Algorhythm Holdings Inc (RIME) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Singing Machine Second Quarter Conference Call. [OPERATOR INSTRUCTIONS] It is my pleasure to turn the conference over to Mr. Danny Zheng, Chief Financial Officer.

Thank you operator and good morning everyone.

After my prepared remarks, Mr. Y. P. Chan, our Interim CEO and Jay Bauer our Chairman will be available to answer questions.

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 risks and uncertainties is contained in this morning's press release and the Singing Machine various filing 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 the statements.

As you know, October 4, 2006, the Singing Machine announced it has integrated its Hong Kong office into facilities, provided by our majority owner, a subsidiary of Starlight International Holding Limited, which is one of our primary suppliers.

In connection with this move, we also sold our Hong Kong subsidiary to an unaffiliated third party.

Accordingly, results for the Hong Kong subsidiary has been reclassified as discontinued operations in the presentation of Singing Machine financial result for this year's second quarter in the previous periods.

For the three months ended September 30, 2006, the Singing Machine reported net sales from continuing operations of $14.297 million This compares to net sales from continuing operation of $3.692 million for the second quarter of fiscal 2006.

Excuse me, gentlemen, let me just -- give me one second.

Operator?

Am I still connected?

I feel I'm disconnected.

You are still connected, sir.

Okay, just one second, please.

I'm sorry, gentlemen.

For the three months ended September 30, 2006, the Singing Machine reported net sales from continuing operation from $14.297 million This compared to net sales from continued operations of $3.692 million for the second quarter for fiscal 2006.

This increase in net sales from our continuing operation can be attributed primarily to the increase in shipments from our operation in [inaudible] where we have obtained a formal declaration of status.

This shipments previous from our discontinued operation in Hong Kong.

Revenue from companies U.S., operation for second quarter of fiscal 2007 declined by $1.900 million compared to second quarter of fiscal 2006.

Income from continued operation before tax for this year's second quarter was $947,000.

This compared to a loss from continuing operation for the second quarter of fiscal 2006 of $652,000.

Net of taxes.

Income from continue operation for the three months ended September 30, 2006, was $947,000 or $0.04 per diluted share.

For the second quarter of fiscal 2006 loss from continue operation was $652,000 or $0.07 per share.

Loss from discontinue operation net of tax for the second quarter of 2007 was $140,000 or $0.01 per share.

This compares to income from discontinued operation net of tax for last year's second quarter of $1.578 million or $0.16 per diluted share.

Net income for the second quarter of fiscal 2007 was $806,000 or $0.04 per diluted share.

For the second quarter of fiscal 2006 net income was $926,000 or $0.09 per diluted share.

In June 2006 Singing Machine closed a $3 million equity investment in the Company by a subsidiary of Starlight.

The Starlight subsidiary received 12.9 million newly issue on share of company's common stock.

Representing a 51% of total number of share issue in outstanding primarily as a result the fully diluted weight average number of Singing Machine common share outstanding increased to approximately 25.3 million September 30, 2006, compared to approximately 9.8 million at September 30, 2005.

For the six months ended September 30, 2006, financial result, please see our press release in our SEC filing.

On the balance sheet at September 30, 2006, the Singing Machine reported cash and cash equivalents of $2.6 million compared to a cash and cash equivalents in March 31, 2006, of $172,000.

The working capital deficiency of September 30, 2006, was $654,000.

This compares to working capital deficit March 31, 2006 of $4.274 million.

The net equity has increased to approximate $104,000 compared to $3.661million an increase of $3.7 million.

The increase of net equity was primarily tribute to the investment of Starlight and to private investors.

We are currently evaluating the Hong Kong tax liability that has been accrue and never accessed for the Company's discontinued Hong Kong subsidiary.

We are working hard to complete the Singing Machine restructuring and position accompanying for the profitable growth in the years ahead.

We remain focussed on reducing expense and set to achieve additional savings in the remainder of current fiscal year.

At the same time, together with company new majority owner, we also are developing plan to dry additional revenue in both our karaoke and consumer electronic business.

Operator, we are ready for the first question.

[OPERATOR INSTRUCTIONS] Ladies and gentlemen, if you'd like to register a question, please press the one followed by Q-And-A.

And our first question comes from the line of Mr. Steve Springer with Target Capital.

Please go ahead with your question.

Yes, good morning.

On the press release, you say you're currently evaluating the Hong Kong tax liability, which that has been accrued but never assessed.

I'm surprised to read that you're currently evaluating this tax liability, in that this tax liability has existed for years, you've sold the subsidiary to which the -- from which the tax liability was derived.

There's been discussion for years about this where the company has claimed that they don't believe that it will ever be assessed or that they in fact, don't owe this tax.

Why are you unable to clean this up?

Steve, this is Danny, Chief Financial Officer.

To answer your question, after we sold the operation on September 30, 2006, we working with our auditor and we also working with our legal counsel in Hong Kong, because this tax also involving Hong Kong and the U.S. territory should get principal need to be review.

