UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For quarter ended June 30, 2019
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _____ to ______.
Commission File Number0 - 24968
THE SINGING MACHINE COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE | 95-3795478 | |
(State of | (IRS Employer I.D. No.) |
6301 NW 5th Way, STESuite 2900, Fort Lauderdale FL 33309
(Address of principal executive offices)
(954) 596-1000
(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. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 [ ] Non-accelerated filer [ ] Smaller Reporting Company [X] Emerging growth company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]No [X]
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 |
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
INDEX
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2018 | March 31, 2018 | June 30, 2019 | March 31, 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash | $ | 1,581,245 | $ | 813,908 | $ | 577,476 | $ | 211,408 | ||||||||
Accounts receivable, net of allowances of $244,300 and $82,102, respectively | 10,601,844 | 1,066,839 | ||||||||||||||
Accounts receivable, net of allowances of $61,948 and $51,096, respectively | 4,861,961 | 1,769,404 | ||||||||||||||
Due from PNC Bank | - | 6,212 | - | 2,236,779 | ||||||||||||
Accounts receivable related party - Starlight Consumer Electronics USA, Inc. | 7,054 | 7,054 | ||||||||||||||
Accounts receivable related party - Cosmo Communications Canada, Inc | 199,707 | - | ||||||||||||||
Accounts receivable related party - Winglight Pacific, Ltd | 1,465,977 | 1,150,104 | 367,373 | 288,941 | ||||||||||||
Inventories, net | 6,118,569 | 8,536,934 | 8,559,750 | 6,024,311 | ||||||||||||
Prepaid expenses and other current assets | 112,383 | 137,970 | 817,767 | 274,278 | ||||||||||||
Deferred financing costs | 13,333 | 13,333 | 12,222 | 13,333 | ||||||||||||
Total Current Assets | 20,100,112 | 11,732,354 | 15,196,549 | 10,818,454 | ||||||||||||
Property and equipment, net | 582,434 | 450,305 | 623,035 | 522,910 | ||||||||||||
Deferred financing costs, net of current portion | 6,667 | 16,667 | 1,111 | 3,333 | ||||||||||||
Deferred tax assets | 515,136 | 937,137 | 997,097 | 758,366 | ||||||||||||
Operating leases - right of use assets | 978,146 | - | ||||||||||||||
Other non-current assets | 12,039 | 11,523 | 44,296 | 90,082 | ||||||||||||
Total Assets | $ | 21,216,388 | $ | 13,147,986 | $ | 17,840,234 | $ | 12,193,145 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 3,359,610 | $ | 1,614,748 | $ | 5,944,781 | $ | 842,708 | ||||||||
Accrued expenses | 1,738,631 | 701,932 | 632,514 | 950,773 | ||||||||||||
Current portion of bank term note payable | 250,000 | 500,000 | - | 125,000 | ||||||||||||
Due to related party - Starlight Electronics Co., Ltd | 468,256 | 210,756 | 100,499 | - | ||||||||||||
Due to related party - Starlight R&D, Ltd. | 110,846 | 113,116 | ||||||||||||||
Due to related party - Merrygain Holding Co., Ltd. | 128,290 | 89,803 | ||||||||||||||
Revolving line of credit | 2,931,118 | - | 627,007 | - | ||||||||||||
Customer deposits | 203,175 | - | ||||||||||||||
Refunds due to customers | - | 445,484 | 300,057 | 31,075 | ||||||||||||
Reserve for sales returns | 2,050,486 | 726,000 | 447,677 | 896,154 | ||||||||||||
Current portion of capital leases | 14,282 | - | ||||||||||||||
Current portion of subordinated related party debt - Starlight Marketing Development, Ltd. | 815,367 | 689,792 | ||||||||||||||
Current portion of finance leases | 14,547 | 14,414 | ||||||||||||||
Current portion of operating lease liabilities | 600,793 | - | ||||||||||||||
Subordinated related party debt - Starlight Marketing Development, Ltd. | 815,367 | 815,367 | ||||||||||||||
Total Current Liabilities | 11,866,886 | 5,091,631 | 9,686,417 | 3,675,491 | ||||||||||||
Bank term note payable, net of current portion | - | 125,000 | ||||||||||||||
Capital leases, net of current portion | 21,152 | - | ||||||||||||||
Subordinated related party debt - Starlight Marketing Development, Ltd., net of current portion | - | 125,575 | ||||||||||||||
Finance leases, net of current portion | 13,817 | 17,499 | ||||||||||||||
Operating lease liabilities, net of current portion | 489,724 | - | ||||||||||||||
Total Liabilities | 11,888,038 | 5,342,206 | 10,189,958 | 3,692,990 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
Shareholders’ Equity | ||||||||||||||||
Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding | - | - | - | - | ||||||||||||
Common stock, Class A, $0.01 par value; 100,000 shares authorized; no shares issued and outstanding | - | - | - | - | ||||||||||||
Common stock, Class B, $0.01 par value; 100,000,000 shares authorized; 38,384,753 and 38,282,028 shares issued and outstanding, respectively | 383,848 | 382,820 | ||||||||||||||
Common stock, Class B, $0.01 par value; 100,000,000 shares authorized; 38,497,643 and 38,464,753 shares issued and outstanding, respectively | 384,977 | 384,648 | ||||||||||||||
Additional paid-in capital | 19,672,314 | 19,624,063 | 19,704,436 | 19,687,263 | ||||||||||||
Subscriptions receivable | - | (2,200 | ) | |||||||||||||
Accumulated deficit | (10,727,812 | ) | (12,201,103 | ) | (12,439,137 | ) | (11,569,556 | ) | ||||||||
Total Shareholders’ Equity | 9,328,350 | 7,805,780 | 7,650,276 | 8,500,155 | ||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 21,216,388 | $ | 13,147,986 | $ | 17,840,234 | $ | 12,193,145 |
See notes to the condensed consolidated financial statements
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended | ||||||||
June 30, 2019 | June 30, 2018 | |||||||
Net Sales | $ | 4,809,040 | $ | 1,836,511 | ||||
Cost of Goods Sold | 3,821,334 | 1,445,028 | ||||||
Gross Profit | 987,706 | 391,483 | ||||||
Operating Expenses | ||||||||
Selling expenses | 659,293 | 446,700 | ||||||
General and administrative expenses | 1,371,056 | 1,208,644 | ||||||
Depreciation | 59,461 | 67,571 | ||||||
Total Operating Expenses | 2,089,810 | 1,722,915 | ||||||
Loss from Operations | (1,102,104 | ) | (1,331,432 | ) | ||||
Other Expenses | - | |||||||
Interest expense | (2,875 | ) | (23,385 | ) | ||||
Finance costs | (3,333 | ) | (3,334 | ) | ||||
Total Other Expenses | (6,208 | ) | (26,719 | ) | ||||
Loss Before Income Tax Benefit | (1,108,312 | ) | (1,358,151 | ) | ||||
Income Tax Benefit | 238,731 | 324,000 | ||||||
Net Loss | $ | (869,581 | ) | $ | (1,034,151 | ) | ||
Net Loss per Common Share | ||||||||
Basic & Diluted | $ | (0.02 | ) | $ | (0.03 | ) | ||
Weighted Average Common and Common Equivalent Shares: | ||||||||
Basic & Diluted | 38,469,813 | 38,282,028 |
See notes to the condensed consolidated financial statements
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOMECASH FLOWS
(Unaudited)
For the Quarter Ended | For the Nine Months Ended | |||||||||||||||
December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||
Net Sales | $ | 19,452,450 | $ | 21,461,835 | $ | 45,593,906 | $ | 58,203,731 | ||||||||
Cost of Goods Sold | 13,826,176 | 15,464,273 | 34,369,467 | 43,389,465 | ||||||||||||
Gross Profit | 5,626,274 | 5,997,562 | 11,224,439 | 14,814,266 | ||||||||||||
Operating Expenses | ||||||||||||||||
Selling expenses | 2,236,777 | 1,971,728 | 4,698,141 | 4,816,931 | ||||||||||||
General and administrative expenses | 1,629,054 | 1,739,664 | 4,341,175 | 4,784,167 | ||||||||||||
Bad debt expense (recovery), net | (104,244 | ) | (164,680 | ) | (155,596 | ) | 2,157,561 | |||||||||
Depreciation | 64,357 | 66,623 | 200,138 | 153,225 | ||||||||||||
Total Operating Expenses | 3,825,944 | 3,613,335 | 9,083,858 | 11,911,884 | ||||||||||||
Income from Operations | 1,800,330 | 2,384,227 | 2,140,581 | 2,902,382 | ||||||||||||
Other Expenses | - | |||||||||||||||
Interest expense | (139,729 | ) | (145,922 | ) | (235,290 | ) | (241,503 | ) | ||||||||
Finance costs | (3,333 | ) | (3,333 | ) | (10,000 | ) | (28,272 | ) | ||||||||
Total Other Expenses | (143,062 | ) | (149,255 | ) | (245,290 | ) | (269,775 | ) | ||||||||
Income Before Income Tax Provision | 1,657,268 | 2,234,972 | 1,895,291 | 2,632,607 | ||||||||||||
Income Tax Provision | (367,255 | ) | (1,080,142 | ) | (422,000 | ) | (1,220,511 | ) | ||||||||
Net Income | $ | 1,290,013 | $ | 1,154,830 | $ | 1,473,291 | $ | 1,412,096 | ||||||||
Net Income per Common Share | ||||||||||||||||
Basic | $ | 0.03 | $ | 0.03 | $ | 0.04 | $ | 0.04 | ||||||||
Diluted | $ | 0.03 | $ | 0.03 | $ | 0.04 | $ | 0.04 | ||||||||
Weighted Average Common and Common Equivalent Shares: | ||||||||||||||||
Basic | 38,384,753 | 38,282,028 | 38,338,599 | 38,271,946 | ||||||||||||
Diluted | 39,459,369 | 39,137,161 | 39,413,214 | 39,127,079 |
For the Three Months Ended | ||||||||
June 30, 2019 | June 30, 2018 | |||||||
Cash flows from operating activities | ||||||||
Net Loss | $ | (869,581 | ) | $ | (1,034,151 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 59,461 | 67,571 | ||||||
Amortization of deferred financing costs | 3,333 | 3,334 | ||||||
Change in inventory reserve | - | (81,780 | ) | |||||
Change in allowance for bad debts | 10,852 | (18,629 | ) | |||||
Stock based compensation | 17,502 | 11,278 | ||||||
Change in net deferred tax assets | (238,731 | ) | (323,999 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,103,409 | ) | (127,637 | ) | ||||
Due from PNC Bank | 2,236,779 | 6,212 | ||||||
Accounts receivable - related parties | (78,432 | ) | 856,453 | |||||
Inventories | (2,535,439 | ) | (216,216 | ) | ||||
Prepaid expenses and other current assets | (543,489 | ) | (135,019 | ) | ||||
