Company Quick10K Filing
Universal Security Instruments
Price0.83 EPS-1
Shares2 P/E-1
MCap2 P/FCF8
Net Debt-0 EBIT-2
TEV2 TEV/EBIT-1
TTM 2019-09-30, in MM, except price, ratios
10-Q 2019-12-31 Filed 2020-02-19
10-Q 2019-09-30 Filed 2019-11-19
10-Q 2019-06-30 Filed 2019-08-19
10-K 2019-03-31 Filed 2019-07-15
10-Q 2018-12-31 Filed 2019-02-19
10-Q 2018-09-30 Filed 2018-11-19
10-Q 2018-06-30 Filed 2018-08-20
10-K 2018-03-31 Filed 2018-07-16
10-Q 2017-12-31 Filed 2018-02-20
10-Q 2017-09-30 Filed 2017-11-17
10-Q 2017-06-30 Filed 2017-08-21
10-K 2017-03-31 Filed 2017-07-14
10-Q 2016-12-31 Filed 2017-02-21
10-Q 2016-09-30 Filed 2016-12-02
10-Q 2016-06-30 Filed 2016-10-12
10-K 2016-03-31 Filed 2016-09-28
10-Q 2015-12-31 Filed 2016-02-18
10-Q 2015-09-30 Filed 2015-12-02
10-Q 2015-06-30 Filed 2015-09-28
10-K 2015-03-31 Filed 2015-08-25
10-Q 2014-12-31 Filed 2015-02-17
10-Q 2014-09-30 Filed 2014-11-19
10-Q 2014-06-30 Filed 2014-08-20
10-K 2014-03-31 Filed 2014-08-04
10-Q 2013-12-31 Filed 2014-02-13
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-16
10-K 2013-03-31 Filed 2013-06-27
10-Q 2012-12-31 Filed 2013-02-13
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-13
10-K 2012-03-31 Filed 2012-06-28
10-Q 2011-12-31 Filed 2012-02-13
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-K 2011-03-31 Filed 2011-06-28
10-Q 2010-12-31 Filed 2011-02-11
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-13
10-K 2010-03-31 Filed 2010-06-23
10-Q 2009-12-31 Filed 2010-02-16
8-K 2020-05-06
8-K 2020-04-27
8-K 2019-10-31
8-K 2019-07-12
8-K 2018-10-26
8-K 2018-07-09

UUU 10Q Quarterly Report

Part I - Financial Information
Item 1.Condensed Consolidated Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4.Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 6.Exhibits
EX-31.1 tm205254d1_ex31-1.htm
EX-31.2 tm205254d1_ex31-2.htm
EX-32.1 tm205254d1_ex32-1.htm
EX-99.1 tm205254d1_ex99-1.htm

Universal Security Instruments Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
30241812602012201420172020
Assets, Equity
4.83.31.80.4-1.1-2.62012201420172020
Rev, G Profit, Net Income
1.61.00.4-0.3-0.9-1.52012201420172020
Ops, Inv, Fin

10-Q 1 tm205254d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly period ended December 31, 2019

 

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-31747

 

UNIVERSAL SECURITY INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland 52-0898545

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

11407 Cronhill Drive, Suite A

Owings Mills, Maryland

 

21117

 (Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (410) 363-3000

 

Inapplicable

(Former name, former address and former fiscal year if changed from last report.)

 

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). Yes  x No ¨

 

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. Large accelerated filer ¨ Accelerated filer ¨ Non-Accelerated Filer x Smaller Reporting Company x Emerging Growth Company ¨

 

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 Exchange Act). Yes ¨ No x

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock UUU NYSE MKT LLC

 

At February 14, 2020, the number of shares outstanding of the registrant’s common stock was 2,312,887.

