Singing to a New Tune: A Cautionary Tale on Ownership Transition
January 31, 2023
CEO of The Singing Machine Company Gary Atkinson has taken his company through multiple funding rounds and a successful ownership transition. In this “TechTalk” episode, Gary has a conversation with EisnerAmper's East Coast Technology and Life Sciences professional Fritz Spencer. The pair talk about consumer trends and business strategy, public company financing and an ownership transition that includes an insightful cautionary tale.
Awesome. Tell our listeners a little bit about yourself. And to put a bow on it, give us the elevator pitch of The Singing Machine Company.
GA:Sure. I would be happy to do that. Like you said, my name's Gary Atkinson. I'm the CEOO of The Singing Machine Company. For those who maybe don't know Singing Machine, we are the worldwide leader in home karaoke consumer products. And I've been here now about 15 years with the company, actually my 15th year with The Singing Machine.
GA:Thank you. Thank you. Prior to starting at Singing Machine, I had no consumer product or electronics or manufacturing background. I was actually in law school training to be an attorney. And while I was in law school, I'd always been interested in business. So, I always knew, even going into law school, I was never going to be a criminal attorney. I knew I wanted to be in business doing corporate law, transactional work. And I had an opportunity while in law school to do a joint MBA program. So, I did a JD/MBA, which they offered at the school. And at the time, so I'd graduated law school, I had moved to Atlanta, Georgia, and was interviewing at different law firms to start my corporate career. And this was back in 2007.
And I got a call from my uncle who owns a large Chinese publicly traded electronics, consumer electronics manufacturing company. And he had told me that he had just bought 52% of a small karaoke company down in South Florida. And he asked me if I was interested in relocating to South Florida and just helping keep an eye on the business. And so, I decided to take that giant leap of faith and took him up on his offer. And so, 2008, I moved down to South Florida and again, didn't know anything about consumer products or the business, but was very fortunate and blessed to have an opportunity to really learn from the ground up. And here I am 15 years later.
FS:Great. Thanks for that. It's hard to sing no to South Florida, isn't it?
GA:You know what, that was the selling factor, South Florida.
FS:Now, as you mentioned, your company's in the retail industry. Can you tell us how your business performed this holiday season? And how does that impact your strategy moving forward into the next year or even beyond?
GA:Sure. Singing Machine, we're a publicly traded company. We haven't yet reported our third quarter earnings through the holiday season. So, without being too specific, since I don't want to talk about anything non-public, but I can talk just at a high level as to the industry and retail in general. Obviously, I think for most people who were following the news, I think it's no surprise that retail, particularly the holiday fourth quarter was a challenging time period for retail in general. We had this strange environment where we had the pandemic, everybody was at home, everybody was shopping. Retail reported great, great, great quarters during the pandemic. And then we kind of come out of the pandemic, and now all of a sudden we're hitting with supply chain struggles. And at the same time, governments printing a lot of money, there's a lot of stimulus checks that are going out, so people are shopping.
And so, despite some of the supply chain struggles, people are still out spending money, retailers are doing well, our businesses are doing well. And then all of a sudden last year, the printing of the money stops, the stimulus stops, we've got now inflation concerns. We've got the war in Ukraine. And that all had very, very significant effects on just how consumers and shoppers in general felt about their lifestyle and how rich or poor people felt. And so, definitely, that had an effect at retail. I think the industry saw it, we saw it. The effects that we saw was really kind of a late start to the holiday season. We saw, typically, what would happen is you start seeing a ramp up in sales somewhere around October.
And the trend that I had heard this past season was really a condensed shopping season, really, instead of a two or three-month holiday season. It really got condensed down to about five or six weeks, where shoppers were definitely looking to buy, but they were looking for deals. Everybody wanted deals. And so, if you weren't running promotions, at retail or brands weren't offering promotions, sales, from what I had heard from others in the industry, sales were soft.
FS:Your Black Fridays, your Cyber Mondays?
GA:Correct. So, you started seeing a lot of people that were offering Black Fridays and then just continuing those promotions on, whereas all the way up through the holidays. And that was the trend of last year pretty much across the board from what I've been hearing.
FS:Great, thanks for that. So, how does that make you or force you to plan for your next year? Or is that change anything in your goals or your expectations?
