Algorhythm Holdings, Inc. (RIME) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's signing -- sorry, Singing Machine second quarter earnings call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn today's program over to Brendan Hopkins.

Hi. Good afternoon, everyone, and thank you for taking the time to join us. We have a quick safe harbor, and we'll get to it. 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, which may cause our actual results in future periods to differ materially from forecasted results. With that said, I'd like to turn the call over to Gary Atkinson, CEO of The Singing Machine Company.

Thank you, Brendan. Good afternoon, everybody. This is Gary Atkinson. I'm the CEO of the Singing Machine. I have also with me this afternoon, Lionel Marquis, company's CFO; and Bernardo Melo, VP of Global Sales and Marketing. I do want to thank everybody for taking the time this afternoon to listen in as we give more detail on the status of our second quarter. For those that haven't seen, the numbers came out this morning, were released in our second quarter 10-Q. Obviously, this was a great quarter for Singing Machine. We're very, very pleased and happy to be back on track. We were successful in a couple of different areas, first one being we were able to grow top line sales during the quarter as well as the year-to-date 6-month period. We were successful in expanding our margin and also reducing expenses. And all of those things contributed to a strong bottom line this quarter. I'm going to be turning the call over to Lionel, who's going to give us a deeper dive into the second quarter financials. And after that, we're going to turn the call over to Bernardo, who's going to give us an update on sales. So with that, I'll turn it over to you, Lionel.

Okay. Thanks, Gary. Good afternoon, everybody. I would like to report the earnings for second quarter. We actually had a strong quarter here, and I'd like to get to some of the highlights right now. Net sales for the quarter, we were up 20 -- we were up by $3.1 million at $23.187 million versus $20.08 million. Year-to-date, up again, $26.511 million versus $24.891 million year-to-date. So $1.6 million pickup. The Carpool Karaoke product contributed approximately $1.1 million quarter-to-date and $0.9 million or almost $1 million year-to-date to those increases. And also, if you recall or may not recall, last year, we had a damaged goods incident with Walmart that hurt our sales by $1.5 million and that we don't have a repeat performance of. Thank you very much. So that helped us in terms of meeting our sales for last year at the same quarter as well as year-to-date. For the quarter, the Internet demand for our product is strong at about $0.5 million increase in that category. And year-to-date, when you're looking at Carpool Karaoke and no damaged goods from last year, those 2 were offset by -- we didn't do any business with JCPenney or minimal business with JCPenney this year as compared to last year. So that $2.4 million from Carpool and no damaged goods was offset with -- and no business with or little business with JCPenney. Gross profit margin, $16 million -- $16.4 million versus $14.4 million. It's about a $2 million increase. Carpool Karaoke contributed approximately $600,000 to that. No damaged goods incident, that was another $300,000. And the rest of that was primarily due to not only the increase in sales but also a pickup in gross profit margin. Year-to-date, $7.959 million versus $6.630 million, a pickup of $1.3 million. Same situation there, $0.5 million related to Carpool Karaoke, no damaged goods for $300,000 and the sales increase and increase in gross profit margin was the reason for the increase there. Our gross profit margin percentage was 29% versus 28.1% or 0.9 point margin pickup. Most of that was due to Carpool Karaoke, which carries a significantly higher-margin yield than the rest of our normal product. Year-to-date, 30% gross profit