Algorhythm Holdings Inc (RIME) 2004 Q1 法說會逐字稿

Welcome to The Singing Machine first-quarter results conference call. (CALLER INSTRUCTIONS).

I would now like to turn the conference over to Mr. Robert Weinberg, Chief Executive Officer.

Thank you, operator, and thank you all for joining me this morning for The Singing Machine's fiscal 2004 first-quarter results conference call.

It is a great pleasure from me to be here this morning with Y.P.

Chan, who became COO about four months ago, and April Green, our CFO.

As you know, I was named CEO less than a month ago, though I have been a Director of the Company since 2001.

I succeeded Eddie Steele who announced his desire to step down from his day-to-day responsibilities as Chairman and CEO.

I want to thank Eddie for all that he accomplished at Singing Machine.

He saw an opportunity in karaoke that no one else saw, he created a new industry and helped build Singing Machine into a meaningful dynamic company.

We are pleased that Singing Machine will continue to benefit from Eddie's vision, guidance, energy and passion as a marketing and product consultant.

As for me, the nearly 30 years I served in various management positions within Toys "R" Us, I rose through the ranks from Buyer Trainee to Senior Vice President General Merchandise Manager where I was responsible for purchasing, advertising, marketing, imports, product development, store planning and allocations for the entire Toys "R" Us chain for more than 700 stores in the U.S. division, and I also served as a liaison for the International Division in those areas as well.

I retired from Toys "R" Us in 2000 and founded Value Creations Group, which is a manufacturing, marketing and distribution company based in Ramsey, New Jersey.

So hopefully you can see that I have considerable experience in the areas most important to Singing Machine as we enter into a new phase of this Company's history.

Another important personnel I would like to mention is that Howard Moore succeeded Eddie as Chairman of the Board.

Howard has been a Director of Singing Machine since August 2000.

He joined Toys "R" Us in 1980 as Executive Vice President and General Merchandise Manager and was a member of that Board of Directors for Toys "R" Us from 1984 to 2000.

Additionally we also recently announced the hiring of a new Sales Director, Dennis Nordon (ph), who has over 25 years of successful selling experience, as well as Robert O'Connor who also joined as Sales Director who formally had served as Vice President of Sales at Economy of American Heat (ph) as well brings over 30 years of consumer electronics selling experience to our company.

Dennis and Robert report to Jack Dromgold, who was promoted to Executive VP to Sales and Marketing.

And those of you who have followed the Company for awhile will recall that Jack joined us last year after serving since 1993 as Vice President of Sales for Hasbro (ph) Games.

These management changes are more than skin deep.

There is just an incredible amount of experience and talent within the group.

I don't think it is an exaggeration to say that we are well on our way to building a new Singing Machine, but let me explain what I mean.

My first order of business when I took over the reins of CEO a couple of weeks ago was to work with Y.P. and the Board to develop and implement an action plan designed to enhance every key area of our operations.

We are working closely with our primary lender, La Salle Business Credit, and we remain optimistic -- but cannot guarantee -- that we will negotiate in the near future a restructured credit agreement for the remainder of fiscal 2004.

As part of this process, we recently met our commitment to our lender to obtain $2 million in subordinated debt financing from third-parties.

At the same time, we are working hard, very hard, to reduce costs throughout the company.

We have reduced headcount, and we are moving to consolidate warehouse and office space quickly as we can.

We want to emphasize that this program will take time to implement fully, but we are as committed as any group can be.

We are alert to every opportunity to take cost out of the business while sustaining our core competencies and leadership position in the karaoke industry.

We have also made significant headway in reducing our inventories.

We delivered $3.8 million of existing inventory since June, and we have begun shipping an additional $12 million in orders that are scheduled to be completed over the next few months.

As of August 12th this year, our unsold or uncommitted inventories amounted to approximately $9.9 million compared to more than 25 million a few months ago, all of which we plan to sell before Christmas.

Our peak selling season is only now beginning.

Last year we did about 80 percent of our business between August and December.