Other non-current assets | 45,786 | (516 | ) | |||||
Accounts payable | 5,102,073 | 72,907 | ||||||
Accrued expenses | (192,221 | ) | 63,103 | |||||
Due to related parties | 100,499 | 133,454 | ||||||
Customer deposits | 203,175 | - | ||||||
Refunds due to customers | 268,982 | (189,330 | ) | |||||
Reserve for sales returns | (448,477 | ) | (588,464 | ) | ||||
Operating lease liabilities, net of operating leases - right of use assets | (13,667 | ) | - | |||||
Net cash provided by (used in) operating activities | 24,996 | (1,501,429 | ) | |||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (159,586 | ) | (282,240 | ) | ||||
Net cash used in investing activities | (159,586 | ) | (282,240 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from revolving line of credit | 627,007 | 1,089,822 | ||||||
Payment of bank term note | (125,000 | ) | - | |||||
Proceeds from subscription receivable | 2,200 | - | ||||||
Payments on finance leases | (3,549 | ) | (2,294 | ) | ||||
Net cash provided by financing activities | 500,658 | 1,087,528 | ||||||
Net change in cash | 366,068 | (696,141 | ) | |||||
Cash at beginning of period | 211,408 | 813,908 | ||||||
Cash at end of period | $ | 577,476 | $ | 117,767 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 1,701 | $ | 194,927 | ||||
Equipment purchased under capital lease | $ | - | $ | 43,526 | ||||
Operating leases - right of use assets initial adoption | $ | 1,108,330 | $ | - | ||||
Operating lease liabilities - initial adoption | $ | 1,234,368 | $ | - |
See notes to the condensed consolidated financial statements
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY
For the three months ended June 30, 2019 and 2018
(Unaudited)
For the Nine Months Ended | ||||||||
December 31, 2018 | December 31, 2017 | |||||||
Cash flows from operating activities | ||||||||
Net Income | $ | 1,473,291 | $ | 1,412,096 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation | 200,138 | 153,225 | ||||||
Amortization of deferred financing costs | 10,000 | 28,272 | ||||||
Change in inventory reserve | (56,780 | ) | (125,000 | ) | ||||
Change in allowance for bad debts | 162,198 | 2,166,677 | ||||||
Stock based compensation | 42,879 | 163,581 | ||||||
Change in net deferred tax assets | 422,001 | 576,461 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (9,697,203 | ) | (12,844,066 | ) | ||||
Due from PNC Bank | 6,212 | 242,859 | ||||||
Accounts receivable - related parties | (515,580 | ) | (1,213,269 | ) | ||||
Inventories | 2,475,145 | (3,599,858 | ) | |||||
Prepaid expenses and other current assets | 25,587 | 44,483 | ||||||
Other non-current assets | (516 | ) | - | |||||
Accounts payable | 1,744,862 | 3,005,248 | ||||||
Accrued expenses | 1,036,699 | 2,121,919 | ||||||
Due to related parties | 293,717 | 285,620 | ||||||
Refunds due to customers | (445,484 | ) | (38,460 | ) | ||||
Reserve for sales returns | 1,324,486 | 2,987,357 | ||||||
Net cash used in operating activities | (1,498,348 | ) | (4,632,855 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (288,740 | ) | (255,776 | ) | ||||
Net cash used in investing activities | (288,740 | ) | (255,776 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from revolving line of credit | 2,931,118 | 3,465,332 | ||||||
Proceeds from bank term note | - | 1,000,000 | ||||||
Payment of bank term note | (375,000 | ) | (250,000 | ) | ||||
Proceeds from exercise of stock options | 6,400 | - | ||||||
Payment of deferred financing costs | - | (40,000 | ) | |||||
Payment on subordinated related party debt | - | (1,109,064 | ) | |||||
Payments on capital leases | (8,093 | ) | - | |||||
Net cash provided by financing activities | 2,554,425 | 3,066,268 | ||||||
Net change in cash | 767,337 | (1,822,363 | ) | |||||
Cash at beginning of period | 813,908 | 2,305,439 | ||||||
Cash at end of period | $ | 1,581,245 | $ | 483,076 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 215,501 | $ | 222,649 | ||||
Cash paid for income taxes | $ | - | $ | 30,000 | ||||
Equipment purchased under capital lease | $ | 43,527 | $ | - |
Preferred Stock | Common Stock | Additional Paid in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Total | |||||||||||||||||||||||||
Balance at March 31, 2019 | - | $ | - | 38,464,753 | $ | 384,648 | $ | 19,687,263 | $ | (2,200 | ) | $ | (11,569,556 | ) | $ | 8,500,155 | ||||||||||||||||
Net loss | (869,581 | ) | (869,581 | ) | ||||||||||||||||||||||||||||
Employee compensation-stock option | 5,002 | 5,002 | ||||||||||||||||||||||||||||||
Collection of subscription receivable | 2,200 | 2,200 | ||||||||||||||||||||||||||||||
Issuance of common stock - directors | 32,890 | 329 | 12,171 | 12,500 | ||||||||||||||||||||||||||||
Balance at June 30, 2019 | - | $ | - | 38,497,643 | $ | 384,977 | $ | 19,704,436 | $ | - | $ | (12,439,137 | ) | $ | 7,650,276 | |||||||||||||||||
Balance at March 31, 2018 | - | $ | - | 38,282,028 | $ | 382,820 | $ | 19,624,063 | $ | - | (12,201,103 | ) | 7,805,780 | |||||||||||||||||||
Net loss | (1,034,151 | ) | (1,034,151 | ) | ||||||||||||||||||||||||||||
Employee compensation-stock option | 11,278 | 11,278 | ||||||||||||||||||||||||||||||
Balance at June 30, 2018 | - | $ | - | 38,282,028 | $ | 382,820 | $ | 19,635,341 | $ | - | $ | (13,235,254 | ) | $ | 6,782,907 |
See notes to the condensed consolidated financial statementsstatements.
6 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018June 30, 2019
(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
The Company reported net income of approximately $1,290,000 and $1,473,000 for the three and nine months ended December 31, 2018, respectively as compared to net income of approximately $1,155,000 and $1,412,000 for the three and nine months ended December 31, 2017. The Company’s net income and cash flow continue to be affected by the Toys R Us bankruptcy as net sales decreased to approximately $19,452,000 and $45,594,000 for the three and nine months ended December 31, 2018, respectively from approximately $21,462,000 and $58,204,000 for the three and nine months ended December 31, 2017, respectively. Lost sales from Toys R Us of approximately $9,986,000 and a decrease in sales to one major customer of approximately $3,419,000 due to the elimination of one promotional product accounted for most of the decrease in sales for the nine months ended December 31, 2018. To assist with the Company’s cash requirements during fiscal 2019 our parent company agreed to continue to delay payment of related party trade debt as well as payments due on subordinated debt until the end of peak season when liquidity improves. Our parent company suspended a portion of monthly service and development fees totaling approximately $99,000 for six months commencing July 1, 2018 through December 31, 2018. Management believes that it has adequate cash available on its revolving credit facility to meet all obligations for the next twelve months. To assist the Company in remaining compliant with its revolving credit facility covenants, PNC Bank issued a third amendment and waiver in August 2018 to the Revolving Credit Facility and the Security Agreement in effect for fiscal 2019 amending the fixed charge coverage ratio and annual capital expenditure limits. While management continues to assess the long term effect of the Toys R Us bankruptcy, management is confident that the temporary suspension of payments on related party debt, suspension of service and development fees for six months, availability of cash from our revolving credit facility and significant efforts to reduce inventory levels during the current fiscal year will be adequate to meet the company’s liquidity requirements for the next twelve months.
NOTE 3-SUMMARYSUMMARY OF SIGNIFICANT 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 and nine months ended December 31,June 30, 2019 and 2018 and 2017 have been prepared in accordance with generally accepted accounting principles 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 accounting principles generally accepted in the United States for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of March 31, 20182019 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, 2018.2019. 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.
COLLECTIBILITY 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.
The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018
FOREIGN CURRENCY TRANSLATION
The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiary are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are recorded in the condensed consolidated statement of operations and translations are recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented.
Concentration of Credit Risk
At times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at December 31, 2018June 30, 2019 and March 31, 20182019 are approximately $1,596,000$577,000 and $54,000,$211,000, respectively.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable.
7 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
INVENTORY
Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs (See ADOPTION OF NEW ACCOUNTING STANDARDS).programs. As of December 31, 2018June 30, 2019 and March 31, 20182019 the estimated amounts for these future inventory returns were approximately $1,348,000$295,000 and $479,000,$599,000, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of December 31, 2018June 30, 2019 and March 31, 20182019 the Company had inventory reserves of approximately $223,000 and $280,000, respectively,$254,000 for estimated excess and obsolete inventory.
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.”
