Algorhythm Holdings, Inc 10-Q for FY2021 Q3
Algorhythm Holdings, Inc. (RIME)
About this 10-Q
Algorhythm Holdings, Inc filed this 10-Q on November 22, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $17.37M
- down 22.1% from $22.29M a year earlier
- Net income
- $692.37K
- down 71.2% from net income of $2.41M a year earlier
- Diluted EPS
- $0.01
- down 83.3% from $0.06 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For
quarter ended | ||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from _____ to ______. |
Commission
File Number
THE SINGING MACHINE COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
| (State of Incorporation ) | (IRS Employer I.D. No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirement for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large
accelerated filer ☐ Accelerated filer ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| CLASS | NUMBER OF SHARES OUTSTANDING | |
| Common Stock, $0.01 par value | as of November 19, 2021 |
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
| INDEX | ||
| Page No. | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | |
Condensed Consolidated Balance Sheets – September 30, 2021 (Unaudited) and March 31, 2021 |
3 | |
| 4 | ||
| 5 | ||
| 6 | ||
Notes to Condensed Consolidated Financial Statements - September 30, 2021 and 2020 (Unaudited) |
7 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 27 |
| Item 4. | Controls and Procedures | 27 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 28 |
| Item 1A. | Risk Factors | 28 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 28 |
| Item 3. | Defaults Upon Senior Securities | 28 |
| Item 4. | Mine Safety Disclosures | 28 |
| Item 5. | Other Information | 28 |
| Item 6. | Exhibits | 28 |
| SIGNATURES | 29 | |
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2021 | March 31, 2021 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts
receivable, net of allowances of $ | ||||||||
| Due from Crestmark Bank | - | |||||||
| Accounts receivable related party - Stingray Group, Inc. | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Deferred financing costs | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Deferred tax assets | ||||||||
| Operating Leases - right of use assets | ||||||||
| Other non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Due to related party - Starlight Consumer Electronics Co., Ltd. | ||||||||
| Due to related party - Starlight R&D, Ltd. | ||||||||
| Revolving lines of credit | ||||||||
| Customer deposits | ||||||||
| Refunds due to customers | ||||||||
| Reserve for sales returns | ||||||||
| Current portion of finance leases | ||||||||
| Current portion of installment notes | ||||||||
| Current portion of note payable - Paycheck Protection Program | - | |||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of subordinated related party debt - Starlight Marketing Development, Ltd. | ||||||||
| Total Current Liabilities | ||||||||
| Finance leases, net of current portion | - | |||||||
| Installment notes, net of current portion | ||||||||
| Note payable - Payroll Protection Program, net of current portion | - | |||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | - | |||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock, Class A, $ par value; shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock, Class B, $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Common stock | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 3 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income From Operations | ||||||||||||||||
| Other Income (Expenses) | ||||||||||||||||
| Gain from Paycheck Protection Plan loan forgiveness | - | - | - | |||||||||||||
| Gain - related party | - | - | - | |||||||||||||
| Gain from damaged goods insurance claim | - | - | ||||||||||||||
| Gain from extinguishment of accounts payable | - | |||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Finance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other (Expenses) Income, net | ||||||||||||||||
| Income Before Income Tax Provision | ||||||||||||||||
| Income Tax Provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Net Income per Common Share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted Average Common and Common Equivalent Shares: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See notes to the condensed consolidated financial statements
| 4 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of deferred financing costs | ||||||||
| Change in inventory reserve | ||||||||
| Change in allowance for bad debts | ||||||||
| Loss from disposal of property and equipment | ||||||||
| Stock based compensation | ||||||||
| Change in net deferred tax assets | ||||||||
| Gain from Paycheck Protection Plan loan forgiveness | ( | ) | ||||||
| Gain - related party | ( | ) | ||||||
| Gain from extinguishment of accounts payable | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Due from Crestmark Bank | ||||||||
| Accounts receivable - related parties | ( | ) | ||||||
| Insurance receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Other non-current assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Due to related parties | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Refunds due to customers | ( | ) | ( | ) | ||||
| Reserve for sales returns | ||||||||
| Operating lease liabilities, net of operating leases - right of use assets | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of stock - net of transaction expenses | ||||||||
| Payment of redemption and retirement of treasury stock | ( | ) | ||||||
| Net proceeds from revolving lines of credit | ||||||||
| Proceeds from note payable - Paycheck Protection Program | ||||||||
| Payment of deferred financing charges | ( | ) | ( | ) | ||||
| Payments on installment notes | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Payment on subordinated debt - related party | ( | ) | ||||||
| Payments on finance leases | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ||||||||
| Cash at beginning of year | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Equipment purchased under capital lease | $ | $ | ||||||
| Issuance of common stock and warrants for stock issuance expenses | $ | $ | ||||||
| Operating leases - right of use assets and lease liabilities at inception of lease | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 5 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended September 30, 2021 and 2020
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Issuance of stock | ||||||||||||||||||||||||||||
| Issuance of pre-funded warrants | - | - | - | |||||||||||||||||||||||||
| Payment of stock issuance expenses | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of stock for stock issuance expenses | - | - | ( | ) | ||||||||||||||||||||||||
| Redemption and retirement of treasury shares | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Issuance of common stock - directors | - | - | ||||||||||||||||||||||||||
| Issuance of common stock - non-employee | ||||||||||||||||||||||||||||
| Employee compensation-stock option | - | - | - | |||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||
| Exercise of stock options, shares | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income | - | - | - | - | ||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the six months ended September 30, 2021 and 2020
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||
| Issuance of stock | ||||||||||||||||||||||||||||
| Issuance of pre-funded warrants | - | - | - | |||||||||||||||||||||||||
| Payment of stock issuance expenses | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of stock for stock issuance expenses | - | - | ( | ) | ||||||||||||||||||||||||
| Redemption and retirement of treasury shares | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Issuance of common stock - directors | - | - | ||||||||||||||||||||||||||
| Issuance of common stock - non-employee | ||||||||||||||||||||||||||||
| Employee compensation-stock option | - | - | - | |||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See notes to the condensed consolidated financial statements
| 6 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation (the “Company”, “SMC”, “The Singing Machine”) and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc.(“SMC-M”) are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments and musical recordings. The products are sold by SMC to retailers and distributors for resale to consumers.
NOTE 2 – LIQUIDITY AND RECENT EQUITY EVENTS
The
Company for the six months ended September 30, 2021 reported net income of approximately $
In
August 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with its majority shareholders,
Koncepts International Limited (“Koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to
which the Company redeemed
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) shares of its common stock (the “Shares”) together
with common warrants to purchase up to
We believe that current working capital, including the net cash obtained from the Purchase and Redemption Agreements along with the availability of cash from our Intercreditor Revolving Credit Facility (See Note 6 – Bank Financing), and cash expected to be generated from our operating forecast will be adequate to meet the Company’s liquidity requirements for at least the next twelve months. We believe the Intercreditor Revolving Credit Facility will be adequate to maintain and grow our business during the remaining term of the agreement. As both the Crestmark 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 3 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three months and six months ended September 30, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
| 7 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
The condensed consolidated balance sheet information as of March 31, 2021 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2021. The interim condensed consolidated financial statements should be read in conjunction with that report.
USE OF ESTIMATES
The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial 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% reserves for customers in bankruptcy and other reserves based upon historical collection experience. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.
The Company is subject to chargebacks from customers for co-op program incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiary are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are recorded in the condensed consolidated statements of income and translations are recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented.
CONCENTRATION OF CREDIT RISK
At
times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured
amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at
September 30, 2021 and March 31, 2021 are approximately $
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable.
INVENTORY
Inventories
are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable
value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected
future inventory returns due to warranty and allowance programs. As of September 30, 2021 and March 31, 2021 the estimated amounts for
these future inventory returns were approximately $
DEFERRED FINANCING COSTS
The
Company classifies deferred financing costs incurred when obtaining or renewing revolving credit facilities as assets in the accompanying
condensed consolidated balance sheets as it is likely that during certain periods during non-peak season there will be no balance due
on these credit facilities to offset the deferred financing costs. In June 2021, the Company incurred approximately $
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 September 30, 2021 and 2020.
| 8 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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– LEASES).
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We follow FASB ASC 825, “Financial Instruments”, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, due from related parties, accounts payable, accrued expenses, customer deposits, refunds due to customers, and due to related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the notes payable, finance leases and installment notes approximate fair value either due to the relatively short period to maturity or the related interest is accrued at a rate similar to market rates. The carrying amounts on the revolving line of credit approximates fair value due the relatively short period to maturity and related interest accrued at market rates.
REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS
The Company recognizes revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers. The Company recognizes revenue when the 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.
The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). The Company’s contracts have no financing elements, payment terms are less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods.
The
Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on
the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our
customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair
value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers
are recorded as a reduction to net sales. For the three months ended September 30, 2021 and 2020 co-op promotion incentives were approximately
$
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).
| 9 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
While the Company generally does not allow products to be returned, the Company does provide for variable consideration contingent upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company estimates variable consideration under our return allowance programs for goods returned to the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates.
The
Company’s reserve for sales returns were approximately $
Revenue is derived from five different major product lines. Disaggregated revenue from these product lines for the three and six months ended September 30, 2021 and 2020 consisted of the following:
SCHEDULE OF DISAGGREGATION OF REVENUE
| Three Months Ended | Six Months Ended | |||||||||||||||
| Product Line | September
30, 2021 | September
30, 2020 | September
30, 2021 | September
30, 2020 | ||||||||||||
| Classic Karaoke Machines | $ | $ | $ | $ | ||||||||||||
| Licensed Product | ||||||||||||||||
| SMC Kids Toys | ||||||||||||||||
| Microphones and Accessories | ||||||||||||||||
| Music Subscriptions | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
SHIPPING AND HANDLING COSTS
Shipping
and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to
fulfill the Company’s promise to transfer the goods. For the three months ended September 30, 2021 and 2020 shipping and handling
expenses were approximately $
The
Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”.
ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed
in the condensed consolidated statements of 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 six months ended September
30, 2021 and 2020 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service
period for the entire portion of the award. For the three months ended September 30, 2021 and 2020, the stock option expense was approximately
$
RESEARCH AND DEVELOPMENT COSTS
Research
and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative
expenses in the condensed consolidated statements of income. For the three months ended September 30, 2021 and 2020, these amounts totaled
approximately $
INCOME TAXES
The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.
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 six months
ended September 30, 2021 and 2020 we estimated our effective tax rate to be approximately
| 10 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
The
Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed
tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is
reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the
largest benefit that has a
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE
| For the three months ended September 30, 2021 | For the three months ended September 30, 2020 | For the six months ended September 30, 2021 | For the six months ended September 30, 2020 | |||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Effect of dilutive stock options | ||||||||||||||||
| Diluted weighted average common shares outstanding | ||||||||||||||||
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
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326). This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 for smaller reporting companies are effective for fiscal years beginning after April 1, 2023 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our condensed consolidated financial statements and related disclosures.
ADOPTION OF NEW ACCOUNTING STANDARDS
In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40),” to address the complexity in accounting for certain financial instruments with characteristics of liabilities and equity. Amongst other provisions, the amendments in this ASU significantly changed the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer freestanding instruments, like warrants, will require liability treatment. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. However, early adoption is permitted as early as fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted the new standard on April 1, 2021. The adoption of ASU 2020-06 did not have a material effect on the Company’s condensed consolidated financial statements.
| 11 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
NOTE 4 - INVENTORIES, NET
Inventories are comprised of the following components:
SCHEDULE OF INVENTORY
| September 30, | March 31, | |||||||
| 2021 | 2021 | |||||||
| Finished Goods | $ | $ | ||||||
| Inventory in Transit | ||||||||
| Estimated Amount of Future Returns | ||||||||
| Subtotal | ||||||||
| Less:Inventory Reserve | ||||||||
| Inventories, net | $ | $ | ||||||
NOTE 5 – PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
SUMMARY OF PROPERTY AND EQUIPMENT
| USEFUL | September 30, | March 31, | ||||||||||
| LIFE | 2021 | 2021 | ||||||||||
| Computer and office equipment | $ | $ | ||||||||||
| Furniture and fixtures | ||||||||||||
| Warehouse equipment | ||||||||||||
| Molds and tooling | ||||||||||||
| Less: Accumulated depreciation | ||||||||||||
| $ | $ | |||||||||||
Depreciation
expense for the three months ended September 30, 2021 and 2020 was approximately $
NOTE 6 – BANK FINANCING
Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit
On
June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility on eligible accounts receivable and inventory which replaced
the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020. The Company signed a two-year
Loan and Security Agreement for a $
Under the Crestmark Facility:
| ● | Advance rate shall not exceed 70% of Eligible Accounts Receivable aged less than 90 days from invoice date. | |
| ● | Crestmark shall maintain a base dilution reserve of 1% for each 1% of dilution over 15%. | |
| ● | Crestmark will implement an availability block of 20% of amounts due on Iron Horse Credit Intercreditor Revolving Credit Facility. | |
| ● | Mandatory pay-down of the loan to zero in January and February each year. |
The
Crestmark Facility is secured by a perfected security interest in all assets including a first security interest in Accounts Receivable
and Inventory. Notwithstanding the foregoing, Crestmark shall subordinate its first security interest in inventory to IHC as agreed between
all parties. The Crestmark Facility bears interest at the Wall Street Journal Prime Rate plus
| 12 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
In
addition, the Company executed a two-year Loan and Security Agreement with Iron Horse Credit for up to $
Under the IHC Facility:
| ● | Advance rate shall not exceed the lower of (a) 70% of the inventory cost or (b) 85% of Net Orderly Liquidation Value (NOLV) as determined by an independent third-party appraiser engaged by IHC. | |
| ● | The Company must maintain a fixed charge coverage ratio test of 1:1 times measured on a rolling 12-month basis, defined as earnings before interest, taxes, depreciation and amortization (“EBITDA”) less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness. This financial covenant was waived for the first six months of the IHC Facility. As of September 30, 2021, the Company was in compliance with this covenant. |
The
IHC Facility is secured by a perfected security interest in the Company’s inventory. The IHC Facility bears interest at
As
of September 30, 2021 there was approximately $
As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms.
Note Payable Payroll Protection Plan
On
May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $
Installment Notes Payable
On
June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an entire
ERP System project over a term of
Subordinated Debt/Note Payable to Related Party
In
conjunction with the Crestmark Facility and IHC Facility there is a subordination agreement on related party debt due to Starlight Marketing
Development, Ltd. of approximately $
In
connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the subordinated note payable. Both
the Crestmark Facility and IHC Facility agreements allow for the repayment of the subordinated note payable provided any amounts borrowed
against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity
to support on-going operations. As of September 30, 2021 the Company met repayment requirements of the Intercreditor Revolving Credit
Facility to make principal payments totaling $
| 13 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
As
of September 30, 2021 and March 31, 2021, the remaining amount due on the note payable was approximately $
NOTE 7 - 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. 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.
LEGAL MATTERS
On September 11, 2020 a Complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in a Superior Court of San Bernadino County. The complaint alleges an employee of SMCL committed employment practice violations against a former temporary employee not employed by SMC Logistics. Management has investigated the allegation and has engaged with an employment attorney to defend the lawsuit. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results.
Management is not aware of any other legal proceedings other than matters that arise in the ordinary course of business.
