Good day everyone, and welcome to today's Singing Machine second quarter earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note today's call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Brendan Hopkins. Please go ahead.
Thank you, and thank you everyone for taking the time to join us today. We have a brief safe harbor, and then we'll get started. Except for historical information contained herein, the statements in this conference call 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'd like to turn the call over to Gary Atkinson, CEO of The Singing Machine.
Thank you, Brendan. My name is Gary Atkinson. I am the company's CEO. Joined with me this afternoon is also Lionel Marquis, company CFO, and Bernardo Melo, company Chief Revenue Officer. I wanna start off by just thanking everybody for taking the time today to listen in and learn more about our second quarter earnings report. We are very pleased to share these results. We believe that our second quarter demonstrates our resiliency in a very challenging time, and it highlights the speed and the flexibility of our team to capitalize on this very rapidly changing environment. In the past year alone, we have dealt with the lingering demand uncertainty created by the global pandemic, the resulting ripple effects on supply chain, inflation, rising interest rates, and worker shortages. We believe we have weathered this storm well.
I'm very proud of our team's response to all of these challenges. First, we have capitalized on our competitors' weakness to expand our relationship with one of our key customers, Walmart. By moving a number of our products into the Walmart consumer electronics department, we have put our best assortment with highest margin offerings front and center in the most influential retail location for all consumer electronics sold in North America today. This has been a tremendous platform for marketing our best technology and products, as well as showcasing our emerging ideas in karaoke. As Lionel will further talk about, this decision was very timely and is a key component to our financial results. Expanding our relationship with Walmart offset sales softness in other areas due to the overall macroeconomic factors I previously mentioned.
These well-timed decisions result in overall revenue growth, strong gross margin improvement, and profitability. In these times, we see this as a major win for the company and for our shareholders. During the second quarter, our team also worked very quickly to convert Sam's Club from a domestic program to an FOB China program. By converting this program to FOB China, we avoided any supply chain uncertainty, and we've improved the efficiency in which our products flow into the club stores. It also guarantees the full delivery of our entire program, which is very important today as retailers look to reduce inventory in their pipeline. At this point, I would like to turn the call over to our Chief Financial Officer, Lionel Marquis, to provide further insight into the details of our successful second quarter. Go ahead, Lionel.
Thank you, Gary. Good afternoon, and thanks for participating in today's earnings call. The following is a recap of key financial highlights for second quarter ended September 30, 2022. Our net sales were consistent for the three-month periods ended September 30, 2022 versus 2021, with net revenues of $17.1 million compared to $17.4 million, respectively. Net sales for the six-month period were $28.8 million versus $23.4 million, an increase of approximately $5.4 million or 23%. The increase was primarily due to an increase of approximately $6.1 million to one major customer that opted for the earlier shipment via direct import and increased their product assortment.
An increase to another major customer of approximately $1.5 million due to the successful initial product set in their consumer electronics department in the prior quarter. These increases were somewhat offset by a decrease in two other top five customers who ended the prior year with excess inventories due to the prior year's late delivery. Our gross profit increased to $3.9 million compared to $3.3 million for the three-month period ended September 30, 2022 versus 2021. An increase of approximately $600,000, primarily due to an increase in gross profit margin from 19.2% to 23.2%. There was an increase in the component cost.
There was a decrease in the component cost of one major customer's promotional item, and that contributed approximately 1.8 gross margin points, with the remaining increase due to significant cost reductions to inbound containers from China, price increases to customers, and margin contribution from new products introduced into one major customer's consumer electronics department. Our gross profit increased approximately $7.1 million compared to $4.9 million for the six-month period ended September 30, 2022 versus 2021, an increase of approximately $2.2 million. The increase in net sales accounted for approximately $1.1 million or almost 50% of the increase, with the remaining increase primarily due to gross profit increase of 24.8% from 20.9% last year.
