Washington, D.C. 20549
Indicate by check mark if the registrant is
a well-known seasoned issuer (as defined in Rule 405 of the Act). Yes
¨
No
x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant\'s
knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate by check mark if the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of Common Stock,
$.01 par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock on the New York Stock
Exchange (NYSE MKT LLC) on September 30, 2017, was $3,613,895.
The number of shares of common stock outstanding
as of July 12, 2018 was 2,312,887.
To the extent specified, Part III of this Form
10-K incorporates information by reference to the Registrant’s definitive proxy statement for its 2018 Annual Meeting of
Shareholders.
PART I
General
Universal Security Instruments,
Inc. (“we” or “the Company”) designs and markets a variety of popularly-priced safety products consisting
primarily of smoke alarms, carbon monoxide alarms and related products. Most of our products require minimal installation and are
designed for easy installation by the consumer without professional assistance, and are sold through retail stores. We also market
products to the electrical distribution trade through our wholly-owned subsidiary, USI Electric, Inc. (“USI Electric”).
The electrical distribution trade includes electrical and lighting distributors as well as manufactured housing companies. Products
sold by USI Electric usually require professional installation.
In 1989 we formed Eyston
Company Limited, a limited liability company under the laws of Hong Kong, as a joint venture with a Hong Kong-based partner, to
manufacture various products in the Peoples Republic of China (the “Hong Kong Joint Venture”). We currently own a 50%
interest in the Hong Kong Joint Venture and are a significant customer of the Hong Kong Joint Venture (74.0% and 62.0% of its sales
during fiscal 2018 and 2017 respectively), with the balance of its sales made to unrelated customers worldwide. We import all of
our products from foreign suppliers. For the fiscal year ended March 31, 2018, approximately 97.8% of our purchases were imported
from the Hong Kong Joint Venture.
Our sales for the year
ended March 31, 2018 were $14,873,189 compared to $14,083,428 for the year ended March 31, 2017. We reported a net loss of $2,262,310
in fiscal 2018 compared to a net loss of $2,058,902 in fiscal 2017, an increase in the net loss of $203,408 (9.9%). The net loss
is primarily due to sales volumes that are insufficient to cover general and administrative expense.
The Company was incorporated
in Maryland in 1969. Our principal executive office is located at 11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117,
and our telephone number is 410-363-3000. Information about us may be obtained from our website
www.universalsecurity.com.
Copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are available free of
charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s
EDGAR reporting system. Simply select the “Investor Relations” menu item, and then click on the “SEC Filings”
link. The SEC’s EDGAR reporting system can also be accessed directly at
www.sec.gov
.
Safety Products
We market a line of residential
smoke and carbon monoxide alarms under the trade names “UNIVERSAL” and “USI Electric” both of which are
manufactured by the Hong Kong Joint Venture.
Our line of safety alarms
consists of units powered by replaceable batteries, ten year sealed batteries, and electrical with battery backup alarms. Our replaceable
battery products contain different types of batteries with different battery lives, and some with alarm silencers. The smoke alarms
marketed to the electrical distribution trade also include hearing impaired and heat alarms with a variety of features. We also
market door chimes, ventilation products, and ground fault circuit interrupters.
Over the past several fiscal
years we have added significantly to our intellectual property portfolio. Since 2010 the United States Patent and Trademark Office
has awarded eight patents to the Company, many being applied to our “Smart Alarm Technology” developed to significantly
reduce nuisance alarms. This “Smart Alarm Technology” is being incorporated into our new sealed battery alarms. In
addition, certain of our detector designs have also been awarded patents. We consider these patented enhancements to form a core
part of the Company’s “next generation” safety product line. The Company has also been awarded foreign patents
for its technology. The Company has actively pursued development of an array of unique packaging and source identifiers with the
intent of promoting consumer association with our Company’s “next generation” product line. These efforts have
resulted in eight new Trademark registrations being granted by the United States Patent and Trademark Office.
We also submitted each
of our new products for independent testing agency approval, and have introduced products into the marketplace as approvals were
received. This process began during the fourth quarter of our 2010 fiscal year and continued through the development and testing
of our sealed battery alarms. Currently, we have received independent testing agency approvals on all of our sealed battery products.
