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EX-32.2 - SINGING MACHINE CO INCex32-2.htm
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EX-31.1 - SINGING MACHINE CO INCex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark one)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended March 31, 2017
  OR
[  ] 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 000-24968

 

THE SINGING MACHINE COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   95-3795478
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)

 

6301 NW 5th Way, Suite 2900, Fort Lauderdale, FL 33309

(Address of principal executive offices)

 

(954) 596-1000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Per Share

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act).:

 

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 by Rule 12b-2 of the Exchange Act) Yes [  ] No [X]

 

As of September 30, 2016, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock as quoted on the Over the Counter Bulletin Board of $0.42 was approximately $5,940,000 (based on 14,143,865) shares outstanding to non-affiliates). For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

 

Number of shares of common stock outstanding as of June 29, 2017 was 38,259,303

 

DOCUMENTS INCORPORATED BY REFERENCE – None

 

 

 

 
 

 

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES

 

INDEX TO ANNUAL REPORT ON FORM 10-K

 

FOR THE FISCAL YEAR ENDED MARCH 31, 2017

 

      PAGE
       
  PART I    
Item 1. Business   3
Item 1A. Risk Factors   7
Item 1B. Unresolved Staff Comments   11
Item 2. Properties   12
Item 3. Legal Proceedings   12
Item 4. Mine Safety Disclosures   12
       
  PART II    
       
Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  13
Item 6. Selected Financial Data   14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations   15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   21
Item 8. Financial Statements and Supplementary Data   21
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   21
Item 9A. Controls and Procedures   21
Item 9B. Other Information   22
       
  PART III    
       
Item 10. Directors, Executive Officers and Corporate Governance   22
Item 11. Executive Compensation   25
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  28
Item 13. Certain Relationships and Related Transactions and Director Independence   29
Item 14. Principal Accounting Fees and   31
       
  PART IV    
       
Item 15. Exhibits, Financial Statement Schedules   32
  Signatures   35

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (the “Annual Report”) contains ‘‘forward-looking statements’’ that represent our beliefs, projections and predictions about future events within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are ‘‘forward-looking statements’’, including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’, ‘‘would’’, ‘‘predicts’’, ‘‘potential’’, ‘‘continue’’, ‘‘expects’’, ‘‘anticipates’’, ‘‘future’’, ‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’ and similar expressions, as well as statements in the future tense, identify forward-looking statements.

 

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time and in relatively new and rapidly developing industries such as oil and gas. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

 

  our ability to attract and retain management;
  our growth strategies;
  anticipated trends in our business;
  our future results of operations;
  our ability to incorporate new and changing technologies;
  our willingness to develop technological innovation;
  our liquidity and ability to finance our acquisition and development activities;
  the impact of government regulation;
  planned capital expenditures (including the amount and nature thereof);
  our financial position, business strategy and other plans and objectives for future operations;
  competition;
  the ability of our management team to execute its plans to meet our goals;
  general economic conditions, whether internationally, nationally or in the regional and local market areas in which we are doing business, that may be less favorable than expected; and
  other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations and pricing.

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings ‘‘Risk Factors’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, ‘‘Business’’ and elsewhere in this Annual Report.

 

PART I

 

ITEM 1. BUSINESS

 

OVERVIEW

 

The Singing Machine Company, Inc., (“Company,” “Singing Machine,” “we,” “us,” or, “our”) is engaged in the development, production, marketing and distribution of consumer karaoke audio equipment, toy products, accessories, music, and audio consumer electronic products. We contract for the manufacturing of all our electronic equipment products with factories located in China. We have also collaborated with a music content service provider that allows the Company to offer karaoke downloads, and streaming subscription services. This collaboration provides the Company with a distribution platform for digital music sales and subscriptions and furthermore it opens up the Company’s music sales to customers who purchase our competitors’ karaoke machines as well. The capabilities of the Company’s music distribution system includes the ability to download or stream selections from this content library, creating the opportunity to open new revenue sources through the sale of subscriptions.

 

We were incorporated in California in 1982. We originally sold our products exclusively to professional and semi-professional singers. In 1988, we began marketing karaoke equipment for home use. We believe we are the first company to introduce the home karaoke products to the United States (“U.S.”). In May 1994, we merged into a wholly-owned subsidiary incorporated in Delaware with the same name. As a result of that merger the Delaware corporation became the successor to the business and operations of the California corporation and retained the name The Singing Machine Company, Inc. (“SMC”). In December 2005, we formed a wholly-owned subsidiary SMC (Comercial Offshore De Macau) Limitada in Macau, China (“SMC Macau” or “Macau subsidiary”), to provide sales, financing, shipping, engineering and sourcing support for Singing Machine and Subsidiaries. Our Macau subsidiary has been approved to operate its business in Macau as Macau Offshore Company (MOC) and is exempt for the Macau corporate income tax. In February 2008, we formed a wholly-owned subsidiary SMC Logistics, Inc. (“SMC-L”), a California corporation, to manage the U.S. domestic logistics and fulfillment warehouse servicing for the Company and in April 2008 a wholly-owned subsidiary, SMC Music, Inc. (“SMC-M”) to contract with third party music providers. The Company trades on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “SMDM”. Our principal executive offices are located in Fort Lauderdale, Florida.

 

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During the fiscal year ended March 31, 2016, our parent company, Shihua Development Company Limited, was renamed to China Sinostar Group Company Limited (“Sinostar”) due to a corporate restructuring transaction. As a result of the transaction, Sinostar now holds 100% of the common stock of koncepts International Limited (“koncepts”). Koncepts is a major shareholder of the Company, owning approximately 49% of our shares of common stock outstanding on a fully diluted basis as of March 31, 2017. Sinostar is a company whose principal activities include designing, manufacturing and selling electronic products through its various subsidiaries. Sinostar’s products include television sets, consumer karaoke audio equipment and DVD products. We do business with a number of entities that are indirectly wholly-owned or majority owned subsidiaries of Sinostar, including Starlight R&D Ltd (“Starlight R&D”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc. (“Cosmo”) and Star Light Electronics Company Ltd (Starlite), among others (Sinostar and its subsidiaries collectively referred to herein as the “Sinostar Group” or “Sinostar”). The Company is also partly held by Treasure Green Holdings Ltd. (“Treasure Green”), a wholly owned subsidiary of Sinostar, owning approximately 3% of our common stock. In total, the Sinostar Group owns approximately 52% of the Company’s shares of common stock. In July 2014, under a restructuring arrangement, Star Light Electronics Company Ltd was separated from the Sinostar Group and is partly and indirectly held by our Chairman, Philip Lau. In March 2015, Starlight R&D Ltd was also separated from the Sinostar Group and is controlled by our Chairman, Phillip Lau. It is expected that our company will continue to do business with these separated entities as suppliers of services.

 

GROWTH STRATEGY

 

The overall objective of the Singing Machine is to create an efficient platform for the development, manufacture, and world-wide marketing and distribution of home entertainment based consumer electronics. The Company will also seek new revenue opportunities through hardware-based music content delivery and the creation of a community based entertainment platform. We also intend to leverage our position as an affiliate of the Sinostar Group to capitalize on synergies which exist therein and to exercise our knowledge of the electronics business to grow revenue. The Company intends to leverage our valuable customer base and strong relationships with our factories to achieve our organic growth initiatives.

 

Organic Growth Strategy

 

We intend to pursue various initiatives to execute our organic growth strategy which is designed to enhance our market presence, expand our customer base and be an industry leader in new product development. Key elements of our organic growth strategy include:

 

Toy Products. Historically karaoke has been our core business. The Singing Machine brand is widely recognized as a leader in karaoke and consequently we hold a dominant market share in the business. While consistently a market leader, the Company has determined that it needs to diversify and expand its core focus in order to grow its business. The Company has therefore refocused its self-perception and is determined to build on its success by defining ourselves as a provider of quality home entertainment – not just home karaoke hardware. Critical to this strategy, the Company has launched a new line of toy products branded SMC Kids. We intend to grow a new line of sing-along music themed toy products at lower opening price points and we are also exploring a sub-line of educational themed learning products. We believe this toy line, if successful, can leverage existing relationships with our current retail partners and help the Company organically grow.

 

Develop Karaoke Hardware That Interfaces With Our Digital Music Store. Streaming music is one of the fastest growing areas in the music industry. We believe that the future of karaoke music distribution is through legal mediums of internet streaming and download sites (e.g. iTunes, Amazon, etc). Since karaoke music only accounts for a small percentage of total music business, retailers usually only offer a limited selection of karaoke products. Thus, it is difficult for customers to find karaoke music in retail outlets, especially for the songs they enjoy. The benefits to the Company are multifaceted including the opportunity to: offer downloadable music which means less physical inventory for the Company and our retail customers to carry; reduce financial return risk since a downloaded piece of karaoke music is not returnable; make available increased marketing opportunities by offering downloads for those who sign up and provide their contact information enabling the Company to create future marketing and advertising campaigns; create an opportunity to sell our karaoke music to not only our customers but also to owners of our competitors’ machines (new and old); create cross-promotions with our retail-customers by giving away music downloads to purchasers of karaoke machines as an incentive to sell more machines.

 

We believe that by tightly integrating our karaoke machine products with access to music content such as Electronic Downloads, Streaming Media, Community Performance Hosting, and by creating quality, wholesome, home entertainment for the entire family we will not only sell more products, we will find new sources of revenue. Using our existing key relationships with our customers and factories, and by adding new relationships with key content providers, we believe we can achieve more top-line growth by utilizing these relationships to design and distribute a more diversified line of karaoke products.

 

Focus On International Growth. We believe that we have the most recognized and trusted brand in the world for consumer karaoke. We also have the most karaoke product offerings and features of any of our competitors in the karaoke market. We have been and will continue aggressively pursuing international business outside of North America to capture a vastly untapped market for home karaoke. The Company’s early efforts to open up new international markets has been successful. Through economies of scale and financed on a direct import basis, we believe this is one of the major areas in which we can substantially increase our revenues.

 

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PRODUCT LINES

 

We currently have four different product lines which consist in total of over 50 different models. The product lines consist of the following:

 

  Classic Karaoke Machines represent the majority of our karaoke machines currently sold. These machines incorporate traditional karaoke features such as CD+G playback, echo, and voice control features, sound enhancement, built-in monitors, A/V out connections to TV for scrolling lyrics, and microphone inputs. Built-in cameras, Bluetooth and recording functions are available in some select models. The retail price range is from $49 to $199. This product line accounted for approximately 66% of total revenue for fiscal 2017.
  Download Karaoke Machines represent a new line of digital karaoke machines launching in Fiscal 2016. These machines include custom proprietary software to play high-definition digital downloaded content from our Singing Machine download store. These machines offer a full range of features including searching, playlist creation, Bluetooth, full motion videos, lead vocal, and HDMI output. The retail price range is from $79 to $199. This product line accounted for approximately 27% of total revenue in fiscal 2017.
  Streaming Karaoke Machines represent a new line of digital karaoke machines that connect to a karaoke library to stream high-definition karaoke videos directly to the machine. These machines use Wi-Fi to stream songs from a library of karaoke music, accessible on a subscription model. The retail price is $199. This product line accounted for less than 1% of total revenue in fiscal 2017.
  SMC Kids Toy Products represents a new category of products for the Company, launching in the Fall of fiscal 2018. These toy products will range from sing-along music players to educational themed learning toys. The anticipated price range will go from $19.99 to $39.99. This product line accounts for 0% of total revenue in fiscal 2017.

 

The remaining 7% of total revenue was from the sales of karaoke related accessories consisting primarily of microphones, music subscriptions and downloads, and other miscellaneous electronic accessories.

 

MARKETING, SALES

 

Our karaoke machines and music are sold nationally and internationally to a broad spectrum of customers, primarily through mass merchandisers, department stores, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. Our product lines are currently sold by the following retailers, among others: Costco, Target, Toys R’ Us, Sam’s Club, Wal-Mart, Best Buy and Amazon.com. Our sales strategy includes offering domestic sales as well as direct import sales made direct to the customer.

 

Domestic Sales. Our strategy of selling products from a domestic warehouse enables us to provide timely delivery and serve as a domestic supplier of imported goods. We purchase karaoke machines overseas from certain factories in China for our own account, and warehouse the products in leased facilities in California. We are responsible for costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products and, therefore, domestic sales command higher sales prices than direct sales. We generally sell from our own inventory in less than container-sized lots. Domestic sales also include our new rapidly growing business of e-commerce in which we ship product directly to the end-consumer.

 

Direct Sales. We ship some hardware products sold by us directly to customers from China through SMC Macau. Sales made through our subsidiary are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses, or stores. Direct sales are made in larger quantities (generally container sized lots) to customers' world wide, which pay SMC Macau pursuant to their own international, irrevocable, transferable letters of credit or on open account.

 

In fiscal 2017, approximately 49% of sales revenues were from direct sales and 51% of revenues were domestic sales. Our sales within the U.S. are primarily made by our in-house sales team and our independent sales representatives. Our independent sales representatives are paid a commission based upon sales made in their respective territories. We utilize some of our outside independent sales representatives to help us provide service to our mass merchandisers and other retailers. The sales representative agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days' notice. Our international sales are primarily made by our in-house sales representatives and our independent distributors.

 

As a percentage of total revenues, our net sales in the aggregate to our five largest customers during the fiscal years ended March 31, 2017, 2016, and 2015, were approximately 79%, 76%, and 77%, respectively. In fiscal 2017, the top three major customers accounted for 30%, 20% and 10% of our net revenues. Although we have long-established relationships with all of our customers, we do not have contractual arrangements to purchase fixed quantities with any of them. A decrease in business or a loss of any of our major customers could have a material adverse effect on our results of operations and financial condition.

 

We also market our products at various national and international trade shows each year. We regularly attend the following trade shows and conventions: the Consumer Electronics Show which takes place each January in Las Vegas; the American Toy Fair which occurs each February in New York and the Hong Kong Electronics Show stages each October in Hong Kong.

 

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We believe the Singing Machine brand is one of the most widely recognized karaoke brands in the United States and Europe. While we continue to heavily focus on our core karaoke business, we wish to expand our business into other product categories. Our strong product procurement team in Hong Kong and China combined with our experienced sales and service team in North America enables us to compete not only in the karaoke market but also in other markets, such as musical instruments, licensed toy products and other consumer electronics products.

 

RETURNS

 

Returns of electronic hardware and music products by our customers generally occur after approval involving quality defects, damaged goods or goods shipped in error. Our policy is to give credit to our customers for the returns in conjunction with the receipt of new replacement purchase orders. Our total returns represented 6.8%, 5.9%, and 8.8% of our net sales in fiscal 2017, 2016, and 2015, respectively. The increase of .9% in return rate compared to prior fiscal years is due primarily to an increase in overstock primarily from the “Club” stores.

 

DISTRIBUTION

 

We distribute hardware products to retailers and wholesale distributors through two methods: shipment of products from inventory held at our warehouse facilities in California (domestic sales), shipments directly through our Macau subsidiary, and manufacturers in China of products (direct sales). Domestic sales are made to customers located throughout North America from inventories maintained at our warehouse facilities in California. In the fiscal year ended March 31, 2017, approximately 51% of our sales were sales from our domestic warehouses (“Domestic Sales”) and 49% were sales shipped directly from China (“Direct Sales”).

 

MANUFACTURING AND PRODUCTION

 

Our karaoke machines are manufactured and assembled by third parties pursuant to design specifications provided by us. Currently, we have ongoing relationships with six factories, located in Guangdong Province of the People's Republic of China, which assemble our karaoke machines. During fiscal 2018, we anticipate that 100% of our karaoke products will be produced by these factories, who have verbally agreed to extend financing to us. We believe that the manufacturing capacity of our factories is adequate to meet the demands for our products in fiscal year 2018. However, if our primary factory in China was prevented from manufacturing and delivering our karaoke products, our operation would be severely disrupted until alternative sources of supply are located. In manufacturing our karaoke related products, these factories use molds and certain other tooling, most of which are owned by us. Our products contain electronic components manufactured by other companies such as Panasonic, Sanyo, Toshiba, and Sony. Our manufacturers purchase and install these electronic components in our karaoke machines and related products. The finished products are packaged and labeled under our trademark, The Singing Machine(R) and private labels.

 

While our equipment manufacturers purchase our supplies from a small number of large suppliers, all of the electronic components and raw materials used by us are available from several sources of supply. We depend on limited suppliers for some key components and the loss of any single supplier may have a material long-term adverse effect on our business, operations, or financial condition. To ensure that our high standards of product quality are met and that factories consistently meet our shipping schedules, we utilize Hong Kong and China based employees as our representatives. These employees include product inspectors who are knowledgeable about product specifications and work closely with the factories to verify that such specifications are met. Additionally, key personnel frequently visit our factories for quality assurance and to support good working relationships.

 

All of the electronic equipment sold by us is warranted to the end user against manufacturing defects for a period of ninety (90) days for labor and parts. All music sold is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 2017, 2016, and 2015, warranty claims have not been material to our results of operations.

 

COMPETITION

 

Our business is highly competitive. Our major competitors for karaoke machines and related products are GPX, Audiovox, Vivitar, Akai, Ion, Karaoke USA, licensed property karaoke products and other consumer electronics companies. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. We believe that our brand name is well recognized in the industry and helps us compete in the karaoke machine category. Our primary competitors for producing karaoke music are Sybersound, Smule, Karaoke Anywhere, and Red Karaoke. We believe that competition for karaoke music is based primarily on popularity of song titles, price, reputation, and delivery times.

 

In addition, we compete with all other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's, and DVD’s. Our financial position depends, among other things, on our ability to keep pace with changes and developments in the entertainment industry and to respond to the requirements of our customers. Many of our competitors have significantly greater financial, marketing, and operating resources and broader product lines than we do.

 

TRADEMARKS AND PATENTS

 

We have obtained registered trademarks for The Singing Machine name and the logo in the U.S. and in the European Union. We have also filed trademark applications in Australia and Hong Kong. We also filed various trademarks for our products. In 2003 we also obtained two U.S. design patents for karaoke machines, patent numbers US D505,960 S and US D524,325 S.

 

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Our trademarks are a significant asset because they provide product recognition. We believe that our intellectual property is significantly protected, but there are no assurances that these rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged.

 

COPYRIGHTS AND LICENSES

 

We offer karaoke music through our Singing Machine Karaoke Download Store, Community, and iPhone/iPad App through a partnership with Stingray Digital Group (“Stingray”). Stingray holds all licensing agreements directly with the music publishers and is responsible for all royalty payments. We share a revenue split with Stingray on all karaoke videos streamed or downloaded by our customers. Stingray is the leading multi-platform music service provider in the world, with an estimated 110 million Pay-TV subscribers in 111 countries around the world. Geared towards individuals and businesses alike, the company’s commercial entities include leading digital music and video services Stingray Music, Concert TV and The KARAOKE Channel. Stingray also offers various business solutions, including music and digital display-based solutions through its Stingray Business division.

 

GOVERNMENT REGULATION

 

Our karaoke machines must meet the safety standards imposed in various national, state, local, and provincial jurisdictions. Our karaoke machines sold in the U.S. are designed, manufactured and tested to meet the safety standards of Underwriters Laboratories, Inc. (“ULE”) or Electronic Testing Laboratories (“ETL”). In Europe and other foreign countries, our products are manufactured to meet the Consumer Electronics (“CE”) marking requirements. CE marking is a mandatory European product marking and certification system for certain designated products. When affixed to a product and product packaging, CE marking indicates that a particular product complies with all applicable European product safety, health and environmental requirements within the CE marking system. Products complying with CE marking are now accepted to be safe in 28 European countries. However, ULE or ETL certification does not mean that a product complies with the product safety, health and environmental regulations contained in all fifty states in the United States. Therefore, we maintain a quality control program designed to ensure compliance with all applicable U.S. and federal laws pertaining to the sale of our products. Our production and sale of music products is subject to federal copyright laws.

 

The manufacturing operations of our foreign suppliers in China are subject to foreign regulation. China has permanent “normal trade relations” (“NTR”) status under U.S. tariff laws, which provides a favorable category of U.S. import duties. China's NTR status became permanent on January 1, 2002. This substantially reduces the possibility of China losing its NTR status, which would result in increasing costs for us.

 

SEASONALITY AND SEASONAL FINANCING

 

Our business is highly seasonal, with consumers making a large percentage of karaoke purchases around the traditional holiday season in our second and third quarter ending September 30 and December 31. These seasonal purchasing patterns and requisite production lead times cause risk to our business associated with the underproduction or overproduction of products that do not match consumer demand. Retailers also attempt to manage their inventories more tightly, requiring that we ship products closer to the time that retailers expect to sell the products to consumers. These factors increase the risk that we may not be able to meet demand for certain products at peak demand times, or that our own inventory levels may be adversely affected by the need to pre-build products before orders are placed. As of March 31, 2017, we had inventory of approximately $5.4 million (net of reserves totaling $700,000) compared to inventory of approximately $3.7 million as of March 31, 2016 (net of reserves totaling $760,000).

 

Our financing of seasonal working capital during fiscal 2017 was from a Revolving Credit Facility from PNC Bank (“Revolving Credit Facility”) established on July 14, 2014 which was renewed on June 22, 2017 and vendor extended accounts payable terms from certain China manufacturers. The Revolving Credit Facility expires on July 15, 2020.

 

During Fiscal2018, we plan on financing our inventory purchases by borrowing on our Revolving Credit Facility and using payment terms that have been granted to us by the factories in China.

 

EMPLOYEES

 

As of June 29, 2017 we employed 38 people, of whom 34 are full-time employees. Two of our employees are located at SMC Macau’s offices and the remaining employees are based in the U.S. Our employees include 3 executive officers, 15 engaged in warehousing and administrative logistics/technical support and 20 in accounting, marketing, sales and administrative functions.

 

ITEM 1A. RISK FACTORS

 

Set forth below and elsewhere in this Annual Report on Form 10-K and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements contained in this Annual Report.

 

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RISKS ASSOCIATED WITH OUR BUSINESS

 

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 years ended March 31, 2017 and 2016 were approximately 79% and 76%, 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 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.

 

In fiscal 2017 and 2016, a number of our customers and distributors returned karaoke products that they had purchased from us. Our customers returned goods valued at approximately $3.6 million or 6.3% of our gross product sales in fiscal 2017 and approximately $2.9 million or 5.5% of our gross product sales in fiscal 2016. The majority of the units returned are due to product defects. Our factories charge customary repair and freight costs which increase our expenses and reduce profitability. 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. 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 of approximately $2,744,000 during fiscal 2017 and $2,703,000 during fiscal 2016. 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. In past years we have overestimated demand for our products which led to excess inventory in some of our products and caused liquidity problems that adversely affected our revenues, net income and cash flow.

 

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 of the order and the delivery date, which reduces our cash flow. As of March 31, 2017 we had approximately $5.4 million in inventory. It is important that we sell this inventory during fiscal 2018, so we have sufficient cash flow for operations.

 

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 84.0% and 85.4%of net sales in fiscal 2017 and 2016, respectively.

 

IF WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND NET PROFITABILITY WILL BE REDUCED.

 

Our major competitors for karaoke machines and related products are GPX, Audiovox, Vivitar, Akai, Ion, Karaoke USA and licensed property karaoke products and other consumer electronics companies. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. 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, 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 2017, 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 2018. 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 DVD’s and streaming video.

 

8
  

 

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:

 

  accurately define and design new products to meet market demand;
     
  design features that continue to differentiate our products from those of our competitors;
     
  transition our products to new manufacturing process technologies;
     
  identify emerging technological trends in our target markets;
     
  anticipate changes in end-user preferences with respect to our customers' products;
     
  bring products to market on a timely basis at competitive prices; and
     
  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 Ontario, 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 and our results of operations adversely affected.

 

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 seven factories in the People's Republic of China to manufacture the majority of our karaoke machines. These factories will be producing all of our karaoke products in fiscal 2018. 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. 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.

 

9
  

 

CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES.

 

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 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 catalogs and showrooms, national chains, specialty stores, and warehouse clubs. 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. As of June 29, 2017 we are not aware of any customers that are operating under the protection of bankruptcy laws with the exception of H H Gregg who filed bankruptcy and liquidation during the fourth quarter of fiscal 2017.

 

A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTER IN CALIFORNIA COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR CUSTOMERS, WHICH COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.

 

A significant amount of our merchandise is shipped to our customers from our warehouse located in Ontario, California. 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.

 

CURRENT LEVELS OF SECURITIES AND FINANCIAL MARKET RISK.

 

During the past twelve months, the securities and financial markets have stabilized and our improved financial condition and results of operations have allowed us to obtain traditional financing with PNC Bank. Should there be a disruption in the current levels of these markets or a deterioration of our business, 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.

 

CURRENCY EXCHANGE RATE RISK

 

The majority of our products are currently manufactured in the People’s Republic of China. During the fiscal year ended March 31, 2017, the Chinese local currency had no material effect on the Company as all of our purchases are denominated in U.S. currency. However, in the event our purchases are required to be made in Chinese local currency, the Yuan, we will be subject to the risks involved in foreign exchange rates. In the future the value of the Yuan may depend to a large extent on the Chinese government’s policies and China’s domestic and international economic and political developments. As a result, our production costs may increase if we are required to make purchases using the Yuan instead of the U.S. dollar and the value of the Yuan increases over time. Any significant increase in the cost of manufacturing our products would have a material adverse effect on our business and results of operations.

 

INCREASED RAW MATERIAL/PRODUCTION PRICING

 

Fluctuation in the price of oil has and will continue to affect the Company in connection with the sourcing and utilizing of petroleum based raw materials and services. We expect to see favorable cost reductions in our finished goods during fiscal year 2018 due to the significant drop in the price of oil. These cost reductions may be somewhat offset by the increased cost of trans-oceanic shipping as well as a number of labor related regulations instituted in China which impact wages and thus the cost of production. These issues are common to all companies in the same type of business and if the Company is not able to negotiate lower costs, or reduce other expenses, or pass on some or all of these price increases to our customers, our profit margin may be decreased.

 

RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE

 

IF OUR OUTSTANDING STOCK OPTIONS ARE EXERCISED, OUR EXISTING SHAREHOLDERS WILL SUFFER DILUTION.

 

As of March 31, 2017, there were outstanding stock options to purchase an aggregate of 1,970,000 shares of common stock at exercise prices ranging from $0.03 to $0.45 per share, not all of which are immediately exercisable. The weighted average exercise price of the outstanding stock options is approximately $0.17 per share.

 

10
  

 

FUTURE SALES OF OUR COMMON STOCK HELD BY CURRENT SHAREHOLDERS AND INVESTORS MAY DEPRESS OUR STOCK PRICE.