There was a decrease in the component costs, as we talked about earlier, the one major promotional item that contributed 1.6 margin points year-to-date, with the remaining increase due to significant cost reductions as the same as for the quarter. That had to do with reductions in inbound containers from China, price increases to customers and margin contribution from new products introduced to the major customers, consumer electronics department. Let's talk about operating expenses. Operating expenses increased to approximately $3.4 million for the three-month period ended September 30, 2022, as compared to approximately $2.6 million for the three-month period ended September 30, 2021. The increase of approximately $800,000 in operating expenses for the quarter were primarily due to the following.
We had increases in selling expenses of approximately $200,000, primarily due to incremental royalty commission and discretionary marketing expenses. We also had one-time costs of approximately $300,000 relating to our public offerings, Nasdaq uplisting, regulatory filings, change of control, which included increases in legal fees, professional fees, stock transfer fees, and investor relations fees. In addition, we had an increase in compensation expense of approximately $200,000, primarily due to common stock and stock option grants issued to existing new board members, officers, and employees. We also had the effects of inflation, especially in our logistics area. We had inflationary warehouse distribution costs of approximately $100,000, and that included increases in pallets and temporary labor costs and in supplies. Let's talk about operating expenses on a year-to-date level.
Operating expenses increased to approximately $6.4 million for the six-month period ended September 30th, 2022, compared to approximately $4.6 million for the six-month period ended September 30th, 2021. The increase of approximately $1.8 million in operating expenses were primarily due to the following. We had increases in selling expenses of approximately $200,000, and it's primarily due to royalty commission discretionary marketing expenses. One-time costs, as we discussed earlier, of approximately $400,000 year to date relating to our public offering, Nasdaq uplisting, regulatory filings, change in control, and this had to do with legal fees and professional fees, stock transfer fees, and investor relations fees, all related to this project. We had an increase in compensation expense of approximately $400,000 year to date.
Again, due to common stock option grants issued to existing new board members, officers, employees, as well as incentive payments to officers and merit pay increases. The logistics area also had some inflationary warehouse distribution costs, especially in the area of pallets, temporary labor costs and supplies. That was approximately $400,000. We also had one-time costs of approximately $200,000 relating to IT projects and product firmware update with the remaining increase due to variable expenses that have increased due to inflation.
As a result of these activities, we recognized income from operations during the three-month period ended September 30, 2022, of approximately $584 thousand, compared to income from operations of approximately $750 thousand for the three-month period ended September 30, 2021, representing a decrease of approximately $165 thousand. Income from operations for the six-month period ended September 30, 2022 versus 2021 were approximately $731 thousand and $260 thousand respectively, representing an increase of approximately $471 thousand. We recognized net income of approximately $296 thousand for the three-month period ended September 30, 2022, compared to net income of $692 thousand for the three-month period ended September 30, 2021.
It should be noted that during the second quarter of the prior year, we had the benefit of $236,000 in one-time gains from the settlement of accounts payable with one of our factories, with no similar gains during our first quarter ended September 30, 2022. We recognized net income of approximately $280,000 for the six-month period ended September 30, 2022, compared to net income of $574,000 for the six-month period ended September 30, 2021.
Again, it should be noted that during the six-month period the prior year, we had the benefit of $236,000 in one-time gains from the settlement of that accounts payable with one of our factories of approximately $236,000, and also from the forgiveness of the Paycheck Protection Program loan of approximately $448,000 with no similar gains during our first quarter ended September 30, 2022. In May of 2022, we successfully completed an equity raise of approximately $4 million, concurrently with an uplisting of our common stock from the OTCBB to Nasdaq.
We received net proceeds of $3.4 million, along with borrowings on our inventory line of credit of $2.5 million, allowing us to finance excess inventory from the prior fiscal year due to global logistics issues, as well as strengthen our cash position at that time. On October fourteenth, just recently, we entered into a new credit agreement with a different bank as the lender, replacing our existing facilities at the time with Crestmark Bank and Iron Horse. They were terminated by the company on October thirteenth, 2022. The credit agreement provides for a three-year secured revolving credit facility and an aggregate principal amount of $15 million, decreasing to $7.5 million during the period January one through July thirty-one of each year, which is our non-peak season.
