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

Good day, everyone, and welcome to The Singing Machine's Year-End Earnings Call. [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, everybody, for taking the time to join us today. We have a quick 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 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.

Thank you, Brendan. This is Gary Atkinson, the company's CEO. I also have with me Lionel Marquis, company's CFO; and Bernardo Melo, Company VP of Sales and Marketing. I'd like to start off by thanking everybody for joining today's call to discuss our fiscal 2021 year-end results. Lionel will start the call by discussing the numbers in more detail, and Bernardo will give an update on sales initiatives. But I wanted to start the call off by saying the management team here is very proud to share the results of this fantastic year, particularly given all of the challenges that we all experienced last year. By all measures, fiscal '21 was a very, very strong year for us where we were able to fully execute upon our plan. We successfully were able to drive explosive sales growth by almost 20%. We were able to expand margins by almost 6%. We successfully were able to lower expenses and subsequently reported over $2.2 million in net income, which works out to about a $5.1 million turnaround from the prior year. Further, from a technology perspective, we were also successful in executing and launching a new integrated digital music content subscription service that launched in our new WiFi-enabled machines that we launched into Costco and Sam's Club last year. The pilot program was a very successful program in terms of high hardware sell-through, and subscription conversion rates were also extremely positive. We're going to touch a little bit more on that later in the call. But before that, I want to turn it over to Lionel Marquis to cover the numbers in more detail.

Thank you, Gary. Good afternoon, everyone. I just want to touch on some of the highlights of the financials that came through for fiscal year 2021. From a net sales perspective, we did $45.8 million versus $38.5 million last year. That's an increase of $7.3 million. Our new Carpool Karaoke line contributed an additional $2.7 million over the prior year to that increase. COVID was good to us in many ways. Demand was very, very heavy and caused a couple of things. One, obviously, we were able to get rid of a lot of inventory that we had excess from the prior year. And it reduced our overstock tremendously from the year before when we had seen some low traffic over the Christmas holidays. So that contributed approximately $2.1 million to the increase in our net sales. And if you remember correctly, in the prior year, we had a damaged goods situation of goods that we had shipped to a large customer that were damaged, and we had taken a $1.6 million revenue hit against that, which we had no repeat of that, thankfully, this year. And co-op marketing -- co-op incentives, if you will, programs, everything we're selling for full price during the holiday due to COVID, I mean, and the demand and just the oddness of the Christmas season, peak season last year, many of the larger retailers did not run their customary co-op incentive program. So consequently, we spent about $900,000 less in co-op programs that we did the year before. Gross profit margin was $12.3 million versus $8.2 million, with an increase in gross profit margin of $4.1 million. Our sales increase contributed approximately $1.5 million to that, our co-ops at spending less than $900,000 and co-ops also contributed to the $4.1 million. And the rest was on gross profit margin increase. Gross profit percentage-wise, we did 26.7% in gross profit margin versus 21.2% in the prior year. That's a 5.5 point increase in the gross profit margin percentages. The co-ops, okay, the less spending on the co-op programs contributed approximately 3.3 points of margin to that. The ratio of Carpool Karaoke products sold compared to the prior year also contributed another 1.5 points of margin, with the rest of the 0.7% increase due to the mix of products sold, including the new product line, the streaming line that we launched, which carried a relatively higher margin than the normal products. Selling expenses were $4.0 million versus $4.3 million in the prior year, about $300,000 less in selling expenses. We ended up spending approximately $500,000 less on the Carpool Karaoke product, which in the prior year we had spent about $0.5 million to launch it. We did not have to launch it this year. It was already launched. And it did take off this year a lot better than what we had anticipated in the prior year. We thought the prior year would be a lot better, but it turned out that this year was better for Carpool Karaoke. That $500,000 was offset by having to pay royalty of approximately $200,000 over the prior year. So the net effect is our selling expenses were lower by about $300,000. General and administrative expense is $6.5 million versus $6.6 million. So we kept all this volume and increase, kept the general and administrative expenses relatively flat. Income from operations, $1.4 million versus a $3.2 million loss in the prior year. Sales were up, no damaged goods issue carryover from the prior year. And expenses were flat or down. The selling expenses, the operating expenses were either flat or down. Other income, that was -- we had a lot of onetime pickups, if you will, this year. We had approximately $1.4 million in insurance gain in those damaged goods from the prior year. So we had taken a pretty big loss due to the uncertainty of what our insurance company would actually pay out for the damaged goods. We recovered that plus more, if you will, on the damaged goods. So we recovered $1.4 million in the insurance proceeds. We also received approximately another $400,000 from our -- the manufacturer who caused the damaged goods problem as well. These increases in other income were offset by interest expense -- additional interest expense of approximately $200,000. And that was due to the different banking solution that I had to enter since we had such a problem with the income last year. Our banking relationships -- we had to change our banking relationships because we were considered a bit more risky at that point, and that cost us a couple of hundred thousand dollars of interest. Net income was $2.1 million versus $2.8 million loss or $4.9 million increase. A couple of things that we did very well with is the inventory. We lowered our inventory by approximately $2.1 million. And again, we ended up the year last year with anywhere from $2 million to $2.5 million of excess inventory, and we were able to move all of that out in this year due to the demand and the takeoff of the Carpool Karaoke product. Accounts payable, well, we had stretched payables a little bit at the end of the year. But all our vendors are current now, and we reduced accounts payable by $2.7 million. All that having been said, that's the highlights of fiscal year '21. And I just wanted to add a caveat that we're already starting out the year pretty well in fiscal year '22 as the -- we've already received a forgiveness on our Payroll Protection Program loan of approximately $450,000, and those results will show in the first quarter of next year. And that's my report.

