10-K
1
tm2114160d2_10k.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Commission file number: 001-31747
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (410) 363-3000
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common Stock UUU NYSE MKT LLC
Securities registered pursuant to Section 12(g) of
the Act:
None
Title of Class
Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Act). Yes ̈
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ̈
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x
No ̈
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
x No ̈
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ̈ Accelerated Filer ̈ Non-Accelerated Filer x
Smaller Reporting Company x Emerging Growth Company ̈
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ̈
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ̈
No x
The aggregate market value of Common Stock, $.01
par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock on the New York Stock Exchange
(NYSE MKT LLC) on September 30, 2020, was $3,923,658.
The number of shares of common stock outstanding
as of July 5, 2021 was 2,312,887.
documents
incorporated by reference
To the extent specified, Part III of this
Form 10-K incorporates information by reference to the Registrant’s definitive proxy statement for its 2021 Annual Meeting
of Shareholders.
UNIVERSAL SECURITY INSTRUMENTS, INC.
2021 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
PART I
Item 1. Business 4
Item 1B. Unresolved Staff Comments 6
Item 2. Properties 6
Item 3. Legal Proceedings 7
Executive Officers of the Registrant 7
PART II
Item 8. Financial Statements and Supplementary Data 13
Item 9A. Controls and Procedures 13
Item 9B. Other Information 14
PART III
Item 10. Directors, Executive Officers and Corporate Governance 15
Item 11. Executive Compensation 15
Item 14. Principal Accountant Fees and Services 15
PART IV
Signatures 18
PART I
ITEM 1. BUSINESS
General
Universal Security Instruments, Inc.
(“we” or “the Company”) designs and markets a variety of popularly-priced safety products consisting primarily
of smoke alarms, carbon monoxide alarms and related products. Most of our products require minimal installation and are designed for easy
installation by the consumer without professional assistance, and are sold through retail stores. We also market products to the electrical
distribution trade through our wholly-owned subsidiary, USI Electric, Inc. (“USI Electric”). The electrical distribution
trade includes electrical and lighting distributors as well as manufactured housing companies. Products sold by USI Electric usually require
professional installation.
In
1989 we formed Eyston Company Limited (Eyston), a limited liability company under the laws of Hong Kong, as a 50% joint venture partner
with a Hong Kong-based partner, to manufacture various products in the Peoples Republic of China (the “Hong Kong Joint Venture”).
Effective, March 31, 2020 we sold our 50% interest in Eyston, however Eyston continues to be the Company’s principal supplier
of safety alarms. The Company imports almost all of its other products from foreign suppliers.
In light of the shutdowns,
quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in the PRC and the United States,
the Company has experienced delays in shipping and receiving of products. As the Company’s products are sold primarily to the construction
industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had an impact on the Company’s
sales We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial results, but we believe that
during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and first quarter of fiscal 2021) sales were negatively impacted
by lower sales resulting from steps taken to combat the spread of COVID-19. Sales in our second and third fiscal quarters ended September 30,
2020, and December 31, 2020 increased significantly when compared to sales for the comparable 2019 periods due to the Company’s
ability to fill orders from inventory for a large national retailer new customer, when the national retailer’s usual supplier was
unable to fill the orders due to delays caused by the pandemic. Our sales growth was also due to sales of two products to another large
national retailer which purchased certain of our models as a 1,350 store test, which were completed in the fourth quarter of the fiscal
year ending March 31, 2021.
Our sales for the year ended
March 31, 2021 were $17,520,151 compared to $14,803,024 for the year ended March 31, 2020. We reported net earnings of $268,343 in fiscal
2021 compared to a net loss of $5,813,891 in fiscal 2020, an increase in net earnings of $6,082,234 (104.6%). The net earnings for the
fiscal year ended March 31, 2021 are attributed to increased sales and gross margins, and to the forgiveness of debt associated with the
Paycheck Protection Program loan under the Cares Act. The net loss for the fiscal year ended March 31, 2020 is primarily due to the loss
arising from the sale of the Company’s interest in the Hong Kong Joint Venture, the Company’s interest in the loss from investment
in the Hong Kong joint venture’s operations, and operating losses from the Company’s domestic operations.
