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 every Interactive Data File required to be submitted 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
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, 2018, was $2,478,100.
The number of shares of common stock outstanding
as of July 15, 2019 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 2019 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 (82.9% and 74.0% of its sales
during fiscal 2019 and 2018 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, 2019, approximately 87.2% of our purchases were imported
from the Hong Kong Joint Venture.
Our sales for the year
ended March 31, 2019 were $17,588,040 compared to $14,873,189 for the year ended March 31, 2018. We reported a net loss of $1,347,986
in fiscal 2019 compared to a net loss of $2,262,310 in fiscal 2018, a decrease in the net loss of $914,324 (40.4%). The net loss
is primarily due to increases in interest expense, product liability insurance expense, and the Company’s interest in the
loss from investment in the Hong Kong joint venture.
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, or are 120 volt with battery backup. Our
replaceable battery products contain different types of batteries with different battery lives, and some include 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, ground fault circuit interrupters (GFCI’s), and other electrical
devices.
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.
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. 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. These products are currently subject to tariffs ranging from ten to twenty-five percent.
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.
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 40 independent sales organizations, compensated by commission, which represents approximately
100 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 five percent of total
net sales in fiscal years 2019 and 2018.
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, 2019 was approximately $748,000. Our backlog as of March 31, 2018 was approximately $1,326,000. This decrease 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 2019 and 2018, 87.2% and 97.8%, 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 82.9% of the Hong Kong Joint Venture’s total sales during fiscal 2019
and 74.0% of total sales during fiscal 2018, 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 $2,039,878
in fiscal 2019 and $3,504,494 in fiscal 2018. 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 2019
and 2018, 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, 2019,
we had thirteen employees, nine 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.
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UNRESOLVED STAFF COMMENTS
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Not applicable.
Effective April 1 2019,
we extended our operating lease for a 15,000 square foot office and warehouse located in Baltimore County, Maryland to expire in
April 2022. Monthly rental expense, with common area maintenance, currently approximates $14,500 and increases 2.5% 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 November 2018 and extends through February 2020. 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 100,000 square foot manufacturing facility in the Guangdong province of Southern China
and a manufacturing facility in the Fujian province of Southern China totaling approximately 250,000 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.
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ITEM 3
.
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LEGAL PROCEEDINGS
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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.
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NAME
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AGE
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POSITIONS
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Harvey B. Grossblatt
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72
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President, and Chief Executive Officer
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James B. Huff
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67
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Chief Financial Officer, Secretary and Treasurer
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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:
Adoption of ASC Topic 606,
Revenue from Contracts with
Customers -
On April 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method. Results for reporting
periods beginning after April 1, 2018 are presented under ASC Topic 606, while prior period amounts were not adjusted and continue
to be reported in accordance with ASC Topic 605, “Revenue Recognition”. The adoption of ASC Topic 606 had no material
impact on our current or previously recorded results of operations.
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.
Disaggregation of Revenue: The Company
presents below revenue associated with sales of products acquired from our Hong Kong Joint Venture separately from revenue associated
with sales of ground fault circuit interrupters (GFCI’s) and ventilation fans. The Company believes this disaggregation best
depicts how our various product lines perform and are affected by economic factors. Revenue recognized by these categories for
the fiscal years ended March 31, 2019 and 2018 are as follows:
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Fiscal Year ended
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March 31, 2019
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March 31, 2018
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Sales of products acquired from our HKJV
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$
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16,039,519
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$
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14,342,046
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Sales of GFCI’s and ventilation fans
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1,548,521
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531,143
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$
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17,588,040
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$
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14,873,189
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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 $132,137 and $118,729 for the years ended March 31, 2019
and 2018, 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, 2019 and 2018, 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 $45,000, have been capitalized and included in inventory for the fiscal years
ended March 31, 2019 and 2018, 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, 2019 and 2018.
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 $472,570 and $462,469 in fiscal years 2019 and 2018, 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 $561,358 and $1,103,420 at March 31, 2019 and 2018, 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, 2019 and 2018 for both basic
and diluted shares. In addition, there were no other securities outstanding during 2019 or 2018.
Recently Issued Accounting Standards:
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 July 2018, the Financial Accounting
Standards Board, or FASB, issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
. This amendment provides entities
with an additional and optional transition method to adopt the new leases standard. Under the new transition method, an entity
can initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. As a result, an entity’s reporting for the comparative periods presented
in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic
840,
Leases
). ASU 2018-11 is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years, with early application permitted. We do not expect that the adoption of ASU 2018-11 on April 1, 2019 will have
a material impact on our financial statements.