 

As of June 29, 2017 there were 38,259,303 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). 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, as amended in January 2006, authorizes the issuance of 100,000,000 shares of common stock. As of June 29, 2017, we had 38,259,303 shares of common stock issued and outstanding and an aggregate of 1,970,000 shares issuable under our outstanding stock options. As such, our Board of Directors has the power, without stockholder approval, to issue up to 59,750,697 shares of common stock. Any issuance of additional shares of common stock, whether by us to new shareholders or the exercise of outstanding 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 shareholders.

 

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 shareholders to elect directors and take other corporate actions. These provisions of our certificate of incorporation include: authorizing our board of directors to issue additional preferred stock, limiting the persons who may call special meetings of shareholders, and establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings.

 

IF WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.

 

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting or disclosure of our management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

THE MARKET PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY SEVERAL FACTORS.

 

The market price of our common stock could fluctuate significantly in response to various factors and events, including:

 

our ability to execute our business plan;
operating results below expectations;
loss of any strategic relationship;
industry developments;
economic and other external factors; and
period-to-period fluctuations in its financial results.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR STOCK.

 

We have never paid cash dividends on our stock and do not anticipate paying cash dividends on our stock in the foreseeable future. The payment of cash dividends on our stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2. PROPERTIES

 

Our corporate headquarters are located in Fort Lauderdale, Florida where we lease approximately 4,000 square feet of office space. The lease expired on December 31, 2016. On August 31, 2016 we signed a lease extension that included the current occupied space as well as approximately 2,500 additional square feet of office space adjacent to our current space. The lease extension will commence upon completion of tenant improvements and will terminate 78 months after commencement. During the tenant improvement construction period the rent will remain the same as the expired lease and will be paid on a month-to-month basis. The annual rental expense for office facilities was $114,508 for the fiscal year ended March 31, 2017.

 

We lease approximately 86,000 square feet of warehouse space in Ontario, California for our logistics operations. The lease expires on August 31, 2020 (original term of 87 months) and includes a provision for the abatement of the first three months base rent in the amount of $113,412. The annual rental expense for warehouse facilities was $510,644 for the fiscal year ended March 31, 2017.

 

We lease a 424 square foot office in Macau. The annual rent expense for this facility was $16,194 for the fiscal year ended March 31, 2017. On May 1, 2016 we renewed our office space lease in Macau for an additional two year term which ends April 30, 2018. The annual base rent is fixed at $16,154 per year for the entire term of the lease.

 

We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases.

 

ITEM 3. LEGAL PROCEEDINGS

 

Management is currently not aware of any legal proceedings against the Company.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company has traded on the Over the Counter Bulletin Board (“OTCBX”) under the symbol “SMDM” since August 2, 2016. Set forth below is the range of high and low sales prices for our common stock during Fiscal 2017 and Fiscal 2016.

 

FISCAL PERIOD  HIGH   LOW 
         
Fiscal 2017:          
First quarter (April 1 - June 30, 2016)  $0.32   $0.28 
Second quarter (July 1 - September 30, 2016)   0.44    0.32 
Third quarter (October 1 - December 31, 2016)   0.76    0.37 
Fourth quarter (January 1 - March 31, 2017)   0.69    0.47 
           
Fiscal 2016:          
First quarter (April 1 - June 30, 2015)  $0.18   $0.14 
Second quarter (July 1 - September 30, 2015)   0.20    0.13 
Third quarter (October 1 - December 31, 2015)   0.22    0.14 
Fourth quarter (January 1 - March 31, 2016)   0.39    0.18 

 

As of June 29, 2017, based upon information received from our transfer agent, there were approximately 481 record holders of our outstanding common stock. This number does not include:

 

  any beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, or
     
  broker-dealers or other participants who hold or clear shares directly or indirectly through the Depository Trust Company, or its nominee, Cede & Co.

 

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DIVIDENDS

 

We have never declared or paid cash dividends on our common stock and our Board of Directors intends to continue its policy for the foreseeable future. Future dividend policy will depend upon our earnings, financial condition, contractual restrictions and other factors considered relevant by our Board of Directors and will be subject to limitations imposed under Delaware law.

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table summarizes our equity compensation plan information as of March 31, 2016:

 

ISSUANCE UNDER EQUITY PLAN CATEGORY  NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS   WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING
OPTIONS, WARRANTS
AND RIGHTS
   NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE COMPENSATION PLANS (EXCLUDING SECURITIES IN
COLUMN (A))
 
Equity Compensation Plans approved by Security Holders   1,970,000   $.17    0 
                
Equity Compensation Plans Not approved by Security Holders   0   $0    0 

 

RECENT SALES OF UNREGISTERED SECURITIES

 

COMMON STOCK ISSUANCES

 

On November 6, 2016, the Company issued 36,000 shares of its common stock to two employees who exercised stock options at an exercise price of $.33 per share.

 

On August 10, 2016, the Company issued 41,668 shares of its common stock to our Board of Directors at $0.24 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2016.

 

All of the above issuances and sales were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Singing Machine or executive officers of the Singing Machine, and transfer was restricted by the Singing Machine in accordance with the requirement of the Securities Act. In addition to representations by the above-reference persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The statements of operations data for the years ended March 31, 2017, 2016, and 2015 and the balance sheet data at March 31, 2017 and 2016 are derived from our audited financial statements which are included elsewhere in this Form 10-K. The statement of operations data for the years ended March 31, 2014 and 2013 and the balance sheet data at March 31, 2015, 2014 and 2013 are derived from our audited financial statements which are not included in this Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.

 

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   2017   2016   2015   2014   2013 
Statement of Operations:                         
Net Sales  $52,919,228   $48,856,544   $39,308,281   $31,379,629   $34,437,774 
Income before income taxes  $2,723,271   $1,602,014   $262,859   $225,519   $1,521,476 
Income tax (provision) benefit  $(1,017,073)  $101,376   $(92,701)  $778,797   $1,619,459 
Net income  $1,706,198   $1,703,390   $170,158   $1,004,316   $3,140,935 
Balance Sheet:                         
Working Capital  $5,538,254   $4,705,866   $3,622,269   $1,350,377   $3,256,979 
Current Ratio   232%   303%   171%   117%   172%
Property, plant and equipment, net  $412,805   $430,602   $466,571   $561,225   $482,777 
Total assets  $11,636,583   $10,461,609   $12,213,925   $11,730,662   $9,626,665 
Shareholder's equity  $7,441,791   $5,653,568   $3,925,964   $3,709,498   $2,597,831 
Per Share Data:                         
Income per common share - basic  $0.04   $0.04   $0.00   $0.03   $0.08 
Income per common share - diluted  $0.04   $0.04   $0.00   $0.03   $0.08 
Cash dividends paid   -    -    -    -    - 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 regarding anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, 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.

 

Statements included in this Annual Report that do not relate to present or historical conditions are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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.

 

OVERVIEW

 

Our primary objectives for the fiscal year ended March 31, 2017 (“Fiscal 2017”) were to:

 

  increase the revenues by expanding our product lines and customer base;
  drive down the general costs as a percentage of net sales;
  improve profitability;
  decrease ending inventory on hand;
  reduce related-party debt.

 

We were successful in increasing revenues by approximately 8.3% primarily due to an additional promotional product added by our largest retail customer, continued increase in on-line shopping and increased penetration in the UK. Gross profit margins increased by approximately 1.7 percentage points to 26.1% primarily due to better overall margin on download products introduced during the season. Operating expenses increased approximately $868,000 primarily due to increases in sales and marketing due to sales growth and additional co-op advertising promotions which accounted for approximately $380,000 of the increase. Increased payroll due to officer and employee bonus increases as well as new hires accounted for $238,000 of the increase. The remaining increase was primarily due to a $172,000 increase in related party service fees and other variable administrative expenses. Operating expenses as a percentage of sales remained relatively stable at 10.7% compared to 10.5% in the prior year. Inventory on hand increased by approximately $1,735,000 or approximately 47% primarily due to lower than anticipated sales of our new download product series and purchases of goods to be shipped the first quarter of Fiscal 2018. Due to increased income from operations we were able to reduce related-party debt approximately $1,097,000 or approximately 36%.

 

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RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's total revenues:

 

   2017   2016   2015 
Total Revenues   100.0%   100.0%   100.0%
Cost of Sales   73.9%   75.6%   78.9%
Operating Expenses   20.5%   20.4%   19.7%
Operating Income   5.6%   4.0%   1.4%
Other (Expenses), net   -0.5%   -0.7%   -0.7%
Income before Tax (provision) benefit   5.1%   3.3%   0.7%
Benefit from (Provision for) Income Taxes   -1.9%   0.2%   -0.3%
Net Income   3.2%   3.5%   0.4%

 

FISCAL YEAR ENDED MARCH 31, 2017 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2016

 

NET SALES

 

Net sales for the year ended March 31, 2017 (“Fiscal 2017”) were approximately $52.9 million. This represents an increase of approximately $4.0 million as compared to approximately $48.9 million in the fiscal year ended March 31, 2016 (“Fiscal 2016”). There was an increase in sales to one major customer of approximately $3.8 million due to one additional promotional product offered to its customers. There was an increase of approximately $1.0 million in sales to two major retail customers due to continued increased popularity in on-line shopping. There was an increase of approximately $0.4 million in international sales due to increased number of products sold to our United Kingdom distributor. These increases of $5.2 million were offset by an approximate $1.2 million reduction in sales to one major retail customer due to poor placement in stores in an area that had less foot traffic.

 

GROSS PROFIT

 

Gross profit for Fiscal 2017 was approximately $13.8 million or 26.1% of total revenues compared to approximately $11.9 million or 24.4% of sales for Fiscal 2016 (an increase of approximately $1.9 million). The increase in net sales as explained above accounted for approximately $0.9 million or approximately 47% of the increase with the remaining increase due to increase in gross profit margin.

 

Gross profit margin for the year ended March 31, 2017 compared to the same period ended March 31, 2016 increased by approximately 1.7 margin points from 24.4% to 26.1%. This increase was primarily due increased profit margins on the download product line hardware introduced during the year as compared to gross profit margin on the traditional product offerings.

 

OPERATING EXPENSES

 

In fiscal year 2017, our operating expenses, including depreciation, increased from approximately $10.0 million to approximately $10.9 million, an increase of approximately $0.9 million or 9% compared to the same period last year. Selling expenses increased by approximately $0.4 million, from $4.7 million in Fiscal 2016 to $5.0 million in Fiscal 2017. The increase was primarily due to the increase in variable selling expenses associated with the 8.3% increase in net sales as explained above.

 

General and administrative expenses increased approximately $0.5 million from approximately $5.2 million in Fiscal 2016 to approximately $5.7 million in Fiscal 2017. There was an increase in payroll of approximately $0.2 million primarily due to increased executive bonuses, merit pay increases and new hires in the logistics and customer service group. There was an increase of approximately $0.2 million in related-party service charges for additional services provided by the Sinostar Group during the fiscal year. The remaining increase of approximately $0.1 million due to other variable expenses associated with the increase in sales as well as the increase in third party logistics services provided to non-related parties.

 

INCOME BEFORE INCOME TAX (PROVISION) BENEFIT

 

We had income before taxes of approximately $2.7 million in Fiscal 2017 compared to income before taxes of approximately $1.6 million in Fiscal 2016. This increase of approximately $1.1 million was primarily due to the combination of the increase in gross profit of approximately $1.9 million due to the increase in sales and gross profit margin as explained in Net Sales and Gross Profit above, offset by the increase in operating and other expenses of approximately $0.8 million as explained in Operating Expenses above.

 

INCOME TAX (PROVISION) BENEFIT

 

Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against 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 not likely to be realized. On March 31, 2017 and 2016, we had net deferred tax assets of approximately $1.5 million and approximately $2.4 million, respectively.

 

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In Fiscal 2017 we recognized an income tax net provision of approximately $1.0 million based on our net income before income tax provision $2.7 million and our effective tax rate of 37.3% Given the past six years of profitability, management’s assessment of the current business climate and expected future profits, it is more likely than not that all of the deferred tax assets will be realized before they expire.

 

In Fiscal 2016 we recognized an income tax net benefit of approximately $0.1 million consisting of an income tax provision of approximately $0.6 million based on our net income before income tax (provision) benefit of approximately $1.7 million and our effective tax rate of 37.8% offset by the reversal of the remaining valuation allowance of approximately $0.8 million.

 

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 income taxes have been made.

 

NET INCOME

 

As a result of the foregoing, we had net income of approximately $1.7 million in both Fiscal 2017 and Fiscal 2016.

  

FISCAL YEAR ENDED MARCH 31, 2016 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2015

 

NET SALES

 

Net sales for the year ended March 31, 2016 (“Fiscal 2016”) were approximately $48.9 million. This represents an increase of approximately $9.6 million as compared to approximately $39.3 million in the fiscal year ended March 31, 2015 (“Fiscal 2015”). There was an increase in sales to one major customer of approximately $4.3 million due to increased promotional programs with this customer which included increased co-op advertising, preferred “end-cap” store locations (displays located at the beginning or end of a store section that covers two aisles) and “shelf-talkers” (looping videos on display with products) and a price increase in one holiday promotion product which accounted for approximately 45% of the increase. There was an increase of approximately $1.7 million in international sales due to increased number of products sold to our United Kingdom distributor and sales to a new distributor in South America accounting for approximately 18% of the increase. There was an increase of approximately $1.7 million in sales to another major retail customer due to increased popularity in on-line shopping accounting for an additional 18% of the increase. The remaining increase of approximately $1.8 million was primarily due to an increase of approximately $0.7 million to one major customer who increased the number of products offered to its customers, an increase penetration in Canada of approximately $0.8 million by our Canadian distributor (a related party) and an increase of approximately $0.3 million from a new domestic customer.

