The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES:
Background and Basis of Presentation
The consolidated financial statements include the accounts of Emerson Radio Corp. (“Emerson”, consolidated — the “Company”), and its subsidiaries. The Company designs, sources, imports and markets a variety of houseware and consumer electronic products, and licenses the Emerson trademark for a variety of products domestically and internationally.
It is the Company’s policy to prepare its financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”). The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.
Certain items in prior year financials were reclassified to conform to current year presentation.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Highly liquid investments with original maturities of three months or less at the time of purchase are considered to be cash equivalents.
Fair Values of Financial Instruments
The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term maturity of these financial instruments. The carrying amounts of bank debt approximate their fair values due to their variable rate interest features.
Investments
The Company determines the appropriate classifications of securities at the time of purchase and evaluates the continuing appropriateness of that classification thereafter. Realized gains and losses are determined on a specific identification basis and are reported separately as a component of income. Decreases and increases in the fair value of securities deemed to be other than temporary are included in earnings.
Long-Lived Assets
The Company’s long-lived assets include property, plant and equipment. At March 31, 2017, the Company had approximately $18,000 of property, plant and equipment, net of accumulated depreciation. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC Topics 350 “Intangibles” and 360 “Property, Plant and Equipment”. The recoverability of assets held and used is measured by a comparison of the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Future events could cause the Company to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets being depreciated. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and betterments are capitalized and depreciated over the remaining estimated
31
useful lives of the related assets. At time of disposal, the cost and related accumulated depreciation are removed from the Company’s records and the difference between net carrying value of the asset and the sale proceeds is recorded as a gain or loss.
Depreciation of property, plant and equipment is provided by the straight-line method as follows:
•
Computer, Equipment and Software
|
|
Three years to seven years
|
•
Furniture & Fixtures
|
|
Seven years
|
•
Leasehold Improvements
|
|
Straight-line basis over the shorter of the useful life of the improvement or the term of the lease
|
Revenue Recognition
Distribution of products
Revenues from product distribution are recognized at the time title passes to the customer. Under the Direct Import Program, title passes in the country of origin. Under the Domestic Program, title passes primarily at the time of shipment. Estimates for future expected returns are based upon historical return rates and netted against revenues.
Management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends and changes in customer demand for the Company’s products when evaluating the adequacy of the reserve for sales returns. Management judgments and estimates must be made and used in connection with establishing the sales return reserves in any accounting period. Additional reserves may be required if actual sales returns increase above the historical return rates. Conversely, the sales return reserve could be decreased if the actual return rates are less than the historical return rates, which were used to establish the reserve.
Sales allowances, marketing support programs, promotions and other volume-based incentives which are provided to retailers and distributors are accounted for on an accrual basis as a reduction to net revenues in the period in which the related sales are recognized in accordance with ASC topic 605, “Revenue Recognition”, subtopic 50 “Customer Payments and Incentives” and Securities and Exchange Commission Staff Accounting Bulletins 101 “Revenue Recognition in Financial Statements,” and 104 “Revenue Recognition, corrected copy” (“SAB’s 101 and 104”).
At the time of sale, the Company reduces recognized gross revenue by allowances to cover, in addition to estimated sales returns as required by ASC topic 605, “Revenue Recognition”, subtopic 15 “Products”, (i) sales incentives offered to customers that meet the criteria for accrual under ASC topic 605, subtopic 50 and (ii) under SAB’s 101 and 104, an estimated amount to recognize additional non-offered deductions it anticipates and can reasonably estimate will be taken by customers which it does not expect to recover. Accruals for the estimated amount of future non-offered deductions are required to be made as contra-revenue items because that percentage of shipped revenue fails to meet the collectability criteria within SAB 104’s and 101’s four revenue recognition criteria, all of which are required to be met in order to recognize revenue.
If additional marketing support programs, promotions and other volume-based incentives are required to promote the Company’s products subsequent to the initial sale, then additional reserves may be required and are accrued for when such support is offered.