Our wholly-owned subsidiary,
USI Electric, Inc., focuses its sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon
monoxide alarms manufactured by our Hong Kong Joint Venture, to the electrical distribution trade and to foreign customers.
Import Matters
We import all of our products.
As an importer, we are subject to numerous tariffs which vary depending on types of products and country of origin, changes in
economic and political conditions in the country of manufacture, potential trade restrictions, and currency fluctuations. We have
attempted to protect ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments in
U.S. dollars.
Our inventory purchases
are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated
with purchasing products abroad. Substantially all of our safety products, including products we purchase from our Hong Kong Joint
Venture, are imported from the People’s Republic of China.
Sales and Marketing; Customers
We sell our products to
various customers, and our total sales market can be divided generally into two categories; sales by the Company to retailers,
including wholesale distributors, chain, discount, television retailers and home center stores, catalog and mail order companies
and other distributors (“retailers”), and sales by our USI Electric subsidiary to the electrical distribution trade
(primarily electrical and lighting distributors and manufactured housing companies) and foreign customers. Products marketed by
the Company have historically been retailed to “do-it-yourself” consumers by these retailers. Products marketed by
our USI Electric subsidiary to the electrical distribution trade typically require professional installation. We do not currently
market a significant portion of our products directly to end users.
A significant portion of
our sales are made by approximately 42 independent sales organizations, compensated by commission, which represents approximately
230 sales representatives, some of which have warehouses where USI Electric products are maintained for sale. In addition, the
Company has established a national distribution system with eight regional stocking warehouses throughout the United States which
generally enables customers to receive their orders the next day without paying for overnight freight charges. Our agreements with
these sales organizations are generally cancelable by either party upon 30 days’ notice. We do not believe that the loss
of any one of these organizations would have a material adverse effect upon our business. Sales are also made directly by the officers
and full-time employees of the Company and our USI Electric subsidiary, seven of whom have other responsibilities for the Company.
Sales outside the United States are made by our officers and through exporters, and amounted to less than one percent of total
net sales in fiscal years 2018 and 2017.
We also market our products
through our website and through our own sales catalogs and brochures, which are mailed directly to trade customers. Our customers,
in turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media. We also
exhibit and sell our products at various trade shows, including the annual National Hardware Show.
Our backlog of orders as
of March 31, 2018 was approximately $1,326,000. Our backlog as of March 31, 2017 was approximately $830,000. This increase in backlog
is primarily due to the timing of orders of our safety products.
Hong Kong Joint Venture
We have a 50% interest in
Eyston Company Limited, the Hong Kong Joint Venture, which has manufacturing facilities in the People’s Republic of China,
for the manufacturing of certain of our electronic and electrical products.
We believe that the Hong
Kong Joint Venture arrangement will ensure a continuing source of supply for a majority of our safety products at competitive prices.
During fiscal years 2018 and 2017, 97.8% and 95.6%, respectively, of our total inventory purchases were made from the Hong Kong
Joint Venture. The products produced by the Hong Kong Joint Venture include smoke alarms and carbon monoxide alarms. Negative changes
in economic and political conditions in China or any other adversity to the Hong Kong Joint Venture will unfavorably affect the
value of our investment in the Hong Kong Joint Venture and would have a material adverse effect on the Company’s ability
to purchase products for distribution.
Our purchases from the
Hong Kong Joint Venture represented approximately 74.0% of the Hong Kong Joint Venture’s total sales during fiscal 2018 and
62.0% of total sales during fiscal 2017, with the balance of the Hong Kong Joint Venture’s sales being primarily made in
Europe and Australia, to unrelated customers. The Hong Kong Joint Venture’s sales to unrelated customers were $3,504,494
in fiscal 2018 and $5,875,243 in fiscal 2017. Please see Note C of the consolidated financial statements, and management’s
discussion and analysis of financial condition and results of operations, for a comparison of annual sales and earnings of the
Hong Kong Joint Venture.
Other Suppliers
Certain private label products
not manufactured for us by the Hong Kong Joint Venture are manufactured by other foreign suppliers. We believe that our relationships
with our suppliers are good. We believe that the loss of our ability to purchase products from the Hong Kong Joint Venture would
have a material adverse effect on the Company. The loss of any of our other suppliers would have a short-term adverse effect on
our operations, but replacement sources for these other suppliers could be developed.
