ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
257,637
|
|
|
$
|
262,355
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
365,143
|
|
|
|
170,010
|
|
Receivables from employees
|
|
|
64,751
|
|
|
|
60,087
|
|
Receivable from Hong Kong Joint Venture
|
|
|
18,367
|
|
|
|
17,584
|
|
|
|
|
448,261
|
|
|
|
247,681
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
1,836,304
|
|
|
|
2,009,471
|
|
Inventories – finished goods
|
|
|
5,851,393
|
|
|
|
4,700,104
|
|
Prepaid expenses
|
|
|
291,476
|
|
|
|
491,928
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
8,685,071
|
|
|
|
7,711,539
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN HONG KONG JOINT VENTURE
|
|
|
10,638,820
|
|
|
|
10,562,837
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
48,755
|
|
|
|
46,293
|
|
INTANGIBLE ASSET - NET
|
|
|
60,368
|
|
|
|
62,604
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
19,437,014
|
|
|
$
|
18,387,273
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit - factor
|
|
$
|
1,046,749
|
|
|
$
|
2,264,125
|
|
Accounts payable - trade
|
|
|
511,800
|
|
|
|
525,638
|
|
Accounts payable - Hong Kong Joint Venture
|
|
|
3,976,508
|
|
|
|
1,206,731
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and employee benefits
|
|
|
75,322
|
|
|
|
82,894
|
|
Commissions and other
|
|
|
51,861
|
|
|
|
75,627
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
5,662,240
|
|
|
|
4,155,015
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value per share; authorized 20,000,000 shares; 2,312,887 shares issued and outstanding at September 30, 2017 and March 31, 2017
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
Retained earnings
|
|
|
251,842
|
|
|
|
963,430
|
|
Accumulated other comprehensive income
|
|
|
613,962
|
|
|
|
359,858
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
13,774,774
|
|
|
|
14,232,258
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
19,437,014
|
|
|
$
|
18,387,273
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,582,816
|
|
|
$
|
4,213,705
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
2,360,196
|
|
|
|
2,905,992
|
|
Cost of goods sold – other
|
|
|
63,832
|
|
|
|
61,097
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,158,788
|
|
|
|
1,246,616
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,145,801
|
|
|
|
1,154,895
|
|
Research and development expense
|
|
|
168,701
|
|
|
|
182,352
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(155,714
|
)
|
|
|
(90,631
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Income from investment in Hong Kong Joint Venture
|
|
|
9,989
|
|
|
|
51,114
|
|
Interest expense
|
|
|
(22,200
|
)
|
|
|
(24,549
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(167,925
|
)
|
|
$
|
(64,066
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.07
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,901,053
|
|
|
$
|
7,392,312
|
|
Cost of goods sold - acquired from Joint Venture
|
|
|
4,612,623
|
|
|
|
4,949,019
|
|
Cost of goods sold - other
|
|
|
148,109
|
|
|
|
133,683
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,140,321
|
|
|
|
2,309,610
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
2,289,721
|
|
|
|
2,268,615
|
|
Research and development expense
|
|
|
343,424
|
|
|
|
319,983
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(492,824
|
)
|
|
|
(278,988
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(178,121
|
)
|
|
|
(145,972
|
)
|
Interest expense
|
|
|
(40,643
|
)
|
|
|
(28,785
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(711,588
|
)
|
|
$
|
(453,745
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.31
|
)
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended Sept. 30,
|
|
|
Six Months Ended Sept. 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
NET LOSS
|
|
$
|
(167,925
|
)
|
|
$
|
(64,066
|
)
|
|
$
|
(711,588
|
)
|
|
$
|
(453,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s portion of Hong Kong Joint Venture’s other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
112,941
|
|
|
|
(113,541
|
)
|
|
|
245,485
|
|
|
|
(279,844
|
)
|
Unrealized (loss) gain on investment securities
|
|
|
(10,904
|
)
|
|
|
(4,341
|
)
|
|
|
8,619
|
|
|
|
(20,921
|
)
|
Total Other Comprehensive Income (Loss)
|
|
|
102,037
|
|
|
|
(117,882
|
)
|
|
|
254,104
|
|
|
|
(300,765
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(65,888
|
)
|
|
$
|
(181,948
|
)
|
|
$
|
(457,484
|
)
|
|
$
|
(754,510
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(711,588
|
)
|
|
$
|
(453,745
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,880
|
|
|
|
15,633
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
178,121
|
|
|
|
145,972
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable and amounts due from factor
|
|
|
(27,413
|
)
|
|
|
37,307
|
|
Increase in inventories, prepaid expenses, and other
|
|
|
(950,837
|
)
|
|
|
(911,794
