SEC Form 10-Q filed by The Singing Machine Company Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| 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:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
| (Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) |
Securities registered under Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of each exchange on which registered | ||
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 requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer ☐ |
| ☒ | Smaller
reporting company | |
| Emerging growth company
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 16, 2024, there were shares of the issuer’s common stock, $ par value per share, outstanding.
THE SINGING MACHINE COMPANY, INC.
TABLE OF CONTENTS
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Singing Machine Company, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ | ||||||||
| Due from Oxford Bank | ||||||||
| Accounts receivable related parties | ||||||||
| Inventory | ||||||||
| Returns asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating leases - right of use assets | ||||||||
| Other non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Refund due to customer | ||||||||
| Customer prepayments | ||||||||
| Reserve for sales returns | ||||||||
| Other current liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Other liabilities, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ (Deficit) Equity | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock $ par value; shares authorized; issued and shares outstanding at June 30, 2024 and issued and outstanding at December 31, 2023. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ (Deficit) Equity | ( | ) | ||||||
| Total Liabilities and Shareholders’ (Deficit) Equity | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 3 |
The Singing Machine Company, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Operating lease impairment expense | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (Expenses) Income | ||||||||||||||||
| Gain from Employee Retention Credit Program refund | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other (Expenses) Income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss Before Income Tax Benefit (Provision) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Tax Benefit (Provision) | ( | ) | ||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share | ||||||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted Average Common and Common Equivalent Shares: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See notes to the condensed consolidated financial statements
| 4 |
The Singing Machine Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
For the Three Months Ended June 30, 2024 and 2023
(Unaudited)
| Common Stock | Additional Paid in | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Capital | Other | Deficit | Total | |||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Capital | Other | Deficit | Total | |||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Sale of common stock, net of offering costs | ||||||||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||||||
| Other | - | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
For the Six Months Ended June 30, 2024 and 2023
(Unaudited)
| Common Stock | Additional Paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Stock based compensation | - | |||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Sale of common stock, net of offering costs | ||||||||||||||||||||
| Sale of common stock warrants | ||||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||
| Other | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See notes to the condensed consolidated financial statements.
| 5 |
The Singing Machine Company, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Provision for estimated cost of returns | ||||||||
| Provision for inventory obsolescence | ||||||||
| Credit losses | ||||||||
| Operating lease impairment expense | ||||||||
| Loss from disposal of property and equipment | ||||||||
| Stock based compensation | ||||||||
| Amortization of right of use assets | ||||||||
| Change in net deferred tax assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Due from banks | ( | ) | ||||||
| Accounts receivable - related parties | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other non-current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Customer deposits | ( | ) | ||||||
| Refunds due to customers | ( | ) | ||||||
| Reserve for sales returns | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from sale of stock, net of offering costs | ||||||||
| Net payments on revolving lines of credit | ( | ) | ||||||
| Other | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash at beginning of year | ||||||||
| Cash at end of period | ||||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | ||||||||
| Equipment purchased under capital lease | ||||||||
See notes to the condensed consolidated financial statements
| 6 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
NOTE 1 – NATURE OF BUSINESS
We are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings. We are a global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children.
The Singing Machine’s operations include its wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”) and MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”).
NOTE 2 - RECENT DEVELOPMENTS
Change in Fiscal Year
During 2023, our Board of Directors approved a change in our fiscal year end from March 31 to December 31. Our results of operations, cash flows, and all transactions impacting shareholders’ equity presented in this Quarterly Report on Form 10-Q as of June 30, 2024 are for the three and six month periods ended June 30, 2024 and 2023.
ATM Offering June 2024
On
June 26, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Ascendiant
Capital markets, LLC, as sales agent (the “Agent”), pursuant to which the Company could offer and sell, from time to time,
through the Agent (the “ATM Offering”), up to approximately $
Subsequent
to June 30, 2024 and through August 16, 2024 (the last trading day prior to filing), the Company sold
shares of common stock under the ATM offering, and received net proceeds from the ATM of approximately $
Asset Purchase
On June 11, 2024, the Company and its wholly owned subsidiary SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab LLC” and collectively with the Company, the “Buyer”), SemiCab, Inc., a Delaware corporation (“SemiCab” or the “Seller”), Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. Subject to certain exceptions set forth in the Asset Purchase Agreement, the parties agreed that the Buyer will not assume the liabilities of the Seller. SemiCab is an artificial intelligence, cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize semi-tractor trailer load efficiency.
