The Singing Machine Company, Inc.

Good morning, everyone, and welcome to Slinging Machines' second quarter fiscal 2024 financial results earnings call. My name is Natalie, and I will be your operator today. As a reminder, today's call is being recorded. We have a brief safe harbor, and then we'll get started. This call contains forward-looking statements under U.S. federal securities law. These statements are subject to risk and uncertainties that could cause actual results to differ maternally from historical experience or present expectations. A description of some of the risk and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statement included in our current and periodic fillings. I would now like to turn the call over to Gary Atkinson, company CEO.

Good morning, ladies and gentlemen. I would like to start off this morning by thanking everyone for taking the time to listen in and participate in our second quarter 2024 earnings call. Joining me on today's call, I have Lionel Marquis, Company CFO, and Bernard O'Mello, Chief Revenue Officer. As is customary with our business, the second quarter is typically one of the busiest times of our fiscal year. This is when we start to deliver our programs for the holidays to our retail partners. And we are very, very active in fulfilling these orders daily from July through October with final replenishments into November and drop shipments starting in December. Due to the timing of our longstanding warehouse lease and its expiration in Ontario, California back in August, we were challenged to execute a complete transition from a 100% in-house logistics model to a fully outsourced 3PL model right at the peak of our shipping season. For those that may not be aware, this process involved a complete overhaul in our entire customer fulfillment operations process, which impacted staffing, IT integration, accounting data flow, internal reporting, and customer relationship management. While this was a massive undertaking for the entire team, I am very pleased with how this team has executed and made it happen day in and day out for weeks on end as we made the transition. The impacts moving forward should be significant to our business. We avoided absorbing significant rent cost increases related to our previous warehouse. We've eliminated a large percentage of our workforce, and we've moved our entire logistics returns and repairs model to a variable just-in-time solution that should mitigate hundreds of thousands of dollars in costs increases annually for the foreseeable future. Beyond this major milestone, it was largely business as usual. Supply chain challenges and inbound container prices have fully normalized for this year. We saw customer demand revert much closer to our normal just-in-time delivery model. We also participated in several forward-looking industry events, such as last month's Toy Fair in New York, that indicate that 2024 should see further stabilization and improvement in the overall US retail environment. We were very active presenting and promoting our upcoming 2024 product offering, which include our new Sesame Street licensed line of products, along with new karaoke innovations and technologies that we plan to unveil in the early part of 2024. With this context in mind, I would like to turn the call over to Lionel Marquis, company CFO to present greater details on the results of operations for our second quarter.

Thank you, Gary. Good morning, everyone. And without further delay, I'd like to walk through some of the brief highlights of results of operations for our second quarter ended September 30th, 2023. Revenues for the three months ended September 30th, 2023 were $15.9 million. as compared to 17.1 million for the same period in the prior year. The decrease was due to delays and a few delays in product shift in late September that will ultimately shift in the first two weeks of October and an increase of approximately $900,000 in co-op incentive accruals planned for the holiday promotions. And this was an increase over 2022. Gross profit margin, gross profit for the second quarter of fiscal 2024 was approximately 3.7 million, yielding a 23.2% gross profit margin as compared to approximately 3.9 million or 22.8 in margins in the second quarter of fiscal 2023. Overall, the difference in dollar terms was due to the decrease in revenues, as we've already detailed. However, the improvement in margins in the first quarter of this year is primarily due to slight changes in the product mix and a decrease in ocean container prices that lowered the company's cost of inbound freight. Operating expenses. During the second quarter of 2024, operating expenses increased to 3.6 million compared to 3.3 million during the second quarter of the prior year. The increase was in part due to Approximately $0.2 million increase in selling expenses associated with a one-time marketing promotion, and $0.1 million in general and administrative expense increase. Just a brief note on liquidity as of September 30, 2023, we had cash in hand of approximately $3.2 million. During the next 12-month period, plan on financing our working capital needs primarily from a combination of vendor financing, cash on hand, and projected cash flows from operations. I'd like to now turn the call back over to Bernardo and to Gary.

Thank you, Lionel. At this point, we're going to turn the call over to Bernardo Mello, our Chief Revenue Officer, for an update on sales for this holiday season. Go ahead, Bernardo.

Yeah, thank you, Gary. And welcome, everybody, to our Q2 earnings call. I'll try to be brief. Just as we move into the holiday season, a couple of changes are happening. Obviously, retail is a very tough environment right now. Consumers are shifting their buying patterns and concentrating on essentials. moving forward, but what we've seen is there's still demand for karaoke. It has come a little bit later than usual due to some transitions at Walmart, moving from toys to the consumer electronic department. That started about a year and a half ago, and the full transition will emerge by spring of 2024. With that being said, we still have a couple of SKUs in the toy department that are performing decently. And in the CE department, we currently have a feature right now, which you'll see at about 1,800 stores, performing well. Got off to a slow start. We're now somewhere around 50% sell-through and expected to sell through by mid-December, that feature. Our regular SKUs are doing well. We still have a good mix of new tech, in Walmart with some casting items that are bound to generate some backend dollars. So we're looking forward to that. We're also going to be on the floor now for Black Friday with an item at a very aggressive price point with some really good features that Walmart partnered up with us. They did shift this year. Instead of shipping in July and August from direct import, we were shipping in October and November. that due to storage issues and just a change of strategy there. But you will see a full assortment at the Walmart stores. For Sam's Club, we also have two SKUs going. They're all fully set now in the stores. They set a little bit later as well, just similar to Walmart, entering in late October and early November. But one of the items is off to a good start. The other one will be on promo here during Black Friday, and we expect some good results. It's a brand-new item that they're carrying for 2023. Target is back with four SKUs. Last year, we were cut down to two SKUs. This year, we managed to bring in four SKUs, and also new tech with the casting model at $99. You also see some promotion now during November and then second week of December. So Target is stabilizing with four SKUs, which we're happy about. We're also doing a lot of promotions on Amazon. We've engaged with a brand-new agency by the name of Vendo. They're top of class and data-driven and marketing-driven. So we are going to see a shift on Amazon, more of a split. We will mostly sell 1P. and now we're switching and balancing out from 1P to 3P. That allows us to control the pricing, control promotional activities, and also drive sales through marketing, not only within the Amazon environment, but also through social media, influencers, CTV ads on Hulu and Netflix and some of the other major streaming services. So we're starting to test that out. see how that goes, and then go into a full campaign come 2024. We have a good mix of products there, and we're constantly battling the marketplace environment with the Chinese off-brands. We have a good strategy, and we feel that we are with the right partners in Vendo. You should see a lot of activity there. Also be on the lookout on your social medias. Like I mentioned before, we're partnering up with some mommy bloggers, some influencers that we've done a really good campaign for. And it's started now in November, and you'll see it all the way through January, February. So be on the lookout there. We've gotten really good feedback on some of the initial ads that we put forward. Internationally, Canada has really taken off for us. We did a big program with Costco Canada where we participated for the first time in their October book, which is a little bit early for karaoke, but it performed well. We had forecasts of about 8,700 pieces. We came in at 13,000 pieces, so that was a huge success. And Costco is extremely happy with those numbers. We're running a secondary ad for Black Friday and Cyber Monday, and we should see close to 90%, 95% sell-through there. Costco US, we launched our very brand-new Wi-Fi model. We usually do the pedestal there, but we've done a tabletop this year, and the consumers seem to embrace the new form factor. We've also, with this model, have launched our new streaming app. It is in partnership with Stingray. It was only viewed in Tesla models, but now it is in our own Wi-Fi model. Very good looking app. All new artwork and flow of how to deal with the app. It also includes a partnership app that's done with a QR code that allows consumers to kind of control their own play queue and who's singing next. So we're excited about this. We think it could be the additional generator of back-end dollars onto the music subscription. In the UK, we've also continued to increase our business there with our distributor CMS. We've got placement in Argos and Fenwick and Costco. With the Wi-Fi streaming model, they picked it up and they followed what the U.S. was doing. Australia is a little bit down this year. You know, the Australian economy has struggled, but we're still distributing products there with our Australian distributor and partnership. So you'll see us on the retail shelf. Besides that, we're moving forward with our secondary and third retail accounts. We're in Best Buy Canada now, Walmart Canada has a pool program. And we're still maintaining all shelf space throughout the country. You'll also see a lot of ads on the Meta platform, which are generating good sales so far. So our dropship direct-to-consumer business is growing. and we're looking to really focus on that for 2024 as well. So I'll hand the call back to Gary, and thank you for listening.

Perfect. Thank you, Bernardo. We always appreciate your updates on these calls. To close out my final prepared statements, I would like to reiterate how proud I am of the efforts of our entire team, particularly, as Bernardo mentioned, in light of the current challenging retail environment. We have continuously sought to improve our business to strengthen key relationships and to establish new promising partnerships. We do see a number of exciting opportunities that we believe will enhance and reinforce our market position, both in the U.S. and abroad. We will continue to leave no stone unturned as we strive to execute on our business plan and growth initiatives as we head into 2024. I'd like to thank everybody for your continued support, and I look forward to providing you all with updates here very soon. Thank you, everybody. Take care.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.