The Singing Machine Company, Inc.
Q4 2023 Earnings Call Transcript

Published: 14 Jul 2023

[Operator:]

Good afternoon, everyone, and welcome to The Singing Machine Fiscal 2023 Financial Results Earnings Call. My name is Travis, and I will be your operator. As a reminder, today's call is being recorded.

[We will have a brief safe harbor and then we'll get started. This call contains forward-looking statements under the U.S. Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.:]

[A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings.:]

[I would now like to turn the call over to Gary Atkinson, company's CEO. Please go ahead, sir.:]

[Gary Atkinson:]

Thank you, Travis. Hi. Good afternoon, everybody. This is Gary Atkinson, Singing Machine's CEO. Joining me on today's call is also Lionel Marquis, the company's CFO; and Bernardo Melo, the company Chief Revenue Officer.

[I'd like to start off today's call by thanking everybody for taking the time to listen in and participate in our fiscal year 2023 Earnings Call. The 12 months ended March 31, 2023, was a challenging year for Singing Machine, not unlike what many other consumer electronics companies experienced last year.:]

[Coming out of the multiyear pandemic and subsequent global supply chain breakdown in calendar 2021, our retail partners, suppliers and logistics partners all faced uncertainty as to the supply of semiconductors, manufacturing and transportation.:]

[As we moved into calendar 2022, these supply chain issues created a backlog of inventory that finally entered the retail pipeline in the early part of 2022. As the year went on, consumers coped with the negative economic impact of the strong inflationary pressures, rising interest rates and the conflict in Ukraine.:]

[Retailers were faced with higher inventory levels and lower in consumer demand, which consequently caused them to cut new orders. All of these factors, unfortunately, combined together to negatively impact our 2022 holiday retail season, which, again, unfortunately, dominated what was otherwise a very successful and encouraging year for our company and our team.:]

[Before our CFO, Lionel Marquis, provides a deeper insight into our fiscal year financial performance, I would like to take a few minutes to highlight some of our key milestones that we achieved during the year. First, we successfully uplisted to the NASDAQ in May of 2022. This was a major accomplishment for our team as this represented many months of hard work, persistence and diligence.:]

[As I'm sure all of you listening today are aware, this is a very rigorous process, and we view our uplisting as a very positive indication of the level of transparency and accountability our company embraces on a daily basis. As part of the uplisting process, we elected to expand our Board of Directors significantly. We did this in part as a requirement for the uplisting, but more importantly, to solicit the advice, knowledge and experience of several very successful business leaders with expertise within the consumer, electronics, legal, finance and accounting fields.:]

[Their ongoing input and counsel will be greatly appreciated as we look to execute on the next phase of our growth plan. To uplist to a national exchange has immediately benefited the company during this fiscal year as we successfully executed capital raises on better terms than what we have executed in the past. We successfully raised $4 million in a concurrent capital raise during our uplisting back last May.:]

[We also announced a $1.7 million at-the-market ATM transaction in October and closed it out in May of this year. Neither transaction involved any warrants or any other long-term derivative preferential rights for investors, keeping our capital structure as simple and clean as possible for all shareholders.:]

[Moving on. Operationally, for fiscal '23, we capitalized on the largest opportunity to expand our distribution, which came from Walmart, already our largest single retail partner today. Walmart had done internal research and determined that karaoke belongs in electronics. It was not just a toy item. It was also an entertainment product for adults and families.:]

[They revamped their locations to make the consumer electronics department a central feature with a more prominent centralized location within their stores. As part of this development, Walmart asked our team to expand our shelf-space commitment, showcasing our higher-end karaoke products in the newly expanded electronics department.:]

[At the same time, we were able to maintain our shelf-space inventory department, showcasing some of our newer toyetic offerings. The net impact for The Singing Machine was that we sold several million in incremental orders to Walmart throughout the fiscal year, offsetting some of what otherwise was a challenging holiday retail environment.:]

