MSN 10-K
Emerson Radio Corp (MSN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates of the registrant at September 30, 2021 (computed by reference to the last reported sale price of the Common Stock on the NYSE American on such date): $
Number of Common Shares outstanding at June 23, 2022:
DOCUMENTS INCORPORATED BY REFERENCE:
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Document |
Part of the Form 10-K |
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Proxy Statement for Annual Meeting of Stockholders for the fiscal year ended March 31, 2022, or an amendment to this Annual Report on Form 10-K |
Part III |
Auditor Firm Id:
TABLE OF CONTENTS
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PART I
Forward-Looking Information
This report contains forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond the Company’s control, and which may cause its actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through the use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
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the ongoing effects of the coronavirus (COVID-19) pandemic-related business disruption and economic uncertainty on both the Company’s projected customer demand and supply chain, as well as its operations and financial performance; |
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the Company’s ability to generate sufficient revenue to achieve and maintain profitability; |
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the Company’s ability to obtain new customers and retain key existing customers, including the Company’s ability to maintain purchase volumes of the Company’s products by its key customers; |
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the Company’s ability to obtain new licensees and distribution relationships and maintain relationships with its existing licensees and distributors; |
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the Company’s ability to resist price increases from its suppliers or pass through such increases to its customers; |
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changes in consumer spending for retail products, such as the Company’s products, and in consumer practices, including sales over the Internet; |
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the Company’s ability to maintain effective internal controls or compliance by its personnel with such internal controls; |
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the Company’s ability to successfully manage its operating cash flows to fund its operations; |
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the Company’s ability to anticipate market trends, enhance existing products or achieve market acceptance of new products; |
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the Company’s ability to accurately forecast consumer demand and adequately manage inventory; |
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the Company’s dependence on a limited number of suppliers for its components and raw materials; |
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the Company’s dependence on third party manufacturers to manufacture and deliver its products; |
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increases in shipping costs for the Company’s products or other service issues with the Company’s third-party shippers; |
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the Company’s dependence on a third party logistics provider for the storage and distribution of its products in the United States; |
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the ability of third party sales representatives to adequately promote, market and sell the Company’s products; |
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the Company’s ability to maintain, protect and enhance its intellectual property; |
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the effects of competition; |
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the Company’s ability to distribute its products in a timely fashion, including as a result of labor disputes and public health threats and social unrest; |
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evolving cybersecurity threats to the Company’s information technology systems or those of its customers or suppliers; |
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changes in foreign laws and regulations and changes in the political and economic conditions in the foreign countries in which the Company operates; |
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changes in accounting policies, rules and practices; |
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changes in tax rules and regulations or interpretations; |
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changes in U.S. and foreign trade regulations and tariffs, including potential increases of tariffs on goods imported into the U.S., and uncertainty regarding the same; |
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limited access to financing or increased cost of financing; |
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the effects of currency fluctuations between the U.S. dollar and Chinese renminbi relative to the dollar and increases in costs of production in China; and |
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the other factors listed under “Risk Factors” in this Annual Report on Form 10-K and other filings with the SEC. |
Furthermore, the situation surrounding the COVID-19 pandemic remains fluid and the potential for a material impact on the Company’s results of operations and financial condition increases the longer the COVID-19 pandemic affects activity levels in the United States and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on its business, results of operations or financial position. The extent of any impact will depend on future developments, including the duration of the outbreak, duration of the measures taken to control the spread, the effectiveness of actions taken to contain and treat the disease, and demand for the Company’s products.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The reader is cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this annual report or the date of the document incorporated by reference into this annual report. The Company has no obligation, and expressly disclaims any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. The Company has expressed its expectations, beliefs and projections in good faith and the Company believes they have a reasonable basis. However, the Company cannot assure the reader that its expectations, beliefs or projections will result or be achieved or accomplished.
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Item 1. |
BUSINESS |
The Company — Overview
Unless the context otherwise requires, the term “the Company” and “Emerson,” refers to Emerson Radio Corp. and its subsidiaries.
Emerson Radio Corp. was incorporated in Delaware in 1994. The Company designs, sources, imports and markets a variety of houseware and consumer electronic products, and licenses its trademarks to others on a worldwide basis for a variety of products.
General
The Company, directly and through several subsidiaries, designs, sources, imports, markets, sells and licenses to certain licensees a variety of houseware and consumer electronic products, both domestically and internationally, under the Emerson® brand name.
The Company believes its competitive advantages include a combination of:
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recognition of the Emerson® brand; |
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the Company’s distribution base and established customer relations; |
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the Company’s sourcing expertise and established vendor relations; |
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an infrastructure with personnel experienced in servicing and providing logistical support to the domestic mass merchant distribution channel, or supervising third-party logistics providers in providing same; and |
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the Company’s extensive experience in establishing license and distribution agreements on a global basis for a variety of products. |
The Company intends to continue leveraging its core competencies to offer a variety of current and new houseware and consumer electronic products to customers. In addition, the Company intends to continue entering into licenses for the use of its trade names and trademarks by third parties. See “Licensing Activities.”
The Company’s core business consists of selling, distributing, and licensing various low and moderately priced houseware and consumer electronic products in various categories. All of the Company’s marketing and sales efforts are currently concentrated in the United States.
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Products
The Company’s current product categories, which include licensed products, consist primarily of the following:
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Houseware Products |
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Audio Products |
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Other |
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Microwave Ovens |
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Clock Radios |
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Massagers |
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Compact Refrigerators |
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Bluetooth Speakers |
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Toothbrushes |
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Toaster Ovens |
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Wireless Charging |
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Security Products |
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Wine Products |
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Sales and Distribution
The Company markets its products exclusively in the United States, primarily through mass merchandisers and online marketplaces.
In fiscal 2022, Walmart accounted for approximately 45%, Amazon.com accounted for approximately 32%, and Fred Meyer accounted for approximately 13% of the Company’s net revenues. In fiscal 2021, Walmart accounted for approximately 37%, Amazon.com accounted for approximately 33%, and Fred Meyer accounted for approximately 11% of the Company’s net revenues. No other customer accounted for more than 10% of net revenues in either period. As a percent of the Company’s total trade accounts receivable, net of specific reserves, Walmart, Amazon.com and Fred Meyer accounted for approximately 69%, 17% and 11%, respectively, as of March 31, 2022. As a percent of the Company’s total trade accounts receivable, net of specific reserves, Amazon.com and Walmart accounted for approximately 69% and 28%, respectively, as of March 31, 2021. No other customer accounted for more than 10% of the Company’s total trade accounts receivable, net of specific reserves, as of March 31, 2022 or March 31, 2021. Management believes that a loss, or a significant reduction, of sales to any of its key customers would have a material adverse effect on the Company’s business and results of operations.
Approximately 50% and 87% of the Company’s net revenues for the fiscal year ended March 31, 2022 (“fiscal 2022”) and the fiscal year ended March 31, 2021 (“fiscal 2021”), respectively, were made through third-party sales representative organizations that receive sales commissions and work in conjunction with the Company’s own sales personnel. With the Company’s permission, third-party sales representative organizations may sell competitive products in addition to the Company’s products. In most instances, either party may terminate a sales representative relationship on 30 days prior notice by the Company and 90 days prior notice by the sales representative organization in accordance with customary industry practice. In fiscal 2022, the Company utilized 4 sales representative organizations, including one which represented approximately 47% of its net revenues. In fiscal 2021, the Company utilized 4 sales representative organizations, including one which represented approximately 49% and another which represented approximately 30% of its net revenues. No other sales representative organization accounted for more than 10% of the Company’s net revenues in fiscal 2022 or fiscal 2021. The remainder of the Company’s sales are to customers that are serviced by its sales personnel. The loss or reduction of product sales made through third party sales representative organizations could have a material adverse effect on the Company’s business and results of operations. Finding replacement organizations and distributors could be a time consuming process during which the Company’s revenues could be negatively impacted.
The Company primarily sells product to customers from its United States warehoused inventory, which is referred to as the “Domestic Program”. Under the Domestic Program, title for product typically passes at the time of shipment. The Company’s direct import program (“Direct Import Program”) allows its customers to import and receive product directly from an export port in the country of manufacture outside the United States. Under the Direct Import Program, title for the Company’s product passes to the customer in the country of origin when the product is shipped by the Company’s subsidiary in China. Under both programs, the Company recognizes revenues at the time title passes to the customer as this is when the Company satisfies its performance obligation under the contracts with its customers. See Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” During fiscal 2022 approximately 9% of the Company’s product sales were sold under the Direct Import Program. During fiscal 2021, less than 1% of the Company’s product sales were sold under the Direct Import Program.
The Company also sells product through third party online marketplaces to broaden its brand reach. The Company’s website serves as an additional sales channel for products, and provides search capability, detailed product information, online merchant availability, demo videos and downloadable product specification sheets. The Company expects sales through online marketplaces to continue to be a growth initiative for its business.
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The Company has an integrated system to coordinate the purchasing, sales and distribution aspects of its operations. The Company receives orders from its major customers via electronic data interface, facsimile, telephone or mail. The Company does not have long-term contracts with any of its customers, but rather receives orders on an ongoing basis. Products imported by the Company for the Domestic Program, generally from factories in Asia, are shipped by ocean and/or inland freight and then stored in the Company’s outsourced warehouse facilities for shipment to customers. The Company monitors its inventory levels and goods in transit through the use of an electronic inventory system. When a purchase order under the Domestic Program is received, it is filled from the Company’s inventory and the warehoused product is labeled and prepared for outbound shipment to the customer by common, contract or small package carrier. The ability of management to correctly anticipate and provide for inventory requirements is essential to the successful operation of the Company’s business.
Licensing Activities
The Company is currently party to one license agreement with a third party licensee that allows the licensee to manufacture and/or sell various products bearing the Company’s trademarks into defined geographic areas. Such activities have had a positive impact on operating results by generating income with minimal incremental costs and without any working capital requirements. The Company has engaged each of Leveraged Marketing Corporation of America (“LMCA”) and Global Licensing Services Pte Limited (“GLSL”) as an agent to assist in identifying and procuring licensing opportunities. The Company protects its brand through careful license and product selection and control processes.
See Item 1A — “Risk Factors — Business, Operational and Strategic Risks — “The failure to obtain new licensees and distribution relationships or to maintain relationships with its existing licensees and distributors could materially and adversely affect the Company’s revenues, earnings and business.”
Design and Manufacturing
The Company’s products are manufactured by original equipment manufacturers in accordance with the Company’s specifications. During fiscal 2022 and 2021, 100% of the Company’s product purchases consisted of finished goods from foreign manufacturers located in the People’s Republic of China.
The Company’s design team is responsible for product development and works closely with suppliers and determines the cosmetic and other features for new products. Accordingly, the exterior designs and operating features of the products reflect the Company’s judgment, or that of its customers, of current styles and consumer preferences.
The following summarizes the Company’s purchases from its major product suppliers that accounted for more than 10% of the Company’s total product purchases in fiscal 2022 and 2021:
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2022 |
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2021 |
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Itoma |
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59 |
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Midea |
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40 |
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Total |
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100 |
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99 |
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* All other suppliers were less than 10% |
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The Company considers its relationships with its suppliers to be satisfactory and believes that, barring any unusual material or part shortages or economic, fiscal or monetary conditions, the Company could develop alternative suppliers. 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 (See Item 1A — “Risk Factors — Business, Operational and Strategic Risks — The Company depends on a limited number of suppliers for its products. If its relationships with such suppliers terminate or are otherwise impaired, the Company would likely experience increased costs, disruptions in the manufacture and shipment of its products and a material loss of net sales” and Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.)
Warranties
The Company offers limited warranties for its consumer electronics, comparable to those offered to consumers by the Company’s competitors in the United States. Such warranties typically consist of a one year period for microwaves and a 90 day period for audio products, under which the Company pays for labor and parts, or offers a new or similar unit in exchange for a non-performing unit.
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Returned Products
The Company’s customers return product for a variety of reasons, including:
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retailer return policies which allow customer returns for no reason concerning the quality of the product itself; |
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damage to goods in transit and cosmetic imperfections; and |
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mechanical failures. |
Trademarks
The Company owns the following principal trademarks for certain consumer electronic products in the United States, Canada, Mexico and various other countries:
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Emerson® |
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Emerson Research® |
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H.H. Scott® |
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iDEA® |
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IDIVA® |
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Ölevia® |
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Scott® |
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SmartSet® |
The Company’s trademark registrations must be renewed at various times. The Company intends to renew all trademarks necessary for the conduct of its business. The Company considers the Emerson® trademark to be of material importance to its business and, to a lesser degree, the remaining trademarks. The Company licenses the Emerson® and certain of its other trademarks to third parties, the scope of which is on a limited product and geographic basis and for a period of time. See “Licensing Activities.”
