Universal Security Instruments, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2021. The company markets and distributes safety and security products. Financial statements are unaudited except the March 31, 2021 balance sheet.
Financial performance
| Metric | Three months ended Sept. 30, 2021 | Three months ended Sept. 30, 2020 | Six months ended Sept. 30, 2021 | Six months ended Sept. 30, 2020 |
|---|---|---|---|---|
| Net sales | $5.27 million | $6.46 million | $9.94 million | $9.40 million |
| Gross profit / margin | $1.58 million / 29.9% | $2.10 million / 32.6% | $2.83 million / 28.5% | $3.18 million / 33.8% |
| Operating income | $122,005 | $748,069 | $146,135 | $704,625 |
| Net income | $107,696 | $725,845 | $122,337 | $646,863 |
| EPS, basic and diluted | $0.05 | $0.31 | $0.05 | $0.28 |
Balance sheet, cash flow and liquidity
- At September 30, 2021, cash was $168,570, total assets $9.69 million, current assets $9.55 million, current liabilities $4.85 million, and shareholders’ equity $4.84 million.
- Six-month operating cash flow was negative $2.39 million, mainly reflecting increases in receivables and amounts due from factor ($1.30 million) and inventories, prepaid expenses and other ($978,000), plus reductions in payables and accruals. Financing provided $2.39 million, primarily through net factor borrowings; cash increased by $7,966.
- Factor borrowings were $2.41 million, with approximately $1.89 million of stated availability. The facility is secured by receivables and inventory, advances are at the factor’s discretion, and the effective interest rate was 5.25%. The agreement was extended to January 6, 2022; a temporary increase to the overadvance cap expires November 30, 2021.
- The $1.08 million unsecured note payable to Eyston bears interest at 5.25% and is due April 19, 2022. Operating lease liabilities were $87,908, all current. Management expects factor availability and operating cash flows to provide sufficient working capital for the 12 months following the report date.
Changes and management commentary
- Quarterly sales fell 18.4% year over year, while six-month sales rose 5.8%. Management attributed the quarterly decline to port-unloading and inventory delays and a large prior-year retailer order that did not recur. First-half growth reflected orders from new customers unable to obtain products from existing suppliers.
- Margins declined in both comparisons, which management attributed principally to higher freight, customs and tariff costs; the prior-year comparable periods benefited from tariff refunds. Six-month SG&A increased to $2.49 million from $2.25 million, while R&D declined to $198,126 from $225,668.
- Six-month net income declined 81.1%. The quarter’s net income declined 85.2%, with management citing lower sales, higher freight and tariffs, selling costs, and legal expenditures.
- COVID-related operating and travel restrictions in the U.S., Hong Kong and China disrupted shipping and receiving. The company said it could not yet quantify the pandemic’s full financial impact. All products are imported from China; certain products face 25% tariffs, and additional tariffs not offset by price increases could harm results.
- The company reported that the Exchange notified it on October 1, 2021 that it had resolved its continued-listing deficiency and was in compliance with listing standards. Management said routine legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether port delays, freight costs, tariffs and COVID-related disruptions persist, and whether the company can pass higher costs to customers.
- Whether factor availability remains accessible on acceptable terms, given that advances are discretionary and the facility’s stated extension and temporary overadvance terms have near-term dates.
- Whether operating cash flow improves after the significant first-half working-capital outflow.
- Repayment or refinancing of the $1.08 million Eyston note due April 19, 2022, and renewal or replacement of the factoring agreement.
- Customer and supplier concentration: the company sources all smoke and carbon monoxide alarms from Eyston; two customers represented 18.4% and 10.1% of second-quarter sales.