UUU Universal Security Instruments Inc

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 2022

OR

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

SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-31747

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 ☒ 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 ☒ 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 ☒ Smaller Reporting Company ☒ 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 ☒

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

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At November 21, 2022, the number of shares outstanding of the registrant’s common stock was 2,312,887.

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

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

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

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

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

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Company has filed requests for refunds of payroll taxes paid for approximately $181,000 for Employee Retention Credits under the provisions of The Coronavirus Aid Relief, and Economic Security Act (CARES Act). The Company expects this refund to be available during the fiscal year ending March 31, 2024. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs for the next twelve months following the issuance date of this report. Cash flows and credit availability is expected to be adequate to fund operations for one year from the issuance date of this report.

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Line of Credit – Factor

In 2015, the Company entered into a Factoring Agreement (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, 2024, 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, 2022, the Company had borrowings under the Agreement of approximately $2,876,000, and the Company had approximately $135,000 of availability under the Agreement at September 30, 2022. 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 8.25% on September 30, 2022). 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.

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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.

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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.

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Concentrations

The Company is primarily a distributor of safety products for use in home and business under both its trade names and private labels for other companies. The Company acquires all of the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. In addition, the Company had two customers in the three and six month periods ended September 30, 2022, that represented 16.0% and 10.2%, and 10.9% and 10.4% of the Company’s net sales, respectively. The Company had two customers in the three and six-month periods ended September 30, 2021, that represented 18.4% and 10.1%, and 12.6% and 12.3% of the Company’s net sales, respectively.

Related Party Transactions

During the three and six-month periods ended September 30, 2022, inventory purchases and other company expenses of approximately $353,000 and $990,000 respectively, were charged to credit card accounts of Harvey B. Grossblatt, the Company's Chief Executive Officer and certain of his immediate family members. During the three and six-month periods ended September 30, 2021, inventory purchases and other company expenses of approximately $244,000 and $823,000 respectively, were charged to credit card accounts of Harvey B. Grossblatt, the Company's Chief Executive Officer and certain of his immediate family members. The Company subsequently reimbursed these charges in full. Mr. Grossblatt receives mileage benefits from these charges. The maximum amount outstanding and due to Mr. Grossblatt at any point during the six-month period ended September 30, 2022, and 2021 amounted to $217,066 and $210,773, respectively. No amounts were due to Mr. Grossblatt at September 30, 2022.

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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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.

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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 condensed 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.

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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 sales to customers that are denied credit by the factor, dispute delivery, and/or have 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, 2022 and March 31, 2022, an allowance of approximately $157,000 has been provided for uncollectible trade accounts receivable.

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Earnings per Common Share

Basic earnings 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 six months ended September 30, 2022, or 2021. As a result, basic and diluted weighted average common shares outstanding are identical for the three and six months ended September 30, 2022, and 2021.

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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.

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Note Payable - Eyston Company Ltd.

On March 31, 2020, the Company sold its fifty percent ownership interest in the Hong Kong Joint Venture and converted $1,081,440 of trade accounts payable due to the Hong Kong Joint Venture to an unsecured long-term interest only note payable with the principal balance due in April 2022. The terms of the note payable were amended subsequent to March 31, 2022, to provide for monthly payments of $100,000 beginning April 2022 and until the note payable is paid in full. The principal balance outstanding on the note payable on September 30, 2022, is $481,440. Interest is based on the Shanghai Commercial Bank Limited in Hong Kong US Dollar prime rate published on the first day of each calendar month plus 2% (7.5% effective rate on September 30, 2022) and is payable monthly.

Leases

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 terminate or extend the lease 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. The Company utilizes certain practical expedients for short-term leases, including the election not to reassess its prior conclusions about lease identification, lease classification and initial direct costs, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee. 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.

Effective March 2022, we extended our operating lease for a 15,000 square foot office and warehouse located in Baltimore County, Maryland to expire in April 2025 subject to a right to terminate the lease if the Company enters into a binding agreement to sell the assets of the Company. No option to continue the lease beyond April 2025 has been provided in the lease extension. Monthly rental expense, with common area maintenance, currently approximates $14,500 and increases 3.0% per year.

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 approximately $485,000 at the date of adoption and increased by approximately $468,000 effective with the lease amendment and extension dated March 2022. 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, 2022, the Company had right-of-use assets of $389,409 and lease liabilities of $395,626 related to its operating leases. Right-of-use assets are included in property and equipment, net, on the 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 consolidated balance sheet. As of September 30, 2022, the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases is two years, six months and 5.5%, respectively. During the six-month period ended September 30, 2022, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $75,675, which is included as an operating cash outflow within the condensed consolidated statements of cash flows. During the six-month period ended September 30, 2022, the operating lease costs related to the Company’s operating leases was $76,779 which is included in operating costs and expenses in the consolidated statements of operations.

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The future minimum payments under operating leases were as follows for the fiscal periods ended March 31:

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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. Management determined that recently issued ASU’s did not have a material impact on the consolidated financial statements at September 30, 2022.

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Gross Profit Margin. Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin was 26.7% and 29.9% of sales for the quarters ended September 30, 2022, and 2021, respectively.  Gross margins were negatively impacted in the period ended September 30, 2022, principally due to increases in the cost of certain electronic components.

Expenses. Selling, general and administrative expenses were $1,189,243 for the three months ended September 30, 2022, compared to $1,357,103 for the comparable three months in the prior year.  As a percentage of net sales, these expenses decreased to 20.3% for the three-month period ended September 30, 2022, from 25.7% for the 2021 period.  These expenses decreased as a percentage of net sales principally due to a reduction in salaries expense resulting from recording the employee retention credit of $181,000 under the CARES Act.

Research and development expenses were comparable at $103,245 for the three-month period ended September 30, 2022 to $97,070 for the comparable quarter of the prior year.

Interest Expense. Our interest expense was $68,525 for the quarter ended September 30, 2022, compared to interest expense of $14,309 for the quarter ended September 30, 2021.  Interest expense is dependent upon the total amounts borrowed from the Factor and the increase in interest rates during the period as compared to the corresponding period of the prior year.

Net Income. We reported net income of $200,602 for the quarter ended September 30, 2022, compared to a net income of $107,696 for the corresponding quarter of the prior fiscal year, a $92,906 (86.3%) increase in net income.  The primary reasons for the increase in the net income is a reduction in salaries expense resulting from recording the employee retention credit under the CARES Act.

Six Months Ended September 30, 2022 and 2021

Sales. Net sales for the six months ended September 30, 2022, were $10,492,445 compared to $9,940,221 for the comparable six months in the prior period, an increase of $552,224 (5.6%). Sales increased principally due to the Company’s ability to fill orders as delays in unloading inventory at California ports of entry began to abate during the period.

Gross Profit Margin. The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company’s gross profit margin was 28.4% for the period ended September 30, 2022, and 28.5% for the period ended September 30, 2021. Gross margins were negatively impacted in the six-month period ended September 30, 2022, principally due to the cost of certain electronic components.

Expenses. Selling, general and administrative expenses were $2,571,846 for the six months ended September 30, 2022, compared to $2,490,242 for the comparable six months in the prior year.  As a percentage of sales, these expenses were 24.5% for the six-month period ended September 30, 2022, and 25.1% for the comparable 2021 period. These expenses decreased as a percentage of net sales since selling, general, and administrative expenses do not fluctuate in direct proportion to sales.

Research and development expenses were comparable at $192,507 for the six months ended September 30, 2022, to $198,126 for the comparable period of the prior year.

Interest Expense. Our interest expense was $124,021 for the six months ended September 30, 2022, compared to interest expense of $23,798 for the six months ended September 30, 2021. Interest expense is dependent upon the total amounts borrowed from the Factor and the increase in interest rates during the period as compared to the corresponding period of the prior year.

Net Income. We reported net income of $94,464 for the six months ended September 30, 2022, compared to a net income of $122,337 for the corresponding period of the prior fiscal year, a decrease in the net income of $27,873 (22.8%).  The primary reasons for the decrease in the net income is increased costs for certain electronic components caused by supply chain disruptions and higher interest expense, partially offset by the inclusion of approximately $181,000 of Employee Retention Credit under the provisions of the Coronavirus Aid Relief, and Economic Security Act.

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Management Plans and Liquidity

In light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in Hong Kong, the PRC and the United States, the Company has experienced delays in shipping and receiving of products.

Our short-term borrowings to finance any operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of its Factoring Agreement with Merchant Factors Corporation (Merchant or Factor). Borrowings under the Factoring Agreement bear interest at prime plus 2% and are secured by trade accounts receivable and inventory. Advances from Merchant are at the sole discretion of Merchant based on Merchant’s assessment of the Company’s receivables, inventory, and financial condition at the time of each request for an advance. The Company had approximately $135,000 of availability of this facility on September 30, 2022. The Company’s non-factored trade and other accounts receivable net of allowance for uncollectible amounts totaled approximately $1,040,000 on September 30, 2022. We anticipate that future availability provided from Merchant, cash flows from operations, and the collection of non-factored trade accounts receivable will provide sufficient working capital for the next twelve months following the date of this report.

In addition, the Company has a short-term note payable due to its principal supplier (Eyston Company Ltd.) that requires monthly payments beginning April, 2022 of $100,000 per month and until the remaining principal balance of approximately $481,000 is repaid. The Company has a long history of working closely with Eyston and believes that forbearance or extension of the payment terms of the short-term note payable can be achieved if required to meet short-term cash flow requirements. Further, the Company’s factor has withheld financing on certain of the Company’s accounts receivable subject to resolution of any disputes. The resolution of disputed items is ongoing and, subsequent to September 30, 2022 the Company continues to provide support for resolution of any disputed items. The Company expects that all amounts in dispute will be resolved satisfactorily. In addition, the Company has filed requests for refunds of customs payments with US Customs and Border Protection for approximately $300,000 (including interest expected) for overpayments of tariff. The Company expects this refund to be available during the fiscal year ending March 31, 2023. Finally, the Company has filed requests for refunds of payroll taxes paid for approximately $181,000 for Employee Retention Credits under the provisions of The Coronavirus Aid Relief, and Economic Security Act (CARES Act). The Company expects this refund to be available during the fiscal year ending March 31, 2024. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs for the next twelve months following the issuance date of this report. Cash flows and credit availability is expected to be adequate to fund operations for one year from the issuance date of this report.

Operating activities used cash of $378,841 for the six months ended September 30, 2022. This was primarily due to an increase in accounts receivable and amount due from factor of $1,276,912, a decrease in accounts payable and accrued expenses of $177,454, and partially offset by a decrease in inventories, prepaid expenses and other of $970,998 and by net income of $94,464. Operating activities used cash of $2,386,577 for the six months ended September 30, 2021. This was primarily due to an increase in accounts receivable and amount due from factor of $1,298,992, an increase in inventories, prepaid expenses and other of $977,530, a decrease in accounts payable and accrued expenses of $238,585, and partially offset by net income of $122,337.

There were no investing activities for the six-month periods ended September 30, 2022, or 2021.

Financing activities provided cash of $118,984 during the six months ended September 30, 2022, from net borrowing in excess of repayments from the factor of $718,984, offset by repayments of the note payable to Eyston Company, Ltd. of $600,000.   Financing activities provided cash of $2,394,543 during the six months ended September 30, 2021 from net borrowing in excess of repayments from the factor.

CRITICAL ACCOUNTING POLICIES

In the notes to the consolidated financial statements, and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of Operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in the United States of America.

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