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We follow FASB ASC 825, Financial Instruments, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, refunds due to customers and due to/from related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the bank term note payable, the subordinated debt to Starlight Marketing Development, Ltd. (related party) and capitalfinance leases approximate fair value due to the relatively short period to maturity and related interest accrued at a rate similar to market rates. The carrying amountsamount 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” (See ADOPTION OF NEW ACCOUNTING STANDARDS). The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). Revenue is recognized when the goods are delivered and control of the goods sold is transferred to the customer. The Company’s contracts have no financing elements, payment terms are less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods.
Costs incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods which are included in general and administrative expenses, in-bound freight costs which are included in the cost of goods sold and accrued sales representative commissions which are included in selling expenses in the accompanying condensed consolidated statements of income. operations.
The Company disaggregates revenues by 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 10)9).
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018
The Company generally does not allow products to be returned other than return allowance programs for goods returned to the customer for various reasons and accordingly records a sales return reserve based on historic return amounts, specific events as identified and management estimates.
The Company’s reserve for sales returns were approximately $2,050,000$448,000 and $726,000$896,000 as of December, 2018June 30, 2019 and March 31, 2019, respectively.
8 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Revenue is derived from four different major product lines. Disaggregated approximate revenue from these product lines for the three months ended June 30, 2019 and 2018 respectively.consisted of the following:
Revenue by Product Line | ||||||||
Three Months Ended | ||||||||
Product Line | June 30, 2019 | June 30, 2018 | ||||||
Classic Karaoke Machines | $ | 4,156,000 | $ | 1,011,000 | ||||
Download Karaoke Machines | 141,000 | 211,000 | ||||||
SMC Kids Toys | 140,000 | 127,000 | ||||||
Music and Accessories | 372,000 | 488,000 | ||||||
Total Net Sales | $ | 4,809,000 | $ | 1,837,000 |
SHIPPING AND HANDLING COSTS
Shipping and handling costs are performed by both the Company and third partythird-party logistics companies. 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. These expenses are classified as a component of selling expenses in the accompanying condensed consolidated statements of operations.
STOCK BASED COMPENSATION
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 incomeoperations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense for the three months ended June 30, 2019 and 2018 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the three months ended June 30, 2019 and 2018, the stock option expense was approximately $5,000 and $11,000, respectively.
ADVERTISING
Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicatedindicate that the customer must spend the cooperative advertising fund upon the occurrence of mutually agreed events. The percentage of the cooperative advertising allowance ranges from 1% to 13% of the purchase. The customers must advertise the Company’s products in the customer’s catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the three months ended December 31,June 30, 2019 and 2018 and 2017 was approximately $1,328,000$361,000 and $1,026,000, respectively. Advertising expense for the nine months ended December 31, 2018 and 2017 was approximately $2,877,000 and $2,650,000,$269,000, respectively. As of December 31, 2018June 30, 2019 and March 31, 2018,2019 there was an accrual for cooperative advertising allowances of approximately $1,019,000$184,000 and $207,000,$185,000, respectively. These amounts were a component of accrued expenses in the condensed consolidated balance sheets.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the condensed consolidated statements of income. For the three months ended December 31,June 30, 2019 and 2018, and 2017, these amounts totaled approximately $27,000$5,000 and $40,000, respectively. For the nine months ended December 31, 2018 and 2017, these amounts totaled approximately $64,000 and $138,000,$16,000, respectively.
INCOME TAXES
The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.
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. On December 22, 2017For the Tax Act was enacted which reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Actthree months ended June 30, 2019 and 2018 we have estimated that our effective tax rate for the fiscal year endingto be approximately 21.5% and 23.9%, respectively. As of June 30, 2019 and March 31, 2019, will be approximately 22% The effective tax rate for the full year ended March 31, 2018 was approximately 28%. As of December 31, 2018 and March 31, 2018, The Singing Machine had gross deferred tax assets of approximately $515,000$997,000 and $937,000,$758,000, respectively. The Company recorded an income tax provisionbenefit of approximately $367,000$239,000 and $1,080,000$324,000 for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively. The Company recorded an income tax provision of approximately $422,000 and $1,221,000 for the nine months ended December 31, 2018 and 2017, respectively.
9 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018June 30, 2019
(Unaudited)
The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of December 31, 2018,June 30, 2019, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions.
As of December 31, 2018, the Company is subject to U.S. Federal income tax examinations for the tax years ended March 31, 2016 and subsequent years.
COMPUTATION OF EARNINGSLOSS PER COMMON SHARE
IncomeLoss per common share is computed by dividing the net incomeloss by the weighted average of common shares outstanding during the period. As of December 31,June 30, 2019 and 2018 and 2017 total potential dilutive shares from common stock options amounted to approximately 2,350,0002,310,000 and 2,450,0002,430,000 shares, respectively. These shares were not included in the computation of diluted earnings per share for the three and nine months ended December 31,June 30, 2019 and June 30, 2018 and 2017.because their effect was anti-dilutive.
ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU 2014-09, Topic 606, “Revenue from Contracts with Customers”, (“ASC 606”) which outlines a single comprehensive model for companies to use when accounting for revenue arising from contracts with customers. The core principle of the revenue recognition model is that an entity recognizes revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company adopted ASC 606 on April 1, 2018 using the full retrospective approach with the application of the standard reflected in the prior year reporting period. After examining the Company’s performance obligations in its contracts, it was determined that there was no effect to the company’s retained earnings or net income during the periods reported. Management determined that most of the Company’s customers (other than distributors) have “customer acceptance rights” in that customers are allowed to return defective goods within a specified period after shipment (generally between 6 and 9 months) after goods have been shipped. Prior to adoption of ASC 606, the Company recognized a liability for the estimated net amount of sales less the estimated net realizable value of expected returned goods at the time of sale. The liability for estimated return goods was approximately $247,000 at March 31, 2018 and was reported in warranty provisions on the consolidated balance sheet. The adoption of ASC 606 required that the net realizable value of estimated return goods be disaggregated from estimated sales return reserves and reported as a current asset and the amount of estimated sales amount to be credited to customers be recognized in current liabilities on the consolidated balance sheet. As a result of the adoption of ASC 606 the net realizable value of estimated returned goods of approximately $479,000 was reclassified to inventory on April 1, 2018 on the condensed consolidated balance sheet. Estimated sales amounts to be credited to customers due to inventory warranty and allowance programs of approximately $726,000 was reported in reserve for sales returns on the consolidated balance sheet on April 1, 2018. (Refer to Note 4 - INVENTORY and Note 12 - RESERVE FOR SALES RETURNS)
The following table shows the financial line items that were affected by the adoption of ASC 606:
As reported at | ASC 606 | Under ASC 606 | ||||||||||
March 31, 2018 | Adjustment | April 1, 2018 | ||||||||||
CONSOLIDATED BALANCE SHEET - MARCH 31, 2018 | ||||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Inventories, net | $ | 8,057,774 | $ | 479,160 | $ | 8,536,934 | ||||||
Liabilities | ||||||||||||
Current Liabilities | ||||||||||||
Reserve for sales returns | $ | - | $ | 726,000 | $ | 726,000 | ||||||
Warranty provisions | $ | 246,840 | $ | (246,840 | ) | $ | - |
As reported at | ASC 606 | Under ASC 606 | ||||||||||
December 31, 2017 | Adjustment | December 31, 2017 | ||||||||||
CONSOLIDATED STATEMENT OF CASH FLOWS - DECEMBER 31, 2017 | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Inventories | $ | (1,758,501 | ) | $ | (1,841,357 | ) | $ | (3,599,858 | ) | |||
Reserve for sales returns | $ | - | $ | 2,987,357 | $ | 2,987,357 | ||||||
Warranty provisions | $ | 1,146,000 | $ | (1,146,000 | ) | $ | - |
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”.The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new 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 will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018 On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 6– LEASES).
The new standardCompany 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 effectiveequal 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 usits finance leases.
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which supersedes most of the prior accounting guidance on April 1, 2019nonemployee share-based payments, and instead aligns it with early adoption permitted.existing guidance on employee share-based payments. We expect to adoptadopted the new standard on its effective date. A modified retrospective approach is required, applying the newApril 1, 2019. The adoption of this standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application.
We expect that this statement willdid not have a material effect on ourthe Company’s condensed consolidated financial statements. While we continue to assess all
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 are effective for fiscal years beginning after April 1, 2020 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of adoption, we currently believe the most significant affects relate to the recognition of new ROU assets and lease liabilitiesthis updated guidance on our balance sheet for our operating leasesconsolidated financial statements and providing significant new disclosures about our leasing activities.related disclosures. Management does not believe that the adoption of ASU 2016-03 will have any material effect on the Company’s financial statements.
NOTE 4-3 - INVENTORIES, NET
Inventories are comprised of the following components:
December 31, | March 31, | |||||||||||||||
2018 | 2018 | June 30, 2019 | March 31, 2019 | |||||||||||||
Finished Goods | $ | 4,935,458 | $ | 8,238,227 | $ | 7,294,603 | $ | 5,679,245 | ||||||||
Estimated Return Goods | 1,347,507 | 479,160 | ||||||||||||||
Inventory in Transit | 58,824 | 99,547 | 1,223,874 | - | ||||||||||||
Estimated Cost of Future Returns | 295,273 | 599,066 | ||||||||||||||
Subtotal | 8,813,750 | 6,278,311 | ||||||||||||||
Less: Inventory Reserve | 223,220 | 280,000 | 254,000 | 254,000 | ||||||||||||
Inventories, net | $ | 6,118,569 | $ | 8,536,934 | $ | 8,559,750 | $ | 6,024,311 |
10 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
NOTE 5 -4 – PROPERTY AND EQUIPMENT NET
A summary of property and equipment is as follows:
USEFUL | December 31, | March 31, | ||||||||||||||||||||
LIFE | 2018 | 2018 | USEFUL LIFE | June 30, 2019 | March 31, 2019 | |||||||||||||||||
Computer and office equipment | 5 years | $ | 286,928 | $ | 286,928 | 5 years | $ | 140,575 | $ | 140,575 | ||||||||||||
Furniture and fixtures | 7 years | 98,410 | 98,410 | 7 years | 98,410 | 98,410 | ||||||||||||||||
Warehouse equipment | 7 years | 209,419 | 238,471 | 7 years | 195,401 | 209,419 | ||||||||||||||||
Molds and tooling | 3-5 years | 3,077,646 | 2,788,905 | 3-5 years | 1,626,422 | 1,466,837 | ||||||||||||||||
3,672,403 | 3,412,714 | 2,060,808 | 1,915,241 | |||||||||||||||||||
Accumulated depreciation | (3,089,969 | ) | (2,962,409 | ) | ||||||||||||||||||
Property and equipment, net | $ | 582,434 | $ | 450,305 | ||||||||||||||||||
Less: Accumulated depreciation | 1,437,773 | 1,392,331 | ||||||||||||||||||||
$ | 623,035 | $ | 522,910 |
Depreciation expense for the three months ended December 31,June 30, 2019 and June 30, 2018 and December 31, 2017 was approximately $64,000$59,000 and $67,000, respectively. Depreciation expense for the nine months ended December 31, 2018 and December 31, 2017 was approximately $200,000 and $153,000$68,000, respectively.