 

 

 

   

 

 

TABLE OF CONTENTS

 

Page
Part I - Financial Information  
     
  Item 1. Condensed Consolidated Financial Statements:  
     
    Condensed Consolidated Balance Sheets at December 31, 2019 (unaudited) and March 31, 2019 3
       
    Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2019 and 2018 (unaudited) 4
       
    Condensed Consolidated Statements of Operations for the Nine Months Ended December 31, 2019 and 2018 (unaudited) 5
       
    Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended December 31, 2019 and 2018 (unaudited) 6
       
    Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended December 31, 2019 (unaudited) 7
   
    Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended December 31, 2018 (unaudited) 8
   
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2019 and 2018 (unaudited) 9
       
    Notes to Condensed Consolidated Financial Statements (unaudited) 10
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
  Item 4. Controls and Procedures 19
     
Part II - Other Information  
     
  Item 1. Legal Proceedings 20
     
  Item 6. Exhibits 20
     
    Signatures 22

 

 2 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   (unaudited)   (audited) 
   December 31, 2019   March 31, 2019 
ASSETS          
CURRENT ASSETS          
Cash  $177,337   $374,472 
Accounts receivable:          
Trade, less allowance for doubtful accounts   1,848    365,293 
Receivables from employees   55,549    54,916 
Receivable from Hong Kong Joint Venture   271,467    45,217 
    328,864    465,426 
           
Amount due from factor   1,800,891    2,549,986 
Inventories – finished goods   6,563,829    6,852,305 
Prepaid expenses   145,711    145,190 
           
TOTAL CURRENT ASSETS   9,016,632    10,387,379 
           
INVESTMENT IN HONG KONG JOINT VENTURE   7,004,447    8,441,889 
INTANGIBLE ASSET - NET   50,307    53,660 
PROPERTY AND EQUIPMENT – NET   386,252    19,998 
OTHER ASSETS   4,000    4,000 
           
TOTAL ASSETS  $16,461,638   $18,906,926 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Line of credit - factor  $1,344,661   $1,851,591 
Short-term portion of lease liability   155,564    - 
Accounts payable - Hong Kong Joint Venture   5,616,296    4,962,023 
Accounts payable - trade   414,778    616,444 
Accrued liabilities:          
Accrued payroll and employee benefits   216,551    132,132 
Accrued commissions and other   235,816    470,876 
           
TOTAL CURRENT LIABILITIES   7,983,666    8,033,066 
           
LONG-TERM PORTION OF LEASE LIABILITY   211,528    - 
COMMITMENTS AND CONTINGENCIES   -    - 
           
SHAREHOLDERS’ EQUITY          
Common stock, $.01 par value per share; authorized 20,000,000 shares; 2,312,887 shares issued and outstanding at December 31, 2019 and March 31, 2019   23,129    23,129 
Additional paid-in capital   12,885,841    12,885,841 
Accumulated Deficit   (4,968,467)   (2,646,866)
Accumulated other comprehensive income   325,941    611,756 
TOTAL SHAREHOLDERS’ EQUITY    8,266,444    10,873,860 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $16,461,638   $18,906,926 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended December 31, 
   2019   2018 
Net sales  $3,223,678   $4,491,862 
Cost of goods sold – acquired from Joint Venture   2,240,801    2,974,182 
Cost of goods sold – other   212,885    456,302 
           
GROSS PROFIT   769,992    1,061,378 
           
Selling, general and administrative expense   1,083,913    1,120,585 
Research and development expense   169,768    86,461 
           
Operating loss   (483,689)   (145,668)
           
Other expense:          
Loss from investment in Hong Kong Joint Venture   (408,836)   (255,401)
Interest expense   (119,308)   (115,924)
           
NET LOSS  $(1,011,833)  $(516,993)
           
Loss per share:          
Basic and diluted  $(0.44)  $(0.22)
           
Shares used in computing net loss per share:          
Weighted average basic and diluted shares outstanding   2,312,887    2,312,887 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 

 

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Nine Months Ended December 31, 
   2019   2018 
Net sales  $11,189,238   $13,064,110 
Cost of goods sold – acquired from Joint Venture   7,312,941    8,389,977 
Cost of goods sold – other   771,130    916,119 
           
GROSS PROFIT   3,105,167    3,758,014 
           
Selling, general and administrative expense   3,455,661    3,416,924 
Research and development expense   487,144    360,766 
           
Operating loss   (837,638)   (19,676)
           
Other expense:          
Loss from investment in Hong Kong Joint Venture    (1,151,627)   (764,197)
Interest expense   (332,336)   (293,277)
           
NET LOSS  $(2,321,601)  $(1,077,150)
           
Loss per share:          
Basic and diluted  ($1.00)  ($0.47)
           
Shares used in computing net loss per share:          
Weighted average basic and diluted shares outstanding   2,312,887    2,312,887 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 5 

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE LOSS

(Unaudited)

  

   Three Months Ended Dec. 31,   Nine Months Ended Dec. 31, 
   2019    2018   2019    2018 
NET LOSS   $(1,011,833)  $(516,993)  $(2,321,601)  $(1,077,150)
                     
Other Comprehensive (Loss) Income Company’s portion of Hong Kong Joint Venture’s other comprehensive (loss) income:                    
Currency translation   10,549    (218,016)   (243,418)   (655,876)
Unrealized (loss) gain on investment securities   (1,412)   58,631    (42,397)   7,877 
Total Other Comprehensive (Loss) Income   9,137    (159,385)   (285,815)   (647,999)
COMPREHENSIVE LOSS  $(1,002,696)  $(676,378)  $(2,607,416)  $(1,725,149)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 6 

 

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED DECEMBER 31, 2019

 

   Common
Shares
   Stock
Amount
   Additional
Paid-In
Capital
   Accumulated
Deficit
   AOCI*   Total 
Balance at April 1, 2019   2,312,887   $23,129   $12,885,841   $(2,646,866)  $611,756   $10,873,860 
                               
Currency translation                       (100,773)   (100,773)
Unrealized loss on investment securities                       (48,797)   (48,797)
                               
Net loss                  (608,954)        (608,954)
                               
Balance at June 30, 2019   2,312,887   $23,129   $12,885,841   $(3,255,820)  $462,186   $10,115,336 
                               
Currency translation                       (153,194)   (153,194)
Unrealized gain on investment securities                       7,812    7,812 
                               
Net loss                  (700,814)        (700,814)
                               
Balance at Sept. 30, 2019   2,312,887   $23,129   $12,885,841   $(3,956,634)  $316,804   $9,269,140 
                               
Currency translation                       10,549    10,549 
Unrealized loss on investment securities                       (1,412)   (1,412)
                               
Net loss                  (1,011,833)        (1,011,833)
                               
Balance at Dec. 31, 2019   2,312,887   $23,129   $12,885,841   $(4,968,467)  $325,941   $8,266,444 

 

* Accumulated Other Comprehensive Income

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 7 

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED DECEMBER 31, 2018

 

   Common
Shares
   Stock
Amount
   Additional
Paid-In
Capital
   Accumulated
Deficit
   AOCI*   Total 
Balance at April 1, 2018   2,312,887   $23,129   $12,885,841   $(1,298,880)  $1,143,246   $12,753,336 
                               
Currency translation                       (379,479)   (379,479)
Unrealized loss on investment securities                       (9,291)   (9,291)
                               
Net loss                  (438,833)        (438,833)
                               
Balance at June 30, 2018   2,312,887   $23,129   $12,885,841   $(1,737,713)  $754,476   $11,925,733 
                               
Currency translation                       (58,381)   (58,381)
Unrealized loss on investment securities                       (41,463)   (41,463)
                               
Net loss                  (121,324)        (121,324)
                               
Balance at Sept. 30, 2018   2,312,887   $23,129   $12,885,841   $(1,859,037)  $654,632   $11,704,565 
                               
Currency translation                       (218,016)   (218,016)
Unrealized gain on investment securities                       58,631    58,631 
                               
Net loss                  (516,993)        (516,993)
                               
Balance at Dec. 31, 2018   2,312,887   $23,129   $12,885,841   $(2,376,030)  $495,247   $11,028,187 

 

* Accumulated Other Comprehensive Income

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 8 

 

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended December 31, 
   2019   2018 
OPERATING ACTIVITIES:          
Net loss  $(2,321,601)  $(1,077,150)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   4,191    17,297 
Loss from investment in Hong Kong Joint Venture   1,151,627    764,197 
Changes in operating assets and liabilities:          
Decrease (Increase) in accounts receivable and amounts due from factor   885,657    (178,028)
Decrease (Increase) in inventories, prepaid expenses, and other   287,955    (1,677,649)
Increase in accounts payable and accrued expenses   301,966    2,250,962 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   309,795    99,629 
           
INVESTING ACTIVITIES:          
Purchase of equipment   -    - 
NET CASH USED IN INVESTING ACTIVITIES   -    - 
           
FINANCING ACTIVITIES:          
Net repayment of Line of Credit - Factor   (506,930)   (83,442)
           
NET CASH USED IN FINANCING ACTIVITIES   (506,930)   (83,442)
           
NET (DECREASE) INCREASE IN CASH   (197,135)   16,187 
           
Cash at beginning of period   374,472    128,161 
           
CASH AT END OF PERIOD  $177,337   $144,348 
           
SUPPLEMENTAL INFORMATION:          
Interest paid  $299,738   $208,860 
Income taxes paid   -    - 
Supplemental disclosures of non-cash activities:          
Right-of-use asset in exchange for operating lease liability  $475,538    - 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9

 

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

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, 2019, 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, 2019 audited financial statements filed with the Securities and Exchange Commission on Form 10-K on July 16, 2019. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.

 

Management Plans

 

The Company had net losses of $2,321,601 for the nine months ended December 31, 2019 and $1,347,986 and $2,262,310 for the years ended March 31, 2019 and 2018, respectively. Furthermore, as of December 31, 2019, working capital (computed as the excess of current assets over current liabilities) decreased by $1,321,347 from $2,354,313 at March 31, 2019, to $1,032,966 at December 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 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 $466,000 at December 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 sealed battery alarms. These amounts are unsecured, bear interest at 5.5% per annum on amounts outstanding at November 13, 2019 and 5.125% per annum on amounts outstanding thereafter, and provide for repayment terms of 120 days for each purchase. The balance outstanding under this agreement at December 31, 2019 was $5,616,296 with $3,939,884 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.

 

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. Notwithstanding the above, the Company has seen substantial increases in its cost structure including the imposition of tariffs on the importation of its products from the Peoples Republic of China and in interest incurred on its credit facilities through December 31, 2019. In addition, sales revenue for the nine months ended December 31, 2019 has not met management’s expectations. Though no assurances can be given, if management’s plan is successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs. Cash flows and credit availability from the Factor and the Hong Kong Joint Venture is 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 December 31, 2019, the Company had borrowings of $1,344,661 under the Agreement, and the Company had remaining availability under the Agreement of approximately $466,000. 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 6.75% at December 31, 2019). 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.

 

10

 

 

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 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 three and nine months ended December 31, 2019 and 2018 are as follows:

 

   Three months ended   Nine months ended 
   Dec. 31, 2019   Dec. 31, 2018   Dec. 31, 2019   Dec. 31, 2018 
Sales of products acquired from our HKJV  $2,722,428   $3,965,173   $9,943,661   $11,857,131 
Sales of GFCI’s and ventilation fans   501,250    526,689    1,245,577    1,206,979 
   $3,223,678   $4,491,862   $11,189,238   $13,064,110 

  

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.

 

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Joint Venture

 

The Company and its joint venture partner, a Hong Kong corporation, each owns a 50% interest in the Hong Kong joint venture that manufactures security products in its facilities located in the People’s Republic of China. There are no material differences between US-GAAP and the basis of accounting used by the Hong Kong Joint Venture. The following represents summarized balance sheet and income statement information of the Hong Kong Joint Venture as of and for the nine months ended December 31, 2019 and 2018:

 

  

2019

(Unaudited)

  

2018

(Unaudited)

 
Net sales  $6,600,373   $11,175,101 
Gross profit   354,003    1,536,150 
Net loss   (2,399,054)   (1,175,720)
Total current assets   12,008,548    14,382,102 
Total assets   17,924,029    20,699,448 
Total current liabilities   2,694,435    2,759,398 
Total liabilities   3,594,691    3,148,268 

  

During the nine months ended December 31, 2019 and 2018 the Company purchased $6,204,745 and $9,316,375, respectively, of products directly from the Hong Kong Joint Venture for resale. For the nine months ended December 31, 2019 the Company has increased its investment in the Joint Venture to reflect a decrease of $47,900 in inter-Company profit on purchases held by the Company in inventory. For the nine months ended December 31, 2018 the Company has decreased its investment in the net earnings of the Joint Venture to reflect an increase of $176,337 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.

 

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.

 

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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 December 31, 2019 and 2018, an allowance of approximately $57,000 has been provided for uncollectible trade accounts receivable.

 

Net Loss per Common Share

 

Basic net loss per common share is computed based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings 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 or nine month periods ended December 31, 2019 or 2018. As a result, basic and diluted weighted average common shares outstanding are identical for the three and nine month periods ended December 31, 2019 and 2018.

 

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.

 

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.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to previous guidance for operating leases with the election of the practical expedient. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the standard on April 1, 2019, the date it became effective for public companies based on the Company’s fiscal year, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to the accumulated deficit as of April 1, 2019 as a result of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided certain conditions were met.

 

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The impact of the adoption of this guidance on the Company’s condensed consolidated financial statements is discussed below:

 

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 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 $475,538 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 December 31, 2019, the Company had right-of-use assets of $368,670 and lease liabilities of $367,092 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 December 31, 2019 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were 2.33 years and 6.0%, respectively. During the nine months ended December 31, 2019, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $125,415, which is included as an operating cash outflow within the condensed consolidated statements of cash flows. During the nine months ended December 31, 2019, the operating lease costs related to the Company’s operating leases was $117,674, which is included in operating costs and expenses in the condensed consolidated statements of operations. During the nine months ended December 31, 2019, 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 December 31, 2019 for the fiscal year ending March 31, 2020:

 

2020 (remainder)  $27,156 
2021   171,462 
2022   175,792 
2023   14,670 
      
Total operating lease payments  $389,080 
Less: amounts representing interest   (21,988)
Present value of net operating lease payments  $367,092 
Less: current portion   155,564 
Long-term portion of operating lease obligations  $211,528 

 

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 which are primarily manufactured through our 50%-owned Hong Kong Joint Venture. Our financial statements detail our sales and other operational results only, and report the financial results of the Hong Kong Joint Venture using the equity method. Accordingly, the following discussion and analysis of the three and nine month periods ended December 31, 2019 and 2018 relate to the operational results of the Company. A discussion and analysis of the Hong Kong Joint Venture’s operational results for these periods is presented below under the heading “Joint Venture.”

 

The Company has developed new products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology and product features. To date we have applied for thirteen patents on these new technologies and features. We have been granted ten patents (including six for new technologies and 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.

 

Results of Operations

 

Three Months Ended December 31, 2019 and 2018

 

Sales. Net sales for the three months ended December 31, 2019 were $3,223,678 compared to $4,491,862 for the comparable three months in the prior year, a decrease of $1,268,184 (28.2%). Sales decreased principally due to reduced sales for rebuilding projects in Puerto Rico due to the delay in emergency management funding and to resistance to the pass through of increased costs associated with tariffs on goods imported from the Peoples Republic of China.

 

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 23.9% and 23.6% of sales for the quarters ended December 31, 2019 and 2018, respectively.

 

Expenses. Selling, general and administrative expenses were $1,083,913 for the three months ended December 31, 2019, compared to $1,120,585 for the comparable three months in the prior year. As a percentage of net sales, these expenses increased to 33.6% for the three month period ended December 31, 2019, from 24.9% for the 2018 period. These expenses increased as a percentage of net sales since selling, general, and administrative expenses do not fluctuate in direct proportion to sales.

