Algorhythm Q1 2024 Earnings Call Transcript

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August 18, 2023

There are 4 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Singing Machine's First Quarter Fiscal 20 24 Financial Results Earnings Call. My name is Travis, and I will be your operator. As a reminder, today's call is being recorded. We have a brief Safe Harbor, and then we'll get started. This call contains forward looking statements under U.

Operator

S. Federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we filed with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. I'd now like to turn the call over to Gary Atkinson, company's CEO.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Good afternoon, everybody. I want to start by thanking everybody for taking the time today to listen in and participate in our first Joining me today on today's call, I also have Lionel Marquis, company's CFO. Before I turn the call over to Lionel to walk everyone through our results of operations,

Operator

I would like to take

Speaker 1

a moment to Help frame the unique nature of our Q1 results for fiscal 2024 versus the same time period last year. For those that have followed our company, you may recall we had a banner Q1 last year. We booked over $11,000,000 in sales And this was due to 3 main factors. Last year during the Q1, we were successful In expanding our karaoke assortment into Walmart's consumer electronics department to ramp up and fill an incredible amount of linear shelf space At thousands of locations throughout the country, we acquired a very large amount of product. This resulted in a single purchase order We'll discuss the stores in excess of $3,100,000 Secondly, coming off the heels of an unprecedented supply chain challenges in 20 The company elected to convert all of its business with Sam's Club to an FOB China program.

Speaker 1

This gave our customer the ability to leverage its buying power to get better freight efficiencies. As a result of that, we booked 3,500,000 sales At the time, the product left the docks in China and not when it left our warehouse facility in California. This accelerated sales almost 3 months earlier and into our Q1 of last year. And finally, The majority of the increase in sales for the Q1 of fiscal 2023 is the result of retailers trying to restock shelves We're empty due to a very strong 2021 holiday season and supply chain struggles that prevented inventory from reaching the retailer. With this in mind, we have returned to our historically normal rhythm of just in time sales.

Speaker 1

Retailers continue to release orders, particularly in August, And we expect September October to be extremely active as we compress 6 to 7 months of sales into a 12 week timeframe. This has many benefits for us as we've been able to keep inventories lean, free up cash and reduce the risk of overstock. We anticipate this change will help to reduce many of the frictional costs that take away from net sales and gross margins, mainly returns, Co op fees and markdown incentives. Overall, we are pleased with our operational performance and we are optimistic on current holiday season. With this context in mind, I would now like to turn the call over to Lionel Marquis, our CFO, to present greater details on the results of operations for fiscal 2023.

Speaker 2

Thank you, Gary. Good afternoon, everyone. Without further delay, I'd like to walk through the results of operations for our first Quarter ended June 30, 20.3. Revenues for the 3 months ended June 30, 2023 were $2,600,000 As compared to $11,700,000 for the same period in the prior year. Gary just provided a great deal of color on the dynamics of the respective quarters From a comparison perspective, I would like to simply add that for many years, our Q1 sales were historically a low point for us.

Speaker 2

Q4 for our company is often very slow immediately after Christmas and the retail big box buyers are not normally very active until late spring We're doing our Q1. It is that time that they typically begin to release orders for shipments, and we normally stage product in Southern California Final fulfillment in late summer to early fall. As a result of this lead time in buying patent, we usually book revenue heavily From late July through late October, sometime into the 1st week of November for last minute orders. We're an extremely seasonal business model And we very rarely generate more than $3,500,000 in sales in our Q1. With the exception of the last Our previous 3 year annual filings have disclosed that between 81% 86% of our net sales We're shipped during our 2nd and third quarters beginning in July and ending in December.

Speaker 2

We'll talk about gross profit for the Q1 of fiscal 2024 was approximately $900,000 yielding a 32.3 percent gross margin as compared to approximately $3,200,000 27.2 Margins gross profit margins in the Q1 of 2023. Overall, the difference in dollar terms was due to the differences in sales generated, As we have already detailed. However, the improvement in the margins in the Q1 of this year is primarily due to the fact that sales in this To bring the product into the U. S. And then fulfill from California, we're able to secure at least 2 or 3 percentage points and improve margins.

Speaker 2

This is a key factor for the improvements this year. Product mix also played a role in the improvement as well as direct as well because direct import shipments generally include holiday Promotional products, shipments of holiday promotional products and they just normally yield a lower gross profit margin. As well as operating expenses during the Q1 of 2024, operating expenses increased $3,300,000 compared to $3,100,000 During the Q1 of the prior year, the $300,000,000 increase in expenses was Almost entirely due to one time expenses relating to the closure of our Ontario, California logistics hub. We elected to move to an entirely outsourced shipping model Our North American operations, we see this as a key way to contain logistics expenses in the coming years based on rising occupancy And labor costs that we want to proactively minimize and shift to a variable cost logistics model rather than carrying Fixed overhead costs during non peak periods. Liquidity, as of June 30, 2023, we had cash on hand of approximately 1,600,000 We had approximately $2,000,000 available on our senior secured line of credit based on eligible collateral.

Speaker 2

The company reduced its overall working capital investments by approximately $1,200,000 in the quarter as the management team focused on inventory management and building and maintaining a liquid short term capital position. The company also significantly reduced its structuring liabilities. Current liabilities of June 30, 2023 decreased by approximately $800,000 to $5,500,000 during The Q1 of 2024 fiscal year 'twenty four. During the next 12 month period, we plan on financing our working capital needs Primarily from a combination of vendor financing, our revolving line of credit, proceeds collected after the fiscal year ended from the completion of our ATM offering, our ATM stock offering. The company believes that its cash on hand working capital amount of cash, cash The first question comes from the line of David.

