The Singing Machine Company, Inc. (NASDAQ:MICS ) Q1 2023 Earnings Conference Call August 23, 2022 10:00 AM ET

Brendan Hopkins - Investor Relations

Gary Atkinson - Chief Executive Officer

Bernardo Melo - Chief Revenue Officer & Director

Lionel Marquis - Chief Financial Officer

Rommel Dionisio - Aegis Capital

Eric Nickerson - Third Century Partners

[Operator Instructions] Good day everyone and welcome to today's Singing Machine Report's First Quarter Earnings. [Operator Instructions] Please note this call is being recorded. I will be standing by if you should need any assistance.

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

Thank you and thank you for joining us, everyone. We have a brief Safe Harbor and then we'll have started. Except for historical information contained herein, the statements in this conference call are fact 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 and 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, Chief Executive Officer of the Singing Machine.

Thank you, Brendan. Good morning, everyone. This is Gary Atkinson, company's CEO. I want to thank everyone this morning that has made the time to participate in our first fiscal quarter earnings call today. I'm joined this morning by Lionel Marquis, company CFO; and Bernardo Melo, Company Chief Revenue Officer.

I want to start by saying we are extremely thrilled at the first quarter results for a lot of reasons. This was the first quarter in company history where we were able to achieve positive income from operations. It's always been our goal as a company to be less reliant on holiday sales and smoothing out the seasonality of our quarters. This first quarter was a tremendous step towards that goal. Before I turn the call over to Lionel to discuss the numbers for the most recent quarter, I wanted to share some thoughts around the direction of the Singing Machine and where we are headed as a company.

Today, karaoke as an activity remains highly popular. We're very fortunate that our core audience for karaoke spans across a very wide spectrum of ages, cultures, nationalities and languages. Truly anyone with a voice can sing. In the news, we've seen announcements from giant automotive brands like Tesla that have implemented karaoke functionality and microphones in their cars. From what we understand, it is a very popular feature. Additionally, karaoke has always been and continues to be at the forefront of pop culture and entertainment with long-standing shows like American Idol, the Voice, America's Got Talent and recently the Mask Singer, a strong case can be made to karaoke and evergreen activity that will never disappear. We believe karaoke is an experience extends well beyond the home. As we have seen with our Carpool Karaoke microphone karaoke is something that can be readily enjoyed in the car. It is also something that is very commonly experienced in bars, lounges, restaurants and is also a very popular online as a virtual experience.

As such, we are actively exploring how to reposition ourselves from the leader in home care machines to the leaders in community, karaoke community and culture. This is why you will hear us talking about new initiatives, new products, new services, all things designed to provide a fantastic end-user experience centered on music, experience and joy. Going forward, we will be excited to provide more concrete updates on the technology and initiatives that should enable our team to dramatically expand the reach and impact on the global karaoke community.

At this point now, I’d like to turn the call over to Lionel to discuss our impressive results of operations for the first quarter.

Thank you, Gary. Good morning to all the participants in today's earnings call. We've started our new fiscal year 2023 with some encouraging results for our first quarter ended June 30, 2022, as compared to the first quarter ended June 30, 2021. In addition, there were a few financial firsts that I'd like to share with everyone. And I think Gary already spilled the beans on the first one. But anyway, our revenues for the first quarter ended June 30, 2022, increased by $5.6 million to $11.7 million compared to $6.1 million for the first quarter of the prior fiscal year. There was a successful initial product set in the consumer electronics department of one of our major customers which accounted for approximately 56% of the revenue increase, with the remaining increase primarily due to another major customer who switched from direct import and requested earlier delivery that historically has been shipped in the second quarter.

This is the first time we've exceeded revenues of more than $6.1 million in the first quarter since I joined the company 14 years ago and also since this management team has been in place. Our gross profit increased to $3.2 million compared to $1.6 million primarily as a result of the increase in revenue. However, our gross profit margin increased by 120 basis points primarily due to the assortment of new products and mics that command higher gross profit margins and they were part of the initial product set in one major customer's consumer electronics department as we -- as I talked about earlier.