On
July 3, 2024, the parties closed on the asset purchase whereby the Company issued to the Seller (i) shares of the Company’s
common stock (ii) a twenty percent (
Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited, a wholly owned subsidiary of the Seller, in consideration for shares of common stock of the Company. The Option Agreement has not been exercised through the date of this filing.
| 7 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
Private Placement
On
November 20, 2023, the Company entered into an agreement to sell $
Hospitality Lease
On
August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi,
LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately
The
term of the Lease Agreement is for fifteen (
During
the three months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space due to failure to receive a
liquor license. Consequently, the Company exercised its early termination provision of the Lease Agreement which was not accepted by
the Landlord. While attempting to settle, the Company failed to make the first recurring cash lease payment due on July 31, 2024, and
as a result defaulted on the lease. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including
security deposits, rent deposits and right of use assets of approximately $
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS NY and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action.
NOTE 3 – LIQUIDITY, GOING CONCERN AND MANAGEMENT PLANS
As
of June 30, 2024, the Company had cash on hand of approximately $
The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
| 8 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
Management intends to finance operations with future debt or equity financings, however, if and when such financings may occur are uncertain.
In making this assessment management performed a comprehensive analysis of the Company’s current circumstances including: its financial position, cash flow and cash usage forecasts, and obligations and debts. Although management has a recent history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements for the three months ended June 30, 2024 and 2023 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements.
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 as of June 30, 2024 and condensed financial statements information for the three and six months ended June 30, 2024 and 2023 are unaudited whereas the condensed consolidated balance sheet as of December 31, 2023 is derived from the audited consolidated balance sheet as of that date. The condensed consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-KT for the transition period ended December 31, 2023. There have been no changes to our significant accounting policies as disclosed on the Company’s annual report on Form 10-KT for the transition period ended December 31, 2023.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 is intended to enhance the usefulness of income tax disclosures by requiring entities to disclose specific rate reconciliations, amount of income taxes separate by federal and individual tax jurisdictions, and the amount of income or loss from continuing operations before income tax expense or benefit disaggregated between federal, state and foreign. ASU 2023-09 is effective for the Company for its fiscal year beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and related disclosures.
NOTE 5 – FINANCING
Oxford Credit Facility
On
March 28, 2024, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Oxford Business Credit
“Oxford”), as Lender. The Credit Agreement established a secured asset-backed revolving credit facility which is comprised
of a maximum $
| 9 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
Borrowings
under the Credit Facility take the form of base rate loans at interest rates of the Wall Street Journal Prime Rate plus
The
Credit Agreement is for a -year term that expires on
The
Company is subject to a two percent (
Fifth Third Bank Asset-backed Revolving Credit Facility
On
October 14, 2022, the Company entered into a Loan and Security Agreement with Fifth Third Financial Corporation (the “Credit Agreement”),
as Lender, replacing the Company’s credit facilities with Crestmark and IHC that were terminated by the Company on October 13,
2022. The Credit Agreement established a secured asset-backed revolving credit facility which is comprised of a maximum $
Costs
associated with closing of the Credit Agreement of approximately $
Borrowings
under the Credit Facility took the form of base rate loans at interest rates of the greater of either
During
the three and six months ended June 30, 2023, the Company incurred interest expense of approximately $
On May 19, 2023, the Company executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and instituted new covenants.
On
August 30, 2023, the Company entered into a Waiver and Second Amendment (the “Revolving Loan Amendment”) to the Credit Agreement.
The Revolving Loan Amendment provides for, among other things, (i) a waiver of all known existing defaults under the Credit Agreement
as of the date of the Revolving Loan Amendment and (ii) the amendment of the definition of “Borrowing Base” to reduce from
$
| 10 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
On November 17, 2023, the Company voluntarily terminated the Credit Agreement as the Company could not comply with the debt coverage financial covenant effective September 30, 2023. There was no balance outstanding on the credit agreement as of the termination date.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Hospitality Lease
On
August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi,
LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately
The
term of the Lease Agreement is for fifteen (
During
the three months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space due to failure to receive a
liquor license. Consequently, the Company exercised its early termination provision of the Lease Agreement which was not accepted by
the Landlord. While attempting to settle, the Company failed to make the first recurring cash lease payment due on July 31, 2024, and
as a result defaulted on the lease. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including
security deposits, rent deposits and right of use assets of approximately $
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS NY and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action.