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
2,724,601
|
|
|
|
596,591
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
1,228,764
|
|
|
|
(570,036
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(16,106
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(16,106
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (repayment of) proceeds from Line of Credit - Factor
|
|
|
(1,217,376
|
)
|
|
|
349,100
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(1,217,376
|
)
|
|
|
349,100
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(4,718
|
)
|
|
|
(220,936
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
262,355
|
|
|
|
362,728
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
257,637
|
|
|
$
|
141,792
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
40,643
|
|
|
$
|
28,785
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Statement of Management
The condensed consolidated financial statements
include the accounts of Universal Security Instruments, Inc. (USI or the Company) and its wholly-owned subsidiary. Except for the
condensed consolidated balance sheet as of March 31, 2017, 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, 2017 audited financial statements filed with
the Securities and Exchange Commission on Form 10-K on July 14, 2017. 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 $711,588
for the six months ended September 30, 2017 and $2,058,902 and $2,137,792 for the years ended March 31, 2017 and 2016, respectively.
Furthermore, as of September 30, 2017, working capital (computed as the excess of current assets over current liabilities) decreased
by $533,693 from $3,556,524 at March 31, 2017, to $3,022,831 at September 30, 2017. In addition, 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 our Factoring Agreement
(Agreement) with Merchant Factor Corporation (Merchant or Factor). Advances from the Company’s factor, are at the sole discretion
of Merchant based on their assessment of the Company’s receivables, inventory and financial condition at the time of each
request for an advance. The availability remaining under this facility is approximately $801,000 at September 30, 2017.
In addition, we have secured extended payment
terms of up to $3,000,000 for the purchase of sealed battery products from our Hong Kong Joint Venture. Amounts due for purchases
under these extended payment terms are unsecured, bear interest at 4.5%, and are payable ninety days from the date of each purchase
thereunder. At September 30, 2017 the Company has a balance under this facility with the Hong Kong Joint Venture of $3,976,508.
The Hong Kong Joint Venture has waived the over advance position subject to a Letter of Intent to the Company dated August 30,
2017 from Taisun Magnetics, Ltd., a related party, to provide additional long-term, interest only financing of $1,000,000. The
loan from Taisun Magnetics, Ltd, when consummated, will be applied to reduce the balance outstanding on the extended payment term
facility provided by our Hong Kong Joint Venture.
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 safety
alarms, seeking additional financing, and reducing non-essential expenditures. This plan is in effect and approved by management.
Management has continued to work on this through September 30, 2017. Though no assurances can be given, if management’s plan
is successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs. Cash flows and
credit availability is expected to be adequate to fund operations for one year from the issuance date of these condensed consolidated
financial statements.
Line of Credit – Factor
On January 15, 2015, the Company entered
into the Agreement with Merchant for the purpose of factoring the Company’s trade accounts receivable and to provide financing
secured by finished goods inventory. The Company has been in negotiations with Merchant regarding the Agreement and was notified
on October 25, 2017 that the agreement was amended with an effective date of September 1, 2017. The Agreement with Merchant was
modified to restrict borrowing solely to eligible accounts receivable and removing the Company’s ability to borrow up to
$1,000,000 supported by inventory. Under the modified 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, 2018 and provides for continuation of the program for successive
two year periods until terminated by one of the parties to the Agreement. As of September 30, 2017, the Company had borrowings
of $1,046,749 under the Agreement, and the Company had remaining availability under the Agreement of approximately $801,000. 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 6.25% at September 30, 2017). Advances under the factoring agreement
are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory and our financial condition
at the time of each request for an advance.
