Algorhythm Holdings, Inc. (RIME) Q2 2022 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Singing Machine announces second quarter earnings. [Operator Instructions] Please note this call may be recorded. It is now my pleasure to turn today's program over to Brendan Hopkins. Please go ahead.

Thank you, and thank you, everyone, for joining us this morning. We have a brief safe harbor, and we'll get started. Except for historical information contained herein, the statements in this conference call are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. With that said, I would like to turn the call over to Gary Atkinson, CEO of Singing Machine.

Thank you, Brendan. Hi. Good morning, everybody. This is Gary Atkinson, CEO of Singing Machine Company. I'm also joined this morning with Lionel Marquis, company's CFO; and Bernardo Melo, VP of Global Sales and Marketing. I'd like to start the call today by recognizing and thanking the entire global operations team here at Singing Machine. It was -- the second quarter was a very challenging quarter from a supply chain perspective. If you all recall, earlier this year, there were a lot of news reports in the media about supply chain struggles in terms of accessing critical components like silicon chips, integrated circuits, raw materials. And a lot of that was true. A lot of what was reported was true, and I know that the entire global team and our manufacturing partners worked tirelessly to make sure the product was built and shipped out on time. So I do want to thank the entire team for putting us in this position to have a successful second quarter. Also, I just wanted to highlight some of the other events that happened during our second quarter in terms of -- we closed a successful $10 million private placement back in August, where we were able to bring a group of widely respected institutional funds and received a strategic investment from our longtime content partner in Stingray. If you recall, we used the proceeds of that private placement to buy back the former 51% majority owners' shares so that we could begin the process of transforming our business. And also during the second quarter, we have started the uplist process to begin to list our shares on to a national exchange. We believe this to also be part of the transformational story behind the company, where we do believe that uplisting to a national exchange will have a positive effect in terms of opening up exposure to a wider audience of investors that can trade in our stock. And just finally, before I turn the call over to Lionel, I also want to just touch base on a little bit of what we're seeing now in terms of the tail end of the supply chain crisis, which is the situation that's happening right now at the port of Los Angeles and Long Beach. There's -- this has been widely reported in the news that there's approximately 100 ocean container vessels that are docked on anchor off the port. It is affecting the entire industry. It's a very large widespread problem with billions of dollars of inventory being held up off the port. And it is affecting us as well. We do currently have a significant amount of containers that are stuck off the port waiting for those boats to come in and dock and unload their inventory. So we're anticipating the tail end of this supply chain crisis to follow us into here our third quarter, potentially fourth quarter and beyond. It depends how quickly the port is able to clean up and resolve itself. So I'm sure we'll have more to talk about on that topic. And for that, I want to turn the call over to Lionel Marquis, CFO, to give us a little bit more detail on some of the numbers.

