UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2020

☐~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 1-11692

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

Delaware		06-1275288
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

25 Lake Avenue Ext., Danbury, Connecticut		06811-5286
(Address of principal executive offices)		(Zip Code)

(203) 743-8000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock $0.01 par value per share		New York Stock Exchange		ETH
(Title of each class)		(Name of each exchange on which registered)		(Trading symbol)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of ~~May 8,~~October 22, 2020 was 25,053,082.

~~Ethan Allen Interiors Inc.~~ETHAN ALLEN INTERIORS INC.

~~Form~~FORM 10-Q ~~Third Quarter of Fiscal 2020~~FIRST QUARTER OF FISCAL 2021

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements	2

Consolidated Balance Sheets (Unaudited)	2

Consolidated Statements of Comprehensive Income (Unaudited)	3

Consolidated Statements of Cash Flows (Unaudited)	4

Consolidated Statements of Shareholders’ Equity (Unaudited)	5

Notes to Consolidated Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	34	27

Item 4. Controls and Procedures	35	28

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	36	29

Item 1A. Risk Factors	36	29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38	29

Item 3. Defaults Upon Senior Securities	38	29

Item 4. Mine Safety Disclosures	38	29

Item 5. Other Information	38	29

Item 6. Exhibits	39	30

SIGNATURES	39	30

~~PAR~~TPART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(In thousands, except par value)

	March 31, 2020			June 30, 2019			September 30, 2020			June 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	116,868		$	20,824		$	61,973		$	72,276
Accounts receivable, net		10,482			14,247			13,241			8,092
Inventories, net		138,774			162,389			127,047			126,101
Prepaid expenses and other current assets		21,204			18,830			30,200			23,483
Total current assets		287,328			216,290			232,461			229,952
Property, plant and equipment, net		242,490			245,246			234,877			236,678
Goodwill		25,388			25,388			25,388			25,388
Intangible assets		19,740			19,740			19,740			19,740
Operating lease right-of-use assets		124,636			-			107,690			109,342
Deferred income taxes		2,044			2,108			774			137
Other assets		1,478			1,579			1,591			1,552
Total ASSETS	$	703,104		$	510,351		$	622,521		$	622,789

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	30,997		$	34,166		$	33,706		$	25,595
Customer deposits and deferred revenue		52,410			56,714			89,908			64,031
Accrued compensation and benefits		20,065			22,646			24,261			18,278
Short-term debt		-			550
Current operating lease liabilities		34,005			-			29,706			27,366
Other current liabilities		9,386			8,750			10,308			3,708
Total current liabilities		146,863			122,826			187,889			138,978
Long-term debt		100,000			516			0			50,000
Operating lease liabilities, long-term		112,515			-			97,154			102,111
Deferred income taxes		1,534			1,069			286			1,074
Other long-term liabilities		2,946			22,011			4,261			2,562
Total LIABILITIES	$	363,858		$	146,422		$	289,590		$	294,725
Commitments and contingencies (see Note 15)

Commitments and contingencies (see Note 16)
Shareholders' equity:
Preferred stock, $0.01 par value; 1,055 shares authorized; none issued	$	-		$	-
Common stock, $0.01 par value, 150,000 shares authorized, 49,054 and 49,049 shares issued; 25,053 and 26,587 shares outstanding at March 31, 2020 and June 30, 2019, respectively		491			491
Preferred stock, $0.01 par value; 1,055 shares authorized; none issued							$	0		$	0
Common stock, $0.01 par value, 150,000 shares authorized, 49,053 shares issued; 25,053 shares outstanding at September 30, 2020 and June 30, 2020, respectively								491			491
Additional paid-in capital		378,166			377,913			378,554			378,300
Treasury stock, at cost: 24,001 and 22,462 shares at March 31, 2020 and June 30, 2019, respectively		(680,916	)		(656,597	)
Treasury stock, at cost: 24,000 shares at September 30, 2020 and June 30, 2020, respectively								(680,916	)		(680,916	)
Retained earnings		650,701			647,710			642,697			638,631
Accumulated other comprehensive loss		(9,218	)		(5,651	)		(7,885	)		(8,441	)
Total Ethan Allen Interiors Inc. shareholders' equity		339,224			363,866			332,941			328,065
Noncontrolling interests		22			63			(10	)		(1	)
Total shareholders' equity		339,246			363,929			332,931			328,064
Total LIABILITIES AND SHAREHOLDERS' EQUITY	$	703,104		$	510,351		$	622,521		$	622,789

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except per share data)

	Three months ended						Nine months ended						Three months ended
	March 31,						March 31,						September 30,
	2020			2019			2020			2019			2020			2019
Net sales	$	149,774		$	177,829		$	498,269		$	562,766		$	151,058		$	173,921
Cost of sales		65,825			79,435			223,005			254,062			65,288			80,127
Gross profit		83,949			98,394			275,264			308,704			85,770			93,794

Selling, general and administrative expenses		83,841			87,504			258,346			269,824			73,466			86,010
Restructuring and other impairment charges, net of gains (note 10)		862			221			(10,173	)		284
Operating income (loss)		(754	)		10,669			27,091			38,596
Interest income, net of interest (expense)		213			(62	)		295			63
Income (loss) before income taxes		(541	)		10,607			27,386			38,659
Income tax expense (benefit)		(318	)		2,629			6,417			9,651
Net income (loss)	$	(223	)	$	7,978		$	20,969		$	29,008
Restructuring and other impairment charges, net of gains														623			(10,857	)
Operating income														11,681			18,641
Interest (expense), net of interest income														(440	)		19
Income before income taxes														11,241			18,660
Provision for income taxes														1,888			4,554
Net income													$	9,353		$	14,106

Per share data
Basic earnings per common share:
Net income (loss) per basic share	$	(0.01	)	$	0.30		$	0.80		$	1.09
Net income per basic share													$	0.37		$	0.53
Basic weighted average common shares		25,703			26,705			26,332			26,690			25,179			26,713
Diluted earnings per common share:
Net income (loss) per diluted share	$	(0.01	)	$	0.30		$	0.80		$	1.08
Net income per diluted share													$	0.37		$	0.53
Diluted weighted average common shares		25,703			26,751			26,362			26,749			25,206			26,750

Comprehensive income (loss)
Net income (loss)	$	(223	)	$	7,978		$	20,969		$	29,008
Comprehensive income
Net income													$	9,353		$	14,106
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		(3,841	)		303			(3,567	)		355			556			(499	)
Other		(15	)		(20	)		(41	)		(65	)		(9	)		(7	)
Other comprehensive income (loss), net of tax		(3,856	)		283			(3,608	)		290			547			(506	)
Comprehensive income (loss)	$	(4,079	)	$	8,261		$	17,361		$	29,298
Comprehensive income													$	9,900		$	13,600

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine months ended						Three months ended
	March 31,						September 30,
	2020			2019			2020			2019
Cash Flows from Operating Activities
Net income	$	20,969		$	29,008		$	9,353		$	14,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,845			14,742			4,140			3,976
Share-based compensation expense		200			986			254			151
Non-cash operating lease cost		24,369			-			7,492			8,022
Deferred income taxes		1,077			(390	)		(1,425	)		564
Restructuring and other impairment charges, net of gains		(5,647	)		284			623			(6,717	)
Restructuring payments		(5,574	)		(177	)		(59	)		(4,071	)
Loss on disposal of property, plant and equipment		191			134			0			9
Other		(13	)		(16	)		(36	)		79
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		3,630			(3,474	)		(5,149	)		1,767
Inventories, net		21,567			(1,613	)		(946	)		8,999
Prepaid expenses and other current assets		(1,980	)		(1,290	)		(6,717	)		(3,980	)
Customer deposits and deferred revenue		(4,914	)		1,145			25,877			7,943
Accounts payable and accrued expenses		(3,428	)		(510	)		8,111			(4,763	)
Accrued compensation and benefits		429			4,414			6,042			2,734
Operating lease liabilities		(24,411	)		-			(8,390	)		(8,066	)
Other assets and liabilities		(626	)		1,064			3,020			2,643
Net cash provided by operating activities		38,684			44,307			42,190			23,396

Cash Flows from Investing Activities
Proceeds from disposal of property, plant and equipment		12,423			1			0			11,615
Capital expenditures		(12,457	)		(6,990	)		(2,439	)		(3,414	)
Acquisitions, net of cash acquired		(1,350	)		-			0			(1,281	)
Other investing activities		20			124			0			20
Net cash used in investing activities		(1,364	)		(6,865	)
Net cash (used in) provided by investing activities								(2,439	)		6,940

Cash Flows from Financing Activities
Borrowings on revolving credit facility		100,000			16,000
Payments on borrowings		-			(8,000	)		(50,000	)		0
Payment of cash dividends		(16,181	)		(41,916	)		0			(5,075	)
Repurchases of common stock		(24,319	)		-
Other financing activities		(369	)		(190	)		(148	)		(119	)
Net cash provided by (used in) financing activities		59,131			(34,106	)
Net cash used in financing activities								(50,148	)		(5,194	)

Effect of exchange rate changes on cash and cash equivalents		(407	)		43			94			(90	)

Net increase in cash and cash equivalents		96,044			3,379
Net (decrease) increase in cash and cash equivalents								(10,303	)		25,052
Cash and cash equivalents at beginning of period		20,824			22,363			72,276			20,824
Cash and cash equivalents at end of period	$	116,868		$	25,742		$	61,973		$	45,876

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Unaudited)

(In thousands)

~~Fiscal 2020~~

													Accumulated																							Accumulated
					Additional								Other						Non-										Additional							Other						Non-
	Common Stock				Paid-in			Treasury Stock					Comprehensive			Retained			Controlling			Total			Common Stock				Paid-in		Treasury Stock					Comprehensive			Retained			Controlling			Total
	Shares		Par Value		Capital			Shares		Amount			Loss			Earnings			Interests			Equity			Shares		Par Value		Capital		Shares		Amount			Loss			Earnings			Interests			Equity
Balance at June 30, 2019		49,049	$	491	$	377,913			22,462	$	(656,597	)	$	(5,651	)	$	647,710		$	63		$	363,929
Balance at June 30, 2020																										49,053	$	491	$	378,300		24,000	$	(680,916	)	$	(8,441	)	$	638,631		$	(1	)	$	328,064
Net income		-		-		-			-		-			-			14,106			-			14,106			-		0		0		-		0			0			9,353			0			9,353
Common stock issued on share-based awards		1		-		18			-		-			-			-			-			18
Share-based compensation expense		-		-		151			-		-			-			-			-			151			-		0		254		-		0			0			0			0			254
Impact of ASU 2016-02 adoption, net of tax		-		-		-			-		-			-			(1,585	)		-			(1,585	)
Cash dividends declared		-		-		-			-		-			-			(5,610	)		-			(5,610	)		-		0		0		-		0			0			(5,287	)		0			(5,287	)
Other comprehensive income (loss)		-																								-		0		0		-		0			556			0			(9	)		547
Balance at September 30, 2019		49,050	$	491	$	378,082			22,462	$	(656,597	)	$	(6,150	)	$	654,621		$	56		$	370,503
Net income		-		-		-			-		-			-			7,086			-			7,086
Common stock issued on share-based awards		4		-		35			-		-			-			-			-			35
Share-based compensation expense		-		-		(28	)		-		-			-			-			-			(28	)
Cash dividends declared		-		-		-			-		-			-			(5,496	)		-			(5,496	)
Repurchase of common stock		-		-		-			546		(10,029	)		-			-			-			(10,029	)
Other comprehensive income (loss)		-
Balance at December 31, 2019		49,054	$	491	$	378,089			23,008	$	(666,626	)	$	(5,377	)	$	656,211		$	37		$	362,825
Net loss		-		-		-			-		-			-			(223	)		-			(223	)
Share-based compensation expense		-		-		77			-		-			-			-			-			77
Cash dividends declared		-		-		-			-		-			-			(5,287	)		-			(5,287	)
Repurchase of common stock		-		-		-			993		(14,290	)		-			-			-			(14,290	)
Other comprehensive income (loss)		-		-		-			-		-			(3,841	)		-			(15	)		(3,856	)
Balance at March 31, 2020		49,054	$	491	$	378,166			24,001	$	(680,916	)	$	(9,218	)	$	650,701		$	22		$	339,246
Balance at September 30, 2020																										49,053	$	491	$	378,554		24,000	$	(680,916	)	$	(7,885	)	$	642,697		$	(10	)	$	332,931

~~Fiscal 2019~~

												Accumulated																							Accumulated
					Additional							Other						Non-										Additional							Other						Non-
	Common Stock				Paid-in		Treasury Stock					Comprehensive			Retained			Controlling			Total			Common Stock				Paid-in		Treasury Stock					Comprehensive			Retained			Controlling			Total
	Shares		Par Value		Capital		Shares		Amount			Loss			Earnings			Interests			Equity			Shares		Par Value		Capital		Shares		Amount			Loss			Earnings			Interests			Equity
Balance at June 30, 2018		48,989	$	490	$	376,950		22,460	$	(656,551	)	$	(6,171	)	$	669,013		$	139		$	383,870
Balance at June 30, 2019																									49,049	$	491	$	377,913		22,462	$	(656,597	)	$	(5,651	)	$	647,710		$	63		$	363,929
Net income		-		-		-		-		-			-			8,840			-			8,840			-		0		0		-		0			0			14,106			0			14,106
Common stock issued on share-based awards		40		-		637		-		-			-			-			-			637			1		0		18		0		0			0			0			0			18
Share-based compensation expense		-		-		491		-		-			-			-			-			491			-		0		151		-		0			0			0			0			151
Impact of ASU 2016-02 adoption, net of tax																									-		0		0		-		0			0			(1,585	)		0			(1,585	)
Cash dividends declared		-		-		-		-		-			-			(5,072	)		-			(5,072	)		-		0		0		-		0			0			(5,610	)		0			(5,610	)
Other comprehensive income (loss)		-																							-		0		0		-		0			(499	)		0			(7	)		(506	)
Balance at September 30, 2018		49,029	$	490	$	378,078		22,460	$	(656,551	)	$	(4,924	)	$	672,781		$	113		$	389,987
Net income		-		-		-		-		-			-			12,190			-			12,190
Common stock issued on share-based awards		9		-		164		-		-			-			-			-			164
Share-based compensation expense		-		-		316		-		-			-			-			-			316
Cash dividends declared		-		-		-		-		-			-			(31,778	)		-			(31,778	)
Other comprehensive income (loss)		-
Balance at December 31, 2018		49,038	$	490	$	378,558		22,460	$	(656,551	)	$	(6,119	)	$	653,193		$	94		$	369,665
Net income		-		-		-		-		-			-			7,978			-			7,978
Common stock issued on share-based awards		2		-		19		-		-			-			-			-			19
Share-based compensation expense		-		-		179		-		-			-			-			-			179
Cash dividends declared		-		-		-		-		-			-			(5,075	)		-			(5,075	)
Other comprehensive income (loss)		-		-		-		-		-			303			-			(20	)		283
Balance at March 31, 2019		49,039	$	490	$	378,756		22,460	$	(656,551	)	$	(5,816	)	$	656,096		$	74		$	373,049
Balance at September 30, 2019																									49,050	$	491	$	378,082		22,462	$	(656,597	)	$	(6,150	)	$	654,621		$	56		$	370,503

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(1)~~(1)

Organization and Nature of Business

Founded in 1932, ~~and incorporated in Delaware in 1989,~~ Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, “we,” “us,” “our,” “Ethan Allen” or the “Company”), is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. Today we are a global luxury international home fashion brand that is vertically integrated from design through delivery, which affords our customers a value proposition of style, quality and price. We provide complimentary interior design service to our customers and sell a full range of furniture products and decorative accents through a retail network of approximately 300 design centers in the United States and abroad as well as online at ethanallen.com. The design centers represent a mix of independent licensees and Company-owned and operated locations. ~~Our~~As of September 30, 2020, our Company operates 144retail design centers, with 138 located in the United States and the remaining six in Canada. The majority of the independently operated design centers are in Asia, with the remaining independently operated design centers located inthroughout the United States, ~~Asia,~~ the Middle East and Europe. We also own and operate nine manufacturing facilities including six manufacturing plants in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras.

COVID-19 Update

The COVID-19 crisis has challenged our operations, but our associates continue to persevere through these challenges. Our primary focus has been to operate in a safe manner, for our associates and clients. As our design centers began to reopen, we implemented various mitigating and safety protocols recommended by the CDC guidelines for operating businesses safely. We established logistics for the supply of hand sanitizer and related dispensers, disinfectant cleaning supplies, masks and nitrile gloves, and have increased the cleaning frequency of our design centers and other facilities. For the safety of our associates in our design centers we require all associates and clients to wear masks.

In our initial response to the COVID-19 health crisis, we undertook immediate action and made adjustments to our business operations, including temporary design center and manufacturing plant closings, a reduction in headcount, curtailing certain operating expenses, suspension of our dividend and share repurchases and delaying investments and capital expenditures. Our approach to the crisis continues to evolve as business trends substantially improved during the first quarter of fiscal 2021. Given the positive trends in cash flows, during the first quarter of fiscal 2021, we repaid the remaining $50.0 million in outstanding debt, previously borrowed under our credit facility in March 2020. We also resumed production in our North American manufacturing plants to work through existing order backlog and have ramped up to near full production by the end of September 2020. The temporary salary reductions were lifted, effective June 30, 2020, as planned and we have brought back many of our associates previously furloughed in April 2020. Further, on August 4, 2020, our Board of Directors reinstated the regular quarterly cash dividend and declared a regular quarterly cash dividend of $0.21 per share, payable on October 22, 2020.

While we continue to serve our customers and operate our business while managing the ongoing COVID-19 health crisis, and have now reopened substantially all of our retail locations in the U.S. and Canada, there can be no assurance that future COVID-19 related developments will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains highly uncertain. We will continue to make decisions regarding the sources and uses of capital in our business to reflect and adapt to changes in market conditions, including any lasting effects of COVID-19. Future adverse developments in connection with the ongoing COVID-19 crisis, including additional waves of COVID-19 outbreaks, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19, changes in consumer behavior, health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or including our financial results and business performance for fiscal 2021.

~~(2)~~(2)

Interim Basis of Presentation

Use of ~~Estimates.~~Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, goodwill and indefinite-lived intangible asset impairment analyses, useful lives for property, plant and equipment, inventory obsolescence, lease accounting, business insurance reserves, tax valuation allowances, the evaluation of uncertain tax positions and other loss reserves.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Principles of ~~Consolidation.~~Consolidation

We conduct business globally and have strategically aligned our business into ~~two~~2 reportable segments: Wholesale and Retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our fiscal ~~2019~~2020 Annual Report on Form ~~10-K~~10-K (the ~~“2019~~“2020 Annual Report on Form ~~10-K”~~10-K”).

~~Reclassifications.~~ ~~Certain reclassifications have been made to~~The Company has evaluated subsequent events through the ~~amounts in prior periods in order to conform to~~date that the ~~current period’s presentation. These changes~~consolidated financial statements were ~~made for disclosure purposes only and did not have any impact on previously reported results.~~issued.

~~(3)~~(3)

Recent Accounting Pronouncements

New Accounting Standards or Updates Recently Adopted

~~Leases~~ ~~– In February 2016, the FASB issued accounting standards update (“ASU”) 2016-02,~~ ~~Leases (Topic 842),~~ an update related to accounting for leases. This standard requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings.

We adopted ASU 2016-02 as of July 1, 2019 using the modified retrospective method and have not restated comparative periods. We elected the package of practical expedients upon adoption, which permits us (i) to not reassess whether any expired or existing contracts are or contain leases, (ii) to not reassess lease classification for any expired or existing leases, and (iii) to not reassess treatment of initial direct costs, if any, for any expired or existing leases. In addition, we elected not to separate lease and non-lease components when determining the ROU asset and lease liability for our design center real estate leases and did not elect the hindsight practical expedient, which would have allowed us to use hindsight when determining the remaining lease term as of the adoption date on July 1, 2019. Lastly, we elected the short-term lease exception policy for all leases, permitting us to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

Upon adoption we recognized operating lease assets of $129.7 million and operating lease liabilities of $149.7 million on our consolidated balance sheet. In addition, $20.0 million of deferred rent and various lease incentives, which were reflected as other long-term liabilities as of June 30, 2019, were reclassified as a component of the right-of-use assets upon adoption. The Company also recognized a cumulative adjustment as of July 1, 2019, which decreased opening retained earnings by $1.6 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on our consolidated statements of operations or cash flows. See Note 7 for further details on new disclosures required under ASU 2016-02.

~~Goodwill Impairment Test~~ ~~– In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,~~ which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company early adopted ASU 2017-04 during fiscal 2020.

~~Recent Accounting Standards or Updates Not Yet Effective~~

Credit Losses of Financial Instruments – In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU 2016-13,~~accounting standards update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic ~~326)~~326): Measurement of Credit Losses on Financial Instruments, ~~an update that~~and subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”). The ASUs requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ~~This accounting standards update will be effective~~The guidance applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions. Accounts receivable is presented net of allowance for ~~us beginning in~~doubtful accounts as a result of the ~~first quarter~~assessment of ~~fiscal 2021~~the collectability of customer accounts, which is recorded based on an overall aging analysis and ~~we do~~ a review of specifically identified accounts, which considers factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. We adopted the ASUs as of July 1, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings. We did not ~~expect~~ recognize a cumulative-effect adjustment upon adoption as the adoption toof the ASUs did not have a material ~~impact~~effect on our consolidated financial statements.

Implementation Costs in a Cloud Computing Arrangement – In August 2018, the FASB issued ASU ~~2018-15,~~2018-15, Intangibles-Goodwill and Other – Internal-Use Software (Subtopic ~~350-40)~~350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, an update related to a client’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the guidance for capitalizing implementation costs to develop or obtain internal-use ~~software.~~software (and hosting arrangements that include an internal-use software license). Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ~~This accounting standards update will be effective~~ We adopted the new guidance as of July 1, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include multi-year service terms with additional renewal periods generally ranging from one to three years. The related assets are recorded within Prepaid expenses and other current assets (for ~~us beginning in the first quarter of fiscal 2021. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to have a material impact~~service terms less than one year) or Other assets (for service terms greater than one year) on our consolidated ~~financial statements.~~

~~Simplifying~~balance sheets, net of accumulated amortization for assets placed in service. The amortization of assets placed in service is recorded in selling, general and administrative expenses, consistent with the ~~Accounting for Income Taxes –~~ ~~In December 2019,~~costs of the ~~FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying~~hosting arrangement, on the ~~Accounting for Income Taxes~~~~, an~~consolidated statements of comprehensive income on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods. The adoption of the accounting standard update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2022, with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do did not ~~expect the adoption to~~ have a material impact on our consolidated financial statements.

Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU ~~2020-04,~~2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an update that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This accounting standards update is intended to ease the process of migrating away from LIBOR to new reference ~~rates~~rates. ASU 2020-04 was adopted in the first quarter of fiscal 2021, but did not have a material impact on our accounting policies or our consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Recent Accounting Standards or Updates Not Yet Effective

Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This accounting standards update will be effective for us beginning in the first quarter of fiscal ~~2021.~~2022. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to have a material impact on our consolidated financial statements.

No other new accounting pronouncements issued or effective as of ~~March 31,~~September 30, 2020 have had or are expected to have ana material impact on our consolidated financial statements.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~(4)~~(4)

Revenue Recognition

Our reported revenue (net sales) consist substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer. For sales to our customers in our wholesale segment, control typically transfers when the product is shipped. The majority of our shipping agreements are freight-on-board shipping point and risk of loss transfers to our wholesale customer once the product is out of our control. Accordingly, revenue is recognized for product shipments on third-party carriers at the point in time that our product is loaded onto the third-party container or truck. For sales in our retail segment, control generally transfers upon delivery to the customer. We recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.

Our practice has been to sell our products at the same delivered cost to all retailers and customers nationwide, regardless of shipping point. Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and administrative expenses. We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize net sales. We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). ~~We do~~ Sales taxes collected is not ~~adjust net sales for~~ recognized as revenue but is included in Accounts payable and accrued expenses on the ~~effects of financing components~~consolidated balance sheets as ~~we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.~~it is ultimately remitted to governmental authorities.

Estimated refunds for ~~sales~~ returns and allowances are based on our historical return patterns. We record these estimated sales refunds on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in Prepaid expenses and other current assets and a corresponding refund liability in Other current ~~liabilitie~~sliabilities on our consolidated balance sheets. At ~~March 31,~~September 30, 2020 and June 30, ~~2019,~~ 2020, these amounts were immaterial.

We capitalize commission fees paid to our associates as contract assets within Prepaid expenses and other current assets on our consolidated balance sheets. These prepaid commissions are subsequently recognized as a selling expense upon delivery (when we have transferred control of our product to our customer). At ~~March 31,~~September 30, 2020, we had prepaid commissions of ~~$7.1~~$14.1 million, which we expect to recognize to selling expense in the next six months. ~~Prepaid commissions totaled $8.0 million at June 30, 2019.~~

In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These customer deposits are reported as a current liability in Customer deposits and d~~eferred~~ r~~evenue~~deferred revenue on our consolidated balance sheets. At June 30, ~~2019~~ 2020 we had customer deposits of ~~$56.7~~$62.6 million, of which we recognized ~~$1.1~~$46.5 million ~~and $54.7 million, respectively,~~ as net sales upon delivery to the customer during the three ~~and nine~~ months ended ~~March 31,~~September 30, 2020. Customer deposits totaled ~~$50.2~~$89.3 million at ~~March 31,~~September 30, 2020.

During October 2019 we introduced the Ethan Allen Member Program, which for a $100 annual fee, offers special members-only pricing, free shipping and white glove in-home delivery, and in our United States design centers, access to preferred financing plans. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue on a straight-line basis over the membership period of one year. These non-refundable fees are initially reported as a current liability in ~~Customer~~ d~~eposits and~~ d~~eferred~~ r~~evenue~~ ~~on our consolidated balance sheet while recognized revenue is reported within~~ ~~Net~~ s~~ales~~ ~~on our consolidated statement of comprehensive income. Revenue recognized from annual membership fees is reported as a part of other revenue in the disaggregated revenue tables below.~~

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The following table disaggregates our net sales by product category by segment for the three months ended ~~March 31,~~September 30, 2020 ~~(in~~(in thousands):

Wholesale

Retail

Total

Upholstery⁽¹⁾
$ 47,214 $ 54,791 $ 102,005
Case goods⁽²⁾
30,096 31,822 61,918
Accents⁽³⁾
16,942 25,849 42,791
Other⁽⁴⁾
(1,113 ) 3,236 2,123
Total before intercompany eliminations
$ 93,139 $ 115,698 208,837
Intercompany eliminations⁽⁵⁾
(59,063 )
Consolidated net sales
$ 149,774

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

	Wholesale			Retail		Total
Upholstery⁽¹⁾	$	52,735		$	57,685	$	110,420
Case goods⁽²⁾		28,739			32,918		61,657
Accents⁽³⁾		17,196			24,313		41,509
Other⁽⁴⁾		(1,336	)		3,165		1,829
Total before intercompany eliminations	$	97,334		$	118,081		215,415
Intercompany eliminations⁽⁵⁾							(64,357	)
Consolidated net sales						$	151,058

The following table disaggregates our net sales by product category by segment for the ~~nine~~three months ended ~~March 31, 2020 (in~~September 30, 2019 (in thousands):

	Wholesale			Retail		Total			Wholesale			Retail		Total
Upholstery⁽¹⁾	$	141,563		$	181,723	$	323,286		$	50,020		$	63,236	$	113,256
Case goods⁽²⁾		95,922			110,465		206,387			34,029			38,760		72,789
Accents⁽³⁾		51,109			86,078		137,187			17,997			29,982		47,979
Other⁽⁴⁾		(2,237	)		13,799		11,562			(717	)		5,288		4,571
Total before intercompany eliminations	$	286,357		$	392,065		678,422		$	101,329		$	137,266		238,595
Intercompany eliminations⁽⁵⁾							(180,153	)							(64,674	)
Consolidated net sales						$	498,269							$	173,921

~~(1)~~(1)

Upholstery furniture includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather.

~~(2)~~(2)

Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture and wooden accents.

(3)

Accents includes items such as ~~beds, dressers, armoires, tables, chairs, buffets, entertainment units,~~window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home ~~office furniture,~~ and ~~wooden accents.~~garden furnishings.

~~(3)~~

Accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.

~~(4)~~(4)

Other includes membership revenue, product delivery sales, the Ethan Allen Hotel room rentals and banquets, sales of ~~third-party~~third-party furniture protection plans and other miscellaneous product sales less prompt payment discounts, sales allowances and other ~~miscellaneous product sales less prompt payment discounts, sales allowances and other~~ incentives.

~~(5)~~(5)

~~Represents~~Intercompany eliminations represents the elimination of all intercompany wholesale segment sales to the ~~elimination of all intercompany wholesale~~retail segment ~~sales to~~during the ~~retail segment during the~~ period presented.

~~(5)~~(5)

~~Inventories~~Fair Value Measurements

~~Inventories~~We have categorized our cash equivalents as Level 1 assets as of September 30, 2020 within the fair value hierarchy as there are ~~stated at~~quoted prices in active markets for identical assets or liabilities. As the ~~lower~~interest rate on our long-term debt is a variable rate, adjusted based on market conditions, it approximates the current market-rate for similar instruments available to companies with comparable credit quality and maturity, and therefore, our long-term debt was categorized as a Level 2 liability in the fair value hierarchy as of ~~cost (on a first-in, first-out basis)~~June 30, 2020. There were no Level 3 assets or ~~net realizable value. Cost is determined based solely~~liabilities held by the Company as of September 30, 2020 and June 30, 2020.

With the exception of the $0.6 million retail asset impairment charge, we did not record any additional other-than-temporary impairments on those ~~charges incurred in~~assets required to be measured at fair value on a non-recurring basis during fiscal 2021.

As of September 30, 2020 we did not have any outstanding debt. The fair value of our long-term debt at June 30, 2020 was $50.0 million, which approximated its carrying amount given the ~~acquisition and production~~application of a floating interest rate equal to the ~~related inventory.~~monthly LIBOR rate plus a spread using a debt leverage pricing grid.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

(6)

Inventories

Inventories at ~~March 31,~~September 30, 2020 and June 30, ~~2019~~ 2020 are summarized as follows (in thousands):

March 31,

June 30,

2020

2019

Finished goods
$ 105,678 $ 128,047
Work in process
10,467 9,185
Raw materials
24,237 26,661
Inventory reserves
(1,608 ) (1,504 )
Inventories, net
$ 138,774 $ 162,389

	September 30,			June 30,
	2020			2020
Finished goods	$	100,477		$	97,718
Work in process		8,737			9,589
Raw materials		20,373			21,343
Inventory reserves		(2,540	)		(2,549	)
Inventories, net	$	127,047		$	126,101

~~(6)~~(7)

Goodwill and ~~Other~~ Intangible Assets

Our goodwill and intangible assets are comprised of goodwill, which represents the excess of cost over the fair value of net assets acquired, and our Ethan Allen trade name and related trademarks. As of September 30, 2020, the goodwill balance was $25.4 million, while other indefinite-lived intangible assets totaled $19.7 million, consistent with the balances as of June 30, 2020.

Both goodwill and indefinite-lived intangible assets are not amortized as they are estimated to have an indefinite life.

We ~~are required to test~~evaluate goodwill ~~and indefinite-lived intangibles at the reporting level for potential impairment annually, or more frequently if impairment indicators occur. Goodwill~~ and other indefinite-lived intangible assets ~~are evaluated~~ for impairment on an annual basis during the fourth quarter of each fiscal year, and between annual tests whenever events or circumstances indicate that the carrying value ~~of the goodwill or other intangible asset~~ may exceed ~~its~~ fair value.

In the fiscal third quarter ended March 31, 2020, wholesale net sales declined 14.1% and there was a meaningful decline (46.4%) in our stock price from the fiscal second quarter to the third quarter (from $19.06 to $10.22). This decline coupled with the significant adverse changes in the business climate from the COVID-19 health crisis, led us to determine that an impairment triggering event occurred, which required an interim quantitative impairment assessment of goodwill and intangible assets. Based on the Company’s interim quantitative assessment performed as of March 31, 2020, the fair value of the wholesale reporting unit exceeded its related carrying value by approximately 25%, thus no impairment of goodwill as of March 31, 2020.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

The fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, was also reviewed as of March 31, 2020 for impairment. We performed the interim trade name impairment test and concluded that its fair value substantially exceeded the carrying value as of March 31, 2020, thus no impairment.

As of March 31, 2020, the goodwill balance was $25.4 million, while other indefinite-lived intangible assets totaled $19.7 million. If the market valuation of our common shares or operating results within the wholesale reporting unit significantly decline beyond current levels, we may again need to conduct an evaluation of the fair value of our goodwill and trade name, which may result in an impairment charge.

~~(7)~~(8)

Leases

~~Leases~~

During the first quarter of fiscal 2020, we adopted ASU 2016-02 and all related amendments. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability.

~~Lease Accounting Policy~~

We have operating leases for many of our design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

~~Lease right-of-use assets represent the right to use an underlying asset pursuant to the~~The Company's lease ~~for the lease term,~~terms and ~~lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities~~discount rates are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our design center real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.as follows:

	September 30,
	2020			2019
Weighted-average remaining lease term (in years)
Operating leases		6.4			6.7
Financing leases		1.6			1.8
Weighted-average discount rate
Operating leases		4.2	%		3.7	%
Financing leases		4.4	%		4.6	%

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

~~We have elected the short-term lease exemption, whereby leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.~~

~~Key Estimates and Judgments~~

~~Key estimates and judgments in applying ASU 2016-02 relate to how the Company determines the discount rate to discount the unpaid lease payments to present value and the lease term.~~

ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determined our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. As we do not have any outstanding public debt, we estimated the incremental borrowing rate based on our estimated credit rating and available market information. We used the incremental borrowing rates we determined as of July 1, 2019 for operating leases that commenced prior to that date. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Some of our leases contain variable lease payments based on a Consumer Price Index or percentage of sales, which are excluded from the measurement of the lease liability.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~The Company's lease terms and discount rates are as follows:~~

	~~March 31, 2020~~
~~Weighted-average remaining lease term (in years)~~
~~Operating leases~~		~~6.7~~
~~Financing leases~~		~~1.7~~
~~Weighted-average discount rate~~
~~Operating leases~~		~~3.8~~	%
~~Financing leases~~		~~4.4~~	%

The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):

		Statement of Comprehensive Income Location	Three months ended March 31, 2020			Nine months ended March 31, 2020				Three months ended September 30,
Operating lease cost		Selling, general and administrative (“SG&A”)	$	8,178		$	24,369
Financing lease cost:
									Statement of Comprehensive Income Location	2020			2019
Operating lease cost⁽¹⁾									Selling, general and administrative (“SG&A”)	$	7,492		$	8,022
Financing lease cost
Depreciation of property		SG&A		152			445		SG&A		151			146
Interest on lease liabilities		Interest income, net of interest (expense)		8			25		Interest (expense), net of interest income		5			9
Short-term lease cost		SG&A		280			1,022
Variable lease cost⁽¹⁾		SG&A		2,333			7,169
Short-term lease cost⁽²⁾									SG&A		159			387
Variable lease cost⁽³⁾									SG&A		2,262			2,463
Less: Sublease income		SG&A		(486	)		(1,588	)	SG&A		(438	)		(506	)
Total lease expense	Total lease expense		$	10,465		$	31,442		Total lease expense	$	9,631		$	10,521

~~(1)~~(1)

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term.

(2)

Leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.

(3)

Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance, real estate taxes, ~~insurance~~incurance and other ~~charges included in~~services provided by the lessor, and other charges included in the lease.

Operating lease rent expense during the three months ended March 31, 2019, as reported within SG&A, was $8.2 million, net of sublease rental income of $0.5 million. For the nine months ended March 31, 2019, operating lease rent expense was $24.2 million, net of sublease rental income of $1.5 million.

~~The following table discloses the operating and financing lease assets and liabilities recognized within our consolidated balance sheet as of March 31, 2020 (in thousands):~~

Consolidated Balance Sheet Location

March 31, 2020

Assets

Operating leases
Operating lease right-of-use assets (non-current)
$ 124,636
Financing leases
Property, plant and equipment, net
741
Total lease assets
$ 125,377

Liabilities

Current:

Operating leases
Current operating lease liabilities
$ 34,005
Financing leases
Other current liabilities
604
Noncurrent:

Operating leases
Operating lease liabilities, long-term
112,515
Financing leases
Other long-term liabilities
127
Total lease liabilities
$ 147,251

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~The ROU assets by segment are as follows as of March 31, 2020 (in thousands):~~

Retail
$ 124,694
Wholesale
683
Total ROU assets
$ 125,377

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the ~~condensed~~ consolidated balance sheets as of ~~March 31,~~September 30, 2020 ~~(in~~(in thousands):

Fiscal Year	Operating Leases			Financing Leases			Operating Leases			Financing Leases
2020 (remaining three months)	$	8,910		$	151
2021		33,424			459
2021 (remaining nine months)							$	24,305		$	306
2022		29,082			78			28,720			78
2023		22,936			39			22,333			39
2024		17,875			19			17,484			19
2025								13,952			8
Thereafter		55,783			8			39,581			0
Total undiscounted future minimum lease payments		168,010			754
Less: imputed interest		(21,490	)		(23	)
Total undiscounted future minimum lease payments⁽¹⁾⁽²⁾								146,375			450
Less: imputed interest⁽³⁾								(19,515	)		(13	)
Total present value of lease obligations	$	146,520		$	731		$	126,860		$	437

(1)

Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

(2)

Excludes future commitments under short-term lease agreements of $0.5 million as of September 30, 2020 as leases with an initial term of twelve months or less are not recorded on the balance sheet.

(3)

Calculated using the incremental borrowing rate for each lease at lease commencement.

As of ~~March 31,~~September 30, 2020, we have entered into one additional operating lease for a design center relocation, which has not yet commenced and is therefore not part of the table above nor included in the lease right-of-use assets and liabilities. The lease will commence when we obtain possession of the underlying leased asset which is expected to be during the ~~first half~~second quarter of fiscal 2021. The lease is for a period of ten years and has aggregate undiscounted future rent payments of $3.2 million.