 

GROSS PROFIT

 

Gross profit for Fiscal 2016 was approximately $11.9 million or 24.4% of total revenues compared to approximately $8.3 million or 21.1% of sales for Fiscal 2015 (an increase of approximately $3.6 million). The increase in net sales as explained above accounted for approximately $2.0 million or approximately 56% of the increase with the remaining increase due to increase in gross profit margin.

 

Gross profit margin for the year ended March 31, 2016 compared to the same period ended March 31, 2015 increased by approximately 3.3 margin points from 21.1% to 24.4%. This increase in gross profit margin was primarily due to cost decreases on two large volume products which accounted for approximately 1.7% of the increase, a price increase for a holiday promotional product at one major customer that accounted for approximately 1.1% of the margin. These increases were offset by the increase in inventory reserve expense for some slow-moving items accounting for approximately 0.1% of margin decrease with the remaining increase of approximately 0.6% due to favorable product mix which included the new products that commanded higher margin.

 

OPERATING EXPENSES

 

In fiscal year 2016, our operating expenses, including depreciation, increased from approximately $7.7 million to approximately $10.0 million, an increase of approximately $2.3 million or 29.9% compared to the same period last year. Selling expenses increased by approximately $1.6 million, from $3.1 million in Fiscal 2015 to $4.7 million in Fiscal 2016. The increase was primarily due to the increase in variable selling expenses associated with the 24% increase in net sales as explained above and increased co-op and promotional programs with one of our largest customers.

 

General and administrative expenses increased approximately $0.7 million from approximately $4.5 million in Fiscal 2015 to approximately $5.2 million in Fiscal 2016. There was an increase in payroll of approximately $0.3 million primarily due to increased executive bonuses, merit pay increases and new hires in the logistics group. There was an increase of approximately $0.2 million in packaging materials and temporary warehouse labor commensurate with the increase in net sales. There was an increase of approximately $0.1 million in related-party service charges for additional services provided by the Shihua Group during the fiscal year. The remaining increase of approximately $0.1 million was due to increased product development expenses associated with continued development of the download product line.

 

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DEPRECIATION

 

Our depreciation expenses were $171,785 for Fiscal 2016 compared to $130,254 for Fiscal 2015. The property and equipment consisted mainly of tools and molds for new products which are depreciated straight-line over three to five years. The increase in depreciation expense was primarily due to the depreciation expense associated with the purchase of approximately $136,000 of molds and tools during Fiscal 2016.

 

NET OTHER EXPENSES

 

Other expenses increased by $29,385 to $335,138 in Fiscal 2016 compared to other expense of $305,753 in Fiscal 2015. There was an increase in interest expense of approximately $8,000 which was primarily due to an increase in interest paid on past due amounts to Ram Light Management, Ltd. (Ram Light) debt (other than note payable to Ram Light) which began bearing interest at 6% per annum as of July 1, 2015. Financing costs relating to the amortization of deferred financing costs of the Revolving Line of Credit increased by approximately $21,000 due to the Revolving Line of Credit having been in affect for a full year in Fiscal 2016 compared to slightly less than nine months during Fiscal 2015.

 

INCOME BEFORE INCOME TAX (PROVISION) BENEFIT

 

We had income before taxes of $1,602,014 in Fiscal 2016 compared to income before taxes of $262,859 in Fiscal 2015. This increase of $1,339,155 was primarily due to the combination of the increase in gross profit of approximately $3,608,000 due to the increase in sales and gross profit margin as explained in Net Sales and Gross Profit above, offset by the increase in operating and other expenses of approximately $2,269,000 as explained in Operating Expenses and Net Other Expenses above.

 

INCOME TAX (PROVISION) BENEFIT

 

Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against 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 not likely to be realized. On March 31, 2016 and 2015, we had net deferred tax assets before valuation allowance of approximately $2.4 million and approximately $3.0 million, respectively, against which we recorded no valuation allowance as of March 31, 2016 and a valuation allowance of approximately $0.7 million as of March 31, 2015.

 

In Fiscal 2016 we recognized an income tax net benefit of approximately $0.1 million consisting of an income tax provision of approximately $0.6 million based on our net income before income tax (provision) benefit of approximately $1.7 million and our effective tax rate of 37.8% offset by the reversal of the remaining valuation allowance of approximately $0.8 million. Given the past five years of profitability, management’s assessment of the current business climate and expected future profits, it is more likely than not that all of the deferred tax assets will be realized before they expire.

 

For Fiscal 2015 we recorded an income tax provision of approximately $0.1 million based on our net income before provision for taxes and our effective tax rate of 35.2%. We did not reverse any of the valuation reserve in Fiscal 2015 as it was management’s judgment that the remaining valuation allowance of $0.8 million on the deferred tax asset was more than likely not to be realized given the lower amounts of profitability during the past two years and uncertain business climate and expected future profits.

 

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 income taxes have been made.

 

NET INCOME

 

As a result of the foregoing, we had net income of $1,703,390 in Fiscal 2016 as compared to a net income of $170,158 in Fiscal 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On March 31, 2017, we had cash on hand of approximately $2,305,000 as compared to cash on hand of approximately $2,116,000 on March 31, 2016. The increase of cash on hand of approximately $189,000 was primarily due to our net income of approximately $1,706,000 and an increase in accounts payable of approximately $660,000. These increases in cash were offset by an increase in inventory of approximately $1,675,000, an increase in accounts receivable of approximately $355,000 and purchases of property and equipment of approximately $148,000 accounting for approximately 99% of the increase in cash on hand.

 

Cash provided by operating activities in Fiscal 2017 was approximately $1,017,000. We had net income of approximately $1,706,000 and there was a decrease in deferred tax assets of approximately $929,000 and an increase in trade accounts payable of approximately $660,000. These increases to cash provided by operations were offset by an increase of approximately $1,675,000 in inventory primarily due to higher than expected quantities in the new download product line an increase in Accounts Receivable of approximately $355,000 and reduction in related party accounts payable of approximately $400,000 which accounted for approximately 85% of the cash provided by operating activities.

 

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Cash provided by operating activities in Fiscal 2016 was approximately $2,552,000. In addition to net income of approximately $1,703,000, there was a decrease in inventory of approximately $3,418,000 of which a significant portion of the decrease was from sale of prior year’s excess inventory because of late product delivery in Fiscal 2015 caused by the work slow-down at the Port of Los Angeles during negotiations between port management and the port workers labor union. These increases were offset by a decrease in accounts payable of approximately $2,045,000 associated with the late delivery of products Fiscal 2015, the reduction of related-party debt of approximately $986,000 with remaining $462,000 increase in cash provided by operating activities due to decreases other operating assets.

 

Cash used by investing activities for Fiscal 2017 and Fiscal 2016 were approximately $148,000 and $136,000, respectively, primarily due to the purchase of molds and tooling for new karaoke models.

 

Cash used in financing activities for Fiscal 2017 and Fiscal 2016 were approximately $679,000 and $416,000, respectively, primarily due to the repayment of the note payable to Ram Light.

 

As of March 31, 2017 our working capital was approximately $5,600,000. Our current liabilities of approximately $4,200,000 include:

 

  Client obligations for defective returns and allowances of approximately $100,000 – the amount will be satisfied by future purchases or refunds.
  Accounts payable of approximately $1,400,000 of which approximately $500,000 were amounts due to product vendors.
  Amounts due to Starlight Marketing Limited (related party) of approximately $1,900,000.
  Accrued expenses of approximately $600,000 of which $200,000 was accrued payroll and $200,000 was due to customers for advertising and co-op allowances.
  Warranty provision for estimated effective returns in the amount of $200,000.

 

WORKING CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM

 

During the next twelve-month period, we plan on financing our working capital needs from:

 

1) Vendor financing – Some of 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 and are expected to account for more than 50% of the total revenues in Fiscal 2018.

 

2) Line of Credit - The Company now has a Revolving Credit Facility expiring on July15, 2020. The outstanding loan balance could not exceed $15,000,000 during peak selling season between August 1 and December 31 and is reduced to a maximum of $7,500,000 between January 1 and July 31. The Revolving Credit Facility allows the outstanding loan balance to increase to a maximum of $20,000,000 (upon bank approval) during peak selling season and Management believes this Revolving Credit Facility is adequate to finance our business during the next fiscal year.

 

EXCHANGE RATES

 

We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau Pataca (MOP). The exchange rate of the Hong Kong dollar to the U.S. dollar has been relatively stable at approximately HK $7.80 to U.S. $1.00 since 1983 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. The exchange rate of the MOP to the U.S. dollar is MOP $7.80 to U.S. $1.00. While exchange rates have been stable for several years we cannot assure you that the exchange rate between the United States, Macau and Hong Kong currencies will continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations.

 

SEASONAL AND QUARTERLY RESULTS

 

Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) 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 84.0%, 85.4%, and 86.6% of net sales in Fiscal 2017, Fiscal 2016, and Fiscal 2015.

 

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 Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts.

 

OFF BALANCE SHEET ARRANGEMENTS

 

None.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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 included accounts receivable allowance for doubtful accounts and reserves on inventory.

 

ACCOUNTS RECEIVABLE AND COLLECTIBILITY

 

The Singing Machine’s accounts receivable consist of amounts due from customers in the ordinary course of business. Accounts receivable are carried at cost, net of allowances for uncollectible amounts. Provisions for losses are charged to operations in amounts sufficient to maintain an allowance for losses at a level considered adequate to cover probable losses inherent in the Company’s 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. The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices.

 

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.

 

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. Net sales are comprised of gross sales net of actual and estimated future returns, discounts and volume rebates. The total returns represent 6.3%, 5.5%, and 8.1% of the gross sales for the fiscal years ended March 31, 2017, 2016, and 2015, respectively.

 

INCOME TAXES

 

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 jurisdictions have been made. 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. 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.

 

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.

 

RECENT ACCOUNTING PRONOUNCEMENTS:

 

In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for companies to use when accounting for revenue arising from contracts with customers. The core principle of the revenue recognition model is that an entity recognizes revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle a company must apply the following steps in determining revenue recognition:

 

  Identify the contract(s) with a customer
  Identify the performance obligations in the contract.
  Determine the transaction price.
  Allocate the transaction price to the performance obligations in the contract.
  Recognize revenue when (or as) the entity satisfies a performance obligation.

 

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The amendments in this ASU are now effective for annual reporting periods beginning April 1, 2018 including interim periods within that reporting period. Management plans to adopt ASU 2014-09 using the full retrospective method of implementation. Management has assessed the effect of implementing ASU 2014-09 to determine the effect on the Company’s financial statements. After examining the Company’s performance obligations in its contracts, most of the Company’s customers (other than distributors) have “customer acceptance rights” in that customers are allowed to return defective goods within a specified period after shipment (between 6 and 9 months) after goods have been shipped. Currently, the Company recognizes a liability for the estimated net amount of sales less related cost of goods sold of expected returned goods at the time of sale. The liability for defective goods is included in warranty provisions on the consolidated balance sheets. The implementation of ASU 2014-09 will require that the cost of the estimated returned goods be reflected in inventory and the amount of estimated sales to be credited to the customer be recognized in liabilities on the consolidated balance sheets.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The ASU requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance in ASU 2015-11 is effective for fiscal years and interim periods within those fiscal years beginning after April 1, 2017. The new guidance should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. After analyzing the Company’s current practices of measuring inventory and comparing those practices to the requirements of ASU 2015-11, management does not believe that the implementation of ASU 2015-11 will have any material effect on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU requires lessees to recognize a right- of use asset and a lease liability on its Balance Sheet regardless of whether a lease is identified as financial lease or an operating lease. If the lease is identified as a financial lease, then the lessee must recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of income and classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. If the lease is identified as and operating lease then the lessee must recognize a single lease cost in the statement of income, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and classify all cash payments within operating activities in the statement of cash flows. Both quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning April 1, 2019; including interim periods within those fiscal years, with early adoption permitted. Management has assessed the effect of implementing ASU 2016-02 to determine the effect on the Company’s financial statements. The Company has several operating leases of which two are long-term real estate agreements that are subject to the requirements of ASU 2016-02 which will have a significant impact on the Company’s consolidated financial statements and will require recognition of a right-to-use asset and a liability for payments.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplemental data required pursuant to this Item 8 are included in this Annual Report, as a separate section, commencing on page F-1 and are incorporated herein by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

N/A

 

ITEM 9A. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Annual Report, we conducted an evaluation as required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, 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 were effective.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

 

21
  

 

(b) Management’s Annual Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of Company management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Management has assessed the effectiveness of our internal control over financial reporting using the components established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A material weakness is any deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of the year covered by this Annual Report.

 

(c) Changes in Internal Controls

 

There were no changes in the Company’s internal controls over financial reporting during the fiscal year ended March 31, 2017, that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table sets forth certain information with respect to our executive officers, directors and significant employees as of June 29, 2017.