Derivative Action
On December 21, 2023, Ault Lending, LLC, a wholly owned subsidiary of Ault Alliance, Inc. (“Ault”), one of the Company’s largest shareholders, filed a derivative shareholder action in Delaware Chancery Court against the Company, its Directors, and other Company shareholders (The Stingray Group, Inc. and Regalia Ventures) (“the Defendants”) for alleged breach of fiduciary duty in approving a recent above-market private placement equity transaction. The complaint alleges the Company, and its Directors followed an inadequate process in evaluating the private placement transaction which occurred back in November 2023 and entered into the transaction with an intent to dilute Ault’s ownership stake in the Company. The Company filed a motion to dismiss the complaint. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of the litigation, and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action.
NOTE 7 – OPERATING LEASES
At the time of this filing, the Company has operating lease agreements for offices in Florida and Hong Kong and a retail location in New York expiring in various years through 2038.
The
Company entered into an operating lease agreement, effective October 1, 2017, for our corporate headquarters located in Fort Lauderdale,
Florida where we lease approximately
| 11 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
The
Company entered into an operating lease on August 23, 2023, for approximately
Supplemental balance sheet information related to leases as of June 30, 2024 and December 31, 2023 is as follows:
| Assets: | June 30, 2024 | December 31, 2023 | ||||||
| Operating lease - right-of-use assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Current portion of operating leases | $ | $ | ||||||
| Operating lease liabilities, net of current portion | $ | $ | ||||||
Supplemental statement of operations information related to operating leases is as follows:
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| Operating lease expense as a component of general and administrative expenses | $ | $ | $ | $ | ||||||||||||
| Supplemental cash flow information related to operating leases is as follows: | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flow paid for operating leases | $ | $ | $ | $ | ||||||||||||
| Lease term and Discount Rate | ||||||||||||||||
| Weighted average remaining lease term (years) | ||||||||||||||||
| Weighted average discount rate | % | % | ||||||||||||||
Minimum future payments under all operating leases as of June 30, 2024, are as follows:
| Payments due by period | Amount | |||
| 2024 (remaining six months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total minimum future payments | $ | |||
| Less: Interest | ||||
| Total operating lease liabilities | $ | |||
| Less: current portion of lease liabilities | ||||
| Operating lease liabilities, net of current portion | $ | |||
Equity Incentive Plan
On April 12, 2022, the Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors.
There were share base compensation awards issued under the 2022 Plan during the three and six months ended June 30, 2024 and 2023. There were and shares forfeited during the three and six months ended June 30, 2024, respectively. There were shares forfeited during the three and six months ended June 30, 2023. As of June 30, 2024, there were shares available to be issued under the 2022 Plan.
As of June 30, 2024, there was an unrecognized expense of approximately $ remaining on options currently vesting over time with an approximate weighted average of remaining until these options are fully vested.
| 12 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
The vested options as of June 30, 2024, had intrinsic value.
Warrants
Common
warrants issued and outstanding as of June 30, 2024 and December 31, 2023, were
As of June 30, 2024, the Company’s warrants by expiration date were as follows:
| Number of Common Warrants | Exercise Price | Expiration Date | ||||||
| $ | ||||||||
| $ | ||||||||
For the three months ended June 30, 2024 | For the three months ended June 30, 2023 | For the six months ended June 30, 2024 | For the six months ended June 30, 2023 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted-average common shares outstanding | ||||||||||||||||
| Basic loss per share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
Basic net loss per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share reflects the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period using the treasury stock method.
For the three and six months ended June 30, 2024 and 2023, options to purchase and shares of common stock, respectively and options to purchase common stock warrants for both June 30, 2024 and 2023 were excluded in the calculation of diluted net loss per share as the result would have been anti-dilutive.
