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 Commission filings and at the forepart of this Annual Report. 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 our financial statements contained in Part II, Item 8, Financial Statements , below, of this Annual Report. Overview of Current and Planned Operations PCS Edventures!, Inc. sells STEM/STEAM products to educational and recreational entities serving youth. Because the majority of our customers work in out-of-school-time settings, we have not attempted to align our products to fit in the classroom setting, until recently. Classroom curriculum must promote academic achievement through rigorous alignment with specific state standards to be considered for use. Each state has its own unique set of standards, making classroom curriculum development a state by-state endeavor. On the other hand, out of school programs focus more broadly on the goals of engagement, career exploration and development of 21 st century skills. 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 programming 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. However, given the administration’s stated goals of removing federal influence and administration from education, and returning those functions to the states, we are now considering which of our products would be adaptable to the educational standards of certain larger states. We intend to continue to weigh state-level priorities much more heavily in the development of future products as well. We view a transition from federal dominance to state dominance of the application of educational standards to curriculum as likely, albeit over a long-time frame, and we are adapting our product development to this change in our market. Market feedback also indicates that products that have evidence of their effectiveness are increasingly being demanded, especially in state-funded programs and larger programs. While we maintain a library of the evidence we have accumulated about the outcomes one can expect when using our products, and while this library of evidence has helped us win larger orders, we believe that expanding this library and upgrading the tiers of evidence we have will produce meaningful benefits for future sales. We have engaged various firms to help us generate more compelling evidence of our products’ effectiveness. We are early in this process, but we intend to substantially build out our library of evidence of our products’ effectiveness. 12 The course we take to accomplish this endeavor will depend on our experiences with these early initiatives. 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 1) a customer service component of our product that adds to its uniqueness and value in the marketplace and 2) 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 ending June 30 and September 30 tend to be the peak of this seasonality (with the quarter ending March 31 being close to these quarters), while the quarter ending December 31 tends to be the low point of our seasonality. The Table below reflects this seasonality. Quarterly Revenue 2023 2024 2025 3/31 2,521,470 2,262,772 1,292,819 6/30 2,605,281 3,159,923 2,423,309 9/30 3,767,326 2,267,338 1,529,503 12/31 459,087 701,147 754,889 During the quarter ending December 31, we focus 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, 2026, our revenue was $6,349,761 compared to $7,421,228 for the year ended March 31, 2025. There were five (5) factors that negatively impacted our revenue in fiscal year 2026 versus that in fiscal year 2025. 1. Our reseller revenue was significantly less in fiscal year 2026 versus that of fiscal year 2025. For the year ended March 31, 2026, reseller revenue was $1.02 million versus $1.59 million for the year ended March 31, 2025. 2. Our Catapult order was less in fiscal year 2026 versus that of fiscal year 2025. Catapult administers summer programming in Missouri due to the state’s public funding of such programs. They experience annual fluctuations in their customer base, and they have moved to a just-in-time inventory system. Consequently, they worked down our inventory that they held during this past season, resulting in a lower order volume compared to the prior year. For the year ended March 31, 2026, Catapult revenue was $0.33 million versus $0.59 million for the year ended March 31, 2025. 3. Our Air Force JROTC (“AFJROTC”) contract produces less revenue as the contract ages. The AFJROTC has approximately 884 sites, and we have sold into approximately 652 of them thus far. For the year ended March 31, 2026, ARJROTC revenue was $0.09 million versus $0.45 million for the year ended March 31, 2025. 4. Larger customer orders were fewer in fiscal year 2026 versus that for fiscal year 2025. For the year ended March 31, 2026, we had eleven (11) customer relationships whose revenue exceeded $100,000 and no customer relationships that exceeded $500,000 in revenue. For the year ended March 31, 2025, we had sixteen (16) customer relationships that exceeded $100,000 and two (2) customer relationships that exceeded $500,000. 