At this point our auditor has requesting additional information from our Hong Kong office and from our Hong Kong counsel and because time constraint, we have to give that auditor additional time for reviewing this.

We will make proper adjustment if necessary in the future period.

Well, I understand.

But that's an inadequate answer, Danny.

This has severely impacted the value of this corporation.

It has severely impacted the value of the Company's stock.

This goes on and on and on.

And the board of directors is not handling this in the correct way.

There's a responsibility to the shareholders to clean this matter up.

And it just never stops.

Steve, let me just make a few remarks as far as the board of directors is concerned.

The board of directors in conjunction with management and people in Hong Kong have found a solution that probably will clear this up.

We still -- let me say on the outset.

We feel very strongly that this situation is something that we do not owe this tax.

However, we found an elegant way to probably resolve this issue, which we have done very aggressively.

And in principle, you're right.

You can't say we haven't done enough about it.

All we can do right now is respond to the orders of request who want some more information.

If you push me against the wall, I would say that I do believe that this matter is going to be cleared up.

However, I -- in the meantime, I can only say that we successfully off-loaded this company.

We sold this company.

And at the moment, we are just trying to clear this up, this auditor whatever information he wants and then take it from there.

More we cannot do at this point, Steve.

We need to respond to the request with the information we're giving him.

As soon as there is some more information, we will pass this on.

Whatever the outcome is.

Jay, I'm sorry, but I disagree with you.

This has existed for years.

You could have sold this subsidiary years ago but you didn't do it.

You sold it last quarter.

It's not simple to do that.

I didn't say it's simple.

Whether it's simple or difficult is not the point.

The point is the obligation you have to clean up the balance sheet and this company has virtually y gone into bankruptcy and someone has to take responsibility for that.

You need to tell us when it's going to be cleaned up, okay, you sold the subsidiary.

If what you have is a minor matter with the accountants in the United States are requesting more information that's going to be delivered next week, you need to tell us that because we cannot go on and on and on [oddities] for years without the management of this company and the board of directors for this company speaking clearly about exactly what the prospects are.

It's not acceptable.

Telling us that we are confident, if you push me against the wall that sometime in the future, that's unacceptable.

Steve, let me make a clarification here.

The Company decision selling the Singing Machine operation Hong Kong is not a solution to resolve the tax issue rather than the business motivated, because Starlight investment because they provide a facility to Singing Machine much lower cost than we incur in Hong Kong.

That's a business motive.

Because on the tax issue, Jay mention that had before, we do not feel our claim in front of the Hong Kong tax authority.

But this setting office have no direct connection with the tax strategy.

This is a pure business motive.

Of course, everything has to go through the due process.

Since September 30, that's only less than two months' period, substantial reversal amount that the company management had putting in our financial statement which were meet the consent from the auditor and auditors working very hard.

They talking and engage Hong Kong counsel to evaluate the potential recall of the liability.

So we had to make sure when we make such adjustment in the future, there has to be a solid ground that everybody can support the number.

Fine, I accept that.

I'm not disputing that.

I'm not challenging that.

What I am challenging is the presentation at this point, of a $0.40 stock where the management is unable or unwilling to tell us when this issue is going to be resolved.

For example, if the accountants -- it is common knowledge in the investment business in the United States of America that accountants are demanding more and more and more information sometimes way beyond what is a reasonable businessman would provide normally.

That is not in dispute.

That is a fact.

So in view of the financial situation involving this company and the fact that we have a $0.40 stock and the company has been obligated to sell millions and millions of shares of stock for pennies literally, it is important that the company talk to their auditors and find out exactly what the auditors want and talk to the auditors in Hong Kong and find out when they are going to be able to provide this information and when we are expecting a resolution.

That is not an unreasonable expectation.

What we do have is we have the management and board of directors sitting on this information and refusing to communicate it to the shareholders and that is un exceptional.

This is incorrect and unfair on your part.

This situation has which we challenged which should have never been put on the Singing Machine in the first place, this is what they insisted at this time.

Let the whole thing blow up then and there and get our books audited.

Give us a break here.

We have done everything we can.

At the moment we have by selling the Singing Machine Company which has resulted in a tremendous cost savings as Danny mentioned about our operation.

We have diminished it substantially.

We have much less cost.

And the fact that some information has to be given to the auditors is all we can say right now.

We have provided this information.

But I cannot just say, put a gun on their chest and say, okay, I want to have this answer tomorrow.

As soon as we have some definitive answers we will provide this information.

The minute we have done anything like this we have always made an announcement and informed everybody.

Apparently you're missing what I said.

I didn't criticize the Company for complying with their auditors.

This thing has been going on for years.

And I have not spoken about this issue in this way before.

However, at this time you're now telling us that the sold the subsidiary and at some time in the future we expect an answer.

That is unacceptable.

I don't know specific;y what the issue is that the auditors are looking for, A. B. I don't know why you didn't anticipate this and discuss it with the auditors before.

