The Singing Machine pany(MICS) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the unaudited condensed consolidated financial statements and related notes for the company and its subsidiaries Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, with detailed notes Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (June 30, 2021 vs. March 31, 2021) | Metric | June 30, 2021 ($) | March 31, 2021 ($) | | :------------------------------------------------ | :------------------------ | :------------- | | Assets | | | | Cash | $1,383,230 | $396,579 | | Accounts receivable, net | $5,562,834 | $2,298,922 | | Inventories, net | $8,370,101 | $5,490,255 | | Total Current Assets | $15,885,517 | $12,979,306 | | Total Assets | $19,450,067 | $16,761,911 | | Liabilities | | | | Accounts payable | $6,262,655 | $2,461,103 | | Total Current Liabilities | $10,329,959 | $7,034,199 | | Total Liabilities | $11,649,238 | $8,852,373 | | Shareholders' Equity | | | | Total Shareholders' Equity | $7,800,829 | $7,909,538 | | Total Liabilities and Shareholders' Equity | $19,450,067 | $16,761,911 | - Cash increased significantly from $396,579 at March 31, 2021, to $1,383,230 at June 30, 2021[10] - Total Current Assets increased by approximately $2.9 million, driven by increases in accounts receivable and inventories[10] - Total Current Liabilities increased by approximately $3.3 million, primarily due to a substantial rise in accounts payable[10] Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net loss for the three-month periods ended June 30, 2021 and 2020 Condensed Consolidated Statements of Operations (Three Months Ended June 30, 2021 vs. 2020) | Metric | June 30, 2021 ($) | June 30, 2020 ($) | | :------------------------------------ | :------------ | :------------ | | Net Sales | $6,065,650 | $3,051,983 | | Cost of Goods Sold | $4,487,780 | $2,089,531 | | Gross Profit | $1,577,870 | $962,452 | | Total Operating Expenses | $2,067,605 | $1,733,390 | | Loss From Operations | $(489,735) | $(770,938) | | Gain from Payroll Protection Plan loan forgiveness | $448,242 | $- | | Total Other Income (Expenses), net | $343,027 | $485,297 | | Net Loss | $(118,613) | $(206,804) | | Net Loss per Common Share (Basic and Diluted) | $(0.00) | $(0.01) | - Net Sales increased by 98.7% to $6,065,650 for the three months ended June 30, 2021, compared to $3,051,983 in the prior year[13] - Gross Profit increased by 64% to $1,577,870, but the gross profit margin decreased to 26.0% from 31.5% year-over-year[13] - Net Loss improved to $(118,613) from $(206,804) in the prior year, significantly aided by a $448,242 gain from PPP loan forgiveness[13] Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities for the three-month periods Condensed Consolidated Statements of Cash Flows (Three Months Ended June 30, 2021 vs. 2020) | Cash Flow Activity | June 30, 2021 ($) | June 30, 2020 ($) | | :------------------------------------------ | :------------ | :------------ | | Net cash provided by (used in) operating activities | $793,982 | $(244,026) | | Net cash used in investing activities | $(55,534) | $(45,314) | | Net cash provided by financing activities | $248,203 | $1,748,733 | | Net change in cash | $986,651 | $1,459,393 | | Cash at end of period | $1,383,230 | $1,804,593 | - Operating activities generated $793,982 in cash for the three months ended June 30, 2021, a significant improvement from $244,026 cash used in the prior year[15] - Cash at the end of the period was $1,383,230, an increase from the beginning of the year but lower than the $1,804,593 at June 30, 2020[15] Condensed Consolidated Statements of Shareholders' Equity Outlines changes in the company's equity accounts, including net loss and stock-based transactions, for the three-month periods Condensed Consolidated Statements of Shareholders' Equity (Three Months Ended June 30, 2021 vs. 2020) | Metric | March 31, 2021 ($) | June 30, 2021 ($) | March 31, 2020 ($) | June 30, 2020 ($) | | :-------------------------- | :------------- | :------------ | :------------- | :------------ | | Total Shareholders' Equity (Beginning) | $7,909,538 | - | $5,688,063 | - | | Net loss | $(118,613) | $(118,613) | $(206,804) | $(206,804) | | Employee compensation-stock option | $5,104 | $5,104 | - | - | | Exercise of stock options | $4,800 | $4,800 | - | - | | Total Shareholders' Equity (End) | - | $7,800,829 | - | $5,481,259 | - Total Shareholders' Equity decreased slightly to $7,800,829 at June 30, 2021, from $7,909,538 at March 31, 2021, primarily due to the net loss[17] Notes to Condensed Consolidated Financial Statements Provides additional information and explanations for the figures presented in the condensed consolidated financial statements NOTE 1 – BASIS OF PRESENTATION Describes the company's business activities and the entities included in the consolidated financial statements - The Singing Machine Company, Inc. and its wholly-owned