The Singing Machine Company, Inc.
Q3 2022 Earnings Call Transcript

Published: 14 Feb 2022

[Operator:]

Good day, everyone, and welcome to today's Singing Machine announces third quarter earnings call. [Operator Instructions] Please note, this call may be recorded and I will be standing by should you need any assistance.

[It is now my pleasure to turn the conference over to Brendan Hopkins. Please go ahead.:]

[Brendan Hopkins:]

Thank you, Nicky. Thank you, everyone, for joining us today. We have a brief safe harbor, and then we'll get started.

[Except for historical information contained herein, the statements in this conference call are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known, unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results.:]

[With that said, I would like to turn the call over to Gary Atkinson, CEO of The Singing Machine.:]

[Gary Atkinson:]

Thank you, Brendan. Good afternoon, everyone. My name is Gary Atkinson, Chief Executive Officer of The Singing Machine Company. I want to thank you all for taking the time to join our earnings call for our third quarter ended December 31, 2021.

[Joining me on the call today is Lionel Marquis, company's CFO; and Bernardo Melo, VP of Global Sales and Marketing.:]

[I'd like to start the call today by saying I couldn't be more pleased with the results and the effort from the entire team during the 2021 year. As you are all aware, there were many, many supply chain challenges last year. In fact, it was the most disruptive year we have ever experienced from a supply chain perspective.:]

[So I'm particularly proud of these results given the shortage of containers and significant unexpected rise in freight costs that we encountered last year, semiconductor and component shortages that we faced during production, and significant port and trucking delays that we faced when we finally built our products and brought them into the states. So with that being said, I'm thrilled to say that despite all of those challenges, we successfully overcame all of those obstacles.:]

[During the third quarter ended December 31, we defended and expanded our retail presence while driving revenue for the quarter up 25% to $21.2 million compared to the same quarter of the prior year. We successfully grew year-to-date revenue for the 9-month period by 6%, now up to $44.7 million. Income from operations for the quarter increased 13%, up to $1.7 million.:]

[In summary, we not only survived the supply chain challenges of last year, but we thrived. I also have some positive news to share regarding our new recurring music content business. Through our strategic key partnership with the Stingray Group, we continue to focus on the digital content subscription aspect of our business.:]

[Our recurring revenue -- our recurring subscription business continues to accelerate, with 25% increase in year-over-year subscription revenue across all platforms, including iOS, Android and our proprietary integrated WiFi product. In fact, the primary driver of growth came from the new WiFi streaming product, which was carried in Costco and Sam's Club nationwide this last year. We saw digital subscriptions from that device grow 370% year-over-year.:]

[As we remain the #1 brand in home karaoke with the largest and strongest distribution network, we believe we are well positioned to scale the subscription revenue business by focusing intently on converting our fleet of karaoke products into higher technology devices that support the recurring revenue model.:]

[We also continue to succeed at all major retailers nationwide, including Walmart, Target, Costco, Sam's Club and Amazon, where we defended our market share and even saw opportunities to refill stores before the holidays due to our strong sell-through and demand.:]

[As we move into the new calendar year, we're already hard at work to secure more retail shelf space and add new technologies to our machines to better support the subscription business. We look forward to calendar 2022 and sharing these developments with you.:]

[Now I'll turn the call over to Lino Marquis, who will talk through the third quarter numbers in more detail. Go ahead, Lionel.:]

[Lionel Marquis:]

Thank you, Gary. Good afternoon, everyone. I'd like to cover some key financial highlights for our third quarter ended December 31, 2021, compared to our third quarter ended December 31, 2020.

[As Gary mentioned earlier, net sales were $21.1 million compared to $17.0 million for the 3-month period ended December 31, 2021, and 2020, respectively. These results represent an increase of $4.2 million or a 24% increase. Net sales for the 9-month period were $44.7 million compared to $42.3 million, an increase of $2.4 million or approximately 6%.:]

[As Gary mentioned earlier, despite significant global challenges and delays in transporting goods from China and additional delays extracting goods from the port of L.A., our major customers were flexible and extended seasonal delivery deadlines and that allowed us to continue shipping late into the holiday season and continue to support strong product demand. As I said that the sales and marketing, he'll expand on the customer relations issue in his discussion later.:]

[Our gross profit for the 3-month period was $5.3 million compared to $5.0 million, representing an increase of approximately $300,000. Gross profit for the 9-month periods were $10.2 million compared to $11.8 million, and that represented an increase of $1.6 million.:]

