UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

For the quarterly period ended December 31, 2018

Or

For the transition period from                      to                     

Commission file number 001-07731

 

 

EMERSON RADIO CORP.

(Exact name of registrant as specified in its charter)

 

 

(973) 428-2000

(Registrant’s telephone number, including area code)

 

 

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.     ☒   Yes     ☐   No

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).     ☒   Yes     ☐   No

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. (Check one):

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐   Yes     ☒   No

Indicate the number of shares outstanding of common stock as of February 11, 2019: 21,042,652.

 

 

 

---

 

TABLE OF CONTENTS

 

 

2

---

 

PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements.

EMERSON RADIO CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

3

---

 

EMERSON RADIO CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands except share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

4

---

 

EMERSON RADIO CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

5

---

 

EMERSON RADIO CORP. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 — BACKGROUND AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Emerson Radio Corp. and its subsidiaries (“Emerson” or the “Company”). The Company designs, sources, imports and markets certain houseware and consumer electronic products, and licenses the Company’s trademarks for a variety of products.

The unaudited interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s consolidated financial position as of December 31, 2018 and the results of operations for the three and nine month periods ended December 31, 2018 and December 31, 2017. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes; actual results could materially differ from those estimates. The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and accordingly do not include all of the disclosures normally made in the Company’s annual consolidated financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended March 31, 2018 (“Fiscal 2018”), included in the Company’s annual report on Form 10-K, as amended, for fiscal 2018.

The results of operations for the three and nine month periods ended December 31, 2018 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the full year ending March 31, 2019 (“Fiscal 2019”).

Whenever necessary, reclassifications are made to conform the prior year’s consolidated financial statements to the current year’s presentation.

Unless otherwise disclosed in the notes to these consolidated financial statements, the estimated fair value of the financial assets and liabilities approximates the carrying value.

 

Recently Adopted Accounting Pronouncements

In May 2014, issued ASU 2014-09 "Revenue from Contracts with Customers", subsequently amended and collectively Topic 606. The standard replaced almost all existing revenue recognition guidance in U.S. GAAP, with the intention to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASC 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASC 606 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which became effective for the Company beginning April 1, 2018. The Company adopted ASC 606 in the first quarter of fiscal 2019 on a modified retrospective basis with no changes recognized in the prior year comparative financial statements. The adoption of this standard did not have a material impact on the Company’s financial statements. The Company has enhanced its disclosures of revenue to comply with the new guidance.

6

---

 

Recently Issued Accounting Pronouncements

The following Accounting Standards Updates (“ASUs”) were issued by the Financial Accounting Standards Board 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 2016-02 “Leases” (Issued February 2016)

In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new Accounting Standards Codification Topic 842 "Leases" to replace the previous Topic 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09 (see above). ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is assessing the standard to determine if ASU 2016-02 will have a material impact on its financial statements.

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, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material impact on its financial statements.

Revenue recognition: Sales to customers and related cost of sales are primarily recognized at the point in time when control of goods transfers to the customer. Under the Direct Import Program, title passes in the country of origin. Under the Domestic Program, title passes primarily at the time of shipment. Estimates for future expected returns are based upon historical return rates and netted against revenues.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Revenue is recorded net of customer discounts, promotional allowances, volume rebates and similar charges. When the Company offers the right to return product, historical experience is utilized to establish a liability for the estimate of expected returns. Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue.

Management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends and changes in customer demand for the Company’s products when evaluating the adequacy of the reserve for sales returns. Management judgments and estimates must be made and used in connection with establishing the sales return reserves in any accounting period. Additional reserves may be required if actual sales returns increase above the historical return rates. Conversely, the sales return reserve could be decreased if the actual return rates are less than the historical return rates, which were used to establish the reserve.

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 in prior periods. 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.

 

 

 

7

---

 

NOTE 2 — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts). Weighted average shares includes the impact of shares held in treasury.

 

 

 

NOTE 3 — SHAREHOLDERS’ EQUITY

Outstanding capital stock at December 31, 2018 consisted of common stock and Series A preferred stock. The Series A preferred stock is non-voting, has no dividend preferences and has not been convertible since March 31, 2002; however, it retains a liquidation preference.