Licensing
In addition to the distribution of products, the Company grants licenses for the right to use the Company’s trademarks for a stated term for the manufacture and/or sale of consumer electronics and other products under agreements which require payment of either i) a non-refundable minimum guaranteed royalty or, ii) the greater of the actual royalties due (based on a contractual calculation, normally comprised of actual product sales by the licensee multiplied by a stated royalty rate, or “Sales Royalties”) or a minimum guaranteed royalty amount. In the case of (i), such amounts are recognized as revenue on a straight-line basis over the term of the license agreement. In the case of (ii), Sales Royalties in excess of guaranteed minimums are accounted for as variable fees and are not recognized as revenue until the Company has ascertained that the licensee’s sales of products have exceeded the guaranteed minimum. In effect, the Company recognizes the greater of Sales Royalties earned to date or the straight-line amount of minimum guaranteed royalties to date. In the case where a royalty is paid to the Company in advance, the royalty payment is initially recorded as a liability and recognized as revenue as the royalties are deemed to be earned according to the principles outlined above.
32
Cost of Sales
Cost of sales includes actual product cost, quality control costs, change in inventory reserves, duty, buying costs, the cost of transportation to the Company’s third party logistics providers’ warehouse from its manufacturers, warehousing costs, and an allocation of those selling, general and administrative expenses that are directly related to these activities.
Other Operating Costs and Expenses
Other operating costs and expenses include costs associated with returned products received from retailers, warranty costs, warehouse supply expenses, and an allocation of those selling, general and administrative expenses that are directly related to these activities. Because other operating costs and expenses are not included in cost of sales, the reported gross margin may not be comparable to those of other distributors that may include all costs related to the cost of product to their cost of sales and in the calculation of gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs of the Company that are not directly related to the cost of procuring product or costs not included in other operating costs and expenses.
Foreign Currency
The assets and liabilities of foreign subsidiaries have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Related translation adjustments are reported as a separate component of shareholders’ equity. Losses and gains resulting from foreign currency transactions are included in the results of operations.
The Company generally does not enter into foreign currency exchange contracts to hedge its exposures related to foreign currency fluctuations and there were no foreign exchange forward contracts held by the Company at March 31, 2017 or March 31, 2016.
Advertising Expenses
Advertising expenses are charged against earnings as incurred and are included in selling, general and administrative expenses. The Company incurred no
advertising expenses during fiscal 2017 and $19,000 during fiscal 2016.
Sales Allowance and Marketing Support Expenses
Sales allowances, marketing support programs, promotions and other volume-based incentives which are provided to retailers and distributors are accounted for on an accrual basis as a reduction to net revenues in the period in which the related sales are recognized in accordance with ASC topic 605, “Revenue Recognition”, subtopic 50 “Customer Payments and Incentives” and Securities and Exchange Commission Staff Accounting Bulletins 101 “Revenue Recognition in Financial Statements,” and 104 “Revenue Recognition, corrected copy” (“SAB’s 101 and 104”).
At the time of sale, the Company reduces recognized gross revenue by allowances to cover, in addition to estimated sales returns as required by ASC topic 605, “Revenue Recognition”, subtopic 15 “Products”, (i) sales incentives offered to customers that meet the criteria for accrual under ASC topic 605, subtopic 50 and (ii) under SAB’s 101 and 104, an estimated amount to recognize additional non-offered deductions it anticipates and can reasonably estimate will be taken by customers which it does not expect to recover. Accruals for the estimated amount of future non-offered deductions are required to be made as contra-revenue items because that percentage of shipped revenue fails to meet the collectability criteria within SAB 104’s and 101’s four revenue recognition criteria, all of which are required to be met in order to recognize revenue.
If additional marketing support programs, promotions and other volume-based incentives are required to promote the Company’s products subsequent to the initial sale, then additional reserves may be required and are accrued for when such support is offered.
