Emerson Radio Corp. — Form 10-Q Summary
Business Context and Reporting Period
Emerson designs, sources, imports and markets housewares and consumer electronics, and licenses its trademarks. The filing covers the three and nine months ended December 31, 2018, representing the third quarter and first nine months of fiscal 2019. The interim financial statements are unaudited. The Company adopted ASC 606 revenue recognition on April 1, 2018 using the modified retrospective method; adoption had no material impact.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2018 | Three Months Ended Dec. 31, 2017 | Nine Months Ended Dec. 31, 2018 | Nine Months Ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net revenues | $2.541 million | $4.236 million | $7.390 million | $10.959 million |
| Operating loss | $(0.767) million | $(0.924) million | $(2.518) million | $(3.155) million |
| Net loss | $(0.529) million | $(1.171) million | $(1.974) million | $(3.103) million |
| Loss per share | $(0.02) | $(0.05) | $(0.09) | $(0.12) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(2.527) million | $(4.849) million |
- Third-quarter revenue declined 40.0%; nine-month revenue declined 32.6%.
- Approximate operating margins were negative 30.2% in the quarter and negative 34.1% for the nine months. Approximate net margins were negative 20.8% and negative 26.7%, respectively.
- Interest income increased to $240,000 in the quarter and $617,000 for the nine months, compared with $131,000 and $365,000, respectively, in the prior periods.
- At December 31, 2018, cash and cash equivalents were $21.928 million, short-term investments were $14.031 million, and total current assets were $42.097 million.
- Total liabilities were $3.512 million, including $2.621 million of non-current income tax payable. The filing reports no debt borrowings. Current liabilities were $891,000, implying substantial current-asset coverage.
- Inventory increased to $4.618 million from $3.164 million at March 31, 2018, while accounts receivable declined to $749,000 from $1.884 million.
- Cash decreased by $3.168 million during the first nine months, to $21.928 million. Investing activities provided $1.970 million, primarily from net reductions in short-term certificates of deposit, while financing activities used $2.611 million for treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Housewares revenue fell 72.0% in the quarter and 59.6% for the nine months, primarily because a key customer discontinued a microwave-oven model, reducing year-over-year sales by approximately $1.8 million in the quarter and $4.2 million for the nine months.
- Audio revenue increased 23.7% in the quarter and 37.0% for the nine months, driven by higher clock-radio sales, partially offsetting the housewares decline.
- Licensing revenue decreased 25.5% in the quarter and 35.9% for the nine months following the non-renewal of a licensee whose agreement expired in December 2017.
- SG&A decreased 13.8% in the quarter and 23.8% for the nine months due primarily to lower compensation, legal and IT costs. However, SG&A as a percentage of revenue increased because revenue declined faster than expenses.
- Net loss improved from $1.171 million to $529,000 in the quarter and from $3.103 million to $1.974 million for the nine months, largely reflecting lower SG&A, lower tax expense and increased interest income.
- Customer concentration remained high: Walmart, Amazon and Fred Meyer represented approximately 89% of quarterly revenue and 80% of nine-month revenue. Walmart represented 51% and 49%, respectively.
- Supplier concentration also remained high: the two largest suppliers provided approximately 96% of products purchased in the quarter and 90% for the nine months; the largest supplier provided 86% and 72%, respectively.
- The Company repurchased common stock during the quarter and the authorized $10 million repurchase program expired on December 31, 2018, with approximately $1.023 million remaining under the authorization.
Guidance, Outlook, Risks and Unusual Items
Management provided no quantitative revenue, earnings or margin guidance. It expects existing cash and operating sources to support existing operations for the next 12 months, but the Company continues to incur operating losses and use cash in operations.
- Management plans to expand distribution channels, regain retail shelf space, increase Internet and e-commerce sales, develop new products and pursue additional licensing relationships.
- U.S. tariffs and potential additional tariffs on goods imported from China may increase product costs. The Company stated that it could not quantify the potential impact and may need pricing or sourcing actions.
- All of the Company’s products are currently manufactured by suppliers in China, increasing exposure to tariffs, trade restrictions, currency fluctuations, labor issues, supply disruption and geopolitical conditions.
- Revenue and receivables are materially dependent on a small number of customers, while product sourcing is materially dependent on a small number of suppliers. A loss of a key customer or supplier, or a customer failure to pay, could materially affect results.
- The Company recorded income tax expense despite generating a pretax loss and recorded an approximately $1.080 million valuation allowance against deferred tax assets. It had approximately $2.3 million of federal NOL carryforwards and $9.2 million of state NOL carryforwards.
- The Company continues evaluating the Tax Cuts and Jobs Act, including potential GILTI and foreign and state tax effects. The filing states that accounting for certain effects was not complete.
- Management reported effective disclosure controls as of December 31, 2018 and no material changes in internal control over financial reporting during the quarter. No material legal proceedings or off-balance-sheet arrangements were reported.
Investor Verification Priorities
- Verify whether sales recover after the key microwave model discontinuation and whether audio growth can offset continued housewares weakness.
- Monitor Walmart, Amazon and other major-customer purchase volumes, deductions, receivables and concentration levels.
- Assess the effect of China tariffs, sourcing changes and pricing actions on gross margin and demand.
- Reconcile inventory growth with sales levels and operating cash usage.
- Review the Company’s ability to reach profitability and sustain operations while operating cash flow remains negative.
- Confirm the final share-repurchase activity and reconcile the filing’s differing repurchase figures: the notes state 1,262,822 shares repurchased during the quarter, while the issuer-purchase table reports 1,267,325 shares.
- Track unresolved tax matters, deferred-tax valuation allowances, NOL utilization and potential effects of GILTI and the Tax Cuts and Jobs Act.