At December 31, 2018, the Company had no options, warrants or other potentially dilutive securities outstanding.

In December 2016, the Company publicly announced the approval by the Board of Directors of the repurchase of up to $5 million of its common stock, that the repurchases may be effected from time to time at prevailing market prices, through open market or in privately negotiated transactions, which may include, in whole or in part, the establishment of a purchase program pursuant to the safe harbor provided by Rule 10b5-1 under the Securities Exchange Act of 1934, through block purchases or through accelerated or forward or similar stock purchases, and that the Company intends to run the repurchase program through the end of calendar 2017, unless the period is extended or shortened by the Board of Directors.

In September 2017, the Company’s Board of Directors approved an additional $5 million, bringing the total authorized stock repurchases under the program to $10 million and extended the program to June 30, 2018. In June 2018, the Company’s Board of Directors 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 will be held in the treasury as authorized and issued shares available for general corporate purposes. During the three months ended December 31, 2018, 1,262,822 shares for $1,884,474 were repurchased. As of December 31, 2018, the Company had repurchased 6,082,677 shares for $8,970,556 under this program. Subsequent to December 31, 2018, the Company settled an additional 4,503 shares purchased under the program prior to its expiration for $6,540. These were the final purchases under the program.

 

 

NOTE 4 — INVENTORY

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. As of December 31, 2018 and March 31, 2018, inventories consisted of the following (in thousands):

 

 

 

NOTE 5 — INCOME TAXES

At December 31, 2018, the Company had $2.3 million of U.S. federal net operating loss (“NOL”) carry forwards. These losses do not expire but are limited to utilization of 80% of taxable income in any one year. At December 31, 2018 the Company had approximately $9.2 million of U.S. state net operating loss carry forwards.  The tax benefits related to these state net operating loss carry forwards and future deductible temporary differences are recorded to the extent management believes it is more likely than not that such benefits will be realized. The income of foreign subsidiaries before taxes was $215,000 for the quarter ended December 31, 2018 as compared to a loss before taxes of $57,000 for the quarter ended December 31, 2017, respectively.       

8

---

 

The Company analyzed the future reasonability of recognizing its deferred tax assets at December 31, 2018. As a result, the Company concluded that a valuation allowance of approximately $1,080,000 would be recorded against the assets.

Although the Company generated a net operating loss, it recorded income tax expense of approximately $2,100 during the three months ended December 31, 2018, resulting from the change in its deferred tax asset balance. During the three months ended December 31, 2017, the Company recorded an income tax expense of $378,000. For the nine months ended December 31, 2018 the Company recorded income tax expense of $73,000 as compared to income tax expense of $313,000 for the nine months ended December 31, 2017.  

The Company is subject to examination and assessment by tax authorities in numerous jurisdictions. As of December 31, 2018, the Company’s open tax years for examination for U.S. federal tax are 2014-2017, and for U.S. states’ tax are 2013-2017. 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.

In December 2017, President Trump signed into law H.R.1, commonly known as the Tax Cuts and Jobs Act (“TCJA”), which makes significant changes to the Internal Revenue Code. Subsequent to enactment of the TCJA in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance regarding accounting for the TCJA’s impact.  SAB 118 requires companies to recognize those tax items for which accounting can be completed. For items whose accounting has not been completed, companies must recognize provisional amounts to the extent they are reasonably estimable, with subsequent adjustments over a measurement period as more information is available and calculations are finalized.

The TCJA lowered the Company’s US statutory federal tax rate from 34% to 21% effective January 1, 2018.

While the Company has recognized the provisional tax effect of the transition tax on deemed repatriation and the revaluation of deferred tax assets and liabilities in its financial statements for the year ended March 31, 2018, the ultimate tax impact could differ from these provisional amounts. The Company will continue to analyze the impact of the TCJA, including any additional regulatory guidance issued by the U.S. tax authorities, and expects to complete its accounting in 2019.