The Company was incorporated
in Maryland in 1969. Our principal executive office is located at 11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, and
our telephone number is 410-363-3000. Information about us may be obtained from our website www.universalsecurity.com. Copies of
our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are available free of
charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s EDGAR
reporting system. Simply select the “Investor Relations” menu item, and then click on the “SEC Filings” link.
The SEC’s EDGAR reporting system can also be accessed directly at www.sec.gov.
Safety Products
We market a line of residential
smoke and carbon monoxide alarms under the trade names “UNIVERSAL” and “USI Electric” both of which are manufactured
by Eyston.
Our line of safety alarms
consists of units powered by replaceable batteries, ten year sealed batteries, or are 120 volt with battery backup. Our replaceable battery
products contain different types of batteries with different battery lives, and some include alarm silencers. The smoke alarms marketed
to the electrical distribution trade also include hearing impaired and heat alarms with a variety of features. We also market door chimes,
ventilation products, ground fault circuit interrupters (GFCI’s), and other electrical devices.
Our wholly-owned subsidiary, USI Electric, Inc.,
focuses its sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon monoxide alarms manufactured
by Eyston, to the electrical distribution trade.
Import Matters
We import all of our products.
As an importer, we are subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic
and political conditions in the country of manufacture, potential trade restrictions, and currency fluctuations. Substantially all of
our safety products are imported from the People’s Republic of China. These products are currently subject to tariffs ranging from
ten to twenty-five percent.
We have attempted to protect
ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments in U.S. dollars. Our inventory
purchases are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated
with purchasing products abroad.
As previously discussed, in
light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in Hong
Kong, the PRC and the United States, the Company has experienced delays in shipping and receiving of products.
Sales and Marketing; Customers
We sell our products to various
customers, and our total sales market can be divided generally into two categories; sales by the Company to retailers, including wholesale
distributors, chain, discount, television retailers and home center stores, catalog and mail order companies and other distributors (“retailers”),
and sales by our USI Electric subsidiary to the electrical distribution trade (primarily electrical and lighting distributors and manufactured
housing companies) and foreign customers. Products marketed by the Company have historically been retailed to “do-it-yourself”
consumers by these retailers. Products marketed by our USI Electric subsidiary to the electrical distribution trade typically require
professional installation. We do not currently market a significant portion of our products directly to end users.
A significant portion of our
sales are made by approximately 40 independent sales organizations, compensated by commission, which represents approximately 100 sales
representatives, some of which have warehouses where USI Electric products are maintained for sale. In addition, the Company has established
a national distribution system with eight regional stocking warehouses throughout the United States which generally enables customers
to receive their orders the next day without paying for overnight freight charges. Our agreements with these sales organizations are generally
cancelable by either party upon 30 days’ notice. We do not believe that the loss of any one of these organizations would have a
material adverse effect upon our business. Sales are also made directly by the officers and full-time employees of the Company and our
USI Electric subsidiary, seven of whom have other responsibilities for the Company. Sales outside the United States are made by our officers
and through exporters, and amounted to less than five percent of total net sales in fiscal years 2021 and 2020.
We also market our products
through our website and through our own sales catalogs and brochures, which are mailed directly to trade customers. Our customers, in
turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media. We also exhibit and
sell our products at various trade shows, including the annual National Hardware Show.
Our backlog of orders as of
March 31, 2021 was approximately $3,905,000. Our backlog as of March 31, 2020 was approximately $507,000. The increase in backlog
is primarily due to delays in unloading of freight at California ports of entry caused by or related to COVID-19 issues.