~~At March 31,~~As of September 30, 2020, we did not have any financing leases that had not commenced.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Other supplemental information for our leases is as follows (in thousands):

Nine months ended
March 31, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases
$ 24,411
Operating cash flows from financing leases
$ 422
Operating lease assets obtained in exchange for new operating lease liabilities
$ 16,333

At the beginning of fiscal 2020, we adopted ASU 2016-02, and as required, the following disclosure is provided for periods prior to adoption. As of June 30, 2019, future minimum payments under non-cancelable leases were as follows (in thousands):

Fiscal Year

Operating Leases

Financing Leases ⁽¹⁾
2020
$ 33,761 $ 550
2021
30,534 437
2022
26,443 60
2023
20,276 19
2024
15,345 -
Thereafter
43,500 -
Total
$ 169,859 $ 1,066

~~(1)~~

As of June 30, 2019, our capital lease obligations were $1.1 million of which the current and long-term portions were included within short-term debt and long-term debt, respectively, in the consolidated balance sheet. Monthly minimum lease payments were accounted for as principal and interest payments.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

	Three months ended September 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,390	$	8,851
Operating cash flows from financing leases	$	148	$	147
Operating lease assets obtained in exchange for new operating lease liabilities	$	4,477	$	6,916

~~(8)~~(9)

Income Taxes

We ~~review our expected annual effective~~recorded income tax ~~rates~~expense of $1.9 million and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. We identify items which are non-recurring in nature and treats these as discrete events. The tax effect of such items is recorded$4.6 million in the ~~quarter in which the related events occur. Due to the volatility of these factors, our consolidated effective income tax rate can change significantly quarter over quarter.~~

~~We conduct business globally~~three months ended September 30, 2020 and as a result, we file income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, we are subject to periodic examination in such domestic and foreign jurisdictions by tax authorities. We are currently under audit in the United States for fiscal 2016 through fiscal 2018. While the amount of uncertain tax impacts with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant. It is reasonably possible that some of these audits may be completed during the next twelve months and that various issues relating to uncertain tax impacts will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

2019, respectively. Our consolidated effective tax rate was ~~58.8% and 23.4% respectively,~~16.8% for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2020 compared with ~~24.8% and 25.0%~~24.4% in the prior year ~~periods.~~period. Our effective tax rate varies from the 21% federal statutory rate due to state taxes and other nonrecurring events that may not be predictable. The decrease in the effective tax rate during the first quarter of fiscal 2021 compared with the first quarter a year ago was due to a $0.9 million reduction in our valuation allowance on deferred tax assets.

As of September 30, 2020, we had $2.0 million of unrecognized tax benefits, of which $1.9 million would reduce our income tax expense and the effective tax rate, if recognized. As of September 30, 2020, we had $0.4 million of unrecognized tax benefits that are expected to decrease in the next 12 months.

~~(9)~~(10)

Debt

Total debt obligations at ~~March 31,~~September 30, 2020 and June 30, ~~2019~~ 2020 consist of the following (in thousands):

	March 31,		June 30,		September 30,		June 30,
	2020		2019		2020		2020

Borrowings under revolving credit facility	$	100,000	$	-	$	0	$	50,000
Capital leases ⁽¹⁾		-		1,066
Total debt		100,000		1,066
Less current maturities		-		550		0		0
Total long-term debt	$	100,000	$	516	$	0	$	50,000

~~(1)~~

Capital leases were previously reported as debt as of June 30, 2019. Upon the adoption of the new leasing standard, the Company reclassified its capital lease obligations from short and long-term debt to other current liabilities and other long-term liabilities, respectively. Refer to Note 7 for further details regarding capital lease obligations.

Credit Agreement

On December 21, 2018, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement provides for a $165 million revolving credit facility (the “Facility”), subject to borrowing base availability, with the maturity date of December 21, 2023. We incurred financing costs of $0.6 million, which are being amortized over the remaining life of the Facility using the effective interest method.

At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 2.0%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 1.0%.

The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Facility, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Facility. All obligations under the Facility are secured by assets of the Loan Parties, including inventory, receivables and certain types of intellectual property.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~Borrowings under the Facility

~~Borrowings~~ ~~under the Facility~~

~~On March 23, 2020, we provided notice to the administrative agent under the Credit Agreement to borrow a principal amount of $80 million under the Facility. Subsequently, on March 30, 2020, we~~We borrowed ~~an additional $20 million, bringing our aggregate borrowings to $100~~$100.0 million under the Facility ~~as of~~ in March ~~31, 2020. Prior to such notice, there were no borrowings outstanding under~~2020 and repaid $50.0 million in June 2020 and the ~~Facility.~~remaining $50.0 million in September 2020 using available cash on hand. The borrowings ~~bear~~had a weighted average interest rate equal to the ~~one-month~~one-month LIBOR rate ~~of 0.95%~~ plus a spread using a debt leverage pricing grid, currently at 1.50%. Interest on the borrowings outstanding is payable monthly in arrears and the principal balance is payable on the maturity date of December 21, 2023. We elected to draw down on the Facility to increase our cash position as a precautionary measure and to preserve financial flexibility in consideration of the disruption and uncertainty surrounding the ongoing COVID-19 pandemic.

~~The outstanding borrowings of $100 million are reported as~~ ~~Long-term debt~~ ~~within the consolidated balance sheet at March 31, 2020.~~grid. For the ~~nine~~three months ended ~~March 31,~~September 30, 2020 ~~and 2019,~~ we recorded interest expense of ~~$0.2 million and~~ $0.3 million ~~respectively,~~ on our outstanding debt. Interest expense was less than $0.1 million for the three months ended September 30, 2019.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The fair value of our long-term debt was $100 million as of March 31, 2020, which we believe approximates the carrying amount as the terms and interest rate approximate market rates given its floating interest rate basis.

Covenants and Other Ratios

The Facility contains various restrictive and affirmative covenants, including required financial reporting, limitations on the ability to grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of this type and size. Loans under the Facility may become immediately due and payable upon certain events of default (including failure to comply with covenants, change of control or cross-defaults) as set forth in the Facility.

The Facility does not contain any significant financial ratio covenants or coverage ratio covenants other than a fixed charge coverage ratio covenant based on the ratio of (a) EBITDA, plus cash Rentals, minus Unfinanced Capital Expenditures to (b) Fixed Charges, as such terms are defined in the Facility (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Facility falls below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing ~~twelve-month~~twelve-month basis.

At ~~March 31,~~September 30, 2020 and June 30, ~~2019,~~ 2020, there was ~~$5.8~~$5.0 million and ~~$6.1~~$5.8 million, respectively, of standby letters of credit outstanding under the Facility. Total borrowing base availability under the Facility was ~~$23.9~~$104.5 million at ~~March 31,~~September 30, 2020 and ~~$158.9~~$58.9 million at June 30, ~~2019.~~ 2020. At both ~~March 31,~~September 30, 2020 and June 30, ~~2019,~~ 2020, we were in compliance with all the covenants under the Facility.

~~(10)~~(11)

Restructuring and Other ~~Impairment Activities~~Impairment Activities

~~Summary of Restructuring, Impairments and Other related charges (gains)~~

Restructuring, impairment and other related costs incurred during the three ~~and nine~~ months ended ~~March 31,~~September 30, 2020and 2019 were as follows (in thousands):

	Three months ended			Nine months ended				Three months ended September 30,
	March 31, 2020			March 31, 2020				2020		2019
Optimization of manufacturing and logistics	$	368		$	829			$	0	$	640
Gain on sale of Passaic property		-			(11,497	)			0		(11,497	)
Impairment of long-lived assets (retail)		389			389				623		0
Other charges		105			106
Total Restructuring and other impairment charges, net of gains	$	862		$	(10,173	)		$	623	$	(10,857	)
Manufacturing overhead costs		(5	)		1,318		⁽¹⁾
Inventory write-downs		-			3,208		⁽¹⁾
Manufacturing overhead costs⁽¹⁾									0		1,052
Inventory write-downs⁽¹⁾									0		3,088
Total	$	857		$	(5,647	)		$	623	$	(6,717	)

~~(1)~~

~~Manufacturing overhead costs and inventory write-downs are reported within~~ ~~Cost of Sales~~ ~~in the consolidated statements of comprehensive income.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~Restructuring and Other Related Charges Rollforward~~

~~The Company’s restructuring activity is summarized in the table below (in thousands):~~

Balance

Fiscal 2020 Activity

Balance

Optimization of Manufacturing and Logistics

June 30, 2019

New Charges (Income)

Non-Cash

(Payments) Receipts

March 31, 2020

Employee severance, other payroll and benefit costs
$ 1,714 $ 777 $ 23 $ (2,468 ) $ -
Manufacturing overhead costs
- 1,318 - (1,318 ) -
Sale of Passaic property
- (11,497 ) 245 11,742 -
Sale of other property, plant and equipment
- (675 ) - 675 -
Other exit costs
- 727 (523 ) (1,250 ) -
Sub-total
$ 1,714 $ (9,350 ) $ (255 ) $ 7,381 $ -

Other Restructuring and Impairment Charges

Inventory write-downs
$ - $ 3,208 $ 3,208 $ - $ -
Impairment of long-lived assets (retail)
- 389 389 - -
Lease exit costs (remaining lease rentals)
3,145 - 2,878 (267 ) -
⁽¹⁾
Other charges (income)
224 106 - (271 ) 59
⁽²⁾
Sub-total
$ 3,369 $ 3,703 $ 6,475 $ (538 ) $ 59

Total Restructuring, Impairments and other exit costs
$ 5,083 $ (5,647 ) $ 6,220 $ 6,843 $ 59

~~(1)~~(1)

~~The previously recorded vacant space liability was reclassified from~~ ~~Accounts payable~~Manufacturing overhead costs and ~~accrued expenses~~ ~~and~~ ~~Other long-term liabilities~~ to ~~Operating lease right-of-use assets~~ ~~upon the adoption of ASU 2016-02, which requires all right-of-use assets to be measured net of any Topic 420 lease liabilities.~~

~~(2)~~

~~The remaining balance from the other charges (income) as of March 31, 2020 is recorded~~inventory write-downs are reported within ~~Accounts payable and accrued expenses~~Cost of Sales. in the consolidated statements of comprehensive income.

~~Optimization~~We recorded a non-cash impairment charge of ~~Manufacturing and Logistics~~

~~During~~$0.6 million during the ~~fourth~~first quarter of fiscal 2019, we initiated restructuring plans to consolidate our manufacturing and logistics operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. As of June 30, 2019, we permanently discontinued operations at our Passaic, New Jersey property and ceased using most of our Old Fort, North Carolina case goods manufacturing operations, which we transferred to our other existing case goods operations.

We completed this optimization project in fiscal 2020 as we converted the Old Fort facility into a distribution center and expanded our existing Maiden, North Carolina manufacturing campus while finalizing severance and other exit costs. In connection with these initiatives, we recorded pre-tax restructuring and other exit charges totaling $2.1 million, consisting of $1.3 million in abnormal manufacturing variances associated with the Passaic and Old Fort facilities, $0.8 million in employee severance and other payroll and benefit costs and $0.7 million in other exit costs partially offset by $0.7 million in gains from the sale of property, plant and equipment held at our Old Fort facility. The abnormal manufacturing overhead variances of $1.3 million were recorded within ~~Cost of Sales~~ ~~with the remaining recorded within the line item~~ ~~Restructuring and other~~ i~~mpairment~~ c~~harges~~~~, net of g~~~~ain~~s ~~in the consolidated statements of comprehensive income.~~

As part of our optimization plans, we also completed the sale of our Passaic property in September 2019 to an independent third party and received $12.4 million in cash less certain adjustments, including $0.9 million in selling and other closing costs. As a result of the sale, the Company recognized a pre-tax gain of $11.5 million in the first quarter of fiscal 2020, which was recorded within the line item ~~Restructuring and other~~ i~~mpairment~~ c~~harges~~~~, net of g~~~~ains~~ ~~in the consolidated statements of comprehensive income.~~

~~Inventory Write-downs~~

~~During the first half of fiscal 2020 we recorded a non-cash charge of $3.2 million~~2021 related to the ~~write-down~~impairment of long-lived assets held at a retail design center location. The asset group used in the impairment analysis, which represented the lowest level for which identifiable cash flows were available and ~~disposal~~largely independent of ~~certain slow moving~~the cash flows of other groups of assets, was the individual retail design center. We estimated future cash flows based on design center-level historical results, current trends, and ~~discontinued inventory items, which was due to actual demand~~operating and ~~forecasted market conditions for these inventory items being less favorable than originally estimated. Of the total inventory write-down, $2.6~~cash flow projections. The impairment charge of $0.6 million ~~related to slow moving finished goods with the remaining $0.6 million consisting of raw materials that were disposed. The non-cash inventory write-down~~ was recorded in the consolidated statement of comprehensive income within the line item ~~Cost~~Restructuring and other impairment charges, net of ~~Sale~~gains.s.

(12)

Earnings Per Share

We compute basic earnings per share (“EPS”) by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated similarly, except that the weighted average outstanding shares are adjusted to include the effects of converting all potentially dilutive share-based awards issued under our employee stock plans. The number of potential common shares outstanding are determined in accordance with the treasury stock method to the extent they are dilutive.

1513

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~(11)~~

~~Share-Based Compensation~~

During the nine months ended March 31, 2020 and 2019, we recognized total share-based compensation expense of $0.2 million and $1.0 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. As of March 31, 2020, $1.2 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 2.8 years. There was no share-based compensation capitalized for the nine months ended March 31, 2020 and 2019, respectively.

At March 31, 2020, there were 1,394,808 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan. Stock options are granted with an exercise price equal to the market price of our common stock at the date of grant, vest ratably over a specified service period, and have a contractual term of 10 years. Equity awards can also include performance vesting conditions. Company policy further requires an additional one year holding period beyond the service vest date for certain executives. Grants to independent directors have a three-year service vesting condition.

~~Stock Option Activity~~

~~A summary of stock option activity during the nine months ended March 31, 2020 is presented below.~~

Weighted

Average

Options

Exercise Price

Outstanding at June 30, 2019
378,911 $ 21.95
Granted
59,188 $ 17.27
Exercised
(4,500 ) $ 11.74
Canceled (forfeited/expired)
(23,495 ) $ 23.30
Outstanding at March 31, 2020
410,104 $ 21.31
Exercisable at March 31, 2020
314,151 $ 21.56

Stock options granted to employees during fiscal 2020 were valued using the Black-Scholes option pricing model with the following weighted average assumptions. There were no stock option awards granted to employees during fiscal 2019.

	~~FY 2020~~
~~Volatility~~		~~30.8~~	%
~~Risk-free rate of return~~		~~1.62~~	%
~~Dividend yield~~		~~4.42~~	%
~~Expected average life (years)~~		~~5.9~~

Non-employee (independent) directors were granted stock options during the first quarter of each fiscal year presented and valued using the Black-Scholes option pricing model with the following assumptions.

FY 2020

FY 2019

Volatility
30.8 % 31.3 %
Risk-free rate of return
1.55 % 2.80 %
Dividend yield
3.97 % 3.24 %
Expected average life (years)
5.3 5.0

~~Restricted Stock Unit Activity~~

~~A summary of restricted stock unit activity during the nine months ended March 31, 2020 is presented below.~~

Weighted

Restricted
Stock Units

Average
Fair Value

Outstanding at June 30, 2019
- $ -
Granted
57,000 $ 9.15
Vested
- $ -
Canceled (forfeited/expired)
- $ -
Outstanding at March 31, 2020
57,000 $ 9.15

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

During the third quarter of fiscal 2020, we granted 57,000 non-performance based restricted stock units ("RSUs"), with a weighted average grant date fair value of $9.15. The RSUs granted to employees entitle the holder to receive the underlying shares of common stock as the unit vests over the relevant vesting period. The RSUs do not entitle the holder to receive dividends declared on the underlying shares while the RSUs remain unvested. We account for these RSUs as equity-based awards because when they vest, they will be settled in shares of our common stock. The grant date fair value of RSUs is measured by reducing the grant date price of the Company's common stock by the present value of the dividends expected to be paid on the underlying stock during the requisite service period, discounted at the appropriate risk-free interest rate. The RSUs vest 25% annually on the anniversary date of grant and become fully vested after four years. There were no RSUs granted to employees during fiscal 2019.

~~Performance Stock Units~~

~~A summary of performance units activity during the nine months ended March 31, 2020 is presented below.~~

Weighted Average

Units

Grant Date Fair Value

Outstanding at June 30, 2019
313,882 $ 22.80
Granted
99,405 $ 12.72
Vested
- $ -
Canceled (forfeited/expired)
- $ -
Outstanding at March 31, 2020
413,287 $ 20.37

During the first quarter of fiscal 2020, we granted 99,405 performance-based units. Payout of these units depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (20%) over a specific performance period of three years. We estimate, as of the date of grant, the fair value of performance units with a discounted cash flow model, using as model inputs the risk-free rate of return as the discount rate, dividend yield for dividends not paid during the restriction period, and a discount for lack of marketability for a one-year post-vest holding period. The lack of marketability discount used is the present value of a future put option using the Chaffe model. The weighted average assumptions used for the stock units granted during fiscal 2020 and 2019, respectively, is presented below.

FY 2020

FY 2019

Volatility
30.5 % 32.1 %
Risk-free rate of return
1.72 % 2.72 %
Dividend yield
3.97 % 3.24 %
Expected average life (years)
3.0 3.0

~~(12)~~

~~Earnings Per Share~~

Basic and diluted ~~earnings per share (“EPS”)~~EPS are calculated using the following weighted average share data (in thousands):

	Three months ended				Nine months ended				Three months ended
	March 31,				March 31,				September 30,
	2020		2019		2020		2019		2020		2019
Weighted average shares outstanding for basic calculation		25,703		26,705		26,332		26,690		25,179		26,713
Dilutive effect of stock options and other share-based awards		-		46		30		59		27		37
Weighted average shares outstanding adjusted for dilution calculation		25,703		26,751		26,362		26,749		25,206		26,750

Dilutive potential common shares consist of stock options, restricted stock units and performance units.

As of ~~March 31,~~September 30, 2020 and 2019, ~~stock options and restricted stock unit~~ total share-based awards of ~~467,104~~437,449 and ~~260,571,~~232,914, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

As of ~~March 31,~~September 30, 2020 and 2019, the number of performance units excluded from the calculation of diluted EPS was ~~287,287~~316,445 and ~~269,138,~~287,287, respectively. ~~Performance units~~Contingently issuable shares with performance conditions are ~~excluded from the calculation of~~evaluated for inclusion in diluted EPS ~~unless~~if, at the ~~performance criteria are probable~~end of ~~being achieved~~current period, conditions would be satisfied as if it were the end of the ~~balance sheet date.~~contingency period.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~Share Repurchase Program~~

On January 13, 2020, the Company’s Board of Directors authorized an increase in the aggregate share repurchase authorization under the Company’s existing multi-year share repurchase program (the “Share Repurchase Program”) to 3,000,000 shares. We repurchased 992,636 shares for $14.3 million during the third quarter of fiscal 2020. There were no share repurchases in the year ago third quarter. As of March 31, 2020, 2,007,364 remains available under the current authorization for future share repurchases. The timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions. The Share Repurchase Program was temporarily suspended on April 1, 2020 as part of the Company’s action plan in response to COVID-19.

~~(13)~~(13)

Accumulated Other Comprehensive Income (~~Loss~~)(Loss)

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations ~~outside the United States.~~in Canada, Honduras and Mexico. Assets and liabilities are translated into U.S. dollars using the current period-end exchange rate and income and expense amounts are translated using the average exchange rate for the period in which the transaction occurred.

