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, 2020, 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, 2020 audited
financial statements filed with the Securities and Exchange Commission on Form 10-K on August 11, 2020. The interim operating
results are not necessarily indicative of the operating results for the full fiscal year.
Liquidity and Management Plans
The Company had a net loss of $78,982 for
the three months ended June 30, 2020 and a net loss of $5,813,891 and $1,347,986 for the years ended March 31, 2020 and
2019, respectively. Working capital (computed as the excess of current assets over current liabilities) increased by $162,219 from
$5,059,498 at March 31, 2020, to $5,221,717 at June 30, 2020.
As the Company’s products are sold
primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic
have had a negative impact on the Company’s sales. The Company is not yet able to quantify the full impact of the COVID-19
pandemic on its sales and financial results, but believes that the pandemic was a factor in significantly lower sales for the quarter
ended June 30, 2020 when compared to sales for the 2019 period.
Our short-term borrowings to finance operating
losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring Agreement
with Merchant Factors Corporation (Merchant or Factor). Borrowings under our Factoring Agreement bear interest at prime plus 2%
and are secured by trade accounts receivable and inventory. Advances from Merchant are at the sole discretion of Merchant based
on their assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance.
The unused availability of this facility totaled approximately $695,000 at June 30, 2020.
The Company has a history of sales that
are insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to
these conditions includes increasing sales resulting from the delivery of the Company’s line of sealed battery ionization
smoke alarms, carbon monoxide products, and ground fault circuit interrupters. In addition, effective March 31, 2020, the
Company sold its ownership interest in its former Hong Kong Joint Venture reducing its current liabilities due to the Hong Kong
Joint Venture by $4,000,000. The Company has seen positive results on this plan due to increased sales of its product offerings
to a major home improvement retailer during the second quarter of the Company’s fiscal year ending March 31, 2021. The
increase in sales to the major home improvement retailer has resulted in significant additional availability under the provisions
of the Company’s facility with its Factor. Management expects this sales growth to continue going forward. In May, 2020 the
Company received a Paycheck Protection Program loan of $221,400 under the CARES Act and expects the loan will be forgiven in compliance
with the provisions of the Act. 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 for the next twelve months following
the issuance date of this report. Cash flows and credit availability are expected to be adequate to fund operations for one year
from the issuance date of this report.
Line of Credit – Factor
On January 15, 2015, the Company entered
into the Agreement with Merchant for the purpose of factoring the Company’s trade accounts receivable and to provide financing
secured by finished goods inventory. Under the Agreement the Company may borrow eighty percent (80%) of eligible accounts receivable.
Additional funding, characterized by Merchant as an over advance, may be provided up to one hundred percent (100%) of eligible
accounts receivable. The over advance portion, if any, may not exceed fifty percent (50%) of eligible inventory up to a maximum
of $500,000. The Agreement has been extended and now expires on January 6, 2022, and provides for continuation of the program
for successive two year periods until terminated by one of the parties to the Agreement. As of June 30, 2020, the Company
had borrowings of $777,685 under the Agreement, and the Company had remaining availability under the Agreement of approximately
$695,000. 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 5.25% at June 30, 2020). Advances under
the factoring agreement are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory and
our financial condition at the time of each request for an advance.
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with US-GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Revenue Recognition
The Company’s primary source of revenue
is the sale of safety and security products based upon purchase orders or contracts with customers. Revenue is recognized at a
point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed
to have been transferred to the customer when the product is shipped or delivered to the customer. Customers may not return, exchange
or refuse acceptance of goods without our approval. Generally, the Company does not grant extended payment terms. Shipping and
handling costs associated with outbound freight, after control over a product has transferred to a customer, are accounted for
as a fulfillment cost and are recorded in selling, general and administrative expense.
The amount of revenue recognized reflects
the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at
the transaction price net of estimates of variable consideration. The Company uses the expected value method based on historical
data in considering the impact of estimates of variable consideration, which may include trade discounts, allowances, product returns
(including rights of return) or warranty replacements. Estimates of variable consideration are included in revenue to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
We have established allowances to cover
anticipated doubtful accounts based upon historical experience.
