Universal Security Instruments, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2019. The filing identifies the registrant as Universal Security Instruments, Inc. (NYSE American: UUU); the request metadata names a different company.
Business context and results
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.
| Metric | Three months ended Sept. 30, 2019 | Prior-year quarter | Six months ended Sept. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $3.62 million | $4.53 million | $7.97 million | $8.57 million |
| Gross profit | $1.09 million | $1.46 million | $2.34 million | $2.70 million |
| Gross margin | 30.1% | 32.2% | 29.3% | 31.5% |
| Operating income (loss) | ($221,296) | $237,006 | ($353,949) | $125,992 |
| Net loss | ($700,814) | ($121,324) | ($1,309,768) | ($560,157) |
| Loss per share, basic and diluted | ($0.30) | ($0.05) | ($0.57) | ($0.24) |
Liquidity, cash flow and obligations
- At September 30, cash was $39,558, current assets were $9.29 million and current liabilities were $7.65 million, leaving working capital of $1.65 million, down $706,945 from March 31.
- Six-month operating cash flow was positive $331,400, compared with cash used of $50,787 a year earlier. The company repaid $666,314 on its factoring line; cash decreased by $334,914 to $39,558.
- Factoring borrowings were $1.19 million, with about $433,000 of unused availability. The facility bears interest at prime plus 2% (7% at period-end), is secured by receivables and inventory, and advances are at the factor’s discretion. The agreement was due to expire January 6, 2020, subject to renewal provisions.
- Accounts payable to the HKJV were $5.50 million, including $2.95 million beyond agreed payment terms. The company says the HKJV allowed extended payment timing at its discretion. These unsecured balances bear 5.5% interest and were described as subject to 120-day repayment terms.
- Adoption of lease accounting resulted in recognition of $404,000 of operating lease liabilities at September 30, 2019, including $140,776 current and $263,224 long-term.
Material changes and management commentary
- Quarterly sales declined 20.0%; six-month sales declined 7.1%. Management attributed the decreases to delayed emergency-management funding for Puerto Rico rebuilding projects and customer resistance to tariff-related price increases.
- Management said tariffs on certain products imported from China, including some carbon monoxide and photoelectric alarms and USB devices, were 25%. Tariffs and sales mix contributed to lower gross margins.
- SG&A rose to $1.13 million for the quarter and $2.37 million for six months. R&D increased to $176,733 and $317,376, respectively, primarily for engineering work to meet proposed 2020 smoke-alarm testing standards.
- The company’s equity-method loss from the HKJV was $373,827 for the quarter and $742,791 for six months, versus $264,396 and $508,796 in the comparable prior periods. HKJV six-month sales fell 38.2% to $4.92 million and its net loss increased to $1.50 million.
- Management reported a history of losses, limited financing sources and sales below expectations. It plans to increase sales of sealed-battery smoke alarms, carbon monoxide products and GFCIs, and stated that cash flows and credit availability were expected to fund operations for one year from the report’s issuance date if its plan succeeds; there is no assurance of success.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses in oversight of the accounting function and the HKJV’s controls. Management described planned remediation, including stronger financial-reporting oversight and reinforced internal policies.
- The company adopted ASC 842 leases on April 1, 2019, with no cumulative retained-earnings adjustment. Management reported no material adverse effect expected from routine legal matters. No specific financial guidance was provided.
Important facts for investors to verify
- Whether sales recover despite Puerto Rico project delays and the company’s difficulty passing tariff costs through to customers.
- Whether the factoring facility was renewed or replaced after its stated January 2020 expiration date, and whether discretionary borrowing availability remains adequate.
- How and when the $2.95 million of overdue HKJV payables will be repaid, and whether the HKJV’s stated payment flexibility continues.
- Whether the company can achieve its sales plan and fund operations through the period management identified, given low cash, recurring losses and limited financing sources.
- Progress in remediating the disclosed material weaknesses and any effect on reporting reliability.
- The filing’s MD&A contains an apparent cash-flow comparison typo regarding financing cash use; the cash-flow statement reports a $666,314 net repayment in 2019 and $64,307 in 2018.