Emerson Radio Corp: Form 10-Q for the period ended Dec 31, 2024

The following discussion of the Company’s operations and financial condition should be read in conjunction with the interim condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

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 (the “Exchange Act”).

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,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

• the Company’s ability to generate sufficient revenue to achieve and maintain profitability;
• the Company’s ability to obtain new customers and retain key existing customers, including the Company’s ability to maintain purchase volumes of the Company’s products by its key customers;
• the Company’s ability to obtain new licensees and distribution relationships and maintain relationships with its existing licensees and distributors;
• the Company’s ability to resist price increases from its suppliers or pass through such increases to its customers;
• changes in consumer spending for retail products, such as the Company’s products, and in consumer practices, including sales over the Internet;
• the Company’s ability to maintain effective internal controls or compliance by its personnel with such internal controls;
• the Company’s ability to successfully manage its operating cash flows to fund its operations;
• the Company’s ability to anticipate market trends, enhance existing products or achieve market acceptance of new products;
• the Company’s ability to accurately forecast consumer demand and adequately manage inventory;
• the Company’s dependence on a limited number of suppliers for its components and raw materials;
• the Company’s dependence on third party manufacturers to manufacture and deliver its products;
• increases in shipping costs for the Company’s products or other service issues with the Company’s third-party shippers;
• the Company’s dependence on a third party logistics provider for the storage and distribution of its products in the United States;
• the ability of third party sales representatives to adequately promote, market and sell the Company’s products;
• the Company’s ability to maintain, protect and enhance its intellectual property;
• the effects of competition;
• the Company’s ability to distribute its products in a timely fashion, including the impact of labor disputes, public health threats and social unrest, if any;
• evolving cybersecurity threats to the Company’s information technology systems or those of its customers or suppliers;
• changes in foreign laws and regulations and changes in the political and economic conditions in the foreign countries in which the Company operates;
• changes in accounting policies, rules and practices;
• changes in tax rules and regulations or interpretations;
• changes in U.S. and foreign trade regulations and tariffs, including recent and potential future increases of tariffs on goods imported into the U.S., and uncertainty regarding the same;
• limited access to financing or increased cost of financing;
• the effects of currency fluctuations between the U.S. dollar and Chinese renminbi and increases in costs of production in China; and
• the other factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 2024 and other filings with the SEC.

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. The Company has expressed its expectations, beliefs and projections in good faith and it believes it has a reasonable basis for them. However, the Company cannot assure the reader that its expectations, beliefs or projections will result or be achieved or accomplished.

Results of Operations

The following table summarizes certain financial information for the three and nine month periods ended December 31, 2024 (fiscal 2025) and December 31, 2023 (fiscal 2024) (in thousands):

Net product sales — Net product sales for the three month period ended December 31, 2024 were approximately $3.9 million as compared to approximately $2.6 million for the three month period ended December 31, 2023, an increase of approximately $1.3 million, or 49.8%. The Company’s sales during the three month period ended December 31, 2024 were highly concentrated among its three largest customers – Amazon, Walmart and Big Lots – comprising in the aggregate approximately 95% of the Company’s total net product sales during the period. The Company’s sales during the three month period ended December 31, 2023, were highly concentrated among its two largest customers – Walmart and Amazon – comprising in the aggregate approximately 85% of the Company’s total net product sales.

Net product sales for the nine month period ended December 31, 2024 were approximately $8.7 million as compared to approximately $6.7 million for the nine month period ended December 31, 2023, an increase of approximately $2.0 million, or 28.9%. The Company’s sales during the nine month period ended December 31, 2024 were highly concentrated among its three largest customers – Amazon, Walmart and Big Lots – comprising in the aggregate approximately 84% of the Company’s total net product sales. The Company’s sales during the nine month period ended December 31, 2023, were highly concentrated among its three largest customers – Walmart, Amazon and Fred Meyer – comprising in the aggregate approximately 91% of the Company’s total net product sales.

