|
ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
June 30, 2019
|
|
|
March 31, 2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
223,598
|
|
|
$
|
374,472
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
482,963
|
|
|
|
365,293
|
|
Receivables from employees
|
|
|
54,930
|
|
|
|
54,916
|
|
Receivable from Hong Kong Joint Venture
|
|
|
12,144
|
|
|
|
45,217
|
|
|
|
|
550,037
|
|
|
|
465,426
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
1,943,961
|
|
|
|
2,549,986
|
|
Inventories – finished goods
|
|
|
7,487,800
|
|
|
|
6,852,305
|
|
Prepaid expenses
|
|
|
130,163
|
|
|
|
145,190
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
10,335,559
|
|
|
|
10,387,379
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN HONG KONG JOINT VENTURE
|
|
|
7,923,355
|
|
|
|
8,441,889
|
|
INTANGIBLE ASSET – NET
|
|
|
52,542
|
|
|
|
53,660
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
465,883
|
|
|
|
19,998
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
18,781,339
|
|
|
$
|
18,906,926
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit – factor
|
|
$
|
1,695,381
|
|
|
$
|
1,851,591
|
|
Short-term portion of lease asset liability
|
|
|
162,906
|
|
|
|
-
|
|
Accounts payable – Hong Kong Joint Venture
|
|
|
5,625,164
|
|
|
|
4,962,023
|
|
Accounts payable – trade
|
|
|
391,823
|
|
|
|
616,444
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and employee benefits
|
|
|
99,401
|
|
|
|
132,132
|
|
Accrued commissions and other
|
|
|
407,544
|
|
|
|
470,876
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
8,382,219
|
|
|
|
8,033,066
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM PORTION OF LEASE ASSET LIABILITY
|
|
|
283,784
|
|
|
|
-
|
|
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 June 30, 2019 and March 31, 2019
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
Accumulated Deficit
|
|
|
(3,255,820
|
)
|
|
|
(2,646,866
|
)
|
Accumulated other comprehensive income
|
|
|
462,186
|
|
|
|
611,756
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
10,115,336
|
|
|
|
10,873,860
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
18,781,339
|
|
|
$
|
18,906,926
|
|
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 June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
4,343,291
|
|
|
$
|
4,045,996
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
2,793,539
|
|
|
|
2,618,867
|
|
Cost of goods sold – other
|
|
|
304,923
|
|
|
|
186,985
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,244,829
|
|
|
|
1,240,144
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,236,839
|
|
|
|
1,197,771
|
|
Research and development expense
|
|
|
140,643
|
|
|
|
153,387
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(132,653
|
)
|
|
|
(111,014
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
368,964
|
|
|
|
244,400
|
|
Interest expense
|
|
|
107,337
|
|
|
|
83,419
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(608,954
|
)
|
|
$
|
(438,833
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
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 June 30,
|
|
|
|
2019
|
|
|
2018
|
|
NET LOSS
|
|
$
|
(608,954
|
)
|
|
$
|
(438,833
|
)
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
Company’s portion of Hong Kong Joint Venture’s other
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
(100,773
|
)
|
|
|
(379,479
|
)
|
Unrealized loss on investment securities
|
|
|
(48,797
|
)
|
|
|
(9,291
|
)
|
Total Other Comprehensive Loss
|
|
|
(149,570
|
)
|
|
|
(388,770
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(758,524
|
)
|
|
$
|
(827,603
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2019 (Unaudited)
|
|
Common
Shares
|
|
|
Stock
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
AOCI*
|
|
|
Total
|
|
Balance at April 1, 2019
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(2,646,866
|
)
|
|
$
|
611,756
|
|
|
$
|
10,873,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,773
|
)
|
|
|
(100,773
|
)
|
Unrealized loss on investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,797
|
)
|
|
|
(48,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(608,954
|
)
|
|
|
|
|
|
|
(608,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(3,255,820
|
)
|
|
$
|
462,186
|
|
|
$
|
10,115,336
|
|
* Accumulated Other Comprehensive Income
The
accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2018 (Unaudited)
|
|
Common
Shares
|
|
|
Stock
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
AOCI*
|
|
|
Total
|
|
Balance at April 1, 2018
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(1,298,880
|
)
|
|
$
|
1,143,246
|
|
|
$
|
12,753,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(379,479
|
)
|
|
|
(379,479
|
)
|
Unrealized loss on investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,291
|
)
|
|
|
(9,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(438,833
|
)
|
|
|
|
|
|
|
(438,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(1,737,713
|
)
|
|
$
|
754,476
|
|
|
$
|
11,925,733
|
|
* Accumulated Other Comprehensive Income
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)
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(608,954
|
)
|
|
$
|
(438,833
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,923
|
|
|
|
7,092
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
368,964
|
|
|
|
244,400
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable and amounts due from factor
|
|
|
521,414
|
|
|
|
333,004
|
|
Increase in inventories, prepaid expenses, and other
|
|
|
(620,468
|
)
|
|
|
(317,637
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
342,457
|
|
|
|
527,640
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
5,336
|
|
|
|
355,666
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayment of Line of Credit - Factor
|
|
|
(156,210
|
)
|
|
|
(406,755
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(156,210
|
)
|
|
|
(406,755
|
)
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(150,874
|
)
|
|
|
(51,089
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
374,472
|
|
|
|
128,161
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
223,598
|
|
|
$
|
77,072
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
107,290
|
|
|
$
|
96,367
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities:
|
|
|
|
|
|
|
|
|
Right-of-use asset in exchange for operating lease liability
|
|
$
|
475,538
|
|
|
|
-
|
|
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, 2019, 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 accounting
principles generally accepted in the United States of America (US-GAAP) have been condensed or omitted. The interim condensed consolidated
financial statements should be read in conjunction with the Company’s March 31, 2019 audited financial statements filed with
the Securities and Exchange Commission on Form 10-K on July 16, 2019. 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 $608,954
for the three months ended June 30, 2019 and $1,347,986 and $2,262,310 for the years ended March 31, 2019 and 2018, respectively.
Furthermore, as of June 30, 2019, working capital (computed as the excess of current assets over current liabilities) decreased
by $400,973 from $2,354,313 at March 31, 2019, to $1,953,340 at June 30, 2019.
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 Factors Corporation (Merchant or Factor). Borrowings under our Factoring Agreement bear interest
at prime plus 2% and are secured by trade accounts receivable and inventory. Advances from Merchant 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. The unused availability of this facility totaled approximately $268,500 at June 30, 2019. In addition,
we have secured extended payment terms for purchases up to $4,000,000 from our Hong Kong Joint Venture for the purchase of sealed
battery alarms. These amounts are unsecured, bear interest at 5.5% per annum, and provide for repayment terms of 120 days for each
purchase. The balance outstanding under this agreement at June 30, 2019 was $5,625,164 with $2,301,890 of this amount being beyond
agreed repayment terms. The Hong Kong Joint Venture has provided discretionary approval to allow the Company to exceed the agreed
upon repayment terms and has indicated it has no plans or intentions that would materially impact the financial position, operations,
or cash flows of the Company.
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 line of sealed battery ionization
smoke alarms, carbon monoxide products, and ground fault circuit interrupters. In addition the Company is seeking improved terms
on its credit facility with the Hong Kong Joint Venture. The Company has seen positive results on this plan during the fiscal years
ended March 31, 2019 and 2018 and through June 30, 2019 due to sales of its product offerings 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.
Line of Credit – Factor
On January 15, 2015, the Company entered
into the Agreement with Merchant for the purpose of factoring the Company’s trade accounts receivable and to provide financing
secured by finished goods inventory. Under the Agreement the Company may borrow eighty percent (80%) of eligible accounts receivable.
Additional funding, characterized by Merchant as an over advance, may be provided up to one hundred percent (100%) of eligible
accounts receivable. The over advance portion, if any, may not exceed fifty percent (50%) of eligible inventory up to a maximum
of $500,000. The Agreement expires on January 6, 2020, and provides for continuation of the program for successive two year periods
until terminated by one of the parties to the Agreement. As of June 30, 2019, the Company had borrowings of $1,695,381 under the
Agreement, and the Company had remaining availability under the Agreement of approximately $268,500. Advances on factored trade
accounts receivable 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 7.50% at June 30, 2019). 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’s primary source of revenue
is the sale of safety and security products based upon purchase orders or contracts with customers. Revenue is recognized at a
point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed
to have been transferred to the customer when the product is shipped or delivered to the customer. Customers may not return, exchange
or refuse acceptance of goods without our approval. Generally, the Company does not grant extended payment terms. Shipping and
handling costs associated with outbound freight, after control over a product has transferred to a customer, are accounted for
as a fulfillment cost and are recorded in selling, general and administrative expense.
