This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good day, everyone, and welcome to today's Singing Machine Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note today's call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Brendan Hopkins. Please go ahead.
spk02: Thank you, and thank you, everyone, for taking the time to join us today. We have a brief safe harbor, and then 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 that may cause our actual results in future periods to differ materially from forecasted results. With that said, I'd like to turn the call over to Gary Atkinson, CEO of the Singing Machine.
spk05: Thank you, Brandon. My name is Gary Atkinson. I am the company CEO. Joined with me this afternoon is also Lionel Marquis, company CFO, and Bernardo Mello, company chief revenue officer. I want to start off by just thanking everybody for taking the time today to listen in and learn more about our second quarter earnings report. We are very pleased to share these results. We believe that our second quarter demonstrates our resiliency in a very challenging time, and it highlights the speed and the flexibility of our team to capitalize on this very rapidly changing environment. In the past year alone, we have dealt with the lingering demand uncertainty created by the global pandemic, the resulting ripple effects on supply chain, inflation, rising interest rates, and worker shortages. We believe we have weathered this storm well. I'm very proud of our team's response to all of these challenges. First, we have capitalized on our competitors' weakness to expand our relationship with one of our key customers, Walmart. By moving a number of our products into the Walmart Consumer Electronics Department, we have put our best assortment with highest margin offerings front and center in the most influential retail location for all consumer electronics sold in North America today. This has been a tremendous platform for marketing our best technology and products, as well as showcasing our emerging ideas in karaoke. As Lionel will further talk about, this decision was very timely and is a key component to our financial results. Expanding our relationship with Walmart offset sales softness in other areas due to the overall macroeconomic factors I previously mentioned. These well-timed decisions result in overall revenue growth, strong gross margin improvement, and profitability. In these times, we see this as a major win for the company and for our shareholders. During the second quarter, our team also worked very quickly to convert Sam's Club from a domestic program to an FOB China program. By converting this program to FOB China, we avoided any supply chain uncertainty and we've improved the efficiency in which our products flow into the club stores. It also guarantees the full delivery of our entire program, which is very important today as retailers look to reduce inventory in their pipeline. At this point, I would like to turn the call over to our Chief Financial Officer, Lionel Marquis, to provide further insight into the details of our successful second quarter. Go ahead, Lionel.
spk04: Thank you, Gary. Good afternoon and thanks for participating in today's earnings call. The following is a recap of key financial highlights for second quarter ended September 30th, 2022. Our net sales were consistent for the three-month period ended. The three-month periods ended September 30th, 2022 versus 2021 with net revenues of $17.1 million compared to $17.4 million respectively. Net sales for the six-month period were $28.8 million versus $23.4 million, an increase of approximately $5.4 million or 23%. The increase was primarily due to an increase of approximately $6.1 million to one major customer that opted for the earlier shipment via direct import and increased their product assortment, and an increase to another major customer of approximately $1.5 million due to the successful initial product set in their consumer electronics department in the prior quarter. These increases were somewhat offset by a decrease in two other top five customers who ended the prior year with excess inventories due to the prior year's late delivery. Our gross profit increased to 3.9 million compared to 3.3 million for the three-month period ended September 30th, 2022 versus 2021. an increase of approximately $600,000, primarily due to an increase in gross profit margin from 19.2% to 23.2%. There was an increase in the component cost, sorry, there was a decrease in the component costs of one major customer's promotional item, and that contributed approximately 1.8 points, gross margin points, with the remaining increase due to significant cost reductions to inbound containers from China, price increases to customers, and margin contribution from new products introduced into one major customer's consumer electronics department. Our gross profit increased approximately $7.1 million compared to $4.9 million for the six-month period ended September 30, 2022 versus 2021, an increase of approximately $2.2 million. The increase in net sales accounted for approximately 1.1 million, or almost 50% of the increase, with the remaining increase primarily due to gross profit increase of 24.8 from 20.9 last year. There was a decrease in the component costs, as we talked about earlier, the one major promotional item. That contributed 1.6 margin points year-to-date, with the remaining Increase due to significant cost reductions as the same as for the quarter, and that had to do with reductions in inbound containers from China, price increases to customers, and margin contribution from new products introduced to the major customers, consumer electronics department. Let's talk about operating expenses. Operating expenses increased to approximately $3.4 million for the three-month period ended September 30, 2022, as compared to approximately $2.6 $2.6 million for the three-month period ended September 30, 2021. The increase of approximately $800,000 in operating expenses per quarter were primarily due to the following. We had increases in selling expenses of approximately $200,000, primarily due to incremental royalty commission and discretionary marketing expenses. We also had one-time costs of approximately $300,000 relating to our public offerings, NASDAQ uplisting, regulatory filings, change of control, which included increases in legal fees, professional fees, stock transfer fees, and investor relations fees. In addition, we had an increase in compensation expense of approximately $200,000, primarily due to common stock and stock option grants issued to existing new board members, officers, and employees. We also had the effects of inflation, especially in our logistics area. We had inflationary warehouse distribution costs of approximately $100,000, and that included increases in pallets and temporary labor costs and in supplies. So let's talk about operating expenses on the year-to-date level. Operating expenses increased to approximately $6.4 million for the six-month period ended September 30, 2022, compared to approximately $4.6 million for the six-month period ended September 30, 2021. The increase of approximately $1.8 million in operating expenses were primarily due to the following. We had increases in selling expenses of approximately $200,000, and it's primarily due to royalty commission discretionary marketing expenses. One-time costs, as we discussed earlier, of approximately $400,000 year-to-date. Relating to our public offering, NASDAQ uplisting, regulatory filing is changing control, and this had to do with legal fees and professional fees, stock transfer fees, and investor relation fees are related to this project. We had an increase in compensation expense of approximately $400,000 year to date, again, due to common stock, stock option grants issued to existing new board members, officers, employees, as well as incentive payments to officers and merit pay increases. The logistics area also had some inflationary warehouse distribution costs, especially in the area of pallets, temporary labor costs and supplies. That was approximately $400,000. We also had one-time costs of approximately $200,000 relating to IT projects and product firmware update with the remaining increase due to variable expenses that have increased due to inflation. As a result of these activities, we recognized income from operations during the three-month period ended September 30, 2022 of approximately $584,000 compared to income from operations of approximately $750,000 for the three-month period ended September 30, 2021, representing a decrease of approximately $165,000. Income from operations for the six-month period ended September 30, 2022, versus 2021 were approximately $731,000 and $260,000 respectively, representing an increase of approximately $471,000. We recognize net income of approximately $296,000 for the three-month period ended September 30, 2022, compared to net income of $692,000 for the three-month period ended September 30, 2021. But it should be noted that During the second quarter of the prior year, we had the benefit of $236,000 in one-time gains from the settlement of accounts payable with one of our factories with no similar gains during our first quarter ended September 30, 2022. We recognized net income of approximately $280,000 for the six-month period ended September 30, 2022 compared to net income of $574,000 for the six-month period ended September 30, 2021. And again, it should be noted that during the six-month period, the prior year, we had the benefit of $236,000 in one-time gains from the settlement of that accounts payable with one of our factories of approximately $236,000 and also from the forgiveness of the payroll protection plan loan of approximately $448,000 with no similar gains during our first quarter ended September 30th, 2022. In May, In May of 2022, we successfully completed an equity raise of approximately $4 million, concurrently with an uplisting of our common stocks from the OTCBB to NASDAQ. We received net proceeds of $3.4 million, along with borrowings on our inventory line accredited of $2.5 million, allowing us to finance excess inventory from the prior fiscal year due to global logistics issues, as well as strengthen our cash precision at that time. On October 14th, just recently, we entered into a new credit agreement with Fifth Third Bank as the lender, replacing our current facilities with, or our existing facilities at the time with Crestmark Bank and Iron Horse. They were terminated by the company on October 13th, 2022. The credit agreement provides for a three-year secured revolving credit facility and an aggregate principal amount of $15 million in decreasing to $7.5 million during the period January 1 through July 31 of each year, which is our non-peak season. The credit agreement is a three-year agreement matures on October 14, 2025. The revolving credit facility bears interest at the prime rate plus 0.5% or the 30-day secured open financing rate of what they call SOFR, S-O-F-R, at plus 3%. So to summarize what we did with the banking deal is we obtained financing with a larger bank after significant scrutiny during the due diligence process, and the bank was still very anxious to close the deal. We increased our access to capital during peak season by $2.5 million over the prior facility that we had with Crestmark and Iron Horse. We also are able to combine our financing of both our accounts receivable inventory under one combined credit facility. And also, we lowered our interest rate to approximately one-half the rate that we were paying on the prior agreement, which will result in significant interest savings going forward. So overall, we've made significant improvements in gross profit margins during the six-month period compared to the same period last year. And we've managed to keep selling expenses commensurate with increase in net sales. We have, however, encountered significant one-time general and administrative expenses during this fiscal year with regards to legal, professional, and other expenses associated with equity events that have occurred during this fiscal year. And, of course, we have the inflation to deal with, and we're going to continue to address the inflation issues going forward. That's my report of the highlights. Thank you for listening. A little bit lengthy today, but there was a lot to go over. I'd like to now turn the call over to Bernardo, who will further discuss recent developments. Bernardo?
