Unassociated Document
December
14, 2010
Securities
and Exchange Commission
100 F
Street N.E.
Washington,
D.C. 20549
Kyle
Moffatt
Re: The Singing Machine
Company, Inc. File No. 0-24968
Ladies
and Gentlemen:
We are in
receipt of your letter to The Singing Machine Company, Inc. (the “Company”)
dated November 17, 2010. For ease of reference, we have reproduced
your comments which are then followed by our responses.
Form 10K for the Fiscal Year
Ended March 31, 2010
Consolidated Financial
Statements
General
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1.
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In
your next filing, please revise your financial statements to disclose all
related party transactions on the face of your financial
statements.
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RESPONSE
In our next and future filings we will
revise our financial statements to disclose all related party transactions on
the face of our financial statements.
Item 9A(T). Controls and
Procedures, page 23
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2.
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It
is unclear to us how you concluded that your disclosure controls and
procedures were effective considering that you had a material weakness in
your internal control over financial reporting that was due to the lack of
formalized financial closing procedures which would appear to directly
impact your disclosure controls and procedures. Please revise
your conclusion to “not effective” or explain in detail how you concluded
that they were effective.
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RESPONSE
In future
filings we will revise our conclusion to “not effective” and will report on our
efforts to remediate our weaknesses.
Notes to Consolidated
Financial Statements
Note 2. Summary
of Significant Accounting Policies
Revenue Recognition, page
8
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3.
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On
page 7, you disclose that you have recently extended more liberal return
authorizations. Tell us in detail about your return policy now
and before the increasingly competitive environment and declining economic
conditions. We note your disclosure on page 8 that warranty
claims have not been material, yet on page 7, you disclose that returns
for either damaged goods or goods shipped in error were 12.3%, 9.4% and
8.6% of net sales. Please reconcile the material returns as a
percentage of sales with your disclosure regarding
warranties. Please expand your disclosure in future
filings.
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RESPONSE
The
Company has two major customer types that we sell product to and we have two
separate programs to track expenses associated with defective returns and
product warranty. We sell to wholesale customers who are primarily
resellers of our products and include retail establishments, dealers and product
distributors. We also sell to end-user consumers directly through our
website and service end-user consumers whose return period to the retail stores
has expired.
A return
program for defective goods is negotiated with each of our wholesale customers
on a year-to-year basis. Customers are either allowed to return
defective goods within a specified period of time after shipment or granted a
“defective allowance” consisting of a fixed percentage (between 1%-5%) off of
invoice price in lieu of returning defective products. Prior to the increasingly
competitive environment and declining economic conditions we typically allowed a
six-month return period for defective goods whereas we have relaxed these
requirements and allowed defective returns of up to three additional months
since economic and competitive conditions have changed. We also have
granted increases in some of our programs for defective allowance percentages.
Even with the increased allowances in percentages some customers elect to return
defective goods rather than accepting a fixed defective allowance since the
changes in competitive environment and decline in economic
conditions.
Our
warranty disclosures on Page 8 relate to costs associated with replacements and
repairs to the end-user consumer who has bought products direct from our website
and consumers who have bought products from our wholesale customers who require
services after their initial return period has expired. These
expenses are tracked and reported separately from our defective return
program. Warranty costs were .07%, .2% and .01% of net sales for
fiscal years ended March 31, 2010, 2009 and 2008 respectively and not considered
to be material.
In future
filings we will define our two major customers and our defective return and
warranty programs and differentiate how these programs relate to the customer
types.
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4.
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Please
tell us in detail about the Customer Credits on Account and why your
customers have paid you for merchandise that is subsequently
returned.
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RESPONSE
The
primary reason for Customer Credits on Account is due to defective product
returned pursuant to our defective return policy after the Christmas season is
finished. As our business is seasonal, most of our large volume
customers require inventory to be delivered three to five months before the peak
holiday shopping season begins. Customers’ payment terms are
generally advance payment for direct imports and 30-60 days after invoice on
domestic shipments. We typically do not receive substantial defective
returns until the beginning of the new calendar year which is months after
shipments have been paid as this is the period when product is purchased by the
end-user and defective product is subsequently returned to the retail
outlet. Due to the seasonality of the business, customers do not buy
enough product after season to offset credits from defective
returns. Several major customers have allowed credit balances to
remain open and are offset with new merchandise invoices in the upcoming
season.
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5.
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Tell
us in detail about your internal controls over financial reporting for
shipments that are direct sales and that are shipped directly from your
manufacturers in China through your Macau subsidiary. Tell us
your terms of sale, i.e. FOB shipping point or
destination. When is the revenue recognized for these
sales? What are the terms of the insurance
arrangements?
