Emerson Radio Corp. — Form 10-Q Summary
Business context and reporting period
Emerson designs, sources, imports and markets housewares and consumer electronics, primarily audio products and microwave ovens, and licenses its trademarks. This report covers the three and nine months ended December 31, 2021, the third quarter and first nine months of fiscal 2022. Comparative periods ended December 31, 2020. The interim financial statements are unaudited.
Financial performance and condition
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Net revenues | $2.574 million | $2.333 million | $6.485 million | $5.898 million |
| Operating loss | $(0.721) million | $(0.981) million | $(2.497) million | $(3.222) million |
| Net loss | $(1.164) million | $(0.945) million | $(2.711) million | $(3.026) million |
| Loss per share | $(0.06) | $(0.04) | $(0.13) | $(0.14) |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(5.544) million | $(4.068) million |
- Revenue increased 10.3% for the quarter and 10.0% for the nine-month period. Product sales rose 10.4% and 10.0%, respectively, while licensing revenue rose 8.3% in both periods.
- Gross margin improved to approximately 29.1% from 24.8% for the quarter and to approximately 26.2% from 23.4% for the nine-month period.
- Operating margin improved to approximately negative 28.0% from negative 42.1% for the quarter and to approximately negative 38.5% from negative 54.6% for the nine-month period. The company remained unprofitable.
- Quarterly net loss widened because of a $450,000 litigation settlement loss. Nine-month net loss narrowed despite the settlement, aided by higher revenue and lower selling, general and administrative expenses.
- Cash and cash equivalents were $24.744 million at December 31, 2021, compared with $5.245 million at March 31, 2021. The increase primarily reflected the liquidation of $25.045 million of short-term investments, partially offset by operating cash use.
- Working capital was approximately $29.0 million, down from $32.1 million at March 31, 2021. Accounts receivable increased to $2.619 million and inventory increased to $2.574 million.
- The company had no outstanding bank debt at December 31, 2021. Its approximately $204,000 Paycheck Protection Program loan, plus accrued interest, was forgiven in July 2021. Lease liabilities totaled approximately $469,000 for operating leases and $3,000 for finance leases.
- Shareholders’ equity was $27.734 million, down from $30.445 million at March 31, 2021, primarily due to the nine-month net loss.
Material changes versus the prior comparable period
- Audio product sales increased 32.8% for the quarter and 33.9% for the nine-month period, driven by clock radios.
- Housewares sales decreased 54.2% for the quarter and 29.6% for the nine-month period, primarily due to lower microwave oven sales.
- Selling, general and administrative expenses decreased 5.8% for the quarter and 8.8% for the nine-month period. The nine-month reduction primarily reflected lower legal and compensation costs.
- Product mix shifted materially toward audio products: audio represented approximately 89% of gross product sales for the quarter and 76% for the nine-month period, versus 73% and 62%, respectively, in the prior-year periods.
- Income from governmental assistance was $207,000 for the nine-month period in 2021, reflecting PPP loan forgiveness, compared with $83,000 of Hong Kong Employment Support Scheme assistance in the prior-year period.
- Interest income declined to $40,000 from $128,000 for the nine-month period because of lower average yields on short-term investments.
Guidance, outlook, risks and unusual items
The company did not provide quantitative earnings or revenue guidance. Management stated that existing cash and sources of cash are expected to support existing operations for the next 12 months, but continued operating cash use and losses remain important considerations.
- COVID-19 continues to affect demand, supplier production, logistics capacity, shipping costs, component availability and customer ordering patterns. Management stated that shipping costs had increased several multiples above fiscal 2021 averages.
- All products are manufactured by suppliers in China. Tariffs, trade restrictions, geopolitical tensions and higher production and freight costs could reduce sales and gross margins if costs cannot be passed through to customers.
- Supplier concentration increased: 100% of products were sourced from the two largest factory suppliers during both the quarter and nine-month period, with the largest supplier representing 81% and 83%, respectively.
- Customer concentration remained high. The three largest customers represented approximately 92% of quarterly revenue and 88% of nine-month revenue. Amazon represented 50% of quarterly revenue, while Walmart represented 37% of nine-month revenue.
- The company recorded a $450,000 loss related to a settlement with a former director. The settlement was entered into on January 3, 2022 and is presented in the December 31, 2021 results.
- Deferred tax assets remain subject to a 100% valuation allowance of approximately $4.152 million. The company had $13.2 million of federal and approximately $16.3 million of state net operating loss carryforwards.
- The company is controlled by Nimble Holdings-related entities, which had shared voting and dispositive power over approximately 72.4% of outstanding common stock. Related-party rent and utility charges totaled approximately $126,000 for the nine-month period.
- Management reported effective disclosure controls as of December 31, 2021 and no material changes to internal control over financial reporting. No material changes were reported to the prior Form 10-K risk factors.
Important facts for investors to verify
- Whether cash reserves can offset continued operating losses and negative operating cash flow.
- The sustainability of revenue growth, particularly the increase in audio products and the decline in microwave sales.
- The impact of customer concentration and any changes in purchase volumes from Walmart, Amazon and Fred Meyer.
- Whether tariffs, freight costs, semiconductor shortages and China-related supply-chain risks will further pressure margins.
- The status and cash-payment schedule of the approximately $1.808 million federal tax liability related to foreign earnings repatriation.
- The terms and financial effects of the $450,000 litigation settlement and any remaining legal contingencies.
- The company’s ability to diversify suppliers, customers, product categories and licensing relationships.