Algorhythm Holdings Inc (RIME) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to The Singing Machine's fourth quarter year-end results conference call. During the presentation, all participants will in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, Thursday, June 30th, 2005.

I would now like to turn the conference over to Mr. Jay Bauer, Chairman of The Singing Machine Company. Please go ahead, sir.

Thank you, operator. Good morning, everyone. With me this morning, our Interim CEO, Y. P. Chan, and CFO, Danny Zheng. After our prepared remarks, we'll be able to answer your questions.

Clearly, fiscal 2005 was a transition year for The Singing Machine. We began the year with very serious problems that had been to be addressed aggressively to secure the Company's future. Our inventories were too high, our cost structure was too high, our supply chain management system needed improvement, as did our vendor support system, and our sales and marketing effort. Cash flow was negative and all of this had to be addressed and corrected against the backdrop of intense competition in the karaoke industry.

I must tell you that I'm extremely proud of the performance of Y. P. Chan and our entire team at The Singing Machine Company in dealing effectively with each and all the issues at hand. We achieved positive cash flow for fiscal 2005. While we reported a loss for the year as a whole, we were profitable in the second and third fiscal quarters despite a substantial decline in revenue compared to the prior year.

Our gross profit surged by more than 400% and our gross margin improved to 24% compared to less than 3% for fiscal 2004. We reduced operating expenses by 50% and more savings are on the way. We strengthened our Board of Directors with the addition of high-quality, highly experienced outside directors that have greatly improved corporate governance. And we did all of this without neglecting new product development that is critical to our future.

And while we were accomplishing all of this, we continued to innovate our new karaoke products for the current season of a sophisticated design for superior user experience. Orders for our products currently amount to about 22 million, which is an encouraging sign for the new fiscal year. Our customers are much more diversified than before. No customer represents more than 10% of our total sales in fiscal 2005.

The credibility issues that plagued us last year are no longer a problem. We believe that the trend of orders over the next couple of months will be up. That's one of the reasons that we currently expect that fiscal 2006 will be a year of improved financial results for The Singing Machine.

To sustain our momentum and take advantage of the distribution platform we have created, we also are developing other specialty consumer electronic products. We believe these products can create additional revenue streams for the Company and offset the traditional seasonal pattern of our karaoke business. We are now introducing and offering for sale two new products with unique features designed to appeal to campers, boaters, and outdoor enthusiasts. And we plan to introduce additional new products incorporating digital technology early in 2006.

Before I turn the call over to Danny, let me offer a few comments on the balance sheet. First, the old inventory carried over from prior years has been reduced from 25 million two years ago, to 600,000 at March 31st, and less than under 50,000 today. So this is no longer an issue for the Company.

Second, while we reduced our liabilities dramatically, payables, accrued expenses, customer credits and sub debt are all down. The convertible debt interest shown as a current liability come due next February, we have developed and are developing a plan to address this issue in a timely manner.

Third, the 2.5 million income tax payable is still on our balance sheet, as it has been for more than two years. You will recall that this represents a potential tax liability to the Inland Revenue Department in Hong Kong for profits earned back in 2001 and 2002. We continue to believe that the Company does not owe this tax under a program that exempts from tax all profits earned outside of Hong Kong. Nevertheless, we must show this as a current liability until we receive an official ruling from the Inland Revenue Department.

We began this process back in 2001. With a formal request made through our Hong Kong Tax Council, a well-known firm that specializes in such matters. The Tax Authority has requested more information on several occasions, which, of course, we provided. Most recently, the last information that they requested was in November 2003. Since then, we have not received any response or assessment from the IRD regarding our offshore claim, although we understand through our Hong Kong Council that the IRD is still considering the case and has not made a decision. That's where we are today. We'll keep you informed of any developments.

Now I'm pleased to introduce Danny Zheng, who was named CFO in April. Since he joined The Singing Machine a year ago, Danny was the person primarily responsible for successfully rebuilding our accounting and financial systems. Working behind the scenes, he was instrumental in automating or financial reporting, establishing procedures to ensure the integrity and accuracy of our financial data, improving our internal controls, and cost, royalty, and inventory accounting systems, and ensuring the timely filing of all documents required by the SEC.

