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 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. However, given the new 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. 12 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. 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 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 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 2022 2023 2024 3/31 1,445,594 2,521,470 2,262,772 6/30 1,391,785 2,605,281 3,159,923 9/30 1,243,662 3,767,326 2,267,338 12/31 1,847,659 459,087 701,147 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, 2025, our revenue was $7,421,228 compared to $9,094,466 for the year ended March 31, 2024. There were five (5) factors that negatively impacted our revenue in fiscal year 2025 versus that in fiscal year 2024. 1. We did not win an Iowa STEM Scale-Up contract in fiscal year 2025 and reported no revenue from that customer. In fiscal year 2024, our revenue from our Iowa STEM Scale-Up contract was $823,143. In fiscal year 2023, our revenue from this customer was $467,457. We won a contract for fiscal year 2026 and expect associated revenue for this contract to be closer to our fiscal year 2023 experience. 2. Our Catapult order was significantly less in fiscal year 2025 versus that of fiscal year 2024. 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 inventory our products over the course of the year. Thus, seasons when their customer base is down and when their inventory of our products is high produce smaller orders than seasons when their customer base is up and they have a low inventory of our products. We believe that their order placed with us in fiscal year 2025, in the aggregate amount of $587,100, was under the former conditions, and that their order placed with us in fiscal year 2024, in the amount of $1,286,695, was under the latter conditions. 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 642 of them thus far. 4. The expiration of ESSER funds on September 30, 2024, eliminated a key funding stream for our products during the second half of our fiscal year. 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. The Company has been soliciting larger customers for over three (3) years and has seen some success. The AFJROTC is the Company’s largest success by a wide margin, producing revenue of $453,314 in the year ended March 31, 2025, $1,269,036 in the year ended March 31, 2024, and $2,655,336 in the year ended March 31, 2023. 13 We have experienced other successes in our 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, 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 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, 2025, our cost of sales was $2,983,940, or 40.2% of revenue. For the year ended March 31, 2024, our cost of sales was $3,359,801, or 36.9% 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 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 $1,914,941 for the year ended March 31, 2025, compared to $1,778,946 for the year ended March 31, 2024. As of March 31, 2025, we had 25 full-time employees. As of March 31, 2024, we had 22 full-time employees. 14 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 $1,439,014 for the year ended March 31, 2025. For the year ended March 31, 2024, general and administrative expenses were $1,148,652. 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. This expansion was the primary driver in the increase in general and administrative expenses in fiscal year 2025 versus fiscal year 2024, although general inflation also played a significant role. Total Operating expenses for the year ended March 31, 2025, were $3,353,955, compared to $2,927,598 for the year ended March 31, 2024. Other Income/Expenses Other income and expenses are those outside of the Company’s ordinary course of business. During the Covid pandemic, the Employee Retention Tax Credit was offered to companies to keep employees on the payroll during the lockdowns. The Company qualified for those benefits, which are 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.” For the year ended March 31, 2025, other income and expenses were $127,930, with net interest income comprising the entire amount. For the year ended March 31, 2024, other income and expenses were $104,328, with interest income totaling $48,904. Net Income Before Tax For the year ended March 31, 2025, net income before tax was $1,211,263 versus $2,911,395 for the year ended March 31, 2024. The Company experienced a lower sales level in fiscal year 2025 versus that of fiscal year 2024, which largely accounts for the difference in net income before tax for these two periods. Operating expenses in fiscal year 2025 were also higher than those for fiscal year 2024. Taxes The Company has significant net operating losses which arose due to past losses. At March 31, 2025, the Company had net operating losses of approximately $8.0 million that may be offset against future taxable income. The federal net operating losses and tax credits expire in years beginning in 2029. The 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. Once the valuation allowance was fully removed, a provision for income taxes was disclosed. For the fiscal year ending March 31, 2025, the Company’s provision for income taxes was ($264,865). 15 Net Income For the year ended March 31, 2025, net income was $946,865 versus $4,441,188 for the year ended March 31, 2024. Removing the tax loss carry-forward valuation allowance added $1,529,793 to net income for the year ended March 31, 2024. Liquidity and Capital Resources Cash Flow from Operations For the year ended March 31, 2025, cash provided by operations was $2,520,966 compared to cash provided by operations of $975,680 for the year ended March 31, 2024. A decrease in accounts receivable and prepaid expenses, and a smaller increase in inventory as of March 31, 2025, compared to March 31, 2024, were the largest factors behind the increase of cash flow from operations in fiscal year 2025 over that in fiscal year 2024. 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. As of March 31, 2024, total current assets were $5,425,141 and total current liabilities were $416,154, resulting in working capital of $5,008,987. The Company had a current ratio as of March 31, 2025, of 18.13 compared to a current ratio of 13.04 as of March 31, 2024. As of March 31, 2025, we had $3,223,147 in cash and cash equivalents compared to $1,329,708 in cash as of March 31, 2024. The improvements in working capital, current ratio, and cash on hand are largely due to the realization of $1,675,859 of accounts receivable during fiscal year 2025 that were on the books at the end of fiscal year 2024. Cash Flow from Investing Activities For the year ended March 31, 2025, cash used by investing activities was $79,814 compared to cash used by investing activities of $23,696 for the year ended March 31, 2024. We purchased warehouse and office equipment related to our move from one facility to two during fiscal year 2025, which accounts for the increase in cash used by investing activities. Cash Flow from Financing Activities For the year ended March 31, 2025, cash used by financing activities was $547,713. We made the following common stock repurchase transactions during fiscal year 2025, which accounts for this activity: Date Shares Price Total Consideration 7/15/2024 250,000 $ 0.195 $ 48,750 9/24/2024 352,084 $ 0.270 $ 95,063 11/19/2024 1,172,417 $ 0.210 $ 246,208 2/7/2025 769,230 $ 0.205 $ 157,692 Total 2,543,731 547,713 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. Off-Balance Sheet Arrangements We had no Off-Balance Sheet arrangements during the years ended March 31, 2025, or 2024. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies.