The Singing Machine Company, Inc. (NASDAQ:MICS) Q4 2023 Earnings Call Transcript

The Singing Machine Company, Inc. (NASDAQ:MICS) Q4 2023 Earnings Call Transcript July 14, 2023

Operator: Good afternoon, everyone, and welcome to the Singing Machine Fiscal 2023 Financial Results Earnings Call. My name is Travis and I’ll be your operator. As a reminder today’s call is being recorded. We will have a brief Safe Harbor and then we will get started. This call contains forward-looking statements under the U.S. Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks 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 filings. I would now like to turn the call over to Gary Atkinson, Company CEO. Please go ahead, sir.

Gary Atkinson: Thank you, Travis. Hi, good afternoon, everybody. This is Gary Atkinson, Singing Machine’s CEO. Joining me on today’s call is also Lionel Marquis, the company’s CFO and Bernardo Melo, the company Chief Revenue Officer. I’d like to start off today’s call by thanking everybody for taking the time to listen in and participate in our fiscal year 2023 earnings call. The 12 months ended March 31, 2023 was a challenging year for Singing Machine, not unlike what many other consumer electronics companies experienced last year. Coming out of the multi-year pandemic and subsequent global supply chain breakdown in calendar 2021, our retail partners, suppliers and logistics partners, all faced uncertainty as to the supply of semiconductors, manufacturing and transportation.

As we moved into Calendar 2022, these supply chain issues created a backlog of inventory that finally entered the retail pipeline in the early part of 2022. As the year went on, consumers coped with the negative economic impact of the strong inflationary pressures, rising interest rates, and the conflict in Ukraine. Retailers were faced with higher inventory levels and lowering consumer demand, which consequently caused them to cut new orders. All of these factors unfortunately combined together to negatively impact our 2022 holiday retail season, which again unfortunately dominated what was otherwise a very successful and encouraging year for our company and our team. Before our CFO, Lionel Marquis provides a deeper insight into our fiscal year financial performance, I would like to take a few minutes to highlight some of our key milestones that we achieved during the year.

First, we successfully uplisted to the NASDAQ in May of 2022. This was a major accomplishment for our team as this represented many months of hard work, persistence and diligence. As I’m sure all of you listening today are aware this is a very rigorous process. And we view our uplisting as a very positive indication of the level of transparency and accountability our company embraces on a daily basis. As part of the uplisting process, we elected to expand our Board of Directors significantly. We did this in part as a requirement for the uplisting but more importantly to solicit the advice, knowledge and experience of several very successful business leaders with expertise within the consumer electronics, legal, finance and accounting fields.

Their ongoing input and counsel will be greatly appreciated as we look to execute on the next phase of our growth plan. To uplist to a national exchange has immediately benefited the company during this fiscal year, as we successfully executed capital raises on better terms than what we have executed in the past. We successfully raised $4 million in a concurrent capital raise during our uplisting back last May. We also announced a $1.7 million at-the-market ATM transaction in October and closed it out in May of this year. Neither transaction involves any warrants or any other long term derivative preferential rights for investors, keeping our capital structure as simple and clean as possible for all shareholders. Moving on, operationally for fiscal ’23, we capitalized on the largest opportunity to expand our distribution, which came from Walmart, already our largest single retail partner today.

Walmart had done internal research and determined that karaoke belongs in electronics. It was not just a toy item. It was also an entertainment product for adults and families. They revamped their locations to make the consumer electronics department a central feature with a more prominent centralized location within their stores. As part of this development, Walmart asked our team to expand our shelf space commitment, showcasing our higher end karaoke products in the newly expanded electronics department. At the same time, we were able to maintain our shelf space in the toy department, showcasing some of our newer Toyatic [ph] offerings. The net impact for The Singing Machine was that we sold several million in incremental orders to Walmart throughout the fiscal year, offsetting some of what otherwise was a challenging holiday retail environment.

For this coming year between toys and electronics departments at Walmart, Walmart stores will carry a total of 14 Singing Machine products on its shelves. While Walmart presented one of our best domestic growth opportunities last year, the Canadian market represents our clearest path to growth in fiscal 2024 and beyond. As a result, we’ve doubled down our commitment and focus on this market, retaining one of the best-in-class sales reps in Canada. Her team has deep relationships with a number of key Big Box retailers. And we have seen in the period after closing the fiscal year, the steps that we took late in fiscal 2023 are now starting to have a positive impact on our international sales moving forward. Finally, we’ve examined our global karaoke growth opportunities.

We’ve ultimately concluded that the karaoke market can be divided into four different subsets. Number one is the in-home karaoke consumer product market. Number two is the high end karaoke commercial market. Number three, the emerging automotive market. And finally, number four, the hospitality market. For our company, we’ve been highly successful within the in-home market, and we enjoy the leading market share in North America for in-home karaoke product sales. However, as this year has proven, this segment presents certain challenges and volatility, namely low single digit industry sales growth, challenging supply chain and a strong reliance on holiday retail consumer demand. As part of our strategic plan, our team is seeking to accelerate our revenue growth, improve overall profitability and diversify our revenue sources.

In order to accomplish this, we have identified the automotive and hospitality space as areas where we intend to devote resources to accomplish these goals. Leading up to our coming annual shareholder meeting in September, our team has been hard at work on new initiatives that we believe will be encouraging relative to the overall outlook for the company. Our growth opportunities are compelling, and we believe we have the brand, the experience and the track record of innovation that should serve us well as we look to execute on these opportunities. With this in mind, I would like to now turn the call over to Lionel Marquis, company CFO, to give greater details on the results of the operations for fiscal 2023. Go ahead Lionel.

Lionel Marquis: Thanks, Gary. Good afternoon, everyone. Without any further delay, I’d like to walk through the results of operations of our fiscal year ending March 31, 2023. To start with revenues. The revenues for the fiscal year 2023 were approximately $39.3 million. This represents a decrease of approximately $8.2 million or 17.3%, as compared to approximately $47.5 million for fiscal year 2022. We experienced a broad based decrease in sales including at four out of our five box retail partners. The decrease in sales was largely due to two main factors. First, customers began the holiday season with excess inventory due to late deliveries in calendar 2021, and due to the lock-jammed supply chains during the latest stages of global pandemic.

This generated an overstock situation or position in the first few months of 2023, which made the retail buying representative slightly more conservative during the summer of 2022. Secondly, the news of economic recession. Inflation, interest rate hikes dampened our retail partners’ expectations for the holiday season, which all resulted in these customers taking more risk-averse approach to buying leading up to the 2022 holiday season. Several of our major customers required significant co-op promotion incentives on goods sold to assist in holiday inventory sell-through. Co-op promotion incentives for the fiscal year ended March 31, 2023 increased to $2.3 million or 6% of net sales as compared to approximately $1.7 million or 3.6% of net sales for the fiscal year ended March 31, 2022.

Talk about gross profit, gross profit for the fiscal 2023 was approximately $9.2 million, yielding a 23.4 percentage of total revenues, compared to approximately $10.8 million or 22.8% of sales for fiscal 2022. The net effect resulted in a decrease of approximately $1.6 million as compared to the same period in 2022. If margin had held constant at 2022 levels the decline in gross profits would have been slightly higher at $1.9 million. Gross profit margin for fiscal 2023 was 23.4% compared to 22.8% for fiscal ’22, an increase of 0.6 margin points. Contributing to this change was the fact that the company was able to successfully lower its overall logistics expense during the fiscal year saving approximately $1.7 million in cost compared to the prior year.

However, higher co-op costs to incentivize retailers to fulfill existing orders increased by approximately $0.6 million. In addition, the company incurred $0.8 million in non-cash expenses relating to inventory, reserves and inventory write-offs. Excluding these non-cash expenses cash gross margins actually improved 280 basis points to 0.60 [ph] basis points growth in fiscal 2023. Operating expenses, during the fiscal year ended March 31, 2023 operating expenses increased to $12.9 million, compared to $10.7 million during the prior year. This represented an increase of $2.2 million or 20.6%. Excluding formulaic selling expenses driven heavily off of direct sales performance, general and operating expenses increased approximately to approximately $9.2 million during the fiscal year ended March 31, 2023, compared to approximately $6.9 million during fiscal year March 31, 2022, an increase of $2.3 million.

There was an increase in legal, professional, investor relations and stock transfer costs of approximately $0.9 million, in part related to the public offering, NASDAQ, uplisting, change in control issues, regulatory filings, Delaware franchise fees, preparation costs related to the credit agreement with Fifth Third Bank and arbitration settlement of the alleged employment practice violation lawsuit against a former temporary employee. Excluding the Delaware fees of just over almost $200,000, almost all of the remaining $900,000 increase was largely one-time in nature. There was an increase in compensation expense of $500,000, primarily due to a one-time compensation expense of $400,000 related to a change in control and employment continuation agreement with the Chief Financial Officer.

The remaining $100,000 million in increased costs was primarily related to the expansion of the Board of Directors, which also included — substantial part of it was non-cash equity compensation. Okay, liquidity, as of March 31, 2023, had cash on hand of $2.9 million, as compared to cash on hand of $2.3 million on March 31, 2022. The company reduced its overall working capital investments by approximately $5.2 million during the year as the management team focused heavily on inventory management and building more liquid short term capital position. The company also heavily reduced its short term liabilities. Current liabilities as of March 31, decreased 49% from $12.0 million to $6.1 million during fiscal 2023. As a result, the company had no short term debt, meaning no revolving debt, and 67% less trade payables at fiscal yearend.

As a result of all these developments on March 31, 2023, our working capital was approximately $9.1 million. During the next 12 month period, we plan on financing our working capital needs primarily from a combination of vendor financing, revolving line of credit proceeds collected after the fiscal year ended from the completion of our ATM or at-the-market offering. The company believes that its cash on hand and working capital net of cash, cash expected to be generated from its operating forecast, along with availability of cash from its credit facilities will be adequate to meet the company’s liquidity requirements for at least the next 12 months of the filing — as of the filing of this report. I would like to now turn the call over to Bernardo Melo, our Chief Revenue Officer who will share some insight into our key accounts and current outlook as we build towards the 2023 holiday retail season.

Bernardo.

Bernardo Melo: Yeah, thank you, Lionel, and hello, everyone. Thanks for listening to our presentation today. I’m pleased to have the responsibility to provide you some — everyone with some color on how our key relationships have weathered the recent economic headwinds, as well as our best estimate for how we see coming holiday — for the coming holiday sales seasons. First, I’d like to provide a brief summary of the overall health and stability of our key account relationships. For year-to-date, our overall commitments from customers are in line with demand from last year. Our last largest accounts are being very precise about ordering, making commitments a little later in the year than normal, but we believe this should benefit out profitability in several ways.

First, our manufacturing partners are just really eager to win our businesses here. As obviously, China, things are tough there, they have been making some pricing concessions. For our domestic business, we’ve seen that the container costs decreased from at peak $18,000 to $20,000 a container, we’re seeing containers now ship as low as $2,000 in some cases. We also expect sell-through rates to decline dramatically due to the conservative buying patterns that they’re making. Similarly, we have our co-op costs being generally flat, as buyers truly need our inventory just to meet Black Friday sale surge. Lastly, we have seen chargebacks expenses and inventory reserves decreasing for the same reason. While these costs are all expected to decrease, our sales prices to our retail partners remain unchanged.

There’s virtually no restock remaining from the lingering effects of COVID-19. We successfully worked all of the excess off without inventory write-downs or bad debt from our retail partners. We have been in a very clean net position with our clients. And we expect significant reduction or remain flat in our co-op or other post sales adjustments that normally negatively impact our gross margin. As a result, we anticipate gross margins to greatly improve and helping to impact net earnings even as net sales remain largely unchanged. Looking beyond the holiday season, we’re also executing a number of new and exciting fronts to help drive revenues into 2024 and beyond. We’re expanding our relationship with Walmart, we see Amazon becoming a strong source of growth in our online sales effort, as we have recently signed a new agency that’s top tier in this industry.

So we’re seeing some new strategies for Amazon and we think we can make a strong push there. We’re also very bullish on the prospects of landing one or more pilot accounts in the auto space. And our marketing efforts are expected to ramp up as we build market awareness for our integrated karaoke solutions, and customization capabilities, as we look to become embedded into the outdoor entertainment console. I look forward to provide further updates soon. With that I’ll turn the call over back to our CEO, Gary to wrap up our presentation.