subsidiaries are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings[19] - The Company conducts business with several entities principally owned by its former Chairman, Philip Lau, including Starlight R&D Ltd, Starlight Consumer Electronics USA, Inc., Cosmo Communications Corporation of Canada, Inc., Winglight Pacific, Ltd, and Starlight Electronics Company Ltd[20] NOTE 2 – LIQUIDITY Discusses the company's ability to meet its short-term obligations, including recent financial events and future outlook - The Company reported a net loss of approximately $119,000 for the three months ended June 30, 2021, an improvement from a net loss of approximately $207,000 for the same period in 2020[21] - In June 2021, the Company received notification that its Paycheck Protection Program (PPP) loan of approximately $444,000 (including principal and interest) was forgiven in its entirety, resulting in a gain of approximately $448,000[21] - Subsequent to the quarter end, on August 10, 2021, the Company completed a stock redemption of 19,623,155 shares for approximately $7,162,000 and a private placement raising approximately $9,800,000, expecting an increase in working capital of approximately $1,800,000 after expenses[22][23] - Management believes current working capital, available cash from the Intercreditor Revolving Credit Facility, and cash from the private placement and operating forecast will be adequate for liquidity requirements for at least the next twelve months[24] NOTE 3 - SUMMARY OF ACCOUNTING POLICIES Outlines the significant accounting principles and methods used in preparing the financial statements PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION Explains the consolidation of subsidiaries and the preparation of interim financial statements in accordance with US GAAP - The condensed consolidated financial statements include the accounts of the Company and all its wholly-owned subsidiaries, with all inter-company accounts and transactions eliminated[25] - The unaudited interim financial statements are prepared in accordance with US GAAP and Form 10-Q requirements, and do not include all disclosures required for complete annual financial statements[25][26] USE OF ESTIMATES Highlights the reliance on management's judgments and assumptions in preparing the financial statements - The Company makes estimates and assumptions for sales returns and allowances, warranty reserves, inventory reserves, and promotional incentives, which affect reported financial amounts[29] COLLECTABILITY OF ACCOUNTS RECEIVABLE Details the company's policies for estimating and reserving for uncollectible accounts receivable and customer chargebacks - The allowance for doubtful accounts is based on management's estimates of customer creditworthiness, economic conditions, and historical data, with 100% reserves for customers in bankruptcy[30] - The Company is subject to customer chargebacks for co-op program incentives, defective returns, and return freight/handling charges, which reduce collectability of open invoices[31] FOREIGN CURRENCY TRANSLATION Explains the methodology for translating financial statements of foreign subsidiaries into U.S. dollars - The Macau Subsidiary's functional currency is the Hong Kong dollar, with financial statements translated to U.S. dollars using period-end rates for assets/liabilities and average rates for revenues/expenses[32] CONCENTRATION OF CREDIT RISK Addresses the company's exposure to credit risk from cash balances and accounts receivable - The Company maintains cash in U.S. bank accounts exceeding FDIC insured amounts and also holds cash balances in foreign financial institutions, which were approximately $109,000 at June 30, 2021[33] - Financial instruments, particularly accounts receivable, subject the Company to concentrations of credit risk[34] INVENTORY Describes the valuation method for inventories and the company's policy for inventory reserves - Inventories, primarily electronic karaoke equipment, microphones, and accessories, are stated at the lower of cost or net realizable value using the first-in, first-out method[35] - As of June 30, 2021, the Company had inventory reserves of approximately $636,000 for estimated excess and obsolete inventory[35] DEFERRED FINANCING COSTS Explains the accounting treatment for costs incurred in obtaining revolving credit facilities - Deferred financing costs for revolving credit facilities are classified as assets and amortized over their term; approximately $38,000 was incurred in June 2021 for the IHC Facility renewal[36] LONG-LIVED ASSETS Details the company's policy for reviewing and assessing impairment of long-lived assets - Long-lived assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable; no impairment was recorded as of June 30, 2021 and 2020[39] LEASES Describes the company's accounting policy for recognizing right-of-use assets and lease liabilities