The Singing Machine pany(MICS) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the periods presented Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of income, cash flows, and shareholders' equity, along with detailed notes explaining the accounting policies and significant financial events for the periods ended December 31, 2021, and 2020 Condensed Consolidated Balance Sheets This table presents a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (Selected Items) | Metric | Dec 31, 2021 (Unaudited) (in USD) | Mar 31, 2021 (in USD) | | :--- | :--- | :--- | | Cash | $7,375,305 | $396,579 | | Accounts receivable, net | $12,254,098 | $2,210,881 | | Inventories, net | $11,126,298 | $5,490,255 | | Total Current Assets | $31,216,220 | $12,979,306 | | Total Assets | $34,060,676 | $16,761,911 | | Total Current Liabilities | $21,405,271 | $7,034,199 | | Total Liabilities | $22,260,979 | $8,852,373 | | Total Shareholders' Equity | $11,799,697 | $7,909,538 | Condensed Consolidated Statements of Income This table details the company's revenues, expenses, and net income over specific reporting periods Condensed Consolidated Statements of Income (Selected Items) | Metric | 3 Months Ended Dec 31, 2021 (in USD) | 3 Months Ended Dec 31, 2020 (in USD) | 9 Months Ended Dec 31, 2021 (in USD) | 9 Months Ended Dec 31, 2020 (in USD) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $21,244,306 | $16,972,603 | $44,678,929 | $42,309,825 | | Cost of Goods Sold | $15,934,842 | $11,998,640 | $34,464,291 | $30,550,406 | | Gross Profit | $5,309,464 | $4,973,963 | $10,214,638 | $11,759,419 | | Income From Operations | $1,693,729 | $1,492,705 | $1,954,007 | $3,160,306 | | Net Income | $1,425,895 | $1,167,295 | $1,999,655 | $3,368,365 | | Basic Net Income per Common Share | $0.03 | $0.03 | $0.04 | $0.09 | | Diluted Net Income per Common Share | $0.03 | $0.03 | $0.04 | $0.09 | Condensed Consolidated Statements of Cash Flows This table outlines the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Selected Items) | Metric | 9 Months Ended Dec 31, 2021 (in USD) | 9 Months Ended Dec 31, 2020 (in USD) | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(3,113,334) | $165,496 | | Net Cash Used in Investing Activities | $(77,599) | $(88,843) | | Net Cash Provided by Financing Activities | $10,169,659 | $401,520 | | Net Change in Cash | $6,978,726 | $478,173 | | Cash at End of Period | $7,375,305 | $823,373 | Condensed Consolidated Statements of Shareholders' Equity This table tracks changes in the company's equity from common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Shareholders' Equity (Selected Items) | Metric | Dec 31, 2021 | Sep 30, 2021 | Dec 31, 2020 | Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Common Stock Shares | 36,636,264 | 36,576,264 | 39,040,748 | 38,557,643 | | Common Stock Amount (in USD) | $366,362 | $365,762 | $390,407 | $385,576 | | Additional Paid-in Capital (in USD) | $24,542,633 | $24,530,384 | $19,768,217 | $19,729,043 | | Accumulated Deficit (in USD) | $(13,109,298) | $(14,535,193) | $(11,058,191) | $(12,225,486) | | Total Shareholders' Equity (in USD) | $11,799,697 | $10,360,953 | $9,100,433 | $7,889,133 | - For the nine months ended December 31, 2021, the Company issued 16,500,001 shares of common stock and 16,833,333 pre-funded warrants, and redeemed 19,623,155 shares of common stock[19] Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on the Company's accounting policies, liquidity, recent equity events, and specific financial statement line items, offering context and further breakdown of the consolidated financial statements NOTE 1 – BASIS OF PRESENTATION This note describes the fundamental principles and scope used in preparing the financial statements - The Company primarily develops, markets, and sells consumer karaoke audio systems, accessories, musical instruments, and musical recordings through its wholly-owned subsidiaries[23] NOTE 2 – LIQUIDITY AND RECENT EQUITY EVENTS This note discusses the company's cash position, debt obligations, and significant equity transactions - A Paycheck Protection Program (PPP) loan of approximately $444 thousand was forgiven in its entirety in June 2021, resulting in a gain of approximately $448 thousand[24] - In August 2021, the Company redeemed 19,623,155 shares of common stock from its majority shareholders for approximately $7.16 million[25][26] - Concurrently, a private placement raised approximately $9.83 million through the issuance of common stock and pre-funded warrants to institutional and strategic investors[26] - The Company expects