The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES:
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 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 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, plant and equipment. At March 31, 2020, the Company had approximately $4,000 of property, plant and equipment, net of accumulated depreciation. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC Topics 350 “Intangibles” and 360 “Property, Plant and Equipment”. The recoverability of assets held and used is measured by a comparison of the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Future events could cause the Company to conclude that impairment indicators exist and that long-lived assets may be impaired. If impairment is deemed to exist, the asset will be written down to fair value. Any such impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. As of March 31, 2020, management expects the carrying value of its long-lived assets to be fully recoverable.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets being depreciated. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and betterments are capitalized and depreciated over the remaining estimated 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.
31
Depreciation of property, plant and equipment is provided by the straight-line method as follows:
|
• Computer, Equipment and Software
|
|
Three years to seven years
|
|
• Furniture and Fixtures
|
|
Seven years
|
|
• Leasehold Improvements
|
|
Straight-line basis over the shorter of the useful life of the improvement or the term of the lease
|
Revenue Recognition
Distribution of products
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 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.
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.
32
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out basis. The Company records inventory reserves to reduce the carrying value of inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. Conversely, if market conditions improve, such reserves are reduced.
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 90 days, on a net basis. 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. Receivables are written off once they are considered uncollectible. The allowance for doubtful accounts receivable increased $2,300 for the year ended March 31, 2020 and decreased by $4,200 for the year ended March 31, 2019.
Cost of Sales
Cost of sales includes actual product cost, quality control costs, change in inventory reserves, duty, buying costs, the cost of transportation to the Company’s third party logistics providers’ warehouse from its manufacturers, warehousing costs, and an allocation of those selling, general and administrative expenses that are directly related to these activities.
Other Operating Costs and Expenses
Other operating costs and expenses include costs associated with returned products received from retailers, warranty costs, warehouse supply expenses, and an allocation of those selling, general and administrative expenses that are directly related to these activities. Because other operating costs and expenses are not included in cost of sales, the gross margin may not be comparable to those of other distributors that may include all costs related to the cost of product to their cost of sales and in the calculation of gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs of the Company that are not directly related to the cost of procuring product or costs not included in other operating costs and expenses.
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 decreased $21,000 for the year ended March 31, 2020 and decreased $159,000 for the year ended March 31, 2019.
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 no foreign exchange forward contracts held by the Company at March 31, 2020 or March 31, 2019.
33
Advertising Expenses
Advertising expenses are charged against earnings as incurred and are included in selling, general and administrative expenses. The Company incurred $165,000 of advertising expenses during fiscal 2020 and $121,000 during fiscal 2019.
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”.
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 2020 and fiscal 2019 was as follows (in thousands):
|
Balance at March 31, 2018
|
|
$
|
117
|
|
|
additions
|
|
|
416
|
|
|
usages
|
|
|
(433
|
)
|
|
adjustments
|
|
|
(16
|
)
|
|
Balance at March 31, 2019
|
|
$
|
84
|
|
|
additions
|
|
|
289
|
|
|
usages
|
|
|
(300
|
)
|
|
adjustments
|
|
|
26
|
|
|
Balance at March 31, 2020
|
|
$
|
99
|
|
Interest income, net
The Company records interest income as earned and interest expense as incurred. The net interest income for fiscal 2020 and 2019 consists of:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest income
|
|
|
776
|
|
|
|
859
|
|
|
Interest income, net
|
|
$
|
776
|
|
|
$
|
859
|
|
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 2020 were approximately nil and nil, respectively, and approximately $3,000 and nil during fiscal 2019.
Comprehensive Income
Comprehensive income is net income adjusted for foreign currency translation adjustments.
34
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
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lease assets and liabilities to be recorded on the balance sheet. This update is effective for public entities in fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years, and certain qualitative and quantitative disclosures are also required. Early adoption was permitted. The Company has adopted this ASU and related amendments as of April 1, 2019 on a modified retrospective basis. The Company has applied the modified retrospective approach by recording a cumulative effect adjustment as of the date of adoption, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. The Company has also elected certain practical expedients permitted under the transition guidance, including to retain the historical lease classification as well as relief from reviewing expired or existing contracts to determine if they contain leases. The Company will be exempting leases with an initial term of twelve months or less from balance sheet recognition and will not separate lease and non-lease components.
