Business context and reporting period
The filing is The Singing Machine Company, Inc.’s unaudited Form 10-Q for the quarter and six months ended September 30, 2018 (fiscal Q2 and first half of fiscal 2019). The company develops and sells karaoke systems, accessories, instruments and recordings, principally to retailers and distributors. The filing does not identify Algorhythm Holdings, Inc. as the registrant; investors should verify the issuer and filing attribution.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2018 | Six months ended Sept. 30, 2018 |
|---|---|---|
| Net sales | $24.305 million, down 26% year over year | $26.141 million, down 29% |
| Gross profit / margin | $5.207 million / 21.4% (23.6% prior year) | $5.598 million / 21.4% (24.0% prior year) |
| Operating income | $1.672 million, versus $1.305 million | $340,000, versus $518,000 |
| Net income | $1.217 million, versus $784,000 | $183,000, versus $257,000 |
| Operating cash flow | Not separately reported for the quarter | -$5.400 million, versus -$13.042 million |
For the six months, investing cash outflow was $289,000 and financing cash inflow was $6.629 million, primarily from $6.878 million of revolver borrowings. Cash rose to $1.755 million from $814,000 at March 31, 2018. At September 30, current assets were $36.918 million and current liabilities $30.416 million; reported working capital was $6.502 million. The balance sheet showed $6.878 million outstanding on the revolving line, $375,000 on the bank term note and $815,000 in subordinated related-party debt, in addition to $39,000 of capital leases. Accounts payable was $18.655 million. Inventory was $12.895 million, up from $8.537 million at March 31.
Material changes and management commentary
- Management attributed about $5.4 million of quarterly and $6.3 million of first-half lost sales to the Toys “R” Us bankruptcy; it said these represented roughly 63% and 60% of the respective sales declines. A major customer’s reduced holiday promotion and shipment timing accounted for much of the remainder.
- Lower sales of higher-margin Toys “R” Us products contributed to gross-margin compression. Quarterly operating income improved despite lower gross profit, substantially because of a favorable bad-debt comparison: the prior-year period included a roughly $2.1 million Toys “R” Us charge, while the current quarter included a roughly $233,000 recovery. First-half operating income nevertheless declined.
- Seasonal working-capital needs were substantial: receivables increased by $19.152 million and inventory by $4.276 million in the first half, partly funded by a $17.040 million increase in accounts payable. The company’s business is highly seasonal, with peak sales generally in the second and third fiscal quarters.
- Management said the revolver, delayed related-party payments and a six-month suspension of approximately $99,000 of service and development fees would support liquidity for the next 12 months. The PNC facility has a $15 million peak-season limit (with a possible additional $5 million by request) and a $7.5 million off-season limit. An August 2018 amendment waived covenant violations and revised the fixed-charge coverage calculation and capital-expenditure cap; the fiscal 2019 cap rose to $375,000.
- Four scheduled $123,000 subordinated-debt installments were not paid because of liquidity effects from the Toys “R” Us bankruptcy. The filing says such payments were restricted by liquidity conditions and reports no current default on senior securities. Management cautioned that covenant noncompliance or a credit-facility default could materially impair its ability to meet obligations.
- The company adopted ASC 606 effective April 1, 2018 using retrospective application; management reported no impact on retained earnings or net income, but balance-sheet classifications changed. A new lease standard was expected to have a material balance-sheet effect when adopted, with the company expecting adoption on April 1, 2019.
Outlook, risks and contingencies
No quantified sales or earnings guidance is provided. Management’s liquidity outlook depends on revolver availability, seasonal cash generation, reduced inventory and continued related-party payment relief. Key risks include the lasting effects of the Toys “R” Us bankruptcy, customer concentration and receivable collection, seasonal shipment timing, inventory and product-return estimates, covenant compliance, and competitive pricing or weaker consumer spending. The sales-return reserve was $1.467 million at September 30, 2018, versus $726,000 at March 31. Management reported no known material legal proceedings beyond ordinary-course matters and no material changes to internal controls; it also stated there were no off-balance-sheet arrangements reasonably likely to affect the company materially.
Important facts for investors to verify
- Confirm that this Singing Machine filing is the intended filing for the requested company; the issuer name differs from Algorhythm Holdings, Inc.
- Check current borrowing-base availability, covenant compliance and the impact of the August waiver, particularly as the facility’s maximum declines outside peak season.
- Monitor collection of the large seasonal receivables balance, inventory sell-through and any further changes to return and doubtful-account reserves.
- Verify the status and repayment timing of deferred related-party debt installments and the suspended service and development fees.
- Assess whether shipments rolling into later quarters and lost major-customer business were recovered, and whether gross margins stabilized after the loss of higher-margin sales.