|
ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
155,826
|
|
|
$
|
362,728
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
180,899
|
|
|
|
17,389
|
|
Receivables from employees
|
|
|
62,185
|
|
|
|
62,090
|
|
Receivable from Hong Kong Joint Venture
|
|
|
69,836
|
|
|
|
60,506
|
|
|
|
|
312,920
|
|
|
|
139,985
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
1,218,507
|
|
|
|
1,789,619
|
|
Inventories – finished goods
|
|
|
5,561,469
|
|
|
|
3,883,247
|
|
Prepaid expenses
|
|
|
200,780
|
|
|
|
410,166
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
7,449,502
|
|
|
|
6,585,745
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN HONG KONG JOINT VENTURE
|
|
|
10,610,725
|
|
|
|
11,779,663
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
53,112
|
|
|
|
71,556
|
|
INTANGIBLE ASSET - NET
|
|
|
63,722
|
|
|
|
67,075
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
18,181,061
|
|
|
$
|
18,510,039
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit - factor
|
|
$
|
693,766
|
|
|
$
|
313,891
|
|
Accounts payable - trade
|
|
|
552,829
|
|
|
|
587,343
|
|
Accounts payable - Hong Kong Joint Venture
|
|
|
1,983,944
|
|
|
|
1,070,103
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and employee benefits
|
|
|
51,188
|
|
|
|
76,480
|
|
Commissions and other
|
|
|
65,630
|
|
|
|
74,327
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
3,347,357
|
|
|
|
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 December 31, 2016 and March 31, 2016
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
Retained earnings
|
|
|
1,446,989
|
|
|
|
2,450,540
|
|
Accumulated other comprehensive income
|
|
|
477,745
|
|
|
|
1,028,385
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
14,833,704
|
|
|
|
16,387,895
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
18,181,061
|
|
|
$
|
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 December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,177,632
|
|
|
$
|
4,112,908
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
2,000,313
|
|
|
|
2,727,122
|
|
Cost of goods sold – other
|
|
|
128,539
|
|
|
|
77,418
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,048,780
|
|
|
|
1,308,368
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,008,865
|
|
|
|
1,141,668
|
|
Research and development expense
|
|
|
199,638
|
|
|
|
147,640
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(159,723
|
)
|
|
|
19,060
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(369,745
|
)
|
|
|
(186,097
|
)
|
Interest expense
|
|
|
(20,338
|
)
|
|
|
(7,135
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(549,806
|
)
|
|
$
|
(174,172
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.24
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
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)
|
|
Nine Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,569,944
|
|
|
$
|
10,327,622
|
|
Cost of goods sold - acquired from Joint Venture
|
|
|
6,949,332
|
|
|
|
7,231,947
|
|
Cost of goods sold - other
|
|
|
262,222
|
|
|
|
220,224
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
3,358,390
|
|
|
|
2,875,451
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
3,277,480
|
|
|
|
3,459,284
|
|
Research and development expense
|
|
|
519,621
|
|
|
|
495,071
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(438,711
|
)
|
|
|
(1,078,904
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(515,717
|
)
|
|
|
(263,530
|
)
|
Interest expense
|
|
|
(49,123
|
)
|
|
|
(20,118
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,003,551
|
)
|
|
$
|
(1,362,552
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.43
|
)
|
|
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
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 Dec. 31,
|
|
|
Nine Months Ended Dec. 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(549,806
|
)
|
|
$
|
(174,172
|
)
|
|
$
|
(1,003,551
|
)
|
|
$
|
(1,362,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s portion of Hong Kong Joint Venture’s other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
(180,486
|
)
|
|
|
(268,350
|
)
|
|
|
(460,330
|
)
|
|
|
(268,350
|
)
|
Unrealized loss on investment securities
|
|
|
(69,389
|
)
|
|
|
(12,966
|
)
|
|
|
(90,310
|
)
|
|
|
(138,426
|
)
|
Total Other Comprehensive Loss
|
|
|
(249,875
|
)
|
|
|
(281,316
|
)
|
|
|
(550,640
|
)
|
|
|
(406,776
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(799,681
|
)
|
|
$
|
(455,488
|
)
|
|
$
|
(1,554,191
|
)
|
|
$
|
(1,769,328
|
)
|
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)
|
|
Nine Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,003,551
|
)
|
|
$
|
(1,362,552
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
21,797
|
|
|
|
28,151
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
515,717
|
|
|
|
263,530
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable and amounts due from factor
|
|
|
398,177
|
|
|
|
(1,151,723
|
)
|
Increase in inventories, prepaid expenses, and other
