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 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Emerson Radio Corp. and its subsidiaries (“Emerson” or the “Company”). The Company designs, sources, imports and markets certain houseware and consumer electronic products, and licenses the Company’s trademarks for a variety of products.
The unaudited interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2020 and the results of operations for the three month periods ended June 30, 2020 and June 30, 2019. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes; actual results could materially differ from those estimates. The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accordingly do not include all of the disclosures normally made in the Company’s annual consolidated financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended March 31, 2020 (“fiscal 2020”), included in the Company’s annual report on Form 10-K, as amended, for fiscal 2020.
The results of operations for the three month period ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the full year ending March 31, 2021 (“fiscal 2021”).
Whenever necessary, reclassifications are made to conform the prior year’s consolidated financial statements to the current year’s presentation.
Revised Financial Statements
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. The Company is no longer including an allocation of those selling, general and administrative expenses that are directly related to these activities in Cost of Sales.
The Company reclassified approximately $399,000 on its Consolidated Statements of Operations, from Cost of Sales to Selling, General and Administrative expenses for the quarter ended June 30, 2019 to conform with its current presentation for quarter ended June 30, 2020. The reclassification was made to more accurately present the relationship between the Company’s net product sales and its cost of sales. The reclassification had no impact on the Company’s previously reported operating loss or net loss for the quarter ended June 30, 2019.
Unless otherwise disclosed in the notes to these consolidated financial statements, the estimated fair value of the financial assets and liabilities approximates the carrying value.
Recently Issued Accounting Pronouncements
The following ASUs were issued by the FASB which relate to or could relate to the Company as concerns the Company’s normal ongoing operations or the industry in which the Company operates.
Accounting Standards Update 2019-12 “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” (Issued December 2019)
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. This standard is required to take effect in the Company’s first quarter (June 2021) of the Company’s fiscal year ending March 31, 2022. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses” (Issued June 2016)
7
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses” to introduce new guidance for the accounting for credit losses on instruments within its scope. ASU 2016-13 requires among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted. The Company does not expect these amendments to have a material impact on its financial statements.
Revenue recognition: Sales to customers and related cost of sales are primarily recognized at the point in time when control of goods transfers 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.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Revenue is recorded net of customer discounts, promotional allowances, volume rebates and similar charges. When the Company offers the right to return product, historical experience is utilized to establish a liability for the estimate of expected returns. Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue.
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.
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.
NOTE 2 — EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts). Weighted average shares includes the impact of shares held in treasury.
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,125
|
)
|
|
$
|
(987
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share —
weighted average shares
|
|
|
21,043
|
|
|
|
21,043
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
NOTE 3 — SHAREHOLDERS’ EQUITY
Outstanding capital stock at June 30, 2020 consisted of common stock and Series A preferred stock. The Series A preferred stock is non-voting, has no dividend preferences and has not been convertible since March 31, 2002; however, it retains a liquidation preference.
At June 30, 2020, the Company had no options, warrants or other potentially dilutive securities outstanding.
8
NOTE 4 — INVENTORY
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. As of June 30, 2020 and March 31, 2020, inventories consisted of the following (in thousands):
|
|
June 30, 2020
|
|
|
March 31, 2020
|
|
Finished goods
|
|
$
|
2,127
|
|
|
$
|
1,918
|
|
NOTE 5 — INCOME TAXES
At June 30, 2020, the Company had $8.7 million of U.S. federal net operating loss (“NOL”) carry forwards. These losses do not expire but are limited to utilization of 80% of taxable income in any one year. At June 30, 2020, the Company had approximately $16.6 million of U.S. state net operating loss carry forwards. 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 income of foreign subsidiaries before taxes was $22,000 for the quarter ended June 30, 2020 as compared to income before taxes of $165,000 for the quarter ended June 30, 2019.
The Company analyzed the future reasonability of recognizing its deferred tax assets at June 30, 2020. As a result, the Company concluded that a valuation allowance of approximately $3,200,000 would be recorded against the assets.
