Singing Machine Company, Inc. (NASDAQ:MICS) Q2 2023 Earnings Conference Call November 14, 2022 5:00 PM ET Company Participants Bernardo Melo - Chief Revenue Officer & Director Lionel Marquis - CFO Gary Atkinson - CEO & Chairman Brendan Hopkins - IR Contact Conference Call Participants Operator Good day, everyone, and welcome to today's Singing Machine's Second Quarter Earnings Call. [Operator Instructions]. It is now my pleasure to turn the conference over to Brendan Hopkins. Please go ahead. Brendan Hopkin ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2022 (954) 596-1000 (Registrant's telephone number, including area code) ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ______. Commission File Number -001-41405 THE SINGING MACHINE COMPANY, INC. (Exact Name of Reg ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended June 30, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ______. Commission File Number –001-41405 6301 NW 5th Way, Suite 2900, Fort Lauderdale FL 33309 (Address of principal executive offices) (954) 596-1000 (Registrant's ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION For the transition period from _________ to ___________ Commission file number 001-41405 THE SINGING MACHINE COMPANY, INC. (Exact name of registrant as specified in its charter) Washington, D.C. 20549 Form 10-K (Mark one) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 95-3795478 ...

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](index=3&type=section&id=Item%201.%20Financial%20Statements) 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](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) 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](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) 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](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) 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](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity) 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](index=19&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) 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](index=10&type=section&id=NOTE%201%20%E2%80%93%20BASIS%20OF%20PRESENTATION) 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](index=23&type=chunk) [NOTE 2 – LIQUIDITY AND RECENT EQUITY EVENTS](index=10&type=section&id=NOTE%202%20%E2%80%93%20LIQUIDITY%20AND%20RECENT%20EQUITY%20EVENTS) 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](index=24&type=chunk) - In August 2021, the Company redeemed **19,623,155** shares of common stock from its majority shareholders for approximately **$7.16 million**[25](index=25&type=chunk)[26](index=26&type=chunk) - 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](index=26&type=chunk) - 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](index=27&type=chunk) [NOTE 3 - SUMMARY OF ACCOUNTING POLICIES](index=10&type=section&id=NOTE%203%20-%20SUMMARY%20OF%20ACCOUNTING%20POLICIES) This note outlines the key accounting principles and methods applied in the financial reporting [Principles of Consolidation and Basis of Presentation](index=10&type=section&id=Principles%20of%20Consolidation%20and%20Basis%20of%20Presentation) 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](index=28&type=chunk) [Use of Estimates](index=12&type=section&id=Use%20of%20Estimates) 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](index=32&type=chunk) [Collectability of Accounts Receivable](index=12&type=section&id=Collectability%20of%20Accounts%20Receivable) 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](index=33&type=chunk) [Foreign Currency Translation](index=12&type=section&id=Foreign%20Currency%20Translation) 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](index=35&type=chunk) [Concentration of Credit Risk](index=12&type=section&id=Concentration%20of%20Credit%20Risk) 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](index=36&type=chunk)[37](index=37&type=chunk) [Inventory](index=12&type=section&id=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](index=38&type=chunk) 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](index=12&type=section&id=Deferred%20Financing%20Costs) 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](index=39&type=chunk) [Long-Lived Assets](index=13&type=section&id=Long-Lived%20Assets) 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](index=40&type=chunk) [Leases](index=14&type=section&id=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](index=42&type=chunk)[43](index=43&type=chunk) [Property and Equipment](index=14&type=section&id=Property%20and%20Equipment) 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](index=44&type=chunk) [Fair Value of Financial Instruments](index=14&type=section&id=Fair%20Value%20of%20Financial%20Instruments) 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](index=46&type=chunk) [Revenue Recognition and Reserve for Sales Returns](index=14&type=section&id=Revenue%20Recognition%20and%20Reserve%20for%20Sales%20Returns) 