5. The change in Presidential administration created significant changes in the education market regarding funding streams, administration of grants, and general federal influence over education. These changes were and still are disruptive to educational decision making and, thus, disruptive to our market. 13 The Company has been soliciting larger customers for over four (4) years and has seen some success until fiscal year 2026. 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, 2026 0 0 11 34 54 102 Year ended March 31, 2025 0 2 16 26 49 103 Year ended March 31, 2024 2 3 17 27 40 94 Year ended March 31, 2023 1 1 10 21 38 60 While we continue to find success increasing customer revenue sizes below the $50,000 threshold, the relationships larger than that were more elusive during fiscal year 2026. Cost of Sales For the year ended March 31, 2026, our cost of sales was $2,509,692, or 39.5% of revenue. For the year ended March 31, 2025, our cost of sales was $2,983,940, or 40.2% of revenue. 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 we can reprice our 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 Lower percentage of reseller sales Higher percentage of reseller sales For the year ended March 31, 2026, reseller sales were 16.1% of total revenue as compared to 21.4% for the year ended March 31, 2025. The lower reseller revenue, as a percentage of total revenue, for fiscal year 2026 versus fiscal year 2025 was the primary factor behind the lower cost of sales, as a percentage of revenue, for fiscal year 2026 versus fiscal year 2025. 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. Prior to January 1, 2026, the Company had a discretionary quarterly bonus program based on qualified revenue. Qualified revenue was defined as revenue where there were no reseller fees or other price adjustments associated with that revenue. Thus, all reseller sales were disqualified from the discretionary quarterly bonus calculation, as were other miscellaneous transactions where the Company did not receive a full margin. 14 Beginning January 1, 2026, the Company modified the formula for its quarterly bonus program to be 10% of income before interest and taxes. Thus, quarterly bonuses depend on profitability, not revenue. Management believes that this new bonus program formula better aligns employee incentives with shareholder interests. Also beginning January 1, 2026, the Company initiated a Simple IRA program. Employees can withhold a percentage of their income each pay period which is deposited into an IRA for the employee. The company matches the first 3% of employee income contributions. Management believes that this program helps retain employees. During quarters with higher profitability, salaries and wages will increase all other things equal. Salary and wages were $2,205,008 for the year ended March 31, 2026, compared to $1,914,941 for the year ended March 31, 2025. As of March 31, 2026, we had 28 full-time employees. As of March 31, 2025, we had 25 full-time employees. 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 strongly correlated with changes in revenue, but they tend to increase over time. General and administrative expenses were $1,418,083 for the year ended March 31, 2026. For the year ended March 31, 2025, general and administrative expenses were $1,386,177. While most expenses increased, we experienced significant decreases from two (2) areas. In late October and early November of 2024, we ended our lease on our 10,000 square foot combined warehouse and office facility, and entered into two (2) new leases - a 20,880 square foot warehouse and R&D facility, and a 5,016 square foot corporate office facility. The expenses associated with those moves, which were part of the general and administrative expenses in fiscal year 2025, were not present in fiscal year 2026. Our tax expenses for fiscal year 2026 were $32,056 versus $153,041 in fiscal year 2025. The decrease is primarily attributable to significantly lower taxable income in the current year compared to the prior year. Additionally, the state income tax payments for fiscal year 2025 included approximately $88,000 related to underpaid state estimated taxes from the fiscal year ended March 31, 2024. Fiscal year 2024 was an exceptionally strong year financially, and the state estimated tax payments made during that year were insufficient to fully cover the ultimate tax liability due upon filing. As a result, a substantial portion of the taxes paid during fiscal year 2025 related to the prior year liability rather than current year operations. Total Operating expenses for the year ended March 31, 2026, were $3,623,091, compared to $3,301,118 for the year ended March 31, 2025. 