# Emerson Radio Corp: Form 10-Q for the period ended Sep 30, 2020 - Company: [Emerson Radio Corp](/companies/msn.md) (CIK 32621) - Form: 10-Q - Filed: 2020-11-16 - Accepted by EDGAR: Nov 16, 2020, 16:01 ET - Period: 2020-09-30 - Accession: 0001564590-20-054166 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/32621/000156459020054166/msn-10q_20200930.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/32621/000156459020054166/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2020-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2020-07-01 to 2020-09-30 | $2.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 6 months, 2020-04-01 to 2020-09-30 | $3.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $1.7m | us-gaap:CostOfGoodsAndServicesSold | | Cost of revenue | 6 months, 2020-04-01 to 2020-09-30 | $2.8m | us-gaap:CostOfGoodsAndServicesSold | | Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $1.6m | us-gaap:SellingGeneralAndAdministrativeExpense | | Selling, general and administrative | 6 months, 2020-04-01 to 2020-09-30 | $3.0m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2020-07-01 to 2020-09-30 | −$1.0m | us-gaap:OperatingIncomeLoss | | Operating income | 6 months, 2020-04-01 to 2020-09-30 | −$2.2m | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2020-07-01 to 2020-09-30 | −$1.0k | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2020-04-01 to 2020-09-30 | $5.0k | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2020-07-01 to 2020-09-30 | −$956.0k | us-gaap:NetIncomeLoss | | Net income | 6 months, 2020-04-01 to 2020-09-30 | −$2.1m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | −$0.05 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2020-04-01 to 2020-09-30 | −$0.10 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | −$0.05 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2020-04-01 to 2020-09-30 | −$0.10 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 21,043,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2020-04-01 to 2020-09-30 | 21,043,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2020-04-01 to 2020-09-30 | −$3.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Cash and equivalents | at 2020-09-30 | $6.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2020-09-30 | $35.5m | us-gaap:AssetsCurrent | | Total assets | at 2020-09-30 | $35.9m | us-gaap:Assets | | Current liabilities | at 2020-09-30 | $1.6m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2020-09-30 | $3.6m | us-gaap:Liabilities | | Shareholders' equity | at 2020-09-30 | $32.3m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 30,719 characters. 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,” “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 ongoing effects of the coronavirus (COVID-19) pandemic-related business disruption and economic uncertainty on both the Company’s projected customer demand and supply chain, as well as its operations and financial performance; - 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; - 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 as a result of labor disputes and public health threats and social unrest; - 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 potential 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 relative to the dollar and increases in costs of production in China; and - the other factors listed under “Risk Factors” in the Company’s Form 10-K, as amended, for the fiscal year ended March 31, 2020 and other filings with the SEC. Furthermore, the situation surrounding the COVID-19 pandemic remains fluid and the potential for a material impact on the Company’s results of operations and financial condition increases the longer the COVID-19 pandemic affects activity levels in the United States and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on its business, results of operations or financial position. The extent of any impact will depend on future developments, including the duration of the outbreak, duration of the measures taken to control the spread, the effectiveness of actions taken to contain and treat the disease, and demand for the Company’s products. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The reader is cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this 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 six month periods ended September 30, 2020 (fiscal 2021) and September 30, 2019 (fiscal 2020) (in thousands): | | Three Months Ended September 30, 2020 | 2019 | Six Months Ended September 30, 2020 | 2019 | | --- | ---: | ---: | ---: | ---: | | Net product sales | $2,211 | $1,379 | $3,445 | $2,937 | | Licensing revenue | 60 | 56 | 120 | 111 | | **Net revenues** | **2,271** | **1,435** | **3,565** | **3,048** | | Cost of sales | 1,747 | 1,177 | 2,765 | 2,527 | | Selling, general and administrative expenses | 1,564 | 1,346 | 3,041 | 2,828 | | **Operating loss** | **(1,040)** | **(1,088)** | **(2,241)** | **(2,307)** | | Interest income, net | 28 | 222 | 110 | 459 | | Income from governmental assistance programs | 55 | - | 55 | - | | **Loss before income taxes** | **(957)** | **(866)** | **(2,076)** | **(1,848)** | | (Benefit) provision for income taxes | (1) | 10 | 5 | 15 | | **Net loss** | **$(956)** | **$(876)** | **$(2,081)** | **$(1,863)** | ***Net product sales —*** Net product sales for the second quarter of fiscal 2021 were $2.2 million as compared to $1.4 million for the second quarter of fiscal 2020, an increase of $0.8 million, or 60.3%. The Company’s core customers benefitted from reduced competition during the period as many retailers were forced to close, either temporarily or permanently, or otherwise operate with reduced hours and restrictions on foot traffic and maximum capacities under COVID-19 restrictions. The improvement in net product sales during the second quarter of fiscal 2021 came from increased consumer demand for certain of the Company’s products offered by these customers, in particular microwaves and clock radios as consumers spent more time at home and shopped online, and the Company’s ability to continue to sell products under difficult economic conditions. The Company’s sales during the second quarters of fiscal 2021 and fiscal 2020 were highly concentrated among the Company’s three largest customers – Wal-Mart, Amazon and Fred Meyer – where net product sales comprised approximately 79% and 81%, respectively, of the Company’s total net product sales. Net product sales for the six month period of fiscal 2021 were $3.4 million as compared to $2.9 million for the six month period of fiscal 2020, an increase of $0.5 million, or 17.3%. The Company’s sales during the six month periods of fiscal 2021 and fiscal 2020 were highly concentrated among the Company’s three largest customers – Wal-Mart, Amazon and Fred Meyer – where net product sales comprised approximately 79% and 78%, respectively, of the Company’s total net 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 $39,000 and nil for the second quarters of fiscal 2021 and fiscal 2020, respectively, and approximately $43,000 and nil for the six month periods of fiscal 2021 and fiscal 2020, respectively. Net product sales are comprised primarily of the sales of houseware and audio products which bear the Emerson® brand name. The major elements which contributed to the overall increase in net product sales were as follows: i) Houseware products: Net sales increased $0.6 million, or 112.4%, to $1.1 million in the second quarter of fiscal 2021 as compared to $0.5 million in the second quarter of fiscal 2020, driven by an increase in year-over-year sales of microwave ovens. Due to limited competition during the early stages of the pandemic, the Company was able to improve its sales of microwaves. For the six month period of fiscal 2021, houseware net product sales were $1.6 million, an increase of $0.3 million, or 21.1%, from $1.3 million for the six month period of fiscal 2020, as the Company and its core customers were able to benefit from reduced competition. ii) Audio products: Net sales were $1.2 million in the second quarter of fiscal 2021 as compared to $0.9 million in the second quarter of fiscal 2020, an increase of $0.3 million, or 30.8%, resulting from increased net sales of clock radios. The Company benefitted from limited competition during the early stages of the pandemic. For the six month period of fiscal 2021, audio product net sales were $1.9 million, an increase of $0.3 million or 14.3%, from $1.6 million in the six month period of fiscal 2020 resulting from increased net sales of clock radios, as the Company and its core customers benefitted from reduced competition during the early stages of the pandemic. ***Business operations —*** The Company expects to continue to expand its existing distribution channels and to develop and promote new products to regain shelf spaces with retailers in the U.S. The Company 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 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 Leveraged Marketing Corporation of America (“LMCA”) 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 recently imposed and proposed 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 affect its product costs going forward. If no mitigation steps are taken, or the mitigation is unsuccessful, the combination of tariffs will result in significantly increased annualized costs to the Company as all of the Company’s products are currently manufactured by suppliers in China. Although the Company is monitoring the trade and political environment and working to mitigate the possible effect of tariffs with its suppliers as well as its customers through pricing and sourcing strategies, including drawing down inventory built up in advance of the recent tariff increases, the Company cannot be certain how its customers and competitors will react to the actions taken. In addition, heightened tensions between the United States and China over Hong Kong and any resulting retaliatory policies may affect our operations in Hong Kong. At this time the Company is unable to quantify possible effects on its costs arising from the new tariffs, which are expected to increase the Company’s inventory costs and associated costs of sales as tariffs are incurred, and some costs may be passed through to the Company’s customers as product price increases in the future. However, if the Company is unable to successfully pass through the additional costs or otherwise mitigate the effects of these tariffs, or if the higher prices reduce demand for the Company’s products, it will have a negative effect on the