Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the company’s first fiscal quarter. The filing identifies the registrant as Universal Security Instruments, Inc.; this differs from the company name in the request metadata. The company markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (HKJV). Financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $4.046 million | $3.318 million | Up 21.9%, mainly from the sealed-battery safety alarm product line |
| Gross profit | $1.240 million | $0.982 million | Gross margin rose to 30.7% from 29.6%, attributed mainly to product mix |
| SG&A | $1.198 million | $1.144 million | Up in dollars; down to 29.6% of sales from 34.5% |
| Research and development | $153,387 | $174,723 | Down 12.2% as the new sealed-product line was completed |
| Operating loss | $111,014 | $337,110 | Improved |
| Net loss | $438,833 | $543,663 | Loss narrowed 19.3%; loss per share was $0.19 versus $0.24 |
| Operating cash flow | $355,666 | $536,548 | Positive, but lower year over year |
Interest expense increased to $83,419 from $18,443, reflecting borrowings and increased extended payables to the HKJV. The company recorded a $244,400 equity-method loss from the HKJV, versus $188,110 a year earlier. Comprehensive loss was $827,603, including $388,770 of other comprehensive loss, primarily currency translation.
Liquidity and financial position
At June 30, 2018, cash was $77,072, total assets were $18.197 million, and current liabilities were $6.271 million. Current assets were $8.716 million, yielding reported working capital of $2.445 million, down from $2.632 million at March 31, 2018. Cash declined by $51,089 during the quarter. The company repaid $406,755 net on its factoring line.
Factor borrowings were $1.204 million, with approximately $913,000 of reported remaining availability. The facility is secured by receivables and inventory, bears interest at 7.00% at quarter-end, and advances are at the factor’s discretion. Amounts payable to the HKJV were $4.333 million; the company reported extended purchase terms of up to $4 million, generally due within 120 days, with the interest rate increased from 4.5% to 5.5% effective June 1, 2018.
Material developments, outlook, and risks
- Revenue growth was driven principally by the completed introduction of sealed-battery safety alarms. The company expects growth from sealed-battery smoke alarms and carbon monoxide products to continue, but provides no quantified guidance.
- Management says cash flows and credit availability are expected to fund operations for one year from the report’s issuance, conditional on its plans continuing to succeed; it cautions that there are no assurances. The company cites a history of losses, insufficient sales to generate profitable operations, and limited financing sources.
- All products are imported from China. A 25% U.S. tariff effective August 23, 2018 applied to GFCIs, a small portion of sales; further tariffs were expected to be announced, and coverage of smoke and carbon monoxide products was uncertain. Unoffset tariff increases could adversely affect results and cash flows.
- The HKJV’s quarterly sales were $3.267 million and its net loss was $546,959. Its gross margin fell to 10.6% from 14.4%, primarily reflecting product mix; the company’s share of its loss was recorded in its results.
- Disclosure controls and procedures were deemed ineffective because of a material weakness in oversight of the HKJV’s accounting function and disclosure controls. Management was monitoring suggested improvements; no material control changes during the quarter were reported.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method and reported no material impact. It had not completed its accounting for the Tax Act; it initially estimated no transition tax would be due, subject to further information and refinement.
- Management said routine claims and litigation were not expected to have a material adverse effect. The filing reports no off-balance-sheet arrangements considered reasonably likely to materially affect liquidity or capital resources.
Important facts for investors to verify
- Whether sales growth and product margins continue, and whether the sealed-battery product line generates sustainable profitability.
- Whether factor financing remains available on acceptable terms, given discretionary advances and the company’s low cash balance.
- How the $4.333 million payable to the HKJV, its higher interest rate, and the related purchase terms affect working capital and cash needs.
- Whether additional China-related tariffs cover the company’s principal products and whether price increases can offset their cost.
- Progress addressing the HKJV-related material weakness, and whether the company can meet its stated one-year funding outlook.
- The final Tax Act transition-tax calculation and the recoverability of deferred tax assets, for which a full valuation allowance was recorded.