EMERSON RADIO CORP annual report, FY2018

Emerson Radio Corp. — Fiscal 2018 Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2018, compared with fiscal 2017. The request references “2017 Q4,” but the supplied filing is an annual Form 10-K for fiscal 2018.

Business Context

Emerson designs, sources, imports, markets and licenses houseware and consumer electronic products under the Emerson brand. Products are manufactured entirely by third parties in China and sold primarily in the United States through mass merchandisers and online marketplaces. The company also receives trademark licensing revenue.

Fiscal 2018 net revenue was concentrated among Walmart, Amazon.com and Fred Meyer, which represented approximately 62%, 11% and 11%, respectively.
Microwave ovens and compact refrigerators represented approximately 69% of fiscal 2018 gross product sales; audio products represented approximately 30%.
Two suppliers represented approximately 93% of purchases: Midea at 59% and Itoma at 34%.

Financial Performance

Metric	Fiscal 2018	Fiscal 2017	Change
Net product sales	$14.363 million	$17.635 million	Down 18.6%
Licensing revenue	$0.659 million	$3.616 million	Down 81.8%
Net revenues	$15.022 million	$21.251 million	Down 29.3%
Cost of sales	$13.921 million	$16.277 million	Down 14.5%
Operating loss	$3.882 million	$0.326 million	Loss increased
Net loss	$6.851 million	$0.237 million	Loss increased
Basic and diluted loss per share	$0.27	$0.01	Loss increased
Net cash used in operating activities	$5.156 million	Cash provided of $1.869 million	Adverse change

Margins: Cost of sales was 96.9% of net product sales versus 92.3% in fiscal 2017. Calculated gross profit was approximately $1.101 million, or 7.3% of net revenue. The operating loss margin was approximately 25.8% and the net loss margin was approximately 45.6%. The filing notes that its gross-margin presentation may not be comparable with distributors that classify certain operating costs differently.

Houseware product sales declined 30.0% to $10.1 million, primarily because of lower microwave and compact refrigerator sales, competitive pricing and weaker retail sell-through. Audio product sales increased 32.9% to $4.3 million, primarily due to clock radios.

Liquidity, Capital Resources and Balance Sheet

Cash and cash equivalents were $25.096 million at March 31, 2018, compared with $27.471 million at March 31, 2017.
Short-term investments were $16.0 million, primarily certificates of deposit, compared with $25.078 million in the prior year.
Total current assets were $47.064 million and total current liabilities were $1.103 million, producing reported working capital of approximately $46.0 million.
Total liabilities were $3.974 million, including $2.871 million of federal tax payable. The filing does not report conventional bank debt or a credit facility.
Net cash used in operations was $5.156 million. Investing activities provided $9.074 million, primarily from net redemptions of certificates of deposit. Financing activities used $6.293 million for treasury-stock purchases.
Management stated that cash on hand and existing sources of cash should be sufficient to support operations for the next 12 months.
The company had no outstanding letters of credit, no capital expenditure commitments other than normal purchase orders, and no SEC-defined off-balance-sheet arrangements.

Material Changes and Unusual Items

Licensing revenue fell sharply following termination of the Funai license agreement effective December 31, 2016. Funai represented approximately 78% of fiscal 2017 licensing revenue and its loss materially affected revenue, earnings and business prospects.
Fiscal 2018 income-tax expense was $3.461 million despite a pretax loss of $3.390 million. Approximately $3.1 million related to a provisional one-time transition tax under the Tax Cuts and Jobs Act on undistributed foreign earnings, and approximately $0.3 million related to remeasurement of deferred tax assets.
Fiscal 2018 SG&A included approximately $489,000 of legal fees for a trademark infringement suit and $88,000 of legal and advisory fees for the board’s Special Committee.
The company repurchased 4.267 million shares for approximately $6.293 million during fiscal 2018. The remaining authorization was approximately $3.641 million at March 31, 2018; the program was later extended to December 31, 2018.
Online marketplace activity expanded materially: Amazon.com represented approximately 11% of fiscal 2018 revenue versus 3% in fiscal 2017.
Direct Import Program sales were less than 1% of fiscal 2018 net product sales, compared with none in fiscal 2017, limiting the liquidity benefit historically associated with direct imports.

Outlook, Risks and Contingencies

Management plans to expand distribution, develop new products, increase e-commerce and online marketplace sales, pursue new licensing relationships and continue streamlining operating costs. No specific quantitative revenue, earnings or margin guidance was provided.

Customer concentration is substantial, and customer orders are not governed by long-term contracts. A loss or reduction in business from Walmart, Amazon.com or Fred Meyer could materially affect results.
The company depends on Chinese suppliers and third-party manufacturers, logistics providers and sales representatives. Tariffs, currency changes, trade restrictions, shipping disruptions, labor issues and supplier failures could increase costs or interrupt supply.
Operating cash flow is the principal funding source. The company does not maintain a conventional credit facility and relies on cash on hand, operating cash flow and supplier credit.
Competition, retailer private-label products, pricing pressure, inventory risk and changing consumer preferences could further reduce sales or margins.
Potential product-liability claims, cybersecurity incidents, intellectual-property disputes and tax examinations could create additional costs. Management believes currently pending litigation is not expected to have a material adverse effect.
Nimble Holdings and affiliates controlled approximately 67.5% of outstanding common stock as of June 15, 2018. The company is a controlled company and relies on exemptions from certain NYSE American governance requirements.
The board’s Special Committee continues to explore strategic alternatives, but the filing provides no assurance that a transaction will occur or that any transaction would benefit shareholders.

Investor Verification Items

Verify the sustainability of revenue after the Funai license termination and the company’s progress in replacing lost licensing revenue.
Assess customer concentration, particularly Walmart’s 62% share of fiscal 2018 revenue and the absence of long-term customer contracts.
Review whether negative operating cash flow, increased inventory and reduced cash balances can be reversed without external financing.
Confirm the final accounting for the provisional Tax Cuts and Jobs Act transition tax and deferred-tax remeasurement.
Evaluate the effect of potential China-related tariffs, supplier concentration and logistics disruptions on product costs and gross margins.
Review the remaining stock-repurchase authorization against the company’s cash needs and operating losses.
Consider the governance and minority-shareholder implications of concentrated ownership and the ongoing strategic-alternatives process.