Attached files
| file | filename |
|---|---|
| EX-31.1 - SINGING MACHINE CO INC | v210864_ex31-1.htm |
| EX-32.1 - SINGING MACHINE CO INC | v210864_ex32-1.htm |
| EX-31.2 - SINGING MACHINE CO INC | v210864_ex31-2.htm |
| EX-32.2 - SINGING MACHINE CO INC | v210864_ex32-2.htm |
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
quarter ended December 31, 2010
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _____ to ______.
Commission File Number 0 -
24968
(Exact
Name of Registrant 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
(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
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
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
|
37,835,793
as of February 11, 2011
|
THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
INDEX
PART I.
FINANCIAL INFORMATION
|
Page
No.
|
||
|
Item
1. Financial Statements
|
||
|
Consolidated
Balance Sheets – December 31, 2010 (Unaudited) and
|
||
|
March
31, 2010
|
3
|
|
|
Consolidated
Statements of Operations - Three
|
||
|
months
and nine months ended December 31, 2010 and 2009
(Unaudited)
|
4
|
|
|
Consolidated
Statements of Cash Flows - Nine months
|
||
|
ended
December 31, 2010 and 2009 (Unaudited)
|
5
|
|
|
Notes
to Consolidated Financial Statements-
|
||
|
December
31, 2010 (Unaudited)
|
6-12
|
|
|
Item
2. Management's Discussion and Analysis of
Financial
|
||
|
Condition
and Results of Operations
|
12-17
|
|
|
Item
4T. Controls and Procedures
|
17-18
|
|
|
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
|
18
|
|
|
Item
3. Defaults Upon Senior Securities
|
18
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
18
|
|
|
Item
5. Other Information
|
18
|
|
|
Item
6. Exhibits
|
18
|
|
|
SIGNATURES
|
20
|
|
2
CONSOLIDATED
BALANCE SHEETS
|
December 31, 2010
|
March 31, 2010
|
|||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 1,312,239 | $ | 865,777 | ||||
|
Accounts
receivable, net of allowances of $212,858 and
|
||||||||
|
$185,407,
respectively
|
2,527,120 | 983,791 | ||||||
|
Due
from factor
|
— | 14,987 | ||||||
|
Due
from related parties, net - Other Starlight Group
Companies
|
— | 141,951 | ||||||
|
Inventories,net
|
3,448,246 | 2,804,848 | ||||||
|
Prepaid
expenses and other current assets
|
71,248 | 118,465 | ||||||
|
Total
Current Assets
|
7,358,853 | 4,929,819 | ||||||
|
Property and
equipment, net
|
424,108 | 736,966 | ||||||
|
Other
non-current assets
|
164,678 | 164,644 | ||||||
|
Total
Assets
|
$ | 7,947,639 | $ | 5,831,429 | ||||
|
Liabilities and Shareholders'
Deficit
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 1,955,289 | $ | 895,713 | ||||
|
Due
to related parties - Starlight Marketing Development, Ltd
|
2,499,286 | 860,356 | ||||||
|
Due
to related parties - Ram Light Management, Ltd
|
1,683,247 | 1,683,747 | ||||||
|
Due
to related parties - Starlight R&D, Ltd
|
430,037 | 431,653 | ||||||
|
Due
to related parties - Cosmo Communications USA, Inc.
|
249,752 | 199,996 | ||||||
|
Due
to related parties, net - Other Starlight Group Companies
|
127,394 | — | ||||||
|
Accrued
expenses
|
532,987 | 227,257 | ||||||
|
Short-term
loan - bank
|
— | 1,091,828 | ||||||
|
Current
portion of long-term financing obligation
|
9,093 | 18,186 | ||||||
|
Obligations
to clients for returns and allowances
|
617,757 | 742,009 | ||||||
|
Warranty
provisions
|
384,506 | 123,708 | ||||||
|
Total
Current Liabilities
|
8,489,348 | 6,274,453 | ||||||
|
Long-term
financing obligation, less current portion
|
— | 4,547 | ||||||
|
Total
Liabilities
|
8,489,348 | 6,279,000 | ||||||
|
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;
|
||||||||
|
37,835,793
and 37,585,794 shares issued and outstanding
|
378,357 | 375,857 | ||||||
|
Additional
paid-in capital
|
19,109,225 | 19,098,726 | ||||||
|
Accumulated
deficit
|
(20,029,291 | ) | (19,922,154 | ) | ||||
|
Total
Shareholders' Deficit
|
(541,709 | ) | (447,571 | ) | ||||
|
Total
Liabilities and Shareholders' Deficit
|
$ | 7,947,639 | $ | 5,831,429 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
3
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
For
Three Months Ended
|
For
Nine Months Ended
|
|||||||||||||||
|
December
31, 2010
|
December
31, 2009
|
December
31, 2010
|
December
31, 2009
|
|||||||||||||
|
Net
Sales
|
$ | 6,935,843 | $ | 11,975,761 | $ | 17,385,142 | $ | 19,781,141 | ||||||||
|
Cost
of Goods Sold
|
5,303,075 | 8,981,999 | 13,483,805 | 15,689,397 | ||||||||||||
|
Gross
Profit
|
1,632,768 | 2,993,762 | 3,901,337 | 4,091,744 | ||||||||||||
|
Operating
Expenses
|
||||||||||||||||
|
Selling
expenses
|
816,375 | 1,708,663 | 1,710,385 | 2,648,835 | ||||||||||||
|
General
and administrative expenses
|
628,642 | 875,864 | 1,938,251 | 2,666,471 | ||||||||||||
|
Depreciation
and amortization
|
98,090 | 120,682 | 339,858 | 322,947 | ||||||||||||
|
Total
Operating Expenses
|
1,543,107 | 2,705,209 | 3,988,494 | 5,638,253 | ||||||||||||
|
Income
(Loss) from Operations
|
89,661 | 288,553 | (87,157 | ) | (1,546,509 | ) | ||||||||||
|
Other
Expenses
|
||||||||||||||||
|
Interest
expense
|
(8,992 | ) | (41,244 | ) | (19,981 | ) | (72,195 | ) | ||||||||
|
Income
(Loss) before provision for income taxes
|
80,669 | 247,309 | (107,138 | ) | (1,618,704 | ) | ||||||||||
|
Provision
for income taxes
|
— | — | — | — | ||||||||||||
|
Net
Income (Loss)
|
$ | 80,669 | $ | 247,309 | $ | (107,138 | ) | $ | (1,618,704 | ) | ||||||
|
Income
(Loss) per Common Share
|
||||||||||||||||
|
Basic
and Diluted
|
$ | 0.00 | $ | 0.01 | $ | (0.00 | ) | $ | (0.04 | ) | ||||||
|
Weighted Average
Common and Common Equivalent
Shares:
|
||||||||||||||||
|
Basic
and Diluted
|
37,835,793 | 37,449,332 | 37,697,107 | 37,449,332 | ||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
4
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
For Nine Months Ended
|
||||||||
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
Loss
|
$ | (107,138 | ) | $ | (1,618,704 | ) | ||
|
Adjustments
to reconcile net loss to net cash and cash equivalents provided
by (used in) operating activities:
|
||||||||
|
Depreciation
and amortization
|
339,858 | 322,947 | ||||||
|
Inventory
reserve charge
|
— | 91,330 | ||||||
|
Change
in allowance for bad debts
|
27,452 | 27,679 | ||||||
|
Stock
based compensation
|
13,000 | 8,971 | ||||||
|
Warranty
provisions
|
260,798 | 63,901 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
(Increase)
Decrease in:
|
||||||||
|
Accounts
receivable
|
(951,213 | ) | (3,502,013 | ) | ||||
|
Inventories
|
(643,398 | ) | 1,049,684 | |||||
|
Prepaid
expenses and other current assets
|
47,217 | 125,566 | ||||||
|
Other
non-current assets
|
(34 | ) | (388 | ) | ||||
|
Increase
(Decrease) in:
|
||||||||
|
Accounts
payable
|
1,059,576 | 145,059 | ||||||
|
Accounts
payable - related party
|
1,955,914 | 1,558,187 | ||||||
|
Accrued
expenses
|
305,730 | 204,880 | ||||||
|
Obligations
to clients for returns and allowances
|
(124,252 | ) | (381,501 | ) | ||||
|
Net
cash provided by (used in) operating activities
|
2,183,510 | (1,904,402 | ) | |||||
|
Cash
flows from investing activities
|
||||||||
|
Purchase
of property and equipment
|
(27,000 | ) | (216,148 | ) | ||||
|
Disposal
of property and equipment
|
— | 1,648 | ||||||
|
Net
cash used in investing activities
|
(27,000 | ) | (214,500 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Borrowings
from (retention by) factor, net
|
14,987 | (206,630 | ) | |||||
|
Net
(repayments) proceeds pursuant to factoring facility
|
(619,567 | ) | 1,768,830 | |||||
|
Net
(repayments) proceeds from short-term bank loan
|
(1,091,828 | ) | 1,092,323 | |||||
|
Payments
on long-term financing obligation
|
(13,640 | ) | (12,124 | ) | ||||
|
Net
loan proceeds from related parties
|
— | 296,680 | ||||||
|
Net
cash (used in) provided by financing activities
|
(1,710,048 | ) | 2,939,079 | |||||
|
Change
in cash and cash equivalents
|
446,462 | 820,177 | ||||||
|
Cash
and cash equivalents at beginning of period
|
865,777 | 957,163 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 1,312,239 | $ | 1,777,340 | ||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
|
Cash
paid for Interest
|
$ | 19,981 | $ | 72,195 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
5
THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
December
31, 2010
NOTE
1 – BASIS OF PRESENTATION
OVERVIEW
The
Singing Machine Company, Inc., a Delaware corporation (the "Company," “SMC”,
"The Singing Machine", “we” or “us”), and wholly-owned subsidiaries SMC
(Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc.
(“SMC-L”), SMC-Music, Inc.(“SMC-M”), and Singing Machine Holdings Ltd. (a B.V.I.
company) are 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.
NOTE
2-SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION.
The accompanying consolidated financial statements include the accounts
of the Company, Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings
Ltd. (a B.V.I. company). All inter-company accounts and transactions have
been eliminated in consolidation for all periods presented.
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS. The consolidated financial statements for the three months
and nine months ended December 31, 2010 and 2009 are unaudited. In the opinion
of management, such consolidated financial statements include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the consolidated financial position and the consolidated results of operations.
The consolidated results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year. The
consolidated balance sheet information as of March 31, 2010 was derived from the
audited consolidated financial statements included in the Company’s Annual
Report on Form 10-K. The interim 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 defective sales returns and allowances, inventory reserves, warranty
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. 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 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.
ACCOUNTS RECEIVABLE FACTORING.
The Company’s factoring facility, which was canceled on June 8, 2010,
only financed non-recourse accounts receivable. Such receivables were
considered to have been sold in accordance with Financial Accounting Standard
Board (“FASB”), Accounting Standard Codification (“ASC”) 860-30, Transfers and
Servicing Secured Borrowing and Collateral. Accordingly, advances received
pursuant to the factoring facility have been netted against the accounts
receivable on the accompanying consolidated balance sheet for March 31,
2010.
FOREIGN
CURRENCY TRANSLATION
The
functional currency of the Macau Subsidiary is the Hong Kong dollar. Such
financial statements 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 and translations were not material during the periods
presented.
CONCENTRATION
OF CREDIT RISK
The
Company maintains cash balances in foreign financial institutions. The
amounts at December 31, 2010 and March 31, 2010 are $41,539 and $734,908,
respectively. At times the Company maintains cash in United States bank
accounts that are in excess of the Federal Deposit Insurance Corporation
(“FDIC”) insured amounts of up to $250,000. As of December 31, 2010 and
March 31, 2010 the amounts uninsured in United States banks were $1,020,700 and
$0, respectively.
6
INVENTORY
Inventories
are comprised of electronic karaoke equipment, accessories, electronic musical
instruments, electronic toys and compact discs and are stated at the lower of
cost or market, as determined using the first in, first out method. 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.
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 defective returns, discounts and volume rebates.
STOCK
BASED COMPENSATION
The
Company began to apply the provisions FASB ASC 718-20, Compensation – Stock
Compensation Awards Classified as Equity (“ASC 718-20”) starting on January 1,
2006. 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
consolidated statement of operations over the service period (generally the
vesting period). Upon adoption, the Company transitioned to ASC 718-20 using the
modified prospective application, whereby compensation cost is only recognized
in the consolidated statements of operations beginning with the first period
that ASC 718-20 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 ASC 718-20 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 ASC 718-20 The Company continues to
use the Black-Scholes option valuation model to value stock options. For
the three and nine months ended December 31, 2010, the stock option expense was
$4,760, and $5,500, respectively. For the three and nine months ended December
31, 2009, the stock option expense was $1,032 and $8,971, respectively.
Employee stock option compensation expense in fiscal years 2010 and 2009
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.
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. For the
quarter ended December 31, 2010, the Company took into consideration guidance
under ASC 718-20 and SEC
Staff Accounting Bulletin No. 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. Set
forth below are the assumptions used in the periods presented:
|
|
·
|
For
the nine months ended December 31, 2010: expected dividend yield 0%,
risk-free interest rate of .22% to 0.41%, volatility 268.4% and 283.9% and
expected term of three years.
|
|
|
·
|
For
the nine months ended December 31, 2009: expected dividend yield 0%,
risk-free interest rate of 0.57% to 1.41%, volatility 70.22% and 80.07%
and expected term of one year.
|
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 upon the occurrence of mutually
agreed events. The percentage of the cooperative advertising allowance ranges
from 2% to 5% of the clients’ inventory purchases. 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 nine months ended December 31, 2010 and
2009 was $715,714 and $735,094, 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 and administrative
expenses in the consolidated statements of operations. For the nine months
ended December 31, 2010 and 2009, these amounts totaled $47,537 and $45,146,
respectively.
7
FAIR
VALUE OF FINANCIAL INSTRUMENTS
We have
adopted FASB ASC 825, which requires disclosures of information about the fair
value of certain financial instruments for which it is practicable to estimate
that value. For purposes of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation.
The
carrying amounts of the Company's short-term financial instruments, including
accounts receivable, due from factors, accounts payable, customer credits on
account, accrued expenses and loans payable to related parties approximates fair
value due to the relatively short period to maturity for these
instruments.
RECLASSIFICATIONS
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
RECENT
ACCOUNTING PRONOUNCEMENTS
Credit
Quality of Financing Receivables and the Allowance for Credit
Losses - In July 2010, FASB issued a new
pronouncement that requires enhanced disclosures regarding the nature of credit
risk in an entity’s portfolio of financing receivables. These changes include
disclosures on how credit risk is analyzed, and the changes and reasons for
those changes in the allowance for credit losses. We have determined that since
our accounts receivable are all short term and measured at the lower of cost or
fair value, they are exempt from these new disclosure requirements and do not
have any effect on our financial statements.
NOTE
3- INCOME TAXES
The
Company follows FASB ASC 740 10-25, Accounting for Uncertainty in Income Taxes,
which defines a recognition threshold and measurement attribute for financial
statement recognition and measurements of tax positions taken or expected to be
taken in a tax return. As of December 31, 2010 this position did not
result in any adjustment to the Company’s provision for income
taxes.
As of
December 31, 2010 and March 31, 2010, The Singing Machine had gross deferred tax
assets of approximately $4.0 million and $4.0 million, respectively, against
which the Company recorded valuation allowances totaling approximately $4.0
million and $4.0 million, respectively.
As of
December 31, 2010 the Company is subject to U.S. Federal income tax examinations
for the tax years ended March 31, 2007 through March 31, 2010.
NOTE
4- INVENTORIES
Inventories
are comprised of the following components:
|
December
31,
|
March
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Finished
Goods
|
$ | 3,610,389 | $ | 3,153,917 | ||||
|
Inventory
in Transit
|
186,926 | — | ||||||
|
Less:
Inventory Reserve
|
(349,069 | ) | (349,069 | ) | ||||
|
Net
Inventories
|
$ | 3,448,246 | $ | 2,804,848 | ||||
Inventory
consigned to customers at December 31, 2010 and March 31, 2010 were $353,557 and
$353,557, respectively.
NOTE
5 - ACCOUNTS RECEIVABLE FACTORING FACILITY
On June
8, 2010 the Company was notified by DBS Bank (Hong Kong) Limited (“DBS” or
“Lender”) that our credit and factoring facilities totaling $13.0M were being
withdrawn effective upon receipt of amounts due on both factoring and accounts
payable financing facilities. As of December 31, 2010, the Company had no
outstanding amounts due to DBS with respect to the financing
facility.
In light
of the loss of our financing facility, our parent company, the Starlight Group
(“Group”), has expressed their willingness and ability to provide bridge
financing and advance funds to us for key vendor payments as well as extending
longer payment terms for goods they manufacture for us. We estimated our
bridge financing requirements from the Group to be between $1.5 million and $2.0
million for the fiscal year ended March 31, 2011. These funds are expected
to be made available by the Group primarily through extended terms for trade
payables with the Group. Since March 31, 2010, our related party debt has
increased by approximately $1.8 million through the period ended December 31,
2010. Taking into account the Group’s proceeds of approximately $9 million
from an offering of their stock in May 2010, internally generated funds and
credit facilities available to the Group, and proposed use of proceeds which
included up to $2.0M of bridge financing for the Company, we have concluded that
our parent will have sufficient working capital to provide bridge financing to
us for at least the next 12 months.