Hong Kong Joint Venture
Through March 31, 2020 we held a fifty percent
interest in Eyston Company Limited, the Hong Kong Joint Venture, which has manufacturing facilities in the People’s Republic of
China, for the manufacturing of certain of our electronic and electrical products. Effective, March 31, 2020 we sold our fifty percent
interest in the Hong Kong Joint Venture in exchange for $4,000,000. The proceeds from the sale were used to reduce our trade accounts
payable due to the Hong Kong Joint Venture by $4,000,000. In addition, the Company and the HKJV agreed to convert $1,081,440 of trade
accounts payable to an interest only note payable requiring monthly interest only payments. In April, 2020 the Company and the HKJV formalized
these terms into a note payable agreement with a maturity date of April 19, 2022. Subsequent to March 31, 2020 Eyston will continue to
be the Company’s principal supplier of safety alarms and the Company will pay for these purchases upon evidence of shipment from
the factory. During the fiscal years ended March 31, 2021 and 2020, 77.6% and 82.7% of our total inventory purchases were made from Eyston,
respectively.
Other Suppliers
Certain private label products
are manufactured for us by foreign suppliers. We believe that our relationships with our suppliers are good. The loss of any of our suppliers
would have a short-term adverse effect on our operations, but replacement sources for these other suppliers could be developed.
Competition
In fiscal years 2021 and 2020,
sales of safety products accounted for substantially all of our total sales. In the sale of smoke alarms and carbon monoxide alarms, we
compete in all of our markets with First Alert and Walter Kidde Portable Equipment, Inc. These companies have greater financial resources
and financial strength than we have. However, we believe that our safety products compete favorably in the market primarily on the basis
of styling, features and pricing.
The safety industry in general involves changing
technology. The success of our products may depend on our ability to improve and update our products in a timely manner and to adapt to
new technological advances.
Employees
As of March 31, 2021,
we had thirteen employees, nine of whom are engaged in administration and sales, and the balance of whom are engaged in product development.
Our employees are not unionized, and we believe that our relations with our employees are satisfactory.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Effective October, 2018, we
extended our operating lease for a 15,000 square foot office and warehouse located in Baltimore County, Maryland to expire in April 2022.
Monthly rental expense, with common area maintenance, currently approximates $14,500 and increases 2.5% per year.
Effective March 2003, we entered
into an operating lease for office space in Naperville, Illinois. This lease, consisting of 3,400 square feet, was renewed and extends
through February 2022. The monthly rental, with common area maintenance, approximated $4,900 per month during the current fiscal year.
The Company believes that
its current facilities are currently suitable and adequate.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in various
claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes of such matters
are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations, or
cash flows.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information
about the Company’s executive officers.
NAME AGE POSITIONS
Harvey B. Grossblatt 74 President, and Chief Executive Officer
James B. Huff 69 Chief Financial Officer, Secretary and Treasurer
HARVEY B. GROSSBLATT has been
a director of the Company since 1996. He served as Chief Financial Officer from October 1983 through August 2004, Secretary
and Treasurer of the Company from September 1988 through August 2004, and Chief Operating Officer from April 2003 through
August 2004. Mr. Grossblatt was appointed Chief Executive Officer in August 2004.
JAMES B. HUFF was appointed
Chief Financial Officer in August 2004 and Secretary and Treasurer in October 2004.
PART II
Market for Common Stock
Our common stock, $.01 par
value (the “Common Stock”) trades on the NYSE MKT LLC exchange, under the symbol UUU. As of March 31, 2021, there were
141 record holders of the Common Stock. The closing price for the Common Stock on that date was $6.75. We have not paid any cash dividends
on our common stock, and it is our present intention to retain all cash flow for use in future operations. The following table sets forth
the high and low prices for the Common Stock for each full quarterly period during the fiscal years indicated.
