Algorhythm Holdings Inc (RIME) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Singing Machine's 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 would 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 am 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 six-month periods. 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. Actually, had a strong quarter here, and like to get some of the highlights of it right now. Net sales for the quarter, we were up 20 -- we were up about $3.1 million at $23.187 million versus $20 million over Q2. Year to date, up again, $26.511 million versus $24.891 million year to date to $1.6 million pickup.

The Carpool Karaoke product contributed approximately $1.1 million quarter to date and $0.9 million, 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 up. Thank you very much so that helped us in terms of beating our sales for last year, 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 damage goods from last year, those two 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 a 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.

And 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% or 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 administrative expenses, we're talking about $1.842 million versus $2.335 million (sic - see Form 10-Q, page 4, "$2.235 million") A loss of $393,000 decrease. We had -- some of you may recall last year, we had bought some special accounts receivable insurance for JCPenney and $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 for the damaged goods. The out-of-pocket costs were approximately $219,000. So those two things on top of the fact that we travel -- that we save quite a bit on travel and entertainment due to not participating shows; shows, got 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 substantial savings on travel and entertainment.

Selling expenses, it's $2.3 million in the prior year versus $2.5 million in the current year. It's about $111,000 difference.

We have 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 out 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 second reason is the quarter to date.

Income from operations $2.4 million versus $859,000 last quarter. That's a $1.5 million or 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 manufacturers that cause 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. It's costing us a little more in interest this year. So, there's about a $95,000 difference. Quarter to date is about $125,000 year to date up additional interest and amortization deferred financing costs.

Net income $2.4 million quarter to date versus $624,000 last year, pickup of $1.8 million. And year to date, it's $2.201 million versus a loss of $245,000 last year. That's a $2.446 million 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 were probably about $2.5 million to $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 have 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 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.

Yeah, thanks Dan. Yeah, I'll go over some of the numbers. You know, some of them are 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 of the sell through numbers that were well into the season.

And I'll start with Amazon was -- you know, for years, we thought that they would be the one that would benefit the most from the closing from Toys R. So, some of the things that we'll be doing and there was 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 a Prime Day. Amazon gave us excellent location on their page. They also perform the QVC type video online with interaction with the product and two people discussing it. And they had online ticker for the product.

And they bought into it about 15,000 pieces in for the Prime Day deal which we capped it. And we thought that would take almost a day to go through those numbers. It sold through in less than two 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 branded products online.

And it did so well that they just bought into 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 timeline has as 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, in a year to date, our sell through already is a 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've received close to $1 million in order this week from Amazon and those 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 demands. But we are shipping everything that we have available to them because they're just exceeding those numbers.

Same thing we're experiencing at walmart.com. As you guys know, walmart.com and Walmart now a complete omnichannel. So, our Walmart store team is the one that we deal with also on walmart.com. And we rolled out the Black Friday this year a lot sooner.

Walmart did about three or four 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 one. And we were part of the November week one program. And already we see some incredible numbers. Interesting to know if 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 in-store or shipping it from store. So, we no longer have to 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 stores because of the system that they have there. 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've admitted that they probably ordered 70,000 pieces less than they should have on the in-line products. 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 continued to go with Singing Machine so that 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 had mentioned before, we were up to five products this year with Sam's Club, last year, we only did three. And even to our summer, our sell-throughs on our summer program, we're about 93% this year. And our main item has 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. They're not doing as well as Costco is. But also, Costco only carries one product; they're carrying five. So that's to be understood.

Costco is doing well with the pedestal. They're exceeding the number there. And there are 189 retails 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 Wi-Fi product that we've talked about before. And they've already given soft commitments for 2021 as well because we're really satisfied with how is that going.

Let me see -- drop-ship 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 four 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 have 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 a pretty much full margin. So that 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 30% to 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, internationally has been slow. As you guys know, Europe has been on shut down. So that's international. Some of the European business has slowed down for us. But thankfully, the US 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 there 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 it was shipped out.

That being said, if I missed anything, I'm sure Gary will cover it. And now I'll hand it over back to Gary.

All right Bernard, thank you so much. Great report. Good numbers

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 have seen Singing Machine heavily promoted almost at every single major retailer on Black Friday. This year, obviously as unusual circumstances arrived with the pandemic, so a lot of retailers have, sort of, back pedaled 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 two 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 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) Eric Nickerson, SMDN

Hi, guys. I am not from SMDN as you know. But good morning.

Yeah, hey, I think Bernardo said a moment ago, that we -- what did you say 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 air freight to keep everybody supplied.

Yeah, no, we are -- for the most part, our products do not make sense for air freight, right, because of the cube 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, but that we were able to use for fulfillment. We did go a little aggressive on order in this year. And we also have products coming in November week three, week four, in December, which usually we don't do.

And those are all due to demands that we were seeing early on, that we have 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 exceeded what we even expected.

Yeah, that's great. It kills your margins, if you see the airfreight, I know.

Yeah.

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 Great Britain that's right.

Yeah, that's correct. And also, in Great Britain we lost a major customer last year. I mean, this year, [Cosmid toys], which drove a lot of the sales. They decided to go directly over the 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, yeah, the combination of the pandemic, a combination of Amazon flooding the market with those Chinese microphones, those things have contributed. And I think our distributor there just sort of took the approach that if you couldn't make money on the business, then you just passed on the business.

Yeah, what I wanted to ask about that was like, if I recall at the, our business here last spring picked up because of the pandemic as people were home and looking for 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 that come in, right?

Yes. Yes, Because the big -- our big customers are our UK distributor and his numbers were lower this year. And mostly was because they are walking away from the [Smith] business that was just not going to be profitable for them to do because they went directly to a factory.

Okay. 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. That's why we 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 mic that does this particular thing that nobody else does? And are we looking for that situation to change or are the competitors going to come out with the same features so that we won't have that advantage anymore?

There's two things, number one, we have a licensing deal with CBS for the Carpool Karaoke official branded mic. And so, a lot of consumers, no Viz show, no James Corden. And they feel that when they buy this mic, it's the official show mic. So that's a competitive advantage that we have.

But the other thing is that the mic works with your car radio, so that you could sing 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 is that there are competitors coming after that technology. So what we are going to do is for year number two, we're going to add some additional features, including voice effect, some minor design changes. But still, we have the exclusive deal for the Carpool Karaoke licensing brand.

Okay, will that be correct to assume that none of this stuff is patent of all. It's just something that we just can't stay ahead of the game and try to stay ahead of the game. Is that it?

Yes, correct.

Okay. You have a great quarter, guys. I think that's all the questions I have.

(Operator Instructions) Jonathan Alvarado.

Hi, nice quarter. Has 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 are delays coming out of China. There is 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 8:00 in the morning and they can't get them out of the ports. So, then we have to wait three 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 -- in order to change orders without penalties. Walmart just announced that they are not going to issue any chargebacks from November, week three, all the way to Christmas because everyone is in the same boat. Everyone is having challenges with the port. We originally had a vessel that got diverted to Tacoma. That delay goes by three 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 said: hey, we're all on the same boat. So, everybody still scrambling. And 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.

Yeah, thank you. I touch 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 few weeks back, but that they are definitely catching up, and our containers are coming in. So we might have lost a week or two 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.

Is there any drop-off in Carpool Karaoke sales? Are they steady?

No, they are steady, they are steady. Just last week, we sold 2,500 pieces at Amazon, where it used to be in the 50s and less than 100. Yeah, no, they are steady. Everybody's seen nicer numbers. We just bought in some additional inventory that we thought we're going to have all the way to February. And we've already sold out again.

And it's a significant number. It's not a slight number. So yeah, we're seeing that 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 motor. Because some of the some of the brick-and-mortar placement was lost.

So now most of it has been fetched, which is fine. But we're looking to take that online success in 2021. And again, we'll get back to brick and mortar.

Are there any new products in the works?

We have. Yeah, we definitely have some new products in the works. We are trying to capitalize on the Wi-Fi product. That was a success. And we're designing a line of that.

Yeah, we are working on a few products. It at this strategic area. We should have some nice assortment of products to be launch for summer or fall of 2021.

Thanks.

(Operator Instructions) Zachary Goerco

Thank you. How are you everyone? Great earnings. Pleasure to hear.

My one question is going to be -- how much do you think at home, let's say COVID sales, they help this quarter? Do you look at it as kind of not being effective? Do you think it helped you immensely going forward or no 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? And that was my question.

Yeah, and that's a good question. You know, we have seen the demand increase since COVID. Since about March, we started seeing some really good numbers. And those numbers were good for spring summer. And now that we're getting to the holiday season, we're seeing our regular holiday push. But that's also a different effect above and beyond on COVID that during that cycle that we go out to every so often within the music department.

So like musical instruments have a steady way that go up and down, and every few years you start seeing a spike. And we are seeing that spike in musical instruments. And that usually needs 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. I believe the combination of both. But the pandemic has definitely helped out the demand here in the United States. yes.

Got it. Thank you.

Jason Hirschman.

Hi, and great quarters guys. And I'm sorry, I missed the first few minutes of the call. So, I apologize if you covered this already. But 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 marketing that you're doing on TikTok since this 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 Lino has shown it in on some of the numbers that marketing has gone down. I mean we've done a total shift on our marketing expense. and it was -- because any of us are geniuses or anything. I mean it was just a budgetary reason that we were trying to cut expenses on. And out of that what was born was really the influencer on TikTok in leading the charge on the Carpool Karaoke mania and things like that.

So now we have a gentleman by Chris Pacheco who runs a lot of the marketing and product. And his team have reached out to a lot of the influencers on TikTok, and they've been receptive. And it's not expensive.

We've also looked at a service called Refersion, which is you could hire recent regional marketing grads and obtain their services for small as like $200, $250. And for that they'll give us polls. 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 increase. And it's been for a fraction of the costs 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 just seeing this mostly TikTok and influencers. Are they mostly US-based? Are you also may be reaching out to some in other markets, whether it's UK or wherever to try and also build some kind of international, I guess, presence or influence?

Yeah, it's a great question. You know right now unfortunately it's mostly US. In Australia, we have worked with our Australian distributor there to do some influences. They have a good presence on Instagram as well.

But you know, it hasn't been the same on. But I think once we are seeing through and through here, what's working in the US, then we'll start. We'll start reaching out to see if they have similar programs in the UK and in Copenhagen and in some of the other regions that are doing really well.

But our UK distributor, his marketing team is also has been in the past very savvy with the influencers and things like that. So unfortunately, we have seen most of the success here in the US but I'm sure that we could use that same model internationally, as I mentioned.

Okay. Well, thank you very much. I appreciate the answer.

Sure.

Eric Nickerson

Yeah, I did think one more thing. Finance question. 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 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, who they want to report it on.

Smaller base -- right now, companies like ours, it took less than a million dollars. 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. In fact, I asked a question this morning. I talked to the bank. They have to submit the stuff and they have everything. And they said: patience, the rules keep changing and how we're supposed to do. But yeah, the expectation is that it will get forgiven.

And 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 you know, it is the government. It's the government run program. So sometimes it takes time, and we should 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, it's not -- it's just cash on the balance sheet, but it hasn't had any income effect yet that would be next year then sometimes that gets clear by then. Am I right?

Well, since our fiscal year is 03/31. I mean, I'm hopeful that by 03/31 this thing is taken care of so that we could report it in this fiscal year. I'd like to get all of everything cleaned up on the balance sheet before the end of fiscal year.

So that would be full taxable income, right, when it's forgiven.

Yeah, the answer to that is yes.

Okay. Yeah, that's all I had. Again, great quarter, guys. Thanks very much.

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 call to the afternoon since everybody's awake this quarter. So that's great.

And we'll look forward to talking with everybody in February when we come out with our third quarter earnings. Alright, take care. Thank you.