Business context and reporting period
The filing is for The Singing Machine Company, Inc. and subsidiaries, a developer, marketer and seller of karaoke systems, accessories and related products. It covers the quarter and nine months ended December 31, 2015, compared with the same periods in 2014. The supplied metadata names Algorhythm Holdings, Inc., but the filing itself identifies The Singing Machine Company, Inc. as the registrant.
The business is seasonal, with sales typically concentrated in the second and third fiscal quarters around the holiday season. The unaudited interim statements are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Net sales | $20.67 million | $18.09 million | $45.19 million | $36.58 million |
| Gross profit / margin | $5.60 million / 27.1% | $4.05 million / 22.4% | $11.41 million / 25.2% | $7.73 million / 21.1% |
| Operating income | $2.18 million | $1.68 million | $3.33 million | $1.49 million |
| Net income | $2.01 million | $1.03 million | $2.58 million | $0.86 million |
| Diluted earnings per share | $0.05 | $0.03 | $0.07 | $0.02 |
- For the nine months, operating cash flow was negative $1.39 million, versus negative $3.20 million in 2014. Investing cash flow was negative $0.14 million; financing cash flow was positive $1.65 million. Cash ended at $232,940.
- At December 31, 2015, current assets were $16.22 million and current liabilities were $9.43 million; reported working capital was $6.79 million. Accounts receivable was $10.30 million, inventory $4.08 million, and cash $232,940.
- Debt and related-party obligations included $1.79 million outstanding on the revolving credit line, $833,091 on the Ram Light related-party note, and $1.92 million of subordinated related-party debt. Total liabilities were $11.35 million.
- Gross deferred tax assets were approximately $1.9 million. The company reversed a remaining valuation allowance of approximately $708,000, citing improved financial performance and expected realization of the assets.
Material changes versus the prior comparable period
- Nine-month sales increased approximately 24%, while net income rose from $855,506 to $2.58 million. Gross margin improved by 4.1 percentage points.
- Management attributed sales growth mainly to increased promotional activity and online sales at major retail customers, higher international distributor sales, and expanded product offerings. Two major customers represented approximately 33% of nine-month sales, versus 34% in 2014.
- Higher prices on selected promotional products, lower costs on certain high-volume products and product mix contributed to margin improvement. Operating expenses also rose: nine-month selling expenses increased about $1.54 million, largely reflecting co-op advertising, commissions and freight.
- Cash from operations remained negative, though the outflow narrowed year over year. Seasonal accounts-receivable growth was a major use of cash; inventory declined as prior-year excess stock was shipped.
- At the balance-sheet dates shown, cash increased from $116,286 at March 31, 2015 to $232,940 at December 31, 2015, while accounts receivable rose substantially and inventory decreased.
Outlook, risks and unusual items
- No numerical earnings or sales guidance is provided. Management said the PNC revolving facility and extended payment terms from key vendors were expected to provide sufficient working capital for at least the next 12 months.
- The PNC facility expires July 14, 2017, is secured by company assets and has a $15 million seasonal limit that falls to $7.5 million from January through July. It includes a 1.1:1 fixed-charge coverage covenant, a $150,000 annual capital-expenditure limit and a mandatory pay-down provision. The filing says the company met the conditions for the September and December 2015 Ram Light note payments; earlier scheduled payments were not permitted because requirements were not met.
- Liquidity is exposed to seasonal working-capital needs, concentrated customers, customer credit and collections, inventory valuation, returns and warranty estimates, and dependence on key vendors and related parties. The five largest customers generated approximately 81% of nine-month revenue.
- Related-party transactions are significant, including product purchases, sales, payables and receivables. Past-due trade payables to affiliates bear 6% interest. These relationships and terms warrant scrutiny.
- Warranty provisions rose to $1.06 million from $197,873 at March 31, 2015. Cooperative advertising accruals were $1.01 million at December 31, 2015, compared with $75,487 at March 31, 2015.
- Management reported no known legal proceedings, no current default on senior securities, and no material change in internal control over financial reporting. It stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the registrant identity and relationship to the company named in the request: the filing cover and financial statements identify The Singing Machine Company, Inc.
- Assess receivables quality, collection timing and customer concentration, including the seasonal increase in receivables and related-party balances.
- Review PNC borrowing-base availability, covenant compliance, required seasonal pay-downs and access to extended vendor terms.
- Evaluate the adequacy of warranty, returns, cooperative advertising and inventory reserves, including the sharp increase in warranty provisions and advertising accruals.
- Review related-party balances, transactions and payment terms, and clarify the filing’s wording about the top three customers: it reports 61% and 52% but labels both figures as periods ended December 31, 2014, leaving the period attribution unclear.