Item 1. Business
ITEM
1. BUSINESS
OVERVIEW
We
are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings.
We
are the leading 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. Our products are among the most widely available karaoke products in the world. Our
mission is to “create joy through music.” In order to deliver on this mission, we are focused on the following multi-prong
approach:
●
In
the short-term, improve profitability by optimizing operations and continue to expand gross margins.
●
In
the mid-to-long-term, continue to grow our global distribution and expand into new product categories that take advantage of our
vast distribution relationships and sourcing abilities.
Our
Product Portfolio
Our
products are sold directly to distributors and retail customers. Our portfolio of owned and licensed brands and products are organized
into the following categories:
Karaoke —
including our flagship brand Singing Machine, our karaoke line is driven by quality products at affordable price points that we believe
deliver great value to our customers. All of our karaoke products are Bluetooth® enabled to allow access to digital music content
via our mobile apps available on iOS and Android platforms. We believe our core karaoke line offers best-in-class innovative features
that, including but not limited to enables customers to output video to a TV screen, correct singer’s pitch in real-time, stream
karaoke content directly to the machine, sing duets, display scrolling lyrics in-time with the song, and play custom karaoke CD+G discs.
The Company’s products are sold directly to consumers via its retail channels, ecommerce, its own website, and distributors worldwide.
This product category accounted for approximately 82% of our net sales in our fiscal year ended March 31, 2022.
Licensed
Products — including brands such as Carpool Karaoke. In 2019, we entered into a 3-year license agreement with CBS® for its
Carpool Karaoke brand, made popular by James Corden on The Late Show with James Corden. We launched an innovative Carpool Karaoke Microphone
that works specifically in the car. This license agreement with CBS® expires on September 30, 2022. We are actively exploring renewing
the license agreement and exploring new licensing opportunities. This product category accounted for approximately 3% of our net sales
in our fiscal year ended March 31, 2022.
Microphones
and Accessories — we currently offer a line of traditional microphone accessories that are compatible with our karaoke machines.
These microphones feature an assortment of colors, come wired or wireless, and may include new features like party lighting and voice
changing effects. We are also seeing growth in portable Bluetooth® microphones which are marketed under our Party Machine brand.
This product category accounted for approximately 9% of our net sales in our fiscal year ended March 31, 2022.
Singing
Machine Kids Youth Electronics — including the brand Singing Machine Kids. Our kids line of products offer fun music entertainment
features designed specifically for children. Our kids’ products provide a high-quality introduction to singing and music entertainment
for young singers and offer innovative features like voice changing effects, recording, Bluetooth® compatibility, and portability.
This product category accounted for approximately 5% of our net sales in our fiscal year ended March 31, 2022.
Music
Subscriptions — in conjunction with our premium partner, Stingray Digital, we offer karaoke music subscription services for
the iOS and Android platforms as well as a web-based download store and integrated streaming services for our hardware. We currently
offer almost 20,000 licensed karaoke songs in the catalog. This product category accounted for approximately 1% of our net sales in our
fiscal year ended March 31, 2022.
Product
Development and Design
Product
development is a key element of our strategic growth plan. We strive to deliver many new, exciting consumer products to market every
single year to retain our presence as the market-leader in consumer karaoke products. Strategic product development is done in-house
from our corporate headquarters in Fort Lauderdale, FL where we identify new potential categories, features, and price points. Products
are created in conjunction with contract product designers and inventors in collaboration with our contract manufacturers in China to
deliver products that represent tremendous value to our customers. In addition to new products, we always look for ways to improve existing
products to hit more affordable price points or improve features based upon market feedback.
Business
Segments
We
operate in one principal industry segment across geographically diverse marketplaces, selling our products globally to large, national
retailers as well as independent retailers, on our retailer’s websites, and our own direct to consumer website. In North America,
our customers include Amazon, Costco, Sam’s Club, Target and Wal-Mart. Our largest international territories are the U.K. and Australia,
where we sell through international distributors, representatives. We also sell to select international retail customers in geographic
locations where we do not have a direct sales presence.
4
Suppliers
and Manufacturing
We
source our products from a variety of contract manufacturers in southern China. We are not dependent on any one supplier as we use many
manufacturers (currently over 5) to make our products. We maintain a Hong Kong office that provides us with factory management, sourcing,
quality control, engineering, and product development. We buy finished goods from our suppliers and generally do not source raw materials
for manufacturing, however in limited circumstances where we develop proprietary hardware and software, we will secure the proprietary
circuits and provide to our contract manufacturers for assembly into the final product. While we are not responsible for sourcing raw
materials, we rely on our contract manufacturers’ ability to secure injected plastic, wood cabinets, integrated circuits, display
panels, speaker drivers, and other components that are necessary for assembly into our final products.