spk01: Yes. Thank you, Lionel. I'll keep it short because I do want to get to a Q&A, give you guys time to ask some questions. You know, I'm just going to echo what Gary and Lionel already said. You know, 2023 for us, our major focus was to introduce new technology into our key retailers or expand on the new technologies that we introduced last year. To continue to position Singing Machines as the leader in the home karaoke segment. You know, I know we take that proud and we need to always execute on the performance of our products. to make sure that we maintain that tagline. So we did that well. We were able to introduce those products into our key retailers this year that had the appetite for them and had the space. So we went into different departments in one of our key retailers and expanded on those technologies in two or three of our other key retailers as well. We had some good product launches. Some good results so far. And I would like to thank those product launches to maintaining our sales so far this year, comparable to what it was last year, because otherwise it would have been a little bit tougher sledding. And yeah, we're positioned well moving forward. Be on the lookout for some key promos across the retail landscape. You're going to see some Two day ads in Target. You're going to see Black Friday in Walmart. You're going to see some key VIP events at Sam's Club. And Costco is going to be running a nice promo with print in the month of December. So, you know, we think that we've seen tougher years before in the past from a consumer and a retail standpoint. And the one thing that we've seen is parents are still, or consumers are still gonna go out and buy gifts. And we wanted to make sure that we were positioned right for that. So we preemptively put some key promos out that would help promote the line and the brand accordingly. Also with Amazon as well. We've now stabilized our distribution partnership and our market in the UK and canada so we're well positioned going into fiscal year 2024 um with with those partnerships uh well established and australia continues to grow um so yeah so we feel confident that if the if the consumer is out there and is looking for karaoke that singing machine is best positioned in the marketplace not only with the technology but with a good promo schedule
spk05: and and good shelf and good coverage on the shelf base and e-commerce as well so um you know with that being said i want to turn the call over because i know we're running we're running a long time so i'll turn it back over to you guys all right thank you bernardo thanks for the update on that um and i do want to make sure we save time for q a but just before we do that i just wanted to touch on a couple of other key non-financial milestones that i wanted to mention so First, the big thing I want to say is that we have maintained and we have secured all of our key relationships and shelf listings with all of our major customers. So that's big news. With all of the news that's been floating around recently at retail and the sort of conservative nature that we're seeing, this is a big win for us to continue to protect and to preserve our shelf space at these key retail accounts. That's a big win. Also, in time for the holidays, we've revamped our karaoke app that's available for Android and for the Apple phones. It now includes official album cover art. And we do continue to grow the size of our karaoke music catalog, now over 70,000, some of the best, most popular karaoke songs available today. And we are continuing to see more activity. There's more downloads. There's more users. that are coming aboard the app this year, especially since we've introduced more of the casting products with Walmart Electronics this year. And we're starting to see music revenue is becoming more meaningful now to EBITDA. We've seen over a 20% increase year over year in not only app downloads, but also music subscription revenue. And we do anticipate that this trend will continue on through the holidays. And then finally, just a bit of thinking in terms of how we're looking at the business for 2023 and beyond. Obviously, for many years, we've enjoyed a strong position as being the leader in the home karaoke category. So we've become a leader in the space through our brand, our innovation, our product portfolio is probably best in class. But one of the things that we've been looking at and studying is that obviously people aren't just limited to singing at home, right? There's a lot of other places where consumers engage in karaoke. And so we do believe there's a number of exciting emerging opportunities. And we believe that we are or that we can position ourselves to be the dominant brand for karaoke, not only in the home, but soon also outside of the home. So as a team, we're very focused on expanding into additional karaoke markets, not only to enhance our value from a revenue perspective, but also profitability. And we look forward to providing everyone here with an update on these efforts as we move forward in the next coming month. So I'll wrap it up with that. And at this point, we can turn it over to Q&A.
