PCS Edventures!, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results from operations should be read in conjunction with our unaudited financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements contained in our Form 10 Registration Statement filed with the SEC on October 3, 2023, and as amended on November 15, 2023, which become effective on December 2, 2023 (the “Form 10”) a copy of which is available by Hyperlink in Part II, Item 6. Exhibits, below. Overview of Current and Planned Operations PCS Edventures!, Inc. sells STEM / STEAM products to educational and recreational entities serving youth. At this time, we do not attempt to align our products to fit in the classroom setting although we are aware that some of our customers use our products to fill enrichment time blocks in the classroom during formal school time. Classroom curriculum must align with specific state standards to be considered for use. Each state has their own unique set of standards, making classroom curriculum development a state by-state endeavor. On the other hand, out of school programs are not subject to a state governmental standard alignments, although these programs often require that educational programs align with various sets of state or national educational standards. This difference makes it easier to penetrate out-of-school programs, as more freedoms exist for curriculum development. We focus our efforts on these out-of-school programs, which include summer school, summer camps, YMCA programs, Boys and Girls club programs and various other programs offered outside of the classroom, at all times of the year, that are too numerous to list. Oftentimes, these programs are sponsored, administered and/or supported by local school districts, and we employ considerable efforts to build relationships with these types of school districts to provide desired programing for their out-of-school programs. The majority of the time, the out-of-school programs offered are funded with grants; however, some programs are run on a for- profit basis. The Company sells to all of these types of entities. We offer professional development training for instructors using our products; and typically charge a fee for this service, with the fee primarily covering our expenses. Management does not view this service as a profit center, but rather as a customer service component of our product that adds to its uniqueness and value in the marketplace, and as a market development endeavor to build out the Company’s addressable market. The nature of our target market produces considerable seasonality for the Company’s revenue. The quarters ended June 30 and September 30 tend to be the peak of this seasonality (with the quarter ended March 31 being close to these quarters), while the quarter ended December 31 tends to be the low point of our seasonality. The Table below reflects this seasonality. Quarterly Revenue 2021 2022 2023 3/31 648,743 1,445,594 2,521,470 6/30 1,062,127 1,391,785 2,605,281 9/30 993,458 1,243,662 3,767,326 12/31 566,473 1,847,659 459,087 The Company, through winning a competitive Request For Proposal, added the Air Force Junior Reserve Officers’ Training Corp (AFJROTC) as a customer in the second half of calendar year 2022. The Company experienced elevated sales due to the fulfillment of the AFJROTC orders for the quarters ended December 31, 2022, March 31, 2023, and September 30, 2023. One of the AFJROTC revenue quarters was December 31, 2022, which corresponds with the lowest seasonal revenue quarter, so the effects of seasonality in 2022 was not as readily apparent as in other calendar years. The table below removes the AFJROTC revenue to highlight the seasonality that the Company experiences. Quarterly Revenue Less Air Force JROTC Revenue 2021 2022 2023 3/31 648,725 1,445,595 1,247,835 6/30 1,062,127 1,391,785 2,605,281 9/30 993,458 1,243,662 2,501,410 12/31 566,473 458,239 459,087 During the quarter ended December 31, the Company focuses on product development, restocking inventory, and general planning for the next year. Sales and marketing activities remain fairly constant throughout the year. 18 Results of Operations The following table shows our results from operations for the periods indicated. For the Three Months Ended December 31, For the Nine Months Ended December 31, 2023 2022 2023 2022 REVENUES $ 459,087 $ 1,847,659 $ 6,831,694 $ 4,483,106 Total Revenues 459,087 1,847,659 6,831,694 4,483,106 COST OF SALES 310,657 751,711 2,503,552 1,833,669 GROSS PROFIT 148,430 1,095,948 4,328,142 2,649,437 OPERATING EXPENSES Salaries and wages 353,934 389,795 1,313,886 1,050,032 