33
The sales and marketing support accrual activity for fiscal 2017 and fiscal 2016 was as follows (in thousands):
Balance at March 31, 2015
|
|
$
|
575
|
|
additions
|
|
|
828
|
|
usages
|
|
|
(839
|
)
|
adjustments
|
|
|
(91
|
)
|
Balance at March 31, 2016
|
|
$
|
473
|
|
additions
|
|
|
492
|
|
usages
|
|
|
(395
|
)
|
adjustments
|
|
|
(276
|
)
|
Balance at March 31, 2017
|
|
$
|
294
|
|
Interest income, net
The Company records interest as incurred. The net interest income for fiscal 2017 and 2016 consists of:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest income
|
|
|
261
|
|
|
|
178
|
|
Interest income, net
|
|
$
|
261
|
|
|
$
|
178
|
|
Income Taxes
Deferred income taxes are recorded to account for the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets have been recorded net of an appropriate valuation allowance, to the extent management believes it is more likely than not that such assets will be realized. (See Note 5 “Income Taxes”). Any tax penalties are recorded as part of selling, general and administrative expenses and any interest to which the Company is subject, is recorded as a part of income tax expense.
Comprehensive Income
Comprehensive income is net income adjusted for foreign currency translation adjustments.
Earnings Per Common Share
Earnings per common share are based upon the weighted average number of common and common equivalent shares outstanding. Outstanding stock options and warrants are treated as common stock equivalents when dilution results from their assumed exercise.
Recent Accounting Pronouncements
Accounting Standards Update 2017-01, Business Combinations, (Topic 805) Clarifying the Definition of a Business (Issued January 2017)
Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element
34
of a business; t
herefore, the Board has developed more stringent criteria for sets without outputs. Lastly, the amendments in this Update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. Public business e
ntities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods.
The Company does not expect these amendments to have a material effect on its financial statements.
Accounting Standards Update 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash (Issued November 2016)
The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
Accounting Standards Update 2016-17 Consolidation (Topic 810), Interests Held through Related Parties That Are under Common Control (Issued October 2016)
This Update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
Accounting Standards Update 2016-16 Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (Issued October 2016)
This Update amends current GAAP, which prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, to require entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those annual reporting periods. The Company does not expect these amendments to have a material effect on its financial statements.
Accounting Standards Update 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (Issued August 2016)
The amendments in this Update provide guidance on the following eight specific cash flow issues: (1) Debt prepayment or debt extinguishment costs, (2) Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) Contingent consideration payments made after a business combination, (4) Proceeds from the settlement of insurance claims, (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) Distributions received from equity method investees, (7) Beneficial interests in securitization transactions, and (8) Separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
Accounting Standards Update 2016-13 Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (Issued June 2016)
The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (PCD assets) that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for
35
credit losses are recorded as a credit loss expense for these assets. Interest income for PCD assets should be recognized based on the effective interest rate, e
xcluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim period
s within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
Accounting Standards Update 2016-10 Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing (Issued April 2016)
The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 1. Identify the contract(s) with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect these amendments to have a material effect on its financial statements, as it is primarily a seller of tangible personal property whose contracts with customers and the related transaction prices and performance obligations will be minimally affected by the amendments.
NOTE 2 — INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. As of March 31, 2017 and March 31, 2016, inventories consisted exclusively of purchased finished goods.
NOTE 3 — RELATED PARTY TRANSACTIONS:
From time to time, Emerson engages in business transactions with its controlling shareholder, The Grande Holdings Limited (“Grande”), and one or more of Grande’s direct and indirect subsidiaries. Set forth below is a summary of such transactions.