Competition
The Company primarily competes in the low-to-medium-priced sector of the housewares and consumer electronics market. Management estimates that the Company has several dozen competitors that are manufacturers and/or distributors, many of which are much larger and have greater financial resources than the Company. The Company competes primarily on the basis of:
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brand recognition; |
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reliability; |
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quality; |
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price; |
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design; |
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consumer acceptance of the Company’s products; and |
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the quality of service and support provided to retailers and their customers. |
The Company also competes at the retail level for shelf space and promotional displays, all of which have an impact on its success in established and proposed distribution channels.
Government Regulation
Pursuant to the Tariff Act of 1930, as amended, the Trade Act of 1974 and regulations promulgated there under, the United States government charges tariff duties, excess charges, assessments and penalties on many imports. These regulations are subject to continuous change and revision by government agencies and by action of the United States Trade Representative. As all of the Company’s products are currently manufactured by suppliers in China, the enactment of new legislation or the administration of current international trade regulations or executive action affecting trade agreements, changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements or changes in sourcing patterns could adversely affect the Company’s operations. See Item 1A — “Risk Factors — Legal, Regulatory and Tax Risks — Foreign regulations and changes in trade policies and the
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political, social and economic conditions in the United States and the foreign countries in which the Company operates its business could affect the Company’s revenues and earnings materially and adversely” and Item 1A — “Risk Factors — Legal, Regulatory and Tax Risks — Tariffs or other restrictions placed on the Company’s products imported into the United States from China, or any related countermeasures taken by China, could have a material adverse effect on the Company’s business, profitability and results of operations.” A number of states have adopted statutes regulating the manner of determining the amount of payments to independent service centers performing warranty service on products such as those sold by the Company. Additional Federal legislation and regulations regarding the importation of consumer electronics products, including the products marketed by the Company, have been proposed from time to time and, if enacted into law, could adversely affect the Company’s financial condition and results of operations.
Product Liability and Insurance
Because of the nature of the products it sells, the Company is periodically subject to product liability claims resulting from personal injuries. The Company may also become involved in various lawsuits incidental to its business.
Although the Company maintains product liability insurance coverage, there can be no assurance that the Company’s coverage limits will be sufficient to cover any successful product liability claims made against it in the future. In management’s opinion, any ultimate liability arising out of currently pending product liability claims will not have a material adverse effect on the Company’s financial condition or results of operations. However, any claims substantially in excess of the Company’s insurance coverage, or any substantial claim not covered by insurance, could have a material adverse effect on the Company’s financial condition and results of operations.
Employees
As of June 14, 2022, the Company had 22 employees, comprised of 10 in the United States and 12 in China. None of the Company’s employees are represented by unions, and the Company believes its labor relations are good.
Available Information
The Company’s corporate website is located at www.emersonradio.com. The Company files reports and other information with the SEC pursuant to the information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company makes available free of charge, on or through its website, the Company’s annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on the Company’s website is not part of this Annual Report on Form 10-K or any other report filed with the SEC. Readers may also read and copy any document the Company files at the SEC’s website at www.sec.gov.
Item 1A. RISK FACTORS
The reader should carefully consider these risk factors in addition to those set forth in the Company’s financial statements or the notes thereto. Additional risks about which the Company is not yet aware or that the Company currently believes to be immaterial also may adversely affect the Company’s business operations. If any of the following occur, the Company’s business, financial condition or operating results may be adversely affected. In that case, the price of the Company’s common stock may decline.
Business, Operational and Strategic Risks
The Company’s business has been and is expected to continue to be adversely affected by the ongoing COVID-19 pandemic.
The Company continues to monitor the effects of the global COVID-19 pandemic on all aspects of its operations and regions, including the effect on its consumers, employees, trade customers, suppliers and distribution channels. The pandemic has created significant business disruption and economic uncertainty, which has affected the Company’s supply chain, distribution channels and consumer demand for its products, and has directly and indirectly affected the Company’s business and operating results. However, the full extent of its impact will depend on future developments that are uncertain and cannot be accurately predicted, including the scope of any new virus mutations and outbreaks, the breadth and duration of any future business disruptions related to the COVID-19 pandemic, consumer confidence and the success of business and economic recovery as the pandemic recedes. The ultimate impact of the COVID-19 pandemic, or any other health epidemic, is highly uncertain and subject to change not only with the spread of the disease, but also with the scope and timing of governmental, regulatory, fiscal, monetary and public health responses.
Surges in demand related to COVID-19, as well as other factors, have continued to strain the global supply chain network, which has resulted in carrier-imposed capacity restrictions, carrier delays, and longer lead times. Demand for Chinese imports has caused shipment receiving and unloading backlogs at many U.S. ports that have been unable to keep pace with unprecedented inbound
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container volume. The situation has been further exacerbated by COVID-19 illness and protocols at many port locations. For example, the Company’s supply chain has been and may in the future be adversely affected with production delays, service disruptions or limited manufacturing volumes associated with shutdowns of factories, logistics providers and shippers or reduced numbers of workers or working hours in the respective facilities, limits on component supplies and diminished capability to implement engineering and design changes in a timely manner. In addition, the Company has experienced an increase in its freight costs as a result of the pandemic. Further, if the COVID-19 pandemic continues and the Company’s operations continue to be adversely affected, the Company risks a delay, default, violation and/or non-compliance under existing agreements. Many of these effects may not be covered by the Company’s existing insurance coverages.
The spread of COVID-19, which has caused a broad impact globally, has had and may continue to have a material economic effect on the Company’s business. For example, the pandemic and related measures taken to limit the spread of disease has resulted in retail store closures, both temporary and permanent, higher unemployment and greater economic uncertainty, which have and may continue to adversely affect consumer purchasing behavior. Consumer spending generally may also be negatively affected by general macroeconomic conditions and consumer confidence, including the effects of the current recession, resulting from the COVID-19 pandemic. This may negatively affect sales of the Company’s products at retail stores and online marketplace channels and through the Company’s licensing agreements. Any significant reduction in consumer visits to, or spending at, retail stores, caused by the COVID-19 pandemic, and any decreased spending at retail stores or online caused by decreased consumer confidence and spending following the pandemic, may result in a loss of sales of the Company’s products and profits and other material adverse effects.
While the potential economic effects and the duration of the COVID-19 pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets. In addition, the current recession has, and a depression or other sustained adverse market event resulting from the spread of COVID-19 could materially and adversely affect the Company’s business and the market value of its common stock. The Company does not yet know the full extent of potential delays or impacts on its business, its industry or the global economy as a whole, and the Company cannot predict the effects that COVID-19 pandemic-related business disruptions and economic uncertainty will have on its customers, suppliers, consumers, and each of their financial conditions. However, any material effect on these parties could further adversely affect the Company’s financial condition and results of operations. Additionally, notwithstanding ongoing efforts to manage COVID-19, including increased testing, widespread vaccination of the public and treatment of those who have contracted COVID-19, it is unclear when or whether progress in any of those areas will translate into an economic recovery that will restore consumer confidence and accelerate consumer spending. The effect of the COVID-19 pandemic may also exacerbate other risks discussed below in this “Risk Factors” section, any of which could have a material adverse effect on the Company’s business and financial condition. Accordingly, given that the potential of these effects of the COVID-19 pandemic on the Company’s operations has been and will likely continue to be material, the Company will continue to monitor the situation closely.
The Company relies on a small number of key customers for the majority of its business, and the loss or significant reduction in business with any of these key customers would materially and adversely affect the Company’s revenues and earnings.
Certain customers have historically made up a significant percentage of the Company’s product sales and net revenues. For fiscal 2022, Walmart, Amazon.com and Fred Meyer accounted for approximately 45%, 32% and 13%, respectively, of the Company’s net revenues. For fiscal 2021, Walmart, Amazon.com and Fred Meyer accounted for approximately 37%, 33% and 11%, respectively, of the Company’s net revenues. The Company expects that its online marketplaces will increasingly represent a significant portion of the Company’s product sales going forward. No other customer accounted for more than 10% of the Company’s net revenues during these periods. All customer purchases are made through purchase orders and the Company does not have any long-term contracts with its customers. Accordingly, sales from customers that have accounted for a significant portion of the Company’s net product sales and net revenues in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period, which has happened in the past and could happen in the future. Some of the Company’s key customers may also experience economic difficulties or otherwise default on their obligations to the Company. The complete loss of, or significant reduction in business from, or a material adverse change in the financial condition of, any of the Company’s key customers would cause a material and adverse change in the Company’s revenues and operating results.
The Company is dependent on a limited number of products for its sales.
The Company derives a substantial portion of its product revenues from a limited number of products, and the Company expects these products to continue to account for a large percentage of its product revenues in the near term. For the twelve months ended March 31, 2022, the Company’s gross product sales were comprised principally of two product types within two categories — housewares products and audio products. Microwave ovens, which product type is within the housewares category, generated approximately 21% of the Company’s gross product sales. Audio products generated approximately 79% of the Company’s gross product sales during fiscal 2022. For the twelve months ended March 31, 2021, the Company’s gross product sales were comprised principally of the same two product types within the same two categories — housewares products and audio products. Microwave ovens, which product type is within the housewares category, generated approximately 35% of the Company’s gross product sales.
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Audio products generated approximately 63% of the Company’s gross product sales during fiscal 2021. 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 product types within these categories or any other new or enhanced products. For example, certain of the Company’s key customers perform periodic line reviews to assess their product offerings, which have in the past and may in the future lead to loss of business and pricing pressures. 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 operation.
The loss or reduction of business of one or a combination of its houseware and audio product lines could materially adversely affect the Company’s revenues, financial condition and results of operations.
If the Company’s third party sales representatives fail to adequately promote, market and sell the Company’s products, the Company’s revenues could significantly decrease.
A significant portion of the Company’s product sales are made through third party sales representative organizations, whose members are not employees of the Company. The Company’s level of sales depends on the effectiveness of these organizations, as well as the effectiveness of its own employees. Some of these third party representatives may sell (and do sell), with the Company’s permission, competitive products of third parties as well as the Company’s products. During fiscal 2022 and fiscal 2021, these organizations were responsible for approximately 50% and 87%, respectively, of the Company’s net revenues. In addition, in fiscal 2022 one of these representative organizations was responsible for approximately 47% of the Company’s net revenues and in fiscal 2021 one of these representative organizations was responsible for approximately 49% and another was responsible for approximately 30% of the Company’s net revenues. If any of the Company’s third party sales representative organizations engaged by the Company, especially the Company’s largest, fails to adequately promote, market and sell its products, the Company’s revenues could be significantly decreased until a replacement organization or distributor could be retained by the Company, which has happened in the past and could happen in the future. The loss or reduction of product sales made through third party sales representative organizations could have a material adverse effect on the Company’s business and results of operations. Finding replacement organizations and distributors could be a time consuming process during which the Company’s revenues could be negatively impacted.
The concentration of product sales among a limited number of retailers and the trend toward private label brands could materially reduce the Company’s revenues and profitability.
With the concentration of the Company’s product sales among a limited number of retailers, the Company is dependent upon a small number of customers whose bargaining strength is growing. These retailers generally purchase a limited selection of houseware and consumer electronics products. As a result, there is significant competition for retail shelf space. In addition, certain of the Company’s key customers use their own private label brands that compete directly with some of the Company’s products. As the retailers in the houseware and consumer electronics industry become more concentrated, competition for sales to these retailers may increase, which could materially reduce the Company's revenues and profitability.
The houseware and consumer electronics industry is consolidating, which could reduce the Company’s ability to successfully secure product placements at key customers and limit its ability to sustain a cost competitive position in the industry.
Over the past several years, the houseware and consumer electronics industry has undergone substantial consolidation, and further consolidation is likely. As a result of this consolidation, the houseware and consumer electronics industry primarily consists of a limited number of large retailers and distributors. The Company’s ability to gain or maintain its market share or maintain or enhance its relationships with key customers may be limited as a result of actions by competitors or the retailers’ increasing use of private label brands.
The failure to obtain new licensees and distribution relationships or to maintain relationships with its existing licensees and distributors could materially and adversely affect the Company’s revenues, earnings and business.
