As used throughout this Report, "we," "our," "the Company" "USI" and similar
words refers to Universal Security Instruments, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
reflecting our current expectations with respect to our operations, performance,
financial condition, and other developments. These forward-looking statements
may generally be identified by the use of the words "may", "will", "believes",
"should", "expects", "anticipates", "estimates", and similar expressions. These
statements are necessarily estimates reflecting management's best judgment based
upon current information and involve a number of risks and uncertainties. We
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and readers are advised that
various factors could affect our financial performance and could cause our
actual results for future periods to differ materially from those anticipated or
projected. While it is impossible to identify all such factors, such factors
include, but are not limited to, those risks identified in our periodic reports
filed with the Securities and Exchange Commission.
OVERVIEW
We are in the business of marketing and distributing safety and security
products. Our financial statements detail our sales and other operational
results for the three-month periods ended June 30, 2022, and 2021.
In light of shutdowns, quarantines and other restrictions and delays in
operations and travel caused by or related to COVID-19 in Hong Kong, the PRC and
the United States, the Company has experienced delays in shipping and receiving
of products.
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.
The Company has developed products based on new smoke and gas detection
technologies, with what the Company believes are improved sensing technology and
product features. Most of our new technologies and features have been
trademarked under the trade name IoPhic.
Changes in international trade duties and other aspects of international trade
policy, both in the U.S. and abroad, could materially impact the cost of our
products. All of our products are imported from the Peoples Republic of China
(PRC). To date, only certain of our products such as Carbon Monoxide and
Photoelectric alarms, and USB devices, have been subjected to tariffs of 25%. We
are monitoring these developments and will determine our strategies as
additional information becomes available. Any increase in tariffs that is not
offset by an increase in our sales prices could have an adverse effect on our
business, financial position, results of operations or cash flows.
As previously reported, on February 25, 2022, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") by and among the Company
(USI), a wholly owned subsidiary of the Company D-U Merger Sub, Inc. a Delaware
corporation ("Merger Sub") and Infinite Reality, Inc., a Delaware corporation
("Infinite Reality"). On May 16, 2022, the Company filed with the United States
Securities Exchange Commission (SEC) a proxy statement and Form S-4 registration
statement in connection with the Merger.
RESULTS OF OPERATIONS
Three Months Ended June 30,2022 and 2021
Sales. Net sales for the three months ended June 30, 2022, were $4,635,304
compared to $4,667,998 for the comparable three months in the prior year, a
decrease of $32,694 (0.7%).
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Gross Profit Margin. Gross profit margin is calculated as net sales less cost of
goods sold expressed as a percentage of net sales. Our gross profit margin was
30.7% and 27.0% of sales for the quarters ended June 30, 2022, and 2021,
respectively. Gross profit margins for the period ended June 30, 2022, improved
due to variations in the mix of products sold.
Expenses. Selling, general and administrative expenses were $1,382,603 for the
three months ended June 30, 2022, compared to $1,133,139 for the comparable
three months in the prior year. As a percentage of net sales, these expenses
increased to 29.8% for the three-month period ended June 30, 2022, from 24.3%
for the 2021 period. These expenses increased as a percentage of net sales since
selling, general, and administrative expenses do not fluctuate in direct
proportion to sales. These expenses increased as a dollar amount due to
increases in freight costs, and due to legal and consulting expenses associated
with the prospective merger.
Research and development expenses were $89,262 for the three-month period ended
June 30, 2022, compared to $101,056 for the comparable quarter of the prior
year, a decrease of $11,794 (11.7%).
Interest Expense. Our interest expense was $55,496 for the quarter ended June
30, 2022, compared to interest expense of $9,489 for the quarter ended June 30,
2021. Interest expense is primarily dependent upon the total amounts borrowed on
average from our Factor, and on interest rates which vary with the prime rate of
interest.