Controlling Shareholder
The Grande Holdings Limited (“Grande”), together with S&T International Distribution Limited (“S&T”), a subsidiary of Grande, and Grande N.A.K.S. Ltd., a subsidiary of Grande (together with Grande, the “Reporting Persons”), have, based on a Schedule 13D/A filed with the Securities and Exchange Commission (“SEC”) on September 15, 2016, the shared power to vote and direct the disposition of 15,243,283 shares, or approximately 56.3%, of the Company’s outstanding common stock as of March 31, 2017. Accordingly, the Company is a “controlled company” as defined in Section 801(a) of the NYSE MKT Company Guide.
On May 31, 2011, upon application of a major creditor, Grande was placed into provisional liquidation when the High Court of Hong Kong appointed joint and several provisional liquidators (“Provisional Liquidators”) over Grande. Accordingly, as of May 31, 2011, the directors of Grande no longer had the ability to exercise control over Grande or the power to direct the voting and disposition of the shares of the Company’s common stock beneficially owned by Grande. In May 2014, Grande, the Provisional Liquidators and a creditor of Grande entered into an agreement to implement the “Grande Restructuring Plan” submitted by a creditor of Grande.
Based on public announcements by Grande dated May 26, 2016 (the “Grande Announcements”), and subsequently confirmed to the Company by Grande, Grande has completed the Grande Restructuring Plan, the Provisional Liquidators over Grande were released and discharged by the Hong Kong Court, the winding up of Grande was permanently stayed, and Grande has fulfilled all trading resumption conditions imposed on Grande by the Stock Exchange of Hong Kong Limited (“HKEX”).
Following the completion of the Grande Restructuring Plan, based on the Grande Announcements and other information received from an affiliate of Grande, certain companies associated with Mr. Ho, the Company’s Chairman of the Board effective as of June 19, 2016, hold in the aggregate approximately a 72.3% shareholding in Grande, and therefore beneficially control the voting and disposition of the shares of the Company beneficially owned by Grande. As at June 15, 2017 the shareholding has increased to 73.5%.
Related Party Transactions
Return of Pledged Collateral to S&T
36
In April 2016, the Company, upon a request made by
S&T, considered and agreed to return to S&T the $500,000 of collateral which S&T had paid to the Company in September 2014 as part of the indemnification agreement between S&T, Grande and the Company pertaining to an Internal Revenue Service challenge of t
he Company’s March 31, 2010 earnings and profits calculations underlying the taxability of a dividend paid during March 2010 to all of it stockholders, net of the $79,000 in expenses incurred by the Company in defending the IRS challenge. On April 29, 2016
, the Company paid $421,000 to S&T to effectuate the release of the collateral net of the aforementioned expenses incurred by the Company. From September 30, 2014 through March 31, 2016, this pledged collateral had been recorded by the Company as restricte
d cash on its balance sheet.
Consulting Services Provided to Emerson by one of its Former Directors who is a Current Director of Grande
Until such agreement was cancelled by the Company effective November 7, 2013, Mr. Eduard Will, a former director of Emerson and a current director of Grande, was paid consulting fees by the Company for work performed by Mr. Will related to a lawsuit that the Company settled in December 2013, and merger and acquisition research. Mr. Will was not re-elected to serve as a director of the Company at the Company’s 2013 Annual Meeting of Stockholders held on November 7, 2013. Accordingly, Mr. Will was no longer a director of the Company or a related party to the Company from November 7, 2013 until his appointment as a director of Grande on February 19, 2016, at which time Mr. Will is once again a related party to the Company.
During March 2016, Emerson accrued $12,000 in consulting fees and expense reimbursements for consulting work invoiced to the Company and expenses incurred by Mr. Will as a director of the Company during the period September 2013 through November 2013, and which the Company paid to Mr. Will in April 2016.
Ancillary Expenses Pertaining to Rented Office Space in Hong Kong
During the twelve months ended March 31, 2017 the Company was billed approximately $14,000, and nil for the twelve months ended March 31, 2016, for utility and service charges from the Grande Properties Management Limited (“GPML”) and Lafe Strategic Services Limited (“LSSL”), both related parties to the Company’s Chairman of the Board, in connection with the Company’s rented office space in Hong Kong. The Company owed nil to both GPML and LSSL related to these charges at March 31, 2017 and March 31, 2016.
