SINGING MACHINE CO INC - Quarter Report: 2009 June (Form 10-Q)
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934
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| For quarter ended June 30, 2009 |
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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| For the transition period from _____ to ______. |
Commission File Number 0 -
24968
(Exact
Name of Registrant as Specified in its Charter)
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DELAWARE
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95-3795478
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(State of
Incorporation )
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(IRS Employer I.D.
No.)
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6601 Lyons Road, Building
A-7, Coconut Creek, FL 33073
(Address
of principal executive offices)
(954)
596-1000
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
One)
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Large accelerated
filer o
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Accelerated filer
o
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Non-accelerated
filer o
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Smaller Reporting
Company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes o No o
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
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CLASS
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NUMBER OF SHARES
OUTSTANDING
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Common Stock, $0.01
par value
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37,449,432 as of
August 19, 2009
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THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
INDEX
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Page
No.
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PART
I. FINANCIAL INFORMATION
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Item
1.
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Financial
Statements
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Consolidated
Balance Sheets – June 30, 2009(Unaudited) and March 31,
2009
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3
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Consolidated
Statements of Operations - Three months ended June 30, 2009 and
2008(Unaudited)
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4
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Consolidated
Statements of Cash Flows - Three months ended June 30, 2009 and 2008
(Unaudited)
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5
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Notes
to Consolidated Financial Statements-June 30, 2009
(Unaudited)
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6-13
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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13-17
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Item
4T.
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Controls
and Procedures
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17
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| PART II. OTHER INFORMATION | |||
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Item
1.
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Legal
Proceedings
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18
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Item
1A.
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Risk
Factors
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18
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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18
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Item
3.
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Defaults
Upon Senior Securities
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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18
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Item
5.
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Other
Information
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18
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Item
6.
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Exhibits
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18
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SIGNATURES
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19
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2
The
Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
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June
30, 2009
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March
31, 2009
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(Unaudited)
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(Audited)
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|||||||
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Assets
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Current
Assets
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||||||||
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Cash
and cash equivalents
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$ | 616,865 | $ | 957,163 | ||||
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Accounts
receivable, net of allowances of $327,293 and $261,980,
respectively
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591,902 | 972,345 | ||||||
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Due
from factor
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4,004 | 73,854 | ||||||
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Inventories,net
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4,211,919 | 4,729,667 | ||||||
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Prepaid
expenses and other current assets
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420,824 | 526,563 | ||||||
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Total
Current Assets
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5,845,514 | 7,259,592 | ||||||
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Property and
Equipment, net
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822,395 | 886,770 | ||||||
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Other
Non-Current Assets
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179,362 | 179,362 | ||||||
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Total
Assets
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$ | 6,847,271 | $ | 8,325,724 | ||||
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Liabilities
and Shareholders' Equity
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||||||||
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Current
Liabilities
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||||||||
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Accounts
payable
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$ | 1,352,525 | $ | 2,588,769 | ||||
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Due
to related parties - net
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619,569 | 1,498,391 | ||||||
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Accrued
expenses
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348,231 | 422,260 | ||||||
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Short-term
loan - bank
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1,742,140 | - | ||||||
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Current
portion of long-term financing obligation
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18,186 | 18,186 | ||||||
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Customer
credits on account
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1,643,994 | 908,449 | ||||||
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Deferred
gross profit on estimated returns
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73,125 | 288,039 | ||||||
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Total
Current Liabilities
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5,797,770 | 5,724,094 | ||||||
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Long-term
financing obligation, less current portion
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19,702 | 22,733 | ||||||
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Total
Liabilities
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5,817,472 | 5,746,827 | ||||||
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Shareholders'
Equity
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||||||||
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Preferred
stock, $1.00 par value; 1,000,000 shares authorized, no shares issued and
outstanding
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- | - | ||||||
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Common
stock, Class A, $.01 par value; 100,000 shares authorized; no shares
issued and outstanding
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- | - | ||||||
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Common
stock, $0.01 par value; 100,000,000 shares authorized; 37,449,432 and
37,449,432 shares issued and outstanding
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374,494 | 374,494 | ||||||
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Additional
paid-in capital
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19,079,689 | 19,075,750 | ||||||
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Accumulated
deficit
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(18,424,384 | ) | (16,871,347 | ) | ||||
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Total
Shareholders' Equity
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1,029,799 | 2,578,897 | ||||||
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Total
Liabilities and Shareholders' Equity
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$ | 6,847,271 | $ | 8,325,724 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
3
The
Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
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For
Three Months Ended
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||||||||
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June
30, 2009
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June
30, 2008
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Net
Sales
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$ | 814,008 | $ | 1,770,346 | ||||
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Cost
of Goods Sold
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1,099,630 | 1,567,697 | ||||||
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Gross
(Loss) Profit
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(285,622 | ) | 202,649 | |||||
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Operating
Expenses
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||||||||
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Selling
expenses
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304,141 | 221,534 | ||||||
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General
and administrative expenses
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860,254 | 922,199 | ||||||
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Depreciation
and amortization
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99,752 | 101,161 | ||||||
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Total
Operating Expenses
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1,264,147 | 1,244,894 | ||||||
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Loss
from Operations
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(1,549,769 | ) | (1,042,245 | ) | ||||
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Other
Expenses
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Interest
expense
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(3,268 | ) | (7,316 | ) | ||||
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Loss
before taxes
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(1,553,037 | ) | (1,049,561 | ) | ||||
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Provision
for income taxes
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- | - | ||||||
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Net
Loss
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$ | (1,553,037 | ) | $ | (1,049,561 | ) | ||