The following table sets forth the activity in accumulated other comprehensive loss ~~for the fiscal year-to-date period ended March 31, 2020 and 2019~~ (in thousands).

	2020			2019			2020			2019
Beginning balance at July 1	$	(5,651	)	$	(6,171	)	$	(8,441	)	$	(5,651	)
Other comprehensive income (loss), net of tax		(3,608	)		290			547			(506	)
Less AOCI attributable to noncontrolling interests		41			65			9			7
Ending balance at March 31	$	(9,218	)	$	(5,816	)
Ending balance at September 30							$	(7,885	)	$	(6,150	)

~~(14)~~(14)

Share-Based Compensation

During the three months ended September 30, 2020 and 2019, we recognized total share-based compensation expense of $0.3 million and $0.2 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. There was 0 share-based compensation capitalized for the three months ended September 30, 2020 and 2019, respectively.

At September 30, 2020, there were 1,301,305 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan (the “Plan”), which provides for the grant of stock options, restricted stock and stock units.

Stock Option Activity

There were 0 stock option awards granted to employees during the first quarter of fiscal 2021 or 2020. As of September 30, 2020, $0.3 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average remaining period of 2.4 years.

Restricted Stock Unit Activity

During the first quarter of fiscal 2021, we granted 38,000 non-performance based restricted stock units ("RSUs"), with a weighted average grant date fair value of $9.58. The RSUs granted to employees entitle the holder to receive the underlying shares of common stock as the unit vests over the relevant vesting period. The RSUs do not entitle the holder to receive dividends declared on the underlying shares while the RSUs remain unvested and vest in two equal annual installments on the first and second anniversary date of the date of grant. There were 0 RSUs granted during the first quarter of fiscal 2020. As of September 30, 2020, $0.8 million of total unrecognized compensation expense related to non-vested restricted stock units is expected to be recognized over a weighted average remaining period of 2.8 years.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Performance Stock Unit Activity

Under the Plan, the Compensation Committee of the Board of Directors was authorized to award common shares to certain employees based on the attainment of certain financial goals over a given performance period. Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other peer companies (20%). The performance award opportunity ranges from 50% of the employee's target award if minimum performance requirements are met to a maximum of 125% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years. The number of awards that will vest, as well as unearned and canceled awards, depend on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with us through the end of the three-year performance periods. We account for performance stock unit awards as equity-based awards because upon vesting, they will be settled in common shares. We expense as compensation cost the fair value of the shares as of the grant date and amortize expense ratably over the total performance and time vest period, considering the probability that we will satisfy the performance goals.

During the first quarter of fiscal 2021 we granted 117,338 PSUs. We estimate, as of the date of grant, the fair value of PSUs with a discounted cash flow model, using as model inputs the risk-free rate of return as the discount rate, dividend yield for dividends not paid during the restriction period, and a discount for lack of marketability for a one-year post-vest holding period. The lack of marketability discount used is the present value of a future put option using the Chaffe model. The weighted average assumptions used for the PSUs granted during the first quarter of fiscal 2021 and 2020, respectively, is presented below.

	FY 2021			FY 2020
Volatility		56.0	%		30.5	%
Risk-free rate of return		0.14	%		1.72	%
Dividend yield		3.26	%		3.97	%

Our unrecognized compensation expense as of September 30, 2020, related to PSUs, was $1.2 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted average remaining period of 2.4 years.

(15) Segment Information

Our operating segments are aligned with how the Company, including ~~its~~our chief operating decision maker, manages the business. As such, our reportable operating segments are the Wholesale segment and the Retail segment. Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of home furnishings and accents more effectively while controlling quality and cost. We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.

As of ~~March 31,~~September 30, 2020, the Company operated 144 design centers (our retail segment) and our independent retailers operated ~~159~~157 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent retailers and other third parties. Our retail segment net sales accounted for ~~79%~~78% of our consolidated net sales in the ~~nine~~three months ended ~~March 31,~~September 30, 2020. Our wholesale segment net sales accounted for the remaining ~~21%~~22%.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Segment information for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2020 and 2019 is provided below (in thousands):

	Three months ended						Nine months ended						Three months ended
	March 31,						March 31,						September 30,
	2020			2019			2020			2019			2020			2019
Net sales
Wholesale segment	$	93,139		$	108,367		$	286,357		$	334,097		$	97,334		$	101,329
Retail segment		115,698			138,947			392,065			442,669			118,081			137,266
Elimination of intercompany sales		(59,063	)		(69,485	)		(180,153	)		(214,000	)		(64,357	)		(64,674	)
Consolidated Total	$	149,774		$	177,829		$	498,269		$	562,766
Consolidated total													$	151,058		$	173,921

Income (loss) before income taxes
Income before income taxes
Wholesale segment	$	8,936		$	13,045		$	31,594		$	36,181		$	13,138		$	16,928
Retail segment		(8,772	)		(1,669	)		(7,343	)		83			1,983			1,564
Elimination of intercompany profit (a)		(918	)		(707	)		2,840			2,332			(3,440	)		149
Operating income (loss)		(754	)		10,669			27,091			38,596
Interest income, net of interest (expense)		213			(62	)		295			63
Consolidated Total	$	(541	)	$	10,607		$	27,386		$	38,659
Operating income														11,681			18,641
Interest (expense), net of interest income														(440	)		19
Consolidated total													$	11,241		$	18,660

Depreciation and amortization
Wholesale segment	$	1,748		$	1,914		$	5,388		$	5,771		$	1,704		$	1,890
Retail segment		2,667			2,903			7,457			8,971			2,436			2,086
Consolidated Total	$	4,415		$	4,817		$	12,845		$	14,742
Consolidated total													$	4,140		$	3,976

Capital expenditures
Wholesale segment	$	3,027		$	726		$	5,338		$	2,407		$	1,042		$	1,163
Retail segment		1,512			1,310			7,119			4,583			1,397			2,251
Consolidated Total	$	4,539		$	2,036		$	12,457		$	6,990
Consolidated total													$	2,439		$	3,414

(a)

Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

	March 31,			June 30,
	2020			2019
(in thousands)							September 30,			June 30,
Total Assets							2020			2020
Wholesale segment	$	316,974		$	237,354		$	244,572		$	255,011
Retail segment		409,231			299,125			404,705			390,635
Inventory profit elimination (a)		(23,101	)		(26,128	)		(26,756	)		(22,857	)
Consolidated Total	$	703,104		$	510,351
Consolidated total							$	622,521		$	622,789

(a)

Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.

~~(15)~~(16) Commitments and Contingencies

Commitments represent obligations, such as those for future purchases of goods or services that are not yet recorded on the balance sheet as liabilities. We ~~accrue non-income tax~~record liabilities for ~~contingencies~~commitments when ~~management believes that a loss is probable,~~incurred (specifically, when the goods or services are received). As of June 30, 2020, we had total contractual obligations of $233.4 million, of which $149.7 million related to our operating lease commitments, $50.0 million of long-term debt and $32.9 million of purchase obligations. With the ~~amounts can be reasonably estimated, while contingent gains are recognized only when realized.~~ exception of the $50.0 million repayment of our long-term debt in September 2020 and monthly lease payments made to our landlords totaling $8.4 million, there were no other material changes in our contractual obligations during the firstthree months of fiscal 2021.

We are routinely party to various legal proceedings, claims, lawsuits and ~~litigation~~regulatory examinations that have arisen in the ordinary course of our business, including employment matters, commercial and intellectual property disputes and environmental items. ~~For more information on how~~The outcome of litigation and other legal matters is always uncertain. We believe that the Company has valid defenses to the legal matters currently pending against it, is defending itself vigorously and has recorded accruals determined in accordance with GAAP, where appropriate. On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote”, “reasonably possible” or “probable” as defined by ASC 450,Contingencies. Where we determine ~~whether to~~an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation loss. Although it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses ~~resulting from litigation, see Note 20~~material to us, management believes that, based on information available at September 30, 2020, the likelihood is remote that any current pending claims or proceedings, individually or in the aggregate, will have a material adverse effect on our ~~consolidated~~ financial ~~statements included in our 2019 Annual Report on Form 10-K.~~ position, results of operations or cash flows.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Environmental items typically involve investigations and proceedings concerning air emissions, hazardous waste discharges, and/or management of solid and hazardous wastes. Under applicable environmental laws and regulations, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment due to the disposal or release of certain hazardous materials. We believe that our facilities are in material compliance with all such applicable laws and regulations.

The outcome of any matters pending against us is subject to future resolution, including the uncertainties of litigation. Based on information available at March 31, 2020, management believes that the ultimate outcome of these unresolved matters against the Company, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

~~(16)~~

~~Subsequent Event~~

~~COVID-19 Update~~

On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the virus. These measures have begun to have a significant adverse impact on many sectors of the economy, including non-essential retail commerce.

On April 1, 2020 we announced our action plan in response to the COVID-19 health crisis including, among other things, the continued temporary closure of the Company’s design centers and most of our manufacturing facilities, the furlough of approximately 70% of our global workforce, the decision by the Company’s CEO to temporarily forego his salary through June 30, 2020, a temporary up to 40% reduction in salaries for all senior management and up to 20% for other salaried employees through June 30, 2020, a temporary reduction of 50% in cash compensation of the Company’s directors, the elimination of all non-essential operating expenses, a delay in discretionary capital expenditures and the temporary halt of the share repurchase program. We paid our furloughed associates through April 2, 2020 and impacted employees will continue to receive enrolled benefits for up to two months. Recently, at the quarterly Board of Directors meeting held on April 28, 2020, our Board temporarily suspended the Company’s regular quarterly cash dividend.

~~Customers can schedule appointments with our design consultants and interact with them through Live Chat online at~~ ~~www.ethanallen.com. Design consultants work remotely utilizing technology, including the Ethan Allen inHome augmented reality app, the 3D room planner tool, Skype and FaceTime. We continue to operate our~~ ~~www.ethanallen.com~~ ~~website and distribution centers to deliver products to our customers.~~

We continue to assess the situation on a daily basis; however, as of the date of this filing, we are unable to predict when and how quickly we will be able to resume full retail and manufacturing operations. We began reopening design centers in a number of U.S. states since May 1, 2020 and to increase production in some of our North American manufacturing plants. We look forward to reopening all of our design centers but expect that this situation will have a significant adverse effect on our reported results for fiscal 2020, including our fourth fiscal quarter, and possibly beyond.

While we expect the effects of COVID-19 to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. Our consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, long-lived asset and indefinite-lived intangible asset valuation; inventory valuation; valuation of deferred income taxes; and income tax contingencies. Events and changes in circumstances arising after March 31, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results and should be read in conjunction with our ~~2019~~2020 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. ~~Unless otherwise noted, all comparisons in the following discussion are from the three and nine month periods ended March 31, 2020 to the three and nine month periods in the prior year.~~

Our MD&A is presented in the following sections:

	-	Forward-Looking Statements
	-	~~Statement Regarding the Impact of COVID-19~~
	-	Executive Overview including COVID-19 Update
	-	Key Operating Metrics
	-	Results of Operations
	-	Reconciliation of Non-GAAP Financial Measures
	-	Liquidity
	-	Capital Resources
	-	Share Repurchase Program
	-	Contractual Obligations
	-	Dividends
	-	Off-Balance Sheet Arrangements and Other Commitments and Contingencies
	-	Foreign Currency
	-	Significant Accounting Policies
	-	Critical Accounting Estimates
	-	Recent Accounting Pronouncements
	-	~~Business Outlook~~

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements ~~regarding future events and our future results that are subject to~~within the ~~safe harbors found in~~meaning of the Private Securities Litigation Reform Act of 1995, 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”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industry in, which ~~we operate and the~~represent management's beliefs and assumptions concerning future events based on information currently available to the Company relating to its future results. Such forward-looking statements are identified in this news release incorporated herein by reference by use of ~~our management. Words~~forward-looking words such as “anticipate,~~” “believe,” “plan,~~” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “continue,” “may,” “will,” ~~“may,~~“short-term,” ~~“continue,” “project,” ”target,~~“target,” “outlook,” “forecast,” “future,” “strategy,” “opportunity,” “would,” “guidance,” “non-recurring,” “one-time,” “unusual,” “should,” “likely,” “COVID-19 impact,” ~~variations of such words,~~ and similar expressions and the negatives of such forward-looking words are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements.words. These forward-looking statements are subject to management decisions and various assumptions about future events and are not guarantees of future performance. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of ~~risk factors~~risks and uncertainties including, but not limited to the following: ~~volatile retail environment and changing economic conditions~~the ongoing global COVID-19 pandemic may ~~further adversely affect consumer demand and spending; global and local economic uncertainty may~~continue to materially adversely affect ~~our manufacturing~~the Company’s business, its results of operations and overall financial performance; additional funding from external sources may not be available at the levels required, or ~~sources~~may cost more than expected; declines in certain economic conditions, which impact consumer confidence and consumer spending; an overall decline in the health of ~~merchandise~~the economy and ~~international operations; disruptions~~consumer spending may affect consumer purchases of ~~our supply chain; changes~~discretionary items; a significant shift in ~~United States trade~~consumer preference toward purchasing products online; ability to maintain and ~~tax policy; competition from overseas manufacturers and domestic retailers;~~enhance the Ethan Allen brand; failure to successfully anticipate or respond to changes in consumer tastes and ~~trends~~trends; global and local economic uncertainty may materially adversely affect manufacturing operations or sources of merchandise and international operations; competition from overseas manufacturers and domestic retailers; disruptions in a timely manner; our ability to maintain and enhance our brand; our number of manufacturing and logistics sites may increase our exposure to business disruptions and could result in higher transportation costs;the supply chain; fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays; ~~our~~ current and former manufacturing and retail operations and products are subject to increasingly stringent ~~environment,~~environmental, health and safety requirements; the ~~use~~number of ~~emerging technologies as well as unanticipated changes~~manufacturing and logistics sites may increase exposure to business disruptions and could result in ~~the pricing and other practices of competitors;~~higher transportation costs; product recalls or product safety concerns; reliance on information technology systems to process transactions, summarize results, and manage ~~our~~its business and that of certain independent retailers; disruptions in both ~~our~~ primary and back-up systems; ~~product recalls or product safety concerns;~~ successful cyber-attacks and the ability to maintain adequate cyber-security systems and procedures; loss, corruption and misappropriation of data and information relating to customers; changes in United States trade and tax policy; reliance on certain key personnel; loss of key personnel or inability to hire additional qualified personnel; additional asset impairment charges that could reduce ~~our~~ profitability; access to consumer credit could be ~~interrupted as a result of conditions outside of our control; our ability~~interrupted; inability to ~~locate new~~maintain current design center ~~sites and/or negotiate favorable lease terms for additional~~locations at current costs; failure to successfully select and secure design ~~centers or for the expansion of existing design centers;~~center locations; changes to ~~fiscal and~~ tax policies; ~~our operations present~~ hazards and risks which may not be fully covered by insurance; possible failure to protect ~~our~~the Company’s intellectual property; failure to successfully transition from a promotional to a membership model; potential risks and uncertainties relating to the duration, severity and geographic spread of the COVID-19 pandemic and its impact on our business, supplies, customers, employees and supply chains; actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to mitigate its impact; the potential negative impact of COVID-19 on the global economy, consumer demand and the supply chain; the impact of COVID-19 upon our ability to reopen design centers and resume manufacturing operations and the resulting effects upon our financial condition, results of operations and liquidity; and other factors disclosed in Part I, Item 1A. Risk Factors,in our ~~2019~~2020 Annual Report on Form 10-K, and elsewhere here in this Quarterly Report on Form ~~10-Q.~~10-Q

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~Executive Overview

~~Statement Regarding the Impact of COVID-19~~

On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancingWho We Are. Founded in an effort to slow the spread of the virus. These measures have begun and are expected to continue to have a significant adverse impact upon many sectors of the economy, including non-essential retail commerce, such as our business.

~~In response to these requirements and for the protection of our employees and customers,~~1932, we implemented certain business continuity plans to ensure the ongoing availability of our services, while taking health and safety measures, including temporarily closures of our design centers and most of our manufacturing plants, implementing enhanced cleaning and hygiene protocols, and implementing remote work policies, where possible. The long-term impact of the COVID-19 pandemic remains uncertain and may continue to adversely impact customer demand, lead to decreased foot traffic to our retail locations as a result of changes in customer behavior patterns, and impact levels of consumer spending, all of which could negatively adversely impact our ongoing and future business and financial condition. We continue to assess the situation on a daily basis; however, while we have begun to reopen design centers in a number of U.S. states since May 1, 2020 and to increase production in some of our North American manufacturing plants, as of the date of this filing, we are unable to predict when and how quickly we will be able to resume full retail and manufacturing operations.

~~On April 1, 2020, the Company implemented its action plan in response to the COVID-19 health crisis. Measures taken included, among other things:~~

●

~~The furlough of approximately 70% of our global workforce;~~

●

~~M. Farooq Kathwari, our Chairman, President and CEO will forego his salary through June 30, 2020;~~

●

~~A salary reduction of up to 40% for all senior management and up to 20% for other salaried employees through June 30, 2020;~~

●

~~Our Board of Directors reduced their cash compensation by 50% through June 30, 2020;~~

●

~~Elimination of all non-essential operating expenses;~~

●

~~Negotiating with our landlords to receive temporary rent deferrals for many of our design center leases;~~

●

~~The delay of non-essential capital expenditures;~~

●

~~Business travel restrictions for all employees;~~

●

~~Working with our vendors to defer payments;~~

●

~~Cancelling various open purchase orders for inventory;~~

●

~~Temporary halt of the share repurchase program; and~~

●

~~Temporary suspension of our regular quarterly cash dividend.~~

The ultimate impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including the duration and severity of the COVID-19 outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. Therefore, we currently are not able to estimate the full impact of COVID-19 on our financial condition and future results of operations. In the near term, we expect that this situation will have a significant adverse effect on our reported results for our fourth fiscal quarter of 2020 and possibly beyond.

~~The fundamentals of the Company remain strong. We believe that we have sufficient liquidity on hand to continue business operations during this volatile period. As disclosed in the~~ ~~Liquidity~~ ~~and~~ ~~Capital Resources~~ sections, as of March 31, 2020, we have total cash on hand of $116.9 million and remaining borrowing availability of $23.9 million under its credit facility. In addition, there are no debt maturities until December 21, 2023.

Since the end of our fiscal third quarter ended March 31, 2020, we continue to experience impact of COVID-19 on our markets and operations including softening demand for our products and services, supply chain disruptions, manufacturing closures, and other logistical constraints. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While we expect this matter to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. Our consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by management as of March 31, 2020. Events and changes in circumstances arising after March 31, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods. For further discussion of this matter, refer to ~~Item 1A. Risk Factors~~ ~~in Part II of this report.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~Executive~~ ~~Overview~~

We are a leading interior design company and manufacturer and retailer of quality home furnishings. ~~Founded over 88 years ago, today we are a leading international home fashion brand doing business in North America, Europe, Asia and the Middle East.~~ We are vertically integrated from design through delivery, affording our ~~customers~~clientele a value proposition of style, quality and price. We offer complementary interior design service to our clients and sell a full range of furniture products and decorative accents through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. The design centers represent a mix of independent licensees and our own Company-operated retail segment. We own and operate nine manufacturing facilities, including ~~six~~three manufacturing plants, one sawmill, one rough mill and a lumberyard in the United States and two manufacturing plants in Mexico and one manufacturing plant in Honduras. Approximately 75% of our products are made in our North American plants.