under FASB ASC 842 - The Company follows FASB ASC 842, recognizing right-of-use (ROU) assets and lease liabilities on the balance sheet for leases longer than twelve months, classifying them as finance or operating[40][41] PROPERTY AND EQUIPMENT Explains the valuation and depreciation methods for property and equipment - Property and equipment are stated at cost less accumulated depreciation, with depreciation provided using accelerated and straight-line methods over estimated useful lives[42] FAIR VALUE OF FINANCIAL INSTRUMENTS Discusses how the fair value of the company's financial instruments is determined - The carrying amounts of the Company's short-term financial instruments (e.g., accounts receivable, accounts payable) and notes payable, finance leases, and installment notes approximate fair value due to their short maturity or market-similar interest rates[44] REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS Outlines the company's revenue recognition policy and its methodology for estimating sales returns - Revenue is recognized in accordance with FASB ASC 606 when control of goods is transferred to the customer, reflecting the expected consideration[45] - Co-op promotion incentives, not being distinct goods or services, are recorded as a reduction to net sales, totaling approximately $272,000 for both three-month periods ended June 30, 2021 and 2020[48] - The Company maintains a reserve for sales returns based on historical return amounts and management estimates, which was approximately $750,000 as of June 30, 2021[52][53] Disaggregated Revenue by Product Line (Three Months Ended June 30, 2021 vs. 2020) | Product Line | June 30, 2021 ($) | June 30, 2020 ($) | | :---------------------- | :------------ | :------------ | | Classic Karaoke Machines | $4,448,000 | $2,341,000 | | Licensed Product | $771,000 | $- | | Music and Accessories | $778,000 | $588,000 | | SMC Kids Toys | $69,000 | $123,000 | | Total Net Sales | $6,066,000 | $3,052,000 | SHIPPING AND HANDLING COSTS Explains the classification and amounts of shipping and handling expenses - Shipping and handling expenses, classified as a component of selling expenses, were approximately $151,000 for the three months ended June 30, 2021, up from $83,000 in the prior year[54] STOCK BASED COMPENSATION Details the accounting for stock-based compensation expense related to employee stock options - Stock-based compensation expense for employee stock options, valued using the Black-Scholes model, was approximately $5,000 for the three months ended June 30, 2021, compared to $0 in the prior year[55] RESEARCH AND DEVELOPMENT COSTS Describes the company's policy for expensing research and development costs - Research and development costs, charged to operations as incurred and included in selling, general and administrative expenses, totaled approximately $31,000 for the three months ended June 30, 2021, up from $13,000 in the prior year[56] INCOME TAXES Explains the company's approach to recognizing deferred tax assets and liabilities and uncertain tax positions - The Company follows FASB ASC 740, recognizing deferred tax assets and liabilities for temporary differences and a valuation allowance if realization is not more likely than not[58] - No uncertain tax positions resulted in adjustments to the income tax provision as of June 30, 2021 and 2020[60] COMPUTATION OF (LOSS) EARNINGS PER SHARE Describes the calculation of basic and diluted net income (loss) per common share - Basic net income (loss) per share is based on the weighted average number of common shares outstanding, while diluted EPS reflects potential dilution from in-the-money options using the treasury stock method[61] - Options to purchase 1,660,000 shares (2021) and 2,230,000 shares (2020) were excluded from diluted EPS calculations as they were anti-dilutive[61] ADOPTION OF NEW ACCOUNTING STANDARDS Reports on the adoption of new accounting pronouncements and their impact on the financial statements - The Company adopted ASU 2019-12, 'Income Taxes' (Topic 740), for the interim period ended June 30, 2021, which did not have a material effect on the financial statements[62] RECENT ACCOUNTING PRONOUNCEMENTS Discusses recently issued accounting standards that the company is currently evaluating - The Company is evaluating ASU 2016-13, 'Financial Instruments—Credit Losses' (Topic 326), which requires immediate recognition of expected credit losses and is effective for smaller reporting companies for fiscal years beginning after April 1, 2023[63] NOTE 4 - INVENTORIES, NET Provides a detailed breakdown of inventory components and their net values Inventories, Net (June 30, 2021 vs. March 31, 2021) | Component | June 30, 2021 ($) | March 31, 2021 ($) | | :-------------------------- | :------------ | :------------- | | Finished Goods | $6,288,000 | $5,348,000 | | Inventory in Transit | $2,217,000 | $250,000 | | Estimated Amount