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](index=47&type=chunk)[49](index=49&type=chunk) 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](index=16&type=section&id=Shipping%20and%20Handling%20Costs) 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](index=56&type=chunk) [Stock Based Compensation](index=16&type=section&id=Stock%20Based%20Compensation) 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](index=57&type=chunk) 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](index=16&type=section&id=Research%20and%20Development%20Costs) 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](index=58&type=chunk) 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](index=16&type=section&id=Income%20Taxes) 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](index=59&type=chunk)[60](index=60&type=chunk) 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](index=18&type=section&id=Computation%20of%20Earnings%20Per%20Share) 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](index=65&type=chunk) 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](index=18&type=section&id=Recent%20Accounting%20Pronouncements) 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](index=66&type=chunk) [NOTE 4 - INVENTORIES, NET](index=18&type=section&id=NOTE%204%20-%20INVENTORIES%2C%20NET) 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](index=20&type=section&id=NOTE%205%20%E2%80%93%20PROPERTY%20AND%20EQUIPMENT) 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](index=20&type=section&id=NOTE%206%20%E2%80%93%20BANK%20FINANCING) This note describes the company's various bank loans, credit facilities, and related terms [Intercreditor Revolving Credit Facility (Crestmark Bank and Iron Horse Credit)](index=20&type=section&id=Intercreditor%20Revolving%20Credit%20Facility%20Crestmark%20Bank%20and%20Iron%20Horse%20Credit) 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](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk) - 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](index=72&type=chunk)[78](index=78&type=chunk) 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](index=76&type=chunk) [Note Payable Payroll Protection Plan](index=22&type=section&id=Note%20Payable%20Payroll%20Protection%20Plan) 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](index=80&type=chunk) [Installment Notes Payable](index=22&type=section&id=Installment%20Notes%20Payable) 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](index=81&type=chunk) 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](index=22&type=section&id=Subordinated%20Debt%2FNote%20Payable%20to%20Related%20Party) 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](index=82&type=chunk) - 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](index=83&type=chunk)[84](index=84&type=chunk) [NOTE 7 - COMMITMENTS AND CONTINGENCIES](index=24&type=section&id=NOTE%207%20-%20COMMITMENTS%20AND%20CONTINGENCIES) This note discloses the company's contractual obligations, potential liabilities, and the impact of COVID-19 [COVID-19](index=24&type=section&id=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](index=86&type=chunk) [Legal Matters](index=24&type=section&id=Legal%20Matters) 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](index=87&type=chunk) [Leases](index=24&type=section&id=Leases_7) 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](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) - 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](index=92&type=chunk) 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](index=25&type=section&id=NOTE%208%20-%20STOCK%20OPTIONS%20AND%20WARRANTS) 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](index=101&type=chunk) 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](index=103&type=chunk) [NOTE 9 – AUGUST 2021 STOCK REDEMPTION](index=27&type=section&id=NOTE%209%20%E2%80%93%20AUGUST%202021%20STOCK%20REDEMPTION) 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](index=106&type=chunk) [NOTE 10 – AUGUST 2021 PRIVATE PLACEMENT](index=29&type=section&id=NOTE%2010%20%E2%80%93%20AUGUST%202021%20PRIVATE%20PLACEMENT) 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](index=108&type=chunk)[111](index=111&type=chunk) - Approximately **$7.16 million** of the private placement proceeds were used to fund the stock redemption agreement[111](index=111&type=chunk) - Stingray Group Inc., a long-standing business partner, participated in the private placement, acquiring a minority interest and becoming a related party[112](index=112&type=chunk) - An application for NASDAQ listing has been submitted and is pending approval, with shareholders approving a reverse stock split simultaneous with up-listing[110](index=110&type=chunk) [NOTE 11 - GEOGRAPHICAL INFORMATION](index=30&type=section&id=NOTE%2011%20-%20GEOGRAPHICAL%20INFORMATION) 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](index=30&type=section&id=NOTE%2012%20%E2%80%93RELATED%20PARTY%20TRANSACTIONS) 