EMERSON RADIO CORP quarterly report, Q2 FY2021

Emerson Radio Corp. — Form 10-Q Summary

Business Context and Reporting Period

Emerson designs, sources, imports and markets housewares and consumer electronics and licenses its trademarks. The filing covers the quarter and six months ended September 30, 2020, representing fiscal 2021 periods, compared with the corresponding fiscal 2020 periods. The financial statements are unaudited.

The company is controlled by Nimble Holdings Company Limited and related entities, which reported shared voting and dispositive power over approximately 72.4% of outstanding common stock.

Key Financial Metrics

Metric	Three Months Ended September 30	Six Months Ended September 30
Net revenues	$2.271 million, up 58.3%	$3.565 million, up 17.0%
Gross profit	$0.524 million; 23.1% margin	$0.800 million; 22.4% margin
Operating loss	$1.040 million; (45.8%) margin	$2.241 million; (62.9%) margin
Net loss	$0.956 million; $(0.05) per share	$2.081 million; $(0.10) per share
Net cash used in operating activities	Not separately provided	$3.070 million

Net product sales were $2.211 million in the quarter and $3.445 million for the six-month period. Licensing revenue was $60,000 and $120,000, respectively. Selling, general and administrative expense was $1.564 million in the quarter and $3.041 million year to date.

At September 30, 2020, cash and cash equivalents were $6.511 million, short-term investments were $25.000 million, and total current assets were $35.470 million. Working capital was approximately $33.9 million. Total liabilities were $3.561 million, including a $204,000 Paycheck Protection Program loan, $2.031 million of federal tax liabilities, and lease liabilities. The company stated that existing cash and sources of cash should support operations for the next 12 months.

Material Changes Versus the Prior Comparable Period

Quarterly net product sales increased 60.3%, primarily from higher microwave and clock-radio demand as consumers spent more time at home and shopping shifted online.
Six-month net product sales increased 17.3%; housewares sales increased 21.1% and audio sales increased 14.3%.
Gross margin improved to 23.1% in the quarter from 18.0% in the prior-year quarter and to 22.4% for six months from 17.1%, based on reported figures and the company’s revised cost-of-sales presentation.
Despite higher revenue, quarterly net loss increased to $956,000 from $876,000 and six-month net loss increased to $2.081 million from $1.863 million.
SG&A increased by $218,000 in the quarter and $213,000 for six months. Legal fees, primarily related to protection of the Emerson trademark, increased to $451,000 in the quarter and $855,000 year to date.
Interest income declined by $194,000 in the quarter and $349,000 for six months because of lower average interest rates on short-term investments.
Operating cash use increased to $3.070 million from $1.390 million in the prior-year six-month period. Cash was supported by $3.101 million of short-term investment maturities and $204,000 of PPP proceeds.
Short-term investments declined from $28.101 million at March 31, 2020 to $25.000 million at September 30, 2020; the remaining certificates of deposit mature in December 2020.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal revenue or earnings guidance. Management expects to expand distribution channels, develop products, increase internet and e-commerce sales, and pursue additional licensing relationships.

COVID-19 continues to create uncertainty involving customer demand, retailer orders, supply-chain operations, logistics, inventory management and freight capacity. Management cannot reasonably quantify the full future effect.
All products are manufactured by suppliers in China. Tariffs and potential retaliatory trade measures may increase product costs, reduce gross margins, impair demand or weaken competitiveness. The company cannot quantify the potential tariff impact.
Supplier and customer concentration is material: the three largest customers represented approximately 77% of quarterly revenue and 76% of six-month revenue; the two largest factory suppliers provided 100% of products for resale in the quarter and six-month period.
Walmart, Fred Meyer and Amazon were the largest customers. The company states that a significant decline in sales to any key customer could materially affect results.
The $204,000 PPP loan bears 1% interest and may be forgiven if program requirements are met. Management intends to seek forgiveness but cannot assure that any portion will be forgiven. Hong Kong government assistance contributed $55,000 of other income.
The company recorded a 100% valuation allowance of approximately $3.5 million against deferred tax assets. It also had approximately $9.6 million of federal and $17.6 million of state net operating loss carryforwards.
Legal proceedings are described as ordinary and routine, with no expected material adverse effect according to management. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.

Important Facts for Investors to Verify

Whether increased COVID-related demand for microwaves and audio products persists after pandemic-related purchasing patterns normalize.
Whether the company can return to profitability while absorbing substantial SG&A, legal expenses and recurring operating cash outflows.
The timing and use of the $25.0 million in short-term investments and whether those funds adequately cover projected operating needs.
Whether the PPP loan receives full or partial forgiveness and the resulting debt obligation if forgiveness is denied.
The impact of China-related tariffs, trade restrictions, freight disruptions and supplier concentration on product costs, inventory and gross margins.
The sustainability of revenue given the concentration among Walmart, Amazon and Fred Meyer and the concentration of receivables among two customers.
The status and potential cost of trademark-related legal work and any other pending litigation or tax examinations.