The Company maintains agreements that allow licensees to use the Company’s trademarks for the manufacture and sale of specific consumer electronics and other products into defined geographic areas. These agreements typically are for a limited period of time and, upon expiration, the Company cannot assure that its agreements with its licensees will be renewed in the future or that the Company’s relationships with its licensees or distributors will be maintained on satisfactory terms or at all. Although the Company has engaged each of LMCA and GLSL as an agent to assist the Company in identifying and procuring licensing opportunities, there can be no assurance that the Company will find and secure suitable licensees or distribution relationships. If the Company is unable to maintain its relationships with its licensees and distributors on terms satisfactory to the Company, or if it fails to obtain new licensees
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or distribution relationships or the Company’s licensees fail to protect the integrity and reputation of the Company’s trademarks, the value of the Emerson brand and the Company’s licensing revenues and earnings could be materially and adversely affected.
The Company depends on a limited number of suppliers for its products. If its relationships with such suppliers terminate or are otherwise impaired, the Company would likely experience increased costs, disruptions in the manufacture and shipment of its products and a material loss of net sales.
Although there are multiple potential suppliers for each of the Company’s products, the Company relies and is dependent on a limited number of suppliers for its main products, all of which are located outside of the United States.
The Company does not have any long-term or exclusive purchase commitments with any of its suppliers. Itoma was the Company’s largest supplier and accounted for approximately 83% and 59% of the Company’s purchases of products during fiscal 2022 and fiscal 2021, respectively. The Company’s failure to maintain existing relationships with its suppliers or to establish new relationships on similar pricing and credit terms in the future could negatively affect the Company’s ability to obtain products in a timely manner. If the Company is unable to obtain an ample supply of product from its existing suppliers or secure alternative sources of supply, it may be unable to satisfy its customers’ orders, which could materially and adversely affect the Company’s revenues and relationships with its customers. Finding replacement suppliers could be a time consuming process during which the Company’s revenues and liquidity could be negatively impacted.
The Company’s products use raw materials and components that may be subject to price fluctuations, shortages or interruptions of supply, and if the Company is unable to maintain supply sources for such raw materials and components, or if such sources fail to satisfy the Company’s supply requirements, the Company may experience a loss of sales, increased component costs and reduced profitability.
Factors that are largely beyond the Company’s control, such as the cost, quality and availability of the raw materials and components needed by suppliers of the Company’s products, may affect the cost of such products, and the Company may not be able to pass those costs on to its customers. The Company’s products use raw materials and components that have been and may continue to be subject to price surges, shortages or interruptions of supply, including semiconductor chips that have been subject to an ongoing significant shortage. The cost, quality and availability of these components are essential to the successful production and sale of the Company’s products. If the Company is unable to maintain supply sources of these raw materials and components, or if such sources fail to satisfy the Company’s supply requirements, the Company may lose sales and experience increased component costs. In particular, the Company utilizes semiconductor chips in its housewares products and audio products. Because semiconductor chips have been recently subject to an ongoing significant shortage, the Company’s ability to source these important components that use semiconductor chips has been adversely affected. These supply interruptions have resulted in increased component delivery lead times, delays in product production and increased costs to obtain components with available semiconductor chips. To the extent this semiconductor chip shortage continues, the production ability of the Company’s suppliers may continue to be impacted. Although the Company is seeking alternate sources of supply of these components, it may take several months to locate alternative suppliers or require the re-tooling of products to accommodate components from different suppliers. If the Company or its suppliers are unable to obtain components from third parties in the quantities and of the quality that the Company requires, on a timely basis and at acceptable prices, the Company may not be able to deliver its products on a timely or cost-effective basis to its customers, which could cause customers to terminate their contracts with the Company, reduce the Company’s gross margins and seriously harm its business, results of operations and financial condition.
If the Company is unable to deliver products in the required amounts and in a timely fashion, the Company could experience delays or reductions in shipments to its customers, which could materially and adversely affect the Company’s revenues and relationships with its customers.
The Company’s ability to provide high quality customer service, process and fulfill orders, and manage inventory depends on the efficient and uninterrupted operation and timely and uninterrupted performance of its suppliers. The Company can provide no assurances that it will not experience operational difficulties with its suppliers, including reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs, increased lead times or production shutdowns or production slowdowns due to social distancing guidelines or issues with absenteeism related to the ongoing COVID-19 pandemic, which have and could in the future result in increased costs and decreased efficiency. If the Company is unable to obtain products from these factories in the required quantities and quality and in a timely fashion, the Company could experience delays or reductions in product shipments to its customers, which could negatively affect the Company’s ability to meet the requirements of its customers, as well as its relationships with its customers, which in turn could materially and adversely affect the Company’s revenues and operating results. In addition, shipping rates and surcharges are volatile and subject to market fluctuations, and any increases in shipping costs may reduce the Company’s margins and adversely affect its profitability.
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All the Company’s suppliers are based in China and as a result the Company is subject to risks associated with international operations and global manufacturing and sourcing including, among others:
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currency fluctuations; |
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labor disputes and union actions that can disrupt the Company’s ability to ship products to customers; |
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potential political, economic and social instability; |
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public health threats, including the COVID-19 pandemic, inclement weather and natural disasters; |
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possible acts of terrorism; |
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restrictions on transfers of funds; |
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changes in import and export duties and quotas; |
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changes in domestic and international customs and tariffs; |
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uncertainties involving the costs to transport products; |
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disruptions in the global transportation network, including port backlogs and availability of shipping containers; |
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unexpected changes in regulatory environments; |
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regulatory issues involved in dealing with foreign suppliers and in exporting and importing products; |
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protection of intellectual property; |
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difficulty in complying with a variety of foreign laws; |
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difficulty in obtaining distribution and support; and |
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potentially adverse tax consequences. |
Furthermore, any material disruption, slowdown or shutdown of the operations of the Company’s principal logistics providers and shippers, including without limitation as a result of labor disputes, public health threats (such as the COVID-19 pandemic), social unrest, inclement weather, natural disasters, possible acts of terrorism, availability of shipping containers and increased security restrictions, could cause delays in the Company’s ability to receive, process and fulfill customer orders and may cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused. These and other factors described above have and could continue to cause increases in shipping and storage costs. As a result, the Company’s relationships with its customers, revenues and operating results could be materially and adversely affected.
The Company relies on a third-party logistics provider for the storage and distribution of its products in the United States and, if such third party logistics provider incurs any damage to the facilities where the Company’s products are stored or is unable to distribute its products as needed, it could have a material adverse effect on the Company’s results of operations and business.
The Company relies on a third-party logistics provider for the storage and distribution of its products. The facilities where the Company’s products are stored by such provider may also be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, communications failure or terrorism. Any material damage to the facilities where the Company’s products are stored could adversely affect its inventory and the ability of such third-party logistics provider to meet the needs of its customers. In addition, an inability to maintain the Company’s contracts with such third-party logistics provider or a delay, disruption or quality control problems in the operations of such third-party logistics provider, including as a result of damage to the facilities of such provider or a strike by such provider’s workers, could cause delays in the Company’s ability to fulfill customer orders and may cause orders to be canceled, lost or delivered late, the Company’s products to be returned or receipt of products to be refused, any of which could adversely affect the Company’s business and results of operations. The Company’s contract with its third-party logistics provider is terminable upon written notice by either party for convenience without cause. If the Company is unable to maintain its contract with its third-party logistics provider, the Company would be required to retain a new third party logistics provider and the Company may be unable to retain such third party at a cost that is acceptable to the Company. If the Company’s shipping costs were to increase as a result of an increase in the fees charged by such third-party logistics provider or as a result of obtaining a new third-party logistics provider and if the Company is unable to pass on these higher costs to its customers, it could have a material adverse effect on the Company’s results of operations and business.
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The Company’s revenues and earnings could be materially and adversely affected if it cannot anticipate market trends, enhance existing products or achieve market acceptance of new products.
The Company’s success is dependent on its ability to anticipate and respond to changing consumer demands and trends in a timely manner, as well as expanding into new markets and sourcing new products that are profitable to the Company. In addition, to increase the Company’s penetration of current markets and gain footholds in new markets for its products, the Company must maintain its existing products and integrate them with new products. The Company may not be successful in sourcing, marketing and releasing new products that respond to technological developments or changing customer needs and preferences. The Company may also experience difficulties that could delay or prevent the successful development, introduction and sale of these new products. These new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If release dates of any future products or enhancements to the Company’s products are delayed, or if these products or enhancements fail to achieve market acceptance when released, the Company’s sales volume may decline and earnings could be materially and adversely affected. In addition, new products or enhancements by the Company’s competitors may cause customers to defer or forgo purchases of the Company’s products, which could also materially and adversely affect the Company’s revenues and earnings.
Cash generated by operating activities represents the Company’s principal source of funding and therefore the Company depends on its ability to successfully manage its operating cash flows to fund its operations.
The Company does not maintain any credit facilities (other than, from time to time, certain letters of credit) in connection with the operation of its business. The Company has relied on, and continues to rely on, its cash on hand and cash generated by operations to manage its business. Certain of the Company’s major factory suppliers, including Itoma, extend credit lines to the Company in amounts based on various factors, including the amounts of the Company’s purchases and their internal credit criteria, and in the past have reduced the maximum amount of open credit lines available to the Company. The loss of, or reduction in, credit lines from the Company’s principal suppliers could reduce the Company’s liquidity, increase its working capital needs or limit its ability to purchase products which in turn could adversely affect its financial condition or results of operations. If the Company is unable to generate sufficient cash from operations, the Company may need to secure alternative means of financing or reorganize its operations to continue to maintain its current business.
The Company is subject to intense competition in the industry in which it operates, which could cause material changes in the selling price of its products or losses of its market share.
The housewares and consumer electronics industry is highly competitive, especially with respect to pricing and the introduction of new products and features. The Company’s products compete in the low to medium-priced sector of the housewares and consumer electronics market and compete primarily on the basis of reliability, brand recognition, quality, price, design, consumer acceptance of the Emerson® trademark and quality service and support to retailers and its customers. The Company and many of its competitors are subject to factory cost increases, and the Company expects these pressures to continue. If these pressures are not mitigated by increases in selling price or cost reductions from the Company’s suppliers or changes in product mix, or if the consumers of the Company’s products change their buying habits as a result of the Company’s actions, the Company’s revenues and profits could be substantially reduced. In addition, the Company’s expanded marketing plan includes sales through online marketplaces, including Amazon.com, and the success of this plan depends on the Company’s ability to increase its visibility and continue to distribute its products through these online marketplaces. As compared to the Company, many of its competitors have significantly greater managerial, financial, marketing, technical and other competitive resources and greater brand recognition. As a result, the Company’s competitors may be able to (i) adapt more quickly to new or emerging technologies and changes in customer requirements; (ii) rapidly replicate new features and innovations that we may introduce into the market; (iii) devote greater resources to the promotion and sale of their products and services; and (iv) respond more effectively to pricing pressures. Competition could increase if new companies enter the market, existing competitors expand their product mix or the Company expands into new markets. An increase in competition could result in material price reductions or loss of the Company’s market share.
In addition, the industry in which the Company competes generally has low barriers to entry that allow the introduction of new products or new competitors at a fast pace. Some retailers have and may continue to introduce their own private label products, which could reduce the volume of products they buy from the Company, as well as decrease the shelf space they allocate to the Company’s products. If the Company is unable to protect the Company’s brand image and authenticity, the Company may be unable to effectively compete with these new market entrants or new products.
The Company depends on the experience and expertise of its senior management team and key technical employees, and the loss of any key employee may impair its ability to operate effectively.
The Company’s success depends upon the continued services of its senior management team and key technical employees. Each of the Company’s executive officers, key technical personnel and other employees could terminate his or her relationship with the
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Company at any time. The loss of any member of the Company’s senior management team might significantly delay or prevent the achievement of the Company’s business objectives and could materially harm the Company’s business and customer relationships. In addition, turnover, particularly on the senior management team, with insufficient development of leadership talent and succession plans, could diminish employee confidence and increase risks for retaining key employees.
Changes in consumer spending and economic conditions may cause the Company’s operating results to fluctuate and cause its stock price to decline.
