The Singing Machine Company, Inc.

Good day, everyone, and welcome to today's The Singing Machine Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. Please be advised, this call may be recorded. It is now my pleasure to turn the program over to Brandon Hopkins. Please go ahead.

Thank you, and thank you, everyone, for taking the time to join us today. We have a brief safe harbor, and we'll get started. Except for historical information contained herein, the statements in this conference call are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. With that said, I would like to turn it all over to Gary Atkinson, CEO of The Singing Machines.

Thank you, Brendan. Good afternoon, ladies and gentlemen. I want to thank everybody for taking the time this afternoon to get an update on the results of our third quarter that we just released this morning. I want to start off by saying we're obviously very, very pleased with the results from this third quarter, our holiday quarter. It was a very, very strong quarter for us in which we were able to deliver on a lot of key performance goals For instance, we were able to grow top line sales by 22% year over year for the third quarter. We were successful in being able to expand margin significantly up to close to 30% for the quarter. And we were able to deliver a whopping earnings per share of $0.09 year to date and $0.03 for the quarter. So we're very, very pleased with the results. We're excited to talk about them with you today. And with that being said, we'll be turning the call over to Lionel Marquis, who is the company's CFO. Lionel is going to be giving us a bit of some color and details behind the numbers. And then after that, we're going to turn it over to Bernardo Mello, who is our VP of Global Sales and Marketing. And Bernardo will give us an update on some of the good results that we saw over the holidays and talk a little bit about what we're seeing going into fiscal 22. So with that being said, I want to turn it over to Lionel.

Good afternoon, everybody. I just wanted to start off by talking a little bit about the amended returns. By now, you have probably seen an amended 10-K for fiscal year 2020, which covers both the fiscal years 2020 and 2019, as well as the amended 10-Qs for Q1 and Q2 of this fiscal year. In reviewing our internal controls, we identified an issue relating to the way that we have been reporting co-op promotional allowance since the adoption of Accounting Standard Code 606, which deals with revenue recognition from contracts. Essentially, we and our auditors determined that the co-op promotional allowances, which have historically been part of our operating and selling expenses, should have been classified as a reduction of revenue upon adoption of that code when we adopted it on April 1st, 2018 for the fiscal year 2019. The amended returns that were filed reflect the corrections that were made to be in compliance with ASC 606 with regards to co-op promotional allowance. There was no change to net income or earnings per share nor was there any change to any of the financial statements as originally filed other than the income statement as was originally filed. The only change that occurred was a reduction in net sales in the amount of the co-op allowances and a corresponding decrease to operating and selling expenses, operating selling expenses to the periods that were originally reported and subsequently amended by the filings. So I'm about to review the results of Q3 and all changes were made to be in for both comparative years have now been made, including in this quarter. So what I'm about to tell you in terms of review is we are measuring apples to apples. We did restate the prior year and the current year. With that having been said, I'm going to proceed to the highlights. Okay, net sales for the quarter, we were up by $3,115,000. And year to date, we were up $4,758,000. Approximately $800,000 has to do with less cooperative promotional allowances. During the season, we did not, this Christmas season, we did not participate in many of the co-op programs because of COVID. A lot of them were extended, started at different periods, plus the demand was high. There was not a need or request to do those seasonal promotions as we normally do as large. So we picked up about $800,000 both year to date and quarter to date on that. our carpool karaoke sales both for the quarter and for the year we increased that by 1.5 million dollars we finally saw the results of this carpool karaoke taking off the way we thought it would last year had a little bit of a delay but this year it was very very strong and again the only difference year to date is an additional 1.5 million dollars worth of damaged goods that we had last year with a specific shipment that was damaged in transit, if you remember correctly, we didn't have that problem this year. So consequently, those were the highlights on net sales. Our gross profit margin went from approximately $4,974,000 up from $2,371,000 last year. It's about a $2.6 million increase. About $600,000 of that increase for the quarter was due to the sales increase. Less co-ops of aid and cooperative marketing allowances were down by $800,000. And there was also a margin pickup of $1.2 million. And a lot of that margin pickup had to do with the Carpool Karaoke product. Sales increase for the year, year to date. We were 11,759,000 versus 7,805,000 last year, a pickup of almost $4 million. There was a sales increase of approximately $1.0 million. There were less co-ops than there were last year of approximately $800,000. And there was margin pickup of approximately $2.1 million. The gross profit percentage, 29.3 versus 17.1 last year, the CPK product of the carpool karaoke product yields a lot higher margin, almost twice the amount that normal products do. So with the increase in that, that gave us an increase for the quarter of approximately five margin points. The co-ops, less co-ops, approximately $800,000, that contributed another five points of margin. And the remaining 2.2 points of margin were due to the product mix of what we sold and an increase in those items. Year-to-date, 27.8 versus 20.8 in the prior year. That's approximately a seven-percentage point pickup on the margins. Carpool Karaoke year-to-date contributed approximately four points. Cooperative marketing allowances, less or less $800,000, that contributed another two points year-to-date. And another point on product mix in terms of what we sold. Selling expenses went from $1,741,000 last year to $1491,000 this year, approximately $250,000 less than last year. Year to date, it was down by about $428,000, and it's primarily due to the The Carpool Karaoke rollout that we did last year, we spent a lot of discretionary marketing pushing that product last year, getting it rolled in this year. It took off on its own, and we did not need to spend anywhere near that kind of money to promote it. So all the promotion on that was done last year. General and administrative expenses, $1,925,000 this year versus $1,442,000 last year. It increased approximately $483,000 for the quarter. Most of it was in payroll. executive bonuses, some changes we made at the warehouse, some bonuses for our regular employees, some of it COVID-related. We had some challenging times with COVID and personnel, a couple of bouts with COVID in our warehouse, you know, our warehouse where we had to shut down for a few days and get everybody tested and move that. So there was some extra incentive involved there too as well. There was also a $78,000 increase in the California rent when we renewed our rental agreement for the warehouse space that we did. We were coming off of a six-year lease, and that rent went up substantially as space is at a premium out in California. Year-to-date, our G&A expenses were $5.1 million versus $5 million in the prior year. It was off about $82,000 year-to-date. We did have the increase, like I said, in payroll by $386,000, but it was offset, okay, by approximately $346,000 of damaged goods that happened last year. We had some out-of-pocket expenses associated with that, so the payroll increase was offset by the fact that we didn't have any damaged goods charges to us in the current year. Income from operations. Almost $1.5 million compared to $889,000 in the prior year. Again, mostly in gross profit, as was discussed earlier. Year-to-date, $3,160,000 versus a loss of $1,132,000. $4.3 million, and again, mostly gross profit margin, as we discussed a few minutes ago. Other income. For the quarter, we're at $62,000. income for the month versus $108,000 deduction in the prior year. The interest expense increased $140,000. Again, we had to, since we did our new deal with the financing situation, it cost us a lot more money than the deal that we had before. This was offset by $188,000. of a one-time pickup from our related party, Cosmo, on some net sales that we had deemed not collected to them, not collectible to them last year, had written off, and we were able to pick some of that back up this year. Year-to-date, $1,214,000 in other income net, okay, versus $166,000 net. or loss, if you will, or expense, if you will, in fiscal year 20. It's approximately $1.4 million in other income, $1.1 million insurance recovery from that damaged goods that we had to eat last year, approximately another $400,000 for concession or accounts payable extinguishment that we received from the vendor who caused the damage. Another $200,000, and again, $188,000 pickup from Cosmo, our related party. We also had an increase. Those things were offset by an increase in interest expense of approximately $265,000 year-to-date. Net income, almost $1.2 million in net income versus a loss of $758,000 last year. It's a pickup of $1.9 million, and year-to-date, We have almost $3.4 million in net income this year versus $1.3 million last year, a pickup of approximately $4.4 million. So as you can see, most of those big one-time losses that we took last year, we were able to recover most of those this year. In fact, we recovered all of them this year. So you're seeing we're reaping the benefits of that this year from a cash flow perspective. Inventory, a couple of things on the balance sheet of note. Our inventory last year at this time at the end of December was $8.1 million. Inventory is now at $5.3 million. So that's a drop of approximately $2.8 million in inventory, very positive. We ended up with a lot of excess inventory last year, a couple of million dollars worth that we were able to move that and more this year. probably even left a little money on the table. The demand for karaoke during this COVID period, stay-at-home stuff was very strong. We put that cash to good use. We had approximately about $6.6 million in accounts payable last year owed to our vendors and stuff, and that has reduced to $3.9 million, almost $4 million currently or at the end of the period as of 12-31. So we took most of that cash that we generated from inventory, paid off all the old debt from last year in terms of accounts payable, and we're able to stay current with our current vendors here. So that's my report. It was very positive, and I'm sure sales will have plenty to say about some of the successes that we had.

Perfect. Well, thank you, Lionel, for a detailed report. We appreciate it. We're going to turn the call over now to Bernardo Mello, VP of Global Sales and Marketing, for some more sales insight into what happened during the third quarter. Go ahead, Bernardo. Hey, guys.

Yeah, I just wanted to recap, you know, third quarter and then the year in general. You know, in the past, I've gone account by account and kind of given the highlights on those accounts. So I just... Just want to get into that a little bit and also leave some time for questions and answers at the end. But, you know, so far this year, this fiscal year, we've really had a good year with our major retail partnerships. Some of the key retailers are strengthening their position with SIG machine branding, and we've seen that. all across um you know we're becoming more relevant to to either the toy department or the consumer electronic department in in those particular retailers for example target this year um really had a banner here on the end of the year this year at 71 percent up year over year um a calendar year and and um a lot of that was was attributed to um they just, they were one of the early winners, um, um, in, in carpool karaoke. Um, a lot of when, when, when the item got really popular at TikTok, um, everybody was, was tagging target on it. Um, and, and they happen to have inventory. We're able to ship them some additional inventory. Um, and that, uh, that item took off, but, It wasn't just a one-trick pony. We had huge success with our core karaoke items as well. And they carry a little bit of a higher price point. You know, their entry level could be as high as $79.99. They're also, their step-up unit is $149. And we didn't see a drop-off in any of those higher prices. As a matter of fact, they were big winners for us. Um, unfortunately we did transition out of carpool karaoke at the brick and mortar stores, but, but we, we, we came in with another handheld microphone that also stood its own. Um, and, and for the year, about 25% of the business was done in that handheld microphone with target, which allowed them to have, to increase their, their gross margin, um, by 13 to 15% and for us to also increase our gross margin in there. So it's a strategy that we want to take in to, uh, fiscal 2022 as well. And we're going to expand about, um, with other retailers as well. Amazon is another one of those retailers that, that, that benefited from, um, uh, from people rushing to online to do, uh, you know, to, to do their shopping. Um, Stingy Machine, again, continues to do really good numbers with Amazon. We were able to reduce our marketing expense drastically with Amazon while transitioning some of that expense into Amazon Marketing Services, AMS, and it totally played out for us as well. We increased our margin there. We increased our presence there. And didn't have to do a lot of promotions with either Amazon and Target this year. As a matter of fact, we didn't participate in Black Friday with Target and still maintained the same number of sales from year's end. So, you know, we were able to prove to them that this is not only a promotional event, category that is marketed well and supported well with inventory in the store that karaoke could perform for them. As a matter of fact, Target even awarded us a holiday end cap where they brought in some toyetic items within the electronic department and cross-promoted with the toy department that performed really well, ended up selling through about 98% of that promotional end cap that was given. So we're looking to grandfather that in this year and only expand on it to see if we can get it to all stores this year. So getting back to Amazon, the excitement is there. We're still showing really good numbers now in our Q4 with about 101% increase. year over year from what we were doing last year. So the trend is continuing. It wasn't just a 2020 number. The trend is really continuing moving forward. And as a matter of fact, if we had a little bit more inventory, we could probably even do those numbers higher. As Lionel mentioned, we're coming out of the year with less inventory than we had last year. Not only that, but also good inventory We've pretty much sold out through all of our end-of-life and sort of inventory. We sold out on that on 2020 without having to discount many of that. We were able to get full cost on a lot of those items. So we're in a much better inventory situation right now due to the sales and the sell-through situation. At key retailers like Costco, Sam's Club, and Target, we did not have to take overstock returns. And if we did, we were very, very minimal. We ended up just settling out because the inventory number was so low that we settled out with some cash to not receive those overstocks. So that was extremely positive for us. Another thing that happened was the launch of our new pedestal unit, which is a Wi-Fi enabled unit. We didn't know how it was going to perform because it was going to be at a higher price point than what the clubs were used to carrying, about $30 to $40 higher than usual. And at the end of the year, it performed really well. So we already have some early commitments for 2022 on that particular model. Um, actually going a little bit stronger for 2022. Um, other things that, that other highlights for the year, um, we took back our, our Canadian distribution. Um, we've done that now direct. So now we've established direct relationships with Toys R Us, with Costco Canada, the source, uh, amongst others. Um, and we're continuing to expand in that Canadian market, um, And, you know, for previous years, that market was steadily going down for us. And in our first year taking it over, we increased business overall. Other things in general to talk about, Europe still, you know, is a challenging situation for us. Our main UK distributor has seen a lot of competition from those handful of Nikes. So the numbers are off there in Europe. But, you know, we're hoping that with things opening up in Europe that that number could bounce back. But our strategy for this year is just continue to strengthen our business with our key retailers who have already started making some early commitments, knowing the challenges that are coming out of Asia. And so things are starting to shape up. The other highlights that I wanted to go over, our direct-to-consumer business increased in sales this year. A lot of it was triggered by some affiliate partnerships that we had with some influencers and with a company called Oak Digital. So they were promoting their items on TikTok, and we were selling them directly on our website. Obviously, I talked about the inventory coming out much better, also in a healthier situation where a lot of the items are good, sellable, moving forward inventory. And then gross margin was up too. Not only were the handheld mics a big contributor to that with carpool karaoke and some of our party mics, but also the pedestal was fully listed with no promotion for the most part. So that generated some good gross margins as well. And, you know, with that being said, I'll leave some of the highlights for Gary to kind of touch on, and then if you have some questions afterwards, we could discuss in the Q&A. I'll transfer over to you, Gary. Okay.

