UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2006
0 - 24968
Commission File Number
THE SINGING MACHINE COMPANY, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 95-3795478
----------------------- ----------------------
(State of Incorporation) (IRS Employer I.D. No.)
6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
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(Address of principal executive offices)
(954) 596-1000
(Issuer'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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
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 22,935,818 as of August 1, 2006
1
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2006(Unaudited)
and March 31,2006 3
Consolidated Statements of Operations - Three months
Ended June 30,2006 and 2005 (Unaudited) 4
Consolidated Statements of Cash Flows - Three months
Ended June 30, 2006 and 2005 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
SIGNATURES 24
2
The Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 2006 March 31, 2006
-------------- --------------
(Unaudited)
Assets
------
Current Assets
Cash and cash equivalents $ 168,635 $ 423,548
Restricted cash -- 268,405
Accounts receivable, less allowances of $103,615
and $103,615, respectively 1,040,120 1,169,271
Due from factor 118,119 134,281
Inventories 1,606,065 1,688,058
Prepaid expenses and other current assets 533,377 228,402
-------------- --------------
Total Current Assets 3,466,316 3,911,965
Property and Equipment, at cost less accumulated
depreciation of $3,353,982 and $3,246,072, respectively 477,156 513,615
Other Non-Current Assets 96,251 98,687
-------------- --------------
Total Assets $ 4,039,723 $ 4,524,267
============== ==============
Liabilities and Shareholders' Deficit
-------------------------------------
Current Liabilities
Accounts payable $ 2,067,135 $ 1,563,810
Accrued expenses 492,403 648,183
Customer credits on account 438,560 1,034,214
Deferred gross profit on estimated returns 48,243 186,282
Loan payable -- 2,000,000
Subordinated debt-related parties 300,000 300,000
Income tax payable 2,453,576 2,453,576
-------------- --------------
Total Current Liabilities 5,799,917 8,186,065
-------------- --------------
Shareholders' Deficit
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, Class A, $.01 par value; 100,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.01 par value; 100,000,000 shares authorized;
22,935,818 and 10,060,282 shares issued and outstanding 229,358 100,603
Additional paid-in capital 14,581,968 11,658,031
Accumulated deficit (16,571,520) (15,420,432)
-------------- --------------
Total Shareholders' Deficit (1,760,194) (3,661,798)
-------------- --------------
Total Liabilities and Shareholders' Deficit $ 4,039,723 $ 4,524,267
============== ==============
The accompanying notes are an integral part of these financial statements.
3
The Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For Three Months Ended
June 30, 2006 June 30, 2005
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Net Sales $ 1,035,876 $ 2,791,755
Cost of Goods Sold 909,404 2,354,860
------------- -------------
Gross Profit 126,472 436,895
Operating Expenses
Selling expenses 3,770 150,204
General and administrative expenses 1,165,697 1,481,974
Depreciations and amortizations 108,009 161,339
------------- -------------
Total Operating Expenses 1,277,476 1,793,517
------------- -------------
Loss from Operations (1,151,004) (1,356,622)
Other Income (Expenses)
Other income 9,018 3,680
Interest expense (9,102) (102,753)
Interest expense - Amortization
of discount on convertible
debentures -- (446,192)
------------- -------------
Net Other Income (Expenses) (84) (545,265)
------------- -------------
Net Loss Before Income Taxes (1,151,088) (1,901,887)
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Provision for Income Taxes -- --
------------- -------------
Net Loss $ (1,151,088) $ (1,901,887)
============= =============
Loss per Common Share:
Basic $ (0.11) $ (0.19)
Diluted (0.11) (0.19)
Weighted Average Common and Common
Equivalent Shares:
Basic 10,736,532 9,864,221
Diluted 10,736,532 9,864,221
The accompanying notes are an integral part of these financial statements.
4
The Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For Three Months Ended
------------------------------
June 30, 2006 June 30, 2005
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Cash flows from operating activities
Net Loss $ (1,151,088) $ (1,901,887)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 108,009 161,339
Change in inventory reserve (6,853) (281,903)
Change in allowance for bad debts -- (29,364)
Amortization of discount/deferred fees on
convertible debentures -- 446,192
Stock compensation 52,692 --
Deferred gross profit on estimated sales returns (138,039) (91,915)
Changes in assets and liabilities:
(Increase) Decrease in:
Accounts receivable 129,151 427,046
Inventories 88,846 1,185,186
Prepaid expenses and other assets (304,975) (116,617)
Other non-current assets 2,436 69,009
Increase (Decrease) in:
Accounts payable 503,325 243,923
Accrued expenses (155,780) (16,502)
Customer credits on account (595,654) (855,555)
------------- -------------
Net cash (used in) operating activities (1,467,929) (761,048)
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Cash flows from investing activities
Purchase of property and equipment (71,550) (35,682)
Restricted cash 266,165 (1,850)
------------- -------------
Net cash provided by (used) in investing activities 194,615 (37,532)
------------- -------------
Cash flows from financing activities
Borrowing from factoring, net 16,162 16,530
Bank overdraft -- 198,341
Proceeds from related party loan -- 200,000
Proceeds from sales of common stock 1,000,000 --
------------- -------------
Net cash provided by financing activities 1,016,162 414,871
------------- -------------
Change in cash and cash equivalents (257,153) (383,709)
Cash and cash equivalents at beginning of period 423,548 617,054
------------- -------------
Cash and cash equivalents at end of period $ 168,635 $ 233,345
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for Interest $ 16,232 $ --
============= =============
Non-Cash Financing Activities:
Related party loan paid off with stock $ -- $ 200,000
============= =============
Conversion of loan payable to equity $ 2,000,000 $ --
============= =============
The accompanying notes are an integral part of these financial statements.
5
THE SINGING MACHINE COMPANY, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation, and Subsidiary (the
"Company," or "The Singing Machine") is primarily engaged in the development,
marketing, and sale of consumer karaoke audio equipment, accessories, musical
instruments and musical recordings. The products are sold directly to
distributors and retail customers.
The preparation of The Singing Machine's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Future events and their effects cannot
be determined with absolute certainty; therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the Company's financial
statements. Management evaluates its estimates and assumptions continually.
These estimates and assumptions are based on historical experience and other
factors that are believed to be reasonable under the circumstances.
THE MANAGEMENT OF THE COMPANY BELIEVES THAT THE FOLLOWING ACCOUNTING POLICIES
REQUIRE A HIGH DEGREE OF JUDGEMENT DUE TO THEIR COMPLEXITY:
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
an amount sufficient to respond to normal business conditions. Management sets
100% reserves for customers in bankruptcy and other reserves based upon
historical collection experience. Should business conditions deteriorate or any
major customer default on its obligations to the Company, this allowance may
need to be significantly increased, which would have a negative impact on
operations.
REVENUE RECOGNITION
Revenue from the sale of equipment, accessories, and musical recordings are
recognized upon the later of (a) the time of shipment or (b) when title passes
to the customers and all significant contractual obligations have been satisfied
and collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. Net sales are comprised of gross sales net of actual and estimated
future returns, discounts and volume rebates. The actual and estimated sales
returns for quarters ended June 30, 2006 and 2005 were $345,886 and $160,938,
respectively. The total return represents 33.4% and 5.8% of the net sales for
quarter ended June 30, 2006 and 2005, respectively.
INVENTORY
The Singing Machine 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.
INCOME TAXES
Significant management judgment is required in developing The Singing Machine's
provision for income taxes, including the determination of foreign tax
liabilities, deferred tax assets and liabilities and any valuation allowances
that might be required against the deferred tax assets. Management evaluates its
ability to realize its deferred tax assets on a quarterly basis and adjusts its
valuation allowance when it believes that it is more likely that the asset will
not be realized.
The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, 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 SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. If
it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
As of June 30, 2006 and March 31, 2006, The Singing Machine had gross deferred
tax assets of approximately $6.4 million and $6.4 million, respectively, against
which the Company recorded valuation allowances totaling approximately $6.4
million and $6.4 million, respectively.
6
For the quarters ended June 30, 2006 and June 30, 2005, the Company recorded no
tax provision. The Company has now exhausted its ability to carry back any
further losses and therefore will only be able to recognize tax benefits to the
extent that it has future taxable income.
The Company's subsidiary has applied for an exemption of income tax in Hong
Kong. Therefore, no taxes have been expensed or provided for at the subsidiary
level. Although no decision has been reached by the governing body, the parent
company has reached the decision to provide for the possibility that the
exemption could be denied and accordingly has recorded a provision for Hong Kong
taxes in fiscal 2003 and 2002. There was no provision for Hong Kong income taxes
since fiscal 2005 due to the subsidiary's net operating losses.
Hong Kong income taxes payable totaled approximately $2.4 million at June 30,
2006 and 2005 and is included in the accompanying balance sheets as income taxes
payable.
OTHER ESTIMATES
The Singing Machine makes other estimates in the ordinary course of business
relating to sales returns and allowances, warranty reserves, and reserves for
promotional incentives. 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.
THE FOLLOWING ARE THE COMPANY'S REMAINING ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Singing
Machine Company, Inc. its wholly-owned Hong Kong Subsidiary, International SMC
(HK) Limited ("Hong Kong Subsidiary") and its wholly-owned Macau Subsidiary, SMC
(Comercial Offshore De Macau) Limitada ("Macau Subsidiary"). All inter-company
accounts and transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Hong Kong and Macau Subsidiary is its local
currency. The financial statements of the subsidiary are translated to U.S.
dollars using year-end rates of exchange for assets and liabilities, and average
rates of exchange for the year for revenues, costs, and expenses. Net gains and
losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented. The effect of exchange rate changes on cash at June 30, 2006 and 2005
were also not material.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash and cash
equivalent balances at June 30, 2006 and March 31, 2006 were $168,635 and
$423,548, respectively.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in foreign financial institutions. Such
balances are not insured. The uninsured amounts at June 30, 2006, and March 31,
2006 are approximately $70,466 and $251,108, respectively.
INVENTORIES
Inventories are comprised of electronic karaoke equipment, accessories, and
compact discs and are stated at the lower of cost or market, as determined using
the first in, first out method.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are classified as a separate component of operating
expenses and those billed to customers are recorded as revenue in the statement
of operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. 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.
7
STOCK BASED COMPENSATION
Effective June 15, 2005, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
all share-based payments to employees including grants of employee stock
options, be measured at fair value and expensed in the consolidated statement of
operations over the service period (generally the vesting period). Upon
adoption, the Company transitioned to SFAS 123 (R) using the modified
prospective application, whereby compensation cost is only recognized in the
consolidated statements of operations beginning with the first period that SFAS
123 (R) is effective and thereafter, with prior periods' stock-based
compensation still presented on a pro forma basis. Under the modified
prospective approach, the provisions of SFAS 123 (R) are to be applied to new
employee awards and to employee awards modified, repurchased, or cancelled after
the required effective date. Additionally, compensation cost for the portion of
employee awards for which the requisite service has not been rendered that are
outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of employee awards shall be based on the
grant-date fair value of those awards as calculated for either recognition or
pro-forma disclosures under SFAS 123. The Company continues to use the
Black-Scholes option valuation model to value stock options. As a result of the
adoption of SFAS 123 (R), the Company recognized a charge of $52,692 (included
in selling, general and administrative expenses) in the quarter ended June 30,
2006 associated with the expensing of stock options. Employee stock option
compensation expense in 2006 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.
Reported and pro forma net loss and loss per share are as follows:
For quarter ended
------------------------------
June 30, 2006 June 30, 2005
-------------- -------------
Net Loss, as reported $ (1,151,088) $ (1,901,887)
Less: Total stock-based employee
compensation expense determined
under fair value based method $ (52,692) $ (150,069)
Net Loss, pro forma $ (1,203,780) $ (2,051,956)
Net Loss per share - basic/diluted As reported $ (0.11) $ (0.19)
Pro forma $ (0.11) $ (0.21)
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 in the table below.
During quarter 2006, the Company took into consideration guidance under SFAS 123
(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and
updating assumptions. 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. Previously such assumptions were determined based
on historical data.
For quarter ended June 30, 2006: expected dividend yield 0%, risk-free interest
rate of 5.1%, volatility of 91% and expected term of three years.
For quarter ended June 30, 2005: expected dividend yield 0%, risk-free interest
rate of 4.0%, volatility of 194.23% and expected term of three years.
ADVERTISING
Costs incurred for producing and publishing advertising of the Company, are
charged to operations as incurred. The Company has entered into cooperative
advertising agreements with its major clients that specifically indicated that
the client has to spend the cooperative advertising fund on mutually agreed
events. The percentage of the cooperative advertising allowance ranges from 2%
to 5% of the purchase. The clients have to advertise the Company's products in
the client's catalog, local newspaper and other advertising media. The client
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
client 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 periods ended
June 30, 2006, and 2005 was $25,588 and $20,403, respectively.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to results of operations as
incurred. These expenses are shown as a component of selling, general &
administrative expenses in the consolidated statements of operations. For the
quarter ended June 30, 2006 and 2005, these amounts totaled $25,588 and $29,919,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," 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.
8
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to the relatively short period to maturity for these
instruments.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (SFAS 123 (revised 2004), effective as
of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. This Statement is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123 (revised 2004) eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in Statement 123
as originally issued. Under APB Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. SFAS 123
(revised 2004) requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions). Recognition of that
compensation cost helps users of financial statements to better understand the
economic transactions affecting an entity and to make better resource allocation
decisions. The Company adopted SFAS 123 (revised 2004) for the fiscal quarter
ending after June 15, 2005. The effect of the adoption of SFAS 123 (revised
2004) is not material.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
The Company has experienced recurring losses in addition to an accumulated
deficit and negative working capital. Our unencumbered assets are limited and we
are not able to meet some short-term obligations. These factors, among others,
raise substantial doubt that the Company may be able to continue operations as a
going concern.
Subsequent to June 30, 2006, we plan to finance our operations as follows:
1) Equity investment - The Company has a plan to raise the additional capital
through private placement within 12 months.
2) Related party loan - We might be able to raise additional short term loan
from our major shareholder in Hong Kong, who is also one of our suppliers.
3) Vendor financing - Our key vendors in China have agreed to manufacture on
behalf of the Company without advanced payments and have extended payment terms
to the Company. The terms with the factories are sufficient to cover the factory
direct sales, which accounted more than 60% of the total revenues.
4) Factoring of accounts receivable - The Company would factor its accounts
receivable for sales originated in the United States.
5) Cost reduction - The Company has reduced significant operating expenses in
this quarter. The cost reduction initiatives are part of our intensive effort to
achieve a successful turn-around restructuring. The Company plans to continue
its cost cutting efforts in the fiscal 2007.
6) Bank facility - The Company is actively seeking additional banking facilities
to finance its domestic purchase.
There can be no assurances that forecasted results will be achieved or that
additional financing will be obtained. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
NOTE 3 - INVENTORIES
Inventories are comprised of the following components:
JUNE 30, MARCH 31,
2006 2006
----------- -----------
Finished Goods $ 2,441,022 $ 2,637,277
Inventory in Transit 144,853 146,904
Less: Inventory Reserve (979,810) (1,096,123)
----------- -----------
Total Inventories $ 1,606,065 $ 1,688,058
=========== ===========
9
Inventory consigned to customers at June 30, 2006 and March 31, 2006 was
$193,852 and $176,750, respectively.