The credit agreement is a 3-year agreement and matures on October 14, 2025. The revolving credit facility bears interest at the prime rate + 0.5% or the 30-day secured overnight financing rate what they call SOFR, S-O-F-R, at +3%. To summarize, what we did with the banking deal is we obtained financing with a larger bank after significant scrutiny during the due diligence process. We still, the bank was still very anxious to close the deal. We increased our access to capital during peak season by $2.5 million over the prior facility that we had with Crestmark and Iron Horse. We also were able to combine our financing of both our accounts receivable inventory under one combined credit facility. Okay?
We lowered our interest rate to approximately one half the rate that we were paying on the prior agreement, which will result in significant interest savings going forward. Overall, we've made significant improvements in gross profit margins during the six-month period compared to the same period last year, and we've managed to keep selling expenses commensurate with increase in net sales. We have, however, encountered significant one-time general and administrative expenses during this fiscal year with regards to legal, professional, and other expenses associated with equity events that have occurred during this fiscal year. Of course, we have the inflation to deal with, and we're gonna continue to address the inflation issues going forward. That's my report of the highlights. Thank you for listening. A little bit lengthy today, but there was a lot to go over.
I'd like to now turn the call over to Bernardo, who'll further discuss recent developments and events. Bernardo?
Yes. Thank you, Lionel. I'll keep it short because I do wanna get to Q&A, give you guys time to ask some questions. You know, I'm just gonna echo what Gary and Lionel already said. You know, 2023 for us, our major focus was to introduce new technology into our key retailers, or expand on those new technologies that we introduced last year, to continue to position Singing Machine as the leader in the home karaoke segment. You know, I know we take that pride, and we need to always execute on the performance of our products to make sure that we maintain that tagline. We did that well.
We were able to introduce those products into our key retailers this year, that had the appetite for them and had the space. We went into different departments in one of our key retailers and expanded on those technologies in two or three of our other key retailers as well. We had some good product launches. We've seen some good results so far. I would like to thank those product launches. You know, maintaining our sales so far this year, comparable to what it was last year, because otherwise it would've been a little bit tougher sledding. Yeah, we're positioned well moving forward. I'll be on the lookout for some key promos across the retail landscape.
You're gonna see some two-day ads in Target. You're gonna see Black Fridays in Walmart. You're gonna see some key VIP events at Sam's Club. Costco is gonna be running a nice promo with Trent in the month of December. You know, we think that we've seen tougher years before in the past from a consumer and a retail standpoint. The one thing that we've seen is parents are still, or consumers are still gonna go out and buy gifts, and we wanted to make sure that we were positioned right for that. We preemptively put some key promos out that would help promote the line and the brand accordingly, also with Amazon as well.
We've now stabilized our distribution partnership and our market in the U.K. and Canada, so we're well positioned going into fiscal year 2024, with those partnerships well established. Australia continues to grow. Yeah. We feel confident that if the consumer is out there and is looking for karaoke, that Singing Machine is best positioned in the marketplace, not only with the technology, but with a good promo schedule, and good shelf, and good coverage on the shelf space and e-commerce as well. You know, with that being said, I wanna turn the call over because I know we're running low on time. I'll turn it back over to you guys.
All right. Thank you, Bernardo. Thanks for the update on that. I do wanna make sure we save time for Q&A, but just before we do that, I just wanted to touch on a couple of other.
Key nonfinancial milestones that I wanted to mention. First, the big thing I wanna say is that we have maintained and we have secured all of our key relationships and shelf listings with all of our major customers. You know, that's big news with all of the news that's been floating around recently at retail and the sort of conservative nature that we're seeing. You know, this is a big win for us to continue to protect and to preserve our shelf space at these key retail accounts. That's a big win. Also, in time for the holidays, we've revamped our karaoke app that's available for Android and for the Apple phones. It now includes official album cover art.
We do continue to grow the size of our karaoke music catalog, now over 70,000, some of the best, most popular karaoke songs available today. We are continuing to see more activity. There's more downloads. There's more users that are coming aboard the app this year, especially since we've introduced more of the casting products with Walmart Electronics this year. We're starting to see music revenue is becoming more meaningful now to EBITDA. We've seen over a 20% increase year-over-year in not only app downloads, but also music subscription revenue. We do anticipate that this trend will continue on through the holidays. Finally, just a bit of thinking in terms of how we're looking at the business for 2023 and beyond.