 

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Research and development expenses were $169,768 for the three month period ended December 31, 2019 compared to $86,461 for the comparable quarter of the prior year, an increase of $83,307 (96.4%). The primary reason for the increase is amounts paid to engineering consultants for services towards meeting revised smoke alarm testing standards proposed for the year 2020.

 

Interest Expense. Our interest expense was $119,308 for the quarter ended December 31, 2019, compared to interest expense of $115,924 for the quarter ended December 31, 2018. Interest expense is dependent upon the total amounts borrowed on average from the Factor and on extended trade payables due to the Hong Kong Joint Venture and on interest rates which vary with the prime rate of interest.

 

Net Loss. We reported a net loss of $1,011,833 for the quarter ended December 31, 2019, compared to a net loss of $516,993 for the corresponding quarter of the prior fiscal year, a $494,840 (95.7%) increase in the net loss. The primary reason for the increase in the net loss is the decrease in sales as discussed above, the imposition of tariffs, and the increase in our net loss of the Hong Kong Joint Venture.

 

Nine Months Ended December 31, 2019 and 2018

 

Sales. Net sales for the nine months ended December 31, 2019 were $11,189,238 compared to $13,064,110 for the comparable nine months in the prior period, a decrease of $1,874,872 (14.3%). Sales decreased principally due to reduced sales for rebuilding projects in Puerto Rico due to the delay in emergency management funding and to resistance to the pass through of increased costs associated with tariffs on goods imported from the Peoples Republic of China.

 

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 27.8% for the nine month period ended December 31, 2019 and 28.8% for the nine month period ended December 31, 2018. The decrease in gross profit margin was primarily due to the imposition of tariffs and the mix of products sold to differing customers.

 

Expenses. Selling, general and administrative expenses were $3,455,661 for the nine months ended December 31, 2019 compared to $3,416,924 for the comparable nine months in the prior year. As a percentage of sales, these expenses were 30.9% for the nine month period ended December 31, 2019 and 26.2% for the comparable 2018 period. These expenses increased 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 $487,144 for the nine months ended December 31, 2019 compared to $360,766 for the comparable period of the prior year, an increase of $126,378 (35.0%). The primary reason for the increase is amounts paid to engineering consultants for services towards meeting revised smoke alarm testing standards proposed for the year 2020.

 

Interest Expense. Our interest expense was $332,336 for the nine months ended December 31, 2019, compared to interest expense of $293,277 for the nine months ended December 31, 2018. Interest expense is dependent upon the total amounts borrowed on average from the Factor and on extended trade payables due to the Hong Kong Joint Venture and on interest rates which vary with the prime rate of interest.

 

Net Loss. We reported a net loss of $2,321,601 for the nine months ended December 31, 2019 compared to a net loss of $1,077,150 for the corresponding period of the prior fiscal year, an increase in the net loss of $1,244,451 (115.5%). The primary reason for the increase in the net loss is the decrease in sales as discussed above, the imposition of tariffs, and the increase in our net loss of the Hong Kong Joint Venture.

 

Joint Venture

 

Net Sales. Net sales of the Joint Venture for the three and nine months ended December 31, 2019 were $1,680,617 and $6,600,373 respectively, compared to $3,218,878 and $11,175,101, respectively, for the comparable period in the prior fiscal year. The 47.8% and 40.9% decreases in net sales by the Joint Venture for the respective three and nine month periods are due to decreased sales to the Company and to unaffiliated customers.

 

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Gross Profit Margin. Gross margins of the Joint Venture for the three month period ended December 31, 2019 decreased to (0.9)% from 13.1% for the 2018 corresponding period. For the nine month period ended December 31, 2019, gross margins were 5.4% compared to 13.8% for the same period of the prior year. Gross margins depend on sales volume of various products, with varying margins. Lower sales and manufacturing production during the December 31, 2019 period do not allow the full absorption of fixed factory costs and negatively impact gross margins. In addition, foreign currency exchange gains and/or losses and changes in inventory reserves impact gross margins.

