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, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the 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, 2016, was $8,788,971.
The number of shares of common stock outstanding
as of June 30, 2017 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 2017 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 (62.0% and 52.0% of its sales
during fiscal 2017 and 2016 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, 2017, approximately 95.6% of our purchases were imported
from the Hong Kong Joint Venture.
Our sales for the year
ended March 31, 2017 were $14,083,428 compared to $13,740,840 for the year ended March 31, 2016. We reported a net loss of $2,058,902
in fiscal 2017 compared to a net loss of $2,137,792 in fiscal 2016, a decrease in the net loss of $78,890 (3.7%). The net loss
is primarily due to sales volumes that are insufficient to cover general and administrative expense. The net loss of the Company
also reflects a $275,664 increase in our loss from investment in the Hong Kong Joint Venture. Decreased purchases by unaffiliated
customers, primarily in Europe from the Hong Kong Joint Venture, was a primary contributor to the increased 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 continued through the development and testing
of our sealed battery alarms. Currently, we have received independent testing agency approvals on all of our sealed battery products.
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 less than one percent in fiscal
2017 and 4.8% of total net sales in fiscal 2016.
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, 2017 was approximately $830,000. Our backlog as of March 31, 2016 was approximately $631,000. 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 2017 and 2016, 95.6% and 97.0%, 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 62.0% of the Hong Kong Joint Venture’s total sales during fiscal 2017
and 52.0% of total sales during fiscal 2016, 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 $5,875,243
in fiscal 2017 and $8,502,710 in fiscal 2016. 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 2017
and 2016, 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. However, 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, 2017,
we had 14 employees, 9 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 $14,000 and increases
3% per year.
Effective March 2003,
we entered into an operating lease for office space in Naperville, Illinois. This lease, consisting of 3,400 square feet, was renewed
in October 2016 and extends through February 2018. 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 various leases with rental payments of approximately $23,000
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
|
|
70
|
|
President, Chief Operating Officer and Chief Executive Officer
|
|
|
|
|
|
James B. Huff
|
|
65
|
|
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.
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.
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; the fee is fixed and determinable;
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 Merchant Factors Corporation (Merchant or Factor)
under a factoring agreement on an ongoing basis. Factoring charges recognized on assignment of receivables are deducted from revenue
in the consolidated statements of operations and amounted to $107,879 and $102,176 for the years ended March 31, 2017 and 2016,
respectively.
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, 2017 and 2016, 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 freight, import duty and inspection fees. Expenses incurred for
inventory quality control in the amount of approximately $43,000 and $37,000, have been capitalized and included in inventory for
the fiscal years ended March 31, 2017 and 2016, respectively. 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, 2017 and 2016.
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 Accounting Standards
Codification (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 $315,957 and $267,128 in fiscal years 2017 and 2016, 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.
The
cumulative balance of currency
translation, a component of accumulated other comprehensive
income, amounted to $325,725 and $983,529 at March 31, 2017 and 2016, respectively.
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 average 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, 2017 and 2016 for both basic and diluted
shares. In addition, there were no other securities outstanding during 2017 or 2016.
Recently Issued Accounting Pronouncements:
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 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.
NOTE B – MANAGEMENT’S PLAN
The Company had net losses of $2,058,902 and
$2,137,792 for the years ended March 31, 2017 and 2016, respectively. Furthermore, as of March 31, 2017, working capital (computed
as the excess of current assets over current liabilities) decreased by $907,077 from $4,463,601 at March 31, 2016, to $3,556,524
at March 31, 2017, and the Company experienced negative cash flows from operations of $2,153,188 and $822,957 for the fiscal years
ended March 31, 2017 and 2016, respectively.
Our
short-term borrowings to finance operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant
to the terms of a factoring agreement with Merchant as further described in Note D – Short Term Borrowings and Credit Arrangements.
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, effective on April 1,
2017, we have secured extended payment terms for purchases up to $3,000,000 from our Hong Kong Joint Venture for the purchase
of
inventory
. Effective April 1, 2017, amounts
borrowed are unsecured, bear interest at 4.00%, and provide for repayment terms of ninety days for each advance thereunder. The
combined availability of these facilities totaled approximately $1,385,000
We anticipate that the
introduction of our complete line of sealed smoke and carbon monoxide alarms will result in increased sales. These sealed products
will compete on price and functionality 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 potentially impact our ability to continue operations.
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 resulting from the delivery
of the Company’s new line of sealed battery ionization smoke alarms and carbon monoxide products, and obtaining additional financing on its credit facility.
The
Company has seen positive results on this plan during the fiscal year ended March 31, 2017 due to the release 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.
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, 2017 and 2016, the Company has an investment balance of $10,562,837 and $12,417,450,
respectively for its 50% interest in the Hong Kong Joint Venture. There are no material differences between US-GAAP and those used
by the Hong Kong Joint Venture.