spk00: At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may withdraw your question at any time by pressing star 2. Once again, for your questions, that is star and 1. And we'll take our first question from John Kletcha. Please go ahead.
spk07: Hello, Singing Machine. I have two questions for you. How is the shipments going for fiscal Q3? I know we're about halfway done now.
spk08: All of our, all of our, hi John, how are you?
spk01: Good. All of our direct import shipments are pretty much done already and in the barn for Q3. In terms of the domestic ones that are lagging a little bit behind, um more than normal and that's and that's just you know retail is just playing um the risk adverse um game right now you know some they're trading off um empty shelves for not being overloaded with inventory the way they were towards the end of last year so you know we've we've been pushing hard to get in there um we do have products in in the in in the stores but you know, that overload of products that existed in the past. They're being a lot more careful with that moving forward.
spk07: Okay. And secondly, do you anticipate any significant programs going forward with Best Buy?
spk01: So Best Buy is one of those soft retailers. You know, they sort of have categorized Karaoke, they have musical instruments, and they have a sour taste for that. The way that we're addressing it is by going towards the dot com, and as you can see now, we just uploaded a whole new section of products on dot com, and just this week alone, we started seeing sales on those new products, but I think you know, the long-term strategy with Best Buy that we're looking at and, you know, I don't know how much of this I could say is more on the professional side of things where we can leverage then their geek squad for installation and things like that. I think that that's going to be our strategy moving forward to develop a line that's more on the pro side that could then leverage their geek squad for installation. So, I'll leave it at that now. I don't know if Gary's going to touch on it a little bit more either in this call or future calls.
spk07: Okay, great. Thank you. Thanks, John. Okay.
spk00: And we'll move next to Eric Nickerson. Please go ahead.
spk06: Yeah. Hi, guys. Lionel, thanks for the good detail on the financials. You covered most of my questions there. Look at the sales. We're down about a percent or so from this year's quarter versus last year's. It's been a year when consumers' discretionary spending has been just massively moving from goods over to services. So this tiny little drop in sales looks pretty encouraging. Am I missing something, or do you guys interpret that pretty much the same way?
spk05: Go ahead, Bernardo.
spk01: You want to address it? Yeah, I know. I just want to address it. That's a great observation, Erica. And you're right. You know, a lot of funds have gone towards service or travel or things. I think people have noticed that they got a little bit too much goods in their household. Um, one thing that we did, um, is we did expand it to different departments, um, within a couple of the major retailers, and that has helped offset, you know, some of the softer sales in, in the previous department. Um, the good thing, the encouraging thing that we have seen that, although that some of those discretionary have, have moved to other places is that especially in like Walmart. And in Costco. our higher price points are doing well. So they're helping upset some of those, some other softer sales. But you are right, you know, it is a challenging year. We just have a little bit more distribution and some of the higher price points have performed well as well.
spk06: Okay, that's pretty cool. So we'll start to see, did you have something to add there, Gary?
spk05: Oh, yeah, I just wanted to add to your first question there, Eric. You know, the other thing that I want to touch on is, you know, we've kind of done the hard work already, right? So we've done all the heavy lifting to secure the shelf space of retail, to build the inventory, to sort of get it shipped and bypass all of these supply chain struggles. So we've done all the hard work to get our karaoke machines into almost every single major big box retailer throughout North America. And I think the big unknown now is, like you said, how are the consumers going to react come the holiday season? And I think that's still a bit of a mystery at this point.