|
|
|
(1,466,836
|
)
|
|
|
(499,057
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
845,338
|
|
|
|
448,781
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(689,358
|
)
|
|
|
(2,272,870
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash distributions from Joint Venture
|
|
|
102,581
|
|
|
|
190,461
|
|
Decrease in funds held by factor
|
|
|
-
|
|
|
|
631,906
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
102,581
|
|
|
|
822,367
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net proceeds from Line of Credit - Factor
|
|
|
379,875
|
|
|
|
1,628,214
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
379,875
|
|
|
|
1,628,214
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(206,902
|
)
|
|
|
177,711
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
362,728
|
|
|
|
49,427
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
155,826
|
|
|
$
|
227,138
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
49,123
|
|
|
$
|
20,118
|
|
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 (U.S. GAAP) 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 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 $1,003,551
for the nine months ended December 31, 2016 and $2,137,792 and $3,704,985 for the years ended March 31, 2016 and 2015, respectively.
Furthermore, as of December 31, 2016, working capital (computed as the excess of current assets over current liabilities) decreased
by $361,456 from $4,463,601 at March 31, 2016, to $4,102,145 at December 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
(Agreement) with Merchant Factor Corporation (Merchant or Factor). 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 $1,783,000
at December 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 and through December 31, 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 with Merchant 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 December 31, 2016, the Company
had borrowings of $693,766 under the Agreement with Merchant, and the Company had remaining availability under the discount factoring
agreement of approximately $1,767,000. 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 December 31, 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 the basis of accounting used by the Hong Kong Joint Venture. The following represents
summarized balance sheet and income statement information of the Hong Kong Joint Venture as of and for the nine months ended December
31, 2016 and 2015:
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
Net sales
|
|
$
|
13,271,177
|
|
|
$
|
15,002,160
|
|
Gross profit
|
|
|
2,169,453
|
|
|
|
2,779,556
|
|
Net loss
|
|
|
(782,051
|
)
|
|
|
(359,513
|
)
|
Total current assets
|
|
|
13,136,416
|
|
|
|
10,689,736
|
|
Total assets
|
|
|
25,825,609
|
|
|
|
29,543,358
|
|
Total current liabilities
|
|
|
3,878,625
|
|
|
|
5,079,527
|
|
Total liabilities
|
|
|
4,352,661
|
|
|
|
5,079,527
|
|
During the nine months ended December 31,
2016 and 2015 the Company purchased $8,122,013 and $5,811,404, respectively, of products directly from the Hong Kong Joint Venture
for resale. For the nine month period ended December 31, 2016 the Company has reduced its equity in the earnings of the Joint Venture
to reflect an increase of $124,692 in inter-Company profit on purchases held by the Company in inventory. For the nine month period
ended December 31, 2015 the Company has decreased its equity in the earnings of the Joint Venture to reflect an increase of $41,317
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 December 31, 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 nine month periods ended December 31, 2016 or 2015. As a result, basic
and diluted weighted average common shares outstanding are identical for the three month and nine month periods ended December
31, 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 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 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 December 2016 the FASB issued Accounting Standards Update
No. 2016-20,
Technical Corrections and Improvements to Topic 606
,
Revenue from Contracts with Customers,
or ASU 2016-20.
The amendments in ASU 2016-20 update and affect narrow aspects of the guidance issued in ASU 2014-09. In May 2016, the FASB issued
ASU 2016-12,
Narrow Scope Improvements and Practical Expedients
,
which provided revised guidance on certain issues relating to revenue from contracts with customers,
including clarification
of the objective of the collectability criterion. In March 2016, the FASB issued a final amendment to clarify the implementation
guidance for principal versus agent considerations and in April 2016 issued a final amendment to clarify the guidance related to
identifying performance obligations and the accounting for intellectual property licenses. We are currently evaluating the impact
these updates may have on our Consolidated Financial Statements and 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.