8
The
factoring facility was established on August 28, 2008, pursuant to a three-party
Banking Facility agreement between the Company’s wholly owned subsidiary SMC
(Commercial Offshore De Macau) Limitada (“Borrower”), DBS and Branch Banking and
Trust Company (“BB&T” or “Factor”). The agreement was comprised
of three facilities including a maximum of $7.0 million on 80% of qualified
accounts receivable, a maximum letter of credit facility of $4.0 million for
accounts payable financing and a maximum of $2.0 million for the negotiation of
export bills under letter of credit.
Under the
factor agreement, the Factor assumed credit risk on approved accounts (factor
risk accounts). For non-approved accounts, the Company assumed the credit
risk (client risk accounts). The factoring fees were .675% of the gross
invoice for both client risk (recourse) and factor risk (non-recourse) accounts.
As of December 31, 2010 there were no open accounts receivable assigned to the
Factor. As of December 31, 2010 and March 31, 2010 there were outstanding
amounts due from BB&T of $0 and $14,987 respectively.
These amounts represent excess of customer payments received by
BB&T that had yet to be transferred to DBS. As of December 31, 2010and
March 31, 2010 the outstanding amount under the factoring facility with DBS was
$0 and $619,567 respectively. This amount represents advances made by DBS on
non-recourse receivables and have been offset against accounts receivable in the
accompanying consolidated balance sheet for March 31, 2010.
NOTE
6 - PROPERTY AND EQUIPMENT
A summary
of property and equipment is as follows:
|
USEFUL
|
December
31,
|
March
31,
|
||||||||||
|
LIFE
|
2010
|
2010
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Computer
and office equipment
|
5
years
|
$ | 660,948 | $ | 660,948 | |||||||
|
Furniture
and fixtures
|
5-7
years
|
217,875 | 217,875 | |||||||||
|
Leasehold
improvements
|
* | 151,503 | 151,503 | |||||||||
|
Warehouse
equipment
|
7
years
|
101,521 | 101,521 | |||||||||
|
Molds
and tooling
|
3-5
years
|
1,847,106 | 1,820,106 | |||||||||
| 2,978,953 | 2,951,953 | |||||||||||
|
Less:
Accumulated depreciation
|
(2,554,845 | ) | (2,214,987 | ) | ||||||||
| $ | 424,108 | $ | 736,966 | |||||||||
Depreciation
expense for the three and nine months ended December 31, 2010 was $98,090 and
$339,858, respectively. Depreciation expense for the three and nine months
ended December 31, 2009 was $120,682 and $322,947, respectively.
NOTE
7 - OBLIGATIONS TO CLIENTS FOR RETURNS AND ALLOWANCES
Due to
the seasonality of the business and length of time clients are given to return
defective product, it is not uncommon for clients to accumulate credits from the
Company’s sales and allowance programs that are in excess of unpaid invoices in
accounts receivable. All credit balances in clients’ accounts receivable
are reclassified to “obligations to clients for returns and allowances” in
current liabilities on the consolidated balance sheet. Client requests for
payment of a credit balance are reclassified from obligations to clients for
returns and allowances to accounts payable on the consolidated balance
sheet. When new invoices are processed prior to settlement of the credit
balance and the client accepts settlement of open credits with new invoices,
then the excess of new invoices over credits are netted in accounts
receivable. As of the periods ended December 31, 2010 and March 31, 2010
obligations to clients for returns and allowances reclassified from accounts
receivable were $617,757 and $742,009, respectively. There were no credit
amounts requested by clients to be paid for the periods ended December 31, 2010
and March 31, 2010 and as such no amounts were reclassified from obligations to
clients for returns and allowances to accounts payable.
NOTE
8 – FINANCING
As of
December 31, 2010 and March 31, 2010 the Company owed DBS $0 and $1,091,828
respectively pursuant to an accounts payable financing facility. The proceeds
were used to pay China manufacturing vendors. The accounts payable facility
loans were secured with corporate guarantees from the Company as well as a
guarantee from Starlight.
This
accounts payable financing facility was pursuant to the three-party Banking
Facility agreement discussed in Note 5.
9
Interest
on letter of credit facilities and discounting charges on accounts receivable
advances were charged at a rate of 1.5% per annum over LIBOR (London Interbank
Offered Rate). The credit facility was secured with corporate guarantees
from the Company as well as a $2.0 million guarantee from Starlight
International Holdings Limited, a related party. This agreement replaced a
previous four-party agreement between the Company, Starlight Marketing Limited
(a related party), Standard Chartered Bank (Hong Kong), Limited and
CIT.
NOTE
9 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
MGA
ENTERTAINMENT, INC. v. THE SINGING MACHINE COMPANY, INC. (CENTRAL DISTRICT COURT
OF CALIFORNIA, CASE CV 10-03761 DOC (RNBX) )
MGA
Entertainment, Inc. (“MGA”) filed an action against the Company on April 16,
2010 alleging breach of contract, breach of implied covenant of good faith and
fair dealing, and conversion claims relating to two licensing agreements between
the parties entered into on May 10, 2006 and November 21, 2006. The two
licensing agreements involved the manufacture, distribution and marketing of
“Bratz” branded merchandise.
The
Company has responded to the above captioned case and has removed the case to
federal court, case no. CV 10-03761 DOC (RNBX). Based upon legal opinion from
outside Counsel, the Company believes it has defenses to the claims raised by
MGA. However, at the time of this filing, the case is still in early stages of
discovery and the outcome is unknown.
The
Company has also filed a class-action lawsuit on behalf of itself and all
similarly situated licensees against MGA in the Central District Court of
California, case no. CV 10-4536-DOC(RNBX). The Company alleges breach of
contract, failure of consideration for the licensing agreements, and other
claims based on various state and federal laws.
On
December 27, 2010 US District Judge David Carter limited the scope of Mattel,
Inc.’s (“Mattel”) copyright infringement claims against MGA to the
first-generation of Bratz dolls. A retrial of the copyright infringement claims
by Mattel against MGA restarted in January 2011.
INCOME
TAXES
In a
letter dated July 21, 2008 the Internal Revenue Service (“IRS”) notified
International SMC (HK) Limited (“ISMC (HK)”, a former foreign subsidiary of the
Company, regarding an unpaid tax balance on Income Tax Return of a
Foreign Corporation (Form 1120-F) for the period ending March 31, 2003.
According to the notice ISMC (HK) has an unpaid balance due in the amount of
$241,639 that includes an interest assessment of $74,125. ISMC (HK) was
sold in its entirety by the Company on September 25, 2006 to a British Virgin
Islands company (“Purchaser”). The sale and purchase agreement with the
Purchaser of ISMC (HK) specifies that the Purchaser would ultimately be
responsible for any liabilities, including tax matters. On June 3, 2009
the IRS filed a federal tax lien in the amount of approximately $170,000 against
ISMC (HK) under ISMC (HK)’s federal Tax ID. Management sought independent legal
counsel to assess the potential liability, if any, on the Company. In a
memorandum from independent counsel, the conclusion based on the facts presented
was that the IRS would not prevail against the Company for collection of the
ISMC (HK) income tax liability based on:
|
|
·
|
The
Internal Revenue Service’s asserted position that the Company is not the
taxpayer.
|
|
|
·
|
The
1120- F tax liability was recorded under the taxpayer identification
number belonging to ISMC and not the Company’s taxpayer identification
number
|
|
|
·
|
The
IRS would be barred from recovery since it failed to assess or issue a
notice of levy within the three year statute of
limitations
|
Based on
the conclusion reached in the legal memorandum, management does not believe that
the Company will have any further liability with regards to this
issue.
LEASES
The
Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida and City of Industry, California.
The leases expire at varying dates. Rent expense for the nine months ended
December 31, 2010 and 2009 was $587,544 and $660,579, 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 December 31, 2010 are as
follows:
10
|
Property Leases
|
Equipment Leases
|
|||||||
|
For
year ending December 31,
|
||||||||
|
2011
|
$ | 693,053 | $ | 113 | ||||
|
2012
|
667,768 | — | ||||||
|
2013
|
168,810 | — | ||||||
| $ | 1,529,631 | $ | 113 | |||||
NOTE
10 - STOCKHOLDERS' EQUITY
COMMON
STOCK ISSUANCES
During
the nine months ended December 31, 2010 and 2009, the Company issued 249,999 and
0 shares of its common stock, respectively.
On August
31, 2010 the Company issued 249,999 shares of its common stock to our Board of
Directors at $.03 per share, pursuant to our annual director compensation
plan.
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
December 31, 2010, 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 December 31, 2010, the Company
granted 1,563,895 options under the Year 2001 Plan with 1,131,380 options still
outstanding, leaving 386,105 options available to be granted. The
outstanding options under this plan include grants of 520,000 shares issued to
key Company employees on October 7, 2008 at an exercise price of $.06 per share
with a one year vesting period.
The
majority of sales to customers outside of the United States for the three and
nine months ended December 31, 2010 and 2009 were made by the Macau
Subsidiary. Sales by geographic region for the period presented are as
follows:
|
FOR
THE THREE MONTHS ENDED
|
FOR
THE NINE MONTHS ENDED
|
|||||||||||||||
|
December
31,
|
December
31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
North
America
|
$ | 6,935,843 | $ | 10,974,825 | 17,114,562 | $ | 17,091,096 | |||||||||
|
Europe
|
— | 1,000,936 | 270,580 | 2,665,742 | ||||||||||||
|
Others
|
— | — | — | 24,303 | ||||||||||||
| $ | 6,935,843 | $ | 11,975,761 | $ | 17,385,142 | $ | 19,781,141 | |||||||||
NOTE 12 – DUE TO RELATED PARTIES,
NET
As of
December 31, 2010 and March 31, 2009 the Company had amounts due to related
parties in the amounts of $4,989,716 and $3,175,752 respectively, consisting
primarily of non-interest bearing trade payables due to Starlight affiliates. As
of December 31, 2010 and March 31, 2009 the Company had amounts due from related
parties in the amounts of $0 and $141,951 respectively, consisting primarily of
non-interest bearing trade receivables due from Starlight
affiliates.
NOTE
13 – RELATED PARTY TRANSACTIONS
During
the nine months ended December 31, 2010 and December 31, 2009 the Company sold
approximately $1,659,000 and $0, respectively to Starlight Electronics 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 Starlight Electronics for the nine months ended December 31,
2010 was 11%. The product was drop shipped to Cosmo Communications
of Canada (“Cosmo”), the Company’s primary distributor of its products to
Canada. This amount was included as a component of cost of goods sold in the
accompanying consolidated statements of operations.
11
During
the nine months ended December 31, 2010 and December 31, 2009 the Company sold
approximately $234,000 and $894,000, respectively directly to Cosmo
at a gross profit margin of 15.9% and 15.6%, respectively. Sales to Cosmo were
similar to prices granted to major direct import customers shipped
internationally with freight prepaid. This amount was included as a component of
cost of goods sold in the accompanying consolidated statements of
operations.
The
Company purchased products from Starlight Marketing Development, Ltd, (“SMD”) a
subsidiary of Starlight International Holding Ltd. The purchases from SMD for
the nine month period ended December 31, 2010 and 2009 were $6,573,834 and
$5,080,767 respectively.
During
the nine month period ended December 31, 2010 and December 31, 2009 the Company
purchased products from Cosmo Communications USA, Inc (“Cosmo USA”) in the
amount of $230,603 and $437,337, respectively.
On August
1, 2010, SMC Logistics entered into a service and logistics agreement with
affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo USA to provide
logistics, fulfillment, and warehousing services for these affiliates’ domestic
sales. The Company received $749,997 and $872,937 in service fees from
these affiliates during the nine months ended December 31, 2010 and December 31,
2009, respectively. For the nine months ended December 31, 2010 and 2009,
the Company additionally received reimbursements from both of these affiliates
in the amount of $50,620 and $80,920, respectively for expenses and salaries
incurred by SMC Logistics on their behalf.
On
December 15, 2009, the Company obtained a short term loan from Starlight
Electronics Company in the amount of $493,250. The proceeds were used to
pay for inventory from one of our vendors, Arts Electronics. The loan
bears interest at 1.77% and was repaid prior to March 31, 2010.
NOTE
14 – WARRANTY PROVISIONS
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 is also subject to returns of CDG music from sales made by our
consignee. The Company records liabilities for its return goods programs
and defective goods allowance program at the time of sale for the estimated
costs that may be incurred. The liability for defective goods is included in
warranty provisions on the Consolidated Balance Sheet.
Changes in the Company’s obligations for return and allowance
programs are presented in the following table:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Estimated
return and allowance liabilities at beginning of period
|
$ | 309,459 | $ | 216,269 | $ | 123,708 | $ | 217,812 | ||||||||
|
Costs
accrued for new estimated returns and allowances
|
206,670 | 317,618 | 524,464 | 654,401 | ||||||||||||
|
Return
and allowance obligations honored
|
(131,623 | ) | (54,790 | ) | (263,666 | ) | (393,116 | ) | ||||||||
|
Estimated
return and allowance liabilities at end of period
|
$ | 384,506 | $ | 479,097 | $ | 384,506 | $ | 479,097 | ||||||||
NOTE
15 – SUBSEQUENT EVENTS
In
accordance with FASB ASC 855, Subsequent Events, we evaluated the effects of all
subsequent events from the end of the third quarter ended December 31, 2010
through February 14, 2010, the date we filed our financial statements with the
U.S. Securities and Exchange Commission. There were no events to report during
this evaluation period.
FORWARD-LOOKING
STATEMENTS
The
following discussion should be read in conjunction with the 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.
12
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 “Singing Machine,”
“we,” “us,” “our” or “the Company”) and our subsidiaries 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 North America and Europe, 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 Costco, Kohl's, J.C. Penney, Toys R Us, and Wal-Mart. Our business
has historically been subject to significant seasonal fluctuations causing our
revenues to vary from period to period and between the same periods in different
fiscal years. Thus, it may be difficult for an investor to project our results
of operations for any given future period. We are uncertain of how
significantly our business will be harmed by a prolonged economic recession but,
we anticipate that continued contraction of consumer spending will negatively
affect our revenues and profit margins.
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 sales for the
three months and nine months ended December 31, 2010 and 2009.
13
The
Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For Three Months Ended
|
For Nine Months Ended
|
|||||||||||||||
|
December 31, 2010
|
December 31, 2009
|
December 31, 2010
|
December 31, 2009
|
|||||||||||||
|
Net
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of Goods Sold
|
76.5 | % | 75.0 | % | 77.6 | % | 79.3 | % | ||||||||
|
Gross
Profit
|
23.5 | % | 25.0 | % | 22.4 | % | 20.7 | % | ||||||||
|
Operating
Expenses
|
||||||||||||||||
|
Selling
expenses
|
11.8 | % | 14.3 | % | 9.8 | % | 13.4 | % | ||||||||
|
General
and administrative expenses
|
9.1 | % | 7.3 | % | 11.1 | % | 13.5 | % | ||||||||
|
Depreciation
and amortization
|
1.3 | % | 1.0 | % | 2.0 | % | 1.6 | % | ||||||||
|
Total
Operating Expenses
|
22.2 | % | 22.6 | % | 22.9 | % | 28.5 | % | ||||||||
|
Income
(Loss) from Operations
|
1.3 | % | 2.4 | % | -0.5 | % | -7.8 | % | ||||||||
|
Other
Income (Expenses)
|
||||||||||||||||
|
Interest
expense
|
-0.1 | % | -0.3 | % | -0.1 | % | -0.4 | % | ||||||||
|
Income
(Loss) before provision for income taxes
|
1.2 | % | 2.1 | % | -0.6 | % | -8.2 | % | ||||||||
|
Provision
for income taxes
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
|
Net
Income (Loss)
|
1.2 | % | 2.1 | % | -0.6 | % | -8.2 | % | ||||||||
QUARTER
ENDED DECEMBER 31, 2010 COMPARED TO THE QUARTER ENDED DECEMBER 31,
2009
NET
SALES
Net sales
for the quarter ended December 31, 2010 decreased to $6,935,843 from
$11,975,761, a decrease of $5,039,918 as compared to the same period ended
December 31, 2009. This decrease in sales is primarily due to decreased
international sales and earlier purchasing commitments from North American
customers which allowed for earlier shipments which took place in the prior
quarter. For the quarter ended December 31, 2010 sales to international
customers decreased by approximately $1,000,000 as European customers had excess
inventory from the prior year to sell off during the current year.
GROSS
PROFIT
Our gross
profit for the quarter ended December 31, 2010 decreased to $1,632,768 from
$2,993,762 a decrease of $1,360,994 as compared to the same period in the prior
year. This decrease is primarily due to the decrease in revenue in the
quarter as compared to the same quarter in the prior year. As a percentage
of revenues, our gross profit margin for the three months ended December 31,
2010 was 23.5% compared to 25.0% for the three months ended December 31,
2009. The decrease in gross profit margin was primarily due to a lower of
cost or market inventory adjustment of approximately $233,000 for end of life
products which contributed approximately 3.4 points of margin decrease for the
comparable periods. This decrease was offset by favorable percentage of
sales to North American customers versus international customers which yield
significantly lower gross profit margins and contributed 1.0 point of the
variation. Contributions from price increases implemented at the beginning of
the fiscal year and product mix accounted for the remaining variance in gross
profit margin.
