Algorhythm Holdings, Inc. — 10-Q Summary
Filing identity: The supplied filing is for The Singing Machine Company, Inc. and subsidiaries, not Algorhythm Holdings, Inc. This summary reflects the filing text provided.
Business context and reporting period
The company develops, markets, and sells karaoke audio systems, accessories, musical instruments, and recordings through retailers and distributors. This unaudited Form 10-Q covers the quarter and nine months ended December 31, 2018, in the fiscal year ending March 31, 2019. The business is seasonal, with its strongest sales generally in the second and third fiscal quarters.
Financial performance
| Metric | Quarter ended Dec. 31, 2018 | Quarter ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $19.452 million | $21.462 million | $45.594 million | $58.204 million |
| Gross profit | $5.626 million | $5.998 million | $11.224 million | $14.814 million |
| Gross margin | 28.9% | 27.9% | 24.6% | 25.5% |
| Operating income | $1.800 million | $2.384 million | $2.141 million | $2.902 million |
| Net income | $1.290 million | $1.155 million | $1.473 million | $1.412 million |
| Diluted EPS | $0.03 | $0.03 | $0.04 | $0.04 |
For the nine-month period, operating cash flow was negative $1.498 million, compared with negative $4.633 million a year earlier. Investing cash flow was negative $0.289 million; financing cash flow was positive $2.554 million, including $2.931 million borrowed under the revolving facility. Cash increased to $1.581 million from $0.814 million at March 31, 2018.
At December 31, 2018, current assets were $20.100 million and current liabilities were $11.867 million, with reported working capital of approximately $8.233 million. Total assets were $21.216 million and total liabilities were $11.888 million. Debt included $2.931 million outstanding on the revolving line, a $250,000 current bank term note, and $815,000 of current subordinated related-party debt; capital lease liabilities totaled approximately $35,000.
Changes versus the prior comparable periods
- Quarterly sales declined about 9.4%; nine-month sales fell about 21.7%. Management attributed most of the nine-month decrease to approximately $9.986 million in lost Toys “R” Us sales and a roughly $3.419 million decline tied to the elimination of a major customer’s promotional product.
- Quarterly gross margin improved by 1.0 percentage point, mainly from manufacturer cost concessions associated with the stronger U.S. dollar versus the Chinese renminbi. Nine-month margin declined 0.9 point, partly because Toys “R” Us had purchased higher-margin products.
- Quarterly operating income decreased about $584,000 as lower gross profit and higher operating expenses outweighed cost savings. Nine-month operating expenses fell about $2.828 million, primarily because of the comparison with prior-year Toys “R” Us bad-debt expense; operating income nevertheless declined about $761,000.
- Net income increased in both comparison periods, helped by lower income-tax provisions. The prior-year quarter and nine-month period included an approximately $328,000 one-time tax provision related to the Tax Cuts and Jobs Act.
- Receivables rose to $10.602 million from $1.067 million at March 31, 2018, reflecting seasonal sales and shipment timing. Inventory declined to $6.119 million from $8.537 million.
Liquidity, outlook, and risks
Management said the revolving credit facility and other liquidity measures should be adequate to meet obligations for the next 12 months. The facility expires July 15, 2020, has seasonal maximums of $15 million (with a possible $5 million peak-season increase) and $7.5 million off-season, and had $2.931 million drawn at December 31. PNC issued an August 2018 amendment and waiver addressing a fixed-charge coverage covenant violation and raised the annual capital-expenditure limit to $375,000. The filing describes mandatory facility pay-down and covenant requirements.
Five customers each represented at least 10% of nine-month sales, together accounting for 86%; the largest represented 37%. The company also reported significant sales-return reserves of $2.050 million and estimated return goods inventory of $1.348 million. Management noted customer concentration, potential customer defaults and chargebacks, competition, economic conditions, working-capital needs, and facility covenant compliance as risks. Five scheduled $123,000 installments on subordinated related-party debt were not made because of the Toys “R” Us bankruptcy’s cash-flow impact. Related parties also deferred trade and subordinated-debt payments, and approximately $99,000 of service and development fees were suspended for six months through December 31, 2018.
No numerical earnings or revenue guidance was provided. A January 29, 2019 subsequent event was a three-year worldwide licensing agreement for CARPOOL KARAOKE products, with a $100,000 minimum royalty guarantee and royalties of 9% or 10% of net sales depending on unit volume. Management expected the lease accounting standard effective April 1, 2019 to materially affect the balance sheet through recognition of right-of-use assets and lease liabilities. The filing stated that management was not aware of legal proceedings and that the company was not in default on senior securities.
Important facts for investors to verify
- Confirm the issuer identity: the provided 10-Q names The Singing Machine Company, Inc., although the request metadata names Algorhythm Holdings, Inc.
- Reconcile revolving-facility availability: the notes report approximately $4.435 million available at December 31, 2018, while MD&A reports approximately $4.182 million.
- Track collection of the large seasonal receivables balance, customer concentration, and subsequent sales-return claims against the $2.050 million reserve.
- Review facility covenant compliance, the effects of the August 2018 waiver, and repayment timing for the $815,000 subordinated related-party balance and deferred related-party amounts.
- Assess whether the CARPOOL KARAOKE license generates sales sufficient to justify its minimum guarantee and royalty commitments.