[We experienced a drop in gross profit margin of approximately 500 basis points, primarily due to cost increases and components that had limited supply due to the supply chain disruptions during the global pandemic as well as significant increases in transportation costs also related to the global supply constraints of 2021.:]

[Income from operations for the 3-month period were $1.7 million compared to $1.5 million, and that was an increase of $200,000. Income from operations for the 9-month period were $2.0 million compared to $3.2 million, a decrease of approximately $1.2 million. The company was successful in executing strict cost control measures within the selling, general and administrative expense categories during the 3-month period. This was a key contributing factor and the company's ability to generate 13.3% higher operating income during the 3 months ended December 31, 2021, compared to the same period in the prior year.:]

[However, the abrupt developments related to cost of goods sold were primarily -- was the primary contributor to the overall decrease in income from operations for the full 9-month period.:]

[So as a result of these discussions, net income for the 3-month period was $1.4 million compared to $1.2 million, representing a $200,000 increase for the quarter. Net income for the 9-month period were $2.0 million compared to $3.4 million for the same period in 2020.:]

[Now we ended December 31, 2021, in a strong cash position at $7.3 million compared to the $4.4 million on December 31, 2020. As we leveraged our outstanding accounts receivable inventory, we improved our working capital position to $9.8 million compared to $7.6 million a year ago.:]

[Inventory at December 31, 2021, was $11.1 million compared to $5.3 million in the prior year, primarily due to the unprecedented backup and delays at the port of Los Angeles experienced -- this was experienced across all industries, where goods intended for holiday shipments were not able to be delivered timely.:]

[So since then, all of the goods have now been received. And all those goods consist of active and in-demand products, and they're expected to ship during the current calendar year. In fact, having these goods on hand could be an advantage in some instances should we continue to experience some of these delays during the upcoming season.:]

[The total outstanding debt on our financing facilities was approximately $8.6 million at December 31, 2021, compared to only $100,000 in the prior period -- the prior year. As of December 31, 2021, we are in compliance with all of our lenders covenants. And our relationships with our lenders remains really strong as they've been very flexible and accommodating with regards to our needs.:]

[Our accounts receivable increased by $3.2 million due to later-than-usual shipments and our inventory increased by $5.8 million, as we mentioned earlier, due to the port of Los Angeles delays. And we have leveraged both assets through our financing facilities to strengthen our cash in hand by $2.9 million and our working capital by $2.2 million. We continue to collect our outstanding receivables and we're using the proceeds to pay down the debt, reduce interest expense.:]

[Our overall receivables base is largely current. The current payment terms -- with the vast majority of these balances due to the company being owed by national household retailers with excellent credit quality. So all together, we believe that our balance sheet is the strongest it's ever been. We continue to believe that with our cash on hand, our financing facilities and our working capital, we have adequate liquidity to support the business for the next 12 months. And that is my report. Back to Gary.:]

[Gary Atkinson:]

Thank you, Lionel. I appreciate the update. At this point of the call, I want to turn it over to Bernardo Melo, our VP of Global Sales and Marketing, who will give us an update on sales. Go ahead, Bernardo.

[Bernardo Melo:]

Thanks, Gary, and thank you all for joining. I'll continue the same narrative as everyone. I mean, overall, our third quarter was strong for The Singing Machine retail, the category -- the home karaoke category remains strong a year after a lot of the stimulus, pandemic spike that we saw and in some cases, across retailer and increased.

[So the demand for home karaoke is still top of mind for consumers. Our top 2 discount retailers, Target had been a year. The Walmart toy department held strong in all 3 in line items, with coverage on all 3,900 stores for those products remaining top in the game, new electronic category at Walmart. The annual event and Black Friday occurred once again, 3 weeks prior to the traditional Thanksgiving weekend, which we saw strong sales results with 98% sell-through for both dot-com and in line.:]

[Target once again carried out items in about 1,700-plus stores as part of the legacy electronic. Our 2-day item during the holiday was well, were almost 100% sell-through. And then the rest of the items saw the same strong sell-through throughout even though we had to increase some of the MSR price, we didn't see a lag in sales at all in some of those items. And in particular, the party Bluetooth microphone continued strong sales in year 2 and now is accounting for about 20% of our overall sales, so that category continues to do well.:]

[For our other regional and national stores, whether discount or specialty stores, we still saw strong demand going right into holiday. And we were able to fulfill a lot of those orders by having the inventory, even though they might have come in a little bit late. So we were still able to fulfill those demands.:]