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Loss
per Common Share
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||||||||
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Basic
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$ | (0.04 | ) | $ | (0.03 | ) | ||
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Diluted
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$ | (0.04 | ) | $ | (0.03 | ) | ||
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Weighted
Average Common and Common
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||||||||
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Equivalent
Shares:
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Basic
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37,449,432 | 31,990,298 | ||||||
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Diluted
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37,449,432 | 31,990,298 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements
4
The Singing Machine Company, Inc. and
Subsidiaries
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
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For
Three Months Ended
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||||||||
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June
30, 2009
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June
30, 2008
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Cash
flows from operating activities
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Net
Loss
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$ | (1,553,037 | ) | $ | (1,049,561 | ) | ||
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Adjustments
to reconcile net loss to net cash and cash equivalents provided by (used
in) operating activities:
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Depreciation
and amortization
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99,752 | 101,161 | ||||||
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Inventory
reserve charge
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181,152 | 9,267 | ||||||
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Change
in allowance for bad debts
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65,313 | (83,072 | ) | |||||
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Stock
compensation
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3,939 | 3,640 | ||||||
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Deferred
gross profit on estimated sales returns
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(214,914 | ) | (157,052 | ) | ||||
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Changes
in assets and liabilities:
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||||||||
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(Increase)
Decrease in:
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||||||||
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Accounts
receivable
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950,861 | 959,838 | ||||||
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Inventories
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336,605 | (1,529,507 | ) | |||||
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Prepaid
expenses and other current assets
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105,739 | (75,667 | ) | |||||
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Other
non-current assets
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- | (5,747 | ) | |||||
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Increase
(Decrease) in:
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||||||||
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Accounts
payable
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(1,236,244 | ) | 2,144,814 | |||||
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Accounts
payable - related party
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(878,822 | ) | - | |||||
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Accrued
expenses
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(74,028 | ) | (59,167 | ) | ||||
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Customer
credits on account
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735,545 | (205,334 | ) | |||||
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Net
cash (used in) provided by operating activities
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(1,478,149 | ) | 53,613 | |||||
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Cash
flows from investing activities
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||||||||
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Purchase
of property and equipment
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(35,377 | ) | (276,769 | ) | ||||
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Net
cash used in investing activities
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(35,377 | ) | (276,769 | ) | ||||
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Cash
flows from financing activities
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||||||||
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Borrowings
from factor, net
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69,850 | 56,042 | ||||||
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Net
payments pursuant to factoring facility
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(635,731 | ) | - | |||||
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Net
proceeds from short-term bank loan
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1,742,140 | - | ||||||
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Payments
on long-term financing obligation
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(3,031 | ) | - | |||||
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Net
loan proceeds from related parties
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- | 180,448 | ||||||
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Net
cash provided by financing activities
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1,173,228 | 236,490 | ||||||
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Change
in cash and cash equivalents
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(340,298 | ) | 13,334 | |||||
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Cash
and cash equivalents at beginning of period
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957,163 | 447,816 | ||||||
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Cash
and cash equivalents at end of period
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$ | 616,865 | $ | 461,150 | ||||
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Supplemental
Disclosures of Cash Flow Information:
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||||||||
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Cash
paid for Interest
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$ | 3,268 | $ | 7,316 | ||||
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Supplemental
Disclosures of Non-Cash Financing Activities:
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||||||||
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Payment
of trade payable with stock
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$ | - | $ | 197,500 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
5
THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
June
30, 2009
NOTE
1 – BASIS OF PRESENTATION
OVERVIEW
The
Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”,
“The Singing Machine”, “we” or “us”), and wholly-owned subsidiaries SMC
(Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc.
(“SMC-L”), SMC-Music, Inc.(“SMC-M”), and Singing Machine Holdings Ltd. (a B.V.I.
company) are primarily engaged in the development, marketing, and sale of
consumer karaoke audio equipment, accessories, musical instruments and musical
recordings. The products are sold directly to distributors and retail
customers.
The
preparation of The Singing Machine’s financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Future events and their effects cannot
be determined with absolute certainty; therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the Company’s financial
statements. Management evaluates its estimates and assumptions continually.
These estimates and assumptions are based on historical experience and other
factors that are believed to be reasonable under the circumstances.
NOTE
2-SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION.
The accompanying consolidated financial statements include the accounts
of the Company, Macau Subsidiary, SMC-L, SMC-M and The Singing Machine Holdings
Ltd. (a B.V.I. company). All inter-company accounts and transactions
have been eliminated in consolidation for all periods presented.
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS. The consolidated financial statements for the three months
ended June 30, 2009 and 2008 are unaudited. In the opinion of management, such
consolidated financial statements include all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of the consolidated
financial position and the consolidated results of operations. The consolidated
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full year. The consolidated balance sheet
information as of March 31, 2009 was derived from the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K. The
interim consolidated financial statements should be read in conjunction with
that report.
USE OF ESTIMATES. The Singing
Machine makes estimates and assumptions in the ordinary course of business
relating to sales returns and allowances, inventory reserves, warranty reserves,
and reserves for promotional incentives that affect the reported amounts of
assets and liabilities and of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Historically, past changes to these
estimates have not had a material impact on the Company’s financial condition.
However, circumstances could change which may alter future
expectations.
COLLECTIBILITY OF ACCOUNTS
RECEIVABLE. The Singing Machine’s allowance for doubtful accounts is
based on management’s estimates of the creditworthiness of its customers,
current economic conditions and historical information, and, in the opinion of
management, is believed to be an amount sufficient to respond to normal business
conditions. Management sets 100% reserves for customers in bankruptcy and other
reserves based upon historical collection experience. Should business conditions
deteriorate or any major customer default on its obligations to the Company,
this allowance may need to be significantly increased, which would have a
negative impact on operations.
ACCOUNTS RECEIVABLE
FACTORING. The Company’s factoring facility only finances
non-recourse accounts receivable. Such receivables are considered to
have been sold in accordance with FASB 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities. Accordingly, advances received pursuant to the factoring
facility have been netted against the accounts receivable on the accompanying
Balance Sheet.
RESERVES ON INVENTORIES. The
Singing Machine reduces inventory on hand to its net realizable value on an
item-by-item basis when it is apparent that the expected realizable value of an
inventory item falls below its original cost. A charge to cost of sales results
when the estimated net realizable value of specific inventory items declines
below cost. Management regularly reviews the Company’s inventories for such
declines in value.
FOREIGN
CURRENCY TRANSLATION
The
functional currency of the Macau Subsidiary is the Hong Kong dollar. Such
financial statements are translated to U.S. dollars using year-end rates of
exchange for assets and liabilities, and average rates of exchange for the year
for revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions and translations were not material during the periods
presented.
6
CONCENTRATION
OF CREDIT RISK
The
Company maintains cash balances in foreign financial
institutions. The amounts at June 30, 2009 and March 31, 2009 are
$446,223 and $666,643 respectively. At times the Company maintains
cash in United States bank accounts that are in excess of the Federal Deposit
Insurance Corporation (“FDIC”) insured amounts of up to $250,000. As
of June 30, 2009 and March 31, 2009 the amounts uninsured in United States banks
was an additional $0 and $1,438 respectively.