Danny is a CPA and has held senior finance posts in a number of private and public companies. He began his career as a tech consultant with a regional CPA firm based in New York. He has proven himself to be a capable, hard working executive with tremendous professionalism and integrity and we are glad to have him on board. Danny?

Thanks, Jay. I begin with Safe Harbor statement. 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 might differ materially.

A more detailed discussion of this risk and uncertainties is contained in this morning's press release and Singing Machine's various filings with the SEC. The statements made during this call are made only as of the day of the call, and we undertake no obligation to update these statements.

I now will briefly review our financial results for fiscal 2005. For more detailed information, I urge you to read our Form 10-K that we filed yesterday. For the 12 months ended March 31st, 2005, The Singing Machine reported revenue of $38.2 million. This compares to revenue of $70.5 million for fiscal 2004. Gross profit for fiscal 2005 increased to $9.3 million or 24% of revenue, from $1.8 million or 3% of revenue for the prior year.

Operating expenses decreased by 50% to $10.9 million for fiscal 2005, versus $22 million for fiscal 2004. Expenses decreased significantly in almost every category from advertising, commissions, to compensation, to freight, to SG&A. The net loss for fiscal 2005 decreased to $3.6 million or $0.39 loss per share, compared to net loss for fiscal 2004 of $22.7 million or $2.65 loss per share.

Results for fiscal 2005 include a $1.6 million noncash expense related to amortization of discounts on the convertible debentures as Jay mentioned it, as well as inventory and write-offs for approximately $0.3 million. Results for fiscal 2004 include line [ph] cash amortization expense of $757,000 and inventory write-offs of approximately $7.6 million. Net cash provided by operating activity for fiscal 2005 was $1.1 million. This compares to net cash provided by operating activities for fiscal 2004 of $3.2 million.

The reasons for the change are instructive. For example, in fiscal 2005 we reduced accounts payable to one of our major suppliers in Asia -- in China, from $2.1 million a year ago to $700,000, which has improved the relationship with our major supplier. We rely on this supplier to extend credit for international shipment for this year. We reduced our credit balance due to customer from $2.1 million to $1.6 million, which has improved our customer confidence. So you can see that we are using our funds wisely to enhance our good standing with our customers and our vendors.

Our balance sheet, cash and restricted cash, increased to about $1.5 million at March 31st, 2005 from about $1.2 million at March 31st, 2004. Inventories decreased to about $3.1 million at March 31st, 2005 from $5.9 million at March 31st, 2004. As Jay mentioned, inventory and carrying over from prior years amounted to about $600,000 at March 31st, 2005 and are lessening 150,000 today.

Current liabilities decreased to 9.7 million at March 31st, 2005 from $15.2 million a year earlier. Primarily reflecting a $3.2 million reduction in accounts payable and a $2.8 million reduction in accrued expenses. This decrease were partially offset by the reclassification to current liabilities of the convertible debenture due on February 20th, 2006. The reduction in subordinate debt reflect the conversion of approximately $400,000 of subordinate debt to equity we announced last quarter. An additional 200,000 of subordinate net debt was converted to equity under same terms in May this year.

Operator, we are ready for the first question.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Linda Donnelly of FMG. Please proceed with your question.

Thank you very much. Actually, three for you that shouldn't take too long to answer. The first, if you could elaborate a little bit on the two new products you mentioned in the call and in the press release that are being introduced apparently at this time. Also, if you could verify -- I'm looking at probably nonrecurring numbers for the year of about 1.9 million or $0.21. And then could you tell us who your best customers were in the -- for your fiscal 2005?

Okay. Linda, thank you for the question. Let me take -- this is Y. P. Chan.

Yes.

Let me take question number one and number three, and then I'll have Danny to respond to your question number two.

All right.

The two new products we are introducing now, a product which we could sell throughout the entire year. This is primarily for outdoor -- outdoor camping and also for household, used, for example, [inaudible] and people could use it and still some people use it. These two systems primarily consists of a battery-operated radio, weather radio band, TFP screen, DVD player, flash line, and other features that will be really useful for outdoor. And we also have a DC adapter to automobile or car when you go outside.

