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

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

COMPREHENSIVE LOSS

(Unaudited)

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

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONSSHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2020

(Unaudited)

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

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY 

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2019

(Unaudited)

* Accumulated Other Comprehensive Income

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

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE LOSS CASH FLOWS 

(Unaudited)

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

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Statement of Management

The condensed consolidated financial statements include the accounts of Universal Security Instruments, Inc. (USI or the Company) and its wholly-owned subsidiary. Except for the condensed consolidated balance sheet as of March 31, 2017,2020, which was derived from audited financial statements, the accompanying condensed consolidated financial statements are unaudited. Significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US-GAAP) have been condensed or omitted. The interim condensed consolidated financial statements should be read in conjunction with the Company’s March 31, 20172020 audited financial statements filed with the Securities and Exchange Commission on Form 10-K on July 14, 2017.August 11, 2020. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.

Liquidity and Management Plans

The Company had a net lossesloss of $1,726,384$78,982 for the ninethree months ended December 31, 2017June 30, 2020 and $2,058,902a net loss of $5,813,891 and $2,137,792$1,347,986 for the years ended March 31, 20172020 and 2016,2019, respectively. Furthermore, as of December 31, 2017, workingWorking capital (computed as the excess of current assets over current liabilities) decreasedincreased by $864,080$162,219 from $3,556,524$5,059,498 at March 31, 2017,2020, to $2,692,444$5,221,717 at December 31, 2017. In addition,June 30, 2020.

As the Company’s products are sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had a negative impact on the Company’s sales. The Company experienced negative cash flows from operationsis not yet able to quantify the full impact of $2,153,188the COVID-19 pandemic on its sales and $822,957financial results, but believes that the pandemic was a factor in significantly lower sales for the fiscal yearsquarter ended March 31, 2017 and 2016, respectively. The Company experienced positive cash flows from operationsJune 30, 2020 when compared to sales for the nine month period ended December 31, 2017 of $689,175.2019 period.

Our short-term borrowings to finance operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring Agreement (Agreement) with Merchant FactorFactors 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 the Factor,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 remaining underof this facility istotaled approximately $722,000$695,000 at December 31, 2017.

In addition, we have secured extended payment terms of up to $4,000,000 for the purchase of sealed battery products from our Hong Kong Joint Venture. Amounts due for purchases under these extended payment terms are unsecured, bear interest at 4.5%, and are payable one hundred twenty days from the date of each purchase thereunder. At December 31, 2017 the Company has a balance under this arrangement with the Hong Kong Joint Venture of $3,860,994.June 30, 2020.

The Company has a history of sales that are insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to these conditions includes increasing sales resulting from the delivery of the Company’s line of sealed battery safetyionization smoke alarms, carbon monoxide products, and other new products, seeking additional financing, andground fault circuit interrupters. In addition, effective March 31, 2020, the Company sold its ownership interest in its former Hong Kong Joint Venture reducing non-essential expenditures. This plan is in effect, approvedits current liabilities due to the Hong Kong Joint Venture by management, and management$4,000,000. The Company has continued to workseen positive results on this plan through Decemberdue to increased sales of its product offerings to a major home improvement retailer during the second quarter of the Company’s fiscal year ending March 31, 2017.2021. The increase in sales to the major home improvement retailer has resulted in significant additional availability under the provisions of the Company’s facility with its Factor. Management expects this 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 expects the loan will be forgiven in compliance with the provisions of the Act. Though no assurances can be given, if management’s plan iscontinues to be successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs.needs for the next twelve months following the issuance date of this report. Cash flows and credit availability isare expected to be adequate to fund operations for one year from the issuance date of these condensed consolidated financial statements.this report.

