MARYLAND | MARYLAND | | 52-0898545 | (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 | 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“large accelerated filer,” “accelerated“accelerated filer,” “smaller“smaller reporting company”company” and “emerging“emerging growth company”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, 2020,2021, was $3,923,658.$11,440,560. The number of shares of common stock outstanding as of July 5, 2021June 30, 2022 was 2,312,887. documents incorporated by reference
To the extent specified, Part III
PART I General Universal Security Instruments, Inc. (“we” or “the Company”) designs and markets a variety of popularly-pricedpopularly 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-ownedwholly 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,Due 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)results. While 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.2021 period, delivery schedules have been delayed and freight costs have increased significantly. Our sales growth was alsohas been due primarily to increased sales of two products to anotherelectrical distributors reflecting increased housing demand and increased retail sales to 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.
retailers. Our sales for the year ended March 31, 20212022, were $17,520,151$19,549,785 compared to $14,803,024$17,520,151 for the year ended March 31, 2020.2021. We reported a net earningsloss of $78,150 in fiscal 2022 compared to net income of $268,343 in fiscal 2021, compared to a net loss of $5,813,891 in fiscal 2020, an increasedecrease in net earnings of $6,082,234 (104.6%$346,493 (129.1%). The net loss for the fiscal year ended March 31, 2022, is attributed to decreased gross margins arising from increases in freight, customs, and duty expenditures. In addition, the Company has incurred increased legal and consulting fees associated with the proposed merger (described below). The net earnings for the fiscal year ended March 31, 2021, are primarily attributed to increased sales and gross margins compared to the fiscal year ended March 31, 2020, and to the forgiveness of debt associated with the Paycheck Protection Program loan under the CaresCARES 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. Proposed Merger 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”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Infinite Reality, with Infinite Reality continuing as the surviving corporation and wholly owned subsidiary of the Company (the “Merger”). The Merger will become effective at the time when the Certificate of Merger has been duly filed or such later date specified in the filed certificate (the “Effective Time”). As a result, immediately following the Effective Time, the former Infinite Reality stockholders will hold approximately 97.6% of the outstanding shares of USI Common Stock and the stockholders of USI will retain ownership of approximately 2.4% of the outstanding shares of USI Common Stock. The directors and officers of Infinite Reality prior to the Effective Time will remain the directors and officers after the Effective Time, until their resignation or removal. At the Effective Time, the Company will take the actions required to replace the officers and directors of the Company with designees by Infinite Reality. At the Effective Time, the parties intend for the Company to convert from a Maryland corporation to a Delaware corporation. Pursuant to the Merger Agreement, Infinite Reality shareholders acquire the right to convert their Infinite Reality common stock held immediately prior to the Merger into the Company common stock. Holders of the Company’s common stock prior to the Effective Time (“Legacy Shareholders”) may also receive a dividend of the Company common stock if the market capitalization of the Company is less than $500 million within180 days after the Effective Time. Under the terms of the Merger Agreement, the Company current operating business will continue, and the Company has agreed to use its best efforts to sell or spin off its business operations prior to the Effective Time. In the event the Company’s current business operations are not sold or otherwise divested by the Effective Time, a Contingent Value Rights Agreement will issue to each Legacy Shareholder. The Merger Agreement includes customary rights of each party to terminate the Merger Agreement, including: in the event shareholder approval is not obtained; if the Company’s shares are not approved for continued listing by the NYSE MKT LLC following the Effective Time; and if a party receives a superior offer and complies with the terms of the Merger Agreement regarding accepting such offer. 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. If USI or Infinite Reality accepts a superior offer and terminates the Merger Agreement, the terminating party will pay a breakup fee to the non-terminating party covering its out-of-pocket expenses, subject to a cap of $100,000, plus 4% of the market capitalization of USI as of the Effective Date. 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. Eyston Company Limited (Eyston) in the Peoples Republic of China (PRC), a principal supplier of the Company’s products. Our line of safety alarms consists of units powered by replaceable batteries, ten yearten-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. TheseCertain of these products are currently subject to tariffs ranging from ten toof 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, sevensome 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 20212022 and 2020.2021. 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, 20212022, was approximately $3,905,000.$6,028,000. Our backlog as of March 31, 20202021, was approximately $507,000.$3,905,000. 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 VentureSuppliers
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 certainThe majority of our electronicproducts are manufactured for us by Eyston and electrical products. Effective, March 31, 2020 we soldamounted to approximately 83.6% and 77.6% of our fifty percent interest in the Hong Kong Joint Venture in exchangepurchases 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, 2022 and 2021, and 2020, 77.6% and 82.7% of our total inventory purchases were made from Eyston, respectively.
Other Suppliers
Certain other private label products are also manufactured for us by foreign suppliers. We believe that our relationships with our other suppliers are good. The loss of any of our other 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 20212022 and 2020,2021, 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, 2021,2022, we had thirteentwelve employees, nineeight 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. Effective October, 2018,March 2022, we extended our operating lease for a 15,000 square foot office and warehouse located in Baltimore County, Maryland to expire in April 2022.2025 subject to a right to terminate the lease if the Company enters into a binding agreement to sell the assets of the Company. Monthly rental expense, with common area maintenance, currently approximates $14,500 and increases 2.5%3.0% 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 2022.2023. 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. 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. Set forth below is information aboutSubsequent to March 31, 2022, 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. GROSSBLATTCompany became aware of a lawsuit filed by Thomas Henderson against Universal Security Instruments, Inc. and its directors in the U.S. District Court for the Southern District of New York, Civil Action No. 22cv4354. To our knowledge, none of the defendants has yet been served. The plaintiff claims to be a directorshareholder in the Company and alleges that the registration statement on Form S-4 filed by the Company on May 16, 2022 (which, when declared effective, will also be the merger proxy statement distributed to the shareholders of the Company since 1996. He served as Chief Financial Officer from October 1983 through August 2004, Secretary and Treasurerof Infinite Reality in connection with the proposed Merger) is materially deficient and misleading in omitting material information and, therefore, violates the provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and the regulations promulgated thereunder. The suit seeks to enjoin the Merger, direct the defendants to comply with the provisions of the Exchange Act, award costs and fees to the plaintiff, and grant such other relief as the court may deem just and proper. The Company from September 1988 through August 2004,believes that the suit is wholly without merit and, Chief Operating Officer from April 2003 through August 2004. Mr. Grossblatt was appointed Chief Executive Officer in August 2004.once served, the Company will aggressively defend the suit.
JAMES B. HUFF was appointed Chief Financial Officer in August 2004 and Secretary and Treasurer in October 2004.6
PART II PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
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, 2021,2022, there were 141133 record holders of the Common Stock. The closing price for the Common Stock on that date was $6.75.$4.25. 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 | | | | | Low | | $ | 0.36 | | | | | | | | | | | Second Quarter | | High | | $ | 4.10 | | | | | Low | | $ | 0.75 | | | | | | | | | | | Third Quarter | | High | | $ | 13.94 | | | | | Low | | $ | 1.85 | | | | | | | | | | | Fourth Quarter | | High | | $ | 19.88 | | | | | Low | | $ | 4.73 | | | | | | | | | | | Fiscal Year Ended March 31, 2020 | | | | | | | | First Quarter | | High | | $ | 1.39 | | | | | Low | | $ | 1.15 | | | | | | | | | | | Second Quarter | | High | | $ | 1.33 | | | | | Low | | $ | 0.81 | | | | | | | | | | | Third Quarter | | High | | $ | 1.03 | | | | | Low | | $ | 0.35 | | | | | | | | | | | Fourth Quarter | | High | | $ | 0.92 | | | | | Low | | $ | 0.30 | |
| ITEM 7 . | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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.PRC. 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.results. Accordingly, the following discussion and analysis of the fiscal years ended March 31, 20212022, and 20202021 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.” subsidiaries. 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)results. While 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.2021 period, delivery schedules have been delayed and freight costs have increased significantly. Our sales growth was alsohas been due primarily to increased sales of two products to anotherelectrical distributors reflecting increased housing demand and increased retail sales to 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. retailers. 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, 20212022, and 20202021 continue to be significantly impacted bydependent upon 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 itsof our line of ten-year sealed battery units, GFCI’s, and other electrical devices. The importation of certain 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, 20212022 and 20202021 Sales. In fiscal year 2021,2022, our net sales were $17,520,151$19,549,785 compared to sales in the prior year of $14,803,024,$17,520,151, an increase of $2,717,127 (18.4%$2,029,634 (11.6%). 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, 20212022, was 32.2%30.9% compared to 25.4%32.2% in fiscal 2020.2021. The increasedecrease in 20212022 gross margin is attributed to the increase in demandfreight and to refunds of tariffs paid in prior periods. demurrage charges caused by global supply chain problems. Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $5,524,343 in fiscal 2022 from $5,034,380 in fiscal 2021 from $4,628,881 in fiscal 2020.2021. As a percentage of net sales, these expenses were 28.3% for the fiscal year ended March 31, 2022, and 28.7% for the fiscal year ended March 31, 2021 and 31.3% for the fiscal year ended March 31, 2020.2021. 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 due to increases in insurancelegal and commissions.consulting fees associated with a proposed Merger. Research and Development. Research and development expense for the fiscal year ended March 31, 2022, was $438,200. 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 20212022 period compared to the 20202021 period was due to decreased independent testing of products. Interest Expense (Net). For the fiscal years ended March 31, 20212022, and 2020,2021, the Company incurred net interest expense of $86,841$147,840 and $409,703,$86,841, 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.Eyston. The decreaseincrease in interest expense resulted from reduced borrowing from Eyston Company Ltd. and reducedincreased borrowing from our factor during the fiscal year ended March 31, 20212022, to fund inventory purchases and operating cash requirements. Income Taxes. For the fiscal years ended March 31, 20212022, and 20202021 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, 20212022, and 20202021 varies from the expected statutory rate. Footnote GF 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). Income. We reported a net loss of $78,150 for the fiscal year 2022, compared to 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%$346,493 (129.1%) in the net loss.income. 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 duringfor the fiscal year ended March 31, 2020. 2022, is attributed to decreased gross margins arising from increases in freight, customs, and duty expenditures. In addition, the Company has incurred increased legal and consulting expense associated with a proposed Merger. Also, contributing to the decrease in the net lossincome for the Fiscalfiscal year ended March 31, 2021, were higher sales, increased gross profit,is 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.
Act. Financial Condition, Liquidity and Capital Resources The Company hadreported a net loss of $78,150 and net income of $268,343 and a net loss of $5,813,891 for the years ended March 31, 20212022 and 2020,2021, respectively. As of March 31, 2021,2022, working capital (computed as the excess of current assets over current liabilities) increaseddecreased by $505,103$1,112,654 from $5,059,498 on March 31, 2020, to $5,564,601 on March 31, 2021.2021, to $4,451,947 on March 31, 2022. Our operating activities used cash of $1,860,051 for the year ended March 31, 2022. Operating activities used cash principally to increase trade accounts receivable and amounts due from factor of $1,506,650, to increase inventories by $1,977,868, a net loss of $78,150, and is partially offset by an increase in accounts payable and accrued expenses of $1,669,566, and a decrease in prepaid expenses of $95,357. 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, 20212022, or 2020.2021. Financing activities provided cash of $2,138,182 reflecting the increase in net borrowing from the Factor. Financing activities used cash of $1,321,362 and $289,926 during the fiscal yearsyear ended March 31, 2021, and 2020, respectively, as a result ofresulting primarily from the net repayment of amounts due to our Factor 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 downturndemand in new home construction and new home sales negativelydirectly impacts sales by our USI Electric subsidiary. Our operating results for the fiscal years ended March 31, 20212022, and 20202021 continue to be significantly impacted bydependent upon 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$11,000 on March 31, 2021. 2022. 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 wereare 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 approximately $560,000 of the Company’s accounts receivable subject to resolution of delivery disputes with a major customer. The resolution of these items has been ongoing and subsequent to March 31, 2022, the customer has been making payments as proof of delivery is confirmed. The Company expects that all amounts in dispute will be resolved satisfactorily and that availability of approximately $560,000 in operating cash flow will become available under the factoring agreement subsequent to March 31, 2022. 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 due toas reflected by 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.offerings. 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, 20212022, and 2020,2021, inventory purchases and other company expenses of approximately $1,206,000$1,582,000 and $999,000,$1,206,000, 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, 2022, and 2021 may include amounts submitted for personal expense reimbursement and 2020amounts paid by Mr. Grossblatt for inventory purchases or other company expenses and amounted to $158,134approximately $211,000 and $136,876,$158,000, respectively, and the amount outstanding at March 31, 2022 and 2021 is approximately $44,000 and 2020 is $50,536 and $27,102,$51,000, 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 no customers in the fiscal year that ended March 31, 2022, that represented greater than 10% of the Company’s net sales. The Company had one customer in the fiscal year that ended March 31, 2022, that represented 13.6% of the Company’s accounts receivable on March 31, 2022. The Company had a different customer during the fiscal year 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.sales. The Company acquires all of the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. Products manufactured for us by Eyston amounted to approximately 83.6% and 77.6% of our purchases for the fiscal years ended March 31, 2022, and 2021, respectively. At March 31, 2022, and 2021, the Company had accounts receivable due from Eyston Company, Ltd. of $381,401. $358,958 and $381,401, respectively. 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. | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
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 not 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.not effective as of March 31, 2022, because of a material weakness in internal control over financial reporting as discussed below. 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. Changes in Internal Control over Financial Reporting.Reporting. ThereExcept for the material weakness noted above 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, 2021.2022.
ITEM 9B. | ITEM 9B. | OTHER INFORMATION |
Not applicable. PART III | ITEM 10 . | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers The information with respect to the identityBoard currently consists of four directors. The Company’s directors are divided into three classes and business experienceare elected for terms of three years each and until his successor is elected and qualifies. The following table sets forth, for each director and executive officer of the directorsCompany, his name, age as of March 31, 2022, the year he first became a director and, if applicable, executive officer of the Company and their remuneration set forth in the section captioned “Electionexpiration of Directors” inhis current term. There are no known arrangements or understandings between any director of the Company’s definitive Proxy Statement filed pursuant to Regulation 14ACompany and issued in conjunction withany other person that has been selected as a director. | | | | | | | | | | | | | | | | | Current | | | | | | | Executive | | Director | | | | | Director | | Officer | | Term | Name | | Age | | Since | | Since | | to Expire | Ira F. Bormel | | 59 | | 2008 | | — | | 2022 | Harvey B. Grossblatt | | 75 | | 1996 | | 1983 | | 2023 | Cary Luskin | | 63 | | 2002 | | — | | 2022 | Ronald A. Seff, M.D. | | 72 | | 2002 | | — | | 2022 | James B Huff | | 70 | | — | | 2004 | | — |
Presented below is certain information concerning the 2021 Annual Meeting of Shareholders (the “Proxy Statement”) is incorporated herein by reference. The information with respect to the identitydirectors and business experience of executive officers of the CompanyCompany. Unless otherwise stated, all directors have held the positions indicated for at least the past five years. Ira F. Bormel has served as chief financial officer of Berman Enterprises LLC and related companies, a Maryland based owner, developer and manager of office and retail commercial properties, since 1999. Mr. Bormel is set forth in Part Ialso a former chief financial officer of this Form 10-K. The informationthe Company. Mr. Bormel is well qualified to serve as a member of the Board due to his experience as chief financial officer of a multi-million dollar business and his familiarity with respect to the Company’s business and industry. Harvey B. Grossblatt was Chief Financial Officer of the Company from 1983 until August 2004, Secretary and Treasurer of the Company from 1988 until August 2004, Chief Operating Officer of the Company from April 2003 through August 2004, and Chief Executive Officer since August 2004. Mr. Grossblatt is well qualified to serve as a member of the Board due to his more than a quarter century experience as a member of the Company’s senior management and detailed knowledge of the Company’s operations and home safety products industry. Cary Luskin has been in the retail electronics business since 1978. Since 1998, Mr. Luskin has been President of The Big Screen Store, Inc., a chain of large-screen television retail stores. Mr. Luskin is well qualified to serve as a member of the Board due to his extensive experience in the retail electronics business and senior executive of a public company. Ronald A. Seff, M.D. has been in the private practice of ophthalmology since 1977. From 1977 until 1998, Dr. Seff practiced with, and was a senior executive of, a large medical practice with four offices in Maryland. Dr. Seff is well qualified to serve as a member of the Board due to his extensive practical business experience gained as a senior executive of a large medical practice in which Dr. Seff had responsibility for a wide range of business functions. Dr. Seff serves on the Audit and Compensation Committees of the Company and has a broad understanding of the Company, its management, and its operations. James B. Huff was appointed Chief Financial Officer of the Company in August 2004 and Secretary and Treasurer in October 2004. Audit Committee The Audit Committee is incorporated hereinappointed by referencethe Board to assist the Board in its duty to oversee the Company’s accounting, financial reporting and internal control functions and the audit of the Company’s financial statements. The Committee’s responsibilities include, among others, direct responsibility for hiring, firing, overseeing the work of and determining the compensation for the Company’s independent auditors, who report directly to the section captioned “Meetings and CommitteesAudit Committee. The members of the Audit Committee during the fiscal year ended March 31, 2022, were Mr. Bormel (Chairman), Dr. Seff and Mr. Luskin. None of the Audit Committee members is an employee of the Company and each is independent under existing NYSE MKT and SEC requirements. The Board has examined the SEC’s definition of Directors” in“audit committee financial expert” and determined that Mr. Bormel satisfies this definition. Accordingly, Mr. Bormel has been designated by the Proxy Statement.Board as the Company’s audit committee financial expert. During the fiscal year ended March 31, 2022, the Audit Committee met four times. The information with respect to complianceBoard has adopted a written charter for the Audit Committee, which is available on the Company’s website, www.universalsecurity.com, under the “Investor Relations” tab. 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”Act requires that the Company’s directors and executive officers and each person who owns more than 10% of the Company’s Shares, file with the SEC an initial report of beneficial ownership and subsequent reports of changes in beneficial ownership of the Proxy Statement. The informationShares. To the Company’s knowledge, based solely upon the review of the copies of such reports furnished to us, all reporting persons complied with the Section 16(a) filing requirements applicable to them with respect to transactions during the fiscal year ended March 31, 2022. Code of Ethics The Company has adopted a Code of Business Conduct and Ethics that is designed to promote the highest standards of ethical conduct by the Company’s directors, executive officers and employees. The Code of Ethics is incorporated herein by reference toposted on the section captioned “Code of Ethics” inCompany’s website, www.universalsecurity.com, under the Proxy Statement.“Investor Relations” tab. | ITEM 11 . | EXECUTIVE COMPENSATION |
Summary Compensation Table The individuals who served as the Company’s Chief Executive Officer and Chief Financial Officer during the fiscal year ended March 31, 2022, as well as two of the Company’s most highly compensated employees whose total compensation during the fiscal year exceeded $100,000 (listed in the Summary Compensation Table below), are referred to as the “named executive officers.” The following table sets forth information requiredregarding the total compensation paid or earned by this itemthe named executive officers as compensation for their services in all capacities during the fiscal years ended March 31, 2022, and 2021. | | | | | | | | | | | | | | | | | | | | Base | | | | Stock | | Option | | | | | | Name and | | | | Salary | | Bonus | | Awards | | Awards | | All Other | | Total | | Principal Position | | Year | | $ | | $ | | $ | | $ | | Compensation | | $ | | (a) | | (b) | | (c) | | (d) | | (e) | | (f) | | $ (i) | | (j) | | Harvey B. Grossblatt, | | 2022 | | 352,286 | | 0 | | 0 | | 0 | | 72,042 | | 424,328 | | President and CEO | | 2021 | | 352,286 | | 2,712 | | 0 | | 0 | | 68,728 | (1) | 423,726 | | James B. Huff, | | 2022 | | 196,424 | | 0 | | 0 | | 0 | | 18,855 | | 215,279 | | Secretary/Treasurer/CFO | | 2021 | | 154,040 | | 0 | | 0 | | 0 | | 18,855 | (2) | 172,895 | | Glenda Anderson, | | 2022 | | 157,386 | | 0 | | 0 | | 0 | | 19,288 | | 176,674 | | Sales Manager | | 2021 | | 162,395 | | 0 | | 0 | | 0 | | 18,288 | (3) | 180,683 | | Phillip Haigh | | 2022 | | 145,640 | | 0 | | 0 | | 0 | | 27,268 | | 172,908 | | Sales Manager | | 2021 | | 145,109 | | 0 | | 0 | | 0 | | 31,978 | (4) | 177,087 | |
