DeFi Capital Markets, Inc 10-Q, filed Nov 21, 2022
DeFi Capital Markets, Inc. (DCM)
About this 10-Q
DeFi Capital Markets, Inc filed this 10-Q on November 21, 2022, covering the quarter ended September 30, 2022.
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.86M
- up 11.1% from $5.27M a year earlier
- Net income
- $200.6K
- up 86.3% from net income of $107.7K a year earlier
- Diluted EPS
- $0.09
- up 80.0% from $0.05 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended
OR
SECURITIES EXCHANGE ACT OF 1934
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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incorporation or organization) |
| Identification No.) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
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.
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).
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 ☐
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:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
At November 21, 2022, the number of shares outstanding of the registrant’s common stock was
TABLE OF CONTENTS
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| | Condensed Consolidated Balance Sheets at September 30, 2022 (unaudited) and March 31, 2022 | 3 | |
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| | Notes to Condensed Consolidated Financial Statements (unaudited) | 9 | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
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PART I - FINANCIAL INFORMATION
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS | | (unaudited) | | (audited) | ||
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| March 31, 2022 | ||
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CURRENT ASSETS |
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Cash | | $ | | $ | | |
Accounts receivable: | |
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Trade, less allowance for doubtful accounts | |
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Other receivables | | | | | | — |
Receivables from employees | |
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Amount due from factor | |
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Inventories – finished goods | |
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Prepaid expenses | |
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TOTAL CURRENT ASSETS | |
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INTANGIBLE ASSETS - NET | |
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PROPERTY AND EQUIPMENT – NET | | | | | | |
OTHER ASSETS | |
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TOTAL ASSETS | | $ | | | $ | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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CURRENT LIABILITIES | |
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Line of credit - factor | | $ | | $ | | |
Note payable - Eyston Company Ltd. | | | | | | |
Short-term portion of operating lease liability | | | | | | 131,880 |
Accounts payable - trade | |
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Accounts payable – Eyston Company Ltd. | |
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Accrued liabilities: | |
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Accrued payroll and employee benefits | |
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Accrued commissions and other | |
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TOTAL CURRENT LIABILITIES | |
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LONG-TERM PORTION OF OPERATING LEASE LIABILITY | | | | |
| 335,411 |
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COMMITMENTS AND CONTINGENCIES | |
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SHAREHOLDERS’ EQUITY | |
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Common stock, $ | |
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Additional paid-in capital | |
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Accumulated Deficit | |
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TOTAL SHAREHOLDERS’ EQUITY | |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
| | Three Months Ended September 30, | ||||
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| 2022 |
| 2021 | ||
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Net sales | | $ | | | $ | |
Cost of goods sold | |
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GROSS PROFIT | |
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Selling, general and administrative expense | |
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Research and development expense | |
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Operating income | |
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Other expense: | |
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Interest expense | |
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NET INCOME | | $ | | | $ | |
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Earnings per share: | |
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Basic and diluted | | | | | ||
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Shares used in computing earnings per share: | |
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Weighted average basic and diluted shares outstanding | |
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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
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
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| Six Months Ended September 30, | ||||
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Net sales | | $ | | | $ | |
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Cost of goods sold | |
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GROSS PROFIT | |
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Selling, general and administrative expense | |
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Research and development expense | |
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Operating income | |
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Other expense: | |
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Interest expense | |
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NET INCOME | | $ | | | $ | |
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Earnings per share: | |
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Basic and diluted | | | | | ||
Shares used in computing earnings per share: | |
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Weighted average basic and diluted shares outstanding | |
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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
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 2022
(Unaudited)
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| Capital |
| Deficit |
| Total | ||||
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Balance at April 1, 2022 |
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Net loss |
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Balance at June 30, 2022 |
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Net income |
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Balance at September 30, 2022 |
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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
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)
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| Deficit |
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Balance at April 1, 2021 |
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Net income |
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Balance at June 30, 2021 |
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Net income | | | | | | | | | | | | | | |
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Balance at September 30, 2021 | | | | $ | | | $ | | | $ | ( | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Six Months Ended September 30, | ||||
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| 2022 |
| 2021 | ||
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OPERATING ACTIVITIES: |
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Net Income | | $ | | | $ | |
Adjustments to reconcile net income to net cash used in operating activities: | |
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Depreciation and amortization | |
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Changes in operating assets and liabilities: | |
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Increase in accounts receivable and amount due from factor | |
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Decrease (Increase) in inventories, prepaid expenses, and other | |
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Decrease in accounts payable and accrued expenses | |
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NET CASH USED IN OPERATING ACTIVITIES | |
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FINANCING ACTIVITIES: | |
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Net borrowing - Line of Credit – Factor | | | | | | |
Repayment of Note Payable – Eyston Company Ltd | |
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NET CASH PROVIDED BY FINANCING ACTIVITIES | |
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NET (DECREASE) INCREASE IN CASH | |
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Cash at beginning of period | |
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CASH AT END OF PERIOD | | $ | | | $ | |
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SUPPLEMENTAL INFORMATION: | | | | | | |
Interest paid | | $ | | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
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 subsidiaries. Except for the condensed consolidated balance sheet as of March 31, 2022, 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, 2022, audited financial statements filed with the Securities and Exchange Commission on Form 10-K as filed on July 14, 2022. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.
As previously reported, on February 25, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company (USI), a wholly owned subsidiary of the Company D-U Merger Sub, Inc. a Delaware corporation (“Merger Sub”) and Infinite Reality, Inc., a Delaware corporation (“Infinite Reality”). On May 16, 2022, the Company filed with the United States Securities Exchange Commission (SEC) a proxy statement and Form S-4 registration statement in connection with the Merger. Subsequent to March 31, 2022, the Company became aware of a lawsuit filed by Thomas Henderson against Universal Security Instruments, Inc. and its directors in the U.S. District Court for the Southern District of New York, Civil Action No. 22cv4354. The plaintiff claims to be a shareholder in the Company and alleges that the registration statement on Form S-4 filed by the Company on May 16, 2022 (which, when declared effective, will also be the merger proxy statement distributed to the shareholders of the Company and of Infinite Reality in connection with the proposed Merger) is materially deficient and misleading in omitting material information and, therefore, violates the provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and the regulations promulgated thereunder. The suit seeks to enjoin the Merger, direct the defendants to comply with the provisions of the Exchange Act, award costs and fees to the plaintiff, and grant such other relief as the court may deem just and proper. The Company believes that the suit is wholly without merit and will aggressively defend the suit.
Liquidity and Management Plans
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
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 $
9
Company has filed requests for refunds of payroll taxes paid for approximately $
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 (
The Agreement has been extended and now expires on January 6, 2024, and provides for continuation of the program for successive
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.
10
Disaggregation of Revenue
The Company presents below revenue associated with sales of products acquired from Eyston Company Ltd. (Eyston) 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, 2022, and 2021 are as follows:
| | Three months ended | | Six months ended | ||||||||
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| Sept. 30, 2022 |
| Sept. 30, 2021 |
| Sept. 30, 2022 |
| Sept. 30, 2021 | ||||
Sales of products acquired from Eyston | | $ | | | $ | | | $ | | | $ | |
Sales of GFCI’s and ventilation fans | |
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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
Related Party Transactions
During the three and six-month periods ended September 30, 2022, inventory purchases and other company expenses of approximately $
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.
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.
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,
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
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.
12
Note Payable - Eyston Company Ltd.
On March 31, 2020, the Company sold its
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
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
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 $
13
The future minimum payments under operating leases were as follows for the fiscal periods ended March 31:
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2023 |
| $ | |
2024 | | | |
2025 | | | |
2026 | | | |
Total operating lease payments | | $ | |
Less: amounts representing interest |
| | ( |
Present value of net operating lease payments |
| $ | |
Less: current portion |
| | 147,593 |
Long-term portion of operating lease obligations |
| $ | 248,033 |
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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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. Our financial statements detail our sales and other operational results for the three and six-month periods ended September 30, 2022 and 2021.
In light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in Hong Kong, the PRC and the United States, the Company has experienced delays in shipping and receiving of products.
As the Company’s products are sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had a negative impact on the Company’s sales. The Company is not yet able to quantify the full impact of the COVID-19 pandemic on its sales and financial results.