NOTE 4 — PROPERTY, PLANT, AND EQUIPMENT:
As of March 31, 2017 and 2016, property, plant and equipment is comprised of the following:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Computer equipment and software
|
|
|
323
|
|
|
|
338
|
|
Furniture and fixtures
|
|
|
193
|
|
|
|
194
|
|
Leasehold improvements
|
|
|
8
|
|
|
|
8
|
|
|
|
|
524
|
|
|
|
540
|
|
Less accumulated depreciation and amortization
|
|
|
(506
|
)
|
|
|
(511
|
)
|
|
|
$
|
18
|
|
|
$
|
29
|
|
Depreciation of property, plant, and equipment amounted to approximately $16,000 and $47,000 for the twelve months ended March 31, 2017 and 2016, respectively. During fiscal 2017, the Company disposed of property, plant and equipment with gross book values totaling approximately $19,000. The Company recognized a total net loss of approximately $1,000 on these disposals in fiscal 2017. During fiscal 2016, the Company disposed of property, plant and equipment with gross book values totaling approximately $6,000. The Company recognized a total net loss of approximately $1,000 on these disposals in fiscal 2016.
37
NOTE 5 — INCOME TAXES:
The Company’s provision for income tax expense (benefit) for fiscal 2017 and fiscal 2016 was as follows:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(596
|
)
|
|
$
|
(685
|
)
|
Foreign, state and other
|
|
|
5
|
|
|
|
8
|
|
Prior year federal and state, with interest
|
|
|
154
|
|
|
|
48
|
|
Uncertain tax positions, federal and state
|
|
|
—
|
|
|
|
(249
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
540
|
|
|
|
602
|
|
Foreign, state and other
|
|
|
69
|
|
|
|
17
|
|
Provision for income tax expense (benefit)
|
|
$
|
172
|
|
|
$
|
(259
|
)
|
The Company files a consolidated federal return and certain state and local income tax returns.
The difference between the effective rate reflected in the provision for income taxes and the amounts determined by applying the statutory federal rate of 34% to earnings before income taxes for fiscal March 2017 and fiscal 2016 is analyzed below:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Statutory provision
|
|
$
|
(40
|
)
|
|
$
|
(432
|
)
|
Foreign subsidiary
|
|
|
(71
|
)
|
|
|
76
|
|
State taxes
|
|
|
(51
|
)
|
|
|
48
|
|
Permanent differences
|
|
|
112
|
|
|
|
3
|
|
True up to prior year taxes
|
|
|
(63
|
)
|
|
|
299
|
|
Valuation allowance
|
|
|
288
|
|
|
|
—
|
|
(Decrease)/increase in Uncertain Tax Positions
|
|
|
—
|
|
|
|
(249
|
)
|
NOL Adjustments
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Provision for income tax (benefit) expense
|
|
$
|
172
|
|
|
$
|
(259
|
)
|
As of March 31, 2017 and March 31, 2016, the significant components of the Company’s deferred tax assets which were classified as non-current, were as follows:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable reserves
|
|
$
|
123
|
|
|
$
|
548
|
|
Inventory reserves
|
|
|
201
|
|
|
|
284
|
|
Accruals
|
|
|
17
|
|
|
|
42
|
|
Property, plant and equipment and intangible assets
|
|
|
438
|
|
|
|
504
|
|
Net operating loss and credit carry forwards
|
|
|
300
|
|
|
|
23
|
|
Valuation allowance
|
|
|
(288
|
)
|
|
|
—
|
|
Total deferred tax assets
|
|
$
|
791
|
|
|
$
|
1,401
|
|
The Company has
U.S. federal net operating loss carry forwards (“NOLs”) of $0.3 million as of March 31, 2017.