| (1) | All other compensation for Mr. Grossblatt for 2022 and 2021, respectively, includes employer 401(k) contributions of $40,815 and $37,852, medical reimbursement and health insurance premiums of $25,209 and $24,858, group life and disability premiums of $5,166 and $5,166, and auto lease value of $852 and $852. |
| (2) | All other compensation for Mr. Huff for 2022 and 2021, respectively, includes employer match of 401(k) contributions of $5,526 and $5,526, group life and disability premiums of $5,529 and $5,529 and auto lease value or reimbursement allowance of $7,800 and $7,800. |
| (3) | All other compensation for Ms. Anderson for 2022 and 2021 respectively, includes employer match of 401(k) contributions of $5,461 and $5,461, medical reimbursement and health insurance premiums of $3,304 and $3,304, group life and disability premiums of $3,523 and $3,523, and auto reimbursement allowances of $7,000 and $6,000. |
| (4) | All other compensation for Mr. Haigh for 2022 and 2021 respectively, includes employer match of 401(k) contributions of $6,000 and $5,010, medical reimbursement and health insurance premiums of $12,600 and $12,600, group life and disability premiums of $3,568 and $3,568, and auto reimbursement allowances of $5,100 and $10,800. |
401(k) Plan The Company has a defined contribution profit sharing plan covering eligible employees. The Plan is incorporated herein by referencevoluntary with respect to participation and is subject to the sections captioned “Director Compensation” and “Executive Compensation”provisions of ERISA. The plan provides for participant contributions of up to 25% of annual compensation, as defined by the plan. The Company contributes an amount equal to a match of the first three percent (3%) contributed by the employee plus fifty percent (50%) of the next two percent (2%) contributed by the employee with a maximum contribution of four percent (4%). The Company may contribute an additional amount from its profits as authorized by the Board. The Company made no additional contributions in fiscal 2022. Participants in the Proxy Statement.plan are immediately vested in their and the Company’s contributions, plus actual earnings thereon. The Company’s fiscal 2022 contributions to the plan on behalf of named executive officers are included in the “All Other Compensation” column in the “Summary Compensation Table” above. Executive Employment Agreements The Chief Executive Officer’s compensation is governed largely by his employment agreement with the Company, originally effective April 1, 2002, as amended. The current employment agreement expires on July 31, 2022. The employment agreement currently provides that Mr. Grossblatt’s base annual salary (since April 1, 2007) is $350,000. Additionally, Mr. Grossblatt is entitled to bonus compensation for each fiscal year of the Company in which the Company earned pre-tax net income in such fiscal year in excess of a percentage, pre-determined by the Board, of shareholders’ equity as of the start of the fiscal year (which is 4% for the fiscal years ended March 31 2022 and 2021), as follows: 3% of all (after the 4% threshold) pre-tax net income up to $1 million, 4% of pre-tax net income from $1-$2 million, 5% of pre-tax net income from $2-$3 million, 6% of pre-tax net income from $3-$4 million, 7% of pre-tax net income over $4 million. Mr. Grossblatt is also entitled to life, health and disability insurance benefits, medical reimbursement, automobile allowance, and Company paid retirement plan contributions. If the Employment Agreement is not renewed by the Company or is terminated by Mr. Grossblatt for good reason, Mr. Grossblatt is entitled to receive his compensation through any balance of the employment term plus a lump sum payment equal to his last 12 months base salary and bonus, health benefits for three years, and an additional lump sum payment payable on each of the first three anniversaries of the termination equal to the 401(k) plan contribution the Company would have made on behalf of the Company had he remained employed by the Company. If Mr. Grossblatt’s employment is terminated following or in anticipation of a “change of control” of the Company, Mr. Grossblatt will be entitled to receive a lump sum payment equal to his base salary for the balance of the Employment Agreement’s term and the amount of Mr. Grossblatt’s last bonus plus three times Mr. Grossblatt’s last 12 months base salary and bonus. In addition, Mr. Grossblatt is entitled to receive health benefits for three years, and an additional lump sum payment payable on the anniversary of the termination equal to the 401(k) plan contribution the Company would have made on behalf of the Company had he remained employed by the Company for three years. In the event of a change in control Mr. Grossblatt will receive an amount equal to three times his base salary for the last 12 months and the amount of his last bonus, limited to 2.99 times Mr. Grossblatt’s average annual taxable compensation from the Company which is included in his gross income for the five taxable years of the Company ending before the date on which the change of control occurs. If the Employment Agreement is terminated by the Company due to Mr. Grossblatt’s death, Mr. Grossblatt’s estate is entitled to receive a lump sum payment equal to his base salary for the greater of the balance of the Employment Agreement’s term or one year, reduced by any individual life insurance benefits the premiums for which are paid for by the Company, plus the amount of his last bonus and the amount of the Company’s last 401(k) plan contribution made on behalf of Mr. Grossblatt. In addition, Mr. Grossblatt’s estate is entitled to the health insurance and medical reimbursement benefits for the longer of the balance of the term or three years following the date of death, or the cash equivalent thereof. If the Employment Agreement is terminated by the Company due to Mr. Grossblatt’s disability, Mr. Grossblatt is entitled to the continuation of the payment of his base salary for the balance of the term, reduced by any group or individual disability income insurance benefits the premiums for which are paid for by the Company and Social Security disability benefits paid to Mr. Grossblatt. In addition, Mr. Grossblatt is entitled to the health insurance and medical reimbursement benefits and a payment equal to the 401(k) plan contribution the Company would have made on behalf of the Company had he remained employed by the Company, for the longer of the balance of the term or three years following the date of disability, or the cash equivalent thereof. The Employment Agreement generally prohibits Mr. Grossblatt from competing with the Company during the term and during any subsequent period during which he receives compensation from the Company. Potential Payments upon Termination or Change in Control The table below shows the estimated incremental value transfer to Harvey B. Grossblatt, the only named executive officer who is contractually entitled to compensation upon termination or a change in control, under various scenarios relating to a termination of employment. Please refer to the discussion titled “Executive Employment Agreements”, above, in this Executive Compensation Section for a description of the circumstances that would trigger payments and benefits upon termination or a change in control. The tables below assume that such termination occurred on March 31, 2022, the last day of the Company’s 2022 fiscal year. The Company’s stock price on the last business day of its 2022 fiscal year was $4.25. The actual amounts that would be paid to any named executive officer can only be determined at the time of an actual termination of employment and would vary from those listed below. The estimated and approximate amounts listed below are in addition to any other benefits that are available to employees generally. | | | | | | | | | | | | | | | | | | | | | | | | | Termination | | | | | | | | | | | | | Resignation | | Following | | | | | | | | | | | | | for Good | | Change in | | | | | | | | | | Non Renewal | | Reason | | Control (1) | | Death | | Disability | | Severance | | $ | 353,000 | (2) | $ | 353,000 | (2) | $ | 1,053,000 | (5) | $ | 353,000
minus benefits | | $ | 353,000
minus benefits | (7) | Health Benefits | | $ | 85,000 | (3) | $ | 85,000 | (3) | $ | 85,000 | (3) | $ | 85,000 | (6) | $ | 85,000 | | 401(k) Contribution | | $ | 72,000 | (4) | $ | 72,000 | (4) | $ | 72,000 | (4) | $ | 24,000 | | $ | 72,000 | (4) | Tax gross up | | | — | | $ | 326,000 | | $ | 785,000 | | | — | | | — | |
| (1) | Limited to 2.99 times Mr. Grossblatt’s average annual taxable compensation from the Company which is included in his gross income for the five taxable years of the Company ending before the date on which the change of control occurs. |
| (2) | Lump sum payment equal to Mr. Grossblatt’s last 12 months base salary and bonus. |
| (3) | The aggregate of the health benefits for the first three years following the termination. |
| (4) | The aggregate of the respective annual lump sum payments, payable on each of the first three anniversaries of the termination, equal to the 401(k) plan contribution the Company would have made on behalf of the Company had Mr. Grossblatt remained employed by the Company. |
| (5) | Lump sum payment equal to Mr. Grossblatt’s annual base salary for the balance of the employment period and last bonus, plus three times Mr. Grossblatt’s last 12 months base salary and bonus limited to 2.99 times Mr. Grossblatt’s average annual taxable compensation. |
| (6) | Mr. Grossblatt’s estate is entitled to the health insurance and medical reimbursement benefits for the longer of the balance of the employment term or three years following the date of death, or the cash equivalent thereof. |
| (7) | This amount assumes a disability occurs on the date of signing of the agreement. |
Director Compensation The following table summarizes the compensation paid to directors for the fiscal year ended March 31, 2022: | | | | | | | | | | | | Fees Earned | | | | | | | | | or | | Option | | | | Name | | Paid in Cash | | Awards | | Total | (a) | | (b) | | (d) | | (h) | Cary Luskin | | $ | 10,000 | | $ | 0 | | $ | 10,000 | Ronald A. Seff, M.D. | | $ | 10,000 | | $ | 0 | | $ | 10,000 | Ira F. Bormel | | $ | 10,000 | | $ | 0 | | $ | 10,000 |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table reflects the names and addresses of the only persons known to the Company to be the beneficial owners of 5% or more of the Shares outstanding as of June 30, 2022. For purposes of calculating beneficial ownership, Rule 13d-3 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) requires inclusion of Shares that may be acquired within sixty days of June 30, 2022. Unless otherwise indicated in the footnotes to this table, beneficial ownership of Shares represents sole voting and investment power with respect to those Shares. | | | | | Name and Address
of Beneficial Owner |
| Shares
Beneficially Owned |
| Percent
of Class | NONE | | | | | | | | | |
The following table sets forth information required by this item regarding security ownership is incorporated herein by referencewith respect to the sections captioned “Beneficial Ownership” and “Information Regarding Share Ownershipbeneficial ownership of Management”the Shares on June 30, 2022, by (i) each executive officer of the Company named in the Proxy Statement. Information required by this item regarding our equity compensation plans is incorporated herein by reference toSummary Compensation Table, (ii) each current director and each nominee for election as a director and (iii) all directors and executive officers of the Section entitled “Executive Compensation”Company as a group. For purposes of calculating beneficial ownership, Rule 13d-3 of the Exchange Act requires inclusion of Shares that may be acquired within sixty days of June 30, 2022. Unless otherwise indicated in the Proxy Statement.footnotes to this table, beneficial ownership of Shares represents sole voting and investment power with respect to those Shares. | | | | | | | | Shares Beneficially | | | | Name of Beneficial Owner | | Owned | | Percent of Class | | Harvey B. Grossblatt | | 110,402 | | 4.77 | % | Cary Luskin | | 59,423 | | 2.57 | % | Ronald A. Seff, M.D. | | 77,469 | | 3.35 | % | James B. Huff | | 510 | | 0.02 | % | Ira F. Bormel | | 0 | | — | | All directors and executive officers as a group (5 persons) | | 247,804 | | 10.71 | % |
| ITEM 13 . | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