margin versus 26.6%, so a 3.4 point pickup in margin. And again, Carpool Karaoke had a lot of contribution to that, and also the mix of products sold had a lot to do with the difference in the increase in the gross profit margin. From general and administrative expenses, we're talking about $1.842 million versus $2.335 million (sic) [ $2.235 million ], so it's a $393,000 decrease. We had -- some of you may recall, last year, we had bought some special accounts receivable insurance for JCPenney at $135,000. Since we didn't do business with JCPenney this year, we didn't need to change -- we didn't need to repeat that. And there was out-of-pocket damage from the damaged goods. We had a pocket cost of approximately $219,000. So those 2 things on top of the fact that we traveled -- that we saved quite a bit on travel and entertainment due to not participating in shows, shows get canceled, and obviously, we've been staying close to home. It's the same thing year-to-date. General and administrative was $3.2 million versus $3.6 million. We're down by $401,000. Same reasons, the insurance of $135,000 for JCPenney, $219,000 of out-of-pocket damage and savings -- substantial savings on travel and entertainment. Selling expenses, it was $2.3 million in the prior year -- in the current year versus $2.5 million in the current year, so about $111,000 difference. We had a lot less marketing, about $300,000, $400,000 less in marketing for the rollout of the Carpool Karaoke product, which we spent quite a bit on last year. And because it has taken off this year, that was offset substantially by royalties going up for the Carpool Karaoke. It's the same reasons for the year-to-date decrease, $2.9 million versus $3.1 million, about $200,000 difference, and the same reason as the quarter-to-date. Income from operations, $2.4 million versus $859,000 last quarter. That's a 1.5 -- almost a $1.6 million increase. Year-to-date, $1.7 million versus a $243,000 loss last year, year-to-date, and that's about a $1.9 million pickup. Other income, you'll notice there's a lot of other income below the line of operations. It has to do with all of the damaged goods issues that we had last year. We had a recovery from our insurance company. We also had a pickup of about $390,000 from one of the manufacturing that caused the damage. So we picked up approximately $936,000 this quarter and almost $1.5 million in recovery year-to-date. Other expenses of note, interest has gone up because we did lose our deal with PNC Bank and had to take another financing route, costing us a little more in interest this year. So there's about a $95,000 difference quarter-to-date. It's about $125,000 year-to-date, additional interest and amortization on finance -- deferred financing costs. Net income, $2.4 million quarter-to-date versus $624,000 last year, a pickup of $1.8 million. And year-to-date it's $2.201 million versus a loss of $245,000 last year. That's $2.246 million of net income. Just one more item of note. We're experiencing very, very strong demand for Karaoke. And at the end of the year, we ended up pretty heavy in inventory. We're probably about $2.5 million or $3 million in excess inventory. We're happy to report -- and half of that was the Carpool Karaoke. We're happy to report that the demand for Karaoke has been extraordinarily strong. And just to give you an example, at this point, this year versus last year, in inventory, we had currently -- or at the end of September, we had approximately $8.2 million in inventory versus the inventory in the prior year of $15.1 million. So that's about a $7 million decrease in inventory. Not all of that is due to the sale, but a lot of it is the excess inventory going away and the excess demand that we had. So we should end up the year pretty light on inventory after everything is done, and we'll let the salesperson to talk about what's going on in the market and what's driving some of this. And that's my report. Thanks.

Thank you, Lionel. Great numbers. Appreciate the report on that. So at this point, we're going to turn it over to Bernardo, who will give us some of the success stories that we've seen through the second quarter and talk a little bit about what we're seeing right now in the market as we enter our peak holiday season. So I'll turn it over to you, Bernardo.

Yes. Thanks, Gary. Yes, I'll go over some of the numbers -- some of the numbers that I've covered throughout a few of the calls this year. So I'll focus a little bit more on sell-through now that we're getting some good set of numbers and we're well into the season. And I'll start out with Amazon. We -- for years, we thought that they would be the ones that would benefit the most from the closing from Toys "R" Us or some of the things that we've been doing. And they were slow starting to pick up some of that, but this year, the sales have really taken off on Amazon. So I first want to focus on the Prime Day success that we had this year. We promoted Carpool Karaoke on the Prime Day. Amazon gave us excellent location on their page. They also performed a QVC type video online with interaction with the product and 2 people discussing it, and they had an online taker for the product. And they bought into it, about 16,000 pieces in for the Prime Day deal, which we casted. And we thought that, that would take almost a day to go through those numbers. It's sold through in less than 2 hours. So a lot of people were excited about that. We got a lot of compliments from the Amazon upper management team as one of the more successful non-Amazon product -- branded products online. And it did so well that they just bought into it, and they're going to run the same promo now during Cyber Monday. So please be on the lookout for that. You'll see the time line has yet to be announced, but we'll have another similar program on Cyber Monday. And they've already bought into the inventory for that. So we're really excited. So just to let you know, the year-to-date sell-through already is 140% increase from last year. So we are well on our way to hitting what that number was that we thought a few years back would be, and we're really excited that Amazon is getting behind our brand, not only with the Carpool Karaoke but also the residual effects that it has on Singing Machine because then people click on the Singing Machine brand and all of our products are good. Just to give you an example, we received close to $1 million in order this week from Amazon, and that was above and beyond forecast. So I mean we are struggling a little bit to fulfill some of those orders because of lack of inventory due to a lot of the demand. But we are shipping everything that we have available to them because they're just exceeding those numbers. Same thing we experienced with walmart.com. As you guys know, walmart.com and Walmart now are complete omnichannel. So our Walmart store fee is the one that we deal with also on dot-com. And we rolled out the Black Friday this year a lot sooner. Walmart did about 3 or 4 different tiers of Black Friday, instead of doing it all on the weekend of Thanksgiving, they started putting the promos out beginning week -- November week 1. And we were part of the November week 1 program. And already, we see some incredible numbers. Interesting to note, that has put our walmart.com numbers 170% increase from last year, year-to-date. And also, we're seeing a lot of people buying the product and picking it up at store or shipping it from stores. So we no longer have to sort of carry the burden of doing dropship at our warehouses. A lot of that stuff is going right out of the Walmart stores, or people are picking it up in the store because of the system that they have. So that's been really positive for us. So we continue to see the success there on walmart.com. During our conversations with them, they admitted that they probably ordered 70,000 pieces less than they should have on the in-line product. And that was just because at the beginning of the year, they thought they were going to be conservative, but the demand has continued. And one of the comments from the buying team there was they would not make that mistake next year. Obviously, they see the success continue to go with Singing Machine. So they're going to focus on fixing that for next year. But the numbers are still good. Going right over to Sam's Club. We are seeing a continued success with all of our products there. Like I mentioned before, we were up to 5 products this year with Sam's Club. Last year, we only did 3. And even through our summer, our sell-throughs on our summer program were about 92% this year. And our main item continued to double in sales so far. So we'll be completely clean on the Sam's Club number on most of the items. They did buy into the high-end Pedestal. That has been steady, not -- they're not doing as well as Costco is, but also Costco carries one product. They're carrying 5. So that's to be understood. Costco's doing well with the Pedestal. They're exceeding the number there. And they're $199 retail, where last year, the product was $169, and we have not seen a drop in sales at all. As a matter of fact, we've seen an increase in sales even though that the price point has been higher. So that bodes well because it's a true WiFi product that we've talked about before. And they've already given self-commitments for 2021 as well because they're really satisfied with what -- how we are going. Let me see. Dropship numbers are still up over 300%. So that's been going well. Our SMC direct-to-consumer business has been up, and that's mainly triggered by Carpool Karaoke. We've had some influencers on TikTok go in and do videos and promote the items right on our Singing Machine website, which is full margins for us. And that business is up over 500%, mostly triggered by Carpool Karaoke. Like Lionel mentioned before, the margins have been great. They've been triggered by Carpool Karaoke, but also we haven't had to close our business this year. We're in such a good inventory position that we haven't had to close out business. Even our end-of-life product, we've been able to sell at pretty much full margin. So that's contributed. So for the quarter, you saw an increase in margin. Actually, when you net out the Walmart annual event item, that margin could be almost even up to about 32%, 33%. So that bodes well for us because, like I said, we haven't had to close out any particular items. We're still doing really well in Australia. And that business has grown. International has been slow. As you guys know, Europe has been in shutdown. So that's the -- international, some of the European business has slowed down for us. But thankfully, the U.S. has picked up on that side. And lastly, Lionel, you mentioned that we didn't do business with JCPenney this year. We did do business with JCPenney. The only difference was that it was a prepaid business, where they had to pay upfront for the goods. So it was a fraction of what the last year's business was, but we are doing -- we still did manage to do some business with JCPenney. They just had to prepay for the goods before they were shipped out. But with that being said, if I missed anything, I'm sure Gary will cover it, and I'll hand it over back to him.

