UNIVERSAL SECURITY INSTRUMENTS INC - Quarter Report: 2021 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended June 30, 2021

OR

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

SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-31747

UNIVERSAL SECURITY INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

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

Inapplicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-Accelerated Filer ☒ Smaller Reporting Company ☒ 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 Exchange Act). Yes ☐ No ☒

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

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At August 19, 2021, the number of shares outstanding of the registrant’s common stock was 2,312,887.

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PART I - FINANCIAL INFORMATION

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2021

(Unaudited)

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2020

(Unaudited)

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2021, 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, 2021 audited financial statements filed with the Securities and Exchange Commission on Form 10-K as filed on July 8, 2021. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.

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Liquidity and Management Plans

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, the Company received a letter from the Exchange advising 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 Company is making progress consistent with the Plan. The Company is working diligently to execute its Plan to regain compliance with the Exchange’s continued listing requirements.

As our 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 sales were negatively impacted by delays in freight forwarding from ports of entry in California due to delays related to issues with COVID-19. Our sales growth in the current period ended June 30, 2021 was due to sales of products to large national retailers which purchased certain of our models as an in-store test.

Our short-term borrowings to finance any operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of its Factoring Agreement with Merchant Factors Corporation (Merchant or Factor).  Borrowings under the Factoring Agreement bear interest at prime plus 2% and are secured by trade accounts receivable and inventory.  Advances from Merchant are at the sole discretion of Merchant based on Merchant’s assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance. The unused availability of this facility totaled approximately $2,428,000 at June 30, 2021. At August 19, 2021 the unused availability of this facility was approximately $223,000. The decrease in availability resulted from increased purchases of inventory to support sales orders expected to ship in the quarter ending September 30, 2021. We anticipate that our availability will increase as sales are recorded in the fulfillment of the outstanding sales orders. We anticipate that the availability provided from Merchant based on increased sales and the ability to borrow on the value of inventory will provide sufficient working capital for the next twelve months following the date of this report.

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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 our line of sealed battery ionization smoke alarms, carbon monoxide products, and ground fault circuit interrupters. The Company has seen positive results on this plan due to increased sales of its product offerings to major home improvement retailers. The increase in sales to major home improvement retailers has resulted in significant additional availability under the provisions of our facility with the Factor.  Management anticipates this sales growth to continue going forward. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months, we anticipate that the Company 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 are expected to be adequate to fund operations for one year from the issuance date of this report.

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Line of Credit – Factor

On January 15, 2015, the Company entered into the Factoring Agreement (the 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 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 has been extended and now expires on January 6, 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 June 30, 2021, the Company had borrowings under the Agreement of approximately $105,000, and the Company had availability under the Agreement of approximately $2,428,000. 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 5.25% at June 30, 2021). Advances under the factoring agreement are made at the sole discretion of Merchant, based on their assessment of the receivables, inventory and our financial condition at the time of each request for an advance.

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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.

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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.

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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, 2021 and 2020 are as follows:

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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 acquires all of the smoke alarm and carbon monoxide alarm safety products that it sells from Eyston Company, Ltd. In addition, the Company had two customers in the fiscal quarter ended June 30, 2021 that represented 13.9% and 10.1% of the Company's net sales.

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.

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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.

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. 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.

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The Company follows ASC 740-10 which provides guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our condensed consolidated financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position.  Interest and penalties, if any, related to income tax matters are recorded as income tax expenses.

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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 June 30, 2021 and March 31, 2021, an allowance of approximately $157,000 has been provided for uncollectible trade accounts receivable.

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Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings (loss) 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 month period ended June 30, 2021 or 2020. As a result, basic and diluted weighted average common shares outstanding are identical for the three months ended June 30, 2021 and 2020.

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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.

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Note Payable - Eyston Company Ltd.

Effective 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, 2021) and is payable monthly. The principal balance of $1,081,440 is due and payable on April 19, 2022.

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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 Codification "ASC" 842, the Company has elected to account

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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, 2021, the Company had right-of-use assets of $128,341 and lease liabilities of $128,341 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, 2021 the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were .75 years and 6.0%, respectively. During the three months ended June 30, 2021, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was $42,781, which is included as an operating cash outflow within the  condensed consolidated statements of cash flows. During the three months ended June 30, 2021, the Company did not enter into any material 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.

The future minimum payments under operating leases were as follows at June 30, 2021 for the fiscal year ending March 31, 2022:

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Recently Adopted Accounting Standards

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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. Management determined that recently issued ASU's did not have a material impact on the consolidated financial statements at June 30, 2021.

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

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FORWARD-LOOKING STATEMENTS

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

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OVERVIEW

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We are in the business of marketing and distributing safety and security products.  Our financial statements detail our sales and other operational results for the three month periods ended June 30, 2021 and 2020.

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In light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in Hong Kong, the PRC and the United States, the Company has experienced delays in shipping and receiving of products.

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As the Company’s products are sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had a negative impact on the Company’s sales.  The Company is not yet able to quantify the full impact of the COVID-19 pandemic on its sales and financial results.

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

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

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RESULTS OF OPERATIONS

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Three Months Ended June 30, 2021 and 2020

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Sales.  Net sales for the three months ended June 30, 2021 were $4,667,998 compared to $2,940,768 for the comparable three months in the prior year, an increase of $1,727,230 (58.7%).    Sales increased principally due to increased sales to large national retailers.