of Future Returns | $501,000 | $528,000 | | Subtotal | $9,006,000 | $6,126,000 | | Less: Inventory Reserve | $636,000 | $636,000 | | Inventories, net | $8,370,000 | $5,490,000 | - Net inventories increased significantly to $8,370,000 at June 30, 2021, from $5,490,000 at March 31, 2021, primarily due to a substantial increase in inventory in transit[64] NOTE 5 – PROPERTY AND EQUIPMENT Presents a detailed breakdown of property and equipment, including cost and accumulated depreciation Property and Equipment, Net (June 30, 2021 vs. March 31, 2021) | Category | June 30, 2021 ($) | March 31, 2021 ($) | | :---------------------- | :------------ | :------------- | | Computer and office equipment | $445,000 | $445,000 | | Furniture and fixtures | $98,000 | $98,000 | | Warehouse equipment | $199,000 | $199,000 | | Molds and tooling | $1,933,000 | $1,878,000 | | Total Cost | $2,675,000 | $2,620,000 | | Less: Accumulated depreciation | $2,014,000 | $1,946,000 | | Property and equipment, net | $661,000 | $674,000 | - Net property and equipment slightly decreased to $661,000 at June 30, 2021, from $674,000 at March 31, 2021, despite an increase in molds and tooling[65] - Depreciation expense for the three months ended June 30, 2021, was approximately $68,000, a slight decrease from $71,000 in the prior year[68] NOTE 6 – BANK FINANCING Details the company's various bank financing arrangements, including revolving credit facilities and notes payable Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit Describes the terms and availability of the company's revolving credit facilities - The Company has a $10.0 million (decreasing to $5.0 million off-peak) Crestmark Facility for accounts receivable and a $2.5 million IHC Facility for inventory financing, both expiring on June 15, 2022[69][71][73] - As of June 30, 2021, approximately $1,500,000 of borrowings were available under these facilities[69] - Interest expense for the three months ended June 30, 2021, was approximately $45,000 for Crestmark (0 in 2020) and $39,000 for IHC (up from $8,000 in 2020)[70][72] - The IHC Facility requires a fixed charge coverage ratio of 1:1 times, which the Company was in compliance with as of June 30, 2021[76] Note Payable Payroll Protection Plan Details the PPP loan received and its subsequent forgiveness - The Company received approximately $444,000 from the PPP in May 2020, which was fully forgiven in June 2021, resulting in a $448,000 gain (including principal and interest) recognized in other income[77] Installment Notes Payable Provides information on the company's installment notes for an ERP system project - The Company has installment notes totaling approximately $365,000 for an ERP System project, with 60-month terms and interest rates ranging from 7.58% to 9.25%[80] - The outstanding balance was approximately $265,000 at June 30, 2021, down from $281,000 at March 31, 2021[80] Subordinated Debt/Note Payable to Related Party Discusses the conversion and outstanding balance of subordinated related party debt - Subordinated related party debt of approximately $803,000 was converted to a 6% note payable on June 1, 2020, with an outstanding balance of approximately $503,000 at June 30, 2021[81][83] - The Company intends to make additional payments and pay off the remaining balance within the next twelve months, provided it meets repayment requirements of the Crestmark and IHC Facilities[82] NOTE 7 - COMMITMENTS AND CONTINGENCIES Discloses the company's legal matters, lease obligations, and other potential liabilities LEGAL MATTERS Reports on legal proceedings and management's assessment of their potential financial impact - A complaint was filed against the SMCL subsidiary in September 2020 alleging employment practice violations; management believes the claims lack merit and will not materially affect financial results[84] LEASES Provides details on the company's operating lease agreements and future minimum payments - The Company has operating lease agreements for offices and a warehouse in Florida, California, and Macau, with terms expiring through 2024[87] Operating Lease Liabilities (June 30, 2021) | Year | Operating Leases ($) | | :------------------------ | :--------------- | | 2021 (remaining 6 months) | $466,342 | | 2022 | $938,348 | | 2023 | $674,488 | | 2024 | $30,739 | | Total Minimum Future Payments | $2,109,917 | | Less: Imputed Interest | $158,354 | | Present Value of Lease Liabilities | $1,951,563 | - Operating lease expense was $232,262 for the three months ended June 30, 2021, with a weighted average remaining lease term of 27.0 months and a weighted average discount rate of 6.25%[95] NOTE 8 - STOCK OPTIONS Summarizes the activity and status of the company's stock option plans Stock Option Activity (Three Months Ended June 30, 2021) | Metric | Number of Options | Weighted Average Exercise Price ($) | | :-------------------------- | :---------------- | :------------------------------ | | Balance at beginning of period | 1,680,000 | $0.32 | | Granted | - | - | | Exercised | (20,000) | $0.24 | | Balance at end of period | 1,660,000 | $0.32 | | Options exercisable at end of period | 1,560,000 | $0.33 | - No stock options were issued during the three months ended June 30, 2021 or 2020[97] - As of June 30, 2021, there was approximately $5,000 of unrecognized expense remaining on currently vesting options, with approximately four months until full vesting[100] NOTE 9 - GEOGRAPHICAL INFORMATION Presents a breakdown of sales by geographic region Sales by Geographic Region (Three Months Ended June 30, 2021 vs. 2020) | Region | June 30, 2021 ($) | June 30, 2020 ($) | | :------------ | :------------ | :------------ | | North America | $5,966,000 | $2,816,000 | | Europe | $- | $183,000 | | Australia | $100,000 | $53,000 | | Total | $6,066,000 | $3,052,000 | - Sales to customers outside the United States were primarily made by the Macau Subsidiary in US dollars[102] - North America accounted for the vast majority of sales, increasing from $2,816,000 in 2020 to $5,966,000 in 2021[102] NOTE 10 –RELATED PARTY TRANSACTIONS Details transactions and balances with related parties DUE TO RELATED PARTIES Reports on amounts owed to related parties for services and licensing fees - Amounts due to related parties for services and licensing fees were approximately $63,000 at June 30, 2021, and March 31, 2021[104] TRADE Describes trade-related transactions with affiliated entities - In July 2020, the Company became the sole Canadian distributor after acquiring Cosmo's karaoke inventory for approximately $685,000[107] - A gain of approximately $11,000 from Cosmo was recognized in Q1 2022 related to payments on prior year sales previously deemed uncollectible[107] - Service expenses from Starlight Electronics Co, Ltd (SLE), a related party, were approximately $91,000 for both three-month periods ended June 30, 2021 and 2020[108] NOTE 11 – RESERVE FOR SALES RETURNS Explains the company's policy and changes in the reserve for estimated sales returns - The Company records a sales return reserve at the time of sale for estimated defective goods returns, based on historical amounts and management estimates[109][110] Changes in Reserve for Sales Returns (Six Months Ended June 30, 2021 vs. 2020) | Metric | June 30, 2021 ($) | June 30, 2020 ($) | | :------------------------------------ | :------------ | :------------ | | Reserve for sales returns at beginning of fiscal year | $960,000 | $1,224,000 | | Provision for estimated sales returns | $539,000 | $284,000 | | Sales returns received | $(749,000) | $(1,128,000) | | Reserve for sales returns at end of period | $750,000 | $380,000 | NOTE 12 – REFUNDS DUE TO CUSTOMERS Reports on the amounts owed to customers for product returns - Refunds due to customers were approximately $94,000 at June 30, 2021, primarily for overstock returns from one customer, down from $145,000 at March 31, 2021[112] NOTE 13 - EMPLOYEE BENEFIT PLANS Provides information on the company's 401(k) plan and related contributions - The Company contributes to a 401(k) plan for employees; contributions and administrative costs totaled approximately $18,000 for the three months ended June 30, 2021, up from $14,000 in the prior year[113] NOTE 14 - CONCENTRATIONS OF CREDIT AND SALES RISK Addresses the company's exposure to credit and sales risk due to customer concentration - A majority of revenues are derived from U.S. retailers, with accounts receivable concentrated among several large customers[114] - At June 30, 2021, 78% of accounts receivable were due from three customers, and for the three months ended June 30, 2021, four customers individually accounted for 10% or more of net sales (45%, 18%, 14%, and 14% respectively)[114][115] NOTE 15 – SUBSEQUENT EVENTS Discloses significant events that occurred after the reporting period, including stock redemption and private placement - On August 10, 2021, the Company completed a stock redemption of 19,623,155 common shares for approximately $7,162,000, with the shares to be retired to treasury[117] - Also on August 10, 2021, a private placement closed, raising approximately $9,800,000 through the sale of common stock and warrants to institutional and strategic investors, including Stingray Group Inc[119][121][122] - Approximately $7,200,000 of the private placement funds were used for the stock redemption, with an expected increase in working capital of approximately $1,800,000 after expenses[121] - In connection with these transactions, Phillip Lau, Peter Hon, and Yat Tung Lau resigned from the Board of Directors[157] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on the company's financial performance, liquidity, and capital resources for the quarter FORWARD-LOOKING STATEMENTS Warns readers about the inherent uncertainties and risks associated with forward-looking information - The discussion contains forward-looking statements based on current expectations, subject to risks and uncertainties that could cause actual results to differ materially[123][124] - Key factors to consider include changes in external factors, unanticipated cash requirements, shifts in business strategy, adverse economic conditions, vendor price increases, competitive market factors, and other risks detailed in SEC filings[125] OVERVIEW Provides a general description of the company's business, products, and market presence - The Singing Machine Company, Inc. and its subsidiaries develop, market, and sell consumer karaoke audio systems, accessories, musical instruments, and recordings, primarily to retailers and distributors in North America, Europe, and Australia[128][129] - The business is highly seasonal, with a majority of retail sales occurring from September through December (holiday season), accounting for approximately 86% and 85% of net sales in fiscal 2021 and 2020, respectively[131] COVID-19 UPDATE Discusses the ongoing impact of the pandemic on the company's operations, supply chain, and market demand - The COVID-19 pandemic continues to be unpredictable, causing manufacturing cost pressures due to raw material and electronic component shortages, as well as inflationary price increases[132] - The Company experienced supply chain challenges, including increased lead times, port closures, global container shortages, and rising logistics and labor costs, which are expected to continue throughout the fiscal year[133] - Demand for home entertainment products, including karaoke, microphones, and toys, grew during the pandemic and remains strong due to market shortages[134] RESULTS OF OPERATIONS Analyzes the company's financial performance, including revenue, expenses, and net income, for the reporting period NET SALES Explains the drivers behind changes in net sales for the reporting period - Net sales for the quarter ended June 30, 2021, increased by approximately $3,014,000 (98.7%) to $6,066,000, compared to $3,052,000 in the prior year[137] - The increase was primarily due to $2,444,000 in holiday promotion goods shipped earlier to one major customer and year-round product offerings by another major customer[137] GROSS PROFIT Analyzes the changes in gross profit and gross profit margin - Gross profit increased by approximately $616,000 to $1,578,000, but the gross profit margin decreased from 31.5% to 26.0% (a 5.5 percentage point decrease)[138][139] - The margin decrease was mainly due to the higher proportion of lower-margin holiday promotion goods (accounting for 4.4 margin points of the decrease) and the mix of returned products[139] OPERATING EXPENSES Details the changes in selling, general, and administrative expenses - Total operating expenses increased by approximately $335,000 to $2,068,000 for the quarter ended June 30, 2021[141] - Selling expenses rose by $279,000, driven by variable expenses (commissions, freight, royalties) commensurate with increased sales and $97,000 in increased online media marketing[141] - General and administrative expenses increased by $58,000 due to higher logistics costs[141] - As a percentage of net sales, total operating expenses decreased significantly from 56.8% to 34.0% (a 22.8 percentage point decrease), primarily due to lower selling and administrative expenses for direct import holiday promotion goods[142] LOSS FROM OPERATIONS Discusses the factors contributing to the company's operating loss - Loss from operations decreased by approximately $281,000 to $(490,000) for the three months ended June 30, 2021, compared to $(771,000) in the prior year, driven by increased gross profit offset by higher operating expenses[143] OTHER INCOME (EXPENSES) Explains the components of other income and expenses, including one-time gains - Net other income decreased by approximately $142,000 to $343,000 for the three months ended June 30, 2021[144] - Q1 2021 included one-time gains of approximately $459,000, primarily from $448,000 in PPP loan forgiveness, offset by $116,000 in interest expenses[144] - Q1 2020 included one-time gains of approximately $521,000 from a $131,000 damaged goods insurance claim and $390,000 from extinguishment of accounts payable, offset by $36,000 in interest expenses[144] INCOME TAXES Reports on the income tax provision or benefit and the effective tax rate - The Company recognized an income tax benefit of approximately $28,000 for Q1 2021 (effective tax rate of 19.1%) compared to $79,000 for Q1 2020 (effective tax rate of 27.6%)[145] NET INCOME Summarizes the overall net income or loss and its primary drivers - Net loss improved to approximately $(119,000) for the three months ended June 30, 2021, from $(207,000) in the prior year, primarily due to improved operating loss and the PPP loan forgiveness[146] LIQUIDITY AND CAPITAL RESOURCES Assesses the company's cash position, working capital, and ability to fund operations and investments - Cash on hand was approximately $1,383,000 at June 30, 2021, compared to $1,805,000 at June 30, 2020, with working capital of approximately $5,556,000[147] - Net cash provided by operating activities was approximately $794,000 for Q1 2021, a significant improvement from $244,000 used in Q1 2020[147] - Operating cash flow was positively impacted by a $4,214,000 decrease in amounts due from Crestmark Bank and a $3,790,000 increase in accounts payable, offset by increases in accounts receivable ($3,251,000) and inventories ($2,880,000) for peak season build-up[147] - Net cash provided by financing activities was approximately $248,000 for Q1 2021, including $300,000 borrowed from the Intercreditor Revolving Credit Facility, compared to $1,749,000 in Q1 2020 which included $1,400,000 from IHC and $444,000 from PPP[150][151] - The Company expects current working capital, available credit facilities, and proceeds from the recent private placement to be adequate for liquidity for at least the next twelve months[158] CRITICAL ACCOUNTING POLICIES Identifies the accounting policies that require significant judgment and estimates - The interim financial statements rely on management's subjective decisions, assessments, and estimates, which are inherently uncertain[159] - Critical accounting estimates and assumptions have not materially changed from those identified in the Company's 2021 Annual Report[159] Item 3. Quantitative and Qualitative Disclosures About Market Risk States that this item is not required for smaller reporting companies - Not required for small reporting companies[160] Item 4. Controls and Procedures Addresses the effectiveness of the company's disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures Reports on the CEO and CFO's assessment of the effectiveness of disclosure controls - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to a material weakness in the consolidated financial statements close process[161][162] - The material weakness was primarily related to errors in inventory cutoff and valuation of estimated returns, partly due to a new accounting software system[162] Plan for material Weakness in Internal Control over Financial Reporting Outlines the company's strategy to address identified material weaknesses in internal controls - Remediation measures include correcting system processing errors in the new ERP system related to returned goods recognition and costing[163][164] - Management plans to strengthen ERP system training for finance and warehouse personnel on inventory cutoff and valuation procedures[164] - The Company will assess resource adequacy and explore additional third-party assistance for proper inventory controls[164] Changes in Internal Controls Reports on any changes in internal control over financial reporting during the quarter - There were no changes in the Company's internal controls over financial reporting during the quarter ended June 30, 2021, that materially affected, or were reasonably likely to materially affect, internal control over financial reporting[164] PART II. OTHER INFORMATION Contains additional information not covered in the financial statements, including legal proceedings and exhibits Item 1. Legal Proceedings Discloses any material legal actions involving the company - A complaint was filed on September 11, 2020, against SMCL alleging employment practice violations; management believes the claims lack merit and will not have a material adverse effect on financial results[166] - Management is not aware of any other legal proceedings outside the ordinary course of business[167] Item 1A. Risk Factors States that this item is not applicable for smaller reporting companies - Not applicable for smaller reporting companies[168] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on any unregistered sales of equity securities and the application of their proceeds - No unregistered sales of equity securities or use of proceeds were reported[168] Item 3. Defaults Upon Senior Securities Confirms whether the company is in default on any of its senior securities - The Company is not currently in default upon any of its senior securities[168] Item 4. Mine Safety Disclosures Reports on any mine safety disclosures, if applicable - No mine safety disclosures were reported[169] Item 5. Other Information Includes any other material information not disclosed elsewhere in the report - No other information was reported[170] Item 6. Exhibits Lists all documents filed as exhibits to the quarterly report - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350[171] SIGNATURES Provides the official signatures of the company's authorized officers, certifying the report - The report was signed on August 16, 2021, by Gary Atkinson, Chief Executive Officer, and Lionel Marquis, Chief Financial Officer[174]