Algorhythm Holdings, Inc. (identified in this filing as The Singing Machine Company, Inc.) — Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2022. The filing covers a karaoke equipment and content business. Financial statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2022 | Nine months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Net sales | $7.11 million | $21.24 million | $35.92 million | $44.68 million |
| Gross profit / margin | $1.29 million / 18.1% | $5.31 million / 25.0% | $8.44 million / 23.5% | $10.21 million / 22.9% |
| Operating income (loss) | ($2.28 million) | $1.69 million | ($1.55 million) | $1.95 million |
| Net income (loss) | ($1.93 million) | $1.43 million | ($1.65 million) | $2.00 million |
Cash flow and liquidity: For the nine months, operating cash use was $2.26 million and investing cash use was $0.15 million; financing provided $2.92 million. Cash at December 31 was $2.80 million, versus $7.38 million a year earlier. Management reported working capital of approximately $10.47 million. Balance-sheet current assets were $21.32 million and current liabilities $10.85 million.
Debt: The company entered a three-year secured revolving facility with Fifth Third Bank in October 2022, with a stated maximum of $15 million, reduced to $7.5 million from January through July. The balance sheet reports $1.76 million outstanding at December 31; the filing separately says the facility had no outstanding balance as of the filing date. Installment notes were approximately $0.16 million at December 31. The prior Crestmark and Iron Horse facilities were terminated, incurring a $183,000 exit fee.
Material changes and management explanation
- Quarterly sales fell 66.5% year over year; nine-month sales declined 19.6%. Management attributed weaker sales primarily to customers carrying excess inventory from delayed prior-year shipments and more cautious holiday purchasing amid recession concerns, inflation, and higher interest rates.
- Quarterly gross margin decreased 6.9 percentage points, to 18.1%. Higher customer promotional incentives and inventory reserves weighed on the margin; lower shipping-container costs partly offset them. Nine-month gross margin increased 0.6 percentage points, reflecting price increases and lower landed costs, partly offset by promotions and inventory reserves.
- Nine-month general and administrative expense rose approximately $1.83 million, including higher legal and professional, compensation, investor-relations, travel, and inflation-related costs. Quarterly G&A included $400,000 of CFO change-of-control and employment-continuation expense.
- Sales-return reserve increased from $990,000 at March 31 to $2.94 million at December 31. Management cited an additional approximately $1.3 million reserve for anticipated overstock returns from one customer. Inventory reserves also increased.
- Common shares outstanding rose from 1.22 million at March 31 to 3.15 million at December 31, reflecting a public offering, warrant exercises, and other issuances. The company raised approximately $3.36 million net in its May 2022 offering and approximately $1.14 million from warrant exercises during the nine-month period.
Outlook, risks and unusual items
- The company was in default of the Fifth Third fixed-charge coverage covenant at December 31, due primarily to lower quarterly revenue and higher G&A. It was negotiating a waiver and covenant revision; the lender had not accelerated the obligations. The filing gives no assurance negotiations would succeed. Although the filing later states the company was not currently in default on senior securities, the disclosed covenant default is a material financing risk.
- Management expected available cash, operating cash flows, financing resources, a potential equity offering, customer early-payment programs, and parent-company support to meet liquidity needs for at least 12 months. The company acknowledged there could be no assurance its plans would succeed and disclosed a support letter from Ault Alliance through March 31, 2024.
- Sales are seasonal, concentrated in the September–December holiday period. Customer concentration is significant: three customers accounted for 46%, 32%, and 22% of quarterly sales; three customers represented approximately 77% of receivables at December 31.
- Management cited inflation, supply-chain and logistics disruption, customer demand, competitive pricing, and customer credit/returns as risks. The company settled an employment-related lawsuit for $30,000; the case was dismissed in December 2022.
- No specific financial guidance was provided. Management’s forward-looking statements were subject to risks and actual results could differ materially.
Important facts for investors to verify
- Confirm the issuer and corporate-name relationship: the supplied filing identifies the registrant as The Singing Machine Company, Inc., not Algorhythm Holdings, Inc.
- Confirm the Fifth Third facility balance after December 31, the current status of the covenant default, and whether a waiver or amended covenant was obtained.
- Assess liquidity plans and the availability and terms of any additional equity financing or parent support.
- Review customer concentration, anticipated overstock returns, sales-return estimates, and inventory reserves for subsequent developments.
- Reconcile the filing’s December 31 facility balance with its statement that no balance was outstanding as of the filing date.