Upon adoption, the Company recognized total lease liabilities of $695,000, and corresponding right-of-use assets of $650,000, all of which is associated with leased office space. The difference between the right-of-use asset and lease liability is due to the existing deferred balance, resulting from historical straight-lining of operating leases that was reclassified upon adoption to reduce the measurement of the right-of-use assets. The Company’s Consolidated Statements of Income and Consolidated Statements of Cash Flows were not materially impacted. See Note 14, “Leases” for further details.
Recently Issued Accounting Pronouncements
The following ASUs were issued by the FASB which relate to or could relate to the Company as concerns the Company’s normal ongoing operations or the industry in which the Company operates.
Accounting Standards Update 2019-12 “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” (Issued December 2019)
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. This standard is required to take effect in the Company’s first quarter (June 2021) of the Company’s fiscal year ending March 31, 2022. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.
Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses” (Issued June 2016)
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, 2020 and March 31, 2019, inventories consisted exclusively of purchased finished goods.
35
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 (“Grande”), and one or more of Nimble’s direct and indirect subsidiaries, or with entities related to the Company’s Chairman of the Board. Set forth below is a summary of such transactions.
Controlling Shareholder
S&T International Distribution Limited (“S&T”), which is a wholly owned subsidiary of Grande N.A.K.S. Ltd., which is a wholly owned subsidiary of Nimble, collectively have, based on a Schedule 13D/A filed with the Securities and Exchange Commission (“SEC”) on February 15, 2019, the shared power to vote and direct the disposition of 15,243,283 shares, or approximately 72.4%, of the Company’s outstanding common stock as of March 31, 2020. Accordingly, the Company is a “controlled company” as defined in Section 801(a) of the NYSE American Company Guide.
Related Party Transactions
Ancillary Expenses Pertaining to Rented Office Space in Hong Kong
During the twelve months ended March 31, 2020 the Company was billed nil and approximately $5,800 and $13,000 for the twelve months ended March 31, 2019, for utility and service charges from Lafe Strategic Services Limited (“LSSL”) and the Grande Properties Management Limited (“GPML”), both related parties to the Company’s Chairman of the Board, in connection with the Company’s rented office space in Hong Kong. The Company owed nil to both LSSL and GPML related to these charges at March 31, 2020 and March 31, 2019.
Administrative service fees charged to related parties
During the twelve months ended March 31, 2020, the Company billed nil and approximately $23,000 for the twelve months ended March 31, 2019 for administrative fees to Phenomenon Agents Ltd (“PAL”), Sansui Acoustics Research Corporation (“SARC”) and TWD Industrial Co. Ltd. (“TICL"), which are subsidiaries of Nimble. The Company was owed nil from PAL, SARC and TICL related to these charges at March 31, 2020 and March 31, 2019.
Charges of rental and utility fees on office space in Hong Kong
During the twelve months ended March 31, 2020, the Company was billed approximately $174,000 and $74,000 for the twelve months ended March 31, 2019, for rental and utility fees from Vigers Appraisal and Consulting Ltd (“VACL”), which is a company related to the Company’s Chairman of the Board. The Company owed nil to VACL related to rental charges as of March 31, 2020 and March 31, 2019.
During the twelve months ended March 31, 2020, the Company was billed approximately $6,000 and nil for the twelve months ended March 31, 2019 for its share of installation charges related to an air conditioning system, and purchase of protective materials for coronavirus from LSSL. The Company owed approximately $300 to LSSL related to these charges as at March 31, 2020 and nil as at March 31, 2019.
NOTE 4 — PROPERTY AND EQUIPMENT:
As of March 31, 2020 and 2019, property, plant and equipment is comprised of the following:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
217
|
|
|
$
|
243
|
|
|
Furniture and fixtures
|
|
|
167
|
|
|
|
167
|
|
|
Leasehold improvements
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
392
|
|
|
|
418
|
|
|
Less accumulated depreciation and amortization
|
|
|
(388
|
)
|
|
|
(412
|
)
|
|
|
|
$
|
4
|
|
|
$
|
6
|
|
Depreciation of property and equipment amounted to approximately $2,000 and $5,000 for the twelve months ended March 31, 2020 and 2019, respectively. During fiscal 2020, the Company disposed of property, plant and equipment with gross book values
36
totaling approximately $26,000. The Company recognized a total net loss of nil on these disposals in fiscal 2020. During fiscal 2019, the Company disposed of property, plant and equipment with gross book values totaling approximately $103,000. The Company recognized a total net loss of $2,000 on these disposals in fiscal 2019.
NOTE 5 — INCOME TAXES:
The Company’s provision for income tax expense for fiscal 2020 and fiscal 2019 was as follows:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(437
|
)
|
|
Foreign, state and other
|
|
|
6
|
|
|
|
6
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
346
|
|
|
|
69
|
|
|
Foreign, state and other
|
|
|
105
|
|
|
|
10
|
|
|
Provision (benefit) for income tax expense
|
|
$
|
457
|
|
|
$
|
(352
|
)
|
The Company files a consolidated federal return and certain state and local income tax returns.
The difference between the effective rate reflected in the provision for income taxes and the amounts determined by applying the statutory federal rate of 21% to earnings before income taxes for fiscal 2020 and fiscal 2019 is analyzed below:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Statutory provision
|
|
$
|
(805
|
)
|
|
$
|
(553
|
)
|
|
Foreign subsidiary
|
|
|
(51
|
)
|
|
|
(36
|
)
|
|
State taxes
|
|
|
(267
|
)
|
|
|
(219
|
)
|
|
Permanent differences
|
|
|
17
|
|
|
|
39
|
|
|
Adjustment to prior year taxes
|
|
|
27
|
|
|
|
(449
|
)
|
|
Valuation allowance
|
|
|
1,536
|
|
|
|
917
|
|
|
NOL Adjustments
|
|
|
—
|
|
|
|
(51
|
)
|
|
Provision (benefit) for income tax expense
|
|
$
|
457
|
|
|
$
|
(352
|
)
|
As of March 31, 2020 and March 31, 2019, the significant components of the Company’s deferred tax assets which were classified as non-current, were as follows:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable reserves
|
|
$
|
38
|
|
|
$
|
41
|
|
|
Inventory reserves
|
|
|
164
|
|
|
|
159
|
|
|
Accruals
|
|
|
20
|
|
|
|
21
|
|
|
Property, plant and equipment and intangible assets
|
|
|
91
|
|
|
|
227
|
|
|
Net operating loss and credit carry forwards
|
|
|
2,588
|
|
|
|
1,365
|
|
|
Valuation allowance
|
|
|
(2,901
|
)
|
|
|
(1,365
|
)
|
|
Total deferred tax assets
|
|
$
|
0
|
|
|
$
|
448
|
|
The Company has $7.6 million of U.S. federal net operating loss carry forwards (“NOLs”) as of March 31, 2020.
37
The Company has $15.5 million of state NOLs as of March 31, 2020 as follows:
|
Loss Year (Fiscal)
|
|
Included in DTA
|
|
Expiration Year (Fiscal)
|
|
|
2014
|
|
$2.4 million
|
|
|
2034
|
|
|
2017
|
|
$0.9 million
|
|
|
2036
|
|
|
2018
|
|
$4.0 million
|
|
2037
|
|
|
2019
|
|
$4.0 million
|
|
2038
|
|
|
2020
|
|
$4.2 million
|
|
2039
|
|
The tax benefits related to these state net operating loss carry forwards and future deductible temporary differences are recorded to the extent management believes it is more likely than not that such benefits will be realized.
The income of foreign subsidiaries before taxes was $425,000 for the fiscal year ended March 31, 2020 as compared to a loss before taxes of $419,000 for the fiscal year ended March 31, 2019, respectively.