OPERATING
EXPENSES
For the
quarter ended December 31, 2010, total operating expenses decreased to
$1,543,107. This represents a decrease of $1,162,102 from the same
period’s quarter ended total operating expenses of $2,705,209. This decrease was
primarily due to decreased variable selling expenses which were lower by
approximately $892,000 due to the reduced sales volume. The remaining decrease
was primarily due to general administrative expenses associated with expense
reductions implemented by management at the beginning of the current fiscal
year.
14
General
and administrative expenses decreased $247,222 for the quarter ended December
31, 2010 compared to the quarter ended December 31, 2009. The decrease was
primarily due to an estimated $176,000 decrease in compensation expense and
employee benefits due to reduction in workforce. The remaining decrease
was due to continued management efforts to reduce expenses commensurate with
sales.
INCOME
FROM OPERATIONS
Income
from operations decreased $198,892 this quarter, to $89,661 for the three months
ended December 31, 2010 compared to income from operations of $288,553 for the
same period ended December 31, 2009. The primary reason for the decrease
in income from operations was the 42% drop in net sales for the three months
ended December 31, 2010 compared to the three months ended December 31,
2009.
OTHER
INCOME/EXPENSES
Our net
other expenses (interest expense) decreased to $8,992 from $41,244 for the same
period a year ago. The decrease in interest expense was primarily due to the
termination of our financing facilities with DBS bank without negotiating any
replacement financing.
INCOME
TAXES
For the
three months ended December 31, 2010 and 2009, the Company did not record a tax
provision because it expects current year-to-date losses and sufficient future
net losses to offset the income for these periods.
NET
INCOME
For the
three months ended December 31, 2010 net income decreased to $80,669 compared to
net income of $247,309 for the same period a year ago. The decrease in net
income was primarily due to the decrease in revenue as compared to the same
period in the prior year.
NINE
MONTHS ENDED DECEMBER 31, 2010 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31,
2009
NET
SALES
Net sales
for the nine months ended December 31, 2010 decreased to $17,385,142 from
$19,781,141, a decrease of $2,395,999 as compared to the same period ended
December 31, 2009. This decrease in sales was almost exclusively due to
the decrease in international sales as European customers had excess inventory
from the prior year to sell off during the current year.
GROSS
PROFIT
Our gross
profit for the nine months ended December 31, 2010 decreased to $3,901,337 from
$4,091,744, a decrease of $190,407 as compared to the same period in the prior
year primarily due to decrease in sales from international customers
for the comparable periods. As a percentage of revenues, our gross profit margin
for the nine months ended December 31, 2010 was 22.4% compared to 20.7% for the
nine months ended December 31, 2009. This increase was
primarily due to favorable margin effects from an increased percentage of sales
to North American customers versus international customers which yield
significantly lower gross profit margins and contributed 1.0 points of the
variation. Contributions from price increases implemented at the beginning
of the fiscal year and product mix accounted for the remaining variance in gross
profit margin.
OPERATING
EXPENSES
For the
nine months ended December 31, 2010, total operating expenses decreased to
$3,988,494 from $5,638,253 for the nine months ended December 31, 2009, a
decrease of $1,649,759. Selling expenses decreased by approximately
$938,000 primarily due to a reduction in outbound freight as one of our major
customers accepted their goods via direct import and assumed all delivery
freight charges. General and administrative expenses decreased
approximately $728,000 of which wage reductions and associated employee benefits
due to reduction in workforce accounted for approximately $383,000 of the
decrease. Factor fees were also decreased by $110,000 due to termination
of our factoring facility with DBS bank in the prior year. The remaining
decrease was due to continued management efforts to reduce administrative
expenses and improved operating efficiencies.
OTHER
INCOME/EXPENSES
Our net
other expenses (interest expense) decreased to $19,981 from $72,195 for the same
period a year ago. The decrease in interest expense was primarily due to the
termination of our financing facilities with DBS bank without negotiating any
replacement financing.
INCOME
TAXES
For the
nine months ended December 31, 2010 and 2009, the Company did not record a tax
provision because it had a net operating loss for the nine months ended December
31, 2010 and had sufficient net operation loss from previous periods to offset
the income for the nine months ended December 31, 2009.
15
NET
LOSS/INCOME
We
incurred a net loss of $107,138 for the nine months ended December 31, 2010
compared to a net loss of $1,618,704 for the same period a year ago. The
$1,511,566 decrease in net loss was primarily due to decreased operating
expenses for reasons explained in the operating expenses section
above.
LIQUIDITY AND CAPITAL
RESOURCES
As of
December 31, 2010, Singing Machine had cash on hand of $1,312,239 as compared to
cash on hand of $1,777,340 as of December 31, 2009. We had a working capital
deficit of $1,130,495 as of December 31, 2010.
Net cash
provided by operating activities was $2,183,510 for the nine months
ended December 31, 2010, as compared to $1,904,402 used in operating activities
the same period a year ago. The increase in net cash provided was a result
of the following factors: increase in trade accounts payable and a decrease in
accounts receivable due to the increase in direct import sales which are paid
shortly after delivery. Accounts receivable were also reduced from participation
in a major retailer’s “quick-pay” vendor payment program which accelerated
collection of outstanding receivables from this vendor in exchange for a
reasonable additional discount off of open invoices.
Net cash
used by investing activities for the nine months ended December 31, 2010 was
$27,000 as compared to $214,500 used by investing activities for the same period
ended a year ago. This decrease was caused primarily by a low amount of
capital expenditures for the current fiscal year.
