The Singing Machine Company, Inc. (NASDAQ:MICS) Q3 2023 Earnings Call Transcript

The Singing Machine Company, Inc. (NASDAQ:MICS) Q3 2023 Earnings Call Transcript February 26, 2023

Operator: Good day, everyone, and welcome to today’s Singing Machine’s Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask a question during the question-and-answer session. Please note that this call may be recorded. It’s now my pleasure to turn the conference over to Mr. Brendan Hopkins. Please go ahead.

Brendan Hopkins: Thank you, and thanks, everyone for joining us today. We have a brief safe harbor and then we’ll get started. So 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, unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. With that said, I would like to turn the call over to Gary Atkinson, CEO of The Singing Machine Company.

Gary Atkinson: Thank you, Brendan. Good morning, ladies and gentlemen. As Brendan mentioned, my name is Gary Atkinson. I am The Singing Machines CEO. I’m joined this morning by Lionel Marquis, company’s CFO. I’d like to thank everybody for taking the time to be part of our third quarter earnings call today to discuss the results of the December 31, 2022 quarter. First, I’d like to provide context around our sales numbers for the quarter and the seasonality of our business for those that are not as familiar with our annual sales patterns. Despite our wholesale sell-in numbers for this quarter, demand for consumer karaoke products remained very strong. The real challenge to this quarter was timing and getting our products into retail.

Normally, our sales cycle is heavily driven by daily demand, which gradually depletes inventory from viral audit shelve space. At this point, we do our best to replenish inventory on the shelves during the non-peak months. Primarily in fiscal year Q2 and fiscal year Q3, our retailers bulk up on inventory as needed in preparation for the holiday season. Last calendar year that traditional sales cycle was partially disrupted by the lingering effects of the COVID-19 pandemic and supply chain disruptions. There was a buildup of retail inventory on the shelves at the end of the first quarter of calendar 2021, which slowly started to make the retailers gradually more cautious throughout the rest of the year. This trend was not unique to our business and affected most year-round brands that sell into retail.

As a result, we saw sales become increasingly front loaded over the calendar year. We are pleased, however, to report that we did experience very strong retail at sell-through numbers for the products that we were able to place. Simply put, the quantities of inventory that we were able to get onto retail shelves sold well. This was despite retailers’ concerns and reactions to the elevated risk factors surrounding the overall economy in the back half of the year. We still continue to see steady demand for our products, and we believe that reflects well on our brand and on our technology. I will now turn the call over to Lionel Marquis, company’s CFO, who will go over the financials in more detail.

Lionel Marquis: Thank you, Gary. Good morning to everyone, and thanks for participating in our third quarter earnings call. This morning, I’d like to share some key financial takeaways for our third quarter ended December 31, 2022. We saw a significant decrease in net sales for the three months ended December 31, 2022, as compared to the three months ended December 31, 2021, with revenues of $7.1 million compared to $21.2 million, respectively. Net sales for the nine months ended December 31, 2022 and 2021 were $35.9 million compared to $44.7 million, respectively. We experienced decreases in net sales to all of our major customers of approximately $8.8 million year-to-date. We attribute this decrease in net sales to the following factors: all of our major customers began the holiday season with excess inventory held over from the previous year due to late deliveries caused by significant supply chain issues experienced at the end of calendar year 2021 and early into 2022.

While our customers’ initial sentiment was positive for a recovery during 2022, news of economic recession, runaway inflation and interest rate hikes dampened customers’ expectations for the upcoming holiday season resulting in a risk adverse approach to carrying inventory. Consequently, customers severely cut back on buying inventory that they had previously committed to or required significant increases in co-op promotion incentives on goods sold during the three months ended December 31, 2022. Co-op promotion incentives for the three months ended December 31, 2022 increased to approximately $1.1 million or 16% of net sales as compared to approximately $0.8 million or 3.7% of net sales during the same period of the prior year. For the nine months ended December 31, 2022, co-op promotion incentives increased to approximately $2.2 million or 6% of net sales as compared to approximately $1.8 million or 4% of net sales for the nine months ended December 31, 2021.

Our gross profit decreased to $1.3 million compared to $5.3 million for the three-month period ended December 31, 2022 versus 2021, a decrease of approximately $4 million. The decrease in net sales, as we discussed above, accounted for approximately $2.5 million of the decrease with the remaining decrease primarily due to the increase in co-op promotion incentives, again, as we discussed earlier. Our gross profit decreased to approximately $8.4 million compared to $10.2 million for the nine months ended December 31, ’22 versus 2021, respectively, a decrease of approximately $1.8 million. Again, the decrease in net sales accounted for $2 million of the decrease, offset by a slight increase in gross profit margin of approximately $200,000. There were increases in gross profit margin of approximately $1.2 million or 3.4 margin points due to price increases and decreased landed cost for products due to decreasing cost of shipping cost containers — shipping container costs, sorry.

Unfortunately, these increases in gross profit were offset by gross profit margin decreases of approximately $1 million or 2.8 margin points due to the co-op promotion incentives as we discussed earlier, and an increase in excess and obsolete inventory reserves. Operating expenses remained relatively flat at $3.6 million for both the three-month periods ended December 31, 2022, and December 31, 2021. It should be noted that there was a one-time compensation increase of approximately $400,000 associated with the change in control and employment continuation agreement reached with the company’s CFO, which was offset by decreases in bad debt and repair reserves. Operating expenses for the nine months ended December 31, 2022, were approximately $10.0 million as compared to $8.3 million for the nine months ended in the prior year, an increase of $1.7 million.

While this was a large increase in operating expenses, it’s worth noting that there were some significant one-time expenses that contributed to the increase, including increases in legal and professional investor relations, stock transfer freeze of approximately $600,000, primarily related to public offering, the NASDAQ up listing, the change in control issues, our regulatory filings, preparation costs relating to our new credit agreement with Fifth Third Bank, an arbitration settlement of an alleged employee practice violation lawsuit against a former temporary employee, increase in compensation expense of $0.5 million, which included compensation for additional members of the Board of Directors, officers and employees incentive compensation, new hires as well as merit increases one-time and the one-time increase in compensation of $400,000 related to the change of control and employment continuation agreement with the company’s CFO.

There was an increase in travel and entertainment of approximately $200,000, which included participation in the large consumer electronics show in Las Vegas, which the company had not participated in for past two years, and an increase of approximately $100,000 in our logistics operation, primarily due to inflation-related costs. As a result of these operating activities, we recognized a loss from operations during the three-month period ended December 31, ’22 of approximately $2.3 million compared to net income from operations of $4 million for the three-month period ended December 31, 2021, representing a decrease of approximately $3.6 million. We recognized a loss from operations of approximately $1.6 million for the nine-month period ended December 31, 2022, compared to income from operations of approximately $2 million for the same period at December 31, 2021, representing a decrease of approximately $3.6 million year-to-date.

We recognized a net loss of approximately $1.7 million for the three months ended December 31, 2022, compared to $1.4 million of net income for the three months in the same period last year. It should be noted that during the three months ended December 31, 2022, there was a one-time expense of approximately $183,000 associated with early exit fees upon termination of our credit facility with Crestmark Bank and Iron Horse. Iron Horse credit, we recognized a net loss of approximately $1.7 million for the nine months ended December 31, 2022, compared to net income of approximately $2 million for the nine months ended December 31, ’21. It should be noted that during the nine-month period of the prior year, we had the benefit of $236,000 onetime gain from the settlement of accounts payable with one of our factories and from the forgiveness of the payroll protection plan loan of approximately $448,000 with no similar gains during the nine months ended December 31, 2022.