Company’s product sales and gross margins. Starting in the fourth quarter of fiscal 2020, the global COVID-19 pandemic has presented significant challenges and adversely affected the Company’s business and operating results, and the operations and production capabilities of the Company’s suppliers in China and the distribution capabilities of the Company’s third party logistics provider, including as a result of quarantine or closure. The pandemic directly and indirectly disrupted certain sales and supply chain activities and affected the Company’s ability to address those challenges during the first quarter of fiscal 2021, which contributed to a decline in net product sales in the first quarter of fiscal 2021. Although the Company has since experienced increased demand in certain of its product categories, the pandemic continued to have an adverse effect during the second quarter of fiscal 2021, including on inventory management following the cancellation or renegotiation of certain product orders, and the Company expects that the pandemic will continue to have an adverse effect over the coming quarters, including on the magnitude and timing of orders by retailers, resellers, distributors and consumers. Additionally, surges in demand and shifts in shopping patterns related to COVID-19 have strained the U.S. freight network, which has at times resulted in carrier delays. In light of the adverse effects of the COVID-19 pandemic on the Company’s business and on macroeconomic conditions domestically and internationally, along with the uncertainty associated with a potential recovery, the Company has implemented certain cost-reduction actions intended to reduce expenditures in line with the lower demand for the Company’s products in light of the effects of the COVID-19 pandemic to the business. However, the environment remains highly uncertain and demand for the Company’s products remains difficult to assess due to many factors including the pace of economic recovery around the world, the status of various government stimulus programs, competitive intensity and retailer actions to continue carefully managing inventory. As a result, the Company is unable at this time to predict the full impact of the COVID-19 pandemic on its operations and financial results, and, depending on the magnitude and duration of the pandemic, including the severity of a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which the Company operates, such impact may be material. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. For more information on risks associated with the Company’s operations, including tariffs, 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, 2020, as updated in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. ***Licensing revenue —*** Licensing revenue in the second quarter of fiscal 2021 was $60,000 as compared to $56,000 in the second quarter of fiscal 2020, an increase of $4,000, or 7.1%. The year-over-year increase can be attributed to the escalation in the annual minimum royalty earned by the Company from its licensee. Licensing revenue for the six month period of fiscal 2021 was $120,000 as compared to $111,000 for the six month period of fiscal 2020, an increase of $9,000, or 8.1%. The year-over-year increase can be attributed to the escalation in the annual minimum royalty earned by the Company from its licensee. ***Net revenues —*** As a result of the foregoing factors, the Company’s net revenues were $2.3 million in the second quarter of fiscal 2021 as compared to $1.4 million in the second quarter of fiscal 2020, an increase of $0.9 million, or 58.3%, and $3.6 million for the six month period of fiscal 2020 as compared to $3.1 million for the six month period of fiscal 2019, an increase of $0.5 million, or 17.0%. ***Cost of sales —*** In absolute terms, cost of sales increased $0.6 million, or 48.4%, to $1.8 million in the second quarter of fiscal 2021 as compared to $1.2 million in the second quarter of fiscal 2020. The increase in absolute terms for the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020 was primarily related to increased net product sales partially offset by lower year-over-year gross cost of sales as a percentage of gross sales. The amounts presented are based on the change in methodology regarding the Company’s definition of Cost of Sales. See “Note 1 – Background and Basis of Presentation”. In absolute terms, cost of sales increased $0.2 million, or 9.4%, to $2.7 million for the six month period of fiscal 2021 as compared to $2.5 million for the six month period of fiscal 2020. The increase in absolute terms for the six month period of fiscal 2021 as compared to the six month period of fiscal 2020 was primarily related to increased net product sales partially offset by lower year-over-year gross cost of sales as a percentage of gross sales. The amounts presented are based on the change in methodology regarding the Company’s definition of Cost of Sales. See “Note 1 – Background and Basis of Presentation”. The Company purchases the products it sells from a limited number of factory suppliers. For the second quarter of fiscal 2021 and fiscal 2020, the Company purchased 100% and 100%, respectively, from its two largest suppliers. For the six month period of fiscal 2021 and fiscal 