The following discussion of the Company's operations and financial condition
should be read in conjunction with the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K. In addition to historical
information, the following discussion contains forward-looking statements that
reflect the Company's plans, estimates and beliefs. The Company's actual results
could differ materially from those contained in or implied by any
forward-looking statements. Factors that could cause or contribute to these
differences include those under Item 1A - "Risk Factors" and "Forward-Looking
Information" and in other parts of this Annual Report on Form 10-K.
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In the following discussion, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all figures are approximations.
Results of Operations:
The following table summarizes certain financial information for the fiscal
years ended March 31, 2022 and 2021 (in thousands):
Twelve Months Ended March 31,
2022 2021
Net product sales $ 7,941 $ 7,200
Licensing revenue 265 245
Net revenues 8,206 7,445
Cost of sales 6,237 5,749
Selling, general and administrative expenses 5,409 5,906
Operating loss (3,440 ) (4,210 )
Loss on settlement of litigation (450 ) -
Interest income, net 57 151
Income from governmental assistance programs 207 83
Loss before income taxes (3,626 ) (3,976 )
Provision for income taxes - -
Net loss $ (3,626 ) $ (3,976 )
Results of Operations - Fiscal 2022 compared with Fiscal 2021
Net product sales - Net product sales for fiscal 2022 were $7.9 million as
compared to $7.2 million for fiscal 2021, an increase of $0.7 million, or 10.3%
as detailed below. The Company's sales were highly concentrated among three
customers - Walmart, Amazon.com and Fred Meyer, where gross product sales to
these three customers were in the aggregate approximately 90.5% and 82.1% of the
Company's total gross product sales in fiscal 2022 and fiscal 2021,
respectively. The increase in net product sales during fiscal 2022 was primarily
driven by increased consumer demand for certain of the Company's products
offered by these customers, in particular clock radios as consumers spent more
time at home and shopped online, and the Company's and its core customers'
ability to continue to sell products under difficult economic conditions,
including through online channels. Net product sales may be periodically
impacted by adjustments made to the Company's sales allowance and marketing
support accrual to record unanticipated customer deductions from accounts
receivable or to reduce the accrual by any amounts which were accrued in the
past but not taken by customers through deductions from accounts receivable
within a certain time period. In the aggregate, these adjustments had the effect
of increasing net product sales and operating income by approximately nil and
$53,000 for fiscal 2022 and fiscal 2021, respectively. Net product sales are
comprised primarily of the sales of houseware and audio products which bear the
Emerson® brand name. The major elements which contributed to the overall
increase in net product sales were as follows:
i) Houseware product net sales decreased $0.9 million, or 35.9%, to
$1.7 million in fiscal 2022 as compared to $2.6 million in fiscal
2021, principally driven by a decrease in sales of microwave ovens
and by a decrease in sales of toaster ovens.
ii) Audio product net sales were $6.3 million in fiscal 2022 compared to
$4.6 million in fiscal 2021, an increase of $1.7 million, or 36.4%,
resulting from increased net sales of clock radios. The Company
benefitted from the introduction of new clock radios into the
marketplace during fiscal 2022.
Business operations - The Company expects to continue to expand its existing
distribution channels and to develop and promote new products with retailers in
the U.S. The Company is also continuing to invest in products and marketing
activities to expand its sales through internet and ecommerce channels. These
efforts require investments in appropriate human resources, media marketing and
development of products in various categories in addition to the traditional
home appliances and audio products on which the Company has historically
focused. The Company also is continuing its efforts to identify strategic
courses of action related to its licensing activities, including seeking new
licensing relationships. The Company has engaged each of LMCA and GLSL as an
agent to assist in identifying and procuring potential licensees.
Emerson's success is dependent on its ability to anticipate and respond to
changing consumer demands and trends in a timely manner, as well as expanding
into new markets and sourcing new products that are profitable to the Company.
Geo-political factors may also affect the Company's operations and demand for
the Company's products, which are subject to customs requirements and to tariffs
and quotas set by governments through mutual agreements and bilateral actions.
