UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________to____________________________
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered under Section 12(b) of the Exchange Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.0001 per share
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 5(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation ST (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company and an “emerging growth company”. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and ‘emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
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securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No
The
registrant was
As of July 15, 2024, the number of shares of the registrant’s common stock outstanding was .
ZRCN Inc
Table of Contents
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PART I
Forward-Looking Statements
This Annual Report on Form 10-K (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. The forward-looking statements are contained in this Report. In some cases you can identify forward-looking statements by terminology such as “may”, “is expected to”, “anticipates”, “estimates”, “intends”, “plans”, “projection”, “could”, “vision”, “goals”, “objective” and “outlook” and similar expressions. These statements are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, many of which are difficult to predict and generally beyond our control.
You should refer to “Risk Factors” of this Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Company,” refer to the registrant, ZRCN Inc. (“ZRCN” - formerly known as Harmony Energy Technologies Corporation (“Harmony”)) and/or ZRCN’s wholly owned subsidiary, Zircon Corporation (“Zircon”).
Our forward-looking statements are subject to a number of known and unknown risks, uncertainties, assumptions, and other factors that may cause our actual future results, performance, or achievements to differ materially from any future results expressed or implied in this report. Reported results should not be considered an indication of future performance.
All of our forward-looking statements are as of the date of this Annual Report on Form 10-K only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Annual Report on Form 10-K or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Annual Report on Form 10-K, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Annual Report on Form 10-K that modify or impact any of the forward-looking statements contained in this Annual Report on Form 10-K will be deemed to modify or supersede such statements in this Annual Report on Form 10-K.
This Report may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies, clinical trials and publications are reliable, we have not independently verified market and industry data from third-party sources.
Risk Factor Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors”, together with the other information in this Report. If any of the following risks actually occurs (or if any of those listed elsewhere in this Report occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.
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Macroeconomic and Industry Risks
The market for our products is highly price sensitive and subject to change with market conditions.
Business Risks
To remain competitive and stimulate customer demand, we must successfully manage frequent introductions and transitions of products.
We depend on product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.
Future operating results depend upon our ability to obtain products in sufficient quantities on commercially reasonable terms.
We are exposed to the risk of write-downs on the value of our inventory and other assets, in addition to purchase commitment cancellation risk.
Demand for new products below expectations and our ability or inability to develop and introduce new products at favorable economic levels could adversely impact our financial results and prospects for growth.
A significant portion of our revenue is dependent upon a small number of customers, and in particular, Home Depot and Lowe’s, our two largest customers that collectively accounted for approximately 63% of net revenue in fiscal 2024. The loss of any one of these customers would negatively impact our revenues and our results of operations.
If the products that we offer do not reflect our customers’ tastes and preferences, our net sales and profit margins could decrease.
Legal and Regulatory Compliance Risks
We are subject to complex and changing laws and regulations, which expose us to potential liabilities, increased costs and other adverse effects on our business.
We may have inadvertently violated Section 13(k) of the Exchange Act (implementing Section 402 of the Sarbanes-Oxley Act of 2002) as a result of the transition from private to public accounting and may be subject to sanctions as a result.
Financial Risks
We manufacture and sell our products in numerous countries around the world. As a result, we may be exposed to foreign currency risks as we engage in transactions and make investments denominated in foreign currencies.
We are subject to changes in tax rates, the adoption of new U.S. or international tax legislation and exposure to additional tax liabilities.
Our results of operations could be negatively impacted by inflationary or deflationary economic conditions.
Financing Risks
We may incur future indebtedness and may in the future issue additional equity or debt securities to finance our business operations and strategic initiatives.
Tight capital and credit markets or the failure to maintain credit ratings could adversely affect us by limiting our ability to borrow or otherwise access liquidity.
We are exposed to credit risk on our accounts receivable.
Legal, Tax, Regulatory and Compliance Risks
Our brand names are important assets of our businesses and violation of our intellectual property or trademark rights, or the failure of our licensees or vendors to comply with our product quality, manufacturing requirements, marketing standards, and other requirements could negatively impact revenues and brand reputation.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely affect our reputation and results of operations.
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Climate change and climate change legislation or regulations may adversely affect our business.
Our failure to continue to successfully avoid, manage, defend, litigate and accrue for claims and litigation could negatively impact our results of operations or cash flows.
Our products could be recalled.
Other Risks
Our results of operations and earnings may not meet guidance or future expectations.
If we are unable to maintain effective internal controls over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected, which could have a material adverse effect on our financial condition and the trading price of our common stock.
Risks Related to our Common Stock
There is currently no active listing or trading market that has been established for our stock and none might ever exist.
We may conduct offerings of our equity securities in the future, in which case an investor’s proportionate interest may become diluted.
The sale or availability of substantial amounts of our common stock could adversely affect their market price.
Because we do not expect to pay dividends in the foreseeable future, investors must rely on price appreciation of our common stock as the only means of generating a positive return for any investment.
PART I
ITEM 1. BUSINESS
Overview
We are a Silicon Valley-based company operating in Northern California since 1977. Leveraging our proprietary sensor-based technology across a mix of global markets, including commercial and residential buildings, government infrastructure and building information modeling, we are focused on creating new, technical solutions for global applications in the areas of home and workplace safety, project efficiency, and structural data analysis.
We have amassed a multi-generational customer base of professional contractors and do-it-yourselfers who rely on Zircon’s innovative and easy-to-use products to get the job done.
We recently launched the Wood Stud SuperScan® advanced stud finder, our most innovative solution to date. We believe that this is a game-changing hand-held stud finder that will help millions of contractors and do-it-yourselfers better understand what’s behind a wall surface. In addition to locating wood studs, Wood Stud SuperScan® stud finder, also recognizes and filters out metallic and low-density objects, delivering a more accurate picture of wooden objects behind the wall surface.
Our Products
Building on over four decades of proprietary technology development and an extensive patent portfolio, we are the manufacturer of the original StudSensor™ stud finder, and a growing line of electronic hand tools, including MultiScanner™ wall scanners, MetalliScanner® metal detectors, and other electronic scanning, water detection and leveling tools.
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Markets and Distribution
Our products are sold primarily to tool retailers for sale to Do-it-Yourselfers and professional tool users throughout the world.
During the years ended March 31, 2024, and 2023, we generated approximately 72% and 66% of our total revenue from three customers, respectively. Accounts receivable from these customers amounted to approximately 77% and 75% of total accounts receivable as of March 31, 2024 and 2023, respectively.
Intellectual Property
Our policy is to protect and enhance the proprietary technologies, inventions, and improvements that are commercially important to our business by filing patent applications in the U.S. and other jurisdictions related to our proprietary technology, inventions, improvements, and products. We also rely on trademarks, trade secrets, and know-how relating to our proprietary technologies and products, continuing innovation, and in licensing technology and products. This reliance is expected to develop, maintain, and strengthen our proprietary position for our products. We consider our Intellectual Property, including patents, tradenames, trademarks and the like, to be among our most valuable assets (e.g., SuperScan®, StudSensor™, MultiScanner™, MetalliScanner® and other Zircon trademarks).
As of March 31, 2024, we held approximately 130 active and pending patents in the United States and approximately 75 active and pending patents outside of the United States. In addition, we held approximately 20 active and pending trademarks in the United States and approximately 10 active and pending trademarks outside of the United States.
Competition
We face competition from several companies that sell similar scanning products through the same retail channel. Stanley, Black & Decker, Franklin, DeWalt, Ryobi and others compete for space in retail outlets such as Home Depot and Lowe’s. All the competitors use the capacitive technology pioneered by us and have incorporated many other features introduced by us. Competition is characterized by aggressive pricing and generous rebates and marketing contributions resulting in downward pressure on gross margins.
Our ability to compete successfully depends heavily on ensuring the continuing and timely introduction of innovative new products to the marketplace. Principal competitive factors important to Zircon include our reputation, price, product features and performance, product quality and reliability, design innovation, very high fill rates and distribution capability, marketing and customer service.
Supply Chain
Our products are assembled by our affiliate, a single-customer Maquiladora company, Zircon de Mexico, located in Ensenada, Mexico and by various outsourced component manufacturers located in China and elsewhere. Various components used in the production of our products are sourced from suppliers throughout the world.
Our products include proprietary Application Specific Integrated Circuits or ASIC Semiconductors, which are sourced in the US. Due to the potentially long lead time in the production of microprocessors, Zircon typically seeks to maintain six to twelve months of anticipated unit volume in any given period as ‘safety stock’ of its ASIC chips to avoid supply shortages and maintain its industry-leading on-time delivery to its retailers and distributor partners. Zircon has historically maintained a greater than 97% on-time delivery with its retail and distributor sales partners.
Our manufacturing affiliate, Zircon de Mexico, also benefits from a deep-water port in Ensenada, Mexico that facilitates direct delivery of product and parts from international vendors. Access to the port has allowed us to avoid historic supply chain disruptions caused by congestion in US ports or other impediments to shipping and receiving necessary components from offshore suppliers.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of our products to European customers and operations began during the year ended March 31, 2019. The principal shareholders of ZRCN are the shareholders of the affiliates and the affiliates are operated solely for the benefit of Zircon.
Research and Development
During fiscal 2024 and fiscal 2023, we incurred research and development (R&D) expenses of $1.9 million and $1.9 million, respectively. Research and development costs that are not capitalizable under ASC 735-10-25 are expensed as incurred. We engage in research & development as a regular, ongoing part of our operations. Our products include proprietary technology, which we believe creates significant product performance advantages relative to products of our competitors and creating key competitive advantages for the Company. We intend to continue to invest materially in R&D to maintain the competitiveness of our existing products, and to develop and commercialize new technologies for future product and product portfolio expansion activities.
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We do not currently maintain any target or standardized rate of R&D expenditure but may establish such targets in the future.
Employees & Contractors
We strive to build a talented, motivated, and dedicated team. As of March 31, 2024, we had 32 full-time equivalent employees.
We utilize contractors and consultants, including financial advisors, SEC reporting consultants, Investor Relations consultants, and other such providers that management deems appropriate for achieving the goals and objectives laid out by the Board of Directors.
Available Information
When filed, the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”). When filed, such reports and other information filed by the Company with the SEC will be available free of charge at www.zircon.com when such reports are available on the SEC’s website. The Company periodically provides other information for investors on its website, www.zircon.com. Online investor information typically includes press releases and other information about financial performance, information on environmental, social and corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Report is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references for convenience only.
ITEM 1A. RISK FACTORS
Our business, results of operations and financial condition, and reputation as well as the price of our stock, if trading, can be affected by a number of factors, whether currently known or unknown, including those described below. When any one or more of these risks materialize from time to time, ZRCN’s business, results of operations and financial condition, as well as the price of our stock, can be materially and adversely affected.
You should consider carefully the risks described below together with the other information contained in this current report on Form 10-K. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below.
Because of the following factors, as well as other factors affecting our results of operations and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. This discussion of risk factors contains forward-looking statements.
This section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Report.
Risks Related to COVID-19
Our business, results of operations and financial condition generally have been adversely affected and could in the future be materially adversely affected by the COVID-19 pandemic.
COVID-19 has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, temporary closures of businesses, and quarantine etc. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.
The COVID-19 pandemic and the measures taken by many countries in response have adversely affected and could in the future materially adversely impact our business, results of operations and financial condition, as well as the price of our stock. During the course of the pandemic, certain of our suppliers, manufacturing partners and logistical service providers have experienced disruptions, resulting in supply shortages that affected our business, and similar disruptions could occur in the future.
We continue to monitor the situation and take appropriate actions in accordance with the recommendations and requirements of relevant authorities. The extent to which the COVID-19 pandemic may impact our operational and financial performance remains uncertain and will depend on many factors outside our control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products. Additional future impacts on us may include, but are not limited to, material adverse effects on demand for our products, our supply chain and sales, our ability to execute our strategic plans, and our profitability and cost structure.
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To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and stock price, it may also have the effect of heightening many of the other risks described in Part I, below.
Macroeconomic and Industry Risks
Our operations and performance depend significantly on global and regional economic conditions and adverse economic conditions can materially adversely affect our business, results of operations and financial condition.
We generate sales revenue primarily in the North American market with additional sales revenues coming from Europe and Asia. In addition, some of our global supply chain and our manufacturing partners, are located in Mexico and China. As a result, our operations and performance depend significantly on global and regional economic conditions. We take steps to mitigate manufacturing risks through redundancies and regular monitoring of business conditions, but there is no guarantee that these efforts will mitigate all associated risks and variables in the global supply chain can have a material impact on our revenue and profitability.
Adverse macroeconomic conditions, including inflation, slower growth or recession, new or increased tariffs and other barriers to trade, changes to fiscal and monetary policy, tighter credit, higher interest rates, high unemployment and currency fluctuations can materially adversely affect demand for our products. In addition, consumer confidence and spending can be adversely affected in response to financial market volatility, negative financial news, high inflation and interest rate, declines in income or asset values, changes to fuel and other energy costs, labor and healthcare costs and other economic factors.
In addition to an adverse impact on demand for Zircon’s products, uncertainty about, or a decline in, global or regional economic conditions can have a significant impact on Zircon’s suppliers, manufacturing partners, and logistics providers. Potential effects include financial instability; inability to obtain credit to finance operations and purchases of our products; and insolvency.
A downturn in the economic environment can also lead to increased business operation risks for the Company and limitations on our ability to conduct and finance our operations. These and other economic factors can materially adversely affect our business, results of operations and financial condition.
Our business can be impacted by political events, trade and other international disputes, Force Majeure events like war, terrorism, natural disasters, public health issues, industrial accidents and other unforeseen business disruptions.
Political events, trade and other international disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business interruptions can harm or disrupt international commerce and the global economy and could have unknown material adverse effects on us and our customers, suppliers, manufacturing partners, and logistics providers.
We believe that we benefit from growth in international trade. Trade and other international disputes can result in tariffs, sanctions, and other measures that restrict international trade and can adversely affect our business. For example, tensions between the U.S. and China have led to a series of tariffs being imposed by the U.S. on imports from mainland China, as well as other business restrictions. Tariffs increase the cost of our products and the components and raw materials that go into making them. These increased costs adversely impact the gross margin that we earn on our products. Tariffs can also make our products more expensive for customers, which could make our products less competitive and reduce consumer demand. Countries may also adopt other measures, such as controls on imports, that could adversely impact on our operations and supply chain and limit our ability to offer our products as designed. These measures can require us to take various actions, including changing suppliers and restructuring business relationships. Changing our operations in accordance with new or changed trade restrictions can be expensive, time-consuming, disruptive to our operations and distracting to management. Such restrictions can be announced with little or no advance notice, and we may not be able to effectively mitigate all adverse impacts from such measures. Political uncertainty surrounding trade and other international disputes could also have a negative effect on consumer confidence and spending, which could adversely affect our business.
Many of our suppliers and manufacturing partners are in locations that are prone to earthquakes and other natural disasters. In addition, such operations and facilities are subject to the risk of interruption by fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, ransomware and other cybersecurity attacks, labor disputes, public health issues, including pandemics such as the COVID-19 pandemic, and other events beyond our control. Global climate change is resulting in certain types of natural disasters occurring more frequently or with more intense effects. Such events can make it difficult or impossible for us to operate and deliver products to our customers. Following an interruption to our business, we may require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales. Because we rely on single or limited sources for our products, a business interruption affecting such sources would exacerbate any negative consequences to us.