Gary Atkinson: Perfect, thank you Bernardo. I want to make sure we save some time here for some Q&A. But finally, I just — I would like to emphasize how proud I am of our team’s accomplishments during this past year. Obviously we’re, as a management team, we’re disappointed in the overall results from a financial perspective. But given how fiscal 2023 began, with a great deal of uncertainty, and retailers adjusting to the lingering effects of COVID and its impacts on logistics, inventory, and obviously retail consumers, I felt like we adapted rapidly. We positioned our brand and products in a way to capture as much market share as possible, especially with the overall challenges that we’ve all been seeing in the market. And finally, it’s equally important to say that we’ve made a lot of great progress on a lot of exciting new fronts.

So transitioning to NASDAQ, taking key steps to enter the automotive and soon to be hospitality spaces within karaoke, are all part of our long term focus on sustained profitable growth, maintaining our best-in-class brand, and world class partnerships in all we do. So that being said, I believe 2023 reflected our vision well, and the milestones that we accomplished are just only the beginning of where we intend to go. So with that being said, I’d like to turn the call back over to our moderator and open it up now for any Q&A.

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Q&A Session

Operator: Yes, sir. [Operator Instructions] We do have a question from Dodd Richards [ph], private investor.

Unidentified Analyst: Okay. I would like to ask, was there anything about the holiday season that you were unprepared for otherwise, could have been executed better? And plus follow-up that with out of the holiday season, this holiday season, buying of large retailers compared to last year?

Gary Atkinson: Yeah, I can, you want to jump on that Bernardo, go for it.

Bernardo Melo: Yeah, I mean, I just — I’ll give some insight. And then you could go ahead. But I think the biggest thing that we were unprepared for is our retailers in the past have been really good about committing to their forecasts and their order plan. And it had never changed for all the years, we’ve been dealing with those retailers and they delayed the orders longer and longer into the season until finally, we had to increase our co-ops to sort of entice them, and assure them that, that we were going to get sell-through, but yeah, just the lateness of them, of how they reacted and how that affected our business. This season we’ve gone — everybody’s gone a little bit conservative. I mean, we are still not out of the woods yet with how the economy is, but we have a good plan. And orders are starting to ship now in late July and August. And we should see a good August and September going through for the holiday season.

Gary Atkinson: And I’ll also just add to that, too, by saying that, I think the biggest difference we’re seeing this year is our retailers, their distribution pipeline is much cleaner this year than it was last year. So last year, we entered the holiday season, there was a lot of inventory that had piled up after the supply chain struggles. And so the retailers had to clean through that inventory first before they started placing new purchase orders. Whereas this year, they’ve already had a long chance to wipe through that inventory. And we were starting off on a much cleaner slate. So we’re feeling more confident this year that it’s — we should be seeing more repeat replenishment orders coming in just given how clean the channels are. I hope that answers the question.

Bernardo Melo: Yeah, and I think one thing also that I just know, Gary that one thing we want to really emphasize to everybody, we have not lost or decreased any shelf space. As a matter of fact, there’s some increases in shelf space. The numbers might be a little bit more conservative, but our presence on the shelf space is still remaining very strong and in some cases has increased in size. So I did want to point that out.

Unidentified Analyst: I do have a follow-up question, if you don’t mind. How do you see the supply chains evolving? I know you mentioned the container price is coming down offering now. Is there a lot of noise around global logistics, especially with regards to China right now? And do you anticipate this having any impact on your ability to ship product for the foreseeable future?

Gary Atkinson: Yeah, we’re seeing I mean — yeah, sure. I mean, we’re seeing and obviously the global logistics and supply chain market has really settled down considerably since 2021, 2022. We’re seeing almost like record lows for container prices to ship a container from China to Los Angeles. They’re now down to $2,000 a container or less and previously, they’d been as high as $20,000 a container. So we’re seeing significant cost savings just bringing goods into the States. And in general, trucking is getting easier. Ports seem to be flowing better. So it’s really a return kind of back to normal, if I can say that. And so everything right now seems to be moving smoothly.

Unidentified Analyst: Perfect. Thank you for taking my question.

Gary Atkinson: All right. Thank you.

Operator: [Operator Instructions] Our next question comes from Scott David, private investor.