Algorhythm Holdings Inc (RIME) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Singing Machine fourth quarter year-end results conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Wednesday, June 30, 2004.

I would now like to turn the conference over to Mr. J. Bauer, Chairman of The Singing Machine.

Please go ahead, sir.

Thank you, operator, and good morning.

Interim CEO, Y.P.

Chan, and our new CFO, Jeff Barocas, are also on the call with me today.

After our prepared remarks we will be available to answer your questions.

I would like to begin by introducing Jeff Barocas, who joined the company as CFO in April.

Jeff brings more than 25 years of experience as a senior financial executive to his new position, and he has held the CFO title at public companies since 1990.

He was CFO at Biometrics Security Technology Inc, a Florida-based security software developer, from 1990 to 1995.

From 1996 to 2002, he was CFO at QUIPP, Inc., a Florida-based manufacturer of automated capital equipment for the newspaper industry.

From 1986 to 1995, he was CFO at London International U.S.

Holdings, a Sarasota, Florida consumer products and medical products company, where he managed all financial, information systems, and materials procurement activities.

His proven financial capability, operational talents, leadership skills and communications expertise will be important assets as we position The Singing Machine for the future.

Good morning, everyone.

I would like to begin with a disclaimer.

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

These statements are based upon 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 Singing Machine's various filings with the SEC.

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

I will now briefly review our financial results for fiscal 2004.

For more detailed financial information, I urge you to read our Form 10-K that we expect to file in the next few days.

It's clear from our performance for fiscal 2004 that the Company paid a heavy price for being very badly positioned as the year began, with excessive inventories in the face of an intensifying competitive environment.

Singing Machine's story for the year was how we dealt with the consequences.

One of the consequences was that we booked inventory charges of $7.6 million and other unusual or nonrecurring items that totaled more than $4.6 million.

Another consequence is that our gross margin was severely reduced even without these charges.

I should also disclose that our auditors will issue a going concern opinion again for fiscal 2004, as they did for fiscal 2003, reflecting our tight liquidity situation at March 31.

Net sales for the fiscal year March 31, 2004 decreased to 70.5 million from 95.6 million for the fiscal 2003 year.

Our sales decrease (indiscernible) increased competition both in the U.S. and in foreign markets.

Our gross margin for fiscal year 2004 was 2.7 percent of sales compared to 24.4 percent of sales for the fiscal year 2003.

The decrease was primarily due to the write-down of inventories by $7.6 million in fiscal 2004.

In addition, we made substantial sales at lower margins than in previous years, with the objective of generating cash.

For example, in the fourth quarter of 2004 we sold $1 million of (indiscernible) inventory at a negative margin of $366,000 after applying inventory reserves.

Gross margin was also negatively affected by the issuance of more than $1 million of customer credits in the fourth quarter of the year, which reduced both sales and gross margins by the like amount.

Gross margins were also negatively affected by the booking of returns of $1.8 million.

Sales mix also had a role in reducing gross margins.

Sales to international customers made up 39 percent of total sales for fiscal 2004 compared to about 18 percent in fiscal 2003.

International sales shipped out of Hong Kong yield a lower gross margin because there are no variable expenses associated with these sales.

Operating expenses increased by about $1.1 million in fiscal 2004 versus fiscal 2003.

This increase was primarily due to severance payments to two former executive officers, higher selling, general and administrative expenses relating to legal fees for the class-action settlement, termination fees for our warehouse facility in California, increased accounting expense for the extra work needed for the restatement of the fiscal year 2001 and 2002, and the amortization of loan costs relating to the loan agreement with our major lender.

These operating costs were partially offset by a decrease in the variable costs associated with sales.

Cooperative advertising allowances declined with the sales, as did freight and other variable costs.

I should also note that we reported a tax expense for the fiscal year 2004 because we fully reserved for a $1.9 million deferred tax asset.

Turning to the balance sheet.

At March 31, 2004 we have cash and restricted cash of $1.2 million compared to $1.1 million at March 31, 2003.

Our current liabilities decreased by more than $8 million to $13.1 million at March 31, 2004, compared to 21.2 million as of March 31, 2003.

Importantly, we did not owe any money under any credit facility during fiscal 2004, whereby we owed 6.7 million under our credit facility with Lasalle during fiscal 2003.

Our most significant accounts payable is our $3.6 million obligation to one of our factories in China.

We have agreed to a payment plan with the factory which provides that most of the significant portion of the debt will be repaid on or before March 31, 2005.

Our cash on hand is limited.

Our average monthly operating costs are approximately $600,000 and decreasing.

And we expect that we will need approximately $1.5 million in working capital during the next three-month period.

Our primary expenses are normal operating costs including salary, wages, rents and other ongoing costs to run the business.

We plan on financing our working capital needs from the collection of existing accounts receivable and the sale of existing inventory on hand.

As of March 31, 2004 our inventory was valued at $5.2 million.

We may try to obtain financing under our factoring agreement and with other factoring companies.