 

Name   Age   Position
         
Gary Atkinson   35   CEO
Bernardo Melo   40   VP Global Sales and Marketing
Lionel Marquis   64   CFO
Phillip Lau   69   Chairman
Harvey Judkowitz   72   Director
Joseph Kling   87   Director
Peter Hon   76   Director
Yat Tung Lau   38   Director

 

Directors are elected or appointed to serve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve for one year until the meeting of the Board of Directors following the annual meeting of stockholders and until their successors have been elected and qualified. Any officer elected or appointed by the Board or appointed by an executive officer or by a committee may be removed by the Board either with or without cause, and in the case of an officer appointed by an executive officer or by a committee, by the officer or committee that appointed him or by the president.

 

The following information sets forth the backgrounds and business experience of our directors and executive officers and has been provided to us by each respective individual:

 

Gary Atkinson joined the Company in January 2008 and served as General Counsel and Corporate Secretary. In November 2009, Mr. Atkinson was appointed as Interim Chief Executive Officer and was promoted as the Company’s permanent Chief Executive Officer in May, 2012. Since taking over as Chief Executive Officer, Gary has led the Company to six consecutive years of profitability and growth in sales. Mr. Atkinson is a licensed attorney in the State of Florida and Georgia. He graduated from the University of Rochester with a Bachelors Degree in Economics and has been awarded a dual-degree J.D./M.B.A. from Case Western Reserve University School of Law and Weatherhead School of Management.

 

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Bernardo Melo has been with the Company since February 2003 and has served as the Vice President of Global Sales and Marketing (“VP of Sales”) since 2008. During his tenure at the Singing Machine, Mr. Melo has overseen the sales and operations of the music division as well as managed the customer service department. Before taking over the responsibility of VP of Sales, Mr. Melo held dual roles with the Company managing the operations, licensing and sales of the music division while concentrating on hardware sales for the Latin America and Canada market as well as key U.S. accounts such as Toys R’ Us. Prior to joining the Company, Mr. Melo held a consulting role for Rewards Network formerly Idine. Mr. Melo’s assignment during his tenure was improving their operational procedures while increasing efficiencies and lowering operating cost. Mr. Melo also worked at Coverall North America as Director of Sales managing a startup initiative for the company covering 15 regional office and 40 sales reps across North America focusing on franchise sales. Overall Mr. Melo has over 13 years of sales, marketing and management experience.

 

Lionel Marquis joined the Company in June 2008 as Controller and Principal Accounting Officer and was appointed as the Company’s Chief Financial Officer in May, 2012. For the past 22 years Mr. Marquis has served as Controller and or Chief Financial Officer for several manufacturing and distribution companies in the South Florida area. Some of these companies include Computer Products, Inc (Artesyn Technologies Inc), US Plastic Lumber Corp., Casi-Rusco, (division of Interlogix Inc.), DHF Industries, Inc and Ingear Fashions, Inc. Mr. Marquis graduated from Bryant University with a Bachelors Degree in Business Administration with a major in accounting. Mr. Marquis is a Certified Public Accountant in the state of Florida.

 

Phillip Lau joined the Company’s board of directors on February 15, 2015 and was appointed as Chairman of the Company’s Board of Directors. Mr. Lau served as Chairman and Managing Director of the Starlight Group of companies since September of 1989. Mr. Lau has over 46 years of management experience in the consumer electronics industry and is a director in a number of Starlight group companies.

 

Harvey Judkowitz has served as a director of the Company since March 29, 2004 and is the chairman of the Audit Committee. He is licensed as a CPA in New York and Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own CPA practices. He has served as the Chairman and CEO of UniPro Financial Services, a diversified financial services company up until the company was sold in September of 2005. He was formerly the President and Chief Operating Officer of Photovoltaic Solar Cells, Inc.

 

Bernard Appel served as a director of the Company since October 31, 2003 until his death on April 2, 2017. He spent 34 years at Radio Shack, beginning in 1959. At Radio Shack, he held several key merchandising and marketing positions and was promoted to the positions of President in 1984 and to Chairman of Radio Shack and Senior Vice President of Tandy Corporation in 1992. Since 1993 through the present date, Mr. Appel has operated the private consulting firm of Appel Associates, providing companies with merchandising, marketing and distribution strategies, creative line development and domestic and international procurement. Mr. Appel’s board position was replaced by Mr. Joseph Kling on May 9, 2017

 

Stewart Merkin served as a director of the Company since December 1, 2004. On July 6, 2016 Mr. Merkin resigned his director position for personal reasons. Mr. Merkin, founding partner of the Law Office of Stewart A. Merkin, has been practicing law in Miami, Florida since 1974. His core legal practice areas include corporate and securities law, as well as mergers and acquisitions and international transactions. He was awarded both J.D. and M.B.A. degrees from Cornell University, as well as a B.S. from The Wharton School, University of Pennsylvania. He was admitted to the Florida Bar in 1972.

 

Peter Hon has served as a director of the Company since January 12, 2007. Mr. Hon has been a non-executive of the Starlight Group since 1998. Mr. Hon passed the College of Law qualifying examination in 1969 in the United Kingdom and began practicing law in Hong Kong in that year after being admitted to the High Court of Hong Kong. He has been the principal of Hon and Co, a law firm in Hong Kong for the past 38 years.

 

Yat Tung Lau has served as a director of the Company since January 12, 2007. Mr. Lau joined the Starlight Group in 2003 as assistant to the Chairman of the Board of Starlight International and is now head of corporate relations. He is also responsible for local sales in China and heads the computer information system department for the Starlight Group. From 2002 to 2003, he held a marketing executive position in Storage Technology Corporation. Mr. Lau received an MBA from the University of Minnesota and also holds a Bachelor of Arts degree in business marketing from Indiana University.

 

Joseph Kling was appointed as a director of the Company on May 9, 2017. Mr. Kling has spent his entire career in the toy industry, most notably serving as CEO of View-Master, the iconic stereoscopic toy company, which later purchased Ideal Toy from CBS and later became View-Master Ideal, publicly traded on the Nasdaq. View-Master Ideal later acquired California Plush Toys and the entire group was later acquired by Tyco Toys in 1989. Kling later went into private M&A consulting and sat on the board of Russ Berrie & Co (currently known as Kids Brands, Inc.) for 21 years advising on the acquisition of several toy companies. Mr. Kling has also served on the Board of Crown Crafts, a large distributor of infant, toddler, and juvenile consumer products and on the board of Lancit Media Entertainment, a children's and family media production company (formerly listed on the Nasdaq). Notably, Mr. Kling has been involved in many major toy company acquisitions of brands such as Melissa & Doug and Brio.

 

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BOARD COMMITTEES

 

We have an audit committee, a compensation committee and a nominating committee.

 

The audit committee consisted of Messrs. Judkowitz (Chairman), Appel (Deceased) and Merkin (Resigned). The Board has determined that Mr. Judkowitz qualifies as an “audit committee financial expert,” as defined under Item 407 of Regulation S-K of the Exchange Act. The Board has determined that each of Messrs. Judkowitz, Merkin and Appel were “independent directors” within the meaning of the listing standards of the major stock exchanges. The audit committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with our independent auditors, reviews our internal accounting controls, and approves services to be performed by our independent auditors. Effective June 2017 Messr. Kling was appointed to the audit committee and the Board has determined that he qualifies as an “independent director” within the meaning of the listing standards of the major stock exchanges.

 

The compensation committee consisted of Messrs. Judkowitz and Merkin (Resigned). The compensation committee considers and authorizes remuneration arrangements for senior management and grants options under, and administers our employee stock option plan. Effective June 2017, Messr. Kling and Philip Lau were appointed to the compensation committee.

  

The nominating committee consisted of Messrs. Appel (Chairman)(Deceased), Merkin (Resigned) and Yat Tung Lau. The nominating committee is responsible for reviewing the qualifications of potential nominees for election to the Board of Directors and recommending the nominees to the Board of Directors for such election. Effective June 2017, Philip Lau was appointed to join the nominating committee.

 

Nomination of Directors

 

As provided in our nominating committee charter and our Company’s corporate governance principles, the Nominating Committee is responsible for identifying individuals qualified to become directors. The Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (1) the Nominating Committee members, (2) our other directors, (3) our shareholders, (4) our Chief Executive Officer or Chairman, and (5) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating Committee considers the entirety of each candidate’s credentials.

 

Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board of Directors. However, at a minimum, candidates for director must possess:

 

  high personal and professional ethics and integrity;
     
  the ability to exercise sound judgment;
     
  the ability to make independent analytical inquiries;
     
  a willingness and ability to devote adequate time and resources to diligently perform Board and committee duties; and
     
  the appropriate and relevant business experience and acumen.

 

In addition to these minimum qualifications, the Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors:

 

  whether the person possesses specific industry expertise and familiarity with general issues affecting our business;
     
  whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K;
     
  whether the person would qualify as an “independent” director under the listing standards of the AMEX;
  the importance of continuity of the existing composition of the Board of Directors to provide long term stability and experienced oversight; and
     
  the importance of diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise.

 

There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s board of directors as set forth in the Company’s Proxy Statement on Schedule 14A filed with the SEC on December 29, 2016.

 

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FAMILY RELATIONSHIPS

 

There are no family relationships among any of our officers or other directors, except for Chairman Phillip Lau who is the father of Director Yat Tung Lau and the uncle of Gary Atkinson, the Company’s CEO.

 

CODE OF ETHICS

 

We have adopted a Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees of the Singing Machine, including our principal executive officer, our principal financial officer, and our principal accounting officer or controller or other persons performing similar functions. A copy of the Code of Ethics is posted on the Company’s website at www.singingmachine.com. We intend to post amendments to or waivers from our Code of Ethics (to the extent applicable to our chief executive officer, principal financial officer, principal accounting officer or controller or other persons performing similar functions) on our website.

 

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

 

Section 16(a) of the Exchange Act requires our officers, directors, and persons who own more than ten percent of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater-than-ten-percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file.

 

Based solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant to Rule 16a-3 under the Exchange Act, we believe that all such forms required to be filed pursuant to Section 16(a) of the Exchange Act during the year ended March 31, 2017 were timely filed, as necessary, by the officers, directors, and security holders required to file such forms except for the following:

 

Mr. Harvey Judkowitz filed a Form 5 in lieu of filing a timely Form 4 with respect to two transactions;

Mr. Bernard Appel filed a Form 5 in lieu of filing a timely Form 4 with respect to one transaction;

Mr. Stewart Merkin filed a Form 5 in lieu of filing a timely Form 4 with respect to one transactions;

Mr. Peter Hon filed a Form 5 in lieu of filing a timely Form 4 with respect to two transactions.

Mr. Yat-Tung Lau filed a Form 5 in lieu of filing a timely Form 4 with respect to one transaction.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and other named executive officers of our Company (collectively, the “named executive officers”) for Fiscal 2017.

 

SUMMARY COMPENSATION TABLE

 

Name and Principal Position  Year   Salary   Bonus   Stock Awards   Option Awards   Non-Equity Incentive Plan Comp   Non-Qualified Deferred Compensation Earnings   Other Comp   TOTAL COMP 
Gary Atkinson   2017   $120,000.00   $71,545   $-   $8,936   $-   $-   $-   $200,481 
Chief Executive Officer   2016   $120,000.00   $54,142   $-   $11,915   $-   $-   $-   $186,057 
                                              
Lionel Marquis   2017   $130,000.00   $52,210   $-   $2,681   $-   $-   $-   $184,891 
Chief Financial Officer   2016   $112,750.00   $32,485   $-   $3,575   $-   $-   $-   $148,810 
                                              
Bernardo Melo   2017   $157,200.00   $207,881   $-   $27,829   $-   $-   $-   $392,910 
VP Global Sales & Marketing   2016   $157,200.00   $194,158   $-   $2,762   $-   $-   $-   $354,120 

 

Narrative Disclosure to Summary Compensation Table

 

Mr. Atkinson does not have an employment contract with the Company and had an annual salary of $120,000 for the fiscal year ended March 31, 2017.

 

Mr. Marquis does not have an employment contract with the Company and has an annual salary of $130,000 for the fiscal year ended March 31, 2017.

 

Mr. Melo does not have an employment contract with the Company and had an annual salary of $157,200 for the fiscal year ended March 31, 2017.

 

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As of June 29, 2017, the Company did not have any employment contracts with any of its employees. However, on January 3, 2014, the Company entered into agreements with the three executive officers named above that if an executive’s employment is terminated by the executive or the Company following a change in control, the executive will be entitled to the following within 10 days of termination:

 

  All accrued and unpaid compensation due to the executive as of the date of termination.
  A lump sum payment equal to one year’s executive base salary if the executive terminates employment.
  A lump sum of one and a half year’s executive base salary and targeted annual bonus if the Company terminates employment.
  All outstanding stock options shall be fully vested and exercisable for the remainder of their full term.
  All outstanding equity-based compensation awards (other than stock options) shall become fully vested with any restrictions removed.

 

OPTION GRANTS IN FISCAL 2017

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table sets forth information with respect to outstanding grants of options to purchase our common stock under our Year 2001 Stock Option Plan as well as other stock option awards issued with Board of Directors approval to the named executive officers as of the fiscal year ended March 31, 2017:

 

Name and Principal Position  Number of Securities Underlying Unexercised Options (#) Exercisable   Number of Securities Underlying Unexercised Options (#) Unexercisable   Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)  Option Exercise Price ($)   Option Expiration Date  Number of Shares or Units of Stock That Have Not Vested (#)   Market Value of Shares or Units of Stock That Have Not Vested ($)   Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)  Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
                                 
Gary Atkinson, CEO - Year 2001 Stock Option Plan   120,000    -   N/A   0.06   10/29/2020   N/A    N/A   N/A  N/A
- Other stock option awards   150,000    -   N/A   0.21   7/1/2023   N/A    N/A   N/A  N/A
- Other stock option awards   50,000    -   N/A   0.24   3/31/2026   N/A    N/A   N/A  N/A
                                      
Lionel Marquis, CFO - Year 2001 Stock Option Plan   120,000    -   N/A   0.06   10/29/2020   N/A    N/A   N/A  N/A
- Other stock option awards   100,000    -   N/A   0.21   7/1/2023   N/A    N/A   N/A  N/A
- Other stock option awards   15,000    -   N/A   0.24   3/31/2026   N/A    N/A   N/A  N/A
                                      
Bernardo Melo, VP Sales - Year 2001 Stock Option Plan   200,000    -   N/A   0.06   10/29/2020   N/A    N/A   N/A  N/A
- Other stock option awards   250,000    -   N/A   0.21   7/1/2023   N/A    N/A   N/A  N/A
- Other stock option awards   25,000    -   N/A   0.17   6/30/2025   N/A    N/A   N/A  N/A
- Other stock option awards   100,000    -   N/A   0.32   8/10/2026   100,000   $42,000.00   N/A  N/A

 

The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in Fiscal 2017.

 

DIRECTOR COMPENSATION

 

Name  Fees Earned or Paid in Cash   Stock Awards (1)   Option Awards (2)   Non-Equity Incentive Plan Compensation ($)   Nonqualified Deferred Compensation Earnings   All Other Compensation   Total 
                             
Bernard Appel  $7,950   $2,500   $3,575   $-   $-   $-   $14,025 
                                    
Peter Hon  $7,750   $2,500   $3,575   $-   $-   $-   $13,825 
                                    
Harvey Judkowitz  $9,400   $2,500   $3,575   $-   $-   $-   $15,475 
                                    
Phillip Lau  $-   $-   $-   $-   $-   $-   $- 
                                    
Yat Tung Lau  $-   $-   $-   $-   $-   $-   $- 
                                    
Stewart Merkin  $1,875   $2,500   $3,575   $-   $-   $-   $7,950 

 

Refer to Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for the relevant assumptions used to determine the valuation of our option awards.

 

(1) As of March 31, 2017 the aggregate number of stock awards held by Messrs. Appel, Merkin, and Judkowitz is 244,669, 242,332, and 264,669, respectively which includes stock options of 20,000 exercised by Mr. Judkowitz on in March, 2016. The aggregate stock awards held by Messrs. Hon and Yat Tung Lau is 39,274 and 28,857, respectively.

 

(2) As of March 31, 2017 the aggregate number of Company stock options held by Messrs. Appel, Judkowitz and Merkin is 200,000 and Messrs. Hon and Yat Tung Lau is 60,000 and 40,000, respectively.

 

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During Fiscal 2017, our compensation package for our non-employee directors consisted of grants of stock options, cash payments, stock issuances and reimbursement of costs and expenses associated with attending our board meetings. Our six non-employee directors during Fiscal 2017 were Messrs. Appel, Judkowitz, Hon, Yat Tung Lau, Merkin and Phillip Lau.

 

During Fiscal 2017, we have utilized the following compensation policy for our directors:

 

  An initial grant of 20,000 Singing Machine stock options with an exercise price determined as the closing price on the day of joining the board. The options will vest in one year and expire in ten years while they are board members or 90 days once they are no longer board members.
     
  An annual cash payment of $7,500 will be made for each completed full year of service or prorated for a partial year. The payment will be made as of March 31.
     
  An annual stock grant of stock equivalent in value to $2,500 for each completed full year of service or prorated for a partial year. The stock price at grant will be determined at the closing price on the day of the Annual Stockholder Meeting. The actual grant will be made on or before March 31.
     
  An annual grant of 20,000 Singing Machine stock options with an exercise price determined as the closing price on the day of the Annual Stockholder Meeting. If the Annual Meeting is held less than 6 months after the board member first joined the board he or she will not receive another option grant.
     
  Independent board members will receive a $500 fee for each board meeting and annual meeting they attend. Committee meetings and telephone board meetings will be compensated with a $250 fee.
     
  All expenses will be reimbursed for attending board, committee and annual meetings or when their presence at a location away from home is requested.
     
  Director Phillip Lau has volunteered to temporarily forfeit all compensation until Fiscal 2018.

 

YEAR 2001 PLAN

 

On June 1, 2001, our Board of Directors approved the Year 2001 Plan and it was approved by our shareholders at our special meeting held September 6, 2001. The Year 2001 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. The Year 2001 Plan authorized an aggregate of 1,950,000 shares of the Company’s common stock with a maximum of 450,000 shares to any one individual in any one fiscal year. The shares of common stock available under the Year 2001 Plan were subject to adjustment for any stock split, declaration of a stock dividend or similar event. At March 31, 2017, we had granted 1,042,000 options under the Year 2001 Plan, 20,000 of which were exercised in fiscal 2017, 62,000 of which had expired and 960,000 of which remained outstanding and fully vested. As of this date the Year 2001 Plan has expired and no further options can be issued thereunder.

 

Options granted under the Year 2001 Plan are not transferable except by will or applicable laws of descent and distribution. Except as expressly determined by the Compensation Committee, no option under the Year 2001 Plan is exercisable after thirty (30) days following an individual's termination of employment with the Company or a subsidiary, unless such termination of employment occurs by reason of such individual's disability, retirement or death. The obligations of the Company under the Year 2001 Plan are binding on (1) any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company or (2) any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company. In the event of any of the foregoing, the Compensation Committee may, at its discretion, prior to the consummation of the transaction, offer to purchase, cancel, exchange, adjust or modify any outstanding options, as such time and in such manner as the Compensation Committee deems appropriate.

 

401(K) PLAN

 

Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at least one year of service are eligible to participate in our 401(k) plan. We make a matching contribution of 100% of salary deferral contributions up to 3% of pay, plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll period. The amounts charged to earnings for contributions to this plan and administrative costs during the years ended March 31, 2017, 2016 and 2015 totaled $45,567, $48,993 and $36,802 respectively.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth as of June 29, 2017 (the “record date”), certain information concerning beneficial ownership of our common stock by:

 

  all directors and former directors of the Singing Machine,
  all named executive officers of the Singing Machine; and
  persons known to own more than 5% of our common stock.

 

Security ownership is based on 38,259,303 shares of our common stock issued and outstanding. In computing the number and percentage of shares beneficially owned by a person, shares of common stock subject to convertible securities and options currently convertible or exercisable, or convertible or exercisable within 60 days of June 29, 2017 are counted as outstanding, but these shares are not counted as outstanding for computing the percentage ownership of any other person.

 

As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted below, and subject to applicable property laws, to our knowledge each person has sole investment and sole voting power over the shares shown as beneficially owned by them. Unless otherwise noted, the principal address of each of the directors and officers listed below is c/o The Singing Machine Company, Inc., 6301 NW 5th Way, Suite 2900, Fort Lauderdale, FL 33309.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of June 29, 2017

 

Name and Address of Beneficial Owner  Amount and Nature of Certain Beneficial Ownership of Common Stock   Percentage of outstanding shares of common stock 
         
Security Ownership of Management:          
Gary Atkinson (1)   356,981    * 
Lionel Marquis (1)   235,000    * 
Bernardo Melo (1)   560,916    * 
Bernard Appel (1) (deceased 4/2/17)   424,669    * 
Harvey Judkowitz (1)   454,669    * 
Yat Tung Lau (1)   68,857    * 
Peter Hon (1)   99,274    * 
Stewart Merkin (1) (resigned 7/6/16)   422,322    * 
Officers & Directors as a Group (8 persons)   2,622,688    6.9%
           
Security Ownership of Certain Beneficial Owners:          
Sinostar (2)   19,623,155    51.3%
koncepts International Ltd.   18,682,679    48.8%
Treasure Green Holdings Ltd. (3)   940,476    2.5%
Arts Electronics Ltd. (4)   3,745,917    9.8%
Gentle Boss Investments Ltd (5)   2,100,000    5.5%
           
* Less than 1%          
           
Total Shares of Common Stock as of June 29, 2017   38,259,303      
Stock Options Exercisable within 60 days of June 29, 2017   1,890,000      
           
Total   40,149,303      

 

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(1) Includes as to the person indicated, the following outstanding stock options to purchase shares of the Company’s Common Stock issued under 2001 Stock Option Plan, which will be vested and exercisable within 60 days of the record date: 320,000 options held by Gary Atkinson, 475,000 options held by Bernardo Melo, 235,000 options held by Lionel Marquis, 180,000 options held by Harvey Judkowitz, Bernie Appel and Stewart Merkin, respectively, 60,000 options held by Peter Hon and 40,000 held by Yat Tung Lau.

 

(2) “Sinostar” is defined in Part I, Item 1 under “Business Overview.” The address for Sinostar is: Rooms 05-15, 13A/F,South Tower, World Finance Centre, Harbour City, 17 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong.

 

(3) On May 2, 2014 Starlight Industrial Holdings Limited transferred 940,476 shares of our common stock to Treasure Green Holdings Ltd., a wholly owned subsidiary of Sinostar.

 

(4) The address for Arts Electronics Ltd. is Room 101, Fo Tan Ind CTR 1/F, 26-28 Au Pui Wan, Fo Tan, Shatin N.T. Hong Kong.

 

(5) The address for Gentle Boss Investments Ltd. is Unit 6, 9/F, Tower B, 55 Hoi Yuen Road, Kwun Tong, Kowloon Hong Kong.

 

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

DUE TO/FROM RELATED PARTIES

 

On March 31, 2017 and 2016, the Company had $0 and $26,152, respectively due from related parties for goods and services sold these companies.

 

On March 31, 2017 and 2016 the Company had $0 and $400,000 due to Ram Light Management, Ltd. for prior years purchases of karaoke hardware. Effective October 1, 2015 the amount due to Ram Light began bearing interest at 6% per annum. The Company paid $7,850 and $16,179 in interest expense to Ram Light for the fiscal years ended March 31, 2017 and 2016, respectively.

 

In connection with the Revolving Line of Credit agreement there was a conversion of past due trade payables to a note payable of $1,100,000 to Ram Light Management, Ltd. on July 15, 2014. As of March 31, 2017 and 2016 the principal amount due on the note was $0 and $696,612, respectively. The note bore interest at 6% per annum and the Company recognized interest expense in the amount of $25,377 and $63,921 for the fiscal years ended March 31, 2017 and 2016, respectively.

 

In connection with the Revolving Credit Facility the Company was required to subordinate related party debt from and Starlight Marketing Development, Ltd. in the amount of $1,924,431(“Starlight Debt”). Since the original agreement expires on July 14, 2017 the subordinated related party debt was classified as a current liability as of March 31, 2017 and a long-term liability as of March 31, 2016 on the accompanying consolidated balance sheets.

 

In connection with the renewal of the Revolving Credit Facility on June 22, 2017, the Starlight Debt remains subordinated however, PNC Bank authorized a two-year term note in the amount of $1,000,000 the proceeds of which are to be used to pay down a portion of the $1,924,431 leaving a balance due on the Starlight Debt of $924,431. The term note will bear interest at 1.75% per annum over PNC’s announced prime rate or 1, 2, or 3 month PNC LIBOR Rate plus 3.75%. The term note will be payable in quarterly installments of $125,000 plus accrued interest with the first installment due on August 1, 2017 and will have a current and long-term component. Provision has also been made to allow repayment of the remaining $924,431 in quarterly installments of $125,000 including interest accrued at 6% per annum commencing August 1, 2017 provided liquidity tests as defined in the original agreement are met. The remaining Starlight Debt will have a current and long-term component.

 

TRADE

 

During Fiscal 2017, 2016 and 2015 the Company sold approximately $0, $0 and $285,000, respectively to Star Light Electronics Company, Ltd. (“SLE”), a related company, for direct shipments to Cosmo Communications of Canada, Ltd (“Cosmo”), another related company, at discounted pricing granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to SLE for Fiscal 2017, 2016 and 2015 was NA, NA and 16.5%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

 

During Fiscal 2017, 2016 and 2015 the Company received approximately $0, $0 and $181,000 respectively in licensing fees from SEC for sales of the Company’s products that were sold directly to Cosmo by SLE. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

 

During Fiscal 2017, 2016 and 2015 the Company purchased products approximately$1,045,000, $4,397,000 and $0, respectively from SLE. These purchases were a component of cost of sales in the accompanying consolidated statements of income.

 

During Fiscal 2017, 2016 and 2015 the Company paid approximately $73,000, $149,000 and $144,000 respectively to SLE as reimbursement for engineering and quality control services performed on our behalf in China. During Fiscal 2017, 2016 and 2015 the Company received $189,000, $60,000 and $60,000 from SLE as reimbursement for customer support services performed by the Company on behalf of Starlight USA. In Fiscal 2017, 2016 and 2015 the Company also paid non-recurring engineering fees to SLE of approximately $43,000, $22,000 and $0, respectively. These expense reimbursements were included in general and administrative expenses on our consolidated statements of operations.

 

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During Fiscal 2017, 2016 and 2015 the Company sold approximately $1,430,000, $1,655,000 and $1,249,000, respectively of product to Winglight Pacific, Ltd. (“Winglight”) a related company, for direct shipment to Cosmo Communications of Canada, Ltd (“Cosmo”), another related company, at discounted pricing granted to major direct import customers shipped internationally with freight prepaid.. The average gross profit margin on sales to Winglight for Fiscal 2017, 2016 and 2015 was 21.4%, 22.0% and 17.9%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

 

During Fiscal 2017, 2016 and 2015 the Company sold approximately $373,000, $969,000 and $272,000, respectively of product to Cosmo from our California warehouse facility. These goods were sold 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 Cosmo yielded 31.8%, 18.4%, and 17.9%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income.