Good morning, everyone. I just want to touch on the highlights of the second quarter. Our net sales were $17.4 million versus $22.3 million in the prior year for the quarter. We're approximately $4.9 million down. We have a couple of things going on here. Our Cpk microphone, our Carpool Karaoke Microphone, which did very well in the prior year, this first generation of microphone, we blend down the inventory. So we did about $2.3 million less this quarter than we did in the prior year same quarter. The other thing that happened, the $2.6 million difference between -- that was $2.3 million worth of the difference in the $4.9 million decrease. The second difference was primarily about $2.6 million, and that was primarily due to the delays from the Port of L.A. So looking at the same instance year-to-date, $23.4 million versus $25.3 million. The Carpool Karaoke Microphone was down $1.5 million from the same quarter last year, and about $400,000 was due to delays from the port of L.A. and the ability to ship some of the Walmart WiFi goods earlier this year to offset. So the Carpool Karaoke Microphone, I mean, we bled down version 1, but we recently introduced for this holiday season the second generation of the product, which I'm sure Sales will discuss later on in this presentation. Gross profit, we were $3.3 million versus $5.8 million last year, about $2.5 million difference. About $1.2 million was due to the sales volume shortfall and the other $1.3 million was primarily due to the amount of margin yield, gross profit margin yield, and we'll talk about that in a second. Year-to-date, $4.9 million of gross profit margin versus $6.8 million, of which $0.5 million was due to volume and $1.0 million was due to margin yield. So let's talk about gross profit margin. Had 19.2% gross profit margin versus 26.1% gross profit margin last year. It's approximately a 6.9% -- 6.9 point margin drop. The Carpool Karaoke Microphone, which carries a very, very strong gross profit margin, the decrease in net volume contributed to about 4 points of margin decrease. The other 2.9 was primarily due to increases in raw material and extremely more expensive freight costs, container costs. And another 1.1 points of margin was due to the mix of products that we ship. Year-to-date, 22.2% gross profit margin versus 26.8% or 4.6 point margin drop. 2.3 or half of those points drop were due to the Carpool Karaoke, which carries the decrease -- decreased the profit margin as the Carpool Karaoke carries a much larger margin than most of our other products. And the rest, again, was due to increases in prices from freight, raw materials as well as the mix of goods that was sold over the period. From an operating expense standpoint, we had $2.6 million in operating expenses for the second quarter versus $3.4 million last year. That was a drop of approximately $800,000, mostly variable expenses, commissions, royalty and freight, which were pretty much commensurate with the decrease in sales. The general and administrative expenses were relatively flat for the quarter. Year-to-date, $4.6 million in selling -- in operating expenses versus $5.1 million, again, about $0.5 million down. And G&A remained flat for the year-to-date period, so we're dealing mostly we have less selling expenses like commissions, royalty and freight. And that was commensurate with the drop in sales year-to-date. As a result, we had income from operations of approximately $750,000, compared to $2.4 million last year, so a $1.7 million drop. And year-to-date was $600,000 versus $1.7 million or a $1.1 million drop. We can talk about other income a little bit and expenses. We were at $116,000 in other income versus $790,000 of other income last year. For those of you who might recall, last year, we had a recovery of a previous year insurance settlement on damaged goods that happened in the previous fiscal year of approximately $937,000. This quarter, we had $236,000 in accounts payable forgiveness. Again, still part of settling out everything that had to do with the damaged goods incident of the prior year. Year-to-date, $207,000 of income versus $742,000 last year and pretty much the same story. We did have $448,000 of loan forgiveness for the payroll protection program. And we also had the $236,000 vendor accounts payable forgiveness related to the damaged goods. So that did help offset some of the things that we were still off in that area by about $0.5 million because the biggest settlement of the insurance of the damaged goods and settling of the damaged goods product happened -- project happened last year. Net income was $900,000 versus $2.4 million for the quarter, about $1.5 million down. $800,000 year-to-date versus $2.2 million in the same year-to-date period last year, approximately $1.4 million down as a result. The only other thing I'll mention here before I sign off is that inventory, you'll note that the inventory was approximately $9.2 million versus $8.2 million in the prior year. And again, this has mostly to do with all of the inventory that's delayed at the port. It was -- of the $19.2 million in inventory, about $9 million of it was in transit as of the end of 9/30. And we can discuss that at a later time. But that's my report. Thank you all.

Thank you, Lionel. At this point, let's turn the call over to Bernardo Melo, VP of Global Sales and Marketing.

Guys, thank you for joining us and taking interest in our earnings call. I wanted to go through some of the -- I wanted to summarize some of the challenges that we face, especially from a sales and logistic situation, that you're going to hear here and you're seeing global. But this year has been an incredibly tough year with nothing to do with how we had executed programs prior to the year. One of the things that we did this year, and you had heard me in previous calls, were that we had secured a lot of the programs for the back end much earlier than we did in previous years. And we were lucky to write our purchase orders in advance. Gary recognized our global logistics team, but I want to do the same with the Hong Kong team working extremely hard securing containers at a time where everybody was bidding higher prices. Just to give you an example, we were usually paying about $3,300 a container. In some instances, we had paid this year about upwards of $20,000 a container just to get the items shipped and meet our commitments. And so Q2 were impacted by those challenges. Some of the programs were set a little bit late, later than we had hoped, but it could have been a lot worse. And that's an attribute to the Hong Kong team and the work that they have been doing and also the team in California that really stepped up to the plate, and we're able to turn things as soon as they got it back out. But it did affect not only our domestic business, but it affected our direct import business. As you guys may know, Walmart has the flexibility that once they get products in their international distribution centers, the stores could pull in additional products and set up their own end caps, which in the past, we've seen a lot of those initiatives done by the store. This year, with product being a little bit scarce in the international distribution centers, we didn't see a lot of those roll out to the stores, and it affected some of the sales. So we were comping sales from last year all through probably September. September and October, we saw a little bit of a slowdown. That was, obviously, like Lionel mentioned, due to Carpool Karaoke leveling down from the buzz that we got from TikTok, also just stores not being completely stacked with inventory. Our gross margins also took a hit because component costs were just raised across the board. We do ship a lot of items with 7-inch panels, which saw somewhere around $4 to $6 in price increase just on the panels. We saw some of the ICs also increase in pricing. And then the container prices really impacted the gross profit as well. Luckily, we had some really -- we were fortunate with our retailers in some instances where they stepped up to the plate and accepted some of the price increases. As you know, we finished our year for rounding out in the back half, mostly in December and January. And some of those price increases didn't come up to us until after Chinese New Year. And every time we place new orders, we were seeing components continue to increase. So that had a heavy impact in our gross margin. And like I said, thankfully, some of the retailers stepped up and partnered with us. But it wasn't across the board. Focusing on individual retailers. Walmart, their sell-through has been pretty steady all throughout. And like I said, there was a slowdown sometime in September and October. As soon as December kicked off, we've seen the numbers continue to grow and get back to leveling out where they should be in this time of year. We had a Black Friday annual event at Walmart that launched early in November 4. We've already seen strong sell-through, through to that, and we should be at 100% sell-through here by the end of November. So we are pretty satisfied with how that program turned out. We were able to increase one of our items from 2,000 stores to all stores in all 3,700 stores. So that shows the continued support from Walmart in believing in the category. Target, also you'll see that they rolled out their 2-day ad, and we're featured on it. We have a $20 off on one of our items. We were able to get enough inventory to the pipeline in Target to be able to support that 2-day ad. So they kept it for us. One big change for them was obviously removing Carpool Karaoke, but they're still selling on dotcom, not at the same rate that they were doing in dot-com and stores but still a steady flow of sales there in Target. So look out. There should be right after -- right after Thanksgiving, you should see our 2-day ad across all stores in Target, and we're expecting some extremely good sales. Costco supported us with our initiative this year on our WiFi pedestal. So this is year 2 of that item. They went a little bit heavier on that. We're in the midst of a 2-week period where they're promoting that to all their members. We've seen already 4 different e-mail blasts on that item, and sales have been stronger than expected on dot-com. Clubs are still selling well, but we've seen the increase come from dot-com. So we're excited about that. The ad is running all the way through November 29. So it was slow getting a lot of those products in because Costco is 100% reliant on domestic deliveries. And some of those containers were caught in, in what we've seen in the port. I mean we've seen some containers even delay up to 60 days in the port. And those being our higher-revenue items, they were caught in the port, but we were able to get enough out to at least support the ad that's running through right now. Sam's Club is another one of our really good stories. We have 4 items in there. We have kids item. We have a family item that's reselling for $49.99. We have an item that we launched this year with Sam's Club that's been trickling little by little, also a domestic item. And then they're also supporting our WiFi pedestal. So we've got incredible success with Sam's Club even though some of the challenges that we have with them being 100% domestic, but we've had good success. If you visited to one of the store -- one of the clubs of Sam's Club, you will see a nice representation of the Singing Machine product there. And they're very happy with the results so far. And hopefully, we can continue to have Sam's Club be a 4-item assortment instead of 1 or 2 that has been in the past. So Amazon, we were featured in Prime Day with Carpool Karaoke. They're still buying some direct import products that are coming in and also some domestic products. Even the big retailers like Amazon, Walmart, they've also had some container challenges themselves. So instead of hitting in late October, some of the containers are hitting now into their DCs. But we're seeing to ramp up. We're seeing the domestic orders coming in steadily just to have that backup of some of those direct imports that hit late. But Amazon continues to be really strong with us. We're still continuing to see weekly replenishment orders on the Carpool Karaoke on our traditional karaoke. We should launch some of the new items that we have coming in here shortly as well. And then I'll summarize international. International has been a really tough challenge for us just because they've also had container costs go up to $22,000 in the U.K. And we deal with some distributors there. So that has put some challenges to those distributors. But we're still in Costco in Australia. We're still in Costco U.K. We're still represented in Amazon. And we still have distribution into France, Italy, Spain and Eastern Europe. So we've maintained as much as we can there, and we've already started to visit some of the international shows. We just had one in Amsterdam, with some good responses as to what we're going to accomplish in 2022. And with that being said, I'll leave the rest into question. I don't want to take too much of the time, so I'll hand it back off to Gary.

