Emerson Radio Corp. Form 10-Q Summary
Business Context and Reporting Period
Emerson Radio Corp. designs, sources, imports and markets houseware and consumer electronic products and licenses its trademarks. This unaudited Form 10-Q covers the three and six months ended September 30, 2017, the second quarter and first half of fiscal 2018, compared with the corresponding periods of fiscal 2017.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Six Months Ended September 30, 2017 | Six Months Ended September 30, 2016 |
|---|---|---|---|---|
| Net revenues | $3.722 million | $6.029 million | $6.723 million | $12.663 million |
| Operating income (loss) | $(1.172) million | $0.327 million | $(2.231) million | $0.243 million |
| Net income (loss) | $(1.042) million | $0.165 million | $(1.932) million | $0.111 million |
| Basic and diluted EPS | $(0.04) | $0.01 | $(0.07) | $0.00 |
| Net cash provided by (used in) operating activities | Not separately provided | Not separately provided | $(3.791) million | $1.341 million |
- Second-quarter gross profit was approximately $247,000, or 6.6% of revenue, versus approximately $1.567 million, or 26.0%, in the prior-year quarter. First-half gross profit was approximately $477,000, or 7.1%, versus $3.103 million, or 24.5%.
- Operating margins were approximately negative 31.5% in the quarter and negative 33.2% for the six months, compared with positive margins of approximately 5.4% and 1.9%, respectively, in the prior-year periods.
- Cash and cash equivalents were $21.927 million at September 30, 2017, down from $27.471 million at March 31, 2017 and $39.025 million at September 30, 2016. Short-term investments were $23.175 million, consisting of certificates of deposit maturing in October 2017.
- Working capital was approximately $50.4 million at September 30, 2017. Total current liabilities were $1.147 million, and the Company reported no non-current liabilities or debt.
- Inventory increased to $3.417 million from $838,000 at March 31, 2017, primarily reflecting finished goods. Accounts receivable increased to $1.778 million from $1.208 million.
- Investing activities provided $1.899 million, primarily from sales of short-term investments. Financing activities used $3.652 million for treasury-stock repurchases.
Material Changes Versus the Prior Comparable Period
- Second-quarter net revenues declined 38.3% and first-half net revenues declined 46.9%. Net product sales fell 26.5% in the quarter and 38.6% year to date.
- Licensing revenue declined 86.4% in the quarter and 83.6% year to date following the termination of the Funai license agreement effective December 31, 2016.
- Houseware sales decreased 38.7% in the quarter and 46.3% year to date, principally due to lower microwave-oven and compact-refrigerator sales. Audio sales increased 40.7% in the quarter and 8.6% year to date, primarily from clock-radio sales.
- Sales remained highly concentrated among Wal-Mart and Fred Meyer, which represented approximately 70.5% of gross product sales in the quarter and 68.9% for the first six months.
- SG&A increased 17.2% in the quarter to $1.402 million, principally because of approximately $0.4 million of legal fees related to a trademark-infringement action. First-half SG&A was approximately unchanged at $2.684 million.
- Operating cash flow shifted from $1.341 million provided in the prior-year first half to $3.791 million used in the current-year first half, driven substantially by the net loss, a $2.579 million inventory increase and a $513,000 increase in accounts receivable.
- The Board increased the common-stock repurchase authorization from $5 million to $10 million and extended the program through June 30, 2018. The Company repurchased 2,473,918 shares during the quarter for approximately $3.652 million.
Guidance, Outlook, Risks and Unusual Items
No formal revenue or earnings guidance is provided. Management expects existing cash and operating sources to support current operations for the next 12 months, but states that the loss of the Funai license will continue to materially affect the business, financial condition, results and cash position.
- Management plans to expand distribution, regain retail shelf space, develop new products and increase internet and e-commerce sales. Management is also seeking a replacement licensee for Funai but states that the timing is uncertain given the worldwide television market.
- The Company recorded a valuation allowance against deferred tax assets, including an increase of approximately $775,000 to a total allowance of $1.063 million. It reported $1.9 million of federal and approximately $4.8 million of state NOL carryforwards.
- A change in control of the controlling shareholder, Grande, may constitute an ownership change under Internal Revenue Code Section 382 and could limit the future use of the Company’s NOLs and other tax attributes, potentially increasing future tax liabilities.
- Key risks include dependence on a small number of customers, suppliers and third-party manufacturers; uncertain customer demand; supplier cost increases; competition; foreign exchange and China-related operating risks; licensing and intellectual-property risks; and the ability to generate sufficient revenue and operating cash flow.
- Wealth Warrior Global Limited acquired approximately 65.9% of Grande on September 26, 2017 and, with affiliates, reported approximately 73.9% ownership of Grande as of October 10, 2017. Emerson remains a controlled company, with Grande-related entities holding approximately 62% of its common stock.
- Potential conflicts of interest exist because certain Emerson officers and directors also hold executive positions with Grande. Related-party charges disclosed for the quarter were not material, and no amounts were owed at September 30, 2017.
- The Company reported an ongoing trademark-infringement suit and expects additional legal costs. Management states that existing litigation is not expected to have a material adverse effect, although ultimate liability cannot be estimated with certainty.
- Management concluded that disclosure controls were effective as of September 30, 2017 and reported no material changes in internal control over financial reporting.
Investor Verification Items
- Verify whether product sales, particularly houseware sales, recover and whether customer concentration remains elevated.
- Monitor the continuing revenue and cash-flow impact of the terminated Funai license and the timing of any replacement license.
- Assess inventory growth, inventory sell-through and the risk of additional working-capital use.
- Review cash balances, the October 2017 certificate-of-deposit maturities and the pace of stock repurchases.
- Determine the ultimate impact of the Grande ownership change on Section 382 NOL limitations and future taxes.
- Track the trademark litigation, related legal spending and any resulting contingency.