The Company analyzed the future reasonability of recognizing its deferred tax assets at March 31, 2020. As a result, the Company concluded that a valuation allowance of approximately $2,901,000 would be recorded against the assets.
The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of March 31, 2020, the Company’s open tax years for examination for U.S. federal tax are 2016-2019, and for U.S. states’ tax are 2011-2019. Based on the outcome of tax examinations or due to the expiration of statutes of limitations, it is reasonably possible that the unrecognized tax benefits related to uncertain tax positions taken in previously filed returns may be different from the liabilities that have been recorded for these unrecognized tax benefits. As a result, the Company may be subject to additional tax expense.
As of March 31, 2020 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, 2020.
NOTE 6 — COMMITMENTS AND CONTINGENCIES:
The Company’s ERP software provider is subscription based with annual commitments as follows (in thousands).
|
Fiscal Years
|
|
Amount
|
|
|
2021
|
|
$
|
27
|
|
|
2022
|
|
|
—
|
|
|
2023
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
|
Thereafter
|
|
|
—
|
|
|
Total
|
|
$
|
27
|
|
Rent expense resulting from leases with non-affiliated companies aggregated $97,000 and $107,000, respectively, for fiscal 2020 and 2019.
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, 2020 and March 31, 2019, the Company had no letters of credit outstanding.
38
Capital Expenditure and Other Commitments:
As of March 31, 2020, there were no capital expenditure or other commitments other than the normal purchase orders used to secure product.
Employee Benefit Plan:
The Company currently sponsors a defined contribution 401(k) retirement plan which is subject to the provisions of the Employee Retirement Income Security Act. The Company matches a percentage of the participants’ contributions up to a specified amount. These contributions to the plan for fiscal 2020 and 2019 were $23,000 and $25,000, respectively, and were charged against earnings for the periods presented.
NOTE 7 — SHAREHOLDERS’ EQUITY:
Common Shares:
Authorized common shares total 75,000,000 with a par value $0.01 per share, of which, 21,042,652 were outstanding as of March 31, 2020 and March 31, 2019. Shares held in treasury at March 31, 2020 and March 31, 2019 were 31,923,145.
Common Stock Repurchase Program:
In December 2016, the Company’s Board of Directors approved a common stock repurchase program under which the Company was authorized to repurchase up to $5 million of its common stock. The Board of Directors subsequently approved an additional $5 million in repurchases and extended the program to December 31, 2018, as of which date the program expired. Under the program, repurchases were funded from available working capital and all repurchased shares are held in the treasury as authorized and issued shares available for general corporate purposes.
During the twelve months ended March 31, 2020, the Company repurchased no shares under the program, as the program expired on December 31, 2018. During the twelve months ended March 31, 2019, the Company repurchased 1,756,436 shares for $2,617,858. In aggregate, the Company repurchased 6,087,180 shares for $8,977,096 under the program.
Series A Preferred Stock:
The Company has issued and outstanding 3,677 shares of Series A Preferred Stock, $.01 par value (“Preferred Stock”), with a face value of $3,677,000, which had no determinable market value as of March 31, 2020. The Preferred Stock is non-voting, has no dividend preferences and has not been convertible since March 31, 2002; however, it retains a liquidation preference.
NOTE 8 — SHORT TERM INVESTMENTS:
At March 31, 2020 and March 31, 2019, the Company held short-term investments in certificates of deposit totaling $28.1 million and $28.4 million, respectively. The Company held no certificates of deposit which were classified as cash equivalents as of March 31, 2020 and $2.0 million as of March 31, 2019.
NOTE 9 — NET EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per share for the years ended March 31, 2020 and March 31, 2019:
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|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,307
|
)
|
|
$
|
(2,437
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share —
weighted average shares
|
|
|
21,043
|
|
|
|
21,931
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.11
|
)
|
39
For the year ended March 31, 2020, there were no outstanding instruments which were potentially dilutive.