Accordingly we anticipate that inventories will decline substantially in the current quarter and again in the December quarter compared to the level at June 30th.

This, of course, will improve our liquidity as we receive payment for these goods in the months to come.

Strategically our goal is to minimize inventories in the future by generating a larger share of our total sales through import programs and efficient supply chain management and a smaller share than was the most previously the case through direct sales from inventories owned and held by the Company in the U.S..

By substantially reducing our investment in inventories as well as warehousing and associated labor and other costs, this strategy will reduce risks and enhance our cash and competitive position.

At the same time, we are committed to meeting the needs of our domestic customers and are confident that we can implement this strategic shift with a minimal impact on them.

Finally, we are developing plans to expand our product offerings in related areas where we see significant incremental growth potential and are confident that Singing Machine's product design, licensing, marketing and manufacturing skills can add value for our customers and our shareholders.

We will have more to report to you on this aspect of our plan in the months to come.

At this point, I would like to ask April Green to review our first-quarter results.

Please note that this conference call will include forward-looking statements.

These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.

These statements are not guarantees of future performance, and actual results may differ materially.

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and in Singing Machine's various filings with the SEC.

The statements made during this call are made only as of the date of the call, and we undertake no obligation to update these statements.

Net sales for the quarter ended June 30, 2003 increased 77.5 percent to 7,627,000 as compared to $4.3 million for the quarter ended June 30th of '02.

The increase in the Company's sales for this quarter is due to the acquisition of new customers in Europe as well as increased sales to existing customers in the U.S..

Sales in European countries increased 2.6 million over the same period in the prior year.

The Company believes that sales in this segment of our business will continue to increase over the remaining fiscal year.

Gross profit for the quarter ended June 30 was 1.7 million or 22.6 percent of sales as compared to 1.3 million or 32.2 percent of sales for the quarter ended June of '02.

The decrease in gross margin percentage compared to the prior year is due primarily from increased sales from our Hong Kong subsidiary to international customers.

International sales were primarily in Europe for the quarter.

Sales to international customers historically maintain lower selling prices and less of our gross profit margin.

The main reason for this is that sales are made to distributors in these countries, and there are no additional variable expenses such as advertising allowances, handling charges, returns and commissions which are normally seen in sales to the states.

Due to the increased inventory levels at June 30th, which was carried from the prior year, the Company anticipates that the gross profit percentage for the remainder of the fiscal year will follow the low last year.

Operating expenses were 3.8 million or 50.6 percent of total revenues for the quarter ended June 30th, '03.

The expenses increased over prior year by $1.2 million, but as a percentage of sales decreased from 61.4 percent in June of '02 to the 50.6 I had already stated.

This decreased percentage is a result of higher revenue base over which to spread our operating fixed costs.

Primary factors contributing to the increase of approximately $1.2 million for the quarter ended June 30th are increased advertising expenses of 105,000 due primarily to increased sales, compensation and related expenses in the amount of 341,000, increased expenses of 300,000 due to increased need for space to hold our high level of inventory in California, increased accounting and legal fees of 214,000 and various other small expenses which contributed to the increase.

Other expenses were 180,000 for the quarter ended June 30th, as compared to net other income in June of '02 of 24,000.

Our interest expense increase is due to the increased use of our credit facility as the default rate of interest during this period.

For the quarter ended June of 2002, the Company had cash reserves to fund our operations and did not need to borrow on the revolving credit facility.

The Company expensed at the interest expense for this year will continue to increase over the remainder of fiscal 2004 due to the credit facility accruing the interest at the current default rate of prime plus 2.5 percent.

The Company's past expense is based on an aggregation of taxes on earnings of its Hong Kong and domestic operations on an annualized basis.

Income tax rates in Hong Kong are approximately 16 percent, while the statutory income tax rate in the United States is 34 percent.

The Company's effective tax rate during the first quarter of fiscal 2004 was 0 percent as compared to 19 percent during the first quarter of fiscal 2003.

