Algorhythm Holdings, Inc. — 10-Q Summary
Filing identity: The supplied filing is for The Singing Machine Company, Inc. and subsidiaries, not Algorhythm Holdings, Inc. It covers the unaudited quarter ended June 30, 2020, compared with the quarter ended June 30, 2019; the balance sheet compares June 30, 2020 with March 31, 2020.
Business and results
The company develops, markets and sells karaoke audio systems, accessories, musical instruments and recordings, primarily through retailers and distributors. Sales are highly seasonal, with most annual revenue typically generated in the second and third fiscal quarters.
| Metric | Quarter ended June 30, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $3.324 million | $4.809 million |
| Gross profit / margin | $1.234 million / 37.1% | $0.988 million / 20.5% |
| Operating loss | $0.771 million | $1.102 million |
| Net loss | $0.207 million; $0.01 per share | $0.870 million; $0.02 per share |
| Operating cash flow | $(0.244) million | $0.025 million |
| Investing cash flow | $(0.045) million | $(0.160) million |
| Financing cash flow | $1.749 million | $0.501 million |
Financial position and liquidity
- Cash was $1.805 million at June 30, versus $0.345 million at March 31. Working capital was approximately $3.891 million.
- Total assets were $15.844 million and total liabilities $10.362 million at June 30. Inventory was $6.870 million.
- Borrowings included $1.400 million drawn on the Iron Horse Credit (IHC) inventory facility, a $0.445 million Paycheck Protection Program (PPP) loan, approximately $0.328 million of installment notes, and approximately $0.803 million of subordinated related-party debt. No balance was outstanding under Crestmark’s receivables facility at quarter-end.
- The new two-year credit arrangements provide for up to $10 million against eligible receivables through Crestmark and up to $2.5 million of inventory financing through IHC. The filing gives differing estimates of facility availability—approximately $2.5 million in MD&A and $2.6 million in the liquidity note—as of filing; it does not provide a clear reconciled value.
Material changes and unusual items
- Sales declined 31% year over year, primarily because a large prior-year Black Friday shipment did not recur: the factory ramp-up was delayed and a customer delayed orders amid COVID-19. Higher replenishment orders from two customers partly offset the decline.
- Gross margin increased to 37.1% from 20.5%, mainly because the prior-year period included lower-margin promotional shipments. Operating expenses fell modestly, but remained high relative to sales.
- Net loss improved, but the quarter included $0.131 million of insurance-claim gain and $0.390 million from extinguished vendor payables. The company also reported that a further approximately $0.846 million insurance recovery was received in July 2020 and expected to recognize it in the quarter ending September 30, 2020.
- Cash from operations was negative, reflecting, among other items, repayment of past-due supplier invoices and reductions in customer-return reserves, accrued expenses and refunds due. Financing inflows included the IHC draw and PPP proceeds.
- The company replaced its PNC revolver with the Crestmark/IHC facilities after previously defaulting on PNC’s fixed-charge coverage requirement and remaining in default under a forbearance arrangement until the PNC facility ended. The IHC facility has a 1:1 fixed-charge coverage covenant, waived for its first six months; the facilities also impose borrowing-base and repayment conditions.
- After quarter-end, the company became its own exclusive Canadian distributor and agreed to acquire Cosmo’s karaoke inventory for approximately $0.685 million. It also extended its California warehouse lease through August 2023, at a higher stated base rent.
Outlook, risks and contingencies
Management said cash, facility availability, insurance proceeds and planned excess-inventory reduction should meet liquidity needs for at least twelve months. This is management’s expectation, not formal financial guidance. The company identified COVID-19-related disruption, uncertain consumer demand, retail closures, competitive pricing and vendor cost increases as risks. Results are seasonal and depend on order timing. Customer and receivables concentration is material: three customers represented 35%, 27% and 15% of quarterly sales, while three customers accounted for 74% of receivables. The company expected to seek forgiveness of the PPP loan; forgiveness was not assured. Management reported no material legal proceedings beyond ordinary-course matters.
Important facts for investors to verify
- Confirm the issuer identity and whether this filing is the intended company filing.
- Verify actual availability, borrowing-base terms, interest costs and covenant compliance under the Crestmark and IHC facilities.
- Confirm the timing and accounting recognition of the remaining insurance recovery, and whether the PPP loan was forgiven.
- Assess whether sales recovery, margins and inventory reduction were sustained after this seasonally weak quarter, particularly given customer concentration and COVID-19 uncertainty.
- Review the financial and operational effects of taking over Canadian distribution and acquiring Cosmo inventory.