Competition
In fiscal years 2018 and
2017, sales of safety products accounted for substantially all of our total sales. In the sale of smoke alarms and carbon monoxide
alarms, we compete in all of our markets with First Alert and Walter Kidde Portable Equipment, Inc. These companies have greater
financial resources and financial strength than we have. However, we believe that our safety products compete favorably in the
market primarily on the basis of styling, features and pricing.
The safety industry in
general involves changing technology. The success of our products may depend on our ability to improve and update our products
in a timely manner and to adapt to new technological advances.
Employees
As of March 31, 2018, we
had 14 employees, 10 of whom are engaged in administration and sales, and the balance of whom are engaged in product development.
Our employees are not unionized, and we believe that our relations with our employees are satisfactory.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
Effective January 2009,
we entered into a ten year operating lease for a 12,000 square foot office and warehouse located in Baltimore County, Maryland
expiring in April 2019. In June 2009, we amended this lease to include an additional 3,000 square feet of warehouse space contiguous
to our existing warehouse in Baltimore County, Maryland. Monthly rental expense, with common area maintenance, currently approximates
$14,000 and increases 3% per year.
Effective March 2003, we
entered into an operating lease for office space in Naperville, Illinois. This lease, consisting of 3,400 square feet, was renewed
in December 2017 and extends through February 2019. The monthly rental, with common area maintenance, approximated $5,500 per month
during the current fiscal year and is subject to increasing rentals of 3% per year.
The Hong Kong Joint
Venture currently operates an approximately 150,000 square foot manufacturing facility in the Guangdong province of Southern China
and a manufacturing facility in the Fujian province of Southern China totaling approximately 280,000 square feet. In February,
2018 the Hong Kong Joint Venture closed a manufacturing facility in Nan’an and transferred the equipment and operations
from that facility to the Fujian facility. The Hong Kong Joint Venture has offered the closed facility for sale or lease. The
Hong Kong Joint Venture’s offices and warehouses are leased pursuant to various leases with rental payments of approximately
$24,000 per month.
The Company believes that
its current facilities, and those of the Hong Kong Joint Venture, are currently suitable and adequate.
|
ITEM 3
.
|
LEGAL PROCEEDINGS
|
From time to time the Company
is involved in various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel,
the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial
position, results of operations, or cash flows in future years.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information
about the Company’s executive officers.
NAME
|
|
AGE
|
|
POSITIONS
|
|
|
|
|
|
Harvey B. Grossblatt
|
|
71
|
|
President, and Chief Executive Officer
|
|
|
|
|
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James B. Huff
|
|
66
|
|
Chief Financial Officer, Secretary and Treasurer
|
HARVEY B. GROSSBLATT has
been a director of the Company since 1996. He served as Chief Financial Officer from October 1983 through August 2004, Secretary
and Treasurer of the Company from September 1988 through August 2004, and Chief Operating Officer from April 2003 through August
2004. Mr. Grossblatt was appointed Chief Executive Officer in August 2004.
JAMES B. HUFF was appointed Chief Financial
Officer in August 2004 and Secretary and Treasurer in October 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Business:
Universal Security
Instruments, Inc.’s (the “Company”) primary business is the sale of smoke alarms and other safety products to
retailers, wholesale distributors and to the electrical distribution trade which includes electrical and lighting distributors
as well as manufactured housing companies. The Company imports all of its safety and other products from foreign manufacturers.
The Company, as an importer, is subject to numerous tariffs which vary depending on types of products and country of origin, changes
in economic and political conditions in the country of manufacture, potential trade restrictions and currency fluctuations.
Principles of Consolidation:
The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiary USI Electric, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation. We believe that our 50% ownership interest in the Hong Kong Joint
Venture allows us to significantly influence the operations of the Hong Kong Joint Venture. As such, we account for our interest
in the Hong Kong Joint Venture using the equity method of accounting. We have included our investment balance as a non-current
asset and have included our share of the Hong Kong Joint Venture’s loss in our consolidated statements of operations. The
investment and earnings and losses are adjusted to eliminate intercompany profits.