In June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting.
This guidance
expands the scope of accounting for share-based payment arrangements to include share-based payment transactions for acquiring
goods and services from nonemployees. This guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018. We do not expect that the adoption of ASU 2018-07 on April 1, 2019 will have a material impact on our
financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
. Under this amendment, lessees will be required to recognize the following for all leases (with the exception of
short-term leases) at the commencement date: 1) a lease liability which is a lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, with early application permitted. Lessees must apply
a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements. We do not expect that the adoption of ASU 2016-02 on April 1, 2019 will have
a material impact on our financial statements
NOTE B – MANAGEMENT’S PLAN
The Company had net losses of $1,347,986
and $2,262,310 for the years ended March 31, 2019 and 2018, respectively. Furthermore, as of March 31, 2018, working capital (computed
as the excess of current assets over current liabilities) decreased by $278,031 from $2,632,344 at March 31, 2018, to $2,354,313
at March 31, 2019.
Our short-term borrowings
to finance operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our
Factoring Agreement with Merchant. 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
unused availability of this facility totaled approximately $605,266 at March 31, 2019. In addition, we have secured extended payment
terms for purchases up to $4,000,000 from our Hong Kong Joint Venture for the purchase of inventory. These amounts are unsecured,
bear interest at 5.5%, and provide for repayment terms of one hundred-twenty days for each advance thereunder. The balance outstanding
under this agreement at March 31, 2019 is $4,962,023 with $2,758,960 of this amount being beyond agreed repayment terms. The Hong
Kong Joint Venture has provided discretionary approval to allow the Company to exceed the agreed upon repayment terms and has indicated
it has no plans or intentions that would materially impact the financial position, operations, or cash flows of the Company.
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 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, 2019 and 2018 due to sales of its sealed battery products, GFCI’s,
and other electrical 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, 2019 and 2018, the Company has an investment balance of $8,441,889 and $10,023,275,
respectively for its 50% interest in the Hong Kong Joint Venture. There are no material differences between US-GAAP and those used
by the Hong Kong Joint Venture.
The following represents summarized financial
information derived from the financial statements of the Hong Kong Joint Venture as of March 31, 2019 and 2018.
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March 31,
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2019
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2018
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Current assets
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$
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13,953,342
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$
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12,515,645
|
|
|
Property and other assets
|
|
|
5,949,528
|
|
|
|
10,687,962
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,902,870
|
|
|
$
|
23,203,607
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,344,644
|
|
|
$
|
2,707,429
|
|
|
Non-current liabilities
|
|
|
388,437
|
|
|
|
389,961
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
17,169,789
|
|
|
|
20,106,217
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
19,902,870
|
|
|
$
|
23,203,607
|
|
|
|
|
For the Year Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
13,252,710
|
|
|
$
|
14,010,358
|
|
|
Gross profit
|
|
|
1,716,392
|
|
|
|
1,211,742
|
|
|
Net loss
|
|
|
(1,791,405
|
)
|
|
|
(2,864,061
|
)
|
During the years ended March 31, 2019 and
2018, the Company purchased $10,982,518 and $10,505,864, respectively, of finished product from the Hong Kong Joint Venture, which
represents 87.2% and 97.8%, respectively, of the Company’s total finished product purchases.
At March 31, 2019 and 2018, the Company
had outstanding $4,962,023 and $3,838,627 under an extended payment term agreement with the Hong Kong Joint Venture. The agreement
provides extended payment terms for the purchase of inventory from the Hong Kong Joint Venture. Purchases under the agreement are
limited to $4,000,000, bear interest at 5.50%, are for a term of one hundred-twenty (120) days, and are unsecured. Dividends declared
and paid by the Hong Kong Joint Venture, which amounted to $0 and $0 for the fiscal years ended March 31, 2019 and 2018, respectively,
are first used to repay any outstanding balance on the agreement. The balance outstanding under this agreement at March 31, 2019
is $4,962,023 with $2,758,960 of this amount being beyond agreed repayment terms.
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 an 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 $605,000
and $1,009,000 at March 31, 2019 and 2018, 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 7.50% at March 31, 2019 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, 2019 and 2018 there was $1,851,591 and $1,611,154 borrowed and outstanding under the
factoring agreement.