General and administrative expenses 231,475 191,117 821,116 587,718 Total Operating Expenses 585,409 580,912 2,135,002 1,637,750 INCOME (LOSS) FROM OPERATIONS (436,979 ) 515,036 2,193,140 1,011,687 OTHER INCOME AND (EXPENSES) Tax credit - 94,703 31,258 94,703 Net interest income (expense) 20,183 (40,544 ) 30,774 (114,705 ) (Gain) loss on lease modification 2,658 - 2,658 - Total Other Income (Expense) 22,841 54,159 64,690 (20,002 ) NET INCOME (LOSS) BEFORE TAXES (414,138 ) 569,195 2,257,830 991,685 Provision for income taxes - - - - NET INCOME (LOSS) $ (414,138 ) $ 569,195 2,257,830 $ 991,685 Net income/loss per common share: Basic $ (0.00 ) $ 0.00 $ 0.02 $ 0.01 Diluted $ (0.00 ) $ 0.00 $ 0.02 $ 0.01 Weighted Average Common Shares Outstanding Basic 124,733,494 125,482,479 125,183,945 124,973,388 Diluted 124,733,494 125,647,758 125,183,945 125,138,667 Revenue For the quarter ended December 31, 2023 our revenue was $459,087. For the quarter ended December 31, 2022, our revenue was $1,847,659, of which $1,389,420 was attributable to our AFJROTC customer. Revenue for the December 31, 2022 quarter, excluding AFJROTC revenue was $458,239, not significantly different than our revenue for the December 31, 2023 quarter. For the nine months ended December 31, 2023, our revenue was $6,831,694 compared to revenue of $4,483,106 for the comparable nine months the year prior. Excluding AFJORTC revenue, revenue for the nine months ended December 31, 2023, was $5,565,778, compared to $3,093,686 for the nine months ended December 31, 2022. The Company has been soliciting larger customers for over two years and has seen some success. The AFJROTC is the Company’s largest success by a wide margin, producing revenue of $1,265,916 in the nine months ended December 31, 2023, and $1,389,420 in the nine months ended December 31, 2022. 19 The Company has experienced other successes in its campaign to find larger customers. The table below shows customer transactions by size for the periods indicated. Number of Customer Transactions by size > $1 million >$500,000 > $100,000 > $50,000 > $25,000 > $10,000 Nine months ended December 31, 2023 1 2 16 23 34 80 Nine months ended December 31, 2022 1 1 8 18 30 49 Nine months ended December 31, 2021 0 0 5 10 15 38 We believe that we can continue to experience success in soliciting larger customers, but we can offer no assurances that success will be certain, nor can we offer any numerical framework in describing the success that may occur. Risk factors include anything that would negatively affect educational funding in the United States; finding and retaining employees that meet our high standards; and anything that would negatively affect our supply chain of critical components. Cost of Sales We strive to have a cost of sales that is less than 40% of revenue. We price our products once per year, at the beginning of the calendar year, and maintains that pricing level throughout the year. During inflationary environments, when the price level of the Company’s raw materials is increasing, the Company must absorb that negative impact to gross margins until it can reprice its products at the beginning of the next calendar year. This repricing analysis considers the current pricing level of materials, as well as the likely increase in those levels in the year ahead. We attempt to incorporate shipping costs into the cost of raw materials, but oftentimes during the course of the year we are compelled to ship in a more expedient manner, which is more expensive than our baseline assumptions. For the quarter ended December 31, 2023, our cost of sales was $310,657, or 67.7% of revenue. For the quarter ended December 31, 2022, our cost of sales was $751,711, or 40.7% of revenue. For any given quarter, and especially in low revenue quarters, the cost of sales can vary significantly from our desired 40% or less of revenue. However, for any given year, the calculation is relevant and desired to be 40% or less of revenue. For the nine months ended December 31, 2023, our cost of sales was $2,503,552, or 36.7% of revenue, as compared to $1,833,669, or 40.9% of revenue for the nine months ended December 31, 2022. Factors affecting cost of sales include: Helps sub 40% cost of sales Impedes sub 40% cost of sales Higher revenue Higher inflation Larger order size Expedited shipping Ability to take advantage of volume discounts Quality issues with raw materials Operating Expenses Operating expenses are divided into two categories – salary + wages, and general + administrative. Salary and wages tend to increase over time as the Company has been increasing its number of employees