Business context and reporting period
The filing is a Form 10-Q for the quarter and nine months ended December 31, 2016. The filing identifies the registrant as The Singing Machine Company, Inc., which develops, markets, and sells karaoke systems and related products; this differs from the company name in the request metadata.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $16.32 million | $20.67 million | $49.31 million | $45.19 million |
| Gross profit / margin | $5.04 million / 30.9% | $5.60 million / 27.1% | $12.68 million / 25.7% | $11.41 million / 25.2% |
| Operating income / margin | $2.07 million / 12.7% | $2.18 million / 10.6% | $4.26 million / 8.7% | $3.33 million / 7.3% |
| Net income | $1.31 million | $2.01 million | $2.69 million | $2.58 million |
- Cash flow: Nine-month operating cash flow was negative $3.37 million, compared with negative $1.39 million a year earlier. Investing cash outflow was $0.11 million; financing cash inflow was $1.77 million. Cash declined $1.71 million from $2.12 million at March 31, 2016 to $0.40 million at December 31, 2016.
- Liquidity: Management reported working capital of $6.88 million at December 31, 2016. Receivables were $9.78 million and inventory was $5.37 million.
- Debt and facilities: The balance sheet showed $2.27 million outstanding on the revolving credit line, a $0.17 million related-party note, and $1.92 million of subordinated related-party debt. The PNC facility has seasonal limits of $15 million and $7.5 million, expires July 2017, and includes financial covenants. The Ram Light note was amended to monthly $100,000 payments and a March 31, 2017 maturity.
Material changes versus the prior comparable period
- Quarterly sales fell about 21%, primarily reflecting shipment timing—about $2.8 million of sales shifted into the preceding quarter—and weaker seasonal sales at a major retailer.
- Nine-month sales rose 9.1%, mainly from a roughly $5.49 million Black Friday shipment and higher international sales, partly offset by weaker sales to a major retailer and certain distributors.
- Gross margin improved in both comparison periods, which management attributed to supplier cost reductions and better margins on new digital-download products.
- Quarterly net income declined primarily because the prior-year quarter included a roughly $708,000 reversal of a deferred-tax valuation allowance. Nine-month net income increased modestly despite a higher tax provision.
- Operating cash use increased as receivables rose about $8.6 million and inventory increased about $1.9 million, including excess stock of a new product. The company relied on revolver borrowings to support working capital.
Outlook, commentary, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management describes the business as seasonal, with the second and third fiscal quarters historically generating most annual sales, and says order timing can materially affect quarterly results.
- Management believed the credit facility would support operations but stated that failure to meet covenants or extend or replace the facility before its July 2017 expiry could materially affect its ability to meet obligations.
- Customer concentration is significant: the five largest customers represented approximately 92% of quarterly sales and 84% of nine-month sales, versus 81% and 61%, respectively, in the prior-year periods.
- U.S. Customs and Border Protection seized three shipments, totaling approximately $193,000 and 1,710 units, pending evidence of compliance with trademark licensing guidelines. Management expected the goods to be released, but that outcome was not certain.
- The company reported a $1.08 million warranty provision. It also reported $1.11 million accrued for cooperative advertising at December 31, 2016, up from $0.09 million at March 31, 2016.
- Management estimated a 32% full-year effective tax rate. The deferred tax asset declined to approximately $1.10 million from $2.41 million at March 31, 2016. Management said adoption of the new lease standard would significantly affect the financial statements, including recognition of right-of-use assets and lease liabilities.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for The Singing Machine Company, Inc., not Algorhythm Holdings, Inc.
- Review receivable aging, customer collections, inventory sell-through and reserves, particularly given the working-capital cash outflow and excess new-product inventory.
- Check compliance with the PNC facility’s borrowing-base and financial covenants, and the status of renewal or replacement before July 2017; also verify repayment of the related-party note.
- Monitor customer concentration and retailer product placement, as well as the outcome of the CBP seizure and any related licensing requirements.
- Assess the sustainability of improved gross margins and the effect of seasonal shipment timing, tax provisions, warranty returns, and the amended long-term office lease.