Business Context and Reporting Period
Emerson Radio Corp. designs, sources, imports and markets houseware and consumer electronic products and licenses its trademarks. This Form 10-Q covers the three months ended June 30, 2018, the first quarter of fiscal 2019, compared with the corresponding period of fiscal 2018. The financial statements are unaudited. The company is a smaller reporting company and a controlled company; affiliates of Nimble Holdings Company Limited controlled approximately 67.6% of outstanding common stock at June 30, 2018.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net product sales | $2.145 million | $2.777 million | Down 22.8% |
| Licensing revenue | $0.118 million | $0.224 million | Down 47.3% |
| Net revenues | $2.263 million | $3.001 million | Down 24.6% |
| Gross profit | $0.052 million | $0.230 million | Down 77.4% |
| Gross margin | 2.3% | 7.7% | Down 5.4 percentage points |
| Operating loss | $0.977 million | $1.059 million | Improved 7.7% |
| Operating margin | (43.2%) | (35.3%) | Down 7.9 percentage points |
| Net loss | $0.850 million | $0.890 million | Improved 4.5% |
| Basic and diluted loss per share | $0.04 | $0.03 | Loss per share increased |
| Net cash used in operating activities | $0.375 million | $3.014 million | Improved $2.639 million |
Cash and cash equivalents were $23.257 million at June 30, 2018, compared with $25.096 million at March 31, 2018 and $49.425 million at June 30, 2017. Short-term investments were $17.085 million, consisting of certificates of deposit maturing in August 2018. Total current assets were $45.893 million and total current liabilities were $1.123 million, producing working capital of approximately $44.8 million. Total liabilities were $3.994 million, primarily income tax payable; the filing does not disclose outstanding debt or borrowings.
Cash used in investing activities was $1.084 million, principally from purchases of short-term investments. Cash used in financing activities was $0.380 million for common-stock repurchases. The company had no off-balance-sheet arrangements. Management stated that existing cash and operating cash sources should be sufficient to support operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Houseware sales declined $1.0 million, or 47.1%, primarily because a key customer discontinued a microwave-oven model, reducing year-over-year sales by approximately $1.1 million.
- Audio sales increased $0.4 million, or 80.8%, mainly from higher clock-radio sales, but this increase did not offset the houseware decline.
- Licensing revenue decreased because a licensee relationship expired and was not renewed in December 2017.
- Cost of sales declined 20.2%, less than the 24.6% decline in revenue, compressing gross margin to 2.3% from 7.7%.
- Selling, general and administrative expense decreased 20.7% to $1.017 million due to lower compensation, legal, information technology, insurance and directors’ fees. SG&A nevertheless increased to 44.9% of revenue from 42.7%.
- Interest income increased to $175,000 from $104,000 because of higher short-term investments and higher average interest rates.
- The company recorded $48,000 of income tax expense versus a $65,000 tax benefit in the prior-year quarter, when the benefit related to a prior-period tax refund.
- The company repurchased 255,462 shares for approximately $380,000 during the quarter. The remaining authorization was $3.261 million at June 30, 2018, and the program was extended through December 31, 2018.
Guidance, Outlook, Risks and Unusual Items
No quantitative revenue or earnings guidance was provided. Management plans to expand distribution channels, develop and promote new products, regain retail shelf space, increase Internet and e-commerce sales, and seek additional licensing relationships. The company adopted ASC 606 revenue recognition on April 1, 2018 using the modified retrospective method; adoption did not materially affect reported revenue.
Management highlighted newly implemented and proposed U.S. tariffs on Chinese imports and potential Chinese retaliatory tariffs. All of the company’s products are currently manufactured by suppliers in China, and the company cannot yet quantify the potential cost impact. Possible responses include pricing and sourcing changes, but customer and competitor reactions remain uncertain.
- Sales were highly concentrated among Wal-Mart and Fred Meyer, which represented approximately 74.8% of gross product sales in the current quarter.
- The company purchased approximately 84% of its products from its two largest suppliers, creating supplier concentration risk.
- Key risks include insufficient revenue to achieve profitability, customer and licensee concentration, competition, consumer-demand changes, dependence on third-party manufacturers, China-related tariffs and currency fluctuations, cybersecurity threats, and limited access to financing.
- At June 30, 2018, the company had approximately $1.0 million of federal net operating loss carryforwards and $8.0 million of state net operating loss carryforwards. A valuation allowance of approximately $716,000 was recorded against deferred tax assets.
- The company continued evaluating the impact of the Tax Cuts and Jobs Act, including global intangible low-taxed income and foreign repatriation matters; the filing does not provide a final quantified impact for all related items.
- Ordinary-course litigation was disclosed, but management does not expect pending matters to materially affect financial position, results of operations or cash flows.
Facts Investors Should Verify
- Whether the loss of the discontinued microwave-oven model and the non-renewed licensee represent continuing revenue reductions.
- The sustainability of the 2.3% gross margin and whether tariff or supplier-cost increases can be passed to customers.
- Customer and supplier concentration, particularly the company’s dependence on Wal-Mart, Fred Meyer and its two largest suppliers.
- The maturity, reinvestment and liquidity availability of the $17.1 million in certificates of deposit.
- The rationale and remaining capacity for stock repurchases while the company continues to report operating and net losses.
- The final effects of tariffs, the Tax Cuts and Jobs Act, uncertain tax positions and future tax examinations.
- Management’s assertion that available cash and operating sources will fund operations for the next 12 months.