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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM  i 10-Q

 i [☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended i  June 30, 2022

OR

 i [☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number  i 001-31747

UNIVERSAL SECURITY INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

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Registrant’s telephone number, including area code: ( i 410)  i 363-3000

Inapplicable

(Former name, former address and former fiscal year if changed from last report.)

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.  i Yes ☒ 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).  i Yes ☒ No ☐

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐  i Non-Accelerated Filer x☐ Smaller Reporting Company  i ☒ Emerging Growth Company  i ☐

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 Exchange Act). Yes  i ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

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At August 17, 2022, the number of shares outstanding of the registrant’s common stock was  i 2,312,887.

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PART I - FINANCIAL INFORMATION

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2022

(Unaudited)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2021

(Unaudited)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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June 30, 2022, the Company continues to provide support for resolution of any disputed items. The Company expects that all amounts in dispute will be resolved satisfactorily. Finally, the Company has filed requests for refunds of customs payments with US Customs and Border Protection for approximately $ i 300,000 (including interest expected) for overpayments of duty. The Company expects this refund to be available during the second quarter of fiscal year 2023. The Company has seen positive results on this plan as reflected by increased sales of its product offerings. Management expects sales growth to continue going forward. 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.

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depicts how our various product lines perform and are affected by economic factors. Revenue recognized by these categories for the three months ended June 30, 2022, and 2021 are as follows:

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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 condensed 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.

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payments, with its real estate leases including lease payments subject to a rate or index which may be variable. Certain real estate leases also include executory costs such as common area maintenance (non-lease component). As a practical expedient permitted under ASC 842, the Company has elected to account for the lease and non-lease components as a single lease component. The Company utilizes certain practical expedients for short-term leases, including the election not to reassess its prior conclusions about lease identification, lease classification and initial direct costs, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee. Lease payments, which may include lease components and non-lease components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable lease amounts based on a rate or index (fixed in substance) as stipulated in the lease contract.

Effective March 2022, we extended our operating lease for a  i 15,000 square foot office and warehouse located in Baltimore County, Maryland to expire in April 2025 subject to a right to terminate the lease if the Company enters into a binding agreement to sell the assets of the Company. No option to continue the lease beyond April 2025 has been provided in the lease extension. Monthly rental expense, with common area maintenance, currently approximates $ i 14,500 and increases  i 3.0% per year.

Our operating leases for real estate are generally renewable with terms and conditions similar to the original lease. None of the Company’s lease agreements contain any residual value guarantees or material restrictive covenants. As a result of the Company’s election of the package of  i practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification, all of the Company’s lease agreements in existence at the date of adoption that were classified as operating leases under ASC 840 have been classified as operating leases under ASC 842. Lease expense for payments related to the Company’s operating leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term and amounted to approximately $ i 485,000 at the date of adoption and increased by approximately $ i 468,000 effective with the lease amendment and extension dated March 2022. When the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s borrowing rates at the lease commencement date in determining the present value of lease payments. The right-of use asset also includes any lease payments made at or before lease commencement less any lease incentives. As of June 30, 2022, the Company had right-of-use assets of $ i 428,350 and lease liabilities of $ i 431,541 related to its operating leases. Right-of-use assets are included in property and equipment, net, on the consolidated balance sheet and lease liabilities related to the Company’s operating leases are included in short-term and long-term lease liability on the consolidated balance sheet. As of June 30, 2022, the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases is  i two years, nine months and  i 5.5%, respectively. During the fiscal quarter ended June 30, 2022, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $ i 37,838, which is included as an operating cash outflow within the condensed consolidated statements of cash flows. During the fiscal quarter ended June 30, 2022, the operating lease costs related to the Company’s operating leases was $ i 37,838 which is included in operating costs and expenses in the consolidated statements of operations.

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Management determined that recently issued ASU’s did not have a material impact on the consolidated financial statements at June 30, 2022.

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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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As used throughout this Report, “we,” “our,” “the Company” “USI” and similar words refers to Universal Security Instruments, Inc.

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FORWARD-LOOKING STATEMENTS

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This Quarterly Report on Form 10-Q contains certain forward-looking statements reflecting our current expectations with respect to our operations, performance, financial condition, and other developments. These forward-looking statements may generally be identified by the use of the words “may”, “will”, “believes”, “should”, “expects”, “anticipates”, “estimates”, and similar expressions. These statements are necessarily estimates reflecting management’s best judgment based upon current information and involve a number of risks and uncertainties. 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 could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. While it is impossible to identify all such factors, such factors include, but are not limited to, those risks identified in our periodic reports filed with the Securities and Exchange Commission.

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OVERVIEW

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We are in the business of marketing and distributing safety and security products. Our financial statements detail our sales and other operational results for the three-month periods ended June 30, 2022, and 2021.

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In light of 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.

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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 a negative impact on the Company’s sales. The Company is not yet able to quantify the full impact of the COVID-19 pandemic on its sales and financial results.

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The Company has developed products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology and product features. Most of our new technologies and features have been trademarked under the trade name IoPhic.

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Changes in international trade duties and other aspects of international trade policy, both in the U.S. and abroad, could materially impact the cost of our products. All of our products are imported from the Peoples Republic of China (PRC). To date, only certain of our products such as Carbon Monoxide and Photoelectric alarms, and USB devices, have been subjected to tariffs of 25%. We are monitoring these developments and will determine our strategies as additional information becomes available. Any increase in tariffs that is not offset by an increase in our sales prices could have an adverse effect on our business, financial position, results of operations or cash flows.