On October 14, we entered into a new credit agreement with Fifth Third Bank as lender replacing our credit facilities with Crestmark Bank and Iron Horse credit that were terminated by the company on October 13, 2022. The credit agreement provides with three-year secured revolving credit facility and an aggregate principal amount of $15 million decreased to $7.5 million during the period of January 1 through July 31 of each year. The credit agreement matures on October 14, 2025. Revolving credit facility based interest at either the prime rate plus 0.5% or be the 30-day term secured overnight financing rate, better known as SOFR, S-O-F-R, plus 3%. As of December 31, 2022, the company is in default of the agreement as we did not comply with the required financial covenant of maintaining a monthly debt coverage ratio of 1.05:1.

To date, the bank has not taken any action to accelerate the company’s obligations under the credit agreement, and we are currently in negotiations with Fifth Third to obtain a waiver and renegotiate a fixed coverage charge ratio covenant. However, it can be no assurance that negotiations will be successful. As of today, there are no borrowings against the credit facility. So an acceleration of loan payment, if it came to that, would not present any significant additional hardship on the company. As negotiations continue to progress with the bank, the company plans to supplement cash flows from operations from several resources and activities, including the following: we intend on raising additional cash through an equity offering. We are also going to utilize the dynamic discount programs offered by several of our major customers, allowing for accelerated payments of invoices in exchange for an early payment discount.

We also are dealing with a one-time reimbursement of payroll taxes of approximately $750,000 from the employee retention credit program. We’re going to continue to work with our factories for extended payment terms, and we are currently aggressively planning to sell excess inventory during the coming year, which is going to increase our cash position significantly. So management believes that our cash on hand by working capital net of cash expected to be generated from operating forecast, and cash expected to be raised through the equity offering, along with availability of our cash from the credit agreement with Fifth Third will be adequate to meet the company’s liquidity requirements for at least the next 12 months. While the company is optimistic that it will be successful in these efforts to achieve our plan cannot be any assurances that we will be successful in doing so.

But as such, the company has a continued support letter from its parent company, Ault Alliance through March 31, 2024. So overall, we’ve made some significant improvements in gross profit margins during the nine-month period ended December 31, 2022, compared to the same period of the prior year. Unfortunately, the good work that was done in this area was offset with unexpected third quarter decrease in net sales and exceptional co-op incentives that were required for customers to sell through their inventory. We managed to keep selling expenses commensurate with increase in net sales. We have encountered significant onetime general and administrative expenses during this fiscal year with regards to legal professional compensation and other expenses associated with equity events that have occurred during this fiscal year.

We’re going to continue to address inflation-related cost going forward and it is our primary goal to be in position to take advantage of an economic recovery that is inevitable at some point. And that’s my report. Gary, I’d like to turn that back to you.

Gary Atkinson: All right. Thank you, Lionel. Before we move to Q&A, I’d like to finish on one final point. We believe the core demand drivers for our products remain unchanged. We are still the number one brand and the captain of the thriving karaoke category that is expanding, not shrinking. Consumers are interacting with music and singing more so than ever. Our goal is still to deliver a best-in-class product that brings people together to enjoy music and karaoke. Our technology provides the highest quality experience and capabilities to bring families and friends together to share music and community, whether that’s in home, in car or in person. To that point, we are not seeing any pullback in excitement or enthusiasm for the karaoke category.

We’re not forecasting to lose any shelf space in karaoke for the coming year, and we believe we will start to see a return to normal. Beyond this quarter, we are very excited about our emerging automotive segment that we successfully launched and demoed at CES last month. We look forward to providing more substantive updates in these efforts in the near future. With that, that concludes our report. I’d like to turn it over now to any questions that might be out there.

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Q&A Session

Operator:

Gary Atkinson: Okay. Well, I want to thank everybody today for attending our third quarter earnings update. We certainly look forward to talking to you all again at our next earnings report when we discuss the fourth quarter and the full fiscal year results. In the meantime, if anybody has any further questions, feel free to contact Brendan Hopkins or myself. Thank you all, everybody, and enjoy the rest of your day, take care.

Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time. Have a good day.