to negotiate revisions or extensions for its Crestmark Bank and Iron Horse Credit facilities, which are set to expire on June 15, 2022[27] NOTE 3 - SUMMARY OF ACCOUNTING POLICIES This note outlines the key accounting principles and methods applied in the financial reporting Principles of Consolidation and Basis of Presentation This section details how the financial statements of the company and its subsidiaries are combined - The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, eliminating all inter-company transactions, and are prepared in accordance with US GAAP for interim financial information[28] Use of Estimates This section explains the management's reliance on estimates for various financial statement items - Management makes estimates and assumptions for sales returns, warranty reserves, inventory reserves, and promotional incentives, which have not historically had a material impact on the Company's financial condition[32] Collectability of Accounts Receivable This section describes the company's policy for assessing and reserving for uncollectible accounts receivable - The allowance for doubtful accounts is based on management's estimates of customer creditworthiness, economic conditions, and historical information, with 100% reserves for customers in bankruptcy[33] Foreign Currency Translation This section explains the methods used to convert foreign subsidiary financial statements into U.S. dollars - The Macau Subsidiary's financial statements are translated from Hong Kong dollars to U.S. dollars using period-end rates for assets/liabilities and average rates for revenues/expenses, with net gains/losses in income and translations in shareholders' equity[35] Concentration of Credit Risk This section identifies significant exposures to credit risk from cash holdings and accounts receivable - The Company maintains cash in U.S. bank accounts exceeding FDIC insured amounts and in foreign financial institutions, with accounts receivable posing a concentration of credit risk[36][37] Inventory This section details the valuation methods and reserves for the company's inventory - Inventories are stated at the lower of cost (FIFO method) or net realizable value, including estimates for future inventory returns and reserves for estimated excess and obsolete inventory[38] Inventory Reserves | Metric | Dec 31, 2021 (in USD) | Mar 31, 2021 (in USD) | | :--- | :--- | :--- | | Estimated Amount of Future Returns | ~$1,978,000 | ~$528,000 | | Inventory Reserves (Excess and Obsolete) | ~$934,000 | ~$636,000 | Deferred Financing Costs This section explains the accounting treatment for costs incurred in obtaining financing - Deferred financing costs for revolving credit facilities are classified as assets and amortized over their term, such as the approximately $38 thousand incurred for the IHC Facility renewal in June 2021[39] Long-Lived Assets This section describes the company's policy for evaluating and recording 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 December 31, 2021, and 2020[40] Leases This section outlines the accounting for lease agreements, including right-of-use assets and lease liabilities - The Company follows FASB ASC 842, recognizing right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months, classifying them as finance or operating leases[42][43] Property and Equipment This section details the valuation and depreciation policies for the company's 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[44] Fair Value of Financial Instruments This section explains how the fair value of various financial instruments is determined - The carrying amounts of the Company's short-term financial instruments, notes payable, finance leases, installment notes, and revolving lines of credit approximate fair value due to their short maturity periods or market-similar interest rates[46] Revenue Recognition and Reserve for Sales Returns This section describes the criteria for recognizing revenue and establishing reserves for product returns - Revenue is recognized when goods are delivered and control is transferred to the customer, with co-op promotion incentives recorded as a reduction to net sales[47][49] Co-op Promotion Incentives | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$796,000 | ~$858,000 | | Nine Months Ended Dec 31 | ~$1,805,000 | ~$2,032,000 | Revenue by Product Line (3 Months Ended Dec 31) | Product Line | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Classic Karaoke Machines | $17,732,000 | $11,998,000 | | Licensed Product | $645,000 | $1,644,000 | | SMC Kids