Algorhythm Holdings, Inc. — 10-Q Summary
Filing identity: The supplied 10-Q names the registrant as The Singing Machine Company, Inc. and subsidiaries, not Algorhythm Holdings, Inc. It covers the quarter and six months ended September 30, 2016, and was signed November 14, 2016. The company develops, markets, and sells karaoke systems, accessories, musical instruments, and recordings.
Financial results and position
| Metric | Three months ended September 30, 2016 | Six months ended September 30, 2016 |
|---|---|---|
| Net sales | $28.13 million, versus $21.06 million | $32.99 million, versus $24.53 million |
| Gross profit and margin | $6.50 million; 23.1%, versus 23.5% | $7.65 million; 23.2%, versus 23.7% |
| Operating income | $2.76 million, versus $1.88 million | $2.19 million, versus $1.14 million |
| Net income | $1.81 million, versus $1.07 million | $1.37 million, versus $0.58 million |
| Diluted earnings per share | $0.05, versus $0.03 | $0.04, versus $0.00 as reported |
- Six-month operating cash flow was negative $8.97 million, compared with negative $8.08 million a year earlier. Investing cash use was $76,428; financing provided $7.88 million, principally from the revolving credit facility. Cash declined by $1.17 million to $948,506 from $2.12 million at March 31, 2016.
- At September 30, current assets were $28.49 million and current liabilities $23.59 million; reported working capital was $4.90 million. Receivables were $18.14 million and inventory $8.63 million, both sharply higher than at March 31, reflecting seasonal shipments and holiday inventory buildup.
- Debt included $8.10 million outstanding under the PNC revolving facility, a $467,449 related-party note payable, and $1.92 million of subordinated related-party debt classified as current. Accounts payable were $10.14 million.
Changes versus the prior comparable periods
- Quarterly sales increased about 34%; six-month sales increased about 34%. Management attributed growth to promotional shipments for Black Friday, increased sales to an online-focused major customer, UK market growth, and earlier customer purchasing.
- Net income increased in both periods, while gross margin declined 0.4 percentage points for the quarter and 0.5 points for the six months. Management cited a greater mix of lower-margin promotional products.
- Operating expenses rose, including higher co-op advertising, commissions, payroll, related-party service charges, and seasonal warehouse costs. Lower interest expense partly offset the increases.
- Receivables and inventory rose substantially during the seasonal build, while operating cash use worsened. Accounts payable and accrued expenses also increased, supporting working capital needs.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance was provided. Management said it believed the PNC facility would be adequate to maintain and grow the business, but planned to extend it or obtain a replacement by its July 2017 expiration.
- The PNC facility permits up to $15 million of borrowing during peak season and $7.5 million off-season, subject to borrowing-base limits and covenants, including a 1.1:1 fixed-charge coverage test. Noncompliance or failure to renew could materially affect the company’s ability to meet obligations. The facility is secured by company assets.
- The business is seasonal, with the second and third fiscal quarters historically producing most annual sales. The top five customers accounted for about 88% of quarterly and 86% of six-month revenue, creating customer concentration risk.
- Warranty provisions rose to $859,872 from $292,500 at March 31; management estimates returns and allowances based on historical experience. The allowance for doubtful accounts also increased materially. A major customer default or deterioration in conditions could require higher reserves.
- Related-party transactions included sales to Winglight Pacific, purchases from related companies, services, and debt. The company reported $636,756 due from related parties. Verify the terms, collectability, and governance of these balances and transactions.
- Management reported no known legal proceedings, no default on senior securities, and no material change in internal controls. It identified no off-balance-sheet arrangements reasonably likely to affect financial condition or results.
Important facts for investors to verify
- Confirm the filing’s issuer identity and its relationship to Algorhythm Holdings, Inc.; the document itself identifies The Singing Machine Company, Inc.
- Assess collectability of the $18.14 million receivables balance, including related-party receivables, and the quality and sell-through of the $8.63 million inventory balance.
- Review borrowing-base availability, covenant compliance, the monthly repayment terms on the Ram Light note, and refinancing plans before the PNC facility expires in July 2017.
- Evaluate whether seasonal promotional shipments and customer concentration can sustain sales and margins, given the slight year-over-year gross-margin decline.
- Review the adequacy of warranty, returns, advertising, and bad-debt accruals, as well as the company’s ability to fund substantial seasonal working-capital needs.