|
ITEM 1.
|
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
UNIVERSAL SECURITY INSTRUMENTS, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
December 31, 2017
|
|
|
March 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
52,525
|
|
|
$
|
262,355
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
306,532
|
|
|
|
170,010
|
|
Receivables from employees
|
|
|
62,155
|
|
|
|
60,087
|
|
Receivable from Hong Kong Joint Venture
|
|
|
12,054
|
|
|
|
17,584
|
|
|
|
|
380,741
|
|
|
|
247,681
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
2,106,594
|
|
|
|
2,009,471
|
|
Inventories – finished goods
|
|
|
5,552,737
|
|
|
|
4,700,104
|
|
Prepaid expenses
|
|
|
179,266
|
|
|
|
491,928
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
8,271,863
|
|
|
|
7,711,539
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN HONG KONG JOINT VENTURE
|
|
|
10,083,608
|
|
|
|
10,562,837
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
42,169
|
|
|
|
46,293
|
|
INTANGIBLE ASSET - NET
|
|
|
59,250
|
|
|
|
62,604
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
18,460,890
|
|
|
$
|
18,387,273
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit – factor
|
|
$
|
1,381,226
|
|
|
$
|
2,264,125
|
|
Accounts payable - trade
|
|
|
223,033
|
|
|
|
525,638
|
|
Accounts payable - Hong Kong Joint Venture
|
|
|
3,860,994
|
|
|
|
1,206,731
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and employee benefits
|
|
|
52,119
|
|
|
|
82,894
|
|
Commissions and other
|
|
|
62,047
|
|
|
|
75,627
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
5,579,419
|
|
|
|
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 December 31, 2017 and March 31, 2017
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
(Accumulated Deficit) Retained earnings
|
|
|
(762,954
|
)
|
|
|
963,430
|
|
Accumulated other comprehensive income
|
|
|
735,455
|
|
|
|
359,858
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
12,881,471
|
|
|
|
14,232,258
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
18,460,890
|
|
|
$
|
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 December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,555,431
|
|
|
$
|
3,177,632
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
2,410,122
|
|
|
|
2,000,313
|
|
Cost of goods sold – other
|
|
|
77,761
|
|
|
|
128,539
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,067,548
|
|
|
|
1,048,780
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,136,033
|
|
|
|
1,008,865
|
|
Research and development expense
|
|
|
169,521
|
|
|
|
199,638
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(238,006
|
)
|
|
|
(159,723
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(676,705
|
)
|
|
|
(369,745
|
)
|
Interest expense
|
|
|
(100,085
|
)
|
|
|
(20,338
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,014,796
|
)
|
|
$
|
(549,806
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.44
|
)
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Nine Months Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,456,484
|
|
|
$
|
10,569,944
|
|
Cost of goods sold - acquired from Joint Venture
|
|
|
7,022,745
|
|
|
|
6,949,332
|
|
Cost of goods sold - other
|
|
|
225,870
|
|
|
|
262,222
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
3,207,869
|
|
|
|
3,358,390
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
3,425,754
|
|
|
|
3,277,480
|
|
Research and development expense
|
|
|
512,945
|
|
|
|
519,621
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(730,830
|
)
|
|
|
(438,711
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(854,826
|
)
|
|
|
(515,717
|
)
|
Interest expense
|
|
|
(140,728
|
)
|
|
|
(49,123
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,726,384
|
)
|
|
$
|
(1,003,551
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.75
|
)
|
|
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended Dec. 31,
|
|
|
Nine Months Ended Dec. 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,014,796
|
)
|
|
$
|
(549,806
|
)
|
|
$
|
(1,726,384
|
)
|
|
$
|
(1,003,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s portion of Hong Kong Joint Venture’s other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment securities
|
|
|
150,095
|
|
|
|
(180,486
|
)
|
|
|
395,580
|
|
|
|
(460,330
|
)
|
|
|
|
(28,602
|
)
|
|
|
(69,389
|
)
|
|
|
(19,983
|
)
|
|
|
(90,310
|
)
|
Total Other Comprehensive Income (Loss)
|
|
|
121,493
|
|
|
|
(249,875
|
)
|
|
|
375,597
|
|
|
|
(550,640
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(893,303
|
)
|
|
$
|
(799,681
|
)
|
|
$
|
(1,350,787
|
)
|
|
$
|
(1,554,191
|
)
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
Nine Months Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,726,384
|
)
|
|
$
|
(1,003,551
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
23,584
|
|
|
|
21,797
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
854,826
|
|
|
|
515,717
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable and amounts due from factor
|
|
|
(230,183
|
)
|
|
|
398,177
|
|
Increase in inventories, prepaid expenses, and other
|
|
|
(539,971
|
)
|
|
|
(1,466,836
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
2,307,303
|
|
|
|
845,338
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
689,175
|
|
|
|
(689,358
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash distributions from Joint Venture
|
|
|
-
|
|
|
|
102,581
|
|
Purchase of equipment
|
|
|
(16,106
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
|
|
(16,106
|
)
|
|
|
102,581
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayment of) proceeds from Line of Credit - Factor
|
|
|
(882,899
|
)
|
|
|
379,875
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(882,899
|
)
|
|
|
379,875
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(209,830
|
)
|
|
|
(206,902
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
262,355
|
|
|
|
362,728
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
52,525
|
|
|
$
|
155,826
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
140,728
|
|
|
$
|
49,123
|
|
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 $1,726,384 for
the nine months ended December 31, 2017 and $2,058,902 and $2,137,792 for the years ended March 31, 2017 and 2016, respectively.