GA:Yeah. I think the words right now that I'm hearing a lot of is really just conservatives, being very conservative in terms of inventory, not trying to do too much particularly at retail. Because I think retail coming off of last year, it's so strange because two years ago everybody wanted inventory. Inventory was one thing that nobody had enough of. Everybody wanted it. Manufacturers like myself, we were all struggling to get product built and to bring it into the states. And then you go to last year, where now all of a sudden everyone has too much inventory and retailers were as risk adverse to inventory as I've probably seen in 15 plus years. That was really the mood.
FS:And don't overextend yourself.
GA:Don't overextend. And that's to the extent where we even heard some retailers that said, "Hey, we would rather have empty shelves and lose the sale than have too much inventory." I mean that's literally the conversations that we were hearing last year. So, that I think will probably likely continue on through 2023. There's a lot of talks about, will the economy make a soft landing? Will we go into a recession? I'm sort of hearing a 50/50 split on how people think that's going to go. But not many people that I'm talking to are thinking that we're just going to magically bounce out of this and go back to those good economic times. I think we're still in for a fairly conservative 2023. So, that's the mood that I'm hearing is that be strategic. There's obviously still great opportunities out there, but generally speaking, don't overextend yourself and maybe stay within the wheelhouse.
FS:Right. Yeah. Expect the turbulence, but hope for a soft landing. I get you.
FS:And as you mentioned, you're in a public company that's gone through several rounds of funding and financing, you've recently uplisted. So, what do you say to people who think that fundraising is limited to pre-IPO companies or startups?
GA:Yeah, that's a great question. When I think about fundraising, I mean I wish it was as simple as, hey, you do an IPO, you raise a bunch of money and you're done. And I think that's rarely the case. I mean, there's probably a small minority of companies that are fortunate enough that they can do that, where they're kicking off so much excess cash that they can afford to never go raise a penny from the market again. But that's a very small minority. I would say 99% of companies, particularly microcap companies, access to capital is their lifeblood. And so, I speak with a lot of companies where they have a full-time person who's head of capital markets and all they do is look to raise money.
And so, I think it's part of every company's thinking in terms of how to raise capital, how to do it in the most cost effective and strategic manner that's not going to hurt or dilute existing shareholders moving forward. And so, some of the things that we've done, I mean there's a lot of different ways to raise money. There's not necessarily just issuing out equity. I mean there's debt, there's traditional bank lenders that you can work with that have revolving lines of credit and ABL facilities. And so, we're fortunate enough, we're big enough where we have access to revolving lines of credit and also our equity as a way to raise money. But we've done it.
I mean, I went 14 years at Singing Machine where we never raised $1 from the capital markets. We basically lived off of our profits and that's how we ran our business. But I do think that even a company like Singing Machine that's been around for 40 years, you do get to a point where if you're not continuing to invest in the business and diversifying and keeping up with trends, you run the risk of becoming stagnant and be replaced by somebody else. So, I think the way we look at it is we want to continue to stay ahead of trends. We want to continue to innovate, we want to continue to invest in areas that we think are going to give us the best return. And so, that takes capital, that just simply requires investment of capital to get into new areas.
And so, it's something that we think a lot about. Now that we just uplisted onto the NASDAQ last summer, and so we have this public vehicle now that gives us better access to the capital market. And so, we're trying to determine what is the best way to utilize that. And there's a lot of different ways. I mean, if we had more time, we could talk a lot about the different sort of tools in the tool belt to go raise capital. But it's certainly an important part of any business, not just a startup, but even mature businesses need access to capital. And some of them may have better cost of financing where they can access bond markets or do different things, but it's an important part of any business for sure.
FS:Certainly. Have to fuel the growth one way or another. And the capital markets is definitely a good way to start.
GA:To go back on that too, I think there's one piece of important advice is, and I fell victim to this and that's why I want to point it out. And if you are running a company and you are looking to raise money, one of the things that I was naively thinking about is, just because there's an investor that wants to give you money, that doesn't necessarily mean that that particular investor is aligned with you and the business. And I've personally fallen victim to this where, particularly let's say hedge funds or institutional investors, they're not always aligned with the best interest of the business. And so, I had thought, hey, if somebody's willing to invest money into the company, they must be excited about the business. They must see a lot of promise in the business. And naturally, their alignment must be the same alignment as mine and the company's.