NOTE 4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT
On August 4, 2004, the Company entered into a 3-year factoring agreement with
Crestmark Bank in Detroit, Michigan. The agreement allows the Company, at the
discretion of Crestmark, to factor its outstanding receivables, with recourse,
up to a maximum of the lesser of approximately $2.5 million or 70% of eligible
accounts receivable. The Company pays 1% of gross receivables in fees with a
$9,000 minimum maintenance fee per month. The average balance of the line will
be subject to interest payable on a monthly basis at prime plus 2% (10% at June
30, 2006). The agreement contains a liquidated damage fee, which equals $9,000
for each remaining month of the contract term for early termination by the
Company.
Crestmark Bank also received a security interest in all of the Company's
accounts receivables and inventory in the United States. The related party loan
holders have subordinated their debt to the Crestmark Bank debt.
As of June 30, 2006 and March 31, 2006, the outstanding amount due from
Crestmark bank for factoring was $118,119 and $134,281, respectively. The amount
represents excess of customer payments received by Crestmark Bank over advances
made to the Company.
NOTE 5 - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
USEFUL June 30, March 31
LIFE 2006 2006
----------- -----------
Computer and office equipment 5 years $ 485,901 $ 516,456
Furniture and fixtures 5-7 years 466,124 364,026
Leasehold improvement * 154,125 154,125
Molds and tooling 3 years 2,724,988 2,725,080
----------- -----------
3,831,138 3,759,637
Less: Accumulated depreciation (3,353,982) (3,246,072)
----------- -----------
$ 477,156 $ 513,615
=========== ===========
* Shorter of remaining term of lease or useful life
NOTE 6 - RESTRICTED CASH
The Company, through the Hong Kong Subsidiary, maintained a letter of credit
facility and short-term loan with a major international bank. The Hong Kong
Subsidiary was required to maintain a separate deposit account in the amount $0
and $268,405 at June 30, 2006 and March 31, 2006, respectively. This amount is
shown as restricted cash in the accompanying balance sheets. The restricted cash
is not covered by the bank's deposit insurance. The Company has terminated its
credit facilities in Hong Kong as of June 30, 2006.
NOTE 7 - LOANS AND LETTERS OF CREDIT
LOAN PAYABLE
On March 10, 2006, the Company borrowed $2 million from a subsidiary of
Starlight International to pay off the $4 million convertible debentures (see
Note 9). The bridge loan was converted into equity upon closing of Starlight $3
million investment on June 25, 2006.
RELATED PARTY LOANS
The related party loan as of June 30, 2006 was $300,000, which is due to an
officer, a director and an individual. According the Security Purchase Agreement
with Starlight dated on February 21, 2006, the Company might use $50,000 of $3
million investment to retire a portion of the loan. The remainder of the loan
will be extended for 3 years at an interest rate of 5.5%. The loan is
subordinated to Crestmark Bank.
On June 2, 2006, the Company received a $200,000 loan from Andrew Shapiro, a
relative of Mr. Bauer. The interest rate on the loan is 8% per annum and is due
on June 20, 2006 or such later date as mutually agreed between the parties. The
loan was repaid on June 30, 2006 with interest.
NOTE 8 - CUSTOMER CREDITS ON ACCOUNT
Customer credits on account represent customers that have received credits in
excess of their accounts receivable balance. These balances were reclassified
for financial statement purposes as current liabilities until paid or applied to
future purchases.
10
NOTE 9 - SECURITIES PURCHASE AGREEMENT
On February 21, 2006, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with koncepts International Limited (the "Purchaser")
pursuant to which the Company agreed to sell and issue 12,875,536 shares of
common stock, $.01 par value per share (the "Common Shares"), and 3 common stock
purchase warrants (the "Warrants") to purchase an aggregate of 5,000,000 shares
of common stock for an aggregate purchase price of $3,000,000, or per share
purchase price of $.233. Subject to additional closings conditions as specified
in the Purchase Agreement, the closing of the offering is subject to the
Company's successful restructuring of $4,000,000 principal amount subordinated
debentures which came due on February 20, 2006, as well as the approval of the
American Stock Exchange and the shareholders of Starlight International Holdings
Ltd., parent company of the Purchaser, as per the requirements of Hong Kong
Stock Exchange.
The Company issued Warrants to purchase (i) 2,500,000 shares of our stock at an
exercise price of $.233 per share for one year from the date of issuance, (ii)
1,250,000 shares of our common stock at an exercise price of $.28 per share for
three years from the date of issuance, and (iii) 1,250,000 shares of our common
stock at an exercise price of $.35 per share for four years from the date of
issuance. The Warrants are subject to adjustment upon the occurrence of specific
events, including stock dividends, stock splits, combinations or
reclassifications of our common stock or distributions of cash or other assets.
Under the terms of the Warrants, in no event shall the Purchaser become the
beneficial owner of more that 19.99% of the number of shares of common stock
outstanding immediately after giving the effect to such issuance.
On March 10, 2006 the Company borrowed $2 million from a subsidiary of Starlight
International to pay off the $4 million convertible debentures. The bridge loan
will be converted into equity upon closing of the Starlight $3 million
investment.
On June 15, 2006, the shareholders of Starlight have approved the Purchase
Agreement. The Company received $1,000,000 cash payment from Purchaser on June
20, 2006. The Company issued 12,875,536 shares of common stock to the Purchaser
in quarter ended June 30, 2006.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
SYBERSOUND RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO
STREAM, INC., TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC,
AMOS ALTER, DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS
VOGT AND RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT (USCA DOCKET NO. 06-55221)
The federal court action filed on August 11, 2005 alleged violation of the
Copyright Act and the Lanham Act by the defendants, and claims for unfair
competition under California law. Sybersound was joined in the complaint by
several publisher owners of musical compositions who alleged copyright
infringement against all the defendants except The Singing Machine Company, Inc.
On November 7, 2005, the district court ordered the publisher plaintiffs'
copyright claims severed from the case. The Singing Machine Company, Inc. is not
a party to the severed cases.
In September 2005, the defendants, including The Singing Machine Company, Inc.,
filed multiple motions to dismiss the original complaint. In October, Sybersound
filed a motion for summary judgment, as well. On January 6, 2006, the court
granted the motions of the defendants and denied the plaintiff's motion,
dismissing the case against the defendants, including The Singing Machine
Company, Inc., with prejudice. Plaintiff Sybersound thereafter appealed the
decision to the Ninth Circuit Court of Appeals. The case is currently under
review by the appellate court.
Despite the confidence of The Singing Machine Company, Inc. that the ruling in
its favor at the district court level will be affirmed on appeal, it is not
possible to predict such outcomes with any degree of certainty.
The Company is also subject to various other legal proceedings and other claims
that arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability, if any, in excess of applicable insurance
coverage, is not likely to have a material effect on the financial condition,
results of operations or liquidity of the Company. However, as the outcome of
litigation or other legal claims is difficult to predict, significant changes in
the range of possible loss could occur, which could have a material impact on
the Company's operations.
NON-COMPLIANCE NOTICE FROM AMEX
The Company has received a non-compliance notice from The American Stock
Exchange (the "Amex") on July 18, 2005. The notice indicated that the Company
has fallen below the continued listing standards of the Amex and that its
listing is being continued pursuant to an extension. Specifically, for the
quarter ended June 30, 2005, the Company was not in compliance with the minimum
shareholders' equity requirement of $2,000,000, and had reported net losses in
each of the past two quarters, resulting in the Company's non-compliance with
Sections 1003(a)(i) and 1003(a)(iv) of the Amex Company Guide. In addition, the
Company failed to announce in a press release, as required by Section 610(b) of
the Amex Company Guide, that it received an audit opinion which contained a
going concern qualification as disclosed in its Form 10-K for fiscal 2005 that
was filed on June 29, 2005.
In order to maintain its Amex listing, the Company submitted a plan by August
18, 2005 advising the Amex of actions it will take, which may allow it to regain
compliance within a maximum of 18 months and 12 months from July 18, 2005,
respectively.
