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 nine months ended December 31, 2019, the third quarter and first nine months of fiscal 2020. The financial statements are unaudited. The company is a controlled company; its controlling shareholder and affiliates held approximately 72.4% of outstanding common stock as of December 31, 2019.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Net revenues | $2.094 million | $2.541 million | $5.142 million | $7.390 million |
| Operating loss | $(1.163) million | $(0.767) million | $(3.470) million | $(2.518) million |
| Net loss | $(0.988) million | $(0.529) million | $(2.851) million | $(1.974) million |
| Loss per diluted share | $(0.05) | $(0.02) | $(0.14) | $(0.09) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(1.826) million | $(2.527) million |
Gross margin was approximately negative 0.5% in the quarter and negative 5.1% for the nine-month period, compared with approximately 7.1% and 4.9%, respectively, in the prior-year periods. Operating margins were approximately negative 55.5% and negative 67.5%, compared with negative 30.2% and negative 34.1% in the comparable periods.
At December 31, 2019, cash and cash equivalents were $6.498 million and short-term investments were $27.964 million, primarily bank certificates of deposit maturing in March 2020. Working capital was approximately $37.2 million. Total liabilities were $3.576 million, including $2.228 million of operating and finance lease liabilities and $2.033 million of non-current income tax payable. The filing does not identify conventional borrowings or funded debt.
Total assets were $39.453 million and shareholders’ equity was $35.877 million. Inventory declined to $2.587 million from $3.520 million at March 31, 2019, while accounts receivable increased to $0.862 million from $0.604 million.
Investing activities provided $0.407 million during the first nine months, principally from net sales of short-term investments. Financing activities were nil; the prior-year period included $2.611 million of treasury-stock purchases. Cash decreased by $1.419 million from March 31, 2019.
Material changes versus the prior comparable period
- Third-quarter revenue declined 17.6% to $2.094 million; nine-month revenue declined 30.4% to $5.142 million.
- Product sales declined 15.8% in the quarter and 29.3% for the nine-month period. Houseware sales fell primarily because a key customer discontinued a model, while audio sales declined mainly from lower clock-radio sales.
- Licensing revenue decreased 53.3% in the quarter and 52.3% year to date because a licensee did not renew after its December 2018 expiration.
- SG&A increased 21.5% in the quarter and 11.3% year to date, primarily because of higher legal fees. SG&A represented 55.0% of quarterly revenue and 62.4% of nine-month revenue.
- Net losses increased to $0.988 million for the quarter and $2.851 million year to date, from $0.529 million and $1.974 million, respectively.
- The company adopted lease accounting under ASC 842 on April 1, 2019, recognizing $0.695 million of lease liabilities and $0.650 million of right-of-use assets. The adoption did not materially affect income or cash flow.
Guidance, outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management expects to expand distribution channels, develop and promote new products, increase internet and e-commerce sales, regain retail shelf space and seek new licensing relationships. Management stated that existing cash and cash sources should be sufficient to support operations for the next 12 months, although the company is generating operating cash outflows and recurring losses.
All products are manufactured by suppliers in China. Tariffs, trade restrictions, currency fluctuations, supplier pricing, supply interruptions and public health threats, including the coronavirus outbreak identified in the filing, could increase costs, disrupt production or reduce demand. Management could not quantify the potential tariff impact and may be unable to pass increased costs to customers.
Customer concentration is substantial: Walmart, Amazon and Fred Meyer accounted for approximately 88% of quarterly revenue and 80% of nine-month revenue. The two largest customers represented 77% of trade accounts receivable at December 31, 2019. The two largest suppliers provided approximately 90% of quarterly purchases and 86% of nine-month purchases.
The company recorded a valuation allowance of approximately $2.1 million against deferred tax assets. It had $5.9 million of federal and approximately $13.2 million of state net operating loss carryforwards. Routine litigation is pending, but management does not expect material adverse liability based on currently available information. Disclosure controls were determined to be effective, and no material changes in internal control were reported.
Important facts for investors to verify
- Whether revenue declines and recurring operating losses continue beyond the reported quarter.
- Whether the company can maintain sales volumes with Walmart, Amazon and Fred Meyer and diversify its customer base.
- The actual effect of China-related tariffs, the Phase One trade agreement, pricing actions and sourcing mitigation on gross margins.
- Whether the company’s cash, short-term investments and operating cash generation remain sufficient as certificates of deposit mature and losses continue.
- The renewal or replacement of expired licensing relationships and the success of new product and e-commerce initiatives.
- Potential tax liabilities, realization of net operating loss carryforwards and the adequacy of the deferred-tax valuation allowance.
- Supply-chain and production effects from China-related public health events, geopolitical developments and supplier concentration.