Fiscal Year Ended March 31, 2021
First Quarter High $ 1.38
Second Quarter High $ 4.10
Third Quarter High $ 13.94
Fourth Quarter High $ 19.88
Fiscal Year Ended March 31, 2020
First Quarter High $ 1.39
Second Quarter High $ 1.33
Third Quarter High $ 1.03
Fourth Quarter High $ 0.92
Forward-Looking Statements
When used in this discussion
and elsewhere in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended
to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution
readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised
that various factors, including Risk Factors discussed in earlier filings, and other risks could affect our financial performance and
could cause our actual results for future periods to differ materially from those anticipated or projected. We do not undertake and specifically
disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
General
We are in the business of
marketing and distributing safety and security products which are primarily manufactured in the Peoples Republic of China. Our consolidated
financial statements detail our sales and other operational results, and for the fiscal year ended March 31, 2020 report the financial
results of the Hong Kong Joint Venture (Eyston) that is accounted for using the equity method of accounting through the date of the sale
of the Company’s 50% interest on March 31, 2020. Accordingly, the following discussion and analysis of the fiscal years ended
March 31, 2021 and 2020 relate to the operational results of the Company and its consolidated subsidiary only and includes the Company’s
equity share of losses in the Hong Kong Joint Venture up until the disposition of the Company’s 50% interest on March 31, 2020.
A discussion and analysis of the Hong Kong Joint Venture’s operational results for the period ended March 31, 2020 is presented
below under the heading “Hong Kong Joint Venture.”
In light of the shutdowns,
quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in the PRC and the United States,
the Company has experienced delays in shipping and receiving of products. As the Company’s products are sold primarily to the construction
industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had an impact on the Company’s
sales We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial results, but we believe that
during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and first quarter of fiscal 2021) sales were negatively impacted
by lower sales resulting from steps taken to combat the spread of COVID-19. Sales in our second and third fiscal quarters ended September 30,
2020, and December 31, 2020 increased significantly when compared to sales for the comparable 2019 periods due to the Company’s
ability to fill orders from inventory for a large national retailer new customer, when the national retailer’s usual supplier was
unable to fill the orders due to delays caused by the pandemic. Our sales growth was also due to sales of two products to another large
national retailer which purchased certain of our models as a 1,350 store test, which were completed in the fourth quarter of the fiscal
year ending March 31, 2021.
Our overall sales are primarily
dependent upon the strength of the U.S. housing market. As stated elsewhere in this report, our USI Electric subsidiary markets our products
to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies); every downturn
in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary. Our operating results for the fiscal
years ended March 31, 2021 and 2020 continue to be significantly impacted by the economic conditions of the U.S. housing market.
We further believe that the
movement of the smoke and carbon monoxide alarm retail markets toward ten-year sealed alarms to comply with new laws passed in several
states, including California and New York will benefit future sales including its line of ten-year sealed battery units, GFCI’s,
and other electrical devices. The importation of wiring devices, carbon-monoxide alarms, and photo-electric alarms are currently subject
to tariffs of 25%.
Comparison of Results of Operations for the Years Ended March 31,
2021 and 2020
Sales. In fiscal year
2021, our net sales were $17,520,151 compared to sales in the prior year of $14,803,024, an increase of $2,717,127 (18.4%). The increase
in sales was primarily due to increased sales to new retail customers reflecting demand attributable to disruptions in the supply chain
of those retail customers caused by or related to COVID 19 issues.
Gross Profit. Gross
profit percentage is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit percentage
for the fiscal year ended March 31, 2021 was 32.2% compared to 25.4% in fiscal 2020. The increase in 2021 gross margin is attributed to
the increase in demand and to refunds of tariffs paid in prior periods.
Selling, General and Administrative
Expense. Selling, general and administrative expenses increased to $5,034,380 in fiscal 2021 from $4,628,881 in fiscal 2020. As a
percentage of net sales, these expenses were 28.7% for the fiscal year ended March 31, 2021 and 31.3% for the fiscal year ended March
31, 2020. These expenses decreased as a percentage of net sales as they do not increase in direct proportion to increases in sales. These
expenses increased as a dollar amount due primarily to increases in insurance and commissions.