INVENTORY
Inventories
are comprised of electronic karaoke equipment, accessories, electronic musical
instruments, electronic toys and compact discs and are stated at the lower of
cost or market, as determined using the first in, first out method. The Singing
Machine reduces inventory on hand to its net realizable value on an item-by-item
basis when it is apparent that the expected realizable value of an inventory
item falls below its original cost. A charge to cost of sales results when the
estimated net realizable value of specific inventory items declines below cost.
Management regularly reviews the Company’s investment in inventories for such
declines in value.
REVENUE
RECOGNITION
Revenue
from the sale of equipment, accessories, and musical recordings are recognized
upon the later of: (a) the time of shipment or (b) when title passes to the
customers and all significant contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. Net sales are comprised of gross sales net of actual and estimated
future returns, discounts and volume rebates.
STOCK
BASED COMPENSATION
The
Company began to apply the provisions of Share-Based Payments (“SFAS 123 (R)”),
starting on January 1, 2006. SFAS 123 (R) which became effective
after June 15, 2005, replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion (“APB”) No. 25,
Accounting for Stock Issued to Employees. SFAS 123 (R) requires all share-based
payments to employees including grants of employee stock options, be measured at
fair value and expensed in the consolidated statement of operations over the
service period (generally the vesting period). Upon adoption, the Company
transitioned to SFAS 123 (R) using the modified prospective application, whereby
compensation cost is only recognized in the consolidated statements of
operations beginning with the first period that SFAS 123 (R) is effective and
thereafter, with prior periods’ stock-based compensation still presented on a
pro forma basis. Under the modified prospective approach, the provisions of SFAS
123 (R) are to be applied to new employee awards and to employee awards
modified, repurchased, or cancelled after the required effective date.
Additionally, compensation cost for the portion of employee awards for which the
requisite service has not been rendered that are outstanding as of the required
effective date shall be recognized as the requisite service is rendered on or
after the required effective date. The compensation cost for that portion of
employee awards shall be based on the grant-date fair value of those awards as
calculated for either recognition or pro-forma disclosures under SFAS 123. The
Company continues to use the Black-Scholes option valuation model to value stock
options. As a result of the adoption of SFAS 123 (R), the Company
recognized a charge of $3,939 (included in selling, general and administrative
expenses) for the three months ended June 30, 2009 associated with the expensing
of stock options. For the three months ended June 30, 2009 and June 30, 2008,
the stock option expense was $3,936 and $3,640
respectively. Employee stock option compensation expense in
fiscal years 2010 and 2009 includes the estimated fair value of options granted,
amortized on a straight-line basis over the requisite service period for the
entire portion of the award.
The fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the assumptions outlined below. For the
quarter ended June 30 2009, the Company took into consideration guidance under
SFAS 123 (R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing
and updating assumptions. The expected volatility is based upon historical
volatility of our stock and other contributing factors. The expected term is
based upon observation of actual time elapsed between date of grant and exercise
of options for all employees. Previously such assumptions were determined based
on historical data.
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|
·
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For
the three months ended June 30, 2009: expected dividend yield 0%,
risk-free interest rate of 0.57% to 1.41%, volatility 70.22% and 80.07%
and expected term of three years.
|
|
|
·
|
For
the three months ended June 30, 2008: expected dividend yield 0%,
risk-free interest rate of 1.55%, volatility of 67.41% and expected term
of one year.
|
ADVERTISING
Costs
incurred for producing and publishing advertising of the Company are charged to
operations as incurred. The Company has entered into cooperative advertising
agreements with its major clients that specifically indicated that the client
has to spend the cooperative advertising fund upon the occurrence of mutually
agreed events. The percentage of the cooperative advertising allowance ranges
from 2% to 5% of the purchase. The clients have to advertise the Company’s
products in the client’s catalog, local newspaper and other advertising media.
The client must submit the proof of the performance (such as a copy of the
advertising showing the Company’s products) to the Company to request for the
allowance. The client does not have the ability to spend the allowance at their
discretion. The Company believes that the identifiable benefit from the
cooperative advertising program and the fair value of the advertising benefit is
equal or greater than the cooperative advertising expense. Advertising expense
for the three months ended June 30, 2009 and 2008 was $64,599 and $40,160,
respectively.
7
RESEARCH
AND DEVELOPMENT COSTS
All
research and development costs are charged to results of operations as incurred.
These expenses are shown as a component of selling, general and administrative
expenses in the consolidated statements of operations. For the three
months ended June 30, 2009 and 2008, these amounts totaled $43,495 and $1,949,
respectively.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires
disclosures of information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation.
The
carrying amounts of the Company’s short-term financial instruments, including
accounts receivable, due from factors, accounts payable, customer credits on
account, accrued expenses and loans payable to related parties approximates fair
value due to the relatively short period to maturity for these
instruments.
RECLASSIFICATIONS
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2009, the the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 168 “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” SFAS No. 168 will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) to be applied
by nongovernmental entities. According to SFAS No. 168, rules and interpretive
releases of the Securities and Exchange Commission (SEC) are also sources of
authoritative GAAP for SEC registrants. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009 at which time the Codification will supersede all
then-existing non-SEC accounting and reporting standards. The
adoption of SFAS No. 168 is not expected to have a material impact on our
financial statements.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“FASB 165”). The purpose of SFAS 165 is
to establish a general standard of accounting for the disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The statement outlines the
following:
|
|
·
|
The
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial
statements
|
|
|
·
|
The
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial
statements
|
|
|
·
|
The
disclosures that an entity should make about events or transactions that
occurred after the balance sheet
date.
|
FASB 165
is effective for interim and annual periods ending after June 15,
2009. The adoption of FASB 165 did not have any impact on our
consolidated financial statements.
NOTE
3- INCOME TAXES
The
Company follows Statement of Financial Accounting Standards No. 109 “Accounting
for Income Taxes” (“SFAS No. 109”) and FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) which clarifies the requirements of SFAS No. 109
relating to the recognition of income tax benefits. . Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax base. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. If it is more likely than not that some portion of a deferred tax asset
will not be realized, a valuation allowance is recognized. FIN 48 provides a
two-step approach to recognizing and measuring tax benefits when the benefits’
realization is uncertain. The first step is to determine whether the benefit is
to be recognized; the second step is to determine the amount to be
recognized:
|
|
·
|
Income
tax benefits should be recognized when, based on the technical merits of a
tax position, the company believes that if a dispute arose with the taxing
authority and were taken to a court of last resort, it is more likely than
not (i.e., a probability of greater than 50 percent) that the tax position
would be sustained as filed; and
|
8
|
|
·
|
If
a position is determined to be more likely than not of being sustained,
the reporting company should recognize the largest amount of tax benefit
that is greater than 50 percent likely of being realized upon ultimate
settlement with the taxing
authority.
|
Significant
management judgment is required in developing The Singing Machine’s provision
for income taxes, including the determination of foreign tax liabilities,
deferred tax assets and liabilities and any valuation allowances that might be
required against the deferred tax assets. Management evaluates its ability to
realize its deferred tax assets on a quarterly basis and adjusts its valuation
allowance when it believes that it is more likely that the asset will not be
realized.
As of
June 30, 2009 and March 31, 2009, The Singing Machine had gross deferred tax
assets of approximately $3.6 million and $3.1 million, respectively, against
which the Company recorded valuation allowances totaling approximately $3.6
million and $3.1 million, respectively.
NOTE
4- INVENTORIES
Inventories
are comprised of the following components:
|
June
30,
|
March
31,
|
|||||||
|
2009
|
2009
|
|||||||
|
Finished
Goods
|
$ | 4,957,308 | $ | 5,475,056 | ||||
|
Inventory
in Transit
|
- | - | ||||||
|
Less:
Inventory Reserve
|
(745,389 | ) | (745,389 | ) | ||||
|
Net
Inventories
|
$ | 4,211,919 | $ | 4,729,667 | ||||
Inventory
consigned to customers at June 30, 2009 and March 31, 2009 were $356,213 and
$352,214 respectively.
NOTE
5 - ACCOUNTS RECEIVABLE FACTORING FACILITY
On August
28, 2008, the Company executed a three-party Banking Facility agreement between
the Company’s wholly owned subsidiary SMC (Commercial Offshore De Macau)
Limitada (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and Branch
Banking and Trust Company (“BB&T” or “Factor”). The
agreement is comprised of three facilities including a maximum of $7.0 million
on 80% of qualified accounts receivable, a maximum letter of credit facility of
$4.0 million for accounts payable financing and a maximum of $2.0 million for
the negotiation of export bills under letter of credit.
According
to the factoring facility, BB&T will serve as the correspondent factor for
the Lender and does not advance funds to the Company directly. The Company
assigns the proceeds from customers to the Lender and the Lender advances funds
to the Borrower. The
maximum amount for the advance is approximately $7.0 million or 80% of the
qualified accounts receivable, which ever is higher. The Factor
assumes credit risk on approved accounts (factor risk accounts). For
non-approved accounts, the Company will assume the credit risk (client risk
accounts). The factoring fees are .675% of the gross invoice for both
client risk (recourse) and factor risk (non-recourse) accounts. As of June 30,
2009 there was a total of $976,030 of open accounts receivable assigned to the
Factor. The Company assumed credit risk (recourse) in the amount of
$512,321. Credit risk on the remaining factor assigned receivables in
the amount of $463,709 was assumed by the Factor (non-recourse). This agreement
was effective October 16, 2008 and replaces a previous four-party agreement
between the Company, Starlight Marketing Limited (a related party), Standard
Chartered Bank (Hong Kong), Limited and CIT (“Old Factor”). As of June 30, 2009
and March 31, 2009 the outstanding amount due
from factors was $4,004 and $73,854
respectively. The amounts represent excess of customer payments
received by BB&T that had yet to be transferred to DBS bank. As
of June 30, 2009 and March 31, 2009 the outstanding amount under the factoring
facility with DBS Bank was $163,381 and $799,112 respectively. This amount
represents advances made by the Bank on non-recourse receivables and have been
offset against accounts receivable in the accompanying consolidated balance
sheet. The terms of the agreement are more particularly described in Note
8.
9
A summary
of property and equipment is as follows:
|
USEFUL
|
June
30,
|
March
31,
|
||||||||||
|
LIFE
|
2009
|
2009
|
||||||||||
|
Computer
and office equipment
|
5
years
|
$ | 657,948 | $ | 652,235 | |||||||
|
Furniture
and fixtures
|
5-7
years
|
|
220,315 | 220,315 | ||||||||
|
Leasehold
improvement
|
*
|
153,993 | 153,993 | |||||||||
|
Warehouse
equipment
|
7
years
|
101,521 | 86,599 | |||||||||
|
Molds
and tooling
|
3
years
|
1,567,207 | 1,552,465 | |||||||||
| 2,700,984 | 2,665,607 | |||||||||||
|
Less:
Accumulated depreciation and amortization
|
(1,878,589 | ) | (1,778,837 | ) | ||||||||
| $ | 822,395 | $ | 886,770 | |||||||||
* Shorter
of remaining term of lease or useful life
NOTE
7 - CUSTOMER CREDITS ON ACCOUNT
Customer
credits on account represent customers that have received credits in excess of
their accounts receivable balance. These balances were reclassified for
financial statement purposes as current liabilities until paid or applied to
future purchases.
NOTE
8 – FINANCING
On
February 12, 2008 the Macau Subsidiary entered into a Banking Facilities
agreement with Heng Seng Bank Limited (“Bank”). Under the terms of
the agreement, the Macau Subsidiary had access to $5,100,000 in total facilities
including $500,000 for payment of goods financed under the bank’s letters of
credit, $3,000,000 for negotiation of discrepant documents presented under
export letters of credit and a factoring facility to a maximum of
$1,600,000. Interest on open balances was due and payable monthly at
a rate of 2% per annum above LIBOR (London Interbank Offered
Rate). The amounts borrowed were collaterized by a promissory note
from the Macau Subsidiary of $5.8 million and an unlimited written guarantee
from the Company. There were no amounts due to the Bank as of June
30, 2009 and March 31, 2009 respectively. In July 2009 the Bank
informed the Company that these facilities have been rescinded effective
immediately.
On July
16, 2008 SMC-L entered into a financing arrangement with Westover Financial,
Inc. for the purchase of four forklifts for the California logistics
operations. The terms of the agreement required an initial payment of
$18,691 and 36 monthly payments of $1,516. On June 30, 2009 the
remaining amount due on this obligation was $37,888 of which $18,186 is due
within the next twelve months and the remaining $19,702 due after one
year.
On August
28, 2008, the Company executed a three-party Banking Facility agreement between
the Macau Subsidiary (“Borrower”), DBS Bank (Hong Kong) Limited (“Lender”) and
BB&T (“Factor”). The agreement provides for credit facilities to a maximum
of $13.0 million consisting of the following:
|
|
·
|
Maximum
of $7.0 million on 80% of qualified accounts
receivable.
|
|
|
·
|
Maximum
letter of credit facility of $4.0 million for accounts payable
financing.
|
|
|
·
|
Maximum
$2.0 million negotiation of export bills under letter of
credit.
|
Interest
on letter of credit facilities and discounting charges on accounts receivable
advances will be charged at a rate of 1.5% per annum over LIBOR (London
Interbank Offered Rate). The credit facility is secured with
corporate guarantees from the Company as well as a $2.0 million guarantee from
Starlight International Holdings Limited, a related party
(“Starlight”). BB&T will serve as the correspondent factor for
the Lender for the Company’s qualified North American accounts receivable.
BB&T does not advance funds to the Company directly. The Company assigns the
proceeds from customers to the Lender and the Lender advances funds to the
Borrower. The combined factoring fees will be .675% of the
gross invoice for all factored accounts. This agreement is effective
October 16, 2008 and replaces the previous four-party agreement between the
Company, Starlight, Standard Chartered Bank (Hong Kong), Limited and CIT (“Old
Factor”).
As of
June 30, 2009 and March 31, 2009 the outstanding amount due from
factors was $4,004 and $73,854 respectively. The amounts
represent excess of customer payments received over amounts
borrowed. As of June 30, 2009 and March 31, 2009 the
outstanding amount due to DBS Bank was $163,381 and $799,112, respectively
pursuant to the factoring facility. The amount has been offset
against accounts receivable in the accompanying consolidated balance
sheet.
During
the first quarter ended June 30, 2009, the Company obtained short term bank
financing from DBS Bank in the amount of $1,742,140 pursuant to an accounts
payable financing facility. The proceeds were used to pay China
manufacturing vendors. The loans are secured with corporate
guarantees from the Company as well as a guarantee from Starlight
and bear interest at 2.7%. The amounts are due to DBS Bank as
follows:
|
|
·
|
$1,000,000
– July 6, 2009 (See Note 14 – Subsequent Events)
|
|
|
·
|
$ 453,530
– September 14, 2009
|
10
|
|
·
|
$ 288,610
– September 15, 2009
|
NOTE
9 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
There is
currently no pending litigation against the Company, however the Company may be
subject to various legal proceedings and other claims that arise in the ordinary
course of business.
INCOME
TAXES
In a
letter dated July 21, 2008 the Internal Revenue Service (IRS) notified the
former foreign subsidiary of an unpaid tax balance on Income Tax Return of a
Foreign Corporation (Form 1120-F) for the period ending March 31, 2003 for
International SMC (HK) Limited “ISMC (HK)”, a former
subsidiary. According to the notice ISMC (HK) has an unpaid balance
due in the amount of $241,639 that includes an interest assessment of
$74,125. ISMC (HK) was sold in its entirety by the Company on
September 25, 2006 to a British Virgin Islands company
(“Purchaser”). The sale and purchase agreement with the Purchaser of
ISMC (HK) specifies that the Purchaser would ultimately be responsible for any
liabilities, including tax matters. On June 3, 2009 the IRS filed a
federal tax lien in the amount of approximately $170,000 against ISMC (HK) under
ISMC (HK)’s federal Tax ID. Management sought independent legal counsel to
assess the potential liability, if any, on the Company. In a
memorandum from independent counsel, the conclusion based on the facts presented
was that the IRS would not prevail against the Company for collection of the
ISMC (HK) income tax liability based on:
|
|
·
|
The
Internal Revenue Service’s asserted position that the Company is not the
taxpayer.
|
|
|
·
|
The
1120- F tax liability was recorded under the taxpayer identification
number belonging to ISMC and not the Company’s taxpayer identification
number
|
|
|
·
|
The
IRS would be barred from recovery since it failed to assess or issue a
notice of levy within the three year statute of
limitations
|
Based on
the conclusion reached in the legal memorandum, management does not believe that
the Company will have any further liability with regards to this
issue.
LEASES
The
Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida and City of Industry,
California. The leases expire at varying dates. Rent expense for the three
months ended June 30, 2009 and 2008 was $225,557 and $141,121
respectively.
In
addition, the Company maintains various warehouse equipment and computer
equipment operating leases.
Future
minimum lease payments under property and equipment leases with terms exceeding
one year as of June 30, 2009 are as follows:
|
Property
Leases
|
Equipment
Leases
|
|||||||
|
For
period ending June 30,
|
||||||||
|
2010
|
$ | 782,992 | $ | 8,788 | ||||
|
2011
|
636,476 | 4,166 | ||||||
|
2012
|
655,571 | - | ||||||
|
2013
|
560,470 | - | ||||||
| $ | 2,635,509 | $ | 12,954 | |||||
LICENSE
AGREEMENTS
On May
10, 2006, we entered into a two-year license agreement with MGA Entertainment,
Inc. to produce and distribute a variety of karaoke products based on MGA’s
BRATZ™ franchise, one of the world’s leading toy lines and girls’ lifestyle
brands, in North America, Europe and Australia. These karaoke products include a
TFT DVD karaoke system, sing-a-long cassette players, deluxe microphones,
electronic keyboards and an electronic drum. The license agreement
contains a minimum guarantee payment term.
On
November 21, 2006 we also entered into a three-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA’s BRATZ™ franchise, one of the world’s leading toy lines
and girls’ lifestyle brands, in North America, New Zealand, Chile and Australia.
These consumer electronic products include boom boxes, clock radios and portable
DVDs. The license agreement contains a minimum guarantee payment
term.
11
As of
June 30, 2009 the total amount due to MGA Entertainment, Inc. was
$407,099. This amount includes $165,099 of additional royalties due
and is included in accrued expenses on the accompanying consolidated balance
sheet. In addition the Company owes MGA Entertainment, Inc. $242,000 for
guaranteed minimum advances due by December 31,2008. This amount has not been
included in the consolidated financial statements since it would be considered a
“gross-up” of the balance sheet. The amounts due have not
been paid due to an ongoing lawsuit between Mattel Inc. and MGA Entertainment
Inc. wherein Mattel has legally challenged MGA’s trademark rights to the BRATZ™
franchise.
NYSE
AMEX EQUITIES STATUS
On June
22, 2009 the Company received notice from NYSE Amex Equities (“AMEX”) that it
has determined that our common stock will be delisted and no longer trade on the
exchange. The Company’s Board of Directors board of directors decided
that it was not in the best interest of the Company and its shareholders to
expend the financial resources necessary to appeal the decision and continue to
be listed on AMEX. On July 6, 2009, the Company’s stock was suspended
from trading on AMEX. The Company immediately applied for admission
to the Over the Counter Bulletin Board (“OTCBB”) and subsequently began trading
on the OTCBB on July 7, 2009 under the symbol “SMDM”.
