Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022, compared with the three months ended June 30, 2021. The filing identifies the registrant as Universal Security Instruments, Inc. (not “Universal Safety Products, Inc.”). The company markets and distributes home and business safety and security products.
Financial performance
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net sales | $4.64 million | $4.67 million |
| Gross profit | $1.42 million | $1.26 million |
| Gross margin | 30.7% | 27.0% |
| Operating income (loss) | $(50,642) | $24,130 |
| Net income (loss) | $(106,138) | $14,641 |
| Basic and diluted EPS | $(0.05) | $0.01 |
| Cash from operating activities | $(562,395) | $(196,612) |
| Cash at period end | $255,881 | $50,371 |
Sales declined $32,694, or 0.7%. Gross margin improved due to product mix. Selling, general and administrative expense rose to $1.38 million from $1.13 million, reflecting higher freight and merger-related legal and consulting costs; research and development expense declined to $89,262 from $101,056. Interest expense increased to $55,496 from $9,489, primarily reflecting borrowings and higher interest rates.
Operating cash use increased year over year. In Q1 2022, inventory, prepaid expenses and other increased by $574,655, and accounts payable and accrued expenses decreased by $318,965; reduced receivables and amounts due from factor provided a $432,250 offset. Financing provided $379,541, including $679,541 of net factor borrowing and $300,000 of repayments to Eyston. There were no investing cash flows.
Financial position and liquidity
At June 30, 2022, total assets were $11.44 million, current assets $10.96 million, current liabilities $6.62 million, and shareholders’ equity $4.53 million. Cash was $255,881. Factor borrowings were $2.84 million; the factoring facility was fully utilized, and additional advances are at the factor’s discretion. The facility bears interest at prime plus 2% (6.75% effective at quarter-end), is secured by receivables and inventory, and expires January 6, 2024.
The Eyston supplier note balance was $781,440 at quarter-end, following $300,000 of repayments. Amended terms require monthly payments of $100,000 until repaid. Operating lease liabilities totaled $431,541, including $145,787 current. Management says working capital and financing should cover the next 12 months, but this depends on sales growth, operating cash flows, factor availability, collections and the company’s plan succeeding. The filing also describes a recent history of sales insufficient to generate profitable operations and limited financing sources.
Material changes, outlook and risks
- Product mix shifted: Eyston-sourced product sales fell to $3.51 million from $4.27 million, while GFCI and ventilation fan sales rose to $1.13 million from $400,707.
- Management expects sales growth to continue, citing sales of sealed-battery ionization smoke alarms, carbon monoxide products and GFCIs. It cautions that there are no assurances its plan will succeed.
- COVID-19-related restrictions and delays in Hong Kong, the PRC and the United States affected shipping and receiving; the company says it cannot yet quantify the pandemic’s full impact. All products are imported from the PRC, and certain products face 25% tariffs; further tariff increases could adversely affect results if not offset through pricing.
- The company has requested approximately $300,000, including expected interest, in customs-duty refunds and expects availability in fiscal Q2 2023. The timing and receipt are not assured.
- The proposed merger with Infinite Reality, Inc. was subject to a shareholder lawsuit alleging material omissions in the merger registration statement. The company says it believes the suit is without merit and intends to defend it; it reported that defendants had not yet been served, to its knowledge.
- Disclosure controls and procedures were deemed ineffective because of a material weakness involving classification and disclosure of financial statement amounts. Management said it plans to remediate the weakness. No material changes in internal control during the quarter were reported.
- Two customers accounted for 12.5% and 10.6% of quarterly sales. The company relies on Eyston for all smoke and carbon monoxide alarm products.
Investor verification priorities
- Confirm progress on remediation of the material weakness and whether subsequent filings demonstrate effective controls.
- Monitor factor availability, disputed receivables, borrowing costs and the ability to meet the Eyston note’s monthly payments.
- Track operating cash use, inventory levels, sales growth and whether the customs refund is received as expected.
- Review the status and terms of the proposed Infinite Reality merger and related litigation.
- Assess the effects of COVID-related supply delays, PRC sourcing and tariffs on product availability and margins.