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 nine-month periods ended December 31, 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. On December 12, 2022, Infinite Reality
terminated the Merger Agreement.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2022 and 2021
Sales. Net sales for the three months ended December 31, 2022, were $5,758,661
compared to $5,319,014 for the comparable three months in the prior year, an
increase of $439,647 (8.3%). Sales increased principally due to the Company's
ability to fill orders as delays in unloading inventory at California ports of
entry continued to abate during the period.
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
29.5% and 32.3% of sales for the quarters ended December 31, 2022, and 2021,
respectively. Gross margins
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were negatively impacted in the period ended December 31, 2022, principally due
to increases in the cost of certain electronic components and due to the mix of
products sold.
Expenses. Selling, general and administrative expenses were $1,178,502 for the
three months ended December 31, 2022, compared to $1,569,746 for the comparable
three months in the prior year. As a percentage of net sales, these expenses
decreased to 20.5% for the three-month period ended December 31, 2022, from
29.5% for the 2021 period. These expenses decreased as a percentage of net sales
principally due to a reduction in salaries expense, a reduction in legal and
consulting expenditures related to the potential merger, and a reduction in
freight, and other selling expenditures.
Research and development expenses were comparable at $101,670 for the
three-month period ended December 31, 2022, to $97,370 for the comparable
quarter of the prior year.
Interest Expense. Our interest expense was $76,755 for the quarter ended
September 30, 2022, compared to interest expense of $14,156 for the quarter
ended December 31, 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 $341,312 for the quarter ended December
31, 2022, compared to a net income of $35,351 for the corresponding quarter of
the prior fiscal year, a $305,961 (865.5%) increase in net income. The primary
reasons for the increase in the net income is supply chain disruptions have
begun to abate resulting in higher sales and due to reduced selling, general,
and administrative expense as described above.
Nine Months Ended December 31, 2022 and 2021
Sales. Net sales for the nine months ended December 31, 2022, were $16,251,106
compared to $15,259,235 for the comparable nine months in the prior period, an
increase of $991,871 (6.5%). 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 28.8% for the period ended December 31, 2022, and 29.8% for
the period ended December 31, 2021. Gross margins were negatively impacted in
the nine-month period ended December 31, 2022, principally due to increases in
the cost of certain electronic components and due to the mix of products sold.
Expenses. Selling, general and administrative expenses were $3,750,348 for the
nine months ended December 31, 2022, compared to $4,059,988 for the comparable
nine months in the prior year. As a percentage of sales, these expenses were
23.1% for the nine-month period ended December 31, 2022, and 26.6% for the
comparable 2021 period. These expenses decreased as a percentage of net sales
principally due to a reduction in salaries expense resulting from recording an
employee retention credit of $181,000 under the CARES Act, and a reduction in
work force. These expenses also decreased due to a reduction in legal and
consulting expenditures related to the potential merger.
Research and development expenses were comparable at $294,177 for the nine
months ended December 31, 2022, to $295,496 for the comparable period of the
prior year.
Interest Expense. Our interest expense was $200,776 for the nine months ended
December 31, 2022, compared to interest expense of $37,954 for the nine months
ended December 31, 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 $435,776 for the nine months ended
December 31, 2022, compared to a net income of $157,688 for the corresponding
period of the prior fiscal year, an increase in the net income of $278,088
(176.4%). The primary reasons for the increase in the net income is supply chain
disruptions have begun to abate resulting in higher sales. In addition, the
Company recorded a reduction in salaries expense resulting from an Employee
Retention Credit under the provisions of the Coronavirus Aid Relief, and
Economic Security Act, and due to reduced selling, general, and administrative
expense as described above.
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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 during the nine months
ended December 31, 2022, 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 no availability on this facility on
December 31, 2022. The Company's non-factored trade and other accounts
receivable net of allowance for uncollectible amounts totaled $817,589 on
December 31, 2022.
The Company's factor has withheld financing on approximately $725,000 of the
Company's accounts receivable subject to resolution of any disputes. The
resolution of disputed items is ongoing and subsequent to December 31, 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 either the fourth quarter of the fiscal year ending March 31,
2023, or the first quarter of 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 provided cash of $347,270 for the nine months ended
December 31, 2022. This was primarily due to net income of $435,776, a decrease
in inventories, prepaid expenses and other assets of $1,719,546, and a decrease
in accounts receivable and amount due from factor of $98,698. This was partially
offset by a decrease in accounts payable and accrued expenses of $1,921,596.
Operating activities used cash of $2,111,908 for the nine months ended December
31, 2021. This was primarily due to an increase in accounts receivable and
amounts due from factor of $1,657,549, an increase in inventories, prepaid
expenses and other of $808,245, and partially offset by an increase in accounts
payable and accrued expenses of $189,243, and net income of $157,688.
There were no investing activities for the nine-month periods ended December 31,
2022, or 2021.
Financing activities used cash of $585,850 during the nine months ended December
31, 2022, from net borrowing in excess of repayments from the factor of
$314,150, offset by repayments of the note payable to Eyston Company, Ltd. of
$900,000. Financing activities provided cash of $2,338,527 during the nine
months ended December 31, 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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