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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM  i 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended i  December 31, 2021

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 ☒ 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 February 16, 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 SUBSIDIARY

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 SUBSIDIARY

CONDENSED CONSOLIDATED INCOME STATEMENTS

(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 SUBSIDIARY

CONDENSED CONSOLIDATED INCOME STATEMENTS

(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 SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED DECEMBER 31, 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 SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED DECEMBER 31, 2020

(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 SUBSIDIARY

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 SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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availability under the Agreement of approximately $ i 383,000. Advances on factored trade accounts receivable are secured by all of the Company’s trade accounts receivable and inventories, are repaid periodically as collections are made by Merchant but are otherwise due upon demand, and bear interest at the prime commercial rate of interest, as published, plus  i two percent (Effective rate  i 5.25% at December 31, 2021). Advances under the factoring agreement are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory and our financial condition at the time of each request for an advance.

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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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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 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. 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 December 31, 2021, the Company had right-of-use assets of $ i 43,965 and lease liabilities of $ i 43,965 related to its operating leases. Right-of-use assets are included in property and equipment, net, on the condensed 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 condensed consolidated balance sheet. As of December 31, 2021 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were . i 25 years and  i 6.0%, respectively. During the nine months ended December 31, 2021, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $ i 128,600, which is included as an operating cash outflow within the condensed consolidated statements of cash flows. On November 1, 2021 the Company signed a one year extension for an operating lease for premises to commence March 1, 2022. During the nine months ended December 31, 2021 there were no newly leased assets for which a right-of use asset was recorded in exchange for a new lease liability.

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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 and nine month periods ended December 31, 2021 and 2020.

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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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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. 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 wiring 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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RESULTS OF OPERATIONS

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Three Months Ended December 31, 2021 and 2020

Sales. Net sales for the three months ended December 31, 2021 were $5,319,014 compared to $5,124,750 for the comparable three months in the prior year, an increase of $194,264 (3.8%). Sales increased principally due to a large order received from a major national retailer.

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 32.3% and 29.7% of sales for the quarters ended December 31, 2021 and 2020, respectively. Gross margins were positively impacted in the period ended December 31, 2021, principally due to price increases applied to address rising freight costs.

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Expenses. Selling, general and administrative expenses were $1,569,746 for the three months ended December 31, 2021, compared to $1,321,311 for the comparable three months in the prior year. As a percentage of net sales, these expenses increased to 29.5% for the three month period ended December 31, 2021, from 25.8% for the 2020 period. These expenses increased as a percentage of net sales due to increased expenditures for customer packaging, presentation, and promotional costs, and due to increased legal and consulting fees related to public company activities.

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Research and development expenses were $97,370 for the three month period ended December 31, 2021 compared to $106,608 for the comparable quarter of the prior year, a decrease of $9,238 (8.7%).

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Interest Expense. Our interest expense was $14,156 for the quarter ended December 31, 2021, compared to interest expense of $14,086 for the quarter ended December 31, 2020.

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Net Income. We reported net income of $35,351 for the quarter ended December 31, 2021, compared to a net income of $78,318 for the corresponding quarter of the prior fiscal year, a $42,967 (54.9%) decrease in net income. The primary reasons for the decrease in the net income are customer packaging, presentation, and promotional costs, and legal and consulting expenditures in the current quarter as compared to the same period in the prior year.

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Nine Months Ended December 31, 2021 and 2020

Sales. Net sales for the nine months ended December 31, 2021 were $15,259,235 compared to $14,522,813 for the comparable nine months in the prior period, an increase of $736,422 (5.1%). Sales increased principally due to orders from new customers. The Company attributes the increased sales to the fact that the Company has had sufficient inventory on hand prior to and since the beginning of the pandemic and, to date, has not been adversely affected by decreased production by its suppliers.

