Algorhythm Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended March 31, 2023, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of filing of this Quarterly Report on Form 10-Q. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.

You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on July 14, 2023.

In this Quarterly Report, unless the context requires otherwise, references to the “Company,” “Singing Machine,” “we,” “our company” and “us” refer to The Singing Machine Company, Inc., a Delaware corporation, as well as our wholly owned subsidiaries; “SMCL” refers to SMC Logistics, Inc., a California corporation, “SMCM” refers to SMC-Music, Inc., a Florida corporation, “SMH” refers to SMC (HK) Limited, a Hong Kong company, and “MICS NY” refers to MICS Nomad, LLC, a Delaware limited liability company.

Overview

The Singing Machine Company, Inc., a Delaware corporation (the “Company” or “The Singing Machine”) is a consumer electronics manufacturer of retail karaoke products. Based in Fort Lauderdale, Florida, and founded over forty years ago, the Company is primarily engaged in the development, marketing, and sale of a wide assortment of at-home and in-car consumer karaoke audio equipment, accessories, musical recordings and products. The Company’s portfolio is marketed under both proprietary brands and licenses, including Carpool Karaoke and Sesame Street. The Company’s products are sold in locations worldwide, primarily through mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores.

The Singing Machine’s operations include its wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”) and MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”).

Recent Developments

Private Placement

On November 20, 2023, the Company the Company entered into an agreement to sell $2,000,000 in common stock through a private placement of common stock (the “Private Placement”). The Private Placement was completed with two Affiliates, (Stingray Group, Inc. and Jay Foreman), both of which were existing shareholders with Board representation. The Private Placement was completed at $0.91 per share of common stock, with a total of approximately 2,199,000 shares issued. Net proceeds from the transaction were approximately $1,900,000, net of transaction fees of approximately $100,000. During the six-month period after the closing date, the purchasers may make a written request for registration under the Securities Act of all or any portion of the shares purchased.

Termination of Debt agreement

On November 17, 2023, the Company voluntarily terminated the asset-backed credit facility with Fifth Third Bank as the Company could not comply with the debt coverage financial covenant effective September 30, 2023.

Change in Fiscal Year.

On September 22, 2023, the Board of Directors approved a change in the fiscal year end of the Company from March 31st to December 31st. Following such change, the date of the Company’s next fiscal year end is December 31, 2023 upon filing of our transition report. Consequently, the Company intends to file a transition report on Form 10-K for the period from April 1, 2023 to December 31, 2023.

Hospitality Lease

On August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately 10,000 square feet of ground floor retail space and a portion of the basement underneath the ground floor retail space in the property located at 111 West 24th Street, New York, New York (the “Premises”). MICS NY intends to use the Premises as a new karaoke venue, offering immersive karaoke technology and audio-visual capabilities, with restaurant and bar offerings.

The term of the Lease Agreement is for fifteen (15) years, or on such earlier date upon which the term shall expire, be canceled or terminated pursuant to any of the conditions or covenants of the Lease Agreement. Pursuant to the Lease Agreement, MICS NY is obligated to pay an initial base rent in the amount of $30,000 beginning August 1, 2024, with scheduled increases over the term, as set forth in the Lease Agreement.

Formation of New Subsidiaries

On July 23, 2023, the Company formed three new subsidiaries: MICS Hospitality Holdings, Inc., a Delaware corporation, MICS Hospitality Management, LLC, a Delaware limited liability company, and MICS Nomad, LLC, a Delaware limited liability company, all of which were formed to support and operate the new hospitality business segment.

ATM Offering

On February 15, 2023, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Aegis Capital Corp, as sales agent (the “Agent”), pursuant to which the Company could offer and sell, from time to time, through the Agent (the “ATM Offering”), up to approximately $1.8 million in shares of the Company’s common stock. The Company received net proceeds of approximately $1,690,000 after payment of brokerage commissions and administrative fees to the agent of approximately $55,000. The ATM Offering closed on May 12, 2023.

Results of Operations

The following table sets forth, for the periods indicated, certain items related to our consolidated statements of income as a percentage of net sales as follows:

Quarter Ended September 30, 2023 Compared to the Quarter Ended September 30, 2022

Net Sales

Net sales for the three months ended September 30, 2023 decreased to approximately $15,931,000, from approximately $17,114,000 representing a decrease of approximately $1,183,000 (6.9%) as compared to the three months ended September 30, 2022. The decrease in net sales was primarily due to an estimated $913,000 increase in accrued co-op incentives based on promotional programs planned for the upcoming holiday season.

Gross Profit

Gross profit for the three months ended September 30, 2023 decreased to approximately $3,733,000 from approximately $3,853,000, representing a decrease of approximately $120,000 as compared to the three months ended September 30, 2022. There was a decrease in gross profit of approximately $266,000 primarily due to the decrease in net sales as described above. This decrease was offset by improved gross margins from 22.5% to 23.4%, which generated approximately $143,000 in higher gross income than if the prior periods’ margins had remained unchanged. The improvement in gross margins was in part due to the introduction of several new products that normally yield higher margins and reductions in product cost due to significant decreases in inbound freight.