The Company has $3.0 million of state NOLs as of March 31, 2017 as follows (in millions $):
Loss Year (Fiscal)
|
|
Included in DTA
|
|
Expiration Year (Fiscal)
|
|
2014
|
|
$2.4 million
|
|
|
2034
|
|
2016
|
|
$0.5 million
|
|
2036
|
|
38
The tax benefits related to these state net operating loss carry forwards and future deductible temporary differences are recorded to the extent management believes it is more likely than not that such benefits will be realized.
The
loss of foreign subsidiaries before taxes was $220,000 for the fiscal year ended March 31, 2017 as compared to a loss before taxes of $212,000 for the fiscal year ended March 31, 2016, respectively.
No provision was made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries. Such earnings have been and will be reinvested but could become subject to additional tax if they were remitted as dividends, or were loaned to the Company or a domestic affiliate, or if the Company should sell its stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on undistributed foreign earnings.
The Company analyzed the future reasonability of recognizing its deferred tax assets at March 31, 2017. As a result, the Company concluded that a valuation allowance of approximately $288,000 would be recorded against the assets.
The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of March 31, 2017, the Company’s open tax years for examination for U.S. federal tax are 2013-2016, and for U.S. states’ tax are 2011-2015. Based on the outcome of tax examinations or due to the expiration of statutes of limitations, it is reasonably possible that the unrecognized tax benefits related to uncertain tax positions taken in previously filed returns may be different from the liabilities that have been recorded for these unrecognized tax benefits. As a result, the Company may be subject to additional tax expense.
NOTE 6 — COMMITMENTS AND CONTINGENCIES:
Leases:
The Company leases warehouse and office space from non-affiliated companies, with annual commitments as follows (in thousands). Also included are commitments to the Company’s ERP software provider:
Fiscal Years
|
|
Amount
|
|
2018
|
|
|
286
|
|
2019
|
|
|
214
|
|
2020
|
|
|
80
|
|
2021
|
|
|
5
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
585
|
|
Rent expense resulting from leases with non-affiliated companies aggregated $264,000 and $250,000, respectively, for fiscal 2017 and 2016.
Letters of Credit:
The Company utilizes the services of one of its banks to issue secured letters of credit on behalf of the Company, as needed, on a 100% cash collateralized basis. At March 31, 2017 and March 31, 2016, the Company had no letters of credit outstanding.
Capital Expenditure and Other Commitments:
As of March 31, 2017, there were no capital expenditure or other commitments other than the normal purchase orders used to secure product.
Employee Benefit Plan:
The Company currently sponsors a defined contribution 401(k) retirement plan which is subject to the provisions of the Employee Retirement Income Security Act. The Company matches a percentage of the participants’ contributions up to a specified amount. These contributions to the plan for fiscal 2017 and 2016 were $42,000 and $44,000, respectively, and were charged against earnings for the periods presented.
39
NOTE 7 — SHAREHOLDERS’ EQUITY:
Common Shares:
Authorized common shares total are 75,000,000 with a par value $0.01 per share, of which, 27,065,852 were outstanding as of March 31, 2017 and 27,129,832 as of March 31, 2016. Shares held in treasury at March 31, 2017 were 25,899,945 and at March 31, 2016 were 25,835,965.
Common Stock Repurchase Program:
In December 2016, the Company’s Board authorized a share repurchase program for up to $5,000,000. During fiscal 2017, 63,980 shares were repurchased under the program for approximately $66,000. The Company’s Board subsequently extended the repurchase program until December 31, 2017, unless completed sooner or otherwise extended.
Series A Preferred Stock:
The Company has issued and outstanding 3,677 shares of Series A Preferred Stock, (“Preferred Stock”), $.01 par value, with a face value of $3,677,000, which had no determinable market value as of March 31, 2017. Effective March 31, 2002, the previously existing conversion feature of the Preferred Stock expired. The Series A convertible preferred stock is non-voting, has no dividend preferences and has not been convertible since March 31, 2002; however, it retains a liquidation preference.
