|
ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
UNIVERSAL SECURITY
INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
(unaudited) (audited)
|
|
|
|
December 31, 2020
|
|
|
March 31, 2020
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
580,904
|
|
|
$
|
93,794
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts
|
|
|
111,627
|
|
|
|
109,548
|
|
Receivables from employees
|
|
|
35,823
|
|
|
|
36,876
|
|
|
|
|
147,450
|
|
|
|
146,424
|
|
|
|
|
|
|
|
|
|
|
Amount due from factor
|
|
|
3,316,483
|
|
|
|
2,300,109
|
|
Inventories – finished goods
|
|
|
3,039,779
|
|
|
|
5,123,959
|
|
Prepaid expenses
|
|
|
178,518
|
|
|
|
113,145
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
7,263,134
|
|
|
|
7,777,431
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS - NET
|
|
|
45,835
|
|
|
|
49,189
|
|
PROPERTY AND EQUIPMENT – NET
|
|
|
225,127
|
|
|
|
346,477
|
|
OTHER ASSETS
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
7,538,096
|
|
|
$
|
8,177,097
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Line of credit – factor
|
|
$
|
-
|
|
|
$
|
1,561,665
|
|
Note payable - bank
|
|
|
221,400
|
|
|
|
-
|
|
Short-term portion of operating lease liability
|
|
|
167,926
|
|
|
|
158,578
|
|
Accounts payable - trade
|
|
|
569,161
|
|
|
|
505,904
|
|
Accounts payable – Eyston Company Ltd.
|
|
|
-
|
|
|
|
266,409
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and employee benefits
|
|
|
158,786
|
|
|
|
136,683
|
|
Accrued commissions and other
|
|
|
122,389
|
|
|
|
88,694
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
1,239,662
|
|
|
|
2,717,933
|
|
|
|
|
|
|
|
|
|
|
NOTE PAYABLE – Eyston Company Ltd.
|
|
|
1,081,440
|
|
|
|
-
|
|
ACCOUNTS PAYABLE – Eyston Company Ltd. - noncurrent
|
|
|
-
|
|
|
|
839,831
|
|
LONG-TERM PORTION OF OPERATING LEASE LIABILITY
|
|
|
43,600
|
|
|
|
171,120
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
1,125,040
|
|
|
|
1,010,951
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value per share;
authorized 20,000,000 shares; 2,312,887 shares issued and outstanding at December 31, 2020 and March 31,
2020
|
|
|
23,129
|
|
|
|
23,129
|
|
Additional paid-in capital
|
|
|
12,885,841
|
|
|
|
12,885,841
|
|
Accumulated Deficit
|
|
|
(7,735,576
|
)
|
|
|
(8,460,757
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
5,173,394
|
|
|
|
4,448,213
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
7,538,096
|
|
|
$
|
8,177,097
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
5,124,750
|
|
|
$
|
3,223,678
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
-
|
|
|
|
2,240,801
|
|
Cost of goods sold – other
|
|
|
3,604,427
|
|
|
|
212,885
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,520,323
|
|
|
|
769,992
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
1,321,311
|
|
|
|
1,083,913
|
|
Research and development expense
|
|
|
106,608
|
|
|
|
169,768
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
92,404
|
|
|
|
(483,689
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
-
|
|
|
|
(408,836
|
)
|
Interest expense
|
|
|
(14,086)
|
|
|
|
(119,308
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
78,318
|
|
|
$
|
(1,011,833
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.03
|
|
|
$
|
(0.44
|
)
|
Shares used in computing earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY
INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Nine Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
14,522,813
|
|
|
$
|
11,189,238
|
|
Cost of goods sold – acquired from Joint Venture
|
|
|
-
|
|
|
|
7,312,941
|
|
Cost of goods sold – other
|
|
|
9,821,319
|
|
|
|
771,130
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
4,701,494
|
|
|
|
3,105,167
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
3,572,189
|
|
|
|
3,455,661
|
|
Research and development expense
|
|
|
332,276
|
|
|
|
487,144
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
797,029
|
|
|
|
(837,638
|
)
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
-
|
|
|
|
(1,151,627
|
)
|
Interest expense
|
|
|
(71,848
|
)
|
|
|
(332,336
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
725,181
|
|
|
$
|
(2,321,601
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.31
|
|
|
$
|
(1.00
|
)
|
Shares used in computing net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
2,312,887
|
|
|
|
2,312,887
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three Months Ended Dec. 31,
|
|
|
Nine Months Ended Dec. 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
NET INCOME (LOSS)
|
|
$
|
78,318
|
|
|
$
|
(1,011,833
|
)
|
|
$
|
725,181
|
|
|
$
|
(2,321,601
|
)
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s portion of Hong Kong Joint Venture’s other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
-
|
|
|
|
10,549
|
|
|
|
-
|
|
|
|
(243,418
|
)
|
Unrealized loss on investment securities
|
|
|
-
|
|
|
|
(1,412
|
)
|
|
|
-
|
|
|
|
(42,397
|
)
|
Total Other Comprehensive Income (Loss)
|
|
|
-
|
|
|
|
9,137
|
|
|
|
-
|
|
|
|
(285,815
|
)
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
78,318
|
|
|
$
|
(1,002,696
|
)
|
|
$
|
725,181
|
|
|
$
|
(2,607,416
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED
DECEMBER 31, 2020
(Unaudited)
|
|
Common
Shares
|
|
|
Stock
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance at April 1, 2020
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(8,460,757
|
)
|
|
$
|
4,448,213
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,982
|
)
|
|
|
(78,982
|
)
|
Balance at June 30, 2020
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(8,539,739
|
)
|
|
$
|
4,369,231
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725,845
|
|
|
|
725,845
|
|
Balance at Sept. 30, 2020
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(7,813,894
|
)
|
|
$
|
5,095,076
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,318
|
|
|
|
78,318
|
|
Balance at Dec. 31, 2020
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(7,735,576
|
)
|
|
$
|
5,173,394
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED
DECEMBER 31, 2019
(Unaudited)
|
|
Common
Shares
|
|
|
Stock
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
AOCI*
|
|
|
Total
|
|
Balance at April 1, 2019
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(2,646,866
|
)
|
|
$
|
611,756
|
|
|
$
|
10,873,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,773
|
)
|
|
|
(100,773
|
)
|
Unrealized loss on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,797
|
)
|
|
|
(48,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(608,954
|
)
|
|
|
|
|
|
|
(608,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(3,255,820
|
)
|
|
$
|
462,186
|
|
|
$
|
10,115,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,194
|
)
|
|
|
(153,194
|
)
|
Unrealized gain on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,812
|
|
|
|
7,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(700,814
|
)
|
|
|
|
|
|
|
(700,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Sept. 30, 2019
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,841
|
|
|
$
|
(3,956,634
|
)
|
|
$
|
316,804
|
|
|
$
|
9,269,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,549
|
|
|
|
10,549
|
|
Unrealized loss on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,412
|
)
|
|
|
(1,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,011,833
|
)
|
|
|
|
|
|
|
(1,011,833
|
)
|
Balance at Dec. 31, 2019
|
|
|
2,312,887
|
|
|
$
|
23,129
|
|
|
$
|
12,885,84
|
|
|
$
|
(4,968,467
|
)
|
|
$
|
325,941
|
|
|
$
|
8,266,444
|
|
* Accumulated Other Comprehensive Income
The accompanying notes are an integral part of these condensed
consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Nine Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
725,181
|
|
|
$
|
(2,321,601
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,532
|
|
|
|
4,191
|
|
Loss from investment in Hong Kong Joint Venture
|
|
|
-
|
|
|
|
1,151,627
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in accounts receivable and amounts due from factor
|
|
|
(1,017,400
|
)
|
|
|
885,657
|
|
Decrease in inventories, prepaid expenses, and other
|
|
|
2,018,807
|
|
|
|
287,955
|
|
Increase in accounts payable and accrued expenses
|
|
|
94,255
|
|
|
|
301,966
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
1,827,375
|
|
|
|
309,795
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net repayment of Line of Credit – Factor
|
|
|
(1,561,665
|
)
|
|
|
(506,930
|
)
|
Note payable – Commercial Bank
|
|
|
221,400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(1,340,265
|
)
|
|
|
(506,930
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
487,110
|
|
|
|
(197,135
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at beginning of
period
|
|
|
93,794
|
|
|
|
374,472
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
580,904
|
|
|
$
|
177,337
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
68,174
|
|
|
$
|
299,738
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities:
|
|
|
|
|
|
|
|
|
Right-of-use asset in exchange for operating lease liability
|
|
$
|
-
|
|
|
$
|
475,538
|
|
Conversion of trade accounts payable to note payable
|
|
$
|
1,081,440
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Statement of Management
The condensed consolidated financial statements
include the accounts of Universal Security Instruments, Inc. (USI, we, our, or the Company) and its wholly-owned subsidiary.
Except for the condensed consolidated balance sheet as of March 31, 2020, 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, 2020 audited
financial statements filed with the Securities and Exchange Commission on Form 10-K on August 11, 2020. The interim operating
results are not necessarily indicative of the operating results for the full fiscal year.
Liquidity and Management Plans
As the Company previously
reported, on August 31, 2020, the Company received a letter from NYSE American LLC (the “Exchange”) stating that
the Exchange has determined that the Company is not in compliance with the Exchange’s continued listing requirements as the
result of the Company’s failure to maintain stockholders’ equity of $6.0 million after reporting losses from continuing
operations and/or net losses in its five most recent fiscal years. On September 23, 2020, the Company submitted to the Exchange
the Company’s plan (the “Plan”) of actions the Company has taken or will take to regain compliance with the continued
listing standards by February 28, 2022 (the “Plan Period”). On November 5, 2020, the Company received a letter
from the Exchange advising the Company that the Exchange has accepted the Plan and granted the Plan Period through February 28,
2022. The Exchange will review the Company periodically to determine whether the Company is making progress consistent with the
Plan. The Company is working diligently to execute its Plan to regain compliance with the Exchange’s continued listing requirements.
As our products are sold primarily to the
construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had an impact
on the Company’s sales. We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial
results, but we believe that during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and first quarter of fiscal
2021) sales were negatively impacted by lower sales resulting from steps taken to combat the spread of COVID-19. Sales in our second
and third fiscal quarters ended September 30, 2020, and December 31, 2020 increased significantly when compared to sales
for the comparable 2019 periods due to the Company’s ability to fill orders from inventory for a large national retailer
new customer, when the national retailer’s usual supplier was unable to fill the orders due to delays caused by the pandemic.
Our sales growth was also due to sales of two products to another large national retailer which purchased certain of our models
as a 1,350 store test, which should be completed later this fiscal year. We anticipate that the increase in sales, the associated
increase in availability from the Factor resulting from these increased sales, and the funds received from the Paycheck Protection
Program will provide sufficient working capital for the next twelve months following the date of this report. Our financial results
were also positively impacted by a reduction in research and interest expenses for the nine months ended December 31, 2020.
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 unused availability of this facility totaled approximately $3,482,000 at December 31, 2020.
The Company has a history of sales that
are insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to
these conditions includes increasing sales resulting from the delivery of our line of sealed battery ionization smoke alarms, carbon
monoxide products, and ground fault circuit interrupters. The Company has seen positive results on this plan due to increased sales
of its product offerings to a major home improvement retailer during the second and third quarters of our fiscal year ending March 31,
2021. The increase in sales to major home improvement retailers has resulted in significant additional availability under the provisions
of our facility with the Factor. Management anticipates this sales growth to continue going forward. In addition, effective March 31,
2020, the Company sold its ownership interest in its former Hong Kong Joint Venture reducing its current liabilities due to the
Hong Kong Joint Venture by $4,000,000. Furthermore, in May, 2020 we received a Paycheck Protection Program loan of $221,400 under
the CARES Act and expect the loan will be forgiven in compliance with the provisions of the Act. Though no assurances can be given,
if management’s plan continues to be successful over the next twelve months, we anticipate that the Company 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
are expected to be adequate to fund operations for one year from the issuance date of this report.
Line of Credit – Factor
On January 15, 2015, the Company entered
into the 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, 2022, and provides for
continuation of the program for successive two year periods until terminated by one of the parties to the Agreement. As of December 31,
2020, the Company had no borrowings under the Agreement, and the Company had availability under the Agreement of approximately
$3,482,000. Advances on factored trade accounts receivable are secured by all of the Company’s trade accounts receivable
and inventories, are repaid periodically as collections are made by Merchant but are otherwise due upon demand, and bear interest
at the prime commercial rate of interest, as published, plus two percent (Effective rate 5.25% at December 31, 2020). Advances
under the factoring agreement are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory
and our financial condition at the time of each request for an advance.
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with US-GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Revenue Recognition
The Company’s primary source of revenue
is the sale of safety and security products based upon purchase orders or contracts with customers. Revenue is recognized at a
point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed
to have been transferred to the customer when the product is shipped or delivered to the customer. Customers may not return, exchange
or refuse acceptance of goods without our approval. Generally, the Company does not grant extended payment terms. Shipping and
handling costs associated with outbound freight, after control over a product has transferred to a customer, are accounted for
as a fulfillment cost and are recorded in selling, general and administrative expense.
The amount of revenue recognized reflects
the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at
the transaction price net of estimates of variable consideration. The Company uses the expected value method based on historical
data in considering the impact of estimates of variable consideration, which may include trade discounts, allowances, product returns
(including rights of return) or warranty replacements. Estimates of variable consideration are included in revenue to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
We have established allowances to cover
anticipated doubtful accounts based upon historical experience.
Disaggregation of Revenue
The Company presents below revenue associated with sales of
products acquired from 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 nine months ended December 31,
2020 and 2019 are as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
Dec. 31, 2020
|
|
|
Dec. 31, 2019
|
|
|
Dec. 31, 2020
|
|
|
Dec. 31, 2019
|
|
Sales of products acquired from Eyston
|
|
$
|
4,669,289
|
|
|
$
|
2,722,428
|
|
|
$
|
12,945,622
|
|
|
$
|
9,943,661
|
|
Sales of GFCI’s and ventilation fans
|
|
|
455,461
|
|
|
|
501,250
|
|
|
|
1,577,191
|
|
|
|
1,245,577
|
|
|
|
$
|
5,124,750
|
|
|
$
|
3,223,678
|
|
|
$
|
14,522,813
|
|
|
$
|
11,189,238
|
|
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 one customer in the fiscal quarter ended December 31, 2020 that represented 14.1% of the Company’s net
sales. Sales to this one customer represented 26.4% of net sales for the nine months ended December 31, 2020.
Receivables
Receivables are recorded when the Company has an unconditional
right to consideration. We have established allowances to cover anticipated doubtful accounts based upon historical experience.
Remaining Performance Obligations
Remaining performance obligations represent
the transaction price of firm orders for satisfied or partially satisfied performance obligations on contracts with an original
expected duration of one year or more. The Company’s contracts are predominantly short-term in nature with a contract term
of one year or less. For those contracts, the Company has utilized the practical expedient in ASC Topic 606 exempting the Company
from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of
a contract that has an original expected duration of one year or less.
Joint Venture
The Company held a fifty percent interest
in Eyston Company Limited, the former Hong Kong Joint Venture, which has manufacturing facilities in the People’s Republic
of China, for the manufacturing of certain of our electronic and electrical products. The Company sold its fifty percent interest
in the Hong Kong Joint Venture effective March 31, 2020. There are no material differences between US-GAAP and the basis of
accounting used by the former Hong Kong Joint Venture for the periods ended December 31, 2019. The following represents summarized
balance sheet and income statement information of the former Hong Kong Joint Venture as of and for the nine months ended December 31,
2019:
|
|
2019
(Unaudited)
|
|
Net sales
|
|
$
|
6,600,373
|
|
Gross profit
|
|
|
354,003
|
|
Net loss
|
|
|
(2,399,054
|
)
|
Total current assets
|
|
|
12,008,548
|
|
Total assets
|
|
|
17,924,029
|
|
Total current liabilities
|
|
|
2,694,435
|
|
Total liabilities
|
|
|
3,594,691
|
|
During the nine months ended December 31,
2019 the Company purchased $6,204,745 of products directly from the Hong Kong Joint Venture for resale. For the nine months ended
December 31, 2019 the Company increased its investment in the Joint Venture to reflect a decrease of $47,900 in inter-Company
profit on purchases held by the Company in inventory.
Income Taxes
We calculate our interim tax provision
in accordance with the guidance for accounting for income taxes in interim periods. We estimate the annual effective tax rate and
apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related to discrete events during the
interim period is recognized in the interim period in which those events occurred.
The Company recognizes a liability or asset
for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts
in the condensed consolidated financial statements. These temporary differences may result in taxable or deductible amounts in
future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed
periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset
will not be realized. After a review of projected taxable income and the components of the deferred tax asset in accordance with
applicable accounting guidance it was determined that it is more likely than not that the tax benefits associated with the remaining
components of the deferred tax assets will not be realized. This determination was made based on the Company’s history of
losses from operations and the uncertainty as to whether the Company will generate sufficient taxable income to use the deferred
tax assets prior to their expiration. Accordingly, a valuation allowance was established to fully offset the value of the deferred
tax assets. Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of
future taxable income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income
is generated, we may be able to offset a portion of future tax expenses.
The Company follows ASC 740-10 which provides
guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax
return and requires that we recognize in our 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 delivery or warranty issues related to the products sold.
Management assesses the credit risk of
both its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account
are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated
from the receivable accounts and from the allowance account in the period that the receivables’ status is determined to be
uncollectible.
Based on the nature of the factoring agreement
and prior experience, no allowance related to Amounts Due from Factor has been provided. At December 31, 2020 and March 31,
2020, an allowance of approximately $157,000 and $57,000, respectively, has been provided for uncollectible trade accounts receivable.
Earnings (Loss) per Common Share
Basic earnings (loss) per common share
is computed based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings (loss)
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 nine month periods ended December 31, 2020 or 2019. As
a result, basic and diluted weighted average common shares outstanding are identical for the three and nine months ended December 31,
2020 and 2019.
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.
Long-Term Note Payable – Eyston Company Ltd.
Effective March 31, 2020 the Company
sold its fifty percent ownership interest in the Hong Kong Joint Venture. On April 19, 2020, the Company converted $1,081,440
of trade accounts payable due to the Hong Kong Joint Venture to an unsecured long-term note payable. 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% (5.25% effective
rate at December 31, 2020) and is payable monthly. The principal balance of $1,081,440 is due and payable on April 19,
2022.
Note Payable – Bank
On May 6, 2020, the Company received a Paycheck Protection
Program loan under the CARES Act (Act) in the amount of $221,400. The loan bears interest at one percent and provides for monthly
payments that have been deferred, and that has a maturity date of May 6, 2022. Under the provisions of the Act, if the proceeds
of the loan are used for certain specified costs, repayment of the loan will be forgiven. The Company has applied for and expects
the loan to be forgiven. Until the Company receives notification from the Small Business Administration that the loan is forgiven,
the loan is classified as a current liability as management expects the loan balance to be extinguished within one year from the
balance sheet date.
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 renew at the
Company’s sole discretion. The Company’s leases are comprised of fixed lease payments, with its real estate leases
including lease payments subject to a rate or index which may be variable. Certain real estate leases also include executory costs
such as common area maintenance (non-lease component). As a practical expedient permitted under Accounting Standards Codification
“ASC” 842, the Company has elected to account for the lease and non-lease components as a single lease component. Lease
payments, which may include lease components and non-lease components, are included in the measurement of the Company’s lease
liabilities to the extent that such payments are either fixed amounts or variable lease amounts based on a rate or index (fixed
in substance) as stipulated in the lease contract.
None of the Company’s lease agreements
contain any residual value guarantees or material restrictive covenants. As a result of the Company’s election of the package
of practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification,
all of the Company’s lease agreements in existence at the date of adoption that were classified as operating leases under
ASC 840 have been classified as operating leases under ASC 842. Lease expense for payments related to the Company’s operating
leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option.
Right-of-use assets represent the
Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s
obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the
Company’s operating leases are recognized at the lease commencement date based on the present value of the remaining
lease payments over the lease term and amounted to approximately $485,000 at the date of adoption. When the Company’s
leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available
surrounding the Company’s borrowing rates at the lease commencement date in determining the present value of lease
payments. The right-of use asset also includes any lease payments made at or before lease commencement less any lease
incentives. As of December 31, 2020, the Company had right-of-use assets of $211,526 and lease liabilities of $211,526
related to its operating leases. Right-of-use assets are included in property and equipment, net, on the condensed
consolidated balance sheet and lease liabilities related to the Company’s operating leases are included in short-term
and long-term lease liability on the condensed consolidated balance sheet. As of December 31, 2020 the Company’s
weighted-average remaining lease term and weighted-average discount rate related to its operating leases were 1.25 years and
6.0%, respectively. During the nine months ended December 31, 2020, the cash paid for amounts included in the
measurement of lease liabilities related to the Company’s operating leases was $142,536, which is included as an
operating cash outflow within the condensed consolidated statements of cash flows. During the nine months ended
December 31, 2020, the Company did not enter into any Material lease agreements set to commence in the future and there
were no newly leased assets for which a right-of use asset was recorded in exchange for a new lease liability, other than
those lease assets recorded upon implementation.
The future minimum payments under operating leases were as follows
at December 31, 2020 for the fiscal year ending March 31, 2021:
2021 (remainder)
|
|
$
|
42,860
|
|
2022
|
|
|
175,431
|
|
2023
|
|
|
29,340
|
|
|
|
|
|
|
Total operating lease payments
|
|
$
|
247,631
|
|
Less: amounts representing interest
|
|
|
(36,105
|
)
|
Present value of net operating lease payments
|
|
$
|
211,526
|
|
Less: current portion
|
|
|
167,926
|
|
Long-term portion of operating lease obligations
|
|
$
|
43,600
|
|
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 December 31, 2020.
|
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 nine month periods ended December 31, 2020 and 2019. Due to the sale of the Company’s interest in
the Hong Kong Joint Venture effective March 31, 2020, the equity method financial results of the former Hong Kong Joint Venture
are only included for the periods ended December 31, 2019. Accordingly, the following discussion and analysis of the three
and nine month periods ended December 31, 2020 and 2019 relate to the operational results of the Company.
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 may experience delays in shipping and receiving of products.
As our products are
sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic
have had an impact on the Company’s sales. We are not yet able to quantify the full impact of the COVID-19 pandemic on our
sales and financial results, but we believe that during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and
first quarter of fiscal 2021) sales were negatively impacted by lower sales resulting from steps taken to combat the spread of
COVID-19. Sales in our second and third fiscal quarters ended September 30, 2020, and December 31, 2020 increased significantly
when compared to sales for the comparable 2019 periods due to the Company’s ability to fill orders from inventory for a large
national retailer new customer, when the national retailer’s usual supplier was unable to fill the orders due to delays caused
by the pandemic. Our sales growth was also due to sales of two products to another large national retailer which purchased certain
of our models as a 1,350 store test, which should be completed later this fiscal year. We anticipate that the increase in sales,
the associated increase in availability from the Factor resulting from these increased sales, and the funds received from the Paycheck
Protection Program will provide sufficient working capital for the next twelve months following the date of this report. Our financial
results were also positively impacted by a reduction in research and interest expenses for the nine months ended December 31,
2020.
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 have been subjected to tariffs of 25%. We are monitoring these developments and
will determine our strategies as additional information becomes available. Any increase in tariffs that is not offset by an increase
in our sales prices could have an adverse effect on our business, financial position, results of operations or cash flows.
Results
of Operations
Three Months Ended December 31,
2020 and 2019
Sales. Net sales
for the three months ended December 31, 2020 were $5,124,750 compared to $3,223,678 for the comparable three months in the
prior year, an increase of $1,901,072 (59.0%). Sales increased principally due to the Company’s ability to fill orders from
inventory for a large national retailer new customer, when the national retailer’s usual supplier was unable to fill the
order due to delays caused by the pandemic. The Company attributes the increased sales to the fact that the Company had significant
inventory on hand prior to the beginning of the pandemic and was not adversely affected by decreased production by its suppliers
and to sales to a second national retailer conducting a test of our products.
Gross Profit Margin.
Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit
margin was 29.7% and 23.9 % of sales for the quarters ended December 31, 2020 and 2019, respectively. Margins in the quarter
ended December 31, 2019 were negatively impacted by tariffs on certain of our products imported from the Peoples Republic
of China.
Expenses. Selling,
general and administrative expenses were $1,321,311 for the three months ended December 31, 2020, compared to $1,083,913 for the
comparable three months in the prior year. As a percentage of net sales, these expenses decreased to 25.8% for the three month
period ended December 31, 2020, from 33.6% for the 2019 period. Selling expenses, as a dollar amount, increased partially due
to commissions on increased sales and freight out, incurred on increased sales during the period ended December 31, 2020. 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 $106,608 for the three month period ended December 31, 2020 compared to $169,768 for the comparable quarter
of the prior year, a decrease of $63,160 (37.2%). The primary reason for the decrease is lower amounts paid to engineering consultants
for services towards meeting revised smoke alarm testing standards.
Interest Expense.
Our interest expense was $14,086 for the quarter ended December 31, 2020, compared to interest expense of $119,308 for the
quarter ended December 31, 2019. Interest expense is primarily dependent upon the total amounts borrowed on average from the
Factor and, in the prior year, extended trade payables due to the Hong Kong Joint Venture and on interest rates which vary with
the prime rate of interest. Effective March 31, 2020, our interest in the Hong Kong Joint Venture was sold and the proceeds
from the sale were used to reduce our indebtedness to the Hong Kong Joint Venture.
Net Income (loss).
We reported net income of $78,318 for the quarter ended December 31, 2020, compared to a net loss of $(1,011,833) for the
corresponding quarter of the prior fiscal year, a $1,090,151 (107.7%) decrease in the net loss. The primary reason for the decrease
in the net loss is increased sales in the current quarter, and the decrease in the loss from our investment in the former Hong
Kong Joint Venture.
Nine Months Ended December 31,
2020 and 2019
Sales. Net sales
for the nine months ended December 31, 2020 were $14,522,813 compared to $11,189,238 for the comparable nine months in the
prior period, an increase of $3,333,575 (29.8%). Sales increased principally due to the Company’s ability to fill an order
from inventory for a large national retailer new customer, when the national retailer’s usual supplier was unable to fill
the order due to delays caused by the pandemic. The Company attributes the increased sales to the fact that the Company had significant
inventory on hand prior to the beginning of the pandemic and was not adversely affected by decreased production by its suppliers.
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 32.4% for the period ended December 31, 2020 and 27.8% for the period ended December 31, 2019.
The Company was assessed and paid tariffs on imported products that were subsequently determined not to be subject to the tariffs.
Accordingly, gross margins are positively impacted in the current period ended December 31, 2020, principally due to refunds
of tariffs previously paid and lower tariff costs.
Expenses. Selling,
general and administrative expenses were $3,572,189 for the nine months ended December 31, 2020 compared to $3,455,661 for
the comparable nine months in the prior year. As a percentage of sales, these expenses were 24.6% for the nine month period ended
December 31, 2020 and 30.9% for the comparable 2019 period. These expenses decreased as a percentage of net sales since selling,
general, and administrative expenses do not fluctuate in direct proportion to sales. Selling expenses as a dollar amount increased
principally due to selling expenses incurred on increased sales during the nine month period ended December 31, 2020.
Research and development
expenses were $332,276 for the nine months ended December 31, 2020 compared to $487,144 for the comparable period of the prior
year, a decrease of $154,868 (31.8%). The primary reason for the decrease is lower amounts paid to engineering consultants for
services towards meeting revised smoke alarm testing standards.
Interest Expense.
Our interest expense was $71,848 for the nine months ended December 31, 2020, compared to interest expense of $332,336 for
the nine months ended December 31, 2019. Interest expense is dependent upon the total amounts borrowed on average from the
Factor and on extended trade payables due to the Hong Kong Joint Venture and on interest rates which vary with the prime rate of
interest. Effective March 31, 2020, our interest in the Hong Kong Joint Venture was sold and the proceeds from the sale were
used to reduce our indebtedness to the Hong Kong Joint Venture.
Net Income
(Loss). We reported net income of $725,181 for the nine months ended December 31, 2020 compared to a net loss of
$2,321,601 for the corresponding period of the prior fiscal year, a decrease in the net loss of $3,046,782 (131.2%). The
primary reason for the decrease in the net loss is increased sales, the decrease in the loss from our investment in the
former Hong Kong Joint Venture, the refund of tariffs as discussed above, and the decrease in interest paid to the former
Hong Kong Joint Venture.