NOTE 10 - INCOME TAXES
For
the three months ended June 30, 2024 and 2023 the Company recognized an income tax benefit of approximately $
The Company’s income tax expense differs from the expected tax benefit/expense based on statutory rates primarily due to full valuation allowance for all of its subsidiaries for the three and six months ended June 30, 2024 and 2023.
| 13 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
NOTE 11 – REVENUE DISAGGREGATION
The Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments:
Revenue by product line is as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| Product Line | June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | ||||||||||||
| Classic Karaoke Machines | $ | $ | $ | $ | ||||||||||||
| Licensed Products | ( | ) | ||||||||||||||
| SMC Kids Toys | ||||||||||||||||
| Microphones and Accessories | ||||||||||||||||
| Music and other income | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
Sales by geographic region for the periods presented are as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| Australia | ||||||||||||||||
| North America | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
The
Company selectively participates in a retailer’s co-op promotion incentives by providing marketing fund allowances to its customers.
As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair value of
the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded
as a reduction to net sales. For the three months ended June 30, 2024 and 2023, co-op promotion incentives were approximately $
The
Company estimates variable consideration under its return allowance programs for goods returned from the customer whereby a revenue return
reserve is recorded based on historic return amounts, specific events as identified and management estimates. The Company’s reserve
for sales returns as of June 30, 2024 and December 31, 2023, was approximately $
A return program for defective goods is negotiated with each of the Company’s wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between six and nine months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates.
The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets.
NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND REVENUE
The
Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for credit
losses is based upon management’s estimates and historical experience and reflects the fact that accounts receivable is concentrated
with several large customers. At June 30, 2024,
| 14 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
Revenues
from customers representing greater than 10% of total net sales derived from our top three customers as a percentage of net sales were
NOTE 13 – RELATED PARTY TRANSACTIONS
Due To/From Related Parties
Stingray
Group, Inc. (“Stingray”) is an existing shareholder with board representation. The Company has a music subscription sharing
agreement with Stingray. For the three months ended June 30, 2024, and 2023, the amounts earned from the subscription agreement were
approximately $
During
the three and six months ended June 30, 2024, the Company advanced $
NOTE 14 – ASSET ACQUISITION
On June 11, 2024, the Company and its wholly owned subsidiary SemiCab,LLC, SemiCab, Inc., Ajesh Kapoor and Vivek Sehgal entered into the Asset Purchase Agreement pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller.
On
July 3, 2024, the parties completed the Asset Purchase Agreement whereby the Company issued to the Seller (i) shares of the Company’s
common stock with a value of approximately $
Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited, a wholly owned subsidiary of the Seller, in consideration for shares of common stock of the Company.
In
connection with the asset acquisition agreement, effective July 3, 2024, SemiCab, LLC entered into employment agreements (the “Agreements”)
with Ajesh Kapoor and Vivek Sehgal Kapoor’s agreement spans three years with an annual base salary of $
| 15 |
The Singing Machine Company, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024 and 2023
(Unaudited)
Pro Forma Information
The unaudited pro forma financial information below presents the effects of the Asset Purchase Agreement as though it had been completed on January 1, 2023. The pro forma adjustments are derived from the historically reported transactions of the respective companies. The pro forma results do not include anticipated combined effects or other expected benefits of the acquisition. The pro forma results for the six months ended June 30, 2024, and 2023 reflect the combined performance of the Company and the SemiCab business for that period. The unaudited pro forma information is based on available data and certain assumptions that the Company believes are reasonable given the circumstances. However, actual results may differ materially from the assumptions used in the accompanying unaudited pro forma financial information. This selected unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not intended to represent what the actual consolidated results of operations would have been had the Asset Purchase Agreement occurred on January 1, 2023, nor does it attempt to forecast future consolidated results of operations.
| Six Months Ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Net revenue | $ | |||||||
| Operating loss from continuing operations | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
The
pro forma results for the six months ended June 30, 2023, include a net increase in operating expenses of $
| 16 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Transition Report on Form 10-KT for the nine months period ended December 31, 2023, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.
You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Transition Report on Form 10-KT, filed with the SEC on April 15, 2024.
