MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including Risk Factors discussed in earlier filings, and other risks could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
General
During the period covered by this Annual Report, we were in the business of marketing and distributing safety and security products which are primarily manufactured in the Peoples Republic of China (PRC). Our consolidated financial statements detail our sales and other operational results. Accordingly, the following discussion and analysis of the fiscal years ended March 31, 2025, and 2024 relate to the operational results of the Company and its consolidated subsidiary.
Our overall sales are primarily dependent upon the strength of the U.S. housing market. As stated elsewhere in this report, our Universal Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies); conditions that impact new home construction and new home sales directly impacts sales by our Universal Electric subsidiary. Our operating results for the fiscal years ended March 31, 2025, and 2024 continue to be dependent upon the economic conditions of the U.S. housing market.
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The importation of certain wiring devices, carbon-monoxide alarms, and photo-electric alarms are currently subject to tariffs of 25%, and subsequent to March 31, 2025 tariffs on these products increased to 55%. The imposition of and modification of tariffs during the latter half of the current fiscal year ended March 31, 2025, and subsequent thereto, has increased uncertainty as to the short-term sustainability of importing products from our principal suppliers. If the Company is unable to import products at a competitive price point our sales could be adversely affected.
Subsequent to the May 22, 2025 asset sale to Feit, we intend to continue importing and marketing our product lines other than smoke alarms and carbon monoxide alarms and we are exploring. Our ability to sell those products at competitive prices depends, among other things, on the tariffs to which imports of those products will be subject. We also are exploring strategic alternatives available to the Company and other business opportunities to drive long-term value for our shareholders. As previously announced, on April 15, 2025, the Company entered into a Memorandum of Understanding (MOU) with Ault & Company, Inc., a Delaware corporation (“A&C”), with respect to the investment in the Company of operating capital for a business to be mutually agreed upon by the Company and A&C. In accordance with provisions of the MOU, the Company added two Board of Director seats and appointed new directors selected by A&C to fill the available seats.
Comparison of Results of Operations for the Years Ended March 31, 2025 and 2024
Sales. In fiscal year 2025, our net sales were $23,563,554 compared to sales in the prior year of $19,517,673, an increase of $4,045,881 (20.7%). The increase in the net income for the fiscal year ended March 31, 2025, is attributed primarily to an increase in sales to retail customers, and to recording an income tax benefit associated with the reversal of a portion of the reserve for deferred tax assets arising from the gain on the sale of assets discussed above. In addition, as further discussed later, certain revisions increasing the net loss in the prior year have been recorded.
Gross Profit. Gross profit percentage is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit percentage for the fiscal year ended March 31, 2025, was 29.0% compared to 28.7% in fiscal 2024. Changes in gross margin is generally attributed to variations in the mix of products sold as certain products are subject to tariff charges that directly impact gross margin.
Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $6,004,507 in fiscal 2025 from $5,735,584 in fiscal 2024. As a percentage of net sales, these expenses were 25.5% for the fiscal year ended March 31, 2025, and 29.4% for the fiscal year ended March 31, 2024. These expenses decreased as a percentage of net sales as they do not change in direct proportion to a change in sales. These expenses increased as a dollar amount due primarily to increased freight costs, insurance, and professional fees.
Engineering and Product Development. Engineering and product development expense for the fiscal year ended March 31, 2025, was $424,849. Engineering and product development expense for the fiscal year ended March 31, 2024, was $427,234. Engineering and product development expense for the 2025 period was comparable to the 2024 period.
Interest Expense and Interest Income. For the fiscal years ended March 31, 2025, and 2024, the Company incurred interest expense of $262,365 and $155,731, respectively, related to borrowing costs associated with interest paid on amounts borrowed from our factor. The increase in interest expense resulted primarily from increased borrowing from our factor during the fiscal year ended March 31, 2025.
For the fiscal year ended March 31, 2024, the Company received interest income of $24,746 related to refunds of customs payments made in the prior fiscal year.
Income Taxes. For the fiscal years ended March 31, 2025, and 2024, our statutory Federal tax rate was 20.0%. The Company has accumulated net operating losses and other income tax credits for which a partial valuation allowance has been established. Accordingly, income taxes or deferred income tax benefits indicated by the provision for income taxes as shown on the Consolidated Statements of Operations for the fiscal years ended March 31, 2025, and 2024, varies from the expected statutory rate. Footnote F to the financial statements provides a reconciliation of the amount of tax that would be expected at statutory rates and the amount of tax expense or benefit provided at the effective rate of tax for each fiscal period.
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Net Income. We reported net income of $500,684 for the fiscal year 2025, compared to a net loss of $695,790 for fiscal 2024, an increase in net income of $1,196,474 (172.0%). The increase in the net income for the fiscal year ended March 31, 2025, is attributed to the increase in sales associated with the initial placement sale to a large national retail customer and a deferred tax benefit attributed to the sale of certain assets to Feit as previously discussed.
Financial Condition, Liquidity and Capital Resources
The Company reported net income of $500,684, and a net loss of $695,790 for the years ended March 31, 2025, and 2024, respectively. As of March 31, 2025, working capital (computed as the excess of current assets over current liabilities) increased by $678,311 from $4,485,400 on March 31, 2024, to $5,163,711 on March 31, 2025.
Our operating activities used cash of $1,048,612 for the year ended March 31, 2025. Operating activities used cash principally by increasing trade accounts receivable and amounts due from factor of $1,090,710, increased inventory of $227,396, by decreasing accounts payable, accrued expenses, and lease liability by $350,758, and offset by prepaid expenses of $81,442, and net income of $500,684. In addition, the following non-cash items are reflected in net cash used in operating activities: depreciation and amortization amounted to $164,126, the change in the allowance for excess and obsolete inventory of $300,000, and was offset by changes in the allowance for credit losses of $65,000, and an income tax benefit of $361,000.
Our operating activities provided cash of $604,076 for the year ended March 31, 2024. Operating activities provided cash principally by decreasing trade accounts receiveable and amounts due from factor of $186,806, by increasing accounts payable and accrued expenses by $1,472,394, and offset by increases in inventories of $688,194, increased prepaid expenses of $61,354, a decrease in operating lease liability of $151,230, and a net loss of $695,790. In addition, the following non-cash items are reflected in net cash provided by operating activities: depreciation and amortization amounted to $163,456 and was offset by changes in the allowance for credit losses of $377,988.
Our investing activities did not provide or use cash during the fiscal years ended March 31, 2025 or 2024.
Financing activities provided cash of $1,331,605 reflecting the increase in net borrowing from the Factor during the fiscal year ended March 31, 2025. Financing activities used cash of $690,497 reflecting the decrease in net borrowing from the Factor during the fiscal year ended March 31, 2024.
Overall, our cash increased by $282,993 during the fiscal year ended March 31, 2025, and decreased by $86,421 for the fiscal year ended March 31, 2024.
Our overall sales are primarily dependent upon the strength of the U.S. housing market. As stated elsewhere in this report, our Universal Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies); demand in new home construction and new home sales directly impacts sales by our Universal Electric subsidiary. Our operating results for the fiscal years ended March 31, 2025, and 2024 continue to be dependent upon the economic conditions of the U.S. housing market. Management believes that with an improved housing market and sales of our sealed products, the Company will continue to improve profitability. However, as previously discussed, the imposition of and modification of tariffs during the latter half of the current fiscal year ended March 31, 2025, and subsequent thereto, has increased uncertainty as to the short-term sustainability of importing products from our principal suppliers. If the Company is unable to import products at a competitive price point, our sales could be adversely affected.
Our product offerings, including sealed battery alarm and ground fault circuit interrupter products, compete in price and functionality with similar products offered by our larger competitors. While we believe there will be market acceptance of our products, we cannot be assured of this. Should our products not achieve the level of acceptance we anticipate, this could have a significant effect on our future operations, and our sales may decline, affecting our ability to continue operating in our current fashion.
Our short-term borrowings to finance operations, trade accounts receivable, and foreign inventory purchases are provided pursuant to the terms of our Factoring Agreement with Merchant Factors Corporation (Merchant or Factor). Borrowings under our Factoring Agreement bear interest at prime plus 2% and are secured by all of the Company’s assets. Advances from Merchant are at the sole discretion of Merchant based on their assessment of the Company’s receivables, inventory and financial condition at the time of each request for an advance. The unused availability of this facility totaled approximately $348,000 and $610,000 on March 31, 2025 and 2024, respectively.
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As previously discussed, following the May 22, 2025 asset sale to Feit, we intend to continue importing and marketing our product lines other than smoke alarms and carbon monoxide alarms. Virtually all of the products we intend to continue selling are manufactured in the Peoples Republic of China. Our ability to sell those products at competitive prices depends, among other things, on the tariffs to which imports of those products will be subject, and our need for capital to purchase and import these items will depend on our ability to sell those products. We are also exploring other business opportunities to drive long-term value for our shareholders and we will not know our capital needs until we have clearly identified one or more opportunities.