NOTE 10 — LICENSE AGREEMENTS:
The Company is currently party to one license agreement that allows the licensee to access the Company’s trademarks for the manufacture and/or the sale of consumer electronics and other products. The license agreement (i) allows the licensee to use the Company’s trademarks for a specific product category, or for sales within specific geographic areas, or for sales to a specific customer base, or any combination of the above, or any other category that might be defined in applicable license agreement and (ii) may be subject to renewal at the initial expiration of applicable agreement and is governed by the laws of the United States.
NOTE 11 — LEGAL PROCEEDINGS:
The Company is not currently a party to any legal proceedings other than litigation matters, in most cases involving ordinary and routine claims incidental to its business. Management cannot estimate with certainty the Company’s ultimate legal and financial liability with respect to such pending litigation matters. However, management believes, based on its examination of such matters, that the Company’s ultimate liability will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 12 — RISKS AND UNCERTAINTIES:
Customer Concentration
For the twelve months ended March 31, 2020, the Company’s three largest customers, accounted for approximately 80% of the Company’s net revenues, with Walmart accounting for 44%, Amazon.com accounting for 25% and Fred Meyer accounting for 11%. For the twelve months ended March 31, 2019 the Company’s three largest customers, accounted for approximately 79% of the Company’s net revenue with Walmart accounting for 50%, Amazon.com accounting for 16% and Fred Meyer accounting for 13%.
Product Concentration
For the twelve months ended March 31, 2020, the Company’s gross product sales were comprised of four product types within two categories — housewares products and audio products — and microwave ovens, which product type is within the housewares category, generated approximately 35% of the Company’s gross product sales. Audio products generated approximately 61% of the Company’s gross product sales during fiscal 2020.
For the twelve months ended March 31, 2019, the Company’s gross product sales were comprised of the same four product types within the same two categories — housewares products and audio products — and microwave ovens, which product type is within the housewares category, generated approximately 39% of the Company’s gross product sales. Audio products generated approximately 57% of the Company’s gross product sales during fiscal 2019.
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 and Amazon.com accounted for 45% and 45% as of March 31, 2020, respectively. As a percent of the Company’s total trade accounts receivable, net of specific reserves, Walmart and Amazon.com accounted for 47% and 29% as of March 31, 2019, respectively. The Company periodically performs credit evaluations of its customers but generally does not require collateral, and the Company provides for any anticipated credit losses in the financial statements based upon management’s estimates and ongoing reviews of recorded allowances. The accounts receivable allowance for doubtful accounts on the Company’s total trade accounts receivable balances was approximately $4,000 at March 31, 2020 and approximately $2,000 at March 31, 2019. Due to the high concentration of the Company’s net trade accounts receivables among just two customers, any significant failure by one of these customers to pay the Company the amounts
40
owing against these receivables would result in a material adverse effect on the Company’s business, financial condition and results of operations.
The Company maintains its cash accounts with major U.S. and foreign financial institutions. The Company’s cash and restricted cash balances on deposit in the U.S. as of March 31, 2020 and March 31, 2019 were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per qualifying bank account in accordance with FDIC rules. The Company’s cash, cash equivalents and restricted cash balances in excess of these FDIC-insured limits were approximately $6.0 million and approximately $7.6 million at March 31, 2020 and March 31, 2019, respectively.
Supplier Concentration
During the twelve months ended March 31, 2020, the Company procured approximately 87% of its products for resale from its two largest factory suppliers, both of which are located in China, and of these, the Company procured approximately 50% of these products from one of them and 37% from another. During the twelve months ended March 31, 2019, the Company procured approximately 90% of its products for resale from its two largest factory suppliers, and of these, the Company procured approximately 71% of these products from one of them and 19% from another.
No assurance can be given that ample supply of product would be available at current prices and on current credit terms if the Company were required to seek alternative sources of supply without adequate notice by a supplier or a reasonable opportunity to seek alternate production facilities and component parts and any resulting significant shortage of product supply would have a material adverse effect on the Company’s business, financial condition and results of operation.