Net product sales are comprised primarily of the sales of houseware and audio products which bear the Emerson® brand name. 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 $11,000 and $3,000 for the three month periods ended December 31, 2024 and December 31, 2023, respectively, and by approximately $32,000 and $9,000 for the nine month periods ended December 31, 2024 and December 31, 2023, respectively. The major elements which contributed to the overall increase in net product sales were as follows:

i) Houseware products: Net sales of houseware products increased approximately $1.5 million, or 239.8%, to approximately $2.1 million for the three month period ended December 31, 2024 as compared to approximately $0.6 million for the three month period ended December 31, 2023, driven by increased net sales of newly introduced microwave ovens to the market. Net sales of houseware products increased approximately $2.4 million, or 118.9%, to approximately $4.4 million for the nine month period ended December 31, 2024 as compared to approximately $2.0 million for the nine month period ended December 31, 2023, driven by increased net sales of newly introduced microwave ovens and refrigerators to the market.

ii) Audio products: Net sales of audio products decreased approximately $0.2 million, or 9.9%, to approximately $1.8 million for the three month period ended December 31, 2024 as compared to approximately $2.0 million for the three month period ended December 31, 2023. Net sales of audio products decreased approximately $0.5 million, or 9.7%, to $4.2 million for the nine month period ended December 31, 2024 as compared to approximately $4.7 million for the nine month period ended December 31, 2023.

Business operations — The Company expects to continue to expand its existing distribution channels and to develop and promote new products with retailers in the U.S and Mexico. The Company is also continuing to invest in products and marketing activities to expand its sales through internet and ecommerce channels. These efforts require investments in appropriate human resources, media marketing and development of products in various categories in addition to the traditional home appliances and audio products on which the Company has historically focused. The Company also is continuing its efforts to identify strategic courses of action related to its licensing activities, including seeking new licensing relationships. The Company has engaged each of Leveraged Marketing Corporation of America and Global Licensing Services Pte Limited as an agent to assist in identifying and procuring potential licensees.

Emerson’s success is dependent on its ability to anticipate and respond to changing consumer demands and trends in a timely manner, as well as expanding into new markets and sourcing new products that are profitable to the Company. Geo-political factors may also affect the Company’s operations and demand for the Company’s products, which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The Company expects that U.S. tariffs on categories of products that the Company imports from China, and China’s retaliatory tariffs on certain goods imported from the United States, as well as modifications to international trade policy, will continue to affect its product costs going forward. Although the Company is monitoring the trade and political environment and working to mitigate the possible effect of tariffs with its suppliers as well as its customers through pricing and sourcing strategies, the Company cannot be certain how its customers and competitors will react to the actions taken. If the Company's mitigation efforts are unsuccessful, the combination of tariffs will result in significantly increased annualized costs to the Company as all of the Company’s products are currently manufactured by suppliers in China. In addition, heightened tensions between the United States and China over Hong Kong and any resulting retaliatory policies may affect our operations in Hong Kong. At this time the Company is unable to quantify possible effects on its costs arising from the new tariffs, which are expected to increase the Company’s inventory costs and associated costs of sales as tariffs are incurred, and some costs may be passed through to the Company’s customers as product price increases in the future. However, if the Company is unable to successfully pass through the additional costs or otherwise mitigate the effects of these tariffs, or if the higher prices reduce demand for the Company’s products, it will have a negative effect on the Company’s product sales and gross margins.

In light of the adverse macroeconomic conditions domestically and internationally, the Company has implemented certain cost-reduction actions intended to reduce expenditures. However, the environment remains uncertain. Demand for the Company’s products remains competitive and requires actions to continue carefully managing inventory. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.

For more information on risks associated with the Company’s operations, please see the risk factors within Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2024.