The Company’s net revenue and operating results may vary significantly from year-to-year and quarter-to-quarter as well as in comparison to the corresponding quarter of the preceding year. Factors that may cause these variations include:
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changes in market and economic conditions; |
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the discretionary nature of consumers’ demands and spending patterns; |
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variations in the sales of the Company’s products to its significant customers; |
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variations in manufacturing and supplier relationships; |
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if the Company is unable to correctly anticipate and provide for inventory requirements, it may not have sufficient inventory to deliver its products to its customers in a timely fashion or the Company may have excess inventory that it is unable to sell; |
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new product developments or introductions; |
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product reviews and other media coverage; |
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competition, including competitive price pressures; and |
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political instability, war (including the current conflict in Ukraine), acts of terrorism, public health threats, such as the ongoing COVID-19 pandemic, or other disasters. |
As a result of any of these factors, the Company’s operating results may fluctuate significantly, which may in turn cause its stock price to decline.
Legal, Regulatory and Tax Risks
The Company is subject to a variety of U.S. and foreign laws and regulations that are central to the Company’s business; its failure to comply with these laws and regulations could harm the Company’s business or operating results.
The Company is or may become subject to a variety of laws and regulations in the United States and abroad that involve matters central to its business, including laws and regulations regarding consumer protection, advertising, electronic commerce, intellectual property, manufacturing, anti-bribery and anti-corruption, and economic or other trade prohibitions or sanctions.
The increasingly global nature of the Company’s business operations subjects the Company to domestic and foreign laws and regulations such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions. The Company’s products are also subject to U.S. export controls, including the United States Department of Commerce’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls. The Company is also subject to a variety of laws and regulations regarding information security and privacy. For example, the European Union's General Data Protection Regulation and the California Consumer Privacy Act, or new interpretations of existing laws and regulations, impose significant requirements on how the Company collects, processes and transfers personal data, as well as significant fines for non-compliance. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.
Foreign regulations and changes in trade policies and the political, social and economic conditions in the United States and the foreign countries in which the Company operates its business could affect the Company’s revenues and earnings materially and adversely.
The Company has operations in China and derives a significant portion of its revenue from sales of products manufactured by third parties located in China. In addition, third parties located in China and other countries located in the same region produce and supply many of the components and raw materials used in the Company’s products. Additionally, a significant portion of the shipping of the Company’s finished goods to the United States occurs through Hong Kong. Conducting an international business inherently
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involves a number of difficulties and risks that could materially and adversely affect the Company’s ability to generate revenues and could subject the Company to increased costs. The diplomatic tensions between the United States and China, including over China’s enactment of the Hong Kong national security law, create uncertainties for doing business in China, and the risk of additional protectionist trade policies and tariffs or other escalating retaliatory policies, such as the passage of the Hong Kong Autonomy Act in July 2020 and the concurrent U.S. executive order that ended the special economic status afforded to Hong Kong under the United States-Hong Kong Policy Act of 1992, could increase the Company’s cost of doing business and adversely affect the Company’s business, financial condition and results of operations. Furthermore, it is unclear whether the current U.S. administration will alter the existing trade agreements between China and the U.S. or otherwise modify or impose additional tariffs on imports from China. It is possible that further tariffs may be imposed on the categories of products the Company imports to the United States, or that the Company’s business will be affected by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing the Company to raise prices or make changes to its operations, any of which could adversely affect demand for the Company’s products or increase its costs.
Among the other factors that may adversely affect the Company’s revenues and increase its costs are:
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currency fluctuations which could cause an increase in the price of the components and raw materials used in the Company’s products and a decrease in its profits; |
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Chinese labor laws; |
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labor shortages affecting the Company’s facilities and its suppliers’ manufacturing facilities located in China; |
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the elimination or reduction of value-added tax refunds to Chinese factories that manufacture products for export; |
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the rise of inflation and substantial economic growth in China; |
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more stringent export restrictions in the countries in which the Company operates which could adversely affect its ability to deliver its products to its customers; |
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tariffs and other trade barriers which could make it more expensive for the Company to obtain and deliver its products to its customers; |
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increases in shipping costs for the Company’s products or other service issues with the Company’s third-party shippers, such as global availability of shipping containers and fuel costs; |
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political instability and economic downturns in these countries which could adversely affect the Company’s ability to obtain its products from its manufacturers or deliver its products to its customers in a timely fashion; |
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outbreaks of public health threats, such as COVID-19, influenza and other highly communicable diseases or viruses, affecting the production capabilities of the Company’s suppliers, including as a result of quarantines or closures; |
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new restrictions on the sale of electronic products containing certain hazardous substances; and |
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the laws of China are likely to govern many of the Company’s supplier agreements. |
Any of the factors described above may materially and adversely affect the Company’s revenues and/or increase its operating expenses.
Tariffs or other restrictions placed on the Company’s products imported into the United States from China, or any related countermeasures taken by China, could have a material adverse effect on the Company’s business, profitability and results of operations.
The Company has operations in China and all of the Company’s products are currently manufactured by suppliers in China. Any tariffs or other trade restrictions affecting the import of these products to the United States from China or any retaliatory trade measures taken by China in response to existing or future tariffs could have a material adverse effect on the Company’s results of operations going forward. The Company’s dependency on its overseas suppliers could exacerbate these and other risks, and any tariffs on the categories of products the Company imports to the United States could negatively affect the demand for such products, increase the cost of components, delay production or affect the Company’s ability to compete against competitors who do not manufacture in China or otherwise are not subject to such tariffs.
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Beginning in 2018, the United States has imposed additional duties, ranging from 10% to 25%, on a variety of goods imported from China. Effective in September 2018, the Office of the U.S. Trade Representative (“USTR”) imposed tariffs of 10% on approximately $200 billion worth of goods imported from China (“List 3 products”), including categories of products the Company imports from China and increased these tariffs to 25% effective in May 2019. In August 2019, the U.S. administration directed the USTR to increase tariffs on List 3 products from 25% to 30% effective October 2019, which increases were subsequently delayed indefinitely. In May 2019, the USTR proposed imposing additional tariffs of up to 25% on essentially all remaining Chinese-origin imports, including approximately $300 billion worth of goods imported from China (“List 4 products”). Tariffs of 15% were imposed on certain List 4 products effective in September 2019 (“List 4A products”), and the remainder were scheduled to be subject to these tariffs effective in December 2019 (“List 4B products”). In January 2020, the United States and China signed a Phase One Economic and Trade Agreement, pursuant to which the tariff increases on the List 4B products remained suspended and the rate of additional tariffs on the List 4A products was reduced to 7.5%, while all other tariffs remain in place. The effects on the Company of these imposed and proposed tariffs are uncertain because of the dynamic nature of governmental actions and responses, as well as possible exemptions for certain products. If the U.S. and China are able to negotiate the issues to restore a mutually advantageous and fair trading regime, the increased tariffs could be eliminated, but given the uncertainties, including as a result of the recent change in U.S. administrations and any other political changes, there can be no assurance of whether, or when, this will be accomplished. If the currently imposed and proposed tariffs covering the categories of products that the Company imports continue or are increased, and the Company is unable to obtain an exception, it could have a material adverse effect on the Company’s business.
Although the Company is monitoring the trade environment and working to mitigate the effects of tariffs through pricing and sourcing strategies, including through proactive management of inventory built up in advance of the recent tariff increases, and may take additional steps, the Company cannot be certain how its customers and competitors will react to the actions taken. Additional tariffs imposed by the United States, and any related countermeasures by China, including as a result of the heightened tensions between the United States and China over Hong Kong, could increase the Company’s cost of goods and reduce its gross margins. If the Company determines to pass some or all of these new tariff burdens on to its customers as product price increases in the future, the result may be a degradation of the Company’s competitive position and a loss of customers that would adversely affect the Company’s operating performance. However, the ultimate outcome of these tariff actions is not clear at this time, and there can be no assurances that the Company’s mitigation efforts will be successful or that the imposition of any such tariffs or trade actions would not have a material adverse effect on the Company’s revenue, gross margins and operating results.
The Company could be exposed to product liability or other claims for which its product liability or other insurance may be inadequate.
A failure of any of the products marketed by the Company may subject it to the risk of product liability claims and litigation arising from injuries allegedly caused by the improper functioning or design of its products. Although the Company currently maintains product liability insurance in amounts which the Company considers adequate, the Company cannot assure that:
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its insurance will provide adequate coverage against potential liabilities; |
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adequate product liability insurance will continue to be available in the future; or |
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its insurance can be maintained on acceptable terms. |
To the extent product liability or other litigation losses are beyond the limits or scope of the Company’s insurance coverage, the Company’s expenses could materially increase.
The Company’s business could be materially and adversely affected if it cannot protect its intellectual property rights or if it infringes on the intellectual property rights of others.
The Company’s ability to compete effectively depends on its ability to maintain and protect its proprietary rights. The Company owns the Emerson® and other trademarks, which are materially important to its business, as well as other trademarks, licenses and proprietary rights that are used for certain of the products that it markets and sells. The Company’s trademarks are registered throughout the world, including the United States and other countries. The laws of some foreign countries in which the Company operates may not protect the Company’s proprietary rights to the same extent as do laws in the United States. The protections afforded by the laws of such countries may not be adequate to protect the Company’s intellectual property rights.
Third parties may seek to challenge, invalidate, circumvent or render unenforceable any trademarks, patents or proprietary rights owned by or licensed to the Company. In addition, in the event third-party licensees fail to protect the integrity of the Company’s trademarks, the value of these marks could be materially and adversely affected. The Company’s inability to protect its proprietary rights could materially and adversely affect the license of its trade names, trademarks and other proprietary rights to third parties as well as its ability to sell its products. Litigation has been and may in the future be necessary to enforce the Company’s intellectual
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property rights, protect the Company’s trade secrets and determine the scope and validity of such intellectual property rights. Any such litigation, whether or not successful, could result in substantial costs and diversion of resources and management’s attention from the operation of the Company’s business.
The Company may receive notices of claims of infringement of other parties’ proprietary rights. Such actions could result in litigation and the Company could incur significant costs and diversion of resources in defending such claims. The party making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief. Such relief could effectively block the Company’s ability to make, use, sell, distribute or market its products and services in certain jurisdictions. The Company may also be required to seek licenses to such intellectual property. The Company cannot predict, however, whether such licenses would be available or, if available, that such licenses could be obtained on terms that are commercially reasonable and acceptable to the Company. The failure to obtain the necessary licenses or other rights could delay or preclude the sale, manufacture or distribution of its products and could result in increased costs to the Company.
An information systems interruption or breach in security, including as a result of cyber-attacks, could adversely affect the Company’s business, results of operations and reputation.
In the ordinary course of business, the Company electronically maintains sensitive data, including intellectual property, its proprietary business information and that of its customers and suppliers, and some personally identifiable information of employees, in its facilities and on its networks. In addition, the Company sells its products through online marketplaces, including Amazon.com, which rely upon third-party online payment platform service providers that maintain personal information collected from customers. The secure processing, maintenance and transmission of this information is important to the Company’s operations. A breach of the Company’s security systems and procedures or those of its vendors could result in significant data losses or theft of the Company’s customers’ or the Company’s employees’ intellectual property, proprietary business information or personally identifiable information. A cybersecurity breach could negatively affect the Company’s reputation.
Because the techniques such as viruses and worms, phishing attacks, distributed denial-of-service attacks, ransomware, used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, the Company may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software or applications the Company procures from third parties or uses in its online marketplaces may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to the Company’s systems or facilities through fraud, trickery or other forms of deceiving its employees. Accordingly, the Company may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, or if such measures are implemented, and even with appropriate training conducted in support of such measures, human errors may still occur. It is virtually impossible for the Company to entirely mitigate this risk. A party, whether internal or external, who is able to circumvent the Company’s security measures or those of its vendors could misappropriate information. In addition, cyber insurance may not protect against all of the costs and liabilities arising from a cyber-attack.
If the Company or the online payment platforms it uses fail to reasonably maintain the security of confidential information, the Company may suffer significant reputational and financial losses and the Company’s results of operations, cash flows, financial condition, and liquidity may be adversely affected. In addition, a system breach could result in other negative consequences, including disruption of internal operations, and may subject the Company to private litigation, government investigations, enforcement actions, and cause the Company to incur potentially significant liability, damages, or remediation costs.
The Company operates its business in jurisdictions where intellectual property theft or compromise is common.
Currently, a majority of the Company’s products are manufactured in China. Subject to contractual confidentiality obligations, the Company is required to share significant product design materials with third-parties necessary for the design and manufacture of our products. The Company cannot be sure that its data or intellectual property will not be compromised through cyber-intrusion, theft or other means, particularly when the data or intellectual property is held by partners in foreign jurisdictions. Should the Company’s intellectual property be compromised, it may be difficult to enforce the Company’s rights in China and other foreign jurisdictions in which the Company operates.
