UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
quarter ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to ______.
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| (State of Incorporation ) | (IRS Employer I.D. No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirement for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
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APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY
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Indicated by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| CLASS | NUMBER OF SHARES OUTSTANDING | |
| Common Stock, $0.01 par value | as of August 13, 2021 |
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
INDEX
| Page No. | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | |
Condensed Consolidated Balance Sheets – June 30, 2021 (Unaudited)and March 31, 2021 |
3 | |
| 4 | ||
| 5 | ||
| 6 | ||
Notes to Condensed Consolidated Financial Statements - June 30, 2021 and 2020 (Unaudited) |
7 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 |
| Item 4. | Controls and Procedures | 23 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 23 |
| Item 1A. | Risk Factors | 24 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| Item 3. | Defaults Upon Senior Securities | 24 |
| Item 4. | Mine Safety Disclosures | 24 |
| Item 5. | Other Information | 24 |
| Item 6. | Exhibits | 24 |
| SIGNATURES | 25 | |
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ | ||||||||
| Due from Crestmark Bank | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Deferred financing costs | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Deferred tax assets | ||||||||
| Operating Leases - right of use assets | ||||||||
| Other non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Due to related party - Starlight Consumer Electronics Co., Ltd. | ||||||||
| Due to related party - Starlight R&D, Ltd. | ||||||||
| Revolving line of credit - Iron Horse Credit | ||||||||
| Customer deposits | ||||||||
| Refunds due to customers | ||||||||
| Reserve for sales returns | ||||||||
| Current portion of finance leases | - | |||||||
| Current portion of installment notes | ||||||||
| Current portion of note payable - Paycheck Protection Program | - | |||||||
| Current portion of operating lease liabilities | ||||||||
| Subordinated related party debt - Starlight Marketing Development, Ltd. | ||||||||
| Total Current Liabilities | ||||||||
| Installment notes, net of current portion | ||||||||
| Note payable - Payroll Protection Program, net of current portion | - | |||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock, Class A, $ par value; shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock, Class B, $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 3 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Net Sales | $ | $ | ||||||
| Cost of Goods Sold | ||||||||
| Gross Profit | ||||||||
| Operating Expenses | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Depreciation | ||||||||
| Total Operating Expenses | ||||||||
| Loss From Operations | ( | ) | ( | ) | ||||
| Other Income (Expenses) | ||||||||
| Gain from Payroll Protection Plan loan forgiveness | - | |||||||
| Gain - related party | - | |||||||
| Gain from damaged goods insurance claim | - | |||||||
| Gain from extinguishment of accounts payable | - | |||||||
| Interest expense | ( | ) | ( | ) | ||||
| Finance costs | ( | ) | ( | ) | ||||
| Total Other Income (Expenses), net | ||||||||
| Loss Before Income Tax Benefit | ( | ) | ( | ) | ||||
| Income Tax Benefit | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net Loss per Common Share | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Common and Common Equivalent Shares: | ||||||||
| Basic and Diluted | ||||||||
See notes to the condensed consolidated financial statements
| 4 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Three Months Ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of deferred financing costs | ||||||||
| Change in inventory reserve | - | |||||||
| Change in allowance for bad debts | ( | ) | ( | ) | ||||
| Stock based compensation | - | |||||||
| Change in net deferred tax assets | ( | ) | ( | ) | ||||
| Payroll Protection Plan loan forgiveness | ( | ) | - | |||||
| Gain - related party | ( | ) | - | |||||
| Gain from extinguishment of accounts payable | - | ( | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Due from Crestmark Bank | ||||||||
| Accounts receivable - related parties | - | |||||||
| Insurance receivable | - | |||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Other non-current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Due to related parties | - | ( | ) | |||||
| Customer deposits | ( | ) | - | |||||
| Refunds due to customers | ( | ) | ( | ) | ||||
| Reserve for sales returns | ( | ) | ( | ) | ||||
| Operating lease liabilities, net of operating leases - right of use assets | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Net Proceeds from revolving lines of credit | ||||||||
| Proceeds from note payable - Payroll Protection Program | - | |||||||
| Payment of deferred financing charges | ( | ) | ( | ) | ||||
| Payments on installment notes | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | - | |||||||
| Payments on finance leases | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ||||||||
| Cash at beginning of year | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Operating leases - right of use assets and lease liabilities at inception of lease | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 5 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended June 30, 2021 and 2020
| Preferred Stock | Common Stock | Additional Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Employee compensation-stock option | ||||||||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See notes to the condensed consolidated financial statements
| 6 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMCL”) and SMC-Music, Inc. (“SMCM”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. The products are sold directly to distributors and retail customers.
We do business with a number of entities that are principally owned by the Company’s former Chairman, Philip Lau , including Starlight R&D Ltd (“SLRD”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc. (“Cosmo”), Winglight Pacific, Ltd (“Winglight”) and Starlight Electronics Company Ltd (“SLE”), among others.
