SINGING MACHINE CO INC - Quarter Report: 2013 September (Form 10-Q)

 

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarter ended September 30, 2013

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______.

 

Commission File Number 0 - 24968

 

 

(Exact Name of Registrant as Specified in its Charter)

 

DELAWARE		95-3795478
(State of Incorporation )		(IRS Employer I.D. No.)

 

(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 ¨

 

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)

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

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 ¨ No ¨

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

  

CLASS		NUMBER OF SHARES OUTSTANDING
Common Stock, $0.01 par value		38,070,642 as of November 14, 2013

 

 

 

  

INDEX

 

PART I. FINANCIAL INFORMATION

 

		Page No.
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – September 30, 2013 (Unaudited) and March 31, 2013	3
	Condensed Consolidated Statements of Operations – Three months and six months ended September 30, 2013 and 2012(Unaudited)	4
	Condensed Consolidated Statements of Cash Flows - Six months ended September, 2013 and 2012 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements - September 30, 2013 (Unaudited)	6-12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12-17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
SIGNATURES		18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 1 – BASIS OF PRESENTATION

 

OVERVIEW

The Singing Machine Company, Inc., a Delaware corporation (the “Company”, “SMC”, “The Singing Machine”) 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 condensed consolidated 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 condensed consolidated 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 condensed consolidated 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 condensed consolidated financial statements include the accounts of the Company, Macau Subsidiary, SMC-L, SMC-M and 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements for the three and six months ended September 30, 2013 and 2012 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of March 31, 2013 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with that report.

 

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.

 

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.

 

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 September 30, 2013 and March 31, 2013, the Company had cash deposits of $0 and $1,007,894, respectively that exceeded the FDIC insurance limit. In addition, the Company deposited $137,967 in a restricted certificate of deposit with Wells Fargo Bank as collateral for a stand-by letter of credit issued to Majestic Realty (California warehouse’s landlord) as a security deposit required by the property lease. The Company maintains cash balances in foreign financial institutions. The amounts in foreign financial institutions at September 30, 2013 and March 31, 2013 were $872,456 and $256,035, 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.

 

 

 

COMPUTATION OF EARNINGS PER SHARE

Income per common share is computed by dividing net income by the weighted average of common shares outstanding during the period. Diluted net income per share is presented as the conversion of stock options would have a dilutive effect. As of September 30, 2013 and 2012 total potential dilutive shares amounted to approximately 530,000 and 0 shares, respectively. These shares were included in the computation of diluted earnings per share for the three months ended September 30, 2013; however, they were not included in the computation of diluted earnings per share for six months ended September 30, 2013 because their effect is anti-dilutive.

 

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 follows the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the condensed consolidated statement of operations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense for the three and six months ended September 30, 2013 and 2012 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. For the three months ended September 30, 2013 and 2012 the stock option expense was $12,420 and $1,639, respectively. For the six months ended September 30, 2013 and 2012 the stock option expense was $14,776, and $3,281, respectively.

 

ADVERTISING

Costs incurred for producing and publishing advertising of the Company are charged to operations the first time the advertising takes place. The Company has entered into cooperative advertising agreements with its major customers that specifically indicated that the customer 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 7% of the purchase. The customers have to advertise the Company's products in the customer's catalog, local newspaper and other advertising media. The customer 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 customer 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 September 30, 2013 and 2012 was $581,427 and $703,322, respectively. Advertising expense for the six months ended September 30, 2013 and 2012 was $726,934 and $859,136, respectively.

 

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 condensed consolidated statements of operations. For the three months ended September 30, 2013 and 2012, these amounts totaled $33,212 and $18,173, respectively. For the six months ended September 30, 2013 and 2012, these amounts totaled $57,002 and $33,240, respectively.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted FASB ASC 825, which 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, accounts payable, obligations to clients for returns and allowances, warranty provision, accrued expenses and net due to related parties approximates fair value due to the relatively short period to maturity for these instruments.

 

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, FASB issued Accounting Standards Update (“ASU”) 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 requires that an unrecognized or portions of an unrecognized tax benefit be presented on the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward unless certain conditions exist. This amendment is to be applied prospectively for reporting periods beginning after December 15, 2013 with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements. 

NOTE 3- INCOME TAXES

The Company analyzes its deferred tax assets and liabilities at the end of each interim period and based on management’s best estimate of its full year effective tax rate recognizes cumulative adjustments to its deferred tax assets and liabilities. The Company’s effective tax rate for the fiscal year ending March 31, 2014 is estimated to be approximately 39%. The effective tax rate for the fiscal year ended March 31, 2013 was 41%.