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with US-GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Revenue Recognition
The Company recognizes sales upon shipment
of products, when title has passed to the buyer, net of applicable provisions for any discounts or allowances. We recognize revenue
when the following criteria are met: evidence of an arrangement exists; fixed and determinable fee; delivery has taken place; and
collectability is reasonably assured. Customers may not return, exchange or refuse acceptance of goods without our approval. However,
the Company has entered into an agreement with a customer to grant pre-approved rights of return of up to fifty percent of products
sold on certain invoices to provide for and gain acceptance within certain markets. When a pre-approved right of return is granted,
revenue recognition is deferred until the right of return expires. Upon the recognition of a sale we will establish an allowance
to cover anticipated doubtful accounts based upon historical experience.
Joint Venture
The Company and its joint venture partner,
a Hong Kong corporation, each owns a 50% interest in a Hong Kong joint venture, Eyston Company Limited (the “Hong Kong Joint
Venture”), that manufactures security products in its facilities located in the People’s Republic of China. There are
no material differences between US-GAAP and the basis of accounting used by the Hong Kong Joint Venture. The following represents
summarized balance sheet and income statement information of the Hong Kong Joint Venture as of and for the six months ended September
30, 2017 and 2016:
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
Net sales
|
|
$
|
8,069,639
|
|
|
$
|
8,273,094
|
|
Gross profit
|
|
|
1,653,871
|
|
|
|
2,208,510
|
|
Net (loss) income
|
|
|
(501,882
|
)
|
|
|
206,428
|
|
Total current assets
|
|
|
12,905,014
|
|
|
|
13,042,873
|
|
Total assets
|
|
|
24,026,974
|
|
|
|
28,010,955
|
|
Total current liabilities
|
|
|
2,019,534
|
|
|
|
4,359,497
|
|
Total liabilities
|
|
|
2,409,799
|
|
|
|
4,833,183
|
|
During the six months ended September 30,
2017 and 2016 the Company purchased $5,548,858 and $5,726,467, respectively, of products directly from the Hong Kong Joint Venture
for resale. For the six months ended September 30, 2017 the Company has decreased its equity in the net loss of the Joint Venture
to reflect a decrease of $72,820 in inter-Company profit on purchases held by the Company in inventory. For the six months ended
September 30, 2016 the Company has reduced its equity in the net earnings of the Joint Venture to reflect an increase of $249,186
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. In addition, the effect of changes in enacted
tax laws or rates or tax status is recognized in the interim period in which the change occurs.
The Company recognizes a liability or asset
for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts
in the financial statements. These temporary differences may result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability
and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized. The Company
established a full valuation allowance on its deferred tax assets to recognize that net operating losses, and research and foreign
tax credits expiring in future periods will likely not be realized. This determination was made based on continued taxable losses
which cause uncertainty as to whether the Company will generate sufficient taxable income to use the deferred tax assets prior
to expiration. Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing
of future taxable income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income
is generated, we may be able to offset a portion of future tax expenses.
Accounts Receivable and Amount Due From
Factor
The Company assigns the majority of its
short-term receivables arising in the ordinary course of business to our factor. At the time a receivable is assigned to our factor
the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear any
credit risk associated with delivery or warranty issues related to the products sold.
Management assesses the credit risk of
both its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account
are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated
from the receivable accounts and from the allowance account in the period that the receivables’ status is determined to be
uncollectible.
Based on the nature of the factoring agreement
and prior experience, no allowance related to Amounts Due from Factor has been provided. At September 30, 2017 and 2016, 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 and six month periods ended September 30, 2017 or 2016. As a result, basic
and diluted weighted average common shares outstanding are identical for the three and six month periods ended September 30, 2017
and 2016.
Contingencies
From time to time, the Company is involved
in various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes
of such matters are not anticipated to have a material adverse effect on the Company’s condensed consolidated financial position,
results of operations, or cash flows in future years.