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, 2022, and 2021, inventory purchases and other company expenses of approximately $1,582,000 and $1,206,000, 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, 2022, and 2021 may include amounts submitted for personal expense reimbursement and amounts paid by Mr. Grossblatt for inventory purchases or other company expenses and amounted to approximately $211,000 and $158,000, respectively, and the amount outstanding at March 31, 2022 and 2021 is approximately $44,000 and $51,000, respectively. The information requiredfollowing table sets forth, for each director, whether such individual has been determined by this item is incorporated herein by referencethe Board to be “independent” as defined in Section 803.A. of the sections captioned “Transactions with Management”, if any, and “Election of Directors” in the Proxy Statement.NYSE MKT LLC Company Guide. | | | Name |
| Independent | Cary Luskin | | Yes | Ira F. Bormel | | Yes | Harvey B. Grossblatt | | No | Ronald A. Seff, M.D. | | Yes |
| ITEM 14 . | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following is a description of the fees billed to the Company by Marcum LLP (the “Auditor”) during the fiscal year ended March 31, 2022, and 2021: Audit Fees. Audit fees include fees billed by the Auditor, for the fiscal years ended March 31, 2022 and 2021, in connection with the annual audits of the Company’s consolidated financial statements, and review of the Company’s interim financial statements. Audit fees also include fees for services performed by the Auditor that are closely related to the audit and in many cases could only be provided by the Auditor. Such services include consents related to Securities and Exchange Commission and other regulatory filings. The aggregate fees for audit services for the fiscal years ended March 31, 2022, and 2021 totaled approximately $208,000 and $196,000 respectively. Audit Related Fees. Audit related services include due diligence services related to accounting consultations, internal control reviews and employee benefit plan audits. There were no fees billed for audit related services paid by the Company during the fiscal years ended March 31, 2022, and 2021. Tax Fees. Tax fees include corporate tax compliance, advisory and planning services. There were no tax related services provided in fiscal years ended March 31, 2022, and 2021. All Other Fees. There were no other fees for services provided in the fiscal years ended March 31, 2022, and 2021. The information requiredCompany’s Audit Committee reviews all fees charged by this item is incorporated hereinthe Company’s independent auditors, and actively monitors the relationship between audit and non-audit services provided. The Audit Committee must pre-approve all audit and non-audit services provided by reference to the section captioned “Independent Registered Public Accountants” in the Proxy Statement.Company’s independent auditors and fees charged. PART IV (a)1. Financial Statements. Statements. (a)3. Exhibits required to be filed by Item 601 of Regulation S-K. Exhibit No. 3.1 | | | 3.1 |
| Articles of Incorporation (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 1988, File No. 1-31747) | 3.2 | | Articles Supplementary, filed October 14, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31, 2002, file No. 1-31747) | 3.3 | | Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 13, 2011, File No. 1-31747) | 10.1 | | 2011 Non-Qualified Stock Option Plan (incorporated by reference to the Company’s Proxy Statement with respect to the Company’s 2011 Annual Meeting of Shareholders, filed July 26, 2011, File No. 1-31747) | 10.210.3 | | Hong Kong Joint Venture Agreement, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003, File No. 1-31747)
| 10.3 | | Discount Factoring Agreement between the Registrant and Merchant Factors Corp., dated January 6, 2015 (substantially identical agreement entered into by USI’s wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 16, 2015, file No. 1-31747) | 10.4 | | Lease between Universal Security Instruments, Inc. and St. John Properties, Inc. dated November 4, 2008 for its office and warehouse located at 11407 Cronhill Drive, Suites A-D, Owings Mills, Maryland 21117 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2008, File No. 1-31747) | 10.5 | | Amendment to Lease between Universal Security Instruments, Inc. and St. John Properties, Inc. dated June 23, 2009 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2009, File No. 1-31747)3, 2022.* | 10.6 | | Amended and Restated Employment Agreement dated July 18, 2007 between the Company and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2007, File No. 1-31747 ), as amended by Addendum dated November 13, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 15, 2007, File No. 1-31747), by Addendum dated September 8, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2008, File No. 1-31747), by Addendum dated March 11, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 12, 2010, File No. 1-31747), by Addendum dated July 19, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 20, 2012, File No. 1-31747), by Addendum dated July 3, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 8, 2013, File No. 1-31747), and by Addendum dated July 21, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 21, 2014, File No. 1-31747) ), by addendum dated July 23, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 28, 2015, File No. 1-31747), by addendum dated July 12, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 12, 2016, File No. 1-31747) by addendum dated July 18, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 20, 2017, File No. 1-31747), by addendum dated July 9, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 9, 2018, File No. 1-31747), by addendum dated July 12, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 16, 2019, File No. 1-31747), and by addendum dated July 27, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 27, 2020, File No. 1-31747). |
, and by addendum dated July 28, 2021 (21 | | Subsidiaries of the Registrant (incorporatedincorporated by reference to Exhibit 2110.1 to the Company’s AnnualCurrent Report on Form 10-K for the year ended March 31, 2012,8-K filed July 28, 2021, File No. 1-31747)1-31747). | 23.121 | | Subsidiaries of the Registrant* | 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* | 32.1 | | Section 1350 Certifications* | 99.1 | | Press Release dated July 8, 2021*14, 2022* | 101 | | | Interactive data files providing financial information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 20212022 in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 20212022 and 2020;2021; (ii) Consolidated Statements of Operations for the years ended March 31, 2022 and 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended March 31, 2021 and 2020 (iv) Consolidated Statements of Shareholders’ Equity for the years ended March 31, 20212022 and 2020; (v)2021; (iv) Consolidated Statements of Cash Flows for the years ended March 31, 20212022 and 2020;2021; and (vi)(v) Notes to Consolidated Financial Statements* | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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, 202114, 2022 | 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 | Signature | | Title | | Date | | | | | | /s/ Harvey B. Grossblatt | | President, Chief Executive Officer | | July 8, 202114, 2022 | Harvey B. Grossblatt | | and Director | | | | | | | | /s/ James B. Huff | | Chief Financial Officer | | July 8, 202114, 2022 | James B. Huff | | (principal financial officer and | | | | | principal accounting officer) | | | | | | | | /s/ Cary Luskin | | Director | | July 8, 202114, 2022 | Cary Luskin | | | | | | | | | | /s/ Ronald A. Seff | | Director | | July 8, 202114, 2022 | Ronald A. Seff | | | | | | | | | | /s/ Ira Bormel | | Director | | July 8, 202114, 2022 | Ira Bormel | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Audit Committee of the Shareholders and Board of Directors and Shareholdersof Universal Security Instruments, Inc. and SubsidiarySubsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Universal Security Instruments, Inc. and SubsidiarySubsidiaries (the “Company”) as of March 31, 20212022 and 2020,2021, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the two years in the period ended March 31, 2021,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2021,2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB"(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Marcum LLP Marcum llp LLP We have served as the Company’s auditor since 2015. Philadelphia, PA July 8, 202114, 2022 UNIVERSAL SECURITY INSTRUMENTS, INC., AND SUBSIDIARYSUBSIDIARIES CONSOLIDATED BALANCE SHEETS | ASSETS | | March 31, | | | | | 2021 | | | 2020 | | | CURRENT ASSETS | | | | | | | | | | Cash | | $ | 160,604 | | | $ | 93,794 | | | Accounts receivable: | | | | | | | | | | Trade, less allowance for doubtful accounts | | | 653,172 | | | | 109,548 | | | Receivables from employees | | | 5,000 | | | | 36,876 | | | | | | | | | | | | | | | | 658,172 | | | | 146,424 | | | | | | | | | | | | | Amount due from factor | | | 1,925,291 | | | | 2,300,109 | | | Inventories – finished goods | | | 4,181,193 | | | | 5,123,959 | | | Prepaid expenses | | | 336,699 | | | | 113,145 | | | | | | | | | | | | | TOTAL CURRENT ASSETS | | | 7,261,959 | | | | 7,777,431 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | INTANGIBLE ASSETS - NET | | | 44,717 | | | | 49,189 | | | PROPERTY AND EQUIPMENT - NET | | | 184,678 | | | | 346,477 | | | OTHER ASSETS | | | 4,000 | | | | 4,000 | | | | | | | | | | | | | TOTAL ASSETS | | $ | 7,495,354 | | | $ | 8,177,097 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | Line of credit – factor
Short-term portion of operating lease liability | | | $ 18,904 171,122 | | | | $1,561,665 158,578 | | | Accounts payable – trade | | | 509,561 | | | | 505,904 | | | Accounts payable – Eyston Company Ltd. | | | 755,148 | | | | 266,409 | | | Accrued liabilities: | | | | | | | | | | Accrued payroll and employee benefits | | | 103,381 | | | | 136,683 | | | Accrued commissions and other | | | 139,242 | | | | 88,694 | | | | | | | | | | | | | TOTAL CURRENT LIABILITIES | | | 1,697,358 | | | | 2,717,933 | | | | | | | | | | | | | ACCOUNTS PAYABLE – Eyston Company Ltd. – noncurrent | | | 1,081,440 | | | | 839,831 | | | LONG-TERM PORTION OF OPERATING LEASE LIABILITY | | | - | | | | 171,120 | | | TOTAL LONG-TERM LIABILITIES | | | 1,081,440 | | | | 1,010,951 | | | COMMITMENTS AND CONTINGENCIES | | | - | | | | - | | | | | | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | | | | Common stock, $.01 par value per share; 20,000,000 shares authorized, 2,312,887 shares issued and outstanding at March 31, 2021 and 2020 | | | 23,129 | | | | 23,129 | | | Additional paid-in capital | | | 12,885,841 | | | | 12,885,841 | | | Accumulated Deficit | | | (8,192,414 | ) | | | (8,460,757 | ) | | | | | | | | | | | | TOTAL SHAREHOLDERS’ EQUITY | | | 4,716,556 | | | | 4,448,213 | | | | | | | | | | | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 7,495,354 | | | $ | 8,177,097 | |
| | | | | | | ASSETS | | March 31, | | | 2022 | | 2021 | CURRENT ASSETS | | | | | | | Cash | | $ | 438,735 | | $ | 160,604 | Accounts receivable: | | | | | | | Trade, less allowance for doubtful accounts | | | 1,290,481 | | | 653,172 | Receivables from employees | | | 6,731 | | | 5,000 | | | | | | | | | | | 1,297,212 | | | 658,172 | | | | | | | | Amount due from factor | | | 2,792,901 | | | 1,925,291 | Inventories – finished goods | | | 6,229,061 | | | 4,181,193 | Prepaid expenses | | | 241,342 | | | 336,699 | | | | | | | | TOTAL CURRENT ASSETS | | | 10,999,251 | | | 7,261,959 | | | | | | | | | | | | | | | | | | | | | | INTANGIBLE ASSETS - NET | | | 40,243 | | | 44,717 | PROPERTY AND EQUIPMENT - NET | | | 477,627 | | | 184,678 | OTHER ASSETS | | | 4,000 | | | 4,000 | | | | | | | | TOTAL ASSETS | | $ | 11,521,121 | | $ | 7,495,354 | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | CURRENT LIABILITIES | | | | | | | Line of credit – factor | | $ | 2,157,086 | | $ | 18,904 | Short-term portion of operating lease liability | | | 131,880 | | | 171,122 | Accounts payable – trade | | | 1,572,356 | | | 509,561 | Note payable – Eyston Company Ltd. | | | 1,081,440 | | | — | Accounts payable – Eyston Company Ltd. | | | 985,077 | | | 755,148 | Accrued liabilities: | | | | | | | Accrued payroll and employee benefits | | | 160,025 | | | 103,381 | Accrued commissions and other | | | 459,440 | | | 139,242 | | | | | | | | TOTAL CURRENT LIABILITIES | | | 6,547,304 | | | 1,697,358 | | | | | | | | NOTE PAYABLE – Eyston Company Ltd. – noncurrent | | | — | | | 1,081,440 | LONG-TERM PORTION OF OPERATING LEASE LIABILITY | | | 335,411 | | | — | | | | | | | | TOTAL LONG-TERM LIABILITIES | | | 335,411 | | | 1,081,440 | COMMITMENTS AND CONTINGENCIES | | | — | | | — | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | Common stock, $.01 par value per share; 20,000,000 shares authorized, 2,312,887 shares issued and outstanding at March 31, 2022 and 2021 | | | 23,129 | | | 23,129 | Additional paid-in capital | | | 12,885,841 | | | 12,885,841 | Accumulated Deficit | | | (8,270,564) | | | (8,192,414) | | | | | | | | TOTAL SHAREHOLDERS’ EQUITY | | | 4,638,406 | | | 4,716,556 | | | | | | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 11,521,121 | | $ | 7,495,354 |