and we expect to continue to do so in the future. Also, the Company desires to retain employees over the long term, which requires periodic increases in compensation as their value to the Company increases. The Company also has a discretionary quarterly bonus program based on qualified revenue. Qualified revenue is defined as revenue where there are no reseller fees or other price adjustments associated with that revenue. Thus, all reseller sales are disqualified from the discretionary quarterly bonus calculation, as are other miscellaneous transactions where the Company did not receive a full margin. During quarters with higher revenue, salaries and wages will increase all other things equal. Salary and wages were $353,934 for the quarter ended December 31, 2023. For the quarter ended December 31, 2022, salaries and wages were $389,795. Salaries and wages declined in the quarter ended December 31, 2023, as compared to the quarter ended December 31, 2022, due to the fact that the Company lost a higher compensated employee on September 30, 2023, and did not replace that employee until the beginning of calendar year 2024. Also, employee bonuses were higher in the quarter ended December 31, 2022, versus that for the quarter ended December 31, 2023. 20 Salary and wages were $1,313,886 for the nine months ended December 31, 2023. For the nine months ended December 31, 2022, salaries and wages were $1,050,032. There will likely be ebb and flow in these numbers going forward, as the timing of hiring employees and the timing of revenue growth spurts will not likely coincide with each other. General and administrative expenses include all operating expenses outside of salaries and wages. These include the following categories: 1. Advertising and marketing expenses 2. Trade show and travel expenses 3. Product development expenses 4. Finance charges 5. Contract labor expenses 6. Lease expenses 7. Insurance premiums 8. Workers’ compensation expenses 9. Office supplies and repairs 10. Professional expenses 11. Licenses 12. State sales tax expenses 13. Office and warehouse infrastructure expenses Most of these expenses are not correlated with changes in revenue, but they tend to increase over time. General and administrative expenses were $231,475 for the quarter ended December 31, 2023. For the quarter ended December 31, 2022, general and administrative expenses were $191,117. General and administrative expenses were $821,116 for the nine months ended December 31, 2023. For the nine months ended December 31, 2022, general and administrative expenses were $587,718. The Company currently leases a 10,000 square foot facility which ends in October of 2024. We are currently looking for new space, with the expectation that we need at least double the amount of space we currently occupy to accommodate our needs in achieving our growth expectations. This will cause general and administrative expenses to increase noticeably, as will the additional expenses associated with being an SEC reporting company. Other Income and Expenses Other income and expenses are those outside of the Company’s ordinary course of business. During covid, the Paycheck Protection Program was offered to companies to keep employees on the payroll during the lockdowns. The Company operated throughout this environment and never initiated action to reduce employee headcount. The financial benefits of the Payroll Protection Program was an item disclosed in the other income and expenses category. Likewise, the Employee Retention Tax Credit was offered for similar purposes and the Company qualified for those benefits, which are also disclosed under other income and expenses. Interest income and interest expense are disclosed under other income and expenses. The Company had considerable interest expense prior to paying off all of its promissory note debt as of March 31, 2023. Since that time and as the Company has accumulated cash, it has invested surplus cash in a Vanguard money market fund that invests exclusively in repurchase agreements and short-term U.S. government securities. The ticker symbol of this fund is VMFXX. The Company’s switch from net debtor to net creditor explains the swing from interest expense to interest income observable for both the quarter and the nine month periods ended December 31, 2023, and 2022. For the quarter ended December 31, 2023, other income and expenses were $22,841, with interest income totaling $20,183 for the period. For the quarter ended December 31, 2022, other income and expenses were $54.159, with interest expense totaling $40,544. Tax credits from the Employee Retention Tax Credit totaled $94,703 for the period versus $0 for the quarter ended December 31, 2023. For the nine months ended December 31, 2023, other income and expenses were $64,690, with interest income totaling $30,774. For the nine months ended December 31, 2022, other income and expenses were ($20,002), with interest expense totaling $114,705. Tax credits from the Employee Retention Tax Credit totaled $94,703 for the period versus $31,258 for the quarter ended December 31, 2023. 