Line of Credit – Factor

On January 15, 2015, the Company entered into the Agreement with Merchant for the purpose of factoring the Company’s trade accounts receivable and to provide financing secured by finished goods inventory. Effective September 1, 2017 the Agreement with Merchant was modified to restrict borrowing solely to eligible accounts receivable and removing the Company’s ability to borrow up to $1,000,000 supported by 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. The Agreement which washas been extended on January 7, 2018,and now expires on January 6, 2020,2022, and provides for continuation of the program for successive two year periods until terminated by one of the parties to the Agreement. As of December 31, 2017,June 30, 2020, the Company had borrowings of $1,381,226$777,685 under the Agreement, and the Company had remaining availability under the Agreement of approximately $722,000.$695,000. Advances on factored trade accounts receivable are secured by all of the Company’s trade accounts receivable and inventories, are repaid periodically as collections are made by Merchant but are otherwise due upon demand, and bear interest at the prime commercial rate of interest, as published, plus two percent (Effective rate 6.25%5.25% at December 31, 2017)June 30, 2020). Advances under the factoring agreement are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory and our financial condition at the time of each request for an advance.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with US-GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

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 recognizes sales upon shipment of products, when title has passeddetermined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the buyer, net of applicable provisions for any discounts or allowances. We recognize revenuecustomer when the following criteria are met: evidence of an arrangement exists; fixed and determinable fee; delivery has taken place; and collectabilityproduct is reasonably assured.shipped or delivered to the customer. Customers may not return, exchange or refuse acceptance of goods without our approval. However,Generally, the Company does not grant extended payment terms. Shipping and handling costs associated with outbound freight, after control over a product has entered into an agreement withtransferred 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 grant pre-approvedwhich 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 returnreturn) or warranty replacements. Estimates of upvariable consideration are included in revenue to fifty percentthe extent that it is probable that a significant reversal in the amount of products sold on certain invoices to provide for and gain acceptance within certain markets. When a pre-approved right of return is granted,cumulative revenue recognition is deferred until the right of return expires. Upon the recognition of a sale werecognized will establish an allowancenot occur.

We have established allowances to cover anticipated doubtful accounts based upon historical experience.

Disaggregation of Revenue

The Company presents below revenue associated with sales of products acquired from the Eyston Company Ltd. for 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 three months ended June 30, 2020 and 2019 are as follows:

Receivables

Receivables are recorded when the Company has an unconditional right to consideration. We have established allowances to cover anticipated doubtful accounts based upon historical experience.

Remaining Performance Obligations

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.

Joint Venture

The Company and its joint venture partner,held a Hong Kong corporation, each owns a 50%fifty percent interest in a Hong Kong joint venture, Eyston Company Limited, (the “Hongthe former Hong Kong Joint Venture”), that manufactures security products in itsVenture, which has manufacturing facilities located in the People’s Republic of China.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 effective March 31, 2020. There are no material differences between US-GAAP and the basis of accounting used by the former Hong Kong Joint Venture.Venture for the period ended June 30, 2019. The following represents summarized balance sheet and income statement information of the former Hong Kong Joint Venture as of and for the ninethree months ended December 31, 2017 and 2016:June 30, 2019:

During the ninethree months ended December 31, 2017June 30, 2020 and 20162019 the Company purchased $7,179,110$1,275,366 and $8,122,013,$2,859,967, respectively, of products directly from the Hong Kong Joint Venture for resale. For the ninethree months ended December 31, 2017June 30, 2019 the Company has reduceddecreased its equity in the net loss ofin the investment in the Joint Venture to reflect an increasea decrease of $74,218$35,453 in inter-Company profit on purchases held by the Company in inventory. For the nine months ended December 31, 2016 the Company has reduced its equity in the net earnings of the Joint Venture to reflect an increase of $124,692 in inter-company profit on purchases held by the Company in inventory.

Income Taxes

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. We estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related to discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, we considered the effect of recent changes in tax law related to the Tax Cut and Jobs Act that occurred during the quarter ended December 31, 2017. These changes reduced the value of the Company’s deferred tax assets by approximately $1,000,000. However, as further explained below, the Company had previously established a full valuation allowance on its deferred tax assets. The Company has not yet completed the analysis to determine its share of the accumulated earnings and profits of the Hong Kong Joint Venture.

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 condensed 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 establishedAfter a full valuation allowance on itsreview 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 to recognize that net operating losses, and research and foreign tax credits expiring in future periods will likely not be realized. This determination was made based on continued taxablethe Company’s history of losses which causefrom 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.

Accounts Receivable and Amount Due From Factor

The Company assigns the majority of its short-term receivables arising in the ordinary course of business to our factor. 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 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 related to Amounts Due from Factor has been provided. At DecemberJune 30, 2020 and March 31, 2017 and 2016,2020, an allowance of approximately $57,000 has been provided for uncollectible trade accounts receivable.