15 Other Income: Other income for the years ended March 31, 2026, and 2025, was entirely comprised of net interest income. The Company invests 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.” Interest accrues daily and is paid monthly. For the year ended March 31, 2026, other income was $104,477. For the year ended March 31, 2025, other income was $127,930. Average account balances in our savings account and interest rates were lower in fiscal year 2026 versus those in fiscal year 2025, which accounts for the decline in interest income. Net Income Before Tax For the year ended March 31, 2026, net income before tax was $321,455 versus $1,211,263 for the year ended March 31, 2025. The Company experienced a lower sales level in fiscal year 2026 versus that of fiscal year 2025, which largely accounts for the difference in net income before tax for these two periods. Operating expenses in fiscal year 2026 were also higher than those for fiscal year 2025 due to increased employee expenses. Taxes The Company has significant net operating losses which arose due to past losses. At March 31, 2026, the Company had net operating losses of approximately $7.7 million that may be offset against future taxable income. The federal net operating losses and tax credits expire in years beginning in 2030. The state net operating losses and tax credits expire in years beginning in 2027. 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. Once the valuation allowance was fully removed, a provision for income taxes was disclosed. For the fiscal year ending March 31, 2026, the Company’s provision for income taxes was ($68,273). For the fiscal year ending March 31, 2025, the Company’s provision for income taxes was ($317,235). Net Income For the year ended March 31, 2026, net income was $253,182 versus $946,865 for the year ended March 31, 2025. Liquidity and Capital Resources Cash Flow from Operations For the year ended March 31, 2026, cash provided by operations was $96,440 compared to cash provided by operations of $2,520,966 for the year ended March 31, 2025. Several factors contributed to the decline in cash provided by operations from fiscal year 2025 to fiscal year 2026. The largest factors were net income decreased by $693,683; the provision for income taxes decreased by 209,952; and accounts receivable increased by $338,726 in fiscal year 2026 versus a decrease of $1,291,987 in fiscal year 2025; As of March 31, 2026, total current assets were $5,631,022 and total current liabilities were $448,856, resulting in working capital of $5,182,166. As of March 31, 2025, total current assets were $5,918,984 and total current liabilities were $326,439, resulting in working capital of $5,592,545. The Company had a current ratio as of March 31, 2026, of 12.5 compared to a current ratio of 18.1 as of March 31, 2025. 16 As of March 31, 2026, we had $2,674,538 in cash compared to $3,223,147 in cash as of March 31, 2025. Cash Flow from Investing Activities For the year ended March 31, 2026, cash used by investing activities was $18,730 compared to cash used by investing activities of $79,814 for the year ended March 31, 2025. We purchased warehouse and office equipment related to our move from one facility to two during fiscal year 2025. These expenses were absent in fiscal year 2026, which accounts for the decrease in cash used by investing activities. Cash Flow from Financing Activities For the year ended March 31, 2026, cash used by financing activities was $626,319. We made the following common stock repurchase transactions during fiscal year 2026, which accounts for this activity: Date Shares Price Total Consideration 5/20/2025 23,747 $ 1.68 $ 39,894 5/22/2025 8,333 $ 1.63 $ 13,607 7/7/2025 83,333 $ 1.44 $ 120,007 7/16/2025 16,666 $ 1.32 $ 22,007 7/21/2025 1,583 $ 1.14 $ 1,802 7/22/2025 1,917 $ 1.19 $ 2,284 7/23/2025 2,000 $ 1.13 $ 2,263 7/24/2025 2,167 $ 1.08 $ 2,347 7/25/2025 2,167 $ 1.07 $ 2,321 7/28/2025 201,514 $ 1.08 $ 217,400 7/29/2025 988 $ 1.32 $ 1,303 8/22/2025 5,458 $ 1.56 $ 8,516 9/19/2025 4,167 $ 1.56 $ 6,507 9/30/2025 8,647 $ 1.38 $ 11,933 10/28/2025 250 $ 1.50 $ 383 12/1/2025 10,873 $ 1.34 $ 14,620 12/4/2025 417 $ 1.44 $ 600 12/8/2025 2,031 $ 1.50 $ 3,046 12/10/2025 14,123 $ 1.32 $ 18,643 12/10/2025 133 $ 1.32 $ 176 12/12/2025 458 $ 1.47 $ 676 12/19/2025 2,500 $ 1.44 $ 3,607 12/23/2025 917 $ 1.56 $ 1,431 12/29/2025 1,571 $ 1.56 $ 2,458 1/9/2026 1,667 $ 1.59 $ 2,647 1/26/2026 35,566 $ 1.38 $ 49,081 2/2/2026 1,110 $ 1.62 $ 1,797 2/11/2026 1,250 $ 1.26 $ 1,575 2/19/2026 1,667 $ 1.50 $ 2,505 2/26/2026 16,667 $ 1.44 $ 24,007 3/13/2026 8,134 $ 1.61 $ 13,135 3/27/2026 11,207 $ 1.68 $ 18,834 3/31/2026 8,333 $ 1.79 $ 14,907 Total 481,561 $ 626,319 For the year ended March 31, 2025, cash used by financing activities was $547,713. We purchased 211,977 shares of our common stock for $2.58 per share, which accounts for this activity. 17 Off-Balance Sheet Arrangements We had no Off-Balance Sheet arrangements during the years ended March 31, 2026, or 2025. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.