The Company has developed products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology and product features. Most of our new technologies and features have been trademarked under the trade name IoPhic.
Changes in international trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact the cost of our products. All of our products are imported from the Peoples Republic of China (PRC). To date, only certain of our products such as Carbon Monoxide and Photoelectric alarms, and wiring devices, have been subjected to tariffs of 25%. We are monitoring these developments and will determine our strategies as additional information becomes available. Any increase in tariffs that is not offset by an increase in our sales prices could have an adverse effect on our business, financial position, results of operations or cash flows.
As previously reported, on February 25, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company (USI), a wholly owned subsidiary of the Company D-U Merger Sub, Inc. a Delaware corporation (“Merger Sub”) and Infinite Reality, Inc., a Delaware corporation (“Infinite Reality”). On May 16, 2022, the Company filed with the United States Securities Exchange Commission (SEC) a proxy statement and Form S-4 registration statement in connection with the Merger.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2022 and 2021
Sales. Net sales for the three months ended September 30, 2022, were $5,857,141 compared to $5,272,223 for the comparable three months in the prior year, an increase of $584,918 (11.1%). Sales increased principally due to the Company’s ability to fill orders as delays in unloading inventory at California ports of entry began to abate during the period.
15
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.
16
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.
17
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 a material weakness in internal control over financial reporting as discussed below.
A material weakness arose in the classification of and disclosure of amounts within the financial statements. The Company plans to remediate the material weakness by clarification of the classification of amounts and inclusion of the required disclosures.
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 September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
18
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.
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ITEM 6. | EXHIBITS |
Exhibit No. |
| |
3.1 | | Articles 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) |
3.2 | | |
3.3 | | |
10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5 | | Amended 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), 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), by addendum dated July 27, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 27, 2020, file No. 1-31747). by addendum dated July 18, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 28, 2021, file No. 1-31747), and by addendum dated July 22, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 28, 2022, file No. 1-31747). |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer* |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer* |
32.1 | | |
99.1 | | |
101 | | Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of September 30, 2022 and March 31, 2022, (ii) Condensed Consolidated Income Statements for the three and six months ended September 30, 2022 and 2021, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2022 and 2021, (v) Condensed Consolidated Statements of Shareholders’ Equity for the six months ended September 30, 2022 and 2021, and (vi) Notes to Condensed Consolidated Financial Statements* |
*Filed herewith
20
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: November 21, 2022 | By: | /s/ Harvey B. Grossblatt |
| | Harvey B. Grossblatt |
| | President, Chief Executive Officer |
| | |
| By: | /s/ James B. Huff |
| | James B. Huff |
| | Vice President, Chief Financial Officer |
21
Exhibit 31.1
CERTIFICATION
I, Harvey B. Grossblatt, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Universal Security Instruments, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Exhibit 31.2
CERTIFICATION
I, James B. Huff, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Universal Security Instruments, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
November 21, 2022 | | /s/ James B. Huff |
| James B. Huff | |
| Chief Financial Officer | |
Exhibit 32.1
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Universal Security Instruments, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2022 as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the “Report”), the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods reflected therein. |
| /s/ Harvey B. Grossblatt | |
| Harvey B. Grossblatt | |
| Chief Executive Officer | |
| | |
| | |
| | /s/ James B. Huff |
| James B. Huff | |
| Chief Financial Officer | |
Exhibit 99.1
For Immediate Release
Contact: Harvey Grossblatt, CEO
Universal Security Instruments, Inc.
(410) 363-3000, Ext. 224
or
Zachary Mizener
Lambert & Co.
(315) 529-2348
Universal Security Instruments Reports Second-Quarter Results
OWINGS MILLS, Md. November 21, 2022 - Universal Security Instruments, Inc. (NYSE AMEX: UUU) today announced results for its fiscal second quarter and six months ended September 30, 2022.
For the three months ended September 30, 2022, sales increased 11.1% to $5,857,141 compared to sales of $5,272,223 for the same period last year. The Company reported net income of $200,602, or $0.09 per basic and diluted share, compared to net income of $107,696 or $0.05 per basic and diluted share for the same period last year.