Recent Accounting Standards Not Yet
Adopted
Changes to US-GAAP are established by the
Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASU’s) to the FASB’s Accounting
Standards Codification. The Company considers the applicability and impact of all ASU’s.
In June 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606.
ASU 2014-09 affects any entity using US GAAP that either enters into contracts
with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts
are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition
requirements in Topic 605,
Revenue Recognition,
and most industry-specific guidance. This ASU also supersedes some cost
guidance included in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts.
In addition,
the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract
with a customer (e.g., assets within the scope of Topic 360,
Property, Plant, and Equipment,
and intangible assets within
the scope of Topic 350,
Intangibles—Goodwill and Other)
are amended to be consistent with the guidance on recognition
and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle,
an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance
obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance
obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. This guidance
is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting
period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect
of initially applying the ASU recognized at the date of initial application. The Company is currently assessing the impact that
adopting this new accounting standard will have on the condensed consolidated financial statements and footnote disclosures.
In December 2016 the FASB issued Accounting
Standards Update No. 2016-20,
Technical Corrections and Improvements to Topic 606
,
Revenue from Contracts with Customers,
or ASU 2016-20. The amendments in ASU 2016-20 update and affect narrow aspects of the guidance issued in ASU 2014-09. In May
2016, the FASB issued ASU 2016-12,
Narrow Scope Improvements and Practical
Expedients
, which provided revised guidance on certain issues relating to revenue from contracts with customers,
including
clarification of the objective of the collectability criterion. In March 2016, the FASB issued a final amendment to clarify the
implementation guidance for principal versus agent considerations and in April 2016 issued a final amendment to clarify the guidance
related to identifying performance obligations and the accounting for intellectual property licenses. The Company is currently
assessing the impact that adopting this new accounting standard will have on the condensed consolidated financial statements and
footnote disclosures.
In August 2016, the FASB issued ASU No.
2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies and provides guidance on eight
cash flow classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash
payments are presented and classified in the statement of cash flows. This standard is effective for annual periods beginning after
December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company does not expect that adopting this new accounting standard will have a material impact on the condensed consolidated
financial statements and footnote disclosures.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used throughout
this Report, “we,” “our,” “the Company” “USI” and similar words refers to Universal
Security Instruments, Inc.
Forward-Looking
Statements
This Quarterly Report
on Form 10-Q contains certain forward-looking statements reflecting our current expectations with respect to our operations, performance,
financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words
“may”, “will”, “believes”, “should”, “expects”, “anticipates”,
“estimates”, and similar expressions. These statements are necessarily estimates reflecting management’s best
judgment based upon current information and involve a number of risks and uncertainties. We caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors
could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated
or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified
in our periodic reports filed with the Securities and Exchange Commission.
overview
We are in the business
of marketing and distributing safety and security products which are primarily manufactured through our 50%-owned Hong Kong Joint
Venture. Our financial statements detail our sales and other operational results only, and report the financial results of the
Hong Kong Joint Venture using the equity method. Accordingly, the following discussion and analysis of the three and six month
periods ended September 30, 2017 and 2016 relate to the operational results of the Company. A discussion and analysis of the Hong
Kong Joint Venture’s operational results for these periods is presented below under the heading “Joint Venture.”
The Company has developed
new products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology
and product features. To date we have applied for thirteen patents on these new technologies and features. We have been granted
ten patents (including six for new technologies and features). Most of our new technologies and features have been trademarked
under the trade name IoPhic.
Results
of Operations
Three Months Ended September 30,
2017 and 2016
Sales.
Net sales
for the three months ended September 30, 2017 were $3,582,816 compared to $4,213,705 for the comparable three months in the prior
period, a decrease of $630,889 (15.0%). Sales decreased principally due to a reduction in sales to a single customer as compared
to sales to that customer in the prior year’s comparable period.
