Business context and reporting period
The filing is for The Singing Machine Company, Inc. and subsidiaries, a seller of karaoke systems, accessories, musical instruments and recordings. It covers the quarter and six months ended September 30, 2020, the company’s fiscal second quarter and first half. The statements are unaudited.
Entity-name discrepancy: The request identifies Algorhythm Holdings, Inc., but the supplied filing names The Singing Machine Company, Inc. as registrant. Confirm the filing belongs to the intended company.
Financial performance and position
| Metric | Three months ended Sep. 30, 2020 | Six months ended Sep. 30, 2020 |
|---|---|---|
| Net sales | $23.19 million, up 15.5% year over year | $26.51 million, up 6.5% |
| Gross profit and margin | $6.73 million; 29.0% (28.1% prior year) | $7.96 million; 30.0% (26.6% prior year) |
| Operating income (loss) | $2.44 million (prior year: $0.86 million) | $1.67 million (prior year: $(0.24) million) |
| Net income (loss) | $2.41 million; $0.06 per diluted share | $2.20 million; $0.06 per diluted share (prior year: $(0.25) million) |
First-half operating expenses were $6.29 million, down from $6.87 million. First-half net income included $1.07 million of insurance-claim gain and $0.39 million from extinguishment of accounts payable; these unusual items materially contributed to reported earnings. For the quarter, insurance-claim gain was $0.94 million.
First-half operating cash flow was negative $0.67 million, versus negative $2.22 million in the prior-year period. Investing cash use was $0.08 million and financing provided $1.48 million. Cash increased to $1.07 million at September 30, 2020, from $0.35 million at March 31, 2020. Management reported working capital of approximately $7.00 million.
At September 30, total assets were $31.57 million, current assets $27.61 million, current liabilities $20.61 million, total liabilities $23.68 million and shareholders’ equity $7.89 million. Accounts receivable were $18.17 million and inventory $8.20 million.
Borrowings included $1.16 million outstanding on the Crestmark/Iron Horse revolving facilities at September 30, a $0.44 million Paycheck Protection Program loan, $0.31 million of installment notes and $0.80 million of subordinated related-party debt. Operating lease liabilities totaled $2.51 million. The company replaced its PNC facility in June 2020 with a two-year, $10 million Crestmark receivables facility and an Iron Horse inventory facility of up to $2.5 million.
Material changes versus the prior comparable periods
- Quarterly sales growth reflected higher Carpool Karaoke The Mic sales, stronger online demand from two major customers, and comparison with the prior-year water-damage-related customer chargebacks. First-half growth was partly offset by approximately $0.83 million less sales to J.C. Penney amid its bankruptcy.
- Classic karaoke machines drove much of the sales increase; download karaoke machines and children’s toys declined. North America sales rose while Europe sales fell substantially.
- Gross margin improved, supported by product mix and higher-margin Carpool Karaoke The Mic sales. Lower marketing and advertising costs, reduced travel, and nonrecurrence of prior-year expenses also reduced operating expenses.
- First-half net income improved from a loss, but included insurance proceeds and a vendor payable credit related to the prior-year damaged-goods incident.
- Accounts receivable and accounts payable rose substantially with peak-season sales and purchasing. The company recorded negative operating cash flow despite positive net income.
Outlook, commentary and risks
- Management gave no specific revenue or earnings guidance. It said cash on hand, credit-facility availability, expected inventory reduction and forecast operating cash generation should cover liquidity needs for at least twelve months.
- Management stated that, as of the filing, approximately $4.55 million was available under the new facilities. The filing also reports September 30 facility balances of approximately $0.13 million at Crestmark and $1.02 million at Iron Horse; the later “as of filing” borrowing figures differ. Confirm the dates and amounts.
- The Iron Horse facility includes a 1:1 fixed-charge coverage covenant, waived for its first six months. Management warned that covenant noncompliance or default could materially impair the company’s ability to meet obligations. Crestmark pricing has an 8.75% floor; Iron Horse pricing is 15.51% annually.
- The company expects to apply for forgiveness of the $0.44 million PPP loan; forgiveness was not assured in the filing.
- Sales are highly seasonal: the second and third fiscal quarters historically produce most annual sales. COVID-19 could disrupt consumer demand, retail operations and liquidity; management said the duration and severity were uncertain.
- Customer and receivable concentration is significant: four North American customers accounted for 93% of receivables at September 30. Three customers represented 77% of quarterly gross sales. A major customer loss or default could adversely affect results.
- Management reported no known material legal proceedings beyond ordinary-course matters, no current default on senior securities, and effective disclosure controls. The company also disclosed no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for The Singing Machine Company, Inc., not Algorhythm Holdings, Inc.
- Reconcile the September 30 facility balances with the higher borrowing amounts and availability stated “as of this filing.”
- Assess the collectibility and concentration of receivables, sales-return exposure, and the adequacy of bad-debt and inventory reserves.
- Separate recurring operating performance from the insurance recovery and $390,000 payable extinguishment when evaluating earnings.
- Track operating cash conversion, seasonal working-capital needs, covenant compliance, facility availability and PPP forgiveness status.
- Evaluate the effect of customer concentration, J.C. Penney’s bankruptcy, seasonality and COVID-19 uncertainty on future sales and liquidity.