NOTE 65 – BANK FINANCING
Revolving Credit Facility
On June 22, 2017, the Company renewed the existing revolving credit facility (the “Revolving Credit Facility”) with PNC Bank, National Association (“PNC”) for an additional three years expiring on July 15, 2020. The outstanding loan balance cannot exceed $15,000,000 during peak selling season between August 1 and December 31 (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and is reduced to a maximum of $7,500,000 between January 1 and July 31. At December 31, 2018June 30, 2019 and March 31, 2018, the2019, there was an outstanding balance of approximately $627,000 and $0 on the Revolving Credit Facility. In connection with the Company’s Revolving Credit Facility, was approximately $2,931,000 and $0, respectively.cash collected by PNC Bank on trade accounts receivable may exceed amounts borrowed on the revolving credit facility from time to time. As of DecemberJune 30, 2019 and March 31, 20182019, PNC Bank owed the Company $0 and approximately $2,237,000 respectively, which represented cash received by PNC Bank on accounts receivable in excess of amounts borrowed against the revolving credit facility. As of June 30, 2019, there was approximately $4,435,000$6,873,000 available to borrow on the Revolving Credit Facility. Usage under the Revolving Credit Facility shall not exceed the sum of the following (the “Borrowing Base”):
● | Up to 85% of the company’s eligible domestic and Canadian accounts receivable and up to 90% of eligible foreign credit insured accounts aged less than 60 days past due (not to exceed 90 days from invoice date, cross aged on the basis of 50% or more past due with certain specific accounts qualifying for up to 120 days from invoice date not to exceed 30 days from the due date; plus | |
● | Up to the lesser of (a) 60% of the cost of eligible inventory or (b) 85% of net orderly liquidation value percentage of eligible inventory (annual inventory appraisals required); minus | |
● | Applicable reserves including a dilution reserve equal to 100% of the Company’s advertising and return accrual reserves. Dilution reserve not to exceed availability generated from eligible accounts receivable. |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018
The Revolving Credit Facility includes the following sub-limits:
● | Letters of Credit to be issued limited to $3,000,000. | |
● | Inventory availability limited to $5,000,000. | |
● | $500,000 eligible in-transit inventory sublimit within the $5,000,000 total inventory. | |
● | Mandatory pay-down to $1,000,000 (excluding letters of credit) for any 30 consecutive days between February 1 and April 30. |
The Revolving Credit Facility must comply with the following quarterly financial covenants to avoid default:
On August 2, 2018, PNC issued a third amendment and waiver (“third amendment”) to the Revolving Credit Facility, the Security Agreement in effect for fiscal 2019. The third amendment waived existing violations of the fixed charge coverage ratio of 1.1:1 and increased maximum capital expenditures from $300,000 to $375,000 per fiscal year. The Company incurred an amendment fee of $10,000 upon execution of the agreement.
The Revolving Credit Facility must comply with the following quarterly financial covenants to avoid default:
● | Fixed charge coverage ratio test of 1.1:1 times measured on a rolling four quarter basis, defined as 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. | |
● | Capital expenditures limited to $375,000 per year. |
11 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Interest on the Revolving Line of Credit is accrued at .75% per annum over PNC’s announced prime rate with an option for the Company to elect the 1, 2 or 3 month fully absorbed PNC LIBOR Rate plus 2.75% per annum with a default rate of 2% over the applicable rate. There is an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which will be calculated on the basis of a 360 day year for the actual number of days elapsed and will be payable quarterly in arrears. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $100,000$1,000 and $114,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the nine months ended December 31, 2018 and 2017, the Company incurred interest expense of approximately $155,000 and $188,000$5,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the three months ended December 31,June 30, 2019 and 2018, and 2017, the Company incurred an unused facility fee of approximately $8,000 and $6,000, respectively on the unused portion of the Revolving Credit Facility. During the nine months ended December 31, 2018 and 2017, the Company incurred an unused facility fee of approximately $23,000 and $20,000 respectively$7,000 on the unused portion of the Revolving Credit Facility.
The Revolving Line of Credit is secured by first priority security interests in all of the named borrowers’ tangible and intangible assets as well as first priority security interests of 100% of member or ownership interests of any of its domestic existing or newly formed subsidiaries and first priority lien on up to 65% of the borrowers’ foreign subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility is also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $815,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and are being amortized over the term of the agreement. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred amortization expense of approximately $3,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility. During the nine months ended December 31, 2018 and 2017, the Company incurred amortization expense of approximately $10,000 and $28,000, respectively.
Term Note Payable
In connection with the amendments above and in addition to the maximum availability limits on the Revolving Line of Credit, the agreement also includes a two-year term note (“Term Note”) in the amount of $1,000,000 the proceeds of which were used to pay down a portion of the subordinated related party debt of approximately $1,924,000 in June 2017. The term note bearsbore interest at 1.75% per annum over PNC’s announced prime rate or 1, 2, or 3 month PNC LIBOR Rate plus 3.75%. The term note iswas payable in quarterly installments of $125,000 plus accrued interest. The outstanding balance on the Term Note was $250,000$0 and $625,000$125,000 as of December 31, 2018June 30, 2019 and March 31, 2018,2019, respectively. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $3,000$0 and $10,000, respectively. During the nine months ended December 31, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $17,000$9,000, respectively.
The subordination agreement has beenwas amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision has also been made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum commencing September 30, 2017. Payments of $123,000 are only permitted upon receipt of the Company’s quarterly compliance certificate; the Company having met the mandatory pay-down of the Revolving Credit Facility to $1,000,000 and average excess availability for the prior 30 days (after subtraction of third party trade payables 30 days or more past due) of no less than $1,000,000 after giving effect to the payment. As part of the Conditions to Installment Payment of the subordinated debt, payments not made under this note that cannot be made as a result of the foregoing prohibition shall not be deemed an Event of Default and can be made as soon as the Company is able to demonstrate that it meets the liquidity requirements defined above. TheQuarterly installment paymentpayments of $123,000 due on December 31,the last day of each fiscal quarter have not been made since September 2017 March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 were not made due to the Toys R Us bankruptcy’s unfavorable effect on cash flow.Company not meeting these requirements. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $4,000$2,000 and $12,000,$9,000, respectively on the related party subordinated debt. During the nine months ended December 31, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $26,000 respectively on the related party subordinated debt.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018
NOTE 76 - COMMITMENTS AND CONTINGENCIES
LEASES
Operating Leases
We have operating lease agreements for offices and a warehouse facility in Florida, California and Hong Kong expiring in various years through 2024.
We entered into an operating lease agreement, effective October 1, 2017, for the corporate headquarters located in Fort Lauderdale, Florida where we lease approximately 6,500 square feet of office space. The lease expires on March 31, 2024. The base rent payment is approximately $8,800 per month, subject to annual adjustments.
We entered into an operating lease agreement, effective June 1, 2013, for 86,000 square feet of warehouse space in Ontario, California for our logistics operations. The lease expires on August 31, 2020 (original lease term of 87 months). The base rent payment is approximately $43,700 per month for the remaining term of the lease. The lease provides for a renewal option to extend the lease term for 5 years at the fair market value at the time of renewal.
We entered into an operating lease agreement, effective May 1, 2018, for 424 square feet of office space in Macau, Hong Kong. The rent is fixed at approximately $1,600 per month for the duration of the lease which expires on April 30, 2021. The lease provides for a renewal option to extend the lease.
Lease expense for our operating leases is recognized on a straight-line basis over the lease terms.
12 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Finance Leases
On May 25, 2018 and June 4, 2018, we entered into two long-term capital leasing arrangements with Wells Fargo Equipment Finance (“Wells Fargo”) to finance the leasing of two used forklift vehicles in the amount of approximately $44,000. The leases require monthly payments in the amount of $1,279 per month over a total lease term of 36 months which commenced on June 1, 2018. The agreement has an effective interest rate of 4.5% and the Company has the option to purchase the equipment at the end of the lease term for one dollar.
On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance a new Enterprise Resource Planning (“ERP”) System project over a term of 60 months at a cost of approximately $375,000. We estimate the system to be placed in service on April 1, 2020. Upon approval by Company management, Dimension will release progress payments directly to the project consultants as specific project milestones are met. Total progress payments will be made to the vendor over a period of approximately nine months and the Company will only be charged financing costs on the amounts released to the vendor. The financing agreement calls for estimated monthly installment payments of approximately $7,257 (including principal and interest) and bears interest of approximately 6.22%. As of June 30, 2019, no funds had yet been released.
