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 and six-month periods ended September 30, 2022 and 2021.
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.
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 wiring 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 September 30, 2022 and 2021
Sales. Net sales for the three months ended September 30, 2022, were $5,857,141
compared to $5,272,223 for the comparable three months in the prior year, an
increase of $584,918 (11.1%). Sales increased principally due to the Company's
ability to fill orders as delays in unloading inventory at California ports of
entry began to abate during the period.
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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
26.7% and 29.9% of sales for the quarters ended September 30, 2022, and 2021,
respectively. Gross margins were negatively impacted in the period ended
September 30, 2022, principally due to increases in the cost of certain
electronic components.
Expenses. Selling, general and administrative expenses were $1,189,243 for the
three months ended September 30, 2022, compared to $1,357,103 for the comparable
three months in the prior year. As a percentage of net sales, these expenses
decreased to 20.3% for the three-month period ended September 30, 2022, from
25.7% for the 2021 period. These expenses decreased as a percentage of net
sales principally due to a reduction in salaries expense resulting from
recording the employee retention credit of $181,000 under the CARES Act.
Research and development expenses were comparable at $103,245 for the
three-month period ended September 30, 2022 to $97,070 for the comparable
quarter of the prior year.
Interest Expense. Our interest expense was $68,525 for the quarter ended
September 30, 2022, compared to interest expense of $14,309 for the quarter
ended September 30, 2021. Interest expense is dependent upon the total amounts
borrowed from the Factor and the increase in interest rates during the period as
compared to the corresponding period of the prior year.
Net Income. We reported net income of $200,602 for the quarter ended September
30, 2022, compared to a net income of $107,696 for the corresponding quarter of
the prior fiscal year, a $92,906 (86.3%) increase in net income. The primary
reasons for the increase in the net income is a reduction in salaries expense
resulting from recording the employee retention credit under the CARES Act.
Six Months Ended September 30, 2022 and 2021
Sales. Net sales for the six months ended September 30, 2022, were $10,492,445
compared to $9,940,221 for the comparable six months in the prior period, an
increase of $552,224 (5.6%). Sales increased principally due to the Company's
ability to fill orders as delays in unloading inventory at California ports of
entry began to abate during the period.
Gross Profit Margin. The gross profit margin is calculated as net sales less
cost of goods sold expressed as a percentage of net sales. The Company's gross
profit margin was 28.4% for the period ended September 30, 2022, and 28.5% for
the period ended September 30, 2021. Gross margins were negatively impacted in
the six-month period ended September 30, 2022, principally due to the cost of
certain electronic components.
Expenses. Selling, general and administrative expenses were $2,571,846 for the
six months ended September 30, 2022, compared to $2,490,242 for the comparable
six months in the prior year. As a percentage of sales, these expenses were
24.5% for the six-month period ended September 30, 2022, and 25.1% for the
comparable 2021 period. These expenses decreased as a percentage of net sales
since selling, general, and administrative expenses do not fluctuate in direct
proportion to sales.
Research and development expenses were comparable at $192,507 for the six months
ended September 30, 2022, to $198,126 for the comparable period of the prior
year.
Interest Expense. Our interest expense was $124,021 for the six months ended
September 30, 2022, compared to interest expense of $23,798 for the six months
ended September 30, 2021. Interest expense is dependent upon the total amounts
borrowed from the Factor and the increase in interest rates during the period as
compared to the corresponding period of the prior year.
Net Income. We reported net income of $94,464 for the six months ended September
30, 2022, compared to a net income of $122,337 for the corresponding period of
the prior fiscal year, a decrease in the net income of $27,873 (22.8%). The
primary reasons for the decrease in the net income is increased costs for
certain electronic components caused by supply chain disruptions and higher
interest expense, partially offset by the inclusion of approximately $181,000 of
Employee Retention Credit under the provisions of the Coronavirus Aid Relief,
and Economic Security Act.
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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 approximately $135,000 of
availability of this facility on September 30, 2022. The Company's non-factored
trade and other accounts receivable net of allowance for uncollectible amounts
totaled approximately $1,040,000 on September 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.
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 remaining principal balance of
approximately $481,000 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
September 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. In addition, 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 tariff. The Company
expects this refund to be available during the fiscal year ending March 31,
2023. Finally, the Company has filed requests for refunds of payroll taxes paid
for approximately $181,000 for Employee Retention Credits under the provisions
of The Coronavirus Aid Relief, and Economic Security Act (CARES Act). The
Company expects this refund to be available during the fiscal year ending March
31, 2024. 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 $378,841 for the six months ended September
30, 2022. This was primarily due to an increase in accounts receivable and
amount due from factor of $1,276,912, a decrease in accounts payable and accrued
expenses of $177,454, and partially offset by a decrease in inventories, prepaid
expenses and other of $970,998 and by net income of $94,464. Operating
activities used cash of $2,386,577 for the six months ended September 30, 2021.
This was primarily due to an increase in accounts receivable and amount due from
factor of $1,298,992, an increase in inventories, prepaid expenses and other of
$977,530, a decrease in accounts payable and accrued expenses of $238,585, and
partially offset by net income of $122,337.
There were no investing activities for the six-month periods ended September 30,
2022, or 2021.
Financing activities provided cash of $118,984 during the six months ended
September 30, 2022, from net borrowing in excess of repayments from the factor
of $718,984, offset by repayments of the note payable to Eyston Company, Ltd. of
$600,000. Financing activities provided cash of $2,394,543 during the six
months ended September 30, 2021 from net borrowing in excess of repayments from
the factor.
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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UNIVERSAL SECURITY INSTRUMENTS, INC. 