Fluctuations in the Company’s tax obligations and effective tax rate and realization of deferred tax assets, including net operating loss carryforwards, may result in volatility of the Company’s operating results.
The Company is subject to income taxes in various U.S. and certain foreign jurisdictions. The Company records tax expense based on its estimates of future payments, which may include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets, including net operating loss carryforwards. In addition, tax laws in certain jurisdictions may limit the ability to use net operating loss carryforwards upon a change in control. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may
17
affect the ultimate settlement of these issues. In addition, the Company’s effective tax rate in a given financial statement period may be materially affected by a variety of factors including but not limited to changes in the mix and level of revenues, varying tax rates in the different jurisdictions in which the Company operates, fluctuations in the valuation allowance, timing of the utilization of net operating loss carryforwards, or by changes to existing accounting rules or regulations. Further, tax legislation or changes in tax rules and regulations or the interpretations thereof, including but not limited to the U.S. Tax Cuts and Jobs Act of 2017, may be enacted in the future which could negatively affect the Company’s current or future tax structure and effective tax rates.
Corporate Governance and Stock Ownership Risks
There is a limited trading market for the Company’s common stock and the market price of the Company’s common stock is subject to volatility.
The Company’s common stock, which trades on the NYSE American, has experienced, and may experience in the future, significant price and volume fluctuations, which could adversely affect the market price of the Company’s common stock. For example, the Company believes that recent volatility in the market price of the Company’s common stock reflects market and trading dynamics unrelated to the Company’s underlying business or macro or industry fundamentals. These fluctuations have been accompanied by reports of strong and atypical retail investor interest, including on social media and online forums. The Company may continue to incur rapid and substantial increases or decreases in its stock price that may not coincide in timing with the disclosure of news or developments by or affecting the Company. Accordingly, the market price of the Company’s common stock may fluctuate dramatically, and may decline rapidly, regardless of any developments in the Company’s business. The market price of the Company’s common stock may also fluctuate significantly in response to various factors and events, including:
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• |
the ongoing impacts and developments relating to the COVID-19 pandemic; |
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• |
actual or anticipated variations in operating results and cash flows; |
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• |
loss of a key customer, licensee or supplier; |
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• |
announcements or events that affect the Company’s products, customers, competitors or markets; |
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• |
general business conditions in the markets and industry in which the Company competes; |
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• |
changes in market valuations of similar companies; |
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• |
the increase in the number of individual holders of the Company’s common stock and their participation in social media platforms targeted at speculative investing; |
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|
• |
the level of the Company’s stock repurchase activity; |
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• |
concentration of holdings of the Company’s common stock; and |
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• |
other events or factors, including those listed under this section entitled “Risk Factors.” |
In addition, the securities markets have recently experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies due to, among other factors, the actions of market participants or other actions outside of the Company’s control, including general market volatility caused by the COVID-19 pandemic. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of the Company’s common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. The Company may be the target of this type of litigation in the future, which could result in substantial costs and divert management’s attention.
The Company is a “controlled company” within the meaning of the NYSE American rules and, as a result, qualifies for, and relies on, exemptions from certain corporate governance requirements. As a result, the Company’s shareholders do not have the same protections afforded to shareholders of companies that are subject to such requirements.
Nimble Holdings Company Limited (“Nimble”), formerly known as The Grande Holdings Limited, through one of its indirect subsidiaries, is the beneficial owner of approximately 72.4% of the Company’s outstanding common stock as of March 31, 2022. As a result, the Company is a “controlled company” within the meaning of the NYSE American Company Guide. Under the NYSE American rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain NYSE American corporate governance requirements, including the requirements that:
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• |
a majority of the Company’s Board of Directors consist of independent directors; |
18
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• |
the Company has a nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and |
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• |
the Company has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. |
The Company has elected to use certain of these exemptions and the Company may continue to use all or some of these exemptions in the future for so long as the Company is a controlled company. The Company’s Board of Directors acts as the nominating committee and compensation committee and determines the compensation and benefits of the Company’s executive officers, administers its employee stock and benefit plans, as may be in effect from time to time, and reviews policies relating to the compensation and benefits of its employees. Although all board members have fiduciary obligations in connection with compensation matters, the Company’s lack of an independent compensation committee presents the risk that any executive officers who are also directors may have influence over their personal compensation and benefits levels that may not be commensurate with the Company’s financial performance. Accordingly, shareholders of the Company do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE American.
The controlling ownership of the Company’s common stock by an indirect subsidiary of Nimble substantially reduces the influence of other stockholders, and the interests of Nimble may conflict with the interests of the Company’s other stockholders.
Nimble, through one of its indirect subsidiaries, is the beneficial owner of approximately 72.4% of the Company’s outstanding common stock as of March 31, 2022. As a result, Nimble will be able to exert significant influence over the Company’s business and have the ability to control the approval process for actions by the Company that require stockholder approval, including: the election of the Company’s directors and the approval of mergers, sales of assets or other significant corporate transactions or matters submitted for stockholder approval. Nimble may have interests that differ from your interests and may cause the shares in the Company beneficially owned by Nimble to be voted in a way with which you disagree and that may be adverse to your interests. In addition, several provisions of the Company’s organizational documents and Delaware law may deter or prevent a takeover attempt, including a takeover attempt in which the potential purchaser offers to pay a per share price greater than the current market price of the Company’s common stock. Under the terms of the Company’s certificate of incorporation, its board of directors has the authority, without further action by the stockholders, to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for the Company’s common stock, including transactions that may be in your best interests.
The Company’s bylaws designate the Court of Chancery of the State of Delaware or the federal district courts in Delaware as the exclusive forum for certain litigation that may be initiated by the Company’s stockholders, which could limit stockholders’ ability to have certain claims heard in any other judicial forum.
Pursuant to the Company’s corporate bylaws, as amended (the “bylaws”), unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on behalf of the Company; (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or other employee of the Company or any stockholder to the Company or the Company’s stockholders; (iii) any action or proceeding asserting a claim against the Company or any current or former director, officer or other employee of the Company or any stockholder arising pursuant to any provision of the General Corporation Law of Delaware or the Company’s certificate of incorporation or bylaws (as each may be amended from time to time); (iv) any action or proceeding to interpret, apply, enforce or determine the validity of the Company’s certificate of incorporation or bylaws (including any right, obligation or remedy thereunder); (v) any action or proceeding as to which the General Corporation Law of Delaware confers jurisdiction to the Court of Chancery of the State of Delaware; and (vi) any action asserting a claim against the Company or any director, officer or other employee of the Company or any stockholder, governed by the internal affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. This forum selection clause in the Company’s bylaws does not apply to suits brought to enforce a duty or liability created by the Exchange Act, or any other claim for which the federal courts of the United States of America have exclusive jurisdiction. The bylaws further provide, that, unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. In addition, the bylaws provide that any person or entity holding, owning or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and to have consented to these provisions. The forum selection clause in the Company’s bylaws may limit stockholders’ ability to have certain claims heard in any court other than in the Court of Chancery or the federal district courts in Delaware.
19
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Item 1B. |
UNRESOLVED STAFF COMMENTS |
Not applicable.
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Item 2. |
PROPERTIES |
Not applicable.
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Item 3. |
LEGAL PROCEEDINGS |
Information with respect to this Item 3 may be found under the heading “Legal Proceedings” in Note 11 to the consolidated financial statements in this report, which information is incorporated into this Item 3 by reference.
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Item 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
PART II
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Item 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a) Market Information
The Company’s common stock began trading on the American Stock Exchange under the symbol MSN on December 22, 1994, and currently trades on the NYSE American under the same symbol.
There is no established trading market for the Company’s Series A convertible preferred stock, whose conversion feature expired as of March 31, 2002.
(b) Holders
At June 14, 2022, there were 160 stockholders of the Company’s common stock whose shares were registered with the Company’s transfer agent. Such number does not include beneficial owners holding the Company’s common stock through nominee names.
(c) Dividends
The Company has not paid cash dividends on its common stock since an extraordinary dividend paid on September 30, 2014, and does not currently plan to declare dividends on its common stock in the foreseeable future. The payment of dividends, if any, would be at the discretion of the Company’s Board of Directors and would depend on the Company’s results of operations, capital requirements, financial condition, prospects, contractual arrangements, and other factors that the Board of Directors may deem relevant.
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Item 6. |
[RESERVED] |
Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company’s operations and financial condition should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under Item 1A – “Risk Factors” and “Forward-Looking Information” and in other parts of this Annual Report on Form 10-K.
20
In the following discussion, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations.
Results of Operations:
The following table summarizes certain financial information for the fiscal years ended March 31, 2022 and 2021 (in thousands):
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Twelve Months Ended March 31, |
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2022 |
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2021 |
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Net product sales |
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$ |
7,941 |
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$ |
7,200 |
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|
Licensing revenue |
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265 |
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|
245 |
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Net revenues |
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8,206 |
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|
7,445 |
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|
Cost of sales |
|
|
6,237 |
|
|
|
5,749 |
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|
Selling, general and administrative expenses |
|
|
5,409 |
|
|
|
5,906 |
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|
Operating loss |
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|
(3,440 |
) |
|
|
(4,210 |
) |
|
Loss on settlement of litigation |
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|
(450 |
) |
|
|
- |
|
|
Interest income, net |
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|
57 |
|
|
|
151 |
|
|
Income from governmental assistance programs |
|
|
207 |
|
|
|
83 |
|
|
Loss before income taxes |
|
|
(3,626 |
) |
|
|
(3,976 |
) |
|
Provision for income taxes |
|
|
- |
|
|
|
- |
|
|
Net loss |
|
$ |
(3,626 |
) |
|
$ |
(3,976 |
) |
Results of Operations — Fiscal 2022 compared with Fiscal 2021
Net product sales — Net product sales for fiscal 2022 were $7.9 million as compared to $7.2 million for fiscal 2021, an increase of $0.7 million, or 10.3% as detailed below. The Company’s sales were highly concentrated among three customers - Walmart, Amazon.com and Fred Meyer, where gross product sales to these three customers were in the aggregate approximately 90.5% and 82.1% of the Company’s total gross product sales in fiscal 2022 and fiscal 2021, respectively. The increase in net product sales during fiscal 2022 was primarily driven by increased consumer demand for certain of the Company’s products offered by these customers, in particular clock radios as consumers spent more time at home and shopped online, and the Company’s and its core customers’ ability to continue to sell products under difficult economic conditions, including through online channels. Net product sales may be periodically impacted by adjustments made to the Company’s sales allowance and marketing support accrual to record unanticipated customer deductions from accounts receivable or to reduce the accrual by any amounts which were accrued in the past but not taken by customers through deductions from accounts receivable within a certain time period. In the aggregate, these adjustments had the effect of increasing net product sales and operating income by approximately nil and $53,000 for fiscal 2022 and fiscal 2021, respectively. Net product sales are comprised primarily of the sales of houseware and audio products which bear the Emerson® brand name. The major elements which contributed to the overall increase in net product sales were as follows:
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i) |
Houseware product net sales decreased $0.9 million, or 35.9%, to $1.7 million in fiscal 2022 as compared to $2.6 million in fiscal 2021, principally driven by a decrease in sales of microwave ovens and by a decrease in sales of toaster ovens. |
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ii) |
Audio product net sales were $6.3 million in fiscal 2022 compared to $4.6 million in fiscal 2021, an increase of $1.7 million, or 36.4%, resulting from increased net sales of clock radios. The Company benefitted from the introduction of new clock radios into the marketplace during fiscal 2022. |
Business operations — The Company expects to continue to expand its existing distribution channels and to develop and promote new products with retailers in the U.S. The Company is also continuing to invest in products and marketing activities to expand its sales through internet and ecommerce channels. These efforts require investments in appropriate human resources, media marketing and development of products in various categories in addition to the traditional home appliances and audio products on which the Company has historically focused. The Company also is continuing its efforts to identify strategic courses of action related to its licensing activities, including seeking new licensing relationships. The Company has engaged each of LMCA and GLSL as an agent to assist in identifying and procuring potential licensees.
