What changed in this filing

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Item 1. Business

2022-07-14 compared with 2021-07-08 · 79 added, 151 removed, 10 unchanged (96% of the section changed)

Universal Security Instruments, Inc.

(“we”

or “the Company”) designs and markets a variety of popularly-priced safety products consisting primarily

of smoke alarms, carbon monoxide alarms and related products.

Most of our products require minimal installation and are designed for easy

installation by the consumer without professional assistance, and are sold through retail stores.

We also market products to the electrical

distribution trade through our wholly-owned subsidiary, USI Electric, Inc.

(“USI Electric”).

The electrical distribution

trade includes electrical and lighting distributors as well as manufactured housing companies.

Products sold by USI Electric usually require

professional installation.

1989 we formed Eyston Company Limited (Eyston), a limited liability company under the laws of Hong Kong, as a 50% joint venture partner

with a Hong Kong-based partner, to manufacture various products in the Peoples Republic of China (the “Hong Kong Joint Venture”).

Effective, March 31, 2020 we sold our 50% interest in Eyston, however Eyston continues to be the Company’s principal supplier

of safety alarms.

The Company imports almost all of its other products from foreign suppliers.

In light of the shutdowns,

quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in the PRC and the United States,

the Company has experienced delays in shipping and receiving of products.

As the Company’s products are sold primarily to the construction

industry and do-it-yourself centers, restrictions and limitations imposed by the COVID-19 pandemic have had an impact on the Company’s

sales We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial results, but we believe that

during the first half of calendar 2020 (our fourth quarter of fiscal 2020 and first quarter of fiscal 2021) sales were negatively impacted

by lower sales resulting from steps taken to combat the spread of COVID-19.

Sales in our second and third fiscal quarters ended September 30,

2020, and December 31, 2020 increased significantly when compared to sales for the comparable 2019 periods due to the Company’s

ability to fill orders from inventory for a large national retailer new customer, when the national retailer’s usual supplier was

unable to fill the orders due to delays caused by the pandemic.

Our sales growth was also due to sales of two products to another large

national retailer which purchased certain of our models as a 1,350 store test, which were completed in the fourth quarter of the fiscal

year ending March 31, 2021.

Our sales for the year ended

March 31, 2021 were $17,520,151 compared to $14,803,024 for the year ended March 31, 2020.

We reported net earnings of $268,343 in fiscal

2021 compared to a net loss of $5,813,891 in fiscal 2020, an increase in net earnings of $6,082,234 (104.6%).

The net earnings for the

fiscal year ended March 31, 2021 are attributed to increased sales and gross margins, and to the forgiveness of debt associated with the

Paycheck Protection Program loan under the Cares Act.

The net loss for the fiscal year ended March 31, 2020 is primarily due to the loss

arising from the sale of the Company’s interest in the Hong Kong Joint Venture, the Company’s interest in the loss from investment

in the Hong Kong joint venture’s operations, and operating losses from the Company’s domestic operations.

The Company was incorporated

in Maryland in 1969.

Our principal executive office is located at 11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, and

our telephone number is 410-363-3000.

(“we” or “the Company”) designs and markets a variety of popularly priced safety products consisting primarily of smoke alarms, carbon monoxide alarms and related products.

Most of our products require minimal installation and are designed for easy installation by the consumer without professional assistance and are sold through retail stores.

We also market products to the electrical distribution trade through our wholly owned subsidiary, USI Electric, Inc.

(“USI Electric”).

The electrical distribution trade includes electrical and lighting distributors as well as manufactured housing companies.

Products sold by USI Electric usually require professional installation.

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

We are not yet able to quantify the full impact of the COVID-19 pandemic on our sales and financial results.

While sales increased when compared to sales for the comparable 2021 period, delivery schedules have been delayed and freight costs have increased significantly.

Our sales growth has been due primarily to increased sales to electrical distributors reflecting increased housing demand and increased retail sales to large national retailers.

Our sales for the year ended March 31, 2022, were $19,549,785 compared to $17,520,151 for the year ended March 31, 2021.

We reported a net loss of $78,150 in fiscal 2022 compared to net income of $268,343 in fiscal 2021, a decrease in net earnings of $346,493 (129.1%).