Obviously for many years we've enjoyed a strong position as being the leader in the home karaoke category. We've become the leader in the space through our brand, our innovation, our product portfolio is probably best in class. One of the things that we've been looking at and studying is that obviously people aren't just limited to singing at home, right? There's a lot of other places where consumers engage in karaoke. We do believe there's a number of exciting emerging opportunities, and we believe that we can position ourselves to be the dominant brand for karaoke, not only in the home, but soon also outside of the home.
As a team, we're very focused on expanding into additional karaoke markets, not only to enhance our value from a revenue perspective, but also profitability. We look forward to providing everyone here with an update on these efforts as we move forward in the next coming months. I'll wrap it up with that. At this point, you can turn it over to Q&A.
At this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may withdraw your question at any time by pressing star two. Once again, for your questions, that is star and one. We'll take our first question from John Kovich. Please go ahead.
Hello, Singing Machine. I have two questions for you. How is the shipments going for fiscal Q3? I know we're about halfway done now.
Hi, John, how are you?
Good.
All of our direct import shipments are pretty much done already and in the bag for Q3. In terms of the domestic ones, they're lagging a little bit behind more than normal. That's just, you know, retail is just playing the risk-averse game right now. You know, they're trading off empty shelves for not being overloaded with inventory the way they were towards the end of last year. You know, we've been pushing hard to get in there. We do have products in the stores, but you know, that overload of product that existed in the past, they're being a lot more careful with that moving forward.
Secondly, do you anticipate any significant programs going forward with Best Buy?
Best Buy is one of those top retailers. You know, they sort of have categorized karaoke. Like they have musical instruments, and they have a store page for that. The way that we're addressing it is by going towards the dot com. As you can see now, we just uploaded a whole new section of products on dot com. Just this week alone, we started seeing sales on those new products.
I think, you know, the long-term strategy with Best Buy that we're looking at, and, you know, I don't know how much of this I could say, is more on the professional side of things where we can leverage their Geek Squad for installation and things like that. I think that's gonna be our strategy moving forward, to develop a line that's more on the pro side, that could then leverage their Geek Squad for installation. I'll leave it at that now. I don't know if Gary's gonna touch on it a little bit more either in this call or next or future calls.
Okay, great. Thank you.
Thanks, John.
Okay.
We'll move next to Eric Nickerson. Please go ahead.
Yeah. Hi, guys. Lionel, thanks for the good detail on the financials. You covered most of my questions there. Look at the sales. You know, we're down about 1% or so from this year's quarter versus last year's. It's been a year when consumers' discretionary spending has been just massively moving from goods over to services. This tiny little drop in sales looks pretty encouraging. Am I missing something or do you guys interpret that pretty much the same way?
We did extend it. Oh, go ahead, Gary.
No, go ahead, Lionel. You wanna address it?
Yeah, no, I just wanna address it. That's a great observation, Eric. You're right, you know, a lot of funds have gone towards service or travel or things. I think people have noticed that they got a little bit too much goods in their household. One thing that we did is we did expand into different departments within a couple of the major retailers, and that has helped offset, you know, some of the softer sales in the previous departments.
The good thing, the encouraging thing that we have seen that although that some of the discretionary have moved to other places, is that especially in like Walmart and in Costco, our higher price points are doing well. They're helping offset some of those, some other softer sales. You are right, you know, it is a challenging year. We just have a little bit more distribution and some of the higher price points have performed well as well.
Okay. That's pretty cool.
Yeah, thank you.
We'll start to see. Did you have something to add there, Gary?
Oh, yeah. I just wanted to add to your first question there, Eric. You know, the other thing that I wanna touch on is, you know, we've kinda done the hard work already, right? We've done all the heavy lifting to secure the shelf space of retail, to build the inventory, to sort of get it shipped and bypass all of these supply chain struggles. We've done all the hard work to get our karaoke machines into almost every single major big box retailer throughout North America. I think the big unknown now is, like you said, how are the consumers going to react come the holiday season? I think that's-
Yeah, they.