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Our operations are also subject to the risks of industrial accidents at our manufacturing partners. While our partners are required to maintain safe working environments and operations, an industrial accident could occur and could result in disruption to our business. Although we maintain insurance coverage for certain types of losses, such insurance coverage may be insufficient to cover all losses that may arise.
The market for our products is competitive but not subject to rapid technological change. If that were to change, we may be unable to compete effectively.
We take measures that we believe are prudent to manage our technology risks, including investing in research & development (R&D) to ensure that our products maintain technological competitiveness, seeking patent and intellectual property protections in key markets and legally asserting our intellectual property rights when we believe that our rights have been violated. These efforts have proven effective for us historically, but there is no guarantee that our technology, R&D or that our efforts to protect our intellectual property will be wholly successful in every instance going forward. Should efforts prove unsuccessful or insufficient, our technology may not be able to maintain our current level of market competitiveness.
The market for our products is highly price sensitive and subject to change with market conditions.
The United States represents our primary market. The US consumer retail market is a highly competitive market characterized by aggressive price competition and potential downward pressure on gross margins. The hand tool industry is not typically characterized by frequent introduction of new products with short product life cycles. Although customers, and retailers, often seek new product ideas, the industry is not known for rapid adoption of technological advancements. New product ideas often take a year or two to be phased into the Plan-o-gram and onto the retailers’ walls. The electronic tool category has had more innovation than most tools and consequently, more competition has emerged.
Our ability to compete successfully depends heavily on ensuring the continuing and timely introduction of innovative new products to the marketplace. We design and develop our products. As a result, we must make significant investments in R&D. There can be no assurance these investments will achieve the expected returns, and we may not be able to develop and market new products successfully. If we are unable to continue to develop and sell innovative new products with attractive margins, our ability to maintain a competitive advantage could be adversely affected.
We are responsible for creating the electronic wall scanning product category and have over 40 years of experience developing and marketing such tools. Never-the-less, we face substantial competition from companies that have significant technical, marketing, distribution, and other resources. In addition, some of our competitors have broader product lines, lower-priced products, a larger clients base, and a longer operating history. Certain competitors have the resources, experience, or cost structures to provide products at little or no profit or even at a loss.
Our business, results of operations and financial condition will depend on our ability to continually improve our products to maintain their functional and design advantages. There can be no assurance we will be able to continue to provide products that compete effectively.
Business Risks
To remain competitive and stimulate customer demand, we must successfully manage frequent introductions and transitions of products.
Due to the competitive nature of the industry in which we compete, we must continue to introduce new product features and innovations and enhance existing products. We must continue to develop new technologies to stimulate consumer demand for new and upgraded products. We must successfully manage the transition to these new and upgraded products. The success of new product introductions depends on a number of factors, including timely and successful development, market acceptance, our ability to manage the risks associated with production ramp-up issues, the effective management of inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand, and the risk that new products may have quality or other defects or deficiencies. There can be no assurance we will successfully manage future introductions and transitions of products and services.
We depend on product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.
Much of our manufacturing is performed by outsourcing partners located in China. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in proximity to one another. We have also outsourced much of our transportation and logistics management to our affiliate, Zircon de Mexico. While these arrangements can lower operating costs, they also reduce our direct control over production. Such diminished control has from time to time and may in the future have an adverse effect on the quality or quantity of products manufactured, or adversely affect our flexibility to respond to changing conditions. Although we have a robust source inspection process and arrangements with partners contain provisions for product defect expense reimbursement, we remain responsible to the consumer for warranties in the event of product defects. Because of this we may experience an unanticipated product defect liability. While we rely on our partners to adhere to our quality standards, deviations may occur from time to time and could materially adversely affect our business, reputation, results of operations and financial condition.
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We rely on outsourcing suppliers in Mexico and China to manufacture our products. Any failure of these partners to perform can have a negative impact on our cost or finished goods. In addition, manufacturing and logistics or transit to final destinations can be disrupted for a variety of reasons, including natural and man-made disasters, information technology system failures, commercial disputes, military actions, economic, business, labor, environmental, public health or political issues, or international trade disputes.
We have invested in certain manufacturing process equipment, much of which is held by certain of our outsourcing partners. While these arrangements help ensure the supply of the products, if these outsourcing suppliers experience severe financial problems or other disruptions in their business, such continued supply can be reduced or terminated, and the recoverability of manufacturing process equipment or prepayments can be negatively impacted or impossible.
Future operating results depend upon our ability to obtain products in sufficient quantities on commercially reasonable terms.
Because we currently obtain the products from limited sources, we are subject to significant supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations that can materially adversely affect our business, results of operations and financial condition. For example, the global semiconductor industry is experiencing high demand and shortages of supply, which has adversely affected, and could materially adversely affect, our ability to obtain sufficient quantities of products on commercially reasonable terms or at all. While we have entered into agreements for the supply of the products, there can be no assurance we will be able to extend or renew these agreements on similar terms, or at all. The manufacturing partners may suffer from poor financial conditions, which can lead to business failure for the supplier or consolidation within a particular industry, further limiting our ability to obtain products on commercially reasonable terms or at all. The effects of global or regional economic conditions on our suppliers may also affect our ability to obtain products. Therefore, we remain subject to risks of supply shortages and price increases that can materially adversely affect our business, results of operations and financial condition.
Our products may be affected from time to time by design and manufacturing defects that could materially adversely affect our business and result in harm to our reputation.
We offer products that can be affected by design and manufacturing defects. Defects can also exist in components and so products. Component defects could make our products unsafe and create a risk of environmental or property damage and personal injury. These risks may increase as our products are introduced into specialized applications, including healthcare. There can be no assurance that we will be able to detect and fix all issues and defects in the products we offer. Failure to do so can result in widespread technical and performance issues affecting our products. In addition, we can be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, and/or intangible assets, and significant warranty and other expenses, including litigation costs and regulatory fines. Quality problems can also adversely affect the experience for users of our products, and result in harm to our reputation, loss of competitive advantage, poor market acceptance, reduced demand for products, delay in new product introductions and lost sales.
We are exposed to the risk of write-downs on the value of our inventory and other assets, in addition to purchase commitment cancellation risk.
We record write-downs for inventories that have become obsolete or exceed anticipated demand, or for which cost exceeds net realizable value. We review long-lived assets, including capital assets and consigned inventory held at our suppliers’ facilities, for impairment whenever events or circumstances indicate the assets may not be recoverable. If we determine that an impairment has occurred, we record a write-down equal to the amount by which the carrying value of the asset exceeds its fair value. Although we believe our inventory, capital assets, prepayments and other assets and purchase commitments are currently recoverable, there can be no assurance we will not incur write-downs, fees, impairments and other charges.
We are exposed to the risk of maintaining inventory levels that could misalign with sales depending upon changing market conditions.
We order our products and build inventory in advance of product announcements and shipments. Manufacturing purchase obligations cover our forecasted component and manufacturing requirements, typically for periods up to 90 days but with some as long as 18 months. Because the markets are volatile, competitive and subject to technology and price changes, there is a risk we will forecast incorrectly and order or produce excess or insufficient amounts of products, or not fully utilize firm purchase commitments.
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We compete globally with companies that are often larger and better capitalized and if we cannot compete effectively, our business may be negatively affected.
The Company has several large competitors who have entered the market over the years, notably Stanley, Black and Decker, DeWalt and Ryobi. They, along with Franklin Sensor, have offered products in the wall scanning market. While our competitors have made inroads in the market, the Company believes its products outperform the competitors’ products.
Customer consolidation could have a material adverse effect on our business.
The emergence of ‘Big Box’ retail home stores in the hardware and tool retail market has forced many small retailers out of business and reduced the overall number of potential retailers able to purchase our tools. The growth of big box stores has not reduced the number of potential end user customers. However, the effect has been to consolidate buying power in fewer retailers. While the pace of the consolidation has slowed, there remains a risk that the top retailers could absorb or acquire the larger regional retailers, further enhancing their buying power which may put pressure on our prices and profitability.
Demand for new products below expectations and our ability or inability to develop and introduce new products at favorable economic levels could adversely impact our financial results and prospects for growth.
Historically, consumer demand for our products correlates to housing industry trends such as existing home turnover and new home construction. Housing turnover and new home construction are affected by inflation and interest rates. Both increased inflation and higher interest rates can impact demand for homes and new home construction. While the inflation rate has recently been decreasing as a result of US monetary policy, interest rates remain elevated. There can be no guarantee the fed policies will be successful in mitigating all aspects of inflation that affect home turnover and purchasing, nor can we predict future interest rates. If inflation were to continue increasing and interest rate continue to rise, we may not be able to mitigate all adverse impacts on end user demand for our products through traditional methods such as pricing adjustments or internal cost reductions.
A significant portion of our revenue is dependent upon a small number of customers, and in particular, Home Depot and Lowe’s, our two largest customers that collectively accounted for approximately 63% of net revenue in fiscal 2024. The loss of any one of these customers would negatively impact our revenues and our results of operations.
Sales to our top five customers accounted for approximately 78% and 82% of our net sales for the years ended March 31, 2024, and 2023, respectively. Sales to our largest customer, Home Depot, accounted for approximately 40% and 40% of our net sales, respectively and Lowe’s accounted for approximately 23% and 23%, respectively, of our net sales for the years ended March 31, 2024, and 2023. Contractual relationships with our major customers do not guarantee sales volumes or longevity. Consequently, our relationship with our major customers could change at any time. Our business, results of operations and financial condition would be materially and adversely affected if:
| ● | we lose Home Depot or any of our other major customers; | |
| ● | or any of our other major customers purchase fewer of our products; or | |
| ● | we experience any other adverse change in our relationship with Home Depot or any of our other major customers. |
If the products that we offer do not reflect our customers’ tastes and preferences, our net sales and profit margins could decrease.
Our success depends in part on our ability to offer products and services that reflect consumers’ tastes and preferences. Consumers’ tastes are subject to frequent, significant and sometimes unpredictable changes. If the merchandise we offer for sale fails to respond to changes in customer preferences, our sales could suffer and we could be required to mark down unsold inventory, which could depress profit margins, or we could be required to accept returned merchandise in exchange for full credit which could depress net sales and profit margins. In addition, any failure to offer products and services in line with customers’ preferences could allow competitors to gain market share, which could harm our business, results of operations and financial condition.
Our success depends largely on the continued service and availability of highly skilled employees, including key personnel.
Much of our future success depends on the continued availability and service of key personnel, including our Chief Executive Officer, executive team, and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense. If we are unable to recruit and retain highly skilled employees, it could materially adversely affect our business, results of operations and financial condition.
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Key personnel may voluntarily terminate their relationship with us at any time, and competition for qualified personnel is intense. The process of locating additional personnel with the combination of skills and attributes required to carry out our strategy could be lengthy, costly, and disruptive.
If we lose the services of key personnel or fail to replace the services of key personnel who depart, we could experience a severe negative effect on our financial results and stock price. The loss of the services of any key personnel, marketing or other personnel or our failure to attract, integrate, motivate, and retain additional key employees could have a material adverse effect on our business, operating and financial results and stock price.
Our officers and directors have limited experience managing a publicly listed company in the United States.
Our officers and directors have limited experience managing a publicly listed company in the United States. Consequently, we may not be able to raise sufficient funds or operate our company in the public capital markets successfully.
Investment in acquisitions and new business strategies could disrupt our ongoing business, present risks not originally contemplated and adversely affect Zircon’s business, reputation, results of operations and financial condition.
We have invested, and in the future may invest, in new business strategies and acquisitions. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater-than-expected liabilities and expenses, economic, legal, and regulatory challenges associated with operating in new businesses, regions or countries, inadequate return on capital, potential impairment of tangible and intangible assets, and significant write-offs. Investment and acquisition transactions are exposed to additional risks. We cannot assure that we will be able to fully realize the anticipated benefits of a transaction. These new ventures are inherently risky and may not be successful. The failure of any significant investment could adversely affect our business, reputation, results of operations and financial condition.
Legal and Regulatory Compliance Risks
We are subject to complex and changing laws and regulations, which expose us to potential liabilities, increased costs and other adverse effects on our business.
Our operations are subject to complex and changing laws and regulations on subjects, including privacy, data security and data localization; consumer protection; advertising, sales, billing and e-commerce; product liability; intellectual property ownership and infringement; availability of third-party software applications and services; labor and employment; anticorruption; import, export and trade; foreign exchange controls and cash repatriation restrictions; foreign ownership and investment; tax; and environmental, health and safety, including electronic waste, recycling, and climate change.
Compliance with these laws and regulations that affect our business can be onerous and expensive, increasing the cost of conducting our operations. Changes to laws and regulations can adversely affect our business by increasing our costs, limiting our ability to offer a product to customers, requiring changes to our supply chain and business practices or otherwise making our products less attractive to customers. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors or agents will not violate such laws and regulations or our policies and procedures. If we are found to have violated laws and regulations, it could materially adversely affect our business, results of operations and financial condition. Regulatory changes and other actions that materially adversely affect our business may be announced with little or no advance notice and we may not be able to mitigate all adverse impacts from such measures.
We may have inadvertently violated Section 13(k) of the Exchange Act (implementing Section 402 of the Sarbanes-Oxley Act of 2002) as a result of the transition from private to public accounting and may be subject to sanctions as a result.
Section 13(k) of the Exchange Act provides that it is unlawful for a company, such as ours, that has a class of securities registered under Section 12 of the Exchange Act to, directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the company. In March 2022, Zircon Corporation, our wholly-owned subsidiary, loaned our chief executive officer funds to pay certain tax obligations, which was still outstanding when we acquired Zircon in April 2023, which may have violated Section 13(k) of the Exchange Act as a result of the transition from private to public company accounting. The loan was repaid in August 2023 as soon as management became aware of the possible violation. The loan repayment was made by means of an offset to beneficial amounts of our chief executive officer in certain loans to the Company to which offset he did not object. Issuers that are found to have violated Section 13(k) of the Exchange Act may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. The imposition of any of such sanctions on us could have a material adverse effect on our business, financial position, results of operations or cash flows.
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Financial Risks
We manufacture and sell our products in numerous countries around the world. As a result, we may be exposed to foreign currency risks as we engage in transactions and make investments denominated in foreign currencies.
Our primary market currently and historically is the US market, but our products are sold and distributed throughout the world. Further, we manufacture our products internationally and maintains supply and other relationships in Europe, Canada, Mexico, and Asia. Fluctuations in exchange rates across certain markets could adversely affect our business, results of operations and financial condition without warning. We are pursuing growth in international markets and if we experience growth in international markets and as they become a larger portion of our overall revenue from product sales, we expect the impact from currency fluctuations to become more pronounced in conjunction with changes in the geographic composition of sales.
We are subject to changes in tax rates, the adoption of new U.S. or international tax legislation and exposure to additional tax liabilities.
We are subject to taxes in the U.S. and foreign jurisdictions. Due to economic and political conditions, tax laws and tax rates for income taxes and other non-income taxes in various jurisdictions may be subject to significant change. Our effective tax rates are affected by changes in the earnings, changes in the valuation of deferred tax assets and liabilities, the introduction of new taxes, or changes in tax laws or their interpretation, including in the U.S., China and other foreign jurisdictions.