NOTE 2 – LIQUIDITY
The
Company reported a net loss of approximately $
On
August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts International
Limited (“Koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to which the Company agreed
to redeem approximately
On
August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional
investors and a strategic investor for private placement of (i) shares of its common stock (the “Shares”) together
with common warrants to purchase up to
We believe that current working capital, the availability of cash from our Intercreditor Revolving Credit Facility (See Note 6 – Bank Financing), additional working capital generated by the private placement and cash generated from our operating forecast will be adequate to meet the Company’s liquidity requirements for at least the next twelve months. We believe the Intercreditor Revolving Credit Facility will be adequate to maintain and grow our business during the remaining term of the agreement. As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms.
NOTE 3 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three months ended June 30, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
| 7 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
The condensed consolidated balance sheet information as of March 31, 2021 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2021. The interim condensed consolidated financial statements should be read in conjunction with that report.
USE OF ESTIMATES
The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change which may alter future expectations.
COLLECTABILITY OF ACCOUNTS RECEIVABLE
The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100% reserves for customers in bankruptcy and other allowances based upon historical collection experience. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.
The Company is subject to chargebacks from customers for co-op program incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiary are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are recorded in the condensed consolidated statement of operations and translations are recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented.
Concentration of Credit Risk
At
times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured
amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at
June 30, 2021 and March 31, 2021 are approximately $
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable.
INVENTORY
Inventories
are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable
value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected
future inventory returns due to warranty and allowance programs. As of June 30, 2021 and March 31, 2021 the estimated amounts for these
future inventory returns were approximately $
DEFERRED FINANCING COSTS
The
Company classifies deferred financing costs incurred when obtaining or renewing revolving credit facilities as assets in the accompanying
condensed consolidated balance sheets as it is likely that during certain periods during non-peak season there will be no balance due
on these credit facilities to offset the deferred financing costs. In June 2021, the Company incurred approximately $
| 8 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” No impairment was recorded as of June 30, 2021 and 2020.
LEASES
The Company follows FASB ASC 842, “Leases”. The ASC requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. (See Note 7– LEASES).
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We follow FASB ASC 825, Financial Instruments, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, customer deposits, refunds due to customers, and due to related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the notes payable, finance leases and installment notes approximate fair value either due to the relatively short period to maturity or the related interest is accrued at a rate similar to market rates. The carrying amounts on the revolving line of credit approximates fair value due the relatively short period to maturity and related interest accrued at market rates.
REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS
The Company recognizes revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers. The Company recognizes revenue when the control of the goods sold is transferred to the customer, in an amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods. The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation.
The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). The Company’s contracts have no financing elements, payment terms are less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods.
The
Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on
the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our
customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair
value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers
are recorded as a reduction to net sales. For both three-month periods ended June 30, 2021 and 2020, co-op promotion incentives were
approximately $
| 9 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
Costs incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods are included in general and administrative expenses, in-bound freight costs are included in the cost of goods sold and accrued sales representative commissions are included in selling expenses in the accompanying consolidated statements of operations as our underlying customer agreements are less than one year.
The Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments (See Note 9 – GEOGRAPHICAL INFORMATION).
While the Company generally does not allow products to be returned, the Company does provide for variable consideration contingent upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company estimates variable consideration under our return allowance programs for goods returned to the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates.
The
Company’s reserve for sales returns was approximately $
Revenue was derived from four different major product lines. Disaggregated revenue from these product lines for the three months ended June 30, 2021 and 2020 consisted of the following:
| Three Months Ended | ||||||||
| Product Line | June 30, 2021 | June 30, 2020 | ||||||
| Classic Karaoke Machines | $ | $ | ||||||
| Licensed Product | - | |||||||
| Music and Accessories | ||||||||
| SMC Kids Toys | ||||||||
| Total Net Sales | $ | $ | ||||||
SHIPPING AND HANDLING COSTS
Shipping
and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to
fulfill the Company’s promise to transfer the goods. For the three months ended June 30, 2021 and 2020 shipping and handling expenses
were approximately $
The
Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”.
ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed
in the condensed consolidated statements of operations over the service period (generally the vesting period). The Company uses the Black-Scholes
option valuation model to value stock options. Employee stock option compensation expense for the three months ended June 30, 2021 and
2020 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the
entire portion of the award. For the three months ended June 30, 2021 and 2020, the stock option expense was approximately $
RESEARCH AND DEVELOPMENT COSTS
Research
and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and
administrative expenses in the condensed consolidated statements of operations. For the three months ended June 30, 2021 and 2020, these
amounts totaled approximately $
INCOME TAXES
The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.
| 10 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
The
Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed
tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is
reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the
largest benefit that has a
Basic net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share reflects the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of Company common stock at the average market price during the period using the treasury stock method. For the three months ended June 30, 2021 and 2020, options to purchase shares and shares of common stock, respectively have been excluded from diluted earnings per share as the result would have been anti-dilutive.
ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes” (Topic 740). Among several issues addressed in this ASU, there was one area potentially affecting Company’s calculations of interim income tax provision or benefit. The guidance specifies that an entity should apply the annual effective tax rate to the year-to date income or loss as long as the tax benefits for any losses are expected to be realized during the year or would be recognizable as a deferred tax asset at the end of the year eliminating the requirement of a valuation allowance for that interim period. There is specific guidance for circumstances in which an entity incurs a loss on a year-to-date basis that exceeds the anticipated ordinary loss for the year, which is an exception to the general guidance in Subtopic 740-270. The Company adopted the standard for the interim period ended June 30, 2021. The adoption of this standard did not have a material effect on our condensed consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 for smaller reporting companies are effective for fiscal years beginning after April 1, 2023 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our condensed consolidated financial statements and related disclosures.
NOTE 4 - INVENTORIES, NET
| June 30, | March 31, | |||||||
| 2021 | 2021 | |||||||
| Finished Goods | $ | $ | ||||||
| Inventory in Transit | ||||||||
| Estimated Amount of Future Returns | ||||||||
| Subtotal | ||||||||
| Less:Inventory Reserve | ||||||||
| Inventories, net | $ | $ | ||||||
Inventories are comprised of the following components:
NOTE 5 – PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
| USEFUL | June 30, | March 31, | ||||||||||
| LIFE | 2021 | 2021 | ||||||||||
| Computer and office equipment | $ | $ | ||||||||||
| Furniture and fixtures | ||||||||||||
| Warehouse equipment | ||||||||||||
| Molds and tooling | ||||||||||||
|
| ||||||||||||
| Less: Accumulated depreciation | ||||||||||||
|
| $ | $ | ||||||||||
| 11 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
Depreciation
expense for the three months ended June 30, 2021 and 2020 was approximately $
NOTE 6 – BANK FINANCING
Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit
On
June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility on eligible accounts receivable and inventory which replaced
the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020. The Company signed a two-year
Loan and Security Agreement for a $
Under the Crestmark Facility:
| ● | Advance rate shall not exceed 70% of Eligible Accounts Receivable aged less than 90 days from invoice date. | |
| ● | Crestmark shall maintain a base dilution reserve of 1% for each 1% of dilution over 15%. | |
| ● | Crestmark will implement an availability block of 20% of amounts due on Iron Horse Credit (“IHC”) Intercreditor Revolving Credit Facility. | |
| ● | Mandatory pay-down of the loan to zero in January and February each year. |
The
Crestmark Facility is secured by a perfected security interest in all assets including a first security interest in Accounts Receivable
and Inventory. Notwithstanding the foregoing, Crestmark shall subordinate its first security interest in inventory to IHC as agreed between
all parties. The Crestmark Facility bears interest at the Wall Street Journal Prime Rate plus
In
addition, the Company executed a two-year Loan and Security Agreement with Iron Horse Credit (“IHC Facility”) for up to $
Under the IHC Facility:
| ● | Advance rate shall not exceed the lower of (a) 70% of the inventory cost or (b) 85% of Net Orderly Liquidation Value (NOLV) as determined by an independent third-party appraiser engaged by IHC. | |
| ● | The Company must maintain a fixed charge coverage ratio test of 1:1 times measured on a rolling 12-month basis, defined as earnings before interest, taxes, depreciation and amortization (“EBITDA”) less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness. This financial covenant was waived for the first six months of the IHC Facility. As of June 30, 2021, the Company was in compliance with this covenant. |
The
IHC Facility is secured by a perfected security interest in the Company’s inventory. The IHC Facility bears interest at
As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms.
Note Payable Payroll Protection Plan
On
May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $
| 12 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
Installment Notes Payable
On
June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an entire
ERP System project over a term of
Subordinated Debt/Note Payable to Related Party
In
conjunction with the Crestmark Facility and IHC Facility there is a subordination agreement on related party debt due to Starlight Marketing
Development, Ltd. of approximately $
In connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the subordinated note payable. Both the Crestmark Facility and IHC Facility agreements allow for the repayment of the subordinated note payable provided any amounts borrowed against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity to support on-going operations. As of June 30, 2021 the Company met repayment requirements of the Intercreditor Revolving Credit Facility to make principal payments totaling $300,000. During the next twelve months the Company intends on making additional payments and pay off the remaining balance outstanding provided the Company meets all repayment requirements of the Crestmark Facility and IHC Facility agreements.
As
of June 30, 2021 and March 31, 2021, the remaining amount due on the note payable was approximately $
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
On September 11, 2020 a Complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in a Superior Court of San Bernadino County. The complaint alleges an employee of SMCL committed employment practice violations against a former temporary employee not employed by SMC Logistics. Management has investigated the allegation and has engaged with an employment attorney to defend the lawsuit. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results.
Management is not aware of any other legal proceedings other than matters that arise in the ordinary course of business.
LEASES
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases.
Operating Leases
We have operating lease agreements for offices and a warehouse facility in Florida, California and Macau expiring in various years through 2024.
| 13 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
We
entered into an operating lease agreement, effective October 1, 2017, for the corporate headquarters located in Fort Lauderdale, Florida
where we lease approximately
We
entered into an operating lease agreement, effective June 1, 2013, for
We
entered into an operating lease agreement, effective May 1, 2018, for
Lease expense for our operating leases is recognized on a straight-line basis over the lease terms.
| Supplemental balance sheet information related to leases as of June 30, 2021 is as follows: | ||||
| Assets: | ||||
| Operating lease - right-of-use assets | $ | |||
| Liabilities | ||||
| Current | ||||
| Current portion of operating leases | $ | |||
| Noncurrent | ||||
| Operating lease liabilities, net of current portion | $ | |||
| Supplemental statement of operations information related to leases for the three months ended June 30, 2021 is as follows: | Three Months Ended | |||
| June 30, 2021 | ||||
| Operating lease expense as a component of general and administrative expenses | $ | |||
| Supplemental cash flow information related to leases for the three months ended June 30, 2021 is as follows: | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flow paid for operating leases | $ | |||
| Financing cash flow paid for finance leases | $ | |||
| Lease term and Discount Rate | ||||
| Weighted average remaining lease term (months) | ||||
| Operating leases | ||||
| Weighted average discount rate | ||||
| Operating leases | % | |||
Scheduled maturities of operating lease liabilities outstanding as of June 30, 2021 are as follows:
| Year | Operating Leases | |||
| 2021, for the remaining 6 months | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total Minimum Future Payments | ||||
| Less: Imputed Interest | ||||
| Present Value of Lease Liabilities | $ | |||
During the three months ended June 30, 2021 and 2020 the Company did not issue any stock options.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees.
| 14 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
| June 30, 2021 | ||||||||
| Number of Options | Weighted Average Exercise Price | |||||||
| Stock Options: | ||||||||
| Balance at beginning of period | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | $ | |||||
| Balance at end of period | $ | |||||||
| Options exercisable at end of period | $ | |||||||
| Range of Exercise Price | Number Outstanding at June 30, 2021 | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable at June 30, 2021 | Weighted Average Exercise Price | ||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| $ - $ | $ | $ | |||||||||||||||||||
| * | |||||||||||||||||||||
| * |
As
of June 30, 2021, there was unrecognized expense of approximately $
The intrinsic value of vested options as of June 30, 2021 was approximately $.
NOTE 9 - GEOGRAPHICAL INFORMATION
Sales to customers outside of the United States for the three months ended June 30, 2021 and 2020 were primarily made by the Macau Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows:
| FOR THE THREE MONTHS ENDED | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| North America | $ | $ | ||||||
| Europe | - | |||||||
| Australia | ||||||||
| $ | $ | |||||||
The geographic area of sales was based on the location where the product is delivered.
NOTE 10 –RELATED PARTY TRANSACTIONS
All transactions listed below are related to the Company as they are all with affiliates of our former Chairman of the Board, Mr. Phillip Lau.
DUE TO RELATED PARTIES
On
June 30, 2021 and March 31, 2021, the Company had amounts due to related parties in the amounts of approximately $
| 15 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
TRADE
On
July 30, 2020, the Company and Cosmo reached agreement that Cosmo would no longer be the Company’s Canadian distributor and the
Company became the sole and exclusive distributor of the Company’s products in Canada. As part of the agreement, the companies
executed a Purchase and Sales agreement whereby the Company acquired all of Cosmo’s karaoke inventory for approximately $
The
Company incurred service expenses from Starlight Electronics Co, Ltd, (“SLE”) a related party. The services from SLE were
approximately $
NOTE 11 – RESERVE FOR SALES RETURNS
A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates.
The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets.
Changes in the Company’s reserve for sales returns are presented in the following table:
| Six Months Ended | ||||||||
| June 30, | June 30, | |||||||
| 2021 | 2020 | |||||||
| Reserve for sales returns at beginning of the fiscal year | $ | $ | ||||||
| Provision for estimated sales returns | ||||||||
| Sales returns received | ( | ) | ( | ) | ||||
| Reserve for sales returns at end of the period | $ | $ | ||||||
NOTE 12 – REFUNDS DUE TO CUSTOMERS
As
of June 30, 2021 and March 31, 2021 the amount of refunds due to customers was approximately $
NOTE 13 - EMPLOYEE BENEFIT PLANS
The
Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s
contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged
to operations for contributions to this plan and administrative costs during the three months ended June 30, 2021 and 2020 totaled approximately
$
NOTE 14 - CONCENTRATIONS OF CREDIT AND SALES RISK
The
Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for
doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts
receivable are concentrated with several large customers. At June 30, 2021,
For
the three months ended June 30, 2021, there were four customers who individually accounted for 10% or more of the Company’s net
sales. Revenue from these customers as a percentage of net sales were
| 16 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021 and 2020
(Unaudited)
NOTE 15 – SUBSEQUENT EVENTS
On
August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts International
Limited (“Koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to which the Company agreed
to redeem approximately shares of common stock of the Company (the “Redeemed Shares”). The closing of the transactions
set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred
back to the Company and the Company wired approximately $
Pursuant to the Redemption Agreement, neither Koncepts nor Treasure Green will remain shareholders of the Company.
On
August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional
investors and a strategic investor for private placement of (i) shares of its common stock (the “Shares”) together
with common warrants to purchase up to
Pursuant to the terms of the Purchase Agreement the Company is obligated to use commercially reasonable best efforts to file a registration statement providing for the resale by the purchasers of the Shares and Warrant Shares being sold in the Private Placement, as soon as practicable (and in any event within 30 days of the closing of the Private Placement). Under the Purchase Agreement the Company is also obligated to use its reasonable best efforts to submit an application to have the Company’s common stock listed on a national exchange by December 31, 2021, and to use its reasonable best efforts to have the Shares and Warrant Shares listed on such national exchange as soon as practicable following the submission of such application.
The
closing of the Private Placement took place on August 10, 2021, when the Shares, Common Warrants, and Pre-Funded Warrants were delivered
to the purchasers and funds, in the amount of approximately $
Stingray Group Inc. (TSX: RAY.A; RAY.B) “(Stingray”), a leading music, media and technology is part of the group of investors who participated in the Private Placement and have acquired a minority interest in the Company. Stingray is a long-standing business partner with the Company that provides our customers with music content from their extensive library of expertly produced and licensed karaoke content.
| 17 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this quarterly report. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part II, Item 1A, “Risk Factors “). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements.
Statements included in this quarterly report that do not relate to present or historical conditions are called “forward-looking statements.” Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,” “will,” and similar expressions are intended to identify forward-looking statements. Our ability to predict or project future results or the effect of events on our operating results is inherently uncertain. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved.
Important factors to consider in evaluating such forward-looking statements include, but are not limited to: (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) the effects of adverse general economic conditions, both within the United States and globally, (v) vendor price increases and decreased margins due to competitive pricing during the economic downturn (vi)various competitive market factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section of our Annual Report on Form 10-K, this Quarterly Report on 10-Q, or in our other filings made with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
| 18 |
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation (the “Company”, “SMC”, “The Singing Machine”) and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc.(“SMC-M”) are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments and musical recordings. The products are sold by SMC to retailers and distributors for resale to consumers.
Our products are sold throughout North America, Europe and Australia primarily through major mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores.
Representative customers include Amazon, Best Buy, BJ’s Wholesale, Costco, Sam’s Club, Target, and Wal-Mart. Our business has historically been subject to seasonal fluctuations causing our revenues to vary from quarter to quarter and between the same periods in different fiscal years. Our products are manufactured for the most part based on the purchase indications of our customers. We are uncertain of how significantly our business would be harmed by a prolonged economic recession, but we anticipate that continued contraction of consumer spending would negatively affect our revenues and profit margins.
Sales of consumer electronics and toy products in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during the second quarter ending September 30 and the third quarter ending December 31. Sales in our second and third quarter, combined, accounted for approximately 86% and 85% of net sales in fiscal 2021 and 2020, respectively.
COVID-19 UPDATE
In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. While our facilities have remained operational during the first half of 2021, we continue to experience various degrees of manufacturing cost pressures due to raw material and electronic component shortages as well as inflationary price increases. Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products and adversely affect our operations.
Further, as consumer demand improves and economic activity increases, we have experienced supply chain challenges, including increased lead times, port closures in China and delays in Los Angeles, global container shortages, as well as inflation of logistics and labor costs due to availability constraints and high demand. We expect these inflationary trends to continue throughout the remainder of the fiscal year.
During Fiscal 2021, we experienced growth in our karaoke, microphone, and toy categories as the pandemic increased demand for home entertainment. For the current fiscal year, demand from consumers and retailers continue to remain strong led by shortages of toys and home entertainment product availability in the market.
We maintain our commitment to protect the health and safety of our employees, customers, and suppliers by continuing our enhanced safety protocols for those on-site at our warehouse facilities. In addition, employees who do not need to be physically present at our corporate office to perform their job responsibilities generally continue to work from home and essential business travel remains the main travel activity. The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities or by us relating to the pandemic. For more information regarding factors and events that may impact our business, results of operations and financial condition as a result of the COVID-19 pandemic, see “Risk Factors” included in Item 1A. “Risk Factors” in our 2021 Annual Report on Form 10-K.
| 19 |
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items related to our condensed consolidated statements of operations as a percentage of net sales for the three months ended June 30, 2021 and 2020 as restated:
| For Three Months Ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Net Sales | 100.0 | % | 100.0 | % | ||||
| Cost of Goods Sold | 74.0 | % | 68.5 | % | ||||
| Gross Profit | 26.0 | % | 31.5 | % | ||||
| Operating Expenses | ||||||||
| Selling expenses | 9.5 | % | 9.8 | % | ||||
| General and administrative expenses | 23.4 | % | 44.7 | % | ||||
| Depreciation and amortization | 1.1 | % | 2.3 | % | ||||
| Total Operating Expenses | 34.0 | % | 56.8 | % | ||||
| Loss from Operations | -8.0 | % | -25.3 | % | ||||
| Other Income (Expenses) | ||||||||
| Gain from Payroll Protection Plan loan forgiveness | 7.4 | % | 0.0 | % | ||||
| Gain - related party | 0.2 | % | 0.0 | % | ||||
| Gain from damaged goods insurance claim | 0.0 | % | 4.3 | % | ||||
| Gain from extinguishment of accounts payable | 0.0 | % | 12.8 | % | ||||
| Interest expense | -1.6 | % | -1.0 | % | ||||
| Finance costs | -0.3 | % | -0.2 | % | ||||
| Total Other Income (expenses), net | 5.7 | % | 15.9 | % | ||||
| Loss Before Income Tax Benefit | -2.3 | % | -9.4 | % | ||||
| Income Tax Benefit | 0.5 | % | 2.6 | % | ||||
| Net Loss | -1.8 | % | -6.8 | % | ||||
QUARTER ENDED JUNE 30, 2021 COMPARED TO THE QUARTER ENDED JUNE 30, 2020
NET SALES
Net sales for the quarter ended June 30, 2021 increased to approximately $6,066,000 from approximately $3,052,000 an increase of approximately $3,014,000 as compared to the same period ended June 30, 2020. We shipped approximately $2,444,000 in holiday promotion goods to one major customer who committed to earlier delivery for the three months ended June 30, 2021 as compared to the prior three months ended June 30, 2020 when no holiday promotion goods were shipped to this customer. The remaining increase in sales was primarily due to another major customer that ordinarily does not order spring goods and decided to offer our product year-round.
GROSS PROFIT
Gross profit for the quarter ended June 30, 2021 increased to approximately $1,578,000 from approximately $962,000 an increase of approximately $616,000 as compared to the same period in the prior year. The increase in net sales contributed approximately $949,000 to the increase in gross profit but was offset by a decrease in gross profit margin percentage of approximately 5.5% or approximately $333,000.
Gross profit margin for the three months ended June 30, 2021 was 26.0% compared to 31.5% for the three months ended June 30, 2020 due primarily to the increase in holiday promotion goods as explained in net sales that yield a significantly lower gross profit margin and accounted for approximately 4.4 margin points of the 5.5 margin point decrease. The remaining decrease was primarily due to the gross margin on the mix of products returned during the three months ended June 30, 2021.
OPERATING EXPENSES
For the quarter ended June 30, 2021, total operating expenses increased to approximately $2,068,000 compared to approximately $1,733,000 from the same period in the prior year. This represents an increase in total operating expenses of approximately $335,000 from the quarter ended June 30, 2020. There was an increase in selling expenses of approximately $279,000 of which $182,000 was primarily due to variable expenses including commissions, freight and royalties which were all commensurate with the increase in net sales. There was an increase in discretionary expenses of approximately $97,000 due to increased on-line media marketing for the spring and summer seasons. General and administrative expenses increased by approximately $58,000 due to increased costs associated with the logistics operations.
| 20 |
For the three months ended June 30, 2021 and 2020, total operating expenses as a percentage of net sales were 34.0% and 56.8%, respectively. This decrease of approximately 22.8 percentage points was primarily due to the significant increase in holiday promotion goods shipped direct import to one major customer that incurred significantly less selling and administrative expenses as compared to goods shipped from our California warehouse facility.
LOSS FROM OPERATIONS
There was a loss from operations of approximately $490,000 for the three months ended June 30, 2021 compared to a loss from operations of approximately $771,000 for the three months ended June 30, 2020. The decrease in the loss from operations of approximately $281,000 was primarily due to the increase in gross profit from increased net sales offset by an increase in operating expenses as explained above.
OTHER INCOME (EXPENSES)
Other income, net decreased by approximately $142,000 to approximately $343,000 in other income, net for the three months ended June 30, 2021 compared to approximately $485,000 in other income, net for the same period ended June 30, 2020. For the three months ended June 30, 2021, there were one-time gains of approximately $459,000 primarily due to forgiveness of the loan under the Paycheck Protection Program of approximately $448,000 which included principal and interest and offset by $116,000 in other expenses primarily due to interest paid on the Intercreditor Revolving Credit Facility. For the three months ended June 30, 2020, there were one-time gains of approximately $521,000 due to a gain from insurance proceeds received for a damaged goods claim of approximately $131,000 and settlement of accounts payable of approximately $390,000 by the vendor responsible for the damaged goods. These one-time gains were offset by approximately $36,000 in other expenses primarily due to interest paid on existing debt.
INCOME TAXES
For the three months ended June 30, 2021 and 2020 the Company recognized an income tax benefit of approximately $28,000 and $79,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 19.1% and 27.6%, respectively.
NET INCOME
For the three months ended June 30, 2021 there was a net loss of approximately $119,000 compared to a net loss of approximately $207,000 for the same period a year ago. The increase in net income was primarily due to the same reasons discussed in Loss from Operations and Other Income (Expenses).
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2021, Singing Machine had cash on hand of approximately $1,383,000 as compared to cash on hand of approximately $1,805,000 on June 30, 2020. We had working capital of approximately $5,556,000 as of June 30, 2021. Net cash provided by operating activities was approximately $794,000 for the three months ended June 30, 2021, as compared to approximately $244,000 used in operating activities for the same period a year ago. During the three months ended June 30, 2021 there was a decrease in amounts due from Crestmark Bank of approximately $4,214,000 as cash collected in excess of amounts due on accounts receivable financing was transferred to operating cash. There was an increase in accounts payable of approximately $3,790,000 primarily related to the purchase of inventory for the upcoming peak season. These increases to cash provided by operating expenses were offset by an increase in accounts receivable of approximately $3,251,000 due to the increase in sales to two major customers and an increase in inventories of approximately $2,880,000 due to an earlier build-up of inventory for the upcoming peak season due to global logistics issues and risks.
Net cash used in operating activities was approximately $244,000 for the three months ended June 30, 2020. During the three months ended June 30, 2020 there was a decrease in accounts payable of approximately $2,913,000 as the Company paid past due invoices to the vendor that caused the damaged goods incident as explained below. There was a seasonal decrease in reserves for sales returns of approximately $844,000, a decrease in accrued expenses of approximately $521,000 and a decrease in refunds due to customers of approximately $415,000 primarily due to repayment of chargebacks to one customer for damaged goods received as explained below. These decreases in cash used in operating activities were offset by a decrease in amounts due from PNC Bank and Crestmark for collections on accounts receivable that exceeded amounts due on the PNC and Crestmark Revolving Credit Facilities of approximately $2,121,000, a decrease in insurance receivable of approximately $1,269,000 primarily due to proceeds received from the damaged goods insurance claim as explained below. Inventories decreased by approximately $698,000 primarily due to one major customer buying goods for a summer program due to the increased demand for karaoke products.
Net cash used in investing activities for the three months ended June 30, 2021 was approximately $56,000 as compared to approximately $45,000 used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for new products.
Net cash provided by financing activities for the three months ended June 30, 2021 was approximately $248,000 compared to cash provided by financing activities of approximately $1,749,000 for the same period ended of the prior year. During the three months ended June 30, 2021, we borrowed approximately $300,000 from our Intercreditor Revolving Credit Facility for working capital. These financing activities were offset by payments made on deferred finance charges associated with the renewal of the IHC Facility of approximately $38,000 with the remaining difference primarily used to pay scheduled installments on installment notes and finance leases.
| 21 |
Net cash provided by financing activities for the three months ended June 30, 2020 was approximately $1,749,000. We borrowed $1,400,000 from our IHC Facility and received loan proceeds from Crestmark in the amount of approximately $444,000 million under the Paycheck Protection Program. These financing activities were offset by payments made on deferred finance charges associated with the closing of the Crestmark and IHC Facilities of approximately $74,000 with the remaining difference used to pay scheduled installments on installment notes and finance leases.
On June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility with Crestmark and IHC on eligible accounts receivable and inventory which replaced the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020 (See Note 4 – Bank Financing). As of this filing, we have borrowed approximately $990,000 on the IHC Facility, which provides for a maximum loan amount of $2,500,000 on eligible inventory and borrowed approximately $500,000 on our Crestmark Facility which will make available up to $10,000,000 of eligible accounts receivable as the fiscal year progresses. As of this filing the Company has approximately $2,200,000 currently available from these two credit facilities.
On May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable to the extent the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness may be reduced if the borrower terminates employees or reduces salaries during the eligible period. The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments until a forgiveness application has been accepted and reviewed by the Small Business Administration (“SBA”), and the SBA provided Crestmark with the loan forgiveness amount. In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety. For the three months ended June 30, 2021, a gain of approximately $448,000 (including principal and interest) from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of operations.
On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts International Limited (“Koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to which the Company agreed to redeem approximately 19,623,155 shares of common stock of the Company (the “Redeemed Shares”). The closing of the transactions set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the Company and the Company wired approximately $7,200,000 to Koncepts and Treasure Green. The Redeemed Shares shall be retired to treasury and shall become available for reissuance in the future.
On August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and a strategic investor for private placement of (i) 16,500,000 shares of its common stock (the “Shares”) together with common warrants to purchase up to 16,500,000 shares of common stock for an exercise price of $0.35 per share, and (ii) 16,833,333 pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $0.01 per share, together with Common Warrants to purchase up to 16,833,333 shares of common stock at an exercise price of $0.35 per share (the “Private Placement”). Shares issuable upon the exercise of the Pre-Funded Warrants and Common Warrants are hereinafter referred to as the “Warrant Shares”. The closing of the Private Placement took place on August 10, 2021, when the Shares, Common Warrants, and Pre-Funded Warrants were delivered to the purchasers and funds, in the amount of approximately $9,800,000, were wired to the Company. Approximately $7,200,000 of the funds received were used to execute the Redemption Agreement. The Company expects an increase in working capital of approximately $1,800,000 of working capital after settlement of expenses associated with closing of these transactions.
In August 2019, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped by the factory. As a result, we incurred a loss in cash flow of approximately $1,559,000 in revenue and approximately $849,000 in additional out of pocket expenses to retrieve, inspect, warehouse and properly destroy the goods in in fiscal 2020. As of the fiscal year ended March 31, 2021 we recovered approximately $2,336,000 from our cargo insurance coverage which settled approximately $1,268,000 in insurance claim receivable with the remaining proceeds reflected in other income and (expenses) as a gain from damaged goods insurance claim in the consolidated statement of income as of March 31, 2021. For the three months ended June 30, 2021 and 2020 the gain from damaged goods insurance claim was approximately $0 and $131,000, respectively. We also secured vendor invoice credits of $390,000 from the factory that caused the damage which is reflected as gain from settlement of accounts payable in the condensed consolidated statement of operations for the three months ended June 30, 2020.
Effective as of August 10, 2021, and in connection with the transactions set forth in the Redemption Agreement and Purchase Agreement (as defined above ), Phillip Lau, Peter Hon, and Yat Tung Lau (each a “Director” and together, the “Directors”) resigned from the Board of Directors of the Company. The Directors’ resignations are not a result of a disagreement on any matter relating to the Company. The Company intends to fill the newly created vacancies on the Board in due course.
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We believe that current working capital, the availability of cash from our Intercreditor Revolving Credit Facility (See Note 6 – Bank Financing), additional working capital generated by the private placement and cash generated from our operating forecast will be adequate to meet the Company’s liquidity requirements for at least the next twelve months. We believe the Intercreditor Revolving Credit Facility will be adequate to maintain and grow our business during the remaining term of the agreement. If we are unable to comply with the financial covenants defined in the financing agreement and default on the credit facility, it may have a material adverse effect on our ability to meet our financial obligations. As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms.
CRITICAL ACCOUNTING POLICIES
The Company’s interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in the Company’s 2021 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for small reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the filing of our Form 10-K for the year ended March 31, 2021, we identified a material weakness primarily related to the consolidated financial statements close process that failed to detect errors which could have been material in the accounting for inventory cutoff and the inventory valuation of estimated returns. Specifically, the Company currently has a deficient process to close the consolidated financial statements and prepare comprehensive and timely account analysis, due in part to a new accounting software system, which resulted in certain adjusting journal entries.
Plan for material Weakness in Internal Control over Financial Reporting
The Company’s management has begun to design and implement certain remediation measures to address the above-described material weakness and enhance the Company’s internal control in order to remediate this material weakness. As part of our remediation measures, the Company has identified and will implement plans to enhance the Company’s process and controls including the following measures:
| ● | The Company implemented a new Enterprise Resource Planning (“ERP”) system in Fiscal 2021 that contributed to the material weaknesses. Management has identified system processing errors specifically related to when returned goods are recognized in inventory and how they are costed. Management is currently working with our third-party systems support group to correct these system errors. | |
| ● | Management plans on strengthening the ERP system training for both finance and warehouse personnel with regards to inventory cutoff and valuation procedures to insure personnel working with inventory are thoroughly familiar with procedures for processing returns. | |
| ● | Management will also assess whether current resources are adequate to maintain proper inventory controls once the system errors have been remediated and additional training is completed and will explore the possibility of additional third-party assistance if necessary. |
(c) Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2021, that materially affected, or were reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 11, 2020, a Complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in a Superior Court of San Bernadino County. The complaint alleges an employee of SMCL committed employment practice violations against a former temporary employee not employed by SMCL. Management has investigated the allegation and has engaged with an employment attorney to defend the lawsuit. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results.
Management is not aware of any other legal proceedings other than matters that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
Not applicable for smaller reporting companies
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are not currently in default upon any of our senior securities.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE SINGING MACHINE COMPANY, INC. | ||
| Date: August 16, 2021 | By: | /s/ Gary Atkinson |
| Gary Atkinson | ||
| Chief Executive Officer | ||
| /s/ Lionel Marquis | ||
| Lionel Marquis | ||
| Chief Financial Officer | ||
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