Algorhythm Holdings Inc (RIME) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Singing Machine's third quarter fiscal 2007 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, February 14, 2007. I would now like to turn the conference over to Mr. Danny Zheng, CEO.

Thank you, operator, and good morning, everyone. With me today are Senior Vice President of Sales and Product Development, Ms. Alicia Haskamp; the Director of Music Sales, Mr. [Tom Tutorial]; and Controller [Jodi Engelmann]. After my prepared remarks, we will be able to answer your questions.

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 guarantee of future performance and actual results might differ materially. A more detailed discussion of these risks 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 date of the call and we undertake no obligation to update these statements.

This morning, we were very pleased to report higher revenue, operating income and net income for the third quarter compared to the prior year. This is the first time we have been able to make this statement for quite some time. With our restructuring now essentially complete, this is the next step towards restoring the trend of sustained revenue and profit growth that characterizes The Singing Machine's performance in the past. Our favorable third quarter results are well [consigned] that we're on the right track.

We are especially pleased by increase in the karaoke music sales in this year's third quarter. Our team is working hard to develop and successfully launch an expanded line of Original Artist Karaoke CDs in the varieties and [generous] and other innovative music products that are helping us build our music franchise. We hope to deliver further gain in our music sales in the future.

We also are encouraged by a positive response among potential customers at last month's Consumer Electronics Shows due to Singing Machine's new lines of electronic products based on MGA BRATZ license, one of the world's leading toy lines and girls' lifestyle brands, and an electronic drum set which has generated over $1 million revenues since we introduced it last year. These products are part of our plan to diversify our revenue base and we are optimistic that they will contribute to our results in the months to come.

Now on January 16, 2007, we entered into an agreement to sell 1.2 million shares of common stock for approximately $1 million to a group of credit and institutional investors. This transaction is expected to close this month. On February 1, 2007, we entered into a second agreement to sell 526,000 shares of common stock for $500,000 to (indiscernible) Electronic Company Limited who is one of our major suppliers in China. This transaction is expected to close in March. This financing will further solidify our financial position and provide working capital we need to implement our business plan.

I also want to take this opportunity to welcome Carol Lau, Yat Tung Lau and Peter Hon to our Board of Directors following their election at the 2007 annual shareholder meeting held in January 12, 2007. The Board also appointed Carol Lau as new Chairwoman of the Board. Carol succeeds Jay Bauer, who will resign as the Chairman but remain a director of the Company. Ms. Lau and Mr. Lau and Hon were nominated by the Board at the request of Starlight International Holdings Limited. The Board also appointed Ms. Lau as Chairwoman of the Compensation Committee and Mr. Lau as a Member of the Nomination Committee. Effective January 12, 2007, Marc Goldberg, a Director since 2004, will no longer serve as a Member of the Board and as the Chairman of Compensation Committee.

I am very pleased by this expansion and strengthening of our Board which reinforces the change in our executive management team we announced in December. From top to bottom, everyone at Singing Machine is excited about our opportunities for growth. And as you can see for our third quarter performance, we're working together effectively to make good things happen for our Company and improve value for our shareholders.

Now I would like to turn the speaker over to our Controller, Jodi Engelmann, to cover our financial measures.

Revenue for the three months ended December 31, 2006 increased 12% to $11,018,000 from $9,988,000 for the third quarter of fiscal 2006, driven primarily by about a $900,000 increase in sales of the Company's karaoke music. Gross margin improved to 30% of revenue compared to 26% for the prior year, also reflecting the increased contribution of higher-margin music sales. Income from operation increased eightfold to $392,000 compared to $52,000 for the third quarter of fiscal 2006.

Net income for the third quarter of fiscal 2006 was $2,824,000, or $0.10 per diluted share, which included $2,454,000 from the reversal of the provision for Hong Kong income taxes. This issue is now behind us as our auditors have agreed with us that we have no liability for this tax. I also want to note that net income before the reversal was $371,000. This compares to a net loss for the third quarter of fiscal 2006 of $565,000, or $0.06 per share.

