Algorhythm Holdings, Inc. annual report, FY2022

Filing and reporting period

Issuer mismatch: The request identifies Algorhythm Holdings, Inc., but the supplied Form 10-K is for The Singing Machine Company, Inc. and subsidiaries (Nasdaq: MICS). The filing covers the fiscal year ended March 31, 2022—not calendar Q4 2021. Figures reflect the 1-for-30 reverse split effective May 23, 2022.

The company develops and sells consumer karaoke equipment, accessories, licensed products and music subscriptions. Karaoke machines accounted for about 82% of fiscal 2022 sales. Sales are highly seasonal: 81% shipped in the fiscal second and third quarters.

Financial performance and position

MetricFY2022FY2021
Net sales$47.5 million$45.8 million
Gross profit / margin$10.8 million / 22.8%$12.3 million / 26.8%
Operating income$69,000$1.43 million
Net income$230,000$2.17 million
Cash from (used in) operations$(2.01) million$171,000
Cash at year-end$2.29 million$397,000
Inventory$14.16 million$5.49 million
Working capital$7.8 millionNot clearly stated

At March 31, 2022, total assets were $22.67 million, total liabilities $12.63 million and shareholders’ equity $10.04 million. Borrowings included $2.5 million on the Iron Horse inventory facility, about $0.35 million on a subordinated related-party note and installment notes; the Crestmark receivables facility had no balance at year-end. Total debt is not presented as a single figure in the supplied filing text. Cash interest paid was $547,000.

Changes, outlook and material risks

  • Sales increased 3.7%, mainly from higher orders by two large customers, partly offset by lower Carpool Karaoke sales. Gross margin fell 4.0 percentage points: lower-margin product mix, higher materials and freight costs, and only partial pass-through of cost increases were key factors. Operating expenses declined modestly.
  • Net income fell sharply, with operating income down to $69,000. Other income included nonrecurring gains, notably approximately $448,000 from PPP loan forgiveness and $339,000 from settlement of accounts payable. Prior-year results included approximately $1.07 million of damaged-goods insurance recovery and a $390,000 vendor settlement gain.
  • Operating cash use was driven principally by an $8.4 million increase in inventory. Management attributed inventory accumulation to late seasonal shipments, lost sales, and stock for a major customer program. The filing warns that failure to sell this stock at historical or better margins could hurt operating cash flow.
  • Management said cash, working capital, forecast operating cash and available credit should meet liquidity needs for at least 12 months from filing. Subsequent to year-end, the company completed a public offering that generated approximately $3.3 million net of estimated costs. Management also cited vendor financing and revolving facilities as sources of working capital.
  • For fiscal 2023, management identified continued U.S. pricing pressure and expected higher finished-goods costs from inflation, oil, shipping, drayage, components and China labor costs. The filing provides no specific revenue or earnings guidance.
  • Major risks include customer concentration (top five customers were about 90% of sales), dependence on Chinese manufacturing and shipping, chip shortages and logistics disruption, seasonality, product returns, tariffs, inflation and discretionary consumer demand. Returns were $3.6 million (7.5% of sales) versus $4.1 million (9.1%) in FY2021; the year-end return reserve was $990,000.
  • After year-end, the stock began trading on Nasdaq following a reverse split. BitNile-related holders reported approximately 52% ownership, making the company a controlled company eligible to rely on certain governance exemptions. The Carpool Karaoke license was due to expire September 30, 2022; renewal discussions were ongoing.
  • A 2020 employment-related lawsuit remained in discovery, with claimed damages of at least $500,000; management disputed the merits and did not expect a material effect. A separate patent suit was dismissed with prejudice in June 2022.

Investor verification points

  1. Confirm issuer identity: the supplied filing is for The Singing Machine Company, Inc., not the company named in the request.
  2. Review the financial statements and subsequent filings for inventory sell-through, returns, margins and operating cash flow after the large inventory build.
  3. Check current borrowing availability, facility terms and covenant compliance; the filing gives varying availability figures at different points in the text.
  4. Assess customer concentration, the status and economics of the Carpool Karaoke license, and the extent of any tariff or cost pass-through.
  5. Verify post-offering share count, warrant dilution and BitNile’s control and governance arrangements.
  6. Note that management reported internal controls over financial reporting effective after remediation of a prior-year material weakness; the auditor did not attest to internal-control effectiveness.