UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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 ______. |
Commission File Number -001-414050-24968
THE SINGING MACHINE COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
95-3795478 | ||
(State or other jurisdiction of | ( | |
incorporation or organization) | Identification No.) |
6301 NW5th 5th Way, Suite 2900, Fort Lauderdale FL 33309
(Address of principal executive offices)
(954) 596-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value $0.01 | MICS | The Nasdaq Stock Market LLC |
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitiondefinitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller Reporting Company ☒ EmergingIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCYAs of November
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
11
Indicated by check mark whether, 2022, 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 ☐issuer had
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:par value $0.01 per share, outstanding.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2021 | March 31, 2021 | |||||||||||||||
(unaudited) | September 30, 2022 | March 31, 2022 | ||||||||||||||
(unaudited) | ||||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash | $ | 7,375,305 | $ | 396,579 | $ | 2,978,683 | $ | 2,290,483 | ||||||||
Accounts receivable, net of allowances of $306,975 and $138,580, respectively | 12,254,098 | 2,210,881 | ||||||||||||||
Accounts receivable, net of allowances of $277,953 and $122,550, respectively | 10,640,685 | 2,785,038 | ||||||||||||||
Due from Crestmark Bank | - | 4,557,120 | 1,076,988 | 100,822 | ||||||||||||
Accounts receivable related party - Stingray Group, Inc. | 159,125 | 88,041 | 81,665 | 152,212 | ||||||||||||
Inventories, net | 11,126,298 | 5,490,255 | 16,022,436 | 14,161,636 | ||||||||||||
Prepaid expenses and other current assets | 284,206 | 221,071 | 158,238 | 344,409 | ||||||||||||
Deferred financing costs | 17,188 | 15,359 | - | 7,813 | ||||||||||||
Total Current Assets | 31,216,220 | 12,979,306 | 30,958,695 | 19,842,413 | ||||||||||||
Property and equipment, net | 580,922 | 674,153 | 532,505 | 565,094 | ||||||||||||
Deferred tax assets | 638,391 | 887,164 | 812,478 | 892,559 | ||||||||||||
Operating Leases - right of use assets | 1,488,258 | 2,074,115 | 862,279 | 1,279,347 | ||||||||||||
Other non-current assets | 136,885 | 147,173 | 193,841 | 86,441 | ||||||||||||
Total Assets | $ | 34,060,676 | $ | 16,761,911 | $ | 33,359,798 | $ | 22,665,854 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 5,982,552 | $ | 2,461,103 | $ | 10,133,743 | $ | 5,391,265 | ||||||||
Accrued expenses | 2,417,409 | 1,659,499 | 2,544,287 | 1,732,355 | ||||||||||||
Due to related party - Starlight Consumer Electronics Co., Ltd. | 14,400 | 14,400 | ||||||||||||||
Due to related party - Starlight R&D, Ltd. | 48,650 | 48,650 | ||||||||||||||
Revolving lines of credit | 8,626,840 | 64,915 | ||||||||||||||
Customer deposits | 9,520 | 139,064 | ||||||||||||||
Revolving line of credit - Iron Horse Credit | 2,500,000 | 2,500,000 | ||||||||||||||
Refunds due to customers | 90,075 | 145,408 | 93,925 | 97,968 | ||||||||||||
Reserve for sales returns | 2,922,457 | 960,000 | 1,690,606 | 990,000 | ||||||||||||
Current portion of finance leases | 7,421 | 2,546 | 7,988 | 7,605 | ||||||||||||
Current portion of installment notes | 72,760 | 68,332 | 77,479 | 74,300 | ||||||||||||
Current portion of note payable - Paycheck Protection Program | - | 172,685 | ||||||||||||||
Current portion of operating lease liabilities | 860,528 | 794,938 | 848,723 | 876,259 | ||||||||||||
Subordinated related party debt - Starlight Marketing Development, Ltd. | 352,659 | 502,659 | ||||||||||||||
Subordinated note payable - Starlight Marketing Development, Ltd. | 352,659 | 352,659 | ||||||||||||||
Total Current Liabilities | 21,405,271 | 7,034,199 | 18,249,410 | 12,022,411 | ||||||||||||
Finance leases, net of current portion | 12,592 | - | 6,528 | 10,620 | ||||||||||||
Installment notes, net of current portion | 157,812 | 212,949 | 99,098 | 138,649 | ||||||||||||
Note payable - Payroll Protection Program, net of current portion | - | 271,215 | ||||||||||||||
Operating lease liabilities, net of current portion | 685,304 | 1,334,010 | 60,374 | 457,750 | ||||||||||||
Total Liabilities | 22,260,979 | 8,852,373 | 18,415,410 | 12,629,430 | ||||||||||||
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 | 366,362 | 390,407 | ||||||||||||||
Common stock | 366,362 | 390,407 | ||||||||||||||
Preferred stock, $ par value; shares authorized; shares issued and outstanding | - | - | ||||||||||||||
Common stock $ par value; shares authorized; and shares issued and outstanding, respectively | 31,088 | 12,212 | ||||||||||||||
Additional paid-in capital | 24,542,633 | 19,773,322 | 29,511,318 | 24,902,694 | ||||||||||||
Accumulated deficit | (13,109,298 | ) | (12,254,191 | ) | (14,598,018 | ) | (14,878,482 | ) | ||||||||
Total Shareholders’ Equity | 11,799,697 | 7,909,538 | 14,944,388 | 10,036,424 | ||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 34,060,676 | $ | 16,761,911 | $ | 33,359,798 | $ | 22,665,854 |
See notes to the condensed consolidated financial statements
3 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||||
December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||||||
Net Sales | $ | 21,244,306 | $ | 16,972,603 | $ | 44,678,929 | $ | 42,309,825 | $ | 17,113,636 | $ | 17,368,973 | $ | 28,805,690 | $ | 23,434,623 | ||||||||||||||||
Cost of Goods Sold | 15,934,842 | 11,998,640 | 34,464,291 | 30,550,406 | 13,149,667 | 14,041,669 | 21,661,191 | 18,529,449 | ||||||||||||||||||||||||
Gross Profit | 5,309,464 | 4,973,963 | 10,214,638 | 11,759,419 | 3,963,969 | 3,327,304 | 7,144,499 | 4,905,174 | ||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Selling expenses | 1,406,175 | 1,490,560 | 2,717,642 | 3,264,364 | 899,590 | 733,485 | 1,504,787 | 1,311,467 | ||||||||||||||||||||||||
General and administrative expenses | 2,154,553 | 1,925,233 | 5,352,902 | 5,130,396 | 2,417,405 | 1,776,997 | 4,787,829 | 3,198,349 | ||||||||||||||||||||||||
Depreciation | 55,007 | 65,465 | 190,087 | 204,353 | 62,323 | 66,809 | 120,390 | 135,080 | ||||||||||||||||||||||||
Total Operating Expenses | 3,615,735 | 3,481,258 | 8,260,631 | 8,599,113 | 3,379,318 | 2,577,291 | 6,413,006 | 4,644,896 | ||||||||||||||||||||||||
Income From Operations | 1,693,729 | 1,492,705 | 1,954,007 | 3,160,306 | ||||||||||||||||||||||||||||
Income from Operations | 584,651 | 750,013 | 731,493 | 260,278 | ||||||||||||||||||||||||||||
Other Income (Expenses) | ||||||||||||||||||||||||||||||||
Gain from Paycheck Protection Plan loan forgiveness | - | - | 448,242 | - | ||||||||||||||||||||||||||||
Other (Expenses) Income | ||||||||||||||||||||||||||||||||
Gain - related party | - | 187,988 | 11,236 | 187,988 | - | - | - | 11,236 | ||||||||||||||||||||||||
Gain from damaged goods insurance claim | - | - | - | 1,067,829 | ||||||||||||||||||||||||||||
Gain from extinguishment of accounts payable | - | - | 236,472 | 390,000 | ||||||||||||||||||||||||||||
Gain from Payroll Protection Plan loan forgiveness | - | - | - | 448,242 | ||||||||||||||||||||||||||||
Gain from settlement of accounts payable | - | 236,472 | - | 236,472 | ||||||||||||||||||||||||||||
Interest expense | (155,573 | ) | (231,034 | ) | (365,966 | ) | (388,355 | ) | (185,827 | ) | (110,864 | ) | (345,940 | ) | (210,393 | ) | ||||||||||||||||
Finance costs | (9,375 | ) | (18,432 | ) | (35,672 | ) | (43,268 | ) | - | (9,375 | ) | (7,813 | ) | (26,297 | ) | |||||||||||||||||
Total Other (Expenses) Income, net | (164,948 | ) | (61,478 | ) | 294,312 | 1,214,194 | (185,827 | ) | 116,233 | (353,753 | ) | 459,260 | ||||||||||||||||||||
Income Before Income Tax Provision | 1,528,781 | 1,431,227 | 2,248,319 | 4,374,500 | 398,824 | 866,246 | 377,740 | 719,538 | ||||||||||||||||||||||||
Income Tax Provision | (102,886 | ) | (263,932 | ) | (248,664 | ) | (1,006,135 | ) | (102,357 | ) | (173,873 | ) | (97,276 | ) | (145,778 | ) | ||||||||||||||||
Net Income | $ | 1,425,895 | $ | 1,167,295 | $ | 1,999,655 | $ | 3,368,365 | $ | 296,467 | $ | 692,373 | $ | 280,464 | $ | 573,760 | ||||||||||||||||
Net Income per Common Share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.03 | $ | 0.03 | $ | 0.04 | $ | 0.09 | $ | 0.10 | $ | 0.43 | $ | 0.11 | $ | 0.40 | ||||||||||||||||
Diluted | $ | 0.03 | $ | 0.03 | $ | 0.04 | $ | 0.09 | $ | 0.08 | $ | 0.43 | $ | 0.09 | $ | 0.39 | ||||||||||||||||
Weighted Average Common and Common Equivalent Shares: | ||||||||||||||||||||||||||||||||
Weighted Average Common and Common | ||||||||||||||||||||||||||||||||
Equivalent Shares: | ||||||||||||||||||||||||||||||||
Basic | 53,410,249 | 38,885,185 | 46,787,545 | 38,667,221 | 3,071,131 | 1,593,929 | 2,484,660 | 1,448,603 | ||||||||||||||||||||||||
Diluted | 53,635,368 | 39,156,481 | 47,109,854 | 39,041,074 | 3,610,188 | 1,605,134 | 2,961,631 | 1,460,967 |
See notes to the condensed consolidated financial statements
4 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
September 30, 2022 | September 30, 2021 | |||||||||||||||
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
December 31, 2021 | December 31, 2020 | September 30, 2022 | September 30, 2021 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net Income | $ | 1,999,655 | $ | 3,368,365 | $ | 280,464 | $ | 573,760 | ||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
Depreciation | 190,087 | 204,353 | 120,390 | 135,080 | ||||||||||||
Amortization of deferred financing costs | 35,672 | 43,268 | 7,813 | 26,297 | ||||||||||||
Change in inventory reserve | 297,661 | 482,926 | (93,447 | ) | 53,890 | |||||||||||
Change in allowance for bad debts | 168,395 | (55,960 | ) | 155,403 | 118,321 | |||||||||||
Loss from disposal of property and equipment | 4,394 | - | - | 4,394 | ||||||||||||
Stock based compensation | 38,376 | 17,605 | 231,213 | 34,727 | ||||||||||||
Change in net deferred tax assets | 248,773 | 872,386 | 80,081 | 145,778 | ||||||||||||
Gain from Paycheck Protection Plan loan forgiveness | (448,242 | ) | - | |||||||||||||
Paycheck Protection Plan loan forgiveness | - | (448,242 | ) | |||||||||||||
Gain - related party | (11,236 | ) | (187,988 | ) | - | (11,236 | ) | |||||||||
Gain from extinguishment of accounts payable | (236,472 | ) | (390,000 | ) | - | (236,472 | ) | |||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (10,123,571 | ) | (7,055,589 | ) | (8,011,050 | ) | (9,409,973 | ) | ||||||||
Due from banks | 4,557,120 | (1,172,374 | ) | |||||||||||||
Due from Crestmark Bank | (976,166 | ) | 4,557,120 | |||||||||||||
Accounts receivable - related parties | (159,125 | ) | 100,000 | 70,547 | (70,880 | ) | ||||||||||
Insurance receivable | - | 1,268,463 | ||||||||||||||
Inventories | (5,933,704 | ) | 1,781,439 | (1,767,353 | ) | (13,721,821 | ) | |||||||||
Prepaid expenses and other current assets | (63,135 | ) | 111,305 | 186,171 | 23,155 | |||||||||||
Other non-current assets | 10,288 | 52,712 | (107,400 | ) | 50,262 | |||||||||||
Accounts payable | 3,769,157 | (689,770 | ) | 4,742,478 | 16,409,171 | |||||||||||
Accrued expenses | 762,252 | 579,732 | 811,932 | 381,213 | ||||||||||||
Due to related parties | - | (184,312 | ) | |||||||||||||
Customer deposits | (129,544 | ) | - | - | (53,249 | ) | ||||||||||
Refunds due to customers | (55,333 | ) | (704,744 | ) | (4,043 | ) | (46,686 | ) | ||||||||
Reserve for sales returns | 1,962,457 | 1,742,434 | 700,606 | 903,731 | ||||||||||||
Operating lease liabilities, net of operating leases - right of use assets | 2,741 | (18,755 | ) | (7,844 | ) | 5,655 | ||||||||||
Net cash (used in) provided by operating activities | (3,113,334 | ) | 165,496 | |||||||||||||
Net cash used in operating activities | (3,580,205 | ) | (576,005 | ) | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchase of property and equipment | (77,599 | ) | (88,843 | ) | (87,801 | ) | (77,599 | ) | ||||||||
Net cash used in investing activities | (77,599 | ) | (88,843 | ) | (87,801 | ) | (77,599 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from Issuance of stock - net of transaction expenses | 9,000,580 | - | 3,362,751 | 9,000,580 | ||||||||||||
Payment of redemption and retirement of treasury stock | (7,162,452 | ) | - | - | (7,162,452 | ) | ||||||||||
Net proceeds from revolving lines of credit | 8,561,925 | 64,915 | - | 1,977,006 | ||||||||||||
Proceeds from note payable - Paycheck Protection Program | - | 443,900 | ||||||||||||||
Payment of deferred financing charges | (37,501 | ) | (73,726 | ) | - | (37,501 | ) | |||||||||