Net (Loss) Income. We reported a net loss of $106,138 for the quarter ended June
30, 2022, compared to a net income of $14,641 for the corresponding quarter of
the prior fiscal year, a $120,779 (824.9%) decrease in net income. The primary
reason for the net loss is increased expenditures for freight costs and legal
and consulting expenses associated with the prospective merger.
Management Plans and Liquidity
In light of the shutdowns, quarantines and other restrictions and delays in
operations and travel caused by or related to COVID-19 in Hong Kong, the PRC and
the United States, the Company has experienced delays in shipping and receiving
of products.
Our short-term borrowings to finance any operating losses, trade accounts
receivable, and foreign inventory purchases are provided pursuant to the terms
of its Factoring Agreement with Merchant Factors Corporation (Merchant or
Factor). Borrowings under the 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 Merchant's assessment
of the Company's receivables, inventory, and financial condition at the time of
each request for an advance. The Company had fully utilized the availability of
this facility on June 30, 2022. The Company's non-factored trade and other
accounts receivable net of allowance for uncollectible amounts totaled
approximately $493,000 on June 30, 2022. We anticipate that future availability
provided from Merchant, cash flows from operations, and the collection of
non-factored trade accounts receivable will provide sufficient working capital
for the next twelve months following the date of this report.
The Company has a recent history of sales that are insufficient to generate
profitable operations and has limited sources of financing. Management's plan in
response to these conditions continues to be to increase 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,
the Company has a short-term note payable due to its principal supplier (Eyston
Company Ltd.) that requires monthly payments beginning April, 2022 of $100,000
per month and until the principal balance of approximately $1,081,000 is repaid.
The Company has a long history of working closely with Eyston and believes that
forbearance or extension of the payment terms of the short-term note payable can
be achieved if required to meet short-term cash flow requirements. Further, the
Company's factor has withheld financing on certain of the Company's accounts
receivable subject to resolution of any disputes. The resolution of disputed
items is ongoing and subsequent to June 30, 2022, the Company continues to
provide support for resolution of any disputed items. The Company expects that
all amounts in dispute will be resolved satisfactorily. Finally, the Company has
filed requests for refunds of customs payments with US Customs and Border
Protection for approximately $300,000 (including interest expected) for
overpayments of duty. The Company expects this refund to be available during the
second quarter of fiscal year 2023. The Company has seen positive results on
this plan as reflected by increased sales of its product offerings. Management
expects sales 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
for the next twelve months following the issuance date of this report. Cash
flows and credit availability is expected to be adequate to fund operations for
one year from the issuance date of this report.
Operating activities used cash of $562,395 for the three months ended June 30,
2022. This was primarily due to a increase in inventories, prepaid expenses and
other of $574,655, and a decrease in accounts payable and accrued expenses of
$318,965, a net loss of $106,138,
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and offset by a decrease in accounts receivable and due from factor of $432,250.
Operating activities used cash of $196,612 for the three months ended June 30,
2021. This was primarily due to a increase in accounts receivable and amounts
due from factor of $321,292, and offset by a decrease in inventories, prepaid
expenses and other of $27,731, and an increase in accounts payable and accrued
expenses of $80,385, and net income of $14,641.
There were no investing activities for the three months ended June 30, 2022, or
2021.
Financing activities provided cash of $379,541 and provided cash of $86,379
during the three months ended June 30, 2022, and 2021, respectively, which is
comprised of borrowings net of advances from the factor of $679,541 and
repayment of a note payable to Eyston Company Ltd. of $300,000 for the three
months ended June 30, 2022, and borrowings net of advances of $86,379 from the
factor for the period ended June 30, 2021.
CRITICAL ACCOUNTING POLICIES
In the notes to the consolidated financial statements, and in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in our Form 10-K, we have disclosed those accounting
policies that we consider to be significant in determining our results of
Operations and financial condition. There have been no material changes to those
policies that we consider to be significant since the filing of our Form 10-K.
The accounting principles used in preparing our unaudited condensed consolidated
financial statements conform in all material respects to accounting principles
generally accepted in the United States of America.
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