 

During Fiscal 2017, 2016 and 2015 the Company purchased products from Starlight Consumer Electronics USA, Inc, (“Starlight USA) an indirect wholly-owned subsidiary of Starlight International of approximately $37,000, $198,000 and $1,640,000, respectively. These amounts were included as a component of cost of goods sold in the accompanying consolidated statements of income. The goods were sold to the Company at net 60 day terms with interest of 6% per annum assessed on amounts on past due invoices. For Fiscal 2017, 2016 and 2015 the Company incurred approximately $0, $9,000 and $4,000, respectively of interest expense related to past due invoices. These amounts were included as a component of other expenses in the accompanying consolidated statements of income.

 

In Fiscal 2017, 2016 and Fiscal 2015 the Company purchased products of approximately $0 and $509,000 and $4,626,000, respectively, from Starlight R&D These amounts were included as a component of cost of goods sold in the accompanying consolidated statements of income. In addition, the Company purchased product repair and engineering services from Starlight R&D during Fiscal 2017, 2016 and Fiscal 2015 of approximately $3,000, $211,000 and $49,000, respectively. These amounts were included as a component of general and administrative expenses in the accompanying consolidated statements of income. These services were sold to the Company at net 60 day terms with interest of 6% per annum assessed on past due invoices. For Fiscal 2017, 2016 and Fiscal 2015 the Company incurred approximately $0, $0 and $18,000 of interest expense related to past due invoices.

 

In Fiscal 2017, 2016 and Fiscal 2015 the Company paid approximately $154,000, $38,000 and $0, respectively to Merrygain Holding Company, Ltd. (a related party subsidiary) for storage fees and other services provided to the Company by this subsidiary. These amounts were included as a component of general and administrative expenses in the accompanying consolidated statements of income.

 

The Company has annually renewable service and logistics agreements with affiliates of Sinostar. The affiliates pay the Company for services based on actual warehouse space occupied. For the years ended March 31, 2017, 2016 and 2015, the Company received approximately $48,000, $108,000 and $141,000, respectively, in service fees from affiliates that are included in general and administrative expenses in the accompanying consolidated statements of income.

 

Review, Approval or Ratification of Transactions with Related Persons

 

We believe that the terms of all of the above transactions are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our company in connection with related party transactions. While we do not maintain a written policy with respect to related party transactions, our board of directors routinely reviews potential transactions with those parties we have identified as related parties prior to the consummation of the transaction. Each transaction is reviewed to determine that a related party transaction is entered into by us with the related party pursuant to normal competitive negotiation. We also generally require that all related parties recuse themselves from negotiating and voting on behalf of the Company in connection with related party transactions.

 

CORPORATE GOVERNANCE

 

Board Determination of Independence

 

The Board has determined that Messrs. Judkowitz, Merkin, Kling and Appel are “independent directors” within the meaning of the listing standards of major stock exchanges. The audit committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with our independent auditors, reviews our internal accounting controls, and approves services to be performed by our independent auditors.

 

30
  

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following is a summary of the fees billed to the Singing Machine by our independent registered public accounting firms for professional services rendered for Fiscal 2017 and Fiscal 2016:

 

Fee Category  Fiscal 2017   Fiscal 2016 
         
Audit Fees  $98,890   $90,989 
Tax Fees   -    - 
All Other Fees   22,335    20,965 
           
Total Fees  $121,225   $111,954 

 

Audit Fees - Consists of fees billed for professional services rendered for the audit of the Singing Machine’s consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that were provided by EisnerAmper, LLP, respectively.

 

Tax Fees - Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, and international tax planning.

 

All Other Fees - Consists of fees for products and services other than the services reported above including review of proxy statements and services provided in connection with the audit of China Sinostar, our parent company.

 

Out of the total Fiscal 2017 and Fiscal 2016 audit and other fees of $121,225 and $34,215, respectively, were billed by EisnerAmper, LLP (formerly Mallah Furman, Certified Public Accountants), respectively. Fiscal 2017 and Fiscal 2016 audit and other fees of, $0 and $77,739 respectively, were billed by Mallah Furman, Certified Public Accountants.

 

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS

 

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

 

31
  

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) 1. The following financial statements for The Singing Machine Company, Inc. and Subsidiaries are filed as a part of this report:

 

Consolidated Balance Sheets— March 31, 2017 and 2016.

 

Consolidated Statements of Income—Years ended March 31, 2017, 2016 and 2015.

 

Consolidated Statements of Cash Flows—Years ended March 31, 2017, 2016 and 2015.

 

Consolidated Statements of Shareholders’ Equity—Years ended March 31, 2017, 2016 and 2015.

 

2. Notes to Consolidated Financial Statements

 

Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto.

 

(b) Exhibits.

 

Exhibit No.   Description

 

3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 and amendments through April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 7, 2000).

 

3.2 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000).

 

3.3 Certificates of Correction filed with the Delaware Secretary of State on March 29 and 30, 2001 correcting the Amendment to our Certificate of Incorporation dated April 20, 1998 (incorporated by reference to Exhibit 3.11 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on April 11, 2000).

 

3.4 Amended By-Laws of the Singing Machine Singing Machine (incorporated by reference to Exhibit 3.14 in the Singing Machine’s Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001).

 

4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by reference to Exhibit 3.3. of the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 7, 2000). File No. 333-57722)

 

32
  

 

10.1 Amended and Restated 1994 Management Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 28, 2001, File No. 333-59684).

 

10.2 Year 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Singing Machine’s registration statement on Form S-8 filed with the SEC on September 13, 2002, File No. 333-99543).

 

10.3 Securities Purchase Agreement dated February 21, 2007, by and between The Singing Machine Company, Inc. and koncepts International Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)

 

10.4 Registration Rights Agreement dated February 21, 2007, by and between The Singing Machine Company, Inc. and koncepts International Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)

 

10.5 One Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)

 

10.6 Three Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)

 

10.7 Four Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007)

 

10.8 Bridge Loan Agreement dated March 8, 2007, by and between The Singing Machine Company, Inc. and Ever Solid Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)

 

10.9 Collateral Security Agreement dated March 8, 2007, by and between The Singing Machine Company, Inc. and Ever Solid Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)

 

10.10 Bridge Note of The Singing Machine Company, Inc. dated March 8, 2007. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on March 14, 2007)

 

10.11 Amendment to lease for executive offices dated April 3, 2008 by and between The Singing Machine Company, Inc. and Lyons Corporate Park, LLLP. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.12 Lease for City of Industry, CA warehouse by and between The Singing Machine Company, Inc. and Sun-Yin USA, Inc. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.13 Cosmo employee management agreement dated May 23, 2008 by and among The Singing Machine Company, Inc. and Cosmo Communications Corporation. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.14 Logistics Agreement dated May 23, 2008 by and among The Singing Machine Company, Inc. and Starlite Consumer Electronics (USA), Inc., Cosmo Communications Corp. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.15 DBS Banking Facility Agreement dated August 28, 2008 by and among The Singing Machine Company, Inc. and SMC (Comercial Offshore De Macau) Limitada. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.16 BB&T Factoring and Security Agreement dated September 19, 2008 by and among The Singing Machine Company, Inc. and Branch Banking and Trust Company. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

33
  

 

10.17 Assignment of Factoring Proceeds and Intercreditor Agreement dated September 19, 2008 by and among The Singing Machine Company, Inc., SMC (Comercial Offshore De Macau) Limitada, Branch Banking and Trust Company, and DBS Bank (Hong Kong) Limited. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.18 Hang Seng Bank Banking Facility dated February 12, 2008 by and among SMC (Comercial Offshore De Macau) Limitada and Hang Seng Bank. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on June 29, 2009)

 

10.19 Licensing Agreement dated May 10, 2006 by and among The Singing Machine Company, Inc. and MGA Entertainment, Inc. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K/A filed with the SEC on July 7, 2009)

 

10.20 Licensing Agreement dated November 21, 2006 by and among The Singing Machine Company, Inc. and MGA Entertainment, Inc. (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on July 7, 2009)

 

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 Lionel Marquis, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*

 

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.*

 

101 The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 formatted in XBRL: (i) Consolidated Balance Sheets as of March 31 2016 and 2015; (ii) Consolidated Statements of Operations for the three years ended March 31, 2016, 2015 and 2014; (iii) Consolidated Statements of Cash Flows for the three years ended March 31, 2016, 2015 and 2014; (iv) Consolidated Statements of Shareholders’ Equity (Deficit) for the three years ended March 31, 2013, 2012 and 2011; (v) Notes to the Consolidated Financial Statements and (vi) Schedule II – Valuation and qualifying Accounts.*

 

* Filed herewith

 

+ Compensatory plan or arrangement.

 

34
  

 

SIGNATURES

 

In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, The Singing Machine Company, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

THE SINGING MACHINE COMPANY, INC.

 

Date: June 29, 2017 By: /s/ Gary Atkinson
    Gary Atkinson
    Chief Executive Officer

 

In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Singing Machine Company, Inc. and in the capacities and on the dates indicated.

 

SIGNATURE   CAPACITY   DATE
         
/s/ GARY ATKINSON   Chief Executive Officer   June 29, 2017
Gary Atkinson   (Principal Executive Officer)    
         
/s/ LIONEL MARQUIS   Chief Financial Officer   June 29, 2017
Lionel Marquis   (Principal Financial Officer)    
         
/s/ PHILLIP LAU   Chairman   June 29, 2017
Phillip Lau        
         
/s/ HARVEY JUDKOWITZ   Director   June 29, 2017
Harvey Judkowitz        
         
/s/ Joseph KLING   Director   June 29, 2017
Joseph Kling        
         
/s/ YAT TUNG LAU   Director   June 29, 2017
Yat Tung Lau        
         
/s/ peter hon   Director   June 29, 2017
Peter Hon        

 

35
  

 

THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES

 

FINANCIAL STATEMENTS

 

INDEX TO FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Income F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Shareholders’ Equity F-7
Notes to Consolidated Financial Statements F-8

 

36
  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

The Singing Machine Company, Inc. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of The Singing Machine Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2017 and 2016, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Singing Machine Company, Inc. and Subsidiaries as of March 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ EisnerAmper LLP  
Fort Lauderdale, Florida  
June 29, 2017  

 

F-2
  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

The Singing Machine Company, Inc. and Subsidiaries

 

We have audited the accompanying consolidated statements of income, shareholders’ equity, and cash flows of The Singing Machine Company, Inc. and Subsidiaries (the “Company”) for the year ended March 31, 2015. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of The Singing Machine Company, Inc. and Subsidiaries for the year ended March 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Mallah Furman  
Fort Lauderdale, Florida  
June 29, 2015  

 

F-3
  

 

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2017   March 31, 2016 
Assets          
Current Assets          
Cash  $2,305,439   $2,116,490 
Accounts receivable, net of allowances of $132,583 and $51,179, respectively   1,655,518    1,381,789 
Due from PNC Bank   242,859    184,392 
Accounts receivable related party - Starlight Consumer Electronics USA, Inc.   -    2,820 
Accounts receivable related party - Starlight R&D, Ltd.   -    4,255 
Accounts receivable related party - Cosmo Communications Canada, Ltd   -    19,077 
Inventories, net   5,426,346    3,690,975 
Prepaid expenses and other current assets   81,278    115,601 
Deferred financing costs   21,606    74,077 
Total Current Assets   9,733,046    7,589,476 
           
Property and equipment, net   412,805    430,602 
Other non-current assets   11,523   11,394 
Deferred financing costs, net of current portion   -    21,606 
Deferred tax asset   1,479,209    2,408,531 
Total Assets  $11,636,583   $10,461,609 
           
Liabilities and Shareholders’ Equity          
Current Liabilities          
Accounts payable  $1,381,870   $722,213 
Note payable related party - Ram Light Management, Ltd.   -    696,612 
Due to related party - Ram Light Management, Ltd   -    400,000 
Accrued expenses   626,331    650,115 
Current portion of capital lease   -   1,078 
Obligations to customers for returns and allowances   38,460    121,092 
Warranty provisions   223,700    292,500 
Subordinated related party debt - Starlight Marketing Development, Ltd.   1,924,431    - 
Total Current Liabilities   4,194,792    2,883,610 
           
Subordinated related party debt - Starlight Marketing Development, Ltd.   -    1,924,431 
Total Liabilities   4,194,792    4,808,041 
           
Commitments and Contingencies          
           
Shareholders’ Equity          
Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, Class A, $0.01 par value; 100,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, Class B, $0.01 par value; 100,000,000 shares authorized; 38,259,303 and 38,181,635 shares issued and outstanding, respectively   382,593    381,816 
Additional paid-in capital   19,412,787    19,337,939 
Subscription receivable   -    (6,400.00)
Accumulated deficit   (12,353,589)   (14,059,787)
Total Shareholders’ Equity   7,441,791    5,653,568 
Total Liabilities and Shareholders’ Equity  $11,636,583   $10,461,609 

 

See notes to the consolidated financial statements.