And I think as you start going down these paths and you start taking money, you start to realize that that's not always the case. That there are groups, particularly I would say hedge funds, that when they make investments into companies, particularly microcap companies, sometimes there's a misalignment of interest where in many cases they may even be betting against you, which sounds contradictory. And I wouldn't have really thought that that would be the case, but it happens. It really happens. And so, I would caution anybody out there who's potentially looking to raise money, to just be very careful about who they're taking money from and what are the terms. And that's another thing, go find a good corporate attorney that has been through it and done it, that can counsel and advise you, because there's a lot of traps and pitfalls into just taking money.
FS:Right. I've heard that resonate very frequently in the venture capital markets. I spend a lot of time in forums and alike, and the fit now is much more important than the EBITDA. Are their goals aligned with us? Are we aligned with theirs? And that is so much more important than the bottom line these days. Because when you're aligned, you're running in the same path. And speaking of advisors, I want to circle this a little bit back to EisnerAmper. How have you leveraged business advisors like myself and others to help achieve your goals or even overcome obstacles or provide advice?
GA:One of the things that's helped me a lot is you always want to surround yourself or find people that are smarter or have more experience or more expertise than you do in any given particular area. So, when we were embarking on this sort of journey to uplist to NASDAQ, we knew we needed to raise money. But like I said, I've been here 14 years, we've never had the opportunity to really access the capital market. So, I needed to find people that had done it before me, and that had walked that same journey, and had made mistakes that I could learn from. And so, I think it's really, really important to find business advisors, whether it's an audit partner like Eisner. And you guys have been great. I mean, you guys advise us in ways where you're the experts. You guys know better than we do and we always appreciate that advice.
But it could be something as simple as just finding a really good attorney who lives in that world day in and day out, and has seen the pitfalls, and seen the tricks, and the traps, and can advise you as a business leader into the right decision, or at least counsel you. I mean, we sort of ran into situations where we didn't unfortunately have great counsel, got into some deals that probably in retrospect weren't the best deals that we could have accomplished at the time. And a lot of it just comes from learning and experience. And now we're fortunate that we found a really great law firm that specializes in a lot of these types of transactions. And so, we're better equipped now after going through what we've been through, to really understand...
And if you're going to take money and you're going to do deals and transactions, at least be eyes wide open in terms of knowing what you're getting into. And I think for most companies that are particularly startups, if they're looking to raise money, it's not a luxury. It's a necessity. They need it. They need that runway to continue to meet payroll, continue to build whatever product they're building. And so, you don't always have the luxury of saying no to people and not taking certain money. But at least if you do, know what you're getting into, eyes wide open.
FS:Well, I couldn't agree more, and thanks for the kind words. So, as you mentioned, you've recently gone through an ownership transition or a transaction. Can you tell us what transpired there?
GA:Yeah, sure, sure. So, like I mentioned earlier, we had listed to NASDAQ. We were on the OTC markets. So, we up uplisted last summer, I think it was June of 2022. And we were really excited. And really, for the first time in my tenure here at Singing Machine, we were really standing on our own two feet. We had no majority owner, we had a very clean cap table, and so we had accomplished what our goal was and we were really excited. And I had attended my first investor conference, this was at LD Micro, which is a great conference for microcap companies that was out in LA. And we were taking meetings. And I was sitting there and I was talking to an investor, his name is Todd Alt, and he asking me great questions. And at some point in the middle of the meeting, he kind of looks me in the eye and he says, "I like what you guys are doing. I want to buy 50% of Singing Machine."
And I was sort of taken aback by that. And I said, in a very polite way, I sort of said, "Thanks, but no thanks. We're not looking for new partners at this time." And so, I didn't really think much of it after that. And we finished the conference, we get home. Couple days later, we start noticing our stock just starts going crazy. It starts going from $4 to $5, to $6, and trading millions of shares a day. And now I start thinking, oh, my goodness, that investor that we've met, is he buying up all of the stock in the open market? And it turns out that was actually what happened. It was almost a perfect storm where he had started accumulating a position in the open market on our stock. And this is one thing that I guess my tale could give guidance to anybody listening today.