Our
goods are produced by our contract manufacturers and are either shipped via ocean vessels to our distribution center in Ontario, California
or we utilize a direct import program where our retail customers coordinate to pick up the goods FOB China. The direct import program
allows our customers to take advantage of better ocean container rates through bigger volume and allows us to bypass our California warehouse.
We maintain a third-party logistics warehouse in Canada where we sell directly to retail customers and independent channels in Canada.
Historically, most of our customers pick up goods from our warehouse (freight collect).
Sales
and Marketing
Our
products are marketed and sold through our direct sales team, working in conjunction with independent sales representatives that provide
sales and customer support for our retail customers in North America. Sales are recognized upon transfer of title to our customers and
are made utilizing standard credit terms of approximately 60-90 days. Our sales terms indicate that we only accept returns for defective
merchandise, however we have accepted overstock returns from our retail partners in the past. Please see risk factor titled “ We
are subject to the risk that some of our large customers may return karaoke products that they have purchased from us and if this happens,
it would reduce our revenues and profitability” under “Risk Factors”.
We
seek to expand our direct-to-consumer sales, which we believe will increase overall gross margins and also increase brand awareness.
Marketing,
promotion and consumer engagement are key elements in the youth electronics, toy, and music categories. Historically, a significant percentage
of our promotional spending has been structured as co-op promotion incentives with our large retail partners. We continue to focus our
marketing efforts on growing brand awareness among our target consumer demographic, optimizing marketing investments, and executing an
integrated marketing strategy. We believe an important component of our future growth is based on speaking to the right customer, with
the right content, in the right channel, at the right time. We have implemented online marketing, social media, and digital analytics
tools, which allow us to better measure the performance of our marketing activities, learn from our consumers, and receive valuable insights
into industry and competitor activities.
Customer
service is a critical component of our marketing strategy. We maintain a U.S.-based internal customer service department within our corporate
headquarters that responds to customer inquiries, investigates and resolves issues, and is available to assist customers and consumers
during business hours.
Competition
The
youth electronics, toy, and music industry has many participants, none of which has dominant market share, though certain companies may
have disproportionate strength in specific product categories. We compete with a number of different companies in a variety of categories,
although there is no single company that competes with us across all of our product categories. Our largest direct competitors are Singsation®,
Singtrix®, eKids®, Bonaok, Karaoke USA™, and Ion® Audio.
The
primary method of competition in the industry consists of brand positioning, product innovation, quality, price, and timely distribution.
Our competitive strengths include our ability to develop innovative new products, speed to market, our relationships with major retailers,
and the quality and pricing of our products.
Intellectual
Property
We
rely on a combination of word and design mark trademarks and trade secrets to protect our intellectual property. In certain circumstances,
we will partner with third parties to develop proprietary products, and, where appropriate, we have license agreements related to the
use of third-party innovation in our products. The duration of our trademark registrations varies from country to country. However, trademarks
are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
Customers
Sales
to our top five customers together comprised approximately 90% of our net sales in both fiscal years ended March 31, 2022 and March 31,
2021. In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales at a
percentage of 37%, 18%, and 17% of total net sales. In our fiscal year ended March 31, 2021, revenues from four of these customers represented
greater than 10% of net sales at a percentage of 36%, 20%, 13% and 12% of total net sales.
We
have no long-term contracts with these customers, and as a result, our success depends heavily on our customers’ willingness to
purchase and provide shelf space for our products.
5
Seasonality
We
do experience heightened seasonal demand for our products in our second and third quarters of our fiscal year. In our fiscal year ended
March 31, 2022 and our fiscal year ended March 31, 2021, approximately 81% and 86%, respectively, of our net sales shipped in our second
and third quarters. However, we continually look for products and new categories to reduce our exposure to seasonality variances.
Regulatory
Matters
Each
of our products is designed to comply with all applicable mandatory and voluntary safety standards. In the United States, these safety
standards are promulgated by federal, state and independent agencies such as the US Consumer Product Safety Commission, ASTM, the Federal
Communications Commission, the Food and Drug Administration, the Federal Trade Commission, and various states Attorney Generals and state
regulatory agencies. All of our products are independently tested by third party laboratories accepted by the Consumer Product Safety
Commission to verify compliance to applicable safety standards. A similar approach is used to design and test products sold internationally.
Insurance
We
carry product liability insurance that provides us with $10,000,000 coverage with a minimal deductible. We consult with our insurers
to ascertain appropriate liability coverage for our product mix. We believe our current coverage is adequate for our existing business
and will continue to evaluate our coverage in the future in line with our expanding sales and product breadth.
Human
Capital Resources
We
believe that the development, attraction and retention of employees is an important factor to our Company’s success. We offer our
employees a wide range of benefits, including 100% paid health benefits for the employee, generous leave, vacation, and personal paid
time-off, 12 paid company holidays a year, and flexible work hours to work-from-home. To support the advancement of our employees, we
offer training and development programs encouraging advancement from within. As of the filing of this report, we had 32 employees, 17
of which are located at our corporate office and 15 at our logistics center in Ontario, California. During peak shipping season, (July
through December), we rely heavily on temporary labor at our logistics warehouse to handle the increased shipment volume.
