ZRCN 10-Q
ZRCN Inc. (ZRCN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission
File Number:
(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)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 S-T (§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, smaller reporting company, or 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.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes
As of November 14, 2024, shares of common stock were issued and outstanding.
Securities registered pursuant to Section 12(b) of the Act: None
Forward-Looking Statements
This Current Report on Form 10-Q (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 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.
Because some of these risks and uncertainties cannot be predicted or quantified and some are beyond our control, you should not rely on our forward-looking statements as predictions of future events. More information about potential risks and uncertainties that could affect our business and financial results is included in the section of this Annual Report titled “Risk Factors” and our other filings with the U.S. Securities and Exchange Commission (“SEC”), which are available on the SEC’s web site at www.sec.gov. Moreover, we operate in a very competitive and rapidly changing environment; new risks and uncertainties may emerge from time to time, and it is not possible for us to predict all risks nor identify all uncertainties. The events and circumstances reflected in our forward-looking statements might not be achieved and actual results could differ materially from those projected in the forward-looking statements. Except as otherwise noted, all forward-looking statements are made as of the date we file this Report, and are based on information and estimates available to us at this time. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Except as required by law, we assume no obligation to update any of the statements in this Report whether as a result of any new information, future events, changed circumstances, or otherwise. You should read this Report with the understanding that our actual future results, performance, events, and circumstances might be materially different from what we expect.
Table of Contents
| 2 |
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
ZRCN Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| September 30, 2024 | March 31, 2024 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net
of provision for credit losses of approximately $ | ||||||||
| Inventory, net | ||||||||
| 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 | ||||||||
| Deferred financing costs | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Operating lease liability, current | ||||||||
| Notes payable, current portion | ||||||||
| Total current liabilities | ||||||||
| Line of credit | ||||||||
| 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 September 30, 2024 and March 31, 2024, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| 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 condensed notes are an integral part of these unaudited consolidated financial statements
| 3 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
(Unaudited)
For the Three Months Ended September 30, | For the Six Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 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 | ||||||||||||||||
| (Gain) loss on foreign currency transactions | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other expenses | ||||||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Benefit from (provision for) income taxes | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Less: Net loss attributable to non-controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to ZRCN Inc. common stockholders | $ | $ | $ | ( | ) | $ | ||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Gain (loss) on change in foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income (loss) | ( | ) | ||||||||||||||
| Net loss attributable to non-controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income (loss) attributable to ZRCN common stockholders | $ | $ | $ | ( | ) | $ | ||||||||||
| Net income (loss) per share attributable to ZRCN Inc.: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | |||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 4 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(Unaudited)
| Common Stock | Accumulated Other Comprehensive | Additional Paid-in | Retained | Total Equity Attributable | Non- controlling | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | (Loss) Income | Capital | Earnings | to ZRCN | Interests | Equity | |||||||||||||||||||||||||
| Balance - March 31, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Stockholder distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Gain on change in foreign currency translation adjustment | — | |||||||||||||||||||||||||||||||
| Common stock issued for advisory services | ||||||||||||||||||||||||||||||||
| Net (loss) income | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance - June 30, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Loss on change in foreign currency translation adjustment | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Common stock issued for advisory services | ||||||||||||||||||||||||||||||||
| Share based compensation | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | ( | ) | |||||||||||||||||||||||||||||
| Balance - September 30, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive | Note Receivable from | Retained | Total Equity Attributable | Non- controlling | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Income | Stockholder | Earnings | to ZRCN | Interests | Equity | |||||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Merger with Harmony | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Gain on change in foreign currency translation adjustment | — | |||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Loss on change in foreign currency translation adjustment | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Repayment of Note Receivable from Stockholder | — | |||||||||||||||||||||||||||||||
| Net income (loss) | — | ( | ) | |||||||||||||||||||||||||||||
| Balance - September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 5 |
ZRCN Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the Six Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of right-of-use assets | ||||||||
| Inventory obsolescence impairment | ||||||||
| Provision for credit losses | ||||||||
| Amortization of financing costs | ||||||||
| Share based compensation expense | ||||||||
| Common stock issued for advisory services | ||||||||
| (Gain) loss on foreign currency transactions | ( | ) | ||||||
| Deferred tax asset | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Federal tax deposit | ( | ) | ( | ) | ||||
| Deferred financing costs | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Effect of Harmony Merger, net of cash acquired | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of notes payable | ( | ) | ||||||
| Repayment of debt assumed in Harmony Merger | ( | ) | ( | ) | ||||
| Borrowing on line of credit | ||||||||
| Repayment on line of credit | ( | ) | ( | ) | ||||
| Stockholder distributions | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate fluctuations on cash | ||||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at beginning of year | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Stockholder distributions in Accounts payable | $ | |||||||
| Right-of-use assets obtained in exchange for operating lease liability | $ | $ | ||||||
| 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 | $ | $ | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 6 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
1. Organization
The Business
Zircon Corporation, ZRCN’s wholly-owned subsidiary, 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.
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 disclosed company, in accordance with the Securities Act of 1933 and the Exchange Act of 1934, both as amended. 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.
2. Liquidity
As
of September 30, 2024, the Company had $
| 7 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company and its subsidiaries’ financial position and interim results as of and for the periods presented have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Results for interim periods are not necessarily indicative of those that may be expected for a full year.
The financial information included herein should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report for the year ended March 31, 2024, in our Form 10-K.
The merger between Harmony’s wholly owned subsidiary and Zircon was accounted for as a reverse asset acquisition in accordance with GAAP. Under this method of accounting, Harmony, through its merger subsidiary, was treated as the “acquired” company and Zircon was treated as the acquirer for financial reporting purposes.
The consolidated assets, liabilities and results of operations prior to the merger are those of Zircon. Refer to Note 4 for additional information on the transaction.
Principles of Consolidation
The accompanying unaudited 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.
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.
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.
| 8 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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). |
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 unaudited consolidated statements of operations and comprehensive income (loss).
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 unaudited 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 unaudited consolidated balance sheets and classifies the change in accounts payable associated with book
overdrafts as an operating activity within the unaudited consolidated statement of cash flows. As of September 30, 2024, the book overdraft
included within accounts payable was $
| 9 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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:
| September 30, 2024 | March 31, 2024 | |||||||
| (In thousands) | (Unaudited) | |||||||
| Accounts receivable | $ | $ | ||||||
| Less provision for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Activity related to the Company’s provision for credit losses was as follows:
| September 30, 2024 | March 31, 2024 | |||||||
| (In thousands) | (Unaudited) | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Credit loss provision | ||||||||
| 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.
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.
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 $
| 10 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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.
The Company expenses share based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Share-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards with performance conditions, compensation cost is recognized over the requisite service period based on the actual or expected achievement of the performance condition. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The Company estimates the fair value of restricted stock award grants on the date of issuance. All share-based compensation costs are recorded in general and administrative or research and development costs in the condensed consolidated statements of operations and comprehensive income (loss) based upon the underlying individual’s role at the Company. Share based awards that do not meet the criteria for equity classification are recorded as liabilities and adjusted to fair value at the end of each reporting period.
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 September 30, 2024, the Company maintained deposits in a single bank that exceeded the federal insured deposit limit of the Federal Deposit Insurance Corporation (FDIC).
| 11 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
During
the three months ended September 30, 2024 and 2023 the Company generated approximately
As
of September 30, 2024 and March 31, 2024,
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, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, and other current liabilities approximated their fair values as of September 30, 2024 and March 31, 2024 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.
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.
As of April 14, 2023, Zircon’s election to be an S Corporation under the Internal Revenue Code was no longer in effect.
| 12 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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:
| September 30, 2024 | March 31, 2024 | |||||||
| Common stock warrants | ||||||||
| Stock options | ||||||||
Leases
In February 2016, the FASB issued an 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 this 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 unaudited 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.
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.
| 13 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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 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 unaudited consolidated financial statements and related disclosures and will adopt the new standard using a retrospective approach.
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 unaudited 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 unaudited consolidated financial statements and related disclosures.
In November 2024, the FASB issued ASU 2024-03, the intent of which is to improve financial reporting and respond to investor input by requiring public business entities to disclose additional information about certain expenses in the notes to financial statements in interim and annual reporting periods. Among other provisions, the new standard requires disclosure of disaggregated amounts for expenses such as employee compensation, depreciation, and intangible asset amortization included in each expense caption presented on the face of the income statement. Public business entities are required to include certain amounts that are already required to be disclosed under GAAP in the same disclosure as the other disaggregation requirements as well as a qualitative description of any amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. The new standard also requires disclosure of the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses. An entity is not precluded from providing additional voluntary disclosures that may provide investors with additional decision-useful information
The amendments in the new standard are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The amendments in the new standard should be applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively to any or all prior periods presented in the financial statements. Management is evaluating the new standard and has not yet determined when, or the method by which, the Company will adopt its amendments
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.
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ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
Zircon
agreed to pay the operating liabilities of Harmony, up to and including an aggregate of $
Zircon
paid transaction costs of $
The following table reconciles the elements of the Merger to the unaudited consolidated statements of changes in stockholders’ equity for the six months ended September 30, 2023:
| (In thousands) | 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 $
| 15 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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 three and six months ended September 30, 2024 and 2023, respectively, were as follows:
For the Three Months Ended September 30, | For the Six Months Ended September 30, | |||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Revenue generated per major product line | (Unaudited) | (Unaudited) | ||||||||||||||
| Stud sensor edge | $ | $ | $ | $ | ||||||||||||
| Multifunctional scanners | ||||||||||||||||
| Stud sensor center | ||||||||||||||||
| Target control products | ||||||||||||||||
| Other | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
Revenue disaggregated according to the geographical location of customers for the three and six months ended September 30, 2024 and 2023, respectively, were as follows:
For the Three Months Ended September 30, | For the Six Months Ended September 30, | |||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Revenue by geographic location of customers | (Unaudited) | (Unaudited) | ||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| Japan | ||||||||||||||||
| Europe | ||||||||||||||||
| Others | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
6. Inventory
Inventory consisted of the following:
| September 30, 2024 | March 31, 2024 | |||||||
| (In thousands) | (Unaudited) | (Audited) | ||||||
| Finished goods, net | $ | $ | ||||||
| Raw materials, net | ||||||||
| Work in process, net | ||||||||
| $ | $ | |||||||
Allowance for slow moving and obsolete inventory was estimated at $
| 16 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
7. Property and Equipment
Property and equipment consisted of the following:
| September 30, 2024 | March 31, 2024 | |||||||
| (In thousands) | (Unaudited) | (Audited) | ||||||
| Manufacturing equipment | $ | $ | ||||||
| Computer equipment | ||||||||
| Leasehold improvements | ||||||||
| Furniture and office equipment | ||||||||
| Vehicles | ||||||||
| Construction in progress | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the three and six months ended September 30, 2024, 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.
8. Intangible Assets
The Company’s intangible assets consisted of the following:
| September 30, 2024 | March 31, 2024 | |||||||||||||||||||||||
| (In thousands) | (Unaudited) | |||||||||||||||||||||||
| 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): | September 30, 2024 Weighted Average Life Remaining | |||
| Patents issued and pending | ||||
| Exclusivity rights and licenses | ||||
| (1) |
For
the three and six months ended September 30, 2024, amortization expense was less than $
Expected future amortization expense of acquired finite-lived intangible assets as of September 30, 2024 is as follows:
| For the Years Ending March 31, (In thousands) | Amount | |||
| Remainder of fiscal 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| $ | ||||
| 17 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
9. Accrued Expenses
Accrued expenses consisted of the following:
| September 30, 2024 | March 31, 2024 | |||||||
| (In thousands) | (Unaudited) | |||||||
| Rebates | $ | $ | ||||||
| Stockholder distributions | ||||||||
| Accrued taxes | ||||||||
| Sales expense | ||||||||
| Payroll and related | ||||||||
| Advertising allowance | ||||||||
| Vacation | ||||||||
| Professional services | ||||||||
| Interest | ||||||||
| $ | $ | |||||||
10. Debt
Line of Credit
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 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
Company recognized deferred financing costs of approximately $
| 18 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
The components of the Credit Agreement consisted of the following:
| September 30, 2024 | March 31, 2024 | |||||||
| (In thousands) | (Unaudited) | |||||||
| SOFR | $ | $ | ||||||
| Excess of SOFR | ||||||||
| Line of credit | $ | $ | ||||||
Notes payable to Stauss Family Administrative Trust
The
Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. As of September 30, 2024, the
principal balance of $
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.
For
the three and six months ended September 30, 2024 the interest expense on notes payable to the Stauss Family Administrative Trust totaled
less than $
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 September 30, 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 three and six months ended September 30, 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 less than $
| 19 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
12. Equity
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 September 30, 2024, shares are authorized for issuance, stock options have been awarded, and shares remain available for issuance under the Equity Plan.
| Number of shares | Weighted average exercise price | Weighted average remaining term (years) | Aggregate intrinsic value (in thousands) | |||||||||||||
| Outstanding as of March 31, 2024 | $ | — | $ | |||||||||||||
| Options granted | ||||||||||||||||
| Outstanding as of June 30, 2024 | ||||||||||||||||
| Options granted | ||||||||||||||||
| Outstanding as of September 30, 2024 | $ | $ | ||||||||||||||
| Vested and exercisable as of September 30, 2024 | $ | — | $ | |||||||||||||
During
the three and six months ended September 30, 2024, the Company issued and common stock options, respectively, with
an aggregate grant date fair value of $
As of September 30, 2024 there was $ million of unrecognized share based compensation expense related to unvested stock options.
On
June 30, 2024, the Company issued common shares valued at less than $
During
the six months ended September 30, 2024 the Company made a distribution of $
13. Warrants
At
the closing of the Merger, the Company issued certain consultants and advisors warrants to purchase an aggregate of
The following table provides the activity for all warrants for six months ended September 30, 2024:
| Total Warrants | Weighted Average Remaining Term | Weighted Average Exercise Price | ||||||||||
| Outstanding as of March 31, 2024 | $ | |||||||||||
| Outstanding as of September 30, 2024 | $ | |||||||||||
| 20 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
14. Commitments and Contingencies
Legal Proceedings
Zircon 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.
A stay, placed on Zircon’s
patent infringement suit filed against Stanley Black & Decker, Inc. (“SBD”) in the Federal District Court in the
Northern District of California in December 2019, was released on May 8, 2024 following disposition of the International Trade
Commission (“ITC”) matter between the parties filed by Zircon. The parties met and conferred and participated in a Court
supervised mediation on September 18, 2024 that resulted in a Settlement Agreement entered into on October 15, 2024. Pursuant to the
Settlement Agreement, Zircon and Stanley provided releases to one another and their respective subsidiaries and affiliates and
Stanley received a fully paid patent license under certain Zircon patents in exchange for payment to Zircon of $
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 these financial statements, 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 Corporation
for approximately $ million 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 less than $
| 21 |
ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
The
Company leases office equipment through a lease that expires in June 2026 and requires monthly lease payments of less than $
The
Company had leased a vehicle that expired on July 2024 and required monthly lease payments of less than $
As
of September 30, 2024, the Company had an operating lease right-of-use asset 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:
| (In thousands) | September 30, 2024 | September 30, 2023 | ||||||
| (Unaudited) | ||||||||
| Components of lease cost: | ||||||||
| Operating lease expense | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
The following table provides the weighted average lease term and weighted average discount rate as of September 30, 2024 and 2023, respectively:
| September 30, 2024 | September 30, 2023 | |||||||
| (Unaudited) | ||||||||
| Weighted average remaining lease term (in years) | ||||||||
| Weighted average discount rate | % | % | ||||||
Future minimum lease payment under non-cancellable lease as of September 30, 2024 are as follows:
| Maturities of lease liabilities (In thousands) | Operating Leases | |||
| Year ending March 31, | ||||
| Remainder of fiscal 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 | $ | |||
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ZRCN Inc.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
15. 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 the premerger ownership of Zircon.
The
Company leases from the Stauss Family Administrative Trust a
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 three and six months ended September 30, 2023, the interest expense on notes payable to the Stauss Family Administrative Trust totaled
less than $
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.
16. Subsequent events
On October 7, 2024 Mr. Brian Wong was added to the Company’s Board of Directors
On
October 11, 2024 the Company disbursed approximately $
On October 15, 2024 the Company. entered into a Settlement Agreement (the “Settlement Agreement”) with SBD, pursuant to which, among other things, the parties entered into a in full settlement of all pending claims brought by the Company against SBD and each party agreed to release and discharge all claims against the other, including any claims that were or could have been asserted in the litigation.
The
Settlement Agreement provides that Zircon shall grant SBD and its affiliates a worldwide, non-exclusive, fully paid-up, irrevocable license
under the Licensed Patents (as defined in the Settlement Agreement) for the term thereof to make, use, sell, offer for sale, have made
and/or import the Licensed Activities and Products (as defined in the Settlement Agreement) in consideration for a one-time payment of
$
On October 18, 2024 Ms. Linda Graebner was added to the Company’s Board of Directors
On October 21, 2024 SBD made the Settlement Payment to the Company.
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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
During the six months ended September 30, 2024, and at March 31, 2024, Zircon’s selected financial information is the following (in thousands):
Financial Position Analysis
The information presented below as of September 30, 2024 as compared to March 31, 2024 for ZRCN Inc (in thousands):
| September 30, 2024 | ||||||||
| In thousands | (Unaudited) | March 31, 2024 | ||||||
| Assets | $ | 27,785 | $ | 27,615 | ||||
| Liabilities | $ | 19,585 | $ | 18,688 | ||||
| Equity | $ | 8,200 | $ | 8,927 | ||||
Assets
Total assets on September 30, 2024 were $27.8 million compared to $27.6 million on March 31, 2024, which was a increase of approximately $0.2 million. This increase was driven primarily by increases in accounts receivable of $0.6 million, deferred financing costs of $0.3, and deferred tax assets of $0.2 million offset by a decrease in inventories of $0.9 million.
Liabilities
Total liabilities on September 30, 2024 were $19.6 million compared to $18.7 million on March 31, 2024, which was an increase of approximately $0.9 million. This increase was driven primarily by an increase in our line of credit of $1.3 million, offset by a decrease in accounts payable and accrued expenses of $0.3 million and a decrease in notes payable of $75,000.
Equity
Total equity on September 30, 2024 was $8.2 million compared to $8.9 million on March 31, 2024, which was a decrease of approximately $0.7 million. This decrease was driven primarily by a net loss of $0.1 million, a cash distribution to shareholders of $0.2 million and an accrued distribution to shareholders of $0.4 million.
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Operating Results Analysis
For the Three Months Ended September 30, | For the Six Months Ended September 30, | |||||||||||||||
| (In thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net Sales | $ | 9,362 | $ | 9,262 | $ | 15,173 | $ | 15,829 | ||||||||
| Cost of goods sold | 5,356 | 4,872 | 8,816 | 8,495 | ||||||||||||
| Gross Profit | 4,006 | 4,390 | 6,357 | 7,334 | ||||||||||||
| Gross Margin | 42.8 | % | 47.4 | % | 41.9 | % | 46.3 | % | ||||||||
| Operating Expenses | ||||||||||||||||
| General & administrative | 2,025 | 1,721 | 3,486 | 3,390 | ||||||||||||
| Marketing & selling | 1,105 | 1,035 | 2,008 | 2,175 | ||||||||||||
| Research and development | 432 | 503 | 857 | 988 | ||||||||||||
| Total Operating Expenses | 3,562 | 3,259 | 6,351 | 6,553 | ||||||||||||
| Operating Income (Loss) | 444 | 1,131 | 6 | 781 | ||||||||||||
| Other Expenses | ||||||||||||||||
| Interest expense | 203 | 176 | 426 | 333 | ||||||||||||
| Other loss | 9 | 10 | 16 | 19 | ||||||||||||
| (Income) loss on foreign currency translation | (62 | ) | (42 | ) | (165 | ) | 7 | |||||||||
| Total other expenses | 150 | 144 | 277 | 359 | ||||||||||||
| Income (Loss) before income taxes | 294 | 987 | (271 | ) | 422 | |||||||||||
| Benefit from (Provision for) income taxes | 175 | (133 | ) | 154 | (33 | ) | ||||||||||
| Net income (loss) | $ | 469 | $ | 854 | $ | (117 | ) | $ | 389 | |||||||
| Less: Net loss attributable to non-controlling interests | (176 | ) | (13 | ) | (98 | ) | (96 | ) | ||||||||
| Net income (loss) attributable to ZRCN Inc. common stockholders | $ | 645 | $ | 867 | $ | (19 | ) | $ | 485 | |||||||
Sales revenue and gross margin
Revenue for the three months ended September 30, 2024 was $9.4 million compared to $9.3 million for the three months ended September 30, 2023 which was a increase of $0.1 million, or 1%. This increase was driven primarily by increased sales in Canada, Europe and Japan. Gross profit for the three months ended September 30, 2024 was $4.0 million, or 43% compared to $4.4 million, or 47%, during the three months ended September 30, 2023, which was a decrease of $0.4 million, or 9% and 4%, respectively. The decrease in gross profit was driven by reduced unit volumes and an unfavorable product mix and the decrease in gross margin was driven by an unfavorable product mix, reduced volumes and stable manufacturing expenses.
Revenue for the six months ended September 30, 2024 was $15.2 million compared to $15.8 million for the six months ended September 30, 2023 which was a decrease of $0.6 million, or 4%. This decrease was driven primarily by decreased sales in the United States. Gross profit for the six months ended September 30, 2024 was $6.4 million, or 42% compared to $7.3 million, or 46%, during the six months ended September 30, 2023, which was a decrease of $0.9 million, or 13% and 4%, respectively. The decrease in gross profit was driven by reduced unit volumes and the decrease in gross margin was driven by an unfavorable produce mix, reduced volumes and stable manufacturing expenses across production volumes.
Research and development
Research and development expenses for the three months ended September 30, 2024 were $0.4 million compared to $0.5 million for the three months ended September 30, 2023. This decrease of $71,000, or 14%, was driven primarily by reduced payroll expenses.
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Research and development expenses for the six months ended September 30, 2024 were $0.9 million compared to $1.0 million for the six months ended September 30, 2023. This decrease of $0.1 million, or 13%, was driven primarily by reduced payroll expenses.
General and Administrative expenses
General and administrative expenses for the three months ended September 30, 2024 were $2.0 million compared to $1.7 million for the three months ended September 30, 2023 which was an increase of $0.3 million, or 18%. This increase was driven primarily by increased payroll, bank fees, and legal expenses.
General and administrative expenses for the six months ended September 30, 2024 were $3.5 million compared to $3.4 million for the six months ended September 30, 2023 which was an increase of $0.1 million, or 3%. This increase was driven primarily by increased bank fees and payroll expenses.
Marketing and Selling expenses.
Marketing and selling expenses for the three months ended September 30, 2024 were $1.1 million compared to $1.0 million for the three months ended September 30, 2023 which was a increase of $70,000, or 7%. This increase was driven primarily by an increase in sales payroll expenses.
Marketing and selling expenses for the six months ended September 30, 2024 were $2.0 million compared to $2.2 million for the six months ended September 30, 2023 which was a decrease of $0.2 million, or 8%. This decrease was driven primarily by a reduction in the consulting, advertising, sales commissions, and payroll expenses.
Stock based compensation.
During the three months ended September 30, 2024 the company recorded stock compensation expense of approximately $9,000. During the three months ended September 30, 2023, Zircon did not record any stock-based compensation.
During the six months ended September 30, 2024 the Company recorded stock based compensation expense of approximately $9,000. During the six months ended September 30, 2023, Zircon did not record any stock-based compensation.
Warrants with a fair value of $0.3 million were issued during the year ended March 31, 2024.
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Other expenses
Other expenses for the three months ended September 30, 2024 were approximately $0.1 million compared to $0.1 million for the three months ended September 30, 2023 which was an increase of approximately $6,000, or 4%. This increase was driven primarily by an increase in interest expense of $27,000 and a decrease in foreign exchange losses of $20,000.
Other expenses for the six months ended September 30, 2024 were approximately $0.3 million compared to $0.4 million for the six months ended September 30, 2023 which was a decrease of approximately $82,000, or 23%. This decrease was driven primarily by an increase in interest expense of $93,000 and a decrease in foreign exchange losses of $0.2 million
Zircon has notes payable to the Stauss Family Administrative Trust to repay loans made to Zircon. The principal balance of $0.7 million 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 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 on these notes for the three months ended September 30, 2024 and 2023, respectively, was approximately $18,000 and $13,000 respectively. Interest expense on these notes for the six months ended September 30, 2024 and 2023, respectively, was approximately $28,000 and $25,000, respectively.
Benefit from/Provision for income taxes
The benefit from income taxes for the three months ended September 30, 2024 was approximately $0.2 million compared to a provision for income taxes of approximately $0.1 million for the three months ended September 30, 2023 which was a favorable change of approximately $0.3 million. This favorable change was driven by a change in our deferred tax asset position.
The benefit from income taxes for the six months ended September 30, 2024 was approximately $0.2 million compared to a provision for income taxes of approximately $33,000 for the six months ended September 30, 2023 which was a favorable change of approximately $0.2 million. This favorable change was driven 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 approximately $0.1 million for both the three and six months ended September 30, 2024 and 2023.
Cash Flow Analysis
| For the Six Months Ended September 30, | ||||||||
| In thousands | 2024 | 2023 | ||||||
| Operating activities | $ | (516 | ) | $ | (125 | ) | ||
| Investing activities | (686 | ) | (875 | ) | ||||
| Financing activities | 972 | 1,212 | ||||||
| Effect of exchange rate changes | 151 | 2 | ||||||
| Net increase (decrease) in cash | $ | (79 | ) | $ | 214 | |||
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Operating activities
During the six months ended September 30, 2024, net cash used by operating activities was $0.5 million. This decrease was due to a net loss of $0.3 million offset by non-cash expenses for depreciation, amortization, and inventory obsolescence impairment of $1.1 million, common stock issued for advisory services of $69.000, a decrease in inventories of $0.4 million, and an increase in accrued expenses of $0.7 million, offset by an increase in accounts receivable of $0.7 million, an increase in prepaids of $0.2 million, a decrease in accounts payable of $1.1 million, an increase in deferred expenses of $0.3 million, an increase in federal tax deposits of $66,000, a decrease in operating lease liabilities of $54,000, and a provision for bad debt and foreign currency losses of $47,000.
During the six months ended September 30, 2023, net cash used by operating activities was $0.1 million. This decrease was due to net income of $0.4 million in addition to non-cash expenses for depreciation and amortization, inventory obsolescence impairment, and provisions for bad debt and currency losses of $0.4 million, a decrease in prepaids of $0.1 million, an increase in accounts payable and accrued expenses of $2.8 million, offset by an increase in accounts receivable of $2.2 million, an increase in inventory of $1.4 million, an increase in the federal tax deposit of $78,000, and a decrease in operating lease liabilities of $86,000.
Investing Activities
During the six months ended September 30, 2024, net cash used in investing activities was $0.7 million. This decrease was due to purchases of property and equipment of $0.7 million.
During the six months ended September 30, 2023, net cash used in investing activities was $0.9 million. This decrease was due to the impact of the Harmony merger, net of cash acquired of $0.5 million and purchases of property and equipment of $0.4 million.
Financing Activities
During the six months ended September 30, 2024, net cash provided by financing activities was $1.0 million. This increase was due to borrowings on lines of credit of $10.6 million offset by repayments of $9.3 million, shareholder distributions of $0.2 million and repayment of debt assumed as part of the Harmony merger of $75,000.
During the six months ended September 30, 2023, net cash provided by financing activities was $1.2 million. This increase was due to net borrowings under the Company’s line of credit of $1.7 million offset by repayments of debt assumed as part of the Harmony merger of $0.3 million, and repayment of notes payable of $0.2 million.
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Liquidity, Capital Resources and Sources of Financing
As of September 30, 2024 the Company had a cash balance of $0.4 million and working capital of $14.2 million. Working capital as of March 31, 2024 was $14.1 million. The increase of $0.1 million was driven primarily by an increase in accounts receivable of $0.6, an increase in prepaids of $0.1 million and a decrease in accounts payable and accrued expenses of $0.3 million offset by a decrease in inventories of $0.9 million. 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. As of September 30, 2024 the Company had a liability of approximately $9.3 million outstanding under the Credit Agreement and was compliant with the maximum total net leverage and but not the fixed charge coverage ratio. The Company is working with the lender to get a waiver regarding the fixed charge coverage ratio.
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 as of September 30, 2024 | ||||
| Common shares issued and outstanding | 10,050,265 | |||
| Potential issuance of common shares | ||||
| Warrants | 217,184 | |||
| Stock options | 298,000 | |||
| Fully diluted shares | 10,565,449 | |||
As of November 14, 2024 the Company had 10,050,265 common shares outstanding.
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 the premerger ownership of Zircon.
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The Company leases from the Stauss Family Administrative Trust a 14,000 square foot facility owned by the 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 $0.7 million 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 $0.2 million. For the three and six months ended September 30, 2024, the interest expense on notes payable to the Stauss Family Administrative Trust totaled less than $0.1 million, respectively.
For the three and six months ended September 30, 2023, the interest expense on notes payable to the Stauss Family Administrative Trust totaled less than $0.1 million, 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.
During the three months ended June 30, 2024, the Company made a distribution of $0.7 million to certain related party shareholders and one director shareholder for taxes due resulting from the Company converting from an S corporation to a C corporation. $0.3 million of this distribution was in cash and the remaining $0.4 million is recorded in accrued expenses on the balance sheet. During October 2024 the Company made a cash distribution of approximately $0.4 million to settle the remaining liability.
Off-Balance Sheet Arrangements
ZRCN has no off-balance sheet arrangements.
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 to Note 3 of the financial statements for the three months ended June 30, 2024, for details.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Foreign Currency 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 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 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.
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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 Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal accounting and financial officer has concluded that as of September 30, 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 continue to develop 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 September 30, 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 September 30, 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 three months ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. 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.
Zircon is engaged in procedures to protect its proprietary rights and Zircon has filed complaints with the Federal Trade Commission and the Customs and Border Patrol.
Zircon Corporation v. Stanley Black & Decker, Inc et al.
A stay, placed on Zircon’s patent infringement suit filed against Stanley Black & Decker, Inc. in the Federal District Court in the Northern District of California in December 2019, was released on May 8, 2024 following disposition of the International Trade Commission (“ITC”) matter between the parties filed by Zircon. The parties met and conferred and participated in a Court supervised mediation on September 18, 2024 that resulted in a Settlement Agreement entered into on October 15, 2024. Pursuant to the Settlement Agreement, Zircon and Stanley provided releases to one another and their respective subsidiaries and affiliates and Stanley received a fully paid patent license under certain Zircon patents in exchange for payment to Zircon of $0.8 million and dismissal with prejudice of the subject litigation. The payment has been made and dismissal filed. The matter is closed.
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.
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Item 1A. Risk Factors
Information regarding the primary risks and uncertainties that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements, appears in Part I, Item 1A - “Risk Factors” of our 2024 Form 10-K filed with the Securities and Exchange Commission on July 16, 2024. There have been no material changes from the risk factors set forth in our Form 10-K filed on July 16.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any sales of unregistered securities of our common stock during the period from April 1, 2024, through September 30, 2024.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During
the last fiscal quarter, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
Item 6. Exhibits
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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. | ||
| Date: November 19, 2024 | By: | /s/ John Stauss |
| Name: | John Stauss | |
| Title: | Chairman and Chief Executive Officer | |
| Date: November 19, 2024 | /s/ Jeff Parsons | |
| Name: | Jeff Parsons | |
| Title: | Chief Financial Officer | |
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