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. This unaudited filing covers the three months ended June 30, 2020, the first quarter of fiscal 2021, compared with June 30, 2019. The company is a controlled company; entities affiliated with Nimble Holdings Company Limited controlled approximately 72.4% of outstanding common stock as of June 30, 2020.
Financial performance and condition
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net revenues | $1.294 million | $1.613 million | Down 19.8% |
| Net product sales | $1.234 million | $1.558 million | Down 20.8% |
| Licensing revenue | $60,000 | $55,000 | Up 9.1% |
| Gross profit | $276,000 | $263,000 | Up $13,000 |
| Gross margin | 21.3% | 16.3% | Up 5.0 percentage points |
| Operating loss | $(1.201) million | $(1.219) million | Improved $18,000 |
| Net loss | $(1.125) million | $(987,000) | Loss increased $138,000 |
| Basic and diluted loss per share | $(0.05) | $(0.05) | No change |
| Net cash used in operating activities | $(1.290) million | $(444,000) | Use increased $846,000 |
Gross profit and gross margin are calculated from reported net revenues less cost of sales. The company reclassified approximately $399,000 of prior-period costs from cost of sales to selling, general and administrative expense; this did not affect prior-period operating or net loss but limits direct comparability of expense ratios. SG&A was $1.477 million, or 114.1% of revenue, versus $1.482 million, or 91.9%, in the prior-year quarter. The operating margin was approximately negative 92.8%, versus negative 75.6%; the net margin was approximately negative 87.0%, versus negative 61.2%.
At June 30, 2020, cash and cash equivalents were $6.093 million, short-term investments were $27.198 million, and total current assets were $36.557 million. Current liabilities were $1.542 million, producing working capital of approximately $35.0 million. Total liabilities were $3.749 million and shareholders’ equity was $33.296 million. The balance sheet included a $204,000 PPP loan, $2.228 million of income-tax liabilities, and operating and finance lease liabilities totaling approximately $421,000.
Cash declined by $183,000 during the quarter to $6.093 million. Operating cash use of $1.290 million was partially offset by $903,000 of proceeds from short-term investments and $204,000 of PPP proceeds. Short-term investments consisted of bank certificates of deposit maturing in September 2020.
Material changes versus the prior comparable period
- Net product sales declined $324,000, primarily because housewares sales fell 36.1% to $0.5 million, driven by lower microwave oven sales; audio sales fell 4.9% to $0.7 million, mainly due to lower clock-radio sales.
- COVID-19 disrupted customer demand, manufacturing and distribution activities and was identified as the primary driver of the sales decline.
- Licensing revenue increased $5,000 because of a higher annual minimum royalty.
- Cost of sales decreased 24.6% to $1.018 million, while SG&A was essentially unchanged. Despite lower operating expenses in absolute terms, the company remained substantially unprofitable because of its low revenue base.
- Interest income declined $155,000 to $82,000 because of lower average interest rates on short-term investments.
- Inventory increased from $1.918 million at March 31, 2020 to $2.127 million at June 30, 2020, while cash and short-term investments together declined approximately $1.086 million.
- Supplier concentration increased: 100% of products for resale were procured from the two largest suppliers, compared with 77% in the prior-year quarter; the largest supplier represented 63% of purchases.
Guidance, outlook, risks and unusual items
The company did not provide quantitative financial guidance. Management expects COVID-19 to adversely affect sales, earnings and cash flows in the second quarter of fiscal 2021 and potentially the third quarter or beyond. It stated that the pandemic has affected orders, inventory management, supply-chain operations and third-party logistics, and that the full impact cannot be reasonably estimated.
Management is pursuing cost reductions, expanded distribution and e-commerce activity, new products, and additional licensing relationships. It believes existing cash, short-term investments and other sources of cash will support operations for the next 12 months, although the company continues to generate operating losses and negative operating cash flow.
The company received approximately $204,000 under the PPP. It intends to seek forgiveness, but cannot assure that the loan will be forgiven in whole or in part. Any unforgiven balance bears 1% interest, matures two years from issuance and has payment deferral for six months.
- COVID-19 remains the principal near-term risk, including potential demand reductions, order cancellations, factory or logistics disruptions, and higher operating costs.
- All products are manufactured by suppliers in China. Tariffs, trade restrictions, China-U.S. tensions and Hong Kong-related policy changes could increase costs, reduce margins or impair demand.
- Customer concentration is significant: Walmart, Amazon and Kroger represented approximately 77% of net revenue, including 46%, 22% and 9%, respectively.
- The company depends heavily on a limited supplier base and third-party manufacturers and logistics providers.
- The company had approximately $8.7 million of U.S. federal and $16.6 million of U.S. state net operating loss carryforwards. A valuation allowance of approximately $3.2 million was recorded against deferred tax assets.
- The company had approximately $2.2 million of federal tax liability related to deemed repatriation of foreign earnings, payable over eight years; two installments had been paid as of June 30, 2020.
- No material changes to internal control over financial reporting were reported, and management concluded that disclosure controls were effective as of June 30, 2020.
Important facts for investors to verify
- Whether COVID-19-related order cancellations, supply-chain disruptions and retailer inventory actions caused further revenue declines after June 30, 2020.
- Whether the $204,000 PPP loan qualifies for full or partial forgiveness and the resulting debt and cash-flow effects.
- Whether the company can reduce operating losses and achieve positive operating cash flow at its current revenue scale.
- The sustainability of the company’s $27.2 million short-term investment balance and its ability to fund ongoing losses and tax obligations.
- The effect of China-related tariffs and trade restrictions on product costs, gross margins, pricing and customer demand.
- The exposure created by concentration in Walmart, Amazon and Kroger and by reliance on two principal suppliers.
- The comparability of reported gross margins and expense ratios because of the $399,000 prior-period cost reclassification.