 

Expenses. Selling, general and administrative expenses were $984,358 and $3,068,158 respectively, for the three and nine month periods ended December 31, 2019, compared to $1,022,455 and $3,265,526 in the prior year’s respective periods. As a percentage of sales, expenses were 58.6% and 46.5% for the three and nine month periods ended December 31, 2019, compared to 31.8% and 29.2% for the three and nine month periods ended December 31, 2018. The changes in selling, general and administrative expense as a percent of sales for the three and nine month periods were primarily due to costs that do not change at the same rate as changes in sales volume.

 

Interest Income.  Interest income on assets held for investment was $64,501 and $293,375 respectively, for the three and nine month periods ended December 31, 2019, compared to interest income of $67,287 and $281,976, respectively, for the prior year’s periods. Interest income is dependent on yields and on the average balance of assets held for investment and amounts due from the Company.

 

Net Loss. Net losses for the three and nine months ended December 31, 2019 were $902,247 and $2,399,054 respectively, compared to net losses of $426,316 and $1,175,720, respectively, in the comparable periods last year. The decrease in net earnings for the three and nine month periods ended December 31, 2019 is due primarily to decreased sales to the company and to unaffiliated customers.

 

Liquidity. Cash needs of the Joint Venture are currently met by funds generated from the sale of assets held for investment. During the nine months ended December 31, 2019, working capital decreased by $2,294,585 from $11,608,698 on March 31, 2019 to $9,314,113 on December 31, 2019.

  

Management Plans and Liquidity

 

The Company had net losses of $2,321,601 for the nine months ended December 31, 2019 and $1,347,986 and $2,262,310 for the years ended March 31, 2019 and 2018, respectively. Furthermore, as of December 31, 2019, working capital (computed as the excess of current assets over current liabilities) decreased by $1,321,347 from $2,354,313 at March 31, 2019, to $1,032,966 at December 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 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 $466,000 at December 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 sealed battery alarms. These amounts are unsecured, bear interest at 5.5% per annum on amounts outstanding at November 13, 2019 and 5.125% per annum on amounts outstanding thereafter, and provide for repayment terms of 120 days for each purchase. The balance outstanding under this agreement at December 31, 2019 was $5,616,296 with $3,939,884 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.

 

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. Notwithstanding the above, the Company has seen substantial increases in its cost structure including the imposition of tariffs on the importation of its products from the Peoples Republic of China and in interest incurred on its credit facilities through December 31, 2019. In addition, sales revenue for the nine months ended December 31, 2019 has not met management’s expectations. Though no assurances can be given, if management’s plan is successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs. Cash flows and credit availability from the Factor and the Hong Kong Joint Venture is expected to be adequate to fund operations for one year from the issuance date of this report.

 

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Operating activities provided cash of $309,795 for the nine months ended December 31, 2019. This was primarily due to a decrease in accounts receivable and amounts due from factor of $885,657, an increase in accounts payable and accrued expenses of $301,966, a decrease in inventories, prepaid expenses and other of $287,955,and offset by a net loss of $2,321,601. The net loss includes a non-cash loss from the investment in the Hong Kong Joint Venture of $1,151,627. Operating activities provided cash of $99,629 for the nine months ended December 31, 2018. This was primarily due to an increase in accounts payable and accrued expenses of $2,250,962 and offset by a net loss of $1,077,150 and an increase in accounts receivable and amounts due from factor of $178,028, and an increase in inventories, prepaid expenses and other of $1,677,649. The net loss includes a non-cash loss from the investment in the Hong Kong Joint Venture of $764,197.

 

There were no investing activities for the nine months ended December 31 2019 or 2018

 

Financing activities used cash of $506,930 during the nine months ended December 31, 2019 and used cash of $83,442 during the nine months ended December 31, 2018, which is comprised of repayments net of advances on the line of credit from our 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. Except as disclosed below, 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 U.S.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to previous guidance for operating leases with the election of the practical expedient. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the standard on April 1, 2019, the date it became effective for public companies based on the Company’s fiscal year, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to the accumulated deficit as of April 1, 2019 as a result of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided certain conditions were met.