 

As of September 30, 2013 and March 31, 2013, The Singing Machine had gross deferred tax assets of approximately $3.4 million and $3.2 million, respectively, against which the Company recorded valuation allowances totaling approximately $1.6 million. A valuation allowance was recorded against deferred tax assets because it is more likely than not that a portion of the tax benefits from the gross deferred tax assets will not be realized. For the three month period ended September 30, 2013, the Company recorded income before income tax provision of approximately $511,000 which generated a decrease in current deferred tax assets and an income tax provision of approximately $187,000. For the six month period ended September 30, 2013, the Company recorded a loss before income tax benefit of approximately $356,000 which generated additional current deferred tax assets and an income tax benefit of approximately $139,000. Due to the seasonality of the business, the Company is expected to reverse this increase in deferred tax assets during the fiscal year ending March 31, 2014.

 

 

 

As of September 30, 2013 the Company is subject to U.S. Federal income tax examinations for the tax years ended March 31, 2010 through March 31, 2013.

NOTE 4- INVENTORIES

Inventories are comprised of the following components:

 

 

Inventory consigned to a distribution center at September 30, 2013 and March 31, 2013 was $353,201 and was fully reserved at September 30, 2013 and March 31, 2013.

NOTE 5 - PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

 

 

* Shorter of remaining term of lease or useful life

 

** As of September 30, 2013 and March 31, 2013 the Company had outstanding commitments for molds and tooling in process in the amounts of approximately $26,000 and $140,000, respectively.

 

Depreciation expense for the three months ended September 30, 2013 and September 30, 2012 was $30,659 and $34,076, respectively.

Depreciation expense for the six months ended September 30, 2013 and September 30, 2012 was $57,977 and $66,851, respectively.

NOTE 6 – LINE OF CREDIT

On October 19, 2012, the Company executed a two-year Accounts Receivable Ledgered Line of Credit Facility (“line of credit”) with Crestmark Bank (“Crestmark”) of Troy, Michigan which allows the Company to receive an advance of up to 70% of qualified accounts receivable. The outstanding loan balance on the line of credit cannot exceed $5,000,000 during our peak selling season between August 2 and February 14 and cannot exceed $500,000 between February 15 and August 1 of each year that the agreement is in effect. The Company has agreed to pledge all of its domestic accounts receivable shipped from North America (except drop shipment and related party invoices) to Crestmark and will assume all of the credit risk on accounts receivable pledged to Crestmark.

 

Interest on the line of credit and discounting charges on accounts receivable advances is accrued at a rate of 2% per annum over the prime rate as published by the Wall Street Journal and at no time shall the effective rate be less than 5.25% per annum. For the three months ended September 30, 2013 and 2012 the amount of interest expense related to the line of credit was $8,061 and $0, respectively. For the six months ended September 30, 2013 and 2012 the amount of interest related to the line of credit was $8,796 and $0, respectively. The credit facility is secured with all assets of the Company as well as related-party debt subordination agreements totaling $2,500,000 from Ram Light Management, Ltd. in the amount of $1,683,247 and Starlight Marketing Development, Ltd. in the amount of $816,753. There is commission fee of 1% of the gross invoice for all domestic accounts receivable pledged. For the three months ended September 30, 2013 and 2012 the amount of commission expense related to the line of credit was $44,113 and $0, respectively. For the six months ended September 30, 2013 and 2012 the amount of commission expense related to the line of credit was $67,133 and $0, respectively. As of September 30, 2013 and March 31, 2013 the amounts due to Crestmark on the line were $1,566,278 and $0, respectively.

 

NOTE 7 – LONG-TERM CAPITAL LEASE

On April 13, 2013, the company entered into a long-term capital leasing arrangement with Wells Fargo Equipment Finance (“Wells Fargo”) to finance the lease of two used forklift vehicles in the amount of $39,312. The lease requires monthly payments in the amount of $1,082 per month over a total lease term of 36 months which commenced on May 19, 2013. The agreement has an effective interest rate of 4.5% and the company has the option to purchase the equipment at the end of the lease term for one dollar. As of September 30, 2013 and March 31, 2013 the outstanding amount due to Wells Fargo was $31,620 and $0, respectively.

 

As of September 30, 2013 and March 31, 2013, the Company had obligations under the capital lease repayable as follows:

 

 

For the three month periods ended September 30, 2013 and September 30, 2012 the amount of interest related to the capital lease were $375 and $0, respectively. For the six month periods ended September 30, 2013 and September 30, 2012 the amount of interest related to the capital lease were $643 and $0, respectively.

NOTE 8 - OBLIGATIONS TO CLIENTS FOR RETURNS AND ALLOWANCES

Due to the seasonality of the business and length of time clients are given to return defective product, it is not uncommon for clients to accumulate credits from the Company’s sales and allowance programs that are in excess of unpaid invoices in accounts receivable. All credit balances in clients’ accounts receivable are reclassified to obligations to clients for returns and allowances in current liabilities on the condensed consolidated balance sheet. Client requests for payment of a credit balance are reclassified from obligations to clients for returns and allowances to accounts payable on the condensed consolidated balance sheets. When new invoices are processed prior to settlement of the credit balance and the client accepts settlement of open credits with new invoices, then the excess of new invoices over credits are netted in accounts receivable. As of the periods ended September 30, 2013 and March 31, 2013, obligations to clients for returns and allowances reclassified from accounts receivable were $388,467 and $376,289, respectively. There were no clients requesting a credit amount refunds as of the period ended September 30, 2013 and March 31, 2013 and as such no amounts were reclassified from obligations to clients for returns and allowances to accounts payable.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

LEGAL MATTERS

Management is currently not aware of any legal proceedings.

 

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 IRS’s asserted position that the Company is not the taxpayer.

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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 is committed to various operating lease agreements for office and warehouse facilities in Fort Lauderdale, Florida, Ontario, California and Macau expiring at varying dates. Rent expense for the three months ended September 30, 2013 and 2012 was $148,424 and $180,462, respectively. Rent expense for the six months ended September 30, 2013 and 2012 was $303,655 and $377,609, respectively. In addition, the Company maintains various warehouse equipment and computer equipment operating leases. Included in rent expense is the cost for the warehouse facilities in City of Industry, California for which the operating lease expired on April 30, 2013 and was not renewed.

 

Future minimum lease payments under property and equipment leases with terms exceeding one year as of September 30, 2013 are as follows:

 

NOTE 11 - GEOGRAPHICAL INFORMATION

The majority of sales to customers outside of the United States for the three and six months ended September 30, 2013 and 2012 were made by the Macau Subsidiary. Sales by geographic region for the periods presented are as follows:

 

 

The geographic area of sales is based primarily on the location where the product is delivered.

 

 

NOTE 12 – DUE TO / FROM RELATED PARTIES, NET

As of September 30, 2013 and March 31, 2013 the Company had amounts due to related parties in the amounts of $9,400,559 and $4,615,937 respectively, consisting primarily of trade payables due to Starlight affiliates. As of September 30, 2013 and March 31, 2013 the Company had amounts due from related parties in the amounts of $1,579,498 and $403,154 respectively, consisting primarily of trade receivables due from Starlight affiliates. Starlight Electronics Company, Ltd (related-party company) charges interest on current year intercompany trade payables that are past due at a rate of 4.5% per annum. For the three and six months ended September 30, 2013 and September 30, 2012 the Company incurred interest expense in the amounts of $0 and $5,575 respectively.

NOTE 13 – RELATED PARTY TRANSACTIONS

During the three months ended September 30, 2013 and September 30, 2012 the Company sold approximately $1,189,000 and $906,000, respectively to Starlight Electronics Company, Ltd. During the six months ended September 30, 2013 and September 30, 2012 the Company sold approximately $1,416,000 and $1,166,000 respectively to Starlight Electronics Company, Ltd. These goods were sold at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Starlight Electronics for the three months ended September 30, 2013 and September 30, 2012 was 8.6% and 13.7%, respectively. The average gross profit margin on sales to Starlight Electronics for the six months ended September 30, 2013 and September 30, 2012 was 8.5% and 12.4%, respectively. The product was drop shipped to Cosmo Communications of Canada (“Cosmo”), the Company’s primary distributor of its products to Canada. During the three months ended September 30, 2013 and September 30, 2012 the Company sold an additional $498,000 and $271,000 respectively of product to Cosmo from our California warehouse facility. During the six months ended September 30, 2013 and September 30, 2012 the Company sold an additional $780,000 and $326,000 respectively of product to Cosmo from our California warehouse facility. These amounts were included as a component of cost of goods sold in the accompanying condensed consolidated statements of operations.