The net loss for the fiscal year ended March 31, 2022, is attributed to decreased gross margins arising from increases in freight, customs, and duty expenditures.

In addition, the Company has incurred increased legal and consulting fees associated with the proposed merger (described below).

The net earnings for the fiscal year ended March 31, 2021, are primarily attributed to increased sales and gross margins compared to the fiscal year ended March 31, 2020, and to the forgiveness of debt associated with the Paycheck Protection Program loan under the CARES Act.

The Company was incorporated in Maryland in 1969.

Our principal executive office is located at 11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, and our telephone number is 410-363-3000.

Information about us may be obtained from our website www.universalsecurity.com.

our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are available free of

charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s EDGAR

reporting system.

Simply select the “Investor Relations”

menu item, and then click on the “SEC Filings”

The SEC’s EDGAR reporting system can also be accessed directly at www.sec.gov .

Copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are available free of charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s EDGAR reporting system.

Simply select the “Investor Relations” menu item, and then click on the “SEC Filings” link.

The SEC’s EDGAR reporting system can also be accessed directly at www.sec.gov .

Proposed Merger

As previously reported, on February 25, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company (USI), a wholly owned subsidiary of the Company D-U Merger Sub, Inc.

a Delaware corporation (“Merger Sub”) and Infinite Reality, Inc., a Delaware corporation (“Infinite Reality”).

The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Infinite Reality, with Infinite Reality continuing as the surviving corporation and wholly owned subsidiary of the Company (the “Merger”).

The Merger will become effective at the time when the Certificate of Merger has been duly filed or such later date specified in the filed certificate (the “Effective Time”).

As a result, immediately following the Effective Time, the former Infinite Reality stockholders will hold approximately 97.6% of the outstanding shares of USI Common Stock and the stockholders of USI will retain ownership of approximately 2.4% of the outstanding shares of USI Common Stock.

The directors and officers of Infinite Reality prior to the Effective Time will remain the directors and officers after the Effective Time, until their resignation or removal.

At the Effective Time, the Company will take the actions required to replace the officers and directors of the Company with designees by Infinite Reality.

At the Effective Time, the parties intend for the Company to convert from a Maryland corporation to a Delaware corporation.

Pursuant to the Merger Agreement, Infinite Reality shareholders acquire the right to convert their Infinite Reality common stock held immediately prior to the Merger into the Company common stock.

Holders of the Company’s common stock prior to the Effective Time (“Legacy Shareholders”) may also receive a dividend of the Company common stock if the market capitalization of the Company is less than $500 million within180 days after the Effective Time.

Under the terms of the Merger Agreement, the Company current operating business will continue, and the Company has agreed to use its best efforts to sell or spin off its business operations prior to the Effective Time.

In the event the Company’s current business operations are not sold or otherwise divested by the Effective Time, a Contingent Value Rights Agreement will issue to each

Legacy Shareholder.

The Merger Agreement includes customary rights of each party to terminate the Merger Agreement, including:

in the event shareholder approval is not obtained;

if the Company’s shares are not approved for continued listing by the NYSE MKT LLC following the Effective Time;

and if a party receives a superior offer and complies with the terms of the Merger Agreement regarding accepting such offer.

On May 16, 2022, the Company filed with the United States Securities Exchange Commission (SEC) a proxy statement and Form S-4 registration statement in connection with the Merger.

If USI or Infinite Reality accepts a superior offer and terminates the Merger Agreement, the terminating party will pay a breakup fee to the non-terminating party covering its out-of-pocket expenses, subject to a cap of $100,000, plus 4% of the market capitalization of USI as of the Effective Date.

Safety Products

We market a line of residential

smoke and carbon monoxide alarms under the trade names “UNIVERSAL”

and “USI Electric”

both of which are manufactured

Our line of safety alarms

consists of units powered by replaceable batteries, ten year sealed batteries, or are 120 volt with battery backup.

Our replaceable battery

products contain different types of batteries with different battery lives, and some include alarm silencers.

The smoke alarms marketed

to the electrical distribution trade also include hearing impaired and heat alarms with a variety of features.

We also market door chimes,

ventilation products, ground fault circuit interrupters (GFCI’s), and other electrical devices.

Our wholly-owned subsidiary, USI Electric, Inc.,

focuses its sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon monoxide alarms manufactured

by Eyston, to the electrical distribution trade.