 

The impact of the adoption of this guidance on the Company’s condensed consolidated financial statements is discussed below:

 

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 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.

 

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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 amount to $475,538 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.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures (as such item is defined in Rules 13a – 15(e) and 15d – 15(e) of the Exchange Act) that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures in accordance with applicable Securities and Exchange Commission guidance as of the end of the period covered by this quarterly report, and have concluded that disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting as discussed below.

 

Material weaknesses arose in our oversight of the accounting function as well as the disclosure controls and procedures of the Hong Kong Joint Venture (HKJV). The HKJV is a material component of the Company’s consolidated financial statements. With respect to our internal control over financial reporting, these matters above are being discussed among management, the HKJV and our Audit Committee. Management intends to review, revise and improve our internal controls over financial reporting until the material weaknesses in internal control over financial reporting are eliminated. Management’s specific remediation to address these material weaknesses will include among other items: a) enhancing corporate financial reporting resources, particularly for oversight, and process improvement, and b) reinforcing internal policies with all process owners.

 

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

From time to time, the Company is involved in various lawsuits and legal matters. It is the opinion of management, based on the advice of legal counsel, that these matters will not have a material adverse effect on the Company’s financial statements.

 

ITEM 6.EXHIBITS

 

Exhibit No.

3.1Articles of Incorporation (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 1988, File No. 1-31747)
3.2Articles Supplementary, filed October 14, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31, 2002, file No. 1-31747)
3.3Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 13, 2011, File No. 1-31747)
10.12011 Non-Qualified Stock Option Plan (incorporated by reference to the Company’s Proxy Statement with respect to the Company’s 2011 Annual Meeting of Shareholders, filed July 26, 2011, File No. 1-31747)
10.2Hong Kong Joint Venture Agreement, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003, File No. 1-31747)
10.3Discount Factoring Agreement between the Registrant and Merchant Factors Corp., dated January 6, 2015 (substantially identical agreement entered into by USI’s wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 16, 2015, file No. 1-31747)
10.4Lease between Universal Security Instruments, Inc. and St. John Properties, Inc. dated November 4, 2008 for its office and warehouse located at 11407 Cronhill Drive, Suites A-D, Owings Mills, Maryland 21117 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2008, File No. 1-31747)
10.5Amendment to Lease between Universal Security Instruments, Inc. and St. John Properties, Inc. dated June 23, 2009 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2009, File No. 1-31747)
10.6Amended and Restated Employment Agreement dated July 18, 2007 between the Company and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2007, File No. 1-31747), as amended by Addendum dated November 13, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 15, 2007, File No. 1-31747), by Addendum dated September 8, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2008, File No. 1-31747), by Addendum dated March 11, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 12, 2010, File No. 1-31747), by Addendum dated July 19, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 20, 2012, File No. 1-31747), by Addendum dated July 3, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 8, 2013, File No. 1-31747), and by Addendum dated July 21, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 21, 2014, File No. 1-31747), by addendum dated July 23, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 28, 2015, File No. 1-31747), by addendum dated July 12, 2016(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 12, 2016, File No. 1-31747), by addendum dated July 18, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 20, 2017, File No. 1-31747), and by addendum dated July 9, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 9, 2018, File No. 1-31747), and by addendum dated July 12, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 16, 2019, file No. 1-31747).
31.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1Section 1350 Certifications*
99.1Press Release dated February 19, 2020*
101Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of December 31, 2019 and March 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2019 and 2018, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2019 and 2018, (iv) Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended December 31, 2019 and 2018, and (v) Notes to Condensed Consolidated Financial Statements*

 

 

*Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNIVERSAL SECURITY INSTRUMENTS, INC.
(Registrant)
    
    
Date: February 19, 2020By: /s/ Harvey B. Grossblatt
  Harvey B. Grossblatt
  President, Chief Executive Officer
    
    
 By: /s/ James B. Huff
   James B. Huff
   Vice President, Chief Financial Officer

 

 

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