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 nine month
periods ended December 31, 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 December 31, 2016
and 2015
Sales.
Net sales
for the three months ended December 31, 2016 were $3,177,632 compared to $4,112,908 for the comparable three months in the prior
period, a decrease of $935,276 (22.7%). Included in the prior year’s comparable quarter were sales of approximately $900,000
to a large customer to which the Company had sales of only approximately $500,000 in the fiscal quarter ended December 31, 2016.
This customer placed orders for an additional approximately $660,000 in the fiscal quarter ended December 31, 2016, however delivery
of these orders will not be completed until the Company’s fourth fiscal quarter ending March 31, 2017.
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 33.0% and 31.8% of sales for the quarters ended December 31, 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 $1,008,865 at December 31, 2016, compared to $1,141,668 for the comparable three months
in the prior year. As a percentage of net sales, these expenses increased to 31.7% for the three month period ended December 31,
2016, from 27.8% for the 2015 period. The increase of these costs as a percentage of net sales was primarily due to lower net sales
as compared to fixed expenses that do not decrease directly with decreased sales.
Research and development
expenses were $199,638 for the three month period ended December 31, 2016 compared to $147,640 for the comparable quarter of the
prior year, an increase of $51,998 (35.2%). 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 was $20,338 for the quarter ended December 31, 2016, compared to interest expense of $7,135
for the quarter ended December 31, 2015. The net interest expense is dependent upon the total amounts borrowed on average 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. Amounts borrowed from the Factor and the Hong Kong Joint Venture increased in the current fiscal year’s
three month period as compared to the same period in the prior fiscal year.
Net Loss.
We
reported a net loss of $549,806 for the quarter ended December 31, 2016, compared to a net loss of $174,172 for the corresponding
quarter of the prior fiscal year, a $375,634 (215.7%) increase in the net loss. The primary reasons for the increase in net loss
is the decrease in sales due to the timing of sales to a major customer during the current year’s quarter, as explained above,
and an increase in the loss from investment in the Hong Kong Joint Venture of $183,648 to $369,745 in the quarter ended December
31, 2016 from $186,097 in the comparable quarter of the prior fiscal year.
Nine Months Ended December 31, 2016
and 2015
Sales.
Net sales for the nine months ended December 31, 2016 were $10,569,944 compared to $10,327,622 for the
comparable nine months in the prior period, an increase of $242,322 (2.3%). The primary reason for the increase in net sales volumes
relates to the introduction and sales of the Company’s new sealed product line. In addition, as described above for the three
month period ended December 31, 2016 net sales volumes were lower than expected due to the timing and recognition of certain sales
transactions to a large customer that was delayed at the customer’s request. Delivery of these orders will not be completed
until the Company’s fourth fiscal quarter ending March 31, 2017.
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 31.8% for the nine months ended December 31, 2016 and 27.8% for the period ended December 31, 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 $3,277,480 for the nine months ended December 31, 2016 compared to $3,459,284 for the
comparable nine months in the prior year. As a percentage of sales, these expenses were 31.0% for the nine month period ended December
31, 2016 and 33.5% 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 $519,621 for the nine months ended December 31, 2016 compared to $495,071 for the comparable nine month period of
the prior year, an increase of $24,550 (5.0%). The primary reasons for the increase is the slight increase of expenditures to independent
testing facilities during the nine month period ended December 31, 2016 as the new sealed product line is completed.
Interest Expense
and Other.
Our interest expense was $49,123 for the nine months ended December 31, 2016, compared to interest expense of $20,118
for the nine months ended December 31, 2015. The net interest expense is dependent upon total amounts borrowed on average 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. Amounts borrowed from the Factor and the Hong Kong Joint Venture increased in the current fiscal year as compared
to the same period in the prior fiscal year.
Net Loss.
We
reported a net loss of $1,003,551 for the nine months ended December 31, 2016 compared to a net loss of $1,362,552 for the
corresponding period of the prior fiscal year, an improvement in the net loss of $359,001 (26.3%). The primary reasons for
the decrease in net loss are the increase in sales and gross profit realized due to the introduction of our new sealed
product line with higher gross profit margins as explained above, however this was partially offset by an increase in the
loss from investment in the Hong Kong Joint Venture of $252,187 to $515,717 for the nine month period ended December 31, 2016
from $263,530 in the comparable nine month period of the prior fiscal year.