Research
and Development. Research and development expense for the fiscal year ended March 31, 2021 was $471,545. Research and
development expense for the fiscal year ended March 31, 2020 was $691,886. The decrease in overall research and development expense
for the 2021 period compared to the 2020 period was due to decreased independent testing of products.
Interest
Expense (Net). For the fiscal years ended March 31, 2021 and 2020, the Company incurred net interest expense of $86,841
and $409,703, respectively, related to borrowing costs associated with interest paid on amounts borrowed from our factor and on extended
trade payables due to Eyston Company Ltd. The decrease in interest expense resulted from reduced borrowing from Eyston Company Ltd. and
reduced borrowing from our factor during the fiscal year ended March 31, 2021 to fund inventory purchases and operating cash requirements.
Income
Taxes. For the fiscal years ended March 31, 2021 and 2020 our statutory Federal tax rate was 21.0%. The Company has accumulated
net operating losses and other income tax credits for which a full valuation allowance has been established. Accordingly, income taxes
or deferred income tax benefits indicated by the provision for income taxes as shown on the Consolidated Statements of Operations for
the fiscal years ended March 31, 2021 and 2020 varies from the expected statutory rate. Footnote G to the financial statements provides
a reconciliation of the amount of tax that would be expected at statutory rates and the amount of tax expense or benefit provided at the
effective rate of tax for each fiscal period.
Net Income (Loss). We
reported net income of $268,343 for the fiscal year 2021, compared to a net loss of $5,813,891 for fiscal 2020, a decrease of $6,082,234
(104.6%) in the net loss. The decrease in the net loss is primarily due to recording the loss arising from the sale of the Company’s
interest in the Hong Kong Joint Venture, and the Company’s interest in the loss from investment in the Hong Kong joint venture’s
operations during the fiscal year ended March 31, 2020. Also contributing to the decrease in the net loss for the Fiscal year ended March
31, 2021 were higher sales, increased gross profit, the forgiveness of $221,400 of debt related to the Paycheck Protection Program under
the CARES Act, reduced expenditures in research and development of approximately $220,000, and a reduction in interest expense of approximately
$323,000 for the fiscal year ended March 31, 2021.
See “Hong Kong Joint
Venture” below for further discussion regarding the operations of the Hong Kong Joint Venture.
Financial Condition, Liquidity and Capital Resources
The Company had net income
of $268,343 and a net loss of $5,813,891 for the years ended March 31, 2021 and 2020, respectively. As of March 31, 2021, working
capital (computed as the excess of current assets over current liabilities) increased by $505,103 from $5,059,498 on March 31, 2020,
to $5,564,601 on March 31, 2021.
Our operating activities provided
cash of $1,388,172 for the year ended March 31, 2021. Operating activities provided cash principally from a decrease in inventories of
$942,766, an increase in accounts payable and accrued expenses of $751,252, net income of $268,343, plus non-cash depreciation of an operating
lease asset of $158,576, and an increase in the allowance for doubtful accounts receivable of $100,000. Operating activities used cash
principally from an increase in prepaid expenses of $223,554, a decrease in the operating lease liability of $158,576, an increase in
accounts receivable and amounts due from factor of $236,930, less non-cash forgiveness of $221,400 from the Paycheck Protection Program
Loan under the CARES Act. For the fiscal year ended March 31, 2020 there was a decrease in the accounts payable due to the Hong Kong Joint
Venture and accrued expenses of $356,096, and the decrease in the operating lease liability of $156,250. In addition the Company had a
net loss of $5,813,891 which includes a non-cash loss from operations of the Hong Kong Joint Venture of $1,369,655 and the non-cash loss
on the sale of our ownership interest in the Hong Kong Joint Venture of $2,472,620. Operating cash was provided as accounts receivable
and amounts due from factor decreased by $568,879 and inventories decreased by $1,728,346.
