Business context and reporting period
The filing is The Singing Machine Company, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2016, covering its karaoke audio systems, accessories, instruments and recordings business. The request metadata names Algorhythm Holdings, Inc.; that does not match the registrant named in the filing. The company reported as a smaller reporting company.
Key financial results
| Metric | Three months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|
| Net sales | $4.86 million | $3.47 million |
| Gross profit / margin | $1.14 million / 23.5% | $0.86 million / 24.8% |
| Operating expenses | $1.72 million | $1.60 million |
| Operating loss | $571,841 | $738,620 |
| Net loss | $437,073 | $494,926 |
| Loss per share, basic and diluted | $0.01 | $0.01 |
| Net cash used in operating activities | $1.47 million | Cash flow statement reports $1.20 million provided |
Sales increased about 40%, primarily from an approximately $1.4 million shipment to a major customer for a Black Friday promotion that was not present in the prior-year quarter. Gross margin fell 1.3 percentage points: the promotional shipment carried a 15.9% margin, while cost reductions and product mix improved margins for other customers. Operating expenses rose $118,483; lower selling expense was more than offset by higher general and administrative costs, including related-party services and payroll.
Financial position, cash flow and debt
At June 30, cash was $444,515, down from $2.12 million at March 31; working capital was $4.08 million. Current assets were $12.84 million and current liabilities $8.76 million. Inventory rose to $8.37 million from $3.69 million, including $1.70 million in transit. Accounts receivable increased to $3.45 million from $1.38 million.
Operating cash use was driven principally by increases in receivables and inventory, partly offset by a $5.60 million increase in accounts payable. Investing cash use was $65,531 per the cash flow statement. Financing cash use was $133,215, including $138,537 of payments on the related-party note; the company reported no revolving-line borrowings during the quarter. The PNC facility has a $15 million peak-season limit and a $7.5 million off-season limit and expires July 14, 2017. It is subject to borrowing-base limits, a 1.1:1 fixed-charge-coverage covenant, a $150,000 annual capital-expenditure cap and a mandatory pay-down requirement.
Reported obligations included a $558,075 Ram Light related-party note, $1.92 million of subordinated related-party debt, and substantial current related-party amounts payable. Total liabilities were $10.68 million. The facility is secured by company assets; failure to comply with its covenants could adversely affect the company’s ability to meet obligations.
Outlook, risks and notable items
Management gave no specific revenue or earnings guidance. It described the business as seasonal, with approximately 85% of fiscal 2016 sales occurring in the second and third fiscal quarters combined. Results depend on order timing and shipments. Management cited risks including weaker consumer spending, vendor price increases, competitive pricing and margin pressure, unexpected working-capital needs, and the ability to comply with credit-facility covenants. It believed the facility would be adequate to maintain and grow the business during its term.
The company recorded a $169,314 income-tax benefit, including an estimated $29,000 alternative minimum tax expense; its estimated fiscal 2017 effective tax rate was approximately 33%. No legal proceedings were identified, and management reported disclosure controls as effective. The filing also reported that the company moved to OTCQX Best Market on August 2, 2016, retaining ticker SMDM.
Investor verification points
- Confirm the intended issuer: the supplied metadata says Algorhythm Holdings, while the filing identifies The Singing Machine Company, Inc.
- Reconcile the prior-year operating cash flow: the cash flow statement reports $1.20 million provided, but MD&A says $1.24 million used.
- Reconcile investing cash use: the cash flow statement reports $65,531, while MD&A reports $65,631.
- Review seasonal inventory and receivables, customer concentration and the major promotional shipment’s margin and collection status.
- Verify borrowing-base availability, covenant compliance and the repayment schedule for the PNC facility and related-party obligations.
- Assess collectability and terms of related-party receivables, payables and sales, and the realization of the deferred tax asset.