LEASES
Operating Leases
We have operating lease agreements for offices and a warehouse facility in Florida, California and Macau 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
We
entered into an operating lease agreement, effective June 1, 2013, for
In
May 2021 we executed a one-year lease for
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 reach
truck vehicle in the amount of approximately $
| 14 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
Supplemental balance sheet information related to leases as of September 30, 2021 is as follows:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES
| Assets: | ||||
| Operating lease - right-of-use assets | $ | |||
| Finance
leases as a component of Property and equipment, net of accumulated depreciation of $ | ||||
| Liabilities | ||||
| Current | ||||
| Current portion of operating leases | $ | |||
| Current portion of finance leases | ||||
| Noncurrent | ||||
| Operating lease liabilities, net of current portion | $ | |||
| Finance leases, net of current portion |
Supplemental statement of operations information related to leases for the three and six months ended September 30, 2021 is as follows:
SCHEDULE OF LEASE TERM AND DISCOUNT RATE
| Three Months Ended | Six Months Ended | |||||||
| September 30 2021 | September 30 2021 | |||||||
| Operating lease expense as a component of general and administrative expenses | $ | $ | ||||||
| Finance lease cost | ||||||||
| Depreciation of leased assets as a component of depreciation | $ | $ | ||||||
| Interest on lease liabilities as a component of interest expense | $ | $ | ||||||
Supplemental cash flow information related to leases for the six months ended September 30, 2021 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 | $ | |||||||
| Financing cash flow paid for finance leases | $ | |||||||
| Lease term and Discount Rate | ||||||||
| Weighted average remaining lease term (months) | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | |||||||
| Finance leases | % |
Scheduled maturities of operating and finance lease liabilities outstanding as of September 30, 2021 are as follows:
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING AND FINANCE LEASES
| Year | Operating Leases | Finance Leases | ||||||
| 2021, for the remaining 3 months | $ | $ | ||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Total Minimum Future Payments | ||||||||
| Less: Imputed Interest | ||||||||
| Present Value of Lease Liabilities | $ | $ | ||||||
During the six months ended September 30, 2021 and 2020 the Company issued and stock options, respectively at an exercise price of $ to directors as compensation for their service.
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 six months ended September 30, 2021: expected dividend yield of %, risk-free interest rate of %, volatility of % and an expected term of . |
| 15 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
SUMMARY OF STOCK OPTION ACTIVITY
| September 30, 2021 | ||||||||
| Number of Options | Weighted Average Exercise Price | |||||||
| Stock Options: | ||||||||
| Balance at beginning of period | $ | |||||||
| Granted | $ | |||||||
| Exercised | ( | ) | $ | |||||
| Balance at end of period | $ | |||||||
| Options exercisable at end of period | $ | |||||||
SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING
| Range of Exercise Price | Number Outstanding at September 30, 2021 | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable at September 30, 2021 | Weighted Average Exercise Price | |||||||||||||||||
| $ | - $ | $ | $ | |||||||||||||||||||
| $ | - $ | $ | $ | |||||||||||||||||||
| * | ||||||||||||||||||||||
| * |
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 September 30, 2021 as follows:
SCHEDULE OF COMMON STOCK WARRANTS ISSUED AND OUTSTANDING
| Number of Shares | ||||
| Warrants outstanding at March 31, 2021 | ||||
| Common warrants issued | ||||
| Pre-funded warrants issued | ||||
| Warrants outstanding at September 30, 2021 | ||||
As of September 30, 2021, the Company’s warrants by expiration date were as follows:
SCHEDULE OF WARRANTS EXPIRATION
Number of Common Warrants | Number of Pre-funded Warrants | Exercise Price | Expiration Date | |||||||||
| $ | ||||||||||||
| $ | N/A * | |||||||||||
| * | Pre-funded warrants expire on the dates they are exercised. |
All outstanding warrants are fully vested.
NOTE 9 – AUGUST 2021 STOCK REDEMPTION
On
August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts and Treasure
Green, pursuant to which the Company redeemed
Pursuant to the Redemption Agreement, neither Koncepts nor Treasure Green remained shareholders of the Company.
NOTE 10 – AUGUST 2021 PRIVATE PLACEMENT
On
August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional
investors and the strategic investor for private placement of (i) shares of its common stock (the “Shares”)
together with Common Warrants to purchase up to
| 16 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
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 is obligated to use its reasonable best efforts to submit an application to have the Company’s common stock listed on a national exchange by December 31, 2021, and to use its reasonable best efforts to have the Shares and Warrant Shares listed on such national exchange as soon as practicable following the submission of such application.
The
closing of the Private Placement took place on August 10, 2021, when the Shares and Warrants were delivered to the purchasers and funds,
in the amount of approximately $
Stingray Group Inc. (“Stingray” or the “strategic investor”), a leading music, media and technology is part of the group of investors who participated in the Private Placement and have acquired a minority interest in the Company. Stingray is a long-standing business partner with the Company that provides our customers with music content from their extensive library of expertly produced and licensed karaoke content and is now a related party (see Note 12- Related Party Transactions).
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 $
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 $
NOTE 11 - GEOGRAPHICAL INFORMATION
Sales to customers outside of the United States for the three and six months ended September 30, 2021 and 2020 were primarily made by the Macau Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows:
SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| FOR
THE THREE MONTHS ENDED | FOR
THE | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Australia | - | |||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
The geographic area of sales was based on the location where the product is delivered.
| 17 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
NOTE 12 –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 Private Placement and have acquired a minority interest in the Company (see Note 10 – August 2021 Private Placement ).
DUE TO/FROM RELATED PARTIES
On
September 30, 2021 and March 31, 2021, the Company had amounts due to related parties in the amounts of approximately $
On
September 30, 2021 and March 31, 2021, the Company had amounts due from Stingray in the amounts of approximately $
TRADE
The
Company has a music subscription sharing agreement with Stingray. For the three months ended September 30, 2021 and 2020 the Company
received music subscription revenue of approximately $
On
July 30, 2020, the Company and Cosmo reached agreement that Cosmo would no longer be the Company’s Canadian distributor and the
Company became the sole and exclusive distributor of the Company’s products in Canada. As part of the agreement, the companies
executed a Purchase and Sales agreement whereby the Company acquired all of Cosmo’s karaoke inventory for approximately $
The
Company incurred service expenses from SLE. The services from SLE were approximately $
| 18 |
NOTE 13 – RESERVE FOR SALES RETURNS
A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates.
The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets.
Changes in the Company’s reserve for sales returns are presented in the following table:
SCHEDULE OF RESERVE FOR SALES RETURNS
| Six Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Reserve for sales returns at beginning of the year | $ | $ | ||||||
| Provision for estimated sales returns | ||||||||
| Sales returns received | ( | ) | ( | ) | ||||
| Reserve for sales returns at end of the period | $ | $ | ||||||
| 19 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 and 2020
(Unaudited)
NOTE 14 – REFUNDS DUE TO CUSTOMERS
As
of September 30, 2021 and March 31, 2021 the amount of refunds due to customers was approximately $
NOTE 15 - 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 September 30, 2021 and 2020 totaled
approximately $
NOTE 16 - 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 September 30, 2021,
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 September 30, 2021, there were three 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
For
the six months ended September 30, 2021, there were three 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
In
August 2021, the Company secured vendor invoice credits of approximately $
| 20 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this quarterly report. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part II, Item 1A, “Risk Factors “). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements.
Statements included in this quarterly report that do not relate to present or historical conditions are called “forward-looking statements.” Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,” “will,” and similar expressions are intended to identify forward-looking statements. Our ability to predict or project future results or the effect of events on our operating results is inherently uncertain. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved.
Important factors to consider in evaluating such forward-looking statements include, but are not limited to: (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) the effects of adverse general economic conditions, both within the United States and globally, (v) vendor price increases and decreased margins due to competitive pricing during the economic downturn (vi)various competitive market factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section of our Annual Report on Form 10-K/A, this Quarterly Report on 10-Q/A, 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”, “SMC”, “The Singing Machine”) and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc.(“SMC-M”) are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments and musical recordings. The products are sold by SMC to retailers and distributors for resale to consumers.
Our products are sold throughout North America, Europe and Australia primarily through major mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores.
| 21 |
Representative customers include Amazon, Best Buy, BJ’s Wholesale, Costco, Sam’s Club, Target, and Wal-Mart. Our business has historically been subject to seasonal fluctuations causing our revenues to vary from quarter to quarter and between the same periods in different fiscal years. Our products are manufactured for the most part based on the purchase indications of our customers. We are uncertain of how significantly our business would be harmed by a prolonged economic recession, but we anticipate that continued contraction of consumer spending would negatively affect our revenues and profit margins.
Sales of consumer electronics and toy products in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during the second quarter ending September 30 and the third quarter ending December 31. Sales in our second and third quarter, combined, accounted for approximately 86% and 85% of net sales in fiscal 2021 and 2020, respectively.
COVID-19 UPDATE
In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. We continue to experience various degrees of manufacturing cost pressures due to raw material and electronic component shortages as well as inflationary price increases. Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products and adversely affect our operations.
Further, as consumer demand 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.
During Fiscal 2021, we experienced growth in our karaoke, microphone, and toy categories as the pandemic increased demand for home entertainment. For the current fiscal year, demand from consumers and retailers continue to remain strong led by shortages of toys and home entertainment product availability in the market.
We maintain our commitment to protect the health and safety of our employees, customers, and suppliers by continuing our enhanced safety protocols for those on-site at our warehouse facilities. In addition, employees who do not need to be physically present at our corporate office to perform their job responsibilities generally continue to work from home and essential business travel remains the main travel activity. The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities or by us relating to the pandemic. For more information regarding factors and events that may impact our business, results of operations and financial condition as a result of the COVID-19 pandemic, see “Risk Factors” included in Item 1A. “Risk Factors” in our 2021 Annual Report on Form 10-K.