Legal Proceedings— On October 10, 2023, the US District Court for the District of Delaware granted final judgment in favor of the Company in its trademark infringement lawsuit against air conditioning and heating products provider Emerson Quiet Kool and wholesaler Home Easy (the “defendants”). Among other things, the court order issues an injunction and directs the US Patent and Trademark Office to cancel the defendants’ existing and proposed "Emerson Quiet Kool" trademarks and prohibits defendants from registering or applying to register, or using the same mark or any other mark or name containing the word "Emerson" going forward. The total judgment awarded to the Company has increased from approximately $6.5 million to approximately $10.4 million, inclusive of disgorgement of wrongful profits, attorney's fees and enhanced damages. The aggregate award to the Company also includes the $4.1 million of advanced deposits previously paid to the Company. The $4.1 million of advanced deposits was reduced by approximately $1 million of incurred legal fees. The remaining balance of $3.1 million was released by the Company to other income during the quarter ended September 30, 2023. Like any judgement, there is no guarantee that the Company will be able to collect the entire judgement or if it is able to collect, how soon it will be able to do so. The defendants have filed separate bankruptcy petitions in the US Bankruptcy Court for the District of New Jersey, and there is no guarantee that those bankruptcy proceedings will not have any effect on the ability of the Company to collect the judgement. The Company is not currently a party to any other legal proceedings other than litigation matters, in most cases involving ordinary and routine claims incidental to its business. Management cannot estimate with certainty the Company’s ultimate legal and financial liability with respect to such pending litigation matters. However, management believes, based on its examination of such matters, that the Company’s ultimate liability will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Licensing revenue — Licensing revenue for the three month period ended December 31, 2024 was approximately $111,000 as compared to approximately $23,000 for the three month period ended December 31, 2023, an increase of approximately $88,000, or 382.6%. The increase for the three month period ended December 31, 2024, was the result of one of the Company's licensees exceeding their annual guaranteed minimum royalties and the revenue earned from a new licensee. Licensing revenue for the nine month period ended December 31, 2024 was approximately $248,000 as compared to approximately $124,000 for the nine month period ended December 31, 2023, an increase of approximately $124,000, or 100%. The year-over-year increase was the result of one of its licensees exceeding their annual guaranteed minimum royalties and the revenue earned from a new licensee, partially offset by lost revenue from a terminated licensee in June 2023.

Net revenues — Net revenues were approximately $4.0 million for the three month period ended December 31, 2024 as compared to approximately $2.6 million for the three month period ended December 31, 2023, an increase of approximately $1.4 million, or 52.7%. The increase in net revenues can be attributed primarily to the introduction of new models of the Company's houseware products to the marketplace as well as increased demand from the Company's key customers.

Net revenues were approximately $8.9 million for the nine month period ended December 31, 2024 as compared to approximately $6.9 million for the nine month period ended December 31, 2023, an increase of approximately $2.0 million, or 30.1%. The increase in net revenues can be attributed primarily to the introduction of new models of the Company's houseware products to the marketplace as well as increased demand from the Company's key customers.

Cost of sales — Cost of sales increased approximately $1.4 million, or 63.8% to approximately $3.5 million for the three month period ended December 31, 2024 as compared to approximately $2.1 million for the three month period ended December 31, 2023. The increase in absolute terms for the three month period ended December 31, 2024 as compared to the three month period ended December 31, 2023 was primarily related to an increase in net product sales, increased carrying costs of inventory and the product mix of sales in the current quarter.

Cost of sales increased approximately $2.3 million, or 41.2% to approximately $8.0 million for the nine month period ended December 31, 2024 as compared to approximately $5.7 million for the nine month period ended December 31, 2023. The increase in absolute terms for the nine month period ended December 31, 2024 as compared to the nine month period ended December 31, 2023 was primarily related to an increase in net product sales, increased carrying costs of inventory and the product mix of sales in the current nine month period.

Selling, general and administrative expenses (“S,G&A”) — S,G&A was approximately $1.2 million for both three month periods ended December 31, 2024 and December 31, 2023. S,G&A, as a percentage of net revenues, was approximately 30.6% for the three month period ended December 31, 2024 as compared to approximately 45.8% for the three month period ended December 31, 2023. The changes in S,G&A for the three month period ended December 31, 2024 as compared to the three month period ended December 31, 2023 was driven primarily by increased compensation costs of approximately $178,000, increased commission expense of approximately $49,000 and increases in trade expenses of approximately $35,000, partially offset by a decrease in legal fees of approximately $274,000. Compensation costs for the three month period ended December 31, 2024 were approximately $737,000 as compared to approximately $558,000 for the three month period ended December 31, 2023. Commission expense fees for the three month period ended December 31, 2024 were approximately $72,000 as compared to approximately $23,000 for the three month period ended December 31, 2023. Trade expenses for the three month period ended December 31, 2024 were approximately $73,000 as compared to approximately $38,000 for the three month period ended December 31, 2023. Legal fees for the three month period ended December 31, 2024 generated a benefit of approximately $37,000 as compared to expense of approximately $236,000 for the three month period ended December 31, 2023.