Furthermore, as of December 31, 2017, working capital (computed as the excess of current assets over current liabilities) decreased
by $864,080 from $3,556,524 at March 31, 2017, to $2,692,444 at December 31, 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. The Company
experienced positive cash flows from operations for the nine month period ended December 31, 2017 of $689,175.
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 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 $722,000 at December 31, 2017.
In addition, we have secured extended payment
terms of up to $4,000,000 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 one hundred twenty days from the date
of each purchase thereunder. At December 31, 2017 the Company has a balance under this arrangement with the Hong Kong Joint Venture
of $3,860,994.
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
safety alarms and other new products, seeking additional financing, and reducing non-essential expenditures. This plan is in effect, approved by
management, and management has continued to work on this plan through December 31, 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. Effective 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 which was
extended on January 7, 2018, 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 December 31, 2017, the Company had borrowings of $1,381,226 under
the Agreement, and the Company had remaining availability under the Agreement of approximately $722,000. 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 December 31, 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 nine months ended December
31, 2017 and 2016:
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
Net sales
|
|
$
|
10,169,231
|
|
|
$
|
13,271,177
|
|
Gross profit
|
|
|
1,580,652
|
|
|
|
2,169,453
|
|
Net loss
|
|
|
(1,561,216
|
)
|
|
|
(782,051
|
)
|
Total current assets
|
|
|
12,794,028
|
|
|
|
13,136,416
|
|
Total assets
|
|
|
23,473,281
|
|
|
|
25,825,609
|
|
Total current liabilities
|
|
|
2,287,795
|
|
|
|
3,878,625
|
|
Total liabilities
|
|
|
2,655,138
|
|
|
|
4,352,661
|
|
During the nine months ended December 31, 2017
and 2016 the Company purchased $7,179,110 and $8,122,013, respectively, of products directly from the Hong Kong Joint Venture for
resale. For the nine months ended December 31, 2017 the Company has reduced its equity in the net loss of the Joint Venture to
reflect an increase of $74,218 in inter-Company profit on purchases held by the Company in inventory. For the nine months ended
December 31, 2016 the Company has reduced its equity in the net earnings of the Joint Venture to reflect an increase of $124,692
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, we considered the effect of recent
changes in tax law related to the Tax Cut and Jobs Act that occurred during the quarter ended December 31, 2017. These changes
reduced the value of the Company’s deferred tax assets by approximately $1,000,000. However, as further explained below,
the Company had previously established a full valuation allowance on its deferred tax assets. The Company has not yet completed
the analysis to determine its share of the accumulated earnings and profits of the Hong Kong Joint Venture.
The Company recognizes a liability or asset
for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts
in the financial statements. These temporary differences may result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability
and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized. The Company
established a full valuation allowance on its deferred tax assets to recognize that net operating losses, and research and foreign
tax credits expiring in future periods will likely not be realized. This determination was made based on continued taxable losses
which cause uncertainty as to whether the Company will generate sufficient taxable income to use the deferred tax assets prior
to expiration. Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing
of future taxable income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income
is generated, we may be able to offset a portion of future tax expenses.
Accounts Receivable and Amount Due From
Factor
The Company assigns the majority of its short-term
receivables arising in the ordinary course of business to our factor. At the time a receivable is assigned to our factor the credit
risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear any credit risk
associated with delivery or warranty issues related to the products sold.
