Washington, D.C. 20549
Indicate by check mark if the registrant
is a well-known seasoned issuer (as defined in Rule 405 of the Act). Yes
¨
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
¨
No
x
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. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted 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 and post such files).
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark if the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of Common Stock,
$.01 par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock on the New York Stock
Exchange (NYSE MKT LLC) on September 30, 2015, was $11,278,438.
The number of shares of common stock outstanding
as of August 31, 2016 was 2,312,887.
To the extent specified, Part III of this
Form 10-K incorporates information by reference to the Registrant’s definitive proxy statement for its 2016 Annual Meeting
of Shareholders.
PART I
General
Universal Security
Instruments, Inc. (“we” or “the Company”) designs and markets a variety of popularly-priced safety products
consisting primarily of smoke alarms, carbon monoxide alarms and related products. Most of our products require minimal installation
and are designed for easy installation by the consumer without professional assistance, and are sold through retail stores. We
also market products to the electrical distribution trade through our wholly-owned subsidiary, USI Electric, Inc. (“USI Electric”).
The electrical distribution trade includes electrical and lighting distributors as well as manufactured housing companies. Products
sold by USI Electric usually require professional installation.
In 1989 we formed Eyston
Company Limited, a limited liability company under the laws of Hong Kong, as a joint venture with a Hong Kong-based partner, to
manufacture various products in the Peoples Republic of China (the “Hong Kong Joint Venture”). We currently own a 50%
interest in the Hong Kong Joint Venture and are a significant customer of the Hong Kong Joint Venture (52.0% and 41.8% of its sales
during fiscal 2016 and 2015 respectively), with the balance of its sales made to unrelated customers worldwide. We import all of
our products from foreign suppliers. For the fiscal year ended March 31, 2016, approximately 97.0% of our purchases were imported
from the Hong Kong Joint Venture.
Our sales for the year
ended March 31, 2016 were $13,740,840 compared to $9,891,554 for the year ended March 31, 2015. We reported a net loss of $2,137,792
in fiscal 2016 compared to a net loss of $3,704,985 in fiscal 2015, a decrease in net loss of $1,567,193 (42.3%). The decrease
in the net loss is primarily due to increased sales and the increased gross profit obtained on sales of the Company’s new
line of sealed battery smoke, carbon monoxide, and combination alarms. Sales of these products have increased as the new line of
products achieved independent certification and began selling throughout the fiscal year. The improvement in the net loss of the
Company also reflects a $386,713 decrease in our loss from investment in the Hong Kong Joint Venture. Increased purchases by the
Company of our new sealed battery alarms from the Hong Kong Joint Venture, as mentioned above, was a primary contributor to reducing
the net loss of the Hong Kong Joint Venture.
The Company was incorporated
in Maryland in 1969. Our principal executive office is located at 11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117,
and our telephone number is 410-363-3000. Information about us may be obtained from our website
www.universalsecurity.com.
Copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are available free of
charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s
EDGAR reporting system. Simply select the “Investor Relations” menu item, and then click on the “SEC Filings”
link. The SEC’s EDGAR reporting system can also be accessed directly at
www.sec.gov
.
Safety Products
We market a line of
residential smoke and carbon monoxide alarms under the trade names “UNIVERSAL” and “USI Electric” both
of which are manufactured by the Hong Kong Joint Venture.
Our line of safety
alarms consists of units powered by replaceable batteries, ten year sealed batteries, and electrical with battery backup alarms.
Our replaceable battery products contain different types of batteries with different battery lives, and some with alarm silencers.
The smoke alarms marketed to the electrical distribution trade also include hearing impaired and heat alarms with a variety of
features. We also market door chimes and ventilation products.
Over the past several
fiscal years we have added significantly to our intellectual property portfolio. Since 2010 the United States Patent and Trademark
Office has awarded eight patents to the Company, many being applied to our “Smart Alarm Technology” developed to significantly
reduce nuisance alarms. This “Smart Alarm Technology” is being incorporated into our new sealed battery alarms. In
addition, certain of our detector designs have also been awarded patents. We consider these patented enhancements to form a core
part of the Company’s “next generation” safety product line. The Company has also been awarded foreign patents
for its technology. The Company has actively pursued development of an array of unique packaging and source identifiers with the
intent of promoting consumer association with our Company’s “next generation” product line. These efforts have
resulted in eight new Trademark registrations being granted by the United States Patent and Trademark Office.
We also submitted each
of our new products for independent testing agency approval, and have introduced products into the marketplace as approvals were
received. This process began during the fourth quarter of our 2010 fiscal year and continues with the development and testing of
our sealed battery alarms. Currently, we have received independent testing agency approvals on certain sealed battery products
and we are awaiting approval of additional models of our sealed battery products before our entire line of new products will have
been introduced to the market by the end of our fiscal year ending March 31, 2017.
Our wholly-owned subsidiary,
USI Electric, Inc., focuses its sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon
monoxide alarms manufactured by our Hong Kong Joint Venture, to the electrical distribution trade and to foreign customers.
Import Matters
We import all of our
products. As an importer, we are subject to numerous tariffs which vary depending on types of products and country of origin, changes
in economic and political conditions in the country of manufacture, potential trade restrictions, and currency fluctuations. We
have attempted to protect ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments
in U.S. dollars.
Our inventory purchases
are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated
with purchasing products abroad. Substantially all of our safety products, including products we purchase from our Hong Kong Joint
Venture, are imported from the People’s Republic of China.
Sales and Marketing; Customers
We sell our products
to various customers, and our total sales market can be divided generally into two categories; sales by the Company to retailers,
including wholesale distributors, chain, discount, television retailers and home center stores, catalog and mail order companies
and other distributors (“retailers”), and sales by our USI Electric subsidiary to the electrical distribution trade
(primarily electrical and lighting distributors and manufactured housing companies) and foreign customers. Products marketed by
the Company have historically been retailed to “do-it-yourself” consumers by these retailers. Products marketed by
our USI Electric subsidiary to the electrical distribution trade typically require professional installation. We do not currently
market a significant portion of our products directly to end users.
A significant portion
of our sales are made by approximately 36 independent sales organizations, compensated by commission, which represents approximately
230 sales representatives, some of which have warehouses where USI Electric products are maintained for sale. In addition, the
Company has established a national distribution system with eight regional stocking warehouses throughout the United States which
generally enables customers to receive their orders the next day without paying for overnight freight charges. Our agreements with
these sales organizations are generally cancelable by either party upon 30 days’ notice. We do not believe that the loss
of any one of these organizations would have a material adverse effect upon our business. Sales are also made directly by the officers
and full-time employees of the Company and our USI Electric subsidiary, seven of whom have other responsibilities for the Company.
Sales outside the United States are made by our officers and through exporters, and amounted to approximately 4.8% in fiscal 2016
and 9.9% of total net sales in fiscal 2015.
We also market our
products through our website and through our own sales catalogs and brochures, which are mailed directly to trade customers. Our
customers, in turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media.
We also exhibit and sell our products at various trade shows, including the annual National Hardware Show.
Our backlog of orders
as of March 31, 2016 was approximately $631,000. Our backlog as of March 31, 2015 was approximately $231,000. This increase in
backlog is primarily due to the timing of orders of our safety products.
Hong Kong Joint Venture
We have a 50% interest
in Eyston Company Limited, the Hong Kong Joint Venture, which has manufacturing facilities in the People’s Republic of China,
for the manufacturing of certain of our electronic and electrical products.
We believe that the
Hong Kong Joint Venture arrangement will ensure a continuing source of supply for a majority of our safety products at competitive
prices. During fiscal years 2016 and 2015, 97.0% and 87.3%, respectively, of our total inventory purchases were made from the Hong
Kong Joint Venture. The products produced by the Hong Kong Joint Venture include smoke alarms and carbon monoxide alarms. Negative
changes in economic and political conditions in China or any other adversity to the Hong Kong Joint Venture will unfavorably affect
the value of our investment in the Hong Kong Joint Venture and would have a material adverse effect on the Company’s ability
to purchase products for distribution.
Our purchases from
the Hong Kong Joint Venture represented approximately 52.0% of the Hong Kong Joint Venture’s total sales during fiscal 2016
and 41.8% of total sales during fiscal 2015, with the balance of the Hong Kong Joint Venture’s sales being primarily made
in Europe and Australia, to unrelated customers. The Hong Kong Joint Venture’s sales to unrelated customers were $8,502,710
in fiscal 2016 and $9,162,424 in fiscal 2015. Please see Note C of the consolidated financial statements, and management’s
discussion and analysis of financial condition and results of operations, for a comparison of annual sales and earnings of the
Hong Kong Joint Venture.
Other Suppliers
Certain private label
products not manufactured for us by the Hong Kong Joint Venture are manufactured by other foreign suppliers. We believe that our
relationships with our suppliers are good. We believe that the loss of our ability to purchase products from the Hong Kong Joint
Venture would have a material adverse effect on the Company. The loss of any of our other suppliers would have a short-term adverse
effect on our operations, but replacement sources for these other suppliers could be developed.
Competition
In fiscal years 2016
and 2015, sales of safety products accounted for substantially all of our total sales. In the sale of smoke alarms and carbon monoxide
alarms, we compete in all of our markets with First Alert and Walter Kidde Portable Equipment, Inc. These companies have greater
financial resources and financial strength than we have. We believe that our safety products compete favorably in the market primarily
on the basis of styling, features and pricing.
The safety industry
in general involves changing technology. The success of our products may depend on our ability to improve and update our products
in a timely manner and to adapt to new technological advances.
Employees
As of March 31, 2016,
we had 15 employees, 10 of whom are engaged in administration and sales, and the balance of whom are engaged in product development.
Our employees are not unionized, and we believe that our relations with our employees are satisfactory.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
Effective January 2009,
we entered into a ten year operating lease for a 12,000 square foot office and warehouse located in Baltimore County, Maryland.
In June 2009, we amended this lease to include an additional 3,000 square feet of warehouse space contiguous to our existing warehouse
in Baltimore County, Maryland. Monthly rental expense, with common area maintenance, currently approximates $13,000 and increases
3% per year.
Effective March 2003,
we entered into an operating lease for an approximately 1,800 square foot office in Naperville, Illinois. This lease was renewed
in March 2015 and increased to approximately 3,400 square feet and extends through February 2017. The monthly rental, with common
area maintenance, approximated $5,000 per month during the current fiscal year and is subject to increasing rentals of 3% per year.
The Hong Kong Joint
Venture currently operates an approximately 100,000 square foot manufacturing facility in the Guangdong province of Southern China
and two manufacturing facilities in the Fujian province of Southern China totaling approximately 300,000 square feet. The Hong
Kong Joint Venture’s offices and warehouses are leased pursuant to two-five year leases with rental payments of approximately
$22,000 per month.
The Company believes
that its current facilities, and those of the Hong Kong Joint Venture, are currently suitable and adequate.
ITEM 3
.
|
LEGAL PROCEEDINGS
|
From time to time the
Company is involved in various claims and routine litigation matters. In the opinion of management, after consultation with legal
counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated
financial position, results of operations, or cash flows in future years.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is
information about the Company’s executive officers.
NAME
|
|
AGE
|
|
POSITIONS
|
|
|
|
|
|
Harvey B. Grossblatt
|
|
69
|
|
President, Chief Operating Officer and Chief Executive Officer
|
|
|
|
|
|
James B. Huff
|
|
64
|
|
Chief Financial Officer, Secretary and Treasurer
|
HARVEY B. GROSSBLATT
has been a director of the Company since 1996. He served as Chief Financial Officer from October 1983 through August 2004, Secretary
and Treasurer of the Company from September 1988 through August 2004, and Chief Operating Officer from April 2003 through August
2004. Mr. Grossblatt was appointed Chief Executive Officer in August 2004.
JAMES B. HUFF was appointed Chief
Financial Officer in August 2004 and Secretary and Treasurer in October 2004.
PART II
ITEM 5
.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market for Common Stock
Our common stock, $.01
par value (the “Common Stock”) trades on the NYSE MKT LLC exchange, under the symbol UUU. As of March 31, 2016, there
were 160 record holders of the Common Stock. The closing price for the Common Stock on that date was $4.12. We have not paid any
cash dividends on our common stock, and it is our present intention to retain all cash flow for use in future operations. The following
table sets forth the high and low prices for the Common Stock for each full quarterly period during the fiscal years indicated.
Fiscal Year Ended March 31, 2016
|
|
|
|
|
|
First Quarter
|
|
High
|
|
$
|
6.81
|
|
|
|
Low
|
|
$
|
5.44
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
High
|
|
$
|
6.88
|
|
|
|
Low
|
|
$
|
5.01
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
High
|
|
$
|
6.02
|
|
|
|
Low
|
|
$
|
4.15
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
High
|
|
$
|
5.05
|
|
|
|
Low
|
|
$
|
3.11
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2015
|
|
|
|
|
|
|
First Quarter
|
|
High
|
|
$
|
4.65
|
|
|
|
Low
|
|
$
|
4.11
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
High
|
|
$
|
4.75
|
|
|
|
Low
|
|
$
|
3.58
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
High
|
|
$
|
6.45
|
|
|
|
Low
|
|
$
|
4.49
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
High
|
|
$
|
6.54
|
|
|
|
Low
|
|
$
|
4.95
|
|
ITEM 7
.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward-Looking Statements
When used in this discussion
and elsewhere in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “estimate,” “project” or similar expressions
are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the
date made, and readers are advised that various factors, including Risk Factors discussed in earlier filings, and other risks could
affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated
or projected. We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect
occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
General
We
are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50%
owned Hong Kong Joint Venture. Our consolidated financial statements detail our sales and other operational results, and report
the financial results of the Hong Kong Joint Venture that is accounted for using the equity method of accounting. Accordingly,
the following discussion and analysis of the fiscal years ended March 31, 2016 and 2015 relate to the operational results of the
Company and its consolidated subsidiary only and includes the Company’s equity share of earnings in the Hong Kong Joint Venture.
A discussion and analysis of the Hong Kong Joint Venture’s operational results for these periods is presented below under
the heading “Hong Kong Joint Venture.”
While we believe that
our overall sales are likely affected by the current global economic situation, we believe that we are specifically negatively
impacted by the severe downturn in the U.S. housing market that occurred in 2008. Although there has since been improvement in
the industry, it has not returned to pre-2008 performance. As stated elsewhere in this report, our USI Electric subsidiary markets
our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies);
every downturn in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary. Our operating
results for the current fiscal years ended March 31, 2016 and 2015 continue to be significantly impacted by the economic conditions
of the U.S. housing market. We anticipate that when and as the housing market continues to improve, sales by our USI Electric subsidiary
will improve, as well.
We further believe
that our fiscal 2016, and to a lesser extent our fiscal 2015, retail sales were positively impacted by the movement of the smoke
and carbon monoxide
alarm
retail
markets
toward ten-year
sealed alarms to comply with new laws passed in several states, including California and New York. In May 2014, the Company previewed
eleven new sealed smoke and carbon monoxide alarms at the International Hardware Show in Las Vegas, and the Company’s prospective
customers’ responses were very positive. As the Company continues its introduction of its new line of sealed battery units,
the Company expects increased sales and higher gross profit margins. The complete line of sealed units is expected to be available
for sale by the end of our fiscal year ending March 31, 2017.
Comparison of Results of Operations
for the Years Ended March 31, 2016 and 2015
Sales.
In fiscal
year 2016, our net sales are $13,740,840 compared to sales in the prior year of $9,891,554, an increase of $3,849,286 (38.9%).
The increase in sales is primarily attributable to the introduction during the current fiscal year of the Company’s new sealed
battery safety alarms.
Gross Profit.
Gross profit percentage is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit
percentage for the fiscal year ended March 31, 2016 was 27.5% compared to 23.5% in fiscal 2015. The increase in 2016 gross margin
is attributed to the mix of products sold that includes a higher percentage of the Company’s new sealed battery safety alarms
that generally have higher margins.
Selling, General
and Administrative Expense.
Selling, general and administrative expenses increased to $4,480,330 in fiscal 2016 from $4,175,584
in fiscal 2015. As a percentage of net sales, these expenses were 32.6% for the fiscal year ended March 31, 2016 and 42.2% for
the fiscal year ended March 31, 2015. The increase in dollars primarily reflects higher audit costs, an increase in rebates and
commissions, and increased insurance expense incurred during the fiscal year ended March 31, 2016, and the decrease as a percentage
is due to a comparison to higher sales in fiscal 2016.
Research and Development.
Research and development expense for the fiscal year ended March 31, 2016 was $665,278, of which approximately $500,000 was
for new product development. Research and development expense for the fiscal year ended March 31, 2015 was $776,778, of which approximately
$600,000 was for new product development. The decrease in overall research and development expense for the 2016 period compared
to the 2015 period was due to the completion of independent testing of certain new products in development.
Interest Expense.
For the fiscal year ended March 31, 2016, the Company incurred interest expense of $29,768 related to borrowing costs principally
associated with amounts incurred on extended trade payables due to the Hong Kong Joint Venture. Amounts borrowed from the Hong
Kong Joint Venture are restricted to the purchase of the Company’s new sealed battery alarms and bear interest at 3.25%,
are for a term of ninety (90) days, and are unsecured.
Interest Income
.
Interest income for the fiscal year ended March 31, 2015 consisted of interest earned on cash deposits with our factor. During
the fiscal years ended March 31, 2015, we earned interest of $22,826 from these deposits.
Income Taxes.
For
the fiscal years ended March 31, 2016 and 2015, our statutory Federal tax rate was 34.0%. The income tax rate indicated by the
provision for income tax expense as shown on the Consolidated Statements of Operations for the fiscal years ended March 31, 2016
and 2015 varies from the expected statutory rate. Footnote H to the financial statements provides a reconciliation of the amount
of tax that would be expected at statutory rates and the amount of tax expense or benefit provided at the effective rate of tax
for each fiscal period.
Net Loss.
We
reported a net loss of $2,137,792 for the fiscal year 2016, compared to a net loss of $3,704,985 for fiscal 2015, a $1,567,193
(42.3%) improvement in net loss. The improvement in the net loss is primarily due to increased sales of the Company’s new
line of sealed battery safety alarms and generally higher gross profit associated with the sale of those products.
Our loss from investment
in the Hong Kong Joint Venture decreased to $741,846 in fiscal 2016 from a loss of $1,128,559 in fiscal 2015, a $386,713 (34.3%)
improvement in the loss. See “Hong Kong Joint Venture” below for further discussion regarding the operations of the
Hong Kong Joint Venture.
Financial Condition, Liquidity and
Capital Resources
The Company had net
losses of $2,137,792 and $3,704,985 for the years ended March 31, 2016 and 2015, respectively. Furthermore, as of March 31, 2016,
working capital (computed as the excess of current assets over current liabilities) decreased by $1,147,951 from $5,611,552 on
March 31, 2015, to $4,463,601 on March 31, 2016.
Our operating activities
used cash of $822,957 for the year ended March 31, 2016 principally as a result of a net loss of $2,137,792. The net loss was partially
offset by the non-cash loss of the Hong Kong Joint Venture of $741,846, and an increase in accounts payable and accrued expenses
of $659,222. Our operating activities used cash of $1,369,660 for the year ended March 31, 2015 principally as a result of a net
loss of $3,704,985. The net loss was partially offset by the non-cash loss of the Hong Kong Joint Venture of $1,128,559, decreases
in accounts receivable and amounts due from factor of $554,699, decreases in inventories of $288,131, and an increase in accounts
payable and accrued expenses of $363,468.
Our investing activities
provided cash of $822,367 during the fiscal year ended March 31, 2016 resulting from the withdrawal of funds held by the factor
of $631,906 and dividends received from the Hong Kong Joint Venture of $190,461. Our investing activities used cash of $631,906
during the fiscal year ended March 31, 2015 resulting from the deposit of funds held by the factor.
Financing activities
provided cash of $313,891 during the fiscal year ended March 31, 2016 as a result of cash advances against factored trade accounts
receivable with our factor. There were no financing activities during the year ended March 31, 2015.
Management believes
that sales by the Company and by our USI Electric subsidiary have been negatively impacted by the ongoing downturn in the U.S.
housing market and delays in commencing sales of the Company’s new line of sealed smoke and carbon monoxide (CO) alarms.
The new line of sealed smoke and carbon monoxide alarms began selling during the current fiscal year and management has noted an
improvement in sales related to these items. Management believes that with an improved housing market and sales of our new sealed
products, the Company will improve profitability. The Company has completed and received approval of its complete line of sealed
ionization models, and is continuing to develop its line of sealed photoelectric products that it expects to be completed during
the fiscal year ending March 31, 2017.
Our sealed products
will compete on price and functionality as we continue to introduce them to the market with similar products offered by our larger
competitors. While we believe there will be market acceptance of our new products we cannot be assured of this. Should our products
not achieve the level of acceptance we anticipate, this will have a significant impact on our future operations, and our sales
may decline, potentially impacting our ability to continue operating in our current fashion.
Our short-term borrowings
to finance operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our
Factoring Agreement with Merchant. Advances from the Company’s factor, are at the sole discretion of Merchant based on their
assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance. In
addition, we have secured extended payment terms for purchases up to $2,000,000 from our Hong Kong Joint Venture for the purchase
of the new sealed battery products. These amounts are unsecured, bear interest at 3.25%, and provide for repayment terms of ninety
days for each advance thereunder. The combined unused availability of these facilities totaled approximately $3,338,000 at March
31, 2016.
The Company has a
history of sales that are insufficient to generate profitable operations, and has limited sources of financing. Management’s
plan in response to these conditions includes increasing sales of the Company’s new line of sealed battery safety alarms,
decreasing payroll expenses, and seeking additional financing on our existing credit facility. The Company has seen positive results
on this plan during the fiscal year ended March 31, 2016 due to the release of certain of its sealed battery products and management
expects this growth to continue going forward. Though no assurances can be given, if management’s plan continues to be successful
over the next twelve months, the Company anticipates that it should be able to meet its cash needs. Cash flows and credit availability
is expected to be adequate to fund operations for one year from the issuance date of this report.
Hong Kong Joint
Venture
In fiscal year 2016,
sales of the Hong Kong Joint Venture were $17,581,195 compared to $15,753,815 in fiscal 2015. During the fiscal year ended March
31, 2016, sales to the Company increased compared to the prior year by approximately $2,493,000 principally due to sales of the
new sealed battery product line.
Gross margins of the
Hong Kong Joint Venture for fiscal year 2016 decreased to 13.3% from 15.3% in the prior fiscal year. The primary reason for the
decrease is the decrease in margins realized on sales to unaffiliated customers and product mix.
Selling, general and
administrative expenses of the Hong Kong Joint Venture for fiscal 2016 were $4,338,438, compared to $5,245,720 in the prior fiscal
year. The reasons for the decrease were due to lower labor costs, gains on investment sales, lower depreciation and classification
of production costs in the current year to more accurately reflect their contribution as production costs. As a percentage of sales,
these expenses were 24.7% and 33.3%, respectively, for the fiscal years ended March 31, 2016 and 2015.
Investment income
and interest income, net of interest expense, was $537,048 for fiscal year 2016, compared to $674,961 for fiscal year 2015.
Net loss was $1,584,012
for fiscal year 2016 compared to a net loss of $2,418,189 for the fiscal year ended March 31, 2015. The improvement in the net
loss for fiscal 2016 was primarily due to increased sales to the Company of new sealed battery safety alarms.
Cash needs of the
Hong Kong Joint Venture are currently met by cash on hand. Working capital increased to $6,144,962 as of March 31, 2016 from $5,387,534
as of March 31, 2015.
Related Party Transactions
Pursuant to its written
charter, the Audit Committee of the Board of Directors of the Company reviews and approves all transactions with related persons
that are required to be disclosed under applicable regulation. During the fiscal year ended March 31, 2016 and 2015, inventory
purchases and other company expenses of approximately $493,000 and $385,000, were charged to credit card accounts of Harvey B.
Grossblatt, the Company’s Chief Executive Officer and certain of his immediate family members. The Company subsequently reimbursed
these charges in full. Mr. Grossblatt received mileage benefits from these charges and the Company utilized some of these benefits.
The maximum amount outstanding and due to Mr. Grossblatt at any point during the fiscal year ended March 31, 2016 and 2015 amounted
to $66,884 and $65,420, respectively, and the amount outstanding at March 31, 2016 and 2015 is $66,884 and $20,206, respectively.
Critical Accounting Policies
Management’s
discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated financial
statements included as part of this document. The preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories,
income taxes, impairment of long-lived assets, and contingencies and litigation. We base these estimates on historical experiences
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
We believe that the
following critical accounting policies affect management’s more significant judgments and estimates used in the preparation
of its consolidated financial statements. For a detailed discussion on the application of these and other accounting policies,
see Note A to the consolidated financial statements, included in this Annual Report. Certain of our accounting policies require
the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates.
By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates.
These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information
provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include:
Income Taxes
:
The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of
assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences may result
in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled.
The deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more
likely than not that a deferred tax asset will not be realized. After a review of projected taxable income and the components of
the deferred tax asset in accordance with applicable accounting guidance it was determined that it is more likely than not that
the tax benefits associated with the remaining components of the deferred tax assets will not be realized. This determination was
made based on the Company’s recent history of losses from operations and the uncertainty as to whether the Company will generate
sufficient taxable income to use the deferred tax assets prior to their expiration. Accordingly, a valuation allowance was established
to fully offset the value of the deferred tax assets. Our ability to realize the tax benefits associated with the deferred tax
assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax
assets. If sufficient future taxable income is generated, we may be able to offset a portion of future tax expenses.
The Company follows
ASC 740-10 which provides guidance for tax positions related to the recognition and measurement of a tax position taken or expected
to be taken in a tax return and requires that we recognize in our consolidated financial statements the impact of a tax position,
if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest
and penalties, if any, related to income tax matters are recorded as income tax expenses.
Revenue Recognition:
We recognize sales upon shipment of products net of applicable provisions for any discounts or allowances. The shipping date from
our warehouse is the appropriate point of revenue recognition since upon shipment we have substantially completed our obligations
which entitle us to receive the benefits represented by the revenues, and the shipping date provides a consistent point within
our control to measure revenue. Customers may not return, exchange or refuse acceptance of goods without our approval. However,
the Company has entered into an agreement with a customer to grant pre-approved rights of return of up to fifty percent of products
sold on certain invoices to provide for and gain acceptance within certain markets. When a pre-approved right of return is granted,
revenue recognition is deferred until the right of return expires. We have established allowances to cover anticipated doubtful
accounts based upon historical experience. The Company reflects the factored accounts receivable as Amount due from Factor with
the corresponding advance from the Factor reflected separately as Line of Credit – Factor. The Company assigns trade receivables
on a pre-approved non-recourse basis to the Factor under the Factoring Agreement on an ongoing basis.
Inventories:
Inventories
are valued at the lower of cost or market. Cost is determined on the first in/first out method. We evaluate inventories on a quarterly
basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and market conditions.
Off-Balance Sheet
Arrangements.
We have not created, and are not party to, any special-purpose or off balance sheet entities for the purpose
of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements and
do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably
likely to materially affect our liquidity or the availability of our capital resources.
Recently Issued Accounting Pronouncements
Changes to accounting
principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards
Board (FASB) in the form of Accounting Standards Updates (ASU’s) to the FASB’s Accounting Standards Codification. The
Company considers the applicability and impact of all ASU’s.
In August 2014, the
FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern, which is
included in Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements
. This update provides
an explicit requirement for management to assess an entity's ability to continue as a going concern, and to provide related footnote
disclosure in certain circumstances. The amendments are effective for annual periods ending after December 15, 2016, and interim
periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting
periods for which the financial statements have not previously been issued. The Company has elected to early adopt ASU 2014-15
which did not have a material impact on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606.
ASU 2014-09 affects any entity using U.S. GAAP that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless
those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede
the revenue recognition requirements in Topic 605,
Revenue Recognition,
and most industry-specific guidance. This ASU also
supersedes some cost guidance included in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts.
In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are
not in a contract with a customer (e.g., assets within the scope of Topic 360,
Property, Plant, and Equipment,
and intangible
assets within the scope of Topic 350,
Intangibles—Goodwill and
Other)
are amended to be consistent with the
guidance on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle,
an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance
obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance
obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. This guidance
is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting
period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect
of initially applying the ASU recognized at the date of initial application. The Company is currently assessing the impact that
adopting this new accounting standard will have on the consolidated financial statements and footnote disclosures.
Other recently issued ASU’s were
evaluated and determined to be either not applicable or are not expected to have a material impact on our consolidated financial
statements.
ITEM 8
.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements
and supplementary data required by this Item 8 are included in the Company’s Consolidated Financial Statements and set forth
in the pages indicated in Item 15(a) of this Annual Report.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
ITEM 9A
.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and
Procedures
We maintain a system
of disclosure controls and procedures (as such item is defined in Rules 13a – 15(e) and 15d – 15(e) of the Exchange
Act) that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports
that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated
to management in a timely manner. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure
controls and procedures in accordance with applicable Securities and Exchange Commission guidance as of the end of the period covered
by this annual report, and have concluded that disclosure controls and procedures were not effective because of the material weakness
in internal control over financial reporting as discussed below.
Material weaknesses
arose in our oversight of the accounting function and disclosure controls and procedures of the Hong Kong Joint Venture (HKJV).
The HKJV is a material component of the Company’s consolidated financial statements. The Company has discussed this weakness
with management of the HKJV and is monitoring implementation of suggested improvements.
Management’s Annual Report on Internal Control over
Financial Reporting
Our management, including
our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our consolidated financial statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles (GAAP). Internal control over financial reporting includes those policies and procedures that: (i)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of consolidated financial statements in accordance with US GAAP, and that the Company’s receipts and expenditures are being
made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies
or procedures may deteriorate.
Our Chief Financial
Officer, with the participation of our Chief Executive Officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the 1992 framework in
Internal Control — Integrated Framework
issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s
internal control over financial reporting was not effective as of March 31, 2016 for the reasons described above.
Changes in Internal Control over
Financial Reporting
.
During the current
fiscal year management remediated material weaknesses related to our domestic operations noted in the prior year’s evaluation
of the effectiveness of our internal control over financial reporting. These weaknesses related to the reconciliation of account
balances and period end cut-off procedures, as well as the application of period costs to the inventory as burden. The remediation
involved additional procedures implemented to review reconciliations and cut-off procedures of account balances and modification
to and the standardization of the application of period costs to the inventory as burden. Except for the remediation of the material
weakness related to our domestic operations, there have been no other changes in internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter
ended March 31, 2016.
ITEM 9B.
|
OTHER INFORMATION
|
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Business:
Universal Security
Instruments, Inc.’s (the “Company”) primary business is the sale of smoke alarms and other safety products to
retailers, wholesale distributors and to the electrical distribution trade which includes electrical and lighting distributors
as well as manufactured housing companies. The Company imports all of its safety and other products from foreign manufacturers.
The Company, as an importer, is subject to numerous tariffs which vary depending on types of products and country of origin, changes
in economic and political conditions in the country of manufacture, potential trade restrictions and currency fluctuations.
Principles of Consolidation:
The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiary USI Electric, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation. We believe that our 50% ownership interest in the Hong Kong Joint
Venture allows us to significantly influence the operations of the Hong Kong Joint Venture. As such, we account for our interest
in the Hong Kong Joint Venture using the equity method of accounting. We have included our investment balance as a non-current
asset and have included our share of the Hong Kong Joint Venture’s loss in our consolidated statements of operations. The
investment and earnings are adjusted to eliminate intercompany profits.
Use of Estimates:
In preparing financial
statements in conformity with accounting principles generally accepted in the United States of America (US-GAAP), management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash:
The Company maintains its cash
in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such
accounts, and believes it is not exposed to any significant credit risk with cash.
Funds Held by Factor:
This amount represents
funds held with the Merchant Factors Corporation (Merchant or Factor) the Company’s factor. These amounts are demand deposits
that are not considered cash equivalents as the Factor does not meet the definition of a financial institution.
Revenue Recognition:
The Company recognizes
sales upon shipment of products, when title has passed to the buyer, net of applicable provisions for any discounts or allowances.
We recognize revenue when the following criteria are met: evidence of an arrangement exists; fixed and determinable fee; delivery
has taken place; and collectability is reasonably assured. Customers may not return, exchange or refuse acceptance of goods without
our approval. However, the Company has entered into an agreement with a customer to grant pre-approved rights of return of up to
fifty percent of products sold on certain invoices to provide for and gain acceptance within certain markets. When a pre-approved
right of return is granted, revenue recognition is deferred until the right of return expires. We have established allowances to
cover anticipated doubtful accounts based upon historical experience.
Accounts Receivable:
The Company assigns
the majority of its trade receivables on a pre-approved non-recourse basis to the Factor under the Factoring Agreement on an ongoing
basis. Factoring charges recognized on assignment of receivables are included in selling, general and administrative expenses in
the consolidated statements of operations and amounted to $102,176 and $68,100 for the years ended March 31, 2016 and 2015, respectively.
The Factoring Agreement for the assignment of accounts receivable expires on January 6, 2018 and provides for continuation of the
program on successive two year periods until terminated by one of the parties to the Agreement.
Management considers amounts due from the Company’s
factor to be “financing receivables”. Trade accounts receivable, other receivables, and receivables from our Hong Kong
Joint Venture are not considered to be financing receivables.
At the time a receivable is assigned to our
factor the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear
any credit risk associated with delivery or warranty issues related to the products sold.
Management assesses the credit risk of both
its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account
from one accounting period to the next are charged to operations in the period the change is determined. Amounts ultimately determined
to be uncollectible are eliminated from the receivable accounts and from the allowance account in the period that the receivables’
status is determined to be uncollectible.
Based on the nature of the factoring agreement
and prior experience, no allowance for uncollectible financing receivables has been provided. At March 31, 2016 and 2015, an allowance
of $57,000 has been provided for uncollectible trade accounts receivable.
Inventories:
Inventories are stated
at the lower of cost (first in/first out method) or market. Included as a component of finished goods inventory are additional
non-material costs. These costs include overhead costs, freight, import duty and inspection fees. We evaluate inventories on a
quarterly basis and write down inventory that is considered obsolete or unmarketable in an amount equal to the difference between
the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Impairment of long-lived assets
: Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may
not be recoverable. The factors considered in performing this assessment include current operating results, anticipated future
results, the manner in which the asset is used and the effects of obsolescence, demand, competition and other economic factors.
Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these assets in relation to
the operating performance of the business and future undiscounted cash flows expected to result from the use of these assets. Impairment
losses are recognized when the sum of expected future cash flows is less than the assets’ carrying value, and losses are
determined based upon the excess carrying value of the assets over its fair value. Based on this assessment, no impairment to long-lived
assets resulted for fiscal years ended March 31, 2016 and 2015.
Income Taxes:
The Company recognizes
a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities
and their reported amounts in the consolidated financial statements. These temporary differences may result in taxable or deductible
amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets
are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred
tax asset will not be realized.
The Company follows ASC 740-10 that gives guidance
to tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and
requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not to
be sustained upon an examination, based on the technical merits of the position. Interest and penalties, if any, related
to income tax matters are recorded as income tax expenses. See Note H, Income Taxes.
Warranties:
We generally provide warranties,
on the safety products, from one to ten years to the non-commercial end user on all products sold. The manufacturers of our safety
products provide us with a one-year warranty on all products we purchase for resale. Claims for warranty replacement of products
beyond the one-year warranty period covered by the manufacturers have not been historically material.
Research and Development:
Research and
development costs are charged to operations as incurred.
Shipping and Handling Fees and Costs:
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound
freight are included in cost of goods sold. Shipping and handling costs associated with outbound freight are included in selling,
general and administrative expenses and totaled $267,128 and $248,128 in fiscal years 2016 and 2015, respectively.
Foreign currency
: The activity and accounts
of the Hong Kong Joint Venture are denominated in Hong Kong dollars and are translated to US dollars in consolidation. The Company
translates the accounts of the Hong Kong Joint Venture at the applicable exchange rate in effect at the year-end date for assets
and liabilities and at the average exchange rate for the reporting period for statement of operation purposes. The Company currently
does not maintain cash in foreign banks to support its operations in Hong Kong.
Net Loss per Share:
Basic net loss per
share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period.
Diluted loss per share is computed by dividing net loss for the period by the weighted number of common shares and common share
equivalents outstanding (unless their effect is anti-dilutive) for the period. As a result of the net losses, the weighted average
number of common shares outstanding is identical for the years ended March 31, 2016 and 2015 for both basic and diluted shares.
In addition, there were no other securities outstanding during the 2016 or 2015.
Recently Issued Accounting Pronouncements:
Changes to US-GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updated
(ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all
ASU’s.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of
Uncertainties about an Entities Ability to Continue as a Going Concern, which is included in Accounting Standards Codification
(“ASC”) 205, Presentation of Financial Statements
. This update provides an explicit requirement for management
to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances.
The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning
after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements
have not previously been issued. The Company has elected to early adopt ASU 2014-15 which did not have a material impact on our
consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606.
ASU 2014-09 affects any entity using U.S. GAAP that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless
those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede
the revenue recognition requirements in Topic 605,
Revenue Recognition,
and most industry-specific guidance. This ASU also
supersedes some cost guidance included in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts.
In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are
not in a contract with a customer (e.g., assets within the scope of Topic 360,
Property, Plant, and Equipment,
and intangible
assets within the scope of Topic 350,
Intangibles—Goodwill and
Other)
are amended to be consistent with the
guidance on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle,
an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance
obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance
obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. This guidance
is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting
period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect
of initially applying the ASU recognized at the date of initial application. The Company is currently assessing the impact that
adopting this new accounting standard will have on the consolidated financial statements and footnote disclosures.
Other recently issued ASU’s were evaluated
and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.
NOTE B – MANAGEMENT PLANS
The Company had net losses of $2,137,792 and
$3,704,985 for the years ended March 31, 2016 and 2015, respectively. Furthermore, as of March 31, 2016, working capital (computed
as the excess of current assets over current liabilities) decreased by $1,147,951 from $5,611,552 at March 31, 2015, to $4,463,601
at March 31, 2016.
Our short-term borrowings to finance operating
losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring Agreement
with Merchant. Advances from the Company’s factor, are at the sole discretion of Merchant based on their assessment of the
Company’s receivables, inventory and financial condition at the time of each request for an advance. In addition, we have
secured extended payment terms for purchases up to $2,000,000 from our Hong Kong Joint Venture for the purchase of the new sealed
battery products. These amounts are unsecured, bear interest at 3.25%, and provides for repayment terms of ninety days for each
advance thereunder. The combined availability of these facilities totaled approximately $3,338,000 at March 31, 2016.
The Company has a history of sales that are
insufficient to generate profitable operations and has limited sources of financing. Management’s plan in response to these
conditions includes increasing sales of the Company’s new line of sealed battery safety alarms, decreasing payroll expenses,
and seeking additional financing on our existing credit facility. The Company has seen positive results on this plan during the
fiscal year ended March 31, 2016 due to the release of certain of its sealed battery products and management expects this growth
to continue going forward. Though no assurances can be given, if management’s plan is successful over the next twelve months,
the Company anticipates that it should be able to meet its cash needs. Cash flows and credit availability is expected to be adequate
to fund operations for one year from the issuance date of these consolidated financial statements.
NOTE C – INVESTMENT IN THE HONG KONG JOINT VENTURE
The Company holds a 50% interest in a Joint
Venture with a Hong Kong Corporation, which has manufacturing facilities in the People’s Republic of China, for the manufacturing
of consumer electronic products. As of March 31, 2016 and 2015, the Company has an investment balance of $11,779,663 and $12,943,280,
respectively for its 50% interest in the Hong Kong Joint Venture. There are no material differences between the accounting principles
generally accepted in the United States of America (US-GAAP) and those used by the Hong Kong Joint Venture when compared to US-GAAP.
The following represents summarized financial
information derived from the financial statements of the Hong Kong Joint Venture as of March 31, 2016 and 2015.
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current assets
|
|
$
|
10,528,508
|
|
|
$
|
11,368,526
|
|
Property and other assets
|
|
|
17,903,298
|
|
|
|
20,606,047
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,431,806
|
|
|
$
|
31,974,573
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,383,546
|
|
|
$
|
5,980,992
|
|
Non-current liabilities
|
|
|
470,850
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
23,577,410
|
|
|
|
25,993,581
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
28,431,806
|
|
|
$
|
31,974,573
|
|
|
|
For the Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
17,581,195
|
|
|
$
|
15,753,815
|
|
Gross profit
|
|
|
2,337,649
|
|
|
|
2,413,517
|
|
Net loss
|
|
|
(1,584,012
|
)
|
|
|
(2,418,189
|
)
|
During the years ended March 31, 2016 and 2015,
the Company purchased $9,078,485 and $6,585,785, respectively, of finished product from the Hong Kong Joint Venture, which represents
97.0% and 87.3%, respectively, of the Company’s total finished product purchases. Amounts due from the Hong Kong Joint Venture
included in Accounts Receivable totaled $60,506 and $135,768 at March 31, 2016 and 2015, respectively.
At March 31, 2016 and 2015, the Company borrowed
$1,070,103 and $299,985 under two separate extended payment term agreements with the Hong Kong Joint Venture. These agreements
provide extended payment terms for the purchase of the Company’s new sealed battery alarms purchased from the Hong Kong Joint
Venture. Purchases under the first of these agreements are limited to $2,000,000, bear interest at 3.25%, are for a term of ninety
(90) days, and are unsecured. Dividends declared and paid by the Hong Kong Joint Venture, which amounted to $190,461 during the
fiscal year ended March 31, 2016, are first used to repay any outstanding balance. At March 31, 2016 and 2015, $729,135 and $299,985,
respectively, was outstanding under this arrangement with our Hong Kong Joint Venture. Under the second extended payment term agreement,
the Hong Kong Joint Venture provides extended repayment terms of sixty (60) days for purchases of certain other products as may
from time to time be negotiated with the Hong Kong Joint Venture. At March 31, 2016 and 2015 there was $340,968 and $0, respectively,
outstanding on the sixty day arrangement. Amounts borrowed, if any, under this arrangement are unsecured, non-interest bearing,
and are not subject to the $2,000,000 limitation discussed above.
The Company’s investment in the Hong
Kong Joint Venture as recorded on the Company’s Consolidated Balance sheets has been adjusted for the effect of intercompany
profit of the Hong Kong Joint Venture in the ending inventory of the Company.
NOTE D – SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
On January 15, 2015, the Company entered into
a Factoring Agreement (Agreement) with Merchant Factors Corporation (Merchant or Factor) for the purpose of factoring the Company’s
trade accounts receivable and to provide financing secured by finished goods inventory. The Agreement for the assignment of accounts
receivable expires on January 6, 2018 and provides for continuation of the program on successive two year periods until terminated
by one of the parties to the Agreement. In accordance with the provisions of the Agreement with Merchant, the Company may take
advances equal to eighty percent (80%) of the uncollected non-recourse factored trade accounts receivable balance less applicable
factoring commissions, and may borrow up to fifty percent (50%) of eligible inventories subject to a borrowing limitation on inventory
of $1,000,000. Financing from Merchant of approximately $2,067,000 is available at March 31, 2016. Advances on factored trade accounts
receivable and borrowing on inventories are secured by all of the Company’s trade accounts receivable and inventories, are
repaid periodically as collections are made by Merchant but are otherwise due upon demand, and bear interest at the prime commercial
rate of interest, as published, plus two percent (effective rate 5.50% at March 31, 2016 and 5.25% at March 31, 2015). Advances
under the Agreement are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory and our
financial condition at the time of each request for an advance. At March 31, 2016 and 2015 there was $313,891 and $0 borrowed and
outstanding under the factoring agreement.
NOTE E - AMOUNTS DUE FROM FACTOR
Under the Agreement, the Company assigned receivables
of $12,942,571 and $8,917,127 during the years ended March 31, 2016 and 2015, respectively. The uncollected balance of non-recourse
receivables held by a factor amounted to $1,789,619 and $1,217,311 at March 31, 2016 and 2015. Collected cash maintained on deposit
with the factor earns interest at the factor’s prime rate of interest less 2.5 percent (effective rate of 1.00% at March
31, 2016.)
NOTE F – PROPERTY AND EQUIPMENT -
NET
Property and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation and amortization are provided by using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes. Expenditures for major betterments that extend the
useful life of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred. When property and
equipment are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts
and any resulting gain or loss is included in the results of operations.
The estimated useful lives for financial reporting
purposes are as follows:
|
Leasehold improvements
|
-
|
Shorter of term of lease or useful life of asset
|
|
Machinery and equipment
|
-
|
5 to 10 years
|
|
Furniture and fixtures
|
-
|
5 to 15 years
|
|
Computer equipment
|
-
|
5 years
|
Property and equipment consist of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Leasehold improvements
|
|
$
|
166,722
|
|
|
$
|
166,722
|
|
Machinery and equipment
|
|
|
190,400
|
|
|
|
190,400
|
|
Furniture and fixtures
|
|
|
261,292
|
|
|
|
261,292
|
|
Computer equipment
|
|
|
286,528
|
|
|
|
286,528
|
|
|
|
|
904,942
|
|
|
|
904,942
|
|
Less accumulated depreciation and amortization
|
|
|
(833,386
|
)
|
|
|
(800,324
|
)
|
|
|
$
|
71,556
|
|
|
$
|
104,618
|
|
Depreciation and amortization expense totaled $37,534 and $46,067
for fiscal years ended March 31, 2016 and 2015, respectively.
NOTE G - LEASES
During January 2009, the Company entered into
an operating lease for its office and warehouse location in Owings Mills, Maryland which expires in March 2019. This lease is subject
to increasing rentals at 3% per year. In June 2009, we amended this lease to include an additional 3,000 square feet of warehouse.
In March 2015, the Company renewed and expanded its operating lease through February 2017 for a 3,400 square foot office in Naperville,
Illinois. This lease is subject to increasing rentals at three percent (3%) per year.
Each of the operating leases for real estate
has renewal options with terms and conditions similar to the original lease. Rent expense, including common area maintenance, totaled
$214,072 and $190,375 for the years ended March 31, 2016 and 2015, respectively.
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Total
|
|
Future minimum lease payments are as follows:
|
|
|
202,950
|
|
|
|
154,188
|
|
|
|
142,628
|
|
|
$
|
499,766
|
|
NOTE H – INCOME TAXES
The Company files its income tax returns in
the U.S. federal jurisdiction, and various state jurisdictions. Deferred income tax assets and liabilities are computed and recognized
for those differences that have future tax consequences and will result in net taxable or deductible amounts in future periods.
Deferred tax expense or benefit is the result of changes in the net asset or liability for deferred taxes. The deferred tax liabilities
and assets for the Company result primarily from net operating loss and tax credit carry forwards, reserves and accrued liabilities.
At March 31, 2016, the Company has total net
operating loss carry forwards of approximately $7,527,000, which expire in various amounts at dates from 2016 through 2032. There
are certain limitations to the use and application of these deferred tax assets. Management reviews net operating loss carry forwards
and income tax credit carry forwards to evaluate if those amounts are recoverable. After a review of projected taxable income and
the components of the deferred tax asset in accordance with applicable accounting guidance it was determined that it is more likely
than not that the tax benefits associated with the remaining components of the deferred tax assets will not be realized. This determination
was made based on the Company’s recent history of losses from operations and the uncertainty as to whether the Company will
generate sufficient taxable income to use the deferred tax assets prior to their expiration. Accordingly, a valuation allowance
was established to fully offset the value of the deferred tax assets. Our ability to realize the tax benefits associated with the
deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the
deferred tax assets. If sufficient future taxable income is generated, we may be able to offset a portion of future tax expenses.
The components of income tax (benefit) from
continuing operations for the Company are as follows:
|
|
2016
|
|
|
2015
|
|
Current benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(25,000
|
)
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit
|
|
|
-
|
|
|
|
-
|
|
Total income tax benefit
|
|
$
|
-
|
|
|
$
|
(25,000
|
)
|
The reconciliation between the statutory federal income tax provision
and the actual effective tax provision for continuing operations is as follows:
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal benefit at statutory rate (34%) before loss carry-forward
|
|
$
|
(726,849
|
)
|
|
$
|
(1,268,195
|
)
|
Non-repatriated loss of Hong Kong Joint Venture
|
|
|
252,228
|
|
|
|
383,710
|
|
Permanent differences
|
|
|
83,024
|
|
|
|
32,713
|
|
State income tax benefit – net of federal effect
|
|
|
(38,815
|
)
|
|
|
(111,900
|
)
|
Increase in deferred tax allowance
|
|
|
430,412
|
|
|
|
938,672
|
|
|
|
$
|
-
|
|
|
$
|
(25,000
|
)
|
The individual components of the Company’s deferred tax assets
are as follows:
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and allowances
|
|
$
|
57,922
|
|
|
$
|
57,965
|
|
Inventory uniform capitalization
|
|
|
26,309
|
|
|
|
28,250
|
|
Net operating loss carry forward
|
|
|
2,821,998
|
|
|
|
2,389,602
|
|
Foreign tax credit carry forward
|
|
|
947,347
|
|
|
|
1,190,390
|
|
Research and development tax credit carry forward
|
|
|
61,701
|
|
|
|
61,701
|
|
Allowance for unrealizable deferred tax assets
|
|
|
(3,915,277
|
)
|
|
|
(3,727,908
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE I - COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in various lawsuits and
legal matters. It is the opinion of management, based on consultation with legal counsel, that there are no outstanding material
claims outside of the normal course of business.
The Company’s employment agreement with
its CEO (the “CEO Agreement”) requires the Company to make certain post-employment payments to the CEO in the event
of his termination following a change in control, death, disability, non-renewal, or resignation with “Good Reason”
under terms of the CEO Agreement. Additionally, the CEO Agreement requires the Company to make post-employment payments, which
can range from approximately $94,000 to $1,995,000, dependent upon the controlling event, as discussed above. On July 12, 2016,
the Company renewed the CEO Agreement through July 31, 2017.
NOTE J - MAJOR CUSTOMERS
The Company is primarily a distributor of safety
products for use in home and business under both its trade names and private labels for other companies. As described in Note C,
the Company purchased a majority of its products from its 50% owned Hong Kong Joint Venture.
For the fiscal year ended March 31, 2016, the
Company had one customer that represented 14.1% of the Company’s net sales. The Company had one customer that
represented 13% of trade accounts receivable as of March 31, 2015.
NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED)