Business context and reporting period
This is the unaudited Form 10-Q for the quarter and nine months ended December 31, 2021. The filing identifies the registrant as The Singing Machine Company, Inc., a karaoke audio systems and accessories business; this differs from the request metadata naming Algorhythm Holdings, Inc.
Sales are seasonal, with most revenue typically occurring in the September–December holiday period. Products are sold primarily through retailers and distributors.
Financial performance and position
| Metric | Three months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2021 |
|---|---|---|
| Net sales | $21.24 million; up 25.2% year over year | $44.68 million; up 5.6% |
| Gross profit / margin | $5.31 million / 25.0%, versus 29.3% | $10.21 million / 22.9%, versus 27.8% |
| Operating income | $1.69 million, versus $1.49 million | $1.95 million, versus $3.16 million |
| Net income | $1.43 million, versus $1.17 million | $2.00 million, versus $3.37 million |
| EPS, basic and diluted | $0.03 | $0.04 |
For the nine-month period, operating cash flow was negative $3.11 million, investing cash flow was negative $0.08 million, and financing cash flow was positive $10.17 million. Cash was $7.38 million at December 31, 2021; working capital was approximately $9.81 million.
At December 31, current liabilities were $21.41 million and current assets $31.22 million. Revolving credit borrowings totaled $8.63 million, comprising approximately $6.64 million under Crestmark and $1.99 million under Iron Horse Credit (IHC). The facilities had about $0.51 million of availability. Total liabilities were $22.26 million.
Material changes versus prior comparable periods
- Quarterly sales rose on strong demand and shipments delayed from the prior quarter by port and logistics disruption. Nine-month sales growth reflected increased orders from two club-store customers, partly offset by lower Carpool Karaoke product sales.
- Gross margin contracted in both comparisons. Management attributed the decline to lower sales of higher-margin Carpool Karaoke products and higher raw-material and freight costs, which were only partly passed on to customers.
- Nine-month net income fell despite higher sales, reflecting lower gross profit and less other income than in the prior year. Prior-year results included a $1.07 million damaged-goods insurance gain; current-year other income included approximately $448,000 of PPP loan forgiveness and $236,000 of vendor payable forgiveness.
- Operating cash use reflected seasonal growth in receivables and inventory, including inventory received too late for planned peak-season shipments. Financing included revolving-credit borrowing and an August equity placement, partly offset by a $7.16 million share redemption.
Outlook, risks and unusual items
Management expected raw-material, component, freight, labor and logistics inflation to continue through the remainder of the fiscal year, with possible inventory timing issues and pressure on margins. The company cited continued consumer and retailer demand but provided no quantified revenue or earnings guidance.
Management said liquidity should cover at least twelve months, assuming operating cash generation and revision or extension of both credit facilities. Both facilities were scheduled to expire June 15, 2022, and renewal was not assured. IHC’s fixed-charge coverage covenant was breached in October and November 2021; waivers were obtained, and the company reported compliance as of December 31.
Customer and receivables concentration is significant: four customers represented approximately 75% of accounts receivable at quarter-end, and the largest customer represented 37% of nine-month sales. The sales-return reserve rose to $2.92 million from $0.96 million at March 31, 2021. COVID-related supply disruption and cost inflation remain risks.
The company reported ineffective disclosure controls and a material weakness relating to the financial close process and inventory cutoff and valuation of returns, partly associated with its new ERP system. Management expected remediation by March 31, 2022. No material litigation was identified beyond ordinary-course matters. A NASDAQ listing application was pending at December 31, 2021; a reverse split had shareholder approval contingent on approval of the uplisting.
Most important facts for investors to verify
- Confirm the filing belongs to the intended issuer: the document names The Singing Machine Company, Inc., not Algorhythm Holdings, Inc.
- Track renewal terms and availability of the Crestmark and IHC facilities before their June 15, 2022 expiration, including covenant compliance.
- Assess whether delayed inventory can be sold without further margin pressure or additional reserves, and monitor the elevated sales-return reserve.
- Review customer concentration, receivable collections, and operating cash conversion; reported nine-month cash use was $3.11 million despite net income.
- Consider potential dilution: the filing reports 51.5 million outstanding warrants, including 34.7 million common warrants at $0.35 and 16.8 million pre-funded warrants at $0.01; substantial warrant and option shares were excluded from diluted EPS as anti-dilutive.
- Check progress on the disclosed internal-control remediation and the status and conditions of the pending NASDAQ application.