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 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;
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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 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
nine month periods ended December 31, 2020 (fiscal 2021) and December 31, 2019
(fiscal 2020) (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
Net product sales $ 2,273 $ 2,038 $ 5,718 $ 4,975
Licensing revenue 60 56 180 167
Net revenues 2,333 2,094 5,898 5,142
Cost of sales 1,754 1,653 4,519 4,180
Selling, general and administrative
expenses 1,560 1,604 4,601 4,432
Operating loss (981 ) (1,163 ) (3,222 ) (3,470 )
Interest income, net 18 179 128 638
Income from governmental assistance
programs 28 - 83 -
Loss before income taxes (935 ) (984 ) (3,011 ) (2,832 )
Provision for income taxes 10 4 15 19
Net loss $ (945 ) $ (988 ) $ (3,026 ) $ (2,851 )
Net product sales - Net product sales for the third quarter of fiscal 2021 were
$2.3 million as compared to $2.0 million for the third quarter of fiscal 2020,
an increase of $0.3 million, or 11.5%. 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 third quarter of
fiscal 2021 came from 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 ability to
continue to sell products under difficult economic conditions. The Company's
sales during the third 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 90% and 90%,
respectively, of the Company's total net product sales.
Net product sales for the nine month period of fiscal 2021 were $5.7 million as
compared to $5.0 million for the nine month period of fiscal 2020, an increase
of $0.7 million, or 14.9%. The Company's sales during the nine month periods of
fiscal 2021 and
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fiscal 2020 were highly concentrated among the Company's three largest customers
- Wal-Mart, Amazon and Fred Meyer - where net product sales comprised
approximately 83% and 83%, 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 $4,000 and nil for the third quarters of
fiscal 2021 and fiscal 2020, respectively, and approximately $46,000 and nil for
the nine 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 were essentially flat in the third quarter
of fiscal 2021 as compared to the third quarter of fiscal 2020. For the
nine month period of fiscal 2021, houseware net product sales were $2.1
million, an increase of $0.2 million, or 10.2%, from $1.9 million for the
nine 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 $1.7 million in the third quarter of fiscal
2021 as compared to $1.4 million in the third quarter of fiscal 2020, an
increase of $0.3 million, or 22.2%, resulting from increased net sales of
clock radios. The Company benefitted from limited competition during the
early stages of the pandemic. For the nine month period of fiscal 2021,
audio product net sales were $3.6 million, an increase of $0.6 million or
18.2%, from $3.0 million in the nine 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 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 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, it 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
and the global availability of shipping containers, which has at times resulted
in carrier delays and increased shipping costs. 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 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,
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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
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 third quarter of fiscal 2021 was
$60,000 as compared to $56,000 in the third 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 nine month period of fiscal 2021 was $180,000 as
compared to $167,000 for the nine month period of fiscal 2020, an increase of
$13,000, or 7.8%. 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 third quarter of fiscal 2021 as compared to $2.1
million in the third quarter of fiscal 2020, an increase of $0.2 million, or
11.4%, and $5.9 million for the nine month period of fiscal 2021 as compared to
$5.1 million for the nine month period of fiscal 2020, an increase of $0.8
million, or 14.7%.