Although the Company generated a net operating loss, it recorded income tax expense of approximately $6,300 during the three months ended June 30, 2020, primarily resulting from state income taxes. During the three months ended June 30, 2019, the Company recorded income tax expense of $5,300.
The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of June 30, 2020, the Company’s open tax years for examination for U.S. federal tax are 2016-2019, and for U.S. states’ tax are 2015-2019. 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.
As of June 30, 2020 the Company had a federal tax liability of approximately $2.2 million related to the repatriation of the Company’s undistributed earnings of its foreign subsidiaries as required by the Tax Cuts and Jobs Act of 2017. The liability is payable over 8 years. The first five installments are each 8% of the liability, the sixth is 15%, the seventh is 20% and the final installment is 25%. As of June 30, 2020, the Company has made two of the eight installments.
NOTE 6 — RELATED PARTY TRANSACTIONS
From time to time, Emerson engages in business transactions with its controlling shareholder, Nimble Holdings Company Limited (“Nimble”), formerly known as The Grande Holdings Limited (“Grande”), and one or more of Nimble’s direct and indirect subsidiaries, or with entities related to the Company’s Chairman of the Board. Set forth below is a summary of such transactions.
Controlling Shareholder
S&T International Distribution Limited (“S&T”), which is a wholly owned subsidiary of Grande N.A.K.S. Ltd., which is a wholly owned subsidiary of Nimble, collectively have, based on a Schedule 13D/A filed with the SEC on February 15, 2019, the shared power to vote and direct the disposition of 15,243,283 shares, or approximately 72.4%, of the Company’s outstanding common stock as of June 30, 2020. Accordingly, the Company is a “controlled company” as defined in Section 801(a) of the NYSE American Company Guide.
9
Related Party Transactions
Charges of rental and utility fees on office space in Hong Kong
During the three months ended June 30, 2020, the Company was billed approximately $43,000 for rental and utility fees from Vigers Appraisal and Consulting Ltd (“VACL”), which is a company related to the Company’s Chairman of the Board. As of June 30, 2020 the Company owed nil to VACL related to these charges.
During the three months ended June 30, 2020, the Company was billed approximately $600 for purchases of personal protection equipment from Lafe Strategic Services Ltd (“LSSL”), which is a company related to the Company’s Chairman of the Board. As of June 30, 2020 the Company owed $600 to LSSL related to these charges.
NOTE 7 — SHORT TERM INVESTMENTS
At June 30, 2020 and March 31, 2020, the Company held short term investments totaling $27.2 million and $28.1 million, respectively. These investments were comprised of bank certificates of deposit, which bear an interest rate of approximately 0.40% and will mature in September 2020.
NOTE 8 — CONCENTRATION RISK
Customer Concentration
For the three months ended June 30, 2020, the Company’s three largest customers accounted for approximately 77% of the Company’s net revenues, of which Walmart accounted for 46%, Amazon accounted for 22% and Kroger accounted for 9%.
For the three months ended June 30, 2019, the Company’s three largest customers accounted for approximately 73% of the Company’s net revenues, of which Walmart accounted for 39%, Amazon accounted for 23% and Fred Meyer accounted for 11%.
A significant decline in net sales to any of the Company’s key customers would have a material adverse effect on the Company’s business, financial condition and results of operation.
Product Concentration
For the three months ended June 30, 2020, the Company’s gross product sales were comprised of two product types within two categories — housewares products and audio products, of which microwave ovens generated approximately 38% of the Company’s gross product sales. Audio products generated approximately 58% of the Company’s gross product sales.
For the three months ended June 30, 2019, the Company’s gross product sales were comprised of the same two product types within two categories — housewares products and audio products, of which microwave ovens generated approximately 49% of the Company’s gross product sales. Audio products generated approximately 49% of the Company’s gross product sales.