The amount of revenue recognized reflects
the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at
the transaction price net of estimates of variable consideration. The Company uses the expected value method based on historical
data in considering the impact of estimates of variable consideration, which may include trade discounts, allowances, product returns
(including rights of return) or warranty replacements. Estimates of variable consideration are included in revenue to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
We have established allowances to cover
anticipated doubtful accounts based upon historical experience.
Disaggregation of Revenue
The Company presents revenue associated with sales of products
acquired from our Hong Kong Joint Venture separately from revenue associated with sales of ground fault circuit interrupters (GFCI’s)
and ventilation fans. The Company believes this disaggregation best depicts how our various product lines perform and are affected
by economic factors. Revenue recognized by these categories for the fiscal quarters ended June 30, 2019 and 2018 are as follows:
|
|
Three months ended
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Sales of products acquired from our HKJV
|
|
$
|
3,939,841
|
|
|
$
|
3,764,416
|
|
Sales of GFCI’s and ventilation fans
|
|
|
403,450
|
|
|
|
281,580
|
|
|
|
$
|
4,343,291
|
|
|
$
|
4,045,996
|
|
Receivables
Receivables are recorded when the Company has an unconditional
right to consideration. We have established allowances to cover anticipated doubtful accounts based upon historical experience.
Remaining Performance Obligations
Remaining performance obligations represent the transaction
price of firm orders for satisfied or partially satisfied performance obligations on contracts with an original expected duration
of one year or more. The Company’s contracts are predominantly short-term in nature with a contract term of one year or less.
For those contracts, the Company has utilized the practical expedient in ASC Topic 606 exempting the Company from disclosure of
the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has
an original expected duration of one year or less.
Joint Venture
The Company and its joint venture partner,
a Hong Kong corporation, each owns a 50% interest in 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 three months ended June 30, 2019 and 2018:
|
|
2019
(Unaudited)
|
|
|
2018
(Unaudited)
|
|
Net sales
|
|
$
|
3,149,100
|
|
|
$
|
3,266,557
|
|
Gross profit
|
|
|
161,680
|
|
|
|
346,111
|
|
Net loss
|
|
|
(808,833
|
)
|
|
|
(546,959
|
)
|
Total current assets
|
|
|
12,875,232
|
|
|
|
13,189,847
|
|
Total assets
|
|
|
18,982,477
|
|
|
|
22,082,883
|
|
Total current liabilities
|
|
|
2,159,436
|
|
|
|
2,990,291
|
|
Total liabilities
|
|
|
2,902,978
|
|
|
|
3,378,728
|
|
During the three months ended June 30,
2019 and 2018 the Company purchased $2,859,967 and $2,804,372, respectively, of products directly from the Hong Kong Joint Venture
for resale. For the three months ended June 30, 2019 the Company has decreased its equity in the net loss of the Joint Venture
to reflect a decrease of $35,453 in inter-Company profit on purchases held by the Company in inventory. For the three months ended
June 30, 2018 the Company has decreased its equity in the net loss of the Joint Venture to reflect a decrease of $29,079 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. 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.
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 history of losses from
operations and the uncertainty as to whether the Company will generate sufficient taxable income to use the deferred tax assets
prior to their expiration. Accordingly, a valuation allowance was established to fully offset the value of the deferred tax assets.
Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable
income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income is generated,
we may be able to offset a portion of future tax expenses.
The Company follows ASC 740-10 which provides
guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax
return and requires that we recognize in our consolidated financial statements the impact of a tax position, if that position is
more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties,
if any, related to income tax matters are recorded as income tax expenses.
The Deemed Repatriation Transition
Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”)
of our Hong Kong Joint Venture. To determine the amount of the Transition Tax, the Company must determine, in addition to other
factors, the amount of post-1986 E&P of the Hong Kong Joint Venture, as well as the amount of non-U.S. income taxes paid on
such earnings. The Company has determined that it does not owe a Transition Tax since it has sufficient net operating loss carryforwards
and foreign tax credit carryforwards to offset the E&P of its Hong Kong Joint Venture that are subject to the tax.
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 June 30, 2019 and 2018, 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 month periods ended June 30, 2019 or 2018. As a result, basic and diluted
weighted average common shares outstanding are identical for the three month periods ended June 30, 2019 and 2018.
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.
Recently Adopted Accounting Standards
Changes to US-GAAP are established by the
Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASU’s) to the FASB’s Accounting
Standards Codification. The Company considers the applicability and impact of all ASU’s.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic
842)
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties
to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either
financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.
This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line
basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases
with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted
for similar to previous guidance for operating leases. The new standard requires lessors to account for leases using an approach
that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The
Company adopted the standard on April 1, 2019, the date it became effective for public companies based on the Company’s fiscal
year, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and
prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of April 1, 2019 as a result
of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among
other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient
provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided
certain conditions were met.
The impact of the adoption of this guidance on the Company’s
condensed consolidated financial statements is discussed below:
The Company is a lessee in lease agreements for office space.
Certain of the Company’s leases contain provisions that provide for one or more options to renew at the Company’s sole
discretion. The Company’s leases are comprised of fixed lease payments, with its real estate leases including lease payments
subject to a rate or index which may be variable. Certain real estate leases also include executory costs such as common area maintenance
(non-lease component). As a practical expedient permitted under ASC 842, the Company has elected to account for the lease and non-lease
components as a single lease component. Lease payments, which may include lease components and non-lease components, are included
in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable
lease amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. None of the Company’s lease
agreements contain any residual value guarantees or material restrictive covenants. As a result of the Company’s election
of the package of practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical
lease classification, all of the Company’s lease agreements in existence at the date of adoption that were classified as
operating leases under ASC 840 have been classified as operating leases under ASC 842. Lease expense for payments related to the
Company’s operating leases is recognized on a straight-line basis over the related lease term, which includes options to
extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Right-of-use assets represent
the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s
obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s
operating leases are recognized at the lease commencement date based on the present value of the remaining lease payments over
the lease term and amounted to $475,538 at the date of adoption. When the Company’s leases do not provide an implicit rate,
the Company uses its incremental borrowing rate based on the information available surrounding the Company’s borrowing rates
at the lease commencement date in determining the present value of lease payments. The right-of use asset also includes any lease
payments made at or before lease commencement less any lease incentives. As of June 30, 2019, the Company had right-of-use assets
of $446,690 and lease liabilities of $446,690 related to its operating leases. Right-of-use assets are included in property and
equipment, net, on the condensed consolidated balance sheet and lease liabilities related to the Company’s operating leases
are included in short-term and long-term lease asset liability on the condensed consolidated balance sheet. As of June 30, 2019
the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were
2.83 years and 6.0%, respectively. During the three months ended June 30, 2019, the cash paid for amounts included in the measurement
of lease liabilities related to the Company’s operating leases was $35,192, which is included as an operating cash outflow
within the consolidated statements of cash flows. During the three months ended June 30, 2019, the operating lease costs related
to the Company’s operating leases was $28,848, which is included in operating costs and expenses in the condensed consolidated
statements of operations. During the three months ended June 30, 2019, the Company did not enter into any lease agreements set
to commence in the future and there were no newly leased assets for which a right-of use asset was recorded in exchange for a new
lease liability, other than those lease assets recorded upon implementation.
The future minimum payments under operating leases were as follows
at June 30, 2019 for the fiscal year ending March 31, 2020:
2020 (remainder)
|
|
$
|
125,413
|
|
2021
|
|
|
171,440
|
|
2022
|
|
|
175,770
|
|
2023
|
|
|
14,670
|
|
|
|
|
|
|
Total minimum operating lease payments
|
|
|
487,293
|
|
Less: amounts representing interest
|
|
|
(40,603
|
)
|
Present value of net minimum operating lease payments
|
|
|
446,690
|
|
Less: current portion
|
|
|
162,906
|
|
Long-term portion of operating lease obligations
|
|
|
283,784
|
|
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 month periods
ended June 30, 2019 and 2018 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
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 new technologies and features). Most of our new technologies and features have been trademarked under
the trade name IoPhic.
Changes in international
trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact the cost of
our products. All of our products are imported from the Peoples Republic of China (PRC). To date, our ground fault circuit interrupters
(GFCI), which constitute only a small portion of our sales, have been included in products subject to a 25% tariff effective August
23, 2018. Additionally, tariffs of 25% have been imposed on our Carbon Monoxide and Photoelectric alarms and additional tariffs
of 10% have been proposed on the remainder of items the Company imports beginning after September 1, 2019. We are monitoring these
developments and will determine our strategies as additional information becomes available. Any increase in tariffs that is not
offset by an increase in our sales prices could have an adverse effect on our business, financial position, results of operations
or cash flows.