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RESPONSE
Direct
sale is a method of shipment where our customers purchase goods from our Macau
subsidiary in full container loads. Terms of sale for all direct
sales are FOB Shipping Point. Our Macau subsidiary follows the
instructions of our customers which are generally specified on their Purchase
Order. We deliver the goods to the customer’s authorized shipping
agent and goods are accepted by the agent. At this point, the
customer is responsible for the shipping transportation costs, insurance on
board and customs clearance on arrival of goods at its specified
destination.
Revenue
is recorded by our Macau subsidiary’s accounting department upon obtaining the
following documentation which is approved by the CFO who is located in
China:
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1.
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Customer
purchase order
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2.
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Full
set of commercial invoices
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3.
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Packing
slip of the cargo delivered
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4.
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Cargo
receipt issued by shipping agent evidencing acceptance of
goods
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5.
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Other
shipping document such as a Bill of Lading to allow customer to claim the
goods from the carrier
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Terms of
sale for all direct sales directly shipped by our manufacturers in China through
our Macau subsidiary are FOB Shipping Point. Since the responsibility
of the goods passes to the customer at shipping point, the customer assumes all
responsibility for transportation and insurance at this
point. Revenue is recognized only when documentary evidence as
summarized above demonstrating acceptance of the goods by the customer at the
point of shipment have been received by the accounting department in the Macau
office.
Note 8 – Financing, page
F-10
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1.
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Tell
us and expand your disclosure here, in liquidity and in other appropriate
sections of your filing regarding the ability of your parent, The
Starlight Group, to provide the bridge financing in light of the
withdrawal of your bank’s factoring and credit
facilities.
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RESPONSE
Due to
the seasonal nature of our business we have relied on credit facilities from DBS
bank to pay key vendors in China and bridge the timing gap of working capital
required for vendors initial shipments of product to our domestic warehouse and
payments received from customers. Despite the loss of our bank’s
factoring and credit facilities, The Starlight Group (“Group”) has expressed
their willingness and ability to advance funds to us for key vendor payments as
well as extending longer payment terms for goods they manufacture for
us. Taking into account the Group’s proceeds from a planned stock
offering in May 2010, internally generated funds and credit facilities available
to the Group, and proposed use of proceeds which included bridge financing for
the Company, we concluded that our parent would have sufficient working capital
to provide bridge financing to us for at least the next 12 months. In
future filings we will expand our disclosures in the appropriate portions of our
filing not limited to the financial notes and liquidity to include the
discussion of the Group’s ability to provide bridge financing.
Forms 10-Q for the Quarterly
Periods Ended June 30 and September 30, 2010
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2.
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Please
respond, as appropriate, to the comments issued regarding Form 10-K for
the year ended March 31, 2010.
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RESPONSE
1. Consolidated Financial
Statements - General
In our
next and future filings we will revise our financial statements to disclose all
related party transactions on the face of our financial statements
2. Item 4T. Controls and
Procedures
We will
revise our conclusion to “not effective” and will report on our efforts to
remediate this issue in future filings. (This comment is appropriate for Form
10Q quarterly periods ended June 30, page 16 and September 30, 2010 page
17).
3. Revenue Recognition –
Return Policy and Warranty Claims
No
additional comments from 3. for Form 10K above are required as policies have not
changed.
4. Customer Credits on
Account
No
additional comments from 4. for Form 10K above are required as practices have
not
changed.
5. Internal
Controls for Direct Sales through Macau Subsidiary.
No
additional comments from 5. for Form 10K above are required as controls have
not
changed.
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6.
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Note 5 Accounts
Receivable Factoring
Facility
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Despite
the loss of our bank’s factoring and credit facilities, The Starlight Group
(“Group”) has expressed their willingness and ability to advance funds to us for
key vendor payments as well as extending longer payment terms for goods they
manufacture for us. Our related party debt has increased by approximately $.5
million and $2.6 million for the quarters ended June 30, 2010 and September 30,
2010 respectively. Taking into account the Group’s proceeds of approximately $9
million from an offering of their stock in May 2010, internally generated funds
and credit facilities available to the Group and proposed use of proceeds which
included bridge financing for the Company, we have concluded that our parent
will have sufficient working capital to provide bridge financing to us for at
least the next 12 months. In future filings we will expand our
disclosures in the appropriate portions of the document not limited to the
financial notes and liquidity to include the discussion of the Group’s ability
to provide bridge financing and the amounts provided.
The
Singing Machine Company, Inc. acknowledges that:
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·
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The
company is responsible for the adequacy and accuracy of the disclosure in
the filing;
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·
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Staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
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·
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The
company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Sincerely,
/s/ Gary
Atkinson
Interim
Chief Executive Officer