Emerson’s success is dependent on its ability to anticipate and respond to changing consumer demands and trends in a timely manner, as well as expanding into new markets and sourcing new products that are profitable to the Company. Geo-political factors may also affect the Company’s operations and demand for the Company’s products, which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The Company expects that current and proposed U.S. tariffs on categories of products that the Company imports from China, and China’s retaliatory tariffs on certain goods
21
imported from the United States, as well as modifications to international trade policy, will continue to affect its product costs going forward. If no mitigation steps are taken, or the mitigation is unsuccessful, the combination of tariffs will result in significantly increased annualized costs to the Company as all of the Company’s products are currently manufactured by suppliers in China. Although the Company is monitoring the trade and political environment and working to mitigate the possible effect of tariffs with its suppliers as well as its customers through pricing and sourcing strategies, the Company cannot be certain how its customers and competitors will react to the actions taken. In addition, heightened tensions between the United States and China over Hong Kong and any resulting retaliatory policies may affect our operations in Hong Kong. At this time the Company is unable to quantify possible effects on its costs arising from the new tariffs, which are expected to increase the Company’s inventory costs and associated costs of sales as tariffs are incurred, and some costs may be passed through to the Company’s customers as product price increases in the future. However, if the Company is unable to successfully pass through the additional costs or otherwise mitigate the effects of these tariffs, or if the higher prices reduce demand for the Company’s products, it will have a negative effect on the Company’s product sales and gross margins.
Starting in the fourth quarter of fiscal 2020, the global COVID-19 pandemic has presented significant challenges and impacted the Company’s business and operating results, and the operations and production capabilities of the Company’s suppliers in China and the distribution capabilities of the Company’s third party logistics provider, including as a result of quarantine or closure. The pandemic has directly and indirectly disrupted certain sales and supply chain activities and affected the Company’s ability to address those challenges. Although the Company has since experienced increased demand in certain of its product categories and favorable impacts on its online channels as a result of the COVID-19 pandemic, the Company expects that the pandemic will continue to impact its business and operations over the coming quarters, including with respect to the magnitude and timing of orders by retailers, resellers, distributors and consumers. Additionally, surges in demand and shifts in shopping patterns related to the COVID-19 pandemic have strained the global freight network and availability of shipping containers, which has been further exacerbated by COVID-19 outbreaks and protocols at many port locations, resulting in carrier-imposed capacity restrictions, carrier delays and longer lead times, including shipment receiving and unloading backlogs at many U.S. ports. As a result, the Company’s shipping costs have recently increased by several multiples compared to fiscal 2021 averages. Global component shortages, in particular semiconductor chips, arising from these changes in consumer demand and reduced manufacturing capacity related to the COVID-19 pandemic have also caused and are likely to continue to result in significant price fluctuations and long lead times in the supply of these components. Although the Company is seeking alternate suppliers for these components, developing alternate sources of supply will be time consuming, difficult and costly, and may require the re-tooling of products to accommodate components from different suppliers. In addition to increasing cost trends, the Company’s suppliers are not equipped to hold meaningful amounts of inventory and if shipping container capacity remains limited or unavailable, they could pause manufacturing, which could ultimately impact the Company’s ability to fulfill customer orders on a timely basis. These impacts on the Company’s supply chain have and may continue to impact the Company’s ability to meet product demand, which could result in additional costs, customer dissatisfaction in the event of inventory shortages or may otherwise adversely impact the Company’s business and results of operations.
In light of the adverse effects of the COVID-19 pandemic on macroeconomic conditions domestically and internationally, along with the uncertainty associated with a potential recovery, the Company has implemented certain cost-reduction actions intended to reduce expenditures in light of the effects of the COVID-19 pandemic to the business. However, the environment remains highly uncertain and demand for the Company’s products remains difficult to assess due to many factors including the pace of economic recovery around the world, the status of various government stimulus programs, competitive intensity and retailer actions to continue carefully managing inventory. As a result, the Company is unable at this time to predict the full impact of the COVID-19 pandemic on its operations and financial results, and, depending on the magnitude and duration of the pandemic, including the further spread and severity of COVID-19 cases in areas in which the Company operates and the availability and distribution of effective vaccines, such impact may be material. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
For more information on risks associated with the Company’s operations, including tariffs and the COVID-19 pandemic, please see the risk factors within Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
Recent Developments — On April 19, 2022, the US District Court for the District of Delaware granted judgment in favor of the Company in its trademark infringement lawsuit against air conditioning and heating products provider Emerson Quiet Kool and wholesaler Home Easy (the “defendants”). Among other things, the court order issues an injunction and directs the US Patent and Trademark Office to cancel the defendants’ existing and proposed “Emerson Quiet Kool” trademarks and prohibits defendants from registering or applying to register the same mark or any other mark or name containing the word “Emerson” going forward. The judgment also awards $6.5 million to the Company. Like any judgment, there is no guarantee that the Company will be able to collect the judgment or, if it is able to collect, how soon it will be able to do so. The Company is pursuing various post-judgment motions against defendants. The defendants have filed a notice of appeal of the judgment.
Licensing revenue — Licensing revenue in fiscal 2022 was approximately $265,000 as compared to $245,000 for fiscal 2021, an increase of $20,000, or 8.2%, which was driven primarily by the escalation of the annual minimum royalty of the Company’s licensee.
22
Net revenues —The Company’s net revenues were $8.2 million for fiscal 2022 as compared to $7.4 million for fiscal 2021, an increase of $0.8 million, or 10.2%, which was driven primarily by the increase in audio product net sales, offset by the decrease in houseware product net sales.
Cost of sales — Cost of sales includes the components described in Note 1 “Cost of Sales” of the Notes to the Consolidated Financial Statements. In absolute terms, cost of sales increased $0.6 million, or 11.8%, to $6.2 million in fiscal 2022 as compared to $5.7 million in fiscal 2021. The increase in absolute terms for fiscal 2022 as compared to fiscal 2021 was primarily related to the improvement in net product sales partially offset by lower year-over-year gross cost of sales as a percentage of gross sales. The decrease in gross cost of sales as a percentage of gross sales for fiscal 2022 as compared to fiscal 2021 was primarily related to the change in product mix as described above, partially offset by increased year-over-year shipping costs. The amounts presented are based on the change in methodology regarding the Company’s definition of Cost of Sales. See Note 1 “Significant Accounting Policies” of the Notes to the Consolidated Financial Statements.
Selling, general and administrative expenses (“S,G&A”) — S,G&A, as a percentage of net revenues, was 65.8% in fiscal 2022 as compared to 79.1% in fiscal 2021. Fiscal 2022 S,G&A, in absolute terms, was $5.4 million and in fiscal 2021 S,G&A, in absolute terms, was $5.9 million, an increase of $0.5 million, or 8.4%. The decrease in S,G&A was primarily due to reduced legal fees of approximately $249,000 or 16.4%. Legal fees during fiscal 2022 were approximately $1,273,000 as compared to $1,522,000 during fiscal 2021. The majority of the decrease in legal fees concerned the protection of the Emerson® trademark. The Company also benefitted by reductions in compensation costs of $127,000 and commission fees of $52,000.
Loss on settlement of litigation — On January 3, 2022, a legal settlement was entered into between the Company and one of its former directors that resolved certain disputes, including certain claims against the former director and an indemnification claim made by the former director. The amount of the settlement was $450,000.
Interest income, net — Interest income, net, was $57,000 in fiscal 2022 as compared to $151,000 in fiscal 2021, resulting from a decrease in interest rates earned on the Company’s short term investments during fiscal 2022.
Income from governmental assistance programs — During fiscal 2022, the Company recorded income of approximately $207,000, related to its Paycheck Protection Program (“PPP”) loan forgiveness. During fiscal 2021, the Company recorded income of approximately $83,000, related to assistance received from the Hong Kong government under a similar program called the Employment Support Scheme. See “Note 15 - Paycheck Protection Program and Employment Support Scheme”.
Provision for income tax expense — The Company adopted ASU 2019-12 during fiscal 2022 and recorded its non-income based state taxes of approximately $11,000 to S,G&A. In order to conform fiscal 2021 to the current presentation, approximately $15,000 of non-income based state taxes were reclassified to S,G&A. In fiscal 2022 and fiscal 2021, the Company recorded a full valuation allowance against its deferred tax assets of approximately $844,000 and $615,000, respectively. See Note 5 “Income Taxes” of the Notes to the Consolidated Financial Statements.
Net (loss) — As a result of the foregoing factors, the Company recorded a net loss of $3.6 million for fiscal 2022 as compared to a net loss of $4.0 million for fiscal 2021.
Liquidity and Capital Resources
General
As of March 31, 2022, the Company had cash and cash equivalents of approximately $25.6 million as compared to approximately $5.2 million at March 31, 2021. Working capital decreased to $28.1 million at March 31, 2022 as compared to $32.1 million at March 31, 2021. The increase in cash and cash equivalents of approximately $20.4 million is set out in “Cash Flows” below.
Cash Flows
Net cash used by operating activities was approximately $4.7 million for fiscal 2022, compared to approximately $4.3 million for fiscal 2021, resulting from a $3.6 million loss generated during the period, a $0.6 million increase in accounts receivable, a $0.4 million increase in right of use assets, a $0.2 million decrease in income taxes payable, a $0.2 million increase in the Company’s PPP loan forgiveness and a $0.2 million increase in inventory partially offset by a $0.2 million decrease in prepaid purchases, a $0.2 million increase in amortization of right-of-use assets and a $0.1 million increase in long term lease liabilities.
Net cash provided by investing activities was $25.0 million for fiscal 2022, compared to $3.0 million for fiscal 2021, primarily due to a decrease of investments in short term deposits.
Net cash provided by financing activities was nil for fiscal 2022 for fiscal 2022, compared to $0.2 million for fiscal 2021.
23
Credit Arrangements
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, 2022 and March 31, 2021, the Company had no letters of credit outstanding.
Short-term Liquidity
The Company’s principal existing sources of cash are generated from operations. The Company believes that its cash on hand and existing sources of cash will be sufficient to support its existing operations over the next 12 months.
Historically, a significant percentage of the Company’s product sales were made under the Direct Import Program. The direct importation of product by the Company to its customers can significantly benefit the Company’s liquidity because this inventory does not need to be financed by the Company. In fiscal 2022, approximately 9% of the Company’s product sales were imported directly to the Company’s customers. In fiscal 2021, less than 1% of the Company’s product sales were imported directly to the Company’s customers.
As of March 31, 2022, there were no capital expenditure or other commitments other than the normal purchase orders used to secure product.
Paycheck Protection Program Loan
In April and May of 2020, the Company applied for and received aggregate PPP loan proceeds of approximately $204,000 under the PPP. The PPP loan accrued interest at 1% and matures two years from the date of issuance, with a deferral of payments for the first six months. The Company used all of the PPP loan proceeds for qualifying expenses in accordance with terms of the Coronavirus Aid, Relief, and Economic Security Act and applied for forgiveness of the loan to the extent applicable. On July 5, 2021, the Company’s PPP loan was completely forgiven by the Small Business Administration. See Note 15 “Paycheck Protection Program and Employment Support Scheme” of the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As of March 31, 2022, the Company did not have any off-balance sheet arrangements as defined under the rules of the Securities and Exchange Commission.
Legal Matters
The Company is subject to various legal proceedings, the outcomes of which are inherently uncertain. The Company records any potential gains related to legal proceedings only after cash is collected. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. Resolution of legal matters in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. See Note 11 in the Notes to the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles that are generally accepted within the United States. The preparation of the Company’s financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management considers certain accounting policies related to inventories, trade accounts receivables, impairment of long-lived assets, valuation of deferred tax assets, sales return reserves and sales allowance accruals to be critical policies due to the estimation processes involved in each.
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. Under both programs, the Company recognizes revenues at the time title passes to the customer as this is when the Company satisfies its performance obligation under the contracts with its customers. Estimates for future expected returns are based upon historical return rates and netted against revenues.
24
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.
The Company adopted ASC topic 606 effective April 1, 2018. 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. Prior to the adoption of ASC topic 606, the Company followed the provisions of ASC topic 605. The adoption of ASC topic 606 did not have a material impact on revenue recognition as compared to revenue recognition provided under ASC topic 605.
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.
Inventory. Inventory is valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out basis and includes inventory purchase costs and allocated overhead. The Company records valuation adjustments for the excess cost of inventory over the estimated net realizable value. Valuation adjustments for slow-moving and obsolete inventory are calculated on an individual product basis based on physical inspection of the product in connection with a physical inventory, review of slow-moving products, forecasted sales, and consideration of active marketing programs.
Trade Accounts Receivable. The Company extends credit based upon evaluations of a customer’s financial condition and provides for any anticipated credit losses in the Company’s financial statements based upon management’s estimates and ongoing reviews of recorded allowances. If the financial condition of a customer deteriorates, resulting in an impairment of that customer’s ability to make payments, additional reserves may be required. Conversely, reserves are reduced to reflect credit and collection improvements.