Supplemental balance sheet information related to leases as of June 30, 2019 is as follows:
Assets | ||||
Operating lease - Right-of-use assets | $ | 978,146 | ||
Finance leases as a component of Property and equipment, net of accumulated depreciation of $7,254 | 36,272 |
Liabilities | ||||
Current | ||||
Current portion of operating leases | $ | 600,793 | ||
Current portion of finance leases | 14,547 | |||
Noncurrent | ||||
Operating lease liabilities, net of current portion | $ | 489,724 | ||
Finance leases, net of current portion | 13,817 |
Supplemental statement of income information related to leases for the three months ended June 30, 2019 is as follows:
Operating lease expense as a component of general and administrative expenses | $ | 148,724 | ||
Finance lease cost | ||||
Depreciation of leased assets as a component of Depreciation | $ | 1,555 | ||
Interest on lease liabilities as a component of Interest Expense | 274 |
Supplemental cash flow information related to leases for the three months ended June 30, 2019 is as follows:
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flow paid for operating leases | $ | 162,392 | ||
Financing cash flow paid for finance leases | 3,549 |
Lease term and Discount Rate
Weighted average remaining lease term (months) | ||||
Operating leases | 32.7 | |||
Finance leases | 23.0 |
Weighted average discount rate | ||||
Operating leases | 6.25 | % | ||
Finance leases | 3.68 | % |
Scheduled maturities of operating and finance lease liabilities outstanding as of June 30, 2019 are as follows:
Year | Operating Leases | Finance Leases | ||||||
2020, for the remaining 9 months | $ | 488,766 | $ | 11,510 | ||||
2021 | 348,562 | 15,346 | ||||||
2022 | 115,814 | 2,558 | ||||||
2023 | 117,638 | - | ||||||
2024 | 121,167 | - | ||||||
Total Minimum Future Payments | 1,191,947 | 29,414 | ||||||
Less: Imputed Interest | 101,430 | 1,056 | ||||||
Present Value of Lease Liabilities | $ | 1,090,517 | $ | 28,358 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
LEGAL MATTERS
Management is currently not aware of any legal proceedings.proceedings other than matters that arise in the ordinary course of business.
OPERATING LEASESNOTE 7 - STOCK OPTIONS
The Company has operating lease agreements for office and warehouse facilities in Fort Lauderdale, Florida; Ontario, California; and Macau expiring at varying dates. Rent expense forDuring the three months ended December 31,June 30, 2019 and 2018 and 2017 was approximately $180,000 and $177,000, respectively. Rent expense for the nine months ended December 31, 2018 and 2017 was approximately $530,000 and $500,000, respectively. In addition, the Company maintains various warehouse equipmentissued 100,000 stock options at an exercise price of $.38 and office equipment operating leases. Future minimum lease payments under property and equipment leases with terms exceeding one year$.55, respectively; to directors as of December 31, 2018 are as follows:compensation for their service.
Operating Leases | ||||
For period ending December 31, | ||||
2019 | $ | 650,000 | ||
2020 | 451,000 | |||
2021 | 119,000 | |||
2022 | 116,000 | |||
2023 and beyond | 181,000 | |||
$ | 1,517,000 |
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.
NOTE 8 - STOCK OPTIONS
● | For three months ended June 30, 2019: expected dividend yield of 0%, risk-free interest rate of 2.08%, volatility of 112.3% and an expected term of three years. |
A summary of stock option activity for the ninethree months ended December 31, 2018June 30, 2019 is summarized below:
December 31, 2018 | June 30, 2019 | |||||||||||||||
Number of Options | Weighted Average Exercise Price | Number of Options | Weighted Average Exercise Price | |||||||||||||
Stock Options: | ||||||||||||||||
Balance at beginning of period | 2,330,000 | $ | 0.22 | 2,210,000 | $ | 0.25 | ||||||||||
Granted | 100,000 | $ | 0.55 | 100,000 | $ | 0.38 | ||||||||||
Exercised | (80,000 | ) | $ | 0.08 | - | - | ||||||||||
Forfeited | - | - | - | - | ||||||||||||
Balance at end of period | 2,350,000 | $ | 0.24 | 2,310,000 | $ | 0.25 | ||||||||||
Options exercisable at end of period | 2,250,000 | $ | 0.23 | 2,210,000 | $ | 0.25 |
The following table summarizes information about employee stock options outstanding at December 31, 2018:June 30, 2019
Range of Exercise Price | Number Outstanding at December 31, 2018 | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable at December 31, 2018 | Weighted Average Exercise Price | |||||||||||||||
$.03 - $.33 | 1,770,000 | 4.0 | $ | 0.15 | 1,770,000 | $ | 0.15 | |||||||||||||
$.45 - $.93 | 580,000 | 8.4 | $ | 0.48 | 480,000 | $ | 0.49 | |||||||||||||
2,350,000 | 2,250,000 |
Range of Exercise Price | Number Outstanding at June 30, 2019 | Weighted Average Remaining Contractural Life | Weighted Average Exercise Price | Number Exercisable at June 30, 2019 | Weighted Average Exercise Price | |||||||||||||||||
$.03 - $.32 | 1,630,000 | 4.0 | 0.16 | 1,630,000 | 0.16 | |||||||||||||||||
$.38 - $.55 | 680,000 | 8.6 | 0.42 | 580,000 | 0.50 | |||||||||||||||||
* | 2,310,000 | 2,210,000 |
* Total number of options outstanding as of June 30, 2019 includes 560,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan.
NOTE 9 -8 – COMMON STOCK ISSUANCES
On August 1, 2018,June 12, 2019, the Company issued 22,72532,890 shares of its common stock to ourits Board of Directors at $0.55$0.38 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2018.2019. The Company recorded director compensation of $0 and $12,500 respective during the three and nine months ended December 31, 2018.June 30, 2019.
On August 3, 2018 the Company issued 80,000 shares of its common stock to a former director who exercised 80,000 stock options at an average option price of $.08 per share. Accordingly, the Company received $6,400 from the former director for the execution of the transaction.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018
NOTE 109 - GEOGRAPHICAL INFORMATION
Sales to customers outside of the United States for the three and nine months ended December 31,June 30, 2019 and 2018 and 2017 were primarily made by the Macau Subsidiary.Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows:
FOR THE THREE MONTHS ENDED | FOR THE NINE MONTHS ENDED | |||||||||||||||||||||||
December 31, | December 31, | June 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
North America | $ | 18,627,982 | $ | 20,534,288 | $ | 41,704,128 | $ | 54,163,819 | $ | 4,613,772 | $ | 1,791,914 | ||||||||||||
Europe | 679,499 | 927,547 | 3,657,429 | 3,943,299 | 99,424 | 34,764 | ||||||||||||||||||
Australia | 100,768 | - | 179,923 | - | 95,844 | - | ||||||||||||||||||
South Africa | 44,201 | - | 46,701 | 96,613 | ||||||||||||||||||||
Others | - | - | 5,725 | - | ||||||||||||||||||||
Other | - | 9,833 | ||||||||||||||||||||||
$ | 19,452,450 | $ | 21,461,835 | $ | 45,593,906 | $ | 58,203,731 | $ | 4,809,040 | $ | 1,836,511 |
The geographic area of sales iswas based primarily on the location where the product is delivered.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
NOTE 11 – RELATED10 –RELATED PARTY TRANSACTIONS
All transactions listed below are related to the Company as they are all with affiliates of our Chairman of the Board, Mr. Phillip Lau.
DUE TO/FROM RELATED PARTIES
On December 31, 2018June 30, 2019 and March 31, 2018,2019, in the aggregate the Company had approximately $1,673,000$368,000 and $1,157,000,$289,000, respectively, due from related parties for goods and services sold to these companies.
On December 31, 2018June 30, 2019 and March 31, 2018,2019, the Company had amounts due to other related party companiesparties in the amounts of approximately $707,000$101,000 and $414,000$0 for engineering fees, storage and administrative services provided to the Company by these related parties.
SUBORDINATED DEBT
In connection with the Revolving Credit Facility the Company was required to subordinate related party debt to Starlight Marketing Development, Ltd. (“subordinated debt”) in the amount of approximately $1,924,000. The Revolving Credit Facility renewal agreement included a Term Note in the amount of $1,000,000, the proceeds of which were used to pay down a portion of the subordinated debt. The remaining subordinated debt of approximately $924,000 bears interest at 6% and is scheduled to be paid in quarterly installments of $123,000 which include interest and commenced September 30, 2017. The remaining amount due on the subordinated debt of approximately $815,000 was classified as a current liability as of DecemberJune 30, 2019 and March 31, 20182019 on the condensed consolidated balance sheets. The subordinated debt was classified as a current portion of approximately $690,000 and a long-term portion of $125,000 as of March 31, 2018 on the condensed consolidated balance sheets. TheQuarterly installment payments of $123,000 due on December 31, 2017, March 31, 2018, June 30, 2018,the last day of each fiscal quarter have not been made since September 30, 2018 and December 31, 2018 were not made due to the Toys R Us bankruptcy’s unfavorable effect on cash flow.2017. During the three months ended December 31,June 30, 2019 and 2018 and 2017 the Company incurred interest expense of approximately $4,000$2,000 and $12,000,$9,000, respectively on the related to the subordinated debt. During the nine months ended December 31, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $26,000, respectively, related to theparty subordinated debt.
TRADE
During the three months ended December 31,June 30, 2019 and June 30, 2018 and December 31, 2017 the Company sold approximately $33,000$74,000 and $0, respectively to Winglight Pacific, Ltd. (“Winglight”), a related party, at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the three months ended December 31,June 30, 2019 and 2018 and December 31, 2017 was 23.1%21.7% and NA, respectively. During the nine months ended December 31, 2018 and December 31, 2017 the Company sold approximately $1,183,000 and $1,462,000, respectively to Winglight at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for the nine months ended December 31, 2018 and December 31, 2017 was 30.0% and 21.8%, respectively. The product was shipped to Cosmo Communications of Canada (“Cosmo”), another related company and the Company’s primary distributor of its products to Canada. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of income.operations.
During the three months ended December 31,June 30, 2019 and 2018 and December 31, 2017 the Company sold approximately $16,000$71,000 and $210,000,$45,000, respectively of product to Cosmo from its California warehouse facility. During the nine months ended December 31, 2018 and December 31, 2017 the Company sold approximately $655,000 and $533,000, respectively of productdirectly to Cosmo from its California warehouse facility. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of income.