The following represents summarized financial
information derived from the financial statements of the Hong Kong Joint Venture as of March 31, 2017 and 2016.
|
|
March 31,
|
|
|
|
|
|
|
2016
|
|
|
|
2017
|
|
|
(Revised)
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
12,314,103
|
|
|
$
|
10,528,508
|
|
Property and other assets
|
|
|
11,960,064
|
|
|
|
17,193,499
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,274,167
|
|
|
$
|
27,722,007
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,356,685
|
|
|
$
|
2,530,163
|
|
Non-current liabilities
|
|
|
392,354
|
|
|
|
470,850
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
21,525,128
|
|
|
|
24,720,994
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
24,274,167
|
|
|
$
|
27,722,007
|
|
|
|
For the Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
15,470,589
|
|
|
$
|
17,581,195
|
|
Gross profit
|
|
|
1,932,919
|
|
|
|
2,337,649
|
|
Net loss
|
|
|
(1,808,497
|
)
|
|
|
(1,584,012
|
)
|
During the years ended March 31, 2017 and 2016,
the Company purchased $9,595,346 and $9,078,485, respectively, of finished product from the Hong Kong Joint Venture, which represents
95.6% and 97.0%, respectively, of the Company’s total finished product purchases. Amounts due from the Hong Kong Joint Venture
included in Accounts Receivable totaled $17,584 and $60,506 at March 31, 2017 and 2016, respectively.
At March 31,
2017 and 2016, the Company borrowed $1,206,731 and $1,070,103 under two separate extended payment term agreements with the Hong
Kong Joint Venture. These agreements provide extended payment terms for the purchase of
inventory
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 $102,581 and $190,461 during the fiscal years ended March 31, 2017 and 2016, are first
used to repay any outstanding balance on these agreements. At March 31, 2017 and 2016, $1,206,731 and $729,135, 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, 2017 and 2016 there was $0 and $340,968, 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. Effective April 1, 2017, the Company has increased its payment
terms for purchases up to $3,000,000 from our Hong Kong Joint Venture and the interest rate thereon has been increased to 4.00%.
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 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.
The amount available to borrow from Merchant is approximately $587,000 and $2,067,000 at March 31, 2017 and 2016, respectively.
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 6.00% at March 31, 2017). 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, 2017 and 2016
there was $2,264,125 and $313,891 borrowed and outstanding under the factoring agreement.
Under the Agreement, the Company assigned
receivables of $13,770,764 and $12,942,571 during the years ended March 31, 2017 and 2016, respectively. The uncollected balance
of non-recourse receivables held by the factor amounted to $2,009,471 and $1,789,619 at March 31, 2017 and 2016. Collected cash
maintained on deposit at March 31 2017 and 2016 with the factor earns interest at the factor’s prime rate of interest less
2.5 percent (effective rate of 1.50% at March 31, 2017.) There was no cash on deposit with the Factor at March 31, 2017 or 2016.
NOTE E – 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 based
on estimated useful lives. 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,
|
|
|
|
2017
|
|
|
2016
|
|
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
|
|
|
(858,649
|
)
|
|
|
(833,386
|
)
|
|
|
$
|
46,293
|
|
|
$
|
71,556
|
|
Depreciation and amortization expense totaled $25,263 and $33,062
for fiscal years ended March 31, 2017 and 2016, respectively.
NOTE F - 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 October 2016, the Company renewed and expanded its operating lease through February 2018 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
$220,492 and $214,072 for the years ended March 31, 2017 and 2016, respectively.
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Total
|
|
Future minimum lease payments are as follows:
|
|
$
|
229,082
|
|
|
$
|
174,958
|
|
|
$
|
10,170
|
|
|
$
|
414,210
|
|
NOTE G – INCOME TAXES
The Company files its income tax returns in
the U.S. federal jurisdiction, and various state jurisdictions. Income tax returns filed for the fiscal years ended March 31, 2016,
2015, and 2014 are considered open and subject to examination by tax authorities. 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,
2017, the Company has total net
federal and state
operating
loss carry forwards of approximately $
8,418,000,
which
expire in various amounts at dates from 2017 through 2032. There are certain limitations to the use and application of these items.
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 assets 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 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 reconciliation between the statutory federal income tax provision
and the actual effective tax provision is as follows:
|
|
Years ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Federal benefit at statutory rate (34%) before loss carry-forward
|
|
$
|
(700,027
|
)
|
|
$
|
(726,849
|
)
|
Non-repatriated loss of Hong Kong Joint Venture
|
|
|
345,953
|
|
|
|
252,228
|
|
Permanent differences
|
|
|
57,651
|
|
|
|
83,024
|
|
State income tax benefit – net of federal effect
|
|
|
(30,515
|
)
|
|
|
(38,815
|
)
|
Expiration of tax credits
|
|
|
251,520
|
|
|
|
243,043
|
|
Increase in deferred
tax
valuation
allowance
|
|
|
75,418
|
|
|
|
187,369
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The individual components of the Company’s deferred tax assets
are as follows:
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and allowances
|
|
$
|
58,558
|
|
|
$
|
57,922
|
|
Inventory uniform capitalization
|
|
|
17,966
|
|
|
|
26,309
|
|
Net operating loss carry forward
|
|
|
3,156,643
|
|
|
|
2,821,998
|
|
Foreign tax credit carry forward
|
|
|
695,827
|
|
|
|
947,347
|
|
Research and development tax credit carry forward
|
|
|
61,701
|
|
|
|
61,701
|
|
Allowance for unrealizable deferred tax assets
|
|
|
(3,990,695
|
)
|
|
|
(3,915,277
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE H - 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 I - 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, 2017, the
Company had one customer that represented 14.8% of the Company’s net sales. The Company had one customer that represented
14.1% of net sales for the year ended March 31, 2016.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)