Operating Expenses

During the three months ended September 30, 2023, total operating expenses increased to approximately $3,628,000, compared to approximately $3,268,000 during the three months ended September 30, 2022. This represents an increase in total operating expenses of approximately $360,000 (11.0%) from the three months ended September 30, 2022. There was an increase in selling expenses of approximately $269,000 during the three months ended September 30, 2023, as compared to the same period in the prior year primarily due to a one-time marketing promotion event cost of approximately $200,000 that was expensed during the three months ended September 30, 2023. The remaining increase was primarily due to an increase in legal and professional expenses related to the launch of the Company’s emerging hospitality segment.

Other Expenses

Other expenses were approximately $8,000 for the three months ended September 30, 2023, as compared to approximately $186,000 in other expenses for the three months ended September 30, 2022. There was a reduction in expenses related to lower interest and financing costs of approximately $134,000 and a gain on sale of warehouse equipment of approximately $44,000 associated with the closing of the California warehouse facility and disposal of warehouse equipment.

Income Taxes

For the three months ended September 30, 2023, we did not recognize any income tax provision or benefit as the Company is not forecasting any taxable income for the current fiscal year. The Company’s income tax provision for the three months ended September 30, 2022, was approximately $102,000. The Company’s income tax expense differs from the expected tax benefit/expense based on statutory rates primarily due to a full valuation allowance for all of its subsidiaries for the three months ended September 30, 2023 and the utilization of certain deferred tax assets and credits for the three months ended September 30, 2022.

Six Months Ended September 30, 2023 Compared to the Six Months Ended September 30, 2022

Net Sales

Net sales for the six months ended September 30, 2023 decreased to approximately $18,556,000, from approximately $28,806,000, representing a decrease of approximately $10,250,000 (35.6%) as compared to the six months ended September 30, 2022. The decrease in net sales was primarily due to an initial product set order for approximately $3,140,000 by our largest customer in the first quarter of fiscal 2022. This was largely a one-time event that represented 35% of the decrease in gross sales recognized during the six months ended September 30, 2023. The remaining decrease of approximately $5,713,000 was primarily due to change in buying demand from specific customers. One customer was the largest contributing factor to this development, and we believe this was primarily due to a reduction in the total number of product lines carried by this customer during the 2022 holiday season, as well as a relocation of the majority of the product within the customer’s retail layout. We also experienced a decrease in demand from a second customer, which was more than offset by new demand from a customer in Canada, which has been a rapidly growing new account for us. All other customer demand levels remained largely in line with expectations.

Gross Profit

Gross profit for the six months ended September 30, 2023 decreased to approximately $4,583,000, from approximately $6,943,000, representing a decrease of approximately $2,360,000 as compared to the six months ended September 30, 2022. The decrease in gross profit was primarily due to the decrease in net sales as discussed in net sales above.

Operating Expenses

During the six months ended September 30, 2023, total operating expenses increased to approximately $6,907,000 compared to approximately $6,211,000 during the six months ended September 30, 2022. This represents an increase in total operating expenses of approximately $696,000 (11.2%) from the six months ended September 30, 2022. The increase in operating expenses is primarily due approximately $575,000 in professional, legal and rent expenses for the launch of the Company’s emerging hospitality segment during the six months ended September 30, 2023 as compared to the same period in the prior year. There was also a one-time marketing promotion event cost of approximately $200,000 that was expensed during the six months ended September 30, 2023.

Other Expenses

Other expenses were approximately $37,000 for the six months ended September 30, 2023, as compared to approximately $354,000 in other expenses for the six months ended September 30, 2022. There was a reduction in expenses related to lower interest and financing costs of approximately $272,000 and a gain on sale of warehouse equipment of approximately $44,000 associated with the closing of the California warehouse facility and disposal of warehouse equipment.

Income Taxes

For the six months ended September 30, 2023, we did not recognize any income tax provision or benefit as the company is not forecasting any taxable income for the current fiscal year. The Company’s income tax provision for the six months ended September 30, 2022, approximately $97,000. The Company’s income tax expense differs from the expected tax benefit/expense based on statutory rates primarily due to full valuation allowance for all of its subsidiaries for the six months ended September 30, 2023 and the utilization of certain deferred tax assets and credits for the three months ended September 30, 2022.

Liquidity and Capital Resources

The Company reported a net loss of approximately $2,362,000 and used cash in operating activities of approximately $1,174,000 for the six months ended September 30, 2023. The Company had cash on hand of approximately $3,213,000 as of September 30, 2023. In addition to this liquidity, the Company also a had positive working capital position (excluding cash) of approximately $5,500,000 as of September 30, 2023, and no material long or short-term indebtedness other than unsecured accounts payable and accrued expenses.

The Company believes that its cash on hand, cash received from the Private Placement, working capital (excluding cash), and cash expected to be generated from its operating forecast will be adequate to meet the Company’s liquidity requirements for at least twelve months from the date of this report. While the Company is optimistic that it will be successful in these efforts to achieve its plan, there can be no assurance that the Company will be successful in doing so.

Critical Accounting Policies

Our interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in our Annual Report for the fiscal year ended March 31, 2023.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer, with the assistance of other members of our management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

During the fiscal quarter ended September 30, 2023, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.