Universal Security Instruments, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2015 (fiscal 2016 third quarter). The filing identifies the registrant as Universal Security Instruments, Inc., despite the request metadata naming Universal Safety Products, Inc. The company markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (JV).
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2015 | Comparable 2014 period |
|---|---|---|---|
| Net sales | $4.11 million | $10.33 million | $2.37 million / $7.11 million |
| Gross profit | $1.31 million | $2.88 million | $0.38 million / $1.49 million |
| Gross margin | 31.8% | 27.8% | 16.1% / 20.9% |
| Operating income (loss) | $19,060 | $(1.08) million | $(760,600) / $(2.38) million |
| Net loss | $(174,172) | $(1.36) million | $(1.10) million / $(2.96) million |
| Loss per share, basic and diluted | $(0.08) | $(0.59) | $(0.48) / $(1.28) |
Quarterly sales rose 73.5% and nine-month sales rose 45.3% year over year. Management attributed the gains and higher gross margins mainly to the new sealed-battery product line and increased carbon-monoxide-alarm sales. Nine-month R&D expense declined 13.5% to $495,071; SG&A increased 4.9% to $3.46 million, but declined as a share of sales to 33.5% from 46.4%.
Cash, liquidity and balance sheet
For the nine months, operating activities used $1.64 million of cash, compared with $669,000 used in the prior-year period. Investing activities provided $190,461, from a JV distribution; financing activities provided $1.63 million from factor advances. Cash increased by $177,711 to $227,138. At December 31, 2015, total assets were $20.21 million, current assets $7.98 million, and current liabilities $3.23 million. Finished-goods inventory was $4.60 million, and amounts due from factor were $2.58 million.
Factor borrowings were $1.63 million, with approximately $1.02 million of stated remaining availability. The facility is secured by receivables and inventory, advances are subject to the factor’s discretion and are otherwise due on demand, and the stated effective interest rate was 5.50%. The company also negotiated 90-day terms on up to $1 million of purchases from the JV’s new sealed-product line.
Changes, outlook and risks
The company’s losses narrowed substantially versus the prior-year quarter and nine-month period, but it remained loss-making for the nine months. Management stated that its history of losses, prior revenue declines and limited financing options raise substantial doubt about its ability to continue as a going concern. Plans include using the factoring facility, reducing inventory and expenses, and making further operating changes if needed. Management cautioned that revenue may not reach levels needed for profitability, costs may exceed estimates, and working-capital needs may be higher than anticipated. The filing provides no quantified earnings or revenue guidance.
The JV’s nine-month sales rose 19.9% to $15.00 million and its net loss narrowed to $359,513 from $1.52 million. USI’s recorded nine-month loss from its JV investment was $263,530. The company reports 10 patents granted, including six relating to new technologies and features, with three applications awaiting notification.
Disclosure controls and procedures were deemed ineffective because of material weaknesses previously identified in the company’s fiscal 2015 Form 10-K. Management described additional review and monitoring procedures and planned further remediation. Management, after consulting counsel, said routine legal matters were not expected to have a material adverse effect. A full valuation allowance was maintained against deferred tax assets.
Investor verification priorities
- Assess the going-concern warning, cash burn, factor availability and the demand-repayment terms of the secured facility.
- Confirm whether sales growth and improved product mix persist and whether operations reach profitability.
- Track inventory, receivables and amounts due from factor, which contributed to operating cash use.
- Review progress in remediating the disclosed internal-control material weaknesses.
- Verify JV performance, the company’s dependence on JV-sourced products, and the status of pending patent applications.