Business context and reporting period
Universal Security Instruments, Inc. (the registrant named in the filing; the request metadata says Universal Safety Products, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended September 30, 2018. The company markets and distributes safety and security products, primarily manufactured by its 50%-owned Hong Kong joint venture (HKJV). The quarter is the second quarter of the company’s fiscal year.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales, 2018 | $4.53 million | $8.57 million |
| Net sales, 2017 | $3.58 million | $6.90 million |
| Gross margin, 2018 / 2017 | 32.2% / 32.3% | 31.5% / 31.0% |
| Operating income (loss), 2018 | $237,006 | $125,992 |
| Net loss, 2018 / 2017 | $(121,324) / $(167,925) | $(560,157) / $(711,588) |
| Loss per share, 2018 / 2017 | $(0.05) / $(0.07) | $(0.24) / $(0.31) |
- Six-month operating cash flow was a use of $50,787, versus cash provided of $1.23 million in 2017. The principal cash uses included a $1.17 million increase in inventory, prepaid expenses and other items; higher payables and accrued expenses partly offset these uses.
- Cash was $13,067 at September 30, 2018, down from $128,161 at March 31, 2018. There were no investing cash flows in the period; financing used $64,307, primarily net repayment of the factor line.
- Current assets were $9.83 million and current liabilities were $7.23 million, leaving working capital of $2.60 million, down $36,823 from March 31. Total assets were $18.94 million and shareholders’ equity was $11.70 million.
- Factor borrowings were $1.55 million, with approximately $640,000 of remaining availability. The facility’s stated effective rate was 7.25%; advances are at the factor’s discretion and secured by receivables and inventory. Amounts payable to the HKJV were $5.17 million; extended purchase terms carry 5.5% interest and are stated to be unsecured.
- Interest expense for the six months was $177,353, compared with $40,643 in 2017. The filing attributes the increase to higher average borrowing from the factor and HKJV.
Material changes versus the prior comparable period
- Sales increased 26.3% for the quarter and 24.2% for the six-month period, principally following the full introduction of sealed-battery safety alarms. HKJV product sales accounted for $7.89 million of six-month revenue; GFCI and ventilation-fan sales were $680,290.
- Gross margin was nearly flat for the quarter and rose 0.5 percentage points for the six-month period. Management attributed margin movements to customer and product mix.
- Net losses narrowed year over year, despite a larger HKJV investment loss: $264,396 for the quarter and $508,796 for six months, compared with HKJV-related losses of $9,989 income and $178,121 loss, respectively, in the prior-year periods.
- At the HKJV, six-month sales declined 1.4% to $7.96 million, gross margin fell to 14.0% from 20.5%, and net loss widened to $749,404 from $501,882. The company’s share of HKJV results is reported using the equity method.
Outlook, risks and other notable matters
- Management expects growth in sealed-battery products to continue and says cash flows and credit availability should fund operations for one year from the report’s issuance, if its plan succeeds; it cautions that there are no assurances. The company disclosed recurring losses and limited financing sources.
- U.S. tariffs effective August 23, 2018 imposed a 25% rate on certain GFCI products, and tariffs effective September 28 imposed a 10% rate on carbon monoxide and photoelectric alarms. All products are imported from China; management warned that unoffset tariff costs could adversely affect results and cash flows.
- Disclosure controls and procedures were deemed ineffective due to a material weakness in oversight of the HKJV’s accounting function and disclosure controls. Management said it was monitoring improvements; no material control changes during the quarter were reported.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method; management said adoption had no material impact. A single customer has pre-approved return rights of up to 25% of products on certain invoices and extended payment terms for part of the amount due.
- Routine legal claims and litigation were not expected by management to have a material adverse effect. No formal numerical revenue or earnings guidance was provided.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Universal Security Instruments, Inc., whereas the request metadata names Universal Safety Products, Inc.
- Assess whether the sales growth from sealed-battery products can continue and whether tariffs can be passed through without weakening demand or margins.
- Monitor factor availability and renewal/advance discretion, low cash on hand, and the $5.17 million payable balance to the HKJV, including repayment terms and interest.
- Review the HKJV’s falling gross margins and increased losses, and progress in addressing the disclosed internal-control material weakness.
- Evaluate whether operating cash flow can improve as inventory and working-capital needs evolve; reported interim results are not necessarily indicative of full-year results.