So we have been working on this product for a while, and now in the past couple weeks we took this product to about five major customers we have. The response so far is pretty good. We're in the process of securing and finalizing some orders to be delivered over the next few months. At this point, we do not have a specific number to give to you as far as revenue is concerned, but as we have more information, we will update everybody, maybe in the next conference call.

All right. Thank you.

With respect to our best customers, in the United States our top customer this year, Sam's Club, Costco, Radio Shacks, Kohl's, and we also have Circuit City and Best Buy still buying from us. So internationally, we still have a couple good customers. One is in U.K., and one is in Scandinavian country. We are receiving orders from them that is pretty good. The third question I turn over to Danny.

Thank you.

Linda, thank you for the question. One you mentioned a nonrecurring expense. The main part is the amortization of discount on the supporting debenture for $4 million. It's a little complicated. It took me a day even though I consider myself a financial specialty, it still took me a day to understand it. I tried to make it short. If you have any questions, you can call my office any time.

All right. Thank you.

When we record this, when we raising this $4 million debenture, we also give the warrants and conversion feature to the debenture holder. Based on the fair value of those convertible features and the warrant, we estimate at that time almost $4 million on those features we're giving our, and we had to amortize the entire period of the loan. So up to February next year, everything will finish, and we will have no more amortization for the next year. So we will finish this nonrecurring. It's about $145,000 per month up to February next year. Does that answer your question, Linda?

Yes. Thank you very much.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Ian Gilson from Granite Financial Group. Please proceed with your question.

Good morning, gentlemen. For the new products, is it necessary to set up a new distribution channel? What are the marketing efforts that you will require to sell those, since obviously, they are not karaoke machines and then will this add to marketing expense over the next year, four quarters?

Ian, this is Jay Bauer. Maybe I can answer this question for you. It's a good question. Well, there is going to be some different customers. That is correct. First of all, we are negotiating with a very important company who is very well-known in the outdoor business for a possible use of the name, which would definitely give us even more entry to some companies that we would like to deal with in with in the sporting goods area. This is under negotiation right now, but even without it, of course, the product is what it is and still can be sold. So this is just a side line.

At the moment we do not need to add any additional sales people, because essentially the companies we are serving right now with karaoke, basically all of them, or certainly most of them companies also handle and distribute other electronic products. What we will gain with this type of product is, of course, also a new possibility to sell to people who are in the boating business, who are in outdoors. People like Home Depot, Lowe's, people like that would be also primarily customers for this type of product, because the product is fairly unique.

It offers a lot of safety things that an outdoor person or a boating person could use. Siren [ph], a flashlight, there is a backup fluorescent light and it's an entire entertainment center, weather channel. These type of products can be sold by our present distribution, but we will also contact other companies we would normally not necessarily deal with. We're very excited about this product, obviously.

When can we see it on your website?

At the moment we are -- we are -- we just received the first samples, I think, about a week ago. We are working out sheets and a lot of preparation needs to be done, also going over features and our engineers in Hong Kong are working with that as well. I would say that certainly within the next four, five weeks we should have some more information about this. Y. P., would that be a correct statement?

Also, Ian, to answer your question Singing Machine has always been a winner and become a new product. Our competitor tried to copy our product. Particularly, we try not to put as much information on website until we know it's a pretty good customer base and have good placement before we put it out.

So I think that policy we're trying to do is that, keep it for the next few week, and hopefully it will get some firm order and then we go out there and we have a really good marketing campaign, and in the momentum we have a newly creat a different category of product that could shelve in the spring due to Father's Day and in the summer and the hurricane season and for Christmas for people that want to go skiing. So I think we are all excited about this product because it truly helped us to diversify from our seasonal karaoke business.

I have a couple questions regarding a production in Shenzhen. There have been a couple of reports and requests by major electronics companies that there are problems regarding water supply and continuity of the power supply. Are we covered against any problems like this?

Ian, as we know, I think, with the increased trade with China, especially in the consumer electronic business, China experienced significant shortage of labor, electricity, and water last year, and this year the situation is a little bit better because, I think, for some of the factories we use especially, one section we use they have their own power generator on site. And also to help with the situation one of the our major suppliers in the beginning of the year that we do the season, the season normally for consumer electronic generally be June, they were able to get some substantial business with one of their customers. They were able to keep their operation running. That means they were able to bring up their labor, labor force and in the slow season retain them during the peak season, and this will help to release some of the -- resolve the issue in China.

