, with the highest concentrated accounting for 22% of accounts receivable, as of March 31, 2023. For the three months ended March 31, 2022, three major customers accounted for 76% of all sales. Accounts receivable due from those three customers accounted for 60% of accounts receivable, with the highest concentrated accounting for 30% of accounts receivable, as of March 31, 2022.

NOTE 9 – FAIR VALUE

The Company is required to disclose, in the condensed consolidated financial statements, the methods used to determine the fair value of financial assets and liabilities based on a hierarchy of three levels of input. Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to the Company as of and during the period.

The three levels of the fair value hierarchy under FASB ASC Topic 820, Fair Value Measurement, are described as follows:

Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

Because of their short-term nature, the amounts reported in the condensed consolidated financial statements for cash, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, and loans and notes payable approximated their respective fair values at March 31, 2023 and September 30, 2022.

NOTE 10 - INCOME TAXES

The income tax expense for the three and six months ended March 31, 2023 and 2022, respectively is $0.

The effective tax rate differs from the statutory Federal rate of 21% primarily because of the change in valuation allowance and the uncertainty of realizing a tax benefit from the Company’s Net Operating Losses (NOLs).

The primary components of the Company's net deferred tax assets and liabilities are as follows:

As of March 31, 2023 and September 30, 2022, the Company had approximately $3.5 million and $3.1 million, respectively, of federal NOL carryforwards available to offset future taxable income.  Full valuation allowances have been established for Federal, state and local jurisdictions that reduce the Company’s net deferred tax assets to an amount that will, more likely than not, be realized. The uncertainty that may affect the realization of these assets is the ability of the Company to generate sufficient taxable income from its operations.

NOTE 11 – NOTES AND LOANS PAYABLE - RELATED PARTY

Notes Payable - Related Party

As of March 31, 2023 and September 30, 2022, the balances of notes payable related party were $367,888 and $370,429, respectively, inclusive of bridge loans and short term loans. Bridge loans bear an annualized interest rate of 12%. On December 31, 2022 all notes payable with related parties were amended to grant additional warrants and extend the maturity date to December 31, 2023. The notes payable to related parties are presented net of unamortized discount of approximately $207,000 and $192,000 as of March 31, 2023 and September 30, 2022, respectively.

(1) Former Chief People Officer and director.

(2) Chief Operating Officer and a director.

(3) Brian Weis owns 20% of this entity.

(4) Brian Weis is the managing member of this entity and owns a 2% interest. A trust of which Mr. Weis is one of two trustees.

Warrants issued on December 31, 2021 to holders of the notes were valued at $1.73 - $1.93. The fair value of each warrant is estimated on the date of issuance using the Black Scholes model based on the following inputs:

Additional warrants issued on December 31, 2022 to holders of the notes were valued at $1.57. The fair value of each warrant is estimated on the date of issuance using the Black Scholes model based on the following inputs:

The additional warrants had a calculated fair value of approximately $527,000 at issuance, as of December 31, 2022. Using the relative fair value method, the Company recognized the resultant debt discount and equity classified warrant in the amount of approximately $276,000 in connection with the notes payable to related parties. Amortization of the discount in connection with the related party notes was $68,945 for the three months ended March 31, 2023. As of March 31, 2023, the remaining unamortized discount associated with the notes was $206,834.

Loans Payable - Equipment, Related Party

As of March 31, 2023 and September 30, 2022, the balances of equipment loans payable with a related party were $43,050 and $49,200, respectively, of which $30,750 and $24,600 was classified as a current liability as of March 31, 2023 and September 30, 2022, respectively. The Company has agreed to repay this loan over 24 months with 0% interest, maturing in September 2024. The Company has recorded imputed interest expense at the current AFR of approximately $500 and $1,100 for the three and six months ended March 31, 2023, respectively.

During the six months ended March 31, 2023 and 2022, the Company received proceeds from related party loans of approximately $18,100 and $7,600, respectively.

NOTE 12 – LOANS PAYABLE

Loans Payable - Stockholder

As of both March 31, 2023 and September 30, 2022, the balance of loans payable to stockholder were $464,078. The loans bear no interest until maturity on January 1, 2025. Interest after maturity is 10% per annum until fully repaid. The Company recognized imputed interest for the three months ended March 31, 2023 and 2022 of approximately $5,300 and $1,100, respectively, based on the then current AFR. The Company recognized imputed interest for the six months ended March 31, 2023 and 2022 of approximately $10,600 and $2,300, respectively.