Okay. Thank you, Lionel. At this point in the call, we're going to turn it over to Bernardo Melo, who will give an update on sales and marketing.

Hello, guys. Yes, I'll cover some of the highlights for the year as the team previously mentioned. We had a pretty big [ badder ] year. It didn't come without challenges. We did have some challenges overall. But for the most part, we remained strong with our strong accounts, and we grew our strong accounts. Some of them grew higher than expected. We had some numbers plugged in that we thought that we would be able to grow. But at the end of the day, the momentum that we gathered early during the pandemic lasted all the way through the entire fiscal year. And now that we've even seen some of the comps of the pandemic to some of the comps now, we're still maintaining pretty healthy sales. And some of the big winners, obviously, were accounts that had a food component within the retail Target, Sam's Club, Walmart, Costco, those accounts that kept the food traffic going as people were buying essential products or buying groceries. We saw a high number of consumers that were taking that opportunity to go look for family entertainment or way to entertain their kids, keep them active inside the house. And they were looking at singing products and Singing Machine being the leader in the home karaoke business really benefited from that. Case in point, I'll start out with Target. Target started asking for a higher demand on products about right around April or May of last year. Luckily, we came into the fiscal year with some good backup inventory. We had ended the year with about $7.7 million of inventory that usually we have to promote to sort of release some of those goods and turn into cash flow. But this year around, we were able to just supply the demand that was there. It started with Carpool Karaoke catching fire on TikTok. It became viral, as you guys have heard before on previous calls, and that started sort of the wave. But it wasn't the only success story. Actually, higher price points were doing well. Portable mics, microphones were doing well, so Bluetooth microphones, Carpool Karaoke and accessories. Because people that were buying musical instruments were going to Singing Machine microphones for their accessory needs. And that led Target to go from $5.3 million at cost to almost $10 million a year within the fiscal year. So they hit a $9.7 million, which is substantial because we've been pretty much flat or even for the last 4, 5 years with Target, and we saw significant sales. And it was not only driven by the sales with the foot traffic in the stores, we had a 48% increase in digital sales as well, which bodes well for us because that's people that have been specifically looking for Singing Machine products. With Carpool Karaoke, another thing that happened with Target was that usually we have promo sales account for about 45% to 50% of the general sales throughout the year. Last year, promo sales only accounted for about 20%. We switched the strategy into just letting the value dictate itself at retail. And we saw that success carry. So we didn't do a 2-day ad with Target. And we saw this year without the 2-day ads still maintain similar sales throughout November and December. The other thing that we saw was that we launched with them a Bluetooth microphone, which we had been hesitant to really dive into because it's more of a single arm product, but we couldn't ignore what was happening in the marketplace. So we launched an item with them, and we couldn't keep it in stock. Actually, we couldn't produce enough items. So we left some money on the table there. This year, we've definitely produced and planned accordingly. And that item still has had challenges keeping in the stock. So we look for that category to continue to grow. We've added some different colors, some different items, and we're looking to introduce some new products by the end of this year on that category to the point that for Target, it accounted for about 25% of the overall sales. We think that number could grow to about 30% to 35%. And those items come with higher gross margins for us. So it is something that we want to definitely concentrate on. Walmart continues to be extremely strong. They made a mistake last year by not buying enough into demand. So we felt like we left about another 60,000 units on the table that we could have sold through. But still, they had -- their business increased $2 million year-over-year. And they continue to be our #1 customer, continue to support the line. Black Friday was extremely successful last year. It went well, sell-through went well. Although that Black Friday didn't happen during the Thanksgiving holiday, it happened in the first week of November. It was still successful because it carried all the way through November instead of just being concentrating on those 2 days and also helped out the peripheral items within the category. So Walmart has committed again some good numbers this year. They finally bought into what the projections are going to be, and we've got those orders in-house. And we're shipping and we've made early commitments with the factory. So we haven't had some of the challenges that others are facing to try to gather inventory. Amazon was another one of the big winners last year, another one of those retailers that has been kind of flat for us with the challenges that we're facing from the competitors in the marketplace. It didn't face it last year. Although marketplace grew and some of these competitors continue to grow their business, Singing Machine grew right along with them. We increased the business overall from about $6.1 million in shipped goods to a little bit over $10 million. And we're already projecting an additional 20% increase this year for Amazon as well. So they had -- they stroke it big with Carpool Karaoke. They did a Prime Day promotion, which they pushed back all the way to October. We sold our complete allotment with them within the first hour. So they ran it back during Cyber Monday. And we had similar success where they had a QVC type program to sell the product, and they did extremely well. They duplicated it again in 2021. So they're all for the success of the Carpool Karaoke. Continued promo sales were down again. Reg sales were up. So we didn't have to fund as many promos at Amazon. Our AMS spending was up because we see that, that's the best bang for the buck. But we deleted a lot of the substantial marketing that we felt was not giving us the same bang for the buck. So we reallocated some of those spend into AMS, and that really turned out well for us. Sam's Club, another good success story there. For the first time, we started a spring/summer program that -- based on what was happening with the pandemic, and that was successful. So now turn that into 2021, they're starting to bring in product now in June as opposed to August, September like they've done in the past. And we just started seeing some early reading on the sales, and it seems very promising as to what we could do for 2021. So it didn't come without challenges. We did have some challenges with Sam's Club and Costco. We introduced a brand new item, which was our first WiFi Pedestal. That was a little bit challenging to get production. The technology involved in it was a big overthink for us. So we had to cut down production from an expected 40-something thousand pieces to about 35,000, and that contributed to some of the lost sales there. But this year, we resolved a lot of the production challenges and it's full speed ahead with Costco on it. They're banking big on that item this year. With that being said, we did face some challenges over in Europe. Europe got hit harder than the U.S. with a lot of their lockdowns and a lot of the retailers are closed. So some of our distributors there were a lot conservative or did not move forward with the line. So we've kind of restrategized of how we're going to attack Europe in 2022. So stay tuned for that. Best Buy lost a lot of the floor space. They wanted to have their aisles cleaned up so that there could be some good social distancing for their shoppers. So by losing the floor space, we lost some of the promotional that we had done the year before. That initiative is still in place for this year. So we're still finding ways to maybe peg the items instead of putting on the floor. So stay tuned for more news there. And just overall, we kind of reintroduced karaoke to a lot of different families that left us some good reviews, some good positive messages on what we're doing. And that momentum was carried over to 2021. So we were glad to see that. We are now developing some new products for 2021, end of the year and then 2022 that's going to capitalize on some of those things that we saw were hot and trendy. And yes, so we look forward, and I'll leave some of the other things for questioning in the back end. I know if you want to get some more specific stuff, I'll stick around for that. And then I'll hand it back over to Gary to give you more of the overview.

Perfect, perfect. Thank you, Bernardo. And I do want to make sure we save a few minutes for questions, but I also just want to quickly touch on before we wrap it up on our side. Bernardo touched on the new WiFi streaming product that we launched last year into Costco and Sam's Club. So from a technology perspective, it was not a large number of units that we launched, but it was a new initiative to grow our WiFi streaming subscription service. And given it was a pilot run, the results were very, very successful from a music subscription perspective. We were able to reduce a lot of the friction in the onboarding process. So we were seeing a lot more users that were buying that new machine that were onboarding, registering, creating accounts and then ultimately subscribing. So we were very, very happy with the results of the pilot program. And as Bernardo said, we're pushing that initiative forward. We're building more devices with that technology going into Costco again this year. And ultimately, we'll be looking to bring that price point down to more and more of our products. So we're very happy with where we see the future direction of our music subscription services going. So with that being said, I see we have a couple of minutes left, so I want to turn it over for Q&A.

[Operator Instructions] And it looks like we have a question from [ Eric Nicholson ].

It must be nice to have an entire year without some disaster spoiling everything. Maybe got a few specific things here. Lionel, you mentioned the PPP loans. There was a first round and a second round. You guys did a $445,000 PPP loan in the first round. And if I heard you right, you've got that forgiven in the first quarter of fiscal '22?