21 Net Income Before Tax For the three months ended December 31, 2023, net income before tax was ($414,138) versus $569,195 for the three months ended December 31, 2022. Revenue variance between the two periods was responsible for the variance in net income before taxes. The prior year period included AFJROTC revenue of $1,389,420 while the current year period had no AFJROTC revenue. The Company’s small size relative to the opportunities it is pursuing can create significant lumpiness in quarterly results and comparisons to the prior year. For the nine months ended December 31, 2023, net income before tax was $2,257,830 versus $991,685 for the nine months ended December 31, 2022. AFJROTC revenue was similar for the two periods, with the prior year period having $123,504 more AFJROTC revenue than the current year period. While the nine month period ended December 31, 2023 incorporates some significant customer wins that may not be present in the future, Management believes that the Company can take advantage of numerous opportunities and achieve different customer wins in the future and repeat the success is has achieved thus far in fiscal year 2024. This expectation of revenue growth is not accompanied by an expectation of consistency, making quarterly results lumpy and annual results subject to a year-over-year decline on occasion. Taxes The Company has significant net operating losses which arose due to past losses. At March 31, 2023, the Company had net operating losses of approximately $13.9 million that may be offset against future taxable income. No tax benefit has been reported in the quarterly consolidated financial statements for fiscal years 2024 and 2023 since the potential tax benefit is offset by a valuation allowance of the same amount. The federal and state net operating losses and tax credits expire in years beginning in 2026. Net Income With the large net operating losses that can be used to offset taxable income, net income is the same as net income before tax for the reporting periods shown. Liquidity and Capital Resources Cash Flow from Operations For the nine months ended December 31, 2023, cash provided by operations was $1,644,991 compared to cash provided by operations of $244,659 for the nine months ended December 31, 2022. As of December 31, 2023, total current assets were $4,950,442 and total current liabilities were $614,636, resulting in working capital of $4,335,806. As of March 31, 2023, total current assets were $2,493,906 and total current liabilities were $1,222,651, resulting in working capital of $1,271,255. The Company had a current ratio as of December 31, 2023 of 8.05 compared to a current ratio of 6.85 as of March 31, 2023. As of December 31, 2023, we had $2,006,618 in cash and cash equivalents compared to $442,657 in cash as of March 31, 2023. The improvements in working capital, current ratio, and cash on hand are all due to a significant increase in net income during fiscal year 2024 versus that for fiscal year 2023. Cash Flow from Investing Activities For the nine months ended December 31, 2023, cash used by investing activities was $16,096 compared to cash used by investing activities of $16,459 for the nine months ended December 31, 2022. We purchased office equipment during these periods which accounts for the activity. Cash Flow from Financing Activities For the nine months ended December 31, 2023, cash used by financing activities was $64,933. We purchased 998,985 shares of common stock for $0.065 per share, which accounts for this activity. For the nine months ended December 31, 2022, cash used by financing activities was $118,327. During this period, principal payments on debt accounted for $143,327 of the cash used by financing activities whereas we received $25,000 from the sale of one million shares of stock related to the exercise of options by Mike J. Bledsoe, our President. 22 Off-Balance Sheet Arrangements We had no Off-Balance Sheet arrangements during the three and nine month periods ended December 31, 2023, and 2022. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and is not required to provide the information required under this item.