Loans Payable - Insurance

As of March 31, 2023 and September 30, 2022, the balance of loans payable insurance was $125,065 and $380,799, respectively, all of which is classified as a current liability. The total balance is comprised of two loans, maturing in July and August of 2023, respectively. The loans have an effective interest rate of 6.1% and 5.6%, respectively.

Loans Payable - Equipment

On February 16, 2023, the Company financed an equipment purchase of $38,475 with NREF, a non-related party. As of March 31, 2023, the balance of the loans payable equipment was $26,566. The loans payable equipment has payments of approximately $1,300 due monthly until maturity in July 2026, with an effective interest rate of approximately 13%.

During the six months ended March 31, 2023 and 2022, the Company made repayments of loans payable of approximately $219,000 and $345,000, respectively.

NOTE 13 – CONVERTIBLE DEBT AND WARRANTS

During the fourth quarter of 2021, the Company sold $2,485,000 of senior secured convertible notes (the “Notes”) and five-year Class A Warrants to purchase 1,195,354 shares of the Company’s common stock at an exercise price of $1.9032 per share. It also issued 110,342 Placement Agent Warrants to a Placement Agent which contain similar terms to the Class A Warrants except they are exercisable at $2.0935 per share.

Each Note is due two years from the date of issuance. The Notes bear interest at 8% per annum payable quarterly, subject to an increase in case of an event of default as provided for therein, and interest is payable in cash or common stock at the option of each investor. The Notes are convertible into shares of common stock at any time following the date of issuance at the holder’s option at a conversion price of $1.9032 per share, subject to certain adjustments. The conversion price will also be subject to adjustment upon any issuance by the Company of common stock or securities convertible or exercisable into common stock at a price per share that is lower than the conversion price (a “Dilutive Price”), subject to certain exempt issuances, whereupon the conversion price will be adjusted to 80% of the Dilutive Price. Furthermore, at any time after December 31, 2022, we may, after written notice to the noteholders, redeem all of the then outstanding principal amount of the Notes for cash in an amount equal to the sum of 110% of the then outstanding principal amount of the Notes, accrued but unpaid interest and all other amounts due in respect of the Notes (if any). The Notes also contain certain negative covenants including the general inability to borrow funds whether to prepay the Notes or otherwise. 

The Class A Warrants are exercisable for five years from the respective dates of issuance at an exercise price of $1.9032 per share, subject to certain adjustments, including adjustment upon any issuance by the Company of common stock or securities convertible or exercisable into common stock at a Dilutive Price in which event the exercise price will be adjusted to 80% of the Dilutive Price, subject to certain exempt issuances. If at any time after the six-month anniversary of the issuance of the Class A Warrants, there is no effective Registration Statement registering, or no current Prospectus available for, the resale of the shares underlying the Class A Warrants, the holders may exercise the Class A Warrants on a net exercise or cashless basis.

Our obligations under the Notes are secured by a first priority lien on all of our assets and those of our wholly owned subsidiaries pursuant to a Security Agreement, dated October 5, 2021 by and among the Company, our wholly owned subsidiaries, Mikab and Americrew Holdings, LLC, the noteholders, and Westpark Capital, Inc. (“West Park”), as agent for the secured parties. Our obligations under the Notes are also guaranteed by our subsidiaries. The Company and our wholly owned subsidiaries, entered into a Guaranty Agreement, dated October 5, 2021.

The Notes also contain customary negative covenants prohibiting the Company from certain actions while the Notes remain outstanding.

Each of the Notes and the Class A Warrants contain a 4.99% beneficial ownership limitation pursuant to which neither may be converted or exercised, as applicable, if and to the extent that following such conversion or exercise the holder would beneficially own more than 4.99% of the Company’s outstanding common stock, subject to increase to 9.99% upon 61 days’ prior written notice by the holder.