Management assesses the credit risk of both
its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account
are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated
from the receivable accounts and from the allowance account in the period that the receivables’ status is determined to be
uncollectible.
Based on the nature of the factoring agreement
and prior experience, no allowance related to Amounts Due from Factor has been provided. At December 31, 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 nine month periods ended December 31, 2017 and 2016. As a result, basic
and diluted weighted average common shares outstanding are identical for the three and nine month periods ended December 31, 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 of adopting this new accounting standard but does not expect that the adoption of this new accounting standard
will have a material impact on the condensed consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments,” which clarifies and provides guidance on eight cash flow
classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. This standard is effective for annual periods beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The Company is currently assessing the impact of adopting this new accounting standard but does not expect that the adoption of
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 nine month
periods ended December 31, 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 December 31, 2017
and 2016
Sales.
Net sales
for the three months ended December 31, 2017 were $3,555,431 compared to $3,177,632 for the comparable three months in the prior
period, an increase of $377,799 (11.9%). Sales increased principally due to an increase 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 30.0% and 33.0% of sales for the quarters ended December 31, 2017 and 2016, respectively. The decrease in gross profit
margin was primarily due to the mix of products sold to differing customers.
Expenses.
Selling,
general and administrative expenses were $1,136,033 for the three months ended December 31, 2017, compared to $1,008,865 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 December 31, 2017, from 31.7% for the 2016 period. The increase in expenses, as a dollar amount is primarily due to
fluctuations in certain expenses within this category, including an increase in insurance expense of approximately $105,000 and
a decrease in professional fees of approximately $65,000. The increase in insurance expense is related to increased product liability
insurance expense.
Research and development
expenses were $169,521 for the three month period ended December 31, 2017 compared to $199,638 for the comparable quarter of the
prior year, a decrease of $30,117 (15.1%). 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.
Interest expense of $100,085 was recorded for the quarter ended December 31, 2017, compared to interest expense of $20,338
for the quarter ended December 31, 2016. Interest expense for the quarter ended December 31, 2017 includes a reclassification of
approximately $57,000 in interest expense from the prior two quarters that was previously misclassified as a component of cost
of goods sold. 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 increase in interest expense noted above.
Net Loss.
We reported
a net loss of $1,014,796 for the quarter ended December 31, 2017, compared to a net loss of $549,806 for the corresponding quarter
of the prior fiscal year, a $464,990 (84.6%) increase in the net loss. The increase in the net loss was primarily the result of
an increase in the net loss of the Hong Kong Joint Venture and by increases in interest and insurance expense as noted above.
Nine Months Ended December 31, 2017 and
2016
Sales.
Net sales
for the nine months ended December 31, 2017 were $10,456,484 compared to $10,569,944 for the comparable nine months in the prior
period, a decrease of $113,460 (1.1%). Sales, as a dollar amount, were generally comparable to sales in the prior year’s
comparable period. However, the Company sold less to a single large customer as compared to the previous year’s nine month
period and offset by increased sales to several new customers.
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 30.7% for the period ended December 31, 2017 and 31.8% for the period ended December 31, 2016. The decrease
in gross profit margin was primarily due to the mix of products sold to differing customers.
Expenses.
Selling,
general and administrative expenses were $3,425,754 at December 31, 2017 compared to $3,277,480 for the comparable nine months
in the prior year. As a percentage of sales, these expenses were 32.8% for the nine month period ended December 31, 2017 and 31.0%
for the comparable 2016 period. The increase in expenses, as a dollar amount, is primarily due to fluctuations in certain expenses
within this category including an increase in insurance expense of approximately $245,000 and a decrease in professional fees of
approximately $194,000. The increase in insurance expense is related to increased product liability insurance expense.
Research and development
expenses were $512,945 for the nine months ended December 31, 2017 compared to $519,621 for the comparable period of the prior
year, a decrease of $6,676 (1.3%). The primary reasons for the increase is the slight increase of expenditures to independent testing
facilities during the nine month period ended December 31, 2017 as the new sealed product line is completed.
Interest Expense and
Other.
