EMERSON RADIO CORP annual report, FY2017

Emerson Radio Corp. Fiscal 2017 Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2017, compared with fiscal 2016. The filing was dated June 26, 2017; the request metadata identifies the period as 2016 Q4, but the filing is an annual report for fiscal 2017.

Business Context

Emerson designs, sources, imports, markets and licenses houseware and consumer electronic products, primarily under the Emerson brand. Products are manufactured by third parties in China and sold primarily in the United States through mass retailers, with licensing activities providing additional revenue.

Fiscal 2017 net revenue was highly concentrated among Walmart, at approximately 53%, and Fred Meyer, at approximately 17%.
Microwave ovens and compact refrigerators represented approximately 82% of fiscal 2017 gross product sales, including approximately 71% from microwaves.
Approximately 98% of product purchases came from the three largest suppliers, with Midea representing approximately 75% of purchases.
The company is a controlled company; Grande and related parties beneficially controlled approximately 56.3% of common stock as of March 31, 2017.

Financial Performance and Key Metrics

Metric	Fiscal 2017	Fiscal 2016	Change
Net product sales	$17.635 million	$41.035 million	Down 57.0%
Licensing revenue	$3.616 million	$4.716 million	Down 23.3%
Net revenue	$21.251 million	$45.751 million	Down 53.6%
Cost of sales	$16.277 million	$38.819 million	Down 58.1%
Operating loss	$0.326 million	$1.405 million	Improved
Net loss	$0.237 million	$0.968 million	Improved
Basic and diluted loss per share	$0.01	$0.04	Improved
Cash flow from operations	$1.869 million	$6.766 million	Down 72.4%

Houseware product sales declined 62.9% to $14.4 million, primarily because of customer product discontinuations, lower retail sell-through and competitive pricing.
Audio product sales increased 45.4% to $3.2 million, driven by clock radios.
Cost of sales was 92.3% of net product sales versus 94.6% in fiscal 2016, implying product gross margins of approximately 7.7% and 5.4%, respectively. The filing cautions that reported gross margin may not be comparable with other distributors because certain operating costs are classified outside cost of sales.
Operating margin improved to approximately negative 1.5% from negative 3.1%, while net margin improved to approximately negative 1.1% from negative 2.1%.
Interest income increased to $261,000 from $178,000. There was no interest expense reported.

Liquidity, Cash Flow and Capital Structure

Cash and cash equivalents were $27.5 million at March 31, 2017, compared with $30.1 million at March 31, 2016.
Short-term investments, primarily certificates of deposit, were $25.1 million versus $20.2 million. Approximately $3.0 million of certificates of deposit matured on May 16, 2017 and were not reinvested as of the filing.
Working capital was approximately $56.0 million, compared with $55.7 million in the prior year.
Total liabilities were $921,000, and the filing reports no outstanding debt or credit facilities other than the ability to obtain fully cash-collateralized letters of credit. No letters of credit were outstanding at year-end.
Operating cash flow was $1.9 million. Investing activities used $4.4 million, primarily for $4.9 million of short-term certificate-of-deposit investments. Financing activities used $66,000 for treasury stock purchases.
Management believes cash on hand and existing cash sources will support operations for the next 12 months, but the company relies principally on operating cash flow and cash on hand rather than committed financing.
The company repurchased 63,980 shares for approximately $66,000 during fiscal 2017 under a $5 million authorization, which was extended through December 31, 2017.

Material Changes Versus the Prior Period

Net revenue fell by $24.5 million, primarily due to a 57.0% decline in product sales and a 23.3% decline in licensing revenue.
A former key customer discontinued carrying Emerson-branded microwave and compact refrigeration products beginning in spring 2016.
The Funai license agreement, historically the company’s most significant licensing relationship, terminated effective December 31, 2016. Funai represented approximately 78% of fiscal 2017 licensing revenue and paid a $2.8 million non-refundable minimum royalty through the termination date.
Direct Import Program sales fell from 47% of net product sales in fiscal 2016 to none in fiscal 2017, increasing the company’s reliance on domestic inventory and working capital.
Selling, general and administrative expense declined 36.0% to $5.1 million as the company reduced corporate and personnel costs. The company also reported $0.2 million of fiscal 2017 legal and advisory costs related to its Special Committee.
Income tax expense was $172,000 versus a $259,000 benefit in fiscal 2016, including an approximately $288,000 valuation allowance against deferred tax assets.

Outlook, Management Commentary, Risks and Unusual Items

Management did not provide quantitative revenue or earnings guidance. The company plans to expand existing distribution channels, develop and promote new products, pursue internet and e-commerce sales, and continue reducing operating costs. Management is also evaluating replacement licensing and distribution relationships following the Funai termination.

The loss of Funai may materially reduce future licensing revenue, product volume and U.S. market presence; the filing states there is no assurance that a replacement licensee will be secured.
Customer concentration is significant, and purchases are made through purchase orders without long-term customer contracts. Loss or material reduction in sales to Walmart or Fred Meyer could materially affect results.
Supplier and manufacturing concentration creates exposure to supply interruptions, pricing changes, China-related risks, tariffs, transportation disruptions, currency fluctuations and production delays.
The company has limited product diversification, intense competition and exposure to retailer private-label products and shelf-space decisions.
The company relies on third-party logistics providers for warehousing and distribution, whose arrangements may be terminable for convenience and whose disruption could delay shipments.
Cash balances exceed applicable FDIC insurance limits, with approximately $27.0 million of U.S. cash, cash equivalents and restricted cash above insured limits at March 31, 2017.
The company maintains a Special Committee to explore strategic alternatives, but no transaction is assured and the potential value of any transaction is uncertain.
Pending legal matters are described as ordinary and routine; management does not expect them to have a material effect. The filing reports no off-balance-sheet arrangements.

Important Facts for Investors to Verify

Whether new licensees or distribution partners replace the revenue and market presence formerly provided by Funai.
Whether Walmart and Fred Meyer maintain purchase volumes and whether customer concentration changes.
Whether product sales recover through new products, e-commerce and expanded distribution channels.
Whether operating cash flow remains positive after the end of the Funai agreement and with no committed credit facility.
Whether the company can reduce supplier, product and geographic concentration, particularly its dependence on Midea and Chinese manufacturing.
The status and potential outcome of the Special Committee’s strategic alternatives process.
The recoverability of deferred tax assets and the effect of the $288,000 valuation allowance.
The use of the remaining stock repurchase authorization and its effect on liquidity and share count.