Business context and reporting period
This 10-Q is for the quarter and six months ended September 30, 2017 (the second fiscal quarter of the year ending March 31, 2018). The filing identifies the registrant as The Singing Machine Company, Inc., which develops and sells karaoke audio systems, accessories, musical instruments, and recordings. This differs from the “Algorhythm Holdings, Inc.” company name in the request metadata.
Financial performance and liquidity
| Metric | Three months ended September 30, 2017 | Six months ended September 30, 2017 |
|---|---|---|
| Net sales | $32.80 million | $36.74 million |
| Gross profit / margin | $7.74 million / 23.6% | $8.82 million / 24.0% |
| Operating income | $1.31 million | $0.52 million |
| Net income | $0.78 million | $0.26 million |
| Operating cash flow | $(13.04) million for six months |
Against the comparable 2016 periods, quarterly sales rose 17%, but quarterly net income fell from $1.81 million. Six-month sales rose about 11%, while net income fell from $1.37 million. Gross margin improved from 23.1% to 23.6% for the quarter and from 23.2% to 24.0% for the six months. Operating expenses increased sharply, primarily due to the bad-debt reserve associated with Toys “R” Us.
At September 30, cash was $288,000, working capital was approximately $6.6 million, and current assets and current liabilities were $44.38 million and $37.78 million, respectively. Accounts receivable was $28.61 million, net of a $2.46 million allowance, and inventory was $14.20 million. Operating cash use reflected seasonal receivable and inventory growth, partly offset by higher accounts payable. Investing activities used $250,000; financing activities provided $11.27 million.
Debt included $11.55 million drawn on the revolving facility, a $875,000 bank term note ($500,000 current), and approximately $815,000 of subordinated related-party debt ($452,948 current). The revolving facility’s peak-season limit is $15 million, with an option to request an additional $5 million; it falls to $7.5 million off season. The company reported compliance with its financial covenants at quarter-end.
Material changes, outlook, and risks
- Quarterly sales increased by approximately $4.7 million. Management attributed the change to promotional shipments, online-channel growth, and international sales, partly offset by delayed shipments to two customers.
- The company recorded a substantial increase in its doubtful-account allowance after Toys “R” Us filed for bankruptcy in September 2017. Management estimated approximately $2 million of unsecured receivables may be uncollectible. Toys “R” Us represented about 15% of quarterly sales and 16% of six-month sales.
- Management said shipments to Toys “R” Us had resumed post-petition, expected fiscal 2018 sales to reach its original projections, and did not anticipate a covenant breach over the next 12 months. No numeric sales or earnings guidance was provided; these statements are forward-looking and uncertain.
- Liquidity depends on seasonal working-capital financing and the PNC facility. The filing identifies risks from customer concentration, customer defaults, covenant compliance, changing consumer spending, competition, and vendor price increases. The top five customers accounted for approximately 89% of quarterly and 85% of six-month revenue.
- The business is seasonal, with the second and third fiscal quarters typically generating the majority of annual sales. The filing reports no known legal proceedings and no off-balance-sheet arrangements. It also notes that adoption of the new lease standard is expected to materially affect the balance sheet.
- Related-party activity included sales to Winglight and Cosmo and purchases of goods or services from affiliated entities; the filing describes these transactions and related balances.
Important facts for investors to verify
- Confirm the registrant identity and whether this filing is the intended company’s 10-Q; the filing names The Singing Machine Company, Inc.
- Track collection and recovery of the Toys “R” Us receivable, the adequacy of the bad-debt allowance, and any continuing impact on sales or credit availability.
- Assess seasonal receivable and inventory conversion, cash use, and dependence on the revolving facility, including compliance with borrowing-base and covenant terms.
- Monitor operating expenses and profitability: despite sales and gross-margin growth, six-month operating income and net income declined materially.
- Review customer concentration, related-party transactions, and the company’s stated fiscal 2018 outlook against subsequent results.