Payments on installment notes | (50,709 | ) | (48,802 | ) | (36,372 | ) | (33,451 | ) | ||||||||
Proceeds from exercise of stock options | 14,000 | 26,400 | - | 4,800 | ||||||||||||
Payment on subordinated debt - related party | (150,000 | ) | - | |||||||||||||
Proceeds from exercise of pre-funded warrants | 168,334 | - | ||||||||||||||
Proceeds from exercise of common warrants | 865,202 | - | ||||||||||||||
Payment on subordinated note payable | (150,000 | ) | ||||||||||||||
Payments on finance leases | (6,184 | ) | (11,167 | ) | (3,709 | ) | (4,440 | ) | ||||||||
Net cash provided by financing activities | 10,169,659 | 401,520 | 4,356,206 | 3,594,542 | ||||||||||||
Net change in cash | 6,978,726 | 478,173 | 688,200 | 2,940,938 | ||||||||||||
Cash at beginning of year | 396,579 | 345,200 | 2,290,483 | 396,579 | ||||||||||||
Cash at end of period | $ | 7,375,305 | $ | 823,373 | $ | 2,978,683 | $ | 3,337,517 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid for interest | $ | 378,076 | $ | 429,264 | $ | 331,225 | $ | 249,734 | ||||||||
Equipment purchased under capital lease | $ | 23,651 | $ | - | $ | - | $ | 23,651 | ||||||||
Issuance of common stock and warrants for stock issuance expenses | $ | 547,838 | $ | - | $ | - | $ | 547,838 | ||||||||
Operating leases - right of use assets and lease liabilities at inception of lease | $ | 16,364 | $ | 2,184,105 | $ | - | $ | 16,364 |
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 December 31,September 30, 2022 and 2021 and 2020
(Unaudited)
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid | Accumulated | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | in Capital | Deficit | Total | Preferred Stock | Common Stock | Paid | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | - | $ | - | 36,576,264 | $ | 365,762 | $ | 24,530,384 | $ | (14,535,193 | ) | $ | 10,360,953 | |||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | - | $ | - | 3,017,700 | $ | 30,177 | $ | 29,098,800 | $ | (14,894,485 | ) | $ | 14,234,492 | |||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 296,467 | 296,467 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock warrants | 77,779 | 778 | 217,003 | - | 217,781 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - officers | 3,335 | 33 | 31,216 | - | 31,249 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - non-employee | 10,000 | 100 | 93,600 | - | 93,700 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Employee compensation-stock option | - | - | 70,699 | - | 70,699 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | - | $ | - | 3,108,814 | $ | 31,088 | $ | 29,511,318 | $ | (14,598,018 | ) | $ | 14,944,388 | |||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | - | - | 1,302,025 | $ | 13,020 | $ | 20,160,613 | $ | (12,372,804 | ) | $ | 7,800,829 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,425,895 | 1,425,895 | - | - | - | - | 692,373 | 692,373 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock | 550,000 | 5,500 | 4,944,500 | - | 4,950,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of pre-funded warrants | - | - | 4,881,667 | - | 4,881,667 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Payment of stock issuance expenses | - | - | (831,087 | ) | - | (831,087 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for stock issuance expenses | 19,047 | 190 | (190 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for stock issuance expenses, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemption and retirement of treasury shares | (654,105 | ) | (6,541 | ) | (4,301,149 | ) | (2,854,762 | ) | (7,162,452 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Redemption and retirement of treasury shares, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors | 575 | 6 | 4,994 | - | 5,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - non-employee | 1,667 | 17 | 16,983 | - | 17,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - non-employee, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee compensation-stock option | - | - | 3,649 | - | 3,649 | - | - | 7,623 | - | 7,623 | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 60,000 | 600 | 8,600 | - | 9,200 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | - | $ | - | 36,636,264 | $ | 366,362 | $ | 24,542,633 | $ | (13,109,298 | ) | $ | 11,799,697 | |||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | - | $ | - | 38,557,643 | $ | 385,576 | $ | 19,729,043 | $ | (12,225,486 | ) | $ | 7,889,133 | |||||||||||||||||||||||||||||||||||||||||||
Net income | 1,167,295 | 1,167,295 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee compensation-stock option | 5,105 | 5,105 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors | 43,105 | 431 | 12,069 | 12,500 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | 440,000 | 4,400 | 22,000 | 26,400 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | - | $ | - | 39,040,748 | $ | 390,407 | $ | 19,768,217 | $ | (11,058,191 | ) | $ | 9,100,433 | |||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | - | $ | - | 1,219,209 | $ | 12,192 | $ | 24,883,954 | $ | (14,535,193 | ) | $ | 10,360,953 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020
(Unaudited)
Preferred Stock | Common Stock | Additional Paid in | Accumulated | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | Preferred Stock | Common Stock | Paid | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | - | $ | - | 1,221,209 | $ | 12,212 | $ | 24,902,694 | $ | (14,878,482 | ) | $ | 10,036,424 | |||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 280,464 | 280,464 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 1,000,000 | 10,000 | 3,990,000 | - | 4,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Payment of stock issuance expenses | - | - | (637,250 | ) | - | (637,250 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of pre-funded warrants | 561,113 | 5,611 | 162,723 | - | 168,334 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock warrants | 309,001 | 3,090 | 862,113 | - | 865,203 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors | 2,468 | 25 | 19,991 | - | 20,016 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - officers | 3,335 | 33 | 31,216 | - | 31,249 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common stock - non-employee | 10,000 | 100 | 93,600 | - | 93,700 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Employee compensation-stock option | - | - | 86,248 | - | 86,248 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Rounding of common stock issued due to reverse split | 1,688 | 17 | (17 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | - | $ | - | 3,108,814 | $ | 31,088 | $ | 29,511,318 | $ | (14,598,018 | ) | $ | 14,944,388 | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | - | $ | - | 39,040,748 | $ | 390,407 | $ | 19,773,322 | $ | (12,254,191 | ) | $ | 7,909,538 | - | $ | - | 1,301,358 | $ | 13,013 | $ | 20,150,716 | $ | (12,254,191 | ) | $ | 7,909,538 | ||||||||||||||||||||||||||||||
Net income | - | - | - | 1,999,655 | 1,999,655 | - | - | - | - | 573,760 | 573,760 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock | 16,500,001 | 165,000 | 4,785,000 | - | 4,950,000 | 550,000 | 5,500 | 4,944,500 | - | 4,950,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of pre-funded warrants | - | - | 4,881,667 | - | 4,881,667 | - | - | 4,881,667 | - | 4,881,667 | ||||||||||||||||||||||||||||||||||||||||||||||
Payment of stock issuance expenses | - | - | (831,087 | ) | - | (831,087 | ) | - | - | (831,087 | ) | - | (831,087 | ) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of stock for stock issuance expenses | 571,428 | 5,714 | (5,714 | ) | - | - | 19,047 | 190 | (190 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Redemption and retirement of treasury shares | (19,623,155 | ) | (196,231 | ) | (4,111,459 | ) | (2,854,762 | ) | (7,162,452 | ) | (654,105 | ) | (6,541 | ) | (4,301,149 | ) | (2,854,762 | ) | (7,162,452 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of common stock - directors | 17,242 | 172 | 4,828 | - | 5,000 | 575 | 6 | 4,994 | - | 5,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock - non-employee | 50,000 | 500 | 16,500 | - | 17,000 | 1,667 | 17 | 16,983 | - | 17,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Employee compensation-stock option | - | - | 16,376 | - | 16,376 | - | - | 12,727 | - | 12,727 | ||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | 80,000 | 800 | 13,200 | - | 14,000 | 667 | 7 | 4,793 | - | 4,800 | |||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | - | $ | - | 36,636,264 | $ | 366,362 | $ | 24,542,633 | $ | (13,109,298 | ) | $ | 11,799,697 | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | - | $ | - | 38,557,643 | $ | 385,576 | $ | 19,729,043 | $ | (14,426,556 | ) | $ | 5,688,063 | |||||||||||||||||||||||||||||||||||||||||||
Beginning balance | - | $ | - | 38,557,643 | $ | 385,576 | $ | 19,729,043 | $ | (14,426,556 | ) | $ | 5,688,063 | |||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 3,368,365 | 3,368,365 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Employee compensation-stock option | 5,105 | 5,105 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock directors | 43,105 | 431 | 12,069 | 12,500 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | 440,000 | 4,400 | 22,000 | 26,400 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | - | $ | - | 39,040,748 | $ | 390,407 | $ | 19,768,217 | $ | (11,058,191 | ) | $ | 9,100,433 | |||||||||||||||||||||||||||||||||||||||||||
Ending balance | - | $ | - | 39,040,748 | $ | 390,407 | $ | 19,768,217 | $ | (11,058,191 | ) | $ | 9,100,433 | |||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | - | $ | - | 1,219,209 | $ | 12,192 | $ | 24,883,954 | $ | (14,535,193 | ) | $ | 10,360,953 |
See notes to the condensed consolidated financial statementsstatements.
6 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,September 30, 2022 and 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 its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”SMCL”) and SMC-Music, Inc.(“SMC-M”SMCM”) and SMC (HK) Limited (“SMH”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems,equipment, accessories musical instruments and musical recordings. The products are sold by SMCdirectly to retailersdistributors and distributors for resale to consumers.retail customers.
NOTE 2 – LIQUIDITY AND RECENT EQUITY EVENTSDEVELOPMENTS
TheControlled Company for
On June 13, 2022, BitNile Holdings, Inc. (“BitNile Holdings”), a Delaware corporation, Ault Lending, LLC (“Ault Lending”), a California limited liability company and subsidiary of BitNile Holdings, and Milton C. Ault, III (“Ault”), Founder and Executive Chairman of BitNile Holdings (collectively the nine months ended December 31, 2021 reported net income“Reporting Persons”) filed a joint Schedule 13D filing (the “Schedule 13D”) reporting that the Reporting Persons acquired, in the aggregate, 52.8% of approximatelythe issued and outstanding shares of common stock, par value $ and used cash in operating activitiesper share (the “Common Stock”) of approximately $3,113,000. In May, 2020 the Company, received loan proceeds from Crestmark Bank in the amount of approximately $444,000 under the Paycheck Protection Program (“PPP”) established by the government to assist companies with financial relief due to COVID-19. The Company used the loan proceeds for loan forgiveness eligible purposes, including payroll, benefits, rent and utilities, and maintained its existing payroll levels during the forgiveness eligible period. In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety. For the nine months ended December 31, 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 income.through open market purchases.
InPursuant to the Schedule 13D and subsequent amended Schedule 13D filings and Section 16 filings, Ault Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of shares of the Common Stock (the “Shares”), or approximately 57.4% of the outstanding shares of Common Stock as of this filing.
As these purchases were made in the open market, control of the Company was not assumed from a particular person or group of persons.
Reverse Stock Split and Nasdaq Listing
On May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30. The reverse stock split was effected to meet The Nasdaq Capital Market’s minimum bid price requirement. All information in these consolidated financial statements have been retroactively adjusted to give effect to this 1-for-30 reverse stock split.
Our common stock was approved for listing on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022.