Thank you, Bernardo. Great job. I do know we are kind of coming up close to time here, and I want to make sure people have an opportunity for questions. Why don't we open it up for Q&A now, and I'm sure we'll continue as people ask questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. And we will take our first question from Mike Schellinger with Microcap Club. Mike, go ahead.

I have a question on Carpool Karaoke. What can you tell us about the seasonality of that product versus the seasonality of a regular product line?

Yeah, that's a great question, and I'm glad you asked it. Actually, One of the real positives of Carpool Karaoke was that it wasn't as seasonal as our traditional karaoke product. It actually, the popularity of it actually launched in late March, early April. And then we had some really strong numbers during the summer. And what we think was because the popularity the use of this product is mostly for cars. We think that parents are buying it for their kids and kids were buying it to do it while they were doing, you know, either summer vacations or driving around in the summer. And then they continue right into fall and then holidays. So right now we're still seeing some strong numbers. We just launched it on Costco.com and it's launched to some good, some pretty solid numbers without a promotion behind it. And also Amazon's numbers have remained pretty strong here in January and February. So it seems that it's not as seasonal as our other items. And that's why we want to focus on expanding on the handheld mics, right? Because those are more year-round business.

And I think you also mentioned the prepared remarks that there's going to be a refresh in Carpool Karaoke. When would we expect to see that?

Yes, we're looking to launch it. We're going to launch it in early summer, but we're probably going to launch it now late summer, August. And that's to coincide with some of the retail set. At the store. And also we are planning another prime day promotion, uh, with Amazon on the 1.0 this year. Um, so that we could transition into the 2.0. Um, and prime day is going to move up from October. The rumors are that is going back to July. So, um, after, after we enter, we get through that promotion, then we're looking at launch sometime in August.

Okay. And then from a loan point of view, do you have an opportunity now to refinance with the great results you've put out in the past year here?

The answer to that is possibly. I'm checking into those possibilities now. But, you know, the current financing, again, there's a good-size out clause to get out. Now, it's only a two-year deal, and we haven't even been through the first year yet. So I would have to see something on the table that would be favorable for a longer period of time. Maybe I've got to eat some expenses going out. But if it's not favorable enough to at least make it reasonable over the three years in terms of recovery, then we may work this thing out until it expires. But I'm looking at those possibilities.

Okay, thank you. Those are my questions.

And once again, if you would like to ask a question, that is star and one on your touchtone phone. It appears we have no further questions at this time.

Okay. Well, thank you, everybody. Again, I want to appreciate everybody spending some time on their Monday afternoon to get an update on our third quarter results, and we look forward to speaking with you all again when we go over our year-end numbers. So thank you, everybody. Take care and have a good rest of your day.