|
ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
39,558
|
|
|
$
|
374,472
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
317,603
|
|
|
|
365,293
|
|
Receivables from employees
|
|
|
56,780
|
|
|
|
54,916
|
|
Receivable from Hong Kong Joint Venture
|
|
|
81,756
|
|
|
|
45,217
|
|
|
|
|
456,139
|
|
|
|
465,426
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
1,618,523
|
|
|
|
2,549,986
|
|
Inventories – finished goods
|
|
|
7,051,113
|
|
|
|
6,852,305
|
|
Prepaid expenses
|
|
|
127,764
|
|
|
|
145,190
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
9,293,097
|
|
|
|
10,387,379
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN HONG KONG JOINT VENTURE
|
|
|
7,404,145
|
|
|
|
8,441,889
|
|
INTANGIBLE ASSET - NET
|
|
|
51,426
|
|
|
|
53,660
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
425,425
|
|
|
|
19,998
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
17,178,093
|
|
|
$
|
18,906,926
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit - factor
|
|
$
|
1,185,277
|
|
|
$
|
1,851,591
|
|
Short-term portion of lease asset liability
|
|
|
140,776
|
|
|
|
-
|
|
Accounts payable - Hong Kong Joint Venture
|
|
|
5,501,165
|
|
|
|
4,962,023
|
|
Accounts payable - trade
|
|
|
314,598
|
|
|
|
616,444
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and employee benefits
|
|
|
106,539
|
|
|
|
132,132
|
|
Accrued commissions and other
|
|
|
397,374
|
|
|
|
470,876
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
7,645,729
|
|
|
|
8,033,066
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM PORTION OF LEASE ASSET LIABILITY
|
|
|
263,224
|
|
|
|
-
|
|
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 September 30, 2019 and March 31, 2019
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
Accumulated Deficit
|
|
|
(3,956,634
|
)
|
|
|
(2,646,866
|
)
|
Accumulated other comprehensive income
|
|
|
316,804
|
|
|
|
611,756
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
9,269,140
|
|
|
|
10,873,860
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
17,178,093
|
|
|
$
|
18,906,926
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
3,622,269
|
|
|
$
|
4,526,252
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
2,278,601
|
|
|
|
2,796,928
|
|
Cost of goods sold – other
|
|
|
253,322
|
|
|
|
272,832
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,090,346
|
|
|
|
1,456,492
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,134,909
|
|
|
|
1,098,568
|
|
Research and development expense
|
|
|
176,733
|
|
|
|
120,918
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(221,296
|
)
|
|
|
237,006
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(373,827
|
)
|
|
|
(264,396
|
)
|
Interest expense
|
|
|
(105,691
|
)
|
|
|
(93,934
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(700,814
|
)
|
|
$
|
(121,324
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.30
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
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.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Six Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
7,965,560
|
|
|
$
|
8,572,248
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
5,072,140
|
|
|
|
5,415,795
|
|
Cost of goods sold – other
|
|
|
558,245
|
|
|
|
459,817
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,335,175
|
|
|
|
2,696,636
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
2,371,748
|
|
|
|
2,296,339
|
|
Research and development expense
|
|
|
317,376
|
|
|
|
274,305
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(353,949
|
)
|
|
|
125,992
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
(742,791
|
)
|
|
|
(508,796
|
)
|
Interest expense
|
|
|
(213,028
|
)
|
|
|
(177,353
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,309,768
|
)
|
|
$
|
(560,157
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.57
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
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.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended Sept. 30,
|
|
|
Six Months Ended Sept. 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
NET LOSS
|
|
$
|
(700,814
|
)
|
|
$
|
(121,324
|
)
|
|
$
|
(1,309,768
|
)
|
|
$
|
(560,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s portion of Hong Kong Joint Venture’s other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
(153,194
|
)
|
|
|
(58,381
|
)
|
|
|
(253,967
|
)
|
|
|
(437,860
|
)
|
Unrealized (loss) gain on investment securities
|
|
|
7,812
|
|
|
|
(41,463
|
)
|
|
|
(40,985
|
)
|
|
|
(50,754
|
)
|
Total Other Comprehensive (Loss) Income
|
|
|
(145,382
|
)
|
|
|
(99,844
|
)
|
|
|
(294,952
|
)
|
|
|
(488,614
|
)
|
COMPREHENSIVE LOSS
|
|
$
|
(846,196
|
)
|
|
$
|
(221,168
|
)
|
|
$
|
(1,604,720
|
)
|
|
$
|
(1,048,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 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
|
|
* Accumulated Other Comprehensive Income
The
accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 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
|
|
* Accumulated Other Comprehensive Income
The
accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL SECURITY
INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Six Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,309,768
|
)
|
|
$
|
(560,157
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
808
|
|
|
|
14,538
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
742,791
|
|
|
|
508,796
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable and amounts due from factor
|
|
|
940,750
|
|
|
|
4,656
|
|
Increase in inventories, prepaid expenses, and other
|
|
|
(181,382
|
)
|
|
|
(1,166,371
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
138,201
|
|
|
|
1,147,751
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
331,400
|
|
|
|
(50,787
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net repayment of Line of Credit - Factor
|
|
|
(666,314
|
)
|
|
|
(64,307
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(666,314
|
)
|
|
|
(64,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(334,914
|
)
|
|
|
(115,094
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
374,472
|
|
|
|
128,161
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
39,558
|
|
|
$
|
13,067
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
171,098
|
|
|
$
|
177,353
|
|
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.
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 $1,309,768
for the six months ended September 30, 2019 and $1,347,986 and $2,262,310 for the years ended March 31, 2019 and 2018, respectively.
Furthermore, as of September 30, 2019, working capital (computed as the excess of current assets over current liabilities) decreased
by $706,945 from $2,354,313 at March 31, 2019, to $1,647,368 at September 30, 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 $433,000 at September 30, 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, and provide for repayment terms of 120 days for each
purchase. The balance outstanding under this agreement at September 30, 2019 was $5,501,165 with $2,947,236 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 September 30, 2019. In addition, sales revenue for
the six months ended September 30, 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 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 expires on January 6, 2020, and provides for continuation of the program for successive two year periods
until terminated by one of the parties to the Agreement. As of September 30, 2019, the Company had borrowings of $1,185,277 under
the Agreement, and the Company had remaining availability under the Agreement of approximately $433,000. 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 7.00% at September 30, 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.
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 six months ended September 30, 2019
and 2018 are as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
Sept. 30, 2019
|
|
|
Sept. 30, 2018
|
|
|
Sept. 30, 2019
|
|
|
Sept. 30, 2018
|
|
Sales of products acquired from our HKJV
|
|
$
|
3,281,392
|
|
|
$
|
4,127,542
|
|
|
$
|
7,221,233
|
|
|
$
|
7,891,958
|
|
Sales of GFCI’s and ventilation fans
|
|
|
340,877
|
|
|
|
398,710
|
|
|
|
744,327
|
|
|
|
680,290
|
|
|
|
$
|
3,622,269
|
|
|
$
|
4,526,252
|
|
|
$
|
7,965,560
|
|
|
$
|
8,572,248
|
|
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.
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 six months ended September 30, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
4,919,756
|
|
|
$
|
7,956,223
|
|
Gross profit
|
|
|
368,790
|
|
|
|
1,115,832
|
|
Net loss
|
|
|
(1,496,807
|
)
|
|
|
(749,404
|
)
|
Total current assets
|
|
|
12,304,440
|
|
|
|
14,298,736
|
|
Total assets
|
|
|
18,281,656
|
|
|
|
21,306,062
|
|
Total current liabilities
|
|
|
2,267,448
|
|
|
|
2,915,045
|
|
Total liabilities
|
|
|
3,162,532
|
|
|
|
3,304,457
|
|
During the six months ended September 30,
2019 and 2018 the Company purchased $4,528,333 and $6,400,803, respectively, of products directly from the Hong Kong Joint Venture
for resale. For the six months ended September 30, 2019 the Company has decreased its investment in the Joint Venture to reflect
an increase of $6,217 in inter-Company profit on purchases held by the Company in inventory. For the six months ended September
30, 2018 the Company has decreased its investment in the net earnings of the Joint Venture to reflect a increase of $134,094 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 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.
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 September 30, 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 six month periods ended September 30, 2019 or 2018. As a result, basic
and diluted weighted average common shares outstanding are identical for the three and six month periods ended September 30, 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. 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 retained earnings 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.
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 September 30, 2019, the Company had right-of-use assets of $407,465 and lease liabilities of $404,000
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
asset liability on the condensed consolidated balance sheet. As of September 30, 2019 the Company’s weighted-average remaining
lease term and weighted-average discount rate related to its operating leases were 2.58 years and 6.0%, respectively. During the
six months ended September 30, 2019, the cash paid for amounts included in the measurement of lease liabilities related to the
Company’s operating leases was $76,997, which is included as an operating cash outflow within the consolidated statements
of cash flows. During the six months ended September 30, 2019, the operating lease costs related to the Company’s operating
leases was $68,262, which is included in operating costs and expenses in the condensed consolidated statements of operations. During
the six months ended September 30, 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 September 30, 2019 for the fiscal year ending March 31, 2020:
2020 (remainder)
|
|
$
|
83,609
|
|
2021
|
|
|
170,772
|
|
2022
|
|
|
175,770
|
|
2023
|
|
|
14,670
|
|
|
|
|
|
|
Total minimum operating lease payments
|
|
$
|
444,821
|
|
Less: amounts representing interest
|
|
|
(40,821
|
)
|
Present value of net minimum operating lease payments
|
|
$
|
404,000
|
|
Less: current portion
|
|
|
140,776
|
|
Long-term portion of operating lease obligations
|
|
$
|
263,224
|
|
|
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 six month
periods ended September 30, 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 September 30,
2019 and 2018
Sales. Net sales
for the three months ended September 30, 2019 were $3,622,269 compared to $4,526,252 for the comparable three months in the prior
year, a decrease of $903,983 (20.0%). 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 30.1% and 32.2% of sales for the quarters ended September 30, 2019 and 2018, respectively. 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 $1,134,909 for the three months ended September 30, 2019, compared to $1,098,568 for the
comparable three months in the prior year. As a percentage of net sales, these expenses increased to 31.3% for the three month
period ended September 30, 2019, from 24.3% for the 2018 period. These expenses increased as a percentage of net sales since selling,
general, and administrative expenses do not decrease in direct proportion to decreased sales.
Research and development
expenses were $176,733 for the three month period ended September 30, 2019 compared to $120,918 for the comparable quarter of the
prior year, an increase of $55,815 (46.5%). 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 $105,691 for the quarter ended September 30, 2019, compared to interest expense of $93,934 for the quarter
ended September 30, 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. Amounts due to the Hong Kong Joint Venture increased in the current fiscal year’s
three month period as compared to the same period in the prior fiscal year.
Net Loss. We
reported a net loss of $700,814 for the quarter ended September 30, 2019, compared to a net loss of $121,324 for the corresponding
quarter of the prior fiscal year, a $579,490 (477.6%) 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.
Six Months Ended September 30, 2019
and 2018
Sales. Net sales
for the six months ended September 30, 2019 were $7,965,560 compared to $8,572,248 for the comparable six months in the prior period,
a decrease of $606,688 (7.1%). 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 29.3% for the period ended September 30, 2019 and 31.5% for the period ended September 30, 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 $2,371,748 for the six months ended September 30, 2019 compared to $2,296,339 for the
comparable six months in the prior year. As a percentage of sales, these expenses were 29.7% for the six month period ended September
30, 2018 and 26.8% for the comparable 2017 period. These expenses increased as a percentage of net sales since selling, general,
and administrative expenses do not decrease in direct proportion to decreased sales.