Great. All right, Bernardo, thank you so much. Great. Great report. Good numbers. I am -- I want to be mindful of time, so we have a chance to answer questions if anybody has any questions for us. But I also just wanted to quickly touch on Black Friday this year. Obviously, in recent years, you would have seen Singing Machine heavily promoted almost at every single major retailer on Black Friday. This year, obviously, is unusual circumstances, right, with the pandemic. So a lot of retailers have sort of backpedaled a little bit away from making the Black Friday such a huge event. We did participate, obviously with Walmart in the annual event. They started running that promotion early. So they've been running that now for 2 weeks. And the sell-through has been very, very strong, exceeding expectations. But with the other retailers, we've pulled back a little bit from doing traditional Black Friday promotions, just knowing that this year, most of the sales are likely going to come digitally. So I just wanted to point that out in case anybody is looking at the Black Friday circulars and not seeing Singing Machine heavily promoted. That was the reason why. So with that being said, I want to make sure we have time for questions. So we'll turn it over to you guys.

[Operator Instructions] And we will take our first question from [ Eric Nickerson ] with SMDM.

All right. I'm not from SMDM, as you know. Yes, I think Bernardo said a moment ago that we -- or one of you said a moment ago that we're shipping -- we're pretty much selling everything that's coming in from the factories. So I'm wondering, you haven't used any airfreight to keep everybody supplied?

Yes. No, we are -- for the most part, our products do not make sense for airfreight, right, because of acute size. And we don't work with huge margins, obviously. But fortunately, it's just been -- we did have some inventory that we carried over from last year that we were able to use for fulfillment. We did go a little aggressive on ordering this year. And we also have products coming in, in November, week 3, week 4, in December, which usually we don't do. And those are all due to demands that we were seeing early on that we had to go back and pull some triggers. So no on the airfreight. But we've tried our best to catch up as much as possible. In some cases, the demand has just far all exceeded what we even expected.

Yes. Okay. That's good. It kills your margin if you do airfreight, I know. The other thing, I think you said that because of the pandemic, overseas sales have been a little slow. I presume you're talking about Europe and mostly England. Is that right?

Yes, that's correct. And also in Great Britain. We also have a major customer last year -- I mean this year called Smyths Toys, which drove a lot of the sales. They decided to go directly with a factory that was just offering prices that we just could not compete when it came to going to our distributor. And they decided to pass on the business for this year. So that caused that. But also, yes, I mean, a combination of the pandemic, a combination of Amazon flooding the product -- the market with those Chinese microphones, those things have contributed. And I think I distributed there just -- we just sort of took the approach that if you couldn't made money on the business then we just pass on the business.

Okay. Yes. What I wanted to ask about that, if I recall that a business here last spring picked up because of the pandemic because people were at home and looking at the things to buy and entertain themselves. So over in Europe, it was more a situation of the demand just didn't occur that might have, if you hadn't had this extra competition there from...

Yes, yes, exactly. Yes, yes. Because the big -- our big customer is our U.K. distributor. And his number's lower this year, and mostly it was because he ended up walking away from the Smyths business. That was just not going to be profitable for them to do it because they went directly to a factory.

Okay. And just one more. I was speaking with Brendan a while back about the mic. And if I remember right, you said that we do have an extra feature in there that makes the mic better that other mics don't have and probably get away with charging higher prices and it's also kind of unique. If I have that information correct, I'm wondering, is that still the case? Do we still have the only mics that does this particular thing that nobody else does? And are we looking for that situation to change? Are the competitors going to come up with the same features so we won't have that advantage anymore?

Well, there's 2 things. Number one, we have a licensing deal with CBS for the Carpool Karaoke official branded mic. And so a lot of consumers know the show, know James Corden, and they feel like when they buy this mic, it's the official show mic. So that's a competitive advantage that we have. The other thing is the mic works with your car radio so that you could sit in the car. And that's been a feature that it's not proprietary but that has been unique to this product. We have heard in Asia that there are competitors coming after that technology. So what we are going to do is for year #2, we're going to add some additional features, including voice effects, minor design changes. But still, we have the exclusive deal for the Carpool Karaoke licensing there.

