Emerson Radio Corp. — Fiscal 2020 Form 10-K Summary
Business Context and Reporting Period
Emerson Radio Corp. 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 retailers and online marketplaces. The filing covers the fiscal year ended March 31, 2020; it is not a quarterly filing, notwithstanding the “2019 Q4” request metadata.
The company is a smaller reporting company and controlled company. Nimble Holdings Company Limited beneficially owned approximately 72.4% of outstanding common stock as of March 31, 2020.
Financial Results and Key Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net product sales | $6.065 million | $8.577 million | Down 29.3% |
| Licensing revenue | $0.228 million | $0.405 million | Down 43.7% |
| Net revenues | $6.293 million | $8.982 million | Down 29.9% |
| Cost of sales | $6.755 million | $8.787 million | Down 23.1% |
| Operating loss | $(4.626) million | $(3.648) million | Loss increased 26.8% |
| Net loss | $(4.307) million | $(2.437) million | Loss increased 76.7% |
| Basic and diluted loss per share | $(0.20) | $(0.11) | More unfavorable |
- Estimated gross margin was negative 7.3% in fiscal 2020 versus positive 2.2% in fiscal 2019. Operating margin was approximately negative 73.5% versus negative 40.6%; net margin was approximately negative 68.5% versus negative 27.1%.
- Houseware net sales declined 37.2% to $2.3 million, principally because of lower microwave, compact refrigerator and wine product sales. Audio net sales declined 23.8% to $3.8 million, primarily due to lower clock-radio sales.
- Selling, general and administrative expense increased 8.4% to $4.164 million, primarily because of higher legal fees, partly offset by lower insurance and compensation costs.
- Interest income declined to $776,000 from $859,000 because of lower investment yields. Fiscal 2020 included a $457,000 tax expense, compared with a $352,000 tax benefit in fiscal 2019, including a full valuation allowance on deferred tax assets.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $6.276 million at March 31, 2020, down from $7.917 million. Short-term certificate-of-deposit investments were $28.101 million, producing cash and short-term investments of approximately $34.4 million.
- Working capital was $36.1 million versus $40.3 million in the prior year. Current assets were $37.356 million and current liabilities were $1.209 million.
- Operating activities used $1.911 million of cash, compared with $2.193 million used in fiscal 2019. The fiscal 2020 use reflected the net loss, partly offset by a $1.602 million reduction in inventory and other working-capital changes.
- Investing activities provided $270,000, primarily from net sales of short-term investments. Financing activities used no cash; fiscal 2019 included $2.618 million of treasury-stock purchases.
- The company stated that it has no credit facilities other than, when needed, fully cash-collateralized letters of credit. No letters of credit were outstanding at March 31, 2020. The filing does not report conventional funded debt at year-end.
- Lease liabilities totaled approximately $475,000 for operating leases and $5,000 for finance leases at March 31, 2020. The company adopted the lease accounting standard during fiscal 2020 and recorded $695,000 of lease liabilities and $650,000 of right-of-use assets at adoption.
- In April and May 2020, the company received approximately $204,000 of Paycheck Protection Program loans bearing 1% interest and maturing in two years. Forgiveness was intended but not assured.
Material Changes Versus Fiscal 2019
- Revenue fell sharply, with product sales down $2.512 million and licensing revenue down $177,000. A licensee did not renew its agreement when it expired on December 31, 2018.
- Profitability deteriorated substantially: the gross margin became negative, the operating loss widened, and the net loss increased by $1.870 million.
- Customer concentration shifted: Walmart represented approximately 44% of fiscal 2020 net revenue versus 50% in fiscal 2019; Amazon increased to 25% from 16%; and Fred Meyer declined to 11% from 13%.
- Online marketplace exposure increased, while sales through third-party sales representatives declined to approximately 87% of revenue from 96%.
- Supplier concentration remained high but shifted: the two largest Chinese suppliers represented 87% of purchases versus 90% in fiscal 2019; the largest supplier declined to 50% from 71%, while the second-largest increased to 37% from 19%.
- The company repurchased no shares in fiscal 2020. The prior repurchase program expired December 31, 2018.
Guidance, Outlook, Risks and Unusual Items
Management expects to expand online and ecommerce sales, develop new products, regain retail shelf space and pursue additional licensing relationships. No quantified revenue, earnings or margin guidance was provided.
- COVID-19 disrupted Chinese suppliers, logistics operations, customer orders and fourth-quarter fiscal 2020 results. Management expects adverse effects on sales, earnings and cash flows in the first and second quarters of fiscal 2021, potentially extending into the third quarter or beyond, but could not quantify the impact.
- The company implemented cost-reduction actions in response to lower demand and order cancellations or renegotiations. Future results may not be indicative of historical trends.
- All products are manufactured in China, exposing the company to tariffs, trade restrictions, currency movements, supplier interruptions, transportation disruption and geopolitical risk. The company could not quantify the future tariff impact and may be unable to pass higher costs to customers.
- Business risk is highly concentrated: Walmart, Amazon.com and Fred Meyer represented approximately 80% of fiscal 2020 revenue; audio products represented approximately 61% of gross product sales; and the two largest suppliers represented 87% of purchases.
- The company depends on cash on hand, operating cash flow and supplier credit rather than a revolving credit facility. Continuing losses or reduced supplier credit could pressure liquidity despite the substantial short-term investment balance.
- Management concluded that disclosure controls and internal control over financial reporting were effective. The auditor issued an unqualified opinion on the financial statements but did not provide an internal-control attestation because the company is a smaller reporting company.
- Management believes ordinary-course litigation will not materially affect financial condition, results or cash flows, although ultimate liability cannot be estimated with certainty.
Investor Verification Checklist
- Verify the company’s post-filing COVID-19 effects, including order cancellations, inventory levels, supply-chain availability and fiscal 2021 cash usage.
- Verify the status and forgiveness of the approximately $204,000 PPP loan.
- Assess whether Walmart, Amazon.com and Fred Meyer concentration has changed and whether customer pricing pressure is affecting margins.
- Review tariff exposure, mitigation actions, supplier credit terms and the feasibility of alternative sourcing outside China.
- Reconcile the cash and certificate-of-deposit balances with operating cash burn and confirm the availability and maturity profile of investments.
- Monitor the full valuation allowance on deferred tax assets and the ability to use approximately $7.6 million of federal net operating loss carryforwards and $15.5 million of state carryforwards.
- Review related-party transactions, controlled-company governance exemptions and the effect of Nimble’s approximately 72.4% ownership on minority shareholders.