For the six months ended September 30, 2022, sales increased 5.6% to $10,492,445 versus $9,940,221 for the same period last year. The Company reported net income of $94,464, or $0.04 per basic and diluted share, compared to net income of $122,337 or $0.05, per basic and diluted share for the corresponding 2021 period.
“The primary reason for the sales increase in the September quarter was improvement in our deliveries from China. Our gross margins decreased for the September quarter which was caused by increases in the cost of certain electrical components caused by supply chain disruptions. Our net income increased for the September quarter due to the inclusion of approximately $181,000 of Employee Retention Credit under the provisions of the Coronavirus Aid Relief, and Economic Security Act which was partially offset by the lower gross margins,” said Harvey Grossblatt - President and CEO.
UNIVERSAL SECURITY INSTRUMENTS, INC. is a U.S.-based manufacturer and distributor of safety and security devices. Founded in 1969, the Company has an over 53-year heritage of developing innovative and easy-to-install products, including smoke, fire and carbon monoxide alarms. For more information on Universal Security Instruments, visit our website at www.universalsecurity.com.
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"Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Certain matters discussed in this news release may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. Actual results could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, among other items, currency fluctuations, the impact of current and future laws and governmental regulations affecting us and other factors which may be identified from time to time in our Securities and Exchange Commission filings and other public announcements. We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. We will revise our outlook from time to time and frequently will not disclose such revisions publicly.
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UNIVERSAL SECURITY INSTRUMENTS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
| | Three Months Ended | | ||||
| | 2022 | | 2021 | | ||
Sales |
| $ | 5,857,141 |
| $ | 5,272,223 |
|
Net income | | | 200,602 | | | 107,696 | |
Earnings per share: | | | | | | | |
Basic and diluted | | $ | 0.09 | | $ | 0.05 | |
Weighted average number of common shares outstanding: | | | | | | | |
Basic and diluted | | | 2,312,887 | | | 2,312,887 | |
| | Six Months Ended September 30, | | ||||
| | 2022 | | 2021 | | ||
Sales |
| $ | 10,492,445 |
| $ | 9,940,221 |
|
Net income | | | 94,464 | | | 122,337 | |
Earnings per share: | | | | | | | |
Basic and diluted | | $ | 0.04 | | $ | 0.05 | |
Weighted average number of common shares outstanding: | | | | | | | |
Basic and diluted | | | 2,312,887 | | | 2,312,887 | |
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS |
| |
| |
| ||
| | Sept. 30, 2022 | | Sept. 30, 2021 | | ||
Cash | | $ | 178,878 | | $ | 168,570 | |
Accounts receivable and amount due from factor | | | 5,367,025 | | | 3,882,455 | |
Inventory | | | 5,171,217 | | | 4,966,226 | |
Prepaid expense | | | 328,188 | | | 529,196 | |
| | | | | | | |
TOTAL CURRENT ASSETS | | | 11,045,308 | | | 9,546,447 | |
| | | | | | | |
PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS–NET | | | 436,142 | | | 139,987 | |
OTHER ASSETS | | | 4,000 | | | 4,000 | |
TOTAL ASSETS | | $ | 11,485,450 | | $ | 9,690,434 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Line of credit – factor | | $ | 2,876,070 | | $ | 2,413,447 | |
Note payable – Eyston Company Ltd. | | | 481,440 | | | 1,081,440 | |
Short-term portion of operating lease liability | | | 147,593 | | | 87,908 | |
Accounts payable | | | 2,605,544 | | | 1,071,670 | |
Accrued liabilities | | | 393,900 | | | 197,076 | |
TOTAL CURRENT LIABILITIES | | | 6,504,547 | | | 4,851,541 | |
LONG TERM PORTION OF OPERATING LEASE LIABILITY | | | 248,033 | | | — | |
TOTAL LONG-TERM LIABILITIES | | | 248,033 | | | — | |
SHAREHOLDERS’ EQUITY: | | | | | | | |
Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 2,312,887 at September 30, 2022 and 2021 | | | 23,129 | | | 23,129 | |
Additional paid-in capital | | | 12,885,841 | | | 12,885,841 | |
Accumulated Deficit | | | (8,176,100) | | | (8,070,077) | |
| | | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | | | 4,732,870 | | | 4,838,893 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 11,485,450 | | $ | 9,690,434 | |