Business Model.Our business model is to maintain continued focus on (i) capitalizing on the strength of our interior design ~~professionals and management~~consultants in our retail design centers, (ii) ~~communicating~~investing in new technologies across key aspects of our ~~messages with effective advertising and marketing campaigns,~~vertically integrated business, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to our design centers, (iv) ~~investing in new technologies across key aspects of~~communicating our ~~vertically integrated business,~~messages with strong advertising and marketing campaigns, and (v) leveraging the benefits of our vertical integration by maintaining a strong manufacturing capacity in North ~~America where we manufacture approximately 75% of our products.~~America.

Our competitive advantages arise from:

	●	providing fashionable high-quality products of the finest craftsmanship;
	●	offering complimentary design service through ~~approximately 2,000 motivated~~our interior ~~design professionals network-wide;~~designer network;
	●	offering a wide array of custom products across our upholstery, case goods, and accent product categories;
	●	~~enhancing~~use of technology in all aspects of the business; and
	●	leveraging our ~~technology in all aspects of the business; and~~vertically integrated structure.
	●	~~leveraging our vertically integrated structure.~~

We assess the performance of our wholesale and retail segments based on total net sales on a comparable period basis. We also measure wholesale orders booked on a comparable period basis. Wholesale orders booked reflect new orders placed with our wholesale segment from all sales channels, including our retail segment, independent retailers and contract customers. Wholesale orders booked vary depending upon a variety of factors, including our product offerings, design center openings, shifts in the timing of holidays, promotional events and the timing and extent of our realization of the costs and benefits of our numerous strategic initiatives, including the recent transition to a membership model, among other things. As a result of these factors, comparability of our wholesale orders booked during any period to period comparison may be affected.

~~Introduction of Membership Model~~ – In October 2019 we introduced the Ethan Allen Member Program, an exclusive membership program providing our customers a new way to make furnishing their home easier and more affordable. For an annual fee of $100, the Ethan Allen Member Program offers special members-only pricing, free shipping and white glove in-home delivery, and in our United States design centers, access to preferred financing plans. We believe the membership model will benefit our customers, enhance our brand and enable our team of interior designers and vertically integrated operations to operate more efficiently. As we transitioned into the Member Program, we saw net sales and related operating income negatively impacted due to the selling cycle with members being longer without the urgency created by promotional deadlines, the reduction of delivery fee revenue and the timing of recognizing membership fees over a one-year period.

Fiscal ~~2020 Third~~2021 First Quarter in Review –⁽¹⁾. Our teams remained focused on serving our clients and keeping our workplaces safe during the first quarter of fiscal 2021. Our fundamentals continue to be strong, with retail written orders and backlogs reporting double-digit growth compared to the prior year, both within our design centers and from e-commerce. Production levels throughout our manufacturing increased steadily during the quarter and are returning back to pre-COVID-19 pandemic levels, which we expect will reduce the high undelivered order backlogs and reduce delivery lead-times in the near term. Our unique vertical structure, whereby we produce about 75% of what we sell, mostly on a custom made-to-order basis in our own North American manufacturing plants, allows us to maintain stronger service levels with greater control over inventory. We continued our marketing efforts and growth with our relevant offerings as well as our complimentary personal interior design service combined with technology and in-home white-glove delivery.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

COVID-19 Update⁽¹⁾. The impact of the ~~transition to the membership program and the~~ COVID-19 crisis, which ~~began to unfold in March, causing~~accelerated during our fiscal 2020 year and caused the temporary closing of all of our North American design centers and most of our manufacturing in March 2020 and through most of our fourth quarter, had a significant negative impact on our consolidated net sales during the first quarter of fiscal 2021. Consolidated net sales were 13.1% lower in the first quarter of fiscal 2021 compared to the prior year primarily due to lower production, supply chain disruptions from COVID-19 and reduced State Department net shipments. Net sales decreased by 3.9% within the wholesale segment and by 14.0% in the retail segment. While net sales decreased, written orders accelerated during the first quarter. Retail segment written orders were up 10.8% over the prior year, including 26.5% growth in August and 11.8% growth in September as discretionary spending continues to shift from travel and entertainment to home furnishings combined with strong marketing programs and 112% growth in e-commerce business orders. We continue to see increased demand for products in the home category and increased online traffic. Wholesale segment orders, while benefitting from the strong retail growth, were negatively impacted by the timing of GSA and other government orders due to COVID-19 pandemic related disruptions that are delaying issuance of new orders. The delayed orders are expected to be issued in the coming months. Excluding GSA and other government orders, Wholesale segment orders booked were up 9.2% for the quarter. Wholesale orders from our U.S. independent retailers increased 20.0%, while orders from our international independent retailers contracted 4.2% due to COVID-19 related economic disruptions in many of the international markets. The pace of our written business since reopening has lengthened the time between customer orders and delivery and we are working hard to reduces these lead times. Our adjusted gross margin increased 50 basis points to 56.8% primarily due to expansion within the wholesale gross margin partially offset by a decrease in the sales mix and plant shutdowns and lower production from COVID-19 related disruptions. Adjusted operating income, which excludes pre-tax charges from restructuring initiatives, asset impairments and other corporate actions in both periods presented, increased 0.7% compared with a year ago primarily due to strong gross margins and cost containment resulting in a 14.3% reduction in operating expenses. The fiscal 2021 effective income tax rate was 16.8% compared with 24.4% in the prior year due to a $0.9 million reduction in our valuation allowance on deferred tax assets. Adjusted diluted EPS was $0.36 compared with $0.35 in the prior year first quarter. As of September 30, 2020, our balance sheet remains strong with cash and cash equivalents of $62.0 million and inventory of $127.0 million. During the first three months of fiscal 2021, we generated $42.2 million of cash from operating activities and repaid the remaining $50.0 million in outstanding debt using available cash on hand. In addition, on August 4, 2020, our Board of Directors reinstated the regular quarterly cash dividend and declared a regular quarterly cash dividend of $0.21 per share, payable on October 22, 2020.

(1)	Refer to the Regulation G Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.

Retail Segment Restructuring and Impairment Charges. During the first quarter of fiscal 2021 we recorded $0.6 million of restructuring and impairment charges within the retail segment. The impairment charge of $0.6 million was for long-lived assets held at one of our retail design centers.

Impact of COVID-19 on our Business. The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. In the fourth quarter of fiscal 2020, ~~third quarter financial results. While~~in response to the COVID-19 pandemic, we took actions to conserve cash in the near term, including the temporary closure of design centers and manufacturing facilities, the furlough of 70% of our ~~third quarter revenues~~global workforce, the decision by our CEO to temporarily forego his salary through June 30, 2020, a temporary reduction in salaries of ~~$150~~up to 40% for all senior management and up to 20% for other salaried employees through June 30, 2020, a temporary reduction of 50% in the cash compensation of the Company’s directors through June 30, 2020, the elimination of all non-essential operating expenses, a delay of capital expenditures, the temporary suspension of the regular quarterly dividend and temporarily halted our share repurchase program. We also borrowed $100 million ~~were~~under our revolving credit facility, which was subsequently repaid in full as of September 30, 2020, negotiated alternative terms for lease payments and reduced merchandise purchases to lower ~~than forecasted, we saw strong growth in orders for~~inventory carrying levels.

As of the end of the first ~~two months~~quarter of fiscal 2021, our manufacturing facilities and design centers had all re-opened and the majority of our ~~fiscal third quarter, until~~furloughed employees had returned to work.

At this time, we believe that we have sufficient liquidity to continue business operations during this volatile period. As the ~~significant disruption~~COVID-19 pandemic is complex and rapidly evolving, our plans as described in this report may change. Although we continue to actively manage the impact of the ongoing COVID-19 crisis and, at this point, we are unable to predict the impact COVID-19 will have on our financial ~~markets~~operations in the near and ~~retail~~long term. The timing of any future actions in response to COVID-19 is largely dependent on the mitigation of the spread of the virus, status of government orders, directives and ~~logistics~~guidelines, recovery of the business ~~operations.~~environment, economic conditions, and consumer demand for our products. Additionally, we continue to follow enhanced health and safety protocols across all locations to ensure our employees and our customers are well-protected.

2219

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary suspension of certain payment requirements for the employer-paid portion of social security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. We elected to defer the employer-paid portion of social security taxes beginning with pay dates on and after March 12, 2020.

Our unique vertical structure continues to provide strong gross margins, as evidenced by our 56.1% third quarter consolidated gross margin. We were also able to return value to our shareholders through a quarterly cash dividend of $5.5 million and share repurchases of $14.3 million, representing 992,636 shares or 3.8% of our outstanding shares. Our independent retailer in China reopened most of their 105 retail locations and our U.S. government contract business performed well in the third quarter. We had $116.9 million in available cash as of March 31, 2020, resulting from us drawing down $100 million from our revolving line of credit, which we believe provides us the necessary liquidity and financial flexibility during the current market disruption and uncertainty.

Consolidated net sales declined 15.8% due to a 16.7% decrease in retail net sales and a 14.1% decrease in wholesale sales. As previously noted, gross margin for the three months ended March 31, 2020, was 56.1%, an increase from 55.3% a year ago due to improved retail gross margin. Operating expenses, as a percentage of sales, increased to 56.6% compared with 49.3% a year ago. The effective income tax rate was 58.8% in the current quarter compared with 24.8% a year ago. Adjusted diluted EPS decreased from $0.31 in the year ago third quarter to $0.02 in the fiscal 2020 third quarter.

Key Operating Metrics

A summary of our key operating metrics is presented in the following table (in millions, except per share amounts).

Three months ended
March 31,

Nine months ended
March 31,

2020

% of Sales

2019

% of Sales

2020

% of Sales

2019

% of Sales

Net sales
$ 149.8 $ 177.8 $ 498.3 $ 562.8
Gross profit
$ 83.9 56.1 % $ 98.4 55.3 % $ 275.3 55.2 % $ 308.7 54.9 %
Adjusted gross profit⁽¹⁾
$ 83.9 56.0 % $ 98.4 55.3 % $ 279.8 56.2 % $ 308.7 54.9 %
Operating income
$ (0.8 ) (0.5 %) $ 10.7 6.0 % $ 27.1 5.4 % $ 38.6 6.9 %
Adjusted operating income⁽¹⁾
$ 0.4 0.2 % $ 11.0 6.2 % $ 22.1 4.4 % $ 39.2 7.0 %
Net income
$ (0.2 ) (0.1 %) $ 8.0 4.5 % $ 21.0 4.2 % $ 29.0 5.2 %
Adjusted net income⁽¹⁾
$ 0.6 0.4 % $ 8.2 4.6 % $ 17.2 3.4 % $ 29.5 5.2 %
Diluted EPS
$ (0.01 ) $ 0.30 $ 0.80 $ 1.08
Adjusted diluted EPS⁽¹⁾
$ 0.02 $ 0.31 $ 0.65 $ 1.10
Cash flow from operating activities
$ 15.3 $ 12.8 $ 38.7 $ 44.3

	Three months ended September 30,
	2020		% of Sales			% Chg			2019		% of Sales			% Chg
Net sales	$	151.1		100.0	%		(13.1	%)	$	173.9		100.0	%		(7.4	%)
Gross profit	$	85.8		56.8	%		(8.6	%)	$	93.8		53.9	%		(7.5	%)
Adjusted gross profit⁽¹⁾	$	85.8		56.8	%		(12.4	%)	$	97.9		56.3	%		(3.5	%)
Operating income	$	11.7		7.7	%		(37.3	%)	$	18.6		10.7	%		58.0	%
Adjusted operating income⁽¹⁾	$	12.3		8.1	%		0.7	%	$	12.2		7.0	%		3.5	%
Net income	$	9.4		6.2	%		(33.7	%)	$	14.1		8.1	%		59.6	%
Adjusted net income⁽¹⁾	$	9.0		5.9	%		(3.2	%)	$	9.3		5.3	%		4.7	%
Diluted EPS	$	0.37					(30.2	%)	$	0.53					60.6	%
Adjusted diluted EPS⁽¹⁾	$	0.36					2.9	%	$	0.35					6.1	%
Cash flow from operating activities	$	42.2					80.3	%	$	23.4					(4.3	%)
Wholesale written orders							(0.4	%)							(1.5	%)

(1)

~~(1)~~Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.

~~Refer to the~~ ~~Reconciliation of Non-GAAP Financial Measures~~ ~~section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.~~

~~A summary of changes from the applicable periods in the preceding fiscal year is presented in the following table.~~

Three months ended

Nine months ended

March 31,

March 31,

2020

2019

2020

2019

Net sales
(15.8 %) (2.0 %) (11.5 %) 0.3 %
Gross profit
(14.7 %) 1.7 % (10.8 %) 1.3 %
Adjusted gross profit⁽¹⁾
(14.7 %) 1.7 % (9.4 %) 1.3 %
Operating income
(107.1 %) 175.5 % (29.8 %) 17.1 %
Adjusted operating income⁽¹⁾
(96.8 %) 150.6 % (43.7 %) 15.3 %
Net income
(102.8 %) 205.0 % (27.7 %) 16.5 %
Adjusted net income⁽¹⁾
(92.5 %) 176.6 % (41.7 %) 14.8 %
Diluted EPS
(103.3 %) 233.3 % (25.9 %) 20.0 %
Adjusted diluted EPS⁽¹⁾
(93.5 %) 181.8 % (40.9 %) 18.3 %
Cash flow from operating activities
19.2 % (38.7 %) (12.7 %) 26.3 %

~~(1)~~

~~Refer to the~~ ~~Reconciliation of Non-GAAP Financial Measures~~ ~~section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

The components of consolidated net sales and operating income by business segment isare presented in the following table (in millions).

	Three months ended March 31,									Nine months ended March 31,									Three months ended September 30,
	2020			2019			% Chg			2020			2019			% Chg			2020			2019			% Chg
Net sales
Wholesale segment	$	93.1		$	108.4			(14.1%	)	$	286.4		$	334.1			(14.3%	)	$	97.3		$	101.3			(3.9	%)
Retail segment		115.7			138.9			(16.7%	)		392.1			442.7			(11.4%	)		118.1			137.3			(14.0	%)
Elimination of intersegment sales		(59.1	)		(69.5	)					(180.2	)		(214.0	)					(64.3	)		(64.7	)
Consolidated net sales	$	149.8		$	177.8			(15.8%	)	$	498.3		$	562.8			(11.5%	)	$	151.1		$	173.9			(13.1	%)

Operating income (loss)
Operating income
Wholesale segment	$	8.9		$	13.0			(31.5%	)	$	31.6		$	36.2			(12.7%	)	$	13.1		$	16.9			(22.4	%)
Retail segment		(8.8	)		(1.7	)		(425.6%	)		(7.3	)		0.1			nm			2.0			1.6			26.8	%
Elimination of intercompany profit (1)		(0.9	)		(0.7	)					2.8			2.3						(3.4	)		0.1
Consolidated operating income (loss)	$	(0.8	)	$	10.7			(107.1%	)	$	27.1		$	38.6			(29.8%	)
Consolidated operating income																			$	11.7		$	18.6			(37.3	%)

(1)

~~(1)~~Represents the change in wholesale profit contained in the retail segment inventory existing at the end of the period.

~~Represents the change in wholesale profit contained in the retail segment inventory existing at the end of the period.~~

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The following table shows selected design center location information.

	Fiscal 2020									Fiscal 2019									Fiscal 2021								Fiscal 2020
	Independent			Company-						Independent			Company-						Independent			Company-					Independent			Company-
	retailers			operated			Total			retailers			operated			Total			retailers			operated		Total			retailers			operated			Total
Retail Design Center activity:
Balance at July 1		158			144			302			148			148			296			160			144		304			158			144			302
New locations		11			6			17			17			2			19			4			-		4			3			4			7
Closures		(9	)		(7	)		(16	)		(3	)		(8	)		(11	)		(7	)		-		(7	)		(4	)		(4	)		(8	)
Transfers		(1	)		1			-			(1	)		1			-			-			-		-			(1	)		1			-
Balance at March 31		159			144			303			161			143			304
Balance at September 30																				157			144		301			156			145			301
Relocations (in new and closures)		1			5			6			-			2			2			-			-		-			-			3			3

Retail Design Center geographic locations:
United States		36			138			174			41			137			178			35			138		173			38			139			177
Canada		-			6			6			-			6			6			-			6		6			-			6			6
China		105			-			105			102			-			102			105			-		105			100			-			100
Other Asia		11			-			11			11			-			11			11			-		11			11			-			11
Europe		1			-			1			1			-			1			1			-		1			1			-			1
Middle East		6			-			6			6			-			6			5			-		5			6			-			6
Total		159			144			303			161			143			304			157			144		301			156			145			301

Results of Operations

For an understanding of the significant factors that influenced our performance for the three months ended September 30, 2020 and 2019, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q ($ in millions, except per share amounts). Unless otherwise noted, all comparisons in the following discussion are from the three-month period ended September 30, 2020 to the comparable prior fiscal year three-month period.

First~~Third~~ Quarter ended September 30, 2020~~March 31, 2020~~compared withFirst~~Third~~ Quarter ended September 30~~March~~ 31, 20199

Consolidated net sales were ~~$149.8~~$151.1 million, a decrease of ~~15.8%~~13.1% compared to the same prior year period. ~~Net~~The net sales ~~decreased by 14.1% within~~decrease was primarily due to the continued impact of COVID-19, which caused temporary design center closures in our ~~wholesale segment compared with 16.7% for~~fourth quarter of fiscal 2020, temporary closures of our ~~retail segment. Net~~manufacturing facilities, and a negative impact on our ability to deliver product to customers. This period of closure, given our production cycle from written order to delivery, has resulted in lower reported net sales in the ~~current year third~~first quarter ~~were negatively impacted as a result~~ of ~~the lower order backlog entering the quarter from~~fiscal 2021. As our ~~transition to a membership model combined with disruptions in March 2020 from the closing of our~~retail design centers and manufacturing ~~plants due~~locations have reopened, we have experienced a strong pace of written orders and our manufacturing is continuing to ~~COVID-19. International sales decreased 33.6% primarily due~~ramp up production to ~~lower sales to China and in Canada.~~meet the demand.

Wholesale net sales decreased ~~14.1%~~3.9% to ~~$93.1~~$97.3 million primarily due to a ~~24.5%~~24.9% decline in sales to our North American retail network and a 36.3% decrease in international sales. Wholesale net sales were significantly impacted in the quarter due to the transition to a membership model and COVID-19. Prior to March 2020, wholesale net sales were improving sequentially each month as we began to see increased demand from our customers. Partially offsetting these declines was growth in contract sales, which grew 24.2% year over year. The year over year increase in contract sales was attributable to continued growth in sales from the United States government General Services Administration (“GSA”) ~~contract.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~Wholesale~~ o~~rders~~ ~~booked, which represents orders booked through all of~~contract combined with a 9.1% decrease in sales to our ~~channels, was down 21.9% compared with the third quarter last year. Wholesale orders from our North American~~international retail network ~~declined 32.0% while orders from China dropped 25.7% from~~primarily as a ~~year ago mainly due to local quarantines in place for most~~result of our fiscal third quarter. The closing of our retail design centers and manufacturing operations during March 2020 negatively impacted our results, as evidenced by a 37.3% decrease in March 2020 wholesale orders compared to a year ago. Increasing concern about the economy and rising unemployment softened customer demand as the volume of new orders was significantly lower in March 2020.COVID-19 related economic disruptions.

Retail net sales from Company-operated design centers decreased ~~by $23.2 million, or 16.7%,~~14.0% to ~~$115.7~~$118.1 million. There was a ~~16.3%~~13.9% decrease in net sales in the United States, while net sales from Canadian design centers decreased ~~29.7%~~15.8%. ~~These decreases were primarily~~The decline in net sales in the current year first quarter was due to ~~the transition~~lower production combined with supply chain disruptions within manufacturing as a result of COVID-19 in addition to ~~the membership model~~reduced premier home delivery revenue and COVID-19. In response to COVID-19, we temporarily closed all of our retail design centers in North America, effective March 19, 2020, and remained closed through the end of the fiscal third quarter. We continued to generate written business through virtual appointments while our design centers were closed. However, the level of new business was significantly lower due to economic uncertainty.clearance sales. There were 144 Company-operated design centers at the end of the ~~third~~first quarter of fiscal ~~2020,~~2021, compared to ~~143~~145 in the prior year ~~period as we continue to relocate and open new locations while closing older locations.~~period.

Gross profit decreased ~~14.7%~~8.6% to ~~$83.9~~$85.8 million compared with the prior year ~~period~~first quarter due to ~~lower~~ sales ~~volumes in~~declines within both ~~our~~the wholesale and retail ~~segments combined with a change~~segments. Wholesale gross profit was up due to an increase in ~~product mix,~~gross margin despite plant shutdowns and restrictions related to the ongoing COVID-19 pandemic partially offset by lower sales volumes. Retail gross profit was lower due to a 14.0% reduction in net shipments partially offset by a higher gross margin.

Gross margin was 56.8% compared with 53.9% a year ago. On an ~~improved~~adjusted basis, the prior year gross margin was 56.3%. The increase in consolidated gross margin was due to higher wholesale and retail gross ~~margin.~~margins partially offset by a decrease in the sales mix. Retail sales, as a percentage of total consolidated sales, ~~was 77.2%~~were 78.2% in the current year ~~third quarter, down~~and 78.9% in the prior year. The wholesale gross margin was 34.8%, an increase from ~~78.1%~~the adjusted wholesale gross margin 33.1% a year ago due to benefits being realized from the prior year optimization project, higher contract business gross margins and increased productivity. Retail gross margin expanded 10 basis points due to improved retail price optimization, including more competitive financing rates. Restructuring charges in the year ago first quarter totaling $4.1 million, which included the write off of inventory, higher unfavorable manufacturing variances and incremental freight and relocation costs, negatively impacted our consolidated gross ~~profit. Our fiscal 2020 third quarter gross~~ margin ~~improved to 56.1%, up from 55.3% in the prior year, primarily due to the retail gross margin expanding 130~~by 240 basis points from improved retail price optimization. Wholesale gross margin decreased 10 basis points from the year ago third quarter due to unfavorable manufacturing variances from lower production partially offset by an increase in profit from the GSA contract.points.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Operating expenses decreased to ~~$84.7~~$74.1 million, or ~~56.6%~~49.0% of net sales, compared with ~~$87.7~~$75.2 million, or ~~49.3%~~43.2% of net sales ~~for the~~last year. Included in prior year ~~period. The $3.0~~operating expenses was a gain of $11.5 million ~~decrease was primarily~~from the sale of the Passaic property. Excluding the gain from the sale of Passaic, operating expenses decreased due to lower ~~retail~~ selling costs and ~~lower~~a reduction in general and administrative ~~costs partially offset by higher wholesale advertising costs.~~expenses. Retail selling expenses were ~~down~~lower due to less warehouse and delivery expenses ~~decreasing~~ from a ~~16.7% reduction in retail net sales and a decrease in~~reduced volume of shipments, less designer selling expenses and lower compensation due to headcount reductions. Wholesale selling costs were down due to a reduction in advertising spend and lower ~~commissions partially offset by an increase in retail advertising expenses, including direct mail and local media.~~compensation costs. General and administrative expenses decreased ~~primarily~~ due to lower ~~wholesale~~ compensation costs coupled with lower ~~depreciation,~~ occupancy costs and regional management charges. Restructuring and impairment charges ~~within the retail segment. Wholesale selling costs increased due to television and radio advertising costs~~incurred during the ~~quarter.~~first quarter of fiscal 2021 were $0.6 million compared to a benefit of $10.9 million last year.

Operating ~~loss~~ ~~was $0.8~~incometotaled $11.7 million ~~or -0.5% of net sales,~~ compared with ~~operating income of $10.7~~$18.6 million ~~or 6.0% of net sales, for~~in the prior year ~~third~~first quarter. Adjusted operating income, which excludes the restructuring and impairment charges, was ~~$0.4 million. The decrease in operating income was driven by the 15.8% decline in consolidated~~$12.3 million, or 8.1% of net sales ~~which negatively impacted gross profit by 14.7% combined with a decrease~~ in the ~~retail/wholesale product mix and higher selling costs from television and radio advertising spend. These decreases were partially offset by~~current year compared with $12.2 million, or 7.0% of net sales last year. Strong cost containment measures, including improved expense management, ~~and~~combined with adjusted gross margin improvement, which rose 8050 basis points year over ~~year.~~year, drove operating income growth. These benefits to operating income were partially offset by the 13.1% decline in consolidated net sales.

Wholesale operating income~~was $8.9~~totaled $13.1 million ~~a decline from $13.0~~compared with $16.9 million ~~over the same prior year period,~~last year. The 22.4% decrease was primarily due to the ~~$15.2 million decrease~~gain on the sale of the Passaic property in ~~wholesale net sales partially offset by lower general and administrative expenses.~~the year ago first quarter. Adjusted wholesale operating margin was ~~$9.5~~$13.1 million or 13.5% of net sales, an increase compared with $10.4 million or 10.2% of net sales ~~a decrease compared with $13.1 million or 12.1% of net sales~~last year largely due to ~~lower sales volumes and higher advertising costs partially offset by~~expanded wholesale adjusted gross margin of 170 basis points, lower wholesale compensation within general and administrative ~~expenses.~~expenses and reduced advertising costs partially offset by a 3.9% reduction in net sales. The Company was able to reduce adjusted operating expenses by 10.5% primarily due to lower headcount, less marketing costs and actions taken to control and minimize expenditures.

Retail operating ~~loss~~income was ~~$8.8~~$2.0 million, or 1.7% of sales, compared with ~~an operating loss~~$1.6 million, or 1.1% of ~~$1.7 million~~sales, for the prior year period. ~~Operating~~The retail operating margin ~~decreased 640~~increased 60 basis points due to the ~~$23.2 million reduction~~10 basis point improvement in ~~net sales partially offset by improved~~ gross margin and a ~~3.1%~~14.9% decrease in operating expenses from lower ~~depreciation,~~ selling, administrative, occupancy and regional management ~~costs.~~costs partially offset by a 14.0% reduction in net sales.

Income tax ~~benefit~~expense ~~on the operating loss~~ was ~~$0.3~~$1.9 million compared with ~~income tax expense of $2.6~~$4.6 million a year ago. Income tax expense was $2.7 million lower compared with a year ago primarily due to the $7.4 million decrease in income before income taxes and a $0.9 million reduction to our valuation allowance on retail segment deferred tax assets. Our effective rate was ~~58.8%~~16.8% in the current quarter compared with ~~24.8%~~24.4% last ~~year. The effective tax rate for~~year due to the ~~third quarter of fiscal 2020 primarily includes a~~discrete tax benefit on the provision for income taxes on the current quarter’s net loss including federal, state, foreign and local income taxes and tax and interest expense on uncertain tax expenses, partially offset by the reversal of various uncertain tax positions. The year ago third quarter effective tax rate of 24.8% primarily includesrelated to a ~~provision for income tax on the current quarter’s income, including federal, state, foreign and local taxes, tax expense on the establishment and maintenance of a~~reduction in our valuation allowance on ~~Canadian~~retail deferred tax ~~assets, and tax and interest expense on uncertain tax positions, partially offset by the reversal of various uncertain tax positions.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

assets.

Net ~~loss~~income was ~~$0.2~~$9.4 million ~~or -$0.01 per diluted share~~ compared with $14.1 million last year. Adjusted net income of ~~$8.0~~$9.0 million ~~or $0.30 per diluted share in the prior year comparable period. Adjusted net income~~ was ~~$0.6~~down 3.2% from $9.3 million ~~or $0.02 per diluted share compared with $8.2 million or $0.31 per diluted share~~ a year ~~ago. This decrease was primarily from~~ago due to net sales being negatively impacted as a result of the COVID-19 health crisis ~~combined with lower backlog entering the quarter from our transition to a membership model.~~

~~Nine~~ ~~Months~~ ~~ended March 31, 2020 compared with Nine~~ ~~Months~~ ~~ended~~ ~~March~~ ~~31, 201~~9

~~Consolidated net sales~~ were $498.3 million, a decrease of 11.5% compared with the same prior year period. Net sales decreased by 14.3% within our wholesale segment and by 11.4% in our retail segment. International sales declined by $12.8 million primarily related to lower sales to China and, to a lesser extent, lower retail sales in Canada. Net sales to China were 47.3% lower in the current year compared with the same period last fiscal year as China was significantly impacted by COVID-19. The transition to a membership model, COVID-19 and softer order trends from consumers negatively impacted our fiscal 2020 net sales.

~~Wholesale net sales~~ decreased 14.3% to $286.4 million primarily due to a 25.5% decline in sales to our North American retail network, a 47.3% decrease in sales to China and the impact from the transition to the membership model, which caused decreases in orders and subsequent shipments within our case goods, upholstery and home accents product lines. Partially offsetting these declines was growth in contract sales, which grew 47.3% year over year. The year over year increase in contract sales was attributable to continued growth in sales from the GSA contract.

~~Wholesale orders~~ booked during fiscal 2020 were down 14.4% compared with the same period last fiscal year. Wholesale orders from China declined 48.3% from a year ago mainly due to COVID-19 stay-at-home orders, the imposition of tariffs by China and the economic uncertainty surrounding the international trade disputes. Excluding orders from China, our total wholesale orders decreased 12.8%, primarily as the result of the transition to the membership model and softened customer demand. These decreases were partially offset by continued growth in our contract business, including the GSA contract.

~~Retail net sales~~ from Company-operated design centers decreased by $50.6 million to $392.1 million. There was an 11.2% decrease in net sales in the United States and a 17.2% decrease in Canada. These decreases were primarily due to softer order trends with the shift to the membership model combined with the impact from COVID-19 design center closings in March 2020. There were 144 Company-operated design centers at the end of the period, one more than the 143 in the prior year period.

~~Gross profit~~ decreased 10.8% to $275.3 million compared with the prior year period due to declines within both our wholesale and retail segments. Retail sales, as a percentage of total consolidated sales, were 78.7% in both periods presented. Wholesale and retail gross profit were both negatively impacted by lower sales volumes partially offset by higher adjusted gross margins. Our fiscal 2020 adjusted gross margin improved to 56.2%, up from 54.9% in the prior year primarily due to improved retail price optimization and increased wholesale contract business. Restructuring charges negatively impacted our fiscal 2020 consolidated gross margin by 100 basis points.

~~Operating expenses~~ decreased to $248.2 million compared with $270.1 million in the prior year period. The 8.1% decrease was due to lower retail selling costs, a reduction in general and administrative expenses and a gain of $11.5 million from the sale of the Passaic, New Jersey property during fiscal 2020 partially offset by higher wholesale advertising costs. Retail selling expenses were lower due to reduced volume of shipments. General and administrative expenses decreased 6.1% in fiscal 2020 primarily due to lower wholesale compensation costs coupled with lower depreciation, occupancy costs and regional management charges within the retail segment.

~~Operating income~~ totaled $27.1 million, or 5.4% of net sales, compared with $38.6 million, or 6.9% of net sales, for the prior year period. Adjusted operating income in the first nine months of fiscal 2020, which excludes restructuring and impairment charges, was $22.1 million, a decrease of 43.7% compared to last year. The adjusted operating income decrease was driven by the 11.5% decline in consolidated net sales combined with higher selling costs from television and radio advertising spend.

~~Wholesale operating income~~ was $31.6 million compared with $36.2 million for the prior year period. Adjusted wholesale operating income in the first nine months of fiscal 2020, which excludes restructuring and impairment charges, was $25.9 million, a decrease of 28.7% compared to last year. The decrease was due to the 14.3% decline in net sales and higher television and radio advertising costs partially offset by lower compensation expense. Restructuring and impairment charges, net of gains, recorded within the wholesale segment included $3.2 million of inventory write-downs, $2.2 million for the optimization of manufacturing and logistics initiative offset by the $11.5 million gain on the sale of our Passaic, New Jersey property.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~Retail operating~~ ~~loss~~ was $7.3 million, or -1.9% of net sales in the current period compared with income of $0.1 million for the prior year period. Operating margin decreased 190 basis points due to the $50.6 million reduction in net sales partially offset by improved gross ~~margin of 180 basis points~~margins and strong cost containment measures resulting in a ~~4.1% decrease~~significant reduction in adjusted operating ~~expenses from lower depreciation, selling, occupancy and regional management costs.~~expenses.

~~Income tax expense~~Diluted EPS was ~~$6.4 million~~$0.37 compared with $9.7 million a year ago. Our effective tax rate was 23.4% in the current year period compared with 25.0%. The effective tax rate for the current fiscal year primarily includes a provision for income taxes on the current quarter’s income including federal, state, foreign and local income taxes and tax and interest expense on uncertain tax expenses, partially offset by the reversal of various uncertain tax positions. The effective tax rate for the prior fiscal year primarily includes a provision for income taxes on that quarter’s income, tax expense on the establishment and maintenance of a valuation allowance on Canadian deferred tax assets and tax and interest expense on uncertain tax position, partially offset by the reversal of and recognition of various uncertain tax positions.

~~Net income~~ ~~was $21.0 million compared with $29.0 million for the prior year period, which resulted in $0.80~~$0.53 per diluted share ~~compared with $1.08~~ in the prior year comparable period. Adjusted diluted EPS was $0.36, up 2.9% compared with $0.35 a year ago and driven by improved gross margin and cost containment.. The valuation allowance tax benefit, net of the retail design center impairment charge positively impacted diluted EPS by $0.01 during fiscal 2021. The gain on the sale of the Passaic property partially offset bywith other first quarter fiscal 2020 restructuring activities and ~~impairment charges~~corporate actions increased diluted EPS by ~~$0.15. Adjusted diluted EPS of $0.65 in the current year represents a decrease of 40.9% over the prior year.~~$0.18.

Reconciliation of Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-GAAP financial measures, including adjusted gross profit and margin, adjusted operating income, adjusted wholesale operating income and margin, adjusted retail operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are shown in tables below.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with U.S. GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with U.S. GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

The following tables below show a reconciliation of non-GAAP financial measures used in this filing to the most directly comparable U.S. GAAP financial measures.

(Unaudited)
(In thousands, except per share data)	Three months ended									Nine months ended										Three months ended
	March 31,									March 31,										September 30,
	2020			2019			% Chg			2020			2019			% Chg				2020			2019			% Chg
Consolidated Adjusted Gross Profit / Gross Margin																			Consolidated Adjusted Gross Profit / Gross Margin
GAAP Gross profit	$	83,949		$	98,394			(14.7%	)	$	275,264		$	308,704			(10.8%	)		$	85,770		$	93,794			(8.6	%)
Adjustments (pre-tax) *		(5	)		-						4,524			-							-			4,140
Adjusted gross profit *	$	83,944		$	98,394			(14.7%	)	$	279,788		$	308,704			(9.4%	)		$	85,770		$	97,934			(12.4	%)
Adjusted gross margin *		56.0	%		55.3	%					56.2	%		54.9	%						56.8	%		56.3	%

Consolidated Adjusted Operating Income / Operating Margin																			Consolidated Adjusted Operating Income / Operating Margin
GAAP Operating income (loss)	$	(754	)	$	10,669			(107.1%	)	$	27,091		$	38,596			(29.8%	)
GAAP Operating income																				$	11,681		$	18,641			(37.3	%)
Adjustments (pre-tax) *		1,107			291						(5,037	)		588							623			(6,428	)
Adjusted operating income *	$	353		$	10,960			(96.8%	)	$	22,054		$	39,184			(43.7%	)		$	12,304		$	12,213			0.7	%

Consolidated Net sales	$	149,774		$	177,829			(15.8%	)	$	498,269		$	562,766			(11.5%	)		$	151,058		$	173,921			(13.1	%)
GAAP Operating margin		(0.5%	)		6.0	%					5.4	%		6.9	%						7.7	%		10.7	%
Adjusted operating margin *		0.2	%		6.2	%					4.4	%		7.0	%						8.1	%		7.0	%

Consolidated Adjusted Net Income / Adjusted Diluted EPS
GAAP Net income (loss)	$	(223	)	$	7,978			(102.8%	)	$	20,969		$	29,008			(27.7%	)
GAAP Net income																				$	9,353		$	14,106			(33.7	%)
Adjustments, net of tax *		836			220						(3,803	)		444							(398	)		(4,853	)
Adjusted net income	$	613		$	8,198			(92.5%	)	$	17,166		$	29,452			(41.7%	)		$	8,955		$	9,253			(3.2	%)
Diluted weighted average common shares		25,703			26,751						26,362			26,749							25,206			26,750
GAAP Diluted EPS	$	(0.01	)	$	0.30			(103.3%	)	$	0.80		$	1.08			(25.9%	)		$	0.37		$	0.53			(30.2	%)
Adjusted diluted EPS *	$	0.02		$	0.31			(93.5%	)	$	0.65		$	1.10			(40.9%	)		$	0.36		$	0.35			2.9	%

Wholesale Adjusted Operating Income / Operating Margin
Wholesale GAAP operating income (loss)	$	8,936		$	13,045			(31.5%	)	$	31,594		$	36,181			(12.7%	)
Wholesale Adjusted Operating Income / Adjusted Operating Margin																			Wholesale Adjusted Operating Income / Adjusted Operating Margin
Wholesale GAAP operating income																				$	13,138		$	16,928			(22.4	%)
Adjustments (pre-tax) *		601			70						(5,691	)		144							-			(6,576	)
Adjusted wholesale operating income *	$	9,537		$	13,115			(27.3%	)	$	25,903		$	36,325			(28.7%	)		$	13,138		$	10,352			26.9	%

Wholesale net sales	$	93,139		$	108,367			(14.1%	)	$	286,357		$	334,097			(14.3%	)		$	97,334		$	101,329			(3.9	%)
Wholesale GAAP operating margin		9.6	%		12.0	%					11.0	%		10.8	%						13.5	%		16.7	%
Adjusted wholesale operating margin *		10.2	%		12.1	%					9.0	%		10.9	%						13.5	%		10.2	%

Retail Adjusted Operating Income / Operating Margin
Retail GAAP operating income (loss)	$	(8,772	)	$	(1,669	)		(425.6%	)	$	(7,343	)	$	83			nm
Retail Adjusted Operating Income / Adjusted Operating Margin																			Retail Adjusted Operating Income / Adjusted Operating Margin
Retail GAAP operating income																				$	1,983		$	1,564			26.8	%
Adjustments (pre-tax) *		506			221						654			444							623			148
Adjusted retail operating income (loss) *	$	(8,266	)	$	(1,448	)		(470.9%	)	$	(6,689	)	$	527			nm
Adjusted retail operating income *																				$	2,606		$	1,712			52.2	%

Retail net sales	$	115,698		$	138,947			(16.7%	)	$	392,065		$	442,669			(11.4%	)		$	118,081		$	137,266			(14.0	%)
Retail GAAP operating margin		(7.6%	)		(1.2%	)					(1.9%	)		0.0	%						1.7	%		1.1	%
Adjusted retail operating margin *		(7.1%	)		(1.0%	)					(1.7%	)		0.1	%						2.2	%		1.2	%

2823

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

* Adjustments to reported U.S. GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following:

(Unaudited)

Three months ended

Nine months ended

(In thousands)

March 31,

March 31,

2020

2019

2020

2019

Inventory write-downs (wholesale)
$ - $ - $ 3,208 $ -
Manufacturing overhead costs and other (wholesale)
(5 ) - 1,316 -
Adjustments to gross profit
$ (5 ) $ - $ 4,524 $ -

Inventory write-downs (wholesale)
$ - $ - $ 3,208 $ -
Optimization of manufacturing and logistics (wholesale)
363 - 2,147 -
Gain on sale of Passaic, New Jersey property (wholesale)
- - (11,497 ) -
Severance and other professional fees incurred (wholesale)
238 70 451 144
Retail acquisition costs and other charges (retail)
- - 139 160
Impairment of long-lived assets and lease exit costs (retail)
506 221 515 284
Adjustments to operating income
$ 1,107 $ 291 $ (5,037 ) $ 588
Adjustments to income before income taxes
$ 1,107 $ 291 $ (5,037 ) $ 588
Related income tax effects ⁽¹⁾
(271 ) (71 ) 1,234 (144 )
Adjustments to net income
$ 836 $ 220 $ (3,803 ) $ 444

* Adjustments to reported U.S. GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following:

Three months ended

(In thousands)

September 30,

2020

2019

Inventory write-downs and additional reserves (wholesale)
$ - $ 3,088
Manufacturing overhead costs and other (wholesale)
- 1,052
Adjustments to gross profit
$ - $ 4,140

Inventory write-downs and additional reserves (wholesale)
$ - $ 3,088
Optimization of manufacturing and logistics (wholesale)
- 1,692
Gain on sale of Passaic, New Jersey property (wholesale)
- (11,497 )
Severance and other professional fees (wholesale)
- 150
Retail acquisition costs, severance and other charges (retail)
- 139
Impairment of long-lived assets (retail)
623 -
Adjustments to operating income
$ 623 $ (6,428 )
Adjustments to income before income taxes
$ 623 $ (6,428 )
Related income tax effects on non-recurring items⁽¹⁾
(153 ) 1,575
Income tax benefit from valuation allowance adjustment
(868 ) -
Adjustments to net income
$ (398 ) $ (4,853 )
(1)
Calculated using a tax rate of 24.5% in all periods presented.

Liquidity

At ~~March 31,~~September 30, 2020, we held cash and cash equivalents of ~~$116.9~~$62.0 million compared with ~~$20.8~~$72.3 million at June 30, ~~2019.~~2020. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations and amounts available under our credit facility. Cash and cash equivalents ~~aggregate~~aggregated to ~~16.6%~~10.0% of our total assets at ~~March 31,~~September 30, 2020, compared with ~~4.8%~~7.0% of our total assets a year ago and ~~4.1%~~11.6% at June 30, ~~2019.~~2020. Our cash and cash equivalents ~~increased $96.0~~decreased $10.3 million during the first ~~nine~~three months of fiscal ~~2020 due to $100.0~~2021 as we repaid 100% or $50.0 million of our outstanding borrowings under our existing credit facility in September 2020, partially offset by net cash provided by operating activities of $38.7 million and proceeds from the sale of our Passaic property of $11.7 million, partially offset by $24.3 million in share repurchases, $16.2 million in dividend payments, $12.5 million of capital expenditures and $1.3 million in retail acquisitions.
29
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~
$42.2 million.

A summary of net cash provided by (used in) operating, investing and financing activities for the ~~nine~~three months ended ~~March 31,~~September 30, 2020 and 2019 is provided below (in millions):

Nine months ended

Three months ended

March 31,

September 30,

2020

2019

2020

2019

Cash provided by (used in) operating activities

Operating activities

Net income
$ 21.0 $ 29.0 $ 9.4 $ 14.1
Non-cash operating lease cost
24.4 - 7.5 8.0
Other non-cash items, including depreciation and amortization
8.6 15.7 3.6 (1.9 )
Restructuring payments
(5.6 ) (0.2 ) (0.1 ) (4.1 )
Change in working capital
(9.7 ) (0.2 ) 21.8 7.3
Total provided by operating activities
$ 38.7 $ 44.3 $ 42.2 $ 23.4

Cash provided by (used in) investing activities

Proceeds from disposal of fixed assets, including sale of Passaic property
$ 12.4 $ -
Investing activities

Proceeds from the disposal of property, plant and equipment
$ - $ 11.6
Capital expenditures
(12.5 ) (7.0 ) (2.4 ) (3.4 )
Acquisitions, net of cash acquired
(1.3 ) - - (1.3 )
Other investing activities
- 0.1
Total provided by (used in) investing activities
$ (1.4 ) $ (6.9 )
Total (used in) provided by investing activities
$ (2.4 ) $ 6.9

Cash provided by (used in) financing activities

Borrowings from revolving credit facility
$ 100.0 $ 16.0
Financing activities

Payments on borrowings
- (8.0 ) $ (50.0 ) $ -
Payment of cash dividends
(16.2 ) (41.9 ) - (5.1 )
Repurchases of common stock
(24.3 ) -
Other financing activities
(0.4 ) (0.2 ) (0.1 ) (0.1 )
Total provided by (used in) financing activities
$ 59.1 $ (34.1 )
Total used in financing activities
$ (50.1 ) $ (5.2 )
24
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Cash Provided by (Used in) ~~Ope~~Operating Activities. ~~rating Activities~~.~~Year-to-date~~We generated $42.2 million in cash ~~provided by~~from operating activities ~~was $38.7 million, a decrease~~during the first quarter of ~~$5.6 million from~~fiscal 2021, an 80.3% increase over the prior year ~~ago period~~ primarily due to ~~lower~~improved working capital and lower restructuring payments. Strong cash flow generation from positive working capital changes were due to higher customer deposits, improved inventory management and timing of accounts payable partially offset by lower collections on receivables and timing of prepaid expenses. Written order growth over the past three months combined with lower net shipments drove the customer deposit balance significantly up. Restructuring payments in the prior year first quarter of $4.1 million were made in connection with our previously announced optimization of manufacturing and logistics activities as well as other exit costs. The change in working capital was primarily due to timing of accounts payable and accrued compensation combined with lower retail customer deposits partially offset by improved inventory management and receivable collections. As a result of the adoption of ASU 2016-02, we now report non-cash operating lease costs as a non-cash adjustment to reconcile to net income while our monthly lease payments are reported as a reduction to operating lease liabilities within working capital. Restructuring payments included $2.5 million in severance, $1.3 million of manufacturing overhead costs and $1.8 million in other exit and relocation ~~payments.~~costs.

Cash Provided by (Used in) Investing Activities. .~~Year-to-date cash~~Cash used in investing activities of ~~$1.4~~$2.4 million was ~~due to~~for capital expenditures during the first three months of ~~$12.5~~fiscal 2021. In the year ago first quarter, investing activities provided cash of $6.9 million ~~and $1.3 million from design center acquisitions partially offset by~~due to cash proceeds of ~~$12.4~~$11.6 million received from the sale of the Passaic property during September 2019 partially offset by capital expenditures of $3.4 million and ~~other manufacturing equipment.~~design center acquisitions. Cash paid to acquire design centers from our independent retailers in an arm’s length ~~transaction~~transactions totaled $1.3 million ~~during the first nine months of fiscal 2020 compared with none~~ a year ago.

Cash Provided by (Used in) Financing Activities. .~~Year-to-date cash provided by~~Cash used in financing activities ~~of $59.1~~was $50.1 million compared with ~~$34.1~~$5.2 million of ~~cash used~~ in the prior year comparable period. The significant increase in cash ~~provided~~used by financing activities was due to the $50.0 million repayment of our borrowings ~~of $100.0 million~~ under ~~our~~the revolving credit facility ~~in March 2020 and a decrease in~~partially offset by lower cash dividends paid due to ~~a special~~the temporary suspension of our regular quarterly cash dividend ~~paid in~~during the ~~prior year. Cash dividends paid in~~fourth quarter of fiscal 2020. On August 4, 2020, ~~totaled $16.2 million compared with $41.9 million in~~our Board of Directors reinstated the ~~prior year due to the $1.00~~regular quarterly cash dividend of $0.21 per share ~~or $26.7 million special cash dividend~~payable to shareholders of record as of October 8, 2020 and was paid inon October 22, 2020. Our policy is to issue quarterly dividends, and we expect to continue to declare and pay comparable quarterly dividends for the prior year. These positive cash flow items were partially offset by share repurchases in the current fiscal year. We repurchased 1,538,363 shares under our existing share repurchase program at an average price of $15.81 per share for a total cash outflow of $24.3 million during the first nine months of fiscal 2020.
30
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~
foreseeable future, business conditions permitting.

We believe our liquidity (cash on hand, cash flow from operating activities and amounts available under our credit facility), will be sufficient to fund our operations, including changes in working capital, necessary capital expenditures, fiscal 2021 contractual obligations and other financing activities, as they occur, for at least the next 12 months. During the period of uncertainty and volatility related to the COVID-19 pandemic, we will continue to monitor our liquidity.

~~Capital Resources~~Included in our cash and cash equivalents is $4.0 million and $3.4 million at September 30, 2020 and June 30, 2020, respectively, held by foreign subsidiaries, a portion of which we have determined to be indefinitely reinvested.

Capital Resources
Capital Expenditures. -Capital expenditures in the first ~~nine~~three months of fiscal ~~2020~~2021 were ~~$12.5~~$2.4 million, compared with ~~$7.0~~$3.4 million in the prior year period. ~~In fiscal 2020, approximately~~The decrease of $1.0 million from the prior year related primarily to lower spending on retail design center improvements and prior year conversion of our Old Fort, North Carolina facility into a distribution center. Approximately 57% of our total capital expenditures during fiscal 2021 related to opening new and relocating design centers in desirable locations, updating existing design center presentations and floor plans and ~~opening new~~renovating home delivery ~~service~~ centers. The remaining 43% was primarily capital expenditures incurred ~~in connection with our optimization project as we convert the Old Fort, North Carolina facility into a distribution center and~~to expand our existing Maiden, North Carolina manufacturing ~~campus.~~campus as well as investments in additional technology to improve existing workflows. We have no material contractual commitments outstanding for future capital expenditures. ~~In addition, as previously announced on April 1, 2020, we have stopped all discretionary capex spending.~~We anticipate that cash from operations will be sufficient to fund future capital expenditures.

Capital ~~Needs~~Needs. - During December 2018 we entered into a five-year, $165 million senior secured revolving credit facility, which amended and restated the previously existing facility. During March 2020, we borrowed a total of $100 million under the credit ~~facility.~~facility, repaid $50 million in June 2020 and the remaining $50 million in September 2020 from available cash. Prior to March, there were no borrowings outstanding under the credit facility. The borrowings bear a weighted average interest rate equal to the one-month LIBOR rate of 0.95% plus a spread using a debt leverage pricing grid, currently at 1.50%. Interest on the borrowings outstanding is payable monthly in arrears and the principal balance is payable on the maturity date of December 21, 2023. We ~~are in compliance with all covenants under the agreement as of March 31, 2020. The credit facility will mature in December 2021. We~~had elected to draw down on the credit facility to increase our cash position as a precautionary measure and to preserve financial flexibility in consideration of the disruption and uncertainty surrounding the ongoing COVID-19 pandemic. ~~The outstanding~~Strong cash flow generation over the past six months allowed us to repay 100% of our borrowings and still end the quarter with a cash on hand balance of ~~$100 million are reported as~~ ~~Long-term debt~~ ~~within the consolidated balance sheet at March 31, 2020.~~$62.0 million.

Letters of Credit - At ~~March 31,~~September 30, 2020 and June 30, ~~2019,~~2020, there was ~~$5.8~~$5.0 million and ~~$6.1~~$5.8 million, respectively, of standby letters of credit outstanding under the revolving credit facility.

Total availability under the credit facility was ~~$23.9~~$104.5 million at ~~March 31,~~September 30, 2020 and ~~$158.9~~$58.9 million at June 30, ~~2019.~~2020. At ~~March 31,~~September 30, 2020 and June 30, ~~2019,~~2020, we were in compliance with all the covenants under the revolving credit facility.

25

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Share Repurchase Program

~~On January 13, 2020, the Board of Directors of the Company authorized an increase in the aggregate~~There were no share ~~repurchase authorization~~repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) ~~to 3,000,000 shares. We repurchased 1,538,363 shares under the program~~ during the first ~~nine~~three months of fiscal ~~2020 at an average price of $15.81 per share.~~2021 and 2020. At ~~March 31,~~September 30, 2020, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our program. AsThe timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions. The Share Repurchase Program was temporarily halted on April 1, 2020 as part of our ~~COVID-19~~ action plan ~~we temporarily suspended our share~~in response to COVID-19. There is no expiration date on the repurchase ~~program.~~authorization.

Contractual Obligations

Fluctuations in our operating results, levels of inventory on hand, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As of June 30, ~~2019,~~2020, we had total contractual obligations of ~~$207.0~~$233.4 million, of which ~~$169.9~~$149.7 million related to our operating lease ~~commitments. Upon adoption~~commitments, $50.0 million of ~~ASU 2016-02, we recognized these operating lease liabilities on~~long-term debt and $32.9 million of purchase obligations. With the exception of the $50.0 million repayment of our ~~consolidated balance sheet. As disclosed earlier~~long-term debt in ~~the~~ ~~Capital Resources~~ section of this MD&A, we borrowed $100.0 million under our revolving credit facility during the third quarter of fiscal 2020. The principal loan balance of $100.0 million remains outstanding as of March 31,September 2020 and ~~is payable on the maturity date of December 21, 2023. Refer~~monthly lease payments made to ~~the~~ ~~Capital Resources~~ ~~section of the MD&A for a discussion on~~ our ~~debt borrowings.~~
~~There~~landlords totaling $8.4 million, there were no other material changes in our contractual obligations during the first ~~nine~~three months of fiscal ~~2020.~~2021.

Dividends
On January 29, 2020, our Board of Directors declared a regular quarterly dividend of $0.21 per share. The cash dividend of $5.3 million was paid on April 23, 2020, to common stockholders of record at the close of business on April 9, 2020.

At the quarterly Board of Directors meeting held on April 28, 2020, our Board temporarily suspended the Company’s regular quarterly cash dividend due to the COVID-19 impact. ~~Future~~
On August 4, 2020, our Board of Directors reinstated the regular quarterly cash dividend and declared a regular quarterly cash dividend of $0.21 per share. The cash dividend of $5.3 million was paid on October 22, 2020, to common stockholders of record on October 8, 2020. Our Board of Directors met with management to review the effects of the COVID-19 pandemic on the business and determined that it was appropriate to return capital to shareholders in the form of a quarterly cash dividend equal to the pre-COVID-19 level of $0.21 per share. We will continue to monitor the pace of business as it relates to future dividends and any future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us, ~~and is~~ subject to final determination by our Board of Directors.

31
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~
Off-Balance Sheet Arrangements and Other Commitments and Contingencies

We do not utilize or employ any off-balance sheet arrangements, including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments, ~~(other than as specified below),~~ or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.

We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.

Foreign Currency

Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in U.S. dollars. The financial statements of these foreign locations are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive (loss) income as a component of shareholders’ equity. Foreign exchange gains or losses resulting from market changes in the value of foreign currencies did not have a material impact during any of the periods presented in this Quarterly Report on Form 10-Q.

26

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Significant Accounting Policies

We describe our significant accounting policies in Note 3, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in our ~~2019~~2020 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first ~~nine~~three months of fiscal ~~2020~~2021 from those disclosed in our ~~2019~~2020 Annual Report on Form 10-K.

Critical Accounting Estimates
Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions.

We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~2019~~2020 Annual Report on Form 10-K.

~~Leases~~~~- We implemented ASU 2016-02 in the first quarter of fiscal 2020. Refer to Note 6,~~ ~~Leases~~~~, for further details on the adoption of ASU 2016-02.~~
~~Goodwill and Other Intangible Assets~~ - We review the carrying value of our goodwill and other intangible assets with indefinite lives at least annually, during the fourth quarter, or more frequently if an event occurs or circumstances change, for possible impairment. For impairment testing, goodwill has been assigned to our wholesale reporting unit. We may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, we may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform the quantitative assessment.
The quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the reporting unit. If the carrying value of an individual indefinite lived intangible asset exceeds its fair value, such individual indefinite lived intangible asset is written down by an amount equal to such excess. Estimating the fair value of reporting units and indefinite lived intangible assets involves the use of significant assumptions, estimates and judgments with respect to a number of factors, including sales, gross margin, general and administrative expenses, capital expenditures, EBITDA and cash flows, the selection of an appropriate discount rate, as well as market values and multiples of earnings and revenue of comparable public companies.
To evaluate goodwill, the Company estimates the fair value of the reporting units using a combination of Market and Income approaches. The Market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). In the Market approach, the “Guideline Company” method is used, which focuses on comparing the Company’s risk profile and growth prospects to reasonably similar publicly traded companies. Key assumptions used for the Guideline Company method include multiples for revenues, EBITDA and operating cash flows, as well as consideration of control premiums. The selected multiples are determined based on public furniture companies within our peer group, and if appropriate, recent comparable transactions are also considered. Control premiums are determined using recent comparable transactions in the open market. Under the Income approach, a discounted cash flow method is used, which includes a terminal value, and is based on management’s forecasts and budgets. The long-term terminal growth rate assumptions reflect our current long-term view of the market in which we compete. Discount rates use the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.
32
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~
During the fiscal third quarter ended March 31, 2020, wholesale net sales declined 14.1% and there was a meaningful decline (46.4%) in our stock price from the fiscal second quarter to the third (from $19.06 to $10.22). This decline coupled with the significant adverse changes in the business climate from the COVID-19 health crisis, led to an interim evaluation of goodwill and other intangible assets. Based on our interim quantitative assessment performed as of March 31, 2020, the fair value of the wholesale reporting unit exceeded its carrying value by approximately 25%, thus no impairment of goodwill as of March 31, 2020.
The fair value of our trade name, which is the Company’s only indefinite lived intangible asset other than goodwill, is valued using the relief-from-royalty method. Significant factors used in the trade name valuation are rates for royalties, future revenue growth and a discount factor. Royalty rates are determined using an average of recent comparable values, review of the operating margins and consideration of the specific characteristics of the trade name. Future growth rates are based on the Company’s perception of the long-term values in the market in which we compete, and the discount rate is determined using the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors. We performed the trade name interim impairment test and concluded its fair value substantially exceeded the carrying value as of March 31, 2020, thus no impairment.
If the market valuation of our common shares or operating results within the wholesale reporting unit significantly decline beyond current levels, we may again need to conduct an evaluation of the fair value of our goodwill and trade name, which may result in an impairment charge. Refer to Note 8, ~~Goodwill and Other Intangible Assets~~~~, for further details on our goodwill and other intangible assets.~~
There have been no ~~other~~significant changes in our critical accounting estimates during the first ~~nine~~three months of fiscal ~~2020~~2021 from those disclosed in our ~~2019~~2020 Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 3, Recent Accounting Pronouncements, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.
~~Business Outlook~~
~~Everything has changed as a result of the rapid spread of COVID-19 around the world.~~
We have begun to reopen design centers in a number of U.S. states since May 1, 2020 and to increase production in some of our North American manufacturing plants. We look forward to reopening all of our design centers but expect that this situation will have a significant adverse effect on our reported results for our fourth fiscal quarter of 2020 and possibly beyond.
Our strong network of North American interior designers continues to create design solutions that best satisfy our customer’s needs while sheltering in their home. We believe changes in consumer spending and new habits being formed as a result of social distancing and sheltering in place, will create opportunities for our brand. Now more than ever, home is a haven, and we are here to help the customer reimagine their homes. We continue to generate business through virtual and in-person appointments and by interacting virtually with our customers through Live Chat online. Our design consultants, who have been working remotely, utilize technology, including the Ethan Allen inHome augmented reality app, the 3D room planner tool, Skype and FaceTime.
~~We continue to operate our~~ ~~www.ethanallen.com~~ website and distribution centers to deliver products to our customers. We plan to further invest in our digital footprint, including our website, in order to enhance our customer experience when navigating the site in an attempt to increase web sales. We are also continually improving our customers’ journey from the time they land on our website to the delivery their purchase through our white glove home delivery service. We view the combination of online traffic and design center traffic in a holistic fashion whereby our customer generally experiences our brand on our website before visiting a design center in person. Our online traffic continues to increase each year and our marketing teams remain laser-focused on enhancing our digital outreach strategies to further drive more traffic and keep our brand relevant in today’s social media world.
We are also making good progress with our new products including Lucy, a mid-century modern inspired upholstery collection that has just launched very successfully online, and Farmhouse, a country cottage inspired furniture collection that is launching in two phases over the next few months. We plan to persevere, get back to work, open all of our design centers and fully restate our manufacturing and logistics operations. Our liquidity position remains strong as of March 31, 2020 and the difficult, but necessary actions we have taken, should enable us to be in a position to ramp operations back up quickly.
Given the number of risk factors, uncertainties and assumptions discussed in Part 1 Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, and particularly the ongoing uncertainty surrounding the duration, magnitude, and impact of COVID-19, actual results may differ materially from these expectations. We currently do not intend to update our forward-looking statements until our next quarterly results announcement, other than in publicly available statements.
33
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates that could impact our financial position and results of operations.

Interest Rate Risk

Debt. Interest rate risk exists primarily through our borrowing activities. We utilize U.S. dollar denominated borrowings to fund substantially all our working capital and investment needs. At ~~March 31,~~September 30, 2020, ~~the fair value of our floating-rate~~we did not have any debt obligations (fixed or floating-rate) outstanding under our revolving credit ~~facility was $100.0 million, which approximated its carrying amount and was determined based on quoted market prices for debt with a similar maturity.~~facility. It is anticipated that the fair market value of any future debt under the credit facility will continue to be immaterially affected by fluctuations in interest rates and we do not believe that the value of such debt would be significantly impacted by current market events. ~~The debt bears~~Previous borrowings under the credit facility during fiscal 2020 had an interest ~~on the outstanding principal amount at a weighted average~~ rate equal to the one-month LIBOR ~~rate of 0.95%~~ plus a spread using a debt leverage pricing ~~grid currently at 1.5%.~~grid. During the ~~nine months ended March 31, 2020,~~first quarter of fiscal 2021, we recorded interest expense of ~~less than $0.2~~$0.3 million on our outstanding debt amounts. We currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future. ~~Assuming all terms of our outstanding long-term debt remained the same, a~~A hypothetical 100 basis point change (up or down) in the one-month LIBOR rate would ~~result in~~would not have a ~~$1.0 million change to~~material effect on our ~~annual interest expense.~~consolidated results of operations and financial condition.

LIBOR Transition
~~Our current outstanding borrowing of $100.0 million~~. Borrowings under our revolving line of credit have an interest rate tied to LIBOR, which is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and end its publication. If LIBOR is no longer available, or otherwise at our option, we will pursue alternative interest rate calculations in our Credit Agreement, including the use of the Secured Overnight Financing Rate (SOFR). A number of other alternatives to LIBOR have been proposed or are being developed, but it is not clear which, if any, will be adopted. Any of these alternative methods may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.

Foreign Currency Exchange Risk

Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, foreign exchange gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A decrease in the value of foreign currencies relative to the U.S. dollar may affect the profitability of our vendors, but as we employ a balanced sourcing strategy, we believe any impact would be moderate relative to peers in our industry. A hypothetical 10% weaker United States dollar against all foreign currencies at ~~March 31,~~September 30, 2020 would have had an immaterial impact on our consolidated results of operations and financial condition. We currently do not engage in any foreign currency hedging activity and we have no intention of doing so in the foreseeable future.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our consolidated results of operations and financial condition have been immaterial.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chairman, President and Chief Executive Officer (principal executive officer) and the Executive Vice President, Administration, Chief Financial Officer and Treasurer (principal financial officer), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of ~~March 31,~~September 30, 2020, our disclosure controls and procedures were effective in ensuring that material information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in our periodic reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~third~~first fiscal quarter ended ~~March 31,~~September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes during the first ~~nine~~three months of fiscal ~~2020~~2021 to the matters discussed in Part I, Item 3 - Legal Proceedings in our ~~2019~~2020 Annual Report on Form 10-K.

Item 1A. Risk Factors

We operate in a changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, operating results or cash flows. ~~The Company has~~We described, in ~~its 2019~~our 2020 Annual Report on Form 10-K, the primary risks related to ~~its~~our business, and ~~securities, and~~ periodically ~~updates~~update those risks for material developments. For a detailed discussion of certain risks that affect our business, refer to the risk factors identified in section Item 1A – Risk Factors in our ~~2019~~2020 Annual Report on Form 10-K.

~~The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. Except as presented below, there have been~~There were no material changes ~~from~~during the first three months of fiscal 2021 to the risk factors associated with our business as previously ~~disclosed~~identified in our ~~2019~~2020 Annual Report on Form 10-K.
~~We are undertaking a significant business initiative with the launch of the Ethan Allen Member Program. If this initiative is not s~~~~uccessful, it may have a~~ ~~material~~ ~~negative impact on our results of operations.~~
In October 2019 we transitioned from a promotional to a membership model, by introducing the Ethan Allen Member Program, which is designed to provide a range of benefits to our customers in return for payment of an annual membership fee. We introduced the Ethan Allen Member Program as an alternative to prior practices involving numerous short-term promotional event-driven programs. There can be no assurance that certainty as to how our customers may react to this program over time or how it will affect our financial results from quarter to quarter.
~~The ongoing global~~ ~~COVID-19 pandemic has and may continue to adversely affect our business, our results of operations and our overall financial performance.~~
The ongoing global COVID-19 pandemic has negatively impacted the world economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which have negatively affected and continue to negatively affect the retail industry and the Company’s business. COVID-19 continues to spread both in the U.S. and globally, and related government and private sector mitigation efforts, including travel restrictions, border closings, restrictions on public gatherings, especially when congregating in heavily populated areas, such as malls and shopping centers, shelter-in-place restrictions and limitations on business, including requiring reduction of operating hours and forced temporary closures of non-essential retailers and other businesses, have adversely affected and are expected to continue to adversely affect our business operations. These actions have begun and could continue to materially and adversely impact our results of operations, financial condition, and liquidity. In particular, the continued spread of COVID-19 and efforts to contain the virus could:
●
continue to impact customer demand for our products and services and customer spending levels and have an adverse long-term impact on future foot traffic to our retail locations as a result of any changes to customer shopping patterns and behaviors, including consumer willingness to visit physical retail locations, such as our design centers;
●
~~reduce the availability and productivity and impact the health and well-being of our employees, customers and business partners;~~
●
~~cause us to experience a material increase in costs as a result of our emergency measures, delayed payments from our customers and uncollectable accounts;~~
●
~~materially and adversely impact our liquidity position and cost of, and ability to access, funds from financial institutions and capital markets;~~
●
~~Continue to cause disruptions in the availability of and timely delivery of materials used in our operations; and~~
●
~~cause other unpredictable events that we currently cannot anticipate.~~
36
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~
We have instituted measures to ensure our supply chain remains open to us; however, there could be global shortages that could in turn materially adversely impact our maintenance and capital programs that we currently cannot anticipate. To protect our employees, customers and the communities in which we operate, on March 19, 2020, we announced the temporary closing of our Company-operated retail design centers and manufacturing plants in North America, which adversely affected our operations, cash flows and liquidity, as our retail design center revenues comprise approximately 79% of our net revenues. Further, after containment of the virus or after some or all of our design centers reopen, any significant reduction in consumer willingness to visit, levels of consumer spending, employee willingness to work in our design centers, or the prolonged temporary closure of our design centers or distribution centers, relating to COVID-19 or its impact on the economy, consumer sentiment or health concerns, would result in a further loss of revenues, profits, cash flows, and other materially impactful effects on our business and operations.
In addition, we have implemented work-from-home policies for certain employees. The effects of shelter-in-place orders and our work-from-home policies may negatively impact productivity and disrupt our business, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. Although we continue to sell products through our website and our distribution centers remain open and operational through the date of filing of this Quarterly Report, governmental mandates or illness or absence of a substantial number of distribution center employees could require that we temporarily close one or more of our distribution centers, or may prohibit or significantly limit us, or our third party logistics providers, from delivering to our customers and our design centers, which would complicate or prevent our fulfilling orders and, once our design centers reopen, would complicate or prevent our ability to supply merchandise to these design centers. Further, although we continue to implement strong physical and cyber-security measures to ensure that our business operations remain functional and to ensure uninterrupted service to our customers, our systems and our operations remain vulnerable to cyber-attacks and other disruptions due to the fact that a significant portion of our employees work remotely as a result of the ongoing COVID-19 crisis, and we cannot be certain that our mitigation efforts will be effective.
The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the virus and related restrictions. At this time, given the uncertainty of the lasting effect of COVID-19, the financial impact on the world economy, and in particular, our business, cannot be determined. Further, despite our efforts to manage various impacts, the situation surrounding COVID-19 remains fluid and the potential for a material impact on our results of operations, financial condition and liquidity increases the longer the virus impacts activity levels in the U.S. and globally. The ultimate impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including the duration and severity of the COVID-19 outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. Therefore, we currently cannot estimate with any degree of certainty the potential impact to our financial position, results of operations and cash flows.
We may require funding from external sources, which may not be available at the levels we require, or may cost more than we expect, and, as a consequence, our expenses and operating results could be negatively affected.
We regularly review and evaluate our liquidity and capital needs. To maximize our liquidity and increase our available cash on hand, we drew down $100 million on our revolving credit facility in March 2020. We believe that our available cash, cash equivalents and cash flow from operations will be sufficient to finance our operations and expected capital requirements for at least the next 12 months unless our design centers and distribution centers remain closed for an extended period of time or we experience a material decline in revenue relating to COVID-19. However, we might experience periods during which we encounter additional cash needs, and we might need additional external funding to support our operations.
Although our credit facility has remaining borrowing availability of $23.9 million as of March 31, 2020, in the event we require additional liquidity from our lenders, such funds may not be available to us on acceptable terms, or at all. In addition, in the event we were to breach any of our financial covenants, our banks would not be required to provide us with additional funding, or they may require us to renegotiate our existing credit facility on less favorable terms. In addition, we may not be able to renew our letters of credit that we use to help pay our suppliers, on terms that are acceptable to us, or at all, as the availability of credit facilities may become limited. Further, the providers of such credit may reallocate the available credit to other borrowers. If we are unable to access additional credit at the levels we require, or the cost of credit is greater than expected, it could adversely affect our operating results.
37
~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2(a) and (b) are not applicable as there have been no unregistered sales of equity securities.

(c) Issuer Purchases of Equity Securities

~~The following table provides~~Our Board of Directors has authorized management, at its discretion, to make repurchases of its common stock in the open market and through privately negotiated transactions, subject to market conditions, pursuant to our previously announced repurchase program. At September 30, 2020, we had a ~~month-to-month summary~~remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our program. There were no share repurchases under the program during the quarter ended September 30, 2020. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchases, if any, will be determined by our officers at their discretion, and as permitted by securities laws, covenants under existing bank agreements and other legal and contractual requirements, and will be based on a number of factors, including an evaluation of general market and economic conditions and the trading price of the common stock. The share repurchase ~~activity during the three months ended March 31, 2020:~~program may be suspended or discontinued at any time without prior notice.
Period

Total number of
shares
purchased⁽¹⁾

Average price
paid per share

Total number of
shares purchased as part
of publicly announced
plan or programs⁽³⁾

Maximum number of shares (or
approximate dollar value) that
may yet be purchased under the
plans or programs⁽³⁾

January 2020
200,991 $ 17.55 200,991 2,799,009
⁽²⁾
February 2020
480,000 $ 14.52 480,000 2,319,009
March 2020
311,645 $ 12.17 311,645 2,007,364
Total
992,636 $ 14.40 992,636 2,007,364
~~(1)~~
~~Shares were purchased under~~ ~~our~~ ~~existing~~ ~~multi-year share r~~~~epurchase program.~~
(2)
On ~~January~~ 13~~, 2020~~~~, the Board of Directors of~~ ~~the Company~~~~authorized an increase in the total authorization of our multi-year existing share re~~~~purchase program~~ to ~~3,000,000~~.
(3)
O~~n April 1, 2020, as part of our COVID-19 action plan, we~~ ~~temporarily~~ ~~suspended our share repurchase program.~~ ~~No minimum number of shares to be repurchased has been fixed. There is no timeframe to complete the repurchase program.~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Item 6. Exhibits

(a)
Exhibits

The following documents are filed as exhibits to this report:

Exhibit
Number

Exhibit Description

Incorporated by Reference
Filed
Herewith
Furnished
Herewith

Form

File
No.

Exhibit

Filing
Date

31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X
32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X
101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

X

101.SCH

Inline XBRL Taxonomy Extension Schema ~~Document~~

X

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document~~

X

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase ~~Document~~

X

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document~~

X

104
Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)
X

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ETHAN ALLEN INTERIORS INC.

(Registrant)
Date: ~~May 11,~~October 29, 2020
BY: /s/ M. Farooq Kathwari
M. Farooq Kathwari

~~M. Farooq Kathwari~~Chairman, President and Chief Executive Officer

~~Chairman, President and Chief Executive Officer~~
(Principal Executive Officer)

Date: ~~May 11,~~October 29, 2020
BY: /s/ Corey Whitely

Corey Whitely

Executive Vice President, Administration,
Chief Financial Officer and Treasurer

(Principal Financial Officer)

3930

	Consolidated Balance Sheet Location	March 31, 2020
Assets
Operating leases	Operating lease right-of-use assets (non-current)	$	124,636
Financing leases	Property, plant and equipment, net		741
Total lease assets		$	125,377

Liabilities
Current:
Operating leases	Current operating lease liabilities	$	34,005
Financing leases	Other current liabilities		604
Noncurrent:
Operating leases	Operating lease liabilities, long-term		112,515
Financing leases	Other long-term liabilities		127
Total lease liabilities		$	147,251

Fiscal Year	Operating Leases		Financing Leases ⁽¹⁾
2020	$	33,761	$	550
2021		30,534		437
2022		26,443		60
2023		20,276		19
2024		15,345		-
Thereafter		43,500		-
Total	$	169,859	$	1,066

	Balance		Fiscal 2020 Activity									Balance
Optimization of Manufacturing and Logistics	June 30, 2019		New Charges (Income)			Non-Cash			(Payments) Receipts			March 31, 2020
Employee severance, other payroll and benefit costs	$	1,714	$	777		$	23		$	(2,468	)	$	-
Manufacturing overhead costs		-		1,318			-			(1,318	)		-
Sale of Passaic property		-		(11,497	)		245			11,742			-
Sale of other property, plant and equipment		-		(675	)		-			675			-
Other exit costs		-		727			(523	)		(1,250	)		-
Sub-total	$	1,714	$	(9,350	)	$	(255	)	$	7,381		$	-

Other Restructuring and Impairment Charges
Inventory write-downs	$	-	$	3,208		$	3,208		$	-		$	-
Impairment of long-lived assets (retail)		-		389			389			-			-
Lease exit costs (remaining lease rentals)		3,145		-			2,878			(267	)		-	⁽¹⁾
Other charges (income)		224		106			-			(271	)		59	⁽²⁾
Sub-total	$	3,369	$	3,703		$	6,475		$	(538	)	$	59

Total Restructuring, Impairments and other exit costs	$	5,083	$	(5,647	)	$	6,220		$	6,843		$	59

				Weighted
				Average
	Options			Exercise Price
Outstanding at June 30, 2019		378,911		$	21.95
Granted		59,188		$	17.27
Exercised		(4,500	)	$	11.74
Canceled (forfeited/expired)		(23,495	)	$	23.30
Outstanding at March 31, 2020		410,104		$	21.31
Exercisable at March 31, 2020		314,151		$	21.56

	FY 2020			FY 2019
Volatility		30.8	%		31.3	%
Risk-free rate of return		1.55	%		2.80	%
Dividend yield		3.97	%		3.24	%
Expected average life (years)		5.3			5.0

			Weighted
	Restricted Stock Units		Average Fair Value

Outstanding at June 30, 2019		-	$	-
Granted		57,000	$	9.15
Vested		-	$	-
Canceled (forfeited/expired)		-	$	-
Outstanding at March 31, 2020		57,000	$	9.15

			Weighted Average
	Units		Grant Date Fair Value
Outstanding at June 30, 2019		313,882	$	22.80
Granted		99,405	$	12.72
Vested		-	$	-
Canceled (forfeited/expired)		-	$	-
Outstanding at March 31, 2020		413,287	$	20.37

Period	Total number of shares purchased⁽¹⁾		Average price paid per share		Total number of shares purchased as part of publicly announced plan or programs⁽³⁾		Maximum number of shares (or approximate dollar value) that may yet be purchased under the plans or programs⁽³⁾
January 2020		200,991	$	17.55		200,991		2,799,009	⁽²⁾
February 2020		480,000	$	14.52		480,000		2,319,009
March 2020		311,645	$	12.17		311,645		2,007,364
Total		992,636	$	14.40		992,636		2,007,364

~~(1)~~	~~Shares were purchased under~~ ~~our~~ ~~existing~~ ~~multi-year share r~~~~epurchase program.~~

(2)	On ~~January~~ 13~~, 2020~~~~, the Board of Directors of~~ ~~the Company~~~~authorized an increase in the total authorization of our multi-year existing share re~~~~purchase program~~ to ~~3,000,000~~.

(3)	O~~n April 1, 2020, as part of our COVID-19 action plan, we~~ ~~temporarily~~ ~~suspended our share repurchase program.~~ ~~No minimum number of shares to be repurchased has been fixed. There is no timeframe to complete the repurchase program.~~

Date: ~~May 11,~~October 29, 2020	BY: /s/ M. Farooq Kathwari
	M. Farooq Kathwari
	~~M. Farooq Kathwari~~Chairman, President and Chief Executive Officer
	~~Chairman, President and Chief Executive Officer~~
	(Principal Executive Officer)

Date: ~~May 11,~~October 29, 2020	BY: /s/ Corey Whitely
	Corey Whitely
	Executive Vice President, Administration, Chief Financial Officer and Treasurer
	(Principal Financial Officer)