Related Party Transactions
During the fiscal year ended March 31, 2025, and 2024, inventory purchases and other company expenses of approximately $1,097,000 and $1,699,000, respectively, were charged to credit card accounts of Harvey B. Grossblatt, the Company’s Chief Executive Officer and certain of his immediate family members. The Company subsequently reimbursed these charges in full. Mr. Grossblatt receives travel mileage and other credit card benefits from these charges. The maximum amount outstanding and due to Mr. Grossblatt at any point during the fiscal year ended March 31, 2025, and 2024 may include amounts submitted for personal expense reimbursement and amounts paid by Mr. Grossblatt for inventory purchases or other company expenses and amounted to approximately $285,000 and $276,000, respectively, and the amount outstanding at March 31, 2025, and 2024 is approximately $0 and $0, respectively.
Critical Accounting Policies
Management’s discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated financial statements included as part of this document. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to credit losses, inventories, income taxes, and contingencies and litigation. We base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note A to the consolidated financial statements included in this Annual Report. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include:
Assets Held for Sale: As previously discussed in Part I, Item 1, the asset sale to Feit closed on May 22, 2025. Under the terms of the Asset Purchase Agreement, the Company sold finished good inventories of $1,655,000, and all of the Company’s fully amortized intangible assets including, but not limited to, all of the Company’s patents, trademarks, copyrights, and the trade name Universal Security Instruments, Inc. and USI Electric, Inc. Accordingly, the assets held for sale on March 31, 2025 pursuant to the terms of the Asset Purchase Agreement, are shown separately in the financial statements accompanying this Annual Report and are valued at the lower of the carrying value or fair value less selling cost.
Income Taxes : The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences may result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized. The Company expects to record a gain on the sale of assets, as previously discussed, of between $2,000,000 and $2,750,000, and accordingly, may be able to use existing operating loss carry-forwards to offset the expected gain on the sale with the filing of its tax returns for the fiscal year ending March 31, 2026. The amount of the operating loss carryforwards to be utilized is anticipated to be approximately $1,765,000 for the fiscal year ended March 31, 2025. The Company has established a deferred tax asset for this portion of its existing loss carry-forwards.
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Further, after a review of projected taxable income, the remaining components of the deferred tax asset, and current global economic conditions, it was determined that it is more likely than not, that the tax benefits associated with the remaining components of deferred tax assets after the sale of a segment of the business, will not be realized. This determination was made based on the Company’s prior 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 remaining deferred tax assets. Our ability to realize the tax benefits associated with the remaining 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.
The impact to the Company’s current and deferred income tax position that may be effected by changes to the Internal Revenue Code resulting from passage of the One Big Beautiful Bill Act, subsequent to the Company’s fiscal year ended March 31, 2025, has not been evaluated.
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 cost of completing the sale 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 a provision to cover anticipated credit losses based upon historical experience.
Inventories: Inventories are valued at the lower-of-cost or net realizable value. Cost is determined on the first in, first out method. We evaluate inventories on a quarterly basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.
Off-Balance Sheet Arrangements. We have not created, and are not party to, any special-purpose or off balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements and do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.
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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 had two customers during the fiscal year ended March 31, 2025 that represented 21.7% and 14.9% of the Company’s net sales. The Company had three customers during the fiscal year ended March 31, 2024, that represented 13.7%, 13.7%, and 10.6% of the Company’s net sales. The Company had two customers during the fiscal year ended March 31, 2025 that represented 17.3% and 13.8% of the Company’s accounts receivable. The Company had no customers in the fiscal year ended March 31, 2024, that represented greater than 10% of the Company’s accounts receivable. During the period covered by this Annual Report, the Company acquired its inventory of smoke alarm and carbon monoxide alarm safety products from Eyston Company, Ltd. Products manufactured for us by Eyston amounted to approximately 96.3% and 84.3% of our purchases for the fiscal years ended March 31, 2025, and 2024, respectively. At March 31, 2025, and 2024, the Company had accounts receivable due from Eyston of $114,204 and $133,401, respectively. At March 31, 2025, and 2024, the Company had trade accounts payable due to Eyston of approximately $1,146,000 and $1,501,000, respectively. Subsequent to March 31, 2025, and in connection with the previously discussed asset sale to Feit, amounts due from, or due to Eyston were settled in full.
New Accounting Standards
See Note A, Recently issued accounting pronouncements, in the Notes to the Consolidated Financial Statements for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.