Speaker 2

Please go ahead. The first question comes from the line of David. Please go ahead. The first question comes from the line of David We're at least 12 months from the filing of this report. That is my report on finance.

Speaker 2

I'd like to turn the call back over to Gary.

Speaker 1

Perfect. Thank you, Lionel.

Speaker 3

I would now like to provide

Speaker 1

a brief summary on our outlook for our key upcoming second and third fiscal quarters. I'm very pleased to announce that all of our existing retailers and distributors in our international territories We remain excited about the karaoke category and have committed again to programs for this coming fall and holiday season. Now that's this is a very important point and I want to mention it again. All of our existing retailers and distributors I've recommitted again to programs for this fall and holiday season. In fact, A number of our customers in international territories are committing to significantly larger programs, including some key customers in Canada But it switched from a competitor brand to singing machine brand products for this year.

Speaker 1

I also want to note again Something that we touched upon in our last earnings call and that is to say that our inventory pipeline within our retail channels is particularly lean right now. Retailers have been cautious in ordering so far this year, which is evidenced by last year's Q4 and this year's Q1 results. But the positive news to this is that our customers do not have a big buildup of inventory that they need to sell through first Further, we continue to develop new products and innovate on new karaoke technology. Our relationship with our strategic partner, Stingray, continues to deepen as we anticipate to roll out a major new update to our streaming karaoke app this coming holiday season. We are also introducing over 5 new karaoke products this year, including a totally redesigned flagship Wi Fi streaming product scheduled to go into Costco U.

Speaker 1

S. Later this fall. We continue to remain the captain of the karaoke category and we are not slowing down our product development process. In fact, you will see Singing Machine featured in many prominent national promotions and ads this year. Finally, I would like to provide a brief update on our emerging growth opportunities in the hospitality and automotive space.

Speaker 1

Over the past few months, we have gradually introduced the concept that we believe we can leverage our experience, our scale And our expertise in the karaoke space to launch new complementary business segments beyond our core consumer electronics business. We believe we will be able to begin providing greater detail and achieve meaningful milestones in the near term, particularly in the hospitality space. We have spent a great deal of time and energy preparing for this opportunity and we are excited to begin providing additional insight into our growth strategy. We believe these new areas present a unique opportunity to maintain our strong core business, while at the same time launching a series of exciting high growth We are truly excited and look forward to providing additional information to shareholders soon. So at this point, I would like to turn the call over to our moderator to see if there's any additional questions.

Operator

We will pause for a moment to allow questions to queue. We do have a question from Dodge Richards, Private Investor.

Speaker 3

It sounds like the current holiday season will be a lot of last year,

Speaker 1

I'm sorry, the question broke up a little bit. If I can reframe it, were you asking a comparison between last year's holiday season and this year's holiday season and Our expectations?

Speaker 3

Yes, that's basically right. I mean, it was last year wasn't very strong. So how do you compare it to what you're expecting this year?

Speaker 1

Okay, perfect. Great question. Thank you for asking that. So and I can jump on this, Lionel. The way that we are thinking about this year compared to last year, I would say last year we were coming off of a very strong And so retailers were coming out of a strong holiday season.

Speaker 1

They had We experienced a lot of interruptions in getting inventory delivered due to a lot of supply chain problems. And so when we entered last year, they were coming with very aggressive forecasts for sales. And so typically what we do is when we get forecasts from our customers, we will go ahead and build inventory to those forecasts. And as we did that, I think the broader macroeconomic climate changed pretty quickly. We started seeing rising Inflation, interest rates spiked, consumer demand dropped Significantly as we entered the holiday season.

Speaker 1

So to sort of, I guess, sum it up, last year, we had a lot of inventory coming in based off of some very Lossy projections from our customers. The economy changed quickly as we entered the holiday season. And to summarize it quickly, there was more inventory than there was demand. And so that ended up hurting us a lot last season in the sense that we ended up having to give away a lot of promotions and take back overstock returns of our products. And this year, we're thinking about things a lot differently.

Speaker 1

To start, we're being a lot more cautious about the quantity of inventory that we're buying. I would say that the forecast that we're receiving, while still very strong, are much more realistic and reasonable In terms of just what we're all seeing in the broader economy. So I think we're much better prepared this year. We're much better prepared for this coming holiday season. I think we're in better alignment with our retail partners and we're getting All of the supply chain struggles that we've seen in recent years are pretty much all cleaned up and gone away.

Speaker 1

So We see an opportunity here this year where we're looking at increasing overall gross margins. And so I see a Significantly different story for this coming holiday season than what happened last year. Last year was a very sort of unexpected reactive season, I think this year we're in a much better, more proactive solution. So hopefully that gives you a little bit of insight and answers the question.

Speaker 3

Thank you for taking my questions.

Speaker 1

Thank you.

Operator

We have no further questions in the queue at this time. I would now like to turn the call back over to today's speakers.

Speaker 1

Okay. Well, thank you everybody. This concludes our presentation for our Q1 results of operations. I do want to thank everyone today for participating in today's call. And I look forward to sharing more updates with everybody on our next quarterly update call.

Speaker 1

So

Operator

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

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