 

The Company purchased products from Starlight Consumer Electronics USA, Inc. (“SCE”) a subsidiary of Starlight International Holding Ltd. The purchases from SCE for the three month period ended September 30, 2013 and 2012 were $7,748,415 and $4,960,073, respectively. The purchases from SCE for the six month period ended September 30, 2013 and 2012 were $9,701,934 and $4,960,073, respectively. The Company purchased product services from Starlight R&D, Ltd, (“SLRD”) a subsidiary of Starlight International Holding Ltd. The purchases from SLRD for the three month period ended September 30, 2013 and 2012 were $164,057 and $0 respectively. The purchases from SLRD for the six month period ended September 30, 2013 and 2012 were $206,162 and $0 respectively. The Company purchased products from Starfair Electronics Co., Ltd, (“SFE”) a subsidiary of Starlight International Holding Ltd. The purchases from SFE for the three month period ended September 30, 2013 and 2012 were $665,164 and $0 respectively. The purchases from SFE for the six month period ended September 30, 2013 and 2012 were $741,867 and $0 respectively. These amounts were included as a component of cost of goods sold in the accompanying condensed consolidated statements of operations.

 

Effective April 1, 2013, SMC-L entered into a service and logistics agreement with Starlight Consumer Electronics (USA), Inc. (“Starlight USA”), an indirect wholly-owned subsidiary of Starlight International, Cosmo USA, Inc. (“Cosmo USA”) and Starlight Electronics USA, Inc. (“Starlight Electronics USA”) to provide logistics, fulfillment, and warehousing services for Starlight USA, Cosmo USA and Starlight Electronic USA’s domestic sales. For these services, Starlight USA, Cosmo USA and Starlight Electronics USA have agreed to reimburse the Company for actual warehouse space occupied by these companies at $0.50 per square foot and for logistics services performed based on an agreed to fee schedule specified in the agreement. The agreement is estimated to generate approximately $370,000 in expense reimbursements during the term of the contract. The Company received $108,804 and $0 in service fees from these affiliates during the three months ended September 30, 2013 and September 30, 2012, respectively. The Company received $191,304 and $0 in service fees from these affiliates during the six months ended September 30, 2013 and September 30, 2012, respectively. This agreement terminates on March 31, 2014 at which time another annual agreement is expected to be signed for the same terms.

 

On July 1, 2012, SMC-L entered into a service and logistics agreement with Starlight Consumer Electronics (USA), Inc. (“Starlight USA”), an indirect wholly-owned subsidiary of Starlight International, Cosmo USA, Inc. (“Cosmo USA”) and Starlight Electronics USA, Inc. (“Starlight Electronics USA”) to provide logistics, fulfillment, and warehousing services for Starlight USA, Cosmo USA and Starlight Electronic USA’s domestic sales. For these services, Starlight USA, Cosmo USA and Starlight Electronics USA agreed to pay the Company annual service fees totaling approximately $435,000 payable monthly beginning July 1, 2012. The Company received $0 and $133,119 in service fees from these affiliates during the three and six months ended September 30, 2013 and September 30, 2012, respectively. This agreement terminated on March 31, 2013 and was replaced by a new agreement effective April 1, 2013.

 

On August 1, 2011, SMC-L entered into a service and logistics agreement with affiliates Starlight Consumer Electronics (USA), Inc., Starlight USA, Inc. and Cosmo USA to provide logistics, fulfillment, and warehousing services for these affiliates’ domestic sales. The Company received $0 and $249,999 in service fees from these affiliates during the six months ended September 30, 2013 and September 30, 2012, respectively.

NOTE 14 – WARRANTY PROVISIONS

A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are either allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months) or granted a “defective allowance” consisting of a fixed percentage (between 1% and 5%) off of the invoice price in lieu of returning defective products. The Company records liabilities for its return goods programs and defective goods allowance program at the time of sale for the estimated costs that may be incurred. The liability for defective goods is included in warranty provisions on the condensed consolidated balance sheets.

 

 

 

Changes in the Company’s obligations for return and allowance programs are presented in the following table:

 

	12

	13

	14

	15

·

Raising additional working capital;

	·	Collecting our existing accounts receivable;
	·	Selling existing inventory;
	·	Vendor financing;
	·	Borrowing from bank credit facility;
	·	Extended payment terms from our majority shareholder;
	·	Fees for fulfillment, delivery and returns services from related parties.

	16

	17

Date: November 14, 2013	By:	/s/ Gary Atkinson
		Gary Atkinson
		Chief Executive Officer
		/s/ Lionel Marquis
		Lionel Marquis
		Chief Financial Officer