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;
• 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 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; 14
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• 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
potential increases of tariffs on goods imported into theU.S. , and uncertainty regarding the same; • limited access to financing or increased cost of financing;
• the effects of currency fluctuations between the
renminbi relative to the dollar and increases in costs of production in
• the other factors listed under "Risk Factors" in the Company's Form 10-K,
as amended, for the fiscal year ended
with the
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 inthe 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 nine month periods endedDecember 31, 2021 (fiscal 2022) andDecember 31, 2020 (fiscal 2021) (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2021 2020 2021 2020 Net product sales$ 2,509 $ 2,273 $ 6,290 $ 5,718 Licensing revenue 65 60 195 180 Net revenues 2,574 2,333 6,485 5,898 Cost of sales 1,826 1,754 4,786 4,519 Selling, general and administrative expenses 1,469 1,560 4,196 4,601 Operating loss (721 ) (981 ) (2,497 ) (3,222 ) Loss on settlement of litigation (450 ) - (450 ) - Interest income, net 7 18 40 128 Income from governmental assistance programs - 28 207 83 Loss before income taxes (1,164 ) (935 ) (2,700 ) (3,011 ) Provision for income taxes - 10 11 15 Net loss$ (1,164 ) $ (945 )$ (2,711 ) $ (3,026 ) Net product sales - Net product sales for the three month period endedDecember 31, 2021 were$2.5 million as compared to$2.3 million for the three month period endedDecember 31, 2020 , an increase of$0.2 million , or 10.4%. The Company's sales during the three month periods endedDecember 31, 2021 andDecember 31, 2020 were highly concentrated among the Company's three largest customers -Wal-Mart , Amazon and Fred Meyer - comprising in the aggregate approximately 94% and 90%, respectively, of the Company's total net product sales. Net product sales for the nine month period endedDecember 31, 2021 were$6.3 million as compared to$5.7 million for the nine month period endedDecember 31, 2020 , an increase of$0.6 million , or 10.0%. The Company's sales during such periods were highly concentrated among the Company's three largest customers -Wal-Mart , Amazon and Fred Meyer - comprising in the aggregate approximately 91% and 83%, respectively, of the Company's total net product sales. 15 -------------------------------------------------------------------------------- Net product sales may be periodically impacted by adjustments made to the Company's sales allowance and marketing support accrual to record unanticipated customer deductions from accounts receivable or to reduce the accrual by any amounts which were accrued in the past but not taken by customers through deductions from accounts receivable within a certain time period. In the aggregate, these adjustments had the effect of increasing net product sales and operating income by approximately$6,000 and$3,000 for the three month periods endedDecember 31, 2021 andDecember 31, 2020 , respectively, and approximately$12,000 and$46,000 for the nine month periods endedDecember 31, 2021 andDecember 31, 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 decreased
million for the three month period ended
a decrease in year-over-year sales of microwave ovens. For the nine month
period ended
million, a decrease of
nine month period endedDecember 31, 2020 , driven by a decrease in year-over-year sales of microwave ovens. ii) Audio products: Net sales increased$0.5 million , or 32.8%, to$2.2
million for the three month period ended
from increased net sales of clock radios. For the nine month period ended
of$1.2 million or 33.9%, from$3.6 million for the nine month period endedDecember 31, 2020 resulting from increased net sales of clock radios. Business operations - The Company expects to continue to expand its existing distribution channels and to develop and promote new products with retailers in theU.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 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 current and proposedU.S. tariffs on categories of products that the Company imports fromChina , andChina's retaliatory tariffs on certain goods imported fromthe 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 inChina . 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 betweenthe United States andChina overHong Kong and any resulting retaliatory policies may affect our operations inHong 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 inChina 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 manyU.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 16