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Gross Profit Margin. The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company’s gross profit margin was 29.8% for the period ended December 31, 2021 and 32.4% for the period ended December 31, 2020. The primary reason for the decrease in gross profit during the nine-month period ended December 31, 2021 was increased freight, tariffs, and customs charges. Gross margins were positively impacted in the comparable period of the prior year due to refunds of tariffs.

Expenses. Selling, general and administrative expenses were $4,059,988 for the nine months ended December 31, 2021 compared to $3,572,189 for the comparable nine months in the prior year. As a percentage of sales, these expenses were 26.6% for the nine month period ended December 31, 2021 and 24.6% for the comparable 2020 period. These expenses increased as a percentage of net sales since selling, general, and administrative expenses do not fluctuate in direct proportion to sales. In addition, these expenses increased as a percentage of net sales due to increased expenditures for customer packaging, presentation, and promotional costs, and due to increased legal and consulting fees related to public company activities.

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Research and development expenses were $295,496 for the nine months ended December 31, 2021 compared to $332,276 for the comparable period of the prior year, a decrease of $36,780 (11.1%). The primary reason for the decrease is lower amounts paid to engineering consultants for services towards meeting revised smoke alarm testing standards.

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Interest Expense. Our interest expense was $37,954 for the nine months ended December 31, 2021, compared to interest expense of $71,848 for the nine months ended December 31, 2020.

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Net Income . We reported net income of $157,688 for the nine months ended December 31, 2021 compared to a net income of $725,181 for the corresponding period of the prior fiscal year, a decrease in the net income of $567,493 (78.3%). The primary reasons for the decrease in the net income is lower gross margins as a result of increased freight, tariffs and customs charges, and increased general and administrative costs.

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Management Plans and Liquidity

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As the Company previously reported, on August 31, 2020, the Company received a letter from NYSE American LLC (the “Exchange”) stating that the Exchange has determined that the Company is not in compliance with the Exchange’s continued listing requirements as the result of the Company’s failure to maintain stockholders’ equity of $6.0 million after reporting losses from continuing operations and/or net losses in its five most recent fiscal years. On October 1, 2021, the Company received a letter from the Exchange notifying

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the Company that it is now in compliance with all of the continued listing standards of the Exchange and that the Company has resolved the continued listing deficiency previously referenced.

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As our products are sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic and recent shipping delays and significant increases in shipping costs have had an impact on the Company’s sales and results of operations. 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 sales, customs charges, and freight costs were negatively impacted by delays in freight forwarding from ports of entry in California due to delays related to issues with COVID-19.

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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 unused availability of this facility totaled approximately $383,000 at December 31, 2021. The Company’s non-factored trade accounts receivable net of allowance for uncollectible amounts totaled approximately $878,000 at December 31, 2021. We anticipate that the 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.

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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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Operating activities used cash of $2,111,908 for the nine months ended December 31, 2021. This was primarily due to an increase in accounts receivable and amounts due from factor of $1,657,549, an increase in inventories, prepaid expenses and other of $808,245, and partially offset by an increase in accounts payable and accrued expenses of $189,243, and net income of $157,688. Operating activities provided cash of $1,827,375 for the nine months ended December 31, 2020. This was primarily due to a decrease in inventories, prepaid expenses and other of $2,018,807, net income of $725,181, and an increase in accounts payable and accrued expenses of $94,255, offset by an increase in accounts receivable and amounts due from factor of $1,017,400.

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There were no investing activities for the nine months ended December 31, 2021 or 2020.

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Financing activities provided cash of $2,338,527 during the nine months ended December 31, 2021 from net borrowing in excess of repayments from the factor. Financing activities used cash of $1,340,265 during the nine months ended December 31, 2020 which is comprised of loan proceeds of $221,400 under the Paycheck Protection Program of the CARES Act for the nine months ended December 31, 2020, and repayments, net of advances on the line of credit from our factor, of $1,561,665 for the period ended December 31, 2020.

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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 effective.

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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 December 31, 2021, 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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