 

F-4
  

 

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

 

   For the Years Ended 
   March 31, 2017   March 31, 2016   March 31, 2015 
             
Net Sales  $52,919,228   $48,856,544   $39,308,281 
                
Cost of Goods Sold   39,082,802    36,937,654    30,997,211 
                
Gross Profit   13,836,426    11,918,890    8,311,070 
                
Operating Expenses               
Selling expenses   5,035,787    4,656,003    3,104,598 
General and administrative expenses   5,648,036    5,153,950    4,507,606 
Depreciation   166,025    171,785    130,254 
Total Operating Expenses   10,849,848    9,981,738    7,742,458 
                
Income from Operations   2,986,578    1,937,152    568,612 
                
Other Expenses               
Interest expense   (189,230)   (261,061)   (253,282)
Financing costs   (74,077)   (74,077)   (52,471)
Total Other Expenses   (263,307)   (335,138)   (305,753)
                
Income before income tax (provision ) benefit   2,723,271    1,602,014    262,859 
                
Income tax (provision) benefit   (1,017,073)   101,376    (92,701)
                
Net Income  $1,706,198   $1,703,390   $170,158 
                
Income per Common Share               
Basic  $0.04   $0.04   $0.00 
Diluted  $0.04   $0.04   $0.00 
                
Weighted Average Common and Common Equivalent Shares:               
Basic   38,242,535    38,146,391    38,097,226 
Diluted   39,422,608    38,597,862    38,602,577 

 

See Notes to the consolidated financial statements.

 

F-5
  

 

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Years Ended 
   March 31, 2017   March 31, 2016   March 31, 2015 
             
Cash flows from operating activities:               
Net Income  $1,706,198   $1,703,390   $170,158 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:               
Depreciation   166,025    171,785    130,254 
Amortization of deferred financing costs   74,077    74,077    52,471 
Change in inventory reserve   (60,000)   339,000    (217,000)
Change in allowance for bad debts   81,404    (122,952)   1,666 
Stock-based compensation   63,745    24,214    46,308 
Change in net deferred tax assets   929,322    (102,976)   92,701 
Changes in operating assets and liabilities:               
(Increase) decrease in:               
Accounts receivable   (355,133)   207,331    (512,283)
Due from Crestmark Bank   -    -    19,638 
Due from PNC Bank   (58,467)   (46,977)   (137,415)
Accounts receivable related parties   26,152    (26,152)   - 
Inventories   (1,675,371)   3,418,192    (1,403,554)
Prepaid expenses and other current assets   34,323    (22,992)   (1,521)
Other non-current assets   (129)   -    6,236 
Increase (decrease) in:               
Accounts payable   659,657    (2,044,967)   849,104 
Due to related parties   (400,000)   (986,206)   (147,825)
Accrued expenses   (23,784)   150,969    52,832 
Warranty provisions   (68,800)   94,627    (37,299)
Obligations to customers for returns and allowances   (82,632)   (278,327)   (70,419)
Net cash provided by (used in) operating activities   1,016,587    2,552,036    (1,105,948)
Cash flows from investing activities:               
Purchase of property and equipment   (148,228)   (135,816)   (35,600)
Refund of restricted cash   -    -    138,042 
Net cash (used in) provided by investing activities   (148,228)   (135,816)   102,442 
Cash flows from financing activities:               
Proceeds from subscription receivable   6,400    -    - 
Proceeds from exercise of stock options   11,880    -    - 
Payment on note payable related party - Ram Light Management, Ltd.   (696,612)   (403,388)   - 
Payment of deferred financing costs   -    -    (222,231)
Payments on capital lease   (1,078)   (12,628)   (12,076)
Net cash used in financing activities   (679,410)   (416,016)   (234,307)
Net change in cash   188,949    2,000,204    (1,237,813)
                
Cash at beginning of year   2,116,490    116,286    1,354,099 
Cash at end of year  $2,305,439   $2,116,490   $116,286 
                
Supplemental Disclosures of Cash Flow Information:               
Cash paid for interest  $253,008   $270,193   $180,371 
Cash paid for income taxes  $58,955   $-   $- 
Supplemental Disclosures of Non-cash Investing and Financing Activities:               
Conversion of related party payables to note payable  $-   $-   $1,100,000 
Property and equipment purchased under capital lease  $-   $-   $36,388 

 

See notes to the consolidated financial statements.

 

F-6
  

 

The Singing Machine Company, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

         Additional             
   Preferred Stock   Common Stock   Paid in   Subscription   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Receivable   Deficit   Total 
Balance at March 31, 2014   -   $-    38,070,642   $380,706   $19,262,127   $-   $(15,933,335)  $3,709,498 
                                         
Net Income                                 170,158    170,158 
Employee compensation-stock option                       38,808              38,808 
Director Fees             46,875    469    7,031              7,500 
Balance at March 31, 2015   -    -    38,117,517    381,175    19,307,966    -    (15,763,177)   3,925,964 
                                         
Net Income                                 1,703,390    1,703,390 
Employee compensation-stock option                       16,714              16,714 
Exercise of stock options             20,000    200    6,200    (6,400)        - 
Director Fees             44,118    441    7,059              7,500 
Balance at March 31, 2016   -    -    38,181,635    381,816    19,337,939    (6,400)   (14,059,787)   5,653,568 
                                         
Net Income                                 1,706,198    1,706,198 
Employee compensation-stock option                       53,745              53,745 
Exercise of stock options             36,000    360    11,520    6,400        18,280 
Director Fees             41,668    417    9,583              10,000 
                                         
Balance at March 31, 2017   -    $-     38,259,303   $382,593   $19,412,787   $-   $(12,353,589)  $7,441,791 

 

See notes to the consolidated financial statements.

 

F-7
  

 

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION

 

OVERVIEW

 

The Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc. (“SMC-M”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. The products are sold directly to distributors and retail customers.

 

China Sinostar Group Company Limited (“Sinostar”) (formerly Shihua Development Company Limited), through its wholly owned subsidiary koncepts International Limited (“koncepts”), is a major shareholder of the Company, owning approximately 49% of our shares of common stock outstanding on a fully diluted basis as of March 31, 2017. Sinostar is a company whose principal activities include designing, manufacturing and selling electronic products through its various subsidiaries. Sinostar’s products include television sets, consumer karaoke audio equipment and DVD products. We do business with a number of entities that are indirectly wholly-owned or majority owned subsidiaries of Sinostar, including Starlight R&D Ltd (“Starlight R&D”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc. (“Cosmo”) and Star Light Electronics Company Ltd (Starlite), among others (Sinostar and its subsidiaries collectively referred to herein as the “Sinostar Group” or “Sinostar”). The Company is also partly held by Treasure Green Holdings Ltd. (“Treasure Green”), a wholly owned subsidiary of Sinostar, owning approximately 2% of our common stock. In total, the Sinostar Group owns approximately 51% of the Company’s shares of common stock. In July 2014, under a restructuring arrangement, Star Light Electronics Company Ltd was separated from the Sinostar Group and is partly and indirectly held by our Chairman, Philip Lau. In March 2015, Starlight R&D Ltd was also separated from the Sinostar Group and is no longer a related party of our company.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

PRINCIPLES OF CONSOLIDATION

 

The accompanying consolidated financial statements include the accounts of the Company, its Macau Subsidiary, SMC-L, and SMC-M. All inter-company accounts and transactions have been eliminated in consolidation for all periods presented.

 

USE OF ESTIMATES

 

The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial condition. However, circumstances could change which may alter future expectations.

 

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

 

The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100% reserves for customers in bankruptcy and other allowances based upon historical collection experience. The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handlingcharges that are deducted from open invoices and reduce collectability of open invoices. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations.

 

FOREIGN CURRENCY TRANSLATION

 

The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiaries 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

 

At times, the Company maintains cash in United States bank accounts that are in excess of the Federal Deposit Insurance Corporation insured amounts. The Company maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at March 31, 2017 and March 31, 2016 are $150,665 and $21,256, respectively.

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. 

 

INVENTORY

 

Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or 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. As of March 31, 2017 and 2016 the Company had inventory reserves of $700,000 and $760,000, respectively, for estimated excess and obsolete inventory.

 

F-8
  

 

LONG-LIVED ASSETS

 

The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

We follow FASB ASC 825, Financial Instruments, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

 

The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, obligations to clients for returns and allowances, subordinated debt to Starlight Marketing Development, Ltd. (related party) and net due to related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the note payable to Ram Light Management, Ltd. (related party) approximates fair value due to the relatively short period to maturity and related interest accrued at a rate similar to market rates. The carrying amounts on the revolving line of credit approximates fair value due the relatively short period to maturity and related interest accrued at market rates.

 

REVENUE RECOGNITION

 

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. Net sales are comprised of gross sales net of actual and estimated future returns, discounts and volume rebates. The total returns represent 6.3%, 5.5%, and 8.1% of the gross sales for the twelve months ended March 31, 2017, 2016, and 2015, respectively.

 

SHIPPING AND HANDLING COSTS

 

Shipping and handling costs are classified as a component of selling expenses and those billed to customers are recorded as a reduction of expense in the consolidated statements of income.

 

STOCK-BASED COMPENSATION

 

The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the consolidated statement of income over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense in fiscal years 2017, 2016 and 2015 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the years ended March 31, 2017, 2016 and 2015, the stock option expense was $53,745, $16,714 and $38,808, respectively.

 

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees.

 

  For the year ended March 31, 2017: expected dividend yield 0%, risk-free interest rate of 0.55%, volatility 145.0% and expected term of three years.
     
  For the year ended March 31, 2016: expected dividend yield 0%, risk-free interest rate of 0.26% to 0.59%, volatility 107.6% to 119.9% and expected term of three years.
     
  For the year ended March 31, 2015: expected dividend yield 0%, risk-free interest rate of 0.26%, volatility 142.9% and expected term of three years.

 

The Company’s directors were issued shares of stock as compensation for their service. For the years ended March 31, 2017, 2016 and 2015, the stock compensation expense to directors was $10,000, $7,500 and $7,500, respectively.

 

F-9
  

 

ADVERTISING

 

Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicated that the customer 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 10% of the purchase. The customers have to advertise the Company’s products in the customer’s catalog, local newspaper and other advertising media. The customer must submit the proof of the performance (such as a copy of the advertising showing the Company’s products) to the Company to request for the allowance. The customer does not have the ability to spend the allowance at their discretion. The Company believes that the identifiable benefit from the cooperative advertising program and the fair value of the advertising benefit is equal or greater than the cooperative advertising expense. Advertising expense for the years ended March 31, 2017, 2016 and 2015 was $2,743,571, $2,703,076 and $1,599,629 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, general and administrative expenses in the consolidated statements of income. For the years ended March 31, 2017, 2016 and 2015, these amounts totaled $141,202, $196,847 and $114,526, respectively.

 

INCOME TAXES

 

The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.

 

The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of March 31, 2017, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for companies to use when accounting for revenue arising from contracts with customers. The core principle of the revenue recognition model is that an entity recognizes revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle a company must apply the following steps in determining revenue recognition:

 

  Identify the contract(s) with a customer
     
  Identify the performance obligations in the contract.
     
  Determine the transaction price.
     
  Allocate the transaction price to the performance obligations in the contract.
     
  Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The amendments in this ASU are now effective for annual reporting periods beginning April 1, 2018 including interim periods within that reporting period. Management plans to adopt ASU 2014-09 using the full retrospective method of implementation. Management has assessed the effect of implementing ASU 2014-09 to determine the effect on the Company’s financial statements. After examining the Company’s performance obligations in its contracts, most of the Company’s customers (other than distributors) have “customer acceptance rights” in that customers are allowed to return defective goods within a specified period after shipment (between 6 and 9 months) after goods have been shipped. Currently, the Company recognizes a liability for the estimated net amount of sales less related cost of goods sold of expected returned goods at the time of sale. The liability for defective goods is included in warranty provisions on the consolidated balance sheets. The implementation of ASU 2014-09 will require that the cost of the estimated returned goods be reflected in inventory and the amount of estimated sales to be credited to the customer be recognized in liabilities on the consolidated balance sheets.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The ASU requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance in ASU 2015-11 is effective for fiscal years and interim periods within those fiscal years beginning after April 1, 2017. The new guidance should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. After analyzing the Company’s current practices of measuring inventory and comparing those practices to the requirements of ASU 2015-11, management does not believe that the implementation of ASU 2015-11 will have any material effect on the Company’s consolidated financial statements.

 

F-10
  

 

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU requires lessees to recognize a right- of use asset and a lease liability on its Balance Sheet regardless of whether a lease is identified as financial lease or an operating lease. If the lease is identified as a financial lease, then the lessee must recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of income and classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. If the lease is identified as and operating lease then the lessee must recognize a single lease cost in the statement of income, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and classify all cash payments within operating activities in the statement of cash flows. Both quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning April 1, 2019; including interim periods within those fiscal years, with early adoption permitted. Management has assessed the effect of implementing ASU 2016-02 to determine the effect on the Company’s financial statements. The Company has several operating leases of which two are long-term real estate agreements that are subject to the requirements of ASU 2016-02 which will have a significant impact on the Company’s consolidated financial statements and will require recognition of a right-to-use asset and a liability for payments.

 

NOTE 3 - INVENTORIES

 

Inventories are comprised of the following components:

 

   March 31, 2017   March 31, 2016 
         
Finished Goods  $6,126,346   $4,450,975 
Less: Inventory Reserve   700,000    760,000 
           
Total Inventories  $5,426,346   $3,690,975 

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

A summary of property and equipment is as follows:

 

   USEFUL LIFE  MARCH 31, 2017   MARCH 31, 2016 
            
Computer and office equipment  5 years