In addition, pursuant to the Securities Purchase Agreement, we entered into Registration Rights Agreements with the purchasers, in which we agreed to file a Registration Statement on Form S-1 with the SEC, covering the resale of the shares of common stock issuable upon conversion of the Notes and exercise of the Class A Warrants and to have such Registration Statement declared effective within 90 days thereafter. The Registration Statement was filed with the SEC during February 2022, and withdrawn in September 2022.

The Class A Warrants are equity classified. On the date of issuance, the Class A Warrants had a fair value of approximately $3,900,000 and relative fair value of $1,500,000. Amortization of debt discount over the notes related two-year term has been recorded in interest expense the accompanying condensed consolidated statement of operations. Interest expense with respect to the debt discount amortization was approximately $189,000 and $189,000 for the three months ended March 31, 2023 and 2022, respectively. Interest expense with respect to the debt discount amortization was approximately $378,000 and $249,000 for the six months ended March 31, 2023 and 2022, respectively. The unamortized debt discount associated with these Class A Warrants was approximately $503,000 and $881,000 as of March 31, 2023 and September 30, 2022, respectively.

The Class A Warrants issued with the December 2021 senior secured convertible notes were valued at $1.73 to $4.92 on the date of issuance. The fair value of each Class A Warrant was estimated on the date of issuance using the Black Scholes model based on the following inputs:

On September 30, 2022, the Company raised $245,000 of capital in the form of senior secured convertible notes and accompanying Class A and Class B Warrants. The notes pay interest at the rate of 8% and are payable two years after issuance, with due dates ranging from September 2024 to December 2024. The lenders can convert the investment at a rate of $1.9032 per share. The lenders also received Class A or Class B Warrants (together, the "Warrants") to buy common stock of the Company at $1.9032 and $2.50, respectively. These Warrants expire five years from issuance, with expiration dates ranging from September 2027 to December 2027.

The Class B Warrants are exercisable for five years from the respective dates of issuance at an exercise price of $2.50 per share, subject to certain adjustments, including adjustment upon any issuance by the Company of common stock or securities convertible or exercisable into common stock at a Dilutive Price in which event the exercise price will be adjusted to 80% of the Dilutive Price, subject to certain exempt issuances. If at any time after the six-month anniversary of the issuance of the Class B Warrants, there is no effective Registration Statement registering, or no current Prospectus available for, the resale of the shares underlying the Class B Warrants, the holders may exercise the Class B Warrants on a net exercise or cashless basis.

The Warrants issued with the September 2022 senior secured convertible notes were valued at $1.97. The fair value of each Warrant was estimated on the date of issuance using the Black Scholes model based on the following inputs:

The Warrants issued with the September 2022 senior secured convertible notes had a calculated fair value of approximately $381,000. Using the relative fair value method, the Company recognized the resultant debt discount and equity classified Warrant in the amount of approximately $149,000. The debt discount will be accreted to interest expense over the two-year term of the related convertible notes. Interest expense with respect to the debt discount amortization for the three months ended March 31, 2023 was approximately $19,000. Interest expense with respect to the debt discount amortization for the six months ended March 31, 2023 was approximately $37,000. There was no interest accretion in the nine months ended September 30, 2022.

During October 2022 and December 2022, the Company raised $593,000 of capital in the form of senior secured convertible notes and accompanying Class A and Class B Warrants. The notes pay interest at the rate of 8% and are payable two years after issuance, with due dates ranging from October 2024 to December 2024. The lenders can convert the investment at a rate of $1.9032 per share. The lenders also received Class A or Class B Warrants to buy common stock of the Company at $1.9032 and $2.50, respectively. These Warrants expire five years from issuance, with expiration dates ranging from October 2027 to December 2027.

The Warrants issued with the October 2022 and December 2022 senior secured convertible notes were valued at $1.57 to $1.88 on the date of issuance. The fair value of each Warrant was estimated on the date of issuance using the Black Scholes model based on the following inputs:

The Warrants issued with the October 2022 and December 2022 senior secured convertible notes had a calculated fair value of approximately $802,000. Using the relative fair value method, the Company recognized the resultant debt discount and equity classified Warrant in the amount of approximately $340,000. The debt discount will be accreted to interest expense over the two-year term of the related convertible notes. Interest expense with respect to the debt discount amortization for the three months ended March 31, 2023 was approximately $43,000. Interest expense with respect to the debt discount amortization for the six months ended March 31, 2023 was approximately $55,000.

