Algorhythm Holdings Inc.(RIME) - 2022 Q4 - Annual Report

Part I Business The Singing Machine Company develops and sells consumer karaoke audio equipment and music subscriptions globally, with significant seasonal sales and outsourced manufacturing, recently becoming a controlled company and uplisting to Nasdaq FY 2022 Net Sales by Product Category | Product Category | Percentage of Net Sales | | :--- | :--- | | Karaoke | ~82% | | Microphones and Accessories | ~9% | | Singing Machine Kids | ~5% | | Licensed Products | ~3% | | Music Subscriptions | ~1% | - The company's top five customers accounted for approximately 90% of net sales in fiscal 2022, with three individually representing 37%, 18%, and 17% of total net sales[34][35] - The business experiences significant seasonality, with approximately 81% of net sales in fiscal 2022 occurring in the second and third fiscal quarters, leading up to the holiday season[36] - Subsequent to the fiscal year-end, BitNile Holdings acquired approximately 52.0% of the company's outstanding common stock, making The Singing Machine a "controlled company" under Nasdaq rules[41][42] - On May 23, 2022, the company effected a 1-for-30 reverse stock split, and on May 24, 2022, its common stock began trading on the Nasdaq Capital Market under the symbol "MICS", followed by a public offering of 1,000,000 shares for gross proceeds of $4.0 million[45][46][47] Risk Factors The company faces significant risks including supply chain disruptions, high customer concentration, increased inventory levels, pricing pressure, product returns, competition, and potential governance impacts from its controlled company status - The COVID-19 pandemic and related global logistics issues led to late delivery of key products, resulting in lost sales and an unplanned increase in inventory of approximately $5.5 million at fiscal year-end 2022[56] - The company is heavily reliant on a few large customers, with sales to the top five comprising approximately 90% of net sales in fiscal 2022, making it vulnerable to changes in their purchasing decisions[63] - Product returns from customers amounted to approximately $3.6 million, or 7.5% of net sales, in fiscal 2022, which can reduce revenues and profitability[64] - Inventory levels increased significantly from $5.5 million as of March 31, 2021, to $14.2 million as of March 31, 2022, posing a risk to cash flow if not sold effectively[67] - As a "controlled company" due to BitNile's majority ownership, the company may be exempt from certain Nasdaq corporate governance requirements, such as having a majority of independent directors, which could reduce stockholder protections[94][95] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[103] Properties The company leases its corporate headquarters in Fort Lauderdale, Florida, and a logistics and warehouse facility in Ontario, California - The company leases its corporate headquarters in Fort Lauderdale, FL (approx. 6,500 sq. ft.) with the lease expiring March 31, 2024[104] - The company leases its warehouse and logistics facility in Ontario, CA (86,000 sq. ft.) with the lease expiring August 31, 2023[105] Legal Proceedings The company is involved in an employment practice lawsuit seeking at least $500,000 in damages, while a separate patent infringement complaint was dismissed with prejudice - A complaint filed against the company's subsidiary SMCL alleges employment practice violations, seeking damages of no less than $500,000, though management does not believe the claims have merit[107] - A patent infringement complaint filed by Tunnel IP LLC on April 29, 2022, was dismissed with prejudice on June 24, 2022[108] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[109] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on the Nasdaq Capital Market in May 2022, with approximately 184 record holders, and the company has no plans to pay cash dividends - Effective May 24, 2022, the company's common stock began trading on the Nasdaq Capital Markets under the symbol "MICS", moving from the OTCQX market[111] - The company has never declared or paid cash dividends on its common stock and does not anticipate doing so in the foreseeable future[112] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2022, net sales increased by 3.7% to $47.5 million, but gross profit margin declined to 22.8% and net income fell to $0.2 million, while liquidity was bolstered by a public offering Fiscal Year Financial Comparison (2022 vs. 2021) | Metric | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $47.5M | $45.8M | +3.7% | | Gross Profit | $10.8M | $12.3M | -12.2% | | Gross Margin | 22.8% | 26.8% | -4.0 pts | | Operating Income | $0.07M | $1.4M | -95.1% | | Net Income | $0.2M | $2.2M | -90.9% | - The decrease in gross profit margin was primarily driven by a $3.1 million decline in sales of high-margin Carpool Karaoke (CPK) licensed products and increased costs for raw materials and freight[121][127] - Inventory increased by $8.7 million, with $5.4 million attributed to late delivery of seasonal products due to global logistics issues[121] - The company's liquidity is supported by a $10.0 million revolving credit facility, a $2.5 million inventory facility, and a May 2022 public offering that yielded approximately $3.3 million in net proceeds[139][140] - Sales returns decreased to $3.6 million (7.5% of net sales) in FY2022 from $4.1 million (9.1% of net sales) in FY2021, primarily due to fewer overstock returns from major customers[64][166] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, The Singing Machine Company is not required to provide information for this item - The company is a smaller reporting company and is not required to provide this information[171] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2022 and 2021, including the independent auditor's report and critical audit matters Report of Independent Registered Public Accounting Firm The independent auditor, EisnerAmper LLP, issued an unqualified opinion on the consolidated financial statements for fiscal years 2022 and 2021, in conformity with U.S. GAAP - The auditor, EisnerAmper LLP, provided an unqualified opinion on the consolidated financial statements[302] Critical Audit Matters The auditor identified Variable Consideration and Inventory Valuation as critical audit matters due to significant management judgments involved in their estimation - Critical Audit Matter 1: Variable Consideration, which includes reserves for sales returns ($1.0 million) and accruals for promotional incentives ($0.5 million), involved significant management judgment regarding future events[308][309] - Critical Audit Matter 2: Inventory Valuation, with net inventory at $14.6 million and reserves at $0.4 million, required significant judgment to estimate net realizable value[311][312] Consolidated Financial Statements The consolidated financial statements show total assets increased to $22.7 million in FY2022, total liabilities grew to $12.6 million, and shareholders' equity increased to $10.0 million, while net income sharply declined to $0.2 million Consolidated Balance Sheet Summary (as of March 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $19,842,413 | $12,979,306 | | Total Assets | $22,665,854 | $16,761,911 | | Total Current Liabilities | $12,022,411 | $7,034,199 | | Total Liabilities | $12,629,430 | $8,852,373 | | Total Shareholders' Equity | $10,036,424 | $7,909,538 | Consolidated Statement of Operations Summary (for the year ended March 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $47,512,161 | $45,802,574 | | Gross Profit | $10,814,778 | $12,297,218 | | Income from Operations | $69,235 | $1,425,351 | | Net Income | $230,471 | $2,172,365 | | Diluted EPS | $0.14 | $1.67 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[173] Controls and Procedures Management concluded that disclosure controls were effective as of March 31, 2022, with a prior material weakness related to inventory cutoff and valuation in the new ERP system now remediated - Management concluded that as of March 31, 2022, the company's disclosure controls and procedures are effective[176] - A material weakness from fiscal year 2021, related to inventory cutoff and FIFO costing in a new ERP system, was identified and has since been remediated through manual calculations and improved personnel training[180][182][183] Other Information The company reports no other information for this item - None[186] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[187] Part III Directors, Executive Officers and Corporate Governance This section details the company's executive officers and Board of Directors, including committee compositions, and highlights its status as a controlled company under Nasdaq rules due to BitNile Holdings' majority ownership Executive Officers | Name | Position | | :--- | :--- | | Gary Atkinson | Chief Executive Officer, Director | | Bernardo Melo | Chief Revenue Officer | | Lionel Marquis | Chief Financial Officer | - Due to BitNile Holdings owning approximately 52.0% of outstanding shares, the company is a "controlled company" under Nasdaq rules[212] - As a controlled company, it may elect exemptions from certain corporate governance rules, including the requirements for a majority of independent directors and for compensation and director nominations to be determined solely by independent directors[213] - The Board has determined that three of its five directors (Messrs. Judkowitz, Kling, and Foreman) are independent[216] Executive Compensation Executive compensation includes base salary, cash incentives, and stock options, with new employment agreements and an Executive Bonus Plan approved in April 2022, tying bonuses to EBITDA performance FY 2022 Executive Compensation Summary | Name and Principal Position | Salary | Bonus | Total Compensation | | :--- | :--- | :--- | :--- | | Gary Atkinson, CEO | $156,075 | $ - | $161,414 | | Lionel Marquis, CFO | $154,154 | $ - | $160,638 | | Bernardo Melo, CRO | $163,004 | $146,725 | $331,232 | - New employment agreements effective April 2022 set initial base salaries at $215,000 for the CEO and CRO, and $175,000 for the CFO[236][239] - A new Executive Bonus Plan approved in April 2022 offers cash bonuses and equity awards based on the company's EBITDA as a percentage of net sales[242][243] - The company adopted a new 2022 Equity Incentive Plan, authorizing an initial 233,334 shares for issuance as awards to employees, directors, and consultants[248][249] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock, with BitNile Holdings, Inc. as the controlling shareholder at 51.99%, and provides information on securities authorized under equity compensation plans Security Ownership of Beneficial Owners (more than 5%) | Name of Beneficial Owner | Percentage of Common Stock | | :--- | :--- | | BitNile Holdings. Inc. | 51.99% | | Stingray Group Inc. | 10.68% | | Armistice Capital Master Fund Ltd. | 5.02% | - As of July 14, 2022, BitNile Holdings, Inc. is the controlling shareholder with 1,568,849 shares, representing 51.99% of common stock[256][257] - All executive officers and directors as a group beneficially own 109,330 shares, or 3.61% of the common stock[256] Equity Compensation Plan Information (as of March 31, 2022) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 56,334 | $9.90 | 233,333 | Certain Relationships and Related Transactions and Director Independence The company discloses related party transactions, including a music subscription sharing agreement with Stingray Group Inc. and a subordinated note payable to a former related party, with the Board reviewing all such transactions and determining director independence - In fiscal 2022 and 2021, the company engaged in transactions with entities owned by former Chairman, Philip Lau, who resigned in August 2021[266][267] - The company has a music subscription sharing agreement with Stingray Group Inc., a major shareholder, which generated approximately $0.5 million and $0.4 million in revenue for the company in fiscal 2022 and 2021, respectively[274] - A subordinated note payable to Starlight Marketing Development, Ltd. (a former related party) had a remaining principal balance of approximately $352,000 as of March 31, 2022[270] - The Board has determined that directors Harvey Judkowitz, Joseph Kling, and Jay B. Foreman are "independent directors" under Nasdaq Listing Rules[277] Principal Accountant Fees and Services This section details fees billed by EisnerAmper LLP for audit and other services in fiscal years 2022 and 2021, with total fees of $189,875 and $164,576 respectively, all pre-approved by the Audit Committee Accountant Fees (EisnerAmper LLP) | Fee Type | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | | Audit Fees | $188,835 | $160,028 | | All Other Fees | $1,040 | $4,548 | | Total Fees | $189,875 | $164,576 | - The Audit Committee's policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm[280] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and various exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents and material contracts - Lists the consolidated financial statements filed with the report, including Balance Sheets, Statements of Income, Cash Flows, and Shareholders' Equity for the years ended March 31, 2022 and 2021[282][283][284] - Includes a detailed list of exhibits, such as the Certificate of Incorporation, By-Laws, material contracts (leases, credit facilities, employment agreements), and Sarbanes-Oxley certifications[287][292] Form 10-K Summary The company reports no information for this item - None[291]