[For this coming year between toys and electronics departments at Walmart, Walmart stores will carry a total of 14 Singing Machine products on its shelves. While Walmart presented one of our best domestic growth opportunities last year, the Canadian market represents our clearest path to growth in fiscal 2024 and beyond.:]

[As a result, we've doubled down our commitment and focused on this market, retaining one of the best-in-class sales reps in Canada. Her team has deep relationships with a number of key big box retailers, and we have seen in the period after closing the fiscal year, the steps that we took late in fiscal 2023 are now starting to have a positive impact on our international sales moving forward.:]

[Finally, we've examined our global karaoke growth opportunities. We've ultimately concluded that the karaoke market can be divided into 4 different subsets. Number one is the in-home karaoke consumer product market; number two is the high-end karaoke commercial market; number three, the emerging automotive market; and finally, number four, the hospitality market.:]

[For our company, we have been highly successful within the in-home market and we enjoy the leading market share in North America for in-home karaoke product sales. However, as this year has proven, this segment presents certain challenges and volatility, namely low single-digit industry sales growth, challenging supply chain and a strong reliance on holiday retail consumer demand.:]

[As part of our strategic plan, our team is seeking to accelerate our revenue growth, improve overall profitability and diversify our revenue sources. In order to accomplish this, we have identified the automotive and hospitality space as areas where we intend to devote resources to accomplish these goals.:]

[Leading up to our coming Annual Shareholder Meeting in September, our team has been hard at work on new initiatives that we believe will be encouraging relative to the overall outlook for the company. Our growth opportunities are compelling, and we believe we have the brand, the experience and the track record of innovation that should serve us well as we look to execute on these opportunities.:]

[With this in mind, I would like to now turn the call over to Lionel Marquis, company's CFO, to give greater details on the results of the operations for fiscal 2023. And go ahead, Lionel.:]

[Lionel Marquis:]

Thanks, Gary. Good afternoon, everyone. Without any further delay, I'd like to walk through the results of operations of our fiscal year ending March 31, 2023. Let's start with revenues. Revenues for the fiscal year 2023 were approximately $39.3 million. This represents a decrease of approximately $8.2 million or 17.3% as compared to approximately $47.5 million for fiscal year 2022.

[We experienced a broad-based decrease in sales, including 4 out of our 5 box retail partners. The decrease in sales was largely due to 2 main factors. First, our customers began the holiday season with excess inventory due to late deliveries in calendar 2021 and due to the logjam supply chains during the later stages of the global pandemic.:]

[This generated an overstock situation or position in the first few months of 2023 which made the retail buying representatives slightly more conservative during the summer of 2022. Secondly, the news of economic recession, inflation, interest rate hikes dampened our retail partners' expectations for the holiday season, which all resulted in these customers taking more risk adverse approach to buying leading up to the 2022 holiday season.:]

[Several of our major customers required significant co-op promotion incentives on goods sold to assist in holiday inventory sell-through. Co-op promotion incentives for the fiscal year ended March 31, 2023, increased to $2.3 million or 6% of net sales as compared to approximately $1.7 million or 3.6% of net sales for the fiscal year ended March 31, 2022.:]

[Talk about gross profit. Gross profit for the fiscal 2023 was approximately $9.2 million, yielding a 23.4% of total revenues compared to approximately $10.8 million or 22.8% of sales for fiscal 2022. The net effect resulted in a decrease of approximately $1.6 million as compared to the same period in 2022. If margin had held constant at 2022 levels, the decline in gross profits would have been slightly higher at $1.9 million.:]

[Gross profit margin of fiscal 2023 was 23.4% compared to 22.8% for fiscal '22. It's an increase of 0.6 margin points. Contributing to this change was the fact that the company was able to successfully lower its overall logistics expense during the fiscal year, saving approximately $1.7 million in costs compared to the prior year. However, higher co-op costs to incentivize retailers to fulfill existing orders increased by approximately $0.6 million.:]

[In addition, the company incurred $0.8 million in noncash expenses relating to inventory reserves and inventory write-offs. Excluding these noncash expenses, cash gross margins actually improved 280 basis points and that's [ not ] with 60 basis points for fiscal 2023.:]