S,G&A was approximately $4.0 million for the nine month period ended December 31, 2024 as compared to approximately $3.5 million for the nine month period ended December 31, 2023, an increase of approximately $0.5 million or 16.3%. S,G&A, as a percentage of net revenues, was approximately 45.1% for the nine month period ended December 31, 2024 as compared to approximately 50.4% for the nine month period ended December 31, 2023. The increase in S,G&A for the nine month period ended December 31, 2024 as compared to the nine month period ended December 31, 2023 was driven primarily by increased compensation costs of approximately $573,000, increased trade expenses of $90,000, increased audit fees of approximately $73,000 and increased depreciation expense of approximately $41,000 partially offset by a decrease in legal fees of approximately $260,000. Compensation costs for the nine month period ended December 31, 2024 were approximately $2,253,000 as compared to approximately $1,680,000 for the nine month period ended December 31, 2023. Trade expenses for the nine month period ended December 31, 2024 were approximately $210,000 as compared to approximately $120,000 for the nine month period ended December 31, 2023. Audit fees for the nine month period ended December 31, 2024 were approximately $176,000 as compared to approximately $103,000 for the nine month period ended December 31, 2023. Depreciation expense for the nine month period ended December 31, 2024 were approximately $57,000 as compared to approximately $16,000 for the nine month period ended December 31, 2023. Legal fees for the nine month period ended December 31, 2024 were approximately $201,000 as compared to approximately $461,000 for the nine month period ended December 31, 2023.

Settlement of litigation — Based on a judgement affirmation by the U.S. Court of Appeals for the Third Circuit in September 2023, the Company recorded income of $3.1 million for the three month period ended September 30, 2023, which was the remaining balance of the advanced deposits. See "Note 10 - Legal Proceedings" in the Notes to the Consolidated Financial Statements.

Interest income, net — Interest income, net, was approximately $206,000 for the three month period ended December 31, 2024 as compared to approximately $289,000 for the three month period ended December 31, 2023, a decrease of approximately $83,000. The decrease was primarily due to lower levels of cash invested on the Company’s short term investments.

Interest income, net, was approximately $705,000 for the nine month period ended December 31, 2024 as compared to approximately $872,000 for the nine month period ended December 31, 2023, a decrease of approximately $167,000. The decrease was primarily due to lower levels of cash invested on the Company’s short term investments.

(Benefit) provision for income taxes — For the three month period ended December 31, 2024, the Company recorded income tax expense of nil as compared to an income tax benefit of approximately $14,000 for the three month period ended December 31, 2023. For the nine month period ended December 31, 2024, the Company recorded income tax expense of approximately $3,000 as compared to $74,000 for the nine month period ended December 31, 2023.The Company under the adoption of ASU 2019-12 “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” incurred non-income based state taxes of approximately $9,000 for both of the nine month periods ended December 31, 2024 and December 31, 2023, which are now reported as S,G&A. See “Note 5 – Income Taxes”.

Although the Company generated a net loss during the three and nine months ended December 31, 2024 , it is unable to realize an income tax benefit until the Company can demonstrate the ability to generate net income on a sustained basis. Therefore, the Company is obligated to record a 100% valuation allowance against the deferred tax assets.

Net loss (income) — As a result of the foregoing factors, the Company realized a net loss of approximately $527,000 for the three month period ended December 31, 2024 as compared to a net loss of approximately $421,000 for the three month period ended December 31, 2023.

As a result of the foregoing factors, the Company realized a net loss of approximately $2,370,000 for the nine month period ended December 31, 2024 as compared to net income of approximately $1,649,000 for the nine month period ended December 31, 2023.