Use of Estimates:
In preparing financial
statements in conformity with accounting principles generally accepted in the United States of America (US-GAAP), management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash:
The Company maintains its cash
in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such
accounts, and believes it is not exposed to any significant credit risk with cash.
Revenue Recognition:
The Company recognizes
sales upon shipment of products, when title has passed to the buyer, net of applicable provisions for any discounts or allowances.
We recognize revenue when the following criteria are met: evidence of an arrangement exists; the fee is fixed and determinable;
delivery has taken place; and collectability is reasonably assured. Customers may not return, exchange or refuse acceptance of
goods without our approval. However, the Company has entered into an agreement with a customer to grant pre-approved rights of
return of up to twenty-five percent of products sold on certain invoices to provide for and gain acceptance within certain markets.
When a pre-approved right of return is granted, revenue recognition is deferred until the right of return expires. We have established
allowances to cover anticipated doubtful accounts based upon historical experience.
Accounts Receivable:
The Company assigns
the majority of its trade receivables on a pre-approved non-recourse basis to Merchant Factors Corporation (Merchant or Factor)
under a factoring agreement on an ongoing basis. Factoring charges recognized on assignment of receivables are deducted from revenue
in the consolidated statements of operations and amounted to $118,729 and $107,879 for the years ended March 31, 2018 and 2017,
respectively.
Management considers amounts due from the Company’s
factor to be “financing receivables”. Trade accounts receivable, other receivables, and receivables from our Hong Kong
Joint Venture are not considered to be financing receivables.
At the time a receivable is assigned to our
factor, the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to
bear any credit risk associated with delivery or warranty issues related to the products sold.
Management assesses the credit risk of both
its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account
from one accounting period to the next are charged to operations in the period the change is determined. Amounts ultimately determined
to be uncollectible are eliminated from the receivable accounts and from the allowance account in the period that the receivables’
status is determined to be uncollectible.
Based on the nature of the factoring agreement
and prior experience, no allowance for uncollectible financing receivables has been provided. At March 31, 2018 and 2017, an allowance
of $57,000 has been provided for uncollectible trade accounts receivable.
Inventories:
Inventories are stated
at the lower of cost (first in/first out method) or net realizable value. Included as a component of finished goods inventory are
additional non-material costs. These costs include freight, import duty and inspection fees. Expenses incurred for inventory quality
control in the amount of approximately $45,000 and $43,000, have been capitalized and included in inventory for the fiscal years
ended March 31, 2018 and 2017, respectively. We evaluate inventories on a quarterly basis and write down inventory that is considered
obsolete or unmarketable in an amount equal to the difference between the cost of inventory and the estimated net realizable value
based upon assumptions about future demand and market conditions.
Impairment of long-lived assets
: Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may
not be recoverable. The factors considered in performing this assessment include current operating results, anticipated future
results, the manner in which the asset is used and the effects of obsolescence, demand, competition and other economic factors.
Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these assets in relation to
the operating performance of the business and future undiscounted cash flows expected to result from the use of these assets. Impairment
losses are recognized when the sum of expected future cash flows is less than the assets’ carrying value, and losses are
determined based upon the excess carrying value of the assets over its fair value. Based on this assessment, no impairment to long-lived
assets resulted for fiscal years ended March 31, 2018 and 2017.
Income Taxes:
The Company recognizes
a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities
and their reported amounts in the consolidated financial statements. These temporary differences may result in taxable or deductible
amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets
are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred
tax asset will not be realized.
The Company follows Accounting Standards Codification
(ASC) 740-10 that gives guidance to tax positions related to the recognition and measurement of a tax position taken or expected
to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position, if that position
is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and
penalties, if any, related to income tax matters are recorded as income tax expenses. See Note H, Income Taxes.
Warranties:
We generally provide warranties,
on the safety products, from one to ten years to the non-commercial end user on all products sold. The manufacturers of our safety
products provide us with a one-year warranty on all products we purchase for resale. Claims for warranty replacement of products
beyond the one-year warranty period covered by the manufacturers have not been historically material.
Research and Development:
Research and
development costs are charged to operations as incurred.
Shipping and Handling Fees and Costs:
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound
freight are included in cost of goods sold. Shipping and handling costs associated with outbound freight are included in selling,
general and administrative expenses and totaled $462,469 and $315,957 in fiscal years 2018 and 2017, respectively.