[Operating expenses. During fiscal year ended March 31, 2023, operating expenses increased to $12.9 million compared to $10.7 million during the prior year. This represented an increase of $2.2 million or 20.6%. Excluding latterly formulaic selling expenses driven heavily off of direct sales performance, general and operating expenses increased approximately -- to approximately $9.2 million during the fiscal year ended March 31, 2023 compared to approximately $6.9 million during fiscal year March 31, 2022, an increase of $2.3 million.:]

[There was an increase in legal professional Investor Relations and stock transfer costs of approximately $0.9 million, in part related to public -- the public offering, NASDAQ uplisting, change of control issues, regulatory filings, Delaware franchise fees, preparation costs related to the credit agreement with Fifth Third Bank and arbitration settlement of the alleged employment practice violation lawsuit against the former temporary employee.:]

[Excluding the Delaware fees of just over almost $200,000, almost all of the remaining $900,000 increase was largely onetime in nature. There was an increase in compensation expense of $500,000, primarily due to onetime -- a onetime compensation expense of $400,000 related to a change in control and employment continuation agreement with the Chief Financial Officer. The remaining [ $100,000 million ] and increased cost was primarily related to the expansion of the Board of Directors, which also included a substantial part of it was noncash equity compensation.:]

[Okay. Liquidity as of March 31, 2023, had cash on hand, $2.9 million as compared to cash on hand of $2.3 million on March 31, 2022. The company reduced its overall working capital investment by approximately $5.2 million during the year as the management team focused heavily on inventory management and building more liquid short-term capital position.:]

[The company also heavily reduced its short-term liabilities. Current liabilities as of March 31 decreased 49% from $12.0 million to $6.1 million during fiscal 2023. As a result, the company had no short-term debt, meaning on the revolving debt and 67% less trade payables at fiscal year-end.:]

[As a result of all these developments on March 31, 2023, our working capital was approximately $9.1 million. During the next 12-month period, we plan on financing our working capital needs primarily from a combination of vendor financing, revolving line of credit, proceeds collected after the fiscal year ended from the completion of our ATM or at-the-market offering.:]

[The company believes that its cash on hand, working capital net of cash, cash expected to be generated from its operating forecast along with availability of cash from its credit facilities will be adequate to meet the company's liquidity requirements for at least the next 12 months as of the filing of this report.:]

[I would like to now turn the call over to Bernardo Melo, our Chief Revenue Officer, who will share some insight into our key accounts and current outlook as we build towards the 2023 holiday retail season. Bernardo?:]

[Bernardo Melo:]

Yes. Thank you, Lionel, and hello, everyone. Thanks for listening to our presentation today. I'm pleased to have the responsibility of providing you some -- everyone with some color on how our key relationships have weathered the recent economic headwinds as well as our best estimate for how we see coming holiday sales seasons.

[First, I'd like to provide a brief summary of the overall health and stability of our key account relationships. For year-to-date, our overall commitments from customers are in line with demand from last year. Our largest accounts are being very precise about ordering, making commitments a little later in the year than normal, but we believe this should benefit our profitability in several ways.:]

[First, our manufacturing partners are just really eager to win our business this year as obviously, China, things are tough there. They have been making some pricing concessions. For our domestic business, we've seen the container cost decreased from a peak $18,000 to $20,000 a container. We're seeing containers now ship as low as $2,000 in some cases.:]

[We also expect sell-through rates decline dramatically due to the conservative buying patterns that they're making. Similarly, we have our co-op costs being generally flat as far as truly need our inventory just to meet Black Friday sales urge. Lastly, we see chargeback expenses and inventory reserves decreasing for the same reason. While these costs are all expected to decrease, our sales prices to our retail partners remain unchanged. There's virtually no overstock remaining from the lingering effects of COVID-19.:]

[We successfully worked all of the excess of without an inventory write-downs or bad debt from our retail partners. We have been in a very clean net position with our clients, and we expect significant reduction or remain flat in our co-op or other post-sales adjustments that normally negatively impact our gross margin.:]

[As a result, we anticipate gross margin to greatly improve in helping to impact net earnings even as net sales remain largely on sale unchanged. Looking beyond the holiday season, we're also executing a number of new and exciting fronts to help drive revenues into 2024 and beyond. We're expanding our relationship with Walmart. We see Amazon become a strong source of growth in our online sales effort as we have recently signed a new agency that's top tier in this industry.:]

[So we're seeing some new strategies for Amazon, and we think we can make a strong push there. We're also very bullish on the prospects of landing one or more pilot accounts in the auto space and our marketing efforts are expected to ramp up as we build market awareness for our integrated karaoke solutions and customization capabilities as we look to become embedded into the auto entertainment console. I look forward to providing further updates soon.:]

[With that, I'll turn the call over back to our CEO, Gary to wrap up our presentation.:]

[Gary Atkinson:]

Perfect. Thank you, Bernardo. I want to make sure we save some time here for some Q&A. But finally, I just -- I would like to emphasize how proud I am of our team's accomplishments during this past year. Obviously, we're -- as a management team, we're disappointed in the overall results from a financial perspective. But given how fiscal 2023 began with a great deal of uncertainty and retailers adjusting to the lingering effects of COVID and its impacts on logistics, inventory and obviously, retail consumers.

[I felt like we adapted rapidly. We positioned our brand and products in a way to capture as much market share as possible, especially with the overall challenges that we've all been seeing in the market. And finally, it's equally important to say that we've made a lot of great progress on a lot of exciting new fronts.:]

[So transitioning to NASDAQ, taking key steps to enter the automotive and soon to the hospitality spaces within karaoke are all part of our long-term focus on sustained profitable growth, maintaining our best-in-class brand and world-class partnerships and all we do.:]

[So that being said, I believe 2023 reflected our vision well and the milestones that we accomplished are just only the beginning of where we intend to go. So with that being said, I'd like to turn the call back over to our moderator and open it up now for any Q&A.:]

[Operator:]

[Operator Instructions] We do have a question from [ Doug Richards ], Private Investor.

[Unknown Attendee:]

Okay. I would like to ask, was there anything about the holiday season that you were unprepared for otherwise could have been executed better and to follow up that how does the holiday season -- this holiday season buying the large retailers compared to last year?

[Gary Atkinson:]

Yes, I mean. Yes, you want to jump on that, Bernardo. Go for it.

[Bernardo Melo:]

Yes. I mean I'll just -- I'll give some insight and then you can do it, but I think the biggest thing that we were unprepared for is -- our retailers in the past have been really good about committing to their forecast and their order plan. And it has never changed for all the years.

[We've been dealing with those retailers. And they delayed the orders longer and longer into the season. And so finally, we hadn't increased our co-ops to sort of entice them and assure them that we were going to get a job through. But yes, just the [ lateness ] of them of how they reacted and how that affected our business. This season, we've gone -- everybody's gone a little bit conservative. I mean we're still not out of the woodwork with how the economy is, but we have a good plan and orders are starting to ship now in late July and August, and we should see a good August and September going so for the holiday season.:]

[Gary Atkinson:]

And then I'll also just add to that, too, by saying that I think the biggest difference we're seeing this year is our retailers, our -- their distribution pipeline is much cleaner this year than it was last year. So last year, we entered the holiday season, there was a lot of inventory that had piled up after the supply chain struggles. And so the retailers had to clean through that inventory first before they started placing new purchase orders.

[Whereas this year, they've had a -- they've already had a long chance to ride through that inventory, and we're starting off on a much cleaner slate. So we're feeling more confident this year that it's -- we should be seeing more repeat replenishment orders coming in, just given how clean the channels are. So I hope that answers the question.:]

[Bernardo Melo:]

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

[Unknown Attendee:]

I do have a follow-up question, if you don't mind. How do you see the supply chain evolving? I know you mentioned that these container prices coming down, it's costing down. Is there a lot of noise around global logistics, especially with regards to China right now? And do you anticipate this having any impact on your ability to ship products in the foreseeable future?