Public Offering
On May 23, 2022, the “Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering pursuant to which the Company sold to the Underwriter 4,000,000 prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $637,000. The price to the public in the offering was $ per share, before underwriting discounts and commissions. The offering closed on May 26, 2022. The Company received net proceeds of approximately $3,363,000. shares of its common stock for gross proceeds of $
Pursuant to the terms of the Underwriting Agreement, the Company agreed to issue to the Underwriter warrants to purchase up to 100,000 shares of common stock representing 10% of the shares sold in the offering, excluding any shares sold through the over-allotment option. The warrants are exercisable six months from the commencement of sales under the offering, have an exercise price of $5.00 per share and expire five years from the date of issuance. The Company estimated the fair value of these warrants to be approximately $244,000 using the Black-Scholes Model based on the following input assumptions: common stock price of $2.90, expected life of the warrants of 3 years; stock price volatility of 176%; dividend yield of 0%; and the risk-free interest rate of 2.63%.
Stock Redemption Agreement
On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with its majority shareholders, Konceptskoncepts International Limited (“Koncepts”koncepts”) and Treasure Green Holdings Ltd. (“Treasure Green”), (entities that owned approximately 51% of the Company and are principally owned by the Company’s former Chairman, Philip Lau) pursuant to which the Company redeemed shares of common stock of the Company (the “Redeemed Shares”). The closing of the transactionstransaction 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 retired.
In August 2021,in consideration of a payment by 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 16,500,000 shares of common stock with 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 $9,832,000, were received by the Company. Approximately $7,162,000 of the funds received were used to execute the Redemption Agreement and the Company paid approximately $7,162,000 to Konceptskoncepts and Treasure Green.Green who no longer have a stake in the Company. The Redeemed Shares were retired and are available for reissuance inreturned to the future.unissued authorized capital of the Company.
7 |
We believeTHE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
NOTE 3 – LIQUIDITY
The Company reported net income of approximately $280,000 and used cash in operating activities of approximately $3,580,000 for the six months ended September 30, 2022. On October 14, 2022 the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Fifth Third Bank, National Association, as Lender (“Fifth Third”) replacing the Company’s credit facilities with Crestmark Bank and Iron Horse Credit that current working capital,were terminated by the Company on October 13, 2022. The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025. The Company believes that our cash on hand, cash expected to be generated from our operating forecast,operations, along with the availability of cash from our credit facilitiesCredit Agreement with Fifth Third (See Note 6 – BANK FINANCING) assuming that they are revised and or extended,7 –FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filingdate of this report. As both the Crestmark Bank (“Crestmark Facility”) and the Iron Horse Credit (“IHC”) Facility (“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 34 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the accounts of the Company, its Macau Subsidiary, SMH, SMCL, and all of its wholly-owned subsidiaries.SMCM. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements.consolidation for all periods presented. The accompanying unaudited financial statements for the three months and ninesix months ended December 31,September 30, 2022 and 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 108 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.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
(Unaudited)
The condensed consolidated balance sheet information as of March 31, 20212022 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021.2022. 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 condition. 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%100% reserves for customers in bankruptcy and other reservesallowances based upon historical collection experience. 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. 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 statements of income and translations arewould be recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented.
CONCENTRATION OF CREDIT RISKConcentration 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 December 31, 2021September 30, 2022 and March 31, 20212022 are approximately $125,000595,000 and $225,000172,000, respectively.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable.
8 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
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 December 31, 2021September 30, 2022 and March 31, 20212022 the estimated amounts for these future inventory returns were approximately $1,978,0001,112,000 and $528,000683,000, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of December 31, 2021September 30, 2022 and March 31, 20212022 the Company had inventory reserves of approximately $934,000271,000 and $636,000364,000, respectively for estimated excess and obsolete inventory.
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 $38,000 in deferred financing costs associated with the one-year renewal of the IHC Facility which are being amortized over twelve months and were classified as current assets on the accompanying condensed consolidated balance sheets.
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 December 31, 2021September 30, 2022 and 2020.
2021.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December, 2021 and 2020
(Unaudited)
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 7–8– 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 financing interest 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, due from related parties, accounts payable, accrued expenses, customer deposits, and 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 goods are delivered and 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.
9 |
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 SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
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 the three months ended December 31,September 30, 2022 and 2021 and 2020 co-op promotion incentives were approximately $796,000724,000 and $858,000738,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 co-op promotion incentives were approximately $1,805,0001,020,000 and $2,032,0001,010,000, respectively.
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.
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 condensed consolidated statements of income 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 11 – Geographical Information).
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
(Unaudited)
While the Company generally does not allow products to be returned,has no overstock return privileges in its vendor agreements with its customers, 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 from our customersthe 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 as of September 30, 2022 and March 31, 2022, were approximately $2,922,0001,691,000 and $960,000990,000 respectively.
The Company disaggregates revenues by product line and major geographic region as most of December 31, 2021its revenue is generated by the sales of karaoke hardware and March 31, 2021, respectively.the Company has no other material business segments (See NOTE 13 – SEGMENT INFORMATION).
Revenue is derived from five different major product lines. Disaggregated revenue from these product lines for the three and ninesix months ended December 31,September 30, 2022 and 2021 and 2020 consisted of the following:
SCHEDULE OF DISAGGREGATION OF REVENUE
Revenue by Product Line | ||||||||||||||||||||||||||||||||
Product Line | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
Product Line | December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||||||
Classic Karaoke Machines | $ | 17,732,000 | $ | 11,998,000 | $ | 37,216,000 | $ | 32,337,000 | $ | 9,132,000 | $ | 13,336,000 | $ | 14,343,000 | $ | 17,810,000 | ||||||||||||||||
Licensed Product | 645,000 | 1,644,000 | 1,510,000 | 4,332,000 | 4,000 | 94,000 | 48,000 | 873,000 | ||||||||||||||||||||||||
SMC Kids Toys | 1,051,000 | 662,000 | 2,145,000 | 1,229,000 | 622,000 | 1,021,000 | 1,557,000 | 1,091,000 | ||||||||||||||||||||||||
Microphones and Accessories | 1,657,000 | 2,481,000 | 3,424,000 | 4,122,000 | 2,558,000 | 1,210,000 | 5,110,000 | 1,994,000 | ||||||||||||||||||||||||
Music Subscriptions | 159,000 | 188,000 | 384,000 | 290,000 | ||||||||||||||||||||||||||||
Streaming * | 4,798,000 | 1,708,000 | 7,748,000 | 1,667,000 | ||||||||||||||||||||||||||||
Total Net Sales | $ | 21,244,000 | $ | 16,973,000 | $ | 44,679,000 | $ | 42,310,000 | $ | 17,114,000 | $ | 17,369,000 | $ | 28,806,000 | $ | 23,435,000 |
* | Streaming—The streaming karaoke product line is defined by the ability to stream karaoke content directly via WiFi to our karaoke machine without requiring any 3rd party devices. |
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 December 31,September 30, 2022 and 2021 and 2020 shipping and handling expenses were approximately $369,000115,000 and $512,000134,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 shipping and handling expenses were approximately $654,000161,000 and $900,000285,000, respectively. These expenses are classified as a component of selling expenses in the accompanying condensed consolidated statements of income.operations.
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 income 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 and ninesix months ended December 31,September 30, 2022 and 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 December 31,September 30, 2022 and 2021, and 2020, the stock option expense was approximately $3,00070,000 and $5,0008,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021, and 2020, the stock option expense was approximately $16,00086,000 and $5,00013,000, respectively.
10 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative expenses in the condensed consolidated statements of income. For the three months ended December 31,September 30, 2022 and 2021, and 2020, these amounts totaled approximately $11,00041,000 and $33,00019,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021, and 2020, these amounts totaled $61,00058,000 and $48,00050,000 respectively.
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. As of both September 30, 2022 and March 31, 2022 the Company recorded a valuation allowance of approximately $78,000.
The Company analyzes its deferred tax assets and liabilities at the end of each interim period and, based on management’s best estimate of its full year effective tax rate, recognizes cumulative adjustments to its deferred tax assets and liabilities. For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 we estimated our effective U.S federal tax rate to be approximately 1121% and 2320%, respectively. As of December 31, 2021September 30, 2022 and March 31, 20212022 the Singing Machine had net deferred tax assets of approximately $638,000812,000 and $887,000893,000, respectively. The Company recorded an income tax provision of approximately $103,000102,000 and $264,000174,000 for the three months ended December 31,September 30, 2022 and 2021, and 2020, respectively. The Company recorded an income tax provision of approximately $249,00097,000 and $1,006,000146,000 for the ninesix months ended December 31,September 30, 2022 and 2021, and 2020, respectively.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 greater than 50% likelihood of being realized upon ultimate resolution. As of December 31, 2021,September 30, 2022, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions.
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE
For the three months ended December 31, 2021 | For the three months ended December 31, 2020 | For the nine months ended December 31, 2021 | For the nine months ended December 31, 2020 | For the three months ended September 30, 2022 | For the three months ended September 30, 2021 | For the six months ended September 30, 2022 | For the six months ended September 30, 2021 | |||||||||||||||||||||||||
Basic weighted average common shares outstanding | 53,410,249 | 38,885,185 | 46,787,545 | 38,667,221 | 3,071,131 | 1,593,929 | 2,484,660 | 1,448,603 | ||||||||||||||||||||||||
Effect of dilutive stock options | 225,119 | 271,296 | 322,309 | 373,853 | ||||||||||||||||||||||||||||
Effect of dilutive stock options and warrants | 539,057 | 11,205 | 476,971 | 12,364 | ||||||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 53,635,368 | 39,156,481 | 47,109,854 | 39,041,074 | 3,610,188 | 1,605,134 | 2,961,631 | 1,460,967 |
Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period. Pre-funded warrants to purchase 16,833,333 shares of common stock are included in basic weighted average shares outstanding as deemed outstanding. Diluted net income 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 the Company’s common stock at the average market price during the period using the treasury stock method. For the three and ninesix months ended December 31, 2021,September 30, 2022, options to purchase approximately and shares of common stock, respectively, have been included in the calculation of diluted net income per share as compared to approximately and shares of common stock, respectively, that were included in the calculation of diluted net income per share for the three and nine months ended December 31, 2020. For the three and nine months ended December 31, 2021, options and warrants to purchase approximately shares of common stock have beenwere excluded in the calculation of diluted net income per share as comparedthe result would have been anti-dilutive. For the three and six months ended September 30, 2021 options and warrants to approximatelypurchase were excluded in the calculation of diluted net income per share for the three and nine months ended December 31, 2020 as the result would have been anti-dilutive.
11 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
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 the Company beginning 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 45 - INVENTORIES, NET
Inventories are comprised of the following components:
SCHEDULE OF INVENTORY
December 31, | March 31, | |||||||
2021 | 2021 | |||||||
Finished Goods | $ | 8,427,000 | $ | 5,348,000 | ||||
Inventory in Transit | 1,655,000 | 250,000 | ||||||
Estimated Amount of Future Returns | 1,978,000 | 528,000 | ||||||
Subtotal | 12,060,000 | 6,126,000 | ||||||
Less:Inventory Reserve | 934,000 | 636,000 | ||||||
Inventories, net | $ | 11,126,000 | $ | 5,490,000 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
(Unaudited)
September 30, | March 31, | |||||||
2022 | 2022 | |||||||
Finished Goods | $ | 13,937,000 | $ | 10,537,000 | ||||
Inventory in Transit | 1,244,000 | 3,306,000 | ||||||
Estimated Amount of Future Returns | 1,112,000 | 683,000 | ||||||
Subtotal | 16,293,000 | 14,526,000 | ||||||
Less:Inventory Reserve | 271,000 | 364,000 | ||||||
Inventories, net | $ | 16,022,000 | $ | 14,162,000 |
NOTE 56 – PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
SUMMARY OF PROPERTY AND EQUIPMENT
USEFUL | December 31, | March 31, | USEFUL | September 30, | March 31, | |||||||||||||||||||
LIFE | 2021 | 2021 | LIFE | 2022 | 2022 | |||||||||||||||||||
Computer and office equipment | 5-7 years | $ | 440,000 | $ | 445,000 | 5-7 years | $ | 468,000 | $ | 440,000 | ||||||||||||||
Furniture and fixtures | 7 years | 98,000 | 98,000 | 7 years | 98,000 | 98,000 | ||||||||||||||||||
Warehouse equipment | 7 years | 210,000 | 199,000 | 7 years | 210,000 | 210,000 | ||||||||||||||||||
Molds and tooling | 3-5 years | 1,946,000 | 1,878,000 | 3-5 years | 2,046,000 | 1,986,000 | ||||||||||||||||||
2,694,000 | 2,620,000 | 2,822,000 | 2,734,000 | |||||||||||||||||||||
Less: Accumulated depreciation | 2,113,000 | 1,946,000 | 2,289,000 | 2,169,000 | ||||||||||||||||||||
$ | 581,000 | $ | 674,000 | $ | 533,000 | $ | 565,000 |
Depreciation expense for the three months ended December 31,September 30, 2022 and 2021 and 2020 was approximately $55,00062,000 and $65,00067,000, respectively.
Depreciation expense for the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 was approximately $190,000120,000 and $204,000135,000, respectively.
NOTE 67 – BANK FINANCING
Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse CreditCredit:
On June 16, 2020, the Company executed an Intercreditor Revolving entered into a two-year Credit Facilityand Security Agreement for a $2.5 million financing facility, with IronHorse Credit LLC (the “IHC Facility”) on eligible accounts receivable and inventory which replaced the Company’s previous revolving credit facility with PNC Bank which was terminatedinventory. Also, on June 16, 2020. The2020, the Company signedentered into a two-year Loan and Security Agreement for a $10.0 million financing facility underwith Crestmark, a division of MetaBank, National Association (the “Crestmark Facility”) on eligible accounts receivable.
Under the terms of the Crestmark Facility, on eligible accounts receivable. Thethe outstanding loan balance cannot exceed $10.0 million during peak selling season between July 1 and December 31and31 and is reduced to a maximum of $5.0 million between January 1 and July 31 with the ability to exceed when required. Costs associated with closing of the Intercreditor Revolving Credit Facility of approximately $74,000 were deferred and were amortized over one year. During the three months ended December 31, 2021 and 2020 the Company incurred amortization expense of approximately $10,000 and $19,000, respectively associated with the amortization of deferred financing costs from the Intercreditor Revolving Credit Facility. During the nine months ended December 31, 2021 and 2020 the Company incurred amortization expense of approximately $36,000 and $40,000, respectively associated with the amortization of deferred financing costs from the Intercreditor Revolving Credit Facility.
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. See Below |
12 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
The Crestmark Facility iswas secured by a perfected security interest in all assets including a first security interest in Accounts Receivableaccounts receivable and Inventory.inventory. Notwithstanding the foregoing, Crestmark shall subordinatesubordinated 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 5.50% with a floor of 8.75%. Interest and Maintenance Fees shall be calculated on the higher of the actual average monthly loan balance from the prior month or a minimum average loan balance of $2,000,0002.0. million. For the three months ended December 31,September 30, 2022 and 2021 and 2020 the Company recorded interest expense under the Crestmark Facility of approximately $106,00079,000 and $100,00051,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 the Company recorded interest expense under the Crestmark Facility of approximately $202,000132,000 and $151,00096,000, respectively. The Crestmark Facility expires on June 15, 2022. As of DecemberSeptember 30, 2022 and March 31, 2021,2022, the Company had anno outstanding balance of approximately $6,637,000 on the Crestmark Facility.
In addition, The Crestmark Facility was terminated on October 13, 2022 and was replaced with the Company executed a two-year Loan and Securitynew Credit Agreement with Iron Horse Credit for up to $2,500,000 in inventory financing.Fifth Third effective October 14, 2022 as outlined below.
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. The Company was not in compliance with this covenant as of |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
(Unaudited)
The IHC Facility iswas secured by a perfected security interest in the Company’s inventory. The IHC Facility bears interest at 1.292% per month or 15.51% annually. Interest shall be calculated on the higher of the actual average monthly loan balance from the prior month or a minimum average loan balance of $1,000,000. Costs associated with the renewal ofInterest expense under the IHC Facility of approximately $38,000 were deferred and are being amortized over one year. Interest expense for the three months ended December 31,September 30, 2022 and 2021 and 2020 werewas approximately $34,000100,000 and $41,00048,000, respectively. Interest expense under the IHC Facility for the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 werewas approximately $120,000198,000 and $103,00086,000, respectively. The IHC Facility expires on June 15, 2022. As of December 31, 2021both September 30, 2022 and March 31, 2021,2022, there was an outstanding balance of approximately $1,990,0002,500,000. The IHC Facility was terminated on October 13, 2022 and $65,000, respectively.was replaced with the new Credit Agreement with Fifth Third effective October 14, 2022 as outlined below.
Simultaneously with the Company’s entry into the IHC Facility and the Crestmark Facility, the Company entered into an Intercreditor Agreement with IronHorse and Crestmark which sets forth the respective rights of each of IronHorse and Crestmark as secured parties.
Credit and Security Agreement with Fifth Third Bank, National Association:
On October 14, 2022 the Company entered into the Credit Agreement with Fifth Third, as Lender (the “Credit Agreement”) replacing the Company’s credit facilitieswith Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022. The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025.
The revolving credit facility bears interest of (a) the Prime Rate plus 0.50% or (b) the 30-day Term SOFR rate plus 3.00% (subject in each case to a floor of 0.50%), depending on the type of loan requested by the Company. “Term SOFR” means the forward-looking SOFR rate administered by CME Group, Inc. (or other administrator selected by Fifth Third) and published on the applicable Bloomberg LP screen page (or such other commercially available source providing such quotations as may be selected by Fifth Third), fixed by the administrator thereof two business days prior to the commencement of the applicable Interest Period (provided, however, that if Term SOFR is not published for such Business Day, then Term SOFR shall be determined by reference to the immediately preceding Business Day on which such rate is published), rounded upwards, if necessary, to the next 1/8th of 1% and adjusted for reserves if Fifth Third is required to maintain reserves with respect to the relevant Loans, all as determined by Lender in accordance with the Credit Agreement and Fifth Third’s loan systems and procedures periodically in effect. An Unused Line Fee of 0.35% per annum of the excess of the Revolving Credit Facility over the average monthly balance of outstanding revolving loans, payable monthly. The obligations under the Credit Agreement are secured by all of the assets of the Company and SMC, presently owned or later acquired, and all cash and non-cash proceeds thereof (including, without limitation, insurance proceeds).
Under the Credit Agreement:
● | Accounts Receivable advance rate up to an 85% against eligible Accounts Receivable assuming dilution is under 5% of sales, plus | |
● | Inventory advance of up to 85% of the Net Orderly Liquidation Value of eligible inventory as determined by an appraiser satisfactory to Fifth Third, with a sublimit to be determined based on Fifth Third’ s continuing due diligence. The inventory advance rate will increase to 95% of the Net Orderly Liquidation Value of eligible inventory from April through June (or another 3-month time frame to be determined based on Fifth Third’s continuing due diligence) each year to support seasonal working capital needs. |
13 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
● | The Company must maintain a Minimum Fixed Charge Coverage of 1.05 to 1. | |
● | Covenants may also include reasonable limitations on dividends, distributions, and management fees. | |
● | The first Fixed Charge Coverage test will be the period from close to September 30, 2022, building to a trailing twelve months. |
Through September 30, 2022, the Company incurred $70,000 of costs in connection with obtaining this financing, which are currently reflected in other non-current assets and were reclassified to deferred financing costs upon the close of the Credit Agreement. As of December 31, 2021date of this filing there was approximately $510,0004,000,000 of available borrowings under these facilities.
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.this Credit Agreement.
Note Payable Payroll Protection Plan
On May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program (the “PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act, (“CARES Act”), which provided 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 was payable over two years at an interest rate of 1%, with a deferral of payments until a forgiveness application was 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 and we were notified by Crestmark that the debt was discharged. For the ninesix months ended December 31,September 30, 2022 and 2021, a gain of approximately $0 and $448,000(including (including principal and interest), respectively from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of income.
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 60 months at a cost of approximately $365,000. As of December 31, 2021, theThe Company had executed three installment notes totaling approximately $365,000 for payments issued to the project vendor. The installment notes have 60-month terms with interest rates of 7.58%, 8.55% and 9.25%, respectively. The installment notes are payable in monthly installments of $7,459$7,459 which include principal and interest. As of December 31, 2021,September 30, 2022 and March 31, 20212022 there was an outstanding balance on the installment notes of approximately $231,000177,000 and $281,000213,000, respectively. For the three months ended December 31,September 30, 2022 and 2021 and 2020 the Company incurred interest expense of approximately $5,0004,000 and $6,0005,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 the Company incurred interest expense of approximately $16,0008,000 and $20,00011,000, respectively.
Subordinated Debt/Note Payable to Related Party
In conjunction with the Crestmark Facility and IHC Facility, there isthe parties entered into a subordination agreement on related party debt due to Starlight Marketing Development, Ltd. of approximately $803,000. On June 1, 2020 the remaining amount due on the subordinated debt of approximately $803,000 was converted to a note payable (“subordinated note payable”) which bears interest at 6%. As part of the agreement to convert the subordinated debt to a note payable it was agreed that interest expense would be accrued at the same 6%6% interest rate on the unpaid principal retroactively from the date that previously scheduled payments had been missed. During the three months ended December 31,September 30, 2022 and 2021 and 2020 interest expense was approximately $3,000 and $12,0005,000, respectively on the subordinated note payable and the related party subordinated debt. During the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 interest expense was approximately $17,0006,000 and $36,00014,000, respectively on the subordinated note payable and the related party subordinated debt.
In connection with the Intercreditor Revolving Credit FacilityAgreement, the Company was required to subordinate the 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 December 31, 2021 the Company met repayment requirements of the Intercreditor Revolving Credit Facility and has made cumulative principal payments totaling $450,000. 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 December 31, 2021both September 30, 2022 and March 31, 2021,2022, the remaining amount due on the note payable was approximately $353,000 and $503,000 respectively.. The remaining amount due on the subordinated note payable was classified as a current liability as of December 31, 2021September 30, 2022 and March 31, 20212022 on the condensed consolidated balance sheets. As part of the new Credit Agreement with Fifth Third that the Company entered into on October 14, 2022, the subordinated note was paid in full on October 26, 2022.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,September 30, 2022 and 2021 and 2020
(Unaudited)
NOTE 78 - COMMITMENTS AND CONTINGENCIES
COVID-19
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. COVID-19
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 unpredictablehas significantly affected U.S. consumer shopping patterns 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 oncaused the health of the U.S. and world economy to deteriorate in fiscal year 2022. While many of the restrictions and measures initially implemented in response to the pandemic have since been softened or lifted in varying degrees in different locations around the world, the uncertainty regarding existing and new potential variants of COVID-19 and the success of any vaccines in respect thereof, may in the future cause a reduction in global economic activity or prompt, the re-imposition of certain restrictions and measures. The Company is dependent upon foreign companies for the foreseeable future. We continuemanufacture of all its electronic products. The Company’s arrangements with manufacturers are subject to experience various degreesthe risk of manufacturing cost pressuresdoing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. Additionally, in late calendar 2021, the increased demand for consumer electronics products and current economic recovery continued to increase worldwide demand for products using semiconductor “chip” components in the production of most consumer electronics which has resulted in an international shortage of chips available to fulfill demand. As a result, the Company has experienced longer delivery lead times and some unavailability of these components which have delayed delivery of some of our products. The Company has also experienced delays in delivery schedules due to raw materialnew outbreaks of COVID-19 in Southern China that have forced temporary closures of some key shipping ports. The port closures have also led to a temporary shortage of shipping containers which have resulted in significant price increases due to increased demand. While we have seen the easing of COVID-19 restrictions 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, any financial hardship or government restrictionsimpact on our suppliers or sub-suppliers caused bybusiness, we cannot predict the impact of the resurgence of variants of 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.other factors affecting local and global economies, specifically China.
LEGAL MATTERS
On September 11, 2020, a complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in the Superior Court of San Bernardino County. The complaint alleges an employee of the Company committed employment practice violations against a former temporary employee not employed by the Company. Management investigated the allegation and has engaged an employment attorney to defend the lawsuit. The case is still in discovery and no trial date has been set. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on the Company’s financial results.
Other than as disclosed above, we are not a party to, and our property is not awarethe subject of, any material legal proceedings other than matters that arise in the ordinary course of business.proceedings.
LEASES
Operating Leases
We have operating lease agreements for offices and a warehouse facility in Florida California and MacauCalifornia expiring in various years through 2024.
We entered into an operating lease agreement, effective October 1, 2017, for the corporate headquarters located in Fort Lauderdale, Florida where we lease approximately 6,500 square feet of office space.Florida. The lease expires on March 31, 2024. The base rent payment is approximately $9,700 per month, subject to annual adjustments.
We entered into an operating lease agreement, effective June 1, 2013 for 86,000 square feet of warehouse space in Ontario, California for our logistics operations. On June 15, 2020 we executed a three-year lease extension which will expire on August 31, 2023.2023. The renewal base rent payment is approximately $65,30069,277 with a 3% increase every 12 months for the remaining term of the extension.
In May 2021 we executed a one-year lease for 424 square feet of office space in Macau which will expire on April 30, 2022. The lease provides for a renewal option to extend the lease. Rent expense on the new lease is fixed at approximately $1,700 per month for the duration of the lease term.
Lease expense for our operating leases is recognized on a straight-line basis over the lease terms.
