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. This unaudited report covers the three months ended June 30, 2017, the first quarter of fiscal 2018, compared with the three months ended June 30, 2016. The company is a smaller reporting company and a controlled company; affiliates of The Grande Holdings Limited controlled approximately 56.4% of outstanding common stock.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net product sales | $2.777 million | $5.471 million | Down 49.2% |
| Licensing revenue | $0.224 million | $1.163 million | Down 80.7% |
| Net revenues | $3.001 million | $6.634 million | Down 54.8% |
| Gross profit | $0.230 million | $1.536 million | Down 85.0% |
| Gross margin | 7.7% | 23.2% | Down 15.5 percentage points |
| Operating loss | $(1.059) million | $(0.084) million | Loss increased |
| Operating margin | (35.3%) | (1.3%) | Declined |
| Net loss | $(0.890) million | $(0.054) million | Loss increased |
| Net loss per diluted share | $(0.03) | $(0.00) | Lower |
| Net cash from operating activities | $(3.014) million | $2.134 million | Declined $5.148 million |
Cash and cash equivalents were $49.425 million at June 30, 2017, compared with $27.471 million at March 31, 2017 and $42.728 million at June 30, 2016. Short-term investments were $0.080 million, versus $25.078 million at March 31, 2017. Total current assets were $56.310 million and current liabilities were $1.232 million, implying working capital of approximately $55.078 million. The company reported no non-current liabilities and no debt balance in the filing.
Cash flow included $24.998 million of proceeds from the sale of short-term certificates of deposit, which largely explains the quarterly increase in cash. Operating cash use was driven principally by a $3.578 million increase in inventory. Capital expenditures were $4,000. The company repurchased 19,133 common shares for approximately $26,000 during the quarter.
Material changes versus the prior comparable period
- Houseware product sales declined 52.7% to $2.3 million, primarily because of lower microwave oven and compact refrigerator sales.
- Audio product sales declined 25.8% to $0.5 million, primarily because of lower clock-radio sales.
- Licensing revenue fell substantially following the termination of the Funai license agreement effective December 31, 2016.
- Gross margin contracted sharply as revenue declined faster than cost of sales.
- SG&A declined 13.8% to $1.282 million through reductions in consulting, director-fee, compensation and audit costs; however, SG&A increased to 42.7% of revenue from 22.4%.
- Other operating costs declined 94.7% to $7,000, primarily due to lower warranty and returns-processing costs.
- Inventory increased to $4.416 million from $0.838 million at March 31, 2017, while accounts receivable increased to $1.502 million from $1.208 million.
- The company increased its valuation allowance against deferred tax assets by approximately $364,000 to $651,000, limiting the tax benefit recognized despite the quarterly loss.
Guidance, outlook, commentary and risks
Management expects existing cash and cash sources to support current operations over the next 12 months, but cautions that the termination of the Funai license agreement will continue to have a material effect on the business, financial condition, results of operations and cash position. No formal revenue or earnings guidance was provided.
Management plans to expand distribution channels, regain retail shelf space, develop and promote new products, and increase internet and e-commerce sales. These efforts may require additional personnel, marketing and product-development investment. The company is also continuing to streamline operations and control costs.
Key risks include the company’s ability to generate sufficient revenue for profitability, customer and licensee concentration, dependence on a limited number of suppliers and third-party manufacturers, consumer-spending conditions, competition, inventory and operating-cash-flow management, foreign exchange and China production costs, intellectual-property protection, financing access, and the effectiveness of internal controls. Wal-Mart and Fred Meyer represented approximately 70.1% of gross product sales in Q1 FY2018. The two largest suppliers represented approximately 96% of purchases.
The company reported no material active litigation, no material changes to the risk factors in its fiscal 2017 Form 10-K, and no off-balance-sheet arrangements. Management concluded that disclosure controls were effective as of June 30, 2017, with no material changes to internal control over financial reporting during the quarter.
Investor verification points
- Verify the sustainability of cash after the $25.0 million reduction in short-term investments and the company’s ability to generate positive operating cash flow.
- Assess the effect of the terminated Funai license on future licensing revenue and profitability.
- Monitor customer and supplier concentration, especially the reliance on Wal-Mart, Fred Meyer and two major suppliers.
- Review the significant inventory build and related risks of obsolescence, markdowns or additional working-capital requirements.
- Evaluate whether planned e-commerce, product-development and marketing investments can restore revenue without further increasing losses.
- Review deferred tax asset realizability, the increased valuation allowance and potential future tax-examination exposure.
- Track the $5 million share-repurchase authorization; approximately $4.908 million remained available at June 30, 2017.