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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended December 31, 2021 June 30, 2022

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 x☒☐ 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 February 16,August 17, 2022, 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 SUBSIDIARYSUBSIDIARIES

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 SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED INCOME 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 SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTSSTATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2022

(Unaudited)

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF SHAREHOLDERS’ EQUITY

NINETHREE MONTHS ENDED DECEMBER 31,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 STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED DECEMBER 31, 2020

(Unaudited)

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

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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARYSUBSIDIARIES

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.wholly owned subsidiaries. Except for the condensed consolidated balance sheet as of March 31, 2021,2022, 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, 20212022, audited financial statements filed with the Securities and Exchange Commission on Form 10-K as filed on July 8, 2021.14, 2022. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.

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As previously reported, on February 25, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company (USI), a wholly owned subsidiary of the Company D-U Merger Sub, Inc. a Delaware corporation (“Merger Sub”) and Infinite Reality, Inc., a Delaware corporation (“Infinite Reality”). On May 16, 2022, the Company filed with the United States Securities Exchange Commission (SEC) a proxy statement and Form S-4 registration statement in connection with the Merger. Subsequent to March 31, 2022, the Company became aware of a lawsuit filed by Thomas Henderson against Universal Security Instruments, Inc. and its directors in the U.S. District Court for the Southern District of New York, Civil Action No. 22cv4354. To our knowledge, none of the defendants has yet been served. The plaintiff claims to be a shareholder in the Company and alleges that the registration statement on Form S-4 filed by the Company on May 16, 2022 (which, when declared effective, will also be the merger proxy statement distributed to the shareholders of the Company and of Infinite Reality in connection with the proposed Merger) is materially deficient and misleading in omitting material information and, therefore, violates the provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and the regulations promulgated thereunder. The suit seeks to enjoin the Merger, direct the defendants to comply with the provisions of the Exchange Act, award costs and fees to the plaintiff, and grant such other relief as the court may deem just and proper. The Company believes that the suit is wholly without merit and, once served, the Company will aggressively defend the suit.

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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 resultIn light of the Company’s failureshutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to maintain stockholders’ equity of $6.0 million after reporting losses from continuing operations and/or net lossesCOVID-19 in its five most recent fiscal years. On October 1, 2021,Hong Kong, the Company received a letter fromPRC and the Exchange notifying the Company that it is now in compliance with all of the continued listing standards of the Exchange and thatUnited States, the Company has resolved the continued listing deficiency previously referenced.

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, customs charges, and freight costs were negatively impacted byexperienced delays in freight forwarding from portsshipping and receiving of entry in California due to delays related to issues with COVID-19.products.

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 unusedCompany had fully utilized the availability of this facility totaled approximately $383,000 at December 31, 2021.on June 30, 2022. The Company’s non-factored trade and other accounts receivable net of allowance for uncollectible amounts totaled approximately $878,000 at December 31, 2021.$493,000 on June 30, 2022. We anticipate that thefuture availability provided from Merchant, cash flows from operations, and the collection of non-factored trade accounts receivable will provide sufficient working capital for the next twelve months following the date of this report.

The Company has a recent history of sales that are insufficient to generate profitable operations and has limited sources of financing. Management’s plan in response to these conditions continues to be to increase sales resulting from the delivery of the Company’s line of sealed battery ionization smoke alarms, carbon monoxide products, and ground fault circuit interrupters. In addition, the Company has a short-term note payable due to its principal supplier (Eyston Company Ltd.) that requires monthly payments beginning April, 2022 of $100,000 per month and until the principal balance of approximately $1,081,000 is repaid. The Company has a long history of working closely with Eyston and believes that forbearance or extension of the payment terms of the short-term note payable can be achieved if required to meet short-term cash flow requirements. Further, the Company’s factor has withheld financing on certain of the Company’s accounts receivable subject to resolution of any disputes. The resolution of disputed items is ongoing and subsequent to

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June 30, 2022, the Company continues to provide support for resolution of any disputed items. The Company expects that all amounts in dispute will be resolved satisfactorily. Finally, the Company has filed requests for refunds of customs payments with US Customs and Border Protection for approximately $300,000 (including interest expected) for overpayments of duty. The Company expects this refund to be available during the second quarter of fiscal year 2023. The Company has seen positive results on this plan as reflected by increased sales of its product offerings. Management expects sales growth to continue going forward. Though no assurances can be given, if management’s plan continues to be successful over the next twelve months, the Company anticipates that it should be able to meet its cash needs for the next twelve months following the issuance date of this report. Cash flows and credit availability is expected to be adequate to fund operations for one year from the issuance date of this report.

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Line of Credit – Factor

In 2015, the Company entered into a 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. Subject to a temporary modification agreement effective on August 11, 2021, and which subsequently expired on November 30, 2021, the over advance portion, if any, may not exceed fifty percent (50%) of eligible inventory up to a maximum of $1,500,000.

The Agreement has been extended and now expires on January 6, 2022,2024, and provides for continuation of the program for successive two year periods until terminated by one of the parties to the Agreement. Subsequent to December 31, 2021, the Company and Merchant have agreed to continue the Agreement on a month-to-month basis pending renewal of the Agreement for another two year period. As of December 31, 2021,June 30, 2022, the Company had borrowings under the Agreement of approximately $2,357,000,$2,837,000, and the Company had

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depicts how our various product lines perform and are affected by economic factors. Revenue recognized by these categories for the three and nine months ended December 31,June 30, 2022, and 2021 and 2020 are as follows:

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Our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets. If sufficient future taxable income is generated, we may be able to offset a portion of future tax expenses.

The Company follows ASC 740-10 which provides guidance for tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our condensed consolidated financial statements

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