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018operations.
The Company incurred service expenses from Starlight Electronics Co, Ltd, (“SLE”) a related party. The services from SLE for the three monthsmonth periods ended December 31,June 30, 2019 and 2018 and 2017 were approximately $87,000$101,000 and $131,000, respectively. The purchases from SLE for the nine months ended December 31, 2018 and 2017 were approximately $268,000 and $270,000, respectively. These amounts were included as a component of cost of goods sold in the accompanying condensed consolidated statements of income.
The Company purchased services from Merrygain Holding Co. Ltd, (“Merrygain”) a related party. The purchases from Merrygain for the three three months ended December 31, 2018 and 2017 were approximately $0 and $39,000, respectively. The purchases from Merrygain for the nine months ended December 31, 2018 and 2017 were approximately $38,000 and $115,000,$96,000, respectively. These amounts were included as a component of general and administrative expenses in the accompanying condensed consolidated statements of income.operations.
NOTE 1211 – 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 either allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months) or granted a “defective allowance” consisting of a fixed percentage (between 1% and 5%) off of invoice price in lieu of returning defective products.. 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.
15 |
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Changes in the Company’s reserve for sales returns are presented in the following table:
Nine Months Ended | Three Months Ended | |||||||||||||||
December 31, | December 31, | June 30, 2019 | June 30, 2018 | |||||||||||||
2018 | 2017 | |||||||||||||||
Reserve for sales returns at beginning of the fiscal year | $ | 726,000 | $ | 600,000 | * | |||||||||||
Reserve for sales returns at beginning of the year | $ | 896,154 | $ | 726,000 | ||||||||||||
Provision for estimated sales returns | 3,235,305 | 4,751,858 | 415,234 | 186,878 | ||||||||||||
Sales returns received | (1,910,819 | ) | (1,764,501 | ) | (863,711 | ) | (775,342 | ) | ||||||||
Reserve for sales returns at end of the period | $ | 2,050,486 | $ | 3,587,357 | $ | 447,677 | $ | 137,536 |
* The reserve for sales returns atNOTE 12 – REFUNDS DUE TO CUSTOMERS
Due to the beginningseasonality of the period ended December 30,2017 has been adjustedbusiness and length of time customers are given to reflectreturn defective product, it is not uncommon for customers to accumulate credits from the full retrospective adoptionCompany’s sales and allowance and cooperative advertising programs that are in excess of ASC 606 effective April 1, 2018.unpaid invoices in accounts receivable. All credit balances in customers’ accounts receivable are reclassified to refunds due to customers in current liabilities on the condensed consolidated balance sheets. Customer requests for payment of a credit balance are reclassified from refunds due to customers to accounts payable on the condensed consolidated balance sheets. When new invoices are processed prior to settlement of the credit balance and the customer accepts settlement of open credits with new invoices, then the excess of new invoices over credits are netted in accounts receivable. As of June 30, 2019 and March 31, 2019, refunds due to customers reclassified from accounts receivable were approximately $300,000 and $31,000, respectively.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the three months ended December 31,June 30, 2019 and 2018 and 2017 totaled approximately $18,000$14,000 and $15,000, respectively. The amounts charged to operations for contributions to this plan and administrative costs during the nine months ended December 31, 2018 and 2017 totaled approximately $51,000 and $39,000,$16,000, respectively. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of income.operations. The Company does not provide any post-employment benefits to retirees.
NOTE 14 – SUBSEQUENT EVENTS- CONCENTRATIONS OF CREDIT AND SALES RISK
On January 29,The Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At June 30, 2019, the Company signed a three-year worldwide licensing agreement with CBS (NYSE: CBS) for the CARPOOL KARAOKE program series. Under the terms87% of the Agreement, Singing Machine will be launching a range of consumer products worldwide designed for use within vehicles under the CARPOOL KARAOKE license. The license agreement began December 1, 2018 and continues through September 30, 2022. The license requires a minimum royalty guaranty of $100,000 with $50,000 payable at the execution of the contract, and a second and third payment of $25,000 payable on or before June 1, 2021 and 2022, respectively. Royalty payments will be calculated at 9% of net sales up to the first 150,000 units; andaccounts receivable were due from two customers in North America that individually owed over 10% of net sales 150,001 units thereafter and are payable on a quarterly basis beginning September 30, 2019.
NOTE 15 – CONCENTRATION OF SALES RISKtotal accounts receivable. At March 31, 2019, 62% of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable.
The Company generates most of its revenue from retailers of products in the United States with a significant amount of sales concentrated with several large customers the loss of which could have an adverse impact on the financial position of the Company. For the ninethree months ended December 31, 2018,June 30, 2019, there were fivetwo customers who individually accounted for 10% or more of the company’s net sales. Revenue derived from these customers as a percentage of net sales were 37%, 14%, 13%, 12%80% and 10%15%, respectively. For the ninethree months ended December 31, 2017,June 30, 2018, 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 35%33%, 17%24% and 12%13%, respectively. In September, 2017, Toys R US (which accounted for approximately 17% of our sales for the nine months ended December 31, 2017) filed for bankruptcy protection and conversion to liquidation in April 2018. The loss of this customer had a significant impact on the financial performance of the Company during the nine months ended December 31, 2018.
16 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this quarterly report. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part II, Item 1A, “Risk Factors ”)“). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements.
Statements included in this quarterly report that do not relate to present or historical conditions are called “forward-looking statements.” Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,” “will,” and similar expressions are intended to identify forward-looking statements. Our ability to predict or project future results or the effect of events on our operating results is inherently uncertain. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved.
Important factors to consider in evaluating such forward-looking statements include, but are not limited to: (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) the effects of adverse general economic conditions, both within the United States and globally, (v) vendor price increases and decreased margins due to competitive pricing during the economic downturn (vi)various competitive market factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section of our Annual Report on Form 10-K, this Quarterly Report on 10-Q, or in our other filings made with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
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, Australia and South Africa primarily through major mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores.
Representative customers include Amazon, Best Buy, BJ’s Wholesale, Costco, Sam’s Club, Target, JC Penney 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 94% and 89% of net sales in fiscal 2019 and 2018, respectively.
17 |
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items related to our condensed consolidated statements of incomeoperations as a percentage of net sales for the three months ended June 30, 2019 and nine months ended December 31, 2018 and 2017:2018:
For Three Months Ended | ||||||||
June 30, 2019 | June 30, 2018 | |||||||
Net Sales | 100.0 | % | 100.0 | % | ||||
Cost of Goods Sold | 79.5 | % | 78.7 | % | ||||
Gross Profit | 20.5 | % | 21.3 | % | ||||
Operating Expenses | ||||||||
Selling expenses | 13.7 | % | 24.3 | % | ||||
General and administrative expenses | 28.5 | % | 65.8 | % | ||||
Depreciation and amortization | 1.2 | % | 3.7 | % | ||||
Total Operating Expenses | 43.4 | % | 93.8 | % | ||||
Loss from Operations | -22.9 | % | -72.5 | % | ||||
Other Expenses | ||||||||
Interest expense | -0.1 | % | -1.3 | % | ||||
Financing costs | -0.1 | % | -0.2 | % | ||||
Total Other Expenses | -0.2 | % | -1.5 | % | ||||
Loss Before Income Tax Benefit | -23.1 | % | -74.0 | % | ||||
Income Tax Benefit | 5.0 | % | 17.6 | % |
The Singing Machine Company, Inc. and Subsidiaries
CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS
For Three Months Ended | For Nine Months Ended | |||||||||||||||
December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||
Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of Goods Sold | 71.1 | % | 72.1 | % | 75.4 | % | 74.5 | % | ||||||||
Gross Profit | 28.9 | % | 27.9 | % | 24.6 | % | 25.5 | % | ||||||||
Operating Expenses | ||||||||||||||||
Selling expenses | 11.5 | % | 9.2 | % | 10.3 | % | 8.3 | % | ||||||||
General and administrative expenses | 8.4 | % | 6.5 | % | 9.5 | % | 8.2 | % | ||||||||
Bad debt expense | -0.5 | % | 0.8 | % | -0.3 | % | 3.7 | % | ||||||||
Depreciation and amortization | 0.3 | % | 0.3 | % | 0.4 | % | 0.3 | % | ||||||||
Total Operating Expenses | 19.7 | % | 16.8 | % | 19.9 | % | 20.5 | % | ||||||||
Income from Operations | 9.2 | % | 11.1 | % | 4.7 | % | 5.0 | % | ||||||||
Other Expenses | ||||||||||||||||
Interest expense | -0.7 | % | -0.7 | % | -0.5 | % | -0.4 | % | ||||||||
Financing costs | 0.0 | % | 0.0 | % | 0.0 | % | -0.1 | % | ||||||||
Total Other Expenses | -0.7 | % | -0.7 | % | -0.5 | % | -0.5 | % | ||||||||
Income Before Income Tax Provision | 8.5 | % | 10.4 | % | 4.2 | % | 4.5 | % | ||||||||
Income Tax Provision | -1.9 | % | -5.0 | % | -1.0 | % | -2.1 | % | ||||||||
Net Income | 6.6 | % | 5.4 | % | 3.2 | % | 2.4 | % |
QUARTER ENDED DECEMBER 31, 2018JUNE 30, 2019 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2017JUNE 30, 2018
NET SALES
Net sales for the quarter ended December 31, 2018 decreasedJune 30, 2019 increased to approximately $19,452,000$4,809,000 from approximately $21,462,000 a decrease$1,837,000, an increase of approximately $2,010,000$2,972,000 as compared to the same period ended December 31, 2017. Lost sales from Toys R UsJune 30, 2018. The primary reason for the increase was due to the earlier direct import shipments of approximately $3,657,000 offset by an increase in sales$3,415,000 of approximately $1,425,000Black Friday goods to one major customer. This increase was offset by a decrease of approximately $213,000 in sales to another major customer who ordered less spring replenishment goods due to the timing of shipments shiftingincreased inventory on hand from the previous quarterholiday season with the remaining variance of approximately $230,000 due to the current quarter accounted for most of the neta decrease in sales for the three months ended December 31, 2018.to various other customers.
