Business context and reporting period
The supplied metadata identifies Algorhythm Holdings, Inc., but the filing is for The Singing Machine Company, Inc. and subsidiaries. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2015, in the company’s fiscal year ending March 31, 2016. The company develops and sells karaoke systems, accessories, musical instruments, and recordings. Sales are seasonal, typically concentrated in the second and third fiscal quarters.
Financial results and position
| Metric | Three months ended September 30, 2015 | Six months ended September 30, 2015 |
|---|---|---|
| Net sales | $21.06 million, up 32.0% year over year | $24.53 million, up 32.6% |
| Gross profit / margin | $4.95 million / 23.5% (19.8% prior year) | $5.81 million / 23.7% (19.9% prior year) |
| Operating income (loss) | $1.88 million (prior year: $0.59 million) | $1.14 million (prior year: loss of $0.19 million) |
| Net income (loss) | $1.07 million (prior year: $0.32 million) | $0.58 million (prior year: loss of $0.18 million) |
| Operating cash flow | Use of $8.08 million for the six months (prior year: use of $6.29 million) |
Quarterly sales growth reflected higher sales to three major retail customers amid expanded promotions and approximately $1.4 million of increased international sales. Management attributed improved gross margin to price increases for a major retailer and lower costs on selected high-volume products. Higher co-op advertising, freight, and commissions increased selling expenses. Six-month other expenses rose to $190,000, including higher interest on related-party and vendor payables and financing-cost amortization. Six-month income tax provision was $375,000; management estimated a fiscal-year effective tax rate of approximately 39%.
At September 30, 2015, cash was $445,000, current assets $29.17 million, and current liabilities $24.90 million, implying working capital of $4.26 million and a current ratio of approximately 1.17. Accounts receivable was $16.97 million and inventory $9.55 million. The balance sheet showed an $8.54 million revolving-line balance, a $968,000 related-party note payable, and $1.92 million of subordinated related-party debt. Total liabilities were $26.83 million, versus total assets of $31.34 million. Operating cash use largely reflected a $15.46 million increase in receivables and a $2.21 million increase in inventory, partly offset by higher payables and accruals. Financing provided $8.54 million, principally from revolving-credit borrowings.
Changes, outlook, and risks
- Compared with the prior-year periods, both quarterly and six-month sales and gross margins improved; the six-month result shifted from an operating and net loss to profit. Operating cash use nevertheless increased.
- The PNC revolving facility expires July 2017 and permits up to $15 million of borrowing during peak season and $7.5 million off-season, subject to a borrowing base and covenants. The facility requires a 1.1:1 fixed-charge coverage ratio and caps annual capital expenditures at $150,000. The company reported that it met conditions for a $150,000 Ram Light note payment at September 30, after missing the requirements for the first three scheduled payments.
- Management expected receivables collections, inventory sales, the credit facility, vendor financing and extended vendor/shareholder payment terms to provide sufficient working capital for the next 12 months. It estimated a need for approximately $1.2 million of working capital over the next three months. Management cautioned that covenant noncompliance or default could materially impair the company’s ability to meet obligations and continue as a going concern. No formal earnings guidance was provided.
- Key exposures include seasonal order and shipment volatility, customer credit and collection risk, inventory sell-through and obsolescence, product returns and warranty costs, competitive pricing and margins, and dependence on credit availability and extended vendor terms. The company reported $6.61 million due to related parties and $1.59 million due from related parties at period end; related-party transactions included product purchases, sales, and logistics arrangements. Management reported no known legal proceedings and no default on senior securities.
Important facts for investors to verify
- Whether the large seasonal receivable balance is collected on schedule, and the borrowing-base availability and covenant headroom under the PNC facility.
- Inventory sell-through, the adequacy of inventory and warranty reserves, and the effect of returns and promotional allowances on margins.
- The terms, aging, settlement, and ongoing dependence on related-party payables, borrowings, receivables, and transactions.
- Whether vendor support and management’s liquidity assumptions remain adequate as borrowing availability falls outside peak season.
- The realization assumptions for deferred tax assets and the impact of the estimated 39% full-year effective tax rate.