Emerson Radio Corp. — Form 10-Q Summary
Business context and reporting period
Emerson designs, sources, imports and markets housewares and consumer electronics, primarily microwave ovens and audio products, and licenses its trademarks. The filing covers the three months ended June 30, 2019, the first quarter of fiscal 2020, compared with the three months ended June 30, 2018. The financial statements are unaudited.
The company is controlled by Nimble Holdings Company Limited and related entities, which held approximately 72.4% of outstanding common stock as of June 30, 2019.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net product sales | $1.558 million | $2.145 million | Down 27.4% |
| Licensing revenue | $0.055 million | $0.118 million | Down 53.4% |
| Net revenues | $1.613 million | $2.263 million | Down 28.7% |
| Gross profit/(loss) | $(0.135) million | $0.052 million | Down $0.187 million |
| Operating loss | $(1.219) million | $(0.977) million | Loss increased $0.242 million |
| Net loss | $(0.987) million | $(0.850) million | Loss increased $0.137 million |
| Basic and diluted loss per share | $(0.05) | $(0.04) | Worsened $0.01 |
Gross margin declined to approximately negative 8.4% from 2.3%. Operating margin declined to approximately negative 75.6% from negative 43.2%, and net margin declined to approximately negative 61.2% from negative 37.6%.
- Cash and cash equivalents were $7.260 million at June 30, 2019, compared with $7.917 million at March 31, 2019 and $23.257 million at June 30, 2018.
- Short-term investments were $28.584 million, primarily certificates of deposit maturing in September 2019. Total cash, cash equivalents and short-term investments were approximately $35.8 million.
- Working capital was approximately $39.2 million at June 30, 2019, compared with $44.8 million at June 30, 2018.
- Operating activities used $0.444 million of cash; investing activities used $0.213 million, primarily for short-term investments; financing activities had no cash impact.
- The filing does not report conventional borrowings or bank debt. Lease liabilities totaled $0.648 million, comprising $0.643 million of operating lease liabilities and $0.005 million of finance lease liabilities. Income tax liabilities totaled $2.422 million.
- Management stated that existing cash balances and cash sources should be sufficient to support existing operations for the next 12 months.
Material changes versus the prior comparable period
- Housewares sales fell $0.4 million, or 33.5%, primarily because a key customer discontinued a microwave model, reducing year-over-year sales by approximately $0.4 million.
- Audio sales fell $0.2 million, or 19.8%, mainly because of lower clock-radio sales.
- Licensing revenue decreased $63,000 because a licensee relationship expired and was not renewed in December 2018.
- Cost of sales declined 20.9% in absolute dollars but exceeded revenue in the quarter, producing a gross loss.
- Selling, general and administrative expense increased 6.5% to $1.083 million. The increase primarily reflected legal fees of approximately $193,000 related to a company-initiated trademark infringement suit, compared with $44,000 in the prior-year quarter.
- Interest income increased to $237,000 from $175,000 because of higher investments in interest-bearing accounts and higher average interest rates.
- The company adopted ASC 842, Leases, on April 1, 2019, recognizing $695,000 of lease liabilities and $650,000 of right-of-use assets. The adoption did not materially affect reported income or cash flows.
Outlook, commentary, risks and unusual items
No quantitative earnings or revenue guidance was provided. Management plans to expand distribution channels, develop new products, regain retail shelf space, increase e-commerce and Internet sales, and pursue additional licensing relationships. The company has engaged Leveraged Marketing Corporation of America to assist with potential licensees.
- All products are manufactured by suppliers in China. The company reported that U.S. tariffs, including increases implemented in 2019 and proposed additional tariffs, could materially increase product and inventory costs, reduce gross margins and weaken demand. The potential financial impact was not quantifiable at the filing date.
- Management is seeking to mitigate tariff effects through supplier negotiations, pricing, sourcing strategies and inventory built up before tariff increases, but cannot assure that these actions will succeed.
- Customer concentration is substantial: Walmart, Amazon and Fred Meyer represented approximately 73% of net revenue in the quarter. Walmart alone represented 39%.
- The two largest suppliers provided approximately 77% of products purchased for resale, with the largest supplier accounting for 42%.
- Microwave ovens and audio products each represented approximately 49% of gross product sales.
- The company has $4.4 million of federal net operating loss carryforwards and approximately $11.7 million of state net operating loss carryforwards. A valuation allowance of approximately $1.680 million was recorded against deferred tax assets.
- Pending legal matters are described as ordinary and routine, except for the trademark infringement litigation initiated by the company. Management believes existing matters will not materially affect financial position, results or cash flows, although ultimate legal liability cannot be estimated with certainty.
- Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether sales recover after the key customer’s microwave model discontinuation and whether the company can regain retail shelf space.
- Whether tariff costs can be passed to customers or mitigated without further reducing demand and gross margins.
- The sustainability of liquidity as the company continues to incur operating losses and use cash.
- The maturity and reinvestment of the $28.6 million short-term investment portfolio in September 2019.
- Customer and supplier concentration, including the financial impact of losing a major customer or supplier.
- The status and potential cost of the trademark infringement litigation.
- Whether licensing revenue declines further following the non-renewal of a licensee.