DeFi Capital Markets, Inc. 10-K

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 the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. General We are in the business of marketing and distributing safety and security products which are primarily manufactured in the Peoples Republic of China (PRC). Our consolidated financial statements detail our sales and other operational results. Accordingly, the following discussion and analysis of the fiscal years ended March 31, 2024, and 2023 relate to the operational results of the Company and its consolidated subsidiaries. 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); conditions that impact new home construction and new home sales directly impacts sales by our USI Electric subsidiary. Our operating results for the fiscal years ended March 31, 2024, and 2023 continue to be dependent upon 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 will benefit future sales of our line of ten-year sealed battery units, GFCI’s, and other electrical devices. The importation of certain wiring devices, carbon-monoxide alarms, and photo-electric alarms are currently subject to tariffs of 25%. 6 Table of Contents Comparison of Results of Operations for the Years Ended March 31, 2024 and 2023 Sales. In fiscal year 2024, our net sales were $19,902,673 compared to sales in the prior year of $22,178,873, a decrease of $2,276,200 (10.3%). The decrease in sales was primarily due to decreased sales to existing retail customers as a result of delays in obtaining certain electronic components used in manufacturing our products and due to delays in ocean freight shipments. 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, 2024, was 29.2% compared to 28.6% in fiscal 2023. The increase in 2024 gross margin is attributed to variations in the mix of products sold as certain products are subject to tariff charges that directly impact gross margin. Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $5,645,584 in fiscal 2024 from $4,974,453 in fiscal 2023. As a percentage of net sales, these expenses were 28.4% for the fiscal year ended March 31, 2024, and 22.4% for the fiscal year ended March 31, 2023. These expenses increased as a percentage of net sales as they do not change in direct proportion to a change in sales. These expenses increased as a dollar amount due primarily to increases in the provision for credit losses, salaries as the prior fiscal year reflected an employee retention credit, and due to increased freight costs, insurance, and professional fees. Engineering and Product Development. Engineering and product development expense for the fiscal year ended March 31, 2024, was $427,234. Engineering and product development expense for the fiscal year ended March 31, 2023, was $402,692. The increase in overall engineering and product development expense for the 2024 period compared to the 2023 period was due to independent testing of products. Net Interest Expense and Interest Income. For the fiscal years ended March 31, 2024, and 2023, the Company incurred net interest expense of $155,731 and $237,686, respectively, related to borrowing costs associated with interest paid on amounts borrowed from our factor. The decrease in interest expense resulted primarily from decreased borrowing from our factor during the fiscal year ended March 31, 2024. For the fiscal year ended March 31, 2024 the Company received interest income of $24,746 related to refunds of customs payments made in the prior fiscal year. Income Taxes. For the fiscal years ended March 31, 2024, and 2023 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, 2024, and 2023 varies from the expected statutory rate. Footnote E 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 (Loss) Income. We reported a net loss of $395,790 for the fiscal year 2024, compared to net income of $720,411 for fiscal 2023, a decrease of $1,116,201 (154.9%) in net income. The net loss for the fiscal year ended March 31, 2024, is attributed to decreased sales resulting from manufacturing delays caused by shortages of critical components and to delays experienced in ocean freight shipments, to increases in salaries as the prior fiscal year reflected an employee retention credit, an increase in the provision for credit losses, and due to increased freight costs, insurance, and professional fees. Financial Condition, Liquidity and Capital Resources The Company reported a net loss of $395,790, and net income of $720,411 for the years ended March 31, 2024, and 2023, respectively. As of March 31, 2024, working capital (computed as the excess of current assets over current liabilities) decreased by $391,075 from $5,176,475 on March 31, 2023, to $4,785,400 on March 31, 2024. Our operating activities provided cash of $604,076 for the year ended March 31, 2024. Operating activities provided cash principally by decreasing trade accounts receivable and amounts due from factor of $354,794, and by increasing accounts payable and accrued expenses by $1,382,394 and offset by increases in inventories of $688,194, increased prepaid expenses of $61,354, and a net loss of $395,790. 7 Table of Contents Our operating activities provided cash of $1,491,943 for the year ended March 31, 2023. Operating activities provided cash principally from a decrease in inventories of $2,165,429, net income of $720,411, and decreases in accounts receivable and amounts due from factor of $425,165. Operating activities used cash principally due to repayment of accounts payable and accrued expenses of $1,918,493. Our investing activities did not provide or use cash during the fiscal years ended March 31, 2024, or 2023. Financing activities used cash of $690,497 reflecting the decrease in net borrowing from the Factor during the fiscal year ended March 31, 2024. Financing activities used cash of $1,779,176 reflecting the decrease in net borrowing from the Factor of $697,736 and the repayment of the Note Payable to Eyston in the amount of $1,081,440 during the fiscal year ended March 31, 2023. 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); demand in new home construction and new home sales directly impacts sales by our USI Electric subsidiary. Our operating results for the fiscal years ended March 31, 2024, and 2023 continue to be dependent upon 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 continue to improve profitability. Management expects our product offerings, including sealed battery alarm and ground fault circuit interrupter products, will compete in 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 effect on our future operations, and our sales may decline, affecting 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 all of the Company’s assets. 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 $610,000 on March 31, 2024. 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, 2024, and 2023, inventory purchases and other company expenses of approximately $1,699,000 and $1,748,000, 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, 2024, and 2023 may include amounts submitted for personal expense reimbursement and amounts paid by Mr. Grossblatt for inventory purchases or other company expenses and amounted to approximately $276,000 and $217,000, respectively, and the amount outstanding at March 31, 2024 and 2023 is approximately $0 and $0, 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 credit losses, inventories, income taxes, 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. ​ 8 Table of Contents 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, the components of the deferred tax asset, and current global economic conditions, 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 prior 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. 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 cost of completing the sale 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 a provision to cover anticipated credit losses 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. 9 Table of Contents 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 three customers during the fiscal year ended March 31, 2024, that represented 13.7%, 13.7%, and 10.6% of the Company’s net sales. The Company had one customer during the fiscal year ended March 31, 2023, that represented 18.2% of the Company’s net sales. The Company had no customers in the fiscal years ended March 31, 2024 and 2023, that represented greater than 10% of the Company’s accounts receivable. The Company acquires all the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. Products manufactured for us by Eyston amounted to approximately 84.3% and 88.5% of our purchases for the fiscal years ended March 31, 2024, and 2023, respectively. At March 31, 2024, and 2023, the Company had accounts receivable due from Eyston of $133,401 and $75,947, respectively. 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. ITEM 8 . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are included in the Company’s Consolidated Financial Statements and set forth in the pages indicated in Item 15(a) of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.