In this Quarterly Report, unless the context requires otherwise, references to the “Company,” “Singing Machine,” “we,” “our company” and “us” refer to The Singing Machine Company, Inc., a Delaware corporation, as well as our wholly owned subsidiaries; “SMCL” refers to SMC Logistics, Inc., a California corporation, “SMCM” refers to SMC-Music, Inc., a Florida corporation, “SMH” refers to SMC (HK) Limited, a Hong Kong company, and “MICS NY” refers to MICS Nomad, LLC, a Delaware limited liability company.
The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view our company from management’s perspective, considering items that would have a material impact on future operations.
Overview
The Singing Machine Company, Inc., a Delaware corporation (the “Company” or “The Singing Machine”) is a consumer electronics manufacturer of retail karaoke products. Based in Fort Lauderdale, Florida, and founded over forty years ago, the Company is primarily engaged in the development, marketing, and sale of a wide assortment of at-home and in-car consumer karaoke audio equipment, accessories, musical recordings and products. The Company’s portfolio is marketed under both proprietary brands and licenses including Carpool Karaoke and Sesame Street. The Company’s products are sold in locations worldwide, primarily through mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores.
The Singing Machine’s operations include its wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”),SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”) and MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”).
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Recent Developments
Change in Fiscal Year
During 2023, our Board of Directors approved a change in our fiscal year end from March 31 to December 31. Our results of operations, cash flows, and all transactions impacting shareholders’ equity presented in this Quarterly Report on Form 10-Q as of June 30, 2024 are for the three and six month periods ended June 30, 2024 and 2023.
ATM Offering June 2024
On June 26, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Ascendiant Capital markets, LLC, as sales agent (the “Agent”), pursuant to which the Company could offer and sell, from time to time, through the Agent (the “ATM Offering”), up to approximately $1,100,000 in shares of the Company’s common stock. On July 8, 2024, the Company entered into the First Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $2,020,000. On August 9, 2024, the Company entered into the Second Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $3,100,000. For the three and six months ended June 30, 2024, the Company had not yet sold any shares of its common stock from this ATM Offering. Pursuant to the agreement, the Agent is to be paid $30,000 in fees to cover legal and administrative expenses and will receive an amount equal to 3% of the gross proceeds from each sale of the Company’s share of common stock.
Subsequent to June 30, 2024 and through August 16, 2024(the last trading day prior to filing), the Company sold 1,657,172 shares of common stock under the ATM offering, and received net proceeds from the ATM of approximately $1,676,000 after payment of brokerage commissions and administrative fees to the agent of approximately $51,000.
Asset Purchase
On June 11, 2024, the Company and its wholly owned subsidiary SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab LLC” and collectively with the Company, the “Buyer”), SemiCab, Inc., a Delaware corporation (“SemiCab” or the “Seller”), Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. Subject to certain exceptions set forth in the Asset Purchase Agreement, the parties agreed that the Buyer will not assume the liabilities of the Seller. SemiCab is an artificial intelligence, cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize semi-tractor trailer load efficiency.
On July 3, 2024, the parties closed on the asset purchase whereby the Company issued to the Seller (i) 641,806 shares of the Company’s common stock (ii) a twenty percent (20%) membership interest in SemiCab LLC.
Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited, a wholly owned subsidiary of the Seller, in consideration for 320,903 shares of common stock of the Company. The Option Agreement has not been exercised through the date of this filing.
Private Placement
On November 20, 2023, the Company entered into an agreement to sell $2,000,000 in common stock through a private placement of common stock (the “Private Placement”). The Private Placement was completed with two Affiliates, (Stingray Group, Inc. and Jay Foreman), both of which were existing shareholders with Board representation. The Private Placement was completed at $0.91 per share of common stock, with a total of approximately 2,198,000 shares issued. Net proceeds from the transaction were approximately $1,900,000, net of transaction fees of approximately $100,000. During the six-month period after the closing date, the purchasers may make a written request for registration under the Securities Act of all or any portion of the shares purchased. During the six months ended June 30, 2024, Jay Foreman has made a written request to register his 1,099,000 shares.
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Hospitality Lease
On August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately 10,000 square feet of ground floor retail space and a portion of the basement underneath the ground floor retail space in the property located at 111 West 24th Street, New York, New York (the “Premises”).