GROSS PROFIT
Gross profit for the quarter ended December 31, 2018 decreasedJune 30, 2019 increased to approximately $5,626,000$988,000 from approximately $5,998,000 a decrease$391,000 an increase of approximately $372,000$597,000 as compared to the same period in the prior year. There was an increase in gross profit of approximately $634,000 due to increased sales as explained in Net Sales above. The offsetting decrease of $37,000 was due to a decrease in net sales accounted forgross profit margin of approximately $561,000 of the decrease and was offset by approximately $323,000 cost concessions from manufacturers due to the strengthening of the US Dollar to the Chinese local currency, the Renminbi, with the remaining variance due to mix of products sold...8 margin points.
GrossAs a percentage of revenues, gross profit margin for the three months ended December 31, 2018June 30, 2019 was 28.9%20.5% compared to 27.9%21.3% for the three months ended December 31, 2017, an increaseJune 30, 2018. The decrease of 1.0.8 margin points. The primary reason for the increase in gross profit marginpoints was due to cost concessions from manufacturersprimarily due to the strengtheningearlier direct import shipments of the US DollarBlack Friday goods to the Chinese local currency, the Renminbi.one major customer that yield lower margins.
OPERATING EXPENSES
For the quarter ended December 31, 2018,June 30, 2019, total operating expenses increased to approximately $3,826,000.$2,090,000 compared to $1,723,000 from the same period in the prior year. This represents an increase in total operating expenses of approximately $213,000$367,000 from the quarter ended December 31, 2017 total operatingJune 30, 2018. Selling expenses increased by approximately $213,000 of $3,613,000. Thiswhich $176,000 were increases in variable expenses commensurate with the increase in sales and the remaining increase of approximately $37,000 was primarily due to an increase of approximately $265,000 in variable selling expenses including commissions, discretionary marketing expenses and co-op advertising programs granted to major retail customers offset by a decrease in general and administrative expenses of approximately $52,000.
Selling expenses increased approximately $265,000primarily for the quarter ended December 31, 2018 compared to the quarter ended December 31, 2017. This increase was primarily due to incremental co-op marketing programs granted to one major customer.promotion of new products.
General and administrative expenses including bad debt and depreciation, decreasedincreased by approximately $52,000 for the quarter ended December 31, 2018 compared$162,000 to the quarter ended December 31, 2017 primarily due to a decrease in related party service charges of approximately $30,000 that were deferred$1,371,000 for the three months ended December 31,June 30, 2019 compared to approximately $1,209,000 for the same period ended June 30, 2018. The remaining $22,000 decreaseincrease in general and administrative expenses was primarily due to variable expenses commensurate witha bad debt recovery from Toys R Us Bankruptcy administrative claims of approximately $135,000 during the decrease in net sales.three months ended June 30, 2018.
INCOMELOSS FROM OPERATIONS
IncomeLoss from operations decreased approximately $584,000$229,000 this quarter to approximately $1,800,000$1,102,000 for the three months ended December 31, 2018June 30, 2019 compared to incomea loss from operations of $2,384,000approximately $1,331,000 for the same period ended December 31, 2017. The decreaseJune 30, 2018. There was an increase in gross profit primarilymargin of approximately $597,000 due to the netincrease in sales decreaseas explained in Net Sales and Gross Profit offset by an increase of approximately $367,000 in operating expenses as explained above for the three months ended December 31, 2018 compared to the same period ended December 31, 2017.in Operating Expenses.
OTHER EXPENSES
Other expenses decreased to approximately $143,000 from approximately $149,000 for the same period a year ago. The decrease was due to a decrease in interest expense of approximately $6,000 reflecting decreased borrowing from the Revolving Credit Facility as cash positions improved with the sale of excess inventory related to the Toys R US bankruptcy from the previous fiscal year.
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INCOME TAXES
For the three months ended December 31,June 30, 2019 and 2018 and December 31, 2017 the Company recognized an income tax provisionbenefit of approximately $367,000$239,000 and $1,080,000 (inclusive of an one-time income tax provision of approximately $328,000 discussed below)$324,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 22%21.5% and 34%23.9%, respectively, for fiscal year ending March 31, 2019 and fiscal year ended March 31, 2018.
On December 22, 2017 the Tax Cuts and Jobs Act (“Tax Act”) was enacted which reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act we estimated that our blended rate for the fiscal year ending March 31, 2018 would be approximately 34%. As of December 31, 2017, management determined a reasonable estimate of the Tax Act’s effect on the value of the Company’s deferred tax assets and liabilities and recognized an additional tax provision of approximately $328,000 during the third quarter ended December 31, 2017.respectively.
NET INCOMELOSS
For the three months ended December 31, 2018June 30, 2019 net income increasedloss decreased to approximately $1,290,000$870,000 compared to a net incomeloss of approximately $1,155,000$1,034,000 for the same period a year ago. The Company benefitted from the effective income tax rate decrease due to the Tax Cuts and Jobs Act which contributed approximately $196,000 toincrease in net income with the remaining variance explained in Income From Operations and Other Expenses above.
NINE MONTHS ENDED DECEMBER 31, 2018 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2017
NET SALES
Net sales for the nine months ended December 31, 2018 decreased to approximately $45,594,000 from approximately $58,204,000 a decrease of approximately $12,610,000 (or 21.7%) as compared to the same period ended December 31, 2017. The Company lost approximately $9,986,000 in sales during the nine months ended September 30, 2018 due to the bankruptcy of Toys R Us in fiscal 2018 which accounted for approximately 79% of the decrease. The remaining decreaseloss was primarily due to the loss of one holiday promotional item for a major customer.
GROSS PROFIT
Gross profit for the nine months ended December 31, 2018 decreased to approximately $11,224,000same reasons discussed in Loss from approximately $14,814,000, a decrease of approximately $3,590,000 as compared to the same period in the prior year. The decrease in net sales accounted for approximately $3,215,000 (90%) of the decrease with the remaining decrease of approximately $375,000 primarily due to decreased gross profit margin.
Gross profit margin for the nine months ended December 31, 2018 was 24.6% compared to 25.5% for the nine months ended December 31, 2017, a decrease of 0.9 margin points. There was an increase in gross profit margin of approximately $365,000 or .8 margin points due to cost concessions from manufacturers due to the strengthening of the US Dollar to the Chinese local currency, the Renminbi. This increase in margin points was offset by the loss of approximately $12,610,000 in sales of high margin yield products to Toys R Us due to bankruptcy.
OPERATING EXPENSES
For the nine months ended December 31, 2018, total operating expenses decreased to approximately $9,084,000 from approximately $11,912,000 for the nine months ended December 31, 2017, a decrease of approximately $2,828,000. This decrease was primarily due partial bankruptcy recovery of Toys R Us bad debt administrative claims of approximately $253,000 as compared to a bad debt expense due to the Toys R Us Bankruptcy of approximately $2,000,000 for the nine months ended December 31, 2018 accounting for approximately $2,253,000 (80%) of the decrease. Selling expenses decreased approximately $119,000 primarily due to the decrease in co-op advertising granted to Toys R Us due to the Toys R Us bankruptcy offset by increased co-op advertising programs offered to one major customer during the nine months ended December 31, 2018. The remaining decrease of approximately $456,000 was primarily due to a decrease in general and administrative expenses.
General and administrative expenses (excluding bad debt expense/recovery and depreciation expense) decreased approximately $443,000 for the nine months ended December 31, 2018 compared to the nine months ended December 31, 2017. Expenses for logistics operations in California decreased by approximately $123,000 primarily due to increased expense reimbursements for logistics services provided to third-party customers. Stock option compensation decreased by approximately $121,000 as officers of the company were not granted any stock options for the fiscal year ended March 31, 2018. There were no related party licensing fees for the use of tooling for the pedestal models for the nine months ended December 31, 2018 compared to the nine months ended December 31, 2017 when the company incurred approximately $116,000 in licensing costs for this expense. The remaining decrease was primarily due to variable expenses associated with the reduction in sales.
INCOME FROM OPERATIONS
Income from operations decreased approximately $761,000 to income from operations of approximately $2,141,000 for the nine months ended December 31, 2018 compared to income from operations of approximately $2,902,000 for the same period ended December 31, 2017. The decrease gross profit of approximately $3,590,000 as explained Gross Profit above offset by the decrease in operating expenses of approximately $2,828,000 as explained in Operating Expenses above is the primary reason for this decrease.
OTHER EXPENSES
Our other expenses decreased to approximately $245,000 from approximately $270,000 for the same period a year ago. The decrease was primarily due to a decrease in amortization of deferred financing costs related to the renewal of the Revolving Credit Facility of approximately $18,000. Interest expense decreased by approximately $7,000 due to decreased borrowing required from the Revolving Credit Facility.
INCOME TAXES
For the nine months ended December 31, 2018 and December 31, 2017 the Company recognized an income tax provision of approximately $422,000 and $1,221,000 (inclusive of a one-time income tax provision of approximately $328,000 discussed below), respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 22% and 34%, respectively, for fiscal year ending March 31, 2019 and fiscal year ended March 31, 2018.
On December 22, 2017 the Tax Cuts and Jobs Act (“Tax Act”) was enacted which reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act we estimated that our blended rate for the fiscal year ending March 31, 2018 would be approximately 34%. As of December 31, 2017, management determined a reasonable estimate of the Tax Act’s effect on the value of the Company’s deferred tax assets and liabilities and recognized an additional tax provision of approximately $328,000 during the third quarter ended December 31, 2017.