Net cash
used in financing activities was $1,710,048 for the nine months ended December
31, 2010, as compared to cash provided by financing activities of $2,939,079 for
the same period ended a year ago. Our facilities with DBS bank were terminated
on June 8, 2010 and we were required to pay off all outstanding balances during
the nine month period ending December 31, 2010 accounting for the significant
increase in funds used by financing activities. During the nine months
ended December 31, 2009 we made use of available credit facilities from DBS bank
and reduced our reliance on related party and vendor financing during that
period. Since we have not replaced our financing facility we have relied
on related party and vendor financing as well as offering major customers
additional discounts in exchange for reduced payment terms.
In light
of the loss of our financing facility, our parent company, the Starlight Group
(“Group”), has expressed their willingness and ability to provide bridge
financing and advance funds to us for key vendor payments as well as extending
longer payment terms for goods they manufacture for us. We estimated our
bridge financing requirements from the Group to be between $1.5 million and $2.0
million for the fiscal year ended March 31, 2011. These funds are expected
to be made available by the Group primarily through extended terms for trade
payables with the Group. Since March 31, 2010, our related party debt has
increased by approximately $1.8 million through the period ending December 31,
2010. Taking into account the Group’s proceeds of approximately $9 million
from an offering of their stock in May 2010, internally generated funds and
credit facilities available to the Group, and proposed use of proceeds which
included up to $2.0M of bridge financing for the Company, we have concluded that
our parent will have sufficient working capital to provide bridge financing to
us for at least the next 12 months.
As of
December 31, 2010, our unrestricted cash on hand was $1,312,239. Our average
monthly general and administrative expenses are approximately $210,000. We
expect that we will require approximately $1 million for working capital during
the next three-month period.
During
the next 12 month period, we plan on financing our operation needs
by:
|
|
·
|
Raising
additional working capital;
|
|
|
·
|
Collecting
our existing accounts receivable;
|
|
|
·
|
Selling
existing inventory;
|
|
|
·
|
Vendor
financing;
|
|
|
·
|
Borrowing
from factoring bank;
|
|
|
·
|
Short
term loans from our majority
shareholder;
|
|
|
·
|
Fees
for fulfillment, delivery and returns services from related
parties.
|
Our
sources of cash for working capital in the long term, 12 months and beyond are
essentially 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.
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.
16
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 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 second and third
fiscal quarters, combined, accounted for approximately 89.0% and 92.0% of net
sales in fiscal 2010 and 2009, respectively.
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.
We are
currently developing and considering selling products other than those within
the karaoke category during the slow season to fulfill the revenue
shortfall.
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 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
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 Macau
income tax exemption.
COLLECTIBILITY
OF ACCOUNTS RECEIVABLE. Our allowance for doubtful accounts is based on
management's estimates of the creditworthiness of our 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. We establish 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.
USE OF 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.
(a) Evaluation of
Disclosure Controls and Procedures. As of the end of the period covered
by this report, we conducted an evaluation, under the supervision and with the
participation of our chief executive officer and chief financial officer of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures are not effective to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms and is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
17
(b) Changes in
Internal Controls. We reported certain material weaknesses in our
internal controls over financial reporting in our annual report on Form 10-K for
the year ended March 31, 2010. The Company is still in the process of
remediating these material weaknesses. Management has worked on a formal
template of closing procedures that will be fully implemented prior to the
closing of our accounting records for the fiscal year ending March 31, 2011
which is expected to address the identified weaknesses.
PART
II - OTHER INFORMATION
MGA
Entertainment, Inc. (“MGA”) filed an action against the Company on April 16,
2010 alleging breach of contract, breach of implied covenant of good faith and
fair dealing, and conversion claims relating to two licensing agreements between
the parties entered into on May 10, 2006 and November 21, 2006. The two
licensing agreements involved the manufacture, distribution and marketing of
“Bratz” branded merchandise.
The
Company has responded to the above captioned case and has removed the case to
federal court, case no. CV 10-03761 DOC (RNBX). Based upon legal opinion from
outside Counsel, the Company believes it has defenses to the claims raised by
MGA. However, at the time of this filing, the case is still in early stages of
litigation and the outcome is unknown.
The
Company has also filed a class-action lawsuit on behalf of itself and all
similarly situated licensees against MGA in the Central District Court of
California, case no. CV 10-4536-DOC(RNBX). The Company alleges breach of
contract, failure of consideration for the licensing agreements, and other
claims based on various state and federal laws.
On
December 27, 2010 US District Judge David Carter limited the scope of Mattel,
Inc.’s (“Mattell”) copyright infringement claims against MGA to the
first-generation of Bratz dolls. A retrial of the copyright infringement claims
by Mattel against MGA restarted in January 2011.
ITEM
1A. RISK FACTORS
RISKS
ASSOCIATED WITH OUR BUSINESS
CURRENT
LEVELS OF SECURITIES AND FINANCIAL MARKET VOLATILITY ARE
UNPRECEDENTED.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers. We believe these
credit market disruptions have likely decreased our ability to access debt and
equity financing. If current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not experience an adverse
effect, which may be material, on our ability to access capital and on our
business, financial condition and results of operations.
RISKS
ASSOCIATED WITH OUR CAPITAL STRUCTURE
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
We are
not currently in default upon any of our senior securities.
None.
None.
31.1
Certification of Gary Atkinson, Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Carol Lau, Interim Chief Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.*
18
32.1
Certifying Statement of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act.*
32.2
Certifying Statement of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act.*
* Filed
herewith
19
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE
SINGING MACHINE COMPANY, INC.
|
Date: February
14, 2011
|
By:
|
/s/ Gary Atkinson
|
|
Gary
Atkinson
|
||
|
Chief
Executive Officer
|
||
|
/s/ Carol Lau
|
||
|
Carol
Lau
|
||
|
Interim
Chief Financial Officer
|
20