That's still a bit of a
They move as a herd.
Mystery at this point. Yeah.
I guess we'll see. Okay, just looking elsewhere, we're gonna start to see a pretty good drop in interest expense line, aren't we? Starting, I guess, in the current quarter?
Yeah.
Going forward.
That's correct. We will see a significant interest drop. One of the other advantages, and I didn't talk about it before, this line of credit, is I had a minimum interest rate. Whether I borrowed on the line on my previous lines or not, for inventory, I had to take a 15.5% APR on $1 million, regardless of whether I had a balance or not in that inventory. Also on the accounts receivable, I was paying approximately 8.5%-8.75% for most of the time, until recently when the prime rate started going up. Now we're closer to, like, 14%-14.5%. I had to pay a minimum of, you know, on two.
as if I were borrowing $2 million each month. Both of those, that no longer exists with the new line. If I don't borrow on the line.
What you just described is the old deal that's been replaced, or that's in the new deal with Fifth Third?
No, that's in the old deal that's being replaced. Those were all minimums.
Oh, okay.
That I had to cover before. On top of the interest rate drop, which we'll see significant loss, you know, of interest, also, we won't have that minimum to cover every month as well. It's, you know, it's a two-edged sword. It's pretty good. You know, it's a good deal. Yeah.
Okay. Just a couple more boring questions. I notice we've got a bunch of options and warrants outstanding. I got half a million or so of them. Can I see a detail of those, you know, the expiration dates and exercise prices in the 10-Q? Or do I have to wait till the 10-K comes out? Where can I see that?
There'll be a section in the 10-Q. You'll see what's left outstanding and what the weighted average, you know, price is.
In the 10-Q. Okay.
Yeah, 10-Q.
Another thing I noticed in the trading in our stock, our major shareholder is buying up the stock in numerous little bits and pieces, which leads me to suspect that a number of shareholders in the company might be steadily dropping. Which leads me to ask if you had any conversations with our majority holder about going private?
You know, I mean, to touch on that, Eric, I mean, we just recently uplisted under the Nasdaq just a few months ago.
Yeah.
You know, I don't think there's, you know. We've certainly invested a lot of time and energy to get to where we are now. I wouldn't say that there's any conversation right now in terms of going private.
It's just not something you've even talked about within that, right?
Correct.
Okay. Good. Okay. That's all I had. Thanks very much. Good report, guys. Very informative.
Great. Thanks for the great questions, Eric.
We'll move next to Joel Marcus. Please go ahead.
Yeah. Hi, guys. Congratulations on what I think is an excellent quarter despite, you know, various extraneous obstacles. My question I'd just like to, you know, sort of lead into it as follows: I know this company has always had its eye on the long term. The move to Nasdaq obviously was in furtherance of that, even though all the transactions that have enabled you to be on Nasdaq, I mean, have resulted in the stock being down about 60% from where it was. You know, certainly right now, this company is trading at a price where there's scant enterprise value, you know, attributed to it. I really believe that you guys have your eye on a much, much bigger future in the long term, and that everything you've done up till now will be proven to be correct.
Could you just go a little bit more into your future vision for this company? Do you intend to expand vertically, you know, with the products, using it in more places, maybe expanding horizontally into other, you know, consumer related appliances, music distribution, et cetera? Obviously, all of us would love to have, you know, I know the suffering will be worth it, but basically, can you give us a little bit, you know, of a, you know, more detailed and clearer picture of what your aims are for this company long term?
Sure. Yeah. Joel, that's a very good question. I'll tell you, it's something we've been spending a lot of time and energy on recently thinking about and starting to put action plans together to start executing on this. You know, the way we look at karaoke as a worldwide category, we believe that the market is in excess of $1 billion a year. Obviously right now we're playing in a smaller sandbox, which is to say, you know, we're the leader in the in-home karaoke devices category. We start thinking about, well, where are people doing karaoke? We're thinking about it in the sense that there's really three or four different verticals in terms of where are people having karaoke experiences.