This decrease in the effective tax rate is a result of estimated tax benefits from fiscal 2004 resulting from estimated United States pretax loss for fiscal 2004 offset by estimated tax expense related to Hong Kong pretax income for fiscal 2004.

As effective tax rates are based on estimates, the Company's future effective income tax rate will fluctuate based on the changes in the estimates.

One area of concern which I know will be raised today is the inventory level.

Historically the Company begins purchasing inventory in the first quarter of its fiscal year.

This can be seen in fiscal 2002 where our inventory increased approximately $3 million for the quarter.

This year as our inventory has been predominantly carried forward from the prior year, we have very little need to purchase through inventory, plus inventory increased only 700,000 in this quarter.

The Company expects to purchase only a small amount of inventory this year, and we believe that the decreases in inventory will be seen more predominantly over the next two quarters.

Other information can be found in our 10-Q report which will be filed this afternoon with the SEC.

Thank you, April.

As you can tell, we are excited about Singing Machine's future.

Domestically the karaoke market remains healthy and growing, and our recent experience in Europe, South America and Australia is exceptionally encouraging for the future.

We look forward to reporting improved top and bottom-line results in the current quarter as we enter the seasonally strongest months of our fiscal year.

Now Y.P., April and myself will be glad to answer any of your questions.

Operator, may we have the first question please?

(CALLER INSTRUCTIONS).

Ian Gilson, Roth Capital Partners.

Good morning, ladies and gentlemen.

Can you hear me?

Could you give me the actual revenue for Europe for the quarter?

You said it was up 2.6 million.

What was the actual number?

The actual number for Europe for the quarter -- I apologize;

I flipped through the page -- we had approximately $3.6 million of sales going to Europe consisting primarily of France, Italy and the United Kingdom.

Thank you.

On the Hong Kong profit, were you going to assume that there was no profit or minimal profit since you had no effective tax rate in the first quarter?

No.

The effective tax rate is calculated by using both the Hong Kong and the U.S..

The Hong Kong did have a profit for the quarter, and the U.S. did not.

Therefore, they washed each other out basically, creating the 0 effective tax rate.

Do you have a tax credit in the United States?

Are you booking a tax credit when you have a loss?

Yes, we are booking a tax credit as we have a loss, and we book the profit expense profit expense for tax in the Hong Kong side.

Looking at the cost structures.

Although some of the numbers were not all that different from the first quarter of last year, we did have some significant dollar increases vis-a-vis the fourth quarter and the year ago, particularly in compensation and in G&A.

Are we going to see some of those costs moderate as we go through the year in absolute dollars?

Yes.

Clearly that is a top top priority for this business both short-term and long-term as well.

Yes.

The answer is yes.

Okay.

Previously you had quoted a commission number.

I notice you have not reported it in the first quarter.

Is there any reason why not?

Only in the first quarter, a lot of our sales are without commission, our international sales in general.

But we also have returns in the first quarter, which made our commission expense for this quarter immaterial in following the (inaudible), the criteria to be reported as a separate line item.

Okay.

I think that does it at the moment.

Linda Donnelly, Franklin Management Group.

Could we address a little further the interest expense?

Is this indicative of what you're going to be seeing through the three or four coming quarters, or is this going to drop dramatically?

To answer that specifically, we anticipate -- we believe our negotiations with Lasalle will be fruitful and that we will have a restructure in place, although we cannot place obviously any complete yes or no on that.

The rate right now is at a default rate, which is an additional 2.75 percent.

We are under the understanding that our rates will go back to normal after the restructuring is put is put into place.

You will see still interest expense but not quite at this level.

Thank you.

Alan Adler, AA Enterprises.

Can you go back to inventory in words, if you're selling against orders $12 million of inventory, so as of August 12 you say you have not 9.2 million and you're going to be buying minimally, are your customers receiving direct shipments, and therefore, it does not go through inventory because to do in the neighborhood of -- I don't know what your sales estimate is for the year -- but last year, I think you did well over close to $100 million.

How do you get to $100 million without building inventory?

The answer to your question is yes.

We are providing the goods to our domestic customer from both our existing inventory warehouse and FBO directly from Hong Kong.