The term of the Lease Agreement is for fifteen (15) years, or on such an earlier date upon which the term shall expire, be canceled or terminated pursuant to any of the conditions or covenants of the Lease Agreement. Pursuant to the Lease Agreement, MICS NY is obligated to pay an initial base rent in the amount of $30,000 beginning August 1, 2024, with scheduled increases over the term, as set forth in the Lease Agreement.
During the three months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space due to failure to receive a liquor license. Consequently, the Company exercised its early termination provision of the Lease Agreement which was not accepted by the Landlord. While attempting to settle, the Company failed to make the first recurring cash lease payment due on July 31, 2024, and as a result defaulted on the lease. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including security deposits, rent deposits and right of use assets of approximately $3,878,000 have been written off during the three months ended June 30, 2024 and are included as a component of operating expenses in the accompanying condensed consolidated statements of operations.
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS NY and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects.
Results of Operations
The following table sets forth, for the periods indicated, certain items related to our consolidated statements of income as a percentage of net sales as follows:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of Goods Sold | 86.7 | % | 79.8 | % | 83.0 | % | 77.5 | % | ||||||||
| Operating Expenses | 265.5 | % | 112.8 | % | 190.4 | % | 98.7 | % | ||||||||
| Loss from Operations | -252.2 | % | -92.6 | % | -173.4 | % | -76.2 | % | ||||||||
| Other (Expenses) Income, Net | -0.7 | % | -1.1 | % | -0.9 | % | 10.6 | % | ||||||||
| Loss Before Income Tax Benefit (Provision) | -252.9 | % | -93.7 | % | -174.3 | % | -65.6 | % | ||||||||
| Income Tax Benefit (Provision) | 2.1 | % | 0.0 | % | 0.0 | % | -25.0 | % | ||||||||
| Net Loss | -250.8 | % | -93.7 | % | -174.3 | % | -90.6 | % | ||||||||
Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023
Net Sales
Net sales for the three months ended June 30, 2024, decreased to approximately $2,440,000 from approximately $2,625,000 representing a decrease of approximately $185,000 (7.0 %) as compared to the three months ended June 30, 2023. The decrease was primarily due to lower overall sell-through results during the past holiday season, mostly with our largest customer, Walmart, which in turn diminished inventory restocking requirements during the first six months of the calendar year which is historically off-peak shipping season.
Gross Profit
Gross profit for the three months ended June 30, 2024 decreased to approximately $324,000 from approximately $529,000 representing a decrease of approximately $205,000 (38.8%) as compared to the three months ended June 30, 2023. Gross margins for the three months ended June 30, 2024 were 13.3% as compared to 20.2% for the three months ended June 30, 2023. Approximately $260,000 of the decrease in gross profit was primarily due to increased sales in excess inventory which yielded significantly lower margin than current models sold and was offset by a decrease in expenses of approximately $57,000 associated with the miscellaneous logistics costs related to the timing of receipt of new goods.
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Operating Expenses
During the three months ended June 30, 2024, total operating expenses increased to approximately $6,478,000, compared to approximately $2,960,000 during the three months ended June 30, 2023. This represents an increase in total operating expenses of approximately $3,518,000 from the three months ended June 30, 2023. The increase in operating expenses was primarily due to the write-off of impaired operating lease assets of approximately $3,878,000 related to the hospitality lease (See Hospitality Lease in Recent Developments). This increase in operating expenses was offset by a decrease in seasonal bad debt reserves of approximately $156,000, a decrease in logistics costs of approximately $124,000 associated with the closing of the warehouse operation and outsourcing of logistics to a third-party logistics company, acceleration of depreciation expense of approximately $130,000 recognized in the prior year on impaired fixed assets associated with the closing of the warehouse.
Other Expenses, net
Other expense consisted of interest expense of approximately $17,000 for the three months ended June 30, 2024, as compared to interest expense of approximately $29,000 for the three months ended June 30, 2023.
Income Taxes
For the three months ended June 30, 2024 and 2023 the Company recognized a tax benefit of approximately $52,000 and $0, respectively. The Company is not recognizing any tax provision for the six months ended June 30, 2024 as the Company is not forecasting any taxable income for the current year and had a loss before income tax benefit in the previous year. The Company’s income tax expense differs for the expected tax benefit based on statutory rates primarily due history of losses and forecasts that suggest the Company will not be able to utilize any deferred tax assets in the future.
Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023
Net Sales
Net sales for the six months ended June 30, 2024, decreased to approximately $4,866,000 from approximately $6,008,000 representing a decrease of approximately $1,142,000 (19.0 %) as compared to the six months ended June 30, 2023. The decrease was primarily due to lower overall sell-through results during the past holiday season, mostly with our largest customer, Walmart, which in turn diminished inventory restocking requirements during the first six months of the calendar year which is historically off-peak shipping season.
Gross Profit
Gross profit for the six months ended June 30, 2024 decreased to approximately $826,000 from approximately $1,349,000 representing a decrease of approximately $523,000 (38.8%) as compared to the six months ended June 30, 2023. Gross margins for the six months ended June 30, 2024 were 17.0%, as compared to 22.5% for the six months ended June 30, 2023. There was a decrease of approximately $276,000 primarily due to lower gross margins caused by increased sales mix of excess inventory yielding margins that were less than current models sold. The remaining decrease in net sales as explained above accounted most of the remaining $267,000 of the decrease in gross profit.
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Operating Expenses
During the six months ended June 30, 2024, total operating expenses increased to approximately $9,267,000 compared to approximately $5,927,000 during the six months ended June 30, 2023. This represents an increase in total operating expenses of approximately $3,340,000 from the six months ended June 30, 2023. The increase in operating expenses was primarily due to the write-off of impaired operating lease assets of approximately $3,878,000 related to the hospitality lease (See Hospitality Lease in Recent Developments). The increase in operating expenses was primarily attributable to a seasonal decrease in bad debt reserves of approximately $81,000, acceleration of depreciation expense of approximately $133,000 recognized in the prior year on impaired fixed assets associated with the closing of the logistics warehouse, a decrease in stock based compensation expense of approximately $101,000, reduced costs in selling expense of approximately $81,000 due to significantly lower inbound freight costs related to the reduced volume of product returns and a decrease in travel and entertainment of approximately $81,000.
Other (Expenses) Income, net
Other expense consisted of interest expense of approximately $45,000 for the six months ended June 30, 2024 as compared to other income, net of approximately $635,000. During the six months ended June 30, 2023, there was a one-time refund of approximately $704,000 from the Employee Retention Credit program offset by interest expense of approximately $69,000 which accounted for the increase in other income, net.
Income Taxes
For the six months ended June 30, 2024, the Company did not recognize any income tax provision as the Company is not forecasting any taxable income for the current year. The Company’s income tax provision for the six months ended June 30, 2023, was approximately $1,502,000 as the Company recognized a full valuation allowance on all of its deferred tax assets based on the recent history of losses and forecasts that suggested the Company would not be able to utilize the deferred tax assets in the future. The Company’s income tax expense differs for the expected tax benefit/expense based on statutory rates primarily due to full valuation allowance for all of its subsidiaries for the six months ended June 30, 2023.
Liquidity and Capital Resources
The Company incurred a net loss of approximately $8,486,000 for the six-month period ended June 30, 2024, and has a history of recurring losses.
On June 30, 2024, we had cash on hand of approximately $1,245,000 as compared to approximately $6,703,000 on December 31, 2023. The decrease in cash on hand of approximately $5,458,000 from December 31, 2023, was primarily due to approximately $5,410,000 used in operations of which approximately $4,711,000 was used to seasonally pay down accounts payable and accrued expenses. There were seasonal reductions in customer deposits and refunds to customers of approximately $1,221,000 and a reduction of approximately $1,217,000 in reserves for sales returns as customers seasonally returned defective and overstock goods from the past holiday season during the six months ended June 30, 2024. These uses of cash for operating activities were offset by a seasonal reduction of approximately $5,000,000 in accounts receivable of which a significant amount of the reduction was offset by customers netting credit amounts due to them from returns and co-op incentive programs against open invoices. As of June 30, 2024, our working capital was approximately $2,688,000.
