Business context and reporting period
The filing is The Singing Machine Company, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2019, covering its fiscal second quarter and first six months of fiscal 2020. The company develops, markets, and sells karaoke systems, accessories, musical instruments, and recordings. Its sales are highly seasonal, with most annual sales typically concentrated in the September–December holiday period.
Entity check: The filing identifies The Singing Machine Company, Inc., not Algorhythm Holdings, Inc. Verify that this is the intended filing.
Financial results and liquidity
| Metric | Three months ended September 30, 2019 | Six months ended September 30, 2019 |
|---|---|---|
| Net sales | $20.08 million; down 17.4% year over year | $24.89 million; down 4.8% |
| Gross profit / margin | $5.64 million / 28.1%, versus $5.21 million / 21.4% | $6.63 million / 26.6%, versus $5.60 million / 21.4% |
| Operating income (loss) | $859,000, versus $1.67 million | $(243,000), versus $340,000 |
| Net income (loss) | $624,000, versus $1.22 million | $(245,000), versus $183,000 |
| Net income (loss) per share, basic | $0.02, versus $0.03 | $(0.01), versus $0.00 |
- For the six months, operating cash flow was negative $2.22 million, compared with negative $5.40 million in the prior-year period. Investing cash flow was negative $213,000 and financing cash flow was positive $4.47 million.
- Cash was $2.25 million at September 30, 2019, up from $211,000 at March 31. Working capital was approximately $6.35 million.
- Current assets were $36.51 million and current liabilities $30.16 million. Total liabilities were $30.69 million; shareholders’ equity was $8.29 million.
- Borrowings included $4.43 million on the revolving credit facility, approximately $803,000 of subordinated related-party debt, and a $176,000 installment note. Finance and operating lease liabilities were also reported.
Material changes versus the prior comparable period
- Quarterly sales fell by $4.22 million. Management attributed about $2.74 million of the decline to lower sales to Canadian and UK distributors amid excess prior-season inventory, and about $1.53 million to a major customer’s chargeback for water-damaged goods.
- Six-month sales declined by $1.25 million. Lower distributor sales and the damage-related chargeback were partly offset by approximately $2.05 million of launch shipments of Carpool Karaoke The Mic.
- Gross margin improved in both periods, primarily from the higher-margin Carpool Karaoke The Mic product and product mix. However, operating expenses rose: by approximately $1.25 million for the quarter and $1.62 million for the six months. The six-month period consequently shifted from operating income to an operating loss.
- Six-month working-capital outflows included higher accounts receivable and seasonal inventory purchases; higher accounts payable and customer-related reserves partly offset those uses.
Outlook, risks, contingencies, and unusual items
- Credit-facility default and forbearance: At September 30, the company was in default for failing the revolving facility’s 1.1:1 fixed-charge coverage covenant. In November, PNC agreed to forbear enforcement through March 31, 2020, subject to conditions, including a $1 million availability block, specified EBITDA hurdles, and a 0.5 percentage-point pricing increase. The facility was scheduled to expire July 15, 2020.
- Management said it expected to cure the defaults, citing anticipated insurance proceeds, and intended to renew or replace the facility. It cautioned that financing efforts may not succeed or provide equally favorable terms; failure to meet conditions could materially affect the company’s ability to meet obligations.
- Damage and insurance claim: A major customer charged back approximately $1.643 million for damaged merchandise and freight. The company recorded a $1.643 million refund liability and a $1.248 million insurance receivable. Claim settlement timing and amount remained uncertain.
- Sales-return reserves increased to $3.23 million from $896,000 at March 31; management noted that approximately $1.1 million of the increase related to anticipated returns of new product from one major customer. The filing also reports $15.29 million of net inventory, including estimated future returns.
- Customer and receivable concentration is significant: three customers accounted for 84% of accounts receivable at September 30. For the six months, two customers represented 43% and 10% of sales.
- Management provided no formal sales or earnings guidance. It emphasized seasonal demand, uncertain insurance recovery, customer concentration, possible adverse economic conditions, competition, vendor price increases, and margin pressure. Management stated that inflation had not significantly affected operations.
- The company adopted the new lease accounting standard on April 1, 2019, recognizing operating lease right-of-use assets and liabilities. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for The Singing Machine Company, Inc., rather than Algorhythm Holdings, Inc.
- Track the insurance claim’s final settlement, collection timing, and any additional customer chargebacks or expenses.
- Monitor compliance with the PNC forbearance covenants, borrowing availability after the $1 million block, and the facility’s renewal or replacement before expiration.
- Assess the adequacy of sales-return and inventory estimates, including the anticipated major-customer returns.
- Evaluate seasonal cash needs, customer concentration, and whether product-launch margins can offset operating-cost growth.