Results
of Operations
Three Months Ended June 30, 2019
and 2018
Sales.
Net sales
for the three months ended June 30, 2019 were $4,343,291 compared to $4,045,996 for the comparable three months in the prior year,
an increase of $297,295 (7.3%). Sales increased principally due to the increased sales of ground fault circuit interrupters and
other electrical devices and accessories.
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 28.7% and 30.7% of sales for the quarters ended June 30, 2019 and 2018, respectively. The decrease in gross profit margin
was primarily due to the increase in tariffs as discussed above.
Expenses.
Selling,
general and administrative expenses were $1,236,839 for the three months ended June 30, 2019, compared to $1,197,771 for the comparable
three months in the prior year. As a percentage of net sales, these expenses decreased to 28.5% for the three month period ended
June 30, 2019, from 29.6% for the 2018 period. These expenses decreased as a percentage of net sales since selling, general, and
administrative expenses do not increase in direct proportion to increased sales.
Research and development
expenses were $140,643 for the three month period ended June 30, 2019 compared to $153,387 for the comparable quarter of the prior
year, a decrease of $12,744 (8.3%). The primary reasons for the decrease are decreased expenditures paid to independent testing
facilities as the sealed product line has been completed.
Interest Expense
and Other.
Our interest expense was $107,337 for the quarter ended June 30, 2019, compared to interest expense of $83,419 for
the quarter ended June 30, 2018. Interest expense is dependent upon the total amounts borrowed on average from the Factor and on
extended trade payables due to the Hong Kong Joint Venture. Amounts due to 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 $608,954 for the quarter ended June 30, 2019, compared to a net loss of $438,833 for the corresponding quarter
of the prior fiscal year, a $170,121 (38.8%) increase in the net loss. The net loss increased principally due to the increase in
the Company’s equity in the loss of the Hong Kong Joint Venture.
Joint
Venture
Net Sales.
Net
sales of the Joint Venture for the three months ended June 30, 2019 were $3,149,100, compared to $3,266,557, for the comparable
period in the prior fiscal year. The net sales of the Joint Venture were generally comparable with the three month period of the
prior fiscal year. While sales to the Company increased during this period when compared to the prior year, the Joint Venture’s
net sales to other unaffiliated customers decreased from the prior year’s period.
Gross Profit Margin.
Gross margins of the Joint Venture for the three month period ended June 30, 2019 decreased to 5.1% from 10.6% for the 2018 corresponding
period. Gross margins depend on sales volume of various products, with varying margins, accordingly, increased sales of higher
margin products and decreased sales of lower margin products positively affect the overall gross margins.
Expenses.
Selling,
general and administrative expenses were $1,077,299 for the three month periods ended June 30, 2019, compared to $1,137,851 in
the comparable period in the prior year. As a percentage of sales, expenses were 34.2% for the three month period ended June 30,
2019, compared to 34.8% for the three month period ended June 30, 2018.
Interest Income.
Interest income on assets held for investment was $64,384 for the three month period ended June 30, 2019, compared to interest
income of $40,046 for the prior year’s period. Interest income is dependent on the average balance of assets held for investment.
Net Loss
. Net
loss for the three months ended June 30, 2019 was $808,833 compared to a net loss of $546,959 in the comparable period last year.
The increase in the net loss for the three month period is due primarily to decreased gross profit margins.
Liquidity.
Cash
needs of the Joint Venture are currently met by funds generated from operations and existing cash and marketable securities. During
the three months ended June 30, 2019, working capital decreased by $1,586,215 from $11,608,698 on March 31, 2019 to $10,022,483
on June 30, 2019.
Management Plans and Liquidity
The Company had net losses of $608,954
for the three months ended June 30, 2019 and $1,347,986 and $2,262,310 for the years ended March 31, 2019 and 2018, respectively.
Furthermore, as of June 30, 2019, working capital (computed as the excess of current assets over current liabilities) decreased
by $400,973 from $2,354,313 at March 31, 2019, to $1,953,340 at June 30, 2019.