The Exchange has completed its review of The Singing Machine's plan of
compliance and supporting documentation and has determined that, in accordance
with Section 1009 of the Company Guide, the Plan makes a reasonable
demonstration of the Company's ability to regain compliance with the continued
listing standards within a maximum of 18 months and 12 months from July 18,
2005, respectively.
11
The Company must regain compliance with the $4,000,000 minimum shareholders'
equity requirement by January 18, 2007. Failure to regain compliance within
these time frames likely will result in the Exchange Staff initiating delisting
proceedings pursuant to Section 1009 of the Company Guide. Further, if our
common stock is removed from listing on Amex, it may become more difficult for
us to raise funds through the sales of our common stock or securities.
LEASES
The Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, Compton, California, Kowloon,
Hong Kong and Macau. The leases expire at varying dates. Rent expense for the
quarter ended June 2006, and 2005 was $141,983 and $162,971, respectively.
In addition, the Company maintains various warehouse equipment and computer
equipment operating leases.
Future minimum lease payments under property and equipment leases with terms
exceeding one year as of June 30, 2006 are as follows:
Property Lease Equipment Lease
-------------- ---------------
For period
Less than 1 year $ 752,640 $ 3,791
1 - 3 years 488,042 9,792
over 3 years -- --
-------------- ---------------
$ 1,240,682 $ 13,583
============== ===============
MERCHANDISE LICENSE AGREEMENTS
On May 10, 2006, we entered into a two-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of karaoke products
based on MGA's BRATZ(TM) franchise, one of the world's leading toy lines and
girls' lifestyle brands, in North America, Europe and Australia. These karaoke
products include a TFT DVD karaoke system, sing-a-long cassette players, deluxe
microphones, electronic keyboards and an electronic drum. The license agreement
contains a minimum guarantee payment term.
NOTE 11 - STOCKHOLDERS' DEFICIT
COMMON STOCK ISSUANCES
During the quarter ended June 30, 2006 and 2005, the Company issued 12,875,536
and 277,778 shares of its common stock, respectively.
On May 1, 2005, the Company has authorized the issuance of 277,778 shares of
common stock for the conversion of a $200,000 related party loan.
On June 25, 2006, the Company has authorized the issuance of 12,875,536 shares
of common stock to koncept International Limited for $3 million investment.
EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings per Share", basic (loss) earnings per
share are computed by dividing the net (loss) earnings for the year by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net earnings for the year by the weighted average number
of common shares outstanding including the effect of common stock equivalents.
For the quarter ended June 2006 and 2005, 6,167,555 and 4,198,729 common stock
equivalents were not included in the computation of diluted earnings per share
as their effect would have been anti-dilutive.
12
STOCK OPTIONS
On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan
(`Plan"), which replaced the 1994 Stock Option Plan, as amended, (the "1994
Plan"). The Plan was developed to provide a means whereby directors and selected
employees, officers, consultants, and advisors of the Company may be granted
incentive or non-qualified stock options to purchase common stock of the
Company. As of June 30, 2006, the Plan is authorized to grant options up to an
aggregate of 1,950,000 shares of the Company's common stock and up to 300,000
shares for any one individual grant in any quarter. As of June 30, 2006, the
Company had granted 1,666,360 options under the Year 2001 Plan, leaving 283,640
options available to be granted. As of June 30, 2006, the Company had 339,050
options issued and 4,000 outstanding under its 1994 Plan.
The exercise price of employee common stock option issuances in quarter ended
June 2006, and 2005 was equal to the fair market value on the date of grant.
Accordingly, no compensation cost has been recognized for options issued under
the Plan in these years prior to June 15, 2006. The Company adopted SFAS 123(R)
for the reporting period ending after June 15, 2005 and recognized the fair
value of the stock option as part of the general and administration expenses.
The amount of $52,692 was recorded as part of the general and administrative
expenses for quarter ended June 30, 2006.
STOCK WARRANTS
As of June 30, 2006, the Company had a total of 5,591,040 stock purchase
warrants outstanding. Of the total, 457,143 warrants were issued to investors in
connection with the $4 million debenture offering and 103,896 warrants were
issued to the respective investment banker in September 2004, 5,000,000 warrants
were issued to koncept International Limited related according to the Security
Purchase Agreement dated on February 21, 2006. The exercise price of warrants
ranges from $0.23 to $1.46. The expiration date of warrants ranges from
September 7, 2006 to February 20, 2010.
NOTE 12 - SEGMENT INFORMATION
The Company operates in one segment and maintains its records accordingly. The
majority of sales to customers outside of the United States are made by the
Macau Subsidiary. Sales by geographic region for the period presented are as
follows:
FOR THE QUARTERS ENDED
June 30,
2006 2005
---------- ----------
North America $ 554,436 $1,804,837
Europe 461,864 898,088
Others 19,576 88,830
---------- ----------
$1,035,876 $2,791,755
========== ==========
The geographic area of sales is based primarily on the location where the
product is delivered.
13
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 Financial
Statements and Notes thereto. Our fiscal year ends March 31. 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. Important factors to consider in evaluating
such forward-looking statements include (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) various
competitive market factors that may prevent us from competing successfully in
the marketplace.
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, and its subsidiary
(the "Singing Machine," "we," or "us") are primarily engaged in the design,
marketing, and sale of consumer karaoke audio equipment, accessories, and
musical recordings. The Company's products are sold directly to distributors and
retail customers. Our electronic karaoke machines and audio software products
are marketed under The Singing Machine(R) and Motown trademarks.
Our products are sold throughout the United States, primarily through department
stores, lifestyle merchants, mass merchandisers, direct mail catalogs and
showrooms, music and record stores, national chains, specialty stores and
warehouse clubs.
Our karaoke machines and karaoke software are currently sold in such major
retail outlets as Best Buy, Costco, Kohl's, J.C. Penney, Radio Shack, Wal-Mart
and Sam's Club.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items related
to our consolidated statements of operations as a percentage of net revenues for
the three months ended June 30, 2006 and 2005.
For three months ended
--------------------
06/30/06 06/30/05
-------- --------
Net Sales 100.0% 100.0%
Cost of Goods Sold 87.8% 84.4%
Gross Profit 12.2% 15.6%
Operating Expenses
Selling expenses 0.4% 5.4%
General and administrative expenses 112.5% 53.1%
Depreciations and amortizations 10.4% 5.8%
Total Operating Expenses 123.3% 64.2%
Loss from Operations -111.1% -48.6%
Other Income (Expenses)
Other income 0.9% 0.1%
Interest expense -0.9% -3.7%
Interest expense - Amortization of discount
on convertible debentures 0.0% -16.0%
Net Other Expenses 0.0% -19.5%
Income Loss Income Taxes -111.1% -68.1%
Income Taxes Expense 0.0% 0.0%
Net Loss -111.1% -68.1%
14
QUARTER ENDED JUNE 30, 2006 COMPARED TO THE QUARTER ENDED JUNE 30, 2005
NET SALES
Net sales for the quarter ended June 30, 2006 decreased to $1,035,876 from
$2,791,755, a decrease of $1,755,879 as compared to the same period ended June
30, 2005. This decrease can be primarily attributed to the decrease in music
sales as well as a decrease in our hardware sales. The karaoke item has become a
very seasonal product. Our major customers have pushed back the delivery
schedule towards second and third quarters.
GROSS PROFIT
Our gross profit for the quarter ended June 30, 2006 decreased to $126,472 from
$436,895, a decrease of $310,423 as compared to the same period in the prior
year. As a percentage of revenues, our gross profit for the three months ended
June 30, 2006 decreased to 12.2% from 15.6% for the same period in 2005. The
decrease of gross profit as a percentage of revenues was primarily due to a high
return of the music product. The profit from music products is higher than the
hardware products.
OPERATING EXPENSES
For the three months ended June 30, 2006, total operating expenses decreased to
$1,277,476 from $1,793,517 for the three months ended June 30, 2005, a decrease
of $516,041. Management has consistently reduced its operating expenses. This
decrease of operating expenses is primarily due to the following factors:
1) Selling expenses decreased $146,434 which was primarily due to the decrease
of sales and the commissions charge back to the music distributor.