Net Loss per Common Share

Basic net loss per common share is computed based on the weighted average number of common shares outstanding during the periods presented. Diluted earningsloss per common share is computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on the Company’s average stock price. There were no potentially dilutive common stock equivalents outstanding during the three and nine month periods ended December 31, 2017 and 2016.June 30, 2020 or 2019. As a result, basic and diluted weighted average common shares outstanding are identical for the three and nine month periods ended December 31, 2017June 30, 2020 and 2016.2019.

Contingencies

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 condensed consolidated financial position, results of operations, or cash flows in future years.

RecentEffective March 31, 2020 the Company sold its fifty percent ownership interest in the Hong Kong Joint Venture. On April 19, 2020, the Company converted $1,081,440 of trade accounts payable due to the Hong Kong Joint Venture to an unsecured long-term note payable. 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 June 30, 2020) and is payable monthly. The principal balance of $1,081,440 is due and payable on April 19, 2022.

Note Payable – Bank

On May 6, 2020, the Company received a Paycheck Protection Program loan under the CARES Act (Act) in the amount of $221,400. The loan bears interest at one percent and provides for monthly payments beginning in December, 2020 with a maturity of May 6, 2022. Under the provisions of the Act, if the proceeds of the loan are used for certain specified costs, repayment of the loan will be forgiven. Management expects the loan to be extinguished within one year from the balance sheet date, and accordingly, has classified the loan as a current liability.

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 renew 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 Accounting Standards Not YetCodification “ASC” 842, the Company has elected to account for the lease and non-lease components as a single lease component. 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.

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. When the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s borrowing rates at the lease commencement date in determining the present value of lease payments. The right-of use asset also includes any lease payments made at or before lease commencement less any lease incentives. As of June 30, 2020, the Company had right-of-use assets of $290,799 and lease liabilities of $290,799 related to its operating leases. Right-of-use assets are included in property and equipment, net, on the condensed consolidated balance sheet and lease liabilities related to the Company’s operating leases are included in short-term and long-term lease liability on the condensed consolidated balance sheet. As of June 30, 2020 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were 1.75 years and 6.0%, respectively. During the three months ended June 30, 2020, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $43,220, which is included as an operating cash outflow within the condensed consolidated statements of cash flows. During the three months ended June 30, 2020, the Company did not enter into any lease agreements 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 those lease assets recorded upon implementation.

The future minimum payments under operating leases were as follows at June 30, 2020 for the fiscal year ending March 31, 2021:

Recently Adopted 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 2014, the FASB Management determined that recently issued ASU No. 2014-09,Revenue from Contracts with Customers: Topic 606.ASU 2014-09 affects any entity using US GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605,Revenue Recognition,and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35,Revenue Recognition—Construction-Type and Production-Type Contracts.In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that areASU’s did not in a contract with a customer (e.g., assets within the scope of Topic 360,Property, Plant, and Equipment,and intangible assets within the scope of Topic 350,Intangibles—Goodwill and Other)are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. This guidance is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company is currently assessing the impact that adopting this new accounting standard will have on the condensed consolidated financial statements and footnote disclosures.

In December 2016 the FASB issued Accounting Standards Update No. 2016-20,Technical Corrections and Improvements to Topic 606,Revenue from Contracts with Customers,or ASU 2016-20. The amendments in ASU 2016-20 update and affect narrow aspects of the guidance issued in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12,Narrow Scope Improvements and Practical Expedients, which provided revised guidance on certain issues relating to revenue from contracts with customers,including clarification of the objective of the collectability criterion. In March 2016, the FASB issued a final amendment to clarify the implementation guidance for principal versus agent considerations and in April 2016 issued a final amendment to clarify the guidance related to identifying performance obligations and the accounting for intellectual property licenses. The Company is currently assessing the impact of adopting this new accounting standard but does not expect that the adoption of this new accounting standard will have a material impact on the condensed consolidated financial statements and footnote disclosures.at June 30, 2020.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies and provides guidance on eight cash flow classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of adopting this new accounting standard but does not expect that the adoption of this new accounting standard will have a material impact on the condensed consolidated financial statements and footnote disclosures.

