Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2014; filed February 17, 2015. The financial statements are unaudited. The request metadata names Universal Safety Products, Inc., but the filing identifies the registrant as Universal Security Instruments, Inc.
Business context
The company markets and distributes safety and security products, primarily manufactured by Eyston Company Limited, a Hong Kong joint venture in which the company owns 50%. The company accounts for its investment using the equity method. Its developing IoPhic smoke- and gas-detection products include a new sealed-battery product line; the company reported ten patents granted and three applications pending.
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Net sales | $2.37 million | $3.74 million | $7.11 million | $9.94 million |
| Gross profit | $382,335 | $1.13 million | $1.49 million | $2.68 million |
| Gross margin | 16.1% | 30.1% | 20.9% | 27.0% |
| Operating loss | $(760,600) | $(97,986) | $(2.38) million | $(882,141) |
| Net loss | $(999,734) | $(367,191) | $(2.70) million | $(2.95) million |
| Loss per share, basic and diluted | $(0.43) | $(0.16) | $(1.17) | $(1.29) |
For the nine months, operating cash used was $668,966, versus $996,956 in the prior-year period. There were no investing cash flows in the current period and no financing cash flows in either period. Cash declined to $1.38 million at December 31, 2014 from $2.05 million at March 31, 2014.
At December 31, 2014, current assets were $6.86 million and current liabilities were $1.03 million. Total assets were $20.90 million, and shareholders’ equity was $19.85 million. The company reported a $25,000 long-term obligation related to an uncertain tax position; no material borrowings were reported on the balance sheet. It had a factoring agreement with CIT with maximum borrowing availability of $1.0 million at quarter-end, secured by receivables and inventory.
Changes, outlook, and risks
- Quarterly sales fell 36.6% year over year; nine-month sales fell 28.5%. Management attributed the decline principally to delays in launching the new sealed-battery product line and lower detector sales.
- Margins declined as promotions to a large-volume customer increased sales of lower-margin products. Research and development expense rose 55.8% for the nine months, while selling, general and administrative expense increased in dollars and rose to 46.5% of sales, partly because fixed costs did not fall with revenue and professional fees increased.
- Nine-month net loss was lower than the prior year’s, despite weaker operations, primarily because the prior-year period included a $2.31 million non-cash charge establishing a full valuation allowance on deferred tax assets. The company recorded no income tax expense in the current nine-month period.
- The joint venture’s nine-month sales declined 23.8% to $12.51 million and it recorded a net loss of $832,838, compared with net income of $633,945 a year earlier. The company’s nine-month equity in joint-venture results was a $335,469 loss.
- After quarter-end, the company replaced CIT financing with a Merchant Factors agreement. It permits advances against eligible receivables and inventory, but advances are at Merchant’s sole discretion and bear interest at prime plus 2%.
- Management expects the new sealed-battery alarm line to support a return to profitability beginning in the second half of the fiscal year ending March 31, 2016. It believes cash and the expanded facility should fund operations for at least 12 months, while warning that revenue shortfalls, higher costs, or greater working-capital needs could weaken liquidity.
- Disclosure controls were deemed ineffective at December 31, 2014 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Management reported remediation efforts underway. Management said material litigation losses were not reasonably likely. The filing also discloses a $25,000 warranty reserve.
Key investor verification points
- Confirm product launch timing, customer demand, and whether the new sealed-battery line can deliver the projected recovery in profitability.
- Review cash usage, working-capital needs, and the availability, discretion, and cost of Merchant Factors advances.
- Track remediation of the material internal-control weaknesses and any changes to disclosure-control effectiveness.
- Assess the joint venture’s operating performance and the company’s dependence on it for product supply and earnings.
- Verify the recoverability and expiration timing of deferred tax assets, as well as developments concerning the uncertain tax position.