Prior to March 2018, the Company had asserted under ASC 740-30 that all of the unremitted earnings of its foreign subsidiaries were indefinitely invested. The Company evaluated 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.

Because of the transition tax on deemed repatriation required by the TCJA, the Company has been subject to tax in 2018 on the entire amount of its previously undistributed earnings from foreign subsidiaries. Beginning in 2019, the TCJA will generally provide a 100% deduction for U.S. federal tax purposes of dividends received by the Company from its foreign subsidiaries. However, the Company is currently evaluating the potential foreign and U.S. state tax liabilities that would result from future repatriations, if any, and how the TCJA will affect the Company's existing accounting position with regard to the indefinite reinvestment of undistributed foreign earnings. The Company expects to complete this evaluation and determine the impact which the legislation may have on its indefinite reinvestment assertion within the measurement period provided by SAB 118.

The TCJA establishes new tax rules designed to tax U.S. companies on global intangible low-taxed income (GILTI) earned by foreign subsidiaries. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA. Therefore, the Company has not made any adjustments related to potential GILTI tax in its December 31, 2018 financial statements.                  

 

 

NOTE 6 — RELATED PARTY TRANSACTIONS

From time to time, Emerson engages in business transactions with its controlling shareholder, Nimble Holdings Company Limited (“Nimble”), formerly known as The Grande Holdings Limited (“Grande”), and one or more of Nimble’s direct and indirect subsidiaries. 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 the shared power to vote and direct the disposition of 15,243,283 shares, or

9

---

 

approximately 72.4%, of the Company’s outstanding common stock as of December 31, 2018. Accordingly, the Company is a “controlled company” as defined in Section 801(a) of the NYSE American Company Guide.

On September 26, 2017, Wealth Warrior Global Limited (“Wealth Warrior”) acquired approximately 65.9% of the outstanding share capital of Nimble from Sino Bright Enterprises Co., Ltd., a company related to the Company’s Chairman of the Board. Based upon disclosures filed by Wealth Warrior on a Schedule 13D on October 10, 2017, as subsequently amended, Wealth Warrior, together with its affiliates, collectively held 73.9% of the outstanding share capital of Nimble as of October 10, 2017. Accordingly, a change of control of the Company was deemed to have occurred as Wealth Warrior may be deemed to be a controlling person of Nimble, and as a result may be deemed to share the power to vote or direct the vote of (and to share the power to dispose or direct the disposition of) the shares of the Company held for the account of S&T.

Related Party Transactions

  

Ancillary expenses pertaining to rented office space in Hong Kong

During the three and nine months ended December 31, 2018, the Company was billed approximately $5,000 and $5,800 for utility and service charges from Lafe Strategic Services Limited (“LSSL”), which is a company related to the Company’s Chairman of the Board, in connection with the Company’s rented office space in Hong Kong. The Company owed $5,000 to LSSL related to these charges at December 31, 2018.

Administrative service fees charged to related parties

During the three and nine months ended December 31, 2018, the Company billed approximately $6,000 and $17,000 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 December 31, 2018.

Security deposit and charges of rental and utility fees on new office space in Hong Kong

During the three and nine months ended December 31, 2018, the Company was billed approximately $22,500 and $30,500 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. During the nine months ended December 31, 2018, a 3 month security deposit of approximately $39,600 was billed from VACL.  As of December 31, 2018 the Company owed nil to VACL related to the security deposit and rental charges. The rental terms have been agreed in advance by the Independent Directors of the Company.

 

 

NOTE 7 — SHORT TERM INVESTMENTS

At December 31, 2018 and March 31, 2018, the Company held short term investments totaling $14.0 million and $16.0 million, respectively. These investments were comprised of bank certificates of deposit, which bear an interest rate of approximately 3.15% and will mature in February 2019.

 

 

NOTE 8 — CONCENTRATION RISK

Customer Concentration

For the three months ended December 31, 2018, the Company’s three largest customers accounted for approximately 89% of the Company’s net revenues, of which Walmart accounted for 51%, Amazon accounted for 23% and Fred Meyer accounted for 15%. For the nine months ended December 31, 2018, the Company’s three largest customers accounted for approximately 80% of the Company’s net revenues, of which Walmart accounted for 49%, Amazon accounted for 17% and Fred Meyer accounted for 14%.

