Universal Security Instruments, Inc. — FY2017 Form 10-K
Period and business: Annual report for the fiscal year ended March 31, 2017 (filed July 14, 2017). The registrant is Universal Security Instruments, Inc.; this differs from the company name in the request metadata. The company markets smoke and carbon monoxide alarms and related safety products, with most products manufactured by its 50%-owned Hong Kong joint venture (HKJV).
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $14.08 million | $13.74 million |
| Gross profit / margin | $4.15 million / 29.5% | $3.78 million / 27.5% |
| Operating loss | $978,140 | $1.37 million |
| Net loss | $2.06 million ($0.89 per share) | $2.14 million ($0.92 per share) |
| Cash used in operations | $2.15 million | $823,000 |
- Revenue increased 2.5%; gross margin improved 2.0 percentage points. SG&A declined slightly to $4.44 million, while R&D rose to $683,000.
- FY2017 net loss included a $1.02 million equity-method loss from HKJV, up from $742,000. Interest expense increased to $63,000.
- At March 31, 2017, cash was $262,000, working capital was $3.56 million, and current assets and current liabilities were $7.71 million and $4.16 million, respectively.
- Factor borrowings were $2.26 million, compared with $314,000 a year earlier. Trade and HKJV payables were $526,000 and $1.21 million. The factor facility is secured by receivables and inventory, bears interest at prime plus 2%, and advances are at the factor’s discretion. Available borrowing under the factor facility was approximately $587,000; combined unused availability under financing arrangements was reported at approximately $1.38 million.
- Total assets were $18.39 million and shareholders’ equity was $14.23 million. The company reported no income tax benefit for either year.
Changes, outlook and risks
- The company attributed improved sales and margins mainly to introducing sealed-battery alarms. Management expected the sealed-alarm line and a stronger housing market to support further sales and improved profitability, but cautioned that product acceptance was not assured.
- Cash from operations deteriorated from negative $823,000 to negative $2.15 million, primarily amid higher receivables and an $817,000 inventory increase. Financing cash flow included $1.95 million of factor advances.
- Management said cash flows and credit availability were expected to fund operations for one year from the report’s issuance, contingent on execution of its sales and financing plans. The filing describes persistent losses, limited financing sources and potential risk to continued operations if the plans or product acceptance fall short.
- From April 1, 2017, HKJV inventory payment terms increased to a $3 million limit and the interest rate rose to 4%. The company purchased 95.6% of its inventory from HKJV; disruption to that source could materially affect supply.
- HKJV sales declined to $15.47 million from $17.58 million, and its net loss increased to $1.81 million from $1.58 million, largely due to weaker sales to unaffiliated customers, particularly in Europe.
- Disclosure controls and internal control over financial reporting were found ineffective because of a material weakness in oversight of HKJV accounting and disclosure controls. Management was monitoring proposed improvements; the external auditor did not express an opinion on internal controls.
- Other risks include exposure to China-related trade, tariffs and currency conditions, a weak U.S. housing market, competition from larger companies, and customer concentration (one customer was 14.8% of FY2017 sales). The filing reports a non-material prior-period revision to the HKJV investment carrying value and related equity balances.
Important facts for investors to verify
- Whether sealed-alarm sales continue to grow and translate into sustained profitability and positive operating cash flow.
- Actual borrowing availability and terms under the factor facility, including the lender’s discretion to approve advances.
- HKJV operating performance, financial reporting controls, inventory supply continuity and the impact of the higher-cost extended payment terms.
- Inventory realizability and receivable collections, given the large inventory balance and cash use from working-capital changes.
- Progress in remediating the disclosed material weakness and any subsequent changes in control effectiveness.
- The company’s ability to realize tax benefits: deferred tax assets were fully offset by a valuation allowance, and approximately $8.42 million of federal and state net operating loss carryforwards were reported.