Disaggregation of Revenue
The Company presents below revenue associated with sales of
products acquired from the Eyston Company Ltd. for separately from revenue associated with sales of ground fault circuit interrupters
(GFCI’s) and ventilation fans. The Company believes this disaggregation best depicts how our various product lines perform
and are affected by economic factors. Revenue recognized by these categories for the three months ended June 30, 2020 and
2019 are as follows:
|
|
Three months ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Sales of products acquired from Eyston Company Ltd.
|
|
$
|
2,454,835
|
|
|
$
|
3,939,841
|
|
Sales of GFCI’s and ventilation fans
|
|
|
485,933
|
|
|
|
403,450
|
|
|
|
$
|
2,940,768
|
|
|
$
|
4,343,291
|
|
Receivables
Receivables are recorded when the Company has an unconditional
right to consideration. We have established allowances to cover anticipated doubtful accounts based upon historical experience.
Remaining Performance Obligations
Remaining performance obligations represent
the transaction price of firm orders for satisfied or partially satisfied performance obligations on contracts with an original
expected duration of one year or more. The Company’s contracts are predominantly short-term in nature with a contract term
of one year or less. For those contracts, the Company has utilized the practical expedient in ASC Topic 606 exempting the Company
from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of
a contract that has an original expected duration of one year or less.
Joint Venture
The Company held a fifty percent interest
in Eyston Company Limited, the former 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. The Company sold its fifty percent interest
in the Hong Kong Joint Venture effective March 31, 2020. There are no material differences between US-GAAP and the basis of
accounting used by the former Hong Kong Joint Venture for the period ended June 30, 2019. The following represents summarized
balance sheet and income statement information of the former Hong Kong Joint Venture as of and for the three months ended June 30,
2019:
|
|
2019
(Unaudited)
|
|
Net sales
|
|
$
|
3,149,100
|
|
Gross profit
|
|
|
161,680
|
|
Net loss
|
|
|
(808,833
|
)
|
Total current assets
|
|
|
12,875,232
|
|
Total assets
|
|
|
18,982,477
|
|
Total current liabilities
|
|
|
2,159,436
|
|
Total liabilities
|
|
|
2,902,978
|
|
During the three months ended June 30,
2020 and 2019 the Company purchased $1,275,366 and $2,859,967, respectively, of products directly from the Hong Kong Joint Venture
for resale. For the three months ended June 30, 2019 the Company decreased its equity in the net loss in the investment in the
Joint Venture to reflect a decrease of $35,453 in inter-Company profit on purchases held by the Company in inventory.
Income Taxes
We calculate our interim tax provision
in accordance with the guidance for accounting for income taxes in interim periods. We estimate the annual effective tax rate and
apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related to discrete events during the
interim period is recognized in the interim period in which those events occurred.
The Company recognizes a liability or asset
for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts
in the condensed consolidated financial statements. These temporary differences may result in taxable or deductible amounts in
future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed
periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset
will not be realized. After a review of projected taxable income and the components of the deferred tax asset in accordance with
applicable accounting guidance it was determined that it is more likely than not that the tax benefits associated with the remaining
components of the deferred tax assets will not be realized. This determination was made based on the Company’s history of
losses from operations and the uncertainty as to whether the Company will generate sufficient taxable income to use the deferred
tax assets prior to their expiration. Accordingly, a valuation allowance was established to fully offset the value of the deferred
tax assets. Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of
future taxable income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income
is generated, we may be able to offset a portion of future tax expenses.
The Company follows ASC 740-10 which provides
guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax
return and requires that we recognize in our consolidated financial statements the impact of a tax position, if that position is
more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties,
if any, related to income tax matters are recorded as income tax expenses.
Accounts Receivable and Amount Due From
Factor
The Company assigns the majority of its
short-term receivables arising in the ordinary course of business to our factor. At the time a receivable is assigned to our factor
the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear any
credit risk associated with delivery or warranty issues related to the products sold.
Management assesses the credit risk of
both its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account
are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated
from the receivable accounts and from the allowance account in the period that the receivables’ status is determined to be
uncollectible.
Based on the nature of the factoring agreement
and prior experience, no allowance related to Amounts Due from Factor has been provided. At June 30, 2020 and March 31,
2020, an allowance of approximately $57,000 has been provided for uncollectible trade accounts receivable.
Loss per Common Share
Basic loss per common share is computed
based on the weighted average number of common shares outstanding during the periods presented. Diluted loss per common share is
computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially
dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents
is determined using the treasury stock method based on the Company’s average stock price. There were no potentially dilutive
common stock equivalents outstanding during the three month periods ended June 30, 2020 or 2019. As a result, basic and diluted
weighted average common shares outstanding are identical for the three periods ended June 30, 2020 and 2019.
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.
Long-Term Note Payable – Eyston Company Ltd.
Effective March 31, 2020 the Company
sold its fifty percent ownership interest in the Hong Kong Joint Venture. On April 19, 2020, the Company converted $1,081,440
of trade accounts payable due to the Hong Kong Joint Venture to an unsecured long-term note payable. Interest is based on the Shanghai
Commercial Bank Limited in Hong Kong US Dollar prime rate published on the first day of each calendar month plus 2% (5.25% effective
rate at June 30, 2020) and is payable monthly. The principal balance of $1,081,440 is due and payable on April 19, 2022.
Note Payable – Bank
On May 6, 2020, the Company received a Paycheck Protection Program
loan under the CARES Act (Act) in the amount of $221,400. The loan bears interest at one percent and provides for monthly payments
beginning in December, 2020 with a maturity of May 6, 2022. Under the provisions of the Act, if the proceeds of the loan are used
for certain specified costs, repayment of the loan will be forgiven. Management expects the loan to be extinguished within one
year from the balance sheet date, and accordingly, has classified the loan as a current liability.
Leases
The Company is a lessee in lease agreements
for office space. Certain of the Company’s leases contain provisions that provide for one or more options to renew at the
Company’s sole discretion. The Company’s leases are comprised of fixed lease payments, with its real estate leases
including lease payments subject to a rate or index which may be variable. Certain real estate leases also include executory costs
such as common area maintenance (non-lease component). As a practical expedient permitted under Accounting Standards Codification
“ASC” 842, the Company has elected to account for the lease and non-lease components as a single lease component. Lease
payments, which may include lease components and non-lease components, are included in the measurement of the Company’s lease
liabilities to the extent that such payments are either fixed amounts or variable lease amounts based on a rate or index (fixed
in substance) as stipulated in the lease contract.
None of the Company’s lease agreements
contain any residual value guarantees or material restrictive covenants. As a result of the Company’s election of the package
of practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification,
all of the Company’s lease agreements in existence at the date of adoption that were classified as operating leases under
ASC 840 have been classified as operating leases under ASC 842. Lease expense for payments related to the Company’s operating
leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option.
Right-of-use assets represent the Company’s
right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease
payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are
recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term and amounted
to approximately $485,000 at the date of adoption. When the Company’s leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information available surrounding the Company’s borrowing rates at the lease
commencement date in determining the present value of lease payments. The right-of use asset also includes any lease payments made
at or before lease commencement less any lease incentives. As of June 30, 2020, the Company had right-of-use assets of $290,799
and lease liabilities of $290,799 related to its operating leases. Right-of-use assets are included in property and equipment,
net, on the condensed consolidated balance sheet and lease liabilities related to the Company’s operating leases are included
in short-term and long-term lease liability on the condensed consolidated balance sheet. As of June 30, 2020 the Company’s
weighted-average remaining lease term and weighted-average discount rate related to its operating leases were 1.75 years and 6.0%,
respectively. During the three months ended June 30, 2020, the cash paid for amounts included in the measurement of lease liabilities
related to the Company’s operating leases was $43,220, which is included as an operating cash outflow within the condensed
consolidated statements of cash flows. During the three months ended June 30, 2020, the Company did not enter into any lease agreements
set to commence in the future and there were no newly leased assets for which a right-of use asset was recorded in exchange for
a new lease liability, other than those lease assets recorded upon implementation.
The future minimum payments under operating leases were as follows
at June 30, 2020 for the fiscal year ending March 31, 2021:
2021 (remainder)
|
|
$
|
128,242
|
|
2022
|
|
|
175,792
|
|
2023
|
|
|
14,670
|
|
|
|
|
|
|
|
Total operating lease payments
|
|
$
|
318,704
|
|
Less: amounts representing interest
|
|
|
(27,905
|
)
|
Present value of net operating lease payments
|
|
$
|
290,799
|
|
Less: current portion
|
|
|
161,655
|
|
Long-term portion of operating lease obligations
|
|
$
|
129,144
|
|
Recently Adopted Accounting Standards
Changes to US-GAAP are established by the
Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASU’s) to the FASB’s Accounting
Standards Codification. The Company considers the applicability and impact of all ASU’s. Management determined that recently
issued ASU’s did not have a material impact on the consolidated financial statements at June 30, 2020.