-------------------------------------------------------------------------------- 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, 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 endedMarch 31, 2021 . Licensing revenue - Licensing revenue for the three month period endedDecember 31, 2021 was$65,000 as compared to$60,000 for the three month period endedDecember 31, 2020 , an increase of$5,000 , or 8.3%. 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 nine month period endedDecember 31, 2021 was$195,000 as compared to$180,000 for the nine month period endedDecember 31, 2020 , an increase of$15,000 , or 8.3%. 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$2.6 million for the three month period endedDecember 31, 2021 as compared to$2.3 million for the three month period endedDecember 31, 2020 , an increase of$0.3 million , or 10.3%, and$6.5 million for the nine month period endedDecember 31, 2021 as compared to$5.9 million for the nine month period endedDecember 31, 2020 , an increase of$0.6 million , or 10.0% Cost of sales - In absolute terms, cost of sales increased$0.1 million , or 4.1%, to$1.8 million for the three month period endedDecember 31, 2021 as compared to$1.7 million for the three month period endedDecember 31, 2020 . The increase in absolute terms for the three month period endedDecember 31, 2021 as compared to the three month period endedDecember 31, 2020 was primarily related to an increase in net product sales partially offset by lower year-over-year gross cost of sales as a percentage of gross sales. In absolute terms, cost of sales increased$0.3 million , or 5.9%, to$4.8 million for the nine month period endedDecember 31, 2021 as compared to$4.5 million for the nine month period endedDecember 31, 2020 . The increase in absolute terms for the nine month period endedDecember 31, 2021 as compared to the nine month period endedDecember 31, 2020 was primarily related to an increase in net product sales partially offset by lower year-over-year gross cost of sales as a percentage of gross sales. The Company purchases the products it sells from a limited number of factory suppliers. For the three month periods endedDecember 31, 2021 andDecember 31, 2020 , the Company purchased 100% and 95%, respectively, from its two largest suppliers. For the nine month periods endedDecember 31, 2021 andDecember 31, 2020 , the Company purchased 100% and 98%, respectively, from its two largest suppliers. Selling, general and administrative expenses ("S,G&A") - S,G&A, in absolute terms, was$1.5 million for the three month period endedDecember 31, 2021 as compared to$1.6 million for three month period endedDecember 31, 2020 , a decrease of$0.1 million or 5.8%. S,G&A, as a percentage of net revenues, was 57.1% for the three month period endedDecember 31, 2021 as compared to 66.9% for the three month period endedDecember 31, 2020 . The decrease in S,G&A was primarily attributed to a decrease in compensation costs of approximately$113,000 . Compensation costs for the three month period endedDecember 31, 2021 were$531,000 as compared to$644,000 for the three month period endedDecember 31, 2020 . S,G&A, in absolute terms, was$4.2 million for the nine month period endedDecember 31, 2021 as compared to$4.6 million for the nine month period endedDecember 31, 2020 , a decrease of$0.4 million , or 8.8%. S,G&A, as a percentage of net revenues, was 64.7% for the nine month period endedDecember 31, 2021 as compared to 78.0% for the nine month period endedDecember 31, 2020 . The decrease in S,G&A was primarily attributed to a decrease in legal fees of approximately$245,000 and a decrease in compensation costs of approximately$126,000 . Legal fees for the nine month period endedDecember 31, 2021 were approximately$1,100,000 as compared to approximately$1,345,000 for the nine month period endedDecember 31, 2020 . The majority of the decrease in legal fees concerned the protection of the Emerson® trademark. Compensation costs for the nine month period endedDecember 31, 2021 were approximately$1,770,000 as compared to approximately$1,896,000 for the nine month period endedDecember 31, 2020 . The majority of the decrease in compensation costs were due to headcount reductions. 17
-------------------------------------------------------------------------------- Loss on settlement of litigation - During the three month period endedDecember 31, 2021 , a settlement agreement between the Company and one of its former directors was entered into regarding an indemnification claim. The amount of the settlement was$450,000 . See "Note 11 - Subsequent Event". Interest income, net - Interest income, net, was$7,000 for the three month period endedDecember 31, 2021 as compared to$18,000 for the three month period endedDecember 31, 2020 , a decrease of$11,000 . The decrease was primarily due to lower average interest rates earned on the Company's short term investments. Interest income, net, was$40,000 for the nine month period endedDecember 31, 2021 as compared to$128,000 for the nine month period endedDecember 31, 2020 , a decrease of$88,000 . The decrease was primarily due to lower average interest rates earned on the Company's short term investments. Income from governmental assistance programs - For the three and nine month periods endedDecember 31, 2021 , the Company recorded income of approximately nil and$207,000 , respectively, related to its PPP loan forgiveness. For the three and nine month periods endedDecember 31, 2020 , the Company recorded income of approximately$28,000 and$83,000 , respectively, related to assistance received from theHong Kong government under the ESS program. See "Note 10 - Paycheck Protection Program and Employment Support Scheme". Provision (benefit) for income taxes - For the three month period endedDecember 31, 2021 , the Company recorded income tax expense of nil as compared to income tax expense of$9,900 for the three month period endedDecember 31, 2020 . See "Note 5 - Income Taxes". For the nine month period endedDecember 31, 2021 , the Company recorded income tax expense of$11,000 as compared to income tax expense of$15,200 for the nine month period endedDecember 31, 2020 . Although the Company generated net losses during fiscal 2022 and fiscal 2021, 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$1,164,000 for the three month period endedDecember 31, 2021 as compared to a net loss of$945,000 for the three month period endedDecember 31, 2020 . For the nine month period endedDecember 31, 2021 , the Company realized a net loss of$2,711,000 as compared to a net loss of$3,026,000 for the nine month period endedDecember 31, 2020 .
Liquidity and Capital Resources
As ofDecember 31, 2021 , the Company had cash and cash equivalents of approximately$24.7 million as compared to approximately$5.2 million atMarch 31, 2021 . Working capital decreased to$29.0 million atDecember 31, 2021 as compared to$32.1 million atMarch 31, 2021 . The increase in cash and cash equivalents of approximately$19.5 million was due to the decrease in short term investments of$25.0 million , an increase of$0.4 million in accounts payable and other current liabilities and the increase in long term lease liabilities of$0.2 million offset by the net loss generated during the period of$2.7 million , an increase in accounts receivable of$1.9 million , an increase in inventory of$0.6 million , an increase in right of use assets of$0.2 million , a decrease in federal taxes payable of$0.2 million , a decrease in PPP loan payable of$0.2 million , a decrease in deferred revenue of$0.2 million and an increase in prepaid expenses and other current assets of$0.1 million .
Cash Flows
Net cash used by operating activities was approximately$5.5 million for the nine month period endedDecember 31, 2021 , resulting from a$2.7 million net loss generated during the period, an increase in accounts receivable of$2.1 million , an increase in inventory of$0.6 million , an increase in right of use assets of$0.4 million , a decrease in federal taxes payable of$0.2 million , the impact of the PPP loan forgiveness of$0.2 million partially offset by an increase in accounts payable and other current liabilities of$0.4 million , an increase in long-term lease liabilities of$0.2 million and a decrease in prepaid purchases of$0.1 million . Net cash provided by investing activities was approximately$25.0 million for the nine month period endedDecember 31, 2021 due to a decrease in short term deposits.
Net cash used by financing activities was nil for the nine month period ended
18 --------------------------------------------------------------------------------
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 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 CARES Act and applied for forgiveness of the loan to the extent applicable. OnJuly 5, 2021 , the Company's PPP loan was completely forgiven by theSmall Business Administration . See Note 10 of the Notes to the Interim Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As of
Recently Adopted Accounting Pronouncements
Accounting Standards Update 2019-12 "Income Taxes (Topic 740) - Simplifying the
Accounting for Income Taxes" (Issued
InDecember 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 afterDecember 15, 2020 . This standard took effect in the first quarter (June 2021 ) of the Company's fiscal year endingMarch 31, 2022 . The adoption of ASU 2019-12 had no material impact on the Company's consolidated financial statements and related disclosures.
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
InJune 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 afterDecember 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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