Under the Agreement, the Company assigned
receivables of $16,868,324 and $15,052,852 during the years ended March 31, 2019 and 2018, respectively. The uncollected balance
of non-recourse receivables held by the factor amounted to $2,549,986 and $2,410,680 at March 31, 2019 and 2018. Collected cash
maintained on deposit at March 31 2019 and 2018 with the factor earns interest at the factor’s prime rate of interest less
2.5 percent (effective rate of 3.00% and 2.25% at March 31, 2019 and 2018, respectively.) There was no cash on deposit with the
Factor at March 31, 2019 or 2018.
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
|
|
|
|
302,634
|
|
|
|
|
|
921,048
|
|
|
|
921,048
|
|
|
Less accumulated depreciation and amortization
|
|
|
(901,050
|
)
|
|
|
(885,463
|
)
|
|
|
|
$
|
19,998
|
|
|
$
|
35,585
|
|
Depreciation and amortization expense totaled $15,587 and $26,814
for fiscal years ended March 31, 2019 and 2018, 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 expired in March 2019. On October
24, 2018, we extended this operating lease to expire in April 2022. This lease is subject to increasing rentals at 2.5% per year.
In November 2018, the Company renewed its operating lease through February 2020 for a 3,400 square foot office in Naperville, Illinois.
This lease is subject to increasing rentals at three percent (3.0%) 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
$208,734 and $223,355 for the years ended March 31, 2019 and 2018, respectively.
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Total
|
|
|
Future minimum lease payments are as follows:
|
|
$
|
221,568
|
|
|
$
|
171,110
|
|
|
$
|
175,431
|
|
|
$
|
14,620
|
|
|
$
|
582,779
|
|
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.
On December 22, 2017, Staff Accounting Bulletin No.
118, or SAB 118, was issued to provide guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement
period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC
740,
Income Taxes
. We finalized our analysis within the measurement period in accordance with SAB 118. During the year ended
March 31, 2019, we did not make any changes to the provisional amounts recorded in our March 31, 2018 Annual Report on Form 10-K
in connection with 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%, which resulted in an approximately
$1.2 million reduction of the Company’s net deferred tax assets with a corresponding reduction to the valuation allowance.
.
The Deemed Repatriation Transition
Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”)
of our Hong Kong Joint Venture. To determine the amount of the Transition Tax, the Company must determine, in addition to other
factors, the amount of post-1986 E&P of the Hong Kong Joint Venture, as well as the amount of non-U.S. income taxes paid on
such earnings. The Company has determined that it does not owe a Transition Tax since it has sufficient net operating loss carryforwards
and foreign tax credit carryforwards to offset the E&P of its Hong Kong Joint Venture that are subject to the tax.
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,
2018, 2017, and 2016 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, 2019 and 2018, the Company
has total net federal and state operating loss carry forwards of approximately $278,431 and $9,301,000, respectively, which expire
in various amounts at dates from 2019 through 2033. 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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Federal benefit at statutory rate (21.0% for 2019 and 30.8% for 2018) before loss carry-forward
|
|
$
|
(283,077
|
)
|
|
$
|
(695,660
|
)
|
|
Non-repatriated loss of Hong Kong Joint Venture
|
|
|
220,478
|
|
|
|
382,027
|
|
|
Permanent and other differences
|
|
|
14,581
|
|
|
|
13,336
|
|
|
State income tax benefit – net of federal effect
|
|
|
(8,437
|
)
|
|
|
(31,785
|
)
|
|
Expiration of tax credits
|
|
|
132,439
|
|
|
|
236,628
|
|
|
Change in value of deferred tax assets due to change in effective rate
|
|
|
-
|
|
|
|
1,197,474
|
|
|
Change in deferred tax asset valuation allowance
|
|
|
(75,984
|
)
|
|
|
(1,102,020
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The individual components of the Company’s deferred tax
assets are as follows:
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Accruals and allowances
|
|
$
|
42,055
|
|
|
$
|
36,409
|
|
|
Inventory uniform capitalization
|
|
|
17,316
|
|
|
|
33,250
|
|
|
Net operating loss carry forward
|
|
|
68,745
|
|
|
|
2,298,116
|
|
|
Foreign tax credit carry forward
|
|
|
72,213
|
|
|
|
459,199
|
|
|
Research and development tax credit carry forward
|
|
|
61,701
|
|
|
|
61,701
|
|
|
Allowance for unrealizable deferred tax assets
|
|
|
(262,030
|
)
|
|
|
(2,888,675
|
)
|
|
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.
The Company had one customer that represented
12.2% and 13.9% of the Company’s net sales for the fiscal years ending March 31, 2019 and 2018, respectively.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)