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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 six months ended September 30, 2021 and 2020 as restated:
The Singing Machine Company, Inc. and Subsidiaries
CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For Three Months Ended | For the Six Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of Goods Sold | 80.8 | % | 73.9 | % | 79.1 | % | 73.2 | % | ||||||||
| Gross Profit | 19.2 | % | 26.1 | % | 20.9 | % | 26.8 | % | ||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | 4.2 | % | 6.6 | % | 5.6 | % | 7.0 | % | ||||||||
| General and administrative expenses | 10.2 | % | 8.3 | % | 13.6 | % | 12.7 | % | ||||||||
| Depreciation and amortization | 0.4 | % | 0.3 | % | 0.6 | % | 0.5 | % | ||||||||
| Total Operating Expenses | 14.8 | % | 15.2 | % | 19.8 | % | 20.2 | % | ||||||||
| Income from Operations | 4.4 | % | 10.9 | % | 1.1 | % | 6.6 | % | ||||||||
| Other Income (Expenses) | ||||||||||||||||
| Gain from damaged goods insurance claim | 0.0 | % | 4.2 | % | 0.0 | % | 4.2 | % | ||||||||
| Gain from extinguishment of accounts payable | 1.4 | % | 0.0 | % | 1.0 | % | 1.5 | % | ||||||||
| Interest expense | -0.6 | % | -0.6 | % | -0.9 | % | -0.6 | % | ||||||||
| Financing costs | -0.1 | % | -0.1 | % | -0.1 | % | -0.1 | % | ||||||||
| Total Other Income (expenses), net | 0.7 | % | 3.5 | % | 0.0 | % | 5.0 | % | ||||||||
| Income Before Income Tax Provision | 5.1 | % | 14.4 | % | 1.1 | % | 11.6 | % | ||||||||
| Income Tax Provision | -1.0 | % | -3.7 | % | -0.6 | % | -2.9 | % | ||||||||
| Net Income | 4.1 | % | 10.7 | % | 0.5 | % | 8.7 | % | ||||||||
QUARTER ENDED SEPTEMBER 30, 2021 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2020
NET SALES
Net sales for the quarter ended September 30, 2021 decreased to approximately $17,369,000 from approximately $22,285,000 a decrease of approximately $4,916,000 as compared to the same period ended September 30, 2020. Sales of our Carpool Karaoke The Mic (“CPK”) product decreased by approximately $2,306,000 during the three months ended September 30, 2021 compared to the same period ended September 30, 2020 as the company winds down it’s promotion of the original version of the product and recently launched a new version of the product with several enhanced features for sale during the upcoming holiday season. The remaining decrease in sales was primarily due to delays in receiving goods from the Port of Los Angeles due to the disruption in the global supply chain.
GROSS PROFIT
Gross profit for the quarter ended September 30, 2021 decreased to approximately $3,327,000 from approximately $5,823,000 a decrease of approximately $2,496,000 as compared to the same period in the prior year. The decrease in net sales contributed approximately $1,284,000 to the decrease in gross profit. The remaining decrease was primarily due to the decrease in gross profit margin of approximately 6.9 points on products sold.
Gross profit margin for the three months ended September 30, 2021 was 19.2% compared to 26.1% for the three months ended September 30, 2020. The decrease in CPK product sales which yield substantially more gross profit margin than our traditional product accounted for approximately 4.0 margin points of the 6.9 gross profit margin point decrease with the remaining 2.9 point decrease primarily due to product cost increases in raw materials and a significant increase in freight costs .
OPERATING EXPENSES
For the quarter ended September 30, 2021, total operating expenses decreased to approximately $2,577,000 compared to approximately $3,384,000 from the same period in the prior year. This represents a decrease in total operating expenses of approximately $807,000 from the quarter ended September 30, 2020. The decrease in operating expenses is primarily due to a decrease in selling expenses of $742,000. There was a decrease in royalty expenses of approximately $321,000 associated with the decrease in CPK sales as explained in net sales. Freight expense decreased by approximately $286,000 due to the decrease in net sales and returns. There was a decrease in in commissions of approximately $83,000 commensurate with the decrease in net sales and discretionary marketing expenditures were down by approximately $52,000. The remaining decrease in operating expenses was due to variable general and administrative expenses.
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INCOME FROM OPERATIONS
There was income from operations of approximately $750,000 for the three months ended September 30, 2021 compared to income from operations of approximately $2,439,000 for the three months ended September 30, 2020. The decrease in income from operations of approximately $1,689,000 was primarily due to the decrease in gross profit offset by the reduction in operating expenses as explained above.
OTHER INCOME (EXPENSES)
Other income and (expenses) decreased by approximately $674,000 to approximately $116,000 in other income, net for the three months ended September 30, 2021 compared to approximately $790,000 in other income, net for the same period ended September 30, 2020. During the three months ended September 30, 2021 there was accounts payable forgiveness of approximately $236,000 from one vendor on goods that were damaged in the prior year compared to a recovery of approximately $937,000 in out-of-pocket expenses relating to a prior year damaged goods insurance claim during the three months ended September 30, 2020. The remaining variance in other income, net was primarily due to a decrease in interest expense and amortization of deferred financing costs associated with the financing terms of the Crestmark Facility and IHC Facility and decreased borrowings from the Crestmark Facility.
INCOME TAXES
For the three months ended September 30, 2021 and 2020 the Company recognized an income tax provision of approximately $174,000 and $821,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 20.1% and 25.2%, respectively.
NET INCOME
For the three months ended September 30, 2021 there was net income of approximately $692,000 compared to net income of approximately $2,408,000 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.