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

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

Forward-Looking Statements

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

overview

We are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50% owned Hong Kong Joint Venture.products. Our financial statements detail our sales and other operational results only,for the three month periods ended June 30, 2020 and report2019. Due to the financial resultssale of the Company’s interest in the Hong Kong Joint Venture usingeffective March 31, 2020, the equity method.method financial results of the former Hong Kong Joint Venture are only included for the period ending June 30, 2019. Accordingly, the following discussion and analysis of the three and nine month periods ended December 31, 2017June 30, 2020 and 20162019 relate to the operational results of the Company. A discussion and analysis

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, Joint Venture’s operationalthe PRC and the United States, the Company may experience 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 a negative impact on the Company’s sales. The Company is not yet able to quantify the full impact of the COVID-19 pandemic on its sales and financial results, but believes that the pandemic was a factor in significantly lower sales for these periods is presented below under the heading “Joint Venture.”quarter ended June 30, 2020 when compared to sales for the 2019 period.

The Company has developed new products based on new smoke and gas detection technologies, with what the Company believes are improved sensing technology and product features. To date we have applied for thirteen patents on these new technologies and features. We have been granted ten patents (including six for new technologies and features). Most of our new technologies and features have been trademarked under the trade name IoPhic.

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

Results of Operations

Three Months Ended December 31, 2017June 30, 2020 and 20162019

Sales. Net sales for the three months ended December 31, 2017June 30, 2020 were $3,555,431$2,940,768 compared to $3,177,632$4,343,291 for the comparable three months in the prior period, an increaseyear, a decrease of $377,799 (11.9%$1,402,523 (32.3%). Sales increaseddecreased principally due to an increase inreduced sales to a single customer as compared to sales to that customer in the prior year’s comparable period.construction and retail segments due to the effects of the COVID-19 pandemic.

Gross Profit Margin. Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin was 30.0%36.6% and 33.0%28.7% of sales for the quarters ended December 31, 2017June 30, 2020 and 2016,2019, respectively. The decreaseCompany was assessed and paid tariffs on imported products that were subsequently determined not to be subject to the tariffs. Accordingly, gross margins increased in gross profit margin was primarilythe current period ended June 30, 2020, principally due to the mixrefunds of products sold to differing customers.tariffs previously paid and lower tariff costs.

Expenses. Selling, general and administrative expenses were $1,136,033$986,669 for the three months ended December 31, 2017,June 30, 2020, compared to $1,008,865$1,236,839 for the comparable three months in the prior year. As a percentage of net sales, these expenses increased to 32.0%33.6% for the three month period ended December 31, 2017,June 30, 2020, from 31.7%28.5% for the 20162019 period. The increase inThese expenses increased as a dollar amount is primarily duepercentage of net sales since selling, general, and administrative expenses do not fluctuate in direct proportion to fluctuations in certain expenses within this category, including an increase in insurance expense of approximately $105,000 and a decrease in professional fees of approximately $65,000. The increase in insurance expense is related to increased product liability insurance expense.sales.

Research and development expenses were $169,521$133,918 for the three month period ended December 31, 2017June 30, 2020 compared to $199,638$140,643 for the comparable quarter of the prior year, a decrease of $30,117 (15.1%$6,725 (4.8%). The primary reasonsreason for the decrease are the decreased expendituresis lower amounts paid to independentengineering consultants for services towards meeting revised smoke alarm testing facilities as the new sealed product line is completed.standards.

Interest Expense and Other.Expense. InterestOur interest expense of $100,085 was recorded$35,538 for the quarter ended December 31, 2017,June 30, 2020, compared to interest expense of $20,338$107,337 for the quarter ended December 31, 2016.June 30, 2019. Interest expense for the quarter ended December 31, 2017 includes a reclassification of approximately $57,000 in interest expense from the prior two quarters that was previously misclassified as a component of cost of goods sold. Interest expense is primarily dependent upon the total amounts borrowed on average from the Factor and, from our Hong Kong Joint Venture. Amounts borrowed fromin the Factor andprior year, extended trade payables due to the Hong Kong Joint Venture increasedand on interest rates which vary with the prime rate of interest. Effective March 31, 2020, our interest in the current fiscal year’s three month period as comparedHong Kong Joint Venture was sold and the proceeds from the sale were used to reduce our indebtedness to the same period in the prior fiscal year resulting in the increase in interest expense noted above.Hong Kong Joint Venture.

