Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2020; filed November 9, 2020. The filing identifies the registrant as Universal Security Instruments, Inc., although the request metadata names Universal Safety Products, Inc.
Business and results
The company markets and distributes safety and security products, including smoke and carbon monoxide alarms, GFCIs, and ventilation fans. It sources all products from China and buys smoke and carbon monoxide alarms from Eyston. Figures below are unaudited.
| Metric | Three months ended Sep. 30, 2020 | Prior-year quarter | Six months ended Sep. 30, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $6.46 million | $3.62 million | $9.40 million | $7.97 million |
| Gross profit / margin | $2.10 million / 32.6% | $1.09 million / 30.1% | $3.18 million / 33.8% | $2.34 million / 29.3% |
| Operating income (loss) | $748,069 | $(221,296) | $704,625 | $(353,949) |
| Net income (loss) | $725,845 | $(700,814) | $646,863 | $(1.31) million |
| Diluted EPS | $0.31 | $(0.30) | $0.28 | $(0.57) |
Financial position and cash flow
- At September 30, cash was $146,393, current assets $8.39 million, and current liabilities $2.45 million. Total assets were $8.71 million and shareholders’ equity $5.10 million, versus $4.45 million at March 31.
- Borrowings included $1.16 million under the factoring facility, with approximately $2.99 million of reported unused availability, and a $221,400 PPP bank loan. The company also had a $1.08 million unsecured note payable to Eyston, due April 19, 2022. The PPP loan bears 1% interest; management expects forgiveness, but forgiveness is not assured.
- Six-month operating cash flow was $234,068, compared with $331,400 in the prior-year period. Financing used $181,469, including $402,869 of net factor repayments and $221,400 of PPP proceeds. Cash increased $52,599 to $146,393.
Material changes and unusual items
- Quarterly sales rose 78.3%; six-month sales rose 18.0%. Management attributed the increase principally to a large national retailer’s order, which the company filled from existing inventory after that retailer’s usual supplier experienced pandemic-related delays.
- Gross margin improved partly because of refunds of tariffs previously paid and lower tariff costs. Management cautioned that additional tariffs not offset by price increases could harm results.
- Research and development expense declined 48.1% for the quarter and 28.9% for the six-month period, mainly due to lower engineering-consultant costs. Six-month interest expense fell to $57,762 from $213,028.
- The company sold its 50% interest in the Hong Kong joint venture effective March 31, 2020. The sale reduced liabilities due to the venture by $4.0 million; a separate $1.08 million trade payable was converted to the Eyston note. No joint-venture investment loss was recorded in 2020, compared with $742,791 in the prior-year six-month period.
Outlook, liquidity, and risks
- Management expected the new retailer to continue purchasing in the quarter ending December 31, 2020. Another large retailer’s purchases involved a 450-store test of certain models, expected to conclude later in the fiscal year. These are expectations, not guaranteed ongoing sales.
- Management said increased sales, factor availability, and PPP funds should provide working capital for the next 12 months, while acknowledging that there can be no assurance. Factor advances are at the lender’s discretion and secured by receivables and inventory.
- NYSE American notified the company that it did not meet the $6.0 million shareholders’ equity continued-listing requirement following losses in its five most recent fiscal years. The Exchange accepted the company’s compliance plan on November 5, 2020, with a plan period through February 28, 2022 and periodic progress reviews. Reported equity at September 30 was $5.10 million.
- COVID-19 had previously reduced sales and may continue to cause shipping or supply delays in the United States, Hong Kong, or China; management could not quantify its full impact. One customer represented 48.1% of quarterly sales and 33.0% of six-month sales. The filing also describes a history of insufficient sales to generate profitable operations and limited financing sources.
- Routine legal matters were not expected by management to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether the retailer orders continue after the pandemic-related supply disruption and whether the 450-store test converts to broader sales.
- Progress toward the Exchange’s February 28, 2022 listing-compliance deadline and the company’s ability to raise equity above the stated threshold.
- Actual factor availability and borrowing terms, including the lender’s discretion to advance funds, and whether the PPP loan is forgiven.
- Customer concentration, China sourcing and tariff exposure, and the sustainability of margins that benefited from tariff refunds and lower tariff costs.
- Whether the company generates sustained operating cash flow; six-month profit coincided with a substantial increase in receivables and amounts due from factor.