I mean, we had no poison pill in place as a sort of defensive mechanism for the companies. And so, I remember vividly that, all of this was going on and I was on the phone with lawyers and accountants and saying, what can we do at this point? If we are being acquired in the open market, what can we do to stop it? And so, at that point, options of poison pills and things came up, and we just simply didn't have the time to implement one. And sure enough, a few days later, Todd, who we had met back at LD Micro had made a public filing. I think they call it a 13D report, basically publicly announcing that he had acquired 52% of Singing Machine in the open market, which is literally unheard of. I mean, nobody that I've spoken to has ever heard of control block of a company being acquired simply in the open market without any-
GA:Yeah, no negotiation with management, just simply went into the open market and did. And really, I think it was a perfect storm because we had a lot of warrant holders, that when they started seeing the activity in the stock, naturally their first thought is, "Oh, wow, let me take advantage of this. Let me exercise my warrants and let me sell my stock." And so, we had a lot of people who were doing that at the same time. And so, they were selling their stock at the same exact time that this new investor was buying. And so, all of that stock was just going straight from one hand and to the other. And I think without that happening, he wouldn't have been able to do what he did. So, it's a cautionary tale, I think for people who might find themselves in a similar position. I'm fortunate in the sense that Todd has turned out to be a great strategic partner for the business, pleasure to work with.
We've gotten along really well, and shares the same vision for the future of Singing Machine that I do. And really, if anything, trying to help to invest to align all of the interests of the company, to maximizing what we could be in the future. And so, I think from that extent, it actually turned out to be a silver lining, to find a strategic partner and an investor that shares that same vision. And I think some people may not be as lucky. It's worked out well. I do want to say that it has been a good thing for the company and for the management team here. So, we're very fortunate and very happy. But it is a little scary when you're sort of faced with a proposition where somebody can acquire control of your business, essentially without any say from the management team or the board to that extent.
FS:Right. That's a very, very rare and interesting story. I'm glad you shared that with us. And I'm even more glad that it ended up working out for you, and that you and your new partner could align and be strategic, as you said. Now, we don't have too much time left, but I did want to end with one thing that we hear at TechTalk to hone in on, and that is, conversations are at the root of our achievements and successes. And my last question to you is going to be, what's one conversation that you've had that continues to influence you on a regular basis?
GA:That's good. So, I think I was fortunate when I was coming up in the business. I had a good mentor, his name was Eddie Steele. He founded Singing Machine. So, he really built the business and there was nobody on this planet that knew the business better than he did. And so, he was a very instrumental part of my upcoming into this business. And like I said, I didn't have the background or experience in consumer products or sales, marketing, distribution, finance. So, those are things I had to learn on the job. And I know there's a couple of conversations he and I had, that even to this day...
He passed away a few years ago, so I don't get the luxury of having access to him anymore. But there are some conversations that still live on and I find them being replayed in my mind from time to time. And I think one of them was, we call it today, like life-work balance. And for him, one of the things he kept telling me is, your family and your health come first. As much as when you're running a business, it's so easy to get all consumed into running it because you're responsible for all of the people and really everything. And so, one of the things he always harped on is, make sure you put your family and your health first and the business second. That was something he always harped on. And that's something that still lives on with me. I find myself with anytime my wife is harassing me to take a vacation, Eddie's words always live on in my head. And I say, "You're right, let's do that." So, that's one.
And if we have time, the other thing that he always really talked about was business is a struggle. I mean, anytime you're doing sales, you're selling a product, you're growing, you're going to have problems. You're going to encounter things, either external forces or internal forces that are going to create obstacles, create challenges that are going to knock you off your course. And his messaging with that is that that's just a part of doing business. If you're not facing challenges, if you're not facing struggles, his attitude was, well, you're just not trying hard or enough. So, anytime I run into obstacles, whether they're external to the business or not, those words always live on in my head as well, in terms of just because we're facing challenges or struggles, doesn't mean that we need to pivot and change our business focus. That's not it. It just means that we're doing business and it's hard.
It's just inherently hard, and you will always run into problems. And his attitude was, you solve them day by day. You break them down into smaller chunks and you don't get overwhelmed and you tackle what you can that day, but they'll always be there. They'll never go away. And if you ever have an expectation that challenges will just all magically go away, you're living in a fairy tale. That always helps me put things in perspective when I think back to that.
FS:No pain, no gain.
FS:Well, Gary, I want to thank you again for having this conversation with me and taking the time. It's been a great chat with you.
Gary Atkinson:Thank you, Fritz. Yeah, my pleasure. Thanks for having me on. This has been great. And hopefully something in there might help one of your listeners.
FS:I'm sure something will, that's a guarantee. And also, I want to give a very special thanks to our listeners and for tuning into TechTalk. I hope you join us on our next episode or visit eisneramper.com to view more tech news.
Transcribed by Rev.com