SIX MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2020
NET SALES
Net sales for the six months ended September 30, 2021 decreased to approximately $23,435,000 from $25,337,000 a decrease of approximately $1,902,000 as compared to the same period ended September 30, 2020. Sales of our CPK product decreased by approximately $1,488,000 during the six months ended September 30, 2021 compared to the same period ended September 30, 2020 as the Company winds down it’s promotion of the original version of the product and recently launched a new version of the product with several enhanced features for sale during the upcoming holiday season. The remaining decrease in sales was primarily due to delays in receiving goods from the Port of Los Angeles due to the disruption in the global supply chain.
GROSS PROFIT
Gross profit for the six months ended September 30, 2021 decreased to approximately $4,905,000 from approximately $6,785,000 a decrease of approximately $1,880,000 as compared to the same period in the prior year. The decrease in net sales as indicated in Net Sales contributed approximately $509,000 to the decrease in gross profit margin. The remaining decrease was primarily due to the decrease in gross profit margin of approximately 5.9 points on products sold.
Gross profit margin for the six months ended September 30, 2021 was 20.9% compared to 26.8% for the six months ended September 30, 2020. The decrease in CPK product sales which yield substantially more gross profit margin than our traditional product accounted for approximately 2.3 margin points of the 5.9 gross profit margin point decrease. There was a decrease of approximately 2.5 points of gross margin primarily due to product cost increases in raw materials, a significant increase in freight costs with the remaining variance due to the mix of products sold.
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OPERATING EXPENSES
For the six months ended September 30, 2021, total operating expenses decreased to approximately $4,645,000 compared to approximately $5,118,000 from the same period in the prior year. This represents a decrease in total operating expenses of approximately $473,000 from the six months ended September 30, 2020. The decrease in operating expenses is primarily due to a decrease in selling expenses of $463,000. There was a decrease in royalty expenses of approximately $210,000 associated with the decrease in CPK sales as explained in net sales. Freight expense decreased by approximately $251,000 due to the decrease in net sales and returns. There was a decrease in in commissions of approximately $46,000 commensurate with the decrease in net sales. These decreases in selling expenses were offset by an increase in discretionary marketing expenditures of approximately $45,000 with the remaining variance primarily due to variable general and administrative expenses.
INCOME FROM OPERATIONS
There was income from operations of approximately $261,000 for the six months ended September 30, 2021 compared to income from operations of approximately $1,668,000 for the six months ended September 30, 2020. The decrease in income from operations of approximately $1,407,000 was primarily due to the decrease in gross profit offset by a reduction in operating expenses as explained above.
OTHER INCOME (EXPENSES)
Other income and (expenses) decreased by approximately $817,000 to approximately $459,000 in other income, net for the six months ended September 30, 2021 compared to approximately $1,276,000 in other income, net for the same period ended September 30, 2020. During the six months ended September 30, 2021 there were one-time gains of approximately $684,000 primarily due to forgiveness of the loan under the Paycheck Protection Program of approximately $448,000 which included principal and interest and there was an accounts payable forgiveness of approximately $236,000 from one vendor on goods that were damaged in the prior year compared to a recovery of approximately $1,067,000 in out-of-pocket expenses relating to a prior year damaged goods insurance claim during the six months ended September 30, 2020 and accounts payable forgiveness of $390,000 from the vendor who caused the damaged goods problem. The remaining variance in other income, net was primarily due to an increase in interest expense and amortization of deferred financing costs associated with the financing terms of the Crestmark Facility and IHC Facility.
INCOME TAXES
For the six months ended September 30, 2021 and 2020 the Company recorded an income tax provision of approximately $146,000 and an income tax provision of approximately $742,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 20.1% and 25.2%, respectively.
NET INCOME
For the six months ended September 30, 2021 there was net income of approximately $574,000 compared to net income of approximately $2,201,000 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 September 30, 2021, Singing Machine had cash on hand of approximately $3,338,000 as compared to cash on hand of approximately $1,071,000 on September 30, 2020. We had working capital of approximately $8,295,000 as of September 30, 2021. Net cash used in operating activities was approximately $576,000 for the six months ended September 30, 2021, as compared to approximately $674,000 used in operating activities for the same period a year ago. During the six months ended September 30, 2021 there was an increase in accounts receivable of approximately $9,410,000 due to 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 $904,000.
Net cash used in operating activities was approximately $674,000 for the six months ended September 30, 2020. During the six months ended September 30, 2020 there was an increase in accounts receivable of approximately $16,576,000 due to a seasonal increase in sales and a seasonal increase in inventories of approximately $1,072,000 due to receipt of inventory for peak season, and a decrease in refunds due to customers of approximately $686,000 as most of the refunds due to the damaged goods incident from the prior year were refunded to the customer. These increases in cash used in operating activities were offset by an increase in accounts payable of approximately $9,498,000 due to seasonal purchases of product for the peak season and 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. There was a decrease in amounts due from banks of approximately $2,388,000 due to excess cash collected in excess of amounts due on the revolving credit facilities with PNC Bank and Crestmark Bank and a seasonal increase in reserve for sales returns of approximately $499,000.
Net cash used in investing activities for the six months ended September 30, 2021 was approximately $78,000 as compared to approximately $85,000 used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for new products.