Finance Leases
On July 1, 2021 we entered into a long-term capital leasing arrangement with Union Credit Corporation to finance the leasing of a used forklift in the amount of approximately $24,000. The lease requirerequires monthly payments in the amount of approximately $755 per month over a total lease term of 36 months which commenced on July 1, 2021. The agreement has an effective interest rate of 9.9% and the Company has the option to purchase the equipment at the end of the lease term for one dollar. As of DecemberSeptember 30, 20212022 and March 31, 2021,2022, the remaining amounts due on this capital leasing arrangement was approximately $20,00015,000 and $018,000, respectively. For the three and nine months ended December 31,September 30, 2022 and 2021 and 2020 the Company incurred interest expense of $696389 and $0, respectively. For the six months ended September 30, 2022 and 2021 the Company incurred interest expense of $1,072828 and $376, respectively.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,September 30, 2022 and 2021 and 2020
(Unaudited)
Supplemental balance sheet information related to leases as of December 31, 2021September 30, 2022 is as follows:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES
Assets: | ||||||||
Operating lease - right-of-use assets | $ | 1,488,258 | $ | 862,279 | ||||
Finance leases as a component of Property and equipment, net of accumulated depreciation of $1,735 | 18,278 | |||||||
Finance leases as a component of Property and equipment, net of accumulated depreciation of $4,859 | 9,657 | |||||||
Liabilities | ||||||||
Current | ||||||||
Current portion of operating leases | $ | 860,528 | $ | 848,723 | ||||
Current portion of finance leases | 7,421 | 7,988 | ||||||
Noncurrent | ||||||||
Operating lease liabilities, net of current portion | $ | 685,304 | $ | 60,374 | ||||
Finance leases, net of current portion | 12,592 | 6,528 | ||||||
Supplemental statement of operations information related to leases for the three and ninesix months ended December 31, 2021September 30, 2022 is as follows:
SCHEDULE OF LEASE TERM AND DISCOUNT RATE
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||
December 31, 2021 | December 31, 2021 | September 30 2022 | September 30 2022 | |||||||||||||
Operating lease expense as a component of general and administrative expenses | $ | 140,016 | $ | 604,347 | $ | 227,839 | $ | 457,088 | ||||||||
Finance lease cost | ||||||||||||||||
Depreciation of leased assets as a component of depreciation | $ | 1,041 | $ | 1,735 | $ | 1,041 | $ | 4,859 | ||||||||
Interest on lease liabilities as a component of interest expense | $ | 692 | $ | 1,068 | $ | 389 | $ | 828 |
Supplemental cash flow information related to leases for the ninesix months ended December 31, 2021September 30, 2022 is as follows:
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flow paid for operating leases | $ | 693,657 | $ | 463,521 | ||||||||||||
Financing cash flow paid for finance leases | $ | 6,184 | $ | 3,709 | ||||||||||||
Lease term and Discount Rate | ||||||||||||||||
Weighted average remaining lease term (months) | ||||||||||||||||
Operating leases | 21.1 | 12.3 | ||||||||||||||
Finance leases | 31.0 | 21.0 | ||||||||||||||
Weighted average discount rate | ||||||||||||||||
Operating leases | 6.25 | % | 6.25 | % | ||||||||||||
Finance leases | 9.86 | % | 9.86 | % |
Scheduled maturities of operating and finance lease liabilities outstanding as of December 31, 2021September 30, 2022 are as follows:
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING AND FINANCE LEASES
Year | Operating Leases | Finance Leases | Operating Leases | Finance Leases | ||||||||||||
2022 | $ | 937,590 | $ | 9,065 | ||||||||||||
2022, for the remaining 3 months | $ | 237,675 | $ | 2,266 | ||||||||||||
2023 | 674,488 | 9,065 | 674,488 | 9,065 | ||||||||||||
2024 | 30,739 | 4,533 | 30,739 | 4,533 | ||||||||||||
Total Minimum Future Payments | 1,642,817 | 22,663 | 942,902 | 15,864 | ||||||||||||
Less: Imputed Interest | 96,985 | 2,650 | 33,805 | 1,348 | ||||||||||||
Present Value of Lease Liabilities | $ | 1,545,832 | $ | 20,013 | $ | 909,097 | $ | 14,516 |
EQUITY INCENTIVE PLAN
On April 12, 2022, our Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the (“2022 Plan”). The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors, and independent contractors.
The maximum number of shares of common stock initially available for issuance under the 2022 Plan is 233,333 shares of common stock and thereafter an annual increase shall be added as of the first day of the Company’s fiscal year beginning in 2023, equal to the least of (i) 5% of the outstanding common stock on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, (ii) 333,334 shares, and (iii) a lesser amount as determined by the Board of Directors. The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled, or are forfeited, shall again become available for issuance under the 2022 Plan.
As of September 30, 2022 we had issued common stock options and granted common stock of under the 2022 Plan leaving shares available for issue.
COMMON STOCK OPTIONS
During the ninesix months ended December 31, 2021September 30, 2022 the Company issued , and stock options, respectively, from the 2022 Plan at an exercise price of $ , $ and $, per share, respectively to directors as compensation for their service.
16 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
During the three and ninesix months ended December 31, 2021September 30, 2022 the Company issued and 3,667 stock options from the 2022 Plan at an exercise price of $ per share and $ per share, respectively, to the Vice PresidentCompany’s officers as incentive compensation for the successful up-listing of Salesthe Company’s common stock on the Nasdaq Capital Market and Marketing as compensation due under his fiscal 2021related to their Fiscal 2022 annual incentive bonus plan.
During the threeOn June 28, 2022 and nine months ended December 31, 2020August 16, 2022 the Company issued and 3,000 stock options respectively from the 2022 Plan to all employees (excluding Company officers) who had one year or more of service to the Company under an Employee Incentive Plan at an exercise price of $ to directors as compensation for their service.and $ per share, respectively.
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. The following inputs were used to value each option grant:
● | For the |
SUMMARY OF STOCK OPTION ACTIVITY
September 30, 2022 | ||||||||
Number of Options | Weighted Average Exercise Price | |||||||
Stock Options: | ||||||||
Balance at beginning of period | 56,343 | $ | 9.90 | |||||
Granted | 107,752 | $ | 6.83 | |||||
Forfeited | (2,668 | ) | $ | 5.63 | ||||
Balance at end of period | 161,427 | $ | 7.90 | |||||
Options exercisable at end of period | 51,341 | $ | 10.19 |
SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING
Range of Exercise Price | Number Outstanding at September 30, 2022 | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable at September 30, 2022 | Weighted Average Exercise Price | |||||||||||||||||
$ - $ | 58,669 | $ | 4.95 | 21,667 | $ | 6.82 | ||||||||||||||||
$ - $ | 81,086 | $ | 8.25 | 8,002 | $ | 7.62 | ||||||||||||||||
$ - $ | 21,672 | $ | 14.42 | 21,672 | $ | 14.42 | ||||||||||||||||
* | 161,427 | 51,341 |
* | ||
As of September 30, 2022, there was unrecognized expense of approximately $ remaining on options currently vesting over time with an approximate average of twenty-eight months remaining until these options are fully vested.
The intrinsic value of vested options as of September 30, 2022 was approximately $ .
WARRANTS
In connection with the August 2021 Private Placement disclosed in Note 2 and Note 11, common warrants and pre-funded warrants issued and outstanding as of September 30, 2022 are as follows:
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,September 30, 2022 and 2021 and 2020
(Unaudited)
SUMMARY OF STOCK OPTION ACTIVITY
December 31, 2021 | ||||||||
Number of Options | Weighted Average Exercise Price | |||||||
Stock Options: | ||||||||
Balance at beginning of period | 1,680,000 | $ | 0.32 | |||||
Granted | 110,000 | $ | 0.25 | |||||
Exercised | (80,000 | ) | $ | 0.18 | ||||
Balance at end of period | 1,710,000 | $ | 0.33 | |||||
Options exercisable at end of period | 1,600,000 | $ | 0.33 |
SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING
Range of Exercise Price | Number Outstanding at December 31, 2021 | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable at December 31, 2021 | Weighted Average Exercise Price | ||||||||||||||||
$ - $ | 1,160,000 | $ | 0.24 | 1,050,000 | $ | 0.24 | |||||||||||||||
$ - $ | 550,000 | $ | 0.50 | 550,000 | $ | 0.50 | |||||||||||||||
* | * | 1,710,000 | 1,600,000 |
As of December 31, 2021, there was unrecognized expense of approximately $ remaining on options currently vesting over time with approximately nine months remaining until these options are fully vested.
The intrinsic value of vested options as of December 31, 2021 was approximately $.
As per the execution of the August 2021 private placement as disclosed in Note 2 and Note 10, common warrants and pre-funded warrants issued and outstanding as of December 31, 2021 are as follows:
SCHEDULE OF COMMON STOCK WARRANTS ISSUED AND OUTSTANDING
September 30, 2022 | ||||||||||||||||
Number of Common Warrants | Weighted Average Exercise Price | Number of Pre-Funded Warrants | Weighted Average Exercise Price | |||||||||||||
Warrants: | ||||||||||||||||
Warrants outstanding at April 1, 2022 | 1,155,557 | $ | 561,113 | $ | ||||||||||||
Warrants issued | 100,000 | $ | - | N/A | ||||||||||||
Warrants exercised | (309,001 | ) | $ | (561,113 | ) | $ | ||||||||||
Warrants outstanding at September 30, 2022 | 946,556 | $ | - | N/A | ||||||||||||
Warrants exercisable at September 30, 2022 | 846,556 | $ | - | N/A |
As of December 31, 2021,September 30, 2022, the Company’s outstanding warrants by expiration date were as follows:
SCHEDULE OF WARRANTS EXPIRATION
Number of CommonWarrants | Number of Pre-funded Warrants | Exercise Price | Expiration Date | ||||||||
34,666,667 | - | $ | 0.35 | ||||||||
- | 16,833,333 | $ | 0.01 | N/A* | |||||||
34,666,667 | 16,833,333 |
All outstanding warrants are fully vested.
Number of Common Warrants | Exercise Price | Expiration Date | ||||||
846,556 | $ | 2.80 | ||||||
100,000 | $ | 5.00 | ||||||
946,556 |
NOTE 910 – AUGUST 2021 STOCK REDEMPTION
On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”)the Redemption Agreement with Koncepts and Treasure Green, pursuant to which the Company redeemed shares of common stock of the Company (the “Redeemed Shares”).Company. The closing of the transaction 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 andin consideration of a payment by the Company paidof approximately $7,162,000 to Koncepts and Treasure Green. The Redeemed Shares were retired and are available for reissuance in the future. Pursuantreturned to the Redemption Agreement, neither Koncepts nor Treasure Green remained shareholdersunissued authorized capital of the Company.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
(Unaudited)
NOTE 1011 – AUGUST 2021 PRIVATE PLACEMENT
On August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and thea strategic investor for a private placement offering of (i) shares of its common stock (the “Shares”) together with Common Warrants to purchase up to 16,500,000550,000 shares of common stock with an exercise price of $0.352.80 per share, and (ii) 16,833,333561,111 pre-funded warrants (“Pre-Funded Warrants”)Warrants with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $0.010.30 per share, together with Common Warrants to purchase up to 16,833,333561,111 shares of common stock at an exercise price of $0.352.80 per share (the “Private Placement”).share.
The Common Warrants and Pre-Funded Warrants are collectively referred to as (the “Warrants”). The Warrants are exercisable at any time at the option of the holder, have a term of 5 years from the issuance date and provide for cashless exercise under certain conditions. The Company determined that the Warrants meet the conditions for equity classification. Shares issuable upon exercise of the Warrants are hereinafter referred to as the “Warrant Shares”. The exercise price and number of the Warrant Shares are subject to anti-dilution and other adjustments for certain stock dividends, stock splits, subsequent rights offerings, pro rata distributions or certain equity structure changes.
Pursuant to the terms of the Purchase Agreement, on September 3, 2021, the Company filed a registration statement providing for the resale by the purchasers of the Shares and Warrant Shares sold in the Private Placement, which registration statement became effective on September 15, 2021. Additionally, under the terms of the Purchase Agreement, the Company iswas 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. As of December 31, 2021 an application with NASDAQ has been submittedindicated, the Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and is pending approval. Shouldbegan trading on the NASDAQ application be approved, the shareholders of the Company have approved a reverse stock split simultaneous with the up-listing.Nasdaq Capital Market on May 24, 2022.
The closing of the Private Placement took place on August 10, 2021, when the Shares and Warrants were delivered to the purchasers and funds, in the amount of approximately $9,832,000, were received by the Company. Approximately $7,162,000 of the funds was used to execute the Redemption Agreement (See Note 910 – August 2021 Stock Redemption).
Stingray Group Inc. (“Stingray” or the “strategic investor”), a leading music, media and technology is part of the group of investors whocompany 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 and is now a related party (see Note 12-14 - Related Party Transactions).
18 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
In connection with the Private Placement, on July 6, 2021, the Company entered into a Placement Agency Agreement with A.G.P./Alliance Global Partners (“AGP”), which provided for AGP to serve as the exclusive placement agent, advisor or underwriter (the “placement agent services”). Pursuant to the Placement Agency Agreement, upon closing of the Private Placement, the Company paid AGP placement fees of $630,000 ((representing 7% of the gross proceeds raised in the Private Placement excluding proceeds raised from the strategic investor, plus 3.5% of the aggregate gross proceeds raised from the strategic investor)investor), and issued AGP warrants to purchase 1,333,33344,445 shares of the Company’s common stock (the “Advisor Warrants”) (representing % of the aggregate number of Shares and Pre-Funded Warrants sold in the Private Placement, excluding the Shares sold to the strategic investor). The Advisor Warrants have the same exercise price ($ ) and terms as the Common Warrants issued in the Private Placement. The Company estimated the fair value of the Advisor Warrants to be approximately $359,000 using the Black-Scholes Model based on the following input assumptions: common stock price of $ , expected life of the warrants of 2.5 years; stock price volatility of %; dividend yield of %; and the risk-free interest rate of %.
In addition to the placement fees paid to AGP, the Company incurred additional offering costs for direct incremental legal, consulting, accounting and filing fees related to the Private Placement of approximately $390,000, of which one consultant was issued shares of restricted common stock with an aggregate fair value of approximately $189,000 and a cash payment of $100,000. Total offering costs related to the Private Placement amounted to approximately $1,379,000831,000, of which was payment of stock issuance expenses, which is recorded as an offset to additional paid in capital in the accompanying condensed consolidated statements of stockholders’ equity.
NOTE 12 – PUBLIC OFFERING AND NASDAQ UPLISTING
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSOn May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30. The reverse stock split was effected to meet The Nasdaq Capital Market’s minimum bid price requirement. All information in these consolidated financial statements have been retroactively adjusted to give effect to this 1-for-30 reverse stock split.
December 31, 2021 and 2020
(Unaudited)On May 23, 2022, the Company entered into the Underwriting Agreement with Aegis Capital Corp., who acted as the sole Underwriter, in a firm commitment underwritten public offering pursuant to which the Company sold to the Underwriter shares of common stock, par value $ per share for gross proceeds of $4,000,000 prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $637,000. The price to the public in the Offering was $ per Share, before underwriting discounts and commissions. The offering closed on May 26, 2022. The Company received net proceeds of approximately $3,363,000 which was used for working capital.
Pursuant to the terms of the Underwriting Agreement, the Company agreed to issue to the Underwriter warrants to purchase up to 100,000 shares of Common Stock representing 10.0% of the Shares sold in this Offering, excluding any Shares sold through the over-allotment option. The warrants are exercisable six months from the commencement of sales under the offering, have an exercise price of $5.00 per share and expire five years from the date of issuance. The Company estimated the fair value of these warrants to be approximately $244,000 using the Black-Scholes Model based on the following input assumptions: common stock price of $2.90, expected life of the warrants of 3 years; stock price volatility of 176%; dividend yield of 0%; and the risk-free interest rate of 2.63%.
On May 24, 2022, the Company’s common stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022.
NOTE 1113 - GEOGRAPHICALSEGMENT INFORMATION
Sales to customers outside of the United States for the three and ninesix months ended December 31,September 30, 2022 and 2021 and 2020 were primarily made by the Macau Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows:
SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE NINE MONTHS ENDED | FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||||||||||||||||||
December 31, | December 31, | September 30, | September 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
North America | $ | 20,997,000 | $ | 16,623,000 | $ | 43,691,000 | $ | 41,014,000 | $ | 16,138,000 | $ | 16,729,000 | $ | 27,830,000 | $ | 22,695,000 | ||||||||||||||||
Europe | 219,000 | 31,000 | 375,000 | 924,000 | 306,000 | 156,000 | 306,000 | 156,000 | ||||||||||||||||||||||||
Australia | 28,000 | 319,000 | 613,000 | 372,000 | 670,000 | 484,000 | 670,000 | 584,000 | ||||||||||||||||||||||||
Net sales | $ | 21,244,000 | $ | 16,973,000 | $ | 44,679,000 | $ | 42,310,000 | $ | 17,114,000 | $ | 17,369,000 | $ | 28,806,000 | $ | 23,435,000 |
The geographic area of sales was based on the location where the product is delivered.
19 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022 and 2021
(Unaudited)
NOTE 1214 –RELATED PARTY TRANSACTIONS
All transactions listed below are related to the Company as Cosmo Communications, Inc (“Cosmo”) and Starlight Electronics Co., Ltd (“SLE”) are affiliates of our former Chairman of the Board, Mr. Phillip Lau. Additionally, Stingray is part of the group of investors who participated in the August 2021 Private Placement and have acquired a minority interest in the Company and has one Director on the Company’s Board (see Note 1011 – August 2021 Private Placement ).
DUE TO/FROM RELATED PARTIES
On December 31, 2021September 30, 2022 and March 31, 2021, the Company had amounts due to related parties in the amounts of approximately $63,000 respectively for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by the former parent company.
On December 31, 2021 and March 31, 2021,2022, the Company had amounts due from Stingray of approximately $159,000242,000 and $88,000152,000, respectively for shared revenue from music content provided to ourthe Company’s customers from theirStingray’s library of produced and licensed karaoke content.
TRADE
The Company has a music subscription sharing agreement with Stingray. For the three months ended December 31,September 30, 2022 and 2021 and 2020 the Company received music subscription revenue of approximately $160,000123,000 and $188,000110,000, respectively. For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 the Company received music subscription revenue of approximately $384,000255,000 and $290,000224,000, respectively. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of income.
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 $685,000. During the three and nine months ended December 31, 2021, there was a gain of approximately $11,000 from Cosmo related to payments received in Fiscal 2022 on prior year sales and the related receivable previously reversed and written off as initially deemed uncollectible.
The Company incurred service expenses from SLE. The services from SLE were approximately $91,000 for the three months ended December 31, 2021 and 2020. The services from SLE for the nine months ended December 31, 2021 and 2020 were approximately $272,000. These amounts were included as a component of general and administrative expenses in the accompanying condensed consolidated statements of income.
NOTE 1315 – 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.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
(Unaudited)
Changes in the Company’s reserve for sales returns are presented in the following table:
SCHEDULE OF RESERVE FOR SALES RETURNS
Nine Months Ended | ||||||||
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Reserve for sales returns at beginning of the year | $ | 960,000 | $ | 1,224,000 | ||||
Provision for estimated sales returns | 4,020,000 | 4,187,000 | ||||||
Sales returns received | (2,058,000 | ) | (2,445,000 | ) | ||||
Reserve for sales returns at end of the period | $ | 2,922,000 | $ | 2,966,000 |
NOTE 14 – REFUNDS DUE TO CUSTOMERS
As of December 31, 2021 and March 31, 2021 the amount of refunds due to customers was approximately $90,000 and $145,000, respectively, primarily due to one customer for overstock returns.
Six Months Ended | ||||||||
September 30, | September 30, | |||||||
2022 | 2021 | |||||||
Reserve for sales returns at beginning of the year | $ | 990,000 | $ | 960,000 | ||||
Provision for estimated sales returns | 1,964,000 | 2,110,000 | ||||||
Sales returns received | (1,263,000 | ) | (1,206,000 | ) | ||||
Reserve for sales returns at end of the period | $ | 1,691,000 | $ | 1,864,000 |
NOTE 1516 - 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 both December 31,September 30, 2022 and 2021 and 2020 totaled approximately $20,000 and $17,000., respectively. The amounts charged to operations for contributions to this plan and administrative costs during both of the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 totaled approximately $55,00035,000 and $54,000, respectively.. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of income. The Company does not provide any post-employment benefits to retirees.
NOTE 1617 - 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 December 31, 2021,September 30, 2022, approximately 7581% of accounts receivable were due from fourthree customers in North America that individually owed over 10% of total accounts receivable. At March 31, 2021,2022, 7053% of accounts receivable were due from threefour customers in North America that individually owed over 10% of total accounts receivable.
The Company generates most of its revenue from retailers of products in the United States with a significant amount of sales concentrated with several large customers, the loss of which could have an adverse impact on the financial position of the Company. For the three months ended December 31, 2021,September 30, 2022, there were fivethree customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 2543%, 24%, 17%, 1729% and 10%, respectively. For the three months ended December 31, 2020,September 30, 2021, there were fivethree customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 2249%, 2216%,19%, 12% and 12%, respectively.
For the ninesix months ended December 31, 2021,September 30, 2022, there were fourtwo customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 37%, 19%, 1646% and 1132%, respectively. For the ninesix months ended December 31, 2020,September 30, 2021, there were fourthree customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 3448%, 1916%, 13% and 1314%, respectively.
In August 2021, the Company secured vendor invoice credits of approximately $236,000 from a factory involved with a damaged goods incident during fiscal 2020 which is reflected as gain from extinguishment of accounts payable in the condensed consolidated statement of income for the nine months ended December 31, 2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view the Company from management’s perspective, considering items that would have a material impact on future operations.
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.
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation (the “Company”,“Company,” “SMC”, “The Singing Machine”), and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”SMCL”), SMC-Music, Inc. (“SMCM”) and SMC-Music, Inc.SMC (HK) Limited (“SMC-M”SMH”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems,equipment, accessories musical instruments and musical recordings. The products are sold by SMCdirectly to retailersdistributors and distributors for resale to consumers.retail customers.
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%81% and 85%86% of net sales in fiscal 2022 and 2021, respectively.
Recent Developments
Controlled Company
As of the date of this report, Ault Lending, LLC (“Ault Lending”) beneficially owns and 2020, respectively.BitNile Holdings, Inc. (“BitNile Holdings”) and Milton C. Ault, III (“Ault,” and collectively with Ault Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,787,200 shares of our common stock or approximately 57.4% of our outstanding shares. Ault Lending is a wholly owned subsidiary of BitNile Holdings. Mr. Ault is the Executive Chairman of BitNile Holdings.
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As longs as BitNile continues to hold more than 50% of the voting power of our Company, we will be a “controlled company” as defined under Nasdaq Marketplace Rules.
For so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely on certain exemptions from corporate governance rules, including:
● | an exemption from the rule that a majority of our board of directors must be independent directors; | |
● | an exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and | |
● | an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. |
Appointment of New Directors
Effective July 27, 2022, the Board of Directors (the “Board”) of the Company increased the number of directors to eight and appointed Messrs. Bernardo Melo, James Turner and Kenneth Cragun as directors. Messrs. Melo, Turner and Cragun will serve as members of the Board until the next annual meeting of the Company’s stockholders, and until their successors are elected and qualified or until their earlier death, resignation or removal. Messrs. Turner and Cragun were recommended for nomination by BitNile, the Company’s majority stockholder, and evaluated and nominated by the Company’s Nominating and Corporate Governance Committee.
Credit and Security Agreement with Fifth Third Bank, National Association
On October 14, 2022 the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Fifth Third Bank, National Association, as Lender (“Fifth Third”) replacing the Company’s credit facilitieswith Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022. The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025.
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. 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,During Fiscal 2022, as consumer demand improved and economic activity increased, 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. We may also experience logistical issues with when we receive inventory and the timing of customer demand which could result in potential future reductions in profit margins and/or the need for additional inventory reserves.
During Due to these supply chain challenges, during the fourth quarter of Fiscal 2021,2022, we experienced growth inlate delivery of inventory that missed the holiday season 2021. We note that this trend was widespread throughout the consumer products and retail categories causing a significant stockpile of consumer product inventory throughout retail channels. As a result of this excess inventory stockpile, we might be expected to discount 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 availabilityinventory or help participate in the market.funding of marking down our customers’ inventory which could result in reductions in profit margins and/or the need for additional inventory reserves.
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 20212022 Annual Report on Form 10-K.
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HIGH INFLATION, RISING INTEREST RATES, AND UNFAVORABLE ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT OUR OPERATIONS AND RESULTS.