Environmental
Issues
We
may be subject to legal and financial obligations under environmental, health and safety laws in the United States and in other jurisdictions
where we operate. We are not currently aware of any material environmental liabilities associated with any of our operations.
Recent
Developments
Controlled
Company
Subsequent
to March 31, 2022, and as of the date of this report, Digital Power Lending, LLC
(“Digital Power Lending ”) beneficially
owns and BitNile Holdings, Inc. (“BitNile Holdings”) and Milton C. Ault, III (“Ault,” and collectively with
Digital Power Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,568,849
shares of our common stock or approximately 52.0% of our outstanding shares. Digital Power Lending is a wholly owned subsidiary of
BitNile Holdings. Mr. Ault is the Executive Chairman of BitNile Holdings.
As
longs as BitNile continues to hold more than 50% of the voting power of our Company, we
will be a “controlled company” as defined under Nasdaq Marketplace Rules.
For
so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely on certain exemptions from corporate
governance rules, including:
●
an
exemption from the rule that a majority of our board of directors must be independent directors;
●
an
exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and
●
an
exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
BitNile
has indicated that it intends to appoint two directors to our Board of Directors. Upon the appointment of the BitNile nominees, our Board of Directors will increase in size to seven directors, of which less than a majority will
be “independent” as defined under Nasdaq Marketplace Rules.
6
Reverse
Stock Split and Nasdaq Listing
On
May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30. The reverse stock split was
affected to meet The Nasdaq Capital Market’s minimum bid price requirement. All information
in this Annual Report on Form 10-K has been retroactively adjusted to give effect to this 1-for-30 reverse stock split.
Our
common stock was approved for listing on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq
Capital Market on May 24, 2022.
Public
Offering
On
May 23, 2022, we consummated a public offering of 1,000,000 shares of our common stock for gross proceeds of $4.0 million prior to deducting
underwriting discounts and commissions and other estimated offering expenses of approximately $0.7 million. The offering closed on May
26, 2022. As compensation, we issued to the underwriter in the public offering warrants to purchase up to 100,000 shares of our common
stock. The warrants are exercisable six months from the commencement of sales under the public offering, have an exercise price of $5.00
per share and expire five years from the date of issuance.
Stock
Redemption Agreement
Prior
to August 10, 2021, the Company was partially held by koncepts International Limited (“koncepts”) which was a major shareholder
of the Company that owned approximately 49% of our shares of common stock outstanding on a fully diluted basis as of March 31, 2021.
The Company was also partly held by Treasure Green Holdings Ltd. (“Treasure Green) which owned approximately 2% of our common stock.
In total approximately 51% of the Company’s shares of common stock on a fully diluted basis as of March 31, 2021 were previously
owned by koncepts and Treasure Green. koncepts and Treasure Green are owned by Fairy King Prawn Holdings Limited (“Fairy King”),
an investment holding company incorporated in the British Virgin Islands, principally owned by the Company’s then Chairman, Philip
Lau.
On
August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with koncepts and Treasure
Green, pursuant to which the Company redeemed 654,105 shares of common stock of the Company (the “Redeemed Shares”). The
closing of the transaction set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were
assigned and transferred back to the Company in consideration of a payment by the Company of approximately $7,162,000 to koncepts and
Treasure Green. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company.
Prior
to August 10, 2021, we did business with a number of entities that are principally owned by the Company’s former Chairman, Philip
Lau, including Starlight R&D Ltd (“SLRD”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications
Corporation of Canada, Inc. (“Cosmo”), Winglight Pacific, Ltd (“Winglight”) and Starlight Electronics Company
Ltd (“SLE”), among others.
Pursuant
to the Redemption Agreement, neither koncepts nor Treasure Green remained shareholders of the Company and SLRD, SCE, Cosmo, Winglight
and SLE are no longer related parties.
Available
Information
The
Company is incorporated under the laws of the State of Delaware and was formed in 1994. Our common stock is traded on the NASDAQ Capital
Market under the symbol “MICS”. Our principal executive offices are located at 6301 NW 5 th Way, Suite 2900, Fort
Lauderdale, FL, and our telephone number is (954) 596-1000. We maintain our corporate website at www.singingmachine.com . Our website
also includes corporate governance information, including our Code of Ethics and our Board committee charters. The information contained
on our website does not constitute a part of this report.
We
file reports with the Securities and Exchange Commission (“SEC”), including an annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with, or furnish to, the SEC. The SEC maintains
an Internet website, www.sec.gov , that contains reports, proxy and information statements and other information that we file electronically
with the SEC.