On June 30, 2023, we had cash on hand of approximately $1,890,000 as compared to $2,795,000 as of December 31, 2022. The decrease in cash on hand of approximately $905,000 was primarily due to approximately $614,000 used in operating activities primarily due to off-peak seasonal settlement of accounts receivable offset by seasonal increases in accounts payable, accrued expenses related to seasonal accruals for estimated returned goods, co-op incentive program expenses and customer refunds, approximately $137,000 used investing activities for the purchase of molds and tooling and approximately $154,000 used in financing activities. While the Company received proceeds from the exercise of common stock warrants and issuance of common stock (net of offering costs) of approximately $1,640,000, this increase in financing activities was offset by repayment of revolving credit lines of credit and other debt of approximately $1,794,000 during the six months ended June 30, 2024.
Based on cash flow projections from operating and financing activities and the existing balance of cash, management is of the opinion that the Company has insufficient funds to sustain operations for at least one year after the date of this report, and it may not be able to meet its payment obligations from operations and related commitments, if the Company is not able to obtain outside financing to allow the Company to continue as a going concern. Based on these factors, the Company has substantial doubt that it will continue as a going concern for the twelve months following the issuance date of the financial statements included elsewhere in this report.
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The Company’s plan to alleviate the going concern issue is to increase revenue while controlling operating costs and expenses and obtaining funds from outside sources of financing to generate positive financing cash flows. While management is optimistic about its ability to raise funds to fund operations for at least one year after the date of this report, there can be no assurance that any such measures will be successful.
The Company’s ability to raise additional funds will depend, in part, on the success of our product development activities, and other events or conditions that may affect the share value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. There can be no assurances that sufficient funds will be available to us when required or on acceptable terms, if at all. Accordingly, management has concluded that these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
Critical Accounting Estimates
Our interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in our Transition Report for the period ended December 31, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for small reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer, with the assistance of other members of our management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not 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 our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
During our transition period ended December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective due to the material weaknesses described below.
| 1. | We lack sufficient resources in our accounting department restricting our ability to review and approve certain material journal entries which increases the likelihood that a material misstatement of interim or annual financial statements might not be prevented. Management evaluated our current process of review and approval of certain material journal entries and concluded this deficiency represented a material weakness. |
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| 2. | We lack sufficient resources in our accounting department, which restricts our ability to review certain material reconciliations related to financial reporting in a timely manner. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. Management evaluated the impact of our failure to have proper segregation between the preparation, review and approval of account reconciliations and concluded that this control deficiency represented a material weakness. |
| 3. | Due to resource restrictions, we have not established a three-way match of documents or other controls precise enough to detect a material misstatement in revenue. Management evaluated our current process of determining the occurrence of revenue and concluded this deficiency represented a material weakness. |
Planned Remediation
We continue to work on improving and simplifying our internal processes and implement enhanced controls to address the material weaknesses in our internal control over financial reporting discussed above and to remedy the ineffectiveness of our disclosure controls and procedures. We are addressing our accounting resource requirements to help remediate the segregation of duties and plan to implement a concise “three-way” document matching procedure. These material weaknesses will not be considered as remediated until the applicable remediated controls are operating for a sufficient period and management has concluded, through testing, that these controls are operating effectively.
Despite the material weaknesses identified above, we believe that the consolidated financial statements included in the period covered by this report on Form 10-Q fairly present, in all material aspects, our financial conditions, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
During the fiscal quarter ended June 30, 2024, there were no additional changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS Nomad LLC, a subsidiary of the Company (“MICS NY”), and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects. The Defendants have not yet been served in this matter.
There were no other material changes during the quarter ended June 30, 2024, to our disclosure in Part I, Item 3, “Legal Proceedings” of our Form 10-KT for the period ended December 31, 2023. There are no other relevant matters to disclose under this Item for this period. See Note 6 to our consolidated financial statements entitled “Commitments and Contingencies” which is incorporated in this item by reference.
ITEM 1A. RISK FACTORS
Not required for small reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Arrangement
During
the three months ended June 30, 2024, no director or officer of the Company
ITEM 6. EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith. |
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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.
| THE SINGING MACHINE COMPANY, INC. | ||
| Date: August 19, 2024 | By: | /s/ Gary Atkinson |
| Gary Atkinson | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ Richard Perez | ||
| Richard Perez | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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