Algorhythm Holdings, Inc. (identified in the filing as The Singing Machine Company, Inc.) — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2021; the quarter is the company’s fiscal second quarter. The financial statements are unaudited. The filing’s registrant name differs from the company named in the request.
Business context and financial performance
The company develops and sells karaoke systems, accessories, musical instruments and recordings, primarily through retailers and distributors. Sales are highly seasonal, with the second and third fiscal quarters typically accounting for most annual sales.
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $17.37 million, down 22.1% from $22.29 million | $23.43 million, down 7.5% from $25.34 million |
| Gross profit / margin | $3.33 million / 19.2%, versus $5.82 million / 26.1% | $4.91 million / 20.9%, versus $6.79 million / 26.8% |
| Operating income | $0.75 million, versus $2.44 million | $0.26 million, versus $1.67 million |
| Net income | $0.69 million, versus $2.41 million | $0.57 million, versus $2.20 million |
| Operating cash flow | Not presented separately for the quarter | $(0.58) million, versus $(0.67) million |
Lower sales of the higher-margin Carpool Karaoke The Mic product and supply-chain-related delivery delays reduced revenue. Management attributed margin contraction to product mix, higher raw-material costs and sharply higher freight costs. Lower selling expenses partly offset the decline in gross profit. First-half net income included approximately $448,000 from PPP loan forgiveness and $236,000 from extinguishment of accounts payable; prior-year results included substantial damaged-goods insurance recoveries.
Liquidity, debt and capital
- At September 30, cash was $3.34 million, working capital was approximately $8.30 million, current assets were $34.38 million and current liabilities were $26.09 million. Cash increased from $0.40 million at March 31, 2021.
- Inventory rose to $19.16 million from $5.49 million at fiscal year-end, while accounts payable increased to $18.62 million from $2.46 million, reflecting seasonal inventory purchases. Receivables were $11.59 million.
- First-half investing cash outflow was $0.08 million; financing cash inflow was $3.59 million. The company received approximately $9.83 million in gross private-placement proceeds and used approximately $7.16 million to redeem and retire 19.62 million shares from former majority shareholders.
- At September 30, the revolving facilities had approximately $2.04 million outstanding and the filing reported $1.45 million available. The Crestmark and Iron Horse facilities were scheduled to expire June 15, 2022; management expected to seek renewal or revision but could not assure terms or extension. The IHC fixed-charge coverage covenant was reported in compliance.
- The August financing included 16.50 million common shares and warrants, plus 16.83 million pre-funded warrants and associated common warrants. The filing reports 51.50 million warrants outstanding, a significant potential dilution risk. Common warrants generally have a $0.35 exercise price.
Outlook, risks and unusual items
- No specific numeric earnings or revenue guidance is provided. Management said consumer and retailer demand remained strong and expected inflationary logistics and labor trends to continue through the rest of the fiscal year.
- COVID-related component shortages, port delays, container availability and inflation could disrupt supply and raise costs. Management also cited the risk of weaker consumer spending and competitive pricing pressure.
- Management believed working capital, facility availability and forecast operating cash flow would meet liquidity needs for at least 12 months, but noted that facility renewal was uncertain. The filing gives differing facility-availability figures in separate sections ($1.45 million at September 30 versus approximately $5.9 million “as of this filing”); the dates and basis are not clearly reconciled in the text.
- Disclosure controls were deemed ineffective. Management identified a material weakness in the financial close process, particularly inventory cutoff and valuation of estimated returns, associated in part with the new ERP system; remediation efforts were underway.
- Three customers accounted for 49%, 16% and 12% of quarterly sales; three customers represented 69% of receivables. A lawsuit involving the logistics subsidiary was described by management as lacking merit and not expected to materially affect results.
Most important facts for investors to verify
- Reconcile the filing’s facility availability and borrowing figures, and confirm renewal or refinancing plans before the June 2022 maturities.
- Track gross margin, freight and input costs, inventory levels, return reserves and the conversion of seasonal receivables and inventory into cash.
- Assess dilution from outstanding common and pre-funded warrants, and confirm current shares outstanding and potential warrant exercises.
- Review progress in correcting the ERP-related inventory-control weakness and restoring effective disclosure controls.
- Monitor customer concentration, supply-chain disruption, and the outcome or financial exposure of the employment-practices lawsuit.