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 32.3% and 29.6% of sales for the quarters ended September 30, 2017 and 2016, respectively. The increase in gross profit
margin was primarily due to the mix of products sold to differing customers and to the introduction of the Company’s new
line of sealed battery safety alarms which generally have higher margins.
Expenses.
Selling,
general and administrative expenses were $1,145,801 for the three months ended September 30, 2017, compared to $1,154,895 for the
comparable three months in the prior year. As a percentage of net sales, these expenses increased to 32.0% for the three month
period ended September 30, 2017, from 27.4% for the 2016 period. These expenses, as a dollar amount, are comparable to the prior
year’s period, however the expenses increase as a percentage of sales due to selling, general, and administrative expenses
that do not decrease in the same proportion as decreases in sales.
Research and development
expenses were $168,701 for the three month period ended September 30, 2017 compared to $182,352 for the comparable quarter of the
prior year, a decrease of $13,651 (7.5%). The primary reasons for the decrease are the decreased expenditures to independent testing
facilities as the new sealed product line is completed.
Interest Expense
and Other.
Our interest expense was $22,200 for the quarter ended September 30, 2017, compared to interest expense of $24,549
for the quarter ended September 30, 2016. Interest expense is dependent upon the total amounts borrowed on average from the Factor
and from our Hong Kong Joint Venture. Amounts borrowed from the Factor and the Hong Kong Joint Venture increased in the current
fiscal year’s three month period as compared to the same period in the prior fiscal year resulting in the decrease in interest
expense noted above.
Net Loss.
We
reported a net loss of $167,925 for the quarter ended September 30, 2017, compared to a net loss of $64,066 for the corresponding
quarter of the prior fiscal year, a $103,859 (162.1%) increase in the net loss.
Six Months Ended September 30, 2017
and 2016
Sales.
Net sales
for the six months ended September 30, 2017 were $6,901,053 compared to $7,392,312 for the comparable six months in the prior period,
a decrease of $491,259 (6.6%). Sales decreased principally due to a reduction in sales to a single customer as compared to sales
to that customer in the prior year’s comparable period.
Gross Profit Margin.
The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company’s
gross profit margin was 31.0% for the period ended September 30, 2017 and 31.2% for the period ended September 30, 2016. The decrease
in gross profit margin was primarily due to the mix of products sold to differing customers and to promotional pricing allowances
on the Company’s new line of sealed battery safety alarms.
Expenses.
Selling,
general and administrative expenses were $2,289,721 at September 30, 2017 compared to $2,268,615 for the comparable six months
in the prior year. As a percentage of sales, these expenses were 33.2% for the six month period ended September 30, 2017 and 30.7%
for the comparable 2016 period. These expenses, as a dollar amount, are comparable to the prior year’s period, however the
expenses increase as a percentage of sales due to selling, general, and administrative expenses that do not decrease in the same
proportion as decreases in sales.
Research and development
expenses were $343,424 for the six months ended September 30, 2017 compared to $319,983 for the comparable period of the prior
year, an increase of $23,441 (7.3%). The primary reasons for the increase is the slight increase of expenditures to independent
testing facilities during the six month period ended September 30, 2017 as the new sealed product line is completed.
Interest Expense
and Other.
Our interest expense was $40,643 for the six months ended September 30, 2017, compared to interest expense of $28,785
for the six months ended September 30, 2016. Interest expense is dependent upon the total amounts borrowed on average from the
Factor and from our Hong Kong Joint Venture. Amounts borrowed from the Factor and the Hong Kong Joint Venture increased in the
current fiscal year’s six month period as compared to the same period in the prior fiscal year resulting in the increase
in interest expense noted above.
Net Loss.
We
reported a net loss of $711,588 for the six months ended September 30, 2017 compared to a net loss of $453,745 for the corresponding
period of the prior fiscal year, an increase in the net loss of $257,843 (56.8%).
Joint
Venture
Net Sales.