The Company expects that current and proposed U.S. tariffs on categories of
products that the Company imports from China, and China's retaliatory tariffs on
certain goods
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imported from the United States, as well as modifications to international trade
policy, will continue to affect its product costs going forward. If no
mitigation steps are taken, or the mitigation is unsuccessful, the combination
of tariffs will result in significantly increased annualized costs to the
Company as all of the Company's products are currently manufactured by suppliers
in China. Although the Company is monitoring the trade and political environment
and working to mitigate the possible effect of tariffs with its suppliers as
well as its customers through pricing and sourcing strategies, the Company
cannot be certain how its customers and competitors will react to the actions
taken. In addition, heightened tensions between the United States and China over
Hong Kong and any resulting retaliatory policies may affect our operations in
Hong Kong. At this time the Company is unable to quantify possible effects on
its costs arising from the new tariffs, which are expected to increase the
Company's inventory costs and associated costs of sales as tariffs are incurred,
and some costs may be passed through to the Company's customers as product price
increases in the future. However, if the Company is unable to successfully pass
through the additional costs or otherwise mitigate the effects of these tariffs,
or if the higher prices reduce demand for the Company's products, it will have a
negative effect on the Company's product sales and gross margins.
Starting in the fourth quarter of fiscal 2020, the global COVID-19 pandemic has
presented significant challenges and impacted the Company's business and
operating results, and the operations and production capabilities of the
Company's suppliers in China and the distribution capabilities of the Company's
third party logistics provider, including as a result of quarantine or closure.
The pandemic has directly and indirectly disrupted certain sales and supply
chain activities and affected the Company's ability to address those challenges.
Although the Company has since experienced increased demand in certain of its
product categories and favorable impacts on its online channels as a result of
the COVID-19 pandemic, the Company expects that the pandemic will continue to
impact its business and operations over the coming quarters, including with
respect to the magnitude and timing of orders by retailers, resellers,
distributors and consumers. Additionally, surges in demand and shifts in
shopping patterns related to the COVID-19 pandemic have strained the global
freight network and availability of shipping containers, which has been further
exacerbated by COVID-19 outbreaks and protocols at many port locations,
resulting in carrier-imposed capacity restrictions, carrier delays and longer
lead times, including shipment receiving and unloading backlogs at many U.S.
ports. As a result, the Company's shipping costs have recently increased by
several multiples compared to fiscal 2021 averages. Global component shortages,
in particular semiconductor chips, arising from these changes in consumer demand
and reduced manufacturing capacity related to the COVID-19 pandemic have also
caused and are likely to continue to result in significant price fluctuations
and long lead times in the supply of these components. Although the Company is
seeking alternate suppliers for these components, developing alternate sources
of supply will be time consuming, difficult and costly, and may require the
re-tooling of products to accommodate components from different suppliers. In
addition to increasing cost trends, the Company's suppliers are not equipped to
hold meaningful amounts of inventory and if shipping container capacity remains
limited or unavailable, they could pause manufacturing, which could ultimately
impact the Company's ability to fulfill customer orders on a timely basis. These
impacts on the Company's supply chain have and may continue to impact the
Company's ability to meet product demand, which could result in additional
costs, customer dissatisfaction in the event of inventory shortages or may
otherwise adversely impact the Company's business and results of operations.
In light of the adverse effects of the COVID-19 pandemic on macroeconomic
conditions domestically and internationally, along with the uncertainty
associated with a potential recovery, the Company has implemented certain
cost-reduction actions intended to reduce expenditures in light of the effects
of the COVID-19 pandemic to the business. However, the environment remains
highly uncertain and demand for the Company's products remains difficult to
assess due to many factors including the pace of economic recovery around the
world, the status of various government stimulus programs, competitive intensity
and retailer actions to continue carefully managing inventory. As a result, the
Company is unable at this time to predict the full impact of the COVID-19
pandemic on its operations and financial results, and, depending on the
magnitude and duration of the pandemic, including the further spread and
severity of COVID-19 cases in areas in which the Company operates and the
availability and distribution of effective vaccines, such impact may be
material. Accordingly, current results and financial condition discussed herein
may not be indicative of future operating results and trends.
For more information on risks associated with the Company's operations,
including tariffs and the COVID-19 pandemic, please see the risk factors within
Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.
Recent Developments - On April 19, 2022, the US District Court for the District
of Delaware granted judgment in favor of the Company in its trademark
infringement lawsuit against air conditioning and heating products provider
Emerson Quiet Kool and wholesaler Home Easy (the "defendants"). Among other
things, the court order issues an injunction and directs the US Patent and
Trademark Office to cancel the defendants' existing and proposed "Emerson Quiet
Kool" trademarks and prohibits defendants from registering or applying to
register the same mark or any other mark or name containing the word "Emerson"
going forward. The judgment also awards $6.5 million to the Company. Like any
judgment, there is no guarantee that the Company will be able
to collect the judgment or, if it is able to collect, how soon it will be able
to do so. The Company is pursuing various post-judgment motions against
defendants. The defendants have filed a notice of appeal of the judgment.