For the nine months ended December 31, 2006, revenue was $26,353,000. This compares to revenue of $31,201,000 for the first nine months of fiscal 2006. Net income for the first nine months of fiscal 2007 was $2,480,000, or $0.11 per diluted share, which included $2,454,000 for the reversal of provision for income taxes. This compares to a net loss for the nine months ended December 31, 2005 of $1,541,000, or $0.15 per share.

On the balance sheet, working capital at December 31, 2006 was $2,340,000. This compares to a working capital deficiency of $4,274,000 at March 31, 2006. Shareholders equity at December 31, 2006 was $2,975,000. This compares to a shareholders deficit of $3,662,000 at March 31, 2006. Danny?

Operator, we are ready for the first question.

(OPERATOR INSTRUCTIONS). Ian Gilson, Zacks Equity Research.

Good morning, gentlemen. I'm gratified to see such splendid results. I have a question (technical difficulty) that you reversed. Is this an opinion of your accountants, or do you actually have a ruling from the Hong Kong tax authorities?

Ian, this is Danny. I'm sorry -- it sounds like your voice is breaking up. Can you repeat the question?

Yes. Is the tax reversal a question from your accountants, or have you received a ruling from the Hong Kong tax authority?

Let me explain to you the background on this tax reversal. As a part of the restructuring of our operation in Hong Kong, we set up our operation in Macau, and Macau office is covering all of the China operations. At the same time, our new majority shareholder, Starlight International, also is helping us in terms of engineering and shipping service. So there is no longer a need for international Singing Machine, which is our formal subsidiary in Hong Kong. We sold this subsidiary to a third independent party in September last year. So based on our professional opinions from Hong Kong, and also our auditors' opinions that we believe we are no longer subject to such tax liability. So we made such a reversal in third quarter ending December 31, and $2.4 million tax liability (indiscernible) in reverse and they are reflecting as bottom-line income.

So you are sure that there is no obligation in Hong Kong anymore?

We don't have the subsidiary in Hong Kong anymore. We have a subsidiary in Macau, The Singing Machine Macau, and we're using Starlight to provide some of the servicing in Hong Kong. So we don't own the subsidiary anymore, no.

Okay thank you.

(OPERATOR INSTRUCTIONS). [Ethan Starr], a private investor.

Good morning. I am wondering when we might see the BRATZ products on store shelves?

Ethan, I will turn your question to our Senior VP, Alicia Haskamp, and just let me give you some background of Alicia. Alicia has been with The Singing Machine over six years and she was Managing Director for our Hong Kong operations. She has done an exceptional job in terms of in the last several years difficult times. And she not only deals with the factories, I also think she also working responsible for our European sales. Now we're happy to bring her on board to oversee all of our sales and product developments, and I'm going to turn the speaker to the Alicia to answer your questions.

The BRATZ product line will be on the shelves sometime in April, end of April, possibly early May of this year.

And is this major retailers or --?

These are major retailers, mass merchants, like Toys 'R' Us, and so forth.

Wonderful. Now I am curious, back to the karaoke music, what had happened there to improve the situation, because I know you had tried to make a go of it before, and it didn't --.

I will hand that to Tom, who is our Head of Music Department.

Thank you for the question, a very good question. We were able to expand our customer base throughout the year and be a part of various promotions for the fourth quarter. And we were successful with some mass merchants, as well as some accounts that we were not able to impact over the last few years.

Okay, does this mean you hope will continue year-round, or is it mostly holiday-driven?

That's one of the challenges we have here at The Singing Machine relative to our music. To meet that challenge, we're diversifying our account base, expanding their role on a year-round basis, and also going head-forward into the Internet initiative relative to downloading music. We hope to continue our music on a substantial -- we hope to continue our music year-round, however, we still see the opportunities at this point in the fourth quarter.

Okay, great, and good luck going forward. I look forward to future results.

(OPERATOR INSTRUCTIONS). There appear to be no further questions from the audio bridge at this time.

Thank you, gentlemen, and thank you for your continued support. And certainly, the year 2006 has been a challenging year for The Singing Machine. We have raised over $5.5 million equity in last year, including $1.5 million we've raised in the last month. We can finally put our financial concerns to a rest and focusing on our product development and the revenue growth. I hope we will have good news for you in the next conference 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.