We had income from operations during the quarter of June 30, 2022, to $147,000 compared to a loss from operations of $490,000 for the quarter ended June 30, 2021, representing an increase of $637,000. While we did experience an increase of approximately $1 million in operating expenses, primarily due to inflationary warehouse distribution costs and some one-time logistics and project expenses of approximately $3 million -- $0.3 million sorry, an increase in onetime professional on the legal fees associated with the recent equity raise and NASDAQ Pump listing that was approximately $200,000 and bad debt reserve expense of approximately $200,000 but that's commensurate with the increase in revenue. We still recognize positive income from operations.

This is the first time that we've recognized positive income from operations, as Gary mentioned earlier, in the history of the company. So as a result of these activities, we recognized a $16,000 net loss for our first quarter ended June 30, 2022, compared to a net loss of $119,000 in the first quarter of the prior year. It should be noted that the first quarter of the prior year, we had the benefit of $0.5 million in onetime gains from the forgiveness of the payroll protection plan and a gain from related party receivables but we had no similar gains or one-time gains during the first quarter ended June 30, 2022.

In May 2022, we successfully completed an equity raise of $4.0 million, concurrently with an uplisting of our common stock from the OTC Bulletin Board to NASDAQ. We received net proceeds of approximately $3.4 million, along with borrowings on our inventory line of credit of $2.5 million. That allowed us to finance the excess inventory from the prior fiscal year due to global logistics as well as strengthening our cash position to $2.3 million as of June 30, 2022, compared to $1.4 million as of June 30, 2021.

Those are the highlights. I mean, overall, we're not immune to increased expenses due to inflation, especially in logistics costs, pallets, warehouse supplies, temporary labor. However, we have seen a significant decrease in the cost of containers from China which we expect will continue to offset some of the inflationary-related cost increases going forward; that's my report.

And I'd like to turn the call back to Gary, who will further discuss recent developments on the sales.

Perfect. Thank you, Lionel. At this point of the call, I'd like to turn it over briefly to Bernardo Melo, to give a brief update on sales and marketing. And then, we want to make sure we reserve enough time for Q&A.

So, I’ll turn it over to Bernardo.

Good morning, everyone. I'll be brief, I just got vacation so didn't have a lot of time and prepare things. But I did want to cover up some recent highlights that we've seen in the market. Obviously, the numbers do speak for themselves. And that has been a recent strategy of ours to diversify our carrier sales to not be so holiday-driven. And some of our key retail partners have recognized that but I will mention Walmart and Sam's Cub are starting started to shift much earlier in the year than previously but we see an opportunity to capture some of the summer fun activities and capture that with karaoke sales.

So we've seen some good numbers, some good early signs of sell-through numbers. About 85% to forecast initially, we're starting to hit in those higher price points and in that new initiative of Walmart. Also, Sam's Club has decided to take most of their goods earlier this year which will give us a longer run in their clubs and also assure to have a more successful season.

As customers go by the aisle, they start seeing, they start making plans for purchase. We start looking at karaoke as an option and that's always good to have that exposure. We just also got recorded targets moving forward. They've increased their store count. So we're now in the 97% of the stores which is good exposure for us there as well as Target continues to be a key retailer even though they've had some inventory challenges on their own with other goods, they still made a commitment to karaoke and we're excited about that. On the marketing front, we were recently at Music City Grand Prix. We had two activations there: one, a carpool karaoke bus that drew a lot of attention and was probably the most popular activation in that -- during that whole weekend. We had so much excitement. Everyone was asking about where could they get this product. We got a lot of great footage.

And it really opened our eyes up to doing a lot more of these activations in the future, especially with our partnership now with Ed now [ph], who has two race cars in the Indy series and they were able to give us mobile space in the car during that weekend. So we are going to meet with them and see how we can leverage their media and some of their activities and continue to market the finishing to broader audiences that we haven't been in the past. So we're really excited about that. And it took like shipping out to be a really good year.

So with that, I'll leave some of the information for questions later and I'll turn it back over to Gary.

All right. Thank you, Bernardo. So at this point in time, we'd like to open it up for any Q&A at this point.

[Operator Instructions] We will take our first question from Rommel Dionisio from Aegis Capital.

Just with regards to the Walmart, some of the new products you guys have gone in there. I think, Bernardo, you mentioned sales -- initial sell-through has been really strong. I did notice that there were some price rollbacks online, at least. It was $149, down to $129, $99 down so we just planned rollback going in? Or yes, did that help drive the self -- I wonder if you could just give some color on it.