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](index=118&type=chunk) - 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](index=119&type=chunk) 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](index=30&type=section&id=NOTE%2013%20%E2%80%93%20RESERVE%20FOR%20SALES%20RETURNS) 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](index=123&type=chunk)[124](index=124&type=chunk) 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](index=32&type=section&id=NOTE%2014%20%E2%80%93%20REFUNDS%20DUE%20TO%20CUSTOMERS) 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](index=32&type=section&id=NOTE%2015%20-%20EMPLOYEE%20BENEFIT%20PLANS) 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](index=128&type=chunk) 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](index=32&type=section&id=NOTE%2016%20-%20CONCENTRATIONS%20OF%20CREDIT%20AND%20SALES%20RISK) 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](index=129&type=chunk) - 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](index=130&type=chunk) - 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](index=131&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 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](index=33&type=section&id=Forward-Looking%20Statements) 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](index=134&type=chunk) - 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](index=135&type=chunk) [Overview](index=33&type=section&id=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](index=137&type=chunk)[138](index=138&type=chunk) - 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](index=140&type=chunk) [COVID-19 Update](index=33&type=section&id=COVID-19%20Update) 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](index=142&type=chunk) - 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](index=143&type=chunk) - 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](index=144&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) 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](index=36&type=section&id=QUARTER%20ENDED%20DECEMBER%2031%2C%202021%20COMPARED%20TO%20THE%20QUARTER%20ENDED%20DECEMBER%2031%2C%202020) 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](index=152&type=chunk) - 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](index=153&type=chunk) [Nine Months Ended December 31, 2021 Compared to the Nine Months Ended December 31, 2020](index=37&type=section&id=NINE%20MONTHS%20ENDED%20DECEMBER%2031%2C%202021%20COMPARED%20TO%20THE%20NINE%20MONTHS%20ENDED%20DECEMBER%2031%2C%202020) 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](index=161&type=chunk) - 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](index=162&type=chunk)[163](index=163&type=chunk) - 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](index=165&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) 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](index=168&type=chunk) - 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](index=171&type=chunk) - 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](index=178&type=chunk) [Critical Accounting Policies](index=42&type=section&id=CRITICALACCOUNTING%20POLICIES) 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](index=179&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not required for smaller reporting companies - This item is not required for small reporting companies[180](index=180&type=chunk) [Item 4. Controls and Procedures](index=42&type=section&id=Item%204.%20Controls%20and%20Procedures) 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](index=42&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) 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](index=181&type=chunk)[182](index=182&type=chunk) [Plan for Material Weakness in Internal Control over Financial Reporting](index=43&type=section&id=Plan%20for%20Material%20Weakness%20in%20Internal%20Control%20over%20Financial%20Reporting) 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](index=183&type=chunk)[192](index=192&type=chunk) - The Company anticipates remediating this material weakness by March 31, 2022[184](index=184&type=chunk) [Changes in Internal Controls](index=43&type=section&id=Changes%20in%20Internal%20Controls) 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](index=185&type=chunk) PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, defaults, and other required disclosures [Item 1. Legal Proceedings](index=43&type=section&id=Item%201.%20Legal%20Proceedings) 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](index=187&type=chunk) [Item 1A. Risk Factors](index=43&type=section&id=Item%201A.Risk%20Factors) This item is not applicable for smaller reporting companies - Not applicable for smaller reporting companies[188](index=188&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=43&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) 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](index=188&type=chunk) [Item 3. Defaults Upon Senior Securities](index=43&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) 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](index=188&type=chunk) [Item 4. Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) There are no mine safety disclosures to report - No mine safety disclosures[189](index=189&type=chunk) [Item 5. Other Information](index=43&type=section&id=Item%205.%20Other%20Information) There is no other information to report in this section - No other information[190](index=190&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) 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](index=193&type=chunk)[195](index=195&type=chunk) 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](index=199&type=chunk)

FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2021 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ______. Commission File Number 000-24968 THE SINGING MACHINE COMPANY, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 95-3795478 (State of In ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) Presents the unaudited condensed consolidated financial statements and related notes for the company and its subsidiaries [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, with detailed notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (June 30, 2021 vs. March 31, 2021) | Metric | June 30, 2021 ($) | March 31, 2021 ($) | | :------------------------------------------------ | :------------------------ | :------------- | | **Assets** | | | | Cash | $1,383,230 | $396,579 | | Accounts receivable, net | $5,562,834 | $2,298,922 | | Inventories, net | $8,370,101 | $5,490,255 | | Total Current Assets | $15,885,517 | $12,979,306 | | Total Assets | $19,450,067 | $16,761,911 | | **Liabilities** | | | | Accounts payable | $6,262,655 | $2,461,103 | | Total Current Liabilities | $10,329,959 | $7,034,199 | | Total Liabilities | $11,649,238 | $8,852,373 | | **Shareholders' Equity** | | | | Total Shareholders' Equity | $7,800,829 | $7,909,538 | | Total Liabilities and Shareholders' Equity | $19,450,067 | $16,761,911 | - Cash increased significantly from **$396,579** at March 31, 2021, to **$1,383,230** at June 30, 2021[10](index=10&type=chunk) - Total Current Assets increased by approximately **$2.9 million**, driven by increases in accounts receivable and inventories[10](index=10&type=chunk) - Total Current Liabilities increased by approximately **$3.3 million**, primarily due to a substantial rise in accounts payable[10](index=10&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Details the company's revenues, expenses, and net loss for the three-month periods ended June 30, 2021 and 2020 Condensed Consolidated Statements of Operations (Three Months Ended June 30, 2021 vs. 2020) | Metric | June 30, 2021 ($) | June 30, 2020 ($) | | :------------------------------------ | :------------ | :------------ | | Net Sales | $6,065,650 | $3,051,983 | | Cost of Goods Sold | $4,487,780 | $2,089,531 | | Gross Profit | $1,577,870 | $962,452 | | Total Operating Expenses | $2,067,605 | $1,733,390 | | Loss From Operations | $(489,735) | $(770,938) | | Gain from Payroll Protection Plan loan forgiveness | $448,242 | $- | | Total Other Income (Expenses), net | $343,027 | $485,297 | | Net Loss | $(118,613) | $(206,804) | | Net Loss per Common Share (Basic and Diluted) | $(0.00) | $(0.01) | - Net Sales increased by **98.7%** to **$6,065,650** for the three months ended June 30, 2021, compared to **$3,051,983** in the prior year[13](index=13&type=chunk) - Gross Profit increased by **64%** to **$1,577,870**, but the gross profit margin decreased to **26.0%** from **31.5%** year-over-year[13](index=13&type=chunk) - Net Loss improved to **$(118,613)** from **$(206,804)** in the prior year, significantly aided by a **$448,242** gain from PPP loan forgiveness[13](index=13&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Summarizes the cash inflows and outflows from operating, investing, and financing activities for the three-month periods Condensed Consolidated Statements of Cash Flows (Three Months Ended June 30, 2021 vs. 2020) | Cash Flow Activity | June 30, 2021 ($) | June 30, 2020 ($) | | :------------------------------------------ | :------------ | :------------ | | Net cash provided by (used in) operating activities | $793,982 | $(244,026) | | Net cash used in investing activities | $(55,534) | $(45,314) | | Net cash provided by financing activities | $248,203 | $1,748,733 | | Net change in cash | $986,651 | $1,459,393 | | Cash at end of period | $1,383,230 | $1,804,593 | - Operating activities generated **$793,982** in cash for the three months ended June 30, 2021, a significant improvement from **$244,026** cash used in the prior year[15](index=15&type=chunk) - Cash at the end of the period was **$1,383,230**, an increase from the beginning of the year but lower than the **$1,804,593** at June 30, 2020[15](index=15&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity) Outlines changes in the company's equity accounts, including