Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2021; filed February 16, 2022. The filing identifies the registrant as Universal Security Instruments, Inc., although the request metadata names Universal Safety Products, Inc.
Business context and results
The company markets and distributes safety and security products, including alarms, ground-fault circuit interrupters and ventilation fans. Most alarm products are acquired from Eyston Company Ltd.; all products are imported from China.
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $5.319 million | $5.125 million | $15.259 million | $14.523 million |
| Gross profit / margin | $1.717 million / 32.3% | $1.520 million / 29.7% | $4.551 million / 29.8% | $4.701 million / 32.4% |
| Operating income | $49,507 | $92,404 | $195,642 | $797,029 |
| Net income | $35,351 | $78,318 | $157,688 | $725,181 |
| Basic and diluted EPS | $0.02 | $0.03 | $0.07 | $0.31 |
Financial position, cash flow and liquidity
- At December 31, 2021, cash was $387,223, current assets $9.954 million, current liabilities $5.179 million and shareholders’ equity $4.874 million. Working capital was approximately $4.775 million.
- Current borrowings included $2.357 million under the factoring facility and $1.081 million owed to Eyston. The Eyston note is unsecured, bears interest at 5.25% at period-end, and is due April 19, 2022. The factoring facility also bears 5.25% at period-end and is secured by receivables and inventory.
- Operating activities used $2.112 million in cash during the nine months, versus providing $1.827 million in the prior-year period. The use principally reflected higher receivables and amounts due from the factor ($1.658 million) and higher inventory, prepaid expenses and other assets ($808,245).
- Financing activities provided $2.339 million, primarily from net factor borrowings. Cash increased by $226,619 to $387,223. The filing reports no investing cash flows in either nine-month period.
- Factor availability was approximately $383,000 at December 31, 2021. Management expected the facility, operating cash flows and collection of non-factored receivables to provide sufficient working capital for the next 12 months; factor advances remain at the factor’s discretion.
Material changes and management commentary
- Quarterly sales increased 3.8%, principally due to a large order from a major national retailer. Quarterly gross margin improved, which management attributed mainly to price increases addressing higher freight costs. Net income nevertheless fell 54.9%, as higher customer packaging, presentation and promotional costs and legal and consulting fees outweighed the sales and margin improvement.
- Nine-month sales rose 5.1%, primarily due to orders from new customers. Gross margin declined from 32.4% to 29.8%, mainly because of increased freight, tariffs and customs charges; the prior-year period benefited from tariff refunds. Nine-month net income fell 78.3%, also reflecting higher general and administrative costs.
- Management cited COVID-19-related shipping and receiving delays in Hong Kong, China and the United States, including freight-forwarding delays at California ports. The company said it could not yet quantify the pandemic’s full effect on sales or financial results.
- The factoring agreement had been extended to January 6, 2022; after quarter-end, the company and factor agreed to continue it month-to-month while renewal for another two-year term was pending.
- The company received notice on October 1, 2021 that it had remedied its NYSE American continued-listing deficiency. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Risks, contingencies and other notable items
- Freight, customs and tariff costs may remain a pressure; some products were subject to 25% tariffs. Management warned that tariff increases not offset by higher selling prices could adversely affect results.
- Customer concentration is material: one customer represented 24.1% of quarterly sales; two customers represented 11.8% and 11.1% of nine-month sales. One customer accounted for 11.2% of receivables and amounts due from factor at quarter-end. The company also depends on Eyston for all smoke and carbon-monoxide alarm products.
- The company disclosed routine legal matters that management, based on counsel’s advice, did not expect to have a material adverse effect. It also disclosed CEO and family credit-card charges for inventory and other expenses, subsequently reimbursed in full; the CEO receives mileage benefits from these charges.
- Deferred tax assets are fully offset by a valuation allowance because management concluded realization was not more likely than not, citing the company’s history of operating losses and uncertainty about future taxable income.
Important facts for investors to verify
- Whether the factoring agreement was renewed beyond its month-to-month continuation, and whether the factor’s discretionary availability remains adequate.
- The April 19, 2022 Eyston note repayment or any refinancing, given the note’s current classification at quarter-end.
- Whether the company can sustain sales-price increases and manage freight, customs and tariff costs without further margin erosion.
- Whether recent customer orders and concentrated customer relationships persist, and whether supplier and import dependence creates additional disruption risk.
- Cash conversion and working-capital trends, particularly the sharp increase in receivables, amounts due from factor and inventory alongside negative operating cash flow.