spk06: I guess we'll see. Okay, just looking elsewhere, we're going to start to see a pretty good drop in the interest expense line, aren't we? Starting, I guess, in the current quarter?
spk04: Yeah, there's... Going forward? We'll start... That's great. We will see a significant interest drop. One of the other advantages, and I didn't talk about it before this line of credit, is I had a minimum interest rate. Whether I borrowed on the line, on my previous lines or not, for inventory, I had to take a 15.5% APR on a million dollars, regardless of whether I had a balance or not in that inventory. And also on the accounts receivable, I had to pay approximately, I was paying approximately $8.50 to $8.75 for most of the time until recently when the prime rates started going up. Now we're closer to like $14, $14.50. But I had to pay a minimum of, you know, as if I were borrowing $2 million each month. So both of those, that no longer exists with the new line. If I don't borrow from the line, I won't get a new line.
spk06: I'm sorry, what you just described is the old deal that's been replaced, or that's in the new deal with Fifth Third?
spk04: No, that's in the old deal that's being replaced. Those were all minimums that I had to cover before. So on top of the interest rate drop, which we'll see significant loss of interest also, we won't have that minimum to cover every month as well. So it's a two-edged sword, and it's a good deal.
spk06: Okay. Just a couple more boring questions. I noticed we've got a bunch of options and warrants outstanding. I got half a million or so of them. Can I see a detail of those, you know, the expiration dates and exercise prices in the 10Q or do I have to wait until the 10K comes out? Where can I see that?
spk04: There, there's, there'll be a section in the 10Q. You'll, you'll see what, what's left outstanding and what the weighted average, you know, price is.
spk06: In the 10Q. Okay. In the 10Q. I think I noticed in the, trading in our stock, our major shareholder is buying up the stock in numerous little bits and pieces, which leads me to suspect that a number of shareholders in the company might be steadily dropping, which leads me to ask, have you had any conversations with our majority holder about going private?
spk05: You know, I mean, to touch on that, Eric, I mean, we just recently uplifted under the NASDAQ. just a few months ago. Um, so, you know, I don't think there's, uh, you know, we've, we've certainly invested a lot of time and energy to, to, to get to where we are now. Um, so I, I, I wouldn't say that there's any conversation right now in terms of going private.
spk06: It's just not something you've even talked about within that.
spk05: Right. Correct.
spk06: Okay. Um, good. Okay. That's all I had. Uh, thanks very much. Good, good report guys. Uh, Very informative.
spk08: Great. Thanks for the great questions, Eric.
spk00: And we'll move next to Joel Marcus. Please go ahead.
spk03: Yeah. Hi, guys. Congratulations on what I think is an excellent quarter despite, you know, various extraneous obstacles. My question, I'd just like to sort of lead into it as follows. I know this company has always had its eye on the long term. The move to NASDAQ obviously was in furtherance of that, even though all the transactions that have enabled you to be on NASDAQ, I mean, have resulted in the stock being down about 60% from where it was. You know, certainly right now, this company is trading at a price where there's scant enterprise value, you know, attributed to it. But I really believe that you guys have your eye on a much, much bigger future in the long term and that everything you've done up till now will be proven to be correct. So could you just go a little bit more into your future vision for this company? Do you intend to expand vertically, you know, with the product, using it in more places, maybe expanding horizontally into other, you know, consumer-related appliances, music distribution, et cetera? So, obviously, all of us would love to have, you know, I know the suffering will be worth it, but basically, can you give us a little bit, you know, of a more detailed and clearer picture of what your aims are for this company long term?