Of course, we know that consumer electronics is a highly seasonal business, that production season started now until the end of September and October. There's no guarantee that they will get what they need in the short period of time, but so far based on our production capacity and based on our forecasts, we were able to meet the demand for now.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

Well, if there's no question, Jay, do you want to do a closing remark?

Actually, we have a question, sir. I do apologize. Our final question comes from the line of Steve Spinker from Target Company. Please proceed with your question.

Yes. Good morning. Could you just review again some of the conditions that existed last year that caused problems with your major customers, where they had concerns about the viability of the Company? And I gather that these -- certainly from my reading of this, much improved earnings statement and call that conditions have dramatically improved for the Company, and is it your belief that your major customers are no longer concerned about the viability of the Company and that that will not affect their ordering pattern going forward, or that we may be able to reinstitute business in some of those other major retailers?

Yes. Steve, this is Jay. Quite right. I can confirm to you one thing, that there is no issue with any company today about the viability of The Singing Machine Company to produce and to deliver merchandise in a timely fashion. As a matter of fact, one of our very, very largest competitors, who is really -- caused a lot of havoc in the industry over the last two years, today is essentially not even in the picture anymore in the karaoke business. And I would say that the karaoke business is more in the hands of just maybe two or three players today that really take the bulk of the business. So this is definitely not an issue anymore.

Now, the reason that we are not or have not worked with some of the larger companies, I can't go into all the details right now. However, let me just say one thing, that we have chosen this year especially and we are very careful also about next year, is that we want to do business but not just at the cost of just taking business if it is not profitable for the Company. This is also the reason why we have upgraded our merchandise. We will remain competitive in the lower pressed models as well, but we have enhanced our product line, we have enhanced the procedures with design that are superior and where the competition is not that great and where it allows our customers, as well as us, to make a decent profit.

However, with this situation is what has happened, we are actually getting calls and we are going to probably next year tackle some of the larger companies again and do business with them and create some business if it is possible. I must say it is not an issue, it's not an issue of our credibility. Our credibility is solid. There's nobody there. Even our biggest customers in Europe and everywhere have received all the merchandise.

There was a little bit of a delay with one customer last year by about 30 days, and that was caused by shortages in the factory at that time. But by comparison, I don't think anybody has delivered as promptly as we have. We continue to do that. Our customers know it and appreciate this, and this is why we have retained and are doing business with some of the finest companies in Europe, as well as here in the United States.

Good. Yes, I must say I'm very pleased with the progress that's been made across the board here in cleaning up some of the problems that the current management team inherited. It's very encouraging. One last question. Last year, last Christmas season, there were considerable delays in the West Coast ports that I think did affect the Company to some degree. What steps have been taken? I know that a lot more business is being -- you're writing contracts FOB Hong Kong. Have you made any alternative arrangements to bring the product into the country?

Steve, let me take that question. Last year there was significant delay in the L.A. Port. There has been some change in the L.A. Port as well. We just read from a public announcement that the L.A. port this year is going to be operate 24 hours. That's one thing.

Secondly, from our perspective, we also try to shift as much of business to FOB as possible, so our customers will arrange the shipment directly and be able to pick up the goods, [inaudible], which are big, they buy a lot of stuff, and they can ship directly to their warehouse.

And the third thing we're doing here is that we definitely plan to order the merchandise earlier, have extra lead time to bring the goods into our warehouse ready to ship to the customers.

Okay. Thank you.

Thank you, Steve.

Thank you. That was the final question. Mr. Bauer, there are no further questions. I'd now like to turn the call back to you. Please continue with your closing remarks.

Thank you very much, ladies and gentlemen. I appreciate you listening to us, and I can assure you that any new information that we have, we will update this in a timely manner. Thank you for your support, and I thank everyone in the Company who has participated in this and all our employees who have really been working very hard and without whom all the accomplishments that we have done would not have been possible. Thank you very much, and hope to speak to you with some good news in the next conference call that we're having. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.