Universal Security Instruments, Inc. — Form 10-Q Summary
Period: Three months ended June 30, 2020, the first quarter of fiscal 2021. The filing identifies the registrant as Universal Security Instruments, Inc. (NYSE American: UUU). The company markets and distributes safety and security products, including smoke and carbon monoxide alarms, GFCIs, and ventilation fans.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $2.941 million | $4.343 million |
| Gross profit / margin | $1.077 million / 36.6% | $1.245 million / 28.7% |
| Operating loss | $43,444 | $132,653 |
| Net loss | $78,982 | $608,954 |
| Loss per share, basic and diluted | $0.03 | $0.26 |
| Cash from operating activities | $747,020 | $5,336 |
Sales declined 32.3% year over year. Management attributed the reduction primarily to COVID-19-related weakness in construction and retail. Gross margin improved, which the company attributed principally to refunds of tariffs previously paid and lower tariff costs. SG&A fell to $986,669 from $1.237 million, but rose as a share of sales to 33.6% from 28.5%. R&D was $133,918, down 4.8%. Interest expense decreased to $35,538 from $107,337.
The smaller net loss also reflects the absence of the prior-year $368,964 loss from the former Hong Kong joint venture (HKJV), which the company sold effective March 31, 2020. The 2019 comparison also included $149,570 of other comprehensive loss related to the venture; Q1 FY2021 had none.
At June 30, 2020, cash was $278,234, total assets were $7.258 million, and shareholders’ equity was $4.369 million. Working capital was $5.222 million, up $162,219 from March 31. Current liabilities were $1.678 million. Borrowings included $777,685 under the factoring facility, a $221,400 PPP loan classified as current, and a $1.081 million unsecured long-term note payable to Eyston Company Ltd. Operating lease liabilities totaled $290,799.
Operating cash flow of $747,020 was primarily supported by reductions in receivables and amounts due from the factor ($596,652) and in inventory, prepaid expenses, and other ($465,639), partly offset by lower payables and accrued expenses. Financing used $562,580, including $783,980 of net factor repayments and $221,400 of PPP proceeds. Cash increased by $184,440 to $278,234.
Outlook, risks, and notable items
- Management said COVID-19 had negatively affected sales and could delay product shipments and receipts; it could not yet quantify the pandemic’s full financial impact.
- Management reported increased sales to a major home improvement retailer subsequent to quarter-end, said this increased factor availability, and expected the growth to continue. No quantified sales or earnings guidance was provided.
- The company reported a history of losses and limited financing sources. It expects cash flows and credit availability to fund operations for at least one year from the report’s issuance, conditional on management’s plan succeeding; it gave no assurance.
- The factoring facility bears interest at prime plus 2% (5.25% effective at June 30), is secured by receivables and inventory, and advances are at the factor’s discretion. Approximately $695,000 of availability remained at quarter-end. The agreement was extended to January 6, 2022.
- The $221,400 PPP loan bears 1% interest; management expected forgiveness if the proceeds complied with program requirements. Forgiveness was not assured. The $1.081 million Eyston note is due April 19, 2022 and bears interest at the applicable Hong Kong U.S.-dollar prime rate plus 2% (5.25% effective at quarter-end).
- All products are imported from China. Certain products had been subject to 25% tariffs; management warned that tariff increases not offset by higher selling prices could harm results and cash flows.
- Management said routine legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective; prior control issues concerning the HKJV were described as no longer applicable following its sale.
Investor verification priorities
- Whether post-quarter sales growth at the major home improvement retailer continued and translated into cash generation and improved margins.
- The ongoing effects of COVID-19 on demand, sourcing, and shipping, and any further tariff exposure or refunds.
- Actual factor availability and borrowing terms, given the facility’s discretionary advances and the company’s limited financing sources.
- Whether the PPP loan qualifies for forgiveness and whether the company can meet the Eyston note and lease obligations as they fall due.
- The comparability of year-over-year results, which is affected by the HKJV sale and the prior-year joint-venture loss.