Obviously the first place is, right, people are singing in their homes. For that market, we already have products and services for the people that are singing at home. The second category that we're looking at is the automotive space. We're seeing a lot of people that are singing in their car, and obviously through our Carpool Karaoke product line, we sort of touch on that. We also think there's a much bigger opportunity that's available in the automotive space. It really started with Tesla. Last year they announced that they were launching a karaoke microphone that would be integrated into the Tesla vehicles, and that set off a, what I would say, a lot of interest from other major automotive brands to sort of look at that space.
You know, when Tesla does something, a lot of people take notice. We're seeing a lot of inquiries into the automotive karaoke category, and it's something that we'll be talking about a lot more as we move forward. You know, then there's also this third category of people doing karaoke outside the home, and it's a face-to-face sort of brick and mortar karaoke venue experience. That's an area where there really hasn't been any innovation in that experience in, I'd say, well over 40 years. It's an area that we're very interested in.
We've spent a lot of time doing research and studying that particular market because it's ripe for disruption and there's really nobody else in the U.S. that's really looking at or thinking about that market for karaoke, and it's something that we are very, very interested in. I would say over the coming sort of 12 months to 24 months, you're gonna see us making a lot of progress and a lot of news and announcements in those different verticals that I just outlined.
Thank you. That sounds really great. Also, I guess one follow-up question. I always saw this company, and I'm dating myself by saying this, as the razor and blade type of company, where basically once you vend the product to somebody, you also have the blades that go into this, namely the music, the music libraries. Do you envision you're vending of music or perhaps maybe even advertising, you know, you know, sponsors, you know, because you've got that huge, you know, screen there and obviously, you know, you could certainly, you know, accommodate, you know, advertisers, et cetera. But I mean, you know, can we look forward to seeing this company have continuing revenues, you know, as an ancillary of the product, namely music, advertising, you know, the Stingray aspect of it?
Could you just give us a little bit of color and flavor on where you're going with that?
Yeah, no, for sure. I mean, the music side of the business does continue to grow year over year over year. Admittedly, it's growing at, probably a slower rate than I think what we would have all expected, and it seems to be directly correlated to the number of karaoke devices that we put into the market. You know, it would make sense that the more karaoke machines we sell, the more potential customers we have through those machines that are then sort of signing up and looking for music. You know, we saw that with Walmart Electronics this year. We put a whole brand new line of casting karaoke machines into Walmart Electronics. Like I mentioned earlier in the introduction, we are seeing now a 20...
Somewhere between 20%-25% increase year-over-year in not only the number of downloads of the app, but also the revenue coming through the app. It is growing, but it probably will take a longer period of time before that really becomes, I would say, sort of a material or significant overall revenue number, since we're, you know, it is very hardware dependent. Like you said, it's razor razorblades, so you need to sell the razors to get the blades. It is a very attractive part of the business. The margins are great. There's no inventory to carry. There's a lot of opportunities there in the music space as well to continue to grow it.
Well, thank you so much. I mean, I think you guys are great. I mean, I even predate Brendan in being involved in this stock. I will continue to be involved. I think long term, this is one of the 5 or 10 best companies, you know, that people have access to in the public markets these days. I think your future is unlimited, and I will continue to be involved. I'll continue to add to position. I, you know, think you guys are absolutely brilliant. I think, you know, in the long term, this is gonna be a huge home run for everybody who has the patience and the wisdom to, you know, be in there with you and hang in there with you and view this as a long-term investment.
I appreciate that, Joel. Thank you. Thanks for the vote of confidence.
Okay. Thank you, guys.
Thank you. Take care.
It does appear there are no further questions at this time.
Okay, great. Well, again, I thank everybody for participating in today's second quarter earnings report. I definitely appreciate the spirited good questions that were asked. We look forward to talking again in a few months on our third quarter report. Thanks. That's all for now. We'll talk soon.
This does conclude today's program. Thank you for your participation. You may disconnect at any time. Have a wonderful evening.