So when you say you will only have a build in each quarter, that is a net build.

You are in effect saying that within the quarter, you will take in shipments and then sell them, and therefore, your quarter ending inventories will only rise slightly?

That is correct.

And what is your sales estimate for the year?

We have made a decision not to provide any guidance in terms of earnings and revenue forecast.

A revenue forecast would be nice.

What would that be?

We are not going to give any revenue or earnings forecast.

Can you give us a little flavor for how you see the business without giving a specific forecast?

And secondly, could you discuss the terms of the $2 million?

Are those just straight loans at an interest rate, or do they involve some equity kicker or something like that?

Okay.

For the forecast, I don't want to comment on that because the Board has made a decision not to provide any forecast.

With respect to the loan at this moment, some of this has not been finalized.

When it is finalized, we will file an 8-K.

Again, it is this same thing.

You have got to give us some feeling, and even before FT people give you a feeling for how their business was, how is business?

The idea that you will give no commentary on how business is, I think is, especially given the events over the last six months, is not a benefit for you. (multiple speakers).

Maybe your Board does not understand.

Not giving a forecast is different from not responding to the general nature of how is business, whether you see good prospects, who is doing well.

And secondly, it would be a shame to read in your 10-K at the end of the year that you gave 10 percent of the company to whoever provided the 2 million shares that you did not disclose it as you were doing it.

To answer your question about the revenue, I hope that you could get some clue from our first quarter revenue which we just announced, and that is actual performance for the first quarter this year --

I don't want to be difficult about it, but you have said yourself that you were selling carryover inventory at little or no profit, and that is a different kind of a sale than forward inventory for the prime Christmas and that area selling season, different kind of sales.

Mr. Weinberg, do you agree?

Let me respond to that.

That is a question you have asked a few times, and that is --

The reason I asked you a few times is you have had a very distressing year.

You missed your sales.

You missed your announcement of 100 million.

You had reported something like 96, and now we are going through a similar thing.

If we were sitting in a small meeting, I would now ask you for a number, I would ask you the same thing.

How is business?

Are your customers optimistic?

Do they not like the product?

Are you going to be able to sell the carryover product?

Will that damage your new designs?

You are not discussing your business at all.

I am.

I will discuss it.

At this point now, we are pleased with our division.

Our distribution is pretty good.

We are also opening up various countries internationally, so we are happy on the distribution side.

On top of that, the real passing grade you get in this business is it is selling at retail, and our product is clearly selling at retail in a variety of channels.

So those two coupled together speak for a very nice future based upon the performance we are experiencing right now.

Good distribution and good sales.

Thank you.

You got my point there is CO about the $2 million loan.

Yes, we understand.

(CALLER INSTRUCTIONS).

Ian Gilson, Roth Capital Partners.

Thank you.

You have said that you expect your interest expense to decline going forward.

Could you go through that for me as to how that works out?

I presume that the $188,000 you have spent was more than just a payment without use of credit because you also said you did not drawdown that line in the quarter.

Could you go through that for me and tell me what has happened and where you stand?

Let me clarify on that.

The actual amount of interest will increase in dollar value, but our percentage of interest, our interest percent, we are currently at a default plus 2.5 percent.

We expect that that will be a prime plus a very small percentage.

So, therefore, as a percentage of our borrowings, it will decrease, but the number itself will increase.

That is actually a (inaudible) if you're talking about any increase in revenue.

Could you give us an idea of what the absolute interest expense might be for the year?

I do not have that number in front of me.

I would have to go back and recalculate.

I apologize, but that is not readily available in front of me at this moment.

What was the peak borrowing under the credit line at any time last year on a daily basis?

Do you happen to have that number?

The absolute maximum it reached on the line last year was $16 million.

16?

Yes.

That is correct.

I am showing no further questions at this time.

Please continue with your presentation or any closing remarks.

I think that concludes our end.

We want to thank everyone for their questions and for participating on the call.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

(CONFERENCE CALL CONCLUDED)