Business context and reporting period
This filing is The Singing Machine Company, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2020, and the nine months then ended. The supplied metadata names Algorhythm Holdings, Inc.; that does not match the registrant identified in the filing. Singing Machine sells karaoke systems, accessories, musical instruments, and recordings.
Financial performance and position
- Quarter: Net sales were $16.97 million, up 22.5% from the restated prior-year quarter. Gross profit was $4.97 million and gross margin 29.3%, versus $2.37 million and 17.1%. Operating income was $1.49 million, compared with an operating loss of $0.89 million; net income was $1.17 million, versus a net loss of $0.76 million. Diluted EPS was $0.03, versus $(0.02).
- Nine months: Net sales were $42.31 million, up 12.7%. Gross profit was $11.76 million and gross margin 27.8%, versus $7.80 million and 20.8%. Operating income was $3.16 million, versus an operating loss of $1.13 million; net income was $3.37 million, versus a net loss of $1.00 million. Diluted EPS was $0.09, versus $(0.03).
- Cash flow: Nine-month operating cash flow was $165,000, down from $684,000. Investing cash outflow was $89,000 and financing cash inflow $402,000. Cash rose to $823,000 from $345,000 at March 31, 2020.
- Liquidity: Working capital was approximately $7.64 million. Current assets were $18.87 million and current liabilities $11.23 million at December 31, 2020.
- Debt and leases: The balance sheet included approximately $65,000 drawn on the Iron Horse inventory facility, $444,000 of PPP borrowing, $297,000 of installment notes, and $803,000 of subordinated related-party debt. No Crestmark revolving balance was outstanding. Operating lease liabilities totaled approximately $2.32 million. Management reported about $171,000 currently available under the Crestmark and Iron Horse facilities, subject to eligibility and facility conditions.
Material changes versus prior comparable periods
- Management attributed quarterly sales growth chiefly to sales to two major customers, demand for the Carpool Karaoke Microphone product, and increased consumer-electronics demand during COVID-19. Nine-month growth was led by one major customer’s online business and CPK product sales.
- Higher-margin CPK sales, product mix, and lower co-op promotion allowances contributed to margin expansion. For the quarter, the lower allowances accounted for about 4.9 percentage points of the 12.2-point gross-margin increase; for nine months, about 2.0 points of the 7.0-point increase.
- Operating expenses increased $221,000 in the quarter, including higher payroll, bonuses, and warehouse rent, but declined $338,000 for the nine-month period, mainly due to lower prior-year launch marketing costs.
- Prior-year results were restated under ASC 606: co-op promotion allowances were reclassified from selling expense to reductions of net sales. The restatement reduced reported 2019 sales and gross profit by $1.66 million for the quarter and $2.86 million for nine months, with no effect on operating loss, net income, balance sheets, cash flows, or equity.
Outlook, risks, contingencies, and unusual items
- The filing gives no numerical earnings or sales guidance. Management cautioned that COVID-19’s duration and effects were uncertain and could harm demand, operations, financial condition, and liquidity. The business is seasonal, with most sales typically concentrated in the second and third fiscal quarters.
- Customer concentration is significant: five customers each represented at least 10% of quarterly sales; the largest represented 22%. Four customers each represented at least 10% of nine-month sales, led by one at 34%. Two customers accounted for 41% of receivables at December 31, 2020.
- Liquidity is exposed to seasonal working-capital demands, including the $7.06 million increase in accounts receivable during the nine-month period. The company’s financing arrangements include borrowing-base limits, mandatory paydowns, and fixed-charge coverage requirements; the IHC covenant was reported in compliance at period-end. Related-party debt repayment is conditional on lender requirements and sufficient liquidity. The company deferred a December 2020 subordinated-debt payment to February 2021 under a holder waiver.
- Unusual nine-month income included a $1.07 million insurance gain for a prior-year damaged-goods incident, a $390,000 gain from extinguishment of vendor payables, and a $188,000 related-party gain. The insurance claim was reported closed. The company expects to seek forgiveness of its $444,000 PPP loan; forgiveness was not yet confirmed in the filing.
- Management concluded disclosure controls and internal control over financial reporting were ineffective due to a material weakness in accounting for co-op allowances under ASC 606. Remediation measures were being designed and implemented. Management reported no legal proceedings beyond ordinary-course matters.
Most important facts for investors to verify
- Confirm the registrant identity: the filing is for The Singing Machine Company, Inc., not the company named in the request metadata.
- Track collections, customer concentration, returns, and seasonal working-capital needs; the sales-return reserve was $2.97 million at December 31, 2020.
- Verify actual borrowing availability and compliance with facility terms, and monitor subordinated-debt repayments and the PPP forgiveness outcome.
- Assess earnings quality after excluding the identified insurance, vendor-credit, and related-party gains, and distinguish demand growth from allowance reclassification and product-mix effects.
- Follow remediation of the material weakness and whether controls become effective in subsequent filings.