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Gross Profit Margin.  Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales.  Our gross profit margin was 27.0% and 36.6% of sales for the quarters ended June 30, 2021 and 2020, respectively. Gross profit margins for the period ended June 30, 2021 were negatively impacted by higher supply chain costs including customs and port material handling costs and higher freight costs. In the prior year the Company was

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assessed and paid tariffs on imported products that were subsequently determined not to be subject to the tariffs. Accordingly, gross margins for the period ended June 30, 2020, reflect refunds of tariff costs.

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Expenses.  Selling, general and administrative expenses were $1,133,139 for the three months ended June 30, 2021, compared to $986,669 for the comparable three months in the prior year.  As a percentage of net sales, these expenses decreased to 24.3% for the three month period ended June 30, 2021, from 33.6% for the 2020 period.  These expenses decreased as a percentage of net sales since selling, general, and administrative expenses do not fluctuate in direct proportion to sales. These expenses increased as a dollar amount due to increases in insurance, commissions, and freight expense.

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Research and development expenses were $101,056 for the three month period ended June 30, 2021 compared to $133,918 for the comparable quarter of the prior year, a decrease of $32,862 (24.5%).  The primary reason for the decrease is lower amounts paid to engineering consultants for services towards meeting revised smoke alarm testing standards.

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Interest Expense.  Our interest expense was $9,489 for the quarter ended June 30, 2021, compared to interest expense of $35,538 for the quarter ended June 30, 2020.  Interest expense is primarily dependent upon the total amounts borrowed on average from the Factor, and on interest rates which vary with the prime rate of interest.

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Net Income (Loss).  We reported net income of $14,641 for the quarter ended June 30, 2021, compared to a net loss of $78,982 for the corresponding quarter of the prior fiscal year, a $93,623 (118.5%) decrease in the net loss.  The primary reason for the increase in net income is higher sales to large national retailers.

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Management Plans and Liquidity

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

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As our products are sold primarily to the construction industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic 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 sales were negatively impacted by delays in freight forwarding from ports of entry in California due to delays related to issues with COVID-19.    Our sales growth in the current period ended June 30, 2021 was due to sales of products to large national retailers which purchased certain of our models as an in-store test.

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Our short-term borrowings to finance any operating losses, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of its Factoring Agreement with Merchant Factors Corporation (Merchant or Factor).  Borrowings under the Factoring Agreement bear interest at prime plus 2% and are secured by trade accounts receivable and inventory.  Advances from Merchant are at the sole discretion of Merchant based on Merchant’s assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance. The unused availability of this facility totaled approximately $2,428,000 at June 30, 2021. At August 19, 2021 the unused availability of this facility was approximately $223,000. The decrease in availability resulted from increased purchases of inventory to support sales orders expected to ship in the quarter ending September 30, 2021. We anticipate that our availability will increase as sales are recorded in the fulfillment of the outstanding sales orders. We anticipate that the availability provided from Merchant based on increased sales and the ability to borrow on the value of inventory will provide sufficient working capital for the next twelve months following the date of this report.

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The Company has a recent history of sales that are insufficient to generate profitable operations, and has limited sources of financing.  Management’s plan in response to these conditions includes increasing sales resulting from the delivery of our line of sealed battery ionization smoke alarms, carbon monoxide products, and ground fault circuit interrupters.  The Company has seen positive results on this plan due to increased sales of its product offerings to major home improvement retailers. The increase in sales to major home improvement retailers has resulted in significant additional availability under the provisions of our facility with the Factor.  Management anticipates this sales growth to continue going forward. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months, we anticipate that the Company 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 are expected to be adequate to fund operations for one year from the issuance date of this report.

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In light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in Hong Kong, the PRC and the United States, the Company has experienced delays in shipping and receiving of products.

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Operating activities used cash of $196,612 for the three months ended June 30, 2021.  This was primarily due to a increase in accounts receivable and amounts due from factor of $321,292, and offset by a decrease in inventories, prepaid expenses and other of $27,731, and an increase in accounts payable and accrued expenses of $80,385, and net income of $14,641.   Operating activities provided cash of $747,020 for the three months ended 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.

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There were no investing activities for the three months ended June 30, 2021 or 2020.

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Financing activities provided cash of $86,379 and used cash of $562,580 during the three months ended June 30, 2021 and 2020, respectively, which is comprised of borrowings net of advances from the factor of $86,379 for the three months ended June 30, 2021, and repayments, net of advances of $783,980 from the factor for the period ended June 30, 2020.  In addition, the Company received loan proceeds of approximately $221,000 in the period ended June 30, 2020 for a paycheck protection program under the CARES Act.

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CRITICAL ACCOUNTING POLICIES

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

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ITEM 4.CONTROLS AND PROCEDURES

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Evaluation of Disclosure Controls and Procedures

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We maintain a system of disclosure controls and procedures (as such item is defined in Rules 13a – 15(e) and 15d – 15(e) of the Exchange Act) that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner.  Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures in accordance with applicable Securities and Exchange Commission guidance as of the end of the period covered by this quarterly report, and have concluded that disclosure controls and procedures were effective.

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Changes in Internal Control over Financial Reporting

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There have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

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

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*Filed herewith

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SIGNATURES

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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