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 Factors Corporation (Merchant or Factor). Borrowings under our Factoring Agreement bear interest
at prime plus 2% and are secured by trade accounts receivable and inventory. Advances from Merchant 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. The unused availability of this facility totaled approximately $268,500 at June 30, 2019. In addition,
we have secured extended payment terms for purchases up to $4,000,000 from our Hong Kong Joint Venture for the purchase of sealed
battery alarms. These amounts are unsecured, bear interest at 5.5% per annum, and provide for repayment terms of 120 days for each
purchase. The balance outstanding under this agreement at June 30, 2019 was $5,625,164 with $2,301,890 of this amount being beyond
agreed repayment terms. The Hong Kong Joint Venture has provided discretionary approval to allow the Company to exceed the agreed
upon repayment terms and has indicated it has no plans or intentions that would materially impact the financial position, operations,
or cash flows of the Company.
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 line of sealed battery ionization
smoke alarms, carbon monoxide products, and ground fault circuit interrupters. In addition the Company is seeking improved terms
on its credit facility with the Hong Kong Joint Venture. The Company has seen positive results on this plan during the fiscal
years ended March 31, 2019 and 2018 and through June 30, 2019 due to sales of its product offerings 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.
Operating activities
provided cash of $5,336 for the three months ended June 30, 2019. This was primarily due to an increase in accounts payable and
accrued expenses of $342,457 and a decrease in accounts receivable and amounts due to factor of $521,414 offset by a net loss of
$608,954 and an increase in inventories, prepaid expenses and other of $620,468. The net loss includes a non-cash loss from the
investment in the Hong Kong Joint Venture of $368,964. Operating activities provided cash of $355,666 for the three months ended
June 30, 2018. This was primarily due to an increase in accounts payable and accrued expenses of $527,640 and a decrease in accounts
receivable and amounts due to factor of $333,004 offset by a net loss of $438,833 and an increase in inventories, prepaid expenses
and other of $317,637. The net loss includes a non-cash loss from the investment in the Hong Kong Joint Venture of $244,400.
Investing activities
did not use or provide cash during the period ended June 30, 2019 or 2018.
Financing activities
used cash of $156,210 and $406,755 during the three months ended June 30, 2019 and 2018, respectively, which is comprised of repayments
net of advances on the line of credit from our factor.
Critical Accounting Policies and Estimates
In the notes to the consolidated financial
statements, and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results
of Operations and financial condition. Except as disclosed below, there have been no material changes to those policies that we
consider to be significant since the filing of our Form 10-K. The accounting principles used in preparing our unaudited condensed
consolidated financial statements conform in all material respects to accounting principles generally accepted in the U.S.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic
842)
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties
to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either
financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.
This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line
basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases
with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted
for similar to previous guidance for operating leases. The new standard requires lessors to account for leases using an approach
that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The
Company adopted the standard on April 1, 2019, the date it became effective for public companies based on the Company’s fiscal
year, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and
prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of April 1, 2019 as a result
of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among
other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient
provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided
certain conditions were met.
The impact of the adoption of this guidance on the Company’s
condensed consolidated financial statements is discussed below:
The Company is a lessee in lease agreements for office space.
Certain of the Company’s leases contain provisions that provide for one or more options to renew at the Company’s sole
discretion. The Company’s leases are comprised of fixed lease payments, with its real estate leases including lease payments
subject to a rate or index which may be variable. Certain real estate leases also include executory costs such as common area maintenance
(non-lease component). As a practical expedient permitted under ASC 842, the Company has elected to account for the lease and non-lease
components as a single lease component. Lease payments, which may include lease components and non-lease components, are included
in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable
lease amounts based on a rate or index (fixed in substance) as stipulated in the lease contract.
None of the Company’s lease agreements contain any material
residual value guarantees or material restrictive covenants. As a result of the Company’s election of the package of practical
expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification,
all of the Company’s lease agreements in existence at the date of adoption that were classified as operating leases under
ASC 840 have been classified as operating leases under ASC 842. Lease expense for payments related to the Company’s operating
leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option.
Right-of-use assets represent the Company’s right to use
an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments
as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are recognized
at the lease commencement date based on the present value of the remaining lease payments over the lease term and amount to $475,538
at the date of adoption. When the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing
rate based on the information available surrounding the Company’s borrowing rates at the lease commencement date in determining
the present value of lease payments. The right-of use asset also includes any lease payments made at or before lease commencement
less any lease incentives.