Toys | $1,051,000 | $662,000 | | Microphones and Accessories | $1,657,000 | $2,481,000 | | Music Subscriptions | $159,000 | $188,000 | | Total Net Sales | $21,244,000 | $16,973,000 | Revenue by Product Line (9 Months Ended Dec 31) | Product Line | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Classic Karaoke Machines | $37,216,000 | $32,337,000 | | Licensed Product | $1,510,000 | $4,332,000 | | SMC Kids Toys | $2,145,000 | $1,229,000 | | Microphones and Accessories | $3,424,000 | $4,122,000 | | Music Subscriptions | $384,000 | $290,000 | | Total Net Sales | $44,679,000 | $42,310,000 | Shipping and Handling Costs This section clarifies the classification of shipping and handling expenses within the financial statements - Shipping and handling expenses are classified as a component of selling expenses, totaling approximately $369 thousand for the three months ended December 31, 2021 (down from approximately $512 thousand in 2020) and approximately $654 thousand for the nine months ended December 31, 2021 (down from approximately $900 thousand in 2020)[56] Stock Based Compensation This section details the accounting for share-based payments to employees - Share-based payments to employees are measured at fair value using the Black-Scholes option valuation model and expensed over the service period[57] Stock Option Expense | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$3,000 | ~$5,000 | | Nine Months Ended Dec 31 | ~$16,000 | ~$5,000 | Research and Development Costs This section explains the treatment of research and development expenditures - Research and development costs are charged to operations as incurred and are included in general and administrative expenses[58] Research and Development Costs | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$11,000 | ~$33,000 | | Nine Months Ended Dec 31 | ~$61,000 | ~$48,000 | Income Taxes This section outlines the accounting for income taxes, including deferred tax assets and liabilities - Deferred tax assets and liabilities are recognized for future tax consequences of temporary differences, with a valuation allowance if realization is not more likely than not[59][60] Income Tax Provision & Effective Tax Rate | Metric | Dec 31, 2021 (in USD) | Dec 31, 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended: | | | | Income Tax Provision | ~$103,000 | ~$264,000 | | Nine Months Ended: | | | | Income Tax Provision | ~$249,000 | ~$1,006,000 | | Estimated Effective Tax Rate | ~11% | ~23% | Net Deferred Tax Assets | Date | Amount (in USD) | | :--- | :--- | | Dec 31, 2021 | ~$638,000 | | Mar 31, 2021 | ~$887,000 | Computation of Earnings Per Share This section describes the calculation of basic and diluted earnings per common share - Basic net income per share is based on the weighted average number of common shares outstanding, while diluted net income per share reflects potential dilution from in-the-money options and pre-funded warrants[65] Weighted Average Common and Common Equivalent Shares | Metric | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 9 Months Ended Dec 31, 2021 | 9 Months Ended Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic | 53,410,249 | 38,885,185 | 46,787,545 | 38,667,221 | | Diluted | 53,635,368 | 39,156,481 | 47,109,854 | 39,041,074 | Recent Accounting Pronouncements This section discusses the impact of newly issued accounting standards on the company's financial reporting - 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 the Company beginning April 1, 2023[66] NOTE 4 - INVENTORIES, NET This note provides a detailed breakdown of the company's inventory components and related reserves Inventories, Net | Component | Dec 31, 2021 (in USD) | Mar 31, 2021 (in USD) | | :--- | :--- | :--- | | Finished Goods | $8,427,000 | $5,348,000 | | Inventory in Transit | $1,655,000 | $250,000 | | Estimated Amount of Future Returns | $1,978,000 | $528,000 | | Subtotal | $12,060,000 | $6,126,000 | | Less: Inventory Reserve | $934,000 | $636,000 | | Inventories, net | $11,126,000 | $5,490,000 | NOTE 5 – PROPERTY AND EQUIPMENT This note details the cost, accumulated depreciation, and net book value of the company's property and equipment Property and Equipment, Net | Category | Dec 31, 2021 (in USD) | Mar 31, 2021 (in USD) | | :--- | :--- | :--- | | Computer and office equipment | $440,000 | $445,000 | | Furniture and fixtures | $98,000 | $98,000 | | Warehouse equipment | $210,000 | $199,000 | | Molds and tooling | $1,946,000 | $1,878,000 | | Total Cost | $2,694,000 | $2,620,000 | | Less: Accumulated depreciation (in USD) | $2,113,000 | $1,946,000 | | Net Property and Equipment | $581,000 | $674,000 | Depreciation Expense | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$55,000 | ~$65,000 | | Nine Months Ended Dec 31 | ~$190,000 | ~$204,000 | NOTE 6 – BANK FINANCING This note describes the company's various bank loans, credit facilities, and related terms Intercreditor Revolving Credit Facility (Crestmark Bank and Iron Horse Credit) This section details the terms and outstanding balances of the company's revolving credit facilities - The Company has a $10.0 million Crestmark Facility (secured by accounts receivable and inventory) and a $2.5 million Iron Horse Credit (IHC) Facility (secured by inventory), both expiring on June 15, 2022[71][72][73][78][79] - The Crestmark Facility bears interest at the Wall Street Journal Prime Rate plus 5.50% (minimum 8.75%), while the IHC Facility bears interest at 1.292% per month (15.51% annually)[72][78] Outstanding Balances (Revolving Lines of Credit) | Facility | Dec 31, 2021 (in USD) | Mar 31, 2021 (in USD) | | :--- | :--- | :--- | | Crestmark Facility | ~$6,637,000 | N/A | | IHC Facility | ~$1,990,000 | ~$65,000 | - The Company was not in compliance with the fixed charge coverage ratio covenant for October and November 2021 but obtained waivers; it was in compliance as of December 31, 2021[76] Note Payable Payroll Protection Plan This section describes the Paycheck Protection Program loan and its forgiveness - A $444 thousand Paycheck Protection Program (PPP) loan received in May 2020 was fully forgiven in June 2021, resulting in a gain of approximately $448 thousand (including principal and interest)[80] Installment Notes Payable This section outlines the company's installment debt obligations and their repayment schedules - The Company has installment notes totaling approximately $365 thousand for an ERP system, with 60-month terms and interest rates ranging from 7.58% to 9.25%[81] Installment Notes Outstanding Balance | Date | Amount (in USD) | | :--- | :--- | | Dec 31, 2021 | ~$231,000 | | Mar 31, 2021 | ~$281,000 | Subordinated Debt/Note Payable to Related Party This section details the subordinated debt and its conversion to a related-party note payable - Subordinated debt of approximately $803 thousand to Starlight Marketing Development, Ltd. was converted to a 6% note payable in June 2020[82] - The Company has made cumulative principal payments totaling $450 thousand and intends to pay off the remaining balance of approximately $353 thousand as of December 31, 2021[83][84] NOTE 7 - COMMITMENTS AND CONTINGENCIES This note discloses the company's contractual obligations, potential liabilities, and the impact of COVID-19 COVID-19 This section discusses the ongoing impact of the COVID-19 pandemic on manufacturing costs and supply chains - The COVID-19 pandemic continues to cause manufacturing cost pressures due to raw material and electronic component shortages, as well as inflationary price increases[86] Legal Matters This section addresses any significant legal proceedings or claims against the company - Management is not aware of any legal proceedings other than matters that arise in the ordinary course of business[87] Leases This section provides details on the company's operating and finance lease agreements and liabilities - The Company has operating lease agreements for offices and a warehouse facility in Florida, California, and Macau, with various expiration dates through 2024[88][89][90] - A long-term capital lease for a used forklift was entered into on July 1, 2021, for approximately $24 thousand over 36 months at a 9.9% effective interest rate[92] Lease Liabilities (Dec 31, 2021) | Type | Current Portion (in USD) | Noncurrent Portion (in USD) | Total Present Value (in USD) | | :--- | :--- | :--- | :--- | | Operating Leases | $860,528 | $685,304 | $1,545,832 | | Finance Leases | $7,421 | $12,592 | $20,013 | Weighted Average Lease Terms and Discount Rates (Dec 31, 2021) | Type | Remaining Lease Term (months) | Discount Rate | | :--- | :--- | :--- | | Operating Leases | 21.1 | 6.25% | | Finance Leases | 31.0 | 9.86% | NOTE 8 - STOCK OPTIONS AND WARRANTS This note details the company's outstanding stock options and warrants, including activity and terms - During the nine months ended December 31, 2021, the Company granted 110,000 stock options and 80,000 options were exercised[101] Stock Option Activity (9 Months Ended Dec 31, 2021) | Metric | Number of Options | Weighted Average Exercise Price | | :--- | :--- | :--- | | Balance at beginning of period | 1,680,000 | $0.32 | | Granted | 110,000 | $0.25 | | Exercised | (80,000) | $0.18 | | Balance at end of period | 1,710,000 | $0.33 | | Options exercisable at end of period | 1,600,000 | $0.33 | - As of December 31, 2021, 51,500,000 warrants were outstanding, including 34,666,667 common warrants (exercise price $0.35, expiring 9/15/2026) and 16,833,333 pre-funded warrants (exercise price $0.01, expire upon exercise)[103] NOTE 9 – AUGUST 2021 STOCK REDEMPTION This note describes the company's redemption of common stock from its majority shareholders - On August 10, 2021, the Company redeemed and retired 19,623,155 shares of common stock from its majority shareholders, Koncepts International Limited and Treasure Green Holdings, Ltd., for approximately $7.16 million[106] NOTE 10 – AUGUST 2021 PRIVATE PLACEMENT This note details the private placement of equity securities and the use of its proceeds - In August 2021, the Company completed a private placement, issuing 16,500,001 shares of common stock and 16,833,333 pre-funded warrants, along with common warrants, raising approximately $9.83 million[108][111] - Approximately $7.16 million of the private placement proceeds were used to fund the stock redemption agreement[111] - Stingray Group Inc., a long-standing business partner, participated in the private placement, acquiring a minority interest and becoming a related party[112] - An application for NASDAQ listing has been submitted and is pending approval, with shareholders approving a reverse stock split simultaneous with up-listing[110] NOTE 11 - GEOGRAPHICAL INFORMATION This note provides a breakdown of the company's sales by different geographic regions Sales by Geographic Region (3 Months Ended Dec 31) | Region | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | North America | $20,997,000 | $16,623,000 | | Europe | $219,000 | $31,000 | | Australia | $28,000 | $319,000 | | Total | $21,244,000 | $16,973,000 | Sales by Geographic Region (9 Months Ended Dec 31) | Region | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | North America | $43,691,000 | $41,014,000 | | Europe | $375,000 | $924,000 | | Australia | $613,000 | $372,000 | | Total | $44,679,000 | $42,310,000 | NOTE 12 –RELATED PARTY TRANSACTIONS This note discloses transactions and balances with entities considered related parties - Amounts due to related parties (Cosmo Communications, Inc. and Starlight Electronics Co., Ltd.) were approximately $63 thousand as of December 31, 2021, for services and licensing fees[118] - Amounts due from Stingray Group Inc. for shared music subscription revenue were approximately $159 thousand as of December 31, 2021, up from approximately $88 thousand as of March 31, 2021[119] Music Subscription Revenue from Stingray | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$160,000 | ~$188,000 | | Nine Months Ended Dec 31 | ~$384,000 | ~$290,000 | Service Expenses from SLE | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$91,000 | ~$91,000 | | Nine Months Ended Dec 31 | ~$272,000 | ~$272,000 | NOTE 13 – RESERVE FOR SALES RETURNS This note details the accounting for estimated sales returns and changes in the reserve - A sales return reserve is recorded at the time of sale for estimated defective goods returns, based on historical data, specific exceptions, and management estimates[123][124] Changes in Reserve for Sales Returns (9 Months Ended Dec 31) | Metric | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Reserve for sales returns at beginning of the year | $960,000 | $1,224,000 | | Provision for estimated sales returns | $4,020,000 | $4,187,000 | | Sales returns received | $(2,058,000) | $(2,445,000) | | Reserve for sales returns at end of the period | $2,922,000 | $2,966,000 | NOTE 14 – REFUNDS DUE TO CUSTOMERS This note provides information on amounts owed to customers for refunds Refunds Due to Customers | Date | Amount (in USD) | | :--- | :--- | | Dec 31, 2021 | ~$90,000 | | Mar 31, 2021 | ~$145,000 | NOTE 15 - EMPLOYEE BENEFIT PLANS This note describes the company's employee benefit plans, including 401(k) contributions - The Company has a 401(k) plan for its employees, with contributions charged to general and administrative expense[128] 401(k) Contributions & Administrative Costs | Period | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Three Months Ended Dec 31 | ~$20,000 | ~$20,000 | | Nine Months Ended Dec 31 | ~$55,000 | ~$54,000 | NOTE 16 - CONCENTRATIONS OF CREDIT AND SALES RISK This note identifies significant concentrations of credit risk from customers and sales - As of December 31, 2021, approximately 75% of accounts receivable were due from four North American customers, each individually owing over 10% of total accounts receivable[129] - For the three months ended December 31, 2021, five customers individually accounted for 10% or more of the Company's net sales (25%, 24%, 17%, 17%, and 10%)[130] - For the nine months ended December 31, 2021, four customers individually accounted for 10% or more of the Company's net sales (37%, 19%, 16%, and 11%)[131] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, liquidity, and capital resources for the three and nine months ended December 31, 2021, discussing key factors influencing results, the impact of COVID-19, and future outlook Forward-Looking Statements This section cautions readers about inherent risks and uncertainties in forward-looking information - The report contains forward-looking statements that involve known and unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed or implied[134] - Important factors include changes in external factors, unanticipated working capital needs, shifts in business strategy, adverse economic conditions, vendor price increases, and competitive market factors[135] Overview This section provides a general description of the company's business, products, and market seasonality - The Company develops, markets, and sells consumer karaoke audio systems, accessories, musical instruments, and musical recordings, primarily through major mass merchandisers and online retailers in North America, Europe, and Australia[137][138] - The business is highly seasonal, with approximately 85-86% of net sales occurring during the second and third quarters (September through December) due to the holiday season[140] COVID-19 Update This section updates on the pandemic's impact on manufacturing, supply chain, and product demand - The COVID-19 pandemic continues to cause manufacturing cost pressures due to raw material and electronic component shortages, as well as inflationary price increases[142] - Supply chain challenges, including increased lead times, port closures, global container shortages, and inflated logistics and labor costs, are expected to persist throughout the fiscal year[143] - Demand for karaoke, microphone, and toy categories remained strong in Fiscal 2021 and the current fiscal year, driven by increased home entertainment demand and product availability shortages[144] Results of Operations This section analyzes the company's financial performance over the reported periods Quarter Ended December 31, 2021 Compared to the Quarter Ended December 31, 2020 This section compares the company's financial results for the three-month periods Key Financials (3 Months Ended Dec 31) | Metric | 2021 (in USD) | 2020 (in USD) | Change (in USD) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $21,244,000 | $16,973,000 | +$4,271,000 | +25.2% | | Gross Profit | $5,309,000 | $4,974,000 | +$335,000 | +6.7% | | Gross Profit Margin | 25.0% | 29.3% | -4.3 pp | -14.7% | | Income From Operations | $1,694,000 | $1,493,000 | +$201,000 | +13.5% | | Net Income | $1,426,000 | $1,167,000 | +$259,000 | +22.2% | - Gross profit margin decreased by 4.3 percentage points, primarily due to a approximately $2.26 million decrease in Carpool Karaoke (CPK) product sales and product cost increases from raw materials and freight[152] - Total operating expenses increased by approximately $135 thousand, driven by higher general and administrative expenses (pallet, warehouse, temporary labor, legal, accounting, consulting fees, bad debt reserve) offset by decreased payroll expenses[153] Nine Months Ended December 31, 2021 Compared to the Nine Months Ended December 31, 2020 This section compares the company's financial results for the nine-month periods Key Financials (9 Months Ended Dec 31) | Metric | 2021 (in USD) | 2020 (in USD) | Change (in USD) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $44,679,000 | $42,310,000 | +$2,369,000 | +5.6% | | Gross Profit | $10,215,000 | $11,759,000 | -$1,544,000 | -13.1% | | Gross Profit Margin | 22.9% | 27.8% | -4.9 pp | -17.6% | | Income From Operations | $1,954,000 | $3,160,000 | -$1,206,000 | -38.2% | | Net Income | $2,000,000 | $3,368,000 | -$1,368,000 | -40.6% | - Gross profit margin decreased by 4.9 percentage points, primarily due to a approximately $2.49 million decrease in higher-margin CPK product sales and increased product and freight costs[161] - Total operating expenses decreased by approximately $338 thousand, mainly due to lower selling expenses (freight, royalty expense) offset by increased general and administrative expenses (legal, accounting, consulting, investor relations fees related to private placement)[162][163] - Other income decreased by approximately $920 thousand, primarily because one-time gains in 2021 (PPP loan forgiveness, accounts payable extinguishment) were less than prior year's gains (damaged goods insurance claim, accounts payable forgiveness)[165] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations Cash and Working Capital | Metric | Dec 31, 2021 (in USD) | Dec 31, 2020 (in USD) | | :--- | :--- | :--- | | Cash on Hand | ~$7,375,000 | ~$823,000 | | Working Capital (in USD) | ~$9,811,000 | N/A | - Net cash used in operating activities was approximately $3.11 million for the nine months ended December 31, 2021, primarily due to increases in accounts receivable and inventories, partially offset by increases in accounts payable and accrued expenses[168] - Net cash provided by financing activities was approximately $6.98 million for the nine months ended December 31, 2021, driven by borrowings from credit facilities and net proceeds from private placement/stock redemption[171] - The Company believes current working capital, cash from operating forecasts, and available credit facilities (assuming extension) will be adequate to meet liquidity requirements for at least twelve months[178] Critical Accounting Policies This section highlights accounting policies requiring significant judgment and estimates - The Company's interim financial statements involve subjective decisions and estimates, but critical accounting estimates and assumptions have not materially changed from those identified in the 2021 Annual Report[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies - This item is not required for small reporting companies[180] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures, identifying a material weakness related to the financial statement close process and outlining the remediation measures being implemented Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's controls for financial reporting - As of December 31, 2021, disclosure controls and procedures were deemed not effective due to a material weakness in the consolidated financial statement close process, specifically regarding inventory cutoff and valuation[181][182] Plan for Material Weakness in Internal Control over Financial Reporting This section outlines the company's strategy to address identified deficiencies in internal controls - Remediation plans include correcting ERP system processing errors related to inventory, strengthening ERP system training for finance and warehouse personnel, and assessing resource adequacy[183][192] - The Company anticipates remediating this material weakness by March 31, 2022[184] Changes in Internal Controls This section reports on any modifications to the company's internal controls during the period - No material changes in the Company's internal controls over financial reporting occurred during the quarter ended December 31, 2021[185] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings Management is not aware of any legal proceedings other than matters that arise in the ordinary course of business - Management is not aware of any legal proceedings other than matters that arise in the ordinary course of business[187] Item 1A. Risk Factors This item is not applicable for smaller reporting companies - Not applicable for smaller reporting companies[188] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company reports no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities and use of proceeds[188] Item 3. Defaults Upon Senior Securities The Company confirms that it is not currently in default upon any of its senior securities - The Company is not currently in default upon any of its senior securities[188] Item 4. Mine Safety Disclosures There are no mine safety disclosures to report - No mine safety disclosures[189] Item 5. Other Information There is no other information to report in this section - No other information[190] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications from the Chief Executive Officer and Chief Financial Officer, and Inline XBRL documents - Exhibits include certifications from the CEO and CFO (Rule 13a-14(a) and 18 U.S.C. Section 1350) and Inline XBRL documents[193][195] SIGNATURES This section provides the official signatures of the company's executive officers, certifying the report's accuracy - The report is signed by Gary Atkinson (Chief Executive Officer) and Lionel Marquis (Chief Financial Officer) on February 14, 2022[199]