2020, the Company purchased 100% and 82%, respectively, from its two largest suppliers. ***Selling, general and administrative expenses (“S,G&A”) —*** S,G&A, in absolute terms, was $1.6 million in the second quarter of fiscal 2021 as compared to $1.3 million in the second quarter of fiscal 2020. S,G&A, as a percentage of net revenues, was 68.9% in the second quarter of fiscal 2021 as compared to 93.8% in the second quarter of fiscal 2020. The increase in S,G&A was primarily attributed to an increase in legal fees of approximately $262,000. Legal fees for the second quarter of fiscal 2021 were $451,000 as compared to $189,000 for the second quarter of fiscal 2020. The majority of the increase in legal fees concerned the protection of the Emerson® trademark. The amounts presented are based on the change in methodology regarding the Company’s definition of Cost of Sales. See “Note 1 – Background and Basis of Presentation”. S,G&A, in absolute terms, was $3.0 million for the six month period of fiscal 2021 as compared to $2.8 million for the six month period of fiscal 2020, an increase of $0.2 million, or 5.6%. S,G&A, as a percentage of net revenues, was 85.3% for the six month period of fiscal 2021 as compared to 92.8% for the six month period of fiscal 2020. The increase in S,G&A was primarily attributed to an increase in legal fees of approximately $384,000. Legal fees for the six month period of fiscal 2021 were $855,000 as compared to $471,000 for the six month period of fiscal 2020. This was partially offset by a decrease in compensation costs of $63,000, a decrease in advertising expense of $54,000 and a decrease in insurance costs of $37,000. The majority of the increase in legal fees concerned the protection of the Emerson® trademark. The amounts presented are based on the change in methodology regarding the Company’s definition of Cost of Sales. See “Note 1 – Background and Basis of Presentation”. ***Interest income, net —*** Interest income, net, was $28,000 in the second quarter of fiscal 2021 as compared to $222,000 in the second quarter of fiscal 2020, a decrease of $194,000. The decrease was primarily due to lower average interest rates earned on the Company’s short term investments. Interest income, net, was $110,000 for the six month period of fiscal 2021 as compared to $459,000 for the six month period of fiscal 2020, a decrease of $349,000. The decrease was primarily due to lower average interest rates earned on the Company’s short term investments. ***Income from governmental assistance programs —*** For both the second quarter and six month periods of fiscal 2021, the Company recorded income of approximately $55,000 related to assistance received from the Hong Kong government under the ESS program. See “Note 10 - Paycheck Protection Program and Employment Support Scheme”. ***(Benefit) provision for income taxes —*** In the second quarter of fiscal 2021, the Company recorded an income tax benefit of $1,000 as compared to income tax expense of $9,200 in the second quarter of fiscal 2020. See “Note 5 – Income Taxes”. For the six month period of fiscal 2021, the Company recorded income tax expense of $5,300 as compared to income tax expense of $14,600 for the six month period of fiscal 2020. Although the Company generated net losses during fiscal 2021 and fiscal 2020, it was unable to realize an income tax benefit due to valuation allowances recorded against its deferred tax assets. ***Net (loss) —*** As a result of the foregoing factors, the Company realized a net loss of $956,000 in the second quarter of fiscal 2021 as compared to a net loss of $876,000 in the second quarter of fiscal 2020. For the six month period of fiscal 2021, the Company realized a net loss of $2,081,000 as compared to a net loss of $1,863,000 for the six month period of fiscal 2020. ### Liquidity and Capital Resources As of September 30, 2020, the Company had cash and cash equivalents of approximately $6.5 million as compared to approximately $6.3 million at March 31, 2020. Working capital decreased to $33.9 million at September 30, 2020 as compared to $36.1 million at March 31, 2020. The increase in cash and cash equivalents of approximately $0.2 million was due to a decrease in short term investments of $3.1 million, an increase in accounts payable and other current liabilities of $0.3 million and an increase in short term loan payable of $0.2 million, partially offset by the net loss generated during the period of $2.1 million, an increase in accounts receivable of $0.4 million, an increase in prepaid purchases of $0.3 million, a decrease in federal taxes payable of $0.2 million, an increase in prepaid expenses and other current assets of $0.2 million and an increase in inventory of $0.2 million. ### Cash Flows Net cash used by operating activities was approximately $3.1 million for the six months ended September 30, 2020, resulting from a $2.1 million net loss generated during the period, an increase in accounts receivable of $0.4 million, an increase in prepaid purchases of $0.3 million, a decrease in federal taxes payable of $0.2 million, an increase in prepaid expenses and other current assets of $0.2 million and an increase in inventory of $0.2 million partially offset by an increase in accounts payable and other liabilities of $0.3 