Net Loss. We reported a net loss of $1,014,796$78,982 for the quarter ended December 31, 2017,June 30, 2020, compared to a net loss of $549,806$608,954 for the corresponding quarter of the prior fiscal year, a $464,990 (84.6%$529,972 (87.0%) increasedecrease in the net loss. The increaseprimary reason for the decrease in the net loss was primarilyis the result of an increasedecrease in our equity in the net loss of the former Hong Kong Joint Venture, the refund of tariffs as discussed above, and by increasesthe decrease in interest and insurance expense as noted above.

Nine Months Ended December 31, 2017 and 2016

Sales. Net sales for the nine months ended December 31, 2017 were $10,456,484 compared to $10,569,944 for the comparable nine months in the prior period, a decrease of $113,460 (1.1%). Sales, as a dollar amount, were generally comparable to sales in the prior year’s comparable period. However, the Company sold less to a single large customer as comparedpaid to the previous year’s nine month period and offset by increased sales to several new customers.

Gross Profit Margin. The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company’s gross profit margin was 30.7% for the period ended December 31, 2017 and 31.8% for the period ended December 31, 2016. The decrease in gross profit margin was primarily due to the mix of products sold to differing customers.

Expenses. Selling, general and administrative expenses were $3,425,754 at December 31, 2017 compared to $3,277,480 for the comparable nine months in the prior year. As a percentage of sales, these expenses were 32.8% for the nine month period ended December 31, 2017 and 31.0% for the comparable 2016 period. The increase in expenses, as a dollar amount, is primarily due to fluctuations in certain expenses within this category including an increase in insurance expense of approximately $245,000 and a decrease in professional fees of approximately $194,000. The increase in insurance expense is related to increased product liability insurance expense.

Research and development expenses were $512,945 for the nine months ended December 31, 2017 compared to $519,621 for the comparable period of the prior year, a decrease of $6,676 (1.3%). The primary reasons for the increase is the slight increase of expenditures to independent testing facilities during the nine month period ended December 31, 2017 as the new sealed product line is completed.

Interest Expense and Other. Our interest expense was $140,728 for the nine months ended December 31, 2017, compared to interest expense of $49,123 for the nine months ended December 31, 2016. Interest expense for the nine month period ended December 31, 2017 includes a reclassification of approximately $57,000 in interest expense from the prior two quarters that was previously misclassified as a component of cost of goods sold. Interest expense is dependent upon the total amounts borrowed on average from the Factor and from ourformer Hong Kong Joint Venture. Amounts borrowed from the Factor and the Hong Kong Joint Venture increased in the current fiscal year’s nine month period as compared to the same period in the prior fiscal year resulting in the increase in interest expense noted above.

Net Loss. We reported a net loss of $1,726,384 for the nine months ended December 31, 2017 compared to a net loss of $1,003,551 for the corresponding period of the prior fiscal year, an increase in the net loss of $722,833 (72.0%).

Joint Venture

Net Sales. Net sales of the Joint Venture for the three and nine months ended December 31, 2017 were $2,099,592 and $10,169,231, respectively, compared to $4,998,083 and $13,271,177, respectively, for the comparable period in the prior fiscal year. The 58.0% decrease and 23.4% decrease in net sales by the Joint Venture for the respective three and nine month periods are due to decreased sales to the Company for the three month period and nine month periods ended December 31, 2017.

Gross Profit Margin. Gross margins of the Joint Venture for the three month period ended December 31, 2017 decreased to a negative (3.4%) from a negative (0.8%) for the 2016 corresponding period. For the nine month period ended December 31, 2017, gross margins were 15.5% compared to 16.4% for the same period of the prior year. Gross margins depend on sales volume of various products, with varying margins, accordingly, increased sales of higher margin products and decreased sales of lower margin products positively affect the overall gross margins. In addition, foreign currency exchange gains and/or losses impact gross margins.

Expenses. Selling, general and administrative expenses were $1,134,807 and $3,377,504 respectively, for the three and nine month periods ended December 31, 2017, compared to $1,201,701 and $3,308,966 in the prior year’s respective periods. As a percentage of sales, expenses were 54.0% and 33.2% for the three and nine month periods ended December 31, 2017, compared to 24.0% and 24.9% for the three and nine month periods ended December 31, 2016. The changes in selling, general and administrative expense as a percent of sales for the three and nine month periods were primarily due to costs that do not change at the same rate as changes in sales volume.