Our interest expense was $140,728 for the nine months ended December 31, 2017, compared to interest expense of $49,123
for the nine months ended December 31, 2016. Interest expense for the nine month period ended December 31, 2017 includes a reclassification
of approximately $57,000 in interest expense from the prior two quarters that was previously misclassified as a component of cost
of goods sold. 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 nine
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 $1,726,384 for the nine months ended December 31, 2017 compared to a net loss of $1,003,551 for the corresponding
period of the prior fiscal year, an increase in the net loss of $722,833 (72.0%).
Joint
Venture
Net Sales.
Net sales
of the Joint Venture for the three and nine months ended December 31, 2017 were $2,099,592 and $10,169,231, respectively, compared
to $4,998,083 and $13,271,177, respectively, for the comparable period in the prior fiscal year. The 58.0% decrease and 23.4% decrease
in net sales by the Joint Venture for the respective three and nine month periods are due to decreased sales to the Company for
the three month period and nine month periods ended December 31, 2017.
Gross Profit Margin.
Gross margins of the Joint Venture for the three month period ended December 31, 2017 decreased to a negative (3.4%) from a negative
(0.8%) for the 2016 corresponding period. For the nine month period ended December 31, 2017, gross margins were 15.5% compared
to 16.4% 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 $1,134,807 and $3,377,504 respectively, for the three and nine month periods ended December
31, 2017, compared to $1,201,701 and $3,308,966 in the prior year’s respective periods. As a percentage of sales, expenses
were 54.0% and 33.2% for the three and nine month periods ended December 31, 2017, compared to 24.0% and 24.9% for the three and
nine month periods ended December 31, 2016. The changes in selling, general and administrative expense as a percent of sales for
the three and nine month periods were primarily due to costs that do not change at the same rate as changes in sales volume.
Interest Income.
Interest income on assets held for investment was $63,298 and $229,544 respectively, for the three and nine month periods ended
December 31, 2017, compared to interest income of $227,901 and $432,618, 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 Loss
. Net loss
for the three and nine months ended December 31, 2017 were $1,059,334 and $1,561,216, respectively, compared to a net loss of $988,478
and $782,051, respectively, in the comparable periods last year. The increase in the net loss for the three and nine month periods
ended December 31, 2017 is due primarily to decreased sales to the Company as noted above.
Liquidity.
Cash
needs of the Joint Venture are currently met by funds generated from operations. During the nine months ended December 31, 2017,
working capital increased by $562,916 from $9,957,418 on March 31, 2017 to $10,520,334 on December 31, 2017.
Management Plans and Liquidity
The Company had net losses of $1,726,384 for
the nine months ended December 31, 2017 and $2,058,902 and $2,137,792 for the years ended March 31, 2017 and 2016, respectively.
Furthermore, as of December 31, 2017, working capital (computed as the excess of current assets over current liabilities) decreased
by $864,080 from $3,556,524 at March 31, 2017, to $2,692,444 at December 31, 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. The Company
experienced positive cash flows from operations for the nine month period ended December 31, 2017 of $689,175.
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 $722,000 at December 31, 2017.
In addition, we have
secured extended payment terms of up to $4,000,000 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
one hundred twenty days from the date of each purchase thereunder. At December 31, 2017 the Company has a balance under this
arrangement with the Hong Kong Joint Venture of $3,860,994.
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 and other new products,
seeking additional financing, and reducing non-essential expenditures. This plan is in effect, approved by management, and management
has continued to work on this plan through December 31, 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.
Operating activities provided
cash of $689,175 for the nine months ended December 31, 2017. This was primarily due to an increase in accounts payable and accrued
expenses of $2,307,303 and offset by a net loss of $1,726,384, an increase in inventories and prepaid expenses of $539,971, and
an increase in accounts receivable and amounts due from factor of $230,183. The net loss includes a non-cash loss from investment
in the Hong Kong Joint Venture of $854,826. Operating activities used cash of $689,358 for the nine months ended December 31, 2016.
This was primarily due to an increase in inventory and prepaid expenses of $1,466,836 and a net loss of $1,003,551. This was partially
offset by a decrease of $398,177 in accounts receivable, increases of $845,338 in accounts payable and accrued expenses, and a
non-cash loss from the investment in the Hong Kong Joint Venture of $515,717.
Investing activities used
cash during the nine months ended December 31, 2017 resulting from the purchase of $16,106 in equipment. Investing activities provided
cash during the nine months ended December 31, 2016 of $102,581 consisting of dividends received from the Hong Kong Joint Venture.
Financing activities used
cash of $882,899 during the nine months ended December 31, 2017 and provided cash of $379,875 during the nine months ended December
31, 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.