Thank you, Bernardo. I appreciate the update. I just want to leave -- I want to make sure we have plenty of time to address questions but just wanted to sort of summarize with some parting thoughts on the quarter and particularly as we move into our holiday quarter. In terms of supply chain, I mean, obviously, it's posed a challenge to us. We see supply chain as a short-term disruption to our business that we think will continue to be a challenge over the coming 1 to 2 quarters, but that's not to say that our business model has changed in any way. The core strength of the business is still the same. We're still the captain of the category at every single major retailer. We are still the market-leading brand that consumers look for and recognize in the home karaoke space. And with the recent placement and the reconstitution of our shares, I believe the company is in best position it's ever been in to execute our business strategy moving forward, which is to transform from a purely hardware distribution model to more of a hardware recurring revenue subscription-based revenue model where we look to grow out our recurring revenue and subscriptions for content. So that -- I don't -- that I believe we are in the best position to execute on that, and that is still the long-term vision for the company over the coming few years. And with the support of the Stingray Group as a strategic investor in the company, I believe we're going to be well positioned to take advantage of that. So at this point, I know we have a couple of minutes, so I'll turn it over to answer questions.

[Operator Instructions] We will take our first question from Rommel Dionisio from Aegis Capital.

Gary, about a year ago, after the holidays, I think in your commentary, you talked about how the pricing environment was good. The promotional environment was low. You didn't need a lot of advertising into the holiday season. And just given the inflationary environment we're seeing overall, well, tightness on supply chain, which obviously you guys are not alone with in facing, are you seeing a similar environment as we enter Black Friday now with low promotions, little necessary advertising and solid pricing? Is that kind of a similar consumer demand that you -- makeup that we're going -- that you're seeing going into the holidays?

Sure. I can definitely touch on that. And if I miss anything, Bernardo can certainly comment. But in terms of what we're seeing, I mean, a lot of these promotional ads and circulars have been sort of prenegotiated at the beginning of the season. So rewind back to sort of March, April, when we were building out these programs with all of our major customers. A lot of these supply chain challenges have not really sort of surfaced out there. And so we had worked programs, created forecast based on a certain amount of promotional activity to be happening for the holiday quarter. And a lot of that is still going on. I mean we still have major promotions running with Costco, planned promotions running with Amazon. Certainly, Walmart just is in the midst of their big Black Friday promotion. So a lot of those things have still happened. But I will say that Bernardo and the team have been very successful in terms of passing on price increases due to supply chain back on to the retailers. And to the extent there's not enough inventory in the pipeline to warrant running a promotion, I know we've been pretty aggressive about just cutting back on as much of that as possible. So Bernardo, if you have any other thoughts, you want to add to that, feel free to chime in.

Yes. I would like to say that we've been pretty consistent from years past in the promotions that we've decided to participate in. I think one of the things that we've stayed away was having those closeout items that we were promoting in the past. The last couple of years, we sort of stayed away from that because our product mix has been good A-plus inventory that is go-forward items. So -- but for the most part, Walmart, Target and Amazon followed similar promotion schedules. We did have a promotional schedule with Sam's Club and Costco this year that was predetermined versus in the past we've sort of ran it based on where they were sitting on inventory, and we approved those. But this year, we had predetermined programs with promos, but the club and the retailers bought into those programs and promos. So they were -- like Gary had said, they were already secured right around January, February and March.

[Operator Instructions] And it appears we have no further questions at this time.

Okay. Well, I appreciate everybody's time this morning to hop on and learn more about our second quarter earnings update. I look forward to touching base with everybody for our third quarter, a big holiday quarter update. So thank you all. And obviously, if any questions in the meantime, feel free to reach out to Brendan Hopkins, and we can schedule update calls. Okay. Thank you, everybody. Take care.