EMERSON RADIO CORP annual report, FY2019

Emerson Radio Corp. — Fiscal 2019 Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2019, compared with fiscal 2018. The requested period is identified as “2018 Q4,” but the filing is an annual report for fiscal 2019. Emerson designs, sources, imports, markets and licenses houseware and consumer electronic products, primarily in the United States under the Emerson brand.

Financial performance and liquidity

Metric	Fiscal 2019	Fiscal 2018	Change
Net product sales	$8.577 million	$14.363 million	Down 40.3%
Licensing revenue	$0.405 million	$0.659 million	Down 38.5%
Net revenues	$8.982 million	$15.022 million	Down 40.2%
Cost of sales	$8.760 million	$13.921 million	Down 37.1%
Operating loss	$(3.648) million	$(3.882) million	Loss narrowed
Net loss	$(2.437) million	$(6.851) million	Loss narrowed
Basic and diluted loss per share	$(0.11)	$(0.27)	Improved
Net cash used in operating activities	$(2.190) million	$(5.156) million	Improved

Approximate gross margin was 2.5% in fiscal 2019 versus 7.3% in fiscal 2018; the filing cautions that gross margin may not be comparable with distributors using different cost classifications.
Operating margin was approximately negative 40.6%, compared with negative 25.8% in fiscal 2018. Net margin was approximately negative 27.1%, compared with negative 45.6%.
Interest income increased to $859,000 from $492,000, primarily because of higher rates on certificates of deposit.
Cash and cash equivalents declined to $7.917 million from $25.096 million. Short-term investments increased to $28.371 million from $16.000 million, largely offsetting the cash decline.
Total current assets were $41.253 million and current liabilities were $960,000, producing working capital of approximately $40.3 million. The company had no outstanding letters of credit and no disclosed debt or credit facility.
Cash used in investing activities was $12.371 million, primarily from net purchases of short-term certificates of deposit. Cash used in financing activities was $2.618 million for treasury-stock repurchases.
Shareholders’ equity decreased to $38.728 million from $43.783 million, reflecting the fiscal 2019 net loss and share repurchases.

Material changes versus fiscal 2018

Houseware product sales fell 64.5% to $3.6 million, principally because of lower sales of microwave ovens, compact refrigerators and wine products, partly offset by higher toaster-oven sales.
Audio product sales increased 16.8% to $5.0 million, driven primarily by clock radios.
Walmart, Amazon.com and Fred Meyer represented approximately 50%, 16% and 13% of fiscal 2019 net revenue, respectively, versus 62%, 11% and 11% in fiscal 2018.
Sales through third-party sales representative organizations increased to approximately 96% of net revenue from 31%. One organization represented approximately 55% of fiscal 2019 net revenue and another represented 32%.
SG&A declined 21.9% to $3.843 million, but increased to 42.8% of revenue from 32.8% because revenue contracted faster than expenses. Fiscal 2019 SG&A included $346,000 of legal fees related to a trademark-infringement suit, compared with $489,000 in fiscal 2018.
Licensing revenue declined partly because one licensee did not renew its agreement when it expired on December 31, 2018. The company had one license agreement remaining at year-end.
The company repurchased 1,756,436 shares for $2.618 million during fiscal 2019. The $10 million repurchase authorization expired on December 31, 2018.
The company adopted ASC 606 revenue recognition guidance on April 1, 2018 using the modified retrospective method; management reported no material impact.

Guidance, outlook, risks and unusual items

Management intends to expand distribution, regain retail shelf space, develop new products, increase internet and e-commerce sales, and pursue additional licensing relationships through LMCA. No quantitative revenue or earnings guidance was provided.
Management believes cash on hand and existing sources of cash will support current operations for the next 12 months, but operating cash flow was negative in fiscal 2019.
All products are manufactured by suppliers in China. Itoma and Midea supplied approximately 71% and 19% of purchases, respectively, in fiscal 2019.
Tariffs on Chinese imports, including increases from 10% to 25% in May 2019, may increase product costs and pressure pricing and margins. The company stated that it could not quantify the potential impact.
Customer concentration is substantial: the three largest customers accounted for approximately 79% of fiscal 2019 net revenue, and the company has no long-term customer contracts.
Product concentration remains significant. Microwave ovens generated approximately 39% of gross product sales and audio products approximately 57%, according to the risk disclosures; the filing contains an apparent inconsistency elsewhere regarding the audio-product percentage.
The company depends on third-party logistics providers, sales representatives and a limited number of suppliers. Loss of a major customer, representative, supplier or logistics provider could materially affect revenue, liquidity and operating results.
The company is a controlled company: Nimble Holdings Company Limited beneficially owned approximately 72.4% of outstanding common stock as of June 26, 2019. Emerson relies on exemptions from certain NYSE American governance requirements.
Management reported effective disclosure controls and internal control over financial reporting. Because Emerson is a smaller reporting company, the auditor did not provide an internal-control attestation.
Pending litigation is described as ordinary and routine, and management does not expect it to have a material adverse effect. The filing does not provide a clear quantified contingency value.
The company expects adoption of lease accounting guidance in fiscal 2020 to add estimated lease liabilities of $625,000 to $764,000 and right-of-use assets of $585,000 to $715,000, without material income-statement or cash-flow impact.

Important facts for investors to verify

Whether the company can restore product sales and achieve profitability after the 40% revenue decline.
The actual effect of U.S.-China tariffs, supplier pricing, freight costs and any related customer price increases on gross margins.
Dependence on Walmart, Amazon.com, Fred Meyer and the two largest sales representative organizations.
Supplier concentration in China, especially the 71% purchase concentration with Itoma.
The composition, maturity and liquidity of the $28.371 million certificate-of-deposit portfolio relative to the $7.917 million cash balance.
Progress in replacing the expired license agreement and securing new licensing revenue.
The inconsistency in the filing’s product-concentration disclosures, particularly the stated percentage of fiscal 2019 audio-product sales.
Potential tax effects, including the $1.365 million valuation allowance against deferred tax assets and approximately $3.3 million of federal net operating loss carryforwards.