Cost of sales - In absolute terms, cost of sales increased $0.1 million, or
6.1%, to $1.8 million in the third quarter of fiscal 2021 as compared to $1.7
million in the third quarter of fiscal 2020. The increase in absolute terms for
the third quarter of fiscal 2021 as compared to the third 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 $0.3 million, or 8.1%, to $4.5
million for the nine month period of fiscal 2021 as compared to $4.2 million for
the nine month period of fiscal 2020. The increase in absolute terms for the
nine month period of fiscal 2021 as compared to the nine 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 third quarter of fiscal 2021 and fiscal 2020, the Company
purchased 95% and 90%, respectively, from its two largest suppliers. For the
nine month period of fiscal 2021 and fiscal 2020, the Company purchased 98% and
86%, 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 both of the third quarters of fiscal 2021 and fiscal
2020. S,G&A, as a percentage of net revenues, was 66.9% in the third quarter of
fiscal 2021 as compared to 76.6% in the third quarter of fiscal 2020. The slight
increase in S,G&A was primarily attributed to an increase in legal fees of
approximately $46,000. Legal fees for the third quarter of fiscal 2021 were
$490,000 as compared to $444,000 for the third 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 $4.6 million for the nine month period of fiscal
2021 as compared to $4.4 million for the nine month period of fiscal 2020, an
increase of $0.2 million, or 3.8%. S,G&A, as a percentage of net revenues, was
78.0% for the nine month period of fiscal 2021 as compared to 86.2% for the nine
month period of fiscal 2020. The increase in S,G&A was primarily attributed to
an increase in legal fees of approximately $430,000. Legal fees for the nine
month period of fiscal 2021 were $1,345,000 as compared to $915,000 for the nine
month period of fiscal 2020. The majority of the increase in legal fees
concerned the protection of the Emerson® trademark. This was partially offset by
a decrease in advertising expenses of $101,000, a decrease in compensation costs
of $79,000 and a decrease in consulting fees of $21,000. 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 $18,000 in the third quarter of
fiscal 2021 as compared to $179,000 in the third quarter of fiscal 2020, a
decrease of $161,000. The decrease was primarily due to lower average interest
rates earned on the Company's short term investments.
Interest income, net, was $128,000 for the nine month period of fiscal 2021 as
compared to $638,000 for the nine month period of fiscal 2020, a decrease of
$510,000. The decrease was primarily due to lower average interest rates earned
on the Company's short term investments.
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Income from governmental assistance programs - During the third quarter and nine
month period of fiscal 2021, the Company recorded income of approximately
$28,000 and $83,000, respectively, related to assistance received from the Hong
Kong government under the ESS program. See "Note 10 - Paycheck Protection
Program and Employment Support Scheme".
Provision for income taxes - In the third quarter of fiscal 2021, the Company
recorded income tax expense of $9,900 as compared to income tax expense of
$4,800 in the third quarter of fiscal 2020. See "Note 5 - Income Taxes".
For the nine month period of fiscal 2021, the Company recorded income tax
expense of $15,200 as compared to income tax expense of $19,400 for the nine
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 $945,000 in the third quarter of fiscal 2021 as compared to a net loss
of $988,000 in the third quarter of fiscal 2020.
For the nine month period of fiscal 2021, the Company realized a net loss of
$3,026,000 as compared to a net loss of $2,851,000 for the nine month period of
fiscal 2020.
Liquidity and Capital Resources
As of December 31, 2020, the Company had cash and cash equivalents of
approximately $30.5 million as compared to approximately $6.3 million at March
31, 2020. Working capital decreased to $33.0 million at December 31, 2020 as
compared to $36.1 million at March 31, 2020. The increase in cash and cash
equivalents of approximately $24.2 million was due to a decrease in short term
investments of $28.1 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 and an increase in deferred revenue of $0.1 million partially offset by
the net loss generated during the period of $3.0 million, an increase in
accounts receivable of $1.0 million, an increase in prepaid purchases of $0.3
million, a decrease in federal taxes payable of $0.2 million.
Cash Flows
Net cash used by operating activities was approximately $4.1 million for the
nine months ended December 31, 2020, resulting from a $3.0 million net loss
generated during the period, an increase in accounts receivable of $1.0 million,
an increase in prepaid purchases of $0.3 million, a decrease in federal taxes
payable of $0.2 million partially offset by an increase in accounts payable and
other liabilities of $0.3 million and an increase in deferred revenue of $0.1
million.
Net cash provided by investing activities was approximately $28.1 million for
the nine months ended December 31, 2020 due to a decrease in short term
certificates of deposit.
Net cash provided by financing activities was $0.2 million for the nine months
ended December 31, 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. The Company used all of the PPP loan
proceeds for qualifying expenses in accordance with terms of the CARES Act and
intends to apply for forgiveness of the loan to the extent applicable. However,
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 December 31, 2020, the Company did not have any off-balance sheet
arrangements as defined under the rules of the SEC.
Recently Adopted Accounting Pronouncements
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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.
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