The following table presents the Company's convertible note maturities:

The following table presents the Company's warrant activity from September 31, 2021 to March 31, 2023:

NOTE 14 – CONTINGENCIES

The Company may from time to time be involved in various legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation will not have a material adverse effect on the Company’s condensed consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Cautionary Note Regarding Forward Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding management’s future plans for the Company, our liquidity and ability to raise capital, our business strategy and our future operations. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, working capital sources, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include the possibility that we are unable to raise capital as and when needed, supply chain shortages and inflation and the Federal Reserve’s interest rate increases in response, the recent banking crisis and any economic downturns or recession that may result from any of the foregoing, and our lack of an operating history and ability to generate positive net income on a consistent basis or at all. Further information on the risk factors affecting our business is contained in “Risk Factors” of our Annual Report on Form 10-KT for the period ended September 30, 2022. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

Company Overview

Prior to the Acquisition in August 2021, the Company was a shell company with no operations. Following the Acquisition, we provide specialty infrastructure contracting services to market participants in the telecommunications and clean energy industries throughout the United States. A proportion of our workforce is staffed through a unique in-house program through which we hire and train military veterans to provide construction and maintenance services to our customers, and we also hire employees with skill and experience in our fields and use third party independent contractors for our operations.

Our business, which is conducted primarily through Mikab, consists of the following:

Understanding Our Results of Operations

Revenue. We provide construction, installation, maintenance and upgrade services to our customers. We derive revenue from projects performed under master and other service agreements as well as from contracts for specific projects requiring the construction and installation of an entire infrastructure system or specified units within an infrastructure system.

Costs of Revenue, exclusive of depreciation. Costs of revenue consists principally of salaries, employee incentives and benefits, subcontracted services, equipment rentals and repairs, fuel and other equipment expenses, material costs, parts and supplies, insurance and facilities expenses. Project profit or loss is calculated by subtracting a project’s costs of revenue, including project-related depreciation, from project revenue. Project profitability and corresponding project margins will generally be reduced if actual costs to complete a project exceed our project cost estimates. Estimated losses on contracts, or the excess of estimated costs to complete a contract over the contract’s remaining revenue, are recognized in the period in which such losses are determined. Factors impacting our costs of revenue, include:

Project Mix. The mix of revenue derived from the projects we perform impacts overall project margins, as margin opportunities can vary by project. For example, installation work, which is often performed on a fixed price basis, has a higher level of margin risk than maintenance or upgrade work, which is often performed under pre-established or time and materials pricing arrangements. As a result, changes in project mix between installation work and maintenance or upgrade services can affect our project margins in a given period. Our project mix by industry can also affect our overall margins, as project margins can vary by industry and over time.

Seasonality, Weather and Geographic Mix. Seasonal patterns, which can be affected by weather conditions, can have a significant effect on project margins. Adverse or favorable weather conditions can affect project margins in a given period. For example, extended periods of rain or snowfall can negatively affect revenue and project margins due to reduced productivity from projects being delayed or temporarily halted. Conversely, when weather remains dry and temperatures are accommodating, more work can be done, sometimes with less cost, which can favorably affect project margins. In addition, the mix of business conducted in different geographic areas can affect project margins due to the particular characteristics of the physical locations where work is being performed, such as mountainous or rocky terrain versus open terrain. Site conditions, including unforeseen underground conditions, can also affect project margins. Presently, the vast majority of our telecommunications work is performed in New Jersey and Indiana.

Price and Performance Risk. Overall project margins may fluctuate due to project pricing, changes in the cost of labor and materials, job productivity and work volume. Job productivity can be affected by quality of the work crew and equipment, the quality of specifications and designs, availability of skilled labor, environmental or regulatory factors, customer decisions or delays and crew productivity. Crew productivity can be influenced by weather conditions and job terrain, such as whether project work is in a right of way that is open or one that has physical obstructions or legal encumbrances.

Subcontracted Resources. Our use of subcontracted resources in a given period is dependent upon activity levels and the amount and location of existing in-house resources and capacity. Project margins on subcontracted work can vary from those on self-performed work. As a result, changes in the mix of subcontracted resources versus self-perform work can affect our overall project margins.