[As far as e-commerce goes, Amazon had another strong season. They followed up a momentous Prime Day that we had for The Singing Machine. And that momentum continued through the holiday, given an example of turkey week, which is just cyber week, we saw the promotions that we ran have really good results especially on a few of the items that were top selling in the entire category.:]

[So again, The Singing Machine brand for Amazon is key for driving traffic and strong sales. Our drop ship expanded this year to some nontraditional discount retailers with some with some department stores, and we saw some gaming stores as well. And those sales are strong. So we're now positioned to continue to expand those drop ship, and we're looking forward to it.:]

[The partnership at the club is stronger than ever with Costco and Sam's expanding their assortment to include more than just one traditional SKU. Costco, for example, carried our WiFi streaming machine for the second year, and they were able to increase sell-through. And the demand we were shipping stuff even a week before Christmas were shipping it just to kind of fulfill especially some of those West Coast clubs that saw that higher demand in California, in Texas and Arizona and things like that.:]

[So that bodes well. And that also builds a strong business case for us on that reoccurring revenue machine, and we're looking to expand that sort of technology or casting technology into the future. So we have those strong [indiscernible] and those clubs are going to continue to support us. And Gary will get into that a little bit more as he ends the conversation.:]

[Internationally, we remain strong. We're still in the U.K., in Italy, in France, in Spain and Australia. And although they had harder restrictions than in the U.S. in terms of retail shutting down, we still saw an uptick in Australia. And they've already had strong commitments for calendar year 2022.:]

[So with that being said, I'll turn the call back over to Gary. And I'll stick around. I'm sure you guys will have a little bit more detailed questions at the end to ask, so I'll be around for that.:]

[Gary Atkinson:]

Perfect. Perfect. Thank you, Bernardo. I do believe we have a lot of callers on the line today, and I want to be mindful of time. So I think let's open it up for some Q&A, so we can make sure we can address everyone's questions.

[Operator:]

[Operator Instructions] Our first question from [ Eric Nickerson ] with Third Century.

[Unknown Analyst:]

Yes. Interesting here. You talked a little bit about the inventory situation and you did a message earlier about sell-through. I get the -- you can maybe add a little color -- tell me if my impression is correct.

[On the plus side, we've got -- we had great sell-through during Christmas, so there's not going to be a lot of returns from retailers. On the minus side, we've got some inventory sitting around because it didn't arrive in time for Christmas. Lionel said that we'll get it all sold this year, and it's all current inventory. But do I have a basically correct impression there? Maybe you can add some color.:]

[Gary Atkinson:]

Yes, that's a great question. Thanks, Eric. Appreciate that. I know Lionel touched on it a little bit in his statements earlier about inventory. We did end up with more inventory than we typically like to coming out of the holiday season. But the reason for that, I think, was pretty clear, the port of L.A. was having significant delays in backlog in terms of processing vessels and containers. So we ended up taking in a lot of inventory late that just simply was no time to move.

[So we do have good inventory. All of the inventory that we have is it's active items. They're all -- it's good products that we currently ship to all of our customers. And I think the nice silver lining to this is if supply chain challenges continue through this year, and we believe they will, we have inventory that's good, that's already in our warehouse ready to go. So maybe Lionel or Bernardo, if you guys have any extra color you want to add to it?:]

[Bernardo Melo:]

Yes. And I think one of the key things on that is normally, you like to have sell-throughs in like the 85% because that means you stock the retailer and you plan it correctly. We have some sell-throughs in the 98% to 100%.

[And if we would have even added some additional inventory in time, that means that we left some additional sales on the table, which bodes well for us. And like Gary said, the inventory is good. So we've already gotten some early commitments on some of that inventory, and we feel real confident in moving that through 2022.:]

[Unknown Analyst:]

Okay. Yes. I guess I got -- I have basically the right impression there. You mentioned the supply chain this year's and that the ships are still backed up at Long Beach. They're still there. And I think Brendan mentioned a while back, you considered maybe reducing the size of the products so that we could ship more stuff in the container and maybe cut our shipping costs. Shipping costs are really, I guess, are going to stay high this year, don't you think?

[Gary Atkinson:]

Yes. I mean we...

[Unknown Analyst:]

The supply chain going forward.