Management Plans and Liquidity
The Company had net
losses of $1,003,551 for the nine months ended December 31, 2016, and $2,137,792 and $3,704,985 for the years ended March 31, 2016
and 2015, respectively. Furthermore, as of December 31, 2016, working capital (computed as the excess of current assets over current
liabilities) decreased by $361,456 from $4,463,601 at March 31, 2016, to $4,102,145 at December 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 have repayment terms of ninety days
for each advance thereunder. The combined availability of these facilities totaled approximately $1,783,000 at December 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 and through December 31, 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 $689,358 for the nine months ended December 31, 2016. This was primarily due to an increase in inventory and prepaid
expenses of $1,466,836 and a net loss of $1,003,551. The net loss includes a non-cash loss from investment in the Hong Kong Joint
Venture of $515,717. This was partially offset by increases of $845,338 in accounts payable and accrued expenses, a decrease in
trade accounts receivable of $398,177
.
Operating activities used cash of $2,272,870 for the
nine months ended December 31, 2015. This was primarily due to an increase in inventories and prepaid expenses of $499,057, an
increase in trade accounts receivable and amounts due from factor of $1,151,723, and a net loss of $1,362,552, offset by an increase
in accounts payable and accrued expenses of $448,781. The net loss includes a non-cash loss from investment in the Hong Kong Joint
Venture of $263,530.
Investing activities
provided cash during the nine months ended December 31, 2016 resulting from the payment of $102,581 in dividends from the Joint
Venture. Investing activities provided cash of $822,367 during the nine months ended December 31, 2015 as a result of the withdrawal
of interest bearing funds held by the factor of $631,906 and dividends received from the Joint Venture of $190,461.
Financing activities
provided cash of $379,875 during the nine months ended December 31, 2016 and provided cash of $1,628,218 during the nine months
ended December 31, 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 nine months ended December 31, 2016 were $4,998,083 and $13,271,177 respectively, compared to $4,765,598 and $15,002,160, respectively,
for the comparable period in the prior fiscal year. The 4.9% increase and 11.5% decrease in net sales by the Joint Venture for
the three and nine month period is due to fluctuations in sales volume to unaffiliated customers primarily in Europe.
Gross Profit
Margin.
Gross margins of the Joint Venture for the three month period ended December 31, 2016 decreased to a negative
(0.8%) from 11.9% for the 2015 corresponding period. For the nine month period ended December 31, 2016, gross margins were
16.4% compared to 18.5% for the same period of the prior year. The quarter ended December 31, 2016 included a non-recurring
write down of inventory of approximately $387,000 to adjust inventory to current value. In addition, 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 affect the overall gross margins.
Expenses.
Selling, general and administrative
expenses were $1,201,701 and $3,308,966, respectively, for the three and nine month periods ended December 31, 2016, compared to
$915,688 and $3,263,223 in the prior year’s respective periods. As a percentage of sales, expenses were 24.0% and 24.9% for
the three and nine month periods ended December 31, 2016, compared to 19.2% and 21.8% for the three and nine month periods ended
December 31, 2015. The changes in selling, general and administrative expense as a percent of sales for the three and nine 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 $227,901 and $432,618 respectively, for the three and nine month periods ended
December 31, 2016, compared to interest income of $125,903 and $355,522, respectively, for the prior year’s periods. Interest
income is dependent on the average balance of assets held for investment.
Net Loss
.
The net loss for the three and nine months ended December 31, 2016 was $988,478 and $782,051, respectively, compared to a net
loss of $336,434 and $359,513, respectively, in the comparable periods last year. The increase in net loss for the three
month period ended December 31, 2016 is due primarily to a non-recurring write down of inventory of approximately $387,000 to
adjust inventory to current value during the December 31, 2016 quarter as explained above. The increase in the net loss for
the nine month period of the current year is due primarily to reduced sales during the nine month period ended December 31,
2016, and a decrease in gross profit margin as explained above.
Liquidity.
Cash needs of the Joint Venture are currently met by
funds generated from operations. During the nine months ended December 31, 2016, working capital increased by $3,112,829 from
$6,144,962 on March 31, 2016 to $9,257,791 on December 31, 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.