What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-02-14 · 49 added, 69 removed, 110 unchanged (52% of the section changed)

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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.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond the Company’s control, and which may cause the Company’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

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dollar and Chinese renminbi relative to the dollar and increases in costs of production in China;

the other factors listed under “Risk Factors” in the Company’s Form 10-K, as amended, for the fiscal year ended March 31, 2021 and other filings with the SEC.

the other factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 2022 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.

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Results of Operations

The following table summarizes certain financial information for the three and nine month periods ended December 31, 2021 (fiscal 2022) and December 31, 2020 (fiscal 2021) (in thousands):

Three Months Ended December 31,

Nine Months Ended December 31,

The following table summarizes certain financial information for the three month periods ended June 30, 2022 (fiscal 2023) and June 30, 2021 (fiscal 2022) (in thousands):

Three Months Ended June 30,

Net product sales

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Operating loss

Loss on settlement of litigation

Interest income, net

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Provision for income taxes

Net product sales — Net product sales for the three month period ended December 31, 2021 were $2.5 million as compared to $2.3 million for the three month period ended December 31, 2020 , an increase of $0.2 million, or 10.4%.

The Company’s sales during the three month periods ended December 31, 2021 and December 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 ended December 31, 2021 were $6.3 million as compared to $5.7 million for the nine month period ended December 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.

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 ended December 31, 2021 and December 31, 2020, respectively, and approximately $12,000 and $46,000 for the nine month periods ended December 31, 2021 and December 31, 2020, respectively .

Net product sales — Net product sales for the three month period ended June 30, 2022 were $1.0 million as compared to $2.0 million for the three month period ended June 30, 2021 , a decrease of $1.0 million, or 49.5%.

The Company’s sales during the three month periods ended June 30, 2022 and June 30, 2021 were highly concentrated among the Company’s three largest customers – Wal-Mart, Fred Meyer and Amazon – comprising in the aggregate approximately 78% and 84%, respectively, of the Company’s total net product sales .

Net product sales are comprised primarily of the sales of houseware and audio products which bear the Emerson ® brand name.

The major elements which contributed to the overall increase in net product sales were as follows:

In the aggregate, these adjustments had no effect on net product sales and operating income for either of the three month periods ended June 30, 2022 and June 30, 2021.

The major elements which contributed to the overall decrease in net product sales were as follows:

Houseware products:

Net sales decreased $0.3 million, or 54.2%, to $0.3 million for the three month period ended December 31, 2021 as compared to $0.6 million for the three month period ended December 31, 2020, driven by a decrease in year-over-year sales of microwave ovens.

For the nine month period ended December 31, 2021 , houseware net product sales were $1.5 million, a decrease of $0.6 million, or 29.6%, from $2.1 million for the nine month period ended December 31, 2020, driven by a decrease in year-over-year sales of microwave ovens.

Net sales decreased $0.3 million, or 43.5%, to $0.5 million for the three month period ended June 30, 2022 as compared to $0.8 million for the three month period ended June 30, 2021, driven by a decrease in year-over-year sales of microwave ovens.

Audio products:

Net sales increased $0.5 million, or 32.8%, to $2.2 million for the three month period ended December 31, 2021 as compared to $1.7 million for the three month period ended December 31, 2020 , resulting from increased net sales of clock radios.

For the nine month period ended December 31, 2021 , audio product net sales were $4.8 million, an increase of $1.2 million or 33.9%, from $3.6 million for the nine month period ended December 31, 2020 resulting from increased net sales of clock radios.

Net sales decreased $0.6 million, or 53.4%, to $0.6 million for the three month period ended June 30, 2022 as compared to $1.2 million for the three month period ended June 30, 2021 , resulting from decreased 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 the U.S.

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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.

The Company has engaged each of Leveraged Marketing Corporation of America and Global Licensing Services Pte Limited as an agent to assist in identifying and procuring potential licensees.

Emerson’s success is dependent on its ability to anticipate and respond to changing consumer demands and trends in a timely manner, as well as expanding into new markets and sourcing new products that are profitable to the Company.