Unfavorable global or regional economic conditions may be triggered by numerous developments beyond our control, including inflation, rising interest rates, geopolitical events, health crises such as the COVID-19 pandemic, and other events that trigger economic volatility on a global or regional basis. Those types of unfavorable economic conditions could adversely affect our business and financial results. In particular, a significant deterioration in economic conditions, including economic slowdowns or recessions, increased unemployment levels, inflationary pressures or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing consumer demand for our products. For example, in 2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 9%, which is now at a 40-year historic high. While we have experienced a significant decrease in container costs for inbound containers due to decreased demand in general, we are continuing to see increases in drayage costs due to cost of fuel increases as well as significant charges from the Port of Los Angeles such as “port congestion fees” and other surcharges due to inflation. The cost of labor, employee benefits, pallets and warehouse supplies and other logistics related costs continue to increase at record rates. Such heightened inflationary levels and higher consumer credit borrowing rates may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items related to our consolidated statements of income as a percentage of net sales for the three and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:
The Singing Machine Company, Inc. and Subsidiaries
CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS
For Three Months Ended | For the Nine Months Ended | For Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of Goods Sold | 75.0 | % | 70.7 | % | 77.1 | % | 72.2 | % | 76.8 | % | 80.8 | % | 75.2 | % | 79.1 | % | ||||||||||||||||
Gross Profit | 25.0 | % | 29.3 | % | 22.9 | % | 27.8 | % | 23.2 | % | 19.2 | % | 24.8 | % | 20.9 | % | ||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Selling expenses | 6.6 | % | 8.8 | % | 6.1 | % | 7.7 | % | 5.3 | % | 4.2 | % | 5.2 | % | 5.6 | % | ||||||||||||||||
General and administrative expenses | 10.1 | % | 11.3 | % | 12.0 | % | 12.1 | % | 14.1 | % | 10.2 | % | 16.6 | % | 13.6 | % | ||||||||||||||||
Depreciation and amortization | 0.3 | % | 0.4 | % | 0.4 | % | 0.5 | % | 0.0 | % | 0.4 | % | 0.0 | % | 0.6 | % | ||||||||||||||||
Total Operating Expenses | 17.0 | % | 20.5 | % | 18.5 | % | 20.3 | % | 19.4 | % | 14.8 | % | 21.8 | % | 19.8 | % | ||||||||||||||||
Income (Loss) from Operations | 8.0 | % | 8.8 | % | 4.4 | % | 7.5 | % | ||||||||||||||||||||||||
Income from Operations | 3.8 | % | 4.4 | % | 3.0 | % | 1.1 | % | ||||||||||||||||||||||||
Other Income (Expenses) | ||||||||||||||||||||||||||||||||
Gain from Paycheck Protection Plan loan forgiveness | 0.0 | % | 0.0 | % | 1.0 | % | 0.0 | % | ||||||||||||||||||||||||
Other (Expenses) Income | ||||||||||||||||||||||||||||||||
Gain - related party | 0.0 | % | 1.1 | % | 0.0 | % | 0.4 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||
Gain from damaged goods insurance claim | 0.0 | % | 0.0 | % | 0.0 | % | 2.5 | % | ||||||||||||||||||||||||
Gain from extinguishment of accounts payable | 0.0 | % | 0.0 | % | 0.5 | % | 0.9 | % | ||||||||||||||||||||||||
Gain from extinguishment of PPP loan forgiveness | 0.0 | % | 0.0 | % | 0.0 | % | -0.9 | % | ||||||||||||||||||||||||
Gain from settlement of accounts payable | 0.0 | % | 0.0 | % | 0.0 | % | -0.1 | % | ||||||||||||||||||||||||
Interest expense | -0.7 | % | -1.4 | % | -0.8 | % | -0.9 | % | -1.1 | % | 1.4 | % | 0.0 | % | ||||||||||||||||||
Finance costs | 0.0 | % | -0.1 | % | -0.1 | % | -0.1 | % | 0.0 | % | -0.6 | % | -1.2 | % | ||||||||||||||||||
Total Other Income (expenses), net | -0.7 | % | -0.4 | % | 0.6 | % | 2.8 | % | ||||||||||||||||||||||||
Total Other (Expenses) Income, net | -1.1 | % | 0.8 | % | -1.2 | % | -1.0 | % | ||||||||||||||||||||||||
Income Before Income Tax Provision | 7.3 | % | 8.4 | % | 5.0 | % | 10.3 | % | 2.7 | % | 5.2 | % | 1.8 | % | 0.1 | % | ||||||||||||||||
Income Tax Provision | -0.5 | % | -1.6 | % | -0.6 | % | -2.4 | % | -0.6 | % | -1.0 | % | -0.3 | % | -0.6 | % | ||||||||||||||||
Net Income | 6.8 | % | 6.8 | % | 4.5 | % | 7.9 | % | 2.1 | % | 4.2 | % | 1.4 | % | -0.5 | % |
QUARTER ENDED DECEMBER 31, 2021SEPTEMBER 30, 2022 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2020SEPTEMBER 30, 2021
NET SALES
Net sales for the quarterthree months ended December 31, 2021 increasedSeptember 30, 2022 decreased to approximately $21,244,000$17,113,000 from approximately $16,973,000 an increase$17,369,000, a decrease of approximately $4,271,000$256,000 as compared to the three months ended September 30, 2021. While the net sales for the three months ended September 30, 2022 remained relatively flat compared to the same period ended December 31, 2020. Thein the prior year there was a significant increase in net sales was primarily due to strong demand for productstwo of our largest customers and goods that shipped latea similar reduction in two other major customers who ended the prior holiday season due to the late arrival of goods that were scheduled to ship in the previous quarter but were significantly delayed at the Port of Los Angeles due to global logistics issues affecting all industries.with excess inventory and reduced current year purchases.
GROSS PROFIT
Gross profit for the quarterthree months ended December 31, 2021September 30, 2022 increased to approximately $5,309,000$3,964,000 from approximately $4,974,000$3,327,000 an increase of approximately $335,000$637,000 as compared to the same period in the prior year. The increase in net sales contributed approximately $1,252,000three months ended September 30, 2021 primarily due to thean increase in gross profit but was offset by a reduction in gross profit margin of approximately $917,000.margin.
Gross profit margin for the three months ended December 31, 2021September 30, 2022 was 25.0%23.2% compared to 29.3%19.2% for the three months ended December 31, 2020.September 30, 2021. There was a decreasereduction in Carpool Karaoke (“CPK) product sales, ofcomponent costs in one major customer’s promotional item that contributed approximately $2,256,000, which accounted for approximately 2.91.8 margin points of the 4.3 gross profit margin point decreaseincrease with the remaining 1.4 point decreasemargin increase primarily due to a decrease in landed product cost increases in raw materials anddue to a significant increasedecrease in freightinbound container costs due to global logistics issues that were only partially passed onand price increases to customers.
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OPERATING EXPENSES
ForDuring the quarterthree months ended December 31, 2021,September 30, 2022, total operating expenses increased to approximately $3,616,000$3,379,000 compared to approximately $3,481,000 from$2,577,000 during the same period in the prior year.three months ended September 30, 2021. This represents an increase in total operating expenses of approximately $135,000$802,000 from the quarterthree months ended December 31, 2020. The increase in operating expenses isSeptember 30, 2021 primarily due to an increase in general and administrative expenses of approximately $229,000.$640,000 and an increase in selling expenses of approximately $166,000.
Selling expenses increased to approximately $900,000 during the three months ended September 30, 2022 compared to approximately $734,000 during the three months ended September 30, 2021, an increase of approximately $166,000. There was an increase in commission and royalty expense of approximately $76,000, an increase of approximately $49,000 in discretionary marketing expense with the remaining increase related to freight costs.
General and administrative expenses increased to approximately $2,417,000 during the three months ended September 30, 2022 compared to approximately $1,777,000 during the three months ended September 30, 2021, an increase of approximately $640,000. There was an increase in one-time legal, professional, investor relations and stock transfer costs of approximately $303,000 primarily related to the public offering, Nasdaq up-listing, change in control matters, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third. There was an increase in compensation of approximately $239,000 primarily due to compensation for new members of the board of directors, and officers’ and employee incentive compensation as well as merit increases. There was an increase in pallet expenses, warehouse supplies and expense and temporary labor at our California facility of approximately $206,000 due to an increase in third party logistics business as well as price increases$98,000 due to inflation related cost increases in pallets, temporary labor and supply chain shortages. There was an increase in legal, accounting, consulting fees and investor relations expenses of approximately $138,000 primarily related to the private placement transaction (see Note 10 - AUGUST 2021 PRIVATE PLACEMENT). There was an increase in bad debt reserve expense of approximately $165,000 related to the increase in net sales and accounts receivable. These increases were offset by a decrease in payroll expenses of approximately $295,000 primarily due to significant decrease in executive bonus accruals during the three months ended December 31, 2021 compared to the three month period ended December 31, 2020.supplies.
INCOME FROM OPERATIONS
There was income from operations of approximately $1,694,000$585,000 for the three months ended December 31, 2021September 30, 2022 compared to income from operations of approximately $1,493,000$750,000 for the three months ended December 31, 2020.September 30, 2021. The increasedecrease in income from operations of approximately $201,000$165,000 was primarily due to the increase in gross profit offset by the increase in operating expenses as explained above.
OTHER (EXPENSES) INCOME (EXPENSES)
Other expenses increased by approximately $103,000$302,000 to approximately $165,000$186,000 in other expenses for the three months ended September 30, 2022 compared to approximately $116,000 in other income, net for the three months ended December 31, 2021 compared to approximately $61,000 in other expenses, net for the same period ended December 31, 2020.September 30, 2021. During the three months ended December 31, 2020September 30, 2022, there was an increase in interest expense of approximately $76,000 as the Company had outstanding borrowings of $2,500,000 on the IHC inventory financing facility during the three months ended September 30, 2022 compared to borrowings of approximately $365,000 outstanding during the three months ended September 30, 2021. During the three months ended September 30, 2021 there was a gain from related partythe settlement of approximately $188,000 from related party accounts receivable that had previously been written off as uncollectible. During the three months ended December 31, 2021 there was a reduction in interest expense and finance amortization costspayable with one of approximately $85,000 compared to the three months ended December 31, 2020 which offset the gain from related party.our factories of $236,000.
INCOME TAXES
For the three months ended December 31,September 30, 2022 and 2021, and 2020 the Company recognized an income tax provision of approximately $103,000$102,000 and $264,000,$174,000, respectively, due to management’s best estimate of the Company’s full year effective U.S. federal tax rate of approximately 11.1%21.2% and 23.0%20.1%, respectively.
NET INCOME
For the three months ended December 31, 2021 there was net income of approximately $1,426,000 compared to net income of approximately $1,167,000 for the same period a year ago. The decrease in net income was primarily due to the same reasons discussed in Income from Operations, Other Income (Expenses) and Income Taxes.
NINESIX MONTHS ENDED DECEMBER 31, 2021SEPTEMBER 30, 2022 COMPARED TO THE NINESIX MONTHS ENDED DECEMBER 31, 2020SEPTEMBER 30, 2021
NET SALES
Net sales for the ninesix months ended December 31, 2021September 30, 2022 increased to approximately $44,679,000$28,806,000 from $42,310,000$23,435,000 an increase of approximately $2,369,000$5,371,000 as compared to the same period ended December 31, 2020September 30, 2021. There was an increase in net sales of approximately $6,100,000 primarily due to sales increases in two “club store” customersa top-five customer that opted to receive product via direct import, accelerated their delivery schedule and increased their assortment due to increased consumer demand andof product offerings. This increase in net sales was offset by a decrease in CPKnet sales of approximately $2,316,000 to two major customers who ended the prior holiday season with excess inventory and reduced current year purchases. The remaining variance was primarily due to an increase in net sales due to new product sales.set in one major customer’s consumer electronics department.
GROSS PROFIT
Gross profit for the ninesix months ended December 31, 2021 decreasedSeptember 30, 2022 increased to approximately $10,215,000$7,144,000 from approximately $11,759,000 a decrease$4,905,000 an increase of approximately $1,544,000$2,339,000 as compared to the same period in the prior year. Despite theThe increase in net sales whichas indicated in Net Sales contributed approximately $658,000$1,123,000 to the increase in gross profit. The remaining increase was primarily due to an increase in gross profit margin this increase was offset by a decrease of approximately $2,202,000 in gross profit margin or approximately 4.9 margin3.9 points on products sold.
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Gross profit margin for the ninesix months ended December 31, 2021September 30, 2022 was 22.9%24.8% compared to 27.8%20.9% for the ninesix months ended December 31, 2020.September 30, 2021. There was a decreasereduction in CPK product sales, (that yield a substantially higher gross profit margin than our traditional product) ofcomponent costs in one major customer’s promotional item that contributed approximately $2,493,000, which accounted for approximately 2.51.6 margin points of the 4.9 gross profitincrease with the remaining margin point decrease. The remaining decrease of approximately 2.4 points of gross margin wasincrease primarily due to a decrease in landed product cost increases in raw materials anddue to a significant increasedecrease in freightinbound container costs due to global logistics issues that were only partially passed onand price increases to customers.
OPERATING EXPENSES
ForDuring the ninesix months ended December 31, 2021,September 30, 2022, total operating expenses decreasedincreased to approximately $8,261,000$6,413,000 compared to approximately $8,599,000 from$4,645,000 during the same period in the prior year.six months ended September 30, 2021. This represents a decreasean increase in total operating expenses of approximately $338,000$1,768,000 from the ninesix months ended December 31, 2020. The decrease in operating expenses isSeptember 30, 2021 primarily due to a decrease in selling expenses of $547,000. There was a decrease in freight expenses of approximately $460,000 associated with a decrease in outbound freight as two major club accounts did not have special projects requiring the company to ship freight prepaid instead of collect as well as inbound freight expense reduction due to a decrease in product returns. There was a reduction in royalty expense of approximately $325,000 primarily due to the reduction in CPK sales as explained in net sales. These decreases in selling expenses were offset by an increase in discretionary marketing expense of approximately $284,000.
