Business context and reporting period
The supplied filing is The Singing Machine Company, Inc.’s unaudited Form 10-Q for the quarter and six months ended September 30, 2012. The request metadata names Algorhythm Holdings, Inc.; that does not match the registrant identified in the filing. The company designs, markets, and sells karaoke equipment, accessories, and music recordings. Sales are seasonal, with peak activity generally in the second and third fiscal quarters.
Financial results and position
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Net sales | $14.38 million | $16.14 million | $14.15 million / $15.94 million |
| Gross profit and margin | $3.47 million; 24.1% | $3.91 million; 24.3% | $3.19 million; 22.6% / $3.62 million; 22.7% |
| Operating income | $1.44 million | $0.96 million | $1.47 million / $0.96 million |
| Net income | $1.43 million | $0.95 million | $1.47 million / $0.96 million |
| Basic and diluted EPS | $0.04 | $0.03 | $0.04 / $0.03 |
| Operating cash flow | Not presented quarterly | $2.67 million provided | $1.69 million used |
Six-month operating cash flow benefited from higher accounts payable and related-party balances, partly offset by increased receivables and inventory. Investing cash flow was negative $109,262, primarily for property and equipment; financing cash flow was zero. Cash was $2.83 million at September 30, 2012, versus $267,465 at March 31, 2012. Current assets of $16.15 million were slightly below current liabilities of $16.25 million, a $98,742 working-capital deficit. Total assets were $16.65 million and shareholders’ equity was $399,848.
The filing reports no outstanding bank debt at September 30. Amounts due to related parties were $6.64 million, primarily trade payables, while amounts due from related parties were $960,442. Accounts payable was $7.98 million; inventory was $7.52 million, including $3.26 million in transit. The six-month tax provision was zero, with net operating losses cited as sufficient to offset income. Deferred tax assets of approximately $3.6 million were fully valuation-allowanced.
Material changes versus prior comparable periods
- Sales rose 1.6% for the quarter and 1.3% for six months. Management attributed the increase to new North American retail customers and warehouse shipments; direct-import sales fell about $3.6 million, partly due to deliveries shifting into early October.
- Gross margin improved by 1.5 percentage points for the quarter and 1.6 points for six months, which management linked to a greater mix of California-warehouse sales, generally higher margin than direct imports.
- Operating expenses increased 17.5% for the quarter and 10.9% for six months. Higher cooperative advertising and lower service fees from related parties contributed; six-month expenses also included higher marketing costs, partly offset by the absence of a prior-year royalty settlement charge.
- Net income was modestly lower year over year for both periods. Interest expense increased to $8,442 for six months, including interest charged by a related party on past-due trade payables.
- Inventory rose from $4.01 million at March 31 to $7.52 million at September 30, while accounts receivable rose from $785,490 to $4.79 million, reflecting seasonal activity and shipment/payment timing.
Outlook, risks, contingencies, and unusual items
On October 19, 2012, after quarter-end, the company entered into a two-year receivables-based credit facility. Advances may be up to 70% of eligible receivables, subject to a $5 million peak-season cap and a $500,000 cap for the remainder of the year. The rate is 2% over prime, with a 5.25% minimum, and the facility is secured by company assets; related-party debt subordination agreements total $2.5 million. No amount was outstanding at September 30. The company said it expected to need approximately $1 million of working capital over the next three months and planned to fund operations through collections, inventory sales, vendor financing, the facility, possible shareholder loans, and related-party service fees. It warned that inability to obtain needed financing could materially impair its ability to meet obligations and continue as a going concern.
Management cited seasonal demand, possible consumer-spending weakness, competitive pricing and margin pressure, vendor price increases, customer credit risk, and working-capital needs as risks. It gave no quantified sales or earnings guidance and said results are subject to substantial seasonal and quarterly fluctuations. It is considering products outside karaoke to address slow-season revenue shortfalls. Management reported no known legal proceedings. A former subsidiary’s IRS tax balance of approximately $241,639 remains disclosed; management, relying on legal advice and the former subsidiary’s sale agreement, does not believe the company will be liable. Lease commitments totaled $662,829. The company reported effective disclosure controls and no material change in internal controls.
The filing’s MD&A contains apparent inconsistencies in its cash-flow comparative descriptions and some period references. The cash-flow statement reports $2.67 million provided in the 2012 six-month period and $1.69 million used in 2011; verify these figures against the filed statements.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for The Singing Machine Company, Inc., not the company named in the request metadata.
- Reconcile the MD&A cash-flow narrative and period references to the financial statements.
- Assess the seasonal working-capital shortfall, receivables and inventory growth, and reliance on vendor and related-party financing.
- Review the new credit facility’s eligibility, borrowing-base availability, collateral, fees, and subsequent utilization.
- Monitor related-party balances and transactions, including past-due payables, interest charges, and service-fee arrangements.
- Evaluate customer returns, warranty estimates, inventory realizability, and the fully reserved deferred tax assets.