Although the Company currently has no outstanding obligation under its factoring agreement, it is in technical default because of the violation of the net tangible net worth required in the working capital requirements.

We intend on negotiating with the factoring company to amend or waive these requirements.

I now turn it back to J.

Thank you, Jeff.

As you know, fiscal 2004 was a very difficult year for The Singing Machine, but I am proud to report that we made progress in areas that are critical to the Company's future.

As we explained on our third-quarter call, we have several specific goals to accomplish in order to move our company forward.

We have focused on reducing costs, reducing inventory, launching new products, improving the reliability and deliverability and quality of our products.

I am just (technical difficulty) proud of Singing Machine's team, as we all work together to get the Company back on the right track.

On the cost side, I am pleased to announce that we recently subleased one of our warehouses and turned it back without any further obligation to us, and partially subleased a second warehouse.

We estimate that this will save the Company approximately $750,000 annually.

We plan to sublease the rest of the space by the end of the year when we complete the sale of our remaining inventory, which should generate quite substantial additional savings.

By the way, our inventory was down to 5.3 million as of the end of fiscal 2004 versus 25.2 million at March 31, 2003.

We also have reduced our payroll expenses in the U.S. by approximately 50 percent compared to last year's peak payroll.

While this has been a painful process, we believe that we have the right people in place to achieve a cost structure that is appropriate for our business.

On the sales side, the new season is off to an encouraging start as the backlog of orders for our karaoke hardware was 32.8 million at June 30, 2004, compared to a backlog of 33.4 million at June 30, 2003.

Please note that the 32.8 million in purchase orders is only an estimate, and these purchase orders can be amended or cancelled any time prior to delivery.

Likewise, they can also, of course, be increased.

Importantly, we expect much higher gross profit on this year's backlog than we earned last year, when gross margin was severely impacted by inventory write-offs and other unusual and nonrecurring charges that we do not expect to be repeated this year.

We expect volume shipments by our vendors in China to begin this summer.

Also, we had a slow start with our distribution agreement with Warner.

We are optimistic that our new distribution agreement with Warner Bros.

Publications will help us expand our karaoke music business compared to last year.

We have made progress, but our liquidity position is tight and we are evaluating a variety of alternatives to raise additional capital.

As you can see, we have come a very long way in cleaning up this company and creating a proper platform for the future.

Clearly, we are not out of the woods yet.

The next two or three months are critical, but we can see the light at the end of the tunnel.

Orders are good, and the karaoke market remains healthy.

We believe that we have what it takes to get there.

We look forward to reporting our profits to you on our next conference call.

Kendra, we are ready for the first question.

(OPERATOR INSTRUCTIONS).

Jerry Bloomberg (ph) with (indiscernible).

Two quick questions (indiscernible).

I've been with the Company for years and years, and I know that management was buying some stock for a while.

I am assuming that that is a vote of confidence.

Needless to say, from what you're saying, I assume it still exists.

But I just want you to just elaborate on that.

Are you going to continue to do that?

How should we read that?

Should we be concerned, too, with possibly being delisted from the American Stock Exchange?

I will first address myself to the question of buying stock.

I have supported the Company in the past by purchasing stock.

I have not sold any stock.

I am planning to continue at appropriate levels to continue to support the Company and to add stock.

I have great confidence in the Company.

I have, as you probably also know, extended certain loans to the Company which are showing that I don't just own stock but I also have continued to support the Company when there was a need for it.

As to your second question about the listing for the American Stock Exchange, I would like to turn it over to Jeff or to Y.P..

I am not too familiar as to what the requirements are.

I cannot believe that we would have to be delisted for any reason.

We are in compliance, I think, with most of the things.

However, this is not my expertise.

And perhaps Jeff or Y.P. has an answer for this; otherwise, we will check on it and let you know.

Jay, I also want to address your first question as well.

As you realize, I've been in the Company for about a year in the past year, and I took a salary reduction on top of that, and I have bought in some of the share, of the Company share myself.

That is my position with respect to the future of the Company, by taking salary cut and also buying into more share of the Company.

With respect to the second question, is that we did ask our lawyer about this particular question.

And I do not want to -- I'm not a lawyer;

I don't want to (indiscernible), but the layman term was that, I think, so far we have not any inquiry or any comment from AMEX with regard to delisting.

And at this point we do not anticipate it happening; however, we cannot guarantee what is going to happen in the future.

But the law basically says that that's a very unlikely scenario.

Jerry, I think the regulations for the AMEX are a little more relaxed than NASDAQ.

And we did look at it once the stock decreased under $1 a share.

At that point -- and at this point, as Y.P. said, we have not had any communication with the AMEX, and we continue just basically to operate the Company to turn it around.

Ian Gilson with Roth Capital.

According to my calculations for the full-year numbers vis-a-vis the nine-month numbers, I have a revenue in the fourth quarter of $2.2 million, a cost of revenue of 3.4 and compensation of $1.5 million, which seems to be rather excessive given the level of revenue that the Company is currently experiencing and is likely to experience in the first fiscal quarter.