Yes, that's correct. Yes, just a few months ago, they went ahead and gave us full forgiveness on that. We were able to participate in round 1, and that's where we got all the funding. When round 2 came along, they discontinued giving it to Chinese-owned companies. So we couldn't participate.

You didn't get a round 2 loan then?

Yes, we couldn't. We did qualify because we were able to show a certain section of revenue in a certain quarter where we had lost more than X percent. I forget what the percentage was. But the fact that we were 51% Chinese-owned, we could not participate in round 2.

Okay. So that -- okay. I was going to ask about round 2. So the forgiveness on the PPP loan, that isn't in fiscal '21, is it?

That is not. You'll see that come through in the first quarter of '22.

Okay. Is that income taxable?

That is not taxable.

Really? Cool. Okay. I've been reading a lot about supply chain issues from just the shortages of ships and the shortages of containers. And I think I heard you guys say that you speeded up your orders by a couple of months to try to deal with that. Is that a big problem going to be for us this year, do you think, getting the product in on time?

That's a great question. It's public knowledge in the market that there's a lot of challenges with IC shortages and just supply. A lot of these secondary factories closed during the COVID and never reopened. Obviously, the high demand for product, the high demand for screens has also tapped into that. We were very early in our projections in our order making this year. So we have placed orders for the year right around January, February to help secure some of that inventory. So we haven't been hit by it as others have, but we have had some challenges. Fortunately, the retailers are being very understanding this year with price increases. They've been very understanding with shipments that may come late in the year or switching along and doing hybrid of programs where like, for example, Sam's Club instead of buying 26,000 of one item, they bought 20,000 of an item and then fulfilled the other 6,000 with another SKU that we were able to supply. So we've been blessed that our retailers have partnered with us this year to sort of help us in areas that we face challenges, except some of the price increases and things like that. But yes, there are still challenges and we're still crossing our fingers because there have been support delays and things like that. But yes, we anticipated some of this, and we did place orders early on, earlier than usual this year.

Okay. Bernardo, while you're still talking, you said something about AMS. I'm kind of ignorant. What is AMS?

It's basically -- think of it as Google AdWords but within the Amazon platform. So Amazon now, because of the growth of all the marketplace, non-label, non-big brand customers that are going in there, Amazon has created a platform that allows you to bid for keywords and basically on your own brand and things like that, and it's crucial to the growth of the business. So what we stopped doing was falling trap to some of the marketing that they were pitching us in the past and just really concentrating on the Amazon marketing platform that allows you to bid for keywords within the category.

So it's by keywords, okay. I won't even ask you to educate me about that. All righty. Another item, kind of a small thing, but understand it, we have warehouse space on the West Coast and there's -- we're able to rent out some of that to kind of use the space to get a little extra money, if I'm not mistaken on all this. But I also read that warehouse space is going into a premium these days, especially on the West Coast. Are we doing well with that as a result or what? Or is that a minor thing that doesn't even matter anymore?

Yes. No, that's a great question, [ Eric ]. I mean we were actually -- before this call, we were just talking about it. I mean we do run a true 3PL operation with the leftover space that we have in our warehouse. And you're correct, I mean, warehouses, especially in Southern California, right now is on fire. I mean that whole category is doing really, really well right now. Especially with the growth of e-commerce, everybody is looking for warehouse and logistics space. So we're doing really well. We've passed on a lot of rate increases to our 3PL customers. We're growing that operation. It's been growing 100% year-over-year this year compared to last year. So it's doing very, very well. I mean it's not huge, meaningful numbers at this point, but there is room to scale that business a little bit. So yes -- no, it's doing well.

Okay. Just I'll be quick here. You didn't mention anything about the fourth quarter in specific. Was there any intel there that told you kind of what to expect going forward? I know a lot of these -- the pandemic, businesses have kind of had a longer tail than people expected. So I'm kind of wondering if you're getting any of that kind of intel from the fourth quarter.

Yes. I mean I think fourth quarter for us -- I mean typically, obviously, fourth quarter is not a strong quarter for us. It's sort of counter-seasonal. It's that low from January to the end of March. But what we are hearing in a lot of the meetings that Bernardo is having with retail is that even though a lot of vaccines are obviously coming down the pipeline and people are getting vaccinated and getting back out into the real world, retailers are still expecting to see a strong -- they're still expecting to see strong demand, particularly for home goods and for home entertainment. And the forecast that we're seeing so far for this year reflect that. So if anything, we're seeing retailers that are trying to pull orders in early because a lot of the shortages that you had mentioned in one of your first questions. So I think a lot of that is going to work out in our favor.