Material and Labor Costs. In some cases, our customers are responsible for supplying materials on projects; however, under certain contracts, we may agree to provide all or part of the required materials. Project margins are typically lower on projects where we furnish a significant amount of materials due to the fact that margins on materials are generally lower than margins on labor costs. Therefore, increases in the percentage of work with significant materials requirements could decrease our overall project margins.

General and Administrative Expense. General and administrative expenses consist principally of compensation and benefit expenses, travel expenses and related costs for our finance, benefits, insurance and risk management, legal, financial and other professional fees, facilities upkeep, information technology services and executive functions. General and administrative expenses also include outside professional and accounting fees, expenses associated with information technology used in administration of the business, acquisition costs, including those related to acquisition integration, and, from time to time, certain restructuring charges.

Interest Income or Expense. Interest expense consists of contractual interest expense on outstanding debt obligations, non-cash interest expense associated with the fair value of warrants treated as a debt discount and other interest expense, including interest expense related to financing arrangements. Interest expense is offset by interest earned on cash and other investments.

Other Income or Expense. Other income or expense consists primarily of gains or losses from sales, disposals of, or changes in estimated recoveries from assets and investments, certain legal/other settlements, gains or losses from changes to estimated earn-out accruals and certain purchase accounting adjustments.

Results of Operations

Results of Operations for the Three and Six Months Ended March 31, 2023 Compared to the Three and Six Months Ended March 31, 2022

Revenue

For the three months ended March 31, 2023 and 2022, the Company’s revenue was $3,775,347 and $1,943,778, respectively. The increase in revenue between periods was primarily attributable to increasing workflow from existing clients and adding new clients throughout the year.

For the six months ended March 31, 2023 and 2022, the Company’s revenue was $7,554,054 and $3,713,263, respectively. The increase in revenue between these periods was primarily attributable to the same reasons referenced above for the corresponding three-month periods.

Cost of revenues, exclusive of depreciation

For the three months ended March 31, 2023 and 2022, the Company’s cost of revenue was $2,333,061 and $1,446,364, respectively. The increase in cost of revenue between these periods was primarily due to startup costs associated with new customers.

For the six months ended March 31, 2023 and 2022, the Company’s cost of revenue was $4,752,956 and $2,807,779, respectively. The increase in cost of revenue between these periods was primarily attributable to the same reasons referenced above for the corresponding three-month periods.

Operating Expenses

For the three months ended March 31, 2023 and 2022, the Company had operating expenses of $1,050,045 and $621,593, respectively. Operating expenses increased in correlation with our increase in revenue.

For the six months ended March 31, 2023 and 2022, the Company had operating expenses of S2,266,110 and $2,414,698, respectively, remaining relatively consistent between periods despite the increase in revenue in the 2023 period.

Operating Income

For the three months ended March 31, 2023, the Company had operating income of $392,241, relative to an operating loss of $124,179 for the three months ended March 31, 2022. The increase was primarily due to the increase in revenue, resulting in improved margins, partially offset by an increase in operating expenses and cost of revenue period-over-period.

For the six months ended March 31, 2023, the Company had operating income of $534,988, relative to an operating loss of $1,509,214 for the six months ended March 31, 2022. The increase was primarily attributable to the same reason referenced above for the corresponding three-month periods, except operating expenses remained relatively consistent despite the increase in revenue between periods.

Interest Expense

For the three months ended March 31, 2023 and 2022, the Company’s interest expense was $443,239 and $248,754, respectively. The increase in interest expense between periods was primarily due to the addition of new leases and interest paid on convertible notes throughout the three-month periods.

For the six months ended March 31, 2023 and 2022, the Company’s interest expense was $1,028,063 and $326,880, respectively. The increase in interest expense between periods was primarily due to the addition of new leases and interest paid on convertible notes throughout the six-month periods.

Recapitalization Expenses

For the six months ended March 31, 2022, the Company incurred non-recurring costs associated with the Acquisition of $239,721.

Net Loss

For the three months ended March 31, 2023, the Company had a net loss of $50,998, relative to a net loss of $372,933 for the three months ended March 31, 2022. The decreased in the net loss was primarily attributable to the increased revenue in the 2023 period coupled with a lower increase in expenditures in the same period.

