Annual Report for Fiscal Year Ending March 31, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management discussion and analysis of the financial position and results of operations ("MD&A") should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included elsewhere in this Report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among others, those listed under "Forward-Looking Statements" and "Risk Factors" and those included elsewhere in this report.

OVERVIEW

Zircon is a Silicon Valley-based company operating in Northern California since 1977, leveraging its proprietary sensor-based technology across a mix of global markets, including commercial and residential buildings, government infrastructure and building information modeling. Zircon is focused on creating new, technical solutions for global applications in the areas of home and workplace safety, project efficiency, and structural data analysis.

Zircon benefits from a multi-generational customer base of professional contractors and do-it-yourselfers who rely on Zircon's innovative and easy-to-use products to get the job done.

RESULTS OF OPERATIONS

The Company's selected financial information for fiscal 2025 and fiscal 2024 is as follows. All the data are presented in United States dollars.

Financial Position Analysis

The information presented as of March 31, 2025 represents the information for ZRCN Inc. The information presented as of March 31, 2024 represents the information of Zircon Corporation.

In thousands		March 31, 2025				March 31, 2024
Assets		$	23,378			$	27,615
Liabilities		$	17,848			$	19,347
Equity		$	5,530			$	8,268

Assets

Total assets as of March 31, 2025, were $23.4 million compared to $27.6 million as of March 31, 2024, which was a decrease of approximately $4.2 million. This decrease was driven primarily by an increase in cash of $0.9 million, an increase in deferred financing costs of $0.2 million offset by a decrease in accounts receivable of approximately $2.5 million, a decrease in inventory of approximately $1.6 million, a decrease in deferred tax assets of $0.5 million, a decrease in property, plant and equipment of $0.2 million, a decrease in operating right-of-use assets of $0.2 million, a decrease in federal tax deposits of $0.2 million, and a decrease in net intangible assets of $0.1 million.

Liabilities

Total liabilities as of March 31, 2025, were $17.9 million compared to $19.3 million as of March 31, 2024, which was a decrease of approximately $1.5 million. This decrease was driven primarily by a decrease in accounts payable and accrued expenses of $1.7 million and a decrease in operating lease liabilities of $0.2 million which was offset by an increase in the line of credit of $0.4 million.

Equity

Total equity as of March 31, 2024, was $5.5 million compared to $8.9 million as of March 31, 2024, which was a decrease of approximately $2.7 million. This decrease was driven primarily by a net loss of $3.0 million offset by stock based payments of approximately $0.3 million.

Operating Results Analysis

Readers are invited to take into consideration the consolidated operating results of Zircon Corporation for the fiscal years ended March 31, 2025 and 2024.

		For the Twelve Months Ended March 31,
(In thousands)		2025				2024
Net Sales		$	28,075			$	31,519
Cost of goods sold			16,936				17,690
Gross Profit			11,139				13,829
Gross Margin			39.7	%			43.9	%
Operating Expenses
General & administrative			7,354				6,702
Marketing & selling			4,528				4,373
Research and development			1,712				1,918
Total Operating Expenses			13,594				12,993
Operating Income (Loss)			(2,455	)			836
Other (Income) Expense
Settlement of litigation			(800	)			0
Interest expense			804				739
Other expense			30				31
(Income) loss on foreign currency translation			(172	)			85
Total other expenses			(138	)			855
Income (Loss) before income taxes			(2,317	)			(19	)
Benefit from (Provision for) income taxes			(573	)			70
Net income (loss)		$	(2,890	)		$	51
Foreign currency translation adjustment			(160	)			(203	)
Comprehensive income (loss)		$	(3,050	)		$	(152	)

Sales revenue and gross margin

Revenue for fiscal 2025 was $28.1 million compared to $31.5 million in fiscal 2024 which was a decrease of $3.4 million, or 11%. This decrease was driven primarily by decreased sales in the United States from one key customer. Gross profit for fiscal 2025 was $11.1 million, or 39.7% compared to $13.8 million, or 43.9%, which was a decrease of $2.7 million, or 19%, and 4.2%, respectively. The decrease in gross profit was driven primarily by reduced revenue from one key customer and the decrease in gross margin was driven by a more unfavorable product mix and reduced absorption of manufacturing expenses due to reduced unit volume.

Research and development

Research and development expenses for fiscal 2025 were $1.7 million compared to $1.9 million in fiscal 2024. The decrease in 2025 was $0.2 million, or 11%, and was driven primarily by reduced consulting expenses.

Marketing and selling

Marketing and selling expenses for fiscal 2025 were $4.5 million compared to $4.4 million in fiscal 2024 which was an increase of $0.1 million, or 4%. This increase was driven primarily by an increase in payroll expense.

Administrative expenses

General and administrative expenses for fiscal 2025 were $7.3 million compared to $6.7 million in fiscal 2024 which was an increase of $0.4 million, or 6%. This increase was driven primarily by an increase of $0.4 million in non-interest bank charges such as audit and legal expenses incurred by the lender and charged to the Company and $0.2 million of audit fees.

Other income/expense

Other income for fiscal 2025 was $0.8 million compared to zero in fiscal 2024 which was an increase of $0.8 million. This increase was driven primarily by a settlement benefit in the Stanley Black & Decker litigation of $0.8 million. This litigation is now closed.

Interest and other expenses for fiscal 2025 were $0.8 million compared to $0.8 million in fiscal 2024 which was an increase of $63,000 or 8%. This increase was driven primarily by an increase in interest expense of $72,000 related to the amortization of deferred financing cost associated with the new financing from FGI. Income from foreign currency translation adjustments increased by $0.3 million primarily due to favorable exchange rate changes between the U.S. dollar and the Mexican peso.

Provision for income taxes

The Company moved from a benefit position of $70,000 during the year ended March 31, 2024 to the need for a provision of $0.6 million for the year ended March 31, 2025 as the Company recorded a full valuation allowance on its previously recorded deferred tax assets. The Company recorded this valuation allowance as a result of net losses recorded during recent fiscal years.

Cash Flow Analysis

		For the Years Ended March 31,
In thousands		2025				2024
Operating activities		$	2,153			$	1,184
Investing activities			(788	)			(1,169	)
Financing activities			(667	)			590
Effect of exchange rate changes			207				(132	)
Net increase (decrease) in cash		$	905			$	473

Operating Activities

During the year ended March 31, 2025, net cash provided by operating activities was $2.2 million. This increase was due to a decrease in accounts receivable of $2.3 million, a decrease in inventory and prepaids of $1.0 million, depreciation of $1.0 million, amortization of intangibles, right-of-use assets, and deferred financing costs of $0.4 million, inventory obsolescence impairment of $0.6 million, provision for credit losses of $0.2 million, stock based compensation of $0.3 million, a reduction in deferred tax assets of $0.5 million, and a reduction in tax deposits of $0.2 million all offset by a net loss of $2.9 million, a decrease in accounts payable and accrued expense of $1.0 million, a decrease in lease liabilities of $0.2 million, and a foreign exchange gain of $0.2 million.

During the year ended March 31, 2024, net cash provided by operating activities was $1.2 million. This increase was due to net income of $51,000, non-cash expenses for depreciation, amortization, and inventory obsolescence impairment of $1.3 million, provision for bad debt and foreign currency losses of $89,000, a decrease in prepaids and other assets of $0.2 million, and common stock issued for advisory services of $0.1 million, an increase in accounts payable and accrued expenses and other current liabilities of $2.8 million, offset by an increase in accounts receivable of $1.1 million, an increase in inventory of $1.4 million, and increase in deferred tax assets of $0.5 million, an increase in the federal tax deposit of $78,000, and a decrease in operating lease liabilities of $0.2 million.

Investing Activities

During the year ended March 31, 2025, net cash used in investing activities was $0.8 million. This decrease was due to purchases of property and equipment of $0.8 million,

During the year ended March 31, 2024, net cash used in investing activities was $1.2 million. This decrease was due to purchases of property and equipment of $0.6 million, the net effect of the Harmony merger of $0.5 million, and investments in intangible assets of $68,000.

Financing Activities

During the year ended March 31, 2025, net cash used in financing activities was $0.7 million. This decrease was due to borrowings under the Company's line of credit of $25.0 million offset by repayment of borrowings of $24.6 million, net shareholder distributions of approximately $0.7 million, deferred financing costs of $0.3 million, and repayment of debt assumed as part of the Harmony merger of $75,000.

During the year ended March 31, 2024, net cash provided by financing activities was $0.6 million. This increase was due to borrowings under the Company's line of credit of $10.9 million offset by repayment of borrowings of $10.1 million, a bank overdraft of $0.4 million offset by repayment of debt assumed as part of the Harmony merger of $0.3 million and repayments of notes payable of $0.3 million.

Liquidity, Capital Resources and Sources of Financing

As of March 31, 2025, the Company had a cash balance of $1.4 million and working capital of $3.5 million. Working capital as of March 31, 2024 was $13.4 million. This decrease of $9.9 million was driven primarily by an increase cash of $0.9 million, a decrease in accounts payable and accrued expenses of $1.7 million, and a decrease in the current portion of notes payable of $75,000 offset by a reclass of the $8.4 million line of credit to current liabilities from non-current liabilities, a decrease in accounts receivables of $2.5 million, a decrease in inventory of $1.6 million, and a decrease in prepaids of $0.1 million. To date the Company has been financed primarily through retained earnings, loans and credit lines secured by accounts receivable, inventory and fixed assets.

We do not believe our existing cash and cash equivalents along with borrowing capacity from our current lender will be sufficient to meet our anticipated cash needs over the next 12 months. The Company has incurred losses and anticipates that existing cash and available credit may not be sufficient to meet its operating and debt service needs for the next 12 months. As of March 31, 2025, the Company is not in compliance with its Credit Agreement covenants and is operating under a forbearance agreement. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management is actively pursuing options to improve liquidity, including negotiating waivers or amendments to existing debt covenants, reducing discretionary spending, and evaluating potential capital raises. While these plans are intended to mitigate the risk, there can be no assurance that they will be successful in eliminating the substantial doubt.

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. As of March 31, 2025, the outstanding balance on the FGI Credit Facility was approximately $8.4 million.

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 a maximum total net leverage of $15.0 million and a minimum fixed charge coverage ratio of 1.10. As of March 31, 2025, the Company was not in compliance with the fixed charge coverage ratio and is working with the lender to obtain a waiver and has entered into a forbearance agreement with regard thereto along with additional covenants.

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 March 31, 2025
Common shares issued and outstanding			10,306,426
Potential issuance of common shares
Warrants			217,184
Stock options			3,216,500
Fully diluted shares			13,740,110

In accordance with a services agreement with Semi-Cap Equity. Partners ("SCE"), an investment bank, dated May 15, 2023 and amended on July 15, 2024, the Company will issue an additional 49,998 common shares to SCE earned during the period from March 31, 2025 through September 4, 2025. As of September 4, 2025 the Company's agreement with SCE has been terminated.

During the year ended March 31, 2025, the Company issued 289,490 common shares primarily to two legal firms in lieu of cash payments to settle outstanding liabilities for services related to patent infringement litigation and patent acquisition. These shares also include the shares issued or to be issued to SCE.

Related Party Transactions

Zircon is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if Zircon operated as an unaffiliated entity.

Zircon has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the "Contractor"), an entity which is owned by certain shareholders of Zircon. Under the terms of the agreement, Zircon provides materials, technical assistance, and expertise to the Contractor, and the Contractor assembles certain of Zircon's products.

In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of Zircon's products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of Zircon.

The Company leases a 14,000 square foot facility from a trust owned by the Stauss Family Administrative Trust.

The Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. As of March 31, 2025, principal balance of $0.7 million is due and payable on December 31, 2027. 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 FGI and no payment is to be made on the note without prior approval from FGI. In the second quarter of 2023, a portion of the note payable to Stauss Family Administrative Trust was settled as a non-cash transaction against the note receivable from one stockholder for $240,190.

For the years ended March 31, 2025 and 2024 the interest expense on notes payable to the Stauss Family Administrative Trust totaled $37,000 and $30,000 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.

On March 27, 2025 the Stauss Family Administrative Trust and the Company agreed to extend the maturity date of the Notes Payable to the trust to December 31, 2027.

Off-Balance Sheet Arrangements

ZRCN has no off-balance sheet arrangements.

Contractual Obligations and Commitments

As of March 31, 2025, we had contractual obligations for building leases, a line of credit with FGI, and notes payable with the Stauss Family Administrative Trust. The building leases include our corporate office in Campbell, CA that will expire in December 2027. As of March 31, 2025, our future contractual commitments for our leases were $0.6 million and our long-term debt obligations were $8.4 million. For additional information on our leases and timing of future payments, please see Note 10 and Note 14 to the consolidated financial statements included in this Annual Report on this Form 10-K.

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 regarding 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 year ended March 31, 2025, for details.

Critical Accounting Policies and Estimates

Please refer to Note 3 Summary of Significant Accounting Policies of the Financial Statements for disclosures regarding the critical accounting policies related to our business.

Recently Issued Accounting Standards

Our recently issued accounting standards are included in Note 3 Summary of Significant Accounting Policies of the Financial Statements for disclosures regarding the critical accounting policies related to our business.