Licensing revenue - Licensing revenue in fiscal 2022 was approximately $265,000
as compared to $245,000 for fiscal 2021, an increase of $20,000, or 8.2%, which
was driven primarily by the escalation of the annual minimum royalty of the
Company's licensee.
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Net revenues -The Company's net revenues were $8.2 million for fiscal 2022 as
compared to $7.4 million for fiscal 2021, an increase of $0.8 million, or 10.2%,
which was driven primarily by the increase in audio product net sales, offset by
the decrease in houseware product net sales.
Cost of sales - Cost of sales includes the components described in Note 1 "Cost
of Sales" of the Notes to the Consolidated Financial Statements. In absolute
terms, cost of sales increased $0.6 million, or 11.8%, to $6.2 million in fiscal
2022 as compared to $5.7 million in fiscal 2021. The increase in absolute terms
for fiscal 2022 as compared to fiscal 2021 was primarily related to the
improvement in net product sales partially offset by lower year-over-year gross
cost of sales as a percentage of gross sales. The decrease in gross cost of
sales as a percentage of gross sales for fiscal 2022 as compared to fiscal 2021
was primarily related to the change in product mix as described above, partially
offset by increased year-over-year shipping costs. The amounts presented are
based on the change in methodology regarding the Company's definition of Cost of
Sales. See Note 1 "Significant Accounting Policies" of the Notes to the
Consolidated Financial Statements.
Selling, general and administrative expenses ("S,G&A") - S,G&A, as a percentage
of net revenues, was 65.8% in fiscal 2022 as compared to 79.1% in fiscal 2021.
Fiscal 2022 S,G&A, in absolute terms, was $5.4 million and in fiscal 2021 S,G&A,
in absolute terms, was $5.9 million, an increase of $0.5 million, or 8.4%. The
decrease in S,G&A was primarily due to reduced legal fees of approximately
$249,000 or 16.4%. Legal fees during fiscal 2022 were approximately $1,273,000
as compared to $1,522,000 during fiscal 2021. The majority of the decrease in
legal fees concerned the protection of the Emerson® trademark. The Company also
benefitted by reductions in compensation costs of $127,000 and commission fees
of $52,000.
Loss on settlement of litigation - On January 3, 2022, a legal settlement was
entered into between the Company and one of its former directors that resolved
certain disputes, including certain claims against the former director and an
indemnification claim made by the former director. The amount of the settlement
was $450,000.
Interest income, net - Interest income, net, was $57,000 in fiscal 2022 as
compared to $151,000 in fiscal 2021, resulting from a decrease in interest rates
earned on the Company's short term investments during fiscal 2022.
Income from governmental assistance programs - During fiscal 2022, the
Company recorded income of approximately $207,000, related to its Paycheck
Protection Program ("PPP") loan forgiveness. During fiscal 2021, the Company
recorded income of approximately $83,000, related to assistance received from
the Hong Kong government under a similar program called the Employment Support
Scheme. See "Note 15 - Paycheck Protection Program and Employment Support
Scheme".
Provision for income tax expense - The Company adopted ASU 2019-12 during fiscal
2022 and recorded its non-income based state taxes of approximately $11,000 to
S,G&A. In order to conform fiscal 2021 to the current presentation,
approximately $15,000 of non-income based state taxes were reclassified to
S,G&A. In fiscal 2022 and fiscal 2021, the Company recorded a full valuation
allowance against its deferred tax assets of approximately $844,000 and
$615,000, respectively. See Note 5 "Income Taxes" of the Notes to the
Consolidated Financial Statements.
Net (loss) - As a result of the foregoing factors, the Company recorded a net
loss of $3.6 million for fiscal 2022 as compared to a net loss of $4.0 million
for fiscal 2021.
Liquidity and Capital Resources
General
As of March 31, 2022, the Company had cash and cash equivalents of approximately
$25.6 million as compared to approximately $5.2 million at March 31, 2021.
Working capital decreased to $28.1 million at March 31, 2022 as compared to
$32.1 million at March 31, 2021. The increase in cash and cash equivalents of
approximately $20.4 million is set out in "Cash Flows" below.
Cash Flows
Net cash used by operating activities was approximately $4.7 million for fiscal
2022, compared to approximately $4.3 million for fiscal 2021, resulting from a
$3.6 million loss generated during the period, a $0.6 million increase in
accounts receivable, a $0.4 million increase in right of use assets, a $0.2
million decrease in income taxes payable, a $0.2 million increase in the
Company's PPP loan forgiveness and a $0.2 million increase in inventory
partially offset by a $0.2 million decrease in prepaid purchases, a $0.2 million
increase in amortization of right-of-use assets and a $0.1 million increase in
long term lease liabilities.
Net cash provided by investing activities was $25.0 million for fiscal 2022,
compared to $3.0 million for fiscal 2021, primarily due to a decrease of
investments in short term deposits.
Net cash provided by financing activities was nil for fiscal 2022 for fiscal
2022, compared to $0.2 million for fiscal 2021.
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Credit Arrangements
Letters of Credit - The Company utilizes the services of one of its banks to
issue secured letters of credit on behalf of the Company, as needed, on a 100%
cash collateralized basis. At March 31, 2022 and March 31, 2021, the Company had
no letters of credit outstanding.
Short-term Liquidity
The Company's principal existing sources of cash are generated from operations.
The Company believes that its cash on hand and existing sources of cash will be
sufficient to support its existing operations over the next 12 months.
Historically, a significant percentage of the Company's product sales were made
under the Direct Import Program. The direct importation of product by the
Company to its customers can significantly benefit the Company's liquidity
because this inventory does not need to be financed by the Company. In fiscal
2022, approximately 9% of the Company's product sales were imported directly to
the Company's customers. In fiscal 2021, less than 1% of the Company's product
sales were imported directly to the Company's customers.
As of March 31, 2022, there were no capital expenditure or other commitments
other than the normal purchase orders used to secure product.
Paycheck Protection Program Loan
In April and May of 2020, the Company applied for and received aggregate PPP
loan proceeds of approximately $204,000 under the PPP. The PPP loan accrued
interest at 1% and matures two years from the date of issuance, with a deferral
of payments for the first six months. The Company used all of the PPP loan
proceeds for qualifying expenses in accordance with terms of the Coronavirus
Aid, Relief, and Economic Security Act and applied for forgiveness of the loan
to the extent applicable. On July 5, 2021, the Company's PPP loan was completely
forgiven by the Small Business Administration. See Note 15 "Paycheck Protection
Program and Employment Support Scheme" of the Notes to the Consolidated
Financial Statements.
Off-Balance Sheet Arrangements
As of March 31, 2022, the Company did not have any off-balance sheet
arrangements as defined under the rules of the Securities and Exchange
Commission.
Legal Matters
The Company is subject to various legal proceedings, the outcomes of which are
inherently uncertain. The Company records any potential gains related to legal
proceedings only after cash is collected. The Company records a liability when
it is probable that a loss has been incurred and the amount is reasonably
estimable, the determination of which requires significant judgment. Resolution
of legal matters in a manner inconsistent with management's expectations could
have a material impact on our financial condition and operating results. See
Note 11 in the Notes to the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles that are generally accepted
within the United States. The preparation of the Company's financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Management considers
certain accounting policies related to inventories, trade accounts receivables,
impairment of long-lived assets, valuation of deferred tax assets, sales return
reserves and sales allowance accruals to be critical policies due to the
estimation processes involved in each.
Revenue recognition: Sales to customers and related cost of sales are primarily
recognized at the point in time when control of goods transfers to the customer.
Under the Direct Import Program, title passes in the country of origin. Under
the Domestic Program, title passes primarily at the time of shipment. Under both
programs, the Company recognizes revenues at the time title passes to the
customer as this is when the Company satisfies its performance obligation under
the contracts with its customers. Estimates for future expected returns are
based upon historical return rates and netted against revenues.
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Revenue is measured as the amount of consideration the Company expects to
receive in exchange for transferring goods. Revenue is recorded net of customer
discounts, promotional allowances, volume rebates and similar charges. When the
Company offers the right to return product, historical experience is utilized to
establish a liability for the estimate of expected returns. Sales and other tax
amounts collected from customers for remittance to governmental authorities are
excluded from revenue.
The Company adopted ASC topic 606 effective April 1, 2018. Sales allowances,
marketing support programs, promotions and other volume-based incentives which
are provided to retailers and distributors are accounted for on an accrual basis
as a reduction to net revenues in the period in which the related sales are
recognized. Prior to the adoption of ASC topic 606, the Company followed the
provisions of ASC topic 605. The adoption of ASC topic 606 did not have a
material impact on revenue recognition as compared to revenue recognition
provided under ASC topic 605.
If additional marketing support programs, promotions and other volume-based
incentives are required to promote the Company's products subsequent to the
initial sale, then additional reserves may be required and are accrued for when
such support is offered.
Inventory. Inventory is valued at the lower of cost or net realizable value.
Cost is determined using the first-in, first-out basis and includes inventory
purchase costs and allocated overhead. The Company records valuation adjustments
for the excess cost of inventory over the estimated net realizable value.
Valuation adjustments for slow-moving and obsolete inventory are calculated on
an individual product basis based on physical inspection of the product in
connection with a physical inventory, review of slow-moving products, forecasted
sales, and consideration of active marketing programs.
Trade Accounts Receivable. The Company extends credit based upon evaluations of
a customer's financial condition and provides for any anticipated credit losses
in the Company's financial statements based upon management's estimates and
ongoing reviews of recorded allowances. If the financial condition of a customer
deteriorates, resulting in an impairment of that customer's ability to make
payments, additional reserves may be required. Conversely, reserves are reduced
to reflect credit and collection improvements.
Income Taxes. The Company records a valuation allowance to reduce the amount of
its deferred tax assets to the amount that management estimates is more likely
than not to be realized. While management considers future taxable income and
ongoing tax planning strategies in assessing the need for the valuation
allowance, in the event that management determines that a deferred tax asset
will likely be realized in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, if it is determined that all or part of a net
deferred tax asset will likely not be realized in the future, an adjustment to
the deferred tax asset would be charged to income in the period such
determination was made.
Sales Return Reserves. Management must make estimates of potential future
product returns related to current period product revenue. Management analyzes
historical returns, current economic trends and changes in customer demand for
the Company's products when evaluating the adequacy of the reserve for sales
returns. Management judgments and estimates must be made and used in connection
with establishing the sales return reserves in any accounting period. Additional
reserves may be required if actual sales returns increase above the historical
return rates. Conversely, the sales return reserve could be decreased if the
actual return rates are less than the historical return rates, which were used
to establish the reserve.
Sales Allowance and Marketing Support Accruals. Sales allowances, marketing
support programs, promotions and other volume-based incentives which are
provided to retailers and distributors are accounted for on an accrual basis as
a reduction to net revenues in the period in which the related sales are
recognized in accordance with ASC topic 606, "Revenue from Contracts with
Customers".
At the time of sale, the Company reduces recognized gross revenue by allowances
to cover, in addition to estimated sales returns as required by ASC topic 606,
"Revenue from Contracts with Customers," (i) sales incentives offered to
customers that meet the criteria for accrual and (ii) an estimated amount to
recognize additional non-offered deductions it anticipates and can reasonably
estimate will be taken by customers, which it does not expect to recover.
Accruals for the estimated amount of future non-offered deductions are required
to be made as contra-revenue items, because that percentage of shipped revenue
fails to meet the collectability criteria within ASC topic 606.
If additional marketing support programs, promotions and other volume-based
incentives are required to promote the Company's products subsequent to the
initial sale, then additional reserves may be required and are accrued for when
such support is offered.
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Recently Adopted Accounting Pronouncements
Accounting Standards Update 2019-12 "Income Taxes (Topic 740) - Simplifying the
Accounting for Income Taxes" (Issued December 2019)
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) -
Simplifying the Accounting for Income Taxes," which is intended to simplify
various aspects related to accounting for income taxes. ASU 2019-12 removes
certain exceptions to the general principles in Topic 740 and also clarifies and
amends existing guidance to improve consistent application. ASU 2019-12 is
effective for fiscal years beginning after December 15, 2020. This standard is
required to take effect in the Company's first quarter (June 2021) of the
Company's fiscal year ending March 31, 2022. The impact of ASU 2019-12 on the
Company's consolidated financial statements is limited. The Company is currently
only subject to non-income based state taxes.
Recently Issued Accounting Pronouncements
The following ASUs were issued by the FASB which relate to or could relate to
the Company as concerns the Company's normal ongoing operations or the industry
in which the Company operates.
Accounting Standards Update 2016-13 "Financial Instruments - Credit Losses"
(Issued June 2016)
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit
Losses" to introduce new guidance for the accounting for credit losses on
instruments within its scope. ASU 2016-13 requires among other things, the
measurement of all expected credit losses for financial assets held at the
reporting date based on historical experience, current conditions, and
reasonable supportable forecasts. Many of the loss estimation techniques applied
today will still be permitted, although the inputs to those techniques will
change to reflect the full amount of expected credit losses. In addition, ASU
2016-13 amends the accounting for credit losses on available-for-sale debt
securities and purchased financial assets with credit deterioration. ASU 2016-13
is effective for fiscal years and interim periods beginning after December 15,
2022. Early adoption is permitted. The Company does not expect these amendments
to have a material impact on its financial statements.
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