Okay. And would it be correct to assume that none of this stuff is patentable? It's just something we just kind of stay ahead of the game and try to stay here gains. Is that it?

Yes, correct.

[Operator Instructions] We will take our next question from [ Jonathan Alvarado ].

Nice quarter. Have there been any supply chain issues? Or are you able to create all your new inventory?

No, no. There's definitely been supply chain issues. There's delays coming out of China. There's a lot of issues due to the pandemic. There's a lot of delays at the port. Sometimes we have goods that are scheduled to be picked up, let's say, today at 8:00 in the morning, and they can't get them up the port. So then they have to wait 3 days, which means we have to change orders for the following week. But the one thing I would tell you is that retailers surprisingly have been amazing. They have worked with everyone this year to change orders without penalty. Walmart just announced that they are not going to issue any chargebacks from November week 3 all the way through Christmas because everyone is in the same boat. Everyone's having challenges with the port. We usually had a vessel -- they got diverted to Tacoma. The delay goes by 2 weeks. So everybody is aware, we've been sending out -- we sent out a memo about a month ago to all the retailers, and the response to us was, hey, we're all in the same boat. So everybody is still scrambling. And yes, there has been some issues, but I'm happy to report that retailers have been extremely flexible with us and with all vendors. And they have worked on changing orders if there's delays.

Yes. Thank you. I touched base with the warehouse late last week. Both Gary and I did. And according to the director there, the port is catching up. I mean they had some substantial issues a few weeks back, but they are definitely catching up, and our containers are coming in. So we might have lost a week or 2 in some cases. But certainly, the stuff is coming. It appears to be at this point anyway, they're catching up, and it's coming in based on what we had hoped.

Great. Is there any drop-off in Carpool Karaoke Microphone sales? Or are they steady?

No, they're steady. They're steady. Just last week, we sold 2,500 pieces at Amazon, where it used to be in the 50s and less than 100. So yes, no, they're steady. Everybody has seen nicer numbers. We just bought in some additional inventory that we thought we were going to have all the way through February, and we already sold out again. So I mean it's a significant number. It's not a slight number. So yes, we're seeing just the numbers are steady. And what we're hoping is for 2021 to move a lot of the online success and continue that and bring it back into brick-and-mortar because some of the brick-and-mortar location -- I mean, placement was lost. So now most of it has been [ rightsized ], which is fine, but we're looking to get online success in 2021 and then bring it back to brick-and-mortars.

And are there any new products in the works?

Yes, yes. We definitely have some new products in the works. We are trying to capitalize on the WiFi product. That was a success. And we're designing a line of that. We are -- yes, we have been working on a few products. And so this -- we should have a nice assortment of products to be launched for summer or fall of 2021.

[Operator Instructions] We'll take our next question from [ Zachary Grotko ].

My one question is going to be, how much do you think at home, let's say, COVID sales if they helped this quarter? Do you look at it as kind of not being affected? Do you think it helps you immensely? Or just going forward on a go-forward basis, how do you look at that? Do you think it's definitely helping you a lot? Or is it kind of stagnant? Or it doesn't -- that was my question.

Yes. And that's a good question. We have seen the demand increase since COVID. Since about March, we started seeing some really good numbers, and those numbers are good for spring/summer. And now that we're getting to the holiday season, we're seeing a regular holiday push. But there's a couple -- there's also a different effect above and beyond COVID that during that cycle that goes through every so -- that we go through every so often within the music department. So like musical instruments have a steady wave that go up and down. And every few years, we start seeing a spike. And we are seeing the spike in musical instruments. And that usually leaves a residual effect into karaoke, which means that parents are promoting maybe not as much video games but just learning instruments and things like that. So I believe it's a combination of both, but the pandemic has definitely helped out the demand here in the United States, yes.

And we will take our next question from [ Jason Hirschman ].

Great quarter, guys. And I'm sorry, I missed the first few minutes of the call, so I apologize if you covered this already. I was hoping if you could give a little bit more detail on some of the -- maybe some relationships that you're hopefully building and some of the marketing that you're doing on TikTok since it is so effective. What are you doing to sort of capitalize on some of these great promoters to really build out your brand and sustain Carpool Karaoke Mic and some other aspects of your business?

