EMERSON RADIO CORP annual report, FY2021

Emerson Radio Corp. Form 10-K Summary

Business Context and Reporting Period

This filing is an Annual Report on Form 10-K for the fiscal year ended March 31, 2021. The requested period is identified as “2020 Q4,” but the filing reports full-year fiscal 2021 results and compares them with fiscal 2020.

Emerson designs, sources, imports, markets and licenses houseware and consumer electronic products under the Emerson brand. Products are sold primarily in the United States through mass merchants and online marketplaces. All products are manufactured by third parties in China.

Financial Performance and Position

Metric	Fiscal 2021	Fiscal 2020	Change
Net product sales	$7.200 million	$6.065 million	18.7% increase
Licensing revenue	$0.245 million	$0.228 million	7.4% increase
Net revenues	$7.445 million	$6.293 million	18.3% increase
Cost of sales	$5.749 million	$5.144 million	11.8% increase
Operating loss	$(4.195) million	$(4.626) million	Improved by $0.431 million
Net loss	$(3.976) million	$(4.307) million	Improved by $0.331 million
Basic and diluted loss per share	$(0.19)	$(0.20)	Improved by $0.01

Approximate gross margin was 22.8% in fiscal 2021 versus 18.3% in fiscal 2020, based on reported net revenues and cost of sales.
Approximate operating margin was negative 56.4% in fiscal 2021 versus negative 73.5% in fiscal 2020. Approximate net margin was negative 53.4% versus negative 68.4%.
Selling, general and administrative expense increased 2.0% to $5.891 million, but declined to 79.1% of revenue from 91.8%. Legal fees increased to approximately $1.522 million from $1.120 million, primarily for Emerson trademark protection.
Net interest income declined to $151,000 from $776,000 due to lower interest rates. Fiscal 2021 also included $83,000 of Hong Kong government assistance income.
Cash and cash equivalents were $5.245 million at March 31, 2021, down from $6.276 million. Short-term investments were $25.045 million, down from $28.101 million.
Working capital was $32.1 million, compared with $36.1 million at March 31, 2020. Total assets were $33.902 million and total liabilities were $3.457 million.
Net cash used in operating activities was $4.293 million, compared with $1.911 million used in fiscal 2020. Investing activities provided $3.058 million, primarily from net sales of short-term investments.
Financing activities provided $204,000 from Paycheck Protection Program proceeds.
The company has no revolving credit facility and had no letters of credit outstanding at either year-end. Management stated that cash on hand and existing cash sources should support operations for the next 12 months.
The company recorded a $204,000 PPP loan as a current liability. The loan bears 1% interest, matures two years from issuance and is subject to potential forgiveness; no assurance of forgiveness was provided.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven by higher demand for microwave ovens and clock radios, increased online shopping and reduced competition during the early stages of the COVID-19 pandemic.
Houseware net sales increased 16.1% to $2.6 million, while audio net sales increased 20.4% to $4.6 million.
Gross product sales remained highly concentrated: Walmart, Amazon.com and Fred Meyer represented approximately 82.1% in fiscal 2021 versus 81.8% in fiscal 2020. Walmart declined to 37% of net revenue from 44%, while Amazon increased to 33% from 25%; Fred Meyer remained at approximately 11%.
Audio products represented approximately 63% of gross product sales, compared with 61% in fiscal 2020; microwave ovens represented approximately 35% in both years.
Supplier concentration increased. The two largest suppliers accounted for 99% of product purchases in fiscal 2021, compared with 87% in fiscal 2020; one supplier represented 59% and another 40% of fiscal 2021 purchases.
Approximately 87% of revenue continued to be generated through third-party sales representative organizations. Fiscal 2021 used four such organizations, with two representing approximately 49% and 30% of revenue.
Fiscal 2021 included no product sales under the Direct Import Program, compared with less than 1% of net product sales in fiscal 2020.
Management changed the classification of certain costs, reclassifying approximately $1.612 million from cost of sales to SG&A for fiscal 2020. The reclassification did not affect previously reported operating or net losses.
Share count was unchanged, with approximately 21.043 million common shares outstanding and 31.923 million shares held in treasury at both year-ends.

Guidance, Outlook, Risks and Unusual Items

Management provided no quantitative revenue or earnings guidance. The company expects to expand U.S. distribution, ecommerce sales, product offerings and licensing relationships, while continuing to invest in marketing, personnel and product development.

COVID-19 continues to create uncertainty around consumer demand, retailer orders, Chinese manufacturing, logistics, shipping capacity and component availability. The company cannot reliably quantify the pandemic’s future effect.
Shipping costs increased substantially, and management stated that recent costs were several multiples of fiscal 2021 averages. Semiconductor shortages have caused longer lead times, production delays and higher component costs.
All products are sourced from China, exposing the company to tariffs, trade restrictions, geopolitical tensions, currency movements, supply disruptions and potential inability to pass higher costs to customers.
The company relies on a small number of customers, suppliers, sales representatives and a third-party logistics provider. Customers have no long-term purchase contracts, and the logistics agreement is terminable for convenience.
The company has significant U.S. and state net operating loss carryforwards, but recorded a full valuation allowance against deferred tax assets. U.S. federal NOLs were approximately $11.0 million and state NOLs approximately $14.5 million at March 31, 2021.
The company is controlled by Nimble Holdings Company Limited, which beneficially owns approximately 72.4% of outstanding common stock. Emerson qualifies as a controlled company and has elected exemptions from certain NYSE American governance requirements.
The company has not paid common-stock cash dividends since September 2014 and does not currently plan to pay dividends in the foreseeable future.
Management concluded that disclosure controls and internal control over financial reporting were effective. Because Emerson is a smaller reporting company, the independent auditor did not provide an attestation report on internal control effectiveness.
Management believes pending litigation is not expected to have a material adverse effect, although ultimate legal liability cannot be estimated with certainty.

Important Facts for Investors to Verify

Verify the filing period: the document is for the fiscal year ended March 31, 2021, not a standalone calendar-year 2020 fourth quarter.
Assess whether the company can reduce recurring operating losses and negative operating cash flow despite substantial cash and short-term investments.
Monitor customer concentration, particularly Walmart and Amazon, and the absence of long-term customer contracts.
Evaluate exposure to Chinese suppliers, tariffs, semiconductor shortages, freight inflation and logistics disruption.
Confirm the status and potential forgiveness of the $204,000 PPP loan.
Review inventory valuation, sales-return and marketing-support accruals, and the auditor’s identification of inventory valuation as a critical audit matter.
Consider the effects of the $3.516 million valuation allowance against deferred tax assets and the future usability of tax NOLs.
Review related-party rental and utility charges of approximately $177,000 in fiscal 2021 and the implications of concentrated ownership and controlled-company governance exemptions.