NOTE 8 — SHORT TERM INVESTMENTS:
At March 31, 2017 and March 31, 2016, the Company held short-term investments in certificates of deposit totaling $25.1 million and $20.2 million, respectively.
The Company held $3.0 million in certificates of deposit which were classified as cash equivalents as of March 31, 2017 and March 31, 2016. The $3.0 million in certificates of deposit matured on May 16, 2017 and have not been re-invested into certificates of deposit.
NOTE 9 — NET EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per share for the years ended March 31, 2017 and March 31, 2016:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) for basic and diluted earnings per share
|
|
$
|
(237
|
)
|
|
$
|
(968
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share — weighted
average shares
|
|
|
27,115
|
|
|
|
27,130
|
|
Effect of dilutive securities on denominator:
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted earnings per share — weighted
average shares and assumed conversions
|
|
|
27,115
|
|
|
|
27,130
|
|
Net (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
For the year ended March 31, 2017, there were no outstanding instruments which were potentially dilutive.
NOTE 10 — LICENSE AGREEMENTS:
The Company is currently party to one license agreement that allow the licensee to use its trademarks for the manufacture and/or the sale of consumer electronics and other products. This license agreement (i) allows the licensee to use the Company’s trademarks for a specific product category, or for sales within specific geographic areas, or for sales to a specific customer base, or
40
any combination of the above, or any other category that might be defined in the license agreement and (ii) may be subject to renewal at the initial expiration of
the agreement and is governed by the laws of the United States.
The Company’s largest license agreement was with Funai which accounted for approximately 78% and 79% of the Company’s total fiscal 2017 and fiscal 2016 licensing revenue, respectively. During fiscal 2017 and 2016 licensing revenues of $2.8 million and $3.75 million, respectively, were earned under this agreement.
As previously disclosed, on December 16, 2015, the Company received written notice from Funai stating its intention to terminate the agreement, with termination to be effective on December 31, 2016. In accordance with the agreement, in June 2016 Funai paid to the Company the full balance of the contracted non-refundable minimum annual royalty through the December 31, 2016 termination date in the amount of $2.8 million.
This licensing relationship contributed substantial product volume and market presence through Funai’s manufacture and distribution of products bearing the Emerson
®
brand name in the United States and its loss is expected to materially and adversely affect the Company’s revenue, earnings and business. The Company is analyzing the impacts of the Funai termination to its business and is identifying strategic courses of action for consideration, including seeking new licensing relationships. There can be no assurance that the Company will be able to secure a new licensee or distribution relationship to replace the licensing revenue, product volume and market presence of Emerson-branded products in the United States, which had been provided through the license agreement with Funai.
NOTE 11 — LEGAL PROCEEDINGS:
The Company is not currently a party to any legal proceedings other than litigation matters, in most cases involving ordinary and routine claims incidental to its business. Management cannot estimate with certainty the Company’s ultimate legal and financial liability with respect to such pending litigation matters. However, management believes, based on its examination of such matters, that the Company’s ultimate liability will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 12 — RISKS AND UNCERTAINTIES:
Customer and Licensee Concentration
For the twelve months ended March 31, 2017, the Company’s largest two customers and largest licensee, accounted for approximately 83% of the Company’s net revenues, with Walmart accounting for 53%, Fred Meyer accounting for 17%, and Funai accounting for 13%. For the 12 months ended March 31, 2016 the Company’s largest two customers, and largest licensee, accounted for approximately 81% of the Company’s net revenue with Target accounting for 42%, Walmart accounting for 31% and Funai accounting for
8%. A significant decline in net sales to any of our top two customers would have a material adverse effect on the Company’s business, financial condition and results of operation. The termination of the Funai license agreement will have a material adverse effect on the Company’s business, financial condition and results of operation.