Okay. Just one more thing. More longer term, is there any prospect on the horizon at all for something like a company something like Toys "R" Us to come back to kind of help us revive brick-and-mortar sales?

I mean that business has started to really split up amongst a couple of accounts. The Sam's Club toys business has been growing close to now $9 million to $10 million where they used to be at around $3 million. Amazon really is taking some of that business. Target toys is taking some of that business. And obviously, Walmart has capitalized. So I think we've gotten to the point now that on the brick-and-mortar side, there's enough business through our big retailers that we started to sort of not miss that Toys "R" Us business as much. I think now what we are in a situation is how do we increase our business with those big retailers by introducing new product lines that sort of go with either different departments or help grow our current department within those stores substantially. So for example, Walmart, we are now doing some business on the electronics side. Target, we're pitching the toy department because we do business on the electronics side now. So that's how we're looking to come back some of that lost business in Toys "R" Us.

Our next question comes from Mike Schellinger.

I was looking at Q4 sales, and if my math is correct, it was $3.5 million, which is substantially higher than it's been in Q4 for a number of years. I was wondering if you could tell me what the reason for that was.

In what, Q4. I mean we came up -- yes, we came out of the season a lot cleaner than we usually come out of seasons, right? So everybody had substantial sell-through. And then we started getting spring/summer orders a lot earlier this year, even to the fact that we even did some direct import business earlier than expected this year as well. So yes, fourth quarter, that business continued to grow. The Amazon business continued to grow. So we were shipping out every single week. And again, like Target on the microphone, we just couldn't keep up with the demand because we introduced the same microphone to Amazon. And between the 2 retailers, they were taking as soon as the containers come in within a couple of weeks, we were cleaning out of that inventory. So yes, I mean we're still seeing those strong sales. Even though a lot of the money is being spent now on traveling for the summer, retailers were just trying to get back in stock.

Okay. Also, I noticed in fiscal Q4, the gross margin was only 15.4%. Can you tell me what the reason was for that?

Yes, that's typical in the fourth quarter. I mean that's when everybody takes their -- when we solidify all of the programs -- I mean we do our best during the year to estimate what the sell-through is going to be in the fourth quarter so that we accrue, as we go along, enough advertising allowance and things of that nature that might hit the bottom line. But it's typical in the fourth quarter that when the actual numbers come up and the sell-through comes up, it's a little bit stronger than we had to. So for those co-op programs, even though the program year-over-year was down, there was strong sell-through in the fourth quarter and we had to bump up some of those co-ops.

Okay. And then regarding Carpool Karaoke, is there any seasonality in that? Is it like similar to your current seasonality? Or is it different?

Yes, it's been anti-seasonal. It really took off last year around April and May. Summer was really strong with it because people are driving around on it. We -- it was more driven by the activity of people using it on social media, which is now we've kind of slowed that down. And now we're looking to ramp it up as we launch Carpool Karaoke 2.0. So you'll see Carpool Karaoke 2.0 launching here sometime in mid-August, and there'll be a full-fledged social media campaign to go along with it.

Our next question comes from [ Jake McRobie ].

I was hoping you could touch on the Carpool Karaoke front, just overall demand sustainability in light of the extreme excitement last year and what that tells you in forms for inventory planning and Carpool Karaoke 2.0.

Yes. And that's a great question. I think the best way to answer that, it went from a non-item to like a hot Instagram and TikTok mainly buy-it item to now it's become an evergreen item. Now people know it. People understand that there's about 12,000 reviews online already on it. So people already see someone that may have it and are buying it. So it's now established as a category. It's now established as an item. We're adding some really cool, exciting features for the 2.0, and we've bought into that hype. We have some visibility that we're doing with Amazon. For example, we're planning what they have, which is a Treasure Truck where they have one of the big cities and they bring out a Treasure Truck, and there's a lot of social media blitz on it. We've reached out to some influencers to help us launch it. And it's just a matter of getting it out there again and seeing some of the new features, which is the microphone is going to allow you to change your voice and also pair up microphones to become a duet. But I think although maybe not the same sort of -- 1.0 is not the same sort of spike that we saw with the social media, it's now become a true category where week-over-week is a constant sale.

[Operator Instructions] And it appears we have no further questions at this time. I will now turn the program back over to our speakers.

Okay. Well, I want to thank everybody. It's been a pleasure sharing these fantastic results with everybody on the phone today. Management team is excited. We're actively developing more new exciting products for fiscal '22 and beyond. And we look forward to sharing these updates with you all on our next first quarter earnings call, which is right around the corner. So thanks, everybody. Appreciate all the great questions. And we will talk to you all soon. Take care.

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