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As previously reported, on February 25, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company (USI), a wholly owned subsidiary of the Company D-U Merger Sub, Inc. a Delaware corporation (“Merger Sub”) and Infinite Reality, Inc., a Delaware corporation (“Infinite Reality”). On May 16, 2022, the Company filed with the United States Securities Exchange Commission (SEC) a proxy statement and Form S-4 registration statement in connection with the Merger.

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RESULTS OF OPERATIONS

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Three Months Ended June 30,2022 and 2021

Sales. Net sales for the three months ended June 30, 2022, were $4,635,304 compared to $4,667,998 for the comparable three months in the prior year, a decrease of $32,694 (0.7%).

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Gross Profit Margin. Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin was 30.7% and 27.0% of sales for the quarters ended June 30, 2022, and 2021, respectively. Gross profit margins for the period ended June 30, 2022, improved due to variations in the mix of products sold.

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Expenses. Selling, general and administrative expenses were $1,382,603 for the three months ended June 30, 2022, compared to $1,133,139 for the comparable three months in the prior year. As a percentage of net sales, these expenses increased to 29.8% for the three-month period ended June 30, 2022, from 24.3% for the 2021 period. These expenses increased as a percentage of net sales since selling, general, and administrative expenses do not fluctuate in direct proportion to sales. These expenses increased as a dollar amount due to increases in freight costs, and due to legal and consulting expenses associated with the prospective merger.

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Research and development expenses were $89,262 for the three-month period ended June 30, 2022, compared to $101,056 for the comparable quarter of the prior year, a decrease of $11,794 (11.7%).

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Interest Expense. Our interest expense was $55,496 for the quarter ended June 30, 2022, compared to interest expense of $9,489 for the quarter ended June 30, 2021. Interest expense is primarily dependent upon the total amounts borrowed on average from our Factor, and on interest rates which vary with the prime rate of interest.

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Net (Loss) Income. We reported a net loss of $106,138 for the quarter ended June 30, 2022, compared to a net income of $14,641 for the corresponding quarter of the prior fiscal year, a $120,779 (824.9%) decrease in net income. The primary reason for the net loss is increased expenditures for freight costs and legal and consulting expenses associated with the prospective merger.

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Management Plans and Liquidity

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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.

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Our short-term borrowings to finance any operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of its Factoring Agreement with Merchant Factors Corporation (Merchant or Factor). Borrowings under the 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 Merchant’s assessment of the Company’s receivables, inventory, and financial condition at the time of each request for an advance. The Company had fully utilized the availability of this facility on June 30, 2022. The Company’s non-factored trade and other accounts receivable net of allowance for uncollectible amounts totaled approximately $493,000 on June 30, 2022. We anticipate that future availability provided from Merchant, cash flows from operations, and the collection of non-factored trade accounts receivable will provide sufficient working capital for the next twelve months following the date of this report.

The Company has a recent history of sales that are 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. In addition, the Company has a short-term note payable due to its principal supplier (Eyston Company Ltd.) that requires monthly payments beginning April, 2022 of $100,000 per month and until the principal balance of approximately $1,081,000 is repaid. The Company has a long history of working closely with Eyston and believes that forbearance or extension of the payment terms of the short-term note payable can be achieved if required to meet short-term cash flow requirements. Further, the Company’s factor has withheld financing on certain of the Company’s accounts receivable subject to resolution of any disputes. The resolution of disputed items is ongoing and subsequent to June 30, 2022, the Company continues to provide support for resolution of any disputed items. The Company expects that all amounts in dispute will be resolved satisfactorily. Finally, the Company has filed requests for refunds of customs payments with US Customs and Border Protection for approximately $300,000 (including interest expected) for overpayments of duty. The Company expects this refund to be available during the second quarter of fiscal year 2023. The Company has seen positive results on this plan as reflected by increased sales of its product offerings. Management expects sales growth to continue going forward. 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.

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Operating activities used cash of $562,395 for the three months ended June 30, 2022. This was primarily due to a increase in inventories, prepaid expenses and other of $574,655, and a decrease in accounts payable and accrued expenses of $318,965, a net loss of $106,138,

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and offset by a decrease in accounts receivable and due from factor of $432,250. Operating activities used cash of $196,612 for the three months ended June 30, 2021. This was primarily due to a increase in accounts receivable and amounts due from factor of $321,292, and offset by a decrease in inventories, prepaid expenses and other of $27,731, and an increase in accounts payable and accrued expenses of $80,385, and net income of $14,641.

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There were no investing activities for the three months ended June 30, 2022, or 2021.

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Financing activities provided cash of $379,541 and provided cash of $86,379 during the three months ended June 30, 2022, and 2021, respectively, which is comprised of borrowings net of advances from the factor of $679,541 and repayment of a note payable to Eyston Company Ltd. of $300,000 for the three months ended June 30, 2022, and borrowings net of advances of $86,379 from the factor for the period ended June 30, 2021.

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CRITICAL ACCOUNTING POLICIES

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In the notes to the consolidated financial statements, and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of Operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in the United States of America.

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ITEM 4.CONTROLS AND PROCEDURES

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Evaluation of Disclosure Controls and Procedures

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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 quarterly report and have concluded that disclosure controls and procedures were not effective, because of a material weakness in internal control over financial reporting as discussed below.

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A material weakness arose in the classification of and disclosure of amounts within the financial statements. The Company plans to remediate the material weakness by clarification of the classification of amounts and inclusion of the required disclosures.

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Changes in Internal Control over Financial Reporting

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There have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

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From time to time, the Company is involved in various lawsuits and legal matters. It is the opinion of management, based on the advice of legal counsel, that these matters will not have a material adverse effect on the Company’s financial statements.

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SIGNATURES

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Pursuant to the requirements 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.

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