The accompanying notes are an integral part of these consolidated financial statements UNIVERSAL SECURITY INSTRUMENTS, INC., AND SUBSIDIARYSUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS | | | | | | | | | Year Ended March 31, | | | 2022 | | 2021 | Net sales | | $ | 19,549,785 | | $ | 17,520,151 | | | | | | | | Cost of goods sold | | | 13,517,552 | | | 11,880,442 | | | | | | | | GROSS PROFIT | | | 6,032,233 | | | 5,639,709 | | | | | | | | Selling, general and administrative expense | | | 5,524,343 | | | 5,034,380 | Research and development expense | | | 438,200 | | | 471,545 | | | | | | | | Operating income | | | 69,690 | | | 133,784 | | | | | | | | Other (expense) income: | | | | | | | Forgiveness of debt – PPP Loan | | | — | | | 221,400 | | | | | | | | Interest expense, net | | | (147,840) | | | (86,841) | | | | | | | | (Loss) Earnings before income taxes | | | (78,150) | | | 268,343 | | | | | | | | Income tax expense | | | 0 | | | 0 | | | | | | | | NET (LOSS) INCOME | | $ | (78,150) | | $ | 268,343 | | | | | | | | (Loss) Earnings per share: | | | | | | | Basic and diluted | | $ | (0.03) | | $ | 0.12 | | | | | | | | Shares used in computing net (loss) earnings per share: | | | | | | | Weighted average basis and diluted shares outstanding | | | 2,312,887 | | | 2,312,887 |
| | | Year Ended March 31, | | | | | 2021 | | | 2020 | | | Net sales | | $ | 17,520,151 | | | $ | 14,803,024 | | | Cost of goods sold – acquired from Joint Venture | | | - | | | | 10,009,571 | | | Cost of goods sold - other | | | 11,880,442 | | | | 1,034,599 | | | | | | | | | | | | | GROSS PROFIT | | | 5,639,709 | | | | 3,758,854 | | | | | | | | | | | | | Selling, general and administrative expense | | | 5,034,380 | | | | 4,628,881 | | | Research and development expense | | | 471,545 | | | | 691,886 | | | | | | | | | | | | | Operating income (loss) | | | 133,784 | | | | (1,561,913 | ) | | | | | | | | | | | Other income (expense):
Forgiveness of debt – PPP Loan | | | 221,400 | | | | - | | | Loss from investment in Hong Kong Joint Venture | | | - | | | | (3,842,275 | ) | | Interest expense, net | | | (86,841 | ) | | | (409,703 | ) | | | | | | | | | | | | Earnings (Loss) before income taxes | | | 268,343 | | | | (5,813,891 | ) | | | | | | | | | | | | Income tax expense | | | - | | | | - | | | | | | | | | | | | | NET INCOME (LOSS) | | $ | 268,343 | | | $ | (5,813,891 | ) | | | | | | | | | | | | Earnings (Loss) per share: | | | | | | | | | | Basic and diluted | | $ | 0.12 | | | $ | (2.51 | ) | | | | | | | | | | | | Shares used in computing net earnings (loss) per share: | | | | | | | | | | Weighted average basis and diluted shares outstanding | | | 2,312,887 | | | | 2,312,887 | |
The accompanying notes are an integral part of these consolidated financial statements UNIVERSAL SECURITY INSTRUMENTS, INC., AND SUBSIDIARYSUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)SHAREHOLDERS’ EQUITY | | | Year Ended March 31, | | | | | 2021 | | | 2020 | | | NET INCOME (LOSS) | | $ | 268,343 | | | $ | (5,813,891 | ) | | | | | | | | | | | Other Comprehensive Loss
Company’s Portion of Hong Kong
Joint Venture’s Other Comprehensive
Loss: | | | | | | | | | | Currency translation loss | | | - | | | | (134,151 | ) | | Unrealized loss on investment securities | | | - | | | | (50,397 | ) | | Less: Reclassification adjustment for gain included in net loss | | | - | | | | (427,208 | ) | | Total Other Comprehensive Loss | | | - | | | | (611,756 | ) | | | | | | | | | | | | COMPREHENSIVE INCOME (LOSS) | | $ | 268,343 | | | $ | (6,425,647 | ) |
| | | | | | | | | | | | | | | | | Common Stock | | | | | | | | | | | | | | | | | Additional | | | | | | | | | | | | | | Paid-In | | Accumulated | | | | | | Shares | | Amount | | Capital | | Deficit | | Total | Balance at April 1, 2020 | | 2,312,887 | | $ | 23,129 | | $ | 12,885,841 | | $ | (8,460,757) | | $ | 4,448,213 | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 268,343 | | | 268,343 | | | | | | | | | | | | | | | | Balance at March 31, 2021 | | 2,312,887 | | | 23,129 | | | 12,885,841 | | | (8,192,414) | | | 4,716,556 | | | | | | | | | | | | | | | | Net loss | | | | | | | | | | | (78,150) | | | (78,150) | | | | | | | | | | | | | | | | Balance at March 31, 2022 | | 2,312,887 | | $ | 23,129 | | $ | 12,885,841 | | $ | (8,270,564) | | $ | 4,638,406 |
The accompanying notes are an integral part of these consolidated financial statements UNIVERSAL SECURITY INSTRUMENTS, INC., AND SUBSIDIARYSUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS | | | Common Stock | | | | | | | | | | | | | | | | | Shares | | | Amount | | | Additional
Paid-In
Capital | | | Accumulated
Deficit | | | Accum.
Other
Comprehensive
Income | | | Total | | | Balance at April 1, 2019 | | | 2,312,887 | | | $ | 23,129 | | | $ | 12,885,841 | | | $ | (2,646,866 | ) | | $ | 611,756 | | | $ | 10,873,860 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Currency translation loss | | | | | | | | | | | | | | | | | | | (134,151 | ) | | | (134,151 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized loss on investment securities | | | | | | | | | | | | | | | | | | | (50,397 | ) | | | (50,397 | ) | Less:
Reclassification
adjustment for
gain included in
net loss | | | | | | | | | | | | | | | | | | | (427,208 | ) | | | (427,208 | ) | | Net loss | | | | | | | | | | | | | | | (5,813,891 | ) | | | | | | | (5,813,891 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2020 | | | 2,312,887 | | | | 23,129 | | | | 12,885,841 | | | | (8,460,757 | ) | | | - | | | | 4,448,213 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | | | | | 268,343 | | | | | | | | 268,343 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2021 | | | 2,312,887 | | | $ | 23,129 | | | $ | 12,885,841 | | | $ | (8,192,414 | ) | | $ | - | | | $ | 4,716,556 | |
| | | | | | | | | Year Ended March 31, | | | 2022 | | 2021 | OPERATING ACTIVITIES: | | | | | | | Net (Loss) Income | | $ | (78,150) | | $ | 268,343 | Adjustments to reconcile net (loss) income to net cash (used by) provided by operating activities: | | | | | | | Depreciation and amortization | | | 7,694 | | | 7,695 | Forgiveness of debt – Paycheck Protection Program | | | — | | | (221,400) | Depreciation of right-of-use asset | | | 171,122 | | | 158,576 | (Decrease) Increase in allowance for inventory and accounts receivable reserves | | | (70,000) | | | 100,000 | | | | | | | | | | | | | | | Changes in operating assets and liabilities: | | | | | | | Increase in accounts receivable and amounts due from factor | | | (1,506,650) | | | (236,930) | (Increase) Decrease in inventories | | | (1,977,868) | | | 942,766 | Decrease (Increase) in prepaid expenses | | | 95,357 | | | (223,554) | Increase in accounts payable and accrued expenses | | | 1,669,566 | | | 751,252 | Decrease in operating lease liability | | | (171,122) | | | (158,576) | | | | | | | | NET CASH (USED BY) PROVIDED BY OPERATING ACTIVITIES | | | (1,860,051) | | | 1,388,172 | | | | | | | | FINANCING ACTIVITIES: | | | | | | | Proceeds from – Paycheck Protection Program | | | — | | | 221,400 | Net borrowing (repayment) of line of credit - factor | | | 2,138,182 | | | (1,542,762) | | | | | | | | NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 2,138,182 | | | (1,321,362) | | | | | | | | INCREASE IN CASH | | | 278,131 | | | 66,810 | | | | | | | | Cash at beginning of period | | | 160,604 | | | 93,794 | | | | | | | | CASH AT END OF PERIOD | | $ | 438,735 | | $ | 160,604 | | | | | | | | Supplemental information: | | | | | | | Interest paid | | $ | 147,840 | | $ | 82,184 | Income taxes paid | | $ | — | | $ | — | | | | | | | | Supplemental disclosures of non-cash activities: | | | | | | | Conversion of trade accounts payable to note payable | | $ | — | | $ | 1,081,440 | Right-of-use asset in exchange for operating lease liability | | $ | 467,291 | | | |
The accompanying notes are an integral part of these consolidated financial statements UNIVERSAL SECURITY INSTRUMENTS, INC., AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year Ended March 31, | | | | | 2021 | | | 2020 | | | OPERATING ACTIVITIES: | | | | | | | | | | Net Income (loss) | | $ | 268,343 | | | $ | (5,813,891 | ) | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | Depreciation and amortization | | | 7,695 | | | | 7,690 | | Forgiveness of debt – Paycheck Protection Program | | | (221,400 | ) | | | - | | | Depreciation of right-of-use asset | | | 158,576 | | | | 156,250 | | | Increase in allowance for doubtful accounts receivable | | | 100,000 | | | | - | | | Loss from investment in Hong Kong Joint Venture | | | - | | | | 3,842,275 | | | | | | | | | | | | | Changes in operating assets and liabilities: | | | | | | | | | | (Increase) Decrease in accounts receivable and amounts due from factor | | | (236,930 | ) | | | 568,879 | | | Decrease in inventories | | | 942,766 | | | | 1,728,346 | | | (Increase) Decrease in prepaid expenses | | | (223,554 | ) | | | 32,045 | | | Increase (Decrease) in accounts payable and accrued expenses | | | 751,252 | | | | (356,096 | ) | | Decrease in operating lease liability | | | (158,576 | ) | | | (156,250 | ) | | | | | | | | | | | | NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 1,388,172 | | | | 9,248 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FINANCING ACTIVITIES: | | | | | | | | | Proceeds from – Paycheck Protection Program | | | 221,400 | | | | - | | | Net repayment of line of credit - factor | | | (1,542,762 | ) | | | (289,926 | ) | | | | | | | | | | | | NET CASH USED IN FINANCING ACTIVITIES | | | (1,321,362 | ) | | | (289,926 | ) | | | | | | | | | | | | INCREASE (DECREASE) IN CASH | | | 66,810 | | | | (280,678 | ) | | | | | | | | | | | | Cash at beginning of period | | | 93,794 | | | | 374,472 | | | | | | | | | | | | | CASH AT END OF PERIOD | | $ | 160,604 | | | $ | 93,794 | | | | | | | | | | | | | Supplemental information: | | | | | | | | | | Interest paid | | $ | 82,184 | | | $ | 496,250 | | | Income taxes paid | | $ | - | | | $ | - | | | | | | | | | | | | | Supplemental disclosures of non-cash activities: | | | | | | | | | | Right-of-use asset in exchange for operating lease liability | | $ | - | | | $ | 485,948 | | | Conversion of trade accounts payable to note payable | | | 1,081,440 | | | | - | | Reduction in trade accounts payable to Eyston Co. Ltd. arising from the sale of
the Hong Kong Joint Venture | | $ | - | | | $ | 4,000,000 | |
The accompanying notes are an integral part of these consolidated financial statements