These decreases in selling expenses of approximately $547,000 were offset by an increase in general and administrative expenses of approximately $223,000 primarily due$1,590,000 and an increase in selling expenses of approximately $194,000.
Selling expenses increased to approximately $1,505,000 during the six months ended September 30, 2022 compared to approximately $1,311,000 during the six months ended September 30, 2021, an increase of approximately $194,000. There was an increase in commission expense of approximately $104,000 commensurate with the increase in net sales and an increase of approximately $77,000 in discretionary marketing expense with the remaining increase related to other variable selling expenses.
General and administrative expenses increased to approximately $4,788,000 during the six months ended September 30, 2022 compared to approximately $3,198,000 during the six months ended September 30, 2021, an increase of approximately $1,590,000. There was an increase in legal, accounting, consulting fees andprofessional, investor relations expensesand stock transfer costs of approximately $443,000 primarily related to the private placement transaction (see Note 10 - AUGUST 2021 PRIVATE PLACEMENT).public offering, Nasdaq up-listing, change in control issues, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third. There was an increase in compensation of approximately $394,000 primarily due to compensation for new members of the board of directors, and officers’ and employee incentive compensation, new hires as well as merit increases. There was an increase in pallet expenses, warehouse supplies and expense and temporary labor at our California facility of approximately $376,000 due to inflation related cost increases.. There were increases of approximately $102,000 related to a firmware upgrade of one of our products, an increase in travel expenses of approximately $87,000, expenses associated with ERP system projects of approximately $79,000 with the remaining increase due to other general variable expenses that have increased due to inflation.
INCOME FROM OPERATIONS
There was income from operations of approximately $1,954,000$731,000 for the ninesix months ended December 31, 2021September 30, 2022 compared to income from operations of approximately $3,160,000$260,000 for the ninesix months ended December 31, 2020.September 30, 2021. The decreaseincrease in income from operations of approximately $1,206,000$471,000 was primarily due to the reductionincrease in gross profit offset by an increase in operating expenses offset by the decrease in gross profit as explained above.
OTHER (EXPENSES) INCOME (EXPENSES)
Other income decreasedexpenses increased by approximately $920,000$813,000 to approximately $294,000$354,000 in other income, netexpense for the ninesix months ended December 31, 2021September 30, 2022 compared to approximately $1,214,000$459,000 in other income, net for the same period ended December 31, 2020.September 30, 2021. During the ninesix months ended December 31, 2021 there were one-time gains of approximately $696,000 primarily due to forgiveness of the loan under the Paycheck Protection Program of approximately $448,000 which included principal and interest andSeptember 30, 2022, there was an accounts payable forgivenessincrease in interest expense of approximately $236,000 from one vendor$136,000 as the Company had outstanding borrowings of $2,500,000 on goods that were damaged in the prior yearIHC inventory financing facility during the three months ended September 30, 2022 compared to a recoveryborrowings of approximately $1,068,000 in out-of-pocket expenses relating to a prior year damaged goods insurance claim$2,000,000 outstanding during the ninesix months ended December 31 2020 and accounts payable forgiveness of $390,000 fromSeptember 30, 2021. Interest rates on the vendor who caused the damaged goods problem.Crestmark Credit Facility increased commensurate with federal interest rate hikes. During the ninesix months ended December 31, 2020September 30, 2021 there was a gain from related partythe forgiveness of the Payroll Protection Plan loan of approximately $188,000$448,000 and a gain from related partythe settlement of accounts receivable that had previously been written off as uncollectible. The remaining variance in other income, net was primarily due to a decrease in interest expense and amortizationpayable with one of deferred financing costs associated with the financing termsour factories of the Crestmark Facility and IHC Facility.$236,000.
INCOME TAXES
For the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 the Company recorded an income tax provision of approximately $249,000$97,000 and an income tax provision of approximately $1,006,000,$146,000, respectively, due to management’s best estimate of the Company’s full year effective U.S. federal tax rate of approximately 11.1%21.2% and 23.0%20.1%, respectively.
NET INCOME
For the nine months ended December 31, 2021 there was net income of approximately $2,000,000 compared to net income of approximately $3,368,000 for the same period a year ago. The decrease in net income was primarily due to the same reasons discussed in Income from Operations, Other Income (Expenses) and Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2021, Singing MachineSeptember 30, 2022, the Company had cash on hand of approximately $7,375,000$2,979,000 as compared to cash on hand of approximately $823,000$3,338,000 on December 31, 2020.September 30, 2021. We had working capital of approximately $9,811,000$12,709,000 as of December 31, 2021.September 30, 2022. Net cash used in operating activities was approximately $3,113,000$3,580,000 for the ninesix months ended December 31, 2021.September 30, 2022. During the ninesix months ended December 31, 2021September 30, 2022 there was an increase in accounts receivable of approximately $10,124,000$8,011,000 due to a seasonal increase in net sales and ana seasonal increase in inventories of approximately $5,933,000$1,767,000. There was an increase in cash due to in-transit and receiptfrom Crestmark Bank of inventory intended for peak season shipments but were received too late to ship due to global logistics issues.approximately $976,000 held in anticipation of the imminent closing of the new Credit Agreement with Fifth Third Bank. These increasesdecreases in net cash used in operating activities were offset by an increase in in accounts payable and accrued expenses of approximately $4,531,000$5,554,000 due to delayed receipt of seasonal purchases of product for the peak seasonseason. There was a seasonal increase in reserves for sales returns of approximately $701,000.
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Net cash used in operating activities was approximately $576,000 for the six months ended September 30, 2021. There was an increase in accounts receivable of approximately $9,410,000 due to global logistics issues.a seasonal increase in sales and a seasonal increase in inventories of approximately $13,722,000 due to in-transit and receipt of inventory for peak season. These increases in net cashed used in operating activities were offset by an increase in in accounts payable of approximately $16,409,000 due to seasonal purchases of product for the peak season. There was a decrease in amounts due from Crestmark Bank of approximately $4,557,000 as cash collected in excess of amounts due on the revolving credit during the first quarter was used to pay for the seasonal increase in inventory. There was a seasonal increase in reserve for sales returns of approximately $1,962,000.
Net cash provided by operating activities was approximately $165,000 for the nine months ended December 31, 2020. During the nine months ended December 31, 2020 there was a decrease in insurance receivable of approximately $1,268,000 as we received proceeds for the one-time damaged goods incident that occurred in the prior fiscal year as well as a gain from the extinguishment of accounts payable of $390,000 from one vendor related to the damaged goods issue. There was a decrease in inventory of approximately $1,781,000 as the Company sold excess inventory left over from the prior fiscal year. There was a seasonal increase in reserves for sales returns of approximately $1,742,000. There was an increase in accrued expenses of approximately $580,000 primarily due to seasonal co-op promotion allowances, commissions and royalties. These increases in cash provided by operations were offset by an increase in accounts receivable of approximately $7,056,000 due to peak season sales. There was an increase in amounts due from banks of approximately $1,172,000 due to cash collected in excess of amounts due on the revolving credit facilities with Crestmark Bank. There was a reduction in refunds due to customers of approximately $705,000 primarily due to settlement of prior year damaged goods claims with one major customer. There was a decrease in accounts payable of approximately $1,470,000 as the Company sold off excess inventory from the prior year and did not need to purchase as much new inventory to fulfill orders.$904,000.
Net cash used in investing activities for the ninesix months ended December 31, 2021September 30, 2022 was approximately $78,000$88,000 as compared to approximately $89,000$78,000 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 ninesix months ended December 31, 2021September 30, 2022 was approximately $6,979,000$4,321,000 compared to cash provided by financing activities of approximately $402,000$3,595,000 for the same period ended of the prior year. In May 2022, we received net proceeds of approximately $3,363,000 from the public offering we executed in conjunction with our up-listing to Nasdaq as summarized in the next two paragraphs. In addition, during the six-months ended September 30, 2022, we received proceeds of approximately $1,034,000 from the exercise of pre-funded and common stock warrants. All proceeds were used for working capital.
On May 23, 2022, the “Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering (the “Offering”) pursuant to which the Company sold to the Underwriter 1,000,000 shares (the “Shares”) of common stock, par value $0.01 per share (the “Common Stock”) for gross proceeds of $4,000,000 prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $637,000. The price to the public in the Offering was $4.00 per Share, before underwriting discounts and commissions. The offering closed on May 26, 2022. The Company received net proceeds of approximately $3,363,000 which was used for working capital.
On May 24, 2022, the Company’s Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022.
Net cash provided by financing activities for the six months ended September 30, 2021 was approximately $3,595,000. We borrowed approximately $8,562,000$1,977,000 from our Crestmark Facility and IHC Facility for working capital. In August 2021, the Company received net proceeds of approximately $1,838,000 from the execution of private placement and stock redemption agreements as summarized in the next two paragraphs.agreements. These financing activities were offset by a payment of $150,000 on the subordinated related party debt,note payable, payment of deferred finance charges associated with the closing of the Crestmark and IHC Facilities of approximately $38,000 with the remaining difference used to pay scheduled installments on installment notes and finance leases.
In August 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) 16,500,001 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 received by the Company. Approximately $7,200,000 of the funds received were used to execute the Redemption Agreement as explained in the next paragraph. The Company received 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, 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 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 paid approximately $7,200,000 to Koncepts and Treasure Green. The Redeemed Shares were retired and are available for reissuance in the future.
Net cash provided by financing activities for the nine months ended December 31, 2020 was approximately $402,000. We received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program with the remaining variance primarily due to repayments of installment and capital lease payments. In the prior fiscal year we received approximately $284,000 from a financing arrangement with Dimension Funding to finance implementation of a new Enterprise Resource Planning system. This increase in cash provided by financing activities were offset by payments of finance leases and the bank term note of approximately $136,000.
On June 16, 2020, the Company executedcurrently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022. However, absent any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date.
On October 14, 2022 the Company entered into the Credit Agreement with Fifth Third, as Lender replacing the Company’s credit facilities with Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022. The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025.
As of the date of this filing, there are no amounts due on the new Credit Agreement and we have approximately $4,000,000 currently available from this credit facility based 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 6 – Bank Financing). As of this filing, we have borrowed approximately $2,500,000 on the IHC Facility, is the maximum loan amount on eligible inventory allowed by this facility and borrowed approximately $1,000,000 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 no additional borrowings currently available from the Crestmark facility until the end of February as per the facility agreement at which time the Company will have approximately $1,000,000 available on the facility.
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 nine months ended December 31, 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 income.
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 the prior fiscal year. As of this filing we have 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 condensed consolidated statement of income. For the three and nine months ended December 31, 2020 the gain from damaged goods insurance claim was approximately $0 and $1,068,000, respectively. We also secured vendor invoice credits of $390,000 from the factory that caused the damage which is reflected as gain from extinguishment of accounts payable in the condensed consolidated statement of income for the nine months ended December 31, 2020.inventory.
We believe that currentour cash on hand, working capital (net of cash), cash expected to be generated from our operating forecast, along with the availability of cash from our credit facilities (See Note 6 – BANK FINANCING) assuming that they are revised and or extended,7 –FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filing of this report. As both the Crestmark Bank (“Crestmark Facility”) and the Iron Horse Credit (“IHC”) Facility (“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 20212022 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for small reporting companies.
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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 statement 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:
Based on the progress to date of implementing these remediation measures, the Company anticipates that this material weakness will be remediated by March 31, 2022.
(b) Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2021,September 30, 2022, that materially affected, or were reasonably likely to materially affect the Company’s internal control over financial reporting.
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 Bernardino County. The complaint alleges an employee of SMCL committed employment practice violations against a former temporary employee not employed by the Company. Management has investigated the allegation and has engaged an employment attorney to defend the lawsuit. The case is still in discovery and no trial date has been set. The complaint seeks damages estimated to be no less than $500,000 in money judgement. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results.
As of the date of this filing, management is not aware of any legal proceedings other than matters that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
Not applicable for smaller reporting companiesFactors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in “Part I, Item 1A. Risk Factors” in the Company’s Form 10-K filed on July 14, 2022. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in the Form 10-K. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
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.
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ITEM 6. EXHIBITS
* Filed herewithherewith.
** Furnished herewith.
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.
THE SINGING MACHINE COMPANY, INC. | ||
Date: | By: | /s/ Gary Atkinson |
Gary Atkinson | ||
Chief Executive Officer | ||
/s/ Lionel Marquis | ||
Lionel Marquis | ||
Chief Financial Officer |