Our results of operations could be negatively impacted by inflationary or deflationary economic conditions.
Inflationary or deflationary economic conditions could affect our ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely and cost-effective manner. We may also experience changes in interest rate environments that impact our cost of capital, the overall strength of the economy and possible demand for our products in the markets in which we operate and sell.
Financing Risks
We may incur future indebtedness and may in the future issue additional equity or debt securities to finance our business operations and strategic initiatives.
Indebtedness or issuances of additional equity or debt securities in connection with mergers or acquisitions, may impact the manner in which we conduct business or our access to external sources of liquidity. The potential issuance of such securities may limit our ability to implement elements of our business strategy and may have a dilutive effect on earnings.
Tight capital and credit markets or the failure to maintain credit ratings could adversely affect us by limiting our ability to borrow or otherwise access liquidity.
We have historically maintained sufficient capital and liquidity to finance our ongoing operations and develop and manufacture our products. As we seek to access capital for growth, tight debt and equity capital markets could impede our ability to access such additional capitalization and impede or delay our growth plans and strategies.
We are exposed to credit risk on our accounts receivable.
Our outstanding trade receivables are not generally covered by collateral or credit insurance. While we have procedures to monitor and limit exposure to credit risk on our trade and non-trade receivables, there can be no assurance such procedures will effectively limit our credit risk and avoid losses, which could have an adverse effect on our financial condition and operating results.
We are not aware of any material credit risks with any of our customers, but there can be no guarantee that such risks will not develop in the future. While we have reserves set aside for doubtful accounts, a business failure by one of our major accounts could adversely impact our profits and operating results.
Legal, Tax, Regulatory and Compliance Risks
Our brand names are important assets of our businesses and violation of our intellectual property or trademark rights, or the failure of our licensees or vendors to comply with our product quality, manufacturing requirements, marketing standards, and other requirements could negatively impact revenues and brand reputation.
We seek to protect our intellectual property rights and our tradenames in the normal course of our business operations. Any inability to protect our other intellectual property rights could also reduce the value of our products and services or diminish our competitiveness. Assertion by us of our intellectual property and trademark rights can also be costly and time-consuming and may materially adversely affect our financial condition and operating results. If we are not able to access the additional liquidity internally or through external means to assert our intellectual property rights, we could incur damage to our brand identity and our sales and results of operations.
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Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely affect our reputation and results of operations.
We regularly move data across national borders, and consequently the Company is subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, greatly increased the jurisdictional reach of European Union law and added a broad array of requirements for handling personal data, including the public disclosure of significant data breaches. Similarly, the California Consumer Privacy Act of 2018 (“CCPA”), which became effective in January 2020, provided, among other things, a new private right of action for data breaches, required companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, and provided consumers with additional rights. The California Privacy Rights Act of 2020, which became effective on January 1, 2023, amends and expands the CCPA, creating new industry requirements, consumer privacy rights and enforcement mechanisms. Virginia and Colorado have also passed robust privacy laws that came or will come into effect on January 1, 2023, and July 1, 2023, respectively. Our reputation and brand and our ability to attract new customers could also be adversely impacted if we fail, or are perceived to have failed, to properly respond to security breaches of our or third party’s information technology systems. Such failure to properly respond could also result in similar exposure to liability.
Additionally, other countries have enacted or are seeking to enact data localization laws that require data to stay within their borders. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries, vendors or manufacturing partners.
Evolving compliance and operational requirements may impose costs that are likely to increase over time. Privacy laws that may be implemented in the future, and court decisions impacting activities across borders, including the Schrems II decision invalidating the EU - U.S. Privacy Shield, will continue to require changes to certain business practices, thereby increasing costs, or may result in negative publicity, require significant management time and attention, and may subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
Climate change and climate change legislation or regulations may adversely affect our business.
Compliance with government regulations, including environmental and climate change regulations, has not had, and based on current information and the applicable laws and regulations currently in effect, is not expected to have a material effect on our capital expenditures, results of operations or competitive position. However, laws and regulations may be changed, accelerated or adopted that impose significant operational restrictions and compliance requirements upon us and which could negatively impact our operating results and financial condition.
Our failure to continue to successfully avoid, manage, defend, litigate and accrue for claims and litigation could negatively impact our results of operations or cash flows.
We are exposed to and may become involved in various litigation matters arising out of the ordinary routine conduct of our business, including, from time to time, actual or threatened litigation relating to such items as commercial transactions, product liability, workers compensation, arrangements between us and our distributors, franchisees or vendors, intellectual property claims and regulatory actions.
In addition, we are subject to environmental laws in each jurisdiction in which business is conducted. Some of our products incorporate substances that are regulated in some jurisdictions in which we conduct manufacturing operations. We have been, and could be in the future, subject to liability if we do not comply with these regulations. In addition, we may in the future be, held responsible for remedial investigations and clean-up costs resulting from the discharge of hazardous substances into the environment, including sites that have never been owned or operated by us but at which we have been identified as a potentially responsible party under federal and state environmental laws and regulations. Changes in environmental and other laws and regulations in both domestic and foreign jurisdictions could adversely affect our operations due to increased costs of compliance and potential liability for non-compliance.
We manufacture products and perform various services that create exposure to product and professional liability claims and litigation. The failure of our products and services to be properly manufactured, configured, installed, designed or delivered, resulting in personal injuries, property damage or business interruption could subject us to claims for damages. The costs associated with defending ongoing or future product liability claims and payment of damages could be substantial. Our reputation could also be adversely affected by such claims, whether or not successful.
There can be no assurance that we will be able to continue to successfully avoid, manage and defend such matters. In addition, given the inherent uncertainties in evaluating certain exposures, actual costs to be incurred in future periods may vary from our estimates for such contingent liabilities.
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Our products could be recalled.
We maintain an awareness of and responsibility for the potential health and safety impacts on our customers. Our product development processes include product safety reviews and extensive testing. Safety reviews are performed at various product development milestones, including a review of product labeling and marking to ensure safety and operational hazards are identified for the customer.
Despite safety and quality reviews, the Consumer Product Safety Commission or other applicable regulatory bodies may require, or Zircon may voluntarily institute, the recall, repair or replacement of our products if those products are found to not be in compliance with applicable standards or regulations. A recall could increase our costs and adversely impact our reputation.
Other Risks
Our results of operations and earnings may not meet guidance or future expectations.
Our results of operations and earnings may not meet guidance or future expectations. We may provide public guidance on expected results of operations for future periods. This guidance would be comprised of forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in this Report and in our other public filings and public statements, and would be based necessarily on assumptions we make at the time we provide such guidance. Our guidance may not always be accurate. We may also choose to withdraw guidance, or lower guidance in future periods. If, in the future, our results of operations for a particular period do not meet our guidance or the expectations of investment analysts, we reduce our guidance for future periods, or we withdraw guidance, the market price of our common stock could decline significantly.
If we are unable to maintain effective internal controls over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected, which could have a material adverse effect on our financial condition and the trading price of our common stock.
As a public company, we are required to design and maintain proper and effective internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 may require that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting, which must be attested to by our independent registered public accounting firm. If we become unable to maintain effective internal controls over financial reporting, our ability to record, process and report financial information timely and accurately could be adversely affected.
Risks Related to our Common Stock
There is currently no active listing or trading market that has been established for our stock and none might ever exist.
We are currently pursuing strategies to develop an active trading market for our common equity shares, either on the Over-the-Counter (OTC) market, or on a listed exchange like the New York Stock Exchange (NYSE) or NASDAQ. Although we believe that these efforts will be successful over time, there is no guarantee that a trading market will develop for our equity shares or that if a trading market does develop, there is no guarantee as to the price per share or any other performance metric relative to the value or tradability of such shares.
We may conduct offerings of our equity securities in the future, in which case an investor’s proportionate interest may become diluted.
If we issue additional common stock shares or securities convertible into our common stock, your percentage interest in the Company could become diluted.
During any future financing, when common stock is issued in return for capital investment, the price per share could be lower than that paid by our current shareholders.
The sale or availability of substantial amounts of our common stock could adversely affect their market price.
Should we become a publicly listed company, sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and could materially impair our ability to raise capital through equity offerings in the future. As of the date of this report, we have 10,016,936 shares of common stock issued and outstanding. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our common stock.
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We have never declared or paid any cash dividends or distributions on our capital stock. And we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors that the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Because we do not expect to pay dividends in the foreseeable future, investors must rely on price appreciation of our common stock as the only means of generating a positive return for any investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the operations and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our common stock as a source for any future dividend income.
Accordingly, a positive return on any investment in our common stock will depend entirely upon any future price appreciation of our common stock. There is no guarantee that the market price of our common stock will appreciate, or even maintain the price at which an investor may have purchased the common stock. Investors may not realize a return on their investment in our common stock and may even lose their entire investment in our common stock.
We may become involved in securities class action litigation that could divert management’s attention and harm our business.
The stock market in general, and the shares of small-cap companies in particular, can experience extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our stock could fall regardless of Zircon’s operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. If the market price or volume of our stock suffers extreme fluctuations, then we may become involved in this type of litigation, which would be expensive and divert management’s attention and resources from managing our business.
In the event we become a publicly listed company, we may also from time to time make forward-looking statements about future operating results and provide some financial guidance to the public markets. Projections may not be made timely or set at expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking statements that adversely affect the stock price could result in losses to investors, stockholder lawsuits or other litigation, sanctions or restrictions issued by the SEC.
Upon becoming a publicly listed company, our common stock may trade below $5.00 per share and be deemed a “penny stock,” which could make it more difficult for investors to sell their shares.
The SEC has adopted rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
| ● | that a broker or dealer approves a person’s account for transactions in penny stocks, and | |
| ● | the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
| ● | obtain financial information and investment experience objectives of the person, and | |
| ● | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
| ● | sets forth the basis on which the broker or dealer made the suitability determination and | |
| ● | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
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Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
We have elected to avail ourself of the extended transition period for complying with new or revised accounting standards pursuant to Section 102(b)(1) of the JOBS Act, and further the JOBS Act will allow us to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in the Company.
For so long as we remain an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies.” In particular, as an emerging growth company we:
| ● | are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002; | |
| ● | are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”); | |
| ● | are not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes); | |
| ● | are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure; | |
| ● | may present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”); and | |
| ● | are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. |
Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended (the “Securities Act”), or such earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1,235,000,000 in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. We would cease to be an emerging growth company on the last day of the fiscal year following the date of the fifth anniversary of our first sale of common equity securities under an effective registration statement or a fiscal year in which we have $1 billion in gross revenues.
We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. Therefore, our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
Our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 1C. CYBERSECURITY
We believe cybersecurity is critical to advancing our technological developments. As a manufacturing and technology company, we face a multitude of cybersecurity threats that range from attacks common to most industries, such as ransomware and denial-of service. Our customers, suppliers, subcontractors, and business partners face similar cybersecurity threats, and a cybersecurity incident impacting us or any of these entities could materially adversely affect our business strategy, performance, and results of operations. These cybersecurity threats and related risks make it imperative that we expend resources on cybersecurity.
Risk Management
We engage third-party services to conduct evaluations of our security controls, whether through penetration testing, independent audits, or consulting on best practices to address new challenges. We have established cybersecurity security awareness training and ongoing monitoring.
In the event of an incident, we intend to follow our cybersecurity incident response plan, which outlines the steps to be followed from incident detection to mitigation, and notification. We contract with external firms that have extensive information technology and program management experience. We have implemented a governance structure and processes to assess, identify, manage, and report cybersecurity risks. As a public company, we must comply with extensive regulations, including requirements for reporting cybersecurity incidents to the SEC. We believe we are positioned to meet the requirements of the SEC. In addition to following SEC guidance and implementing pre-existing third party frameworks, we have developed our own practices and frameworks, which we believe enhance our ability to identify and manage cybersecurity risks. Assessing, identifying, and managing cybersecurity related risks are factored into our overall business approach. We rely heavily on our supply chain to deliver our products and services, and a cybersecurity incident at a clinical site, subcontractor, or business partner could materially adversely impact us. We require that our subcontractors report cybersecurity incidents to us so that we can assess the direct impact of the incident.
ITEM 2. PROPERTIES
We lease facilities under an operating lease in Campbell, CA. through 2027. ZRCN and Zircon are headquartered in a 14,000 square foot building in Campbell, CA.
We believe our facilities are suitable for their present and intended purposes and are operating at a level consistent with the requirements of the industry in which we operate. We also believe that our leases are at competitive or market rates and do not anticipate any difficulty in leasing suitable additional space upon expiration of our current lease terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time and in the normal course of operations, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Other than as indicated below, we are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.
ZRCN is engaged in procedures to protect its proprietary rights and has filed complaints with the Federal Trade Commission and the Customs and Border Patrol.
Zircon Corporation v. Stanley Black & Decker, Inc et al.
Zircon appealed an adverse ruling by the International Trade Commission (“ITC”) in an investigation before the ITC in which Zircon sought an injunction to prevent Stanley, Black & Decker, Inc. and its wholly owned subsidiary, Black & Decker (U.S.), Inc. (together “SBD”) from importing and selling in the United States certain products alleged by Zircon to infringe its patents. The appeal was initiated by Zircon following the ruling by the ITC overturning the decision by Judge Charles Bullock, Presiding Judge of the ITC issued on October 7, 2021, finding that three patents at issue in the investigation were both valid and practiced by Zircon and that SBD infringed Zircon’s auto recalibration patent. The Commission found that while Zircon’s auto recalibration patent met all objective requirements for validity, it reversed the Presiding Judge on the subjective requirement of non-obviousness. Zircon then timely appealed to the Federal Circuit Court of Appeal (“FCCA”) and the matter was heard de novo before the FCCA on January 9, 2024. On May 8, 2024, the FCCA denied Zircon’s request for an order from the ITC excluding importation of certain SBD products. However, Zircon’s action against SBD for damages filed December 9, 2019 in the Fed District Court in the Northern District of California, under stay pending the disposition of the FCCA matter between Zircon and the ITC, may now move forward and Zircon is reviewing and considering its options. All charges in connection with the litigation versus SBD have been expensed to date and no damage claim against zircon have been filed in this matter. The parties involved in the matter are meeting and conferring as required by the Court.
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Morgenthaler, et al. v. Zircon, et al.
Zircon was one of more than twenty (20) defendants named in a suit filed in Los Angeles County, California Superior Court on behalf of three family members injured in an accident between an automobile and a truck and trailer. The accident occurred in May 2017 and the Complaint was filed on December 1, 2017. Zircon, represented in the case by insurance defense lawyers selected and paid for by the company’s liability insurance carrier, The Travelers Indemnity Company, had no direct or indirect involvement in the accident and had no goods on the truck at the time of the accident. Zircon argued that it was neither the cause in fact nor the proximate cause of the accident or of the damages suffered by the Plaintiffs, and filed a Motion for Summary Judgement. The trial court judge found that there were “…no triable issues of fact, and that the moving party, Defendant Zircon Corporation, is entitled to judgement as a matter of law…”. The Order on the Motion was entered on May 23, 2022 and the Plaintiffs appealed. On January 30, 2024, the California Second District Court of Appeal affirmed the trial court’s Summary Judgement in favor of Zircon. Plaintiffs did not further appeal the January 30, 2024 affirmation by the California Second District Court of Appeal of the trial court’s Summary Judgement in favor of Zircon, and the matter is closed with regard to Zircon.