Liquidity and Capital Resources

As of December 31, 2024, the Company had cash and cash equivalents of approximately $0.7 million as compared to approximately $19.9 million at March 31, 2024. Cash and cash equivalents includes short term investments in deposits which were classified as cash equivalents of $0.1 million as of December 31, 2024 compared to approximately $19.1 million of such deposits as of March 31, 2024. Working capital decreased to approximately $23.4 million at December 31, 2024 as compared to approximately $26.6 million at March 31, 2024. The decrease in cash and cash equivalents of approximately $19.2 million was due to an increase in short term deposits of approximately $15.7 million, the net loss generated during the period of approximately $2.4 million, an increase in accounts receivable of approximately $2.2 million, a decrease in long-term taxes payable of approximately $0.7 million, a decrease in right of use assets of approximately $0.2 million and an increase in property and equipment of approximately $0.1 million, partially offset by a decrease in inventory of approximately $1.8 million, an increase in long term operating lease liabilities of approximately $0.2 million and an increase in short-term taxes payable of approximately $0.1 million.

Cash Flows

Net cash used by operating activities was approximately $3.3 million for the nine month period ended December 31, 2024, resulting from the loss generated during the period of approximately $2.4 million, an increase in accounts receivable of approximately $2.2 million, a decrease in income taxes payable of approximately $0.5 million and an increase in right of use assets of approximately $0.3 million, partially offset by a decrease in inventory of approximately $1.8 million, an increase in long term lease liabilities of approximately $0.2 million and an increase in accounts payable and other current liabilities of approximately $0.1 million.

Net cash used by investing activities was approximately $16.0 million for the nine month period ended December 31, 2024 due to net purchases of short-term investments of approximately $15.8 million and additions to property and equipment of approximately $0.2 million.

Net cash provided by financing activities was approximately $6,000 for the nine month period ended December 31, 2024 due to a new copier lease.

Sources and Uses of Funds

The Company’s principal existing sources of cash are generated from operations and its existing short-term deposits and investments. 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, 2024, the Company did not have any off-balance sheet arrangements as defined under the rules of the SEC.

Recent 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 2023-07 Segment Reporting (Topic 280): "Improvements to Reportable Segment Disclosures” (Issued October 2023)

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): "Improvements to Reportable Segment Disclosures" ("ASU 2023-07") to update reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of this guidance did not have any impact on the Company's segment reporting.

Accounting Standards Update 2024-03 Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): "Disaggregation of Income Statement Expenses” (Issued November 2024)

In November 2024, the FASB issued ASU No. 2024-03 “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” This ASU requires public business entities to disclose, for interim and annual reporting periods, additional information about certain income statement expense categories. The requirements are effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027. Entities are permitted to apply either the prospective or retrospective transition methods. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.

(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 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 SEC’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, 2024, 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 SEC’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 (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the risk factors contained in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2024, other than as set forth below.

Foreign regulations and changes in trade policies and the political, social and economic conditions in the United States and the foreign countries in which the Company operates its business could affect the Company’s revenues and earnings materially and adversely.

The Company has operations in China and derives a significant portion of its revenue from sales of products manufactured by third parties located in China. In addition, third parties located in China and other countries located in the same region produce and supply many of the components and raw materials used in the Company’s products. Additionally, a significant portion of the shipping of the Company’s finished goods to the United States occurs through Hong Kong. Conducting an international business inherently involves a number of difficulties and risks that could materially and adversely affect the Company’s ability to generate revenues and could subject the Company to increased costs. The diplomatic tensions between the United States and China, including over China’s enactment of the Hong Kong national security law, create uncertainties for doing business in China, and the risk of additional protectionist trade policies and tariffs or other escalating retaliatory policies, such as the passage of the Hong Kong Autonomy Act in July 2020 and the concurrent U.S. executive order that ended the special economic status afforded to Hong Kong under the United States-Hong Kong Policy Act of 1992, could increase the Company’s cost of doing business and adversely affect the Company’s business, financial condition and results of operations. Furthermore, although there is currently significant uncertainty with respect to future United States trade regulations on a short-term or long-term basis, the current U.S. administration has publicly supported potential trade proposals, including import tariffs and other trade sanctions, including the U.S. administration's recent introduction of additional tariffs on China and proposed tariffs on Canada and Mexico, as well as modifications to international trade policy and other changes that may affect U.S. trade relations with other countries. It is possible that additional tariffs or other trade restrictions may be imposed on the categories of products the Company imports to the United States, or that the Company's business will be affected by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing the Company to raise prices or make changes to its operations, any of which could adversely affect demand for the Company's products or increase its costs.

Among the other factors that may adversely affect the Company's revenues and increase its costs are:

• currency fluctuations which could cause an increase in the price of the components and raw materials used in the Company’s products and a decrease in its profits;
• Chinese labor laws;
• labor shortages affecting the Company's facilities and it suppliers' manufacturing facilities located in China;
• the elimination or reduction of value-added tax refunds to Chinese factories that manufacture products for export;
• the rise of inflation and substantial economic growth in China;
• more stringent export restrictions in the countries in which the Company operates which could adversely affect its ability to deliver its products to its customers;
• tariffs and other trade barriers, such as import and export duties and quotas, which could make it more expensive for the Company to obtain and deliver its products to its customers;
• increases in shipping costs for the Company’s products or other service issues with the Company’s third-party shippers, such as global availability of shipping containers and fuel costs;
• political instability and economic downturns globally and in the countries in which the Company operates could adversely affect the Company’s ability to obtain its products from its manufacturers or deliver its products to its customers in a timely fashion;
• outbreaks of public health threats affecting the production capabilities of the Company’s suppliers, including as a result of quarantines or closures;
• new restrictions on the sale of electronic products containing certain hazardous substances; and
• the laws of China are likely to govern many of the Company’s supplier agreements.

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

Tariffs or other restrictions placed on the Company’s products imported into the United States from China, or any related countermeasures taken by China, could have a material adverse effect on the Company’s business, profitability and results of operations.

The Company has operations in China and all of the Company’s products are currently manufactured by suppliers in China. Any tariffs or other trade restrictions affecting the import of these products to the United States from China or any retaliatory trade measures taken by China in response to existing or future tariffs could have a material adverse effect on the Company’s results of operations going forward. The Company's dependency on its overseas suppliers could exacerbate these and other risks. Previously imposed tariffs on the categories of products the Company imports to the United States negatively affected the demand for such products and increased the cost of components. Additional tariffs could further affect the demand for such products, increase the cost of components, result in delays in production or affect the Company's ability to compete against competitors who do not manufacture in China or otherwise are not subject to such tariffs.

Effective in September 2018, the United States imposed tariffs of 10% on approximately $200 billion worth of goods imported from China, including categories of products the Company imports from China. These tariffs were increased to 25% effective in May 2019. Effective in September 2019, the United States imposed additional tariffs on essentially all remaining Chinese-origin imports, including approximately $300 billion worth of goods imported from China (“List 4 products”). Tariffs of 15% were imposed on certain List 4 products effective in September 2019 (“List 4A products”), and the remainder were scheduled to be subject to these tariffs effective in December 2019 (“List 4B products”). In January 2020, the United States and China signed a Phase One Economic and Trade Agreement, pursuant to which the tariff increases on the List 4B products remained suspended and the rate of additional tariffs on the List 4A products was reduced to 7.5%, while all other tariffs remained in place. In February 2025, the United States announced a 10% additional tariff on imports from China. The previous tariffs negatively affected the demand for the Company's products and increased the cost of components. The effects on the Company of the newly announced tariffs are uncertain because of the dynamic nature of governmental actions and responses, as well as possible exemptions for certain products and potential retaliatory action from China. However, if the currently imposed and proposed tariffs covering the categories of products that the Company imports continue or are increased, and the Company is unable to obtain an exception, it could have a material adverse effect on the Company's business.

Although the Company is monitoring the trade environment and working to mitigate the effects of tariffs through pricing and sourcing strategies, including through ongoing inventory management, the Company cannot be certain how its customers and competitors will react to the actions taken. If the Company determines to pass some or all of these new tariff burdens on to its customers as product price increases in the future, the result may be a degradation of the Company’s competitive position and a loss of customers that would adversely affect the Company’s operating performance. Additional tariffs imposed by the United States, and any related countermeasures by China, including as a result of the heightened tensions between the United States and China over Hong Kong, could further increase the Company’s cost of goods and reduce its gross margins. We cannot predict future trade policy or the terms of any renegotiated trade agreements and their impacts upon our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has in the past has adversely impacted and has the potential to further adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could further adversely impact our business, financial condition and results of operations.