DeFi Capital Markets, Inc. 10-K

ITEM 5 . MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for Common Stock Our common stock, $.01 par value (the “Common Stock”) trades on the NYSE MKT LLC exchange, under the symbol UUU. As of March 31, 2021, there were 141 record holders of the Common Stock. The closing price for the Common Stock on that date was $6.75. We have not paid any cash dividends on our common stock, and it is our present intention to retain all cash flow for use in future operations. The following table sets forth the high and low prices for the Common Stock for each full quarterly period during the fiscal years indicated. Fiscal Year Ended March 31, 2021 First Quarter High $ 1.38 Low $ 0.36 Second Quarter High $ 4.10 Low $ 0.75 Third Quarter High $ 13.94 Low $ 1.85 Fourth Quarter High $ 19.88 Low $ 4.73 Fiscal Year Ended March 31, 2020 First Quarter High $ 1.39 Low $ 1.15 Second Quarter High $ 1.33 Low $ 0.81 Third Quarter High $ 1.03 Low $ 0.35 Fourth Quarter High $ 0.92 Low $ 0.30 ITEM 7 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including Risk Factors discussed in earlier filings, and other risks could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 8 General We are in the business of marketing and distributing safety and security products which are primarily manufactured in the Peoples Republic of China. Our consolidated financial statements detail our sales and other operational results, and for the fiscal year ended March 31, 2020 report the financial results of the Hong Kong Joint Venture (Eyston) that is accounted for using the equity method of accounting through the date of the sale of the Company’s 50% interest on March 31, 2020. Accordingly, the following discussion and analysis of the fiscal years ended March 31, 2021 and 2020 relate to the operational results of the Company and its consolidated subsidiary only and includes the Company’s equity share of losses in the Hong Kong Joint Venture up until the disposition of the Company’s 50% interest on March 31, 2020. A discussion and analysis of the Hong Kong Joint Venture’s operational results for the period ended March 31, 2020 is presented below under the heading “Hong Kong Joint Venture.” In light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in the PRC and the United States, the Company has experienced delays in shipping and receiving of products. As the Company’s products are sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had an impact on the Company’s sales We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial results, but we believe that during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and first quarter of fiscal 2021) sales were negatively impacted by lower sales resulting from steps taken to combat the spread of COVID-19. Sales in our second and third fiscal quarters ended September 30, 2020, and December 31, 2020 increased significantly when compared to sales for the comparable 2019 periods due to the Company’s ability to fill orders from inventory for a large national retailer new customer, when the national retailer’s usual supplier was unable to fill the orders due to delays caused by the pandemic. Our sales growth was also due to sales of two products to another large national retailer which purchased certain of our models as a 1,350 store test, which were completed in the fourth quarter of the fiscal year ending March 31, 2021. Our overall sales are primarily dependent upon the strength of the U.S. housing market. As stated elsewhere in this report, our USI Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies); every downturn in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary. Our operating results for the fiscal years ended March 31, 2021 and 2020 continue to be significantly impacted by the economic conditions of the U.S. housing market. We further believe that the movement of the smoke and carbon monoxide alarm retail markets toward ten-year sealed alarms to comply with new laws passed in several states, including California and New York will benefit future sales including its line of ten-year sealed battery units, GFCI’s, and other electrical devices. The importation of wiring devices, carbon-monoxide alarms, and photo-electric alarms are currently subject to tariffs of 25%. Comparison of Results of Operations for the Years Ended March 31, 2021 and 2020 Sales. In fiscal year 2021, our net sales were $17,520,151 compared to sales in the prior year of $14,803,024, an increase of $2,717,127 (18.4%). The increase in sales was primarily due to increased sales to new retail customers reflecting demand attributable to disruptions in the supply chain of those retail customers caused by or related to COVID 19 issues. Gross Profit. Gross profit percentage is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit percentage for the fiscal year ended March 31, 2021 was 32.2% compared to 25.4% in fiscal 2020. The increase in 2021 gross margin is attributed to the increase in demand and to refunds of tariffs paid in prior periods. Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $5,034,380 in fiscal 2021 from $4,628,881 in fiscal 2020. As a percentage of net sales, these expenses were 28.7% for the fiscal year ended March 31, 2021 and 31.3% for the fiscal year ended March 31, 2020. These expenses decreased as a percentage of net sales as they do not increase in direct proportion to increases in sales. These expenses increased as a dollar amount due primarily to increases in insurance and commissions. 9 Research and Development. Research and development expense for the fiscal year ended March 31, 2021 was $471,545. Research and development expense for the fiscal year ended March 31, 2020 was $691,886. The decrease in overall research and development expense for the 2021 period compared to the 2020 period was due to decreased independent testing of products. Interest Expense (Net). For the fiscal years ended March 31, 2021 and 2020, the Company incurred net interest expense of $86,841 and $409,703, respectively, related to borrowing costs associated with interest paid on amounts borrowed from our factor and on extended trade payables due to Eyston Company Ltd. The decrease in interest expense resulted from reduced borrowing from Eyston Company Ltd. and reduced borrowing from our factor during the fiscal year ended March 31, 2021 to fund inventory purchases and operating cash requirements. Income Taxes. For the fiscal years ended March 31, 2021 and 2020 our statutory