Yes. That's a good question. And Lionel has shown it on some of the numbers that marketing has gone down. I mean we've done a total shift on a marketing expense. And it wasn't because any of us are geniuses or anything. I mean it was just a budgetary reason that we were trying to cut expenses. And out of that, what was born was really the influencers on TikTok and leading the charge on the Carpool Karaoke mania and things like that. So now we have a gentleman named Chris Pacheco who runs a lot of marketing and product. He and his team have reached out to a lot of the influencers on TikTok and they've been receptive. And it's not expensive. I mean we've also looked at the service call reversion, which is -- you could hire recent grad -- recent marketing grads and obtain their services for a smaller -- it's like $200, $250. And for that, they'll give us posts. They'll go on and make sure that the users are engaged in our pages. And we've seen our TikTok page grow substantially. We see the engagement on Instagram, on Facebook and on TikTok increased. And it's been for a fraction of the cost in our marketing. So now that we've seen this model work. Once our cash improves and if our sales improve, we could reinvest in that. I think we'll reach out on a larger scale. Right now, we have just some key influencers that we're working with to help us out, and it's worked out for us.

Bernardo, let me -- just one follow-up. Are you seeing this as mostly like in TikTok? And these influencers, are they mostly U.S.-based? Or are you also maybe reaching out to some in other markets, whether it's U.K. or whatever, to try and also build some kind of international, I guess, trend or influence?

Yes, it's a great question. Right now, unfortunately, it's mostly U.S. In Australia, we have worked with our streaming distributor there to do some influences. They have a good presence on Instagram as well. But it hasn't been the same. But I think once we're seeing true and true here what's working in the U.S., then we'll start reaching out to see if they have similar programs in the U.K. and in Copenhagen and in some of the other regions that were doing really well. But our U.K. distributor, this marketing team is -- also has been in the past, very savvy with influencers and things like that. So unfortunately, we have seen most of the success here in the U.S., but I'm sure that we could use that same model internationally eventually.

And we will take our final question from [ Eric Nickerson ].

Yes. I'll take one more swing. Finance question. If I remember right, you guys said you took out a PPP loan last spring. If I'm right about that, can you tell me how much was it? And has it been forgiven and taken into income yet?

The answer to that is it's still on the books. It was $445,000. We have -- we spent it in the way that it was supposed to be spent, and we expect it to be forgiven. The banks have to submit our expenses and our documents as proof, but the government keeps on changing the rules in terms of how they want the banks to report and who they want to report it on. Smaller -- right now, companies like ours who took less than $1 million, it should be a pretty simple thing to submit the things and just get forgiveness. But there's been a delay. I don't know why I'm -- in fact, I asked the question this morning because it's up to the bank. They have to submit the stuff and they have everything. And they said patience. The rules keep changing on how we're supposed to do it. But yes, I think the expectation is that it will get forgiven. It's not been taken off the books yet. So I'm expecting that to be another pickup before the end of this fiscal year. But it is a government-run program. So sometimes these things take -- you got to have patience, I guess.

I understand they're looking for fraud around the country. So that may be what's slowing it down. So anyway, if not -- it's just cash on the balance sheet, but it doesn't have any income effect yet. That would be next year then some time, if that gets forgiven then. Am I right?

Well, since our fiscal year was 3/31, I mean, I'm hopeful that by 3/31, this thing is taken care of. I mean -- so that we could report in this fiscal year. I'd like to get all of them cleaned up on the balance sheet before the end of the fiscal year. So I would think...

That would be fully taxable income then, right, when it's forgiven -- if it's forgiven?

Yes, the answer to that is yes.

And we have no further questions at this time. I will turn the program back over to our presenters for any additional or closing remarks.

Okay. Well, again, great questions, everybody. I want to thank you all for taking the time this afternoon to talk with us about our second quarter earnings. We may have to actually move all these calls to the afternoon since everybody is awake this quarter, so that's great. And we look forward to talking with everybody in February when we come out with our third quarter earnings. All right. Take care. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.