Business context and reporting period
Universal Security Instruments, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. It markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (JV). The filing covers the company’s operations and accounts for the JV using the equity method.
Identity note: The request metadata names Universal Safety Products, Inc.; the filing itself identifies Universal Security Instruments, Inc. Investors should verify the intended issuer.
Financial results and liquidity
| Metric | Quarter ended June 30, 2013 | Comparable 2012 period |
|---|---|---|
| Net sales | $3.006 million | $3.059 million |
| Gross profit / margin | $749,324 / 24.9% | $978,345 / 32.0% |
| Operating loss | $467,056 | $507,725 |
| Net loss | $19,530; basic and diluted loss per share $0.01 | $362,588; loss per share $0.16 |
| Operating cash flow | $(950,858) | $(317,961) |
SG&A was $1.090 million, down $270,180 year over year; R&D was approximately $127,000, essentially unchanged. The quarter included a $169,066 income tax benefit and $272,041 of equity earnings from the JV. Comprehensive loss was $200,110, including $180,580 of other comprehensive loss.
At June 30, cash was $1.488 million, down from $2.439 million at March 31. Current assets were $10.009 million and current liabilities $866,473 (approximately 11.5x current ratio). Inventory was $5.003 million; amounts due from the factor were $1.985 million. The company reported no borrowings under its factoring agreement and $1.000 million of borrowing availability. The agreement’s maximum is $1.000 million, secured by receivables and inventory. A separate $25,000 long-term obligation is reported; the notes identify it with an uncertain income-tax position, penalties and imputed interest.
Material changes and JV performance
- Company sales declined 1.8%, which management attributed mainly to customer order timing. Gross margin fell 7.1 percentage points, primarily due to product mix.
- SG&A fell 19.9%, principally because advertising and promotion spending for next-generation products decreased by approximately $202,000. The smaller net loss reflected lower promotional spending and higher JV earnings.
- The JV reported sales of $6.250 million versus $5.399 million, gross margin of 29.0% versus 24.7%, and net income of $527,078 versus $166,819. Higher sales volumes and product mix contributed to the improvement. USI recorded $272,041 as its equity in JV earnings.
- Operating cash use increased year over year, chiefly reflecting a $669,727 increase in inventory and prepaid expenses. There were no investing or financing cash flows in the quarter.
- The March 31, 2013 balance sheet was revised for an immaterial prior-period error: the company had not recorded its share of JV other comprehensive income. The revision increased the reported JV investment and accumulated other comprehensive income by $1.376 million at March 31, 2013; prior filings were not amended.
Outlook, risks and unusual items
No quantified earnings or sales guidance is provided. Management said it did not anticipate changes in its ability to maintain liquidity and believed factoring availability, JV distributions and credit facilities would provide sufficient working capital. Results are not necessarily indicative of the full fiscal year.
Risks and uncertainties noted include customer order timing, product mix and margins, inventory demand and obsolescence, collection and warranty-related credit exposure, and the company’s dependence on the JV for product supply and earnings. Management said remaining deferred tax assets were more likely than not to be realized, but realization depends on future taxable income; a $300,000 valuation allowance had been established for foreign tax credits expected to expire unused. The company also reported pending legal matters that management, on counsel’s advice, did not expect to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
The company had applied for 13 patents related to new smoke and gas detection technologies and features; 10 had been granted, including six for new technologies and features, and three applications were pending. Management highlighted the IoPhic brand for many of these features.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for Universal Security Instruments, Inc., not the company name in the request metadata.
- Assess whether lower company gross margins and continued operating cash consumption are temporary, particularly given inventory growth.
- Review the factoring agreement’s availability, collateral terms and the relationship between the reported “amount due from factor” and borrowings; the filing reports no debt borrowings under the facility.
- Evaluate the sustainability and cash-distribution implications of JV earnings, and the company’s exposure to JV operating and investment results.
- Monitor deferred-tax-asset recoverability, expiring foreign tax credits and the $25,000 uncertain-tax-position liability.