Our investing activities did
not provide or use cash during the fiscal years ended March 31, 2021 or 2020.
Financing activities used
cash of $1,321,362 and $289,926 during the fiscal years ended March 31, 2021 and 2020, respectively, as a result of the net repayment
of amounts due to our Factor
Our overall sales are primarily
dependent upon the strength of the U.S. housing market. As stated elsewhere in this report, our USI Electric subsidiary markets our products
to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies); every downturn
in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary. Our operating results for the fiscal
years ended March 31, 2021 and 2020 continue to be significantly impacted by the economic conditions of the U.S. housing market.
Management believes that with an improved housing market and sales of our sealed products, the Company will improve profitability.
Management expects our product
offerings including sealed battery alarm and ground fault circuit interrupter products will compete on price and functionality with similar
products offered by our larger competitors. While we believe there will be market acceptance of our products we cannot be assured of this.
Should our products not achieve the level of acceptance we anticipate, this could have a significant impact on our future operations,
and our sales may decline, potentially impacting our ability to continue operating in our current fashion.
Our short-term borrowings
to finance operations, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring
Agreement with Merchant Factors Corporation (Merchant or Factor). Borrowings under our Factoring Agreement bear interest at prime plus
2% and are secured by trade accounts receivable and inventory. Advances from Merchant are at the sole discretion of Merchant based on
their assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance. The
unused availability of this facility totaled approximately $1,795,000 at March 31, 2021.
The Company sold its fifty
percent ownership in Eyston effective March 31, 2020. The non-cash proceeds from the sale were used to reduce our trade accounts
payable due to Eyston by $4,000,000. In addition, the Company and Eyston agreed to convert $1,081,440 of trade accounts payable to an
interest only note payable with the principal being due on the maturity date of April 19, 2022. Until March 31, 2020 we had
secured extended payment terms for purchases up to $4,000,000 from Eyston for the purchase of sealed battery alarms. These amounts were
unsecured, incurred interest at 5.5% per annum, and provided for repayment terms of 120 days for each purchase. Subsequent to March 31,
2020, Eyston continues to be the Company’s principal supplier of safety alarms and the Company will pay for these purchases upon
evidence of shipment from the factory.
Prior to the fiscal year ended March 31, 2021 the
Company has a history of sales that were insufficient to generate profitable operations, and has limited sources of financing. Management’s
plan in response to these conditions continues to be to increase sales resulting from the delivery of the Company’s line of sealed
battery ionization smoke alarms, carbon monoxide products, and ground fault circuit interrupters. The Company has seen positive results
on this plan due to increased sales of its product offerings to a major home improvement retailer during the second and third quarters
of the Company’s fiscal year ended March 31, 2021. This increase in sales has resulted in significant additional availability under
the Company’s facility with its Factor. Management expects sales growth to continue going forward. In May, 2020 the Company received
a Paycheck Protection Program loan of $221,400 under the CARES Act and the loan was subsequently forgiven in compliance with the provisions
of the CARES Act. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months,
the Company anticipates that it should be able to meet its cash needs for the next twelve months following the issuance date of this report.
Cash flows and credit availability is expected to be adequate to fund operations for one year from the issuance date of this report.
Hong Kong Joint Venture
In fiscal year 2020, Eyston’s
sales were $8,054,070.
Eyston’s gross margins
for fiscal year 2020 were 3.4%.
Selling, general and administrative
expenses of Eyston for fiscal 2020 were $4,186,690. As a percentage of sales, these expenses were 52.0% for the fiscal years ended March 31,
2020.
Investment income and interest
income, net of interest expense, was $261,349 for fiscal year 2020.
The net loss was $3,235,107
for fiscal year 2020. The net loss for fiscal 2020 was primarily due to sales that are insufficient to cover fixed general and administrative
cost.