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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.

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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.

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, 2022.

Licensing revenue — Licensing revenue for the three month period ended December 31, 2021 was $65,000 as compared to $60,000 for the three month period ended December 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 ended December 31, 2021 was $195,000 as compared to $180,000 for the nine month period ended December 31, 2020, an increase of $15,000, or 8.3%.

Legal Proceedings — 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 for the three month period ended June 30, 2022 was $70,000 as compared to $65,000 for the three month period ended June 30, 2021 , an increase of $5,000, or 7.7%.

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 ended December 31, 2021 as compared to $2.3 million for the three month period ended December 31, 2020 , an increase of $0.3 million, or 10.3%, and $6.5 million for the nine month period ended December 31, 2021 as compared to $5.9 million for the nine month period ended December 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 ended December 31, 2021 as compared to $1.7 million for the three month period ended December 31, 2020 .

The increase in absolute terms for the three month period ended December 31, 2021 as compared to the three month period ended December 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 ended December 31, 2021 as compared to $4.5 million for the nine month period ended December 31, 2020.

The increase in absolute terms for the nine month period ended December 31, 2021 as compared to the nine month period ended December 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.

Net revenues — Net revenues were $1.1 million for the three month period ended June 30, 2022 as compared to $2.1 million for the three month period ended June 30, 2021 , a decrease of $1.0 million, or 47.7%.

Cost of sales — In absolute terms, cost of sales decreased $0.7 million, or 45.4%, to $0.9 million for the three month period ended June 30, 2022 as compared to $1.6 million for the three month period ended June 30, 2021 .

The decrease in absolute terms for the three month period ended June 30, 2022 as compared to the three month period ended June 30, 2021 was primarily related to a decrease in net product sales partially offset by higher 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 ended December 31, 2021 and December 31, 2020, the Company purchased 100% and 95%, respectively, from its two largest suppliers.

For the nine month periods ended December 31, 2021 and December 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 ended December 31, 2021 as compared to $1.6 million for three month period ended December 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 ended December 31, 2021 as compared to 66.9% for the three month period ended December 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 ended December 31, 2021 were $531,000 as compared to $644,000 for the three month period ended December 31, 2020 .

S,G&A, in absolute terms, was $4.2 million for the nine month period ended December 31, 2021 as compared to $4.6 million for the nine month period ended December 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 ended December 31, 2021 as compared to 78.0% for the nine month period ended December 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 ended December 31, 2021 were approximately $1,100,000 as compared to approximately $1,345,000 for the nine month period ended December 31, 2020.

The majority of the decrease in legal fees concerned the protection of the Emerson® trademark.

Compensation costs for the nine month period ended December 31, 2021 were approximately $1,770,000 as compared to approximately $1,896,000 for the nine month period ended December 31, 2020.

The majority of the decrease in compensation costs were due to headcount reductions.

Loss on settlement of litigation — During the three month period ended December 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 ended December 31, 2021 as compared to $18,000 for the three month period ended December 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 ended December 31, 2021 as compared to $128,000 for the nine month period ended December 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 ended December 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 ended December 31, 2020, 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 (benefit) for income taxes — For the three month period ended December 31, 2021 , the Company recorded income tax expense of nil as compared to income tax expense of $9,900 for the three month period ended December 31, 2020 .

In each of the three month periods ended June 30, 2022 and June 30, 2021, the Company purchased 100% of its products from its two largest suppliers.

Selling, general and administrative expenses (“S,G&A”) — S,G&A, in absolute terms, was $1.34 million for the three month period ended June 30, 2022 as compared to $1.37 million for three month period ended June 30, 2021 , essentially flat or 2.3%.

S,G&A, as a percentage of net revenues, was 125.1% for the three month period ended June 30, 2022 as compared to 67.0% for the three month period ended June 30, 2021 .

The decrease in S,G&A was primarily attributed to a decrease in compensation costs of approximately $124,000, a decrease in director’s fees of $32,000 and a decrease in bad debt expense of $22,000 partially offset by an increase in legal fees of $158,000.

Compensation costs for the three month period ended June 30, 2022 were $508,000 as compared to $632,000 for the three month period ended June 30, 2021 .

Legal fees for the three month period ended June 30, 2022 were $431,000 as compared to $273,000 for the three month period ended June 30, 2021 .

Director’s fees for the three month period ended June 30, 2022 were $33,000 as compared to $65,000 for the three month period ended June 30, 2021 .

Interest income, net — Interest income, net, was $50,000 for the three month period ended June 30, 2022 as compared to $17,000 for the three month period ended June 30, 2021 , an increase of $33,000.

The increase was primarily due to higher average interest rates earned on the Company’s short term investments.

Income from governmental assistance programs — For the three month period ended June 30, 2022, the Company recorded income of approximately $22,000 under the ESS program.

For the three month period ended June 30, 2021, the Company recorded income of nil under the ESS program.

See “Note 10 – Governmental Assistance Programs”.

Provision (benefit) for income taxes — For the three month periods ended June 30, 2022 and June 30, 2021 , the Company recorded income tax expense of nil.

Under ASU 2019-12 “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” the Company incurred $10,950 of non-income based state taxes for both periods, which are now reported as S,G &A.

See “Note 5 – Income Taxes”.

For the nine month period ended December 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 ended December 31, 2020.

Although the Company generated net losses during fiscal 2023 and fiscal 2022, 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 ended December 31, 2021 as compared to a net loss of $945,000 for the three month period ended December 31, 2020 .

For the nine month period ended December 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 ended December 31, 2020.

Net (loss) — As a result of the foregoing factors, the Company realized a net loss of $1,077,000 for the three month period ended June 30, 2022 as compared to a net loss of $915,000 for the three month period ended June 30, 2021 .

Liquidity and Capital Resources

As of December 31, 2021, the Company had cash and cash equivalents of approximately $24.7 million as compared to approximately $5.2 million at March 31, 2021.

Working capital decreased to $29.0 million at December 31, 2021 as compared to $32.1 million at March 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.

Net cash used by operating activities was approximately $5.5 million for the nine month period ended December 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 ended December 31, 2021 due to a decrease in short term deposits.

Net cash used by financing activities was nil for the nine month period ended December 31, 2021.

As of June 30, 2022, the Company had cash and cash equivalents of approximately $24.9 million as compared to approximately $25.6 million at March 31, 2022.

Cash and cash equivalents includes short term investments in deposits which were classified as cash

equivalents of $21.1 million as of June 30, 2022 compared to $22.0 million of such deposits as of March 31, 2022.

Working capital decreased to $27.1 million at June 30, 2022 as compared to $28.1 million at March 31, 2022.

The decrease in cash and cash equivalents of approximately $0.7 million was due to the net loss generated during the period of $1.1 million, an increase in inventory of $0.3 million, an increase in prepaid purchases of $0.1 million and a decrease in deferred revenue of $0.1 million partially offset by a decrease in accounts receivable of $0.7 million, a decrease in prepaid expenses and other current assets of $0.1 million and an increase in accounts payable and other current liabilities of $0.1 million.

Net cash used by operating activities was approximately $0.7 million for the three month period ended June 30, 2022, resulting from a $1.1 million net loss generated during the period, an increase in inventory of $0.3 million, an increase in prepaid purchases of $0.1 million and a decrease in deferred revenue of $0.1 million partially offset by a decrease in accounts receivable of $0.7 million, a decrease in prepaid expenses and other current assets of $0.1 million and an increase in accounts payable and other current liabilities of $0.1 million.

Net cash provided by investing activities was nil for the three month period ended June 30, 2022.

Net cash used by financing activities was nil for the three month period ended June 30, 2022.

Sources and Uses of Funds

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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.

On July 5, 2021, the Company’s PPP loan was completely forgiven by the Small Business Administration.

See Note 10 of the Notes to the Interim Consolidated Financial Statements.

Off-Balance Sheet Arrangements

As of December 31, 2021, the Company did not have any off-balance sheet arrangements as defined under the rules of the SEC.

As of June 30, 2022, 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis