Business Context and Reporting Period
Emerson Radio Corp. designs, sources, imports and markets houseware and consumer electronic products and licenses its trademarks. This unaudited Form 10-Q covers the three months ended June 30, 2021, the first quarter of fiscal 2022, compared with the three months ended June 30, 2020. The company is a controlled company, with its controlling shareholder holding approximately 72.4% of outstanding common stock.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net revenues | $2.052 million | $1.294 million | Up 58.6% |
| Net product sales | $1.987 million | $1.234 million | Up 61.0% |
| Licensing revenue | $65,000 | $60,000 | Up 8.3% |
| Gross profit | $443,000 | $276,000 | Up $167,000 |
| Gross margin | Approximately 21.6% | Approximately 21.3% | Improved modestly |
| Operating loss | $(921,000) | $(1.201) million | Improved $280,000 |
| Net loss | $(915,000) | $(1.125) million | Improved $210,000 |
| Loss per share | $(0.04) | $(0.05) | Improved |
| Net cash used in operating activities | $(1.811) million | $(1.290) million | Higher use of $521,000 |
Cost of sales was $1.609 million, while selling, general and administrative expense was $1.364 million. SG&A represented 66.7% of revenue, compared with 114.1% in the prior-year quarter. The company reported no material interest-bearing debt other than a $204,000 Paycheck Protection Program loan, which was forgiven after quarter-end, and lease liabilities.
At June 30, 2021, cash and cash equivalents were $4.418 million and short-term investments were $24.061 million, for total cash and short-term investments of approximately $28.5 million. Working capital was approximately $31.2 million. Total liabilities were $3.287 million and shareholders’ equity was $29.530 million. Cash declined by $827,000 during the quarter, primarily because of the net loss and increases in accounts receivable and prepaid purchases, partially offset by $984,000 of proceeds from short-term investments.
Material Changes Versus the Prior Comparable Period
- Product sales increased by $753,000, driven by higher demand for clock radios and microwave ovens, including increased online shopping and time spent at home.
- Houseware sales rose 54.5% to approximately $0.8 million, and audio sales rose 65.6% to approximately $1.2 million.
- SG&A declined 7.7%, principally because legal fees decreased by approximately $130,000 to $273,000. The company stated that most of the decrease related to Emerson trademark protection.
- Interest income declined by $65,000 to $17,000 because of lower average interest rates on short-term investments.
- Operating and net losses narrowed despite continued unprofitability. The filing does not provide a clear full-year profitability target.
- Operating cash usage increased to $1.811 million from $1.290 million, reflecting working-capital investment in receivables and prepaid purchases.
- The customer mix became more concentrated: the three largest customers represented approximately 82% of net revenue, compared with 77% in the prior-year quarter. Walmart represented 44%, Fred Meyer 24% and Amazon 14%.
Guidance, Outlook, Risks and Unusual Items
Management expects to expand distribution channels, develop and promote new products, increase internet and e-commerce sales, and seek additional licensing relationships. It believes existing cash and other sources of funds will be sufficient to support operations for the next 12 months; however, the company continues to generate operating losses and negative operating cash flow.
- COVID-19 continues to create demand uncertainty, supply-chain disruption, port congestion, longer lead times and higher freight costs. Shipping costs had increased by several multiples compared with fiscal 2021 averages.
- Global component shortages, including semiconductor shortages, may cause price increases, production delays and difficulty fulfilling customer orders.
- All products are currently manufactured by suppliers in China. Tariffs, trade-policy changes and U.S.-China tensions could increase inventory and product costs, reduce gross margins or weaken demand if costs cannot be passed to customers.
- The company obtained 100% of resale products from its two largest factory suppliers during the quarter, with the largest supplier providing 83%. Supplier concentration and dependence on third-party logistics providers remain significant.
- Two customers represented 73% and 11% of trade accounts receivable at June 30, 2021. A significant customer default could materially affect results.
- The company recorded a 100% valuation allowance of approximately $3.8 million against deferred tax assets. It had approximately $12.2 million of federal and $15.3 million of state net operating loss carryforwards.
- The company had approximately $2.031 million of federal tax liability related to repatriation of foreign earnings, payable over eight years; three installments had been paid as of June 30, 2021.
- On July 5, 2021, the SBA forgave the approximately $204,000 PPP loan plus approximately $2,400 of accrued interest. The company expects to record the forgiveness as other income in the quarter ending September 30, 2021.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and no material changes in internal control over financial reporting.
Investor Verification Items
- Verify whether revenue growth in clock radios, microwave ovens and e-commerce channels is sustainable after pandemic-related demand effects.
- Monitor whether freight, component, tariff and manufacturing-cost increases pressure gross margins.
- Assess the company’s ability to reduce recurring operating losses and convert substantial short-term investments into sufficient operating cash flow.
- Review exposure to Walmart, Fred Meyer, Amazon and the two largest accounts receivable balances.
- Track supplier concentration, Chinese manufacturing dependence and the availability of alternative component and logistics sources.
- Confirm the accounting and timing of PPP loan forgiveness and any resulting tax or other income effects.