Emerson Radio Corp. — Form 10-Q Summary
Business context and reporting period
Emerson designs, sources, imports and markets houseware and consumer electronic products and licenses its trademarks. The filing covers the three and six months ended September 30, 2018, representing the second quarter and first six months of fiscal 2019. The financial statements are unaudited. The company is a controlled company, with affiliates of Nimble Holdings Company Limited holding approximately 68.3% of outstanding common stock.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net revenues | $2.586 million, down 30.5% | $4.849 million, down 27.9% |
| Net product sales | $2.474 million, down 30.5% | $4.619 million, down 27.1% |
| Licensing revenue | $112,000, down 30.4% | $230,000, down 40.3% |
| Operating loss | $774,000, compared with $1.172 million | $1.751 million, compared with $2.231 million |
| Net loss | $595,000, or $0.03 per share | $1.445 million, or $0.06 per share |
| Operating margin | Approximately negative 30.0% | Approximately negative 36.1% |
| Gross margin | Approximately 5.9% | Approximately 4.2% |
| Net cash used in operating activities | Not separately provided for the quarter | $2.005 million |
- Cost of sales was $2.434 million for the quarter and $4.645 million for the six-month period. Selling, general and administrative expense was $918,000 and $1.935 million, respectively.
- Interest income increased to $202,000 for the quarter and $377,000 for the six-month period, primarily because of higher investments and interest rates.
- At September 30, 2018, cash and cash equivalents were $23.359 million, short-term investments were $15.006 million, and total current assets were $44.582 million.
- Total liabilities were $3.588 million, including $2.621 million of non-current income tax payable. The filing does not report funded debt or borrowings.
- Cash decreased by $1.737 million during the first six months. Investing activities provided $995,000, principally from net sales of certificates of deposit, while financing activities used $727,000 for share repurchases.
- Management stated that existing cash and operating cash sources should be sufficient to support operations for the next 12 months.
Material changes versus the prior comparable period
- Houseware sales declined 57.3% in the quarter and 52.4% for the six-month period. Management attributed approximately $1.4 million of quarterly and $2.4 million of six-month decline to a key customer discontinuing a microwave oven model.
- Audio sales increased 33.3% in the quarter and 48.8% year to date, driven primarily by clock radios, partially offsetting the houseware decline.
- Licensing revenue fell because a licensee relationship expired and was not renewed in December 2017.
- SG&A declined 34.5% in the quarter and 27.9% year to date due primarily to lower compensation and legal costs, as well as lower IT and insurance costs in the six-month period.
- Despite lower revenue, net loss improved from $1.042 million to $595,000 for the quarter and from $1.932 million to $1.445 million year to date. The improvement reflected lower operating expenses and higher interest income, but the company remained unprofitable.
- The company repurchased 233,649 shares for $346,898 during the quarter. As of September 30, $2.914 million remained under the repurchase authorization; subsequent purchases reduced the remaining authorization to $1.654 million as of November 9, 2018.
- The company adopted ASC 606 revenue guidance on April 1, 2018 using the modified retrospective method. Management reported no material impact on reported revenue.
Guidance, outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management plans to expand distribution, develop and promote new products, increase internet and e-commerce sales, and pursue additional licensing relationships.
- U.S. tariffs and potential additional tariffs on products imported from China may increase product costs. The company could not quantify the potential effect and may need to raise prices or modify sourcing.
- Customer concentration is significant: the four largest customers represented approximately 88% of quarterly and 87% of six-month net revenue. Wal-Mart and Amazon represented approximately 66.5% of quarterly and 67.4% of six-month gross product sales.
- Supplier concentration is also high: the two largest factory suppliers provided approximately 87% of quarterly and 85% of six-month resale products; all products are currently manufactured by suppliers in China.
- The company recorded income tax expense despite generating losses, including $23,000 in the quarter and $71,000 year to date, because of valuation allowances and changes in deferred tax assets. It had approximately $1.6 million of federal and $8.6 million of state NOL carryforwards at September 30, 2018.
- The company recorded an approximately $896,000 valuation allowance against deferred tax assets and continued evaluating the Tax Cuts and Jobs Act, including GILTI and the tax effects of future foreign earnings repatriation.
- Legal matters were described as ordinary and routine; management did not expect them to have a material adverse effect. No off-balance-sheet arrangements were reported.
- Management concluded that disclosure controls were effective as of September 30, 2018, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue recovers after the discontinued microwave model and whether audio growth can offset continued weakness in housewares.
- The financial impact of China-related tariffs, sourcing concentration, currency movements and potential price increases.
- The sustainability of operations given recurring losses and $2.005 million of operating cash outflow in the first six months.
- The collectability of receivables, given that two customers represented 79% of trade accounts receivable at September 30, 2018.
- The effect of continuing stock repurchases on liquidity, share count and available capital.
- The final accounting and cash-tax implications of the Tax Cuts and Jobs Act, including GILTI, deferred tax assets and foreign earnings repatriation.