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARYSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: Universal Security Instruments, Inc.’s (the “Company”) primary business is the sale of smoke alarms and other safety products to retailers, wholesale distributors and to the electrical distribution trade which includes electrical and lighting distributors as well as manufactured housing companies. The Company imports all of its safety and other products from foreign manufacturers. The Company, as an importer, is subject to 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. Proposed Merger: 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”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Infinite Reality, with Infinite Reality continuing as the surviving corporation and wholly owned subsidiary of the Company (the “Merger”). The Merger will become effective at the time when the certificate of merger has been duly filed or such later date specified in the filed certificate (the “Effective Time”). As a result, immediately following the Effective Time, the former Infinite Reality stockholders will hold approximately 97.6% of the outstanding shares of USI Common Stock and the stockholders of USI will retain ownership of approximately 2.4% of the outstanding shares of USI Common Stock. The directors and officers of Infinite Reality prior to the Effective Time will remain the directors and officers after the Effective Time, until their resignation or removal. At the Effective Time, the Company will take the actions required to replace the officers and directors of the Company with designees by Infinite Reality. At the Effective Time, the parties intend for the Company to convert from a Maryland corporation to a Delaware corporation. Pursuant to the Merger Agreement, Infinite Reality shareholders acquire the right to convert their Infinite Reality common stock held immediately prior to the Merger into the Company common stock. Holders of the Company’s common stock prior to the Effective Time (“Legacy Shareholders”) may also receive a dividend of the Company common stock if the market capitalization of the Company is less than $500 million within 180 days after the Effective Time. Under the terms of the Merger Agreement, the Company current operating business will continue, and the Company has agreed to use its best efforts to sell or spin off its business operations prior to the Effective Time. In the event the Company’s current business operations are not sold or otherwise divested by the Effective Time, a Contingent Value Rights Agreement will issue to each Legacy Shareholder. The Merger Agreement includes customary rights of each party to terminate the Merger Agreement, including: in the event shareholder approval is not obtained; if the Company’s shares are not approved for continued listing by the NYSE MKT LLC following the Effective Time; and if a party receives a superior offer and complies with the terms of the Merger Agreement regarding accepting such offer. 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. If USI or Infinite Reality accepts a superior offer and terminates the Merger Agreement, the terminating party will pay a breakup fee to the non-terminating party covering its out-of-pocket expenses, subject to a cap of $100,000, plus 4% of the market capitalization of USI as of the Effective Date. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary USI Electric, Inc.subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 the Hong Kong Joint Venture in exchange for $4,000,000. We believe that our 50% ownership interest in the Hong Kong Joint Venture through the date of its sale on March 31, 2020 allowed us to significantly influence the operations of the Hong Kong Joint Venture. As such, we accounted for our interest in the operations of the Hong Kong Joint Venture using the equity method of accounting we have included our investment balance as a non-current asset through the date of sale. We have included our share of the Hong Kong Joint Venture’s loss in our consolidated statements of operations for fiscal years ended March 31, 2020. The investment and earnings and losses were adjusted to eliminate intercompany profits through the date of its sale on March 31, 2020. Use of Estimates: In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (US-GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, 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 could differ from those estimates. Cash: The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk with cash. 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. Remaining performance obligations represent the transaction price of firm orders for satisfied or partially satisfied performance obligations on contracts with an original expected duration of one year or more. The Company’s contracts are predominantly short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC Topic 606 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. 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. Disaggregation of Revenue:Revenue: The Company presents below revenue associated with sales of safety alarm products separately from revenue associated with sales of ground fault circuit interrupters (GFCI’s) and ventilation fans. The Company believes this disaggregation best depicts how our various product lines perform and are affected by economic factors. Revenue recognized by these categories for the fiscal years ended March 31, 20212022, and 20202021 are as follows: | | | Fiscal Year ended | | | | | | March 31, 2021 | | | March 31, 2020 | | | | | | | | | | | | | | Fiscal Year ended | | | | March 31, 2022 | | March 31, 2021 | | Sales of safety alarms | | $ | 15,218,162 | | | $ | 13,098,923 | | | $ | 16,487,028 | | $ | 15,218,162 | | Sales of GFCI’s and ventilation fans | | | 2,301,989 | | | | 1,704,101 | | | | 3,062,757 | | | 2,301,989 | | | | $ | 17,520,151 | | | $ | 14,803,024 | | | | | | $ | 19,549,785 | | $ | 17,520,151 |
Accounts Receivable: The Company assigns the majority of its trade receivables on a pre-approved non-recourse basis to Merchant Factors Corporation (Merchant or Factor) under a factoring agreement on an ongoing basis. Factoring charges recognized on assignment of receivables are deducted from revenue in the consolidated statements of operations and amounted to $154,267$165,579 and $118,141$154,267 for the years ended March 31, 2022, and 2021, and 2020, respectively. Management considers amounts due from the Company’s factor to be “financing receivables”. Trade accounts receivable, foreign receivables, and receivables from our suppliers are not considered to be financing receivables. At the time a receivable is assigned to our factor, the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear any credit risk associated with delivery or warranty issues related to the products sold. Management assesses the credit risk of both its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account from one accounting period to the next are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated from the receivable accounts and from the allowance account in the period that the receivables’ status is determined to be uncollectible. Based on the nature of the factoring agreement and prior experience, no allowance for uncollectible financing receivables has been provided and no amounts are considered to be past due at March 31, 2021.2022. At March 31, 20212022, and 2020, respectively,2021, an allowance of $157,000 and $57,000 has been provided for uncollectible trade accounts receivable. Inventories: Inventories are stated at the lower of cost (first in/first out method) or net realizable value. Included as a component of finished goods inventory are additional non-material costs. These costs include freight, import duty, tariffs, and inspection fees. Expenses incurred for inventory quality control in the amount of approximately $45,000 and $45,000, were absorbed in inventory for the fiscal years ended March 31, 20212022, and 2020,2021, respectively. We evaluate inventories on a quarterly basis and write down inventory that is considered 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. Impairment of long-lived assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable. The factors considered in performing this assessment include current operating results, anticipated future results, the manner in which the asset group is used and the effects of obsolescence, demand, competition and other economic factors. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these asset groups in relation to the operating performance of the business and future undiscounted cash flows expected to result from the use of these asset groups. Impairment losses are recognized when the sum of expected future cash flows is less than the asset groups carrying value, and losses are determined based upon the excess carrying value of the asset group over its fair value. Based on this assessment, no impairment to long-lived assets resulted for fiscal years ended March 31, 20212022, and 2020.2021. Leases:Leases: The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company estimates the incremental borrowing rate to discount the lease payments based on information available at lease commencement. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. 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 expense is recognized on a straight-line basis over the lease term. See Note F,E, Leases.
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. The Company follows Accounting Standards Codification (ASC) 740-10 that gives guidance to 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 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. See Note G,F, Income Taxes. Warranties: We generally provide warranties, on the safety products, from one to ten years to the non-commercial end user on all products sold. The manufacturers of our safety products provide us with a one-year warranty on all products we purchase for resale. Claims for warranty replacement of products beyond the one-year warranty period covered by the manufacturers have not been historically material. Research and Development: Research and development costs are charged to operations as incurred. Shipping and Handling Fees and Costs: The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are included in cost of goods sold. Shipping and handling costs associated with outbound freight are included in selling, general and administrative expenses and totaled $409,692$426,740 and $343,838$409,692 in fiscal years 20212022 and 2020,2021, respectively. Foreign currency: The activity and accounts of the Hong Kong Joint Venture are denominated in Hong Kong dollars and are translated to US dollars. The Company translates the accounts of the Hong Kong Joint Venture at the applicable exchange rate in effect at the year-end date for assets and liabilities and at the average exchange rate for the reporting period for statement of operation purposes.
The reclassification of the realized gain from other comprehensive income is included in the loss from investment in the Hong Kong Joint Venture in the Consolidated Statements of Operations for the fiscal year ended March 31, 2020.
Net (Loss) Earnings (Loss) per Share: Basic net (loss) earnings (loss) per share is computed by dividing net (loss) income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted (loss) earnings (loss) per share is computed by dividing net (loss) income (loss) for the period by the weighted average number of common shares and common share equivalents outstanding (unless their effect is anti-dilutive) for the period. As a result, of the net loss for the fiscal year ended March 31, 2020, the weighted average number of common shares outstanding is identical for both basic and diluted shares. In addition, there were no other securities outstanding during 20212022 or 20202021 other than common stock. Recently Issued Accounting Standards: Changes to US-GAAP are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASU’s. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The guidance in ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The Company adopted this guidance as of April 1, 2020, and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. NOTE B– LIQUIDITY AND MANAGEMENT’S PLAN 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 September 23, 2020, the Company submitted to the Exchange the Company’s plan (the “Plan”) of actions the Company has taken or will take to regain compliance with the continued listing standards by February 28, 2022 (the “Plan Period”). On November 5, 2020,October 1, 2021, the Company received a letter from the Exchange advisingnotifying the Company that the Exchange has accepted the Plan and granted the Plan Period through February 28, 2022. The Exchange will review the Company periodically to determine whether the Companyit is making progress consistent with the Plan. The Company is working diligently to execute its Plan to regainnow in compliance with the Exchange’s continued listing requirements. standards of the Exchange and that the Company has resolved the continued listing deficiency previously referenced. The Company hadreported a net incomeloss of $268,343$78,150 for the fiscal year ended March 31, 20212022 and a net lossincome of $5,813,891$268,343 for the year ended March 31, 2020.2021. As the Company’s products are sold primarily to the construction industryIn light of shutdowns, quarantines and do-it-yourself centers,other restrictions and limitations imposeddelays in operations caused by or related to COVID-19 in the COVID-19 pandemic have had an impact onPRC and the Company’s salesUnited States, the Company has experienced delays in shipping and receiving of products. 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)results. While 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 periods2021 period, delivery schedules have been delayed and freight costs have increased significantly. Sales growth has been due primarily to the Company’s abilityincreased sales to fill orders from inventory for aelectrical distributors reflecting increased housing demand and increased retail sales to 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.retailers.