2) General and administrative expenses decreased $316,277 which was primarily
due to the reduction of compensation expenses and the warehouse and office
rental.
3) Depreciation and amortization expenses decreased $53,330 which was
primarily due to the completed amortization for the loan cost related to
the $4 million debenture in fiscal 2006.
Our management will continue to implement cost cutting efforts in order to
further reduce operating expenses for the remaining period of the current fiscal
year.
OTHER INCOME/EXPENSES
Our net other expenses decreased to $84 from $545,265 for the same period a year
ago. The decrease was primarily due to the retirement of $4 million debenture in
fourth quarter of fiscal 2006.
INCOME TAXES
For the three months ended June 30, 2006 and 2005, the Company did not record a
tax provision because it expects sufficient future net losses to offset the
income for these periods.
NET INCOME
The net income decreased to a net loss of $1,151,088 from a net loss of
$1,901,887 for the same period a year ago. The decrease of net loss was
primarily due to the reduction of operating expenses and other expenses as
described above.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, Singing Machine had cash on hand of $168,635, as compared
to cash on hand of $233,345 and restricted cash of $872,645 as of June 30, 2005.
We had a working capital deficit of $2,333,601 as of June 30, 2006. The accrual
of the Hong Kong tax liability of approximately $2.4 million contributes to the
working capital deficit.
Net cash used by operating activities was $1,467,929 for the three months ended
June 30, 2006, as compared to $761,048 used by operating activities the same
period a year ago. We generated approximately $1.2 million cash from overstock
inventory in the first quarter of last year and our prepaid expenses had
increased in the first quarter this year due to an advance to a factory for a
new product and a royalty prepayment for a licensing product.
Net cash provided by investing activities for the three months ended June 30,
2006 was $194,615 as compared to $37,532 used in investing activities for the
same period ended a year ago. During first quarter of fiscal 2007, we invested
approximately $60,000 for our new office remolding in Macau and we have withdrew
the fixed deposit of $266,165 form a bank in Hong Kong.
Net cash provided by financing activities was $1,016,162 for the three months
ended June 30, 2006, as compared to $414,871 for the same period ended a year
ago. We received $1 million from koncepts international as the final payment for
the $3 million equity investment in first quarter of fiscal 2007.
15
The Company has a factoring agreement with Crestmark Bank, pursuant to which the
Company may borrow 70% of eligible accounts receivable up to approximately $2.5
million. The agreement stipulates that we are only allowed to factor sales
originating from our warehouses in the United States. The factoring company
determines the eligible receivables based on their own credit standard, and the
accounts' aging. As of June 30, 2006, the credit availability under this
agreement is $118,119.
As of June 30, 2006, our unrestricted cash on hand was $168,635. Our average
monthly general and administrative expenses are approximately $350,000. We
expect that we will require approximately $1.05 million for working capital
during the next three-month period.
During the next 12 month period, we plan on financing our operation needs by:
o Raising additional working capital.
o Collecting our existing accounts receivable;
o Selling existing inventory;
o Vendor financing;
o Borrowing from our factoring agreement;
o Cutting our operating expenses in Hong Kong.
Our sources of cash for working capital in the long term, 12 months and beyond,
are the same as our sources during the short term. We are actively seeking
additional financing facilities and capital investments to maintain and grow our
business. If we need to obtain additional financing and fail to do so, it may
have a material adverse effect on our ability to meet our financial obligations
and to continue as a going concern.
Our commitments for debt and other contractual obligations as of June 30, 2006
are summarized as follows:
----------
Total Less than 1 year 1 - 3 years 3 - 5 years Over 5 years
---------- ---------------- ----------- ----------- ------------
Property Leases $1,240,682 $ 752,640 $ 488,042 -- --
Equipment Leases 13,585 3,791 9,794 -- --
Subordinated Debt - Related Party 300,000 50,000 -- 250,000 --
Licensing Agreement 150,000 -- 150,000 -- --
Interest Payments 11,620 11,620 -- -- --
---------- ---------------- ----------- ----------- ------------
Total $1,715,887 $ 818,051 $ 647,836 $ 250,000 --
========== ================ =========== =========== ============
INVENTORY SELL THROUGH
We monitor the inventory levels and sell through activity of our major customers
to properly anticipate returns and maintain the appropriate level of inventory.
We are not aware of any customer that has overstock products. We have proper
return reserves to cover these potential returns.
SEASONAL AND QUARTERLY RESULTS
Historically, our operations have been seasonal, with the highest net sales
occurring in our fiscal second and third quarters (reflecting increased orders
for equipment 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
fiscal second and third quarter, combined, accounted for approximately 88% and
87% of net sales in fiscal 2006 and 2005, respectively. By contrast, our highest
levels of returned merchandise occurred in the first and fourth quarter since
customers usually returned defective or overstock inventory subsequent to the
Christmas holiday season. Approximately 63% and 84% of the total returns were
received in the first and fourth quarter combined in fiscals 2006 and 2005.
Our results of operations may also fluctuate from quarter to quarter as 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 The Singing Machine's operations.
Singing Machine has historically passed any price increases on to its customers
since prices charged by Singing Machine are generally not fixed by long-term
contracts.
CRITICAL ACCOUNTING POLICIES
We prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such,
management is required to make certain estimates, judgments and assumptions that
it believes are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods presented. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating our reported financial results include: accounts receivable allowance
for doubtful accounts, reserves on inventory, deferred tax assets and our Hong
Kong income tax exemption.
16
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 an amount sufficient to respond to
normal business conditions. Management sets 100% reserves for customers in
bankruptcy and other reserves based upon historical collection experience.
Should business conditions deteriorate or any major customer default on its
obligations to the Company, this allowance may need to be significantly
increased, which would have a negative impact on operations.
RESERVES ON INVENTORIES. The Singing Machine establishes a reserve on inventory
based on the expected net realizable value of inventory 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.
INCOME TAXES. Significant management judgment is required in developing our
provision for income taxes, including the determination of foreign tax
liabilities, deferred tax assets and liabilities and any valuation allowances
that might be required against the deferred tax assets. Management evaluates its
ability to realize its deferred tax assets on a quarterly basis and adjusts its
valuation allowance when it believes that it is more likely than not that the
asset will not be realized.
We operate within multiple taxing jurisdictions and are subject to audit in
those jurisdictions. Because of the complex issues involved, any claims can
require an extended period to resolve. In management's opinion, adequate
provisions for potential income taxes in the jurisdiction have been made.
OTHER ESTIMATES. We make other estimates in the ordinary course of business
relating to sales returns and allowances, warranty reserves, and reserves for
promotional incentives. Historically, past changes to these estimates have not
had a material impact on our financial condition. However, circumstances could
change which may alter future expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and rates. We are exposed to market risk in the areas of
changes in United States and international borrowing rates and changes in
foreign currency exchange rates. In addition, we are exposed to market risk in
certain geographic areas that have experienced or remain vulnerable to an
economic downturn, such as China. We purchase substantially our entire inventory
from companies in China, and, therefore, we are subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. While we
believe that, if such an event were to occur, we would be able to find
alternative sources of inventory at competitive prices, we cannot assure you
that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. Historically and as of June 30, 2006,
we have not used derivative instruments or engaged in hedging activities to
minimize market risk.
INTEREST RATE RISK
As or June 30, 2006, our exposure to market risk resulting from changes in
interest rates is immaterial.
FOREIGN CURRENCY RISK
We have a wholly owned subsidiary in Hong Kong. Sales by our Hong Kong
subsidiary made on an FOB China or Hong Kong basis are dominated in U.S.
dollars. However, purchases of inventory and Hong Kong operating expenses are
typically denominated in Hong Kong dollars, thereby creating exposure to changes
in exchange rates. Changes in either the Hong Kong dollar or U.S. dollar
exchange rates may positively or negatively affect our gross margins, operating
income and retained earnings. We do not believe that near-term changes in the
exchange rates, if any, will result in a material effect on our future earnings,
fair values or cash flows, and therefore, we have chosen not to enter into
foreign currency hedging transactions. We cannot assure you that this approach
will be successful, especially in the event of a significant and sudden change
in the value of the Hong Kong dollar.
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.
(b) Changes in Internal Controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND THE MARKET PRICE OF OUR STOCK
RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE SIGNIFICANT WORKING CAPITAL NEEDS AND IF WE ARE UNABLE TO OBTAIN
ADDITIONAL FINANCING, WHEN NEEDED, WE MAY NOT HAVE SUFFICIENT CASH FLOW TO RUN
OUR BUSINESS.
As of June 30, 2006, our cash on hand is limited. We need approximately $1.05
million in working capital in order to finance our operations over the next
three months. We will finance our working capital needs from the collection of
accounts receivable, and sales of existing inventory. As of June 30, 2006, our
inventory was valued at $1.6 million. See "Liquidity" beginning on page 15. If
these sources do not provide us with adequate financing, we may try to seek
financing from lenders and investors. If we are not able to obtain adequate
financing, when needed, it will have a material adverse effect on our cash flow
and our ability to continue as a going concern. If we have a severe shortage of
working capital, we may not be able to continue our business operations and may
be required to file a petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code or enter into some other form of liquidation or reorganization
proceeding.
WE MAY BE DEEMED INSOLVENT AND WE MAY GO OUT OF BUSINESS.
As of June 30, 2006, our cash position is limited and we had negative equity. We
are not able to pay all of our creditors on a timely basis. We are not current
on our accounts payable of $0.4 million to our factory in China. If we are not
able to pay our current debts as they become due, we may be deemed to be
insolvent. We may be required to file a petition for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code or enter into some other form of liquidation or
reorganization proceedings.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS RAISED SUBSTANTIAL DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN AS OF MARCH 31, 2006.
We received a report dated May 26, 2006 from our independent certified public
accountants covering the consolidated financial statements for our fiscal year
ended March 31, 2006 that included an explanatory paragraph which stated that
the financial statements were prepared assuming that the Singing Machine would
continue as a going concern. This report stated that our operating performance
in fiscal 2006 and our minimal liquidity raised substantial doubt about our
ability to continue as a going concern. If we are not able to raise additional
capital, we may need to curtail or stop our business operations. We may be
required to file a petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code or enter into some other form of liquidation or reorganization
proceedings.
A SMALL NUMBER OF OUR CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF ONE OR MORE OF THESE KEY CUSTOMERS COULD SIGNIFICANTLY
REDUCE OUR REVENUES AND CASH FLOW.
We rely on a few large customers to provide a substantial portion of our
revenues. As a percentage of total revenues, our net sales to our five largest
customers during the year ended March 31, 2006 and year ended March 31, 2005
were approximately 56% and 40%, respectively. We do not have long-term
contractual arrangements with any of our customers and they can cancel their
orders at any time prior to delivery. A substantial reduction in or termination
of orders from any of our largest customers would decrease our revenues and cash
flow.
WE ARE RELYING ON ONE FACTORY TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR
KARAOKE MACHINES FOR FISCAL 2007, AND IF THE RELATIONSHIP WITH THIS FACTORY IS
DAMAGED OR INJURED IN ANY WAY, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.
We have worked out a written agreement with factories in China to produce most
of our karaoke machines for fiscal 2007. We owe one factory approximately $0.4
million as of June 30, 2006 and have worked out a verbal payment plan with it.
If the factory is unwilling or unable to deliver our karaoke machines to us, our
business will be adversely affected. Because our cash on hand is minimal, we are
relying on revenues received from the sale of our ordered karaoke machines to
provide cash flow for our operations. If we do not receive cash from these
sales, we may not be able to continue our business operations.
WE ARE RELYING ON ONE DISTRIBUTOR TO DISTRIBUTE OUR MUSIC PRODUCTS, IF THE
DISTRIBUTION AGREEMENT IS TERMINATED, IT WOULD REDUCE OUR REVENUES AND
PROFITABILITY.
We are relying on Warner Elektra Atlantic Corporation (WEA) to distribute our
music products in fiscal 2007, if the distribution agreement is terminated, our
music revenues might decrease as well as our profitability.
WE ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE
PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE
OUR REVENUES AND PROFITABILITY.
18
In fiscal 2006 and 2005, a number of our customers and distributors returned
karaoke products that they had purchased from us. Our customers returned goods
valued at $2.4 million, or 7.4% of our net sales in fiscal 2006. Some of the
returns resulted from customer's overstock of the products. Although we were not
contractually obligated to accept this return of the products, we accepted the
return of the products because we valued our relationship with our customers.
Because we are dependent upon a few large customers, we are subject to the risk
that any of these customers may elect to return unsold karaoke products to us in
the future. If any of our customers were to return karaoke products to us, it
would reduce our revenues and profitability.
WE ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTION AND
FINANCIAL INCENTIVES AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR
CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY.
Because there is intense competition in the karaoke industry, we are subject to
pricing pressure from our customers. Many of our customers have demanded that we
lower our prices or they will buy our competitor's products. If we do not meet
our customer's demands for lower prices, we will not sell as many karaoke
products. In the fiscal year ended March 31, 2006, our sales to customers in the
United States decreased because of increased price competition. We are also
subject to pressure from our customers regarding certain financial incentives,
such as return credits or large advertising or cooperative advertising
allowances, which effectively reduce our profit. We gave advertising allowances
in the amount of $0.2 million during fiscal 2006 and $0.6 million during fiscal
2005. We have historically offered advertising allowances to our customers
because it is standard practice in the retail industry.
WE EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS AND IF
WE DO NOT ACCURATELY FORECAST DEMAND, OUR REVENUES, NET INCOME AND CASH FLOW MAY
BE AFFECTED.
Because of our reliance on manufacturers in China for our machine production,
our production lead times range from one to four months. Therefore, we must
commit to production in advance of customers orders. It is difficult to forecast
customer demand because we do not have any scientific or quantitative method to
predict this demand. Our forecasting is based on management's general
expectations about customer demand, the general strength of the retail market
and management's historical experiences. We overestimated demand for our
products in fiscal 2003 and 2004 and had $5.9 million in inventory as of March
31, 2004. Because of this excess inventory, we had liquidity problems in fiscal
2005 and our revenues, net income and cash flow were adversely affected.
WE ARE SUBJECT TO THE COSTS AND RISKS OF CARRYING INVENTORY FOR OUR CUSTOMERS
AND IF WE HAVE TOO MUCH INVENTORY, IT WILL AFFECT OUR REVENUES AND NET INCOME.
Many of our customers place orders with us several months prior to the holiday
season, but they schedule delivery two or three weeks before the holiday season
begins. As such, we are subject to the risks and costs of carrying inventory
during the time period between the placement or the order and the delivery date,
which reduces our cash flow. As of June 30, 2006 we had $1.6 million in
inventory on hand. It is important that we sell this inventory during fiscal
2007, so we have sufficient cash flow for operations.
OUR GROSS PROFIT MARGINS HAVE DECREASED OVER THE PAST YEAR AND WE EXPECT A
COMPETITIVE MARKET.
Over the past year, our gross profit margins have generally decreased due to the
competition except for fiscal 2005 when we had developed several new models,
which were in demand and yielded higher profit margins. We expect that our gross
profit margin might decrease under downward pressure in fiscal 2007.
OUR BUSINESS IS SEASONAL AND THEREFORE OUR ANNUAL OPERATING RESULTS WILL DEPEND,
IN LARGE PART, ON OUR SALES DURING THE RELATIVELY BRIEF HOLIDAY SEASON.
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 87.9%, 86.7% and
87.2% of net sales in fiscal 2006, 2005 and 2004, respectively.
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IF WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND
NET PROFITABILITY WILL BE REDUCED.
Our major competitor for karaoke machines and related products is Memorex. We
believe that competition for karaoke machines is based primarily on price,
product features, reputation, delivery times, and customer support. Our primary
competitors for producing karaoke music are Compass, Pocket Songs, Sybersound,
UAV and Sound Choice. We believe that competition for karaoke music is based
primarily on popularity of song titles, price, reputation, and delivery times.
To the extent that we lower prices to attempt to enhance or retain market share,
we may adversely impact our operating margins. Conversely, if we opt not to
match competitor's price reductions we may lose market share, resulting in
decreased volume and revenue. To the extent our leading competitors reduce
prices on their karaoke machines and music, we must remain flexible to reduce
our prices. If we are forced to reduce our prices, it will result in lower
margins and reduced profitability. Because of intense competition in the karaoke
industry in the United States during fiscal 2006, we expect that the intense
pricing pressure in the low end of the market will continue in the karaoke
market in the United States in fiscal 2007. In addition, we must compete with
all the other existing forms of entertainment including, but not limited to:
motion pictures, video arcade games, home video games, theme parks, nightclubs,
television, prerecorded tapes, CD's and video cassettes.
IF WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE
TO GROW.
The karaoke industry is characterized by rapid technological change, frequent
new product introductions and enhancements and ongoing customer demands for
greater performance. In addition, the average selling price of any karaoke
machine has historically decreased over its life, and we expect that trend to
continue. As a result, our products may not be competitive if we fail to
introduce new products or product enhancements that meet evolving customer
demands. The development of new products is complex, and we may not be able to
complete development in a timely manner. To introduce products on a timely
basis, we must:
o accurately define and design new products to meet market needs;
o design features that continue to differentiate our products from
those of our competitors;
o transition our products to new manufacturing process technologies;
o identify emerging technological trends in our target markets;
o anticipate changes in end-user preferences with respect to our
customers' products;
o bring products to market on a timely basis at competitive prices;
and
o respond effectively to technological changes or product
announcements by others.
We believe that we will need to continue to enhance our karaoke machines and
develop new machines to keep pace with competitive and technological
developments and to achieve market acceptance for our products. At the same
time, we need to identify and develop other products which may be different from
karaoke machines.
OUR PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD PREVENT
OR DELAY OUR CUSTOMERS' RECEIPT OF INVENTORY.
We rely principally on four contract ocean carriers to ship virtually all of the
products that we import to our warehouse facility in Compton, California.
Retailers that take delivery of our products in China rely on a variety of
carriers to import those products. Any disruptions in shipping, whether in
California or China, caused by labor strikes, other labor disputes, terrorism,
and international incidents may prevent or delay our customers' receipt of
inventory. If our customers do not receive their inventory on a timely basis,
they may cancel their orders or return products to us. Consequently, our
revenues and net income would be reduced.
OUR MANUFACTURING OPERATIONS ARE LOCATED IN THE PEOPLE'S REPUBLIC OF CHINA,
SUBJECTING US TO RISKS COMMON IN INTERNATIONAL OPERATIONS. IF THERE IS ANY
PROBLEM WITH THE MANUFACTURING PROCESS, OUR REVENUES AND NET PROFITABILITY MAY
BE REDUCED.
We are using six factories in the People's Republic of China to manufacture the
majority of our karaoke machines. These factories will be producing
approximately 98% of our karaoke products in fiscal 2007. Our arrangements with
these factories are subject to the risks of doing business abroad, such as
import duties, trade restrictions, work stoppages, and foreign currency
fluctuations, limitations on the repatriation of earnings and political
instability, which could have an adverse impact on our business. Furthermore, we
have limited control over the manufacturing processes themselves. As a result,
any difficulties encountered by our third-party manufacturers that result in
product defects, production delays, cost overruns or the inability to fulfill
orders on a timely basis could adversely affect our revenues, profitability and
cash flow. Also, since we do not have written agreements with any of these
factories, we are subject to additional uncertainty if the factories do not
deliver products to us on a timely basis.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND
RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS
WILL BE SEVERELY DAMAGED.
Our growth and ability to meet customer demand depends in part on our capability
to obtain timely deliveries of karaoke machines and our electronic products. We
rely on third party suppliers to produce the parts and materials we use to
manufacture and produce these products. If our suppliers are unable to provide
our factories with the parts and supplies, we will be unable to produce our
products. We cannot guarantee that we will be able to purchase the parts we need
at reasonable prices or in a timely fashion. In the last several years, there
have been shortages of certain chips that we use in our karaoke machines. If we
are unable to anticipate any shortages of parts and materials in the future, we
may experience severe production problems, which would impact our sales.
CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY
VARIOUS ECONOMIC CONDITIONS AND CHANGES.
20
Our business and financial performance may be damaged more than most companies
by adverse financial conditions affecting our business or by a general weakening
of the economy. Purchases of karaoke machines and music are considered
discretionary for consumers. Our success will therefore be influenced by a
number of economic factors affecting discretionary and consumer spending, such
as employment levels, business, interest rates, and taxation rates, all of which
are not under our control. Additionally, other extraordinary events such as
terrorist attacks or military engagements, which adversely affect the retail
environment may restrict consumer spending and thereby adversely affect our
sales growth and profitability.
WE MAY HAVE INFRINGED THE COPYRIGHTS OF CERTAIN MUSIC PUBLISHERS AND IF WE
VIOLATE FEDERAL COPYRIGHT LAWS, WE WILL BE SUBJECT TO MONETARY PENALTIES.
Over the past several years, Singing Machine (like its competitors) has received
notices from certain music publishers alleging that the full range of necessary
rights in their copyrighted works has not been properly licensed in order to
sell those works as part of products known as "compact discs with graphics"
("CDG"s). CDG's are compact discs which contain the musical recordings of
karaoke songs and graphics which contain the lyrics of the songs. Singing
Machine has negotiated licenses with the complaining parties, or is in the
process of settling such claims, with each one of the complaining copyright
owners. As with any alleged copyright violations, unlicensed users may be
subject to damages under the U.S. Copyright Act. Such damages and claims could
have a negative effect on Singing Machine's ability to sell its music products
to its customers if left unchecked or unresolved, the reason Singing Machine
pursues licenses so diligently.
WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR
PROPRIETARY TECHNOLOGY, COPYRIGHTS OR TRADE SECRETS AND ANY CLAIMS ASSERTED
AGAINST US COULD AFFECT OUR NET PROFITABILITY.
We believe that we independently developed the technology used in our electronic
and audio software products and that it does not infringe on the proprietary
rights, copyrights or trade secrets of others. However, we cannot assure you
that we have not infringed on the proprietary rights of third parties or those
third parties will not make infringement violation claims against us. During
fiscal 2000, Tanashin Denki, Ltd., a Japanese company that holds a patent on a
cassette tape drive mechanism alleged that some of our karaoke machines violated
their patents. We settled the matters with Tanashin in December 1999.
Subsequently in December 2002, Tanashin again alleged that some of our karaoke
machines violated their patents. We entered into another settlement agreement
with them in May 2003. In addition to Tanashin, we could receive infringement
claims from other third parties. Any infringement claims may have a negative
effect on our profitability and financial condition.
WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS, WHO ARE EXPERIENCING
FINANCIAL DIFFICULTIES, AND IF THESE CUSTOMERS ARE UNABLE TO PAY US, OUR
REVENUES AND PROFITABILITY WILL BE REDUCED.
