Algorhythm Holdings Inc (RIME) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Singing Machine Co. second quarter results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Danny Zheng, Chief Financial Officer of The Singer Machine. Go ahead, sir.

Thank you, operator and good morning, everyone. After my prepared remarks, Chairman Josef Bower, Interim CEO Y.P. Chan and I will be available to answer your questions. Please know 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 guarantee 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 the 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.

For the three months ended September 30, 2005, net sales were $18.532 million, compared to net sales of $18.753 million for the second quarter of fiscal 2005. This modest decline in net sales was primarily due to $175,000 decrease in sales of karaoke music, compared to last year's second quarter. Second quarter's gross margin declined to about 21% from 22.7% for the second quarter of fiscal 2005. This decrease reflected both in a decline in music sales, which yield a high margin than karaoke hardware, and an increase in manufacture costs, caused by high energy and labor costs in China.

Total operating expense decrease by $698,000 to 13% of revenue for this year's second quarter, from 16.5% of second quarter of fiscal 2005. Lower advertising and freight expenses explain part of this decline. More important was a 31% decrease in SG&A expense versus prior year, reflecting reduced professional fees, [FOB] expense, warehouse rental and relative fees. We expect to achieve further reduction in operating expense in second half of the fiscal year, primarily in connection with anticipate subleasing of our warehouse space in California.

Net income for second quarter of fiscal 2006 increased to $926,000 or $0.09 per share. This compare to net income for second quarter of fiscal 2005 of $722,000 or $0.08 per diluted share. For the six months ended September 30, 2005, net sales were $21.324 million, compared to net sales of $22.610 million for the same period of fiscal 2005. The net loss for this year's first half was $976,000 or $0.10 per share. This compares to a net loss of last year's first quarter, first half of $798,000 or $0.09 per share. Backlog of order for our karaoke product was approximately $10 million at September 30, 2005. This compares to backlog of approximately $12.5 million at September 30, 2004. I shall add, this orders are subject to cancellation or modification at any time prior to delivery.

On the balance sheet, at September 30, 2005, the Singing Machine reported cash and cash equivalents of $2.011 million, compared to cash and cash equivalents at March 31, 2005 of $670,000. Inventory declined to $2.201million at September 30, 2005, from $3.095 million at March 31, 2005. The working capital deficiency at September 30, 2005, was $3.783 million, which among other items reflected income taxes payable to the Hong Kong tax authority of $2.454 million and the net value of convertible debentures due in February of 2006 of $3.282 million. In other words, this two item alone account for more than all the working capital deficiency.

As we have reported on prior conference calls, we continue to believe the Singing Machine owe no tax to Hong Kong tax authority. We're also eyeing discussion with convertible debenture holder, which we hope to complete before the end of the calendar year. Here again, I cannot provide details of our discussion at this time. We are exploring a variety of options concerning these debentures and we report publicly as the [environment] requires.

We are pleased by our improved bottom line performance for the second quarter and by the progress we have made in repositioning the Singing Machine for the future. Our management team is dedicated and energized, and we are working together effectively to move the Company forward. Our primary and strategic objective is to leverage our distribution network and sourcing capabilities by adding new consumer products to our portfolio with the potential to create additional revenue streams and offset the traditional seasonal pattern of karaoke business.

We currently are evaluating a number of promising products, developed in-house and by third-parties that meet our criteria, including products incorporating digital and wireless technologies, that we plan to introduce early in 2006. We also are continuing to secure strategic license for both music and hardware to expand our karaoke product offering, and we are continuing to invest in new technology and designs to maintain our leadership in karaoke. We'd also are exploring opportunities to establish strategic partnerships in the manufacturing and product environment, where we see promising opportunity to create additional shareholder value.

In this connection, we recently have expand distribution of our high-end karaoke system into Musical Instrument or MI segment business, which targets semi-professional and professionals. We believe this segment of the market is less seasonal than our tarditi --traditional mass market consumer segment. We currently have a one-item offering to this market and have significant impact on our competition in MI market. Next year, we plan to offer three karaoke products of this segment. We believe we can have a impact on the segment because we offer better product with better feature and lower price than the competitors. We think this is a interesting opportunity for Singing Machine to gain incremental revenue going forward.

Operator, we're ready for the first question.

Thank you. [ OPERATOR INSTRUCTIONS ] The first question comes from the line of Linda Donnelly of Wachovia. Please go ahead.

Thank you. Concerning the potential tax liability for Hong Kong, do you have any estimation of when you might get a ruling on that?

Linda, this is Josef Bower. Unfortunately not. As I've mentioned previously, and I just came back from Hong Kong, there has been, essentially, to our estimation, not much changes in the Hong Kong government's view of these things. We have not received the ruling. We have [consumed] this with professional people there. We do really believe that we have no liability there. But, unfortunately, I cannot give you any further information on the time schedules. We are anxious to bring this to some conclusion, and as soon as we have whatever answer, we will certainly will let everybody know.

All right. And one other question, if I may. What is the average number of days in which you receive your accounts receivable?

The average day is about 60 days.

60?

That's for the domestic sales. For all the FOB sales from Hong Kong, which one account almost 65% of our business, we are doing under [netal] credit business, so we get the customer payment within 15 days, two weeks.

Thank you very much.

Thank you.

[ OPERATOR INSTRUCTIONS ] The next question comes from the line of Leonard Samuels, private investor. Please go ahead, sir.

Hi, this is Len Samuels. I was wondering about the potential for returns. Previously, in previous years, you've had a lot of obsolete inventory write-offs and a lot of returns, especially the quarter after the current one. And I wondering if that problem is likely to persist and whether the potential for that has changed this year?

Yes. In the product return entry it's a combined two returns; one is the defective return, the other return is over-stock returns. In the defective return, the ratio is always stayed the same. It's anywhere from 4 to 5% and in the previous year, as you can see there, in year 2003 or 2004, seems our revenue grow so much and certain customers worked up inventory. So, result higher returns. At that time, the return was about 9.5 to 10% returns. In last year, our return is down to 5.5% and this year, we expect that's going to be less than 5% or total return for the year. So, the order return is under control. We have a management system managing a setting [inaudible] information for our customer, so that in [inaudible] have a better ability to manage our product.

Okay. And a related question. I don't know what role that plays in the decline in backlog, but why do you have a decline in backlog?

That kind of relate to some extent for this year, since we conservative in term of putting out inventory, we decide not to bring in so much good into it, in anticipation of the revenue. As before -- before what we did was we -- we normally do about 20-30% on domestic good in our California warehouse and this year, our policy is to cut that down to about 5%. And sometimes is better to sell out than have too much inventory in our warehouse, as in the previous year. That impact our cash flow.

Okay. Thank you very much.

Thank you.

Mr. Zheng, there are no further questions at this time. 'll turn the conference back over to you. Please continue with your presentation or closing remarks.

This is Josef Bower again. Thank you very much. I can only say that we will keep you informed, as a lot of interest and discussions going on in our Company right now, which we hope to bring to satisfaction conclusion. We will keep everybody informed on all of this issues as they develop, and we'll stay in touch and make announcement as things have been final. And thank you very much for listening in today.

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.

Thank you.

Thank you.