[Gary Atkinson:]

Yes, we're seeing -- I mean -- yes, sure. I mean we're seeing -- and obviously, the global logistics and supply chain market has really settled down considerably since 2021, 2022. We're seeing almost like record lows for container prices to ship a container from China to Los Angeles. They're now down to $2,000 a container or less. And previously, they've been as high as $20,000 a container. So we're seeing significant cost savings just bringing goods into the states. And in general, trucking is getting easier. Port seem to be flowing better.

[So it's really a return kind of back to normal, if I can say that. And so everything right now seems to be moving smoothly.:]

[Operator:]

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

[Unknown Attendee:]

I really have 2 basic questions. And it's kind of what you left us with at the very end of your wrap-up Mr. Atkinson. Can you kind of give us a sense why you see -- seem excited about this automotive opportunity? I mean is this from your Carpool karaoke experience. And my other one, so karaoke has been in barge for years, and there's a very strong link between barge and hospitality and the Karaoke space. Why would you see this as a growth market?

[Gary Atkinson:]

That's a great question. So I'll start off by answering the automotive part of your question first. So yes, I mean we're really excited about the automotive category general. You're right, Carpool karaoke has given us at least 5 years of experience in the market, developing microphones for cars. It's not a trivial thing.

[And when we went to the Consumer Electronics Show last January, and we announced our entrance into the automotive space, we saw overwhelming and honestly, overwhelming response to the product. We've built a microphone that integrates with most major automotive brands. And we saw a lot of interest in the product.:]

[We've got the support of one of our strategic investors in the Stingray Group that has the content that works in the infotainment system of most cars. So we've seen the success. I mean, Tesla was probably the first to launch microphones in their cars. It's only in the China market.:]

[But from what we understand, that's been successful. And so we've had a lot of conversations with a lot of major automotive brands to bring karaoke microphones into the car. Now it hasn't gone sort of quickly as we had hoped.:]

[A lot of these automotive guys, they just, I think, in the broader sort of economic environment, they've been a little bit more conservative. I think the other thing that we've been dealing with is that they're looking forward -- they're building cars or they're developing cars now that will be on the road in 2024, 2025.:]

[So it's been a little slower than we would have liked to sort of start signing our first partnerships, but the interest is there. The market is huge. You think about the millions and millions of new cars, particularly EV cars that are coming on the road every day.:]

[It's a big market, and there's a lot of interest from these automotive brands. So it's something I'm really excited about. I know the team is excited about, and we're just going to be pushing on it and hopefully start attending some of these automotive shows like the L.A. Auto Show or the New York Auto Show just to stay in front of these brands.:]

[And again, I feel confident that we'll be able to be a big player in that space. And I guess there was a part 2 your question as well. So I think you were asking about the -- something I had said earlier about the hospitality market. And that's another area that we've been really thinking hard about and looking at carefully.:]

[I would say right now, the karaoke market, the venue market is very sort of fragmented space. There's a lot of individual players, so basically mom-and-pop operators in almost every single major market. But there really hasn't been a single brand or a company that has really sort of led the forefront in terms of innovation in the space.:]

[And so we just -- we see a huge opportunity to disrupt what a traditional karaoke venue looks like. And really, the goal for us is to be the sort of the top off of karaoke, is that analogy makes sense in the sense that we envision a concept that is like upscale. It's gamified. There's a technology component to it. And obviously, it sort of wrapped up in a high-end upscale physical environment with higher quality food and beverage.:]

[And again, no one's really stepped up to consolidate that market and really lead the category there. So we just see a tremendous, tremendous opportunity to do that. And so it's something we've been really looking at and thinking hard about.:]

[Operator:]

And we have no further questions in the queue at this time. I would now like to turn the call back over to today's speakers.

[Gary Atkinson:]

Excellent. All right. Well, I appreciate everybody's time today to listen to our presentation. So we look forward to talking to you all again at our first quarter earnings report, which is just right around the corner. So with that, happy Friday. Everybody, have a great weekend, and we'll talk to you all soon. Thank you.

[Operator:]

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