[Gary Atkinson:]

So we're seeing pretty much the same -- the status quo on supply chain. We're still seeing container costs that remain high, maybe not as high as the peak of last. There's still hovering right around that sort of $15,000 for a 40-foot container. So we're not expecting supply chain to just magically ease up for this year. But the way we're approaching it is now we have advanced knowledge of it. So we're building -- I know Bernardo and the sales team, they're aggressively building in those increased transportation costs into our new programs for 2022.

[And the other initiative that Bernardo is hard to work on is we're actually trying to transition a lot of our customers over to an FOB China program. And so what that means is our customers will actually take possession of the inventory from the port in China. So that way, we don't...:]

[Unknown Analyst:]

Walmart [indiscernible], don't they?

[Gary Atkinson:]

Yes, Walmart does that currently now. They've been one of the biggest in terms of -- because Walmart, they have the best global supply chain of probably any company in the world. So they're in a much better position to deal with increased freight costs and containers, and they're just better at it than we are.

[And we think our other customers are also better at it, and they can pass along those cost savings to their customers. So we're using that to go in and renegotiate some of our programs and just try to push that risk back off on to the retailers to deal with those supply chain challenges.:]

[Bernardo Melo:]

And just to add a little bit on that. It's a well-known world issue. And with our partnerships and our retailers, we've been fully transparent, saying, "Hey, we're quoting future programs based on X price of containers." And they've been made aware of it from the get-go.

[So it's something that's been talked about. It's something that we are including in future quotations. And like Gary said, we're trying to mitigate some of those issues by also switching some of the programs from a domestic to a direct import.:]

[Operator:]

[Operator Instructions] We will move next with [ Jordan Qu ], a private investor.

[Unknown Attendee:]

What is the major strength of your products compared to the product from your competitor? Why want to buy your product? And then second question is the manufacturing in China, right? In case supply chain problem becomes more serious or China -- your relationship continued work, do you have alternative or place to import your products?

[Bernardo Melo:]

I could take the first one, Gary. Maybe you could handle the second one.

[Gary Atkinson:]

Okay, sure.

[Bernardo Melo:]

And that's a great question about the products. We're celebrating our 40 years this year in business. We are -- we've been around since 1982. And we're the leader. I mean 99%, 100% of our business is karaoke. And so we tend to lead it with technology. Our products are mostly 2 karaoke products, which is the true karaoke experience of having the product synchronized well with the on-screen lyrics. So we're not just a sing-a-long solution, which is what most of the competitors are doing. We're a true karaoke solution.

[With our partnership with Stingray, we offer an end-to-end solution that works well with machine and app and music. And we -- like I said, we just tend to have better quality, pay attention more to the products, and that's why the retailers really rely on us to drive this category forward. And I'll pass on the second half to Gary to talk about manufacturing.:]

[Gary Atkinson:]

Hi, Jordan. So if I understood the second part of your question, right, I think you're asking supply chain and what happens if it gets worse?

[Unknown Attendee:]

Yes.

[Gary Atkinson:]

Were you referring to manufacturing or just to transportation and port?

[Bernardo Melo:]

Both. Both.

[Unknown Attendee:]

In case the China, the U.S. relationship become worse, both touch, yes.

[Gary Atkinson:]

Yes. So we remain committed to looking at supply chain from a global perspective. So we're -- we've looked and investigated at working with other contract manufacturers based outside of China. So we've looked at Thailand. We've looked at Malaysia. We've looked at a few other Asian countries, particularly when the trade war was going on with China.

[So we've got some relationships that we could leverage if we needed to if the supply chain situation gets significantly worse. I think the challenge though is that most of the components that go into our products, they all come right out of China. A lot of the manufacturing of the PCBA boards, the wood, the plastic inject and a lot of other related components, they all stem from China.:]

[So even buying goods from, let's say, Thailand or Malaysia, they're still sourcing those components from China. So that's been the challenge trying to diversify our supply chain away. But we do have relationships if we need to, where we could divert some of our manufacturing to other countries.:]

[And we've also looked into -- if supply chain continues to worsen, we know that there is a dock worker union out in the Port of L.A. And we know that context coming up here in the summer of 2022. So we're looking now and investigating different ports to bring our products into just to ensure that if these problems continue to worsen, at least we'll have a plan B and a plan C in case it gets to that. So hopefully, that answers your question.:]

[Operator:]

We'll move next with Mike Schellinger with MicroCapClub.

[Mike Schellinger:]

Given the supply chain issues, to what extent do you have sales that shifted from fiscal Q3 to fiscal Q4?

