Emerson Radio Corp. — Form 10-Q Summary
Business Context and Reporting Period
Emerson designs, sources, imports and markets housewares and consumer electronics, including microwave ovens, other housewares and audio products, and licenses its trademarks. This Form 10-Q covers the three and six months ended September 30, 2019, the second quarter and first six months of fiscal 2020, compared with the corresponding fiscal 2019 periods. The financial statements are unaudited.
Financial Performance and Liquidity
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Six months ended September 30, 2019 | Six months ended September 30, 2018 |
|---|---|---|---|---|
| Net revenues | $1.435 million | $2.586 million | $3.048 million | $4.849 million |
| Net product sales | $1.379 million | $2.474 million | $2.937 million | $4.619 million |
| Licensing revenue | $56,000 | $112,000 | $111,000 | $230,000 |
| Gross profit/(loss) | $(115,000) | $144,000 | $(251,000) | $184,000 |
| Gross margin | (8.0%) | 5.6% | (8.2%) | 3.8% |
| Operating loss | $(1.088) million | $(774,000) | $(2.307) million | $(1.751) million |
| Net loss | $(876,000) | $(595,000) | $(1.863) million | $(1.445) million |
| Loss per share | $(0.04) | $(0.03) | $(0.09) | $(0.06) |
- SG&A expense increased 6.0% to $973,000 in the quarter and 6.3% to $2.056 million year to date, primarily due to legal and consulting costs.
- Interest income increased to $222,000 in the quarter and $459,000 year to date, supported by higher short-term investments and interest rates.
- Cash and cash equivalents were $5.084 million at September 30, 2019, down from $7.917 million at March 31, 2019 and $23.359 million at September 30, 2018. Short-term investments were $29.814 million, primarily bank certificates of deposit maturing in December 2019.
- Working capital was approximately $38.1 million at September 30, 2019, compared with $43.6 million at September 30, 2018. Total current assets were $39.196 million and current liabilities were $1.073 million.
- Operating cash flow was negative $1.390 million for the six months, investing cash flow was negative $1.443 million due to purchases of short-term investments, and financing cash flow was zero.
- The filing reports no conventional borrowings or off-balance-sheet arrangements. Lease liabilities totaled $592,000, comprising $587,000 of operating lease liabilities and $5,000 of finance lease liabilities. Income tax liabilities totaled $2.227 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 44.5%, and six-month revenue declined 37.1%. Product sales fell 44.3% in the quarter and 36.4% year to date.
- Housewares sales declined 53.4% in the quarter and 42.8% year to date, principally because a key customer discontinued a microwave model. Audio sales declined 37.3% in the quarter and 30.3% year to date, primarily due to lower clock-radio sales.
- Licensing revenue declined 50.0% in the quarter and 51.7% year to date following the non-renewal of a licensee whose agreement expired in December 2018.
- Gross margin deteriorated from positive to negative, while operating losses increased to 75.8% of revenue in the quarter and 75.7% year to date. The filing attributes the operating deterioration primarily to lower sales and increased SG&A.
- Inventory declined to $2.621 million from $3.520 million at March 31, 2019, contributing positively to operating cash flow.
- The Company adopted ASC 842, Leases, on April 1, 2019, recognizing $650,000 of right-of-use assets and $695,000 of lease liabilities. The income statement and cash flow statement were not materially affected.
Outlook, Commentary, Risks and Unusual Items
- Management expects to expand distribution channels, develop new products, regain retail shelf space, grow internet and e-commerce sales, and pursue new licensing relationships. The filing provides no quantified revenue, earnings or margin guidance.
- The Company states that existing cash and operating cash sources are expected to support operations for the next 12 months, but it continues to generate operating losses and negative operating cash flow.
- All products are manufactured by suppliers in China. Tariffs, including increased List 3 tariffs and tariffs imposed on certain List 4 products, may increase inventory and cost of sales. The Company is pursuing pricing, supplier negotiations, sourcing strategies and inventory drawdowns, but cannot quantify the ultimate impact or ensure successful cost recovery.
- Customer concentration is substantial: Walmart, Amazon and Fred Meyer represented approximately 78% of quarterly net revenue and 75% of six-month net revenue. Supplier concentration is also high, with the two largest suppliers providing 100% of quarterly purchases and 82% of six-month purchases.
- The Company is controlled by Nimble Holdings-related entities, which held approximately 72.4% of outstanding common stock. Related-party rental and utility charges were approximately $43,500 for the quarter and $87,000 year to date.
- At September 30, 2019, the Company had approximately $5.4 million of federal and $12.7 million of state NOL carryforwards. A valuation allowance of approximately $1.960 million was recorded against deferred tax assets, so the Company recognized tax expense despite reporting a net loss.
- Management reported effective disclosure controls as of September 30, 2019 and no material changes to internal control over financial reporting. Routine litigation was not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether revenue declines and negative gross margins continue, particularly following the microwave model discontinuation and lower clock-radio sales.
- The timing and effect of U.S.-China tariffs, including the Company’s ability to pass costs to customers or diversify sourcing.
- Cash conversion and liquidity after the December 2019 maturity of approximately $29.8 million of certificates of deposit.
- Customer and supplier concentration, especially dependence on Walmart, Amazon, Fred Meyer and China-based manufacturers.
- The status of licensing renewals and the Company’s ability to restore licensing revenue.
- Whether management’s expectation of sufficient liquidity for the next 12 months remains valid in light of continued losses and negative operating cash flow.