DeFi Capital Markets, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As used throughout this Report, “we,” “our,” “the Company” and similar words refers to Universal Safety Products, Inc. and Subsidiaries. FORWARD-LOOKING STATEMENTS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2026 (the “2026 Annual Report”). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in the 2026 Annual Report. OVERVIEW We are engaged in the marketing and distribution of safety and security products. The accompanying condensed consolidated financial statements present our sales and other operating results for the three-month periods ended June 30, 2026 and 2025. Historically, our products consisted primarily of smoke alarms, carbon monoxide alarms and related products. On October 31, 2024, we entered into an Asset Purchase Agreement with Feit Electric Company, Inc. (“Feit”), pursuant to which Feit agreed to acquire the smoke alarm and carbon monoxide alarm portion of our business, together with certain intangible assets, including the trade names Universal Security Instruments, Inc. and Universal Electric, Inc. The transaction was approved by the requisite vote of our shareholders at a special meeting held on April 15, 2025, and closed on May 22, 2025. Following the closing, our continuing product operations consist primarily of the importation and marketing of ground fault circuit interrupters (“GFCIs”) and ventilation fans, which we sell to the retail and electrical distribution trades, the latter through our wholly owned subsidiary, Universal Safety Electric, Inc. We continue to explore additional business opportunities intended to drive long-term value for our shareholders. As part of that effort, in July 2025 we formed Universal DeFi, LLC (“Universal DeFi”), a wholly owned subsidiary, to pursue two lines of business: a tokenization platform, which had not commenced operations as of June 30, 2026, and the operation of licensed nodes and a validator on the Ault Blockchain network. On April 6, 2026, Ault Capital Group, Inc. (“Ault Capital Group”), acting as authorized agent for Ault DAO, LLC, transferred and activated to Universal DeFi 125,000 node licenses and the right to operate one validator, together with the wallet holding the related reward tokens, for no upfront cash consideration. Through these arrangements, Universal DeFi earns AULT tokens (the “AULT Tokens”), the native digital asset of the Ault Blockchain. In consideration of the transfer and delivery of the 125,000 Node Licenses, on June 30, 2026, Universal DeFi entered into a node revenue sharing agreement with Ault Capital Group under which it will pay Ault Capital Group 25% of net proceeds actually received from the sale of AULT Tokens and rewards, retaining the remaining 75%, until cumulative payments to Ault Capital Group total $93,750,000. As of June 30, 2026, AULT Tokens were not being traded on any exchange or other market, and no observable market price or other reliable indicator of fair value existed as of June 30, 2026. Accordingly, we have not recognized any asset or revenue with respect to the node licenses, the validator right or the AULT Tokens earned, and no revenue share liability or expense has been recorded, for the three months ended June 30, 2026. Universal DeFi has generated no revenue to date and expects to continue to incur losses as it develops its operations. See Notes 1, 3 and 10 to the condensed consolidated financial statements for additional information. We have a history of net operating losses and have financed our operations primarily through issuances of convertible debt. These conditions raise substantial doubt about our ability to continue as a going concern. See “Liquidity and Capital Resources” below and Note 2 to the condensed consolidated financial statements. Changes in international trade duties and other aspects of international trade policy, both in the United States and abroad, could materially affect the cost of our products. We import all of our products, and as an importer we are subject to numerous tariffs that vary by product type and country of origin, as well as to changes in economic and political conditions in the country of manufacture, potential trade restrictions and currency fluctuations. Substantially all of our safety products are imported from the People’s Republic of China, and certain of these products are currently subject to tariffs of 20%. The imposition and modification of tariffs during the latter half of the fiscal year ended March 31, 2025, and subsequently has increased uncertainty as to the short-term sustainability of importing products from our principal suppliers. If we are unable to import products at a competitive price point, our sales could be adversely affected. 18 Table of Contents RESULTS OF OPERATIONS Three Months Ended June 30, 2026 and 2025 Sale s Net sales for the three months ended June 30, 2026, were $109,559 compared to $3,824,247 for the comparable three months in the prior year, a decrease of $3,714,688, or 97%. As previously discussed, we sold the rights to sell a significant portion of our product line on May 22, 2025. Sales subsequent to this date included only those products that we continue to import and market. Gross Profit Margin Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin was 8.3% and 18.2% of sales for the quarters ended June 30, 2026, and 2025, respectively. Gross margins were negatively impacted in the quarters ended June 30, 2026 and 2025, primarily due to tariffs, the mix of products sold due to the previously discussed sale of a portion of our business, and higher freight costs. Expenses Selling, general and administrative expenses were $743,823 for the three months ended June 30, 2026, and $1,113,303 for the comparable three months in 2025. Although these expenses decreased in absolute dollars, as a percentage of net sales they increased to 679% for the three-month period ended June 30, 2026, from 29.1% for the 2025 period. This increase as a percentage of net sales is primarily attributable to the substantial decline in net sales following the sale of our rights to a significant product line in May 2025, while certain selling, general and administrative expenses, including fixed and recurring corporate and administrative costs, and costs associated with exploring strategic alternatives to our existing business, remain in place and do not decline proportionately with sales. Engineering and Product Development Engineering and product development expenses were $1,367 and $112,007 for the three-month periods ended June 30, 2026 and 2025, respectively. The decreased expenses were primarily due to the previously discussed sale of a significant portion of our business. Interest (Expense) Income Interest expense of $75,527 was recognized during the quarter ended June 30, 2026, compared to interest income of $3,828 for the quarter ended June 30, 2025. Interest expense is primarily related to the convertible debt issued and the amortization of the related original issuance discounts during the quarter ended June 30, 2026, as compared to the corresponding period of the prior year during which there were no notes issued and interest income was highly dependent upon the total amounts borrowed from the Factor coupled with interest rates during the period. Change in Fair Value of Derivative Liabilities The Company recognized income of $150,635 from the change in fair value of derivative liabilities during the quarter ended June 30, 2026, compared to $0 for the quarter ended June 30, 2025. The derivative liabilities represent the conversion features embedded in the 2026 and 2025 convertible notes, which are bifurcated from the host debt instruments and measured at fair value using a Monte Carlo simulation and the binomial valuation models. The income recognized reflects the decrease in the fair value of these derivative liabilities between April 1, 2026 and June 30, 2026. Gain on Sale of Assets For the three-month period ended June 30, 2025, we reported a gain on the sale of assets previously held for sale in the amount of $2,820,668. The purchase price of approximately $4,955,000 was reduced by the basis of the assets held for sale amounting to approximately $1,682,000 and by certain customary costs associated with the sale, including commissions and consulting fees amounting to approximately $453,000. 19 Table of Contents Net (Loss) Income We reported a net loss of $662,086 for the quarter ended June 30, 2026, compared to net income of $1,810,321 for the corresponding quarter of the prior fiscal year, a $2,472,407 or 137% decrease in net income. The primary reason for the decrease in the net income is our sale of a significant portion of its business, as previously discussed, resulting in a gain on the sale of $2,820,668 during the prior year period. Operating activities used cash of $687,805 for the three months ended June 30, 2026, driven primarily by our net loss for the period, which reflects the sale of a portion of our business, as previously discussed, and the legal and organizational costs of building Universal DeFi as a new venture. Operating activities provided cash of $1,070,173 for the three months ended June 30, 2025. This was primarily due to a decrease in accounts receivable and amounts due from factor of $1,579,321, a decrease in inventories and prepaid expenses of $3,768,052, net income of $1,810,321, a decrease in deferred tax assets of $361,000, offset by a decrease in accounts payable and accrued expenses of $1,945,916 and the gain on sale of asset of $2,820,668. Operating cash flow amounts for the three months ended June 30, 2025 reflect the reclassification described in Note 3 to the condensed consolidated financial statements. Investing activities for the three months ended June 30, 2026 used $45,401 cash for the purchase of property, plant and equipment. Investing activities for the three months ended June 30, 2025 provided cash from the sale of assets, net of the payment of related liabilities, of $4,502,605. Investing cash flow amounts for the three months ended June 30, 2025 reflect the reclassification described in Note 3 to the condensed consolidated financial statements. Financing activities provided net cash of $970,000 during the three months ended June 30, 2026. This reflects the issuance of convertible debt of $1,060,000, less the original issue discount of $60,000 and debt issuance expenses of $30,000. Financing activities used cash of $2,100,458 during the three months ended June 30, 2025, which was comprised of repayments net of advances from the Factor. LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN As of June 30, 2026, we had cash and cash equivalents of $3.7 million, working capital of $3.4 million and a history of net operating losses for each of the three-month periods during the last year. We have financed our operations primarily through issuances of convertible debt. These conditions raise substantial doubt about our ability to continue as a going concern for at least one year after the date that the condensed consolidated financial statements are issued. Our ability to continue as a going concern is dependent on our ability to generate cash flows from operations and find additional sources of funding through either equity offerings, debt financings, or a combination of any such transactions. Our contractual cash requirements have not changed materially since we filed our Form 10-K for the fiscal year ended March 31, 2026. In June 2026, we entered into a securities purchase agreement providing for the sale of convertible notes in an aggregate principal amount of up to $10,600,000. During the three months ended June 30, 2026, we closed the first tranche, which consisted of the issuance of a note with a principal amount of $1,060,000, for cash proceeds of $970,000 net of an original issue discount of $60,000 and issuance costs of $30,000. The closing of the remaining tranches is subject to various contingencies, some of which are outside our control, and there is no assurance that the additional funding will be available when needed or that we will be able to obtain other financing on terms acceptable to us, if at all. CRITICAL ACCOUNTING POLICIES In the notes to the consolidated financial statements, and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in the United States of America. ​ 20 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Because we are a smaller reporting company, we are not required to provide the information otherwise required under this Item.