[Gary Atkinson:]

Fiscal Q3, so our -- so the quarter that we just announced this morning, we had -- not a lot, I don't think, right? Bernardo, I mean we...

[Bernardo Melo:]

Yes. No...

[Gary Atkinson:]

We capture...

[Bernardo Melo:]

We saw some of our direct import switched over from Q2 to Q3. That number wasn't too significant. Our Q3 numbers domestically was because there was an increased demand and we were shipping domestic later than usually. We try to close most of our domestic shipments into the clubs and into the stores to hit the DCs in November because of all the traffic that's going into.

[This year, we saw some strong demand, and we extended that into December week 2, December week 3 in some instances. So that's where some of the increases happened. And some of the stuff that came in domestically for us, we still supplemented our direct import business with domestic extra demand stuff.:]

[So yes, it was a combination of two, but it was -- that retailers accepted this year for us to break that normal mode of second week of November into December week 2 and week 3 due to some of those unexpected and high demand.:]

[Operator:]

We will move next with Eric Nickerson with Third Century.

[Unknown Analyst:]

Yes. I guess I'm back. All right. So I guess there's a big project afoot here to uplist our shares from the OTCQX market to NASDAQ. Can you tell me how that's going? Is that on track? Or what can you tell us about that?

[Gary Atkinson:]

Yes, sure. I'd be happy to answer that for you, Eric. So I need to be a bit careful. We can't talk about NASDAQ, but what I can say is that we are working on uplisting from the OTC up on to a national exchange. And that project continues to move forward. So we've submitted an application to one of the national exchanges already. And we're in pretty regular communication with their team.

[It's our belief, we think we meet all the requirements right now for an uplisting with the exception of our stock price, obviously. And also the total number of shareholders, you need to have at least, I think, 300 [indiscernible] shareholders for an uplist.:]

[So in terms of how we've responded to those challenges, we've -- during our last annual meeting, we successfully received support from shareholders to do a reverse stock split. So that way, we can meet the share requirement if we do get successfully uplisted. And also, we've engaged with probably one of the best law firms in the country when it comes to handling uplists.:]

[So we think we're going to be able to successfully resolve any and all deficiencies right now in the application. And we think we're in an excellent position to move forward with a pretty timely and efficient uplisting onto one of those national exchanges. So we're excited about this because we think it has great potential to unlock a lot of shareholder value. OTC is a fine exchange, but I think most people would agree that it's not a national exchange like a NASDAQ or NYSE. So we think it's going to be a great event for the company.:]

[Operator:]

[Operator Instructions] Your next question from [ Freddie Gupta ], a private investor.

[Unknown Attendee:]

Hi. I'm invested in Singing Machine for the last 4 months. Recently, I saw one of the electric vehicle company, Tesla, basically announcing the karaoke for the car. Any plans you have to work with the other automotive companies like General Motors, or Ford, or Toyota to co-brand your karaoke systems and sell it like with them?

[Gary Atkinson:]

That's a great observation. I'm glad you brought that up. We obviously saw that news. The day it came out, Tesla making that announcement, and to be clear, so Tesla announced just for the China market that they are going to be releasing in-car microphones that work with their karaoke entertainment system.

[So we know -- we work with Stingray. Stingray is the company that powers Tesla's karaoke content in the car. So we already have that great strategic relationship with Stingray. And I guess I can say right now we're pushing towards trying to establish that relationship with Tesla. We obviously were the first to move with the Carpool Karaoke Microphones that we launched.:]

[So we know the space. We know we're seeing the growth in the in-car karaoke entertainment category, and we think it's we think it's a vibrant category to continue to be in. And we think it makes perfect sense. We see that karaoke streams are very, very popular inside of automobiles.:]

[And we think we have the right relationships already in place to take advantage of it, and we already know the categories. So I think -- I mean, it's nothing that's been ironed out yet, but we think we make a good partner for this category. And we definitely want to be in it.:]

[Operator:]

[Operator Instructions] And we show no further questions over the phone at this time.

[Gary Atkinson:]

Okay. Well, thank you very much, everybody. We certainly appreciate all the spirited questions today and appreciate everyone taking time out of their busy day to get an update on our third quarter fiscal -- third fiscal quarter updates. And we look forward to sharing new developments and new progress as we close out the fiscal year-end. So we look forward to talking to everybody soon. Thank you, everybody. Take care. Have a great day.

[Bernardo Melo:]

Yes. Thank you. Bye-bye.

[Operator:]

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