NOTE 13 — GEOGRAPHIC INFORMATION:
Net revenues and long-lived assets of the Company for the fiscal years ended March 31, 2020 and March 31, 2019 are summarized below by geographic area (in thousands). Net revenues are attributed to geographic area based on the location of the customer.
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|
Year Ended March 31, 2020
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|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
6,293
|
|
|
$
|
—
|
|
|
$
|
6,293
|
|
|
Long-lived assets
|
|
$
|
252
|
|
|
$
|
293
|
|
|
$
|
545
|
|
|
|
|
Year Ended March 31, 2019
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
8,982
|
|
|
$
|
—
|
|
|
$
|
8,982
|
|
|
Long-lived assets
|
|
$
|
41
|
|
|
$
|
119
|
|
|
$
|
160
|
|
41
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 three to five years. The Company has elected not to separate lease and non-lease components for all leased assets. The Company did not identify any events or conditions during the year ended March 31, 2020 to indicate that a reassessment or re-measurement of the Company’s existing leases was required. There were also no impairment indicators identified during the year ended March 31, 2020 that required an impairment test for the Company’s right-of-use assets or other long-lived assets in accordance with ASC 360-10.
As of March 31, 2020, the Company’s current operating and finance lease liabilities were $241,000 and $1,000, respectively, and its non-current operating and finance lease liabilities were approximately $234,000 and $4,000, respectively. The Company’s operating and finance lease right-of-use asset balances are presented in non-current assets. The net balance of the Company’s operating and finance lease right-of-use assets as of March 31, 2020 were approximately $442,000 and $5,000, respectively.
The components of lease costs, which were included in operating expenses in the Company’s condensed consolidated statements of operations, were as follows:
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|
|
Twelve Months Ended March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Lease cost
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
254
|
|
|
$
|
—
|
|
|
Finance lease cost
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of right-of-use assets
|
|
|
—
|
|
|
|
—
|
|
|
Interest on lease liabilities
|
|
|
—
|
|
|
|
—
|
|
|
Variable lease costs
|
|
|
—
|
|
|
|
—
|
|
|
Total lease cost
|
|
|
254
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The supplemental cash flow information related to leases are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
264
|
|
|
|
—
|
|
|
Operating cash flows from finance leases
|
|
|
—
|
|
|
|
—
|
|
|
Financing cash flows from finance leases
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
650
|
|
|
|
—
|
|
|
Finance leases
|
|
|
5
|
|
|
|
—
|
|
|
Information relating to the lease term and discount rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in months)
|
|
As of March 31, 2020
|
|
|
As of March 31, 2019
|
|
|
Operating leases
|
|
|
26.0
|
|
|
|
—
|
|
|
Finance leases
|
|
|
50.2
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.50
|
%
|
|
|
—
|
|
|
Finance leases
|
|
|
7.50
|
%
|
|
|
—
|
|
42
|
As of March 31, 2020 the maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
267
|
|
|
$
|
1
|
|
|
2022
|
|
|
162
|
|
|
|
1
|
|
|
2023
|
|
|
84
|
|
|
|
1
|
|
|
2024
|
|
|
—
|
|
|
|
1
|
|
|
2025
|
|
|
—
|
|
|
|
1
|
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
Total lease payments
|
|
$
|
513
|
|
|
$
|
5
|
|
|
Less: Imputed interest
|
|
|
(38
|
)
|
|
|
—
|
|
|
Total
|
|
$
|
475
|
|
|
$
|
5
|
|
NOTE 15— SUBSEQUENT EVENT:
The Covid-19 outbreak in early 2020 has had a negative impact on the Company’s operational and financial performance. However, the extent of this negative impact cannot be reasonably estimated at this time.
In April and May of 2020, the Company applied for and received aggregate loan proceeds in the amount of approximately $204,000 under the Paycheck Protection Program ("PPP"). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the Company terminates employees or reduces salaries during the eight-week period and does not cure these terminations or reductions by June 30, 2020, as per the current guidance from the Small Business Administration.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes its use of proceeds will meet the conditions for forgiveness of the loan, management cannot provide assure that its actions will result in the forgiveness of the loan, in whole or in part.
43
