Algorhythm Holdings, Inc. (filing registrant: The Singing Machine Company, Inc.) — Form 10-Q
Reporting period: Three months ended June 30, 2018, compared with the three months ended June 30, 2017. The filing identifies the registrant as The Singing Machine Company, Inc.; the company name in the request metadata differs.
Business context and financial results
The company develops, markets, and sells karaoke audio systems, accessories, musical instruments, and recordings through retailers and distributors. Its business is seasonal, with most sales historically occurring in the second and third fiscal quarters.
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 |
|---|---|---|
| Net sales | $1.837 million | $3.940 million |
| Gross profit / margin | $391,000 / 21.3% | $1.079 million / 27.4% |
| Operating loss | $1.331 million | $787,000 |
| Net loss | $1.034 million | $527,000 |
| Basic and diluted loss per share | $0.03 | $0.01 |
| Cash used in operating activities | $1.501 million | $2.333 million |
| Cash used in investing activities | $282,000 | $185,000 |
Material changes and financial position
- Sales fell about 53%. Management attributed approximately $936,000 of the decline to lost Toys “R” Us sales following its bankruptcy, approximately $873,000 to later shipment timing for European and Canadian distributors, and the remainder mainly to lower replenishment orders from a major customer.
- Gross margin declined 6.1 percentage points. Management attributed about 4.6 points to packaging and spare-parts purchase timing and one-time costs of moving production to another vendor, and about 1.5 points to the loss of higher-margin Toys “R” Us sales.
- Operating expenses declined approximately $143,000, but the lower gross profit drove a larger operating loss. Net loss increased by approximately $507,000 year over year.
- Cash was $118,000 at June 30, 2018, versus $814,000 at March 31, 2018. The filing reports working capital of approximately $4.815 million. Net cash declined $696,000 during the quarter, despite $1.088 million of net financing cash inflow, principally from the revolving credit facility.
- At quarter end, the company had $1.090 million outstanding on its revolving credit facility, a $625,000 bank term note, approximately $815,000 of subordinated related-party debt, and approximately $41,000 of capital lease obligations. Current liabilities were $5.938 million and total liabilities were $5.965 million.
- Inventory was $8.835 million. Approximately $1.0 million of inventory associated with unshipped Toys “R” Us commitments remained on hand; management expected to sell it during the current fiscal year’s peak season.
Liquidity, outlook, and risks
- Management said available revolving-credit capacity would be adequate to meet obligations for the next 12 months. This depends in part on seasonal sales, inventory reduction, and continued lender and related-party support; no formal revenue or earnings guidance was provided.
- In August 2018, PNC amended and waived covenant violations, allowing a one-time $550,000 credit for Toys “R” Us-related bad-debt expense in the fixed-charge coverage calculation and increasing the annual capital-expenditure limit to $375,000. The filing reports a $10,000 amendment fee.
- The parent company agreed to defer related-party trade debt and subordinated-debt payments until after peak season and suspend approximately $99,000 of service and development fees for July through December 2018. Three scheduled $123,000 subordinated-debt installments had not been made because of cash-flow effects from the Toys “R” Us bankruptcy.
- The revolving facility expires July 2020, with stated maximum availability of $15 million during peak season (with possible additional availability upon request) and $7.5 million off-season, subject to borrowing-base limits and covenants. Management warned that covenant noncompliance or default could materially impair the company’s ability to meet obligations.
- ASC 606 was adopted effective April 1, 2018 using the full retrospective approach. Management reported no effect on retained earnings or net income, but reclassified estimated returned-goods inventory and sales-return liabilities. The company also said the future lease-accounting standard is expected to have a significant balance-sheet impact because it has long-term real-estate leases.
- Management reported no known material legal proceedings beyond ordinary-course matters. The company identified general risks including customer demand, competition, economic conditions, margins, cash requirements, and the timing of customer orders and shipments.
Important facts for investors to verify
- Whether peak-season sales and inventory reductions materialize as expected, including the planned sale of Toys “R” Us-related inventory.
- Current borrowing-base availability, covenant compliance after the August waiver, and the company’s ability to meet required lender paydowns and debt installments.
- Whether related-party payment deferrals and the six-month fee suspension remain in effect, and how related-party balances and terms evolve.
- The adequacy and realizability of inventory, customer-return, and receivables reserves, particularly given the steep sales decline and customer bankruptcy.
- The discrepancy between the request’s company name and the filing’s registrant name, and the intended reporting-period label; the filing itself covers the quarter ended June 30, 2018.