Claim Asserted by Mr. Michael Green
In April 2024, Mr. Michael Green, an individual in Great Britain, asserted violation by Zircon in its U.S. website of certain privacy protections under the laws of Great Britain. The Company believes its U.S. website has not violated the laws of Great Britain and that, in any event, has responded stating such laws do not apply outside Great Britain. As of the date of filing this Annual Report on Form 10-K, Mr. Green has not responded to the Company and has not asserted any claim for damages.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is neither traded nor quoted at any market.
Holders of Our Common Stock
As of March 31, 2024, there were 96 stockholders of record of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Recent Sales of Unregistered Securities
There have been no sales of unregistered securities.
ITEM 6. [Reserved.]
| 19 |
SELECTED FINANCIAL DATA
The following selected consolidated financial information has been derived from the audited consolidated financial statements of Zircon. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes to those statements included therein.
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net Sales | $ | 31,519,187 | $ | 30,499,470 | ||||
| Cost of goods sold | 17,689,837 | 18,266,095 | ||||||
| Gross Profit | 13,829,350 | 12,233,375 | ||||||
| Selling, administrative and other costs | 12,993,111 | 11,980,960 | ||||||
| Operating Income | 836,239 | 252,415 | ||||||
| Other Expenses | ||||||||
| Interest expense | 739,576 | 451,677 | ||||||
| Other loss | 31,069 | 29,133 | ||||||
| Loss on foreign currency translation | 84,878 | 48,106 | ||||||
| Total other expenses | 855,523 | 528,916 | ||||||
| Loss before income taxes | (19,284 | ) | (276,501 | ) | ||||
| Income tax benefit (expense) | 69,839 | (158,202 | ) | |||||
| Net income (loss) | $ | 50,555 | $ | (434,703 | ) | |||
| Less: Net income attributable to non-controlling interests | 270,013 | 232,869 | ||||||
| Net loss attributable to ZRCN Inc. common stockholders | $ | (219,458 | ) | $ | (667,572 | ) | ||
| Foreign currency translation adjustment | (203,410 | ) | 11,445 | |||||
| Comprehensive loss attributable to ZRCN Inc. common stockholders | $ | (152,855 | ) | $ | (423,258 | ) | ||
| Net loss per share attributable to ZRCN Inc. common shareholders: | ||||||||
| Basic and diluted | (0.02 | ) | $ | (1.34 | ) | |||
| Weighted average common shares outstanding: | ||||||||
| Basic and diluted | 9,573,088 | 500,000 | ||||||
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Consolidated Statements of Operations Data: | ||||||||
| Cash and cash equivalents | $ | 502,162 | $ | 29,015 | ||||
| Working capital | 14,086,990 | 15,092,755 | ||||||
| Total assets | 27,614,106 | 24,942,433 | ||||||
| Long-term obligations | 9,237,680 | 8,966,703 | ||||||
| Total stockholders’ equity | 8,926,352 | 9,826,891 | ||||||
| 20 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management discussion and analysis of the financial position and results of operations (“MD&A”) should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included elsewhere in this Report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among others, those listed under “Forward-Looking Statements” and “Risk Factors” and those included elsewhere in this report.
OVERVIEW
Zircon is a Silicon Valley-based company operating in Northern California since 1977. leveraging its proprietary sensor-based technology across a mix of global markets, including commercial and residential buildings, government infrastructure and building information modeling. Zircon is focused on creating new, technical solutions for global applications in the areas of home and workplace safety, project efficiency, and structural data analysis.
Zircon benefits from a multi-generational customer base of professional contractors and do-it-yourselfers who rely on Zircon’s innovative and easy-to-use products to get the job done.
RESULTS OF OPERATIONS
The Company’s selected financial information for fiscal 2024 and fiscal 2023 is as follows. All the data are presented in United States dollars.
Financial Position Analysis
The information presented as of March 31 of each of the past two (2) years represents the information of Zircon Corporation.
| March 31, 2024 | March 31, 2023 | |||||||
| Assets | 27,614,106 | 24,942,433 | ||||||
| Liabilities | 18,687,754 | 15,115,542 | ||||||
| Equity | 8,926,352 | 9,826,891 | ||||||
Assets
Total assets as of March 31, 2024, were $27.6 million compared to $24.9 million as of March 31, 2023, which was an increase of approximately $2.7 million. This increase was driven primarily by an increase in cash of $0.5 million, an increase in accounts receivable of approximately $1.1 million, an increase in inventory of approximately $0.9 million, and increase in deferred tax assets of $0.5 million and an increase in the federal tax deposit of $0.1 million offset by a decrease in prepaids and other assets of $0.2 million and a decrease in operating right-of-use assets of $0.2 million.
Liabilities
Total liabilities as of March 31, 2024, were $18.7 million compared to $15.1 million as of March 31, 2023, which was an increase of approximately $3.6 million. This increase was driven primarily by an increase in our line of credit of $0.8 million, an increase in accounts payable of approximately $3.2 million, and an increase in accrued expenses of $0.2 million offset by a decrease in notes payable of $0.2 million, a decrease in notes payable to the Stauss Family Administrative Trust of $0.2 million, and a decrease in the operating lease liability of $0.2 million.
Equity
Total equity as of March 31, 2024, was $8.9 million compared to $9.8 million as of March 31, 2023, which was a decrease of approximately $0.9 million. This decrease was driven primarily by costs associated with the Harmony merger of $1.1 million, a net loss of $0.2 million and a foreign currency translation loss of $0.2 million offset by a non-cash gain on our settlement of a note payable with the Status Family Trust of $0.2 million, non-controlling interests of $0.3 million and the issuance of common stock for advisory services of $0.1 million.
| 21 |
Operating Results Analysis
Readers are invited to take into consideration the consolidated operating results of Zircon Corporation for the fiscal years ended March 31, 2024, and 2023.
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net Sales | $ | 31,519,187 | $ | 30,499,470 | ||||
| Cost of goods sold | 17,689,837 | 18,266,095 | ||||||
| Gross Profit | 13,829,350 | 12,233,375 | ||||||
| Operating Expenses | ||||||||
| General & administrative | 6,701,914 | 5,369,848 | ||||||
| Marketing & selling | 4,373,250 | 4,708,971 | ||||||
| Research and development | 1,917,947 | 1,902,141 | ||||||
| Total Operating Expenses | 12,993,111 | 11,980,960 | ||||||
| Operating Income | 836,239 | 252,415 | ||||||
| Other Expenses | ||||||||
| Interest expense | 739,576 | 451,677 | ||||||
| Other loss | 31,069 | 29,133 | ||||||
| Loss on foreign currency translation | 84,878 | 48,106 | ||||||
| Total other expenses | 855,523 | 528,916 | ||||||
| Loss before income taxes | (19,284 | ) | (276,501 | ) | ||||
| Income tax benefit (expense) | 69,839 | (158,202 | ) | |||||
| Net income (loss) | $ | 50,555 | $ | (434,703 | ) | |||
| Less: Net income attributable to non-controlling interests | 270,013 | 232,869 | ||||||
| Net loss attributable to ZRCN Inc. common stockholders | $ | (219,458 | ) | $ | (667,572 | ) | ||
| Foreign currency translation adjustment | (203,410 | ) | 11,445 | |||||
| Comprehensive loss attributable to ZRCN Inc. common stockholders | $ | (152,855 | ) | $ | (423,258 | ) | ||
Sales revenue and gross margin
Revenue for fiscal 2024 was $31.5 million compared to $30.5 million in fiscal 2023 which was an increase of $1.0 million, or 3%. This increase was driven primarily by increased sales in the United States and Asia and reduced sales discounts. Gross profit for fiscal 2024 was $13.8 million, or 43.9% compared to 12.2 million, or 40.1%, which was an increase of $1.6 million, or 13%, and 3.8%, respectively. The increase in gross profit was driven by improved pricing and the increase in gross margin was driven by reduced manufacturing expenses.
Research and development
Research and development expenses for fiscal 2024 were $1.9 million compared to $1.9 million in fiscal 2023. The increase in 2024 was $15,000, or 1%, and was driven by consulting expenses.
Marketing and selling
Marketing and selling expenses for fiscal 2024 were $4.4 million compared to $4.7 million in fiscal 2023 which was a decrease of $0.3 million, or 7%. This decrease was driven primarily by a reduction in the use of consulting services and reduced advertising.
Administrative expenses
General and administrative expenses for fiscal 2024 were $6.7 million compared to $5.4 million in fiscal 2023 which was an increase of $1.3 million, or 25%. This increase was driven primarily by consulting and legal expenses associated with the Harmony merger, payroll expenses, and corporate service expenses.
| 22 |
Stock based compensation
Warrants with a fair value of $301,572 were issued during the year ended March 31, 2024.
Other expenses
Other expenses for fiscal 2024 were $0.9 million compared to $0.5 million in fiscal 2023 which was an increase of $0.4 million, or 62%. This increase was driven primarily by an increase in interest expense of $0.3 million and an increase in foreign exchange losses of $37,000. The increase in interest expense was driven by an increase in our average line of credit balance during fiscal 2024.
Zircon has notes payable to the Stauss Family Administrative Trust to repay loans made to Zircon. The principal balance of $667,230 is due and payable in December 2024. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit payable to the bank and no payment is to be made on the note without prior approval from the bank. On March 31, 2024 the Stauss Family Administrative Trust and the Company agreed to extend the maturity date of the Notes Payable to the trust to December 31, 2025.
Interest expense for the notes in fiscal 2024 was $30,399 while in fiscal 2023 the expense was $50,601.
Provision for income taxes
The benefit from income taxes for fiscal 2024 was $70.000 compared to a provision of $0.2 million in fiscal 2023 which was an decrease of $0.2 million, or 144%. This decrease was driven primarily by a change in our deferred tax asset position.
Other comprehensive income (loss)
Comprehensive income (loss) for all periods presented is comprised primarily of net income (loss) and foreign currency translation adjustments. The change in foreign currency translation adjustment was a loss of $0.2 million in fiscal 2024 compared to a gain of $11,000 which was a decrease of $0.2 million. This change was primarily driven by unfavorable exchange rate changes in Mexico.
Cash Flow Analysis
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities | $ | 1,183,344 | $ | 1,030,586 | ||||
| Investing activities | (1,168,607 | ) | (794,262 | ) | ||||
| Financing activities | 590,039 | (466,034 | ) | |||||
| Effect of exchange rate changes | (131,629 | ) | (7,551 | ) | ||||
| Net increase (decrease) in cash | $ | 473,147 | $ | (237,261 | ) | |||
Operating Activities
During the year ended March 31, 2024, net cash provided by operating activities was $1.2 million. This increase was due to net income of $51,000, non-cash expenses for depreciation, amortization, and inventory obsolescence impairment of $1.3 million, provision for bad debt and foreign currency losses of $89,000, a decrease in prepaids and other assets of $0.2 million, and common stock issued for advisory services of $0.1 million, an increase in accounts payable and accrued expenses and other current liabilities of $2.8 million, offset by an increase in accounts receivable of $1.1 million, an increase in inventory of $1.4 million, and increase in deferred tax assets of $0.5 million, an increase in the federal tax deposit of $78,000, and a decrease in operating lease liabilities of $0.2 million.
During the year ended March 31, 2023, net cash provided by operating activities was $1.0 million. This increase was due to a net loss of $0.4 million being offset by non-cash expenses for depreciation and amortization of $1.3 million and bad debt expense of $2,000, a decrease in accounts receivable of $94,000, a decrease in inventory of $1.2 million, a decrease in prepaids and other assets of $0.4 million, an increase in accrued expenses of $0.1 million, offset by an increase in the federal tax deposit of $64,000, a decrease in accounts payable of $1.5 million, and a decrease in operating lease liabilities of $54,000.
| 23 |
Investing Activities
During the year ended March 31, 2024, net cash used in investing activities was $1.2 million. This decrease was due to purchases of property and equipment of $0.6 million, the net effect of the Harmony merger of $0.5 million, and investments in intangible assets of $68,000.
During the year ended March 31, 2023, net cash used in investing activities was $0.8 million. This decrease was due to purchases of property and equipment of $0.7 million, investments in intangible assets of $95,000, and the issuance to a shareholder of a note receivable of $29,000.
Financing Activities
During the year ended March 31, 2024, net cash provided by financing activities was $0.6 million. This increase was due to borrowings under the Company’s line of credit of $10.9 million offset by repayment of borrowings of $10.1 million, a bank overdraft of $0.4 million offset by repayment of debt assumed as part of the Harmony merger of $0.3 million and repayments of notes payable of $0.3 million.
During the year ended March 31, 2023, net cash used in financing activities was $0.5 million. This decrease was due to borrowings under the Company’s line of credit of $19.0 million offset by repayment of borrowings of $18.9 million, repayments of notes payable of $0.4 million, and a distribution to stockholders of $0.2 million for S Corp related pass-through tax liabilities.
Liquidity, Capital Resources and Sources of Financing
As of March 31, 2024, the Company had a cash balance of $0.5 million and working capital of $14.1 million. Working capital as of March 31, 2023 was $15.1 million. The decrease of $1.0 million was driven primarily by an increase in accounts payable offset by a smaller, combined increase in accounts receivable and inventory. To date the Company has been financed primarily through retained earnings, loans and credit lines secured by accounts receivable, inventory and fixed assets. The Company believes that it has sufficient liquidity and access to loans and credit lines to fund its operations and working capital requirements for the next 12 months.
On May 31, 2024, the Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with FGI Worldwide LLC, as Agent for the lender (“FGI”). The Credit Agreement provides for a $15 million senior secured revolving credit facility (the “Credit Facility”) available to be used by the Company, Zircon and its Affiliates for replacement and discharge of the Company’s current US Bank loan of $8,750,000 and matures on May 31, 2027. The Company, Zircon and the Affiliates are guarantors of all obligations under the Credit Agreement and the Company’s four principal shareholders are limited guarantors thereof.
The Credit Agreement stipulates a base rate measured by the sum of Term SOFR for a period of one month, as published by the CME Group Benchmark Administration Limited (or any successor administration of Term SOFR) two business days prior to the beginning of the calendar month and a percentage equal to 0.10% (10 basis points) per annum. If at any time the displayed Term SOFR is less than 0.00%, Term SOFR is deemed to be 0.00% for the purposes of the credit facility.
The Credit Agreement bears interest measured by such outstanding amounts on receivable advances and inventory advances that accrue interest at the greater of 5.25% per annum or 3.00% above the base rate. Interest is charged on the last day of each month on a daily net balance of funds advanced or otherwise charged to the Company.
The Credit Agreement requires the Company to comply with maximum total net leverage and minimum fixed charge coverage ratios.
| 24 |
Information on Outstanding Securities
The following table sets out the number of common shares and warrants outstanding as of the date hereof:
| Information on Outstanding Securities | ||||
| Common shares issued and outstanding | 10,016,936 | |||
| Potential issuance of common shares | ||||
| Warrants | 217,184 | |||
| Stock options | - | |||
| Fully diluted shares | 10,234,120 | |||
In accordance with an agreement with S.C.E. Partners (“SCE”) dated May 15, 2023, the Company will issue an additional 25,000 common shares to SCE through June 30, 2024.
Related Party Transactions
Zircon is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if Zircon operated as an unaffiliated entity.
