Universal Security Instruments, Inc. — Form 10-Q
Reporting period: Fiscal quarter and nine months ended December 31, 2016. The request identifies the company as Universal Safety Products, Inc.; the filing is for Universal Security Instruments, Inc.
Business context
The company markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (HKJV). The company accounts for the HKJV using the equity method. The financial statements are unaudited interim statements.
Financial results
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $3.18 million | $4.11 million | $10.57 million | $10.33 million |
| Gross profit | $1.05 million | $1.31 million | $3.36 million | $2.88 million |
| Gross margin | 33.0% | 31.8% | 31.8% | 27.8% |
| Operating income (loss) | $(160,000) | $19,000 | $(439,000) | $(1.08 million) |
| Net loss | $(550,000) | $(174,000) | $(1.00 million) | $(1.36 million) |
| Loss per share | $(0.24) | $(0.08) | $(0.43) | $(0.59) |
- Quarterly sales declined 22.7%, mainly because a major customer bought approximately $500,000 in the quarter versus approximately $900,000 a year earlier. The company reported about $660,000 of additional customer orders, with delivery expected in the fourth fiscal quarter.
- Nine-month sales rose 2.3%, attributed mainly to the newer sealed-battery product line. Higher margins on that line contributed to gross-margin improvement.
- Nine-month net loss narrowed by 26.3%, despite a larger equity-method loss from the HKJV: $516,000 versus $264,000. In the December quarter, that JV loss rose to $370,000 from $186,000.
Cash flow, liquidity and debt
- Cash was $156,000 at December 31, 2016, down from $363,000 at March 31, 2016. Nine-month operating cash use was $689,000, compared with $2.27 million in the prior-year period; investing provided $103,000 and financing provided $380,000.
- Working capital was $4.10 million, down from $4.46 million at March 31, 2016. Current assets were $7.45 million and current liabilities were $3.35 million. Inventory increased to $5.56 million from $3.88 million.
- Factor borrowings were $694,000, secured by receivables and inventory, at an effective rate of 5.50% and due on demand. The filing reports approximately $1.77 million of remaining availability under the factoring agreement. Separate extended payment terms from the HKJV allow up to $2.0 million of unsecured purchases, bearing 3.25% interest and repayable within 90 days; the filing cites combined facility availability of approximately $1.78 million.
- The company had no reported long-term liabilities. Its “amount due from factor” was $1.22 million at period-end.
Outlook, risks and other significant matters
- Management expects sales growth to continue, citing sealed-battery safety alarms and payroll reductions. It believes cash and credit availability should fund operations for one year from the financial statements’ issuance date if its plan succeeds, but gives no assurance. Financing advances are at the factor’s discretion, and management describes the company as having limited financing sources and a history of losses.
- The HKJV reported a $988,000 net loss for the three months ended December 31, 2016, including a non-recurring inventory write-down of approximately $387,000. Its nine-month net loss was $782,000. The filing attributes weaker nine-month JV results to reduced sales and lower gross margin.
- Disclosure controls and procedures were deemed ineffective due to a material weakness in oversight of the HKJV’s accounting function and disclosures. Management was monitoring suggested improvements; no material control changes during the quarter were reported.
- The company recorded a full valuation allowance against deferred tax assets. Management said routine legal matters were not expected to have a material adverse effect. The company was evaluating the impact of newly issued accounting standards, including revenue-recognition guidance.
Important facts for investors to verify
- Whether the major customer’s pending orders were delivered and recognized as revenue in the quarter ending March 31, 2017.
- Whether sealed-battery product growth and improved company gross margins can offset continuing operating losses and the HKJV’s deterioration.
- Actual borrowing availability and renewal or advance terms, given the factor’s discretion and the filing’s separate availability figures.
- Progress in remediating the HKJV-related material weakness in financial reporting controls.
- Inventory quality and valuation, including the HKJV write-down and the company’s own elevated inventory balance.