For the six months ended March 31, 2023 and 2022, the Company had a net loss of $493,075 and $2,075,815, respectively. The decrease in the net loss was primarily attributable to the same reason referenced above for the corresponding three-month periods.

Understanding our Operating Results

Revenue from our customers is obtained from purchase orders submitted from time to time. Accordingly, the Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue has in the past been and may in the future be further limited by potential disruption to its supply chains or changes in customer ordering patterns and geopolitical turmoil. The Company’s ability to recognize revenue in the future for its backlog of customer orders will depend on the Company’s ability to acquire, assemble and deliver products and services to the customers and fulfill its other contractual obligations in a timely manner. In recent periods we have faced challenges in meeting customer demand due to limitations in our operational and capital resources, as more particularly in the disclosure included or referenced “Item 1A – Risk Factors.” Additionally, significant uncertainty exists surrounding our future revenue prospects given our dependence on a limited number of customers for the vast majority of our revenue.

Liquidity and Capital Resources

Cash Flows used by Operating Activities:

For the six months ended March 31, 2023, net cash used in operating activities was $587,462, compared to net cash used in operating activities of $1,773,346 for the six months ended March 31, 2022. The decrease in cash used in operating activities for the 2023 period as compared to the 2022 period was primarily attributable to the decrease in net loss for the same period.

Cash Flows from Investing Activities:

Our net cash used in investing activities was $105,819 and $0 for the six months ended March 31, 2023 and 2022, respectively. The increase in cash used in investing activities is due to the acquisition of fixed assets during the six months ended March 31, 2023.

Cash Flows from Financing Activities:

For the six months ended March 31, 2023, the net cash provided by financing activities was $392,586 primarily consisting of proceeds from the issuance of related party loans and convertible notes, net of repayments of loans payable. For the six months ended March 31, 2022, net cash provided by financing activities was $2,124,031 consisting primarily of proceeds from loans and notes payable, net of repayments of loans payable.

Going Concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve months following the date of these financial statements.

Because Americrew does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about Americrew’s ability to continue as a going concern. Therefore, Americrew will need to raise additional funds and is currently exploring alternative sources of financing. Historically, Americrew raised capital through private placements, to finance working capital needs and may attempt to raise capital through the sale of common stock or other securities and obtaining some short-term loans from related parties. There can be no assurance that the Company will be successful in raising future capital.

The Company had approximately $67,226 in cash on hand as of May 12, 2023. We will need to raise additional capital to fund our operations for the next twelve months. The $2,485,000 of 2021 Notes mature between October 4, 2023 and December 30, 2023.

Our liquidity is primarily derived from financing transactions and revenue from our contracts with customers, although management anticipates a larger proportion of our capital resources to be derived from financing transactions in future periods, particularly as we seek growth capital to fund our acquisition efforts in the next twelve months.

We are reliant upon completing one or more securities offerings in the future to continue our operations as planned and to meet our financial obligations. Because we were only able to raise $2,485,000 of the up to $15,000,000 sought in our recent private placement offerings which closed on December 31, 2021, we require additional capital to meet our financial obligation and working capital requirements for the next twelve months. We launched a second offering of $7,000,000 of convertible notes and warrants in August 2022, of which $838,000 was raised in 2022; this offering expired on March 31, 2023. We will therefore require additional capital in order to execute our business plan. A summary of the recent financings is provided below.

On January 28, 2022, Mikab entered into a non-recourse Factoring and Security Agreement (the “Factoring Agreement”) with Tower Cap LLC (the “Purchaser”) under which the Purchaser agreed to purchase selected Mikab accounts receivable (subject to a required reserve). The Purchaser retains the right to purchase such accounts as it deems appropriate. Under the Factoring Agreement, the amount advanced to Mikab varies by account debtor. The fees include interest ranging from 1.95% per month for accounts due in 30 days to 1.75% for accounts due in 90 days in addition to other fees which Mikab will be charged in the ordinary course of the relationship. The Purchaser also has a security interest (subject to that of the holders of the 2021 Notes) in all accounts receivable and other assets of Mikab.