Related Party Transactions
Pursuant to its written charter,
the Audit Committee of the Board of Directors of the Company reviews and approves all transactions with related persons that are required
to be disclosed under applicable regulation. During the fiscal year ended March 31, 2021 and 2020, inventory purchases and other
company expenses of approximately $1,206,000 and $999,000, respectively, were charged to credit card accounts of Harvey B. Grossblatt,
the Company’s Chief Executive Officer and certain of his immediate family members. The Company subsequently reimbursed these charges
in full. Mr. Grossblatt receives travel mileage and other credit card benefits from these charges. The maximum amount outstanding
and due to Mr. Grossblatt at any point during the fiscal year ended March 31, 2021 and 2020 amounted to $158,134 and $136,876,
respectively, and the amount outstanding at March 31, 2021 and 2020 is $50,536 and $27,102, respectively.
Critical Accounting Policies
Management’s discussion
and analysis of our consolidated financial statements and results of operations is based upon our consolidated financial statements included
as part of this document. The preparation of these consolidated financial statements requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, impairment of long-lived
assets, and contingencies and litigation. We base these estimates on historical experiences and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that the following
critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its consolidated
financial statements. For a detailed discussion on the application of these and other accounting policies, see Note A to the consolidated
financial statements, included in this Annual Report. Certain of our accounting policies require the application of significant judgment
by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject
to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical
experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information
available from outside sources, as appropriate. Our critical accounting policies include:
Income
Taxes: The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax
basis of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences may result
in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The
deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than
not that a deferred tax asset will not be realized. After a review of projected taxable income and the components of the deferred tax
asset in accordance with applicable accounting guidance it was determined that it is more likely than not that the tax benefits associated
with the remaining components of the deferred tax assets will not be realized. This determination was made based on the Company’s
history of losses from operations and the uncertainty as to whether the Company will generate sufficient taxable income to use the deferred
tax assets prior to their expiration. Accordingly, a valuation allowance was established to fully offset the value of the deferred tax
assets. Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable
income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income is generated, we may
be able to offset a portion of future tax expenses.
The Company follows ASC 740-10
which provides guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in
a tax return and requires that we recognize in our consolidated financial statements the impact of a tax position, if that position is
more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties,
if any, related to income tax matters are recorded as income tax expenses.
Revenue
Recognition: The Company’s primary source of revenue is the sale of safety and security products based upon purchase
orders or contracts with customers. Revenue is recognized at a point in time once the Company has determined that the customer has obtained
control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped or delivered
to the customer. Customers may not return, exchange or refuse acceptance of goods without our approval. Generally, the Company does not
grant extended payment terms. Shipping and handling costs associated with outbound freight, after control over a product has transferred
to a customer, are accounted for as a fulfillment cost and are recorded in selling, general and administrative expense.
The amount of revenue recognized
reflects the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at
the transaction price net of estimates of variable consideration. The Company uses the expected value method based on historical data
in considering the impact of estimates of variable consideration, which may include trade discounts, allowances, product returns (including
rights of return) or warranty replacements. Estimates of variable consideration are included in revenue to the extent that it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur.
We have established allowances
to cover anticipated doubtful accounts based upon historical experience.
Inventories:
Inventories are valued at the lower of cost or net realizable value. Cost is determined on the first in/first out method. We
evaluate inventories on a quarterly basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference
between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.
Off-Balance
Sheet Arrangements. We have not created, and are not party to, any special-purpose or off balance sheet entities for the purpose
of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements and do not
have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely
to materially affect our liquidity or the availability of our capital resources.
Concentrations
The Company is primarily a distributor of safety
products for use in home and business under both its trade names and private labels for other companies. The Company had one customer
in the fiscal year that ended March 31, 2021 that represented 21.9% of the Company’s net sales and two customers in the fiscal year
that ended March 31, 2020 that represented 12.2% and 10.3% of the Company’s net sales, respectively. The Company acquires all of
the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. At March 31, 2021, the Company had accounts
receivable due from Eyston Company, Ltd. of $381,401.
