PCS Edventures!, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statements for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995: Except for historical facts, all matters discussed in this Annual Report, which are forward-looking, involve a high degree of risk and uncertainty. Certain statements in this Annual Report set forth management’s intentions, plans, beliefs, expectations, or predictions of the future based on current facts and analyses. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results may differ materially from those indicated in such statements, due to a variety of factors, risks, and uncertainties. Potential risks and uncertainties include, but are not limited to, competitive pressures from other companies within the Educational Industries, economic conditions in the Company’s primary markets, exchange rate fluctuation, reduced product demand, increased competition, inability to produce required capacity, unavailability of financing, government action, weather conditions and other uncertainties, including those detailed in our SEC filings. We assume no duty to update forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion should be read in conjunction with Item 8, Financial Statements, in Part II of this Annual Report. 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 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. 12 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. We 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, we focused on product development, restocking inventory, and general planning for the next year. Sales and marketing activities remain fairly constant throughout the year. Results of Operations Revenue For the year ended March 31, 2024, our revenue was $9,094,466 compared to $7,004,575 for the year ended March 31, 2023. 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 $1,269,036 in the year ended March 31, 2024, and $2,655,336 in the year ended March 31, 2023. We have 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 Year ended March 31, 2024 2 3 17 27 40 94 Year ended March 31, 2023 1 1 10 21 38 60 Year ended March 31, 2022 0 1 6 13 18 51 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 For the year ended March 31, 2024, our cost of sales was $3,359,801, or 36.9% of revenue. For the year ended March 31, 2023, our cost of sales was $2,798,617, or 40.0% of revenue. 13 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 maintain 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. 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, we desire 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 $1,778,946 for the year ended March 31, 2024, compared to $1,521,536 for the year ended March 31, 2023. 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; and 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 $1,148,652 for the year ended March 31, 2024. For the year ended March 31, 2023, general and administrative expenses were $871,967. 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 a Commission reporting company. Total Operating expenses for the year ended March 31, 2024, were $2,927,598, compared to $2,393,503 for the year ended March 31, 2023. 14 Other Income/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 also 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 the years ended March 31, 2024, and March 31, 2023. For the year ended March 31, 2024, other income and expenses were $104,328, with interest income totaling $48,904. For the year ended March 31, 2023, other income and expenses were ($47,745), with interest expense totaling ($142,605). Net Income Before Tax For the year ended March 31, 2024, net income before tax was $2,911,395 versus $1,764,710 for the year ended March 31, 2023. The Company experienced a higher sales level in fiscal year 2024 versus that of fiscal year 2023, which largely accounts for the difference in net income before tax for these two periods. Taxes The Company has significant net operating losses which arose due to past losses. At March 31, 2024, the Company had net operating losses of approximately $9.2 million that may be offset against future taxable income. The federal and state net operating losses and tax credits expire in years beginning in 2026. Prior to fiscal year 2023, the Company offset its potential tax benefit from the operating loss carry-forwards with a valuation allowance in the same amount. As it became clear that the Company will more likely than not use its tax loss carry-forward amounts, the valuation allowance was partially removed for the fiscal year ending March 31, 2023, such that the tax benefit recognized by us in fiscal year 2023 was $1,011,466. The valuation allowance was fully removed as of March 31, 2024, resulting in a tax benefit of $1,529,793 for fiscal year 2024. Net Income For the year ended March 31, 2024, net income was $4,441,188 versus $2,776,176 for the year ended March 31, 2023. Removing the tax loss carry-forward valuation allowance added $1,529,793 to net income for the year ended March 31, 2024, and $1,011,466 for the year ended March 31, 2023. Liquidity and Capital Resources Cash Flow from Operations For the year ended March 31, 2024, cash provided by operations was $975,680 compared to cash provided by operations of $1,341,409 for the year ended March 31, 2023. Increases in accounts receivable and inventory as of March 31, 2024, compared to March 31, 2023, were the two largest factors in the difference in cash flow from operations for the two periods. As of March 31, 2024, total current assets were $5,425,141 and total current liabilities were $416,154, resulting in working capital of $5,008,989. As of March 31, 2023, total current assets were $2,493,906 and total current liabilities were $364,269, resulting in working capital of $2,129,637. The Company had a current ratio as of March 31, 2024, of 13.04 compared to a current ratio of 6.85 as of March 31, 2023. As of March 31, 2024, we had $1,329,708 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. 15 Cash Flow from Investing Activities For the year ended March 31, 2024, cash used by investing activities was $23,696 compared to cash used by investing activities of $19,495 for the year ended March 31, 2023. We purchased office equipment during these periods which accounts for the activity. Cash Flow from Financing Activities For the year ended March 31, 2024, cash used by financing activities was $64,933. We purchased 998,985 shares of our common stock for $0.065 per share, which accounts for this activity. For the year ended March 31, 2023, cash used by financing activities was $1,463,327. During this period, principal payments on debt accounted for $1,493,327 of the cash used by financing activities whereas we received $30,000 from the sale of 1.25 million shares of stock related to the exercise of 1,000,000 options by Michael J. Bledsoe, our President, and 250,000 options by Michelle Fisher, our Director of Curriculum. Off-Balance Sheet Arrangements We had no Off-Balance Sheet arrangements during the years ended March 31, 2024 or 2023. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.