Emerson Radio Corp. Form 10-Q Summary
Business Context and Reporting Period
Emerson Radio Corp. designs, sources, imports and markets houseware and consumer electronic products, and licenses its trademarks. This unaudited report covers the three and six months ended September 30, 2021, the second quarter and first half of fiscal 2022, compared with the corresponding fiscal 2021 periods. The company is a controlled company; entities affiliated with its controlling shareholder held approximately 72.4% of outstanding common stock as of September 30, 2021.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Net revenues | $1.859 million, down 18.1% | $3.911 million, up 9.7% |
| Net product sales | $1.794 million, down 18.9% | $3.781 million, up 9.8% |
| Licensing revenue | $65,000, up 8.3% | $130,000, up 8.3% |
| Operating loss | $855,000, compared with $1.040 million | $1.776 million, compared with $2.241 million |
| Net loss | $632,000, or $0.03 per share | $1.547 million, or $0.07 per share |
Calculated gross margin was approximately 27.3% in the quarter and 24.3% for the six-month period. Calculated operating margins were approximately negative 46.0% and negative 45.4%, respectively. SG&A was $1.363 million in the quarter and $2.727 million year to date, primarily reflecting lower legal fees related to Emerson trademark protection.
- Cash and cash equivalents were $26.025 million at September 30, 2021, compared with $5.245 million at March 31, 2021. The increase primarily reflected the conversion of $25.045 million of short-term investments into cash.
- Net cash used in operating activities was $4.265 million for the six months, compared with $3.070 million in the prior-year period. Working-capital uses included higher inventory and accounts receivable.
- Net cash provided by investing activities was $25.045 million, principally from maturities or withdrawals of short-term investments. Financing cash flow was nil.
- Working capital was approximately $30.2 million at September 30, 2021, versus $32.1 million at March 31, 2021.
- Total liabilities were $3.133 million, including $1.808 million of federal tax liabilities related to foreign earnings repatriation and approximately $525,000 of operating and finance lease liabilities. The $204,000 PPP loan was forgiven on July 5, 2021.
- Management stated that existing cash and other sources of cash should be sufficient to support operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Quarterly net product sales declined primarily because houseware sales fell 55.5% to $0.5 million, driven by lower microwave oven sales. Audio sales increased 15.1% to $1.3 million, primarily from clock radios.
- For the six-month period, houseware sales declined 20.1% to $1.3 million, while audio sales increased 34.8% to $2.5 million.
- Customer concentration increased. The three largest customers represented approximately 90% of quarterly net revenue and 86% of six-month net revenue, compared with 77% and 76%, respectively, in the prior-year periods.
- Product mix shifted toward audio products. Audio represented approximately 73% of quarterly gross product sales and 67% for the six-month period, compared with 52% and 54%, respectively, in the prior-year periods.
- SG&A declined 12.9% in the quarter and 10.3% year to date, largely due to lower legal fees. Despite the expense reduction, SG&A remained high at 73.3% of quarterly revenue and 69.7% of six-month revenue.
- Governmental assistance increased other income by $207,000 in the current-year periods from PPP loan forgiveness, compared with $55,000 of Hong Kong Employment Support Scheme income in the prior-year periods. This benefit is non-recurring based on the filing.
- All products for resale were sourced from the company’s two largest factory suppliers; the largest supplier provided 84% of quarterly purchases and 83% of six-month purchases, compared with 53% and 58% in the prior-year periods.
Guidance, Outlook, Risks and Unusual Items
- The company provided no quantified revenue, earnings or margin guidance. It expects to expand distribution channels, develop new products, increase internet and e-commerce activity, and seek additional licensing relationships.
- COVID-19 continues to affect customer demand, supplier production, logistics and order timing. Freight costs had increased by several multiples compared with fiscal 2021 averages, and semiconductor shortages and shipping-container constraints were causing longer lead times and potential fulfillment issues.
- All products are manufactured by suppliers in China. U.S. tariffs, potential retaliatory tariffs, China-related geopolitical tensions and currency fluctuations could increase product costs and pressure sales and gross margins. The company cannot quantify the potential tariff impact.
- Dependence on a small number of customers and suppliers is significant. A loss of, or payment failure by, a major customer could materially affect results. Approximately $25.8 million of U.S. cash and restricted cash exceeded FDIC-insured limits at September 30, 2021.
- The company had approximately $12.5 million of federal and $16.1 million of state net operating loss carryforwards. A 100% valuation allowance of approximately $3.821 million was maintained against deferred tax assets.
- Legal proceedings were described as ordinary and routine, with management not expecting a material adverse effect. The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls as of September 30, 2021.
Important Facts for Investors to Verify
- Whether cash generation improves enough to offset recurring operating losses and the $4.265 million first-half operating cash outflow.
- The sustainability of the $26.025 million cash balance, including the impact of converting short-term investments into cash rather than generating cash from operations.
- Customer concentration, especially exposure to Walmart, Amazon and Fred Meyer, and the associated accounts-receivable concentration.
- The effect of freight inflation, tariffs, component shortages and China-related supply-chain disruptions on gross margins and product availability.
- Whether the shift from microwave ovens toward audio products is durable and whether new products, e-commerce initiatives and licensing relationships can improve profitability.
- The recoverability of deferred tax assets and the remaining schedule of approximately $1.808 million in foreign-earnings repatriation tax liabilities.