Income Taxes. The Company records a valuation allowance to reduce the amount of its deferred tax assets to the amount that management estimates is more likely than not to be realized. While management considers future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event that management determines that a deferred tax asset will likely be realized in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if it is determined that all or part of a net deferred tax asset will likely not be realized in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Sales Return Reserves. 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 Allowance and Marketing Support Accruals. 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 606, “Revenue from Contracts with Customers”.
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 606, “Revenue from Contracts with Customers,” (i) sales incentives offered to customers that meet the criteria for accrual and (ii) 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 ASC topic 606.
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.
25
Recently Adopted Accounting Pronouncements
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 impact of ASU 2019-12 on the Company’s consolidated financial statements is limited. The Company is currently only subject to non-income based state taxes.
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 2016-13 “Financial Instruments – Credit Losses” (Issued June 2016)
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.
|
Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
26
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
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Page No. |
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28 |
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Consolidated Statements of Operations for the years ended March 31, 2022 and 2021 |
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30 |
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31 |
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32 |
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Consolidated Statements of Cash Flows for the years ended March 31, 2022 and 2021 |
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33 |
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34 |
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: the Board of Directors and Stockholders
of Emerson Radio Corp. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Emerson Radio Corp. and Subsidiaries (the “Company”) as of March 31, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows, for each of the years in the two -year period ended March 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of their operations and their cash flows for each of the two-year period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below arise from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relates.
28
Inventories
As described in Note 1 of the consolidated financial statements, inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes inventory purchase costs and allocated overhead. The Company records valuation adjustments for the excess cost of inventory over the estimated net realizable value. Valuation adjustments for slow-moving and obsolete inventory are calculated on an individual product basis based on physical inspection of the product in connection with a physical inventory, review of slow-moving products, forecasted sales, and consideration of active marketing programs.
We identified valuation adjustments for slow-moving and obsolete inventories as a critical audit matter because of the significant judgment required by management in developing its assumptions about forecasted consumption and sales, and in determining the estimated net realizable value adjustments applied to individual inventory items. Testing management’s assumptions and estimates used in calculating the valuation adjustments required a high degree of auditor judgment and the use of more experienced audit professionals.
Our audit procedures related to valuation adjustments for slow-moving inventories included the following, among others:
• We tested the reliability of system-generated reports used by management on a sample basis by agreeing the selected items to the underlying records.
• We observed the physical condition of inventories during physical inventory counts.
• We tested the accuracy of the valuation adjustments by selecting a sample of inventory items and recalculating the estimated net realizable value based upon subsequent period transactions.
• We tested the reasonableness of management’s assumptions about forecasted sales by:
• Performing a retrospective review to assess management’s estimated percentages by comparing the prior year inventory to current year consumption and sales.
• Corroborating the assumptions related to slow-moving products and forecasted sales with management.
/s/ MSPC
Certified Public Accountants and Advisors,
A Professional Corporation
We have served as the Company’s auditor since 2005.
New York, New York
June 23, 2022
29
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended March 31, 2022 and 2021
(In thousands, except per share data)
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2022 |
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2021 |
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|||||
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Net revenues: |
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Net product sales |
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$ |
|
|
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$ |
|
|
|
Licensing revenue |
|
|
|
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|
|
|
Net revenues |
|
|
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|
|
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|
|
Costs and expenses: |
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|
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Cost of sales |
|
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Selling, general and administrative expenses |
|
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|
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|
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|
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
Other (loss) income: |
|
|
|
|
|
|
|
|
|
Loss on settlement of litigation |
|
|
( |
) |
|
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— |
|
|
Interest income, net |
|
|
|
|
|
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Income from governmental assistance programs |
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Loss before income taxes |
|
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( |
) |
|
|
( |
) |
|
Provision for income tax expense |
|
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— |
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|
|
— |
|
|
Net loss |
|
|
( |
) |
|
|
( |
) |
|
Basic loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted loss per share |
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$ |
( |
) |
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$ |
( |
) |
|
Weighted average shares outstanding |
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|
Basic |
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Diluted |
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|
|
The accompanying notes are an integral part of the consolidated financial statements.
30
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2022 and 2021
(In thousands)
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|
March 31, 2022 |
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March 31, 2021 |
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||
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|||||
|
ASSETS |
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Current Assets: |
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|
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|
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|
Cash and cash equivalents |
|
$ |
|
|
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$ |
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|
|
Short term investments |
|
|
— |
|
|
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|
|
|
Accounts receivable, net |
|
|
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Inventory |
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Prepaid purchases |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Non-Current Assets: |
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|
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Property and equipment, net |
|
|
|
|
|
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— |
|
|
Right-of-use asset-operating leases |
|
|
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|
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Right-of-use asset-finance leases |
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Other assets |
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|
|
|
|
|
|
Total Non-Current Assets |
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
|
|
|
$ |
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
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Current Liabilities: |
|
|
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|
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|
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|
|
Accounts payable and other current liabilities |
|
|
|
|
|
|
|
|
|
Paycheck Protection Program loan |
|
|
— |
|
|
|
|
|
|
Due to affiliate |
|
|
— |
|
|
|
|
|
|
Short-term operating lease liability |
|
|
|
|
|
|
|
|
|
Short-term finance lease liability |
|
|
|
|
|
|
|
|
|
Income tax payable, current portion |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
|
|
|
|
|
|
Non-Current Liabilities: |
|
|
|
|
|
|
|
|
|
Long-term operating lease liability |
|
|
|
|
|
|
|
|
|
Long-term finance lease liability |
|
|
|
|
|
|
|
|
|
Income tax payable |
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
|
|
|
$ |
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
Series A Preferred shares — and outstanding; liquidation preference of $ |
|
|
|
|
|
|
|
|
|
Common shares — $ shares issued at March 31, 2022 and March 31, 2021, respectively; shares outstanding at March 31, 2022 and March 31, 2021, respectively |
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
|
Treasury stock, at cost ( and March 31, 2021, respectively) |
|
|
( |
) |
|
|
( |
) |
|
Total Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
31
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For The Years Ended March 31, 2022 and 2021
(In thousands)
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Total |
|
|||||||
|
|
|
Preferred |
|
|
Number |
|
|
Par |
|
|
Paid-In |
|
|
Accumulated |
|
|
Treasury |
|
|
Shareholders’ |
|
|||||||
|
|
|
Stock |
|
|
of Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Stock |
|
|
Equity |
|
|||||||
|
Balance — March 31, 2020 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance — March 31, 2021 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance — March 31, 2022 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements
32
EMERSON RADIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended March 31, 2022 and 2021
|
|
|
|
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash (used) by operating activities: |
|
|
|
|
|
|
|
|
|
Loan forgiveness from Paycheck Protection Program |
|
|
( |
) |
|
|
— |
|
|
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
— |
|
|
|
|
|
|
Asset valuation allowances |
|
|
|
|
|
|
( |
) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
Inventory |
|
|
( |
) |
|
|
( |
) |
|
Prepaid purchases |
|
|
|
|
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
|
Other assets |
|
|
|
|
|
|
— |
|
|
Accounts payable and other current liabilities |
|
|
( |
) |
|
|
|
|
|
Right of use assets-operating |
|
|
( |
) |
|
|
— |
|
|
Short term lease liabilities |
|
|
|
|
|
|
( |
) |
|
Long term lease liabilities |
|
|
|
|
|
|
( |
) |
|
Due to affiliate |
|
|
( |
) |
|
|
|
|
|
Income taxes payable |
|
|
( |
) |
|
|
( |
) |
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Net cash (used) by operating activities |
|
|
( |
) |
|
|
( |
) |
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
Proceeds from sale of short-term investments |
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
— |
|
|
|
( |
) |
|
Disposals to property and equipment |
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
( |
) |
|
|
— |
|
|
Net cash provided by investing activities |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
Proceeds from Paycheck Protection Program loan |
|
|
— |
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
— |
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of the year |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year |
|
$ |
|
|
|
$ |
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements
33
EMERSON RADIO CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES:
Description of the Business
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.
Basis of Presentation
It is the Company’s policy to prepare its consolidated 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 may have been reclassified to conform to current year presentation.
Use of Estimates
In preparing consolidated 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.
Long-Lived Assets
The Company’s long-lived assets include property and equipment. At March 31, 2022, the Company had approximately $
Property and Equipment
Property 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 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.
34
Depreciation of property and equipment is provided by the straight-line method as follows:
|
• Computer, Equipment and Software |
|
|
|
• Furniture and Fixtures |
|
|
|
• Leasehold Improvements |
|
|
Revenue Recognition
Distribution of products
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.
The Company adopted ASC topic 606 effective April 1, 2018. 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. Prior to the adoption of ASC topic 606, the Company followed the provisions of ASC topic 605. The adoption of ASC topic 606 did not have a material impact on revenue recognition as compared to revenue recognition provided under ASC topic 605.
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.
The Company offers limited warranties for its consumer electronics, comparable to those offered to consumers by the Company’s competitors in the United States. Such warranties typically consist of a
Licensing
In addition to the distribution of products, the Company grants licenses for the right to access the Company’s intellectual property, specifically 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.
35
Inventory
Inventory is valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out basis and includes inventory purchase costs and allocated overhead. The Company records valuation adjustments for the excess cost of inventory over the estimated net realizable value. Valuation adjustments for slow-moving and obsolete inventory are calculated on an individual product basis based on physical inspection of the product in connection with a physical inventory, review of slow-moving products, forecasted sales, and consideration of active marketing programs.
Accounts Receivable
The Company extends credit based upon evaluations of a customer’s financial condition and provides for any anticipated credit losses in the Company’s financial statements based upon management’s estimates and ongoing reviews of recorded allowances. Credit is extended for periods between 10 and
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 and warehousing costs.
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.
Sales Return Reserves
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. The sales return reserves increased $
Foreign Currency
The assets and liabilities of foreign subsidiaries, whose functional currencies are other than the United States Dollar, 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
Advertising Expenses
Advertising expenses are charged against earnings as incurred and are included in selling, general and administrative expenses. The Company incurred $
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 606, “Revenue from Contracts with Customers”.
36
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 606, “Revenue from Contracts with Customers.” (i) sales incentives offered to customers that meet the criteria for accrual and (ii) 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 ASC topic 606.
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.
The sales and marketing support accrual activity for fiscal 2022 and fiscal 2021 was as follows (in thousands):
|
Balance at March 31, 2020 |
|
$ |
|
|
|
additions |
|
|
|
|
|
usages |
|
|
( |
) |
|
adjustments |
|
|
( |
) |
|
Balance at March 31, 2021 |
|
$ |
|
|
|
additions |
|
|
|
|
|
usages |
|
|
( |
) |
|
adjustments |
|
|
|
|
|
Balance at March 31, 2022 |
|
$ |
|
|
Interest income, net
The Company records interest income as earned and interest expense as incurred. The net interest income for fiscal 2022 and 2021 consists of:
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Interest expense |
|
$ |
( |
) |
|
$ |
( |
) |
|
Interest income |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
$ |
|
|
|
$ |
|
|
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. Penalties and interest incurred during fiscal 2022 and fiscal 2021 were approximately
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.
Recently Adopted Accounting Pronouncements
Accounting Standards Update 2019-12 “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” (Issued December 2019)
37
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 impact of ASU 2019-12 on the Company’s consolidated financial statements is limited. The Company is currently only subject to non-income based state taxes.
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 2016-13 “Financial Instruments – Credit Losses” (Issued June 2016)
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.
NOTE 2 — INVENTORIES:
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. As of March 31, 2022 and March 31, 2021, 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, Nimble Holdings Company Limited (“Nimble”), formerly known as The Grande Holdings Limited, 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 Securities and Exchange Commission (“SEC”) on February 15, 2019, the shared power to vote and direct the disposition of
Related Party Transactions
Charges of rental and utility fees on office space in Hong Kong
During fiscal 2022 and fiscal 2021, the Company was billed approximately $
During fiscal 2022 and fiscal 2021, the Company was billed approximately $
38
NOTE 4 — PROPERTY AND EQUIPMENT:
As of March 31, 2022 and 2021, property and equipment is comprised of the following:
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Computer equipment and software |
|
$ |
|
|
|
$ |
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
— |
|
Depreciation of property and equipment amounted to approximately $
NOTE 5 — INCOME TAXES:
The Company’s provision for income tax expense for fiscal 2022 and fiscal 2021 was as follows:
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
Foreign, state and other |
|
|
— |
|
|
|
— |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
Foreign, state and other |
|
|
— |
|
|
|
— |
|
|
Provision for income tax expense |
|
$ |
— |
|
|
$ |
— |
|
The Company adopted ASU 2019-12 (Topic 740) Simplifying the Accounting for Income Taxes during fiscal 2022. In the table above, the income tax expense of $
The Company files a consolidated federal return and certain state and local income tax returns.
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Statutory provision |
|
$ |
( |
) |
|
$ |
( |
) |
|
Foreign subsidiary |
|
|
( |
) |
|
|
( |
) |
|
State taxes |
|
|
( |
) |
|
|
( |
) |
|
Permanent differences |
|
|
|
|
|
|
|
|
|
Adjustment to prior year taxes |
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
|
|
|
Provision for income tax expense |
|
$ |
— |
|
|
$ |
— |
|
39
As of March 31, 2022 and March 31, 2021, the significant components of the Company’s deferred tax assets which were classified as non-current, were as follows:
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Accounts receivable reserves |
|
$ |
|
|
|
$ |
|
|
|
Inventory reserves |
|
|
|
|
|
|
|
|
|
Accruals |
|
|
|
|
|
|
|
|
|
Property and equipment and intangible assets |
|
|
|
|
|
|
|
|
|
Net operating loss and credit carry forwards |
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
( |
) |
|
|
( |
) |
|
Total deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
40
The Company has $
|
Loss Year (Fiscal) |
|
Included in DTA |
|
Expiration Year (Fiscal) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
Total |
|
$ |
|
|
|
|
The tax benefits related to these state NOLs 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 $
The Company analyzed the future reasonability of recognizing its deferred tax assets at March 31, 2022. As a result, the Company concluded that a valuation allowance of approximately $
The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of March 31, 2022, the Company’s open tax years for examination for U.S. federal tax are
As of March 31, 2022 the Company is asserting under ASC 740-30 that all of the unremitted earnings of its foreign subsidiaries are indefinitely invested. The Company evaluates this assertion each period based on a number of factors, including the operating plans, budgets, and forecasts for both the Company and its foreign subsidiaries; the long-term and short-term financial requirements in the U.S. and in each foreign jurisdiction; and the tax consequences of any decision to repatriate earnings of foreign subsidiaries to the U.S.
The Tax Cut and Job Act (“TCJA”) establishes new tax rules designed to tax U.S. companies on global intangible low-taxed income (GILTI) earned by foreign subsidiaries. The Company has evaluated this provision of the TCJA and the application of ASC 740 and its impact is reflected in the financial statements as of March 31, 2022.
NOTE 6 — COMMITMENTS AND CONTINGENCIES:
The Company’s ERP software provider is subscription based with annual commitments as follows (in thousands).
|
Fiscal Years |
|
Amount |
|
|
|
2023 |
|
$ |
|
|
|
2024 |
|
|
— |
|
|
2025 |
|
|
— |
|
|
2026 |
|
|
— |
|
|
2027 |
|
|
— |
|
|
Thereafter |
|
|
— |
|
|
Total |
|
$ |
|
|
41
Rent expense resulting from leases with non-affiliated companies aggregated $
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
Capital Expenditure:
As of March 31, 2022 and March 31, 2021, there were
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 2022 and 2021 were $
NOTE 7 — SHAREHOLDERS’ EQUITY:
Common Shares:
Authorized common shares total
Series A Preferred Stock:
The Company has issued and outstanding
NOTE 8 — SHORT TERM INVESTMENTS:
At March 31, 2022 and March 31, 2021, the Company held short-term investments in deposits totaling nil and $
NOTE 9 — NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted loss per share for the years ended March 31, 2022 and March 31, 2021:
|
|
|
Twelve Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
|
|
|||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share — weighted average shares |
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
For the years ended March 31, 2022 and March 31, 2021, there were
42
NOTE 10 — LICENSE AGREEMENTS:
The Company is currently party to
NOTE 11 — LEGAL PROCEEDINGS:
On April 19, 2022, the US District Court for the District of Delaware granted judgment in favor of the Company in its trademark infringement lawsuit against air conditioning and heating products provider Emerson Quiet Kool and wholesaler Home Easy (the “defendants”). Among other things, the court order issues an injunction and directs the US Patent and Trademark Office to cancel the defendants’ existing and proposed “Emerson Quiet Kool” trademarks and prohibits defendants from registering or applying to register the same mark or any other mark or name containing the word “Emerson” going forward. The judgment also awards $
The Company is not currently a party to any other 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 Concentration
For fiscal 2022, the Company’s three largest customers accounted for approximately
Product Concentration
For fiscal 2022, the Company’s gross product sales were comprised of two product types within two categories — housewares products and audio products. Microwave ovens, which product type is within the housewares category, generated approximately
For fiscal 2021, the Company’s gross product sales were comprised of the same two product types within the same two categories — housewares products and audio products. Microwave ovens, which product type is within the housewares category, generated approximately
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.
Concentrations of Credit Risk
As a percent of the Company’s total trade accounts receivable, net of specific reserves, Walmart, Amazon.com and Fred Meyer accounted for
43
customer accounted for more than
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, 2022 and March 31, 2021 were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
Supplier Concentration
During fiscal 2022, the Company procured
No assurance can be given that ample supply of product would be available at current prices and on current credit terms. This is 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. 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, 2022 and March 31, 2021 are summarized below by geographic area (in thousands). Net revenues are attributed to geographic area based on the location of the customer.
|
|
|
Year Ended March 31, 2022 |
|
|||||||||
|
|
|
U.S. |
|
|
Foreign |
|
|
Consolidated |
|
|||
|
Net revenues |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Long-lived assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Year Ended March 31, 2021 |
|
|||||||||
|
|
|
U.S. |
|
|
Foreign |
|
|
Consolidated |
|
|||
|
Net revenues |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Long-lived assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
44
NOTE 14 — 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
As of March 31, 2022, the Company’s current operating and finance lease liabilities were $
The components of lease costs, which were included in operating expenses in the Company’s condensed consolidated statements of operations, were as follows:
|
|
|
Twelve Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Lease cost |
|
|
|
|
|
|
|
|
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
Variable lease costs |
|
|
|
|
|
|
|
|
|
Total lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
|
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Right-of-use assets obtained in exchange for lease obligations: |
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Operating leases |
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Finance leases |
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45
|
Information relating to the lease term and discount rate are as follows: |
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Weighted average remaining lease term (in months) |
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As of March 31, 2022 |
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As of March 31, 2021 |
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||
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Operating leases |
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Finance leases |
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Weighted average discount rate |
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Operating leases |
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% |
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% |
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Finance leases |
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% |
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% |
|
As of March 31, 2022 the maturities of lease liabilities were as follows: |
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(in thousands) |
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Operating Leases |
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Finance Leases |
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||
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2023 |
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$ |
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$ |
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2024 |
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2025 |
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2026 |
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— |
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— |
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Thereafter |
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— |
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— |
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Total lease payments |
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$ |
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$ |
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Less: Imputed interest |
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( |
) |
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— |
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Total |
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$ |
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$ |
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NOTE 15 — PAYCHECK PROTECTION PROGRAM AND EMPLOYMENT SUPPORT SCHEME:
On July 5, 2021, the Company’s Paycheck Protection Program (”PPP”) loan of approximately $
The Hong Kong government implemented a similar program called the Employment Support Scheme (“ESS”). It provided grants to companies who retained their employees during the COVID-19 outbreak. The Company’s Hong Kong subsidiary applied for and was granted approximately $
The income realized from the PPP loan forgiveness and the amount granted under the ESS program are presented as Other Income under the description called “Income from governmental assistance programs” in the Consolidated Statements of Operations.
NOTE 16 — SUBSEQUENT EVENT
On April 19, 2022, the US District Court for the District of Delaware granted judgment in favor of the Company in its trademark infringement lawsuit against air conditioning and heating products provider Emerson Quiet Kool and wholesaler Home Easy (the “defendants”). Among other things, the court order issues an injunction and directs the US Patent and Trademark Office to cancel the defendants’ existing and proposed “Emerson Quiet Kool” trademarks and prohibits defendants from registering or applying to register the same mark or any other mark or name containing the word “Emerson” going forward. The judgment also awards $
46
|
Item 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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Item 9A. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d — 15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in its Exchange Act reports are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons; by collusion of two or more people, or by management override of the control. The Company’s controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
As a result of its internal assessment, the Company’s management concluded that disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to ensure that such information is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under this framework, management concluded that the Company’s internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm. This is pursuant to the rules of the Securities and Exchange Commission for smaller reporting companies, that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2022 there were no changes in the Company’s internal control that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
Item 9B. |
OTHER INFORMATION |
None.
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Item 9C. |
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
47
PART III
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Item 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required is incorporated herein by reference to Emerson’s definitive Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission on or before July 29, 2022.
|
Item 11. |
EXECUTIVE COMPENSATION |
The information required is incorporated herein by reference to Emerson’s definitive Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission on or before July 29, 2022.
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Item 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required is incorporated herein by reference to Emerson’s definitive Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission on or before July 29, 2022.
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Item 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required is incorporated herein by reference to Emerson’s definitive Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission on or before July 29, 2022.
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Item 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required is incorporated herein by reference to Emerson’s definitive Proxy Statement, or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission on or before July 29, 2022.
PART IV
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Item 15. |
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES |
(a) List of Financial Statements, Financial Statement Schedules, and Exhibits.
1. Financial Statements. The following financial statements of Emerson Radio Corp. are included in Item 8 of Part II of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended March 31, 2022 and 2021
Consolidated Balance Sheets as of March 31, 2022 and 2021
Consolidated Statements of Changes in Shareholders’ Equity for the years ended March 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended March 31, 2022 and 2021
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. All financial statement schedules are omitted from this Annual Report on Form 10-K, as they are not required or applicable or the required information is included in the financial statements or notes thereto.
48
3. Exhibits. The following exhibits are filed with this Annual Report on Form 10-K or are incorporated herein by reference, as indicated.
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Exhibit Number
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3.1 |
Certificate of Incorporation of Emerson (incorporated by reference to Exhibit (3) (a) of Emerson’s Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994) (filed in paper format). |
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3.1.1 |
Certificate of Designation for Series A Preferred Stock (incorporated by reference to Exhibit (3) (b) of Emerson’s Registration Statement on Form S-1, Registration No. 33-53621, declared effective by the SEC on August 9, 1994) (filed in paper format). |
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3.1.2 |
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3.2 |
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3.2.1 |
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3.2.2 |
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3.2.3 |
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3.2.4 |
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4.1 |
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10.1 |
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10.2 |
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10.3 |
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21.1 |
Principal Subsidiaries of the Company as of March 31, 2022.* |
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23.1 |
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31.1 |
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31.2 |
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32 |
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101.INS |
XBRL Instance Document. * |
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101.SCH |
XBRL Taxonomy Extension Schema Document. * |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document. * |
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49
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document. * |
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101.LAB |
XBRL Taxonomy Extension Label Linkbase Document. * |
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101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document. * |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* |
Filed herewith. |
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** |
Furnished herewith. |
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† |
Management contract or compensatory plan or arrangement. |
|
Item 16. |
FORM 10-K SUMMARY |
None.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
EMERSON RADIO CORP. |
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By: |
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/s/ Christopher W. Ho |
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|
|
Christopher W. Ho |
|
|
|
Chief Executive Officer |
|
|
|
Principal Executive Officer |
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|
By: |
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/s/ Richard Li |
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|
|
Richard Li |
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|
|
Chief Financial Officer |
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|
|
Principal Financial and Accounting Officer |
Dated: June 23, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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/s/ Christopher W. Ho |
|
Chairman of the Board and |
|
June 23, 2022 |
|
Christopher W. Ho |
|
Chief Executive Officer |
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|
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|
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|
|
/s/ Richard Li |
|
Chief Financial Officer |
|
June 23, 2022 |
|
Richard Li |
|
|
|
|
|
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|
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|
|
/s/ Michael Binney |
|
Chief Operating Officer and Director |
|
June 23, 2022 |
|
Michael Binney |
|
|
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|
/s/ Kareem E. Sethi |
|
Director |
|
June 23, 2022 |
|
Kareem E. Sethi |
|
|
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|
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/s/ Kin Yuen |
|
Director |
|
June 23, 2022 |
|
Kin Yuen |
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|
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51