Concentrations of Credit Risk
As a percent of the Company’s total trade accounts receivable, net of specific reserves, the Company’s top two customers accounted for 51% and 46% as of June 30, 2020, respectively. As a percent of the Company’s total trade accounts receivable, net of specific reserves, the Company’s top two customers accounted for 45% and 45% as of March 31, 2020, 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. 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.
10
Supplier Concentration
During the three months ended June 30, 2020, the Company procured 100% of its products for resale from its two largest factory suppliers, of which 63% was supplied by its largest supplier. During the three months ended June 30, 2019, the Company procured approximately 77% of its products for resale from its two largest factory suppliers, of which 42% was supplied by its largest supplier.
NOTE 9 — LEASES
The Company leases office space in the U.S. and in Hong Kong as well as a copier in the U.S. These leases have remaining non-cancellable lease terms of three to five years. The Company has elected not to separate lease and non-lease components for all leased assets. The Company did not identify any events or conditions during the quarter ended June 30, 2020 to indicate that a reassessment or re-measurement of the Company’s existing leases was required. There were also no impairment indicators identified during the quarter ended June 30, 2020 that required an impairment test for the Company’s right-of-use assets or other long-lived assets in accordance with ASC 360-10.
As of June 30, 2020, the Company’s current operating and finance lease liabilities were $246,000 and $1,000, respectively and its non-current operating and finance lease liabilities were $171,000 and $3,000, respectively. The Company’s operating and finance lease right-of-use asset balances are presented in non-current assets. The net balance of the Company’s operating and finance lease right-of-use assets as of June 30, 2020 was $387,000 and $4,000, respectively.
The components of lease costs, which were included in operating expenses in the Company’s condensed consolidated statements of operations, were as follows:
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Lease cost
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
64
|
|
|
$
|
63
|
|
Finance lease cost
|
|
|
—
|
|
|
|
—
|
|
Amortization of right-of-use assets
|
|
|
—
|
|
|
|
—
|
|
Interest on lease liabilities
|
|
|
—
|
|
|
|
—
|
|
Variable lease costs
|
|
|
—
|
|
|
|
—
|
|
Total lease cost
|
|
|
64
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
The supplemental cash flow information related to leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
67
|
|
|
|
65
|
|
Operating cash flows from finance leases
|
|
|
—
|
|
|
|
—
|
|
Financing cash flows from finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
650
|
|
|
|
650
|
|
Finance leases
|
|
|
5
|
|
|
|
5
|
|
11
Information relating to the lease term and discount rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in months)
|
|
As of June 30, 2020
|
|
|
As of June 30, 2019
|
|
Operating leases
|
|
|
23.5
|
|
|
|
34.1
|
|
Finance leases
|
|
|
47.2
|
|
|
|
59.2
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
Finance leases
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
As of June 30, 2020 the maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
201
|
|
|
$
|
1
|
|
2022
|
|
|
162
|
|
|
|
1
|
|
2023
|
|
|
84
|
|
|
|
1
|
|
2024
|
|
|
—
|
|
|
|
1
|
|
2025
|
|
|
—
|
|
|
|
1
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
Total lease payments
|
|
$
|
447
|
|
|
$
|
5
|
|
Less: Imputed interest
|
|
|
(30
|
)
|
|
|
(1
|
)
|
Total
|
|
$
|
417
|
|
|
$
|
4
|
|
NOTE 10 — PAYCHECK PROTECTION PROGRAM
The Covid-19 outbreak in the first half of calendar 2020 has had a negative impact on the Company’s operational and financial performance. However, the extent of this negative impact cannot be reasonably estimated at this time.
In April and May of 2020, the Company applied for and received aggregate loan proceeds in the amount of approximately $204,000 under the Paycheck Protection Program ("PPP"). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the Company terminates employees or reduces salaries during the eight-week period and does not cure these terminations or reductions by June 30, 2020, as per the current guidance from the Small Business Administration.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes its use of proceeds will meet the conditions for forgiveness of the loan, management cannot provide assure that its actions will result in the forgiveness of the loan, in whole or in part.
12