Our short-termShort-term borrowings to finance operations, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of ourthe Factoring Agreement with Merchant. Advances from the Company’s factor 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$11,000 at March 31, 2021.2022.
The Company sold its fifty percent ownership in Eyston effective March 31, 2020. The non-cash proceeds from the sale were used to reduceManagement expects 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 a 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 ofproduct offerings including sealed battery alarms. These amounts were unsecured, incurred interest at 5.5% per annum,alarm 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.
We anticipate, now that our complete line of sealed smoke and carbon monoxide alarms has been introduced, that theseground 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 willcould have a significant impact on our future operations, and our sales may decline, potentially impactimpacting our ability to continue operations.operating in our current fashion.
Prior to the fiscal year ended March 31, 2021 theThe Company has a history of sales that wereare 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 approximately $560,000 of the Company's accounts receivable subject to resolution of delivery disputes with a major customer. The resolution of these items has been ongoing and subsequent to March 31, 2022, the customer has been making payments as proof of delivery is confirmed. The Company expects that all amounts in dispute will be resolved satisfactorily and that availability of approximately $560,000 in operating cash flow will become available under the factoring agreement subsequent to March 31, 2022. 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 due toas reflected by 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.offerings. 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.
NOTE C – INVESTMENT IN THE HONG KONG JOINT VENTURE The Company 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. The Company sold its fifty percent interest in the Hong Kong Joint Venture in exchange for $4,000,000. The Company recorded a loss related to the sale of the Company’s investment in the Hong Kong Joint Venture of $2,472,620, and a loss from its equity share of the Hong Kong Joint Venture’s net loss for the year ended March 31, 2020 of $1,369,655. The combined loss is recorded as the loss from investment in the Hong Kong Joint Venture on the Consolidated Statements of Operations for the year ended March 31, 2020. The proceeds of the sale were used to reduce our outstanding trade account payable balance owed to the Hong Kong Joint Venture. There are no material differences between US-GAAP and those used by the Hong Kong Joint Venture.
The following represents summarized financial information derived from the financial statements of the Hong Kong Joint Venture for the fiscal year ended March 31, 2020.
| | | For the Year Ended March 31, | | | | | 2020 | | | Net Sales | | $ | 8,054,070 | | | | | | | | | Gross Profit | | | 276,787 | | | | | | | | | Net Loss | | | (3,235,107 | ) |
During the year ended March 31, 2021 and 2020, the Company purchased $7,612,131 and $7,335,646, respectively, of finished product from Eyston, which represented 77.6% and 82.7%, respectively, of the Company’s total finished product purchases.
Effective March 31, 2020, the Company sold its fifty percent ownership interest in the Hong Kong Joint Venture and converted $1,081,440 of trade accounts payable due to the Hong Kong Joint Venture to an unsecured long-term interest only note payable with the principal balance due in April 2022. Interest is based on the Shanghai Commercial Bank Limited in Hong Kong US Dollar prime rate published on the first day of each calendar month plus 2% (5.25% effective rate at March 31, 2020) and is payable monthly. For the fiscal year ended March 31, 2020 the Company 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.
NOTE D – SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
On January 15, 2015, the Company entered into an Agreement with Merchant for the purpose of factoring the Company’s trade accounts receivable and to provide financing secured by finished goods inventory. Under the modified Agreement the Company may borrow eighty percent (80%) of eligible accounts receivable. Additional funding, characterized by Merchant as an over advance, may be provided up to one hundred percent (100%) of eligible accounts receivable. The over advance portion, if any, may not exceed fifty percent (50%) of eligible inventory up to a maximum of $500,000. Subject to a temporary modification agreement effective on August 11, 2021, and which subsequently expired on November 30, 2021, the over advance portion, if any, may not exceed fifty percent (50%) of eligible inventory up to a maximum of $1,500,000. The Agreement, which was extended and expires on January 6, 2022,2024, provides for continuation of the program for successive two yeartwo-year periods until terminated by one of the parties to the Agreement. The amount available to borrow from Merchant is approximately $1,795,000 and $738,000$11,000 at March 31, 2021 and 2020, respectively.2022. Advances on factored trade accounts receivable and borrowing on inventories 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 two percent (effective rate 5.50% and 5.25% at March 31, 20212022 and March 31, 2020)2021, respectively). Advances under the 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. At March 31, 20212022 and 20202021 there was $18,904$2,157,086 and $1,561,665$18,904 borrowed and outstanding under the factoring agreement, respectively. Under the Agreement, the Company assigned receivables of $17,003,317$18,449,900 and $14,162,999$17,003,317 during the years ended March 31, 20212022, and 2020,2021, respectively. The uncollected balance of non-recourse receivables held by the factor amounted to $1,925,291$2,792,901 and $2,300,109$1,925,291 at March 31, 2022 and 2021. Included in the uncollected balance of receivables held by the factor are amounts classified by the factor as amounts at client risk of $589,000 and $238,000 at March 31, 2022 and 2021, and 2020.respectively. Collected cash maintained on deposit at March 31, 2021 and 2020 with the factor earns interest at the factor’s prime rate of interest less 2.5 percent (effective rate of 0.75%1.00% and 0.75% at March 31, 20212022 and 2020,2021, respectively.) There was no cash on deposit with the Factor at March 31, 20212022 or 2020. 2021. In May, 2020 the Company received a Paycheck Protection Program loan of $221,400 under the CARESCoronavirus Aid, Relief and Economic Security Act (CARES) and during the fiscal year ended March 31, 2021, the loan was forgiven in compliance with the provisions of the CARES Act. NOTE ED – PROPERTY AND EQUIPMENT - NET Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided by using the straight-line method based on estimated useful lives. Expenditures for major betterments that extend the useful life of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. The estimated useful lives for financial reporting purposes are as follows: | | | Leasehold improvements | - | Shorter of term of lease or useful life of asset | Machinery and equipment | - | 5 to 10 years | Furniture and fixtures | - | 5 to 15 years | Computer equipment | - | 5 years |
Property and equipment consist of the following: | | | March 31, | | | | | | 2021 | | | 2020 | | | | | | | | | | | | | | March 31, | | | | 2022 | | 2021 | | Leasehold improvements | | $ | 652,670 | | | $ | 652,670 | | | $ | 1,119,961 | | $ | 652,670 | | Machinery and equipment | | | 190,400 | | | | 190,400 | | | | 190,400 | | | 190,400 | | Furniture and fixtures | | | 261,292 | | | | 261,292 | | | | 261,292 | | | 261,292 | | Computer equipment | | | 302,634 | | | | 302,634 | | | | 302,634 | | | 302,634 | | | | | 1,406,996 | | | | 1,406,996 | | | | | | | 1,874,287 | | | 1,406,996 | | Less accumulated depreciation | | | (1,222,318 | ) | | | (1,060,519 | ) | | | (1,396,660) | | | (1,222,318) | | | | $ | 184,678 | | | $ | 346,477 | | | | | | $ | 477,627 | | $ | 184,678 |
Depreciation expense totaled $161,799,$174,342, which includes $158,576 of amortization of right-of-use lease asset, and $159,469 which included $156,250$171,122 of amortization of right-of-use lease asset for fiscal yearsyear ended March 31, 2022. For the fiscal year ended March 31, 2021, and 2020, respectively.depreciation expense totaled $161,799 which included $158,576 of amortization of right-of-use lease asset. Right-of-use lease assets of $171,122$467,291 and $329,698,$171,122, net, are included in leasehold improvements in Property and Equipment on the Consolidated Balance Sheets as of March 31, 20212022, and 2020,2021, respectively. NOTE F -E – LEASES The Company is a lessee in lease agreements for office space. Certain of the Company’s leases contain provisions that provide for one or more options to renewterminate or extend the lease at the Company’s sole discretion. The Company’s leases are comprised of fixed lease 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, and 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. During January 2009,Effective March 2022, we extended our operating lease for a 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 enteredenters 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 $14,500 and increases 3.0% per year.