Federal tax rate was 21.0%. The Company has accumulated net operating losses and other income tax credits for which a full valuation allowance has been established. Accordingly, income taxes or deferred income tax benefits indicated by the provision for income taxes as shown on the Consolidated Statements of Operations for the fiscal years ended March 31, 2021 and 2020 varies from the expected statutory rate. Footnote G to the financial statements provides a reconciliation of the amount of tax that would be expected at statutory rates and the amount of tax expense or benefit provided at the effective rate of tax for each fiscal period. Net Income (Loss). We reported net income of $268,343 for the fiscal year 2021, compared to a net loss of $5,813,891 for fiscal 2020, a decrease of $6,082,234 (104.6%) in the net loss. The decrease in the net loss is primarily due to recording the loss arising from the sale of the Company’s interest in the Hong Kong Joint Venture, and the Company’s interest in the loss from investment in the Hong Kong joint venture’s operations during the fiscal year ended March 31, 2020. Also contributing to the decrease in the net loss for the Fiscal year ended March 31, 2021 were higher sales, increased gross profit, the forgiveness of $221,400 of debt related to the Paycheck Protection Program under the CARES Act, reduced expenditures in research and development of approximately $220,000, and a reduction in interest expense of approximately $323,000 for the fiscal year ended March 31, 2021. See “Hong Kong Joint Venture” below for further discussion regarding the operations of the Hong Kong Joint Venture. Financial Condition, Liquidity and Capital Resources The Company had net income of $268,343 and a net loss of $5,813,891 for the years ended March 31, 2021 and 2020, respectively. As of March 31, 2021, working capital (computed as the excess of current assets over current liabilities) increased by $505,103 from $5,059,498 on March 31, 2020, to $5,564,601 on March 31, 2021. Our operating activities provided cash of $1,388,172 for the year ended March 31, 2021. Operating activities provided cash principally from a decrease in inventories of $942,766, an increase in accounts payable and accrued expenses of $751,252, net income of $268,343, plus non-cash depreciation of an operating lease asset of $158,576, and an increase in the allowance for doubtful accounts receivable of $100,000. Operating activities used cash principally from an increase in prepaid expenses of $223,554, a decrease in the operating lease liability of $158,576, an increase in accounts receivable and amounts due from factor of $236,930, less non-cash forgiveness of $221,400 from the Paycheck Protection Program Loan under the CARES Act. For the fiscal year ended March 31, 2020 there was a decrease in the accounts payable due to the Hong Kong Joint Venture and accrued expenses of $356,096, and the decrease in the operating lease liability of $156,250. In addition the Company had a net loss of $5,813,891 which includes a non-cash loss from operations of the Hong Kong Joint Venture of $1,369,655 and the non-cash loss on the sale of our ownership interest in the Hong Kong Joint Venture of $2,472,620. Operating cash was provided as accounts receivable and amounts due from factor decreased by $568,879 and inventories decreased by $1,728,346. Our investing activities did not provide or use cash during the fiscal years ended March 31, 2021 or 2020. Financing activities used cash of $1,321,362 and $289,926 during the fiscal years ended March 31, 2021 and 2020, respectively, as a result of the net repayment of amounts due to our Factor Our overall sales are primarily dependent upon the strength of the U.S. housing market. As stated elsewhere in this report, our USI Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies); every downturn in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary. Our operating results for the fiscal years ended March 31, 2021 and 2020 continue to be significantly impacted by the economic conditions of the U.S. housing market. Management believes that with an improved housing market and sales of our sealed products, the Company will improve profitability. 10 Management expects our product offerings including sealed battery alarm and ground fault circuit interrupter products will compete on price and functionality with similar products offered by our larger competitors. While we believe there will be market acceptance of our products we cannot be assured of this. Should our products not achieve the level of acceptance we anticipate, this could have a significant impact on our future operations, and our sales may decline, potentially impacting our ability to continue operating in our current fashion. Our short-term borrowings to finance operations, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring Agreement with Merchant Factors Corporation (Merchant or Factor). Borrowings under our Factoring Agreement bear interest at prime plus 2% and are secured by trade accounts receivable and inventory. Advances from Merchant are at the sole discretion of Merchant based on their assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance. The unused availability of this facility totaled approximately $1,795,000 at March 31, 2021. The Company sold its fifty percent ownership in Eyston effective March 31, 2020. The non-cash proceeds from the sale were used to reduce our trade accounts payable due to Eyston by $4,000,000. In addition, the Company and Eyston agreed to convert $1,081,440 of trade accounts payable to an interest only note payable with the principal being due on the maturity date of April 19, 2022. Until March 31, 2020 we had secured extended payment terms for purchases up to $4,000,000 from Eyston for the purchase of sealed battery alarms. These amounts were unsecured, incurred interest at 5.5% per annum, and provided for repayment terms of 120 days for each purchase. Subsequent to March 31, 2020, Eyston continues to be the Company’s principal supplier of safety alarms and the Company will pay for these purchases upon evidence of shipment from the factory. Prior to the fiscal year ended March 31, 2021 the Company has a history of sales that were insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to these conditions continues to be to increase sales resulting from the delivery of the Company’s line of sealed battery ionization smoke alarms, carbon monoxide products, and ground fault circuit interrupters. The Company has seen positive results on this plan due to increased sales of its product offerings to a major home improvement retailer during the second and third quarters of the Company’s fiscal year ended March 31, 2021. This increase in sales has resulted in significant additional availability under the Company’s facility with its Factor. Management expects sales growth to continue going forward. In May, 2020 the Company received a Paycheck Protection Program loan of $221,400 under the CARES Act and the loan was subsequently forgiven in compliance with the provisions of the CARES Act. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs for the next twelve months following the issuance date of this report. Cash flows and credit availability is expected to be adequate to fund operations for one year from the issuance date of this report. Hong Kong Joint Venture In fiscal year 2020, Eyston’s sales were $8,054,070. Eyston’s gross margins for fiscal year 2020 were 3.4%. Selling, general and administrative expenses of Eyston for fiscal 2020 were $4,186,690. As a percentage of sales, these expenses were 52.0% for the fiscal years ended March 31, 2020. Investment income and interest income, net of interest expense, was $261,349 for fiscal year 2020. The net loss was $3,235,107 for fiscal year 2020. The net loss for fiscal 2020 was primarily due to sales that are insufficient to cover fixed general and administrative cost. 11 Related Party Transactions Pursuant to its written charter, the Audit Committee of the Board of Directors of the Company reviews and approves all transactions with related persons that are required to be disclosed under applicable regulation. During the fiscal year ended March 31, 2021 and 2020, inventory purchases and other company expenses of approximately $1,206,000 and $999,000, respectively, were charged to credit card accounts of Harvey B. Grossblatt, the Company’s Chief Executive Officer and certain of his immediate family members. The Company subsequently reimbursed these charges in full. Mr. Grossblatt receives travel mileage and other credit card benefits from these charges. The maximum amount outstanding and due to Mr. Grossblatt at any point during the fiscal year ended March 31, 2021 and 2020 amounted to $158,134 and $136,876, respectively, and the amount outstanding at March 31, 2021 and 2020 is $50,536 and $27,102, respectively. Critical Accounting Policies Management’s discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated financial statements included as part of this document. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, impairment of long-lived assets, and contingencies and litigation. We base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note A to the consolidated financial statements, included in this Annual Report. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include: Income Taxes : The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences may result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized. After a review of projected taxable income and the components of the deferred tax asset in accordance with applicable accounting guidance it was determined that it is more likely than not that the tax benefits associated with the remaining components of the deferred tax assets will not be realized. This determination was made based on the Company’s history of losses from operations and the uncertainty as to whether the Company will generate sufficient taxable income to use the deferred tax assets prior to their expiration. Accordingly, a valuation allowance was established to fully offset the value of the deferred tax assets. Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income is generated, we may be able to offset a portion of future tax expenses. The Company follows ASC 740-10 which provides guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our consolidated financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties, if any, related to income tax matters are recorded as income tax expenses. 12 Revenue Recognition: The Company’s primary source of revenue is the sale of safety and security products based upon purchase orders or contracts with customers. Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped or delivered to the customer. Customers may not return, exchange or refuse acceptance of goods without our approval. Generally, the Company does not grant extended payment terms. Shipping and handling costs associated with outbound freight, after control over a product has transferred to a customer, are accounted for as a fulfillment cost and are recorded in selling, general and administrative expense. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at the transaction price net of estimates of variable consideration. The Company uses the expected value method based on historical data in considering the impact of estimates of variable consideration, which may include trade discounts, allowances, product returns (including rights of return) or warranty replacements. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We have established allowances to cover anticipated doubtful accounts based upon historical experience. Inventories: Inventories are valued at the lower of cost or net realizable value. Cost is determined on the first in/first out method. We evaluate inventories on a quarterly basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. Off-Balance Sheet Arrangements. We have not created, and are not party to, any special-purpose or off balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements and do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources. Concentrations The Company is primarily a distributor of safety products for use in home and business under both its trade names and private labels for other companies. The Company had one customer in the fiscal year that ended March 31, 2021 that represented 21.9% of the Company’s net sales and two customers in the fiscal year that ended March 31, 2020 that represented 12.2% and 10.3% of the Company’s net sales, respectively. The Company acquires all of the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. At March 31, 2021, the Company had accounts receivable due from Eyston Company, Ltd. of $381,401. Accounting Standards New Accounting Standards See Note A, Recently issued accounting pronouncements, in the Notes to the Consolidated Financial Statements for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.