Research and development
expenses were $317,376 for the six months ended September 30, 2019 compared to $274,305 for the comparable period of the prior
year, an increase of $43,071 (15.7%). 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 $213,028 for the six months ended September 30, 2019, compared to interest expense of $177,353 for the six months ended
September 30, 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 $1,309,768 for the six months ended September 30, 2019 compared to a net loss of $560,157 for the corresponding
period of the prior fiscal year, an increase in the net loss of $749,611 (133.8%). 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 six months ended September 30, 2019 were $1,770,656 and $4,919,756 respectively, compared
to $4,689,666 and $7,956,223, respectively, for the comparable period in the prior fiscal year. The 62.2% and 38.2% decreases in
net sales by the Joint Venture for the respective three and six month periods are due to decreased sales to the Company and to
unaffiliated customers.
Gross Profit Margin.
Gross margins of the Joint Venture for the three month period ended September 30, 2019 decreased to 11.7% from 16.4% for the 2018
corresponding period. For the six month period ended September 30, 2019, gross margins were 7.5% compared to 14.0% for the same
period of the prior year. Gross margins depend on sales volume of various products, with varying margins. In addition, foreign
currency exchange gains and/or losses impact gross margins.
Expenses. Selling,
general and administrative expenses were $1,006,501 and $2,083,800 respectively, for the three and six month periods ended September
30, 2019, compared to $1,105 220 and $2,243,071 in the prior year’s respective periods. As a percentage of sales, expenses
were 56.8% and 42.3% for the three and six month periods ended September 30, 2019, compared to 23.6% and 28.2% for the three and
six month periods ended September 30, 2018. The changes in selling, general and administrative expense as a percent of sales for
the three and six 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 $164,490 and $228,874 respectively, for the three and six month periods ended
September 30, 2019, compared to interest income of $28,957 and $69,003, 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 six months ended September 30, 2019 were $687,974 and $1,496,807 respectively, compared to net losses of $202,445 and $749,404,
respectively, in the comparable periods last year. The decrease in net earnings for the three and six month periods ended September
30, 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 six months
ended September 30, 2019, working capital decreased by $1,313,082 from $11,608,698 on March 31, 2019 to $10,295,616 on September
30, 2019.
Management Plans and Liquidity
The Company had net losses of $1,309,768
for the six months ended September 30, 2019 and $1,347,986 and $2,262,310 for the years ended March 31, 2019 and 2018, respectively.
Furthermore, as of September 30, 2019, working capital (computed as the excess of current assets over current liabilities) decreased
by $706,945 from $2,354,313 at March 31, 2019, to $1,647,368 at September 30, 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 $433,000 at September 30, 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, and provide for repayment terms of 120 days for each
purchase. The balance outstanding under this agreement at September 30, 2019 was $5,501,165 with $2,947,236 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 September 30, 2019. In addition, sales revenue for
the six months ended September 30, 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 is expected to be adequate to fund operations for one year from the issuance date of this report.
Operating activities provided cash
of $331,400 for the six months ended September 30, 2019. This was primarily due to a decrease in trade accounts receivable and
amounts due from factor of $940,750, an increase in accounts payable and accrued expenses of $138,201 and offset by a net loss
of $1,309,768 and an increase in inventories, prepaid expenses and other of $181,382. The net loss includes a non-cash loss from
the investment in the Hong Kong Joint Venture of $742,791. Operating activities used cash of $50,787 for the six months ended September
30, 2018. This was primarily due to an increase in inventories, prepaid and other of $1,166,371 and a net loss of $560,157 and
offset by an increase in accounts payable and accrued expenses of $1,147,751. The net loss includes a non-cash loss from the investment
in the Hong Kong Joint Venture of $508,796
There were no investing
activities for the six months ended September 30 2019 or 2018
Financing activities
used cash of $666,314 during the six months ended September 30, 2018 and used cash of $64,307 during the six months ended September
30, 2018, which is comprised of advances net of repayments 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. 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 retained earnings 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.
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.