We sell products to retailers, including department stores, lifestyle merchants,
direct mail retailers, which are catalogs and showrooms, national chains,
specialty stores, and warehouse clubs. Some of these retailers, such as K-Mart,
FAO Schwarz and KB Toys, have engaged in leveraged buyouts or transactions in
which they incurred a significant amount of debt, and operated under the
protection of bankruptcy laws. As of June 30, 2006, we are aware of only three
customers, FAO Schwarz, Musicland and KB Toys, which are operating under the
protection of bankruptcy laws. Deterioration in the financial condition of our
customers could result in bad debt expense to us and have a material adverse
effect on our revenues and future profitability.
A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTERS IN CALIFORNIA OR FLORIDA
COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR STORES, WHICH COULD
ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
A significant amount of our merchandise is shipped to our customers from one of
our two warehouses, which are located in Compton, California, and Coconut Creek,
Florida. Events such as fire or other catastrophic events, any malfunction or
disruption of our centralized information systems or shipping problems may
result in delays or disruptions in the timely distribution of merchandise to our
customers, which could substantially decrease our revenues and profitability.
OUR BUSINESS OPERATIONS COULD BE DISRUPTED IF THERE ARE LABOR PROBLEMS ON THE
WEST COAST.
During fiscal 2006, approximately 33% of our sales were domestic warehouse
sales, which were made from our warehouses in California and Florida. During the
third quarter of fiscal 2003, the dock strike on the West Coast affected sales
of two of our karaoke products and we estimate that we lost between $3 and $5
million in orders because we could not get the containers of these products off
the pier. If another strike or work slow-down occurs and we do not have a
sufficient level of inventory, a strike or work slow-down would result in
increased costs to us and may reduce our profitability.
21
RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE WHICH MAY CAUSE INVESTORS
TO LOSE ALL OR A PORTION OF THEIR INVESTMENT.
From December 1, 2004 through June 30, 2006, our common stock has traded between
a high of $.95 and a low of $0.26. During this period, we had liquidity problems
and incurred a net loss of $1.9 million in fiscal 2006 and loss of $3.6 million
in fiscal 2005. Our stock price may continue to be volatile based on similar or
other adverse developments in our business. In addition, the stock market
periodically experiences significant adverse price and volume fluctuations which
may be unrelated to the operating performance of particular companies.
IF INVESTORS SHORT OUR SECURITIES, IT MAY CAUSE OUR STOCK PRICE TO DECLINE.
During the past year, a number of investors have held a short position in our
common stock. As of July 11, 2006, investors hold a short position in
approximate 283,000 shares of our common stock which represents 4.0% of our
public float. The anticipated downward pressure on our stock price due to actual
or anticipated sales of our stock by some institutions or individuals who engage
in short sales of our common stock could cause our stock price to decline.
Additionally, if our stock price declines, it may be more difficult for us to
raise capital.
OUR COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE, WHICH MAY
HAVE A MATERIAL ADVERSE IMPACT ON THE PRICING AND TRADING OF OUR COMMON STOCK.
The Company has received a non-compliance notice from The American Stock
Exchange (the "Amex") on July 18, 2005. The notice indicated that the Company
has fallen below the continued listing standards of the Amex and that its
listing is being continued pursuant to an extension. Specifically, for the
fiscal year ended March 31, 2005, the Company was not in compliance with the
minimum shareholders' equity requirement of $2,000,000, and had reported net
losses in each of the past two fiscal years, resulting in the Company's
non-compliance with Sections 1003(a)(i) and 1003(a)(iv) of the Amex Company
Guide. In addition, the Company failed to announce in a press release, as
required by Section 610(b) of the Amex Company Guide, that it received an audit
opinion which contained a going concern qualification as disclosed in its Form
10-K for fiscal 2005 that was filed on June 29, 2005.
In order to maintain its Amex listing, the Company submitted a plan by August
18, 2005 advising the Amex of actions it will take, which may allow it to regain
compliance within a maximum of 18 months and 12 months from July 18, 2005,
respectively.
The Exchange has completed its review of The Singing Machine's plan of
compliance and supporting documentation and has determined that, in accordance
with Section 1009 of the Company Guide, the Plan makes a reasonable
demonstration of the Company's ability to regain compliance with the continued
listing standards within a maximum of 18 months and 12 months from July 18,
2005, respectively.
The Company must regain compliance with the $4,000,000 minimum shareholders'
equity requirement by January 18, 2007. Failure to regain compliance within
these time frames likely will result in the Exchange Staff initiating delisting
proceedings pursuant to Section 1009 of the Company Guide. Further, if our
common stock is removed from listing on Amex, it may become more difficult for
us to raise funds through the sales of our common stock or securities.
IF OUR OUTSTANDING DERIVATIVE SECURITIES ARE EXERCISED OR CONVERTED, OUR
EXISTING SHAREHOLDERS WILL SUFFER DILUTION.
As of June 30, 2006, there were outstanding stock options to purchase an
aggregate of 2,005,410 shares of common stock at exercise prices ranging from
$.32 to $11.09 per share, not all of which are immediately exercisable. The
weighted average exercise price of the outstanding stock options is
approximately $1.17per share. As of June 30, 2006, there were outstanding
immediately exercisable options to purchase an aggregate of 576,515 shares of
our common stock. There were outstanding stock warrants to purchase 5,591,040
shares of common stock at exercise prices ranging from $.23 to $4.03 per share,
all of which are exercisable. The weighted average exercise price of the
outstanding stock warrants is approximately $0.48 per share.
FUTURE SALES OF OUR COMMON STOCK HELD BY CURRENT STOCKHOLDERS AND INVESTORS MAY
DEPRESS OUR STOCK PRICE.
As of June 30, 2006, there were 22,935,818 shares of our common stock
outstanding. We have filed two registration statements registering an aggregate
3,794,250 of shares of our common stock (a registration statement on Form S-8 to
register the sale of 1,844,250 shares underlying options granted under our 1994
Stock Option Plan and a registration statement on Form S-8 to register 1,950,000
shares of our common stock underlying options granted under our Year 2001 Stock
Option Plan). An additional registration statement on Form S-1 was filed in
October 2003, registering an aggregate of 2,795,465 shares of our common stock.
The market price of our common stock could drop due to the sale of large number
of shares of our common stock, such as the shares sold pursuant to the
registration statements or under Rule 144, or the perception that these sales
could occur.
OUR STOCK PRICE MAY DECREASE IF WE ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK.
Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares
of common stock as amended in January 2006. As of June 30, 2006, we had
22,935,818 shares of common stock issued and outstanding and an aggregate of
7,596,450 shares issuable under our outstanding options and warrants. As such,
our Board of Directors has the power, without stockholder approval, to issue up
to 69,467,732 shares of common stock.
22
Any issuance of additional shares of common stock, whether by us to new
stockholders or the exercise of outstanding warrants or options, may result in a
reduction of the book value or market price of our outstanding common stock.
Issuance of additional shares will reduce the proportionate ownership and voting
power of our then existing stockholders.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAKE IT DIFFICULT FOR A
THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON
STOCK.
Delaware law and our certificate of incorporation and bylaws contain provisions
that could delay, defer or prevent a change in control of our company or a
change in our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. These provisions of our restated certificate of
incorporation include: authorizing our board of directors to issue additional
preferred stock, limiting the persons who may call special meetings of
stockholders, and establishing advance notice requirements for nominations for
election to our board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 25, 2006, the Company has authorized the issuance of 12,875,536 shares
of common stock to koncept International Limited for $3 million investment. The
Company used $2 million of the proceed to retire the $4 million debentures. The
remaining $1 million was used as working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are not currently in default upon any of our senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.*
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.*
32.1 Certifying Statement of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act.*
32.2 Certifying Statement of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act.*
* Filed herewith.
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SINGING MACHINE COMPANY, INC.
Dated: August 14, 2006 By: /s/ YI PING CHAN
--------------------------------------------
Interim Chief Executive Officer and
Chief Operating Officer (Principal Executive
Officer)
Dated: August 14, 2006 By: /s/ DANNY ZHENG
--------------------------------------------
Chief Financial Officer (Principal Financial
Officer)
24