Interest Income. Interest income on assets held for investment was $63,298 and $229,544 respectively, for the three and nine month periods ended December 31, 2017, compared to interest income of $227,901 and $432,618, respectively, for the prior year’s periods. Interest income is dependent on the average balance of assets held for investment. Amounts held for investment decreased during the current years’ fiscal periods.

Net Loss. Net loss for the three and nine months ended December 31, 2017 were $1,059,334 and $1,561,216, respectively, compared to a net loss of $988,478 and $782,051, respectively, in the comparable periods last year. The increase in the net loss for the three and nine month periods ended December 31, 2017 is due primarily to decreased sales to the Company as noted above.

Liquidity. Cash needs of the Joint Venture are currently met by funds generated from operations. During the nine months ended December 31, 2017, working capital increased by $562,916 from $9,957,418 on March 31, 2017 to $10,520,334 on December 31, 2017.

Management Plans and Liquidity

The Company had a net lossesloss of $1,726,384$78,982 for the ninethree months ended December 31, 2017June 30, 2020 and $2,058,902a net loss of $5,813,891 and $2,137,792$1,347,986 for the years ended March 31, 20172020 and 2016,2019, respectively. Furthermore, as of December 31, 2017, workingWorking capital (computed as the excess of current assets over current liabilities) decreasedincreased by $864,080$162,219 from $3,556,524$5,059,498 at March 31, 2017,2020, to $2,692,444$5,221,717 at December 31, 2017. June 30, 2020.

In addition,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 experiencedmay experience 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 a negative cash flows from operationsimpact on the Company’s sales. The Company is not yet able to quantify the full impact of $2,153,188the COVID-19 pandemic on its sales and $822,957financial results, but believes that the pandemic was a factor in significantly lower sales for the fiscal yearsquarter ended March 31, 2017 and 2016, respectively. The Company experienced positive cash flows from operationsJune 30, 2020 when compared to sales for the nine month period ended December 31, 2017 of $689,175.2019 period.

Our short-term borrowings to finance operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring Agreement (Agreement) with Merchant FactorFactors 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 the Company’s factor,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 remaining underof this facility istotaled approximately $722,000$695,000 at December 31, 2017.June 30, 2020.

In addition, we have secured extended payment terms of up to $4,000,000 for the purchase of sealed battery products from our Hong Kong Joint Venture. Amounts due for purchases under these extended payment terms are unsecured, bear interest at 4.5%, and are payable one hundred twenty days from the date of each purchase thereunder. At December 31, 2017 the Company has a balance under this arrangement with the Hong Kong Joint Venture of $3,860,994.

The Company has a history of sales that are insufficient to generate profitable operations, and has limited sources of financing. Management’s plan in response to these conditions includes increasing sales resulting from the delivery of the Company’s new line of sealed battery safetyionization smoke alarms, carbon monoxide products, and other new products, seeking additional financing, andground fault circuit interrupters. In addition, effective March 31, 2020, the Company sold its ownership interest in the Hong Kong Joint Venture reducing non-essential expenditures. This plan is in effect, approvedits current liabilities due to the Hong Kong Joint Venture by management, and management$4,000,000. The Company has continued to workseen positive results on this plan through Decemberdue to increased sales of its product offerings to a major home improvement retailer during the second quarter of the Company’s fiscal year ending March 31, 2017.2021. The increase in sales to the major home improvement retailer subsequent to June 30, 2020 has resulted in significant additional availability under the provisions of the Company’s facility with its Factor. Management expects this 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 expects the loan will be forgiven in compliance with the provisions of the Act. Though no assurances can be given, if management’s plan iscontinues to be successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs.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 at least one year from the issuance date of these condensed consolidated financial statements.this report.

Operating activities provided cash of $689,175$747,020 for the ninethree months ended December 31, 2017.June 30, 2020. This was primarily due to a decrease in accounts receivable and amounts due from factor of $596,652, a decrease in inventories, prepaid expenses and other of $465,639, and offset by a decrease in accounts payable and accrued expenses of $238,958, and a net loss of $78,982. Operating activities provided cash of $5,336 for the three months ended June 30, 2019. This was primarily due to a decrease in accounts receivable and amounts due from factor of $521,414, an increase in accounts payable and accrued expenses of $2,307,303$342,457, and offset by a net loss of $1,726,384, an increase in inventories, and prepaid expenses and other of $539,971, and an increase in accounts receivable and amounts due from factor of $230,183. The net loss includes a non-cash loss from investment in the Hong Kong Joint Venture of $854,826. Operating activities used cash of $689,358 for the nine months ended December 31, 2016. This was primarily due to an increase in inventory and prepaid expenses of $1,466,836$620,468, and a net loss of $1,003,551. This was partially offset by a decrease of $398,177 in accounts receivable, increases of $845,338 in accounts payable and accrued expenses, and$608,954. The net loss includes a non-cash loss from the investment in the Hong Kong Joint Venture of $515,717.$368,964.

InvestingThere were no investing activities used cash duringfor the ninethree months ended December 31, 2017 resulting from the purchase of $16,106 in equipment. Investing activities provided cash during the nine months ended December 31, 2016 of $102,581 consisting of dividends received from the Hong Kong Joint Venture.June 30, 2020 or 2019.

Financing activities used cash of $882,899$562,580 and $156,210 during the ninethree months ended December 31, 2017June 30, 2020 and provided cash of $379,875 during the nine months ended December 31, 2016,2019, respectively, which is comprised of advancesloan proceeds of $221,400 under the Paycheck Protection Program of the CARES Act for the three months ended June 30, 2020, and repayments, net of repaymentsadvances on the line of credit from our factor.factor, of $783,980 and $156,210 for the periods ended June 30, 2020 and 2019, respectively.

Critical Accounting Policies

Management’s discussion and analysis of our condensed consolidated financial statements and results of operations are based on our condensed consolidated financial statements included as part of this document. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affectIn 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, and contingencies and litigation. We base these estimates on historical experiences, future projections 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 the following critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. For a detailed discussion on the application on these and other accounting policies, see Note Anotes to the consolidated financial statements, and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 8 of theour Form 10-K, forwe have disclosed those accounting policies that we consider to be significant in determining our results of Operations and financial condition. Except as disclosed below, there have been no material changes to those policies that we consider to be significant since the year ended March 31, 2017 as filed with the Securities and Exchange Commission on July 14, 2017. Certainfiling of our Form 10-K. The accounting policies require the application of significant judgment by managementprinciples used in selecting the appropriate assumptions for calculatingpreparing our unaudited condensed consolidated financial estimates. By their nature, these judgments are subjectstatements conform in all material respects 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 trendsaccounting principles generally accepted in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include:U.S.

Revenue Recognition. The Company recognizes sales upon shipment of products, when title has passed to the buyer, net of applicable provisions for any discounts or allowances. We recognize revenue when the following criteria are met: evidence of an arrangement exists; fixed and determinable fee; delivery has taken place; and collectability is reasonably assured. Customers may not return, exchange or refuse acceptance of goods without our approval. However, the Company has entered into an agreement with a customer to grant pre-approved rights of return of up to fifty percent of products sold on certain invoices to provide for and gain acceptance within certain markets. When a pre-approved right of return is granted, revenue recognition is deferred until the right of return expires. We have established allowances to cover anticipated doubtful accounts based upon historical experience.

Inventories. Inventories are valued at the lower of cost or market. 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 market value based upon assumptions about future demand and market conditions.

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 recent 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 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.

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 condensed financial statements and do not have any arrangements or relationships with entities that are not consolidated into our condensed financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.

ITEM 4.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 quarterly report, and have concluded that disclosure controls and procedures were not effective because of the material weaknesseffective.

Changes in internal controlInternal Control over financial reporting as discussed below.Financial Reporting

MaterialIn previous reporting periods material weaknesses arose in our oversight of the accounting function andas well as the disclosure controls and procedures of the Hong Kong Joint Venture (HKJV). The HKJV iswas a material component of the Company’s consolidated financial statements. The Company has discussed this weakness with managementsold its 50% ownership interest in the HKJV effective March 31, 2020, and accordingly, considers that the above matter is no longer applicable as it relates to the Company’s disclosure controls and procedures. Other than the consequences of the HKJV and is monitoring implementationsale of suggested improvements.

Changesour interest in Internal Control over Financial Reporting. Therethe Hong Kong Joint Venture, there have not been any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2017June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

ITEM 6.EXHIBITS

Exhibit No. (* Indicates filed herewith)