million. Net cash provided by investing activities was approximately $3.1 million for the six months ended September 30, 2020 due to a decrease in short term certificates of deposit. Net cash provided by financing activities was $0.2 million for the six months ended September 30, 2020 due to proceeds received from the Paycheck Protection Program (“PPP”), established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). ### Sources and Uses of Funds The Company’s principal existing sources of cash are generated from operations and its existing short-term 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. ### Paycheck Protection Program Loan In April and May of 2020, the Company applied for and received aggregate loan proceeds of approximately $0.2 million under the PPP. The PPP loan accrues interest at 1% and matures two years from the date of issuance, with a deferral of payments for the first six months. While the Company intends to pursue the forgiveness of the PPP loan in accordance with the requirements and limitations under the CARES Act, no assurance can be provided that forgiveness of any portion of the PPP loan will be obtained. See Note 10 of the Notes to the Interim Consolidated Financial Statements. ### Off-Balance Sheet Arrangements As of September 30, 2020, the Company did not have any off-balance sheet arrangements as defined under the rules of the SEC. ### Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, *Leases* (Topic 842), which requires lease assets and liabilities to be recorded on the balance sheet. This update is effective for public entities in fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years, and certain qualitative and quantitative disclosures are also required. Early adoption was permitted. The Company has adopted this ASU and related amendments as of April 1, 2019 on a modified retrospective basis. The Company has applied the modified retrospective approach by recording a cumulative effect adjustment as of the date of adoption, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. The Company has also elected certain practical expedients permitted under the transition guidance, including to retain the historical lease classification as well as relief from reviewing expired or existing contracts to determine if they contain leases. The Company will be exempting leases with an initial term of twelve months or less from balance sheet recognition and will not separate lease and non-lease components. Upon adoption, the Company recognized total lease liabilities of $695,000, and corresponding right-of-use assets of $650,000, all of which is associated with leased office space. The difference between the right-of-use asset and lease liability is due to the existing deferred balance, resulting from historical straight-lining of operating leases that was reclassified upon adoption to reduce the measurement of the right-of-use assets. The Company’s Consolidated Statements of Income and Consolidated Statements of Cash Flows were not materially impacted. See Note 9, “Leases” for further details. ### Recently Issued Accounting Pronouncements The following ASUs were issued by the FASB which relate to or could relate to the Company as concerns the Company’s normal ongoing operations or the industry in which the Company operates. ### Accounting Standards Update 2019-12 “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” (Issued December 2019) In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. This standard is required to take effect in the Company’s first quarter (June 2021) of the Company’s fiscal year ending March 31, 2022. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures. ### Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses” (Issued June 2016) In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses” to introduce new guidance for the accounting for credit losses on instruments within its scope. ASU 2016-13 requires among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted. The Company does not expect these amendments to have a material impact on its financial statements. ## Controls and procedures As filed, 2,326 characters. (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 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 September 30, 2020, 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 that occurred during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ## Risk factors As filed, 14,922 characters. 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, 2020, 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, 2020. ***The Company’s business has been and is expected to continue to be adversely affected by the ongoing COVID-19 pandemic.