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Net cash provided by financing activities for the six months ended September 30, 2021 was approximately $3,595,000 compared to cash provided by financing activities of approximately $1,485,000 for the same period ended of the prior year. We borrowed approximately $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. These financing activities were offset by a payment of $150,000 on the subordinated related party debt, 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 six months ended September 30, 2020 was approximately $1,485,000 compared to cash provided by financing activities of approximately $4,472,000 for the same period ended of the prior year. We borrowed approximately $1,156,000 from our Crestmark Facility and IHC Facility for working capital and received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program. These financing activities were offset by payments made on deferred finance charges associated with the closing of the Crestmark and IHC Facilities of approximately $74,000 with the remaining difference used to pay scheduled installments on installment notes and finance leases.
On June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility with Crestmark and IHC on eligible accounts receivable and inventory which replaced the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020 (See Note 6 – Bank Financing). As of this filing, we have borrowed approximately $990,000 on the IHC Facility, which provides for a maximum loan amount of $2,500,000 on eligible inventory and borrowed approximately $5,600,000 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 $5,900,000 currently available from these two credit facilities.
On May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable to the extent the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness may be reduced if the borrower terminates employees or reduces salaries during the eligible period. The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments until a forgiveness application has been accepted and reviewed by the Small Business Administration (“SBA”), and the SBA provided Crestmark with the loan forgiveness amount. In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety. For the three and six months ended September 30, 2021, a gain of approximately $448,000 (including principal and interest) from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of 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 six months ended September 30, 2020 the gain from damaged goods insurance claim was approximately $937,000 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 six months ended September 30, 2020.
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We believe that current working capital, the availability of cash from our Intercreditor Revolving Credit Facility (See Note 6 – Bank Financing), additional working capital generated by the private placement and cash generated from our operating forecast will be adequate to meet the Company’s liquidity requirements for at least the next twelve months. We believe the Intercreditor Revolving Credit Facility will be adequate to maintain and grow our business during the remaining term of the agreement. If we are unable to comply with the financial covenants defined in the financing agreement and default on the credit facility, it may have a material adverse effect on our ability to meet our financial obligations. As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms.
CRITICAL ACCOUNTING POLICIES
The Company’s interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in the Company’s 2021 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for small reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the filing of our Form 10-K for the year ended March 31, 2021, we identified a material weakness primarily related to the consolidated financial 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:
| ● | The Company implemented a new Enterprise Resource Planning (“ERP”) system in Fiscal 2021 that contributed to the material weaknesses. Management has identified system processing errors specifically related to when returned goods are recognized in inventory and how they are costed. Management is currently working with our third-party systems support group to correct these system errors. | |
| ● | Management plans on strengthening the ERP system training for both finance and warehouse personnel with regards to inventory cutoff and valuation procedures to insure personnel working with inventory are thoroughly familiar with procedures for processing returns. | |
| ● | Management will also assess whether current resources are adequate to maintain proper inventory controls once the system errors have been remediated and additional training is completed and will explore the possibility of additional third-party assistance if necessary. |
(b) Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2021, that materially affected, or were reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 11, 2020, a Complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in a Superior Court of San Bernadino County. The complaint alleges an employee of SMCL committed employment practice violations against a former temporary employee not employed by SMCL. Management has investigated the allegation and has engaged with an employment attorney to defend the lawsuit. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results.
Management is not aware of any other legal proceedings other than matters that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
Not applicable for smaller reporting companies
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | (a) Total number of shares (or units) purchased | (b)
Average price paid per share (or unit) | (c) total number of shares (or units) purchased as part of publicly announced plans or program | (d)
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | ||||||||||||
| July 1, 2021 to July 31, 2021 | 0 | N/A | 0 | 0 | ||||||||||||
| August 1, 2021 to August 31, 2021 | 19,623,155 shares of common stock (1) | $0.365 per share of common stock | 0 | 0 | ||||||||||||
| September 1, 2021 to September 30, 2021 | 0 | N/A | 0 | 0 | ||||||||||||
| Total | 19,623,155 shares of common stock | $ | 7,162,451.58 | 0 | 0 | |||||||||||
(1) All shares were redeemed by the Company from two shareholders in a privately negotiated transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are not currently in default upon any of our senior securities.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE SINGING MACHINE COMPANY, INC.
| Date: November 22, 2021 | ||
| By: | /s/ Gary Atkinson | |
| Gary Atkinson | ||
| Chief Executive Officer | ||
| /s/ Lionel Marquis | ||
| Lionel Marquis | ||
| Chief Financial Officer |
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EXHIBIT 31.1
CERTIFICATIONS
I, Gary Atkinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine Company, Inc. for the period ended September 30, 2021;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Gary Atkinson | |
|
Gary Atkinson Chief Executive Officer (Principal Executive Officer)
Date: November 22, 2021 |
EXHIBIT 31.2
CERTIFICATIONS
I, Lionel Marquis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine Company, Inc. for the period ended September 30, 2021;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Lionel Marquis | |
|
Lionel Marquis Chief Financial Officer (Principal Accounting and Financial Officer)
Date: November 22, 2021 |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Singing Machine Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gary Atkinson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to The Singing Machine Company, Inc. and will be retained by The Singing Machine Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Gary Atkinson | |
Gary Atkinson | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 22, 2021 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Singing Machine Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lionel Marquis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to The Singing Machine Company, Inc. and will be retained by The Singing Machine Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
| /s/ Lionel Marquis | |
| Lionel Marquis | |
| Chief Financial Officer | |
| (Principal Accounting and Financial Officer) | |
| Date: November 22, 2021 |