NOTE
10 - STOCKHOLDERS’ EQUITY
COMMON
STOCK ISSUANCES
During
the three months ended June 30, 2009 and 2008, the Company issued 0 and 940,476
shares of its common stock, respectively.
The
shares issued were to Starlight Industrial Holdings, Ltd. for $197,500 ($.21 per
share) for the satisfaction of certain payables owed by the Company
for tooling.
EARNINGS
PER SHARE
In
accordance with SFAS No. 128, “Earnings per Share”, basic (loss) earnings per
share are computed by dividing the net (loss) earnings for the year by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net earnings for the year by the weighted average number
of common shares outstanding including the effect of common stock
equivalents.
STOCK
OPTIONS
On June
1, 2001, the Board of Directors approved the 2001 Stock Option Plan (“Plan”),
which replaced the 1994 Stock Option Plan, as amended, (the “1994 Plan”). The
Plan was developed to provide a means whereby directors and selected employees,
officers, consultants, and advisors of the Company may be granted incentive or
non-qualified stock options to purchase common stock of the Company. As of June
30, 2009, the Plan is authorized to grant options up to an aggregate of
1,950,000 shares of the Company’s common stock and up to 300,000 shares for any
one individual grant in any quarter. As of June 30, 2009, the Company granted
1,333,885 options under the Year 2001 Plan with 901,370 options still
outstanding, leaving 616,115 options available to be granted. There
were no additional stock options issued during the three months ended June 30,
2009. As of June 30, 2009, the Company has 5,550 options still issued and no
options available to be granted under the 1994 Plan, since the 1994 Plan has
expired (after 10 years).
STOCK
WARRANTS
As of
June 30, 2009, the Company had a total of 2,500,000 stock purchase warrants
outstanding. The exercise price of these warrants range from $0.28 to $0.35. The
expiration date of these warrants range from July 25, 2009 to July 26,
2010.
12
The
majority of sales to customers outside of the United States for the three months
ended June 30, 2009 and 2008 were made by the Macau Subsidiary. Sales
by geographic region for the period presented are as follows:
|
FOR
THE THREE MONTHS ENDED
|
||||||||
|
June
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
North
America
|
$ | 814,008 | $ | 1,228,648 | ||||
|
Australia
|
- | 405,537 | ||||||
|
Europe
|
- | 135,139 | ||||||
|
Others
|
- | 1,022 | ||||||
| $ | 814,008 | $ | 1,770,346 | |||||
The
geographic area of sales is based primarily on the location where the product is
delivered.
NOTE 12 – DUE TO RELATED PARTIES,
NET
As of
June 30, 2009 and March 31, 2009 the Company had amounts due to related parties
in the amounts of $619,569 and $1,498,391 respectively consisting
primarily of non-interest bearing trade payables and expenses due to Starlight
affiliates.
NOTE
13 – RELATED PARTY TRANSACTIONS
On May
23, 2008, SMC Logistics entered into a service and logistics agreement with
affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications
Corp. (“Cosmo”) to provide logistics, fulfillment, and warehousing services for
Starlight and Cosmo’s domestic sales. The Company received $372,938
and $0 in service fees for the quarters ended June 30, 2009 and June 30, 2008
respectively. For the quarters ended June 30, 2009 and 2008, the
Company additionally received reimbursements from Cosmo in the amount of
$100,743 and $0 respectively for expenses and salaries incurred by SMC Logistics
on behalf of Cosmo.
On April
1, 2008, the Company issued 940,476 shares of common stock to Starlight
Industrial Holdings, Ltd. for $197,500 ($.21 per share) as payment for certain
payables owed by the Company for tooling. There was no common stock issue to
related parties during the first quarter ended June 30, 2009.
NOTE
14 – SUBSEQUENT EVENTS
We
evaluated the effects of all subsequent events from the end of the first quarter
ended June 30, 2009 through August 19, 2009, the date we filed our financial
statements with the U.S. Securities and Exchange Commission
(“SEC”).
On July
6, 2009, a short-term loan in the amount of $1,000,000 was due to DBS Bank as
disclosed in Note 8 Financing above. On July 6, 2009 the Company paid
$500,000 to DBS Bank and received a 30-day extension for the remaining $500,000
balance due. On or about August 6, 2009 the Company received an
additional 30-day extension to September 7, 2009.
In July
2009, Heng Seng Bank Limited informed the Company that the $5,100,000 in
financing facilities described in Note 8 have been rescinded effective
immediately.
On July
6, 2009, the Company’s stock was suspended from trading on AMEX. The Company
immediately applied for admission to the Over the Counter Bulletin Board
(“OTCBB”) and subsequently began trading on the OTCBB on July 7, 2009 under the
symbol “SMDM” (see Note 9).
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes included elsewhere in this quarterly report. This
document contains certain forward-looking statements including, among others,
anticipated trends in our financial condition and results of operations and our
business strategy. (See Part II, Item 1A, “Risk Factors “). These
forward-looking statements are based largely on our current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements.
Statements
included in this quarterly report that do not relate to present or historical
conditions are called “forward-looking statements.” Such forward-looking
statements involve known and unknown risks and uncertainties and other factors
that could cause actual results or outcomes to differ materially from those
expressed in, or implied by, the forward-looking statements. Forward-looking
statements may include, without limitation, statements relating to our plans,
strategies, objectives, expectations and intentions. Words such as “believes,”
“forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,”
“plans,” “should,” “could,” “will,” and similar expressions are intended to
identify forward-looking statements. Our ability to predict or project future
results or the effect of events on our operating results is inherently
uncertain. Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be accurate indications
of the times at, or by which, such performance or results will be
achieved.
13
Important
factors to consider in evaluating such forward-looking statements include, but
are not limited to: (i) changes in external factors or in our internal budgeting
process which might impact trends in our results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in our
business strategy or an inability to execute our strategy due to unanticipated
changes in the industries in which we operate; and (iv) the effects of adverse
general economic conditions, both within the United States and globally, (v)
vendor price increases and decreased margins due to competitive pricing during
the economic downturn (vi)various competitive market factors that may prevent us
from competing successfully in the marketplace and (vii) other factors described
in the risk factors section of our Annual Report on Form 10-K, this Quarterly
Report on 10-Q, or in our other filings made with the SEC.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements.
OVERVIEW
The
Singing Machine Company, Inc., a Delaware corporation, (the “Singing Machine,”
“we,” “us” or “ours”) and our subsidiaries are primarily engaged in the design,
marketing, and sale of consumer karaoke audio equipment, accessories, musical
recordings and Bratz licensed electronic products. The Company’s products are
sold directly to distributors and retail customers. Our electronic karaoke
machines and audio software products are marketed under The Singing Machine(R)
and Motown trademarks.
Our
products are sold throughout North America and Europe, primarily through
department stores, lifestyle merchants, mass merchandisers, direct mail catalogs
and showrooms, music and record stores, national chains, specialty stores and
warehouse clubs.
Our
karaoke machines and karaoke software are currently sold in such major retail
outlets as Costco, Kohl’s, J.C. Penney, Toys R Us Wal-Mart and Sam’s Club. Our
business has historically been subject to significant seasonal fluctuations
causing our revenues to vary from period to period and between the same periods
in different fiscal years. Thus, it may be difficult for an investor to project
our results of operations for any given future period. We are
uncertain of how significantly our business will be harmed by a prolonged
economic recession but, we anticipate that continued contraction of
consumer spending will negatively affect our revenues and profit
margins.
RESULTS
OF OPERATIONS
The
following table sets forth, for the periods indicated, certain items related to
our consolidated statements of operations as a percentage of net sales for the
three months ended June 30, 2009 and 2008.
The
Singing Machine Company, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
three months ended
|
||||||||
|
June
30, 2009
|
June
30, 2008
|
|||||||
|
Net
Sales
|
100.0 | % | 100.0 | % | ||||
|
Cost
of Goods Sold
|
135.1 | % | 88.6 | % | ||||
|
Gross
Profit
|
-35.1 | % | 11.4 | % | ||||
|
Operating
Expenses
|
||||||||
|
Selling
expenses
|
37.4 | % | 12.5 | % | ||||
|
General
and administrative expenses
|
105.7 | % | 52.1 | % | ||||
|
Depreciation
and amortization
|
12.3 | % | 5.7 | % | ||||
|
Total
Operating Expenses
|
155.3 | % | 70.3 | % | ||||
|
Income
from Operations
|
-190.5 | % | -58.9 | % | ||||
|
Other
Income (Expenses)
|
||||||||
|
Interest
expense
|
-0.4 | % | -0.4 | % | ||||
|
Net
Other Expenses (Income)
|
-0.4 | % | -0.4 | % | ||||
|
Net
Income
|
-190.8 | % | -59.3 | % | ||||
14
NET
SALES
Net sales
for the quarter ended June 30, 2009 decreased to $814,008 from $1,770,346, a
decrease of $956,338 as compared to the same period ended June 30, 2008. This
decrease was primarily due to a $474,738 decrease in Bratz licensed product from
the same period ending June 30, 2008 as this product life cycle winds down. We
also incurred some one-time pricing discounts granted to Costco Mexico in the
amount of $54,000 for defective product and $181,440 to Sam’s Club for margin
assistance on a slow-moving product. The remaining difference was
primarily due to increased returns compared to the same period ended June 30,
2008.
GROSS
PROFIT
Our gross
profit for the quarter ended June 30, 2009 decreased to $(285,622) from
$202,649, a decrease of $488,271 as compared to the same period in the prior
year. As a percentage of revenues, our gross profit for the three months ended
June 30, 2009 decreased to (35.1)% from 11.4% for the same period in 2008. While
the first quarter of the fiscal year has historically not had strong
performance, we experienced several one-time charges during the period that
significantly contributed to the margin decrease. In addition to the
one-time pricing discounts totaling $235,440 described in Net Sales, above we
also recognized a one-time charge of $181,142 to adjust certain Bratz licensed
products and musical instruments to lower of cost or market value to accommodate
large discounted sales and potential sales in subsequent periods. The
remaining difference is primarily due to the decrease in sales volume from the
same period ending June 30, 2008.
OPERATING
EXPENSES
For the
quarter ended June 30, 2009, total operating expenses increased to
$1,264,147. This represents an increase of $19,253 over last year’s
same quarter ended total operating expenses of $1,244,894. This
increase was primarily due to an increase selling expenses of $82,607 due
inbound freight from increased volume of returns and marketing
expenses associated with new products and our internet store
launch.. These expenses were offset by an increase in logistics
expense reimbursements from the Starlight logistics agreement that was not fully
in effect during the same period in 2008.
LOSS
FROM OPERATIONS
Loss from
operations increased $503,461 this quarter, to $1,553,037 for the three months
ended June 30, 2009 as compared to a loss from operations of $1,049,561 for the
same period ended June 30, 2008. This decrease was primarily due to reduced
profit margins which were affected by one-time charges of $416,582 for pricing
discounts and lower of cost or market inventory adjustments for certain products
as described in Net Sales and Gross Profit above. The remaining
difference was due to the decrease in sales volume compared to the same period
ending June 30, 2008.
15
OTHER
INCOME/EXPENSES
Our net
other expenses (interest expense) decreased to $3,268 for the three months ended
June 30, 2009 from $7,316 for the same period in 2008. The decrease of interest
expenses was primarily due to the decrease in factor interest charges due to
decrease in amount of sales factored compared to the same period ending June 30,
2009.
INCOME
TAXES
For the
three months ended June 30, 2009 and 2008, we did not record a tax provision
because we incurred losses during these periods.
NET
LOSS
For the
three months ended June 30, 2009 net loss increased to $1,553,037 from
$1,049,461 for the same period in 2008. This decrease was primarily due to
reduced profit margins which were affected by one-time charges of $416,582 for
pricing discounts and lower of cost or market inventory adjustments for certain
products as described in Net Sales and Gross Profit above. The remaining
difference was due to the decrease in sales volume compared to the same period
ending June 30
LIQUIDITY
AND CAPITAL RESOURCES
Net cash
used by operating activities was $1,478,149 for the three months ended June 30,
2009, as compared to $53,613 generated by operating activities the same period a
year ago. The increase in net cash used was a result of the following
factors: A decrease in accounts payable to Hong Kong and related party suppliers
and an increase in customer credits on account due to increased product
returns. These decreases to cash used by operations were offset by a
decrease in inventory from sales of existing inventory and later shipment by
vendors of current year products.
Net cash
used by investing activities for the three months ended June 30, 2009 was
$35,377 as compared to $276,769 used by investing activities for the same period
ended in 2008. This decrease was caused primarily by the decrease in
purchases new tools and moulds.