We market a line of residential smoke and carbon monoxide alarms under the trade names “UNIVERSAL” and “USI Electric” both of which are manufactured by Eyston Company Limited (Eyston) in the Peoples Republic of China (PRC), a principal supplier of the Company’s products.

Our line of safety alarms consists of units powered by replaceable batteries, ten-year sealed batteries, or are 120 volt with battery backup.

Our replaceable battery products contain different types of batteries with different battery lives, and some include alarm silencers.

The smoke alarms marketed to the electrical distribution trade also include hearing impaired and heat alarms with a variety of features.

We also market door chimes, ventilation products, ground fault circuit interrupters (GFCI’s), and other electrical devices.

Our wholly-owned subsidiary, USI Electric, Inc., focuses its sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon monoxide alarms manufactured by Eyston, to the electrical distribution trade.

Import Matters

We import all of our products.

As an importer, we are subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic

and political conditions in the country of manufacture, potential trade restrictions, and currency fluctuations.

Substantially all of

our safety products are imported from the People’s Republic of China.

These products are currently subject to tariffs ranging from

ten to twenty-five percent.

We have attempted to protect

ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments in U.S.

Our inventory

purchases are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated

with purchasing products abroad.

As previously discussed, in

light of the shutdowns, quarantines and other restrictions and delays in operations and travel caused by or related to COVID-19 in Hong

Kong, the PRC and the United States, the Company has experienced delays in shipping and receiving of products.

We import all our products.

As an importer, we are subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic and political conditions in the country of manufacture, potential trade restrictions, and currency fluctuations.

Substantially all our safety products are imported from the People’s Republic of China.

Certain of these products are currently subject to tariffs of twenty-five percent.

We have attempted to protect ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments in U.S.

Our inventory purchases are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated with purchasing products abroad.

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

Sales and Marketing;

We sell our products to various

customers, and our total sales market can be divided generally into two categories;

sales by the Company to retailers, including wholesale

distributors, chain, discount, television retailers and home center stores, catalog and mail order companies and other distributors (“retailers”),

and sales by our USI Electric subsidiary to the electrical distribution trade (primarily electrical and lighting distributors and manufactured

housing companies) and foreign customers.

Products marketed by the Company have historically been retailed to “do-it-yourself”

consumers by these retailers.

Products marketed by our USI Electric subsidiary to the electrical distribution trade typically require

professional installation.

We sell our products to various customers, and our total sales market can be divided generally into two categories;

sales by the Company to retailers, including wholesale distributors, chain, discount, television retailers and home center stores, catalog and mail order companies and other distributors (“retailers”), and sales by our USI Electric subsidiary to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies) and foreign customers.

Products marketed by the Company have historically been retailed to “do-it-yourself” consumers by these retailers.

Products marketed by our USI Electric subsidiary to the electrical distribution trade typically require professional installation.

We do not currently market a significant portion of our products directly to end users.

A significant portion of our

sales are made by approximately 40 independent sales organizations, compensated by commission, which represents approximately 100 sales

representatives, some of which have warehouses where USI Electric products are maintained for sale.

In addition, the Company has established

a national distribution system with eight regional stocking warehouses throughout the United States which generally enables customers

to receive their orders the next day without paying for overnight freight charges.

Our agreements with these sales organizations are generally

cancelable by either party upon 30 days’

We do not believe that the loss of any one of these organizations would have a

material adverse effect upon our business.

Sales are also made directly by the officers and full-time employees of the Company and our

USI Electric subsidiary, seven of whom have other responsibilities for the Company.

Sales outside the United States are made by our officers

and through exporters, and amounted to less than five percent of total net sales in fiscal years 2021 and 2020.

We also market our products

through our website and through our own sales catalogs and brochures, which are mailed directly to trade customers.

Our customers, in

turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media.

We also exhibit and

sell our products at various trade shows, including the annual National Hardware Show.

Our backlog of orders as of

March 31, 2021 was approximately $3,905,000.

A significant portion of our sales are made by approximately 40 independent sales organizations, compensated by commission, which represents approximately 100 sales representatives, some of which have warehouses where USI Electric products are maintained for sale.

In addition, the Company has established a national distribution system with eight regional stocking warehouses throughout the United States which generally enables customers to receive their orders the next day without paying for overnight freight charges.

Our agreements with these sales organizations are generally cancelable by either party upon 30 days’ notice.

We do not believe that the loss of any one of these organizations would have a material adverse effect upon our business.

Sales are also made directly by the officers and full-time employees of the Company and our USI Electric subsidiary, some of whom have other responsibilities for the Company.

Sales outside the United States are made by our officers and through exporters, and amounted to less than five percent of total net sales in fiscal years 2022 and 2021.

We also market our products through our website and through our own sales catalogs and brochures, which are mailed directly to trade customers.

Our customers, in turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media.

We also exhibit and sell our products at various trade shows, including the annual National Hardware Show.

Our backlog of orders as of March 31, 2022, was approximately $6,028,000.

Our backlog as of March 31, 2021, was approximately $3,905,000.

The increase in backlog

is primarily due to delays in unloading of freight at California ports of entry caused by or related to COVID-19 issues.

Hong Kong Joint Venture

Through March 31, 2020 we held a fifty percent

interest in Eyston Company Limited, the Hong Kong Joint Venture, which has manufacturing facilities in the People’s Republic of

China, for the manufacturing of certain of our electronic and electrical products.

Effective, March 31, 2020 we sold our fifty percent

interest in the Hong Kong Joint Venture in exchange for $4,000,000.

The proceeds from the sale were used to reduce our trade accounts

payable due to the Hong Kong Joint Venture by $4,000,000.

In addition, the Company and the HKJV agreed to convert $1,081,440 of trade

accounts payable to an interest only note payable requiring monthly interest only payments.

In April, 2020 the Company and the HKJV formalized

these terms into a note payable agreement with a maturity date of April 19, 2022.

Subsequent to March 31, 2020 Eyston will continue to

be the Company’s principal supplier of safety alarms and the Company will pay for these purchases upon evidence of shipment from

During the fiscal years ended March 31, 2021 and 2020, 77.6% and 82.7% of our total inventory purchases were made from Eyston,

respectively.

Other Suppliers

Certain private label products

are manufactured for us by foreign suppliers.

We believe that our relationships with our suppliers are good.

The loss of any of our suppliers

would have a short-term adverse effect on our operations, but replacement sources for these other suppliers could be developed.

In fiscal years 2021 and 2020,

sales of safety products accounted for substantially all of our total sales.

In the sale of smoke alarms and carbon monoxide alarms, we

compete in all of our markets with First Alert and Walter Kidde Portable Equipment, Inc.

These companies have greater financial resources

and financial strength than we have.

However, we believe that our safety products compete favorably in the market primarily on the basis

of styling, features and pricing.

The safety industry in general involves changing

The success of our products may depend on our ability to improve and update our products in a timely manner and to adapt to

new technological advances.

As of March 31, 2021,

we had thirteen employees, nine of whom are engaged in administration and sales, and the balance of whom are engaged in product development.

The increase in backlog is primarily due to delays in unloading of freight at California ports of entry caused by or related to COVID-19 issues.

The majority of our products are manufactured for us by Eyston and amounted to approximately 83.6% and 77.6% of our purchases for the fiscal years ended March 31, 2022 and 2021, respectively.

Certain other private label products are also manufactured for us by foreign suppliers.

We believe that our relationships with our other suppliers are good.

The loss of any of our other suppliers would have a short-term adverse effect on our operations, but replacement sources for these suppliers could be developed.

In fiscal years 2022 and 2021, sales of safety products accounted for substantially all of our total sales.

In the sale of smoke alarms and carbon monoxide alarms, we compete in all of our markets with First Alert and Walter Kidde Portable Equipment, Inc.

These companies have greater financial resources and financial strength than we have.

However, we believe that our safety products compete favorably in the market primarily on the basis of styling, features and pricing.

The safety industry in general involves changing technology.

The success of our products may depend on our ability to improve and update our products in a timely manner and to adapt to new technological advances.

As of March 31, 2022, we had twelve employees, eight of whom are engaged in administration and sales, and the balance of whom are engaged in product development.

Our employees are not unionized, and we believe that our relations with our employees are satisfactory.

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What changed 10-K

Item 1. Business