Zircon has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “Contractor”), an entity which is owned by certain shareholders of Zircon. Under the terms of the agreement, Zircon provides materials, technical assistance, and expertise to the Contractor, and the Contractor assembles certain of Zircon’s products.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of Zircon’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of Zircon.
The Company leases a 14,000 square foot facility from a trust owned by the Stauss Family Administrative Trust.
The Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. As of March 31, 2024, principal balance of $667,230 is due and payable in December 2025. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit note payable to the bank and no payment is to be made on the note without prior approval from the bank. In the second quarter of 2023, a portion of the note payable to Stauss Family Administrative Trust was settled as a non cash transaction against the note receivable from one stockholder for $240,190.
For the years ended March 31, 2024 and 2023 the interest expense on notes payable to the Stauss Family Administrative Trust totaled $30,399 and $50,601 respectively.
On March 31, 2024 the Stauss Family Administrative Trust and the Company agreed to extend the maturity date of the Notes Payable to the trust to December 31, 2025.
Off-Balance Sheet Arrangements
ZRCN has no off-balance sheet arrangements.
Contractual Obligations and Commitments
As of March 31, 2024, we did not have any material contractual obligations.
Estimates, Judgments and Assumptions
ZRCN prepares its consolidated financial statements in accordance with US GAAP, which require management to make estimates and assumptions that affect the amounts of its assets and liabilities, the information provided with regard to future assets and liabilities as well as the amounts of revenues and expenses for the relevant periods. Readers are invited to refer the Note 3 of the financial statements for the year ended March 31, 2024, for details.
Critical Accounting Policies and Estimates
Please refer to Note 3 Summary of Significant Accounting Policies of the Financial Statements for disclosures regarding the critical accounting policies related to our business.
Recently Issued Accounting Standards
Our recently issued accounting standards are included in Note 3 Summary of Significant Accounting Policies of the Financial Statements for disclosures regarding the critical accounting policies related to our business.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
ZRCN’s exposure to changes in interest rates relates primarily to Zircon’s cash, cash equivalents and outstanding debts.
Foreign Currency & Exchange Risk
ZRCN sources parts and materials from foreign vendors and sells its products in various foreign markets around the world. Changes in foreign currency exchange for the purchase of components from vendors and the sale of products in foreign markets can have a material impact on the Company’s results of operations and liquidity. The Company could hedge or take other steps to mitigate the impact from foreign currency exchange rates, but there is no guarantee that these efforts will be successful in every instance.
| 25 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
| Report
of Independent Registered Public Accounting Firm (PCAOB ID: |
F-1 |
| Balance Sheets | F-2 |
| Statements of Operations | F-3 |
| Statements of Stockholders’ Equity | F-4 |
| Statements of Cash Flows | F-5 |
| Notes to Financial Statements | F-6 |
| 26 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ZRCN Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ZRCN Inc. (the Company) as of March 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders’ equity and cash flow for the years ended March 31, 2024 and 2023 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flows for the years ended March 31, 2024 and 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters to be communicated below, are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements taken as a whole and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
We did not identify any critical audit matters that need to be communicated.
| /s/
|
|
| We have served as the Company’s auditor since 2023. | |
July 15, 2024 |
ASSURANCE DIMENSIONS CERTIFIED PUBLIC ACCOUNTANTS & ASSOCIATES
also d/b/a McNAMARA and ASSOCIATES, PLLC
TAMPA BAY: 4920 W Cypress Street, Suite 102 |Tampa, FL 33607 | Office: 813.443.5048 | Fax: 813.443.5053
JACKSONVILLE: 4720 Salisbury Road, Suite 223 | Jacksonville, FL 32256 | Office: 888.410.2323 | Fax: 813.443.5053
ORLANDO: 1800 Pembrook Drive, Suite 300 | Orlando, FL 32810 | Office: 888.410.2323 | Fax: 813.443.5053
SOUTH FLORIDA: 3111 N. University Drive, Suite 621 | Coral Springs, FL 33065 | Office: 754.800.3400 | Fax: 813.443.5053
www.assurancedimensions.com
“Assurance Dimensions” is the brand name under which Assurance Dimensions, LLC including its subsidiary McNamara and Associates, LLC (referred together as “AD LLC”) and AD Advisors, LLC (“AD Advisors”), provide professional services. AD LLC and AD Advisors practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable laws, regulations, and professional standards. AD LLC is a licensed independent CPA firm that provides attest services to its clients, and AD Advisors provide tax and business consulting services to their clients. AD Advisors, and its subsidiary entities are not licensed CPA firms.
| F-1 |
ZRCN Inc.
CONSOLIDATED BALANCE SHEETS
| March 31, 2024 | March 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts
receivable, net of provision for credit losses of approximately $ | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Deferred tax asset | ||||||||
| Operating lease right-of-use assets | ||||||||
| Federal tax deposit | ||||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Notes payable, current portion | ||||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| Line of credit | ||||||||
| Notes payable, net of current portion | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Notes payable to Stauss Family Administrative Trust | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock; at $ par value, shares authorized, and shares issued and outstanding as of March 31, 2024 and 2023, respectively | ||||||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Note receivable from stockholder | ( | ) | ||||||
| Retained earnings | ||||||||
| Total equity attributable to ZRCN Inc. stockholders | ||||||||
| Non-controlling interests in variable interest entities | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Marketing and selling | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Income from operations | ||||||||
| Other expenses: | ||||||||
| Interest expense | ||||||||
| Other expenses | ||||||||
| Loss on foreign currency transactions | ||||||||
| Total other expenses | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit (expense) | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Less: Net income attributable to non-controlling interests | ||||||||
| Net loss attributable to ZRCN Inc. common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) | $ | $ | ( | ) | ||||
| Change in foreign currency translation adjustment | ( | ) | ||||||
| Comprehensive loss | ( | ) | ( | ) | ||||
| Less: Net income attributable to non-controlling interests | ||||||||
| Less: Other comprehensive (loss) income attributable to noncontrolling interest | ( | ) | ||||||
| Comprehensive loss attributable to ZRCN common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share attributable to ZRCN Inc.: | ||||||||
| Basic and diluted | $ | ) | $ | ) | ||||
| Weighted average common shares outstanding: | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Common Stock | Accumulated Other Comprehensive | Note Receivable from | Retained | Total Equity Attributable | Non- controlling | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | (Loss) Income | Stockholder | Earnings | to ZRCN | Interests | Equity | |||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | $ | | ||||||||||||||||||||||
| Stockholder distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Advance to stockholder | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Change in foreign currency translation adjustment | — | |||||||||||||||||||||||||||||||
| Net (loss) income | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Merger with Harmony | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for advisory services | ||||||||||||||||||||||||||||||||
| Noncash settlement of Stauss note payable for settlement of note receivable from stockholder | — | |||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net (loss) income | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance - March 31, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of right-of-use assets | ||||||||
| Inventory obsolescence impairment | ||||||||
| Provision for credit losses | ||||||||
| Loss on foreign currency transactions | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Common stock issued for advisory services | | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Federal tax deposit | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Effect of Harmony Merger, net of cash acquired | ( | ) | ||||||
| Investment in intangible assets | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Issuance of note receivable to shareholder | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Repayment of debt assumed in Harmony Merger | ( | ) | ||||||
| Distributions to stockholders | ( | ) | ||||||
| Borrowing on line of credit | ||||||||
| Repayment on line of credit | ( | ) | ( | ) | ||||
| Bank overdraft | | |||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate fluctuations on cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Common stock issued in connection with Harmony merger | $ | $ | ||||||
| Fair value of Advisor Warrants issued to effectuate Harmony Merger | $ | $ | ||||||
| Assets acquired in Harmony Merger | $ | $ | ||||||
| Liabilities assumed in Harmony Merger | $ | ( | ) | $ | ||||
| Noncash settlement of Stauss note payable for settlement of note receivable from stockholder | $ | $ | ||||||
| ROU assets obtained in exchange for lease obligations in connection with adoption of ASC 842 | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Common stock issued in connection with Harmony merger | $ | $ | ||||||
| Fair value of Advisor Warrants issued to effectuate Harmony Merger | $ | $ | ||||||
| Assets acquired in Harmony Merger | $ | $ | ||||||
| Liabilities assumed in Harmony Merger | $ | ( | ) | $ | ||||
| Noncash settlement of Stauss note payable for settlement of note receivable from stockholder | $ | $ | ||||||
| ROU assets obtained in exchange for lease obligations in connection with adoption of ASC 842 | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
1. Organization
The Business
On April 14, 2023 (the “Closing Date”), Zircon Corporation (“Zircon”) effectuated a merger and reorganization with Harmony Energy Technologies, Inc. (“Harmony”), a Delaware Corporation, ZRCN Inc., a California corporation and a wholly owned subsidiary of Harmony (the “Merger Sub”). The merger leverages Zircon’s sensor-based, ASIC (“Application-Specific Integrated Circuits”) processor technology and patent portfolio, to accelerate growth in its product lines and global markets as a publicly traded company. The combination of Harmony and Zircon was effectuated through a merger (the “Merger”) of Merger Sub into Zircon. The separate existence of Merger Sub ceased, and Merger Sub was merged with and into Zircon (Zircon, as the surviving corporation following the Merger). Upon completion of the Merger, Harmony changed its name to ZRCN Inc. (“ZRCN” or the “Company”). While Harmony was the legal acquirer of Zircon in the Merger, the Merger is treated as a reverse recapitalization, whereby Zircon is deemed to be the accounting acquirer, and the historical financial statements of Zircon became the historical financial statements of Harmony (renamed ZRCN Inc.) upon the closing of the Merger. Under this method of accounting, Harmony was treated as the “acquired” company and Zircon is treated as the acquirer for financial reporting purposes.
Accordingly, for accounting purposes, the Merger was treated as the equivalent of Zircon issuing stock for the net assets of Harmony, accompanied by a recapitalization. The net assets of Harmony were stated at historical cost, with no goodwill or other intangible assets recorded.
Zircon was incorporated in California in 1977. The Company, through Zircon, is principally engaged in the design and manufacture of electronic-based consumer hardware and sells its products primarily to retail outlets located throughout the United States, Canada, Japan and Europe. The Company and Zircon operate from their headquarters located in Campbell, California and an affiliate entity of Zircon, Zircon de Mexico S.A. de C.V., located in Ensenada, Mexico. The operations of the Company and Zircon are supported also by an affiliated entity of Zircon, Zircon Corporation Limited, located in the United Kingdom.
2. Liquidity
As
of March 31, 2024, the Company had $
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). On this basis, revenue and the related assets are recognized when services are performed and products are sold, and expenses and related liabilities are recorded when the obligation is incurred.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ZRCN as well as its variable interest entities. The Company consolidates all entities over which the Company has the power to govern the financial and operating policies and therefore exercises control, and upon which the Company has a controlling financial interest. The entities are consolidated from the date at which the Company obtains control and are de-consolidated from the date at which control ceases. All intercompany balances and transactions have been eliminated. Accounting policies of the entities have been revised where necessary to ensure consistency with the policies adopted by the Company.
| F-6 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Under Accounting Standards Codification (“ASC”) Topic 810-10-25, Consolidation, Zircon de Mexico S.A. de C.V. (“ZDM”) and Zircon Corporation Limited (“Zircon UK”) have been determined to be variable interest entities with Zircon as the primary beneficiary. Therefore, the financial statements of ZDM and Zircon UK are consolidated with Zircon and the Company, and all significant intercompany transactions and balances have been eliminated.
Reverse Stock Split
On
May 10, 2023, ZRCN authorized a
Variable Interest Entities
In accordance with ASC 810, Consolidation (“ASC 810”), the Company assesses whether it has an explicit or implicit variable interest in legal entities in which it has a financial relationship and, if so, whether or not those entities are variable interest entities (“VIEs”). Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with changes in the fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which directly absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly, such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity, its organizational structure, including decision making ability over the activities that most significantly impact the VIE’s economic performance. For those entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.
If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company - that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.
The Company has determined that ZDM and Zircon UK are variable interest entities with the Company’s wholly owned subsidiary, Zircon, as the primary beneficiary, and thus the Company, with the ability to exercise control, as determined under the guidance of ASC 810. In its determination, management considered the following qualitative and quantitative factors:
| a. | the overall purpose and design of the entities, which exist primarily for the benefit of or on behalf of the Company and; | |
| b. | the Company’s contractual and common control arrangements with the VIEs, through which it gains both the power to direct the activities that most significantly impact their economic performance, and the obligation to absorb losses and receive benefits that potentially could be significant to the VIEs; | |
| c. | the equity at risk of the entities is not sufficient to finance the entities’ activities without additional subordinated financial support by the Company (i.e., the entities are thinly capitalized). |
| F-7 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
The following table summarizes the carrying amount of the assets and liabilities of ZDM included in the Company’s consolidated balance sheets at March 31, 2024 and 2023 (after elimination of intercompany transactions and balances):
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | $ | |||||||
| Prepaid expenses and other assets | $ | |||||||
| Total current assets | ||||||||
| Property and equipment | $ | |||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | $ | |||||||
| Total current liabilities | $ | $ | ||||||
The following table summarizes the carrying amount of the assets and liabilities of Zircon UK included in the Company’s consolidated balance sheets at March 31, 2024 and 2023 (after elimination of intercompany transactions and balances):
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Total current assets | ||||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Total current liabilities | $ | $ | ||||||
Non-controlling Interests
The Company follows ASC 810, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated entities and the loss of control of those entities. Non-controlling interest positions, which represent 100% of the activity in the Company’s consolidated entities before intercompany transactions have been eliminated, are reported as a separate component of consolidated stockholders’ equity from the equity attributable to ZRCN’s stockholders for all years presented. The net income attributed to the NCI’s is separately designated in the accompanying comprehensive loss.
| F-8 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Significant estimates used in preparing these consolidated financial statements include the provision for credit losses, allowance for inventory obsolescence, allocation of overhead to inventory, estimated future benefit and fair value of intangible assets, accrued rebates and advertising allowances, useful lives and depreciation methods of property and equipment, and uncertain tax positions. It is at least reasonably possible that the significant estimates used will change within the next year.
Cash
The
carrying value of cash approximates fair value due to the short-term nature of the instruments. From time to time, the Company may be
in the position of a “book overdraft” in which outstanding checks exceed cash. The Company classifies book overdrafts in
accounts payable within its consolidated balance sheets, and classifies the change in accounts payable associated with book overdrafts
as an operating activity within the consolidated statement of cash flows. As of March 31, 2024, the book overdraft included within accounts
payable was $
Accounts Receivable, Net
Accounts receivables are stated at the amount the Company expects to collect. The Company provides credit without requiring collateral, in the normal course of business, to credit-worthy customers as determined by management’s review of references and credit reports. Bad debts are charged against the provision for credit losses. The provision for credit losses is adjusted to provide a specific and general allowance for estimated uncollectible accounts, which is based on management’s judgment based on a number of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the provision for credit losses and a credit to accounts receivable. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, management believes that losses on balances outstanding will not exceed the provision for credit losses.
Accounts receivable consisted of the following:
| March 31, 2024 | March 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less provision for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Activity related to the Company’s provision for credit losses was as follows:
| March 31, 2024 | March 31, 2023 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Credit loss provision | ||||||||
| Write-offs | ( | ) | ||||||
| Balance, end of period | $ | $ | ||||||
Inventory
Inventories, which consist primarily of raw materials and finished goods, are stated at the lower of cost or net realizable value. The Company states inventory cost utilizing the first-in, first-out (FIFO) method. Labor and overhead associated with inventory purchases are estimated and capitalized in inventory. The need for an allowance for inventory obsolescence is based on an evaluation of slow-moving or obsolete inventory.
| F-9 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Property and Equipment, Net
Property and equipment are stated at cost. Leasehold improvements are amortized over the shorter of the lease terms or estimated useful lives of the respective assets. Depreciation is computed using the straight-line method over the following estimated useful lives of the respective assets:
| Leasehold improvement | |
| Computer equipment | |
| Manufacturing equipment | |
| Furniture and office equipment | |
| Vehicles |
Intangible Assets, Net
Included
in intangible assets are external amounts paid to vendors as well as consulting and legal fees for purchased patents and the cost of
the exclusivity rights and licenses secured by the Company for certain technology. The intangible assets are recorded at cost on the
balance sheet and adjusted for amortization, abandonments, and impairments (see Note 8). Acquired identifiable intangible assets are
valued at the acquisition date primarily by using a discounted cash flow method. Amortization is computed using the straight-line method
over their estimated useful lives of to years. Amortization for filed patents not yet
issued will begin upon the date of issuance. The Company evaluates intangible assets for impairment and writes off assets that are not
used in any products. During the years ended March 31, 2024 and 2023, there were
Impairment of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset
or asset group may not be recoverable. The recoverability of long-lived assets is measured by a comparison of the carrying amount of
the asset or asset group to the future undiscounted cash flows expected to be generated by that asset group. If the asset or asset group
is considered to be impaired, an impairment loss is recorded to adjust the carrying amounts to the estimated fair value. The excess of
the carrying value of the reporting unit over the estimated fair value was first allocated to the intangibles and then to goodwill. Fair
value was determined using the income approach. As of March 31, 2024 and March 31, 2023, there has been
Deposits
The
Company has amounts pledged as security deposits of $
Revenue Recognition
The Company’s revenues result from the sale of products and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). For its contracts with customers, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. The Company satisfies its performance obligation and recognizes revenue at the time the customer obtains the rights to the product, which is generally when goods are shipped. As a result, the majority of the Company’s revenue is recognized at a point in time.
| F-10 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Provisions
for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of
revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any
expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a
reduction of revenue except to the extent that there is a distinct good or service and evidence of the fair value of the advertising,
in which case the expense is classified as marketing and selling expense. Advertising expenses included within marketing and selling
expenses were $
Research and Development
The Company incurs research and development costs of products for use in scanning behind opaque surfaces. The Company will continue to invest in research and development to develop additional components and products of its scanning product offerings and remains committed to providing its customers and partners with best-in-class scanning products and services. Such research and development costs, software development costs, and any new product development costs, are expensed as incurred, and include personnel-related costs, depreciation related to engineering and test equipment, allocated costs of facilities and information technology, outside services and consultant costs, supplies, software tools and product certification.
Warranty
The
Company provides an assurance warranty that its products and the functionalities work as intended and comply with defined specifications.
The Company does not provide an extended service warranty to its customers. The actual cost associated with the assurance warranty is
$
Comprehensive Loss
Comprehensive loss of all periods presented is comprised primarily of net loss and foreign currency translation adjustments.
Segment Reporting
The Company determines its reporting units in accordance with FASB ASC 280, Segment Reporting (“ASC 280”). The Company evaluates a reporting segment by first identifying its operating segments under ASC 280. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) to allocate resources and assess performance. The Company defines its CODM to be its president and chief operating officer. The Company then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated. The president and chief operating officer reviews the financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating the Company’s financial performance. The Company has one operating segment and therefore one reporting segment. Management reviews its business as a consolidated segment, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate.
Concentration of Business and Credit Risk
As of March 31, 2024, the Company maintained deposits in a single bank that exceeded the federal insured deposit limit of the Federal Deposit Insurance Corporation (FDIC).
During
the years ended March 31, 2024 and 2023 the Company generated approximately
| F-11 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
As
of March 31, 2024 and 2023,
Fair Value of Financial Instruments
In accordance with FASB ASC 820 Fair Value Measurements and Disclosures, the Company uses a three-level hierarchy for fair value measurements of certain assets and liabilities for financial reporting purposes that distinguishes between market participant assumptions developed from market data obtained from outside sources (observable inputs) and our own assumptions about market participant assumptions developed from the best information available to us in the circumstances (unobservable inputs). The fair value hierarchy is divided into three levels based on the source of inputs as follows:
| a. | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; | |
| b. | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active; and | |
| c. | Level 3 – inputs to the valuation methodology are unobservable and insignificant to the fair value measurement. |
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company believes the carrying amounts of its cash equivalents, accounts receivable, other current assets, other assets, accounts payable, accrued expenses, and other current liabilities approximated their fair values as of March 31, 2024 and 2023 due to their short-term nature. Management measures intangible assets at fair value on a non-recurring basis using internally developed assumptions about the market as there is no market activity available. All carrying amounts of other applicable assets and liabilities on the Company’s balance sheet approximate fair value. For long-term debt, the estimated fair value approximates its carrying value, as the interest rate is in line with the market interest rates for this type of debt.
Foreign Operations and Foreign Currency
The Company’s reporting currency is the U.S. dollar and the Company’s records are maintained in U.S. dollars. Assets and liabilities, including any amounts due or receivable from foreign entities, are translated into the reporting currency using the exchange rates in effect on the consolidated balance sheet dates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year, which is the result of the consolidated statement of operations translation process. Any revenues or expenses that are billed in foreign currency are converted at the average rates of exchange prevailing during each period. Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the U.S. dollar are reflected in earnings. The cumulative translation adjustments associated with the net assets of foreign entities are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of changes in stockholders’ equity.
Operations outside the United States include entities in Mexico and the United Kingdom. The Company also transacts business in other foreign countries. Foreign operations are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. Management believes estimates related to income tax uncertainties are appropriate based on current facts and circumstances. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof, as well as, other factors. Any interest and penalties related to income tax matters are classified as a component of income tax expense.
| F-12 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
As of April 14, 2023, Zircon’s election to be an S Corporation under the Internal Revenue Code was no longer in effect.
Basic net loss per share of common stock is computed by dividing net income or loss attributable to ZRCN by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes, when applicable, the potential impact of common stock warrant shares and other dilutive instruments because their effect would be anti-dilutive. Diluted net income per share, when applicable, includes the warrant shares because their effect would be dilutive. The dilutive securities outstanding are as follows:
| March 31, 2024 | March 31, 2023 | |||||||
| Common stock warrants | ||||||||
In accordance with an agreement with SCE dated May 15, 2023, the Company will issue an additional common shares to SCE through June 30, 2024.
Leases
In February 2016, the FASB issued a new accounting standard, ASC Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company’s lease arrangements relate primarily to office space, a vehicle, and office equipment. The Company’s leases may include renewal options and rent escalation clauses. The Company is typically required to make fixed minimum rent payments relating to its right to use an underlying leased asset.
The Company determines if an arrangement is a lease at inception and classifies its leases at commencement. Operating leases are presented as right-of-use (“ROU”) assets and the corresponding lease liabilities are included in operating lease liabilities, current and operating lease liabilities on the Company’s consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset, and lease liabilities represent the Company’s obligation for lease payments in exchange for the ability to use the asset for the duration of the lease term. The Company does not recognize short term leases that have a term of twelve months or less as ROU assets or lease liabilities.
ROU assets and lease liabilities are recognized at commencement date and determined using the present value of the future minimum lease payments over the lease term. The Company uses an incremental borrowing rate based on estimated rate of interest for collateralized borrowing since the Company’s leases do not include an implicit interest rate. The estimated incremental borrowing rate considers market data, actual lease economic environment, and actual lease term at commencement date. The lease term may include options to extend when it is reasonably certain that the Company will exercise that option. The Company recognizes lease expense on a straight-line basis over the lease term.
The Company has lease agreements which contain both lease and non-lease components, which it has not elected to account for as a single lease component. As such, minimum lease payments exclude fixed payments for non-lease components within a lease agreement, in addition to excluding variable lease payments not dependent on an index or rate, such as common area maintenance, operating expenses, utilities, or other costs that are subject to fluctuation from period to period.
| F-13 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of stockholders’ equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be liability classified and recorded at their initial fair value on the date of issuance and remeasured at fair value and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the private placement warrants was estimated using a Black Scholes valuation approach with assumptions relevant on the date of issuance and the fair value of the penny warrants issued in connection with the Merger was estimated using the intrinsic value method.
Recently Issued Accounting Pronouncements
As an emerging growth company, the Company will have the option of adopting new accounting pronouncements on a delayed basis and has opted to take advantage of this option. As a result, the Company has been adopting new accounting standards based on the timeline for adoption afforded to privately held companies, unless it chooses to early adopt a new accounting standard.
Recently Issued Accounting Standards Adopted
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options (“ASU 2021-04”), which introduces a new way for companies to account for warrants either as stock compensation or derivatives. Under the new guidance, if the modification does not change the instrument’s classification as equity, the Company accounts for the modification as an exchange of the original instrument for a new instrument. In general, if the fair value of the “new” instrument is greater than the fair value of the “original” instrument, the excess is recognized based on the substance of the transaction, as if the issuer has paid cash. The effective date of the standard is for interim and annual reporting periods beginning after December 15, 2021 for all entities, and early adoption is permitted. The Company adopted ASU 2021-04 effective April 1, 2023. There was no impact to its consolidated financial statements at the date of adoption.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Under the new guidance, the acquirer is required to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The effective date of the standard is for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2021-08 effective April 1, 2023. There was no impact to its consolidated financial statements at the date of adoption.
In June 2016, the FASB issued ASU No. 2016-13, Accounting for Credit Losses (Topic 326) (“ASU 2016-13”), which requires the use of an “expected loss” model on certain types of financial instruments. ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2016-13 effective April 1, 2023 which did not have a material impact to its consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The new standard requires a company to disclose incremental segment information on an annual and interim basis, including significant segment expenses and measures of profit or loss that are regularly provided to the chief operating decision maker. The standard is effective for the Company beginning in fiscal year 2024 and interim periods within fiscal year 2025, with early adoption permitted. The Company does not expect to early adopt the new standard. The Company is currently evaluating the impact of ASU 2023-07 on its consolidated financial statements and related disclosures and will adopt the new standard using a retrospective approach.
| F-14 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
In December 2023, the FASB also issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The new standard requires a company to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid. The standard is effective for the Company for annual periods beginning after December 15, 2024, with early adoption permitted. The Company does not expect to early adopt the new standard. The new standard is expected to be applied prospectively, but retrospective application is permitted. The Company is currently evaluating the impact of ASU 2023-09 on its consolidated financial statements and related disclosures.
In March 2024, FASB issued ASU No. 2024-01, “Compensation- Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards.” ASU 2024-01 provides an illustrative example that includes four fact patterns to demonstrate how an entity should apply the scope guidance in paragraph 718-10-15-3 to determine whether a profits interest award should be accounted for in accordance with Topic 718. ASU 2024-01 is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of ASU 2024-01 on its consolidated financial statements and related disclosures.
4. Merger with Harmony Energy Technologies Corporation
On April 14, 2023 (the “Closing Date”), Harmony closed the Merger with Zircon, as a result of which Zircon became a wholly-owned subsidiary of Harmony. While Harmony was the legal acquirer of Zircon in the Merger, for accounting purposes, the Merger is treated as a reverse recapitalization, whereby Zircon is deemed to be the accounting acquirer, and the historical financial statements of Zircon became the historical financial statements of Harmony (renamed ZRCN Inc.) upon the closing of the Merger. Under this method of accounting, Harmony was treated as the “acquired” company and Zircon is treated as the acquirer for financial reporting purposes.
Accordingly, for accounting purposes, the Merger was treated as the equivalent of Zircon issuing stock for the net assets of Harmony, accompanied by a recapitalization. The net assets of Harmony were stated at historical cost, with no goodwill or other intangible assets recorded.
As part of the Merger and reverse recapitalization, the Company assumed certain operating liabilities of Harmony, including certain payables due to vendors and employees, as well as notes payable to noteholders. In addition, Zircon and Harmony effectuated a share exchange whereby the shareholders of Zircon exchanged common shares representing % of the total outstanding shares of Zircon, for newly issued common shares of Harmony, or approximately % of the total outstanding shares of Harmony. Harmony shareholders thus retained common shares according to the terms of the merger. In connection with the Merger, the Company entered into a warrant exchange agreement, dated April 14, 2023 (the “Warrant Exchange Agreement”), with certain holders of the Company’s warrants under which such holders received shares of Common Stock in exchange for their warrants, bringing the total shares of the combined organization owned by Harmony’s pre-Merger shareholders to shares.
Zircon
agreed to pay the operating liabilities of Harmony, up to and including an aggregate of $
Zircon
paid transaction costs of $
| F-15 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
The following table reconciles the elements of the Merger to the consolidated statements of changes in stockholders’ equity for the year ended March 31, 2024:
| Recapitalization | ||||
| Cash | $ | |||
| Non-cash net working capital assumed from Harmony | ( | ) | ||
| Less: cash transaction costs and advisory fees allocated to ZRCN equity | ( | ) | ||
| Effect of Merger, net of transaction costs | $ | ( | ) | |
| Number of Shares | ||||
| Common stock of Harmony prior to Merger | ||||
| Shares issued for Warrant Exchange Agreement | ||||
| Common stock owned by Harmony’s pre-Merger shareholders | ||||
| Common stock issued in exchange for Zircon common stock | ||||
| Total shares of common stock immediately after Merger | ||||
Debt Settlement Agreement
In
connection with the Merger, the Company entered into debt settlement agreements (the “Debt Settlement Agreements”) with certain
third-party creditors of the Company under which the Company agreed to make certain payments over the next 12 months to the creditors
in satisfaction of an aggregate of $
5. Revenue
Disaggregation of Revenue from Contracts with Customers
Revenue disaggregated according to the timing of transfer of goods or services (e.g., at a point in time) for the years ended March 31, 2024 and 2023, were as follows:
| Revenue generated per major product line | For the Year Ended March 31, 2024 | For the Year Ended March 31, 2023 | ||||||
| Stud sensor edge | $ | $ | ||||||
| Multifunctional scanners | ||||||||
| Stud sensor center | ||||||||
| Target control products | ||||||||
| Other | ||||||||
| Total Revenue | $ | $ | ||||||
| F-16 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Revenue disaggregated according to the geographical location of customers for the years ended March 31, 2024 and 2023, were as follows:
| Revenue by geographic location of customers | For the Year Ended March 31, 2024 | For the Year Ended March 31, 2023 | ||||||
| United States | $ | $ | ||||||
| Canada | ||||||||
| Europe | ||||||||
| Japan | ||||||||
| UK | ||||||||
| Others | ||||||||
| Total Revenue | $ | $ | ||||||
6. Inventory
Inventory consisted of the following:
| March 31, 2024 | March 31, 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| $ | $ | |||||||
Obsolescence
allowance was estimated at $
7. Property and Equipment
Property and equipment consisted of the following:
| March 31, 2024 | March 31, 2023 | |||||||
| Manufacturing equipment | $ | $ | ||||||
| Computer equipment | ||||||||
| Leasehold improvements | ||||||||
| Furniture and office equipment | ||||||||
| Vehicles | ||||||||
| Construction in progress | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the years ended March 31, 2024 and 2023, depreciation and amortization expense was $
Construction in progress consists of assets and technologies under development. The Company starts depreciation once the assets are completed and placed in service.
| F-17 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
8. Intangible Assets
The Company’s intangible assets consisted of the following:
| March 31, 2024 | March 31, 2023 | |||||||||||||||||||||||
| Finite-lived intangible assets (1): | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||
| Patents issued and pending | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exclusivity rights and licenses | ( | ) | ( | ) | ||||||||||||||||||||
| Total finite-lived intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Finite-lived intangible assets (1): | March 31, 2024 Weighted Average Life Remaining | |||
| Patents issued and pending | ||||
| Exclusivity rights and licenses | ||||
| (1) |
For
the years ended March 31, 2024 and 2023, amortization expense was $
Expected future amortization expense of acquired finite-lived intangible assets as of March 31, 2024 is as follows:
| For the Years Ending March 31, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| $ | ||||
9. Accrued Expenses
Accrued expenses consisted of the following:
| March 31, 2024 | March 31, 2023 | |||||||
| Rebates | $ | $ | ||||||
| Vacation | ||||||||
| Accrued taxes | ||||||||
| Payroll and related | ||||||||
| Sales expense | ||||||||
| Advertising allowance | ||||||||
| Professional services | ||||||||
| Interest | ||||||||
| $ | $ | |||||||
| F-18 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
10. Debt
Line of Credit
The
Company had a revolving line of credit with a bank, which allowed for borrowings up to $
While
the line of credit had a maximum limit of $
On
November 8, 2023, Zircon Corporation, a subsidiary of ZRCN Inc., entered into an amendment (the “Amendment”) to the Loan
Agreement, dated as of January 23, 2023, and the related Commercial Promissory Note (the “Base Rate”) dated January 27, 2023
in the original principal amount of $
Pursuant
to the Amendment, the Bank waived Zircon’s existing defaults under the Loan Agreement for its failure to comply with certain covenants
set forth in the Loan Agreement as the result of, without limitation, Zircon’s reverse merger with the Company. In addition, the
Pursuant
to the Amendment, while the line of credit has a maximum limit of $
On
February 13, 2024, the Company signed an agreement with U.S. Bank to extend the maturity date on its line of credit from
For
the years ended March 31, 2024 and 2023, interest expense on the line of credit totaled $
The components of the revolving line of credit consisted of the following:
| March 31, 2024 | March 31, 2023 | |||||||
| SOFR | $ | $ | ||||||
| Excess of SOFR | ||||||||
| $ | $ | |||||||
| F-19 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Notes payable
In
July 2018, the Company entered into a term loan with a bank for $
In
September 2019, the Company entered into a term loan with a bank for $
For
the years ended March 31, 2024 and 2023, interest expense on notes payable totaled $
The table below details the activity related to the Notes payable:
| July 2018 Note | September 2019 Note | Harmony Notes | Total | |||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, March 31, 2023 | ||||||||||||||||
| Issuances and Harmony debt assumed | ||||||||||||||||
| Less: accrued interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total principal balance, March 31, 2024 | $ | $ | $ | $ | ||||||||||||
Future scheduled maturities of notes payable are as follows:
| For the Period Ending March 31, | Amount | |||
| 2025 | $ | |||
| $ | ||||
| Notes payable, current portion | $ | |||
Notes payable to Stauss Family Administrative Trust
The
Company has notes payable to the Stauss Family Administrative Trust, a related party. to repay loans made to the Company. As of March 31, 2024, principal
balance of $
For
the years ended March 31, 2024 and 2023 the interest expense on notes payable to the Stauss
Family Administrative Trust totaled $
| F-20 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Loan Repayment
Section 13(k) of the Exchange Act provides that it is unlawful for a company, such as ours, that has a class of securities registered under Section 12 of the Exchange Act to, directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the Company. In March 2022, Zircon Corporation, the Company’s wholly-owned subsidiary, loaned our chief executive officer funds to pay certain tax obligations, which was still outstanding when we acquired Zircon in April 2023, which may have violated Section 13(k) of the Exchange Act as a result of the transition from private to public company accounting. The loan was repaid in August 2023 as soon as management became aware of the possible violation. The loan repayment was made by means of an offset to beneficial amounts of our chief executive officer in certain loans to the Company to which offset he did not object. Issuers that are found to have violated Section 13(k) of the Exchange Act may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. In accordance with ASC 450, Contingencies, no amounts have been accrued for a loss contingency as it is not estimable as of March 31, 2024. The imposition of any of such sanctions on us could have a material adverse effect on our business, financial position, results of operations or cash flows.
The Company has a defined contribution profit sharing plan for all eligible employees. Contributions to the profit sharing plan are determined annually by the Board of Directors. There were no profit sharing contributions made during the years ended March 31, 2024 and 2023.
All
eligible employees are also allowed to participate in the Company’s 401(k) plan. The Company’s contributions to the plan
are based on a specified percentage of each participant’s eligible contribution, decided annually by the Board of Directors, as
defined in the plan document. The Company’s contributions
of $
12. Share Based Compensation
On February 28, 2024 the Company adopted a 2024 Equity Incentive Plan (the “Equity Plan”). The Plan provides for granting of stock options (“Options”), restricted stock units (“RSUs”), and other equity-based awards tied to the value of shares of common stock to key personnel, including directors, officers, employees, consultants, and advisors of the Company and its subsidiaries. The Plan provides for the grant of options (which may include “incentive stock options” (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”)), stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), and other stock-based awards. As of March 31, 2024 there were no outstanding or issued Options, RSUs, or any other equity-based awards issued or outstanding pertaining to the Equity Plan and the stockholders have authorized awards to be granted under the Equity Plan.
13. Warrants
At
the closing of the Merger, the Company issued certain consultants and advisors warrants to purchase an aggregate of
| F-21 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
The following table provides the activity for all warrants for the year ended March 31, 2024:
| Total Warrants | Weighted Average Remaining Term | Weighted Average Exercise Price | ||||||||||
| Outstanding as of March 31, 2023 | — | $ | ||||||||||
| Issued | $ | |||||||||||
| Outstanding as of March 31, 2024 | $ | |||||||||||
14. Commitments and Contingencies
Legal Proceedings
ZRCN is engaged in procedures to protect its proprietary rights and has filed complaints with the Federal Trade Commission and the Customs and Border Patrol.
Zircon Corporation v. Stanley Black & Decker, Inc.
Zircon appealed an adverse ruling by the International Trade Commission (“ITC”) in an investigation before the ITC in which Zircon sought an injunction to prevent Stanley, Black & Decker, Inc. and its wholly owned subsidiary, Black & Decker (U.S.), Inc. (together “SBD”) from importing and selling in the United States certain products alleged by Zircon to infringe its patents. The appeal was initiated by Zircon following the ruling by the ITC overturning the decision by Judge Charles Bullock, Presiding Judge of the ITC issued on October 7, 2021, finding that three patents at issue in the investigation were both valid and practiced by Zircon and that SBD infringed Zircon’s auto recalibration patent. The Commission found that while Zircon’s auto recalibration patent met all objective requirements for validity, it reversed the Presiding Judge on the subjective requirement of non-obviousness. Zircon then timely appealed to the Federal Circuit Court of Appeal (“FCCA”) and the matter was heard de novo before the FCCA on January 9, 2024. On May 8, 2024, the FCCA denied Zircon’s request for an order from the ITC excluding importation of certain SBD products. However, Zircon’s action against SBD for damages filed December 9, 2019 in the Fed District Court in the Northern District of California, under stay pending the disposition of the FCCA matter between Zircon and the ITC, may now move forward and Zircon is reviewing and considering its options. All charges in connection with the litigation versus SBD have been expensed to date and no damage claim against zircon have been filed in this matter. The parties involved in the matter are meeting and conferring as required by the Court.
Morgenthaler, et al. v. Zircon, et al.
Zircon was one of more than twenty (20) defendants named in a suit filed in Los Angeles County, California Superior Court on behalf of three family members injured in an accident between an automobile and a truck and trailer. The accident occurred in May 2017 and the Complaint was filed on December 1, 2017. Zircon, represented in the case by insurance defense lawyers selected and paid for by the company’s liability insurance carrier, The Travelers Indemnity Company, had no direct or indirect involvement in the accident and had no goods on the truck at the time of the accident. Zircon argued that it was neither the cause in fact nor the proximate cause of the accident or of the damages suffered by the Plaintiffs, and filed a Motion for Summary Judgement. The trial court judge found that there were “…no triable issues of fact, and that the moving party, Defendant Zircon Corporation, is entitled to judgement as a matter of law…”. The Order on the Motion was entered on May 23, 2022 and the Plaintiffs appealed. On January 30, 2024, the California Second District Court of Appeal affirmed the trial court’s Summary Judgement in favor of Zircon. Plaintiffs did not further appeal the January 30, 2024 affirmation by the California Second District Court of Appeal of the trial court’s Summary Judgement in favor of Zircon, and the matter is closed with regard to Zircon.
| F-22 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Claim Asserted by Mr. Michael Green
In April 2024, Mr. Michael Green, an individual in Great Britain, asserted violation by Zircon in its U.S. website of certain privacy protections under the laws of Great Britain. The Company believes its U.S. website has not violated the laws of Great Britain and that, in any event, has responded stating such laws do not apply outside Great Britain. As of the date of filing this Annual Report on Form 10-K, Mr. Green has not responded to the Company and has not asserted any claim for damages.
Leases
The
Company’s corporate headquarters in Campbell, California are leased from the trust of one of the former shareholders of Zircon
Corporation for approximately $per
month under a lease expiring in December 2027. The lease requires the Company to pay utilities, maintenance and real estate taxes.
Rent expense was $
The
Company leases office equipment through a lease that expires in June 2026 and requires monthly lease payments of $
The
Company leases a vehicle through a lease that expires in July 2024 and requires monthly lease payments of $
As
of March 31, 2024, the Company had a operating lease right-of-use assets of $
The components of lease expense, which include short-term and variable lease expense and are included in selling, general and administrative expense, are as follows:
| March 31, 2024 | March 31, 2023 | |||||||
| Weighted-average remaining lease term: | ||||||||
| Operating leases (in years) | ||||||||
| March 31, 2024 | March 31, 2023 | |||||||
| Weighted-average remaining discount rate: | ||||||||
| Operating leases | % | % | ||||||
Future minimum lease payment under non-cancellable lease as of March 31, 2024 are as follows:
| Maturities of lease liabilities | Operating Leases | |||
| Year ending March 31, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 and thereafter | ||||
| Total Minimum Lease Payments | ||||
| Less effects of discounting | ( | ) | ||
| Present value of future minimum lease liabilities | ||||
| Less current portion of operating lease liability | ( | ) | ||
| Operating lease liability, net of current portion | $ | |||
Executive Agreement
On
October 1, 2012, Zircon Corporation (the” Company”) and John R. Stauss (the “Executive”) entered into an Employment
Agreement (“Agreement”). The Agreement established an annual Base Salary of not less than $
| F-23 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
15. Income Taxes
The components of income tax expense (benefit) consists of the following:
| For the Years Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| State | ( | ) | ||||||
| International | ||||||||
| Total current expense | ||||||||
| Deferred: | ||||||||
| Federal | ( | ) | ||||||
| State | ( | ) | ||||||
| Total deferred benefit | ( | ) | ||||||
| Income tax (benefit) expense | $ | ( | ) | $ | ||||
A
reconciliation of total income tax provision and the amount computed by applying the federal statutory income tax rate of
| Tax expense at statutory rates | $ | |||
| Effect of: | ||||
| Conversion of S corporation to C corporation | ( | ) | ||
| State income taxes, net of federal benefit | ( | ) | ||
| ASC 740-10 penalty | ||||
| International | ||||
| Other items | ||||
| Total | $ | ( | ) |
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows:
| At March 31, 2024 | At March 31, 2023 | |||||||
| Deferred tax assets: | ||||||||
| Accrued vacation | $ | $ | ||||||
| Inventory reserve | ||||||||
| Capitalized R&D | ||||||||
| ROU asset | ||||||||
| NOL | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities | ||||||||
| Lease liability | ( | ) | ||||||
| Fixed assets | ( | ) | ||||||
| Total deferred tax liabilities | ( | ) | ||||||
| Net deferred tax asset | $ | $ | ||||||
| F-24 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
Management considers that it is more likely than not that deferred tax assets will be realizable. Therefore, no valuation allowance has been established against deferred tax assets.
The
Company has federal net operating losses as of March 31, 2024 of $
The Company files a US federal tax return, a California state tax return, and a Chinese tax return. The federal tax returns for the March 31, 2020 and later years are open to examination, while the California tax returns for the March 31, 2019 and later years are open to examination. The Chinese tax returns are subject to various statutes of limitations. The Chinese tax provision is de minimis as the Company has limited operations in China.
The Company has no unrecognized tax benefits at March 31, 2024 and 2023. No interest or penalties were accrued at March 31, 2024 and 2023.
| Tabular disclosure of unrecognized tax benefits is as follows: | ||||
| March 31, 2023 unrecognized tax benefits | $ | |||
| Current year increases in unrecognized tax benefits due to tax positions taken in current period | ||||
| Recognized interest and penalties | ||||
| March 31, 2024 unrecognized tax benefits | $ | |||
The
Company acquired federal net operating losses of approximately $
The Company recognized ASC 740-10
interest and penalties of $
| F-25 |
ZRCN Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2024 AND 2023
16. Related Party Transactions
Zircon is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if Zircon operated as an unaffiliated entity.
Zircon has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “Contractor”), an entity which is owned by certain shareholders of Zircon. Under the terms of the agreement, Zircon provides materials, technical assistance, and expertise to the Contractor, and the Contractor assembles certain of Zircon’s products.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of Zircon’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of Zircon.
The Company leases a 14,000 square foot facility from a trust owned by the Stauss Family Administrative Trust.
The
Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. As of March 31, 2024, principal
balance of $
For
the years ended March 31, 2024 and 2023 the interest expense on notes payable to the Stauss Family Administrative Trust totaled $
On March 31, 2024 the Stauss Family Administrative Trust and the Company agreed to extend the maturity date of the Notes Payable to the trust to December 31, 2025.
17. Subsequent Events
On
May 31, 2024, the Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with FGI Worldwide LLC, as Agent
for the lender (“FGI”). The Credit Agreement provides for a $
The Credit Agreement requires the Company to comply with maximum total net leverage and minimum fixed charge coverage ratios.
On March 31, 2024 the Stauss Family Administrative Trust and the Company agreed to extend the maturity date of the Notes Payable to the trust to December 31, 2025.
On May 1, 2024 the Company awarded a grant of common stock options to one of its employees.
| F-26 |
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal accounting and financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal accounting and financial officer has concluded that as of March 31, 2024, our disclosure controls and procedures were not effective as of such date as a result of material weaknesses in our internal control over financial reporting due to inadequate segregation of duties within account processes due to limited personnel and insufficient written policies and procedures for accounting, IT and financial reporting and record keeping. Under the direction of our principal executive officer and principal financial and accounting officer, we are developing a plan to remediate the material weaknesses.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S.. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
As of March 31, 2024, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of March 31, 2024, our internal control over financial reporting had material weaknesses that lack adequate segregation of duties within account processes due to limited personnel and insufficient written policies and procedures for accounting, IT and financial reporting and record keeping and we are implementing plans to improve such internal control.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers, Directors and Key Employees
The following table sets forth the name, age and position of each of our executive officers, key employees and directors as of July 15, 2024. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers serve at the discretion of the board.
| Name | Age | Position | ||
| John Stauss (1) | 66 | Chief Executive Officer, Chairman and Director | ||
| Ronald Bourque (2) | 73 | Chief Financial Officer and President | ||
| Robert Wyler (3) | 80 | General Counsel and Director |
Set forth below is a brief description of the background and business experience of each of our current executive officers and directors.
Notes:
(1) On April 14, 2023, Mr. Stauss was appointed to serve as our Chief Executive Officer, Chairman, and a Director, effective immediately.
(2) On April 17, 2023, Mr. Bourque was appointed to serve as our Chief Financial Officer and President, effective immediately, and was appointed as a director on May 12, 2023.
(3) On April 17, 2023, Mr. Wyler was appointed to serve as our General Counsel, effective immediately, and was appointed as a director on May 12, 2023.
John Stauss, age 66, was appointed on April 13, 2023, to serve as our Chief Executive Officer, Chairman and a Director, effective immediately. Mr. Stauss originally joined Zircon in 1984 as Operations Manager. In 1989, he was promoted to President where he served in that capacity until 2000. Mr. Stauss stepped down as President but remained a Director of the company from 2000 – 2006. In 2006, John returned to Zircon as its Chairman and CEO, where he has continually sought to set broad performance objectives for the Zircon to deliver excellence with a high degree of focus on consistent profitability, technical superiority, intellectual property development, industrial design and industry-leading vendor and end-user support. Mr. Stauss graduated from Homestead Highschool in 1975 and Cal Poly, San Luis Obispo with a Bachelors in Biochemistry in 1982 and a Masters in Business Administration (MBA) in 1984.
Ronald Bourque, age 73, was appointed on April 13, 2023, to serve as our Chief Financial Officer and President, effective immediately. Mr. Bourque was also appointed to serve as a director of the Company on May 12, 2023. Mr. Bourque joined Zircon in 1985 and is the company’s Chief Operating Officer and President. Ron is responsible for all facets of the company’s operations, including management of all critical finance and production related activities, such as procurement, inventory, HR, facilities management, sales and customer service, as well as all F, P & A functions, audit, A/R, A/P and manufacturing operations. Prior to Zircon, Mr. Bourque held various senior management roles with high volume electronic and electronic hand-tool manufacturers. Mr. Bourque received a Bachelor of Science with a concentration in management and a minor in accounting, from San Jose State University in June 1975. He earned his Masters in Business Administration (MBA) from San Jose State University in 1984. Ron also served in the US Navy from 1968 – 1972, where he received a Letter of Commendation and was honorably discharged. Mr. Bourque is a Vietnam veteran.
Robert Wyler, age 80, was appointed on April 14, 2023, to serve as our General Counsel and Secretary, effective immediately. Mr. Wyler was also appointed to serve as a director of the Company on May 13, 2023. Mr. Wyler is a co-Founder of Zircon Corporation and is currently Vice President and Secretary, as well as the company’s General Counsel and a Director. Bob has served in various senior leadership and legal roles with domestic and international technology companies, including Varian Associates, a public company based in Palo Alto and Litronix, Inc. of Cupertino, CA., where he was responsible for supervision and management of all of the company’s legal matters both in the US and also across Litronix’s international operations in Europe, Malaysia, Singapore and Mauritus. Mr. Wyler received a Bachelor of Science in Mechanical Engineering from Stanford University in 1965, and a Juris Doctorate (JD) from Hastings College of Law in San Francisco in 1968.
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Term of Office
Our directors are appointed to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board, subject to their respective employment agreements.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Involvement in Certain Legal Proceedings
During the past 10 years, none of our current directors, nominees for directors or current executive officers has been involved in any legal proceeding identified in Item 401(f) of Regulation S-K.
Director Independence
The Board of Directors is currently composed of three members, which are John Stauss, Ron Bourque and Robert Wyler. Misters Stauss, Bourque and Wyler do not qualify as independent in accordance with the published listing requirements of the NASDAQ. The NASDAQ independence definition includes a series of objective tests, such as that the Director is not, and has not been for at least three years, one of Zircon’s employees and that neither the Director, nor any of his family members has engaged in various types of business dealings with us.
Audit Committee
Pursuant to Section 4.2 of the Bylaws, the Board may, by resolution passed by a majority of the entire Board, designate one or more committees. Pursuant to a Directors’ Resolution, John Stauss, Ron Bourque and Robert Wyler have each been appointed as members of the Audit Committee of the Company.
Nominating and Compensation Committees
We do not have a standing nominating and compensation committee. Rather, our Board of Directors performs the functions of these committees. We do not believe it is necessary for our Board of Directors to appoint such committees because the volume of matters that come before our Board of Directors for consideration permits the directors to give sufficient time and attention to such matters to be involved in all decision making.
Code of Business Conduct and Ethics
We have not adopted a formal Code of Business Conduct and Ethics applicable to all Board members, officers and employees. We intend to adopt one during the fiscal year ended March 31, 2025.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents the compensation awarded to, earned by or paid to each of our named executive officers for the year ended December 31, 2023.
| Summary Compensation Table | |||||||||||||||||||||||||||||||||||
| Name and | Fiscal Year Ending | Salary | Bonus | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Non-Qualified Deferred Compensation Earnings | All Other Compensation | Totals | ||||||||||||||||||||||||||
| Principal Position | March 31, | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||||||
| John Stauss, | 2024 | 323,965 | 43,031 | — | — | — | — | 4,000 | 370,996 | ||||||||||||||||||||||||||
| Chairman & CEO | 2023 | 330,177 | 51,467 | — | — | — | — | 4,000 | 385,644 | ||||||||||||||||||||||||||
| Ronald Bourque, | 2024 | 285,287 | — | — | — | — | — | 4,000 | 289,287 | ||||||||||||||||||||||||||
| President & CFO | 2023 | 290,773 | — | — | — | — | — | 4,000 | 294,773 | ||||||||||||||||||||||||||
| Robert Wyler, | 2024 | 241,878 | — | — | — | — | — | — | 241,878 | ||||||||||||||||||||||||||
| Corporate Counsel and Secretary | 2023 | 251,181 | — | — | — | — | — | — | 251,181 | ||||||||||||||||||||||||||
Narrative Disclosure to Summary Compensation Table
On October 1, 2012, Zircon Corporation (the” Company”) and John R. Stauss (the “Executive”) entered into an Employment Agreement (“Agreement”). The Agreement established an annual Base Salary of not less than $300,000 paid in periodic installments in accordance with the Company’s regular payroll practices. The Agreement also provides for a bonus equal to 20% of net income based on revenue and profitability targets as set forth in the Company’s Business Plan. The performance bonus is calculated and paid on a quarterly basis. Under the terms of the Agreement, Mr. Stauss was paid $43,010 in October 2023 for the performance results through the quarter ended September 30, 2023. The Agreement also entitles the Executive to participate in employee benefit plans of the Company consistent with the benefit plan requirements for all employees. The Executive is also entitled to prompt reimbursement by the Company for all reasonable ordinary and necessary travel, entertainment and other expenses incurred by the Executive during the employment period. The Agreement has been extended through March 31, 2027.
Outstanding Equity Awards at March 31, 2024
There were no outstanding equity incentive plan awards for each of the named executive officers outstanding as of March 31, 2024.
Compensation of Directors
There was no compensation paid or accrued during the fiscal year ended March 31, 2024 to each of Zircon’s current and former non-employee directors. Directors who are employed by us are not compensated for their service on our Board of Directors.
2024 Equity Incentive Plan
On February 28, 2024, the Company’s board of directors adopted the ZRCN Inc. 2024 Equity Incentive Plan (the “Plan”) initially reserving 40,000,000 shares of the Company’s common stock for issuance thereunder, provided, that, the shares of Common Stock issued under the Plan with respect to any exempt awards shall not count against such share limit. Exempt awards include (i) any awards previously granted by a corporation or other entity acquired by the Company or any of its subsidiaries or with which the Company or any of its subsidiaries combines by merger or otherwise; (ii) an “employment inducement” award as described in the applicable stock exchange listing manual or rules; and (iii) any award that is purchased for fair market value (including awards to be received in lieu of fully vested compensation that is otherwise due). The number of shares of Common Stock available for grant under the Plan will be automatically increased on the first day of each calendar year beginning with the first January 1 following the Effective Date and ending with the last January 1 during the initial ten-year term of the Plan, equal to the lesser of (A) five percent (5%) of the shares of Common Stock outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year and (B) such lesser number of shares of Common Stock as determined by the Board.
The Plan became effective on February 28, 2024 upon approval of the Plan by the Company’s shareholders. Pursuant to the Plan, the Company can grant stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, annual or long-term performance awards or other stock-based awards. As of March 31, 2024, the Company did not grant any awards under the Plan.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the beneficial ownership of the Company’s Common Stock on July 15, 2024:
| ● | each person, or group of affiliated persons, who is the beneficial owner of more than 5% of the outstanding common stock of the Company; | |
| ● | each executive officer and director of the Company; and | |
| ● | all of the Company’s executive officers and directors as a group. |
Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including securities that are exercisable or convertible, as the case may be, within 60 days of July 15, 2024. Shares of common stock issuable pursuant to such securities are deemed outstanding for computing the percentage of the person holding such securities and the percentage of any group of which the person is a member but are not deemed outstanding for computing the percentage of any other person. Except as indicated by the footnotes below, the combined Company believes, based on the information furnished to it, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose, including for purposes of Section 13(d) and 13(g) of the Securities Act.
The percentage of shares beneficially owned is based on 10,016,936 shares of Company Common Stock outstanding as of July 15, 2024.
Unless otherwise noted below, the address of the persons listed on the table is c/o ZRCN Inc., 1580 Dell Avenue, Campbell, CA 95008.
Beneficial ownership representing less than 1% is denoted with an asterisk (*).
| Beneficial Ownership | ||||||||
| Name of Beneficial Owner | Shares | % | ||||||
| Greater than 5% Stockholders: | ||||||||
| Stauss 2014 Revocable Trust (1) | 3,990,133 | 39.83 | % | |||||
| Kurt Stauss (2) | 1,773,392 | 17.70 | % | |||||
| Eric Stauss (3) | 1,773,392 | 17.70 | % | |||||
| Current Executive Officers and Directors: | ||||||||
| John Stauss (1) | 3,990,132 | 39.83 | % | |||||
| Ronald Bourque | 0 | * | ||||||
| Robert Wyler | 1,330,044 | 13.28 | % | |||||
| All current executive officers and directors as a group (3 persons) | 5,320,176 | 53.11 | % | |||||
| (1) | John Stauss, as a trustee of the Stauss 2014 Revocable Trust, has the voting power to vote and dispose of the shares held in such trust. |
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based on a review of the copies of such forms received, we believe that during 2024, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information about our equity compensation plans as of March 31, 2024.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | 0 | $ | 0 | 0 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 0 | 0 | ||||||||||
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following includes a summary of transactions since March 31, 2023 to which we have been a party, including transactions in which the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described elsewhere in this Annual Report on Form 10-K. We are not otherwise a party to a current related party transaction, and no transaction is currently proposed, in which the amount of the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years and in which a related person had or will have a direct or indirect material interest.
Zircon is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if the company operated as an unaffiliated entity.
Zircon has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “contractor”), an entity which is owned by certain shareholders of Zircon.
Under the terms of the agreement, Zircon provides materials, technical assistance, and expertise to the contractor, and the contractor assembles certain of Zircon’s products. Zircon paid the contractor for costs incurred in manufacturing Zircon’s products, as defined in the contract, plus a profit percentage of approximately 5% of actual cost during the 9-month periods ended December 31, 2022, and 2021. Total payments including the profit percentage amounted to $1,862,179 and $1,987,013 for the 9-month periods ended December 31, 2022, and 2021, respectively. As of December 31, 2022, and 2021, Zircon had a payable to the contractor of approximately $89,331 and $33,046, respectively.
Zircon has a note payable to the contractor. The note was established for the purpose of reducing the payable balance and to satisfy the company’s lender’s requirements. During the period December 31, 2021, Zircon increased the borrowings by $400,000 to reduce the payable balance and to control the timing of the expected cash payments. The outstanding loan balance on December 31, 2022, was at $800,000. The note bears interest at the current Federal funds rate not to exceed 5% and is limited to an increase of no more than 2% annually. The entire principal balance is due and payable in December 2024 and is subordinated to the line of credit agreement the company has with the bank.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of Zircon’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of Zircon. The company pays certain administrative and selling expenses of the affiliate. During the 9-month periods ended December 31, 2022, and 2021, the company recorded sales to the affiliate of approximately $5,611 and $38,457, respectively. As of December 31, 2022, and 2021, the company had a receivable from the affiliate of approximately $95,400 and $175,751, respectively.
Notes Payable
Zircon has notes payable to the Stauss Family Administrative Trust to repay loans made to Zircon. During the year ended March 31, 2022, Zircon management made a one-time unscheduled payment of $247,755. The remaining principal balance of $907,420 is due and payable in December 2024. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit payable to the bank and no payment is to be made on the note without prior approval from the bank.
Director Independence
Our board of directors undertook a review of the independence of our directors and considered whether any director has a relationship with us that could compromise that director’s ability to exercise independent judgment in carrying out that director’s responsibilities. Our board of directors has affirmatively determined that none are “independent directors,” as defined under the Nasdaq rules.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed to us by Assurance Dimensions, our independent registered public accounting firms, for the indicated services for each of the last two fiscal years were as follows:
| 2024 | 2023 | |||||||
| Audit fees (1) | $ | 119,400 | $ | 25,000 | ||||
| Audit-related fees | — | — | ||||||
| Tax fees | — | — | ||||||
| All other fees | — | — | ||||||
| (1) | Audit fees consist of fees for professional services performed by MaloneBailey and RBSM for the audit and review of our financial statements, preparation and filing of our registration statements, including issuance of comfort letters. |
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements
See “Index to Consolidated Financial Statements” on page F-1.
(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this report.
(3) Exhibits
Exhibits not filed or furnished herewith are incorporated by reference to exhibits previously filed with the SEC, as reflected in the table below. We will furnish a copy of any exhibit to stockholders, without charge upon written request to the Company.
| + | Indicates a management contract or compensatory plan or arrangement. |
| † | Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request. |
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ZRCN INC. | |
| /s/ John Stauss | |
| July 15, 2024 | Chairman and Chief Executive Officer (Principal Executive Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert Wyler as his or her attorney-in-fact, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ John Stauss | Chairman and Chief Executive Officer | July 15, 2024 | ||
| John Stauss | (Principal Executive Officer) | |||
| /s/ Ronaold Bourque | Chief Operating Officer, Chief Financial Officer and Director | July 15, 2024 | ||
| Ronaold Bourque | (Principal Financial and Accounting Officer) | |||
| /s/ Robert Wyler | General Counsel, Secretary and Director | July 15, 2024 | ||
| Robert Wyler |
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