The Company maintains an operating lease for its office and warehouse location in Owings Mills, Maryland which was set to expire in March 2019. In October, 2018, we extended this operating lease to expire in April 2022. This lease is subject to increasing rentals at 2.5% per year. The Company renewed its operating lease through February 2022 for a 3,400 square foot officespace in Naperville, Illinois. This lease, consisting of 3,400 square feet, was renewed and extends through February 2023. The monthly rental, with common area maintenance, approximated $4,900 per month during the current fiscal year. Included are 32 additional one-year renewal options that are not included in the measurement of the lease term. Our operating leases for real estate are generally renewable with terms and conditions similar to the original lease. Rent expense, including common area maintenance, totaled $239,557$252,975 and $208,734$239,557 for the years ended March 31, 20212022, and 2020,2021, respectively. 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 $485,000 at the date of adoption.adoption and increased by approximately $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 March 31, 2022, the Company had right-of-use assets of $467,291 and lease liabilities of $467,291 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 March 31, 2022 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases is three years and 5.5%, respectively. During the fiscal year ended March 31, 2022, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $175,770, which is included as an operating cash outflow within the consolidated statements of cash flows. During the fiscal year ended March 31, 2022, the operating lease costs related to the Company’s operating leases was $175,770 which is included in operating costs and expenses in the consolidated statements of operations. As of March 31, 2021, the Company had right-of-use assets of $171,122 and lease liabilities of $171,122 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 March 31, 2021 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases is one year and 6.0%, respectively. During the fiscal year ended March 31, 2021, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $173,622, which is included as an operating cash outflow within the consolidated statements of cash flows. During the fiscal year ended March 31, 2021, the operating lease costs related to the Company’s operating leases was $173,622 which is included in operating costs and expenses in the consolidated statements of operations. During the fiscal years ended March 31, 2021 and 2020, the Company did not enter into anya material lease agreementsagreement set to commence in the future and there were no newly leased assets for which a right-of use asset was recorded in exchange for a new lease liability, other than thosethose lease assets recorded upon implementation. As of March 31, 2020, the Company had right-of-use assets of $329,698 and lease liabilities of $329,698 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 March 31, 2020 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were two years and 6.0%, respectively. During the fiscal year ended March 31, 2020, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $160,605, which is included as an operating cash outflow within the consolidated statements of cash flows. During the fiscal year ended March 31, 2020, the operating lease costs related to the Company’s operating leases was $160,605 which is included in operating costs and expenses in the consolidated statements of operations. The future minimum payments under operating leases were as follows at March 31, 2021:2022: | | | | 2023 | | $ | 138,738 | 2024 | | | 155,512 | 2025 | | | 160,178 | 2026 | | | 26,760 | Total operating lease payments | | $ | 481,188 | Less: amounts representing interest | | | (13,897) | Present value of net operating lease payments | | $ | 467,291 | Less: current portion | | | 131,880 | Long-term portion of operating lease obligations | | $ | 335,411 |
| 2022 | | $ | 175,792 | | | 2023 | | | - | | | Total operating lease payments | | $ | 175,792 | | | Less: amounts representing interest | | | (4,670 | ) | | Present value of net operating lease payments | | $ | 171,122 | | | Less: current portion | | | - | | | Long-term portion of operating lease obligations | | $ | 171,122 | |
NOTE GF – INCOME TAXES The Company files its income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. Income tax returns filed for the fiscal years ended March 31, 2021, 2020, 2019, and 20182019 are considered open and subject to examination by tax authorities. Deferred income tax assets and liabilities are computed and recognized for those differences that have future tax consequences and will result in net taxable or deductible amounts in future periods. Deferred tax expense or benefit is the result of changes in the net asset or liability for deferred taxes. The deferred tax liabilities and assets for the Company result primarily from net operating loss and tax credit carry forwards, reserves, and accrued liabilities. At March 31, 2021,2022, the Company has total net federal operating loss carry forwards of approximately $5,912,000.$5,537,000. There are certain limitations to the use and application of these items. Management reviews net operating loss carry forwards and income tax credit carry forwards to evaluate if those amounts are recoverable. After a review of projected taxable income and the components of the deferred tax assets 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 reconciliation between the statutory federal income tax provision and the actual effective tax provision is as follows: | | | Years ended March 31, | | | | | | 2021 | | | 2020 | | | | | | | | | | | | | | Years ended March 31, | | | | 2022 | | 2021 | | Federal tax (benefit) at statutory rate (21%) before loss carry-forward | | $ | 56,352 | | | $ | (1,220,917 | ) | | $ | (16,412) | | $ | 56,352 | | | | | | | | | | | | | | | | | | | | | Permanent and other differences | | | (33,029 | ) | | | 7,646 | | | | 12,017 | | | (33,029) | | State income tax (benefit) – net of federal effect | | | 3,353 | | | | (72,000 | ) | | | 15,646 | | | 3,353 | | Expiration of tax credits | | | 129,999 | | | | - | | | | — | | | 129,999 | | | | | | | | | | | | | | | | | | | | | Change in deferred tax asset valuation allowance | | | (156,675 | ) | | | 1,285,271 | | | | (11,251) | | | (156,675) | | | | $ | - | | | $ | - | | | | | | $ | — | | $ | — |
The individual components of the Company’s deferred tax assets are as follows: | | | March 31, | | | | | | 2021 | | | 2020 | | | | | | | | | | | | | | March 31, | | | | 2022 | | 2021 | | Deferred tax assets: | | | | | | | | | | | | | | | | Accruals and allowances | | $ | 76,376 | | | $ | 39,112 | | | $ | 68,553 | | $ | 76,376 | | Inventory uniform capitalization | | | 11,027 | | | | 18,544 | | | Non deductible capitalized inventory and reorganization expenditures | | | | 54,895 | | | 11,027 | | Net operating loss carry forward | | | 1,241,522 | | | | 1,258,433 | | | | 1,194,224 | | | 1,241,522 | | Foreign tax credit carry forward | | | - | | | | 169,511 | | | | — | | | — | | Research and development tax credit carry forward | | | 61,701 | | | | 61,701 | | | | 61,701 | | | 61,701 | | Allowance for unrealizable deferred tax assets | | | (1,390,626 | ) | | | (1,547,301 | ) | | | (1,379,373) | | | (1,390,626) | | Net deferred tax asset | | $ | - | | | $ | - | | | $ | — | | $ | — |
NOTE H -G – COMMITMENTS AND CONTINGENCIES From time to time, the Company is involved in various lawsuits and legal matters. It is the opinion of management, based on consultation with legal counsel, that there are no outstanding material claims outside of the normal course of business. The Company’s employment agreement with its CEO (the “CEO Agreement”) requires the Company to make certain post-employment payments to the CEO in the event of his termination following a change in control, death, disability, non-renewal, or resignation with “Good Reason” under terms of the CEO Agreement. Additionally, the CEO Agreement requires the Company to make post-employment payments, which can range from approximately $94,000 to $1,995,000, dependent upon the controlling event, as discussed above. In July, 2020,2021, the Company renewed the CEO Agreement through July 31, 2021.2022. NOTE IH - 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 no customers in the fiscal year that ended March 31, 2022, that represented greater than 10% of the Company’s net sales. The Company had one customer in the fiscal year that ended March 31, 2022, that represented 13.6% of the Company’s accounts receivable on March 31, 2022.The Company had a different customer during the fiscal year ended March 31, 2021 that represented 21.9% of the Company's net sales. The Company acquires all of the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. Products manufactured for us by Eyston amounted to approximately 83.6% and 77.6% of our purchases for the fiscal years ended March 31, 2022, and 2021, respectively. At March 31, 2022, and 2021, the Company had receivablesaccounts receivable due from Eyston Company, Ltd. of $381,401 recorded in trade accounts receivable. The Company had one customer in the fiscal year that ended March 31, 2021 that represented 21.9% of the Company’s net sales$358,958 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,$381,401, respectively.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years 2021 and 2020 are summarized as follows:
| | | Quarter Ended | | | | | June 30, | | | September 30, | | | December 31, | | | March 31, | | | 2021 | | | | | | | | | | | | | | | | | | Net sales | | $ | 2,940,768 | | | $ | 6,457,295 | | | $ | 5,124,750 | | | $ | 2,997,338 | | | Gross profit | | | 1,077,143 | | | | 2,104,028 | | | | 1,520,323 | | | | 938,215 | | | Net income (loss) | | | (78,982 | ) | | | 725,845 | | | | 78,318 | | | | (456,838 | ) | | Net income (loss) per share: | | | | | | | | | | | | | | | | | | Basic and diluted | | | (0.03 | ) | | | 0.31 | | | | 0.03 | | | | (0.19 | ) | | | | | | | | | | | | | | | | | | | | 2020 | | | | | | | | | | | | | | | | | | Net sales | | $ | 4,343,291 | | | $ | 3,622,269 | | | $ | 3,223,678 | | | $ | 3,613,786 | | | Gross profit | | | 1,244,829 | | | | 1,090,346 | | | | 769,992 | | | | 653,687 | | | Net loss | | | (608,954 | ) | | | (700,814 | ) | | | (1,011,833 | ) | | | (3,492,290 | ) | | Net loss per share: | | | | | | | | | | | | | | | | | | Basic and diluted | | | (0.26 | ) | | | (0.30 | ) | | | (0.44 | ) | | | (1.51 | ) |
NOTE KI – RETIREMENT PLAN
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code. All full-time employees who have completed 12 months of service are eligible to participate. Employees are permitted to contribute up to the amounts prescribed by law. The Company may provide contributions to the plan consisting of a matching amount equal to a percentage of the employee’s contribution, not to exceed four percent (4%). Employer contributions were $43,412$43,688 and $41,121$43,412 for the years ended March 31, 2022, and 2021, and 2020, respectively. NOTE LJ – RELATED PARTY TRANSACTIONS During the fiscal year ended March 31, 20212022, and 2020,2021, inventory purchases and other company expenses of approximately $1,206,000$1,582,000 and $999,000$1,206,000, 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, 2022, and 2021 may include amounts submitted for personal expense reimbursement and 2020amounts paid by Mr. Grossblatt for inventory purchases or other company expenses and amounted to $158,134approximately $211,000 and $136,876,$158,000, respectively, and the amount outstanding at March 31, 2022 and 2021 is approximately $44,000 and 2020 is $50,536 and $27,102,$51,000, respectively. NOTE MK – INTANGIBLE ASSETS - NET Intangible assets consist of legal expenses of $89,434 incurred in obtaining and perfecting patents onused by the Company in newly developed detector technology and are capitalized for financial statement purposes. Upon issuance, patents are amortized on a straight-line basis over twenty years. Amortization expense for the fiscal year ended March 31, 2022, and 2021 was $4,474 and 2020 was $4,472, and $4,471, respectively. Accumulated amortization at March 31, 2022 and 2021 was $49,191 and 2020 was $44,717, and $40,245, respectively. Amortization expense for the next five years is expected to be $4,472 per fiscal year through 2026.2027. NOTE L – NOTE PAYABLE – EYSTON COMPANY, LTD. On March 31, 2020, the Company sold its 50 percent ownership interest in the Hong Kong Joint Venture and converted $1,081,440 of trade accounts payable due to the Hong Kong Joint Venture to an unsecured long-term interest only note payable with the principal balance due in April 2022. The terms of the note payable were amended subsequent to March 31, 2022, to provide for monthly payments of $100,000 beginning April 2022 and until the note payable is paid in full. Interest is based on the Shanghai Commercial Bank Limited in Hong Kong US Dollar prime rate published on the first day of each calendar month plus 2% (5.5% effective rate at March 31, 2022) and is payable monthly. NOTE N–M – SHAREHOLDERS’ EQUITY Under the terms of the Company’s 2011 Non-Qualified Stock Option Plan, 120,000 shares of common stock are reserved for the granting of stock options. There were no stock options outstanding at March 31, 20212022 or 2020.2021. NOTE N – SUBSEQUENT EVENTS On May 16, 2022, the Company filed registration statement Form S-4 with the Securities Exchange Commission. The registration statement indicates that subject to shareholder approval, regulatory approval, and acceptance by the New York Stock Exchange, the Company has agreed to a reverse merger transaction with Infinite Reality, Inc. Subsequent to March 31, 2022, the Company became aware of a lawsuit filed by Thomas Henderson against Universal Security Instruments, Inc. and its directors in the U.S. District Court for the Southern District of New York, Civil Action No. 22cv4354. To our knowledge, none of the defendants has yet been served. The plaintiff claims to be a shareholder in the Company and alleges that the registration statement on Form S-4 filed by the Company on May 16, 2022 (which, when declared effective, will also be the merger proxy statement distributed to the shareholders of the Company and of Infinite Reality in connection with the proposed Merger) is materially deficient and misleading in omitting material information and, therefore, violates the provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and the regulations promulgated thereunder. The suit seeks to enjoin the Merger, direct the defendants to comply with the provisions of the Exchange Act, award costs and fees to the plaintiff, and grant such other relief as the court may deem just and proper. The Company believes that the suit is wholly without merit and, once served, the Company will aggressively defend the suit. |