Emerson Radio Corp. — Fiscal 2021 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Emerson designs, sources, imports and markets houseware and consumer electronic products and licenses its trademarks. The filing covers the three and nine months ended December 31, 2020, compared with the corresponding periods ended December 31, 2019. The company is a controlled company; entities affiliated with Nimble Holdings Company Limited controlled approximately 72.4% of outstanding common stock as of December 31, 2020.
Financial Results and Liquidity
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Net revenues | $2.333 million | $2.094 million | $5.898 million | $5.142 million |
| Operating loss | $(0.981) million | $(1.163) million | $(3.222) million | $(3.470) million |
| Net loss | $(0.945) million | $(0.988) million | $(3.026) million | $(2.851) million |
| Loss per share | $(0.04) | $(0.05) | $(0.14) | $(0.14) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(4.068) million | $(1.826) million |
- Third-quarter revenue increased 11.4%; nine-month revenue increased 14.7%. Product sales rose 11.5% and 14.9%, respectively, while licensing revenue rose 7.1% and 7.8%.
- Approximate gross margin improved to 24.8% from 21.1% in the quarter and to 23.4% from 18.7% for the nine-month period. The company reclassified certain 2019 costs from cost of sales to SG&A; the reclassification did not affect operating or net losses.
- Approximate operating margin improved to negative 42.0% from negative 55.5% in the quarter and to negative 54.6% from negative 67.5% for the nine-month period.
- SG&A was $1.560 million in the quarter and $4.601 million year to date. Legal expense increased by approximately $46,000 in the quarter and $430,000 year to date, primarily for Emerson trademark protection.
- Cash and cash equivalents were $30.513 million at December 31, 2020, compared with $6.276 million at March 31, 2020. The increase largely reflected the maturity and reinvestment of $28.101 million of short-term investments into deposits classified as cash equivalents.
- Working capital was approximately $33.0 million, down from $36.1 million at March 31, 2020. Total liabilities were $3.724 million, including a $204,000 PPP loan and approximately $2.031 million of federal tax liability payable over eight years.
- Management stated that existing cash and other sources are expected to support operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Sales benefited from increased demand for clock radios, online shopping and reduced retail competition during the COVID-19 period. Audio sales increased 22.2% in the quarter and 18.2% year to date; houseware sales were flat in the quarter and increased 10.2% year to date.
- The quarterly net loss narrowed by approximately $43,000, but the nine-month net loss increased by approximately $175,000 because higher operating losses and substantially lower interest income more than offset revenue growth.
- Interest income declined to $18,000 from $179,000 in the quarter and to $128,000 from $638,000 year to date because of lower average investment yields.
- Government assistance contributed $28,000 in the quarter and $83,000 year to date through Hong Kong’s Employment Support Scheme. The company also received $204,000 under the PPP.
- Accounts receivable increased to $1.465 million from $484,000 at March 31, 2020, contributing to operating cash usage.
Outlook, Risks, Contingencies and Unusual Items
- The company intends to expand U.S. retail, internet and e-commerce distribution, develop new products and seek additional licensing relationships. No quantified revenue or earnings guidance was provided.
- COVID-19 continues to create uncertainty involving demand, retail activity, manufacturing, logistics, shipping-container availability, freight costs and supplier operations. Management stated that the full future impact cannot be estimated reliably.
- All products are manufactured by suppliers in China. Tariffs, U.S.-China trade tensions, Hong Kong policy changes, currency movements and higher production or shipping costs could reduce demand and gross margins. The company cannot quantify the potential tariff impact and may not be able to pass costs to customers.
- Customer concentration is substantial: Walmart, Amazon and Fred Meyer represented approximately 88% of quarterly revenue and 81% of nine-month revenue. The two largest customers represented 87% of net accounts receivable combined at December 31, 2020.
- Supplier concentration increased: the two largest suppliers provided 95% of purchases in the quarter and 98% year to date, with the largest supplier accounting for 57% and 58%, respectively.
- The company recorded a 100% valuation allowance of approximately $3.7 million against deferred tax assets. It had approximately $10.6 million of federal and $18.5 million of state net operating loss carryforwards.
- The PPP loan was used for qualifying expenses, and the company intends to seek forgiveness, but forgiveness is not assured. Any unforgiven amount bears 1% interest and is payable over two years.
- Management reported no material changes in internal control over financial reporting and concluded that disclosure controls were effective. Pending litigation is described as ordinary and routine, and management does not expect a material adverse effect.
Investor Verification Priorities
- Verify whether revenue growth and the improved gross margin persist after COVID-related demand shifts and reduced competition normalize.
- Monitor operating cash burn, accounts receivable collections and the company’s ability to remain profitable without investment income or government assistance.
- Assess customer and supplier concentration, including the financial and operational effect of losing a major customer or supplier.
- Confirm PPP loan forgiveness status and changes in the approximately $2.031 million federal tax liability.
- Evaluate the eventual effect of China-related tariffs, trade restrictions, shipping costs and Hong Kong developments on product costs and margins.
- Review the effect of elevated legal spending on trademark protection and any developments in related proceedings.