*** The Company is closely monitoring the effects of the global COVID-19 pandemic on all aspects of its operations and regions, including the effect on its consumers, employees, trade customers, suppliers and distribution channels. The pandemic has created significant business disruption and economic uncertainty, which has affected the Company’s supply chain, distribution channels and consumer demand for its products, and has already directly and indirectly affected the Company’s business and operating results. However, the full extent of its impact will depend on future developments that are uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain or treat its effects and the severity of a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which the Company operates. The ultimate impact of the COVID-19 pandemic, or any other health epidemic, is highly uncertain and subject to change not only with the spread of the disease, but also with the scope and timing of governmental, regulatory, fiscal, monetary and public health responses. As COVID-19 continues to spread, the Company’s business operations could be further disrupted or delayed. The pandemic has already resulted in, and may continue to result in, work stoppages, slowdowns and delays, travel restrictions, event cancellations, and other factors that cause an increase in costs or order cancellations, reductions or delays. For example, the Company’s supply chain has been and may in the future be adversely affected with production delays, service disruptions or limited manufacturing volumes associated with shutdowns of factories, logistics providers and shippers or reduced numbers of workers or working hours in the respective facilities, limits on component supplies and diminished capability to implement engineering and design changes in a timely manner. In addition, quarantines, stay at home orders and other travel limitations (whether voluntary or required) may impede the Company’s employees’ ability to efficiently conduct research and development activities or oversee manufacturing and shipping activities, which may slow innovation, lead to higher costs, logistics disruptions or delays in delivering to the Company’s distribution channels and customers. Further, if the spread of the COVID-19 pandemic continues and the Company’s operations continue to be adversely affected, the Company risks a delay, default, violation and/or non-compliance under existing agreements. Many of these effects may not be covered by the Company’s existing insurance coverages. The spread of COVID-19, which has caused a broad impact globally, including restrictions on travel and quarantine policies put into place by businesses and governments, has had and may continue to have a material economic effect on the Company’s business. For example, the pandemic and related measures taken to limit the spread of disease has resulted in retail store closures, both temporary and permanent, higher unemployment and greater economic uncertainty, which may adversely affect consumer purchasing behavior. Consumer fears about becoming ill with the disease may continue, which may adversely affect traffic to retail stores selling the Company’s products. Consumer spending generally may also be negatively affected by general macroeconomic conditions and consumer confidence, including the effects of the current recession, resulting from the COVID-19 pandemic. This may negatively affect sales of the Company’s products at retail stores and online marketplace channels and through the Company’s licensing agreements. Any significant reduction in consumer visits to, or spending at, retail stores caused by COVID-19, and any decreased spending at retail stores or online caused by decreased consumer confidence and spending following the pandemic, may result in a loss of sales of the Company’s products and profits and other material adverse effects. While the potential economic effects and the duration of the COVID-19 pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets. In addition, the current recession has, and a depression or other sustained adverse market event resulting from the spread of COVID-19 could materially and adversely affect the Company’s business and the market value of its common stock. The Company does not yet know the full extent of potential delays or impacts on its business, its industry or the global economy as a whole, and the Company cannot predict the effects that COVID-19 pandemic-related business disruptions and economic uncertainty will have on its customers, suppliers, consumers, and each of their financial conditions. However, any material effect on these parties could further adversely affect the Company’s financial condition and results of operations. Additionally, while significant efforts are underway to slow the spread of COVID-19, increase testing, and develop vaccines and therapeutics, it is unclear when or whether progress in any of those areas will translate into an economic recovery that will restore consumer confidence and accelerate consumer spending. The effect of the COVID-19 pandemic may also exacerbate other risks discussed below and in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2020, any of which could have a material adverse effect on the Company’s business and financial condition. Accordingly, given that the potential of these effects of the COVID-19 pandemic on the Company’s operations has been and will likely continue to be material, the Company will continue to monitor the situation closely. ***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 increasing diplomatic tensions between the United States and China, including over China’s recent enactment of a new national security law in Hong Kong, 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 recent 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, the current U.S. administration continues to signal its