Yes. Thank you for the question. We do plan rollbacks and promos throughout the year. So we put out a promo calendar early on in about March or April with our strategic retail partners. So you will be seeing that throughout the holidays, beginning now. One thing that Amazon Prime has shown us is that there are some good deals out there. The consumer will start picking up products earlier which has been the case for us as well. So yes, we are -- we have been working some of our online-only deals right now. Some are -- but we do have some scheduled in stores at the Walmart CE. You'll see some from end of September to January and then also from October through December. So yes, the promo calendar is out and be on the look at. We do have some good promos out there.

Great. Okay. Maybe just a follow-up question. I saw the announcement on the Costco. New product introduction into that channel, not long ago that you guys put out. Could you just maybe take a minute to just put that launch in some perspective, I think you entered Costco a couple of years ago and have been building a relationship. Could you just maybe just spend a minute or two, just talk about the evolution of that relationship and how that’s built and what you guys see going forward?

Actually, we've been in Costco now for over 20 years consecutively. We've had very good relationships with them. They tend not to be the first the technology-driven account. But with us, they've always allowed us to introduce new technology just because their customers can absorb that higher price point. So the model that we introduced, we included, we upgraded all the new WiFi technology to be up to speed with everything that's being rolled out this year in the marketplace, all the new securities improvement to how we assemble the product. We took a lot of feedback from customers last year. And yes, we think it's really the top-of-the-line product that we have introduced and thankfully because of our partnership with Costco, we're able to roll it out. So we're starting to sprinkle into the club now and you should be able to start seeing them by the end of the week, beginning of next week in most of their clubs.

[Operator Instructions] We will now take our next question from Eric Nickerson with Third Century Partners.

Great quarter, lots of fun. Quick question about the -- I think, make sure I got it right. The $1 million or so of extra expenses, operating expenses that about that. I think you said about $200,000 of that was accounted for by the cost of the uplift and the capital base. Did I get that correct?

Okay. And also, Lionel, quickly on your inventory accounting. Are you using last in first out or first in first out or something else, I don’t know about inventory.

No, it's first in first out.

Okay. And is it identified cost like for every item or is it an average cost that kind of thing?

It's a weighted average cost. But I mean, basically, it's layered. I mean we're looking at quantities that come in. And as they go out, our system is set up to actually layer the quantities item by item out the door. Now, we don't track by serial number. But as a whole, just the numbers, the oldest ones go out first.

Okay, good enough. I think I understood that our initial setup with Walmart is 3,200 of their -- I presume their superstores. And they're all in the United States, you can confirm or correct me on that. How is it looking to get into Walmart around the rest of the world?

Yes, it's a good question. We're working with Walmart Canada as well. This year, obviously, unfortunately, it was a little bit late in the year by the time we were able to try to duplicate what we are doing in the U.S. Unfortunately -- a-fortunately and unfortunately, they work really far out. But now we have two proof of concepts both in the toy and the electronic department and we are already starting to work for Q1 of next year, so May of next year. So we are in the talks with them now as we speak.

Okay. Well, that would be pretty cool. Do you have a…

And on that note also, we are duplicating the same success in Sam's Club, we're bringing that over to Sam's Club Mexico. We just got those commitments. So you'll see Sam's Club Mexico has similar programs to the U.S. and that will be out this fall. We're just working on the non-label technology stuff now and we'll be shipping Mexico out. So yes, we're taking similar approval concept we do in the U.S. that's been really successful for us and we're taking that to different countries.

Okay, great. It will be good to watch that. I'm not going to ask you guys to speculate any but I would like to hear your opinions maybe from all three of you on this quarter's report. What do you see -- I don't like to be a Debbie Downer but what do you see as the -- maybe the outstanding negatives, if any, in this quarter's report in terms of looking backward to the quarter but also what it tells us about what we should expect for the rest of the year?

Sure. I'll take a first to add to that, Eric. So when I think about this first quarter, I mean, I really am genuinely excited at what we accomplished this first quarter. I really -- I don't see any negatives. I mean it was a quarter in which we opened up probably the largest retailer in the world in probably the most sought-after department in consumer electronics of any other retailers. So that, I think, in and of itself, is a huge win for the company and for the brand. We saw during the first quarter, like Lionel mentioned, some of the supply chain troubles or challenges that we faced last year. They're starting to ease up this first quarter. And as we move forward into the holiday, I think we continue to see that trend continuing on. And it also has helped us smoothen out some of the quarters. So now we're shipping earlier. We're getting those weekly replenishment orders coming in from Walmart Electronics and we're seeing the sell-through starting earlier. So across the board, I see the first quarter as a tremendous win in almost every aspect.

Now, I know you asked or touched on how we're seeing the remainder of the year. We talked a little bit about some of the challenges of retail. If you've been following some of the announcements that the major retailers have been making, they put out some sour moods during our first quarter in which they talked about the struggles with inflation. They talked about the struggles of having a lot of inventory. And so that has certainly been weighing on the conversation in terms of just how conservative they're being this year as opposed to previous years. But even despite all of that, I mean, like Bernardo mentioned, we're still seeing a strong appetite from all of our retailers to continue in karaoke. We're seeing the sell-through every week coming in, particularly from Walmart Electronics. So, I see this first quarter as nothing that wins for the company.

Yes. Just to touch on, I think my biggest concern and the biggest challenge for me is, unfortunately, retailers do have inventory that they came into last year, I mean, TVs and those are not secrets, they've made an announcement on that. So some of the open-to-buy dollars have been tied up. We saw Target delayed some purchasing and stuff like that. But now we've got commitments, now, they seem to be rolling. But yes, I mean, that's something that they've talked about openly. And although it's not indirect -- it's not directly affecting karaoke, it could indirect affect karaoke because of the overall purchase open and purchase dollars.

Okay. Let me just -- a couple of quickies then. With Walmart, do you guys have any -- you take any haircut with dealing with them since they’re so enormous just overall? Or are they -- tell me about your margins with them compared to the rest of what we do? Is there any difference? I’m just trying to guess that might be lower margins…

No, I think Walmart is very fair. I mean I know I speak for everyone in the room. I mean, we truly enjoy working with them. The one thing about Walmart is that is a true dermatitis. They know they're the best in logistics. They know they're the best in getting people in their store, the marketing. So they don't necessarily require us to include that in our cost. They just want the best cost and they'll handle those things on their own. So I truly enjoyed working with both Walmart and Sam's from that aspect of it that they're fair. And anything that they do is not to their bottom line. They just want to provide the best value possible to their customers. So with that being said, their margins are pretty similar to others and the relationship and the rack are more than fair.

Okay. But one more time about margins. Are you guys at all bothered that $11.5 million in sales, we just barely broke even? Is there a margin problem overall? Or is it just -- is that pretty good? I mean can the fixture -- this was a weird great quarter. And I’m wondering if…

It's not a margin -- no, it's not a margin issue because as you see, the margins were up by 120 basis points… What hit us this quarter and it was pretty obvious as we went through there. I mean we had $1 million of G&A expenses over and above last year. Some of it related to the logistics area and price increases and inflation. We encountered somewhat more of that than usual. The second thing is we have a couple of large projects in the logistics area with some of our 3PL customers as well as with the Walmart -- the initial setup for Walmart, there was a lot of pallets and supplies and labor involved in getting things ready that hit us for a couple of hundred thousand. But even though we're going to hit -- we're not immune to inflation.

We're going to see those prices continue to hit us in the pocketbook in that area. However, the special projects are well on time, they'll go away. The same thing with our 3PL customers, a couple of large projects there that will not repeat themselves. We had some legal expenses and professional expenses, as I said, associated with the preparation for the NASDAQ uplisting and some of the filings that we had to do. It was basically overall G&A thing, we had some compensation. We've got new people on the board. We had some basic incentives that the office has hit as well. So it's a combination of things. Some of it is going to repeat itself. The inflation to be part of it is not going to go away but I don't anticipate us having $1 million overrun every quarter here going to.

It appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Okay. Well, I want to thank everybody for participating on today’s earnings call. We look forward to sharing our progress throughout this quarter and speaking with everyone again during our second quarter earnings call. So thank you, everybody. Take care. Have a great rest of your day.

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