Management Plans and Liquidity
As the Company previously
reported, on August 31, 2020, the Company received a letter from NYSE American LLC (the “Exchange”) stating that
the Exchange has determined that the Company is not in compliance with the Exchange’s continued listing requirements as the
result of the Company’s failure to maintain stockholders’ equity of $6.0 million after reporting losses from continuing
operations and/or net losses in its five most recent fiscal years. On September 23, 2020, the Company submitted to the Exchange
the Company’s plan (the “Plan”) of actions the Company has taken or will take to regain compliance with the continued
listing standards by February 28, 2022 (the “Plan Period”). On November 5, 2020, the Company received a letter
from the Exchange advising the Company that the Exchange has accepted the Plan and granted the Plan Period through February 28,
2022. The Exchange will review the Company periodically to determine whether the Company is making progress consistent with the
Plan. The Company is working diligently to execute its Plan to regain compliance with the Exchange’s continued listing requirements.
As our products are sold primarily to the
construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had an impact
on the Company’s sales. We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial
results, but we believe that during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and first quarter of fiscal
2021) sales were negatively impacted by lower sales resulting from steps taken to combat the spread of COVID-19. Sales in our second
and third fiscal quarters ended September 30, 2020, and December 31, 2020 increased significantly when compared to sales
for the comparable 2019 periods due to the Company’s ability to fill orders from inventory for a large national retailer
new customer, when the national retailer’s usual supplier was unable to fill the orders due to delays caused by the pandemic.
Our sales growth was also due to sales of two products to another large national retailer which purchased certain of our models
as a 1,350 store test, which should be completed later this fiscal year. We anticipate that the increase in sales, the associated
increase in availability from the Factor resulting from these increased sales, and the funds received from the Paycheck Protection
Program will provide sufficient working capital for the next twelve months following the date of this report. Our financial results
were also positively impacted by a reduction in research and interest expenses for the nine months ended December 31, 2020.
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 unused availability of this facility totaled approximately $3,482,000 at December 31, 2020.
The Company has a history of sales that
are insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to
these conditions includes increasing sales resulting from the delivery of our line of sealed battery ionization smoke alarms, carbon
monoxide products, and ground fault circuit interrupters. The Company has seen positive results on this plan due to increased sales
of its product offerings to a major home improvement retailer during the second and third quarters of our fiscal year ending March 31,
2021. The increase in sales to major home improvement retailers has resulted in significant additional availability under the
provisions of our facility with the Factor. Management anticipates this sales growth to continue going forward. In addition, effective
March 31, 2020, we sold its ownership interest in its former Hong Kong Joint Venture reducing its current liabilities due
to the Hong Kong Joint Venture by $4,000,000. Furthermore, in May, 2020 we received a Paycheck Protection Program loan of $221,400
under the CARES Act and expect the loan will be forgiven in compliance with the provisions of the Act. Though no assurances can
be given, if management’s plan continues to be successful over the next twelve months, we anticipate that the Company 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
are expected to be adequate to fund operations for one year from the issuance date of this report.
Operating activities provided cash of $1,827,375
for the nine months ended December 31, 2020. This was primarily due to a decrease in inventories, prepaid expenses and other
of $2,018,807, net income of $725,181, and an increase in accounts payable and accrued expenses of $94,255, offset by an increase
in accounts receivable and amounts due from factor of $1,017,400. Operating activities provided cash of $309,795 for the nine months
ended December 31, 2019. This was primarily due to a decrease in accounts receivable and amounts due from factor of $885,657,
an increase in accounts payable and accrued expenses of $301,966, a decrease in inventories, prepaid expenses and other of $287,955,
and offset by a net loss of $2,321,601. The net loss includes a non-cash loss from the investment in the Hong Kong Joint Venture
of $1,151,627.
There were no investing activities for
the nine months ended December 31, 2020 or 2019.
Financing activities used cash of $1,340,265
and $506,930 during the nine months ended December 31, 2020 and 2019, respectively, which is comprised of loan proceeds of
$221,400 under the Paycheck Protection Program of the CARES Act for the nine months ended December 31, 2020, and repayments,
net of advances on the line of credit from our factor, of $1,561,665 and $506,930 for the periods ended December 31, 2020
and 2019, respectively.
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 U.S.