Other than paying our debt obligations as they come due, the Company intends to utilize any available cash primarily for its continued operations and organic growth. However, in order to execute our business plan, we will need to raise additional capital. In the furtherance of these efforts, the Company raised $838,000 in 2022 by issuing secured convertible promissory notes and five-year Class A and Class B warrants exercisable into our common stock at an exercise price $1.9032 per share and $2.50 per share, respectively.

We anticipate raising the additional funds to meet our financial obligations, working capital and growth capital requirements which will likely require us to issue debt securities which will be dilutive to our current stockholders and/or could impose restrictions on our future operating and financing activities. There can be no assurance that the Company will be successful in raising future capital. See “Risk Factors” for more information on the risks we face with respect to our operational and financing activities, outstanding securities, and need for additional capital to continue and grow our operations and meet our financial obligations as and when they come due.

Related Party Bridge Loans and Accompanying Notes and Warrants

During the period from May 27 through August 11, 2021, certain insiders (the “Related Party Lenders”) made a total of $651,649 of bridge loans to the Company. These loans are evidenced by promissory notes which bear interest at 12% to 15% per annum and were originally due upon the earlier of the closing of the Acquisition or September 1, 2021. The Company also issued Warrants in connection with the bridge loans. The Related Party Lenders agreed to defer payment until the closing of the first financing following the closing of the Acquisition, and subsequently agreed to modify the bridge notes, the effect of which was to extend the indebtedness’ due date into 2023. For more information about these related party notes and warrants, see "Note 11 – Loans Payable - Related Party."

Acquisition Strategy

As part of our growth strategy, we may acquire companies that expand, complement, or diversify our business. We regularly review opportunities and periodically engage in discussions regarding possible acquisitions. Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify, acquire, and successfully integrate companies. Additionally, our inability to raise sufficient proceeds from our private placement offerings in late 2021 and 2022 has hindered our ability to pursue acquisitions as planned and will likely delay our acquisition efforts in 2023 and beyond, particularly given our financial obligations under the related party bridge notes, convertible notes payable and Notes which extend into late 2023.

Impact of Certain Events

Beginning in 2020, the effects of the COVID-19 pandemic impacted certain aspects and geographies of the global economy due to supply chain, production and other logistical disruptions. While we operated as a provider of essential services during the pandemic, our operations and financial results were adversely impacted by governmental responses and supply chain and labor shortages which occurred during and in the wake of the COVID-19 pandemic. The long-term implications of the COVID-19 pandemic and related developments, if any, on our financial performance remain uncertain and variable in the current economic environment including rising interest and inflation rates and the bank failures thus far in 2023. Among other consequences, these developments could result in a recession in 2023 or later, which may have an adverse impact on our operations, be it directly and/or through third parties on which our operations and revenue depends.

Critical Accounting Policies

Revenue Recognition

Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied, and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer; (ii) identifies the performance obligations within the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation.

Customers are billed as work is completed and accepted. Extended contracts are billed in segments as completed. The amount of unbilled work in process at the end of a period is immaterial to the financial statements taken as a whole. If a contract has been completed and accepted but not billed at the end of the year, the contract price is accrued as sales in the period completed.

Convertible Notes

The Company accounts for its convertible notes at issuance by allocating the proceeds received among freestanding instruments according to ASC 470, based upon their relative fair values. The fair value of debt and common stock is determined based on the closing price of the common stock and the date of the transaction, and the fair value of warrants, if any, is determined using the Black-Scholes Merton option-pricing model. Convertible notes are subsequently carried at amortized cost. The fair value of warrants is recorded as additional paid-in capital, with a corresponding debt discount from the face amount of the convertible notes.

The discounts on the convertible notes, consisting of amounts ascribed to warrants are amortized to interest expense, using the effective interest method, over the terms of the related convertible notes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

We are required to maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on their evaluations as of the end of the period covered by this Quarterly Report on Form 10-Q, Mr. Brian Weis, who is presently serving as our President and Chief Operating Officer (Principal executive officer) and Mr. Ross DiMaggio, who is presently serving as our Chief Financial Officer (Principal financial officer), have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer, to allow timely decisions regarding required disclosure as a result of material weaknesses in our internal control over financial reporting.

Changes in Internal Controls over Financial Reporting.

There have been no changes in the Company’s internal control over financial reporting during the three-month period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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. 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 will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

ITEM 1A. RISK FACTORS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS