|
ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
UNIVERSAL SECURITY
INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
September 30, 2016
|
|
|
March 31, 2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
141,792
|
|
|
$
|
362,728
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
25,971
|
|
|
|
17,389
|
|
Receivables from employees
|
|
|
62,322
|
|
|
|
62,090
|
|
Receivable from Hong Kong Joint Venture
|
|
|
175,366
|
|
|
|
60,506
|
|
|
|
|
263,659
|
|
|
|
139,985
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
1,628,638
|
|
|
|
1,789,619
|
|
Inventories – finished goods
|
|
|
4,996,042
|
|
|
|
3,883,247
|
|
Prepaid expenses
|
|
|
211,165
|
|
|
|
410,166
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
7,241,296
|
|
|
|
6,585,745
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN HONG KONG JOINT VENTURE
|
|
|
11,332,924
|
|
|
|
11,779,663
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
58,158
|
|
|
|
71,556
|
|
INTANGIBLE ASSET- NET
|
|
|
64,840
|
|
|
|
67,075
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
18,701,218
|
|
|
$
|
18,510,039
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit - factor
|
|
$
|
662,991
|
|
|
$
|
313,891
|
|
Accounts payable - trade
|
|
|
481,627
|
|
|
|
587,343
|
|
Accounts payable - Hong Kong Joint Venture
|
|
|
1,808,531
|
|
|
|
1,070,103
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and employee benefits
|
|
|
89,686
|
|
|
|
76,480
|
|
Commissions and other
|
|
|
25,000
|
|
|
|
74,327
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
3,067,835
|
|
|
|
2,122,144
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value per share; authorized 20,000,000 shares; 2,312,887 shares issued
and outstanding at September 30, 2016 and March 31, 2016
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
Retained earnings
|
|
|
1,996,795
|
|
|
|
2,450,540
|
|
Accumulated other comprehensive income
|
|
|
727,618
|
|
|
|
1,028,385
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
15,633,383
|
|
|
|
16,387,895
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
18,701,218
|
|
|
$
|
18,510,039
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,213,705
|
|
|
$
|
3,278,225
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
2,905,992
|
|
|
|
2,519,022
|
|
Cost of goods sold – other
|
|
|
61,097
|
|
|
|
74,546
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,246,616
|
|
|
|
684,657
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,154,895
|
|
|
|
1,153,830
|
|
Research and development expense
|
|
|
182,352
|
|
|
|
147,128
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(90,631
|
)
|
|
|
(616,301
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Income from investment in Hong Kong Joint Venture
|
|
|
51,114
|
|
|
|
209,700
|
|
Interest expense
|
|
|
(24,549
|
)
|
|
|
(4,701
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(64,066
|
)
|
|
$
|
(411,302
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.03
|
)
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Six Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,392,312
|
|
|
$
|
6,214,715
|
|
Cost of goods sold - acquired from Joint Venture
|
|
|
4,949,019
|
|
|
|
4,504,825
|
|
Cost of goods sold - other
|
|
|
133,683
|
|
|
|
142,806
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,309,610
|
|
|
|
1,567,084
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
2,268,615
|
|
|
|
2,317,616
|
|
Research and development expense
|
|
|
319,983
|
|
|
|
347,431
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(278,988
|
)
|
|
|
(1,097,963
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(145,972
|
)
|
|
|
(77,433
|
)
|
Interest expense
|
|
|
(28,785
|
)
|
|
|
(12,983
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(453,745
|
)
|
|
$
|
(1,188,379
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.20
|
)
|
|
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended Sept. 30,
|
|
|
Six Months Ended Sept. 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(64,066
|
)
|
|
$
|
(411,302
|
)
|
|
$
|
(453,745
|
)
|
|
$
|
(1,188,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss Company’s portion of Hong Kong Joint Venture’s other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
(113,541
|
)
|
|
|
0
|
|
|
|
(279,844
|
)
|
|
|
0
|
|
Unrealized loss on investment securities
|
|
|
(4,341
|
)
|
|
|
(31,945
|
)
|
|
|
(20,921
|
)
|
|
|
(125,460
|
)
|
Total Other Comprehensive Loss
|
|
|
(117,882
|
)
|
|
|
(31,945
|
)
|
|
|
(300,765
|
)
|
|
|
(125,460
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(181,948
|
)
|
|
$
|
(443,247
|
)
|
|
$
|
(754,510
|
)
|
|
$
|
(1,313,839
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Six Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(453,745
|
)
|
|
$
|
(1,188,379
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,633
|
|
|
|
18,769
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
145,972
|
|
|
|
77,433
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable and amounts due from factor
|
|
|
37,307
|
|
|
|
(217,597
|
)
|
Increase in inventories, prepaid expenses, and other
|
|
|
(911,794
|
)
|
|
|
(535,233
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
596,591
|
|
|
|
311,484
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(570,036
|
)
|
|
|
(1,533,523
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease in funds held by factor
|
|
|
-
|
|
|
|
631,906
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
631,906
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net proceeds from Line of Credit - Factor
|
|
|
349,100
|
|
|
|
1,001,007
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
349,100
|
|
|
|
1,001,007
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(220,936
|
)
|
|
|
99,390
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
362,728
|
|
|
|
49,427
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
141,792
|
|
|
$
|
148,817
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
28,785
|
|
|
$
|
12,983
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Statement of Management
The condensed consolidated financial statements
include the accounts of Universal Security Instruments, Inc. (USI or the Company) and its wholly-owned subsidiary. Except for the
condensed consolidated balance sheet as of March 31, 2016, which was derived from audited financial statements, the accompanying
condensed consolidated financial statements are unaudited. Significant inter-company accounts and transactions have been eliminated
in consolidation. In the opinion of the Company’s management, the interim condensed consolidated financial statements include
all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been condensed or omitted. The interim condensed consolidated
financial statements should be read in conjunction with the Company’s March 31, 2016 audited financial statements filed with
the Securities and Exchange Commission on Form 10-K filed on September 28, 2016. The interim operating results are not necessarily
indicative of the operating results for the full fiscal year.
Management Plans
The Company had net losses of $453,745
for the six months ended September 30, 2016 and $2,137,792 and $3,704,985 for the years ended March 31, 2016 and 2015, respectively.
Furthermore, as of September 30, 2016, working capital (computed as the excess of current assets over current liabilities) decreased
by $290,140 from $4,463,601 at March 31, 2016, to $4,173,461 at September 30, 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 have repayment terms of ninety days for each advance
thereunder. The combined availability of these facilities totaled approximately $2,091,000 at September 30, 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 and through September 30, 2016 due to the increased sales of certain of its sealed
battery products and reductions in payroll expense. Management expects sales 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 condensed consolidated financial statements.
Line of Credit – Factor
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, 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. As of September 30, 2016, the Company had borrowings of $662,991 under the Agreement with Merchant, and the Company
had remaining availability under the discount factoring agreement of approximately $1,931,000. 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 September 30, 2016). Advances under the factoring 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.
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with US-GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
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.
Joint Venture
The Company and its joint venture partner,
a Hong Kong corporation, each owns a 50% interest in a Hong Kong joint venture, Eyston Company Limited (the “Hong Kong Joint
Venture”), that manufactures security products in its facilities located in the People’s Republic of China. There are
no material differences between US-GAAP and those used by the Honk Kong Joint Venture when compared to US-GAAP. The following represents
summarized balance sheet and income statement information of the Hong Kong Joint Venture as of and for the six months ended September
30, 2016 and 2015:
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
Net sales
|
|
$
|
8,273,094
|
|
|
$
|
10,236,562
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,208,510
|
|
|
|
2,214,351
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
206,428
|
|
|
|
(23,079
|
)
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,042,873
|
|
|
|
11,705,386
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
28,010,955
|
|
|
|
31,239,508
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,359,497
|
|
|
|
5,494,185
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,833,183
|
|
|
|
5,494,185
|
|
During the six months ended September 30,
2016 and 2015 the Company purchased $5,726,467 and $4,853,808, respectively, of products directly from the Hong Kong Joint Venture
for resale. For the six month period ended September 30, 2016 the Company has reduced its equity in the earnings of the Joint Venture
to reflect an increase of $249,186 in inter-Company profit on purchases held by the Company in inventory. For the six month period
ended September 30, 2015 the Company has reduced its equity in the earnings of the Joint Venture to reflect an increase of $65,893
in inter-Company profit on purchases held by the Company in inventory.
Income Taxes
We calculate our interim tax provision
in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate
the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related
to discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the
effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.
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 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
established a full valuation allowance on its deferred tax assets to recognize that net operating losses, and research and foreign
tax credits expiring in future periods will likely not be realized. This determination was made based on continued taxable losses
which cause uncertainty as to whether the Company will generate sufficient taxable income to use the deferred tax assets prior
to expiration. 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.
Accounts Receivable and Amount Due From
Factor
The Company assigns the majority of its
short-term receivables arising in the ordinary course of business to our factor. 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
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 related to Amounts Due from Factor has been provided. At September 30, 2016 and 2015, an allowance
of approximately $57,000 has been provided for uncollectible trade accounts receivable.
Net Loss per Common Share
Basic net loss per common share is computed
based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings per common share
is computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially
dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents
is determined using the treasury stock method based on the Company’s average stock price. There were no potentially dilutive
common stock equivalents outstanding during the three or six month periods ended September 30, 2016 or 2015. As a result, basic
and diluted weighted average common shares outstanding are identical for the three month and six month periods ended September
30, 2016 and 2015.
Contingencies
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 condensed consolidated financial position,
results of operations, or cash flows in future years.
Recent Accounting Pronouncements Not
Yet Adopted
Changes to US-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 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 condensed consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No.
2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies and provides guidance on eight
cash flow classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash
payments are presented and classified in the statement of cash flows. This standard is effective for annual periods beginning after
December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is currently assessing the impact that adopting this new accounting standard will have on its 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 condensed consolidated
financial statements.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
As used throughout
this Report, “we,” “our,” “the Company” “USI” and similar words refers to Universal
Security Instruments, Inc.
Forward-Looking
Statements
This Quarterly Report
on Form 10-Q contains certain forward-looking statements reflecting our current expectations with respect to our operations, performance,
financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words
“may”, “will”, “believes”, “should”, “expects”, “anticipates”,
“estimates”, and similar expressions. These statements are necessarily estimates reflecting management’s best
judgment based upon current information and involve a number of risks and uncertainties. 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
could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated
or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified
in our periodic reports filed with the Securities and Exchange Commission, including “Item 1A. Risk Factors” contained
in recent Annual Reports on Form 10-K.
overview
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 financial statements detail our sales and other operational results only, and report the financial results of the
Hong Kong Joint Venture using the equity method. Accordingly, the following discussion and analysis of the three and six month
periods ended September 30, 2016 and 2015 relate to the operational results of the Company. A discussion and analysis of the Hong
Kong Joint Venture’s operational results for these periods is presented below under the heading “Joint Venture.”
The Company has developed
new products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology
and product features. To date we have applied for thirteen patents on these new technologies and features. We have been granted
ten patents (including six for the new technologies and features), and are currently awaiting notification from the U.S. Patent
Office regarding the three remaining patent applications. Most of our new technologies and features have been trademarked under
the trade name IoPhic.
Results
of Operations
Three Months Ended September 30,
2016 and 2015
Sales.
Net sales
for the three months ended September 30, 2016 were $4,213,705 compared to $3,278,225 for the comparable three months in the prior
period, an increase of $935,480 (28.5%). The primary reason for the increase in net sales volumes relates to the introduction and
sales of the Company’s new sealed product line.
Gross Profit Margin.
Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit
margin was 29.6% and 20.9% of sales for the quarters ended September 30, 2016 and 2015, respectively. The increase in gross profit
margin was primarily due to the higher margins realized on the Company’s new sealed product line.
Expenses.
Selling,
general and administrative expenses were $1,154,895 at September 30, 2016, compared to $1,153,830 for the comparable three months
in the prior year. As a percentage of net sales, these expenses decreased to 27.4% for the three month period ended September 30,
2016, from 35.2% for the 2015 period. The decrease of these costs as a percentage of net sales was primarily due to higher net
sales as compared to fixed expenses that do not increase directly with increased sales.
Research and development
expenses were $182,352 for the three month period ended September 30, 2016 compared to $147,128 for the comparable quarter of the
prior year, an increase of $35,224 (23.9%). The primary reasons for the increase is the increased expenditures to independent testing
facilities as the new sealed product line is completed.
Interest Expense
and Other.
Our interest expense, is $24,549 for the quarter ended September 30, 2016, compared to interest expense of $4,701
for the quarter ended September 30, 2015. The net interest expense is dependent upon amounts borrowed from the Factor and from
our Hong Kong Joint Venture netted against interest earned on balances maintained in an interest bearing account with our factor.
Net Loss.
We
reported a net loss of $64,066 for the quarter ended September 30, 2016, compared to a net loss of $411,302 for the corresponding
quarter of the prior fiscal year, a $347,236 (84.4%) improvement in the net loss. The primary reasons for the decrease in net loss
are the increase in sales due to the increased sales and gross profit margins realized on our new sealed product line, as explained
above.
Six Months Ended September 30, 2016
and 2015
Sales.
Net sales
for the six months ended September 30, 2016 were $7,392,312 compared to $6,214,715 for the comparable six months in the prior period,
an increase of $1,177,597 (18.9%). The primary reason for the increase in net sales volumes relates to the introduction and sales
of the Company’s new sealed product line.
Gross Profit Margin.
The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company’s
gross profit margin was 31.2% for the period ended September 30, 2016 and 25.2% for the period ended September 30, 2015. The increase
in gross profit margin was primarily due to the higher margins realized on the Company’s new sealed product line.
Expenses.
Selling,
general and administrative expenses were $2,268,615 at September 30, 2016 compared to $2,317,616 for the comparable six months
in the prior year. As a percentage of sales, these expenses were 30.7% for the six month period ended September 30, 2016 and 37.3%
for the comparable 2015 period. The decrease of these costs as a percentage of net sales was primarily due to higher net sales
as compared to fixed expenses that do not increase directly with increased sales.
Research and development
expenses were $319,983 for the six months ended September 30, 2016 compared to $347,431 for the comparable period of the prior
year, a decrease of $27,448 (7.9%). The primary reasons for the decrease is the slight reduction of expenditures to independent
testing facilities during the six month period ended September 30, 2016 as the new sealed product line is completed.
Interest Expense
and Other.
Our interest expense was $28,785 for the six months ended September 30, 2016, compared to interest expense of $12,983
for the six months ended September 30, 2015. The net interest expense is dependent upon amounts borrowed from the Factor and from
our Hong Kong Joint Venture netted against interest earned on balances maintained in an interest bearing account with our factor.
Net Loss.
We
reported a net loss of $453,745 for the six months ended September 30, 2016 compared to a net loss of $1,188,379 for the corresponding
period of the prior fiscal year, an improvement in the net loss of $734,634 (61.8%). The primary reasons for the decrease in net
loss are the increase in sales and gross profit margins realized due to the introduction of our new sealed product line with higher
gross profit margins as explained above.
Management Plans and Liquidity
The Company had net
losses of $453,745 for the six months ended September 30, 2016, and $2,137,792 and $3,704,985 for the years ended March 31, 2016
and 2015, respectively. Furthermore, as of September 30, 2016, working capital (computed as the excess of current assets over current
liabilities) decreased by $290,140 from $4,463,601 at March 31, 2016, to $4,173,461 at September 30, 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 have repayment terms of ninety days
for each advance thereunder. The combined availability of these facilities totaled approximately $2,091,000 at September 30, 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 and through September 30, 2016 due to the increased sales of certain of its sealed
battery products and reductions in payroll expense. Management expects sales 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 condensed consolidated financial statements.
Operating activities
used cash of $570,036 for the six months ended September 30, 2016. This was primarily due to an increase in inventory and prepaid
expenses of $911,794 and a net loss of $453,745. This was partially offset by increases of $596,591 in accounts payable and accrued
expenses, and a loss from the investment in the Hong Kong Joint Venture of $145,972. For the same period last year, operating activities
used cash of $1,533,523, primarily as a result of the net loss of $1,188,379, increases in accounts receivable and amounts due
from factor of $217,597, increases in inventory and prepaid expenses of $535,233, and partially offset by an increase in accounts
payable and accrued expenses of $311,484.
Investing activities
did not use or provide cash during the six months ended September 30, 2016. Investing activities provided cash of $631,906 during
the six months ended September 30, 2015 as a result of the withdrawal of interest bearing funds held by the factor.
Financing activities
provided cash of $349,100 during the six months ended September 30, 2016 and provided cash of $1,001,007 during the three months
ended September 30, 2015, which is comprised of advances net of repayments on the line of credit from our factor.
Joint
Venture
Net Sales.
Net
sales of the Joint Venture for the three and six months ended September 30, 2016 were $4,789,764 and $8,273,094 respectively, compared
to $5,624,057 and $10,236,562, respectively, for the comparable period in the prior fiscal year. The 14.8% and 19.2% respective
decreases in net sales by the Joint Venture for the three and six month periods are due to lower sales to unaffiliated customers
primarily in Europe.
Gross Profit Margin.
Gross margins of the Joint Venture for the three month period ended September 30, 2016 decreased to 31.3% from 32.9% for the 2015
corresponding period. For the six month period ended September 30, 2016, gross margins were 26.7% compared to 21.6% for the same
period of the prior year. Gross margins depend on sales volume of various products, with varying margins, accordingly, increased
sales of higher margin products and decreased sales of lower margin products positively affect the overall gross margins.
Expenses.
Selling,
general and administrative expenses were $1,129,972 and $2,107,265, respectively, for the three and six month periods ended September
30, 2016, compared to $1,138,359 and $2,347,535 in the prior year’s respective periods. As a percentage of sales, expenses
were 23.6% and 25.5% for the three and six month periods ended September 30, 2016, compared to 20.2% and 22.9% for the three and
six month periods ended September 30, 2015. The changes in selling, general and administrative expense as a percent of sales for
the three and six month periods were primarily due to costs that do not change at the same rate as changes in sales volume.
Interest Income.
Interest income on assets held for investment was $106,763 and $204,717 respectively, for the three and six month periods ended
September 30, 2016, compared to interest income of $113,049 and $229,619, respectively, for the prior year’s periods. Interest
income is dependent on the average balance of assets held for investment.
Net Income (Loss)
.
Net earnings for the three and six months ended September 30, 2016 were $412,603 and $206,427, respectively, compared to net earnings
(loss) of $761,848 and $(23,079), respectively, in the comparable periods last year. The decrease in net earnings for the three
month period ended September 30, 2016 are due primarily to decreased sales volume for the joint venture as noted above. The increase
in net income for the six month period of the current year is due primarily to a reduction in selling, general and administrative
costs and improved gross profit margins realized during the six month period ended September 30, 2016.
Liquidity.
Cash
needs of the Joint Venture are currently met by funds generated from operations. During the six months ended September 30, 2016,
working capital increased by $2,538,414 from $6,144,962 on March 31, 2016 to $8,683,376 on September 30, 2016.
Critical
Accounting Policies
Management’s
discussion and analysis of our condensed consolidated financial statements and results of operations are based on our condensed
Consolidated Financial Statements included as part of this document. The preparation of these condensed 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, and contingencies and litigation. We base these estimates on historical
experiences, future projections 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 the following
critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements. For a detailed discussion on the application on these and other accounting policies,
see Note A to the consolidated financial statements included in Item 8 of the Form 10-K for the year ended March 31, 2016 as filed
with the Securities and Exchange Commission on September 28, 2016. 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:
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.
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.
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 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.
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 condensed financial statements and do not
have any arrangements or relationships with entities that are not consolidated into our condensed financial statements that are
reasonably likely to materially affect our liquidity or the availability of our capital resources.