Foreign currency
: The activity and accounts of the Hong Kong
Joint Venture are denominated in Hong Kong dollars and are translated to US dollars in consolidation. The Company translates the
accounts of the Hong Kong Joint Venture at the applicable exchange rate in effect at the year-end date for assets and liabilities
and at the average exchange rate for the reporting period for statement of operation purposes. The Company currently does not maintain
cash in foreign banks to support its operations in Hong Kong.
The cumulative balance of currency translation, a component of accumulated
other comprehensive income, amounted to $561,870 and $325,725 at March 31, 2018 and 2017, respectively.
Net Loss per Share:
Basic net loss per
share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period.
Diluted loss per share is computed by dividing net loss for the period by the weighted average number of common shares and common
share equivalents outstanding (unless their effect is anti-dilutive) for the period. As a result of the net losses, the weighted
average number of common shares outstanding is identical for the years ended March 31, 2018 and 2017 for both basic and diluted
shares. In addition, there were no other securities outstanding during 2018 or 2017.
Recently Issued Accounting Pronouncements:
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates
(ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all
ASU’s.
In June 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606.
ASU 2014-09 affects any entity using U.S. GAAP that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless
those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede
the revenue recognition requirements in Topic 605,
Revenue Recognition,
and most industry-specific guidance. This ASU also
supersedes some cost guidance included in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts.
In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are
not in a contract with a customer (e.g., assets within the scope of Topic 360,
Property, Plant, and Equipment,
and intangible
assets within the scope of Topic 350,
Intangibles—Goodwill and Other)
are amended to be consistent with the guidance
on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle,
an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance
obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance
obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. This guidance
is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting
period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect
of initially applying the ASU recognized at the date of initial application. The adoption of this new accounting standard is not
expected to have a material impact on the consolidated financial statements and footnote disclosures.
In December 2016 the FASB issued Accounting
Standards Update No. 2016-20,
Technical Corrections and Improvements to Topic 606
,
Revenue from Contracts with Customers,
or ASU 2016-20. The amendments in ASU 2016-20 update and affect narrow aspects of the guidance issued in ASU 2014-09. In May
2016, the FASB issued ASU 2016-12,
Narrow Scope Improvements and Practical
Expedients
, which provided revised guidance on certain issues relating to revenue from contracts with customers,
including
clarification of the objective of the collectability criterion. In March 2016, the FASB issued a final amendment to clarify the
implementation guidance for principal versus agent considerations and in April 2016 issued a final amendment to clarify the guidance
related to identifying performance obligations and the accounting for intellectual property licenses. The Company adopted this
new accounting standard on April 1, 2018 which has not had 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 adopted this new accounting standard on April 1, 2018 which has not had a material impact on the condensed consolidated
financial statements and footnote disclosures.
NOTE B – MANAGEMENT’S PLAN
The Company had net losses of $2,262,310 and
$2,058,902 for the years ended March 31, 2018 and 2017, respectively. Furthermore, as of March 31, 2018, working capital (computed
as the excess of current assets over current liabilities) decreased by $924,180 from $3,556,524 at March 31, 2017, to $2,632,344
at March 31, 2018.
Our short-term borrowings
to finance operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of a
factoring agreement with Merchant as further described in Note D – Short Term Borrowings and Credit Arrangements. Advances
from the Company’s factor, are at the sole discretion of Merchant based on their assessment of the Company’s receivables,
inventory and financial condition at the time of each request for an advance. In addition, we have secured extended payment terms
for purchases up to $4,000,000 from our Hong Kong Joint Venture for the purchase of sealed battery inventory. Amounts borrowed
from the Hong Kong Joint Venture under these extended payment terms are unsecured, bear interest at 4.50%, and provide for repayment
terms of one hundred-twenty days for each advance thereunder. Effective June 1, 2018, the interest rate on advances from the Hong
Kong Joint Venture increases to 5.5%. The combined availability remaining under these facilities totaled approximately $1,171,000
at March 31, 2018.
We anticipate, now that
our complete line of sealed smoke and carbon monoxide alarms has been introduced, that sales will continue to increase. These sealed
products will compete on price and functionality with similar products offered by our larger competitors. While we believe there
will be market acceptance of our new products we cannot be assured of this. Should our products not achieve the level of acceptance
we anticipate this will have a significant impact on our future operations and potentially impact our ability to continue operations.