Net cash
provided by financing activities was $1,173,228 for the three months ended June
30, 2009, as compared to cash provided by financing activities of $236,490 for
the same period ended in 2008. The company relied on short-term pre-inventory
financing facility from DBS Bank of $1,742,140 to finance existing and current
year production by related party and other Hong Kong vendors. The
entire amount of the short-term financing is currently due on or before
September 15, 2009. We anticipate that shipments to and payment from
one major European customer will be completed prior to the due date of the loans
and the proceeds will be sufficient to pay the amounts when due. This
financing activity increase was offset by net repayment of factoring facilities
of $635,731 from collections of Accounts receivable.
As of
June 30, 2009, our unrestricted cash on hand was $616,865. Our average monthly
general and administrative expenses are approximately $320,000. We expect that
we will require approximately $1 million for working capital during the next
three-month period.
During
the next 12 month period, we plan on financing our operation needs
by:
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·
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Raising
additional working capital;
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·
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Collecting
our existing accounts receivable;
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·
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Selling
existing inventory;
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·
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Vendor
financing;
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·
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Borrowing
from factoring bank;
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·
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Short
term loans from our majority shareholder;
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·
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Fees
for fulfillment, delivery and returns services from related
parties.
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Our
sources of cash for working capital in the long term, 12 months and beyond, are
essentially the same as our sources during the short term. We are actively
seeking additional financing facilities and capital investments to maintain and
grow our business. If we need to obtain additional financing and fail
to do so, it may have a material adverse effect on our ability to meet our
financial obligations and to continue as a going concern.
INVENTORY
SELL THROUGH
We
monitor the inventory levels and sell through activity of our major customers to
properly anticipate returns and maintain the appropriate level of inventory. We
believe that we have proper return reserves to cover potential returns based on
historical return ratios and information available from the
customers.
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SEASONAL
AND QUARTERLY RESULTS
Historically,
our operations have been seasonal, with the highest net sales occurring in our
second and third fiscal quarters (reflecting increased orders for equipment and
music merchandise during the Christmas holiday season) and to a lesser extent
the first and fourth quarters of the fiscal year. Sales in our second and third
fiscal quarters, combined, accounted for approximately 92.0% and 87.8% of net
sales in fiscal 2009 and 2008, respectively.
Our
results of operations may also fluctuate from quarter to quarter as a result of
the amount and timing of orders placed and shipped to customers, as well as
other factors. The fulfillment of orders can therefore significantly affect
results of operations on a quarter-to-quarter basis.
We are
currently developing and considering selling products other than those within
the karaoke category during the slow season to fulfill the revenue
shortfall.
INFLATION
Inflation
has not had a significant impact on our operations. We generally have
adjusted our prices to track changes in the Consumer Price Index since prices we
charge are generally not fixed by long-term contracts.
OFF-BALANCE
SHEET ARRANGEMENTS
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
CRITICAL
ACCOUNTING POLICIES
We
prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such,
management is required to make certain estimates, judgments and assumptions that
it believes are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods presented. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating our reported financial results include: accounts receivable allowance
for doubtful accounts, reserves on inventory, deferred tax assets and our Macau
income tax exemption.
COLLECTIBILITY
OF ACCOUNTS RECEIVABLE. Our allowance for doubtful accounts is based on
management’s estimates of the creditworthiness of our customers, current
economic conditions and historical information, and, in the opinion of
management, is believed to be an amount sufficient to respond to normal business
conditions. Management sets 100% reserves for customers in bankruptcy and other
reserves based upon historical collection experience. Should business conditions
deteriorate or any major customer default on its obligations to the Company,
this allowance may need to be significantly increased, which would have a
negative impact on operations.
RESERVES
ON INVENTORIES. We establish a reserve on inventory based on the expected net
realizable value of inventory on an item-by-item basis when it is apparent that
the expected realizable value of an inventory item falls below its original
cost. A charge to cost of sales results when the estimated net realizable value
of specific inventory items declines below cost. Management regularly reviews
the Company’s investment in inventories for such declines in value.
INCOME
TAXES. Significant management judgment is required in developing our provision
for income taxes, including the determination of foreign tax liabilities,
deferred tax assets and liabilities and any valuation allowances that might be
required against the deferred tax assets. Management evaluates its ability to
realize its deferred tax assets on a quarterly basis and adjusts its valuation
allowance when it believes that it is more likely than not that the asset will
not be realized.
We
operate within multiple taxing jurisdictions and are subject to audit in those
jurisdictions. Because of the complex issues involved, any claims can require an
extended period to resolve. In management’s opinion, adequate provisions for
potential income taxes in the jurisdiction have been made.
USE OF OTHER ESTIMATES. We
make other estimates in the ordinary course of business relating to sales
returns and allowances, warranty reserves, and reserves for promotional
incentives. Historically, past changes to these estimates have not had a
material impact on our financial condition. However, circumstances could change
which may alter future expectations.
(a) Evaluation of
Disclosure Controls and Procedures. As of the end of the period covered
by this report, we conducted an evaluation, under the supervision and with the
participation of our chief executive officer and chief financial officer of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission’s rules and forms and is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
17
(b) Changes in
Internal Controls. We reported certain material weaknesses in our
internal controls over financial reporting in our annual report on Form 10-K for
the year ended March 31, 2009. The Company is still in the process of
addressing these material weaknesses and will continue to update the Exchange as
to our remediation progress.
None.
ITEM
1A. RISK FACTORS
RISKS
ASSOCIATED WITH OUR BUSINESS
CURRENT
LEVELS OF SECURITIES AND FINANCIAL MARKET VOLATILITY ARE
UNPRECEDENTED.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers. We believe these
credit market disruptions have likely decreased our ability to access debt and
equity financing. If current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not experience an adverse
effect, which may be material, on our ability to access capital and on our
business, financial condition and results of operations.
RISKS
ASSOCIATED WITH OUR CAPITAL STRUCTURE
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
We are
not currently in default upon any of our senior securities.
None.
None.
31.1
Certification of Anton Handal, Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Carol Lau, Interim Chief Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.*
32.1
Certifying Statement of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act.*
32.2
Certifying Statement of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act.*
* Filed
herewith
18
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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THE
SINGING MACHINE COMPANY, INC.
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Date:
August 19, 2009
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By:
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/s/ Anton H. Handal
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Anton
H. Handal
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Chief
Executive Officer
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/s/ Carol Lau
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Carol
Lau
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Interim
Chief Financial Officer
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19