spk05: Sure. Yeah, Joel, that's a very good question. And I'll tell you, it's something we've been spending a lot of time and energy on recently thinking about and starting to put action plans together to start executing on this. But the way we look at karaoke as a worldwide category, we believe that the market is in excess of a billion dollars a year. And obviously right now we're playing in a smaller sandbox, which is to say, you know, we're the leader in the in-home karaoke devices category. And so we start thinking about, well, where are people doing karaoke? And we're thinking about it in the sense that there's really three or four different verticals in terms of where are people having karaoke experiences. And obviously the first place is, right, people are singing in their homes. And for that market, we already have products and services for the people that are staying at home. The second category that we're looking at is the automotive space. We're seeing a lot of people that are singing in their car. And obviously, through our Carpool Karaoke product line, we sort of touch on that. But we also think there's a much bigger opportunity that's available in the automotive space. And it really started with Tesla. Last year, they announced that they were launching a karaoke microphone that would be integrated into the Tesla vehicles. And that set off a, what I would say, a lot of interest from other major automotive brands to sort of look at that space. You know, when Tesla does something, a lot of people take notice. And so we're seeing a lot of inquiries into the automotive karaoke category. And it's something that we'll be talking about a lot more as we move forward. Then there's also this third category of people doing karaoke outside the home. And it's a face-to-face sort of brick and mortar karaoke venue experience. And that's an area where there really hasn't been any innovation in that experience in, I'd say, well over 40 years. So it's an area that we're very, very interested in. We spent a lot of time doing research and studying that particular market because it's ripe for disruption. And there's really nobody else in the US that's really looking at or thinking about that market for karaoke. And it's something that we are very, very interested in. So I would say over the coming sort of 12 months to 24 months, you're going to see us making a lot of progress and a lot of news and announcements in those different verticals that I just outlined.
spk03: Thank you. That sounds really great. Also, I guess one follow-up question. I always saw this company, and I'm dating myself by saying this, as the razor and blade type of company where basically once you vend the product to somebody, you also have the blades that go into this, namely the music, the music libraries. Do you envision your vending of music or perhaps maybe even advertising, you know, you know, sponsors, you know, because you've got that huge, you know, screen there. And obviously, you know, you could certainly, you know, accommodate, you know, advertisers, et cetera. But I mean, You know, can we look forward to seeing this company have continuing revenues, you know, as an ancillary of the product, namely music, advertising, you know, the stingray aspect of it. So could you just give us a little bit of color and flavor on where you're going with that?
spk05: Yeah, no, for sure. I mean, the music side of the business does continue to grow year over year over year. Admittedly, it's growing at probably a slower rate than I think what we would have all expected. And it seems to be directly correlated to the number of karaoke devices that we put into the market. So it would make sense that the more karaoke machines we sell, the more potential customers we have through those machines that are then sort of signing up and looking for music. And we saw that with Walmart Electronics this year. We put a whole brand new line of of casting karaoke machines into Walmart electronics. And like I mentioned earlier in the introduction, we are seeing now somewhere between 20% to 25% increase year over year in not only the number of downloads of the app, but also the revenue coming through the app. So it is growing, but it probably will take a longer period of time before that really becomes, I would say, sort of a material or significant overall revenue number since we're, you know, it is very hardware dependent. Like you said, it's razor, razor blades. So you need to sell the razors to get the blades. But no, it is, it is a very, it's a very attractive part of the business. The margins are great. There's no inventory to carry. So there's a lot of opportunities there in the music space as well to, to, to continue to grow it.
spk03: Well, Thank you so much. I mean, I think you guys are great. I mean, I even predate Brendan in being involved in this stock. I will continue to be involved. I think long term, this is one of the five or 10 best companies, you know, that people have access to in the public markets these days. So, I think your future is unlimited and I will continue to be involved. I'll continue to add to position. And I, you know, think you guys are absolutely brilliant. And I think, you know, in the longterm, this is going to be a huge home run for everybody who has the patience and the wisdom to, you know, be in there with you and hang in there with you and view this as a longterm investment.
spk05: I appreciate that, Joel. Thank you.
spk08: Thanks for the vote of confidence. Okay. Thank you, guys. Thank you. Take care.
spk00: And it does appear there are no further questions at this time.
spk05: Okay. Great. Well, again, I thank everybody for participating in today's second quarter earnings report. I definitely appreciate the spirited good questions that were asked. And we look forward to talking again in a few months on our third quarter earnings report so thanks that's all for now we'll talk soon
Disclaimer