Net sales of the Joint
Venture for the three and six months ended September 30, 2017 were $4,903,659 and $8,069,639 respectively, compared to $4,789,764
and $8,273,094, respectively, for the comparable period in the prior fiscal year. The 2.4% increase and 2.5% decrease in net sales
by the Joint Venture for the respective three and six month periods are due to increased sales to the Company for the three month
period ended September 30, 2017 and lower sales to the Company for the six month period ended September 30, 2017.
Gross Profit Margin.
Gross margins of the Joint Venture for the three month period ended September 30, 2017 decreased to 24.5% from 31.3% for the 2016
corresponding period. For the six month period ended September 30, 2017, gross margins were 20.5% compared to 26.7% for the same
period of the prior year. Gross margins depend on sales volume of various products, with varying margins, accordingly, increased
sales of higher margin products and decreased sales of lower margin products positively affect the overall gross margins. In addition,
foreign currency exchange gains and/or losses impact gross margins.
Expenses.
Selling,
general and administrative expenses were $1,217,372 and $2,291,375 respectively, for the three and six month periods ended September
30, 2017, compared to $1,129,972 and $2,107,265 in the prior year’s respective periods. As a percentage of sales, expenses
were 24.8% and 28.4% for the three and six month periods ended September 30, 2017, compared to 23.6% and 25.5% for the three and
six month periods ended September 30, 2016. The changes in selling, general and administrative expense as a percent of sales for
the three and six month periods were primarily due to costs that do not change at the same rate as changes in sales volume.
Interest Income.
Interest income on assets held for investment was $19,159 and $90,119 respectively, for the three and six month periods ended September
30, 2017, compared to interest income of $106,763 and $204,717, respectively, for the prior year’s periods. Interest income
is dependent on the average balance of assets held for investment. Amounts held for investment decreased during the current years
fiscal periods.
Net Income (Loss)
.
Net earnings (loss) for the three and six months ended September 30, 2017 were $25,179 and $(501,882), respectively, compared to
net earnings of $412,603 and $206,427, respectively, in the comparable periods last year. The decrease in net earnings for the
three and six month periods ended September 30, 2017 is due primarily to decreased gross profit margins for the joint venture as
noted above.
Liquidity.
Cash
needs of the Joint Venture are currently met by funds generated from operations. During the six months ended September 30, 2017,
working capital decreased by $39,017 from $9,957,418 on March 31, 2017 to $9,918,401 on September 30, 2017.
Management Plans and Liquidity
The Company had net losses of $711,588
for the six months ended September 30, 2017 and $2,058,902 and $2,137,792 for the years ended March 31, 2017 and 2016, respectively.
Furthermore, as of September 30, 2017, working capital (computed as the excess of current assets over current liabilities) decreased
by $533,693 from $3,556,524 at March 31, 2017, to $3,022,831 at September 30, 2017. In addition, 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 our Factoring Agreement
(Agreement) with Merchant Factor Corporation (Merchant or Factor). Advances from the Company’s factor, are at the sole discretion
of Merchant based on their assessment of the Company’s receivables, inventory and financial condition at the time of each
request for an advance. The availability remaining under this facility is approximately $801,000 at September 30, 2017.
In addition, we have secured extended payment
terms of up to $3,000,000 for the purchase of sealed battery products from our Hong Kong Joint Venture. Amounts due for purchases
under these extended payment terms are unsecured, bear interest at 4.5%, and are payable ninety days from the date of each purchase
thereunder. At September 30, 2017 the Company has a balance under this facility with the Hong Kong Joint Venture of approximately
$3,976,508. The Hong Kong Joint Venture has waived the over advance position subject to a Letter of Intent to the Company dated
August 30, 2017 from Taisun Magnetics, Ltd., a related party, to provide additional long-term, interest only financing of $1,000,000.
The loan from Taisun Magnetics, Ltd., when consummated, will be applied to reduce the balance outstanding on the extended payment
term facility provided by our Hong Kong Joint Venture.
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 safety
alarms, seeking additional financing, and reducing non-essential expenditures. This plan is in effect and approved by management.
Management has continued to work on this plan through September 30, 2017. 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 these condensed
consolidated financial statements.
