Business context and reporting period
The filing is for The Singing Machine Company, Inc. and subsidiaries, covering the quarter and nine months ended December 31, 2013. The company designs, markets, and sells karaoke equipment, accessories, and recordings. Its business is seasonal, with sales concentrated in the second and third fiscal quarters. The supplied filing identifies the registrant as The Singing Machine Company, Inc.; it does not explain the relationship to the requested company name, Algorhythm Holdings, Inc.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net sales | $16.815 million | $16.617 million | $29.063 million | $32.756 million |
| Gross profit / margin | $4.107 million / 24.4% | $4.022 million / 24.2% | $6.811 million / 23.4% | $7.937 million / 24.2% |
| Operating income | $1.489 million | $1.429 million | $1.142 million | $2.391 million |
| Net income | $821,000 | $1.397 million | $604,000 | $2.352 million |
| Operating cash flow | Not presented quarterly | $1.056 million | $3.429 million |
At December 31, 2013, cash was $2.356 million and restricted cash was $138,000; working capital was $1.829 million. Total assets were $16.915 million, total liabilities $13.639 million, and shareholders’ equity $3.276 million. No balance was outstanding on the Crestmark line of credit at period-end. Capital lease obligations were $28,718. The balance sheet also shows substantial related-party amounts payable, including $2.5 million of subordinated related-party debt classified as current.
Operating cash flow fell year over year as seasonal receivables and inventory absorbed cash, partly offset by higher accounts payable and related-party balances. Nine-month investing cash use was $345,000, including $138,000 placed in restricted cash; financing cash use was $8,000. The filing reports $50,810 of interest expense for the nine-month period.
Material changes versus prior comparable periods
- Quarterly sales rose by $198,000, which management attributed mainly to shipments delayed from the prior quarter by vendor production, quality, weather, inspection, and subcontract issues.
- Nine-month sales declined $3.693 million. Management cited lower orders from a major customer carrying existing inventory, lost direct-import sales tied to vendor inspection deficiencies, a vendor’s change in freight terms, and cancellations or delays.
- Nine-month gross margin fell 0.8 percentage points to 23.4%, reflecting the freight-term change and less favorable product mix. Operating income and net income also declined materially.
- Quarterly net income was lower despite slightly higher sales and operating income, partly reflecting a $627,000 tax provision; the prior-year quarter recorded no provision. The nine-month tax provision was $488,000, versus none in the prior-year period.
- General and administrative expense increased, including costs associated with the new Home product, stock-based compensation, financing commissions, and reduced warehouse reimbursements from related parties. Selling expense decreased.
Outlook, risks, contingencies, and unusual items
No formal revenue or earnings guidance is provided. Management expected to fund operations through collections, inventory sales, vendor financing, bank facilities, extended related-party payment terms, and potential additional financing. It stated that the Starlight Group was willing and able to extend trade terms and that it expected no bridge financing from the Group for the fiscal year ending March 31, 2014. Management also warned that failure to obtain additional financing, if needed, could materially impair the company’s ability to meet obligations and continue as a going concern. It estimated approximately $1.035 million of working-capital needs for the next three months.
Risks highlighted include seasonal results, vendor delays and quality problems, customer order variability, competition and margin pressure, customer credit or collection issues, and reliance on related-party trade terms. The company’s logistics agreement with Starlight affiliates ended December 31, 2013, earlier than expected; management was seeking independent clients to replace those reimbursements. Deferred tax assets included a valuation allowance of approximately $1.6 million, and management estimated a 45% effective tax rate for fiscal 2014. The filing reports no known current legal proceedings; management did not believe the company would be liable for a former subsidiary’s disputed IRS balance of approximately $242,000.
Investor verification points
- Confirm the registrant’s identity and any relationship between The Singing Machine Company, Inc. and Algorhythm Holdings, Inc.
- Track receivable collections, inventory levels, and vendor payment terms, given their significant effects on operating cash flow and liquidity.
- Review related-party payables, subordinated debt, and the availability and terms of continued Starlight Group support.
- Assess whether the company can replace the terminated affiliate logistics agreement and secure any additional financing it may need.
- Monitor vendor delivery and quality performance, major-customer ordering patterns, gross margins, warranty reserves, and realization of deferred tax assets.