Accounting Standards
New Accounting Standards
See Note A, Recently issued accounting pronouncements, in the Notes
to the Consolidated Financial Statements for a discussion of recently adopted new accounting guidance and new accounting guidance not
yet adopted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and
supplementary data required by this Item 8 are included in the Company’s Consolidated Financial Statements and set forth in the
pages indicated in Item 15(a) of this Annual Report.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure
controls and procedures (as such item is defined in Rules 13a – 15(e) and 15d – 15(e) of the Exchange Act)
that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports that we file
or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in
a timely manner. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures
in accordance with applicable Securities and Exchange Commission guidance as of the end of the period covered by this annual report, and
have concluded that disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial
Reporting
Our management, including
our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of our consolidated financial statements for external reporting purposes in accordance with US GAAP. Internal control over
financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with US GAAP, and that
the Company’s receipts and expenditures are being made only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
Our Chief Financial Officer,
with the participation of our Chief Executive Officer, conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the 1992 framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting
was effective.
Changes
in Internal Control over Financial Reporting.
There have been no other changes
in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control
over financial reporting during the quarter ended March 31, 2021.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect
to the identity and business experience of the directors of the Company and their remuneration set forth in the section captioned “Election
of Directors” in the Company’s definitive Proxy Statement filed pursuant to Regulation 14A and issued in conjunction with
the 2021 Annual Meeting of Shareholders (the “Proxy Statement”) is incorporated herein by reference. The information with
respect to the identity and business experience of executive officers of the Company is set forth in Part I of this Form 10-K.
The information with respect to the Company’s Audit Committee is incorporated herein by reference to the section captioned “Meetings
and Committees of the Board of Directors” in the Proxy Statement. The information with respect to compliance with Section 16(a) of
the Exchange Act is incorporated herein by reference to the section captioned “Compliance with Section 16(a) of the Exchange
Act” in the Proxy Statement. The information with respect to the Company’s Code of Ethics is incorporated herein by reference
to the section captioned “Code of Ethics” in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by
this item is incorporated herein by reference to the sections captioned “Director Compensation” and “Executive Compensation”
in the Proxy Statement.
The information required by
this item regarding security ownership is incorporated herein by reference to the sections captioned “Beneficial Ownership”
and “Information Regarding Share Ownership of Management” in the Proxy Statement. Information required by this item regarding
our equity compensation plans is incorporated herein by reference to the Section entitled “Executive Compensation” in
the Proxy Statement.
The information required by
this item is incorporated herein by reference to the sections captioned “Transactions with Management”, if any, and “Election
of Directors” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by
this item is incorporated herein by reference to the section captioned “Independent Registered Public Accountants” in the
Proxy Statement.
PART IV
ITEM 15. EXHIBITS
(a)1.
Financial Statements.
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of March 31, 2021 and 2020 F-2
Notes to Consolidated Financial Statements F-7
(a)3. Exhibits required to be filed by Item
601 of Regulation S-K.
Exhibit No.
23.1 Independent Registered Public Accounting Firm’s Consent
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
July 8, 2021 By: /s/ Harvey B. Grossblatt
Harvey B. Grossblatt
President and Chief Executive Officer
(principal executive officer)
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Harvey B. Grossblatt President, Chief Executive Officer July 8, 2021
Harvey B. Grossblatt and Director
/s/ James B. Huff Chief Financial Officer July 8, 2021
James B. Huff (principal financial officer and
principal accounting officer)
/s/ Cary Luskin Director July 8, 2021
Cary Luskin
/s/ Ronald A. Seff Director July 8, 2021
Ronald A. Seff
/s/ Ira Bormel Director July 8, 2021
Ira Bormel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Audit Committee of the
Board of Directors and Shareholders
Universal Security Instruments, Inc. and Subsidiary