Operating activities
provided cash of $1,228,764 for the six months ended September 30, 2017. This was primarily due to an increase in accounts payable
and accrued expenses of $2,724,601 and offset by an increase in inventories and prepaid expenses of $950,837, a net loss of $711,588,
and an increase in accounts receivable and amounts due from factor of $27,413. The net loss includes a non-cash loss from investment
in the Hong Kong Joint Venture of $178,121. Operating activities used cash of $570,036 for the six months ended September 30, 2016.
This was primarily due to an increase in inventory and prepaid expenses of $911,794 and a net loss of $453,745. This was partially
offset by increases of $596,591 in accounts payable and accrued expenses, and a non-cash loss from the investment in the Hong Kong
Joint Venture of $145,972.
Investing activities
used cash during the six months ended June 30, 2017 resulting from the purchase of $16,106 in equipment. Investing activities did
not use or provide cash during the six months ended September 30, 2016.
Financing activities
used cash of $1,217,376 during the six months ended September 30, 2017 and provided cash of $349,100 during the six months ended
September 30, 2016, which is comprised of advances net of repayments on the line of credit from our factor.
Critical
Accounting Policies
Management’s
discussion and analysis of our condensed consolidated financial statements and results of operations are based on our condensed
consolidated financial statements included as part of this document. The preparation of these condensed consolidated financial
statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including
those related to bad debts, inventories, income taxes, and contingencies and litigation. We base these estimates on historical
experiences, future projections and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following
critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements. For a detailed discussion on the application on these and other accounting policies,
see Note A to the consolidated financial statements included in Item 8 of the Form 10-K for the year ended March 31, 2017 as filed
with the Securities and Exchange Commission on July 14, 2017. Certain of our accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments
are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based
on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our
customers, and information available from outside sources, as appropriate. Our critical accounting policies include:
Revenue Recognition.
The Company recognizes sales upon shipment of products, when title has passed to the buyer, net of applicable provisions for any
discounts or allowances. We recognize revenue when the following criteria are met: evidence of an arrangement exists; fixed and
determinable fee; delivery has taken place; and collectability is reasonably assured. Customers may not return, exchange or refuse
acceptance of goods without our approval. However, the Company has entered into an agreement with a customer to grant pre-approved
rights of return of up to fifty percent of products sold on certain invoices to provide for and gain acceptance within certain
markets. When a pre-approved right of return is granted, revenue recognition is deferred until the right of return expires. We
have established allowances to cover anticipated doubtful accounts based upon historical experience.
Inventories.
Inventories are valued at the lower of cost or market. Cost is determined on the first-in first-out method. We evaluate inventories
on a quarterly basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference between
the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Income Taxes.
The
Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets
or liabilities and their reported amounts in the consolidated financial statements. These temporary differences may result in taxable
or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred
tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not
that a deferred tax asset will not be realized. After a review of projected taxable income and the components of the deferred tax
asset in accordance with applicable accounting guidance it was determined that it is more likely than not that the tax benefits
associated with the remaining components of the deferred tax assets will not be realized. This determination was made based on
the Company’s recent history of losses from operations and the uncertainty as to whether the Company will generate sufficient
taxable income to use the deferred tax assets prior to their expiration. Accordingly, a valuation allowance was established to
fully offset the value of the deferred tax assets. Our ability to realize the tax benefits associated with the deferred tax assets
depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets.
If sufficient future taxable income is generated, we may be able to offset a portion of future tax expenses.
The Company follows
ASC 740-10 that gives guidance to tax positions related to the recognition and measurement of a tax position taken or expected
to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position, if that position
is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties,
if any, related to income tax matters are recorded as income tax expenses.
Off-Balance Sheet
Arrangements.
We have not created, and are not party to, any special-purpose or off balance sheet entities for the purpose
of raising capital, incurring debt or operating parts of our business that are not consolidated into our condensed financial statements
and do not have any arrangements or relationships with entities that are not consolidated into our condensed financial statements
that are reasonably likely to materially affect our liquidity or the availability of our capital resources.