Also, commissions seem to be on the high side.

And I was wondering -- I know that you have done some extensive efforts in cutting G&A expense, which is highly commendable, but it still appears that your expense levels are very high.

Jeff, Y.P., is this something that you need to address (indiscernible)?

Ian, I'll try to address each one of the comments individually.

On the compensation expense, as I basically said in my opening comments, is that we had essentially two executives and a third executive we were paying severance pay.

In addition to that, under proper accounting procedures we accrued all the severance expense back into the year fiscal 2004.

In total we had an accrual of compensation expense of approximately $600,000 for executives that were under contract that we had to pay out under a contract negotiated settlement.

In addition to that there was compensation expense not in the form of actual money but in actual stock.

The Company issued approximately $500,000 of compensation expense in the form of stock.

And as Y.P. was saying, this is basically the commitment of the management team to support the shareholders by not (indiscernible) needed liquidity out of the Company.

If I could turn my attention to the gross margin, there were two things that impacted the gross margin in the fourth quarter.

One was, as we clearly stated in the press release, we had booked a significant inventory reserve to bring the inventory value down to lower of cost or market.

I think the inventory in total is properly positioned right now at approximately $ 5.2 million to make a normal margin as we sell off the inventory in the upcoming months.

In addition to that, as I alluded, before we had an additional $1 million of credits that we issued to our customers in the fourth quarter, and these were basically the major retailers.

And basically the credits were issued so that they basically kept the stock, specifically, marked our (ph) money.

In addition to that, we had -- which is traditional in a seasonal business -- we had a significant return of merchandise, probably higher than in previous years.

In the March quarter?

In the March quarter, yes.

Basically, we have the sell-in for the Christmas season that goes into the trade, and after January 1 we have the returns if there is not a sell-through.

Traditionally, we do not take returns, but if we want to do business with a lot of these retailers in the future it's a negotiation that we have to talk about with each customer on an individual basis.

I think that might have answered all your questions in general.

Was that inventory return marked to zero or marked to some market estimate?

Again, I looked at it and I put it at the lower of cost to market. (multiple speakers) I sat down with a traditional testing of the inventory valuation with our salespeople, and I looked at what the selling price is versus the cost.

And we marked it down to the market value if it was lower than the cost.

When do you hope to announce the first quarter?

Have you got a date set for that in the future?

Not currently.

As we get closer to closing the books for the first quarter we'll make an announcement.

The tax situation in Hong Kong is still uncertain?

Ian, as of now the tax authority, which is IRD in Hong Kong, have not -- have not come back with any decision regarding our potential tax in the Hong Kong company.

So to just remind to the listener, and I think last year (indiscernible) all the tax expense -- and we took a hit by (indiscernible) for more than about $1.7 (ph) million, (indiscernible) the Hong Kong government has not made any decision yet.

So you have a potential tax liability of 2.4 million?

That is still in our book -- in our balance sheet.

Is that correct, Jeff?

That's correct.

(indiscernible) we still believe, as before, that we are not really liable for this tax situation.

However, as Y.P. mentioned, the Hong Kong government has made no decision and is possibly unlikely to make a decision for sometime.

I know from other companies who are dealing on the same basis as we are dealing there, and they have heard also nothing.

And I think there is nothing that we can say at this moment more than what we have said before.

The way I read the statements and the comments that have been made, Hong Kong is a profitable operation.

That means that you are paying taxes even though you don't have any money.

Well, Ian, let me address this issue.

I think -- starting in year 2004 what we have done is we have (indiscernible) expense, and based on what our ABC, activity-based cost, is, we (indiscernible) have done is that in the past year in 2004 was, we have charged back Hong Kong subsidiary for the expense that should be charged (ph) back in the revenue.

If you look at our financial statement for the Hong Kong this year, and Hong Kong actually has a loss.

Therefore, we do not have any tax liability in Hong Kong this year, for 2004.

(OPERATOR INSTRUCTIONS).

We have a last-minute question from the line of Linda Donnelly (ph) at Wachovia Securities.

Please precede.

I was wondering if you could tell us, on the backlog as it stands as of June 15, how much of that is for United States and how much is international?

Linda, the backlog of $32.8 million is actually the FOB (ph) order;

FOB order essentially is combining of (indiscernible) into international, and also coming directly to the U.S. customer on the LC (ph) basis.

And I do not -- as of this moment I do not have a specific breakdown.

And if you want I am more than happy to maybe just (indiscernible) that number in our K.

At this time there appear to be no further questions.

Thank you very much.

Ladies and gentlemen, as I mentioned before, I would like to certainly leave this on an upbeat note.

We feel very comfortable where we are going right now, and I assure you that everything will be done to turn this company around.

And hopefully we will have some, as we are keeping you informed, some good news down the road.

We appreciate your involvement and for being here today, and thank you very, very much.

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.