For the three months ended December 31, 2017, the Company’s three largest customers accounted for approximately 92% of the Company’s net revenues, of which Walmart accounted for 61%, Amazon accounted for 17% and Fred Meyer accounted for 14%. For the nine months ended December 31, 2017, the Company’s three largest customers accounted for approximately 84% of the Company’s net revenues, of which Walmart accounted for 62%, Amazon accounted for 11% and Fred Meyer accounted for 11%.

10

---

 

A significant decline in net sales to any of the Company’s key customers would have a material adverse effect on the Company’s business, financial condition and results of operation.

Product Concentration

For the three and nine months ended December 31, 2018, the Company’s gross product sales were comprised of two product types within two categories — housewares products and audio products, of which microwave ovens generated approximately 30% and 40%, respectively, of the Company’s gross product sales. Audio products generated approximately 67% and 56%, respectively, of the Company’s gross product sales.

For the three and nine months ended December 31, 2017, the Company’s gross product sales were comprised of the same two product types within two categories — housewares products and audio products, of which microwave ovens generated approximately 59% and 63%, respectively, of the Company’s gross product sales. Audio products generated approximately 33% and 28%, respectively, of the Company’s gross product sales.

Concentrations of Credit Risk

As a percent of the Company’s total trade accounts receivable, net of specific reserves, the Company’s top 2 customers accounted for 53% and 46% as of December 31, 2018, respectively. As a percent of the Company’s total trade accounts receivable, net of specific reserves, the Company’s top 2 customers accounted for 64% and 21% as of March 31, 2018, respectively. The Company periodically performs credit evaluations of its customers but generally does not require collateral, and the Company provides for any anticipated credit losses in the financial statements based upon management’s estimates and ongoing reviews of recorded allowances. Due to the high concentration of the Company’s net trade accounts receivables among just two customers, any significant failure by one of these customers to pay the Company the amounts owing against these receivables would result in a material adverse effect on the Company’s business, financial condition and results of operations.

Supplier Concentration

During the three and nine months ended December 31, 2018, the Company procured approximately 96% and 90% of its products for resale from its two largest factory suppliers, of which 86% and 72%, respectively, was supplied by its largest supplier. During the three and nine months ended December 31, 2017, the Company procured approximately 97% and 93% of its products for resale from its two largest factory suppliers, of which 68% and 63%, respectively, was supplied by its largest supplier.

 

11

---

 

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

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 Quarterly Report.

In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. Accordingly, all amounts are approximations.

Forward-Looking Information

This report contains forward looking statements within the meaning of 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 the Company’s 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. The reader can identify these forward-looking statements through the Company’s use of words such as “may,” “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:

12

---

 

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 report or the date of the document incorporated by reference into this 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. Management has expressed its expectations, beliefs and projections in good faith and it believes it has a reasonable basis for them. However, management cannot assure the reader that its expectations, beliefs or projections will be achieved or accomplished.

Results of Operations

The following table summarizes certain financial information for the three and nine month periods ended December 31, 2018 (fiscal 2019) and December 31, 2017 (fiscal 2018) (in thousands):

 

 

Net product sales — Net product sales for the third quarter of fiscal 2019 were $2.4 million as compared to $4.1 million for the third quarter of fiscal 2018, a decrease of $1.7 million, or 40.6%. The Company’s sales during the third quarters of fiscal 2019 and fiscal 2018 were highly concentrated among the Company’s two largest customers – Wal-Mart and Amazon.com in fiscal 2019 and fiscal 2018, where gross product sales comprised approximately 75.4% and 79.5%, respectively, of the Company’s total gross product sales.

For the nine month period of fiscal 2019, net product sales were $7.0 million as compared to $10.4 million for the nine month period of fiscal 2018, a decrease of $3.4 million, or 32.4%. The Company’s sales during the nine month periods of fiscal 2019 and fiscal 2018 were highly concentrated among the Company’s two largest customers – Wal-Mart and Amazon.com in fiscal 2019 and fiscal 2018, where gross product sales comprised approximately 70.2% and 76.2%, respectively, of the Company’s total gross product sales.

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 $6,000 and $18,000 for the third quarters of fiscal 2019 and fiscal 2018, respectively, and approximately $15,000 and $41,000 for the nine month periods of fiscal 2019 and fiscal 2018, 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 decrease in net product sales were as follows:

13

---

 

Business operations —Emerson will continue to expand the existing distribution channels and to develop and promote new products to regain shelf spaces with retailers in the USA. Emerson is also investing 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 Emerson has historically focused. Emerson also is continuing its efforts to identify strategic courses of action related to its licensing activities, including seeking new licensing relationships.

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 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 the recently announced U.S. tariffs on certain imported goods from China, and the current U.S. administration’s public support for additional tariffs on imported goods from China, and China’s retaliatory tariffs on certain goods imported from the United States, as well as modifications to international trade policy, may affect its product costs going forward, which could require the Company to take pricing action to offset the increasing costs; however, at this time the Company is unable to quantify this possible effect on its costs. Although the Company is monitoring the trade environment and working to mitigate the possible effect of tariffs through pricing and sourcing strategies, the Company cannot be certain how its customers and competitors will react to the actions taken, and some costs may be passed through to the Company’s customers as product price increases in the future. For more information on risks associated with the Company’s operations, including tariffs, please see the risk factors within Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K, as amended, for the year ended March 31, 2018, as updated in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.

Emerson has taken active steps to manage and control its operating costs. The operating costs for the third quarter of fiscal 2019 were $0.9 million as compared to $1.1 million for the third quarter of fiscal 2018. The operating costs for the nine month period of fiscal 2019 were $2.9 million as compared to $3.8 million for the nine month period of fiscal 2018.

Licensing revenue — Licensing revenue in the third quarter of fiscal 2019 was $0.1 million as compared to $0.2 million in the third quarter of fiscal 2018, a decrease of $0.1 million or 25.5%. The year-over-year decrease can be attributed to the non-renewal of one of the Company’s licensees which expired in December 2017.

Licensing revenue for the nine month period of fiscal 2019 was $0.3 million as compared to $0.5 million for the nine month period of fiscal 2018, a decrease of $0.2 million or 35.9%. The year-over-year decrease can be attributed to the non-renewal of one of the Company’s licensees which expired in December 2017.

Net revenues — As a result of the foregoing factors, the Company’s net revenues were $2.5 million in the third quarter of fiscal 2019 as compared to $4.2 million in the third quarter of fiscal 2018, a decrease of $1.7 million, or 40.0% and $7.4 million for the nine month period of fiscal 2019 as compared to $11.0 million for the nine month period of fiscal 2018, a decrease of $3.6 million or 32.6%.

Cost of sales — In absolute terms, cost of sales decreased $1.7 million, or 41.7%, to $2.4 million in the third quarter of fiscal 2019 as compared to $4.1 million in the third quarter of fiscal 2018. The decrease in absolute terms for the third quarter of fiscal 2019 as compared to the third quarter of fiscal 2018 was primarily related to decreased net product sales and by lower year-over-year gross cost of sales as a percentage of gross sales.

14

---

 

In absolute terms, cost of sales decreased $3.3 million, or 32.0%, to $7.0 million for the nine month period of fiscal 2019 as compared to $10.3 million for the nine month period of fiscal 2018. The decrease in absolute terms for the nine month period of fiscal 2019 as compared to the nine month period of fiscal 2018 was primarily related to decreased net product sales and by lower year-over-year gross cost of sales as a percentage of gross sales.

The Company purchases the products it sells from a limited number of factory suppliers. For the third quarter of fiscal 2019 and fiscal 2018, the Company purchased 96% and 97%, respectively, from its two largest suppliers. For the nine month period of fiscal 2019 and fiscal 2018, the Company purchased 90% and 93%, respectively, from its two largest suppliers.

Other operating costs and expenses — Other operating costs and expenses as a percentage of net product sales were 0.1% for the third quarter of fiscal 2019 as compared to 0.3% for the third quarter of fiscal 2018. In absolute terms, other operating costs and expenses decreased $12,000, or 85.7%, to $2,000 for the third quarter of fiscal 2019 as compared to $14,000 for the third quarter of fiscal 2018 as a result of lower warranty and returns processing costs.

Other operating costs and expenses as a percentage of net product sales were 0.3% for the nine month period of fiscal 2019 as compared to 0.4% for the nine month period of fiscal 2018. In absolute terms, other operating costs and expenses decreased $16,000, or 42.1%, to $22,000 for the nine month period of fiscal 2019 as compared to $38,000 for the nine month period of fiscal 2018 as a result of lower warranty and returns processing costs.

Selling, general and administrative expenses (“S,G&A”) — S,G&A, in absolute terms, was $0.9 million in the third quarter of fiscal 2019 as compared to $1.1 million in the third quarter of fiscal 2018, a decrease of $0.2 million, or 13.8%. S,G&A, as a percentage of net revenues, was 37.3% in the third quarter of fiscal 2019 as compared to 26.0% in the third quarter of fiscal 2018. The decrease in S,G&A was due to reductions in compensation costs and legal fees.

S,G&A, in absolute terms, was $2.9 million for the nine month period of fiscal 2019 as compared to $3.8 million for the nine month period of fiscal 2018, a decrease of $0.9 million, or 23.8%. S,G&A, as a percentage of net revenues, was 39.0% for the nine month period of fiscal 2019 as compared to 34.5% for the nine month period of fiscal 2018. The decrease in S,G&A was due to reductions in compensation costs, legal fees and IT costs.

Interest income, net — Interest income, net, was $240,000 in the third quarter of fiscal 2019 as compared to $131,000 in the third quarter of fiscal 2018, an increase of $109,000. The increase was primarily due to higher investments in interest bearing accounts and higher average interest rates earned on the Company’s short term investments.

Interest income, net, was $617,000 for the nine month period of fiscal 2019 as compared to $365,000 for the nine month period of fiscal 2018, an increase of $252,000. The increase was primarily due to higher investments in interest bearing accounts and higher average interest rates earned on the Company’s short term investments.

Provision for income taxes — In the third quarter of fiscal 2019, the Company recorded an income tax expense of $2,000 as compared to income tax expense of $378,000 in the third quarter of fiscal 2018. The income tax expense recorded in the third quarter of fiscal 2018 was primarily related to the passage of the Tax Cuts and Jobs Act of 2017.

For the nine month period of fiscal 2019, the Company recorded an income tax expense of $73,000 as compared to income tax expense of $313,000 for the nine month period of fiscal 2018. The income tax expense recorded in the nine months of fiscal 2018 was primarily related to the passage of the Tax Cuts and Jobs Act of 2017.

Net (loss) — As a result of the foregoing factors, the Company realized a net loss of $0.5 million in the third quarter of fiscal 2019 as compared to a net loss of $1.2 million in the third quarter of fiscal 2018.

For the nine month period of fiscal 2019, the Company realized a net loss of $2.0 million as compared to a net loss of $3.1 million for the nine month period of fiscal 2018.

Liquidity and Capital Resources

As of December 31, 2018, the Company had cash and cash equivalents of approximately $21.9 million, as compared to approximately $20.8 million at December 31, 2017. Working capital decreased to $41.2 million at December 31, 2018 as compared to $48.4 million at December 31, 2017. The increase in cash and cash equivalents of approximately $1.1 million was due to a decrease in short term investments of $8.2 million, an increase in long term income taxes payable of $2.6 million, a decrease in prepaid purchases of $1.4 million, a decrease in accounts receivable of $0.8 million, a decrease in deferred tax assets of $0.1 million partially offset by

15

---

 

the net loss generated during the prior 12 months of $5.7 million, an increase in treasury stock of $4.3 million, an increase in inventory of $1.5 million and a decrease in accounts payable and other current liabilities of $0.5 million.

Cash Flows

Net cash used by operating activities was approximately $2.5 million for the nine months ended December 31, 2018, resulting from a $2.0 million net loss generated during the period, an increase in inventory of $1.5 million, a decrease in long term income taxes payable of $0.3 million, a decrease in asset allowances and reserves of $0.2 million and a decrease in accounts payable and other liabilities of $0.2 million partially offset by a decrease in accounts receivable of $1.3 million, an decrease in prepaid purchases of $0.3 million and a decrease in deferred tax assets of $0.1 million

Net cash provided by investing activities was approximately $2.0 million for the nine months ended December 31, 2018 due to a decrease in short term certificates of deposit.

Net cash used by financing activities was approximately $2.6 million for the nine months ended December 31, 2018 due to repurchases of common stock pursuant to the Company’s stock repurchase plan.

Sources and Uses of Funds

The Company’s principal existing sources of cash are generated from operations. The Company believes that its existing cash balance and sources of cash will be sufficient to support existing operations over the next 12 months.

Off-Balance Sheet Arrangements

As of December 31, 2018, the Company did not have any off-balance sheet arrangements as defined under the rules of the Securities and Exchange Commission.

Recently Adopted Accounting Pronouncements

In May 2014, issued ASU 2014-09 "Revenue from Contracts with Customers", subsequently amended and collectively Topic 606. The standard replaced almost all existing revenue recognition guidance in U.S. GAAP, with the intention to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASC 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASC 606 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which became effective for the Company beginning April 1, 2018. The Company adopted ASC 606 in the first quarter of fiscal 2019 on a modified retrospective basis with no changes recognized in the prior year comparative financial statements. The adoption of this standard did not have a material impact on the Company’s financial statements. The Company has enhanced its disclosures of revenue to comply with the new guidance.

Recently Issued Accounting Pronouncements

The following Accounting Standards Updates (“ASUs”) were issued by the Financial Accounting Standards Board 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 2016-02 “Leases” (Issued February 2016)

In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new Accounting Standards Codification Topic 842 "Leases" to replace the previous Topic 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09 (see above). ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is assessing the standard to determine if ASU 2016-02 will have a material impact on its financial statements.

16

---

 

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, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material impact on its financial statements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

 

 

Item 4. Controls and Procedures.

(a) 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its Exchange Act reports 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 Chief Executive Officer and Chief 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. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, 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 December 31, 2018, are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act 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.

(b) Changes in Internal Controls Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

17

---

 

PART II — OTHER INFORMATION

 

 

Item 1. 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 any 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.

Item 1A. Risk Factors.

The Company’s operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K, as amended, for the year ended March 31, 2018, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of the Company’s common stock. Except as set forth below, there have been no material changes to our risk factors since the Company's Annual Report on Form 10-K for the year ended March 31, 2018.

Foreign regulations and changes in 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. Conducting an international business inherently 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. For example, the current U.S. administration has publicly supported trade proposals, including recently implemented tariffs on certain goods imported from China and other proposed tariffs, as well as modifications to international trade policy and other changes that may affect U.S. trade relations with other countries. In addition, in July 2018, the Office of the United States Trade Representative announced a list of thousands of categories of goods that currently face tariffs of 10%. These tariffs may increase to 25% in March 2019 if the U.S. and China cannot reach an agreement on various related matters. As 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 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 Company’s ability to compete against competitors who do not manufacture in China or otherwise are not subject to such tariffs. Among the other factors that may adversely affect the Company’s revenues and increase its costs are:

Any of the factors described above may materially and adversely affect the Company’s revenues and/or increase its operating expenses.

18

---

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table reports information regarding repurchases by the Company of its common stock during the three months ended December 31, 2018:

 

Issuer Purchases of Equity Securities (1)

 

 

 

 

 

Item 3. Defaults Upon Senior Securities.

(a) None

(b) None

 

 

Item 4. Mine Safety Disclosure.

Not applicable.

 

 

Item 5. Other Information.

None

 

 

19

---

 

Item 6. Exhibits.

 

 

20

---

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

21