The Company has a history of sales that are
insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to these
conditions includes increasing sales resulting from the delivery of the Company’s new line of sealed battery ionization smoke
alarms and carbon monoxide products, and obtaining additional financing on its credit facility. The Company has seen positive results
on this plan during the fiscal years ended March 31, 2018 and 2017 due to sales of its sealed battery products and management expects
this growth to continue going forward. Though no assurances can be given, if management’s plan continues to be successful
over the next twelve months, the Company anticipates that it should be able to meet its cash needs. Cash flows and credit availability
is expected to be adequate to fund operations for one year from the issuance date of this report.
NOTE C – INVESTMENT IN THE HONG KONG JOINT VENTURE
The Company holds a 50% interest in a
joint venture with a Hong Kong corporation, which has manufacturing facilities in the People’s Republic of China, for the
manufacturing of consumer electronic products. As of March 31, 2018 and 2017, the Company has an investment balance of $10,023,275
and $10,562,837, respectively for its 50% interest in the Hong Kong Joint Venture. There are no material differences between US-GAAP
and those used by the Hong Kong Joint Venture.
The following represents summarized financial
information derived from the financial statements of the Hong Kong Joint Venture as of March 31, 2018 and 2017.
|
|
March 31,
|
|
|
|
2018
|
|
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2017
|
|
Current assets
|
|
$
|
12,515,645
|
|
|
$
|
12,314,103
|
|
Property and other assets
|
|
|
10,687,962
|
|
|
|
11,960,064
|
|
|
|
|
|
|
|
|
|
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Total assets
|
|
$
|
23,203,607
|
|
|
$
|
24,274,167
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,707,429
|
|
|
$
|
2,356,685
|
|
Non-current liabilities
|
|
|
389,961
|
|
|
|
392,354
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
20,106,217
|
|
|
|
21,525,128
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
23,203,607
|
|
|
$
|
24,274,167
|
|
|
|
For the Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
14,010,358
|
|
|
$
|
15,470,589
|
|
Gross profit
|
|
|
1,211,742
|
|
|
|
1,932,919
|
|
Net loss
|
|
|
(2,864,061
|
)
|
|
|
(1,808,497
|
)
|
During the years ended March 31, 2018 and 2017,
the Company purchased $10,505,864 and $9,595,346, respectively, of finished product from the Hong Kong Joint Venture, which represents
97.8% and 95.6%, respectively, of the Company’s total finished product purchases.
At March 31, 2018 and 2017, the Company had
outstanding $3,838,627 and $1,206,731 under an extended payment term agreement with the Hong Kong Joint Venture. This agreement
provides extended payment terms for the purchase of inventory from the Hong Kong Joint Venture. Purchases under this agreement
is limited to $4,000,000, bears interest at 4.50%, is for a term of one hundred-twenty (120) days, and is unsecured. Dividends
declared and paid by the Hong Kong Joint Venture, which amounted to $0 and $102,581 during the fiscal years ended March 31, 2018
and 2017, respectively, are first used to repay any outstanding balance on the agreement.
The Company’s investment in the Hong
Kong Joint Venture as recorded on the Company’s consolidated balance sheets has been adjusted for the effect of intercompany
profit of the Hong Kong Joint Venture in the ending inventory of the Company.
NOTE D – SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
On January 15, 2015, the Company entered into
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. The amount available to borrow from Merchant is approximately $1,009,000
and $587,000 at March 31, 2018 and 2017, respectively. Advances on factored trade accounts receivable and borrowing on inventories
are secured by all of the Company’s trade accounts receivable and inventories, are repaid periodically as collections are
made by Merchant but are otherwise due upon demand, and bear interest at the prime commercial rate of interest, as published, plus
two percent (effective rate 6.00% at March 31, 2017 and 6.75% at March 31, 2018). Advances under the Agreement are made at the
sole discretion of Merchant, based on their assessment of the receivables, inventory and our financial condition at the time of
each request for an advance. At March 31, 2018 and 2017 there was $1,611,154 and $2,264,125 borrowed and outstanding under the
factoring agreement.