Product Concentration
For the twelve months ended March 31, 2017, the Company’s gross product sales were comprised of four product types within two categories — housewares products and audio products, and two of these product types, namely microwave ovens and compact refrigerators — both within the housewares category — generated approximately 82% of the Company’s gross product sales, with microwave ovens generating approximately 71% of the total and compact refrigerators generating approximately 11% of the total. For the twelve months ended March 31, 2016, the Company’s gross product sales were comprised of the same four product types within the same two categories — housewares products and audio products, and two of these product types, namely microwave ovens and compact refrigerators — both within the housewares category — generated approximately 93% of the Company’s gross product sales, with microwave ovens generating approximately 56% of the total and compact refrigerators generating approximately 37% of the total. As a result of this dependence, a significant decline in pricing of, or market acceptance of these product types and categories, either in general or specifically as marketed by the Company, would have a material adverse effect on the Company’s business, financial condition and results of operations. Because the market for these product types and categories is characterized by periodic new product introductions, the Company’s future financial performance will depend, in part, on the successful and timely development and customer acceptance of new and enhanced versions of these product types and other products distributed by the Company. There can be no assurance that the Company will continue to be successful in marketing these products types within these categories or any other new or enhanced products.
41
Concentrations of Credit Risk
As a percent of the Company’s total trade accounts receivable, net of specific reserves, Walmart and Fred Meyer accounted for 91% and nil as of March 31, 2017, respectively. As a percent of the Company’s total trade accounts receivable, net of specific reserves, Target and Walmart accounted for nil and 88% as of March 31, 2016, respectively. The Company periodically performs credit evaluations of its customers but generally does not require collateral, and the Company provides for any anticipated credit losses in the financial statements based upon management’s estimates and ongoing reviews of recorded allowances. The accounts receivable allowance for doubtful accounts on the Company’s total trade accounts receivable balances was $4,000 at March 31, 2017 and $9,000 at March 31, 2016. Due to the high concentration of the Company’s net trade accounts receivables among just two customers, any significant failure by one of these customers to pay the Company the amounts owing against these receivables would result in a material adverse effect on the Company’s business, financial condition and results of operations.
The Company maintains its cash accounts with major U.S. and foreign financial institutions. The Company’s cash and restricted cash balances on deposit in the U.S. as of March 31, 2017 and March 31, 2016 were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per qualifying bank account in accordance with FDIC rules. The Company’s cash, cash equivalents and restricted cash balances in excess of these FDIC-insured limits were approximately $27.0 million and approximately $30.1 million at March 31, 2017 and March 31, 2016, respectively.
Supplier Concentration
The Company, during the twelve months ended March 31, 2017, procured approximately 98% of its products for resale from its three largest factory suppliers, and of these, the Company procured approximately 75% of these products from one of them. The Company, during the twelve months ended March 31, 2016, procured approximately 98% of its products for resale from its three largest factory suppliers, and of these, the Company procured approximately 53% of these products from one of them. No assurance can be given that ample supply of product would be available at current prices and on current credit terms if the Company were required to seek alternative sources of supply without adequate notice by a supplier or a reasonable opportunity to seek alternate production facilities and component parts and any resulting significant shortage of product supply would have a material adverse effect on the Company’s business, financial condition and results of operation.
NOTE 13 — GEOGRAPHIC INFORMATION:
Net revenues and long-lived assets of the Company for the fiscal years ended March 31, 2017 and March 31, 2016 are summarized below by geographic area (in thousands). Net revenues are attributed to geographic area based on location of customer.
|
|
Year Ended March 31, 2017
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
21,251
|
|
|
$
|
—
|
|
|
$
|
21,251
|
|
Long-lived assets
|
|
$
|
26
|
|
|
$
|
93
|
|
|
$
|
119
|
|
|
|
Year Ended March 31, 2016
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
45,751
|
|
|
$
|
—
|
|
|
$
|
45,751
|
|
Long-lived assets
|
|
$
|
32
|
|
|
$
|
98
|
|
|
$
|
130
|
|
42