intent to alter trade agreements between China and the U.S. and may impose additional tariffs on imports from China. It is possible that further tariffs may be imposed on the categories of products the Company imports to the United States, or that the Company’s business will be affected by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing the Company to raise prices or make changes to its operations, any of which could adversely affect demand for the Company’s products or increase its costs. Among the other factors that may adversely affect the Company’s revenues and increase its costs are: - 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 its 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 which could make it more expensive for the Company to obtain and deliver its products to its customers; - political instability and economic downturns in these countries which could adversely affect the Company’s ability to obtain its products from its manufacturers or deliver its products to its customers in a timely fashion; - outbreaks of public health threats, such as COVID-19, influenza and other highly communicable diseases or viruses, affecting the production capabilities of the Company’s suppliers, including as a result of quarantines or closures; - 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 counter-measures 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 from China or any retaliatory trade measures taken by China in response to existing or future tariffs could have a material adverse effect on the Company’s results of operations going forward. The Company’s dependency on its overseas suppliers could exacerbate these and other risks, and any tariffs on the categories of products the Company imports to the United States could negatively affect the demand for such products, increase the cost of components, delay production or affect the Company’s ability to compete against competitors who do not manufacture in China or otherwise are not subject to such tariffs. Beginning in 2018, the United States has imposed additional duties, ranging from 10% to 25%, on a variety of goods imported from China. Effective in September 2018, the Office of the U.S. Trade Representative (“USTR”) imposed tariffs of 10% on approximately $200 billion worth of goods imported from China (“List 3 products”), including categories of products the Company imports from China and increased these tariffs to 25% effective in May 2019. In August 2019, the U.S. administration directed the USTR to increase tariffs on List 3 products from 25% to 30% effective October 2019, which increases were subsequently delayed indefinitely. In May 2019, the USTR proposed imposing additional tariffs of up to 25% on essentially all remaining Chinese-origin imports, including approximately $300 billion worth of goods imported from China (“List 4 products”). Tariffs of 15% were imposed on certain List 4 products effective in September 2019 (“List 4A products”), and the remainder were scheduled to be subject to these tariffs effective in December 2019 (“List 4B products”). In January 2020, the United States and China signed a Phase One Economic and Trade Agreement, pursuant to which the tariff increases on the List 4B products remained suspended and the rate of additional tariffs on the List 4A products was reduced to 7.5%, while all other tariffs remain in place. The effects on the Company of the recently imposed and proposed tariffs are uncertain because of the dynamic nature of governmental actions and responses, as well as possible exemptions for certain products. If the U.S. and China are able to negotiate the issues to restore a mutually advantageous and fair trading regime, the increased tariffs could be eliminated, but given the uncertainties, including as a result of any political changes, there can be no assurance of whether, or when, this will be accomplished. If the recently 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 possible effect of tariffs through pricing and sourcing strategies, including through proactive management of inventory built up in advance of the recent tariff increases, and may take additional steps, the Company cannot be certain how its customers and competitors will react to the actions taken. Additional tariffs imposed by the United States, and any related countermeasures by China, including as a result of the heightened tensions between the United States and China over Hong Kong, could increase the Company’s cost of goods and reduce its gross margins. If the Company determines to pass some or all of these new tariff burdens on to its customers as product price increases in the future, the result may be a degradation of the Company’s competitive position and a loss of customers that would adversely affect the Company’s operating performance. However, the ultimate outcome of these tariff actions is not clear at this time, and there can be no assurances that the Company’s mitigation efforts will be successful or that the imposition of any such tariffs or trade actions would not have a material adverse effect on the Company’s revenue, gross margins and operating results. Filed Nov 16, 2020. Source: SEC EDGAR, the filing index for accession 0001564590-20-054166. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.