Under the Agreement, the Company assigned receivables
of $15,052,852 and $13,770,764 during the years ended March 31, 2018 and 2017, respectively. The uncollected balance of non-recourse
receivables held by the factor amounted to $2,410,680 and $2,009,471 at March 31, 2018 and 2017. Collected cash maintained on deposit
at March 31 2018 and 2017 with the factor earns interest at the factor’s prime rate of interest less 2.5 percent (effective
rate of 2.25% and 1.50% at March 31, 2018 and 2017, respectively.) There was no cash on deposit with the Factor at March 31, 2018
or 2017.
NOTE E – PROPERTY AND EQUIPMENT -
NET
Property and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation and amortization are provided by using the straight-line method based
on estimated useful lives. Expenditures for major betterments that extend the useful life of property and equipment are capitalized.
Repair and maintenance costs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the cost
and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in the results
of operations.
The estimated useful lives for financial reporting
purposes are as follows:
Leasehold improvements
|
-
|
Shorter of term of lease or useful life of asset
|
Machinery and equipment
|
-
|
5 to 10 years
|
Furniture and fixtures
|
-
|
5 to 15 years
|
Computer equipment
|
-
|
5 years
|
Property and equipment consist of the following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Leasehold improvements
|
|
$
|
166,722
|
|
|
$
|
166,722
|
|
Machinery and equipment
|
|
|
190,400
|
|
|
|
190,400
|
|
Furniture and fixtures
|
|
|
261,292
|
|
|
|
261,292
|
|
Computer equipment
|
|
|
302,634
|
|
|
|
286,528
|
|
|
|
|
921,048
|
|
|
|
904,942
|
|
Less accumulated depreciation and amortization
|
|
|
(885,463
|
)
|
|
|
(858,649
|
)
|
|
|
$
|
35,585
|
|
|
$
|
46,293
|
|
Depreciation and amortization expense totaled $26,814 and $25,263
for fiscal years ended March 31, 2018 and 2017, respectively.
NOTE F - LEASES
During January 2009, the Company entered into
an operating lease for its office and warehouse location in Owings Mills, Maryland which expires in March 2019. This lease is subject
to increasing rentals at 3% per year. In June 2009, we amended this lease to include an additional 3,000 square feet of warehouse.
In December 2017, the Company renewed and expanded its operating lease through February 2019 for a 3,400 square foot office in
Naperville, Illinois. This lease is subject to increasing rentals at three percent (3%) per year.
Our operating leases for real estate are generally
renewable with terms and conditions similar to the original lease. Rent expense, including common area maintenance, totaled $223,355
and $220,492 for the years ended March 31, 2018 and 2017, respectively.
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Future minimum lease payments are as follows:
|
|
$
|
236,631
|
|
|
$
|
10,170
|
|
|
$
|
0
|
|
|
$
|
246,801
|
|
NOTE G – INCOME TAXES
The Tax Cuts and Jobs Act (the “Tax Act”) was
enacted on December 22, 2017. The Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, requires
companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, changes
rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017,
eliminates the corporate alternative minimum tax (“AMT”) and changes how existing AMT credits can be realized, creates
the base erosion anti-abuse tax (BEAT), a new minimum tax, and creates a new limitation on deductible interest expense.
The SEC issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), which provides guidance on accounting
for the tax effects of the Tax Act. SAB 118 provides a measurement period, which should not extend beyond one year from the Tax
Act’s enactment date, for companies to complete the accounting under ASC 740,
Income Taxes
. In accordance with SAB
118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to
determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine
a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions
of the tax laws that were in effect immediately before the enactment of the Tax Act. At March 31, 2018, the Company has not completed
its accounting for the tax effects of enactment of the Tax Act.
The Company re-measured certain deferred tax assets and
liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company
is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement
of these balances or potentially give rise to new deferred tax amounts.
The Deemed Repatriation Transition Tax (“Transition
Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of our Hong Kong
Joint Venture. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount
of post-1986 E&P of the Hong Kong Joint Venture, as well as the amount of non-U.S. income taxes paid on such earnings. The
Company has initially determined that it will not owe a Transition Tax since it estimates that it has sufficient net operating
loss carryforwards and foreign tax credit carryforwards to offset the expected E&P of its Hong Kong Joint Venture that are
subject to the tax. However, the Company is continuing to gather additional information to refine its computation.
