Business context and reporting period
This is The Singing Machine Company, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2021 (its fiscal first quarter), not a filing in the name of Algorhythm Holdings, Inc. The company develops and sells karaoke audio equipment, accessories, toys, and music products through retailers and distributors. Sales are highly seasonal, with most revenue typically generated in the September–December quarters.
Financial results and liquidity
| Metric | Three months ended June 30, 2021 | Prior-year period |
|---|---|---|
| Net sales | $6.066 million | $3.052 million |
| Gross profit / margin | $1.578 million / 26.0% | $0.962 million / 31.5% |
| Operating expenses | $2.068 million | $1.733 million |
| Operating loss | $0.490 million | $0.771 million |
| Net loss | $0.119 million | $0.207 million |
| Operating cash flow | $0.794 million provided | $0.244 million used |
Cash was $1.383 million at June 30, 2021, versus $0.397 million at March 31, 2021. Working capital was approximately $5.556 million. Current assets were $15.886 million and current liabilities $10.330 million. Net cash used in investing activities was $0.056 million; financing activities provided $0.248 million. The company reported $11.649 million of total liabilities, including $0.365 million drawn on the Iron Horse inventory facility, approximately $0.265 million of installment notes, $0.503 million of subordinated related-party debt, and operating lease liabilities of $1.952 million. No balance was outstanding on the Crestmark revolver at quarter-end; approximately $1.5 million was available under the facilities at that date.
Changes versus the prior-year quarter
- Sales nearly doubled, driven partly by $2.444 million of holiday-promotion goods shipped early to a major customer and additional spring orders from another major customer.
- Gross margin declined 5.5 percentage points. Management attributed about 4.4 points of the reduction to lower-margin holiday-promotion shipments, with the remainder primarily related to the mix of returned products.
- Operating expenses rose $0.335 million, while expenses as a share of sales fell to 34.0% from 56.8%, partly because direct-import shipments required less selling and administrative expense.
- Net loss narrowed, but results included a $0.448 million gain from full forgiveness of the Paycheck Protection Program loan. The prior-year quarter included $0.521 million of unusual gains from an insurance claim and settlement of accounts payable.
- Inventory increased to $8.370 million from $5.490 million at March 31, largely reflecting an earlier seasonal build amid logistics constraints. Accounts payable also rose substantially to $6.263 million from $2.461 million.
Outlook, risks, contingencies, and unusual items
Management said current working capital, credit-facility availability, proceeds from the subsequent private placement, and forecast operating cash generation should be adequate for at least twelve months. This is not quantified earnings guidance. Both revolving facilities expire June 15, 2022; renewal or revised terms are uncertain, and facility covenant compliance remains important. The company reported compliance with the Iron Horse fixed-charge coverage covenant at June 30, 2021.
Management described ongoing raw-material and electronic-component shortages, longer lead times, port and container disruptions, and higher logistics and labor costs, which it expected to continue through the remainder of the fiscal year. The business is seasonal and relies on a small number of customers: four customers each represented at least 10% of quarterly sales, together accounting for 91%; three customers represented 78% of accounts receivable. Inventory valuation, customer returns, and collectability are also significant estimates and exposures.
After quarter-end, on August 10, the company completed a private placement that generated approximately $9.8 million and redeemed approximately 19.6 million shares for approximately $7.2 million; it expected about $1.8 million of additional working capital after transaction expenses. The placement included 16.5 million common shares, 16.833 million pre-funded warrants, and warrants to purchase additional shares, creating potential dilution. The company also agreed to pursue a national-exchange listing application by December 31, 2021. Several directors resigned in connection with these transactions. A staffing-related employment-practices lawsuit is pending; management disputes the claims and does not expect a material adverse effect. The filing states disclosure controls were not effective and identifies a material weakness in the financial-close process, particularly inventory cutoff and valuation of estimated returns, with remediation underway.
Most important facts to verify
- Confirm the issuer identity: the supplied filing is for The Singing Machine Company, Inc., not Algorhythm Holdings, Inc.
- Assess whether the sales increase is repeatable, given its reliance on early seasonal shipments and a customer expanding spring purchases, and monitor the lower gross margin.
- Verify post-quarter financing, share redemption, warrant terms, resulting share count and potential dilution, and the actual change in working capital.
- Monitor inventory build, customer concentration, credit-facility availability and covenants, and the June 2022 facility expirations.
- Track remediation of the material weakness and any developments in the pending lawsuit or supply-chain cost pressures.