NET INCOME
For the nine months ended December 31, 2018 net income increased to approximately $1,473,000 compared to net income of approximately $1,412,000 for the same period a year ago. The Company benefitted from the effective income tax rate decrease due to the Tax Cuts and Jobs Act which contributed approximately $222,000 to net income with the remaining variance explained in Income From Operations and Other Expenses above.Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2018,June 30, 2019, Singing Machine had cash on hand of approximately $1,581,000$577,000 as compared to cash on hand of approximately $483,000$118,000 on December 31, 2017.June 30, 2018. We had working capital of approximately $8,233,000$5,510,000 as of December 31, 2018.June 30, 2019. Net cash provided by operating activities was approximately $25,000 for the three months ended June 30, 2019, as compared to approximately $1,501,000 used in operating activities for the same period a year ago. During the three months ended June 30, 2019 there was an decrease in amounts due from PNC bank for collections on accounts receivable that exceeded amounts due on the Revolving Credit Facility of approximately $2,237,000, an increase in accounts payable of approximately $5,102,000 due to seasonal purchases of product for the upcoming season and an increase in customer deposits of approximately $203,000. These increases in cash provided by operating activities were offset by a net loss of approximately $870,000, an increase in accounts receivable of approximately $3,103,000 primarily due to shipment of Black Friday goods to one major customer, and an increase in inventories of approximately $2,535,000 due to seasonal increase in products purchased for the upcoming season. There was an increase in prepaid expenses of approximately $543,000 due to prepaid royalties, licenses and promotion expenses primarily associated with the launch of the new Carpool Karaoke product in July 2019 and a seasonal decrease in reserve of sales returns of approximately $448,000.
Net cash used in operating activities was approximately $1,498,000$1,501,000 for the ninethree months ended December 31, 2018, as compared to approximately $4,633,000 used in operating activities during the same period a year ago.June 30, 2018. During the nine months ended December 31,three month period ending June 30, 2018 the Company hadthere was a net incomeloss of approximately $1,473,000 inclusive of bad debt recovery of Toys R Us bankruptcy administrative claims of approximately $253,000. During this period accounts receivable increased by approximately $9,697,000 due$1,034,000 primarily to the seasonal increase in net sales during the quarter ended December 31, 2018. This use of operating cash was offset by operating activities that provided cash including a decrease in inventories of approximately $2,475,000 due to the sale of prior year excess inventory relateda reduction in sales due to lost revenue from the Toys R Us bankruptcy in fiscal 2018 as well as a seasonaldecrease in sales to our European and Canadian distributors due the timing of shipments as orders from these customers were received later as compared to the same period of the prior year. There was an increase in accounts payable (primarily inventory vendors)inventories of approximately $1,745,000, a seasonal$216,000 due to goods received for the upcoming season and an increase in accruedprepaid expenses of approximately $1,037,000, a seasonal increase in reserves for estimated sales returns of approximately $1,324,000, an increase in amounts$135,000 due to related parties of approximately $294,000. These activities accounted for approximately 90% of the cash used in operationsdeposits on accessories to be shipped with the remaining 1% due to seasonal changes in other operating assets and liabilities.
Net cash used in operating activitiesfinished products. There was approximately $4,633,000 for the nine months ended December 31, 2017. During the nine months ended December 31, 2017 the Company had net income of approximately $1,412,000. During this period the Company experienced an increase in inventory of approximately $3,599,000 primarily due to Toys R Us bankruptcy that caused delays in restocking as well as another major customer who delayed restocking, Accounts receivable also increased by approximately $10,844,000 (excluding approximately $2,000,000 of potentially uncollectible past due receivables due to the Toys R US bankruptcy filing) due primarily to the increase in net sales during the quarter ended December 31, 2017 as well as an increase in payment terms to two major customers. These uses of operating cash were offset by operating activities that provided cash including an increase in accounts payable (primarily inventory vendors) of approximately $3,005,000, a seasonal increase in accrued expenses of approximately $2,122,000 and a seasonal increasedecrease in reserve for sales returns of approximately $2,987,000 which were all commensurate with the increase$588,000 reflecting an estimated amount of returns expected from defective returns and allowance programs and a decrease in seasonal sales. These activities accounted for approximately 94% of the cash used in operations with the remaining 6%refunds due to seasonal changescustomers of approximately $189,000 primarily due to customers’ accumulated credits from the Company’s sales and allowance and cooperative advertising programs that are in otherexcess of unpaid invoices in trade accounts receivable. These uses of cash in operating assets and liabilities.activities totaling approximately $2,162,000 were offset by a decrease of approximately $856,000 from related party trade receivables.
Net cash used byin investing activities for the ninethree months ended December 31, 2018June 30, 2019 was approximately $289,000$160,000 as compared to approximately $256,000$282,000 used byin investing activities for the same period ended a year ago. Investment activity during the nine months ended December 31, 2018 consisted of the purchase of moldsago and tooling and warehouse equipment of approximately $289,000. Investment activity during the nine months ended December 31, 2017 consisted primarily of the purchases of molds and tooling of approximately $165,000 and office furniture of approximately $91,000.for new products.
Net cash provided by financing activities for the three-month period ended June 30, 2019 was approximately $2,554,000 for the nine months ended December 31, 2018, as$501,000 compared to net cash provided by financing activities of approximately $3,066,000$1,088,000 for the same period ended a year ago. Duringof the nine months ended December 31, 2018, the Companyprior year. We borrowed approximately $2,931,000$627,000 from theour Revolving Credit Facility with PNC Bank which provided most of thefor working capital for operations duringwhich was offset by payments of finance leases and the period. The company paid $375,000 on thebank term note owed to PNC Bank.of approximately $129,000.
Net cash provided by financing activities for the three-month period ended June 30, 2018 was approximately $3,066,000 for the nine months ended December 31, 2017. During the nine months ended December 31, 2017, the Company$1,088,000. We borrowed approximately $3,465,000$1,088,000 from theour Revolving Credit Facility with PNC Bank which provided most of thefor working capital for operations during the period. PNC Bank also approved a term note in the amount of $1,000,000 the proceeds of which were used to pay down subordinated related party debt and the company made scheduled payments of $250,000 against the term note. The company also made an additional scheduled payment of approximately $109,000 against the subordinated related party debt from working capital. The company also paid $40,000 in deferred financing fees related to the renewal of the Revolving Facility.
As of December 31, 2018,June 30, 2019, we continued to borrow from our Revolving Credit Facility, which provides for a maximum loan amount of $15,000,000 (with an option to increase the maximum loan amount to $20,000,000) during peak selling season (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and reduces to $7,500,000 during the off-peak season. We believe this credit facility will be adequate to maintain and grow our business during the three-year 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 of December 31, 2018 there was approximately $4,182,000 available to borrow on the Revolving Credit Facility.
The Company reported net income of approximately $1,290,000 and $1,473,000 for the three and nine months ended December 31, 2018, respectively as compared to net income of approximately $1,155,000 and $1,412,000 for the three and nine months ended December 31, 2017. The Company’s net income and cash flow continue to be affected by the Toys R Us bankruptcy as net sales decreased to approximately $19,452,000 and $45,594,000 for the three and nine months ended December 31, 2018, respectively from approximately $21,462,000 and $58,204,000 for the three and nine months ended December 31, 2017, respectively. Lost sales from Toys R Us of approximately $9,986,000 and a decrease in sales to one major customer of approximately $3,419,000 due to elimination of one promotional product accounted for most of the decrease in sales for the nine months ended December 31, 2018. To assist with the Company’s cash requirements during fiscal 2019 our parent company agreed to continue to delay payment of related party trade debt as well as payments due on subordinated debt until the end of peak season when liquidity improves. Our parent company suspended a portion of monthly service and development fees totaling approximately $99,000 for six months commencing July 1, 2018 through December 31, 2018. Management believes that it has adequate cash available on its revolving credit facility to meet all obligations for the next twelve months. To assist the Company in remaining compliant with its revolving credit facility covenants, PNC Bank issued a third amendment and waiver in August 2018 to the Revolving Credit Facility andexpires in July 2020. Management plans to either extend the Security Agreement in effect for fiscal 2019 amendingcurrent Revolving Credit Facility or negotiate a new credit facility on or before the fixed charge coverage ratio and annual capital expenditure limits. While management continues to assess the long term effectexpiration of the Toys R Us bankruptcy, management is confident that the temporary suspension of paymentscurrent agreement. If we are unable to extend or negotiate a new agreement, it may have a material adverse effect on related party debt, suspension of service and development fees for six months, availability of cash from our revolving credit facility and significant efforts to reduce inventory levels during the current fiscal year will be adequateability to meet the company’s liquidity requirements for the next twelve months.our financial obligations.
INVENTORY SELL THROUGH
We monitor the inventory levels and sell through activity of our major customers to properly anticipate defective returns and maintain the appropriate level of inventory. We believe that our warranty provision reflects the proper amount of reserves to cover potential defective sales returns based on historical return ratios and information available from the customers.
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SEASONAL AND QUARTERLY RESULTS
Historically, our operations have been seasonal, with the highest net sales occurring in our second and third fiscal quarters (reflecting increased orders for equipmentsystems and music merchandise during the Christmas holiday season) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in our second and third fiscal quarters, combined, accounted for approximately 89%94% and 84%89% of net sales in fiscal 20182019 and 2017,2018, respectively.
Our results of operations may also fluctuate from quarter to quarter due toas a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis.
INFLATION
Inflation has not had a significant impact on our operations. We generally have adjusted our prices to track changes in the Consumer Price Index since prices we charge are generally not fixed by long-term contracts.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balanceoff balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
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 20182019 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smallersmall 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 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.
(b)Changes in Internal Controls. There was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
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Management is currently not aware of any legal proceedings.proceedings other than matters that arise in the ordinary course of business.
Not applicable for smaller reporting companies
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are not currently in default upon any of our senior securities.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
* Filed herewith
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC. | ||
Date: | By: | /s/ Gary Atkinson |
Gary Atkinson | ||
Chief Executive Officer | ||
/s/ Lionel Marquis | ||
Lionel Marquis | ||
Chief Financial Officer |
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