The Company files its income tax returns in
the U.S. federal jurisdiction, and various state jurisdictions. Income tax returns filed for the fiscal years ended March 31, 2017,
2016, and 2015 are considered open and subject to examination by tax authorities. Deferred income tax assets and liabilities are
computed and recognized for those differences that have future tax consequences and will result in net taxable or deductible amounts
in future periods. Deferred tax expense or benefit is the result of changes in the net asset or liability for deferred taxes. The
deferred tax liabilities and assets for the Company result primarily from net operating loss and tax credit carry forwards, reserves
and accrued liabilities.
At March 31, 2018 and 2017, the Company has
total net federal and state operating loss carry forwards of approximately $9,301,000 and $8,418,000, respectively, which expire
in various amounts at dates from 2018 through 2032. There are certain limitations to the use and application of these items. Management
reviews net operating loss carry forwards and income tax credit carry forwards to evaluate if those amounts are recoverable. After
a review of projected taxable income and the components of the deferred tax assets in accordance with applicable accounting guidance
it was determined that it is more likely than not that the tax benefits associated with the remaining components of the deferred
tax assets will not be realized. This determination was made based on the Company’s history of losses from operations and
the uncertainty as to whether the Company will generate sufficient taxable income to use the deferred tax assets prior to their
expiration. Accordingly, a valuation allowance was established to fully offset the value of the deferred tax assets. Our ability
to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income
and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income is generated, we may
be able to offset a portion of future tax expenses.
The reconciliation between the statutory federal income tax provision
and the actual effective tax provision is as follows:
|
|
Years ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal benefit at statutory rate (30.8% for 2018 and 34.0% for 2017) before loss carry-forward
|
|
$
|
(695,660
|
)
|
|
$
|
(700,027
|
)
|
Non-repatriated loss of Hong Kong Joint Venture
|
|
|
382,027
|
|
|
|
345,953
|
|
Permanent and other differences
|
|
|
13,336
|
|
|
|
57,651
|
|
State income tax benefit – net of federal effect
|
|
|
(31,785
|
)
|
|
|
(30,515
|
)
|
Expiration of tax credits
|
|
|
236,628
|
|
|
|
251,520
|
|
Change in value of deferred tax assets due to change in effective rate
|
|
|
1,197,474
|
|
|
|
-
|
|
Change in deferred tax asset valuation allowance
|
|
|
(1,102,020
|
)
|
|
|
75,418
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The individual components of the Company’s deferred tax assets
are as follows:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and allowances
|
|
$
|
36,409
|
|
|
$
|
58,558
|
|
Inventory uniform capitalization
|
|
|
33,250
|
|
|
|
17,966
|
|
Net operating loss carry forward
|
|
|
2,298,116
|
|
|
|
3,156,643
|
|
Foreign tax credit carry forward
|
|
|
459,199
|
|
|
|
695,827
|
|
Research and development tax credit carry forward
|
|
|
61,701
|
|
|
|
61,701
|
|
Allowance for unrealizable deferred tax assets
|
|
|
(2,888,675
|
)
|
|
|
(3,990,695
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE H - COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved
in various lawsuits and legal matters. It is the opinion of management, based on consultation with legal counsel, that there are
no outstanding material claims outside of the normal course of business.
The Company’s employment agreement with
its CEO (the “CEO Agreement”) requires the Company to make certain post-employment payments to the CEO in the event
of his termination following a change in control, death, disability, non-renewal, or resignation with “Good Reason”
under terms of the CEO Agreement. Additionally, the CEO Agreement requires the Company to make post-employment payments, which
can range from approximately $94,000 to $1,995,000, dependent upon the controlling event, as discussed above. On July 9, 2018,
the Company renewed the CEO Agreement through July 31, 2019.
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of safety
products for use in home and business under both its trade names and private labels for other companies. As described in Note C,
the Company purchased a majority of its products from its 50% owned Hong Kong Joint Venture.
For the fiscal year ended March 31, 2018, the
Company had one customer that represented 13.9% of the Company’s net sales. The Company had one customer that represented
14.8% of net sales for the year ended March 31, 2017.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)