C, I don't know what the auditors in Hong Kong, the authorities in Hong Kong are saying about this, but you do.

And it's your obligation to tell us what you think the best -- your best reasoning is as to when this issue will be resolved rather than continuing the same policy that you followed in the past, Jay, of just going along and going along and going along.

It's unacceptable.

We have a time for you to speak clearly to the shareholders about the prospect to resolve this issue and not tell us at some time in the future this is going to be cleared up.

Steve, this is Y.P.

Chan here.

We are for you and understand your frustration here and from the Company perspective we are working to get this issue behind us.

One of the things you mentioned in today's environment, we also need to balance between transparency and making forward statement that potential might, might not happen.

Steve, we understand your frustration and we are not intentionally do anything that would [inaudible]-- anything like that.

We just try the best we can and hope you understand that.

I don't understand it.

And I'm not looking for a date certain.

I'm not asking that there be an announcement December.

That's not what I'm saying.

I'm saying there needs to be some sort of indication from management as to what sort of time line are we thinking.

Are we talking about 2009?

We try to get everything before. [inaudible] We tried to get everything done was hoping we were able to do this tax statement by today, but unfortunately because tax statement by today, but unfortunately because additional one documentation required by auditor and therefore were unable to make sure a statement today.

We are working hard, expected to be resolved hopefully within the next 30 days.

Steve, we are working on try to get this resolved within the next few week that hopefully and maybe next week, but the issue we need to balance out between the transparency and also forward-looking statements.

This issue has been extremely sensitive.

Has been one of the easier phase in the company the last couple of year and we do not take this lightly.

It does not happen in two weeks, are you going to call me a liar and say it didn't happen?

Please, Jay.

All I'd like to say is I appreciate what Danny and Y.P. are doing.

I think they are being responsible managers and frankly I think they are doing a very good job under difficult circumstances considering what the board of directors has done with this company. [inaudible]

Thank you very much.

Our next question comes from the line of Mr. [inaudible] of Sachs.

Good morning.

I do have a question regarding inventory.

Basically able going into the season.

I'm not sure that inventory basically is a more than 30 days old.

And what is the cost structure of that inventory and are we looking for any potential of a writ off of that inventory?

Correct me if I'm wrong, but your question is that is our -- how do we go into the season and do we expect to write off any inventory?

Correct.

Your voice kind of is not that clear.

I think so far this year, the shipping season is the delay.

I mentioned to you in the last quarter and we the next few week going into the season.

What the difference compare with several years ago, we plan very carefully our inventory situation.

We almost just in time inventory.

Everything coming in and going out.

Actually, this year, so far, our inventory is oversold due to the manufacturing delay in delivering.

We do not anticipate at this point we will have overstock inventory by the year end.

Accordingly, we do not write off the inventory in the year end.

Okay, thanks you.

No problem, sir.

Thank you very much.

And our next question comes from the line of Miss Linda Donnelly of Wachovia.

I was not able to point out in time for the conference call what your accounts payable was September '05.

Is it substantially more than it was a year ago and if so, why

Because the Hong Kong office, we have to put anything relate with the formal operation into discontinued operation.

That number was taking away from the comparison schedule.

If you looking that information for last year, accounts payable, let me pulling my file here, as of 2005, we had if discontinued operation our accounts payable is $6.7 million.

So it's a $3 million increase this year, that attribute to a new financing trend from the parent company which rise from Starlight.

Last year we have a letter of credit basically is a cash deal.

And this year we have 30 days, so that's result increase in accounts payable.

All right, thank you.

Thank you.

Linda, one thing I want to emphasize.

This is the benefit of our parent company because of the investment and we're also able working out some sort of payment schedule with them, have less cash flow on our operations.

So the benefit of the investment from Starlight, A, will increase $3 million equity.

And, B, we will structure the payment term.

We do not need a letter of credit up front.

They allow us to have more efficient working capital.

And, C, is that all the good debt by our parent company came on time and without delays.

So as you will see, these are logistic, financial, and operation help that we have received from Starlight that become our parent company.

We expect this kind of cooperation and benefit continue as we move forward.

All right, thank you.

Thank you, very much.

Ladies and gentlemen, once more, as another reminder, to register for a question is one followed by the four on your telephone.

There are no further questions at this time.

I will now turn the call back to you.

Thank you, everyone.

Our Chairman, Jay Bauer, will make a closing remark.

Thank you very much for attending this conference.

And I can only assure you that management, in conjunction with the board, are leaving no stone unturned to resolve the pending issues, one of them that Mr. Steve Springer brought up.

As soon as we have a result, we will provide this information and give the information and pass it on to you.

I thank you very much for your patience.

This has been definitely an improved year for us.

And we're looking forward to further improvements, but some things just take time.

And we are aware of them.

And we will do everything possible to provide adequate information as it is available.

Thank you very much.

Thank you very much, ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation, ask you please disconnect your line.

Have a great day.