net loss and stock-based transactions, for the three-month periods Condensed Consolidated Statements of Shareholders' Equity (Three Months Ended June 30, 2021 vs. 2020) | Metric | March 31, 2021 ($) | June 30, 2021 ($) | March 31, 2020 ($) | June 30, 2020 ($) | | :-------------------------- | :------------- | :------------ | :------------- | :------------ | | Total Shareholders' Equity (Beginning) | $7,909,538 | - | $5,688,063 | - | | Net loss | $(118,613) | $(118,613) | $(206,804) | $(206,804) | | Employee compensation-stock option | $5,104 | $5,104 | - | - | | Exercise of stock options | $4,800 | $4,800 | - | - | | **Total Shareholders' Equity (End)** | - | $7,800,829 | - | $5,481,259 | - Total Shareholders' Equity decreased slightly to **$7,800,829** at June 30, 2021, from **$7,909,538** at March 31, 2021, primarily due to the net loss[17](index=17&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Provides additional information and explanations for the figures presented in the condensed consolidated financial statements [NOTE 1 – BASIS OF PRESENTATION](index=8&type=section&id=NOTE%201%20%E2%80%93%20BASIS%20OF%20PRESENTATION) Describes the company's business activities and the entities included in the consolidated financial statements - The Singing Machine Company, Inc. and its wholly-owned subsidiaries are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings[19](index=19&type=chunk) - The Company conducts business with several entities principally owned by its former Chairman, Philip Lau, including Starlight R&D Ltd, Starlight Consumer Electronics USA, Inc., Cosmo Communications Corporation of Canada, Inc., Winglight Pacific, Ltd, and Starlight Electronics Company Ltd[20](index=20&type=chunk) [NOTE 2 – LIQUIDITY](index=8&type=section&id=NOTE%202%20%E2%80%93%20LIQUIDITY) Discusses the company's ability to meet its short-term obligations, including recent financial events and future outlook - The Company reported a net loss of approximately **$119,000** for the three months ended June 30, 2021, an improvement from a net loss of approximately **$207,000** for the same period in 2020[21](index=21&type=chunk) - In June 2021, the Company received notification that its Paycheck Protection Program (PPP) loan of approximately **$444,000** (including principal and interest) was forgiven in its entirety, resulting in a gain of approximately **$448,000**[21](index=21&type=chunk) - Subsequent to the quarter end, on August 10, 2021, the Company completed a stock redemption of **19,623,155 shares** for approximately **$7,162,000** and a private placement raising approximately **$9,800,000**, expecting an increase in working capital of approximately **$1,800,000** after expenses[22](index=22&type=chunk)[23](index=23&type=chunk) - Management believes current working capital, available cash from the Intercreditor Revolving Credit Facility, and cash from the private placement and operating forecast will be adequate for liquidity requirements for at least the next twelve months[24](index=24&type=chunk) [NOTE 3 - SUMMARY OF ACCOUNTING POLICIES](index=8&type=section&id=NOTE%203%20-%20SUMMARY%20OF%20ACCOUNTING%20POLICIES) Outlines the significant accounting principles and methods used in preparing the financial statements [PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION](index=8&type=section&id=PRINCIPLES%20OF%20CONSOLIDATION%20AND%20BASIS%20OF%20PRESENTATION) Explains the consolidation of subsidiaries and the preparation of interim financial statements in accordance with US GAAP - The condensed consolidated financial statements include the accounts of the Company and all its wholly-owned subsidiaries, with all inter-company accounts and transactions eliminated[25](index=25&type=chunk) - The unaudited interim financial statements are prepared in accordance with US GAAP and Form 10-Q requirements, and do not include all disclosures required for complete annual financial statements[25](index=25&type=chunk)[26](index=26&type=chunk) [USE OF ESTIMATES](index=10&type=section&id=USE%20OF%20ESTIMATES) Highlights the reliance on management's judgments and assumptions in preparing the financial statements - The Company makes estimates and assumptions for sales returns and allowances, warranty reserves, inventory reserves, and promotional incentives, which affect reported financial amounts[29](index=29&type=chunk) [COLLECTABILITY OF ACCOUNTS RECEIVABLE](index=10&type=section&id=COLLECTABILITY%20OF%20ACCOUNTS%20RECEIVABLE) Details the company's policies for estimating and reserving for uncollectible accounts receivable and customer chargebacks - The allowance for doubtful accounts is based on management's estimates of customer creditworthiness, economic conditions, and historical data, with **100%** reserves for customers in bankruptcy[30](index=30&type=chunk) - The Company is subject to customer chargebacks for co-op program incentives, defective returns, and return freight/handling charges, which reduce collectability of open invoices[31](index=31&type=chunk) [FOREIGN CURRENCY TRANSLATION](index=10&type=section&id=FOREIGN%20CURRENCY%20TRANSLATION) Explains the methodology for translating financial statements of foreign subsidiaries into U.S. dollars - The Macau Subsidiary's functional currency is the Hong Kong dollar, with financial statements translated to U.S. dollars using period-end rates for assets/liabilities and average rates for revenues/expenses[32](index=32&type=chunk) [CONCENTRATION OF CREDIT RISK](index=10&type=section&id=CONCENTRATION%20OF%20CREDIT%20RISK) Addresses the company's exposure to credit risk from cash balances and accounts receivable - The Company maintains cash in U.S. bank accounts exceeding FDIC insured amounts and also holds cash balances in foreign financial institutions, which were approximately **$109,000** at June 30, 2021[33](index=33&type=chunk) - Financial instruments, particularly accounts receivable, subject the Company to concentrations of credit risk[34](index=34&type=chunk) [INVENTORY](index=10&type=section&id=INVENTORY) Describes the valuation method for inventories and the company's policy for inventory reserves - Inventories, primarily electronic karaoke equipment, microphones, and accessories, are stated at the lower of cost or net realizable value using the first-in, first-out method[35](index=35&type=chunk) - As of June 30, 2021, the Company had inventory reserves of approximately **$636,000** for estimated excess and obsolete inventory[35](index=35&type=chunk) [DEFERRED FINANCING COSTS](index=10&type=section&id=DEFERRED%20FINANCING%20COSTS) Explains the accounting treatment for costs incurred in obtaining revolving credit facilities - Deferred financing costs for revolving credit facilities are classified as assets and amortized over their term; approximately **$38,000** was incurred in June 2021 for the IHC Facility renewal[36](index=36&type=chunk) [LONG-LIVED ASSETS](index=12&type=section&id=LONG-LIVED%20ASSETS) Details the company's policy for reviewing and assessing impairment of long-lived assets - Long-lived assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable; no impairment was recorded as of June 30, 2021 and 2020[39](index=39&type=chunk) [LEASES](index=12&type=section&id=LEASES) Describes the company's accounting policy for recognizing right-of-use assets and lease liabilities under FASB ASC 842 - The Company follows FASB ASC 842, recognizing right-of-use (ROU) assets and lease liabilities on the balance sheet for leases longer than twelve months, classifying them as finance or operating[40](index=40&type=chunk)[41](index=41&type=chunk) [PROPERTY AND EQUIPMENT](index=12&type=section&id=PROPERTY%20AND%20EQUIPMENT) Explains the valuation and depreciation methods for property and equipment - Property and equipment are stated at cost less accumulated depreciation, with depreciation provided using accelerated and straight-line methods over estimated useful lives[42](index=42&type=chunk) [FAIR VALUE OF FINANCIAL INSTRUMENTS](index=12&type=section&id=FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) Discusses how the fair value of the company's financial instruments is determined - The carrying amounts of the Company's short-term financial instruments (e.g., accounts receivable, accounts payable) and notes payable, finance leases, and installment notes approximate fair value due to their short maturity or market-similar interest rates[44](index=44&type=chunk) [REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS](index=12&type=section&id=REVENUE%20RECOGNITION%20AND%20RESERVE%20FOR%20SALES%20RETURNS) Outlines the company's revenue recognition policy and its methodology for estimating sales returns - Revenue is recognized in accordance with FASB ASC 606 when control of goods is transferred to the customer, reflecting the expected consideration[45](index=45&type=chunk) - Co-op promotion incentives, not being distinct goods or services, are recorded as a reduction to net sales, totaling approximately **$272,000** for both three-month periods ended June 30, 2021 and 2020[48](index=48&type=chunk) - The Company maintains a reserve for sales returns based on historical return amounts and management estimates, which was approximately **$750,000** as of June 30, 2021[52](index=52&type=chunk)[53](index=53&type=chunk) Disaggregated Revenue by Product Line (Three Months Ended June 30, 2021 vs. 2020) | Product Line | June 30, 2021 ($) | June 30, 2020 ($) | | :---------------------- | :------------ | :------------ | | Classic Karaoke Machines | $4,448,000 | $2,341,000 | | Licensed Product | $771,000 | $- | | Music and Accessories | $778,000 | $588,000 | | SMC Kids Toys | $69,000 | $123,000 | | **Total Net Sales** | **$6,066,000** | **$3,052,000** | [SHIPPING AND HANDLING COSTS](index=14&type=section&id=SHIPPING%20AND%20HANDLING%20COSTS) Explains the classification and amounts of shipping and handling expenses - Shipping and handling expenses, classified as a component of selling expenses, were approximately **$151,000** for the three months ended June 30, 2021, up from **$83,000** in the prior year[54](index=54&type=chunk) [STOCK BASED COMPENSATION](index=14&type=section&id=STOCK%20BASED%20COMPENSATION) Details the accounting for stock-based compensation expense related to employee stock options - Stock-based compensation expense for employee stock options, valued using the Black-Scholes model, was approximately **$5,000** for the three months ended June 30, 2021, compared to **$0** in the prior year[55](index=55&type=chunk) [RESEARCH AND DEVELOPMENT COSTS](index=14&type=section&id=RESEARCH%20AND%20DEVELOPMENT%20COSTS) Describes the company's policy for expensing research and development costs - Research and development costs, charged to operations as incurred and included in selling, general and administrative expenses, totaled approximately **$31,000** for the three months ended June 30, 2021, up from **$13,000** in the prior year[56](index=56&type=chunk) [INCOME TAXES](index=14&type=section&id=INCOME%20TAXES) Explains the company's approach to recognizing deferred tax assets and liabilities and uncertain tax positions - The Company follows FASB ASC 740, recognizing deferred tax assets and liabilities for temporary differences and a valuation allowance if realization is not more likely than not[58](index=58&type=chunk) - No uncertain tax positions resulted in adjustments to the income tax provision as of June 30, 2021 and 2020[60](index=60&type=chunk) [COMPUTATION OF (LOSS) EARNINGS PER SHARE](index=16&type=section&id=COMPUTATION%20OF%20%28LOSS%29%20EARNINGS%20PER%20SHARE) Describes the calculation of basic and diluted net income (loss) per common share - Basic net income (loss) per share is based on the weighted average number of common shares outstanding, while diluted EPS reflects potential dilution from in-the-money options using the treasury stock method[61](index=61&type=chunk) - Options to purchase **1,660,000 shares** (2021) and **2,230,000 shares** (2020) were excluded from diluted EPS calculations as they were anti-dilutive[61](index=61&type=chunk) [ADOPTION OF NEW ACCOUNTING STANDARDS](index=16&type=section&id=ADOPTION%20OF%20NEW%20ACCOUNTING%20STANDARDS) Reports on the adoption of new accounting pronouncements and their impact on the financial statements - The Company adopted ASU 2019-12, 'Income Taxes' (Topic 740), for the interim period ended June 30, 2021, which did not have a material effect on the financial statements[62](index=62&type=chunk) [RECENT ACCOUNTING PRONOUNCEMENTS](index=16&type=section&id=RECENT%20ACCOUNTING%20PRONOUNCEMENTS) Discusses recently issued accounting standards that the company is currently evaluating - The Company is evaluating ASU 2016-13, 'Financial Instruments—Credit Losses' (Topic 326), which requires immediate recognition of expected credit losses and is effective for smaller reporting companies for fiscal years beginning after April 1, 2023[63](index=63&type=chunk) [NOTE 4 - INVENTORIES, NET](index=16&type=section&id=NOTE%204%20-%20INVENTORIES%2C%20NET) Provides a detailed breakdown of inventory components and their net values Inventories, Net (June 30, 2021 vs. March 31, 2021) | Component | June 30, 2021 ($) | March 31, 2021 ($) | | :-------------------------- | :------------ | :------------- | | Finished Goods | $6,288,000 | $5,348,000 | | Inventory in Transit | $2,217,000 | $250,000 | | Estimated Amount of Future Returns | $501,000 | $528,000 | | Subtotal | $9,006,000 | $6,126,000 | | Less: Inventory Reserve | $636,000 | $636,000 | | **Inventories, net** | **$8,370,000** | **$5,490,000** | - Net inventories increased significantly to **$8,370,000** at June 30, 2021, from **$5,490,000** at March 31, 2021, primarily due to a substantial increase in inventory in transit[64](index=64&type=chunk) [NOTE 5 – PROPERTY AND EQUIPMENT](index=17&type=section&id=NOTE%205%20%E2%80%93%20PROPERTY%20AND%20EQUIPMENT) Presents a detailed breakdown of property and equipment, including cost and accumulated depreciation Property and Equipment, Net (June 30, 2021 vs. March 31, 2021) | Category | June 30, 2021 ($) | March 31, 2021 ($) | | :---------------------- | :------------ | :------------- | | Computer and office equipment | $445,000 | $445,000 | | Furniture and fixtures | $98,000 | $98,000 | | Warehouse equipment | $199,000 | $199,000 | | Molds and tooling | $1,933,000 | $1,878,000 | | **Total Cost** | **$2,675,000** | **$2,620,000** | | Less: Accumulated depreciation | $2,014,000 | $1,946,000 | | **Property and equipment, net** | **$661,000** | **$674,000** | - Net property and equipment slightly decreased to **$661,000** at June 30, 2021, from **$674,000** at March 31, 2021, despite an increase in molds and tooling[65](index=65&type=chunk) - Depreciation expense for the three months ended June 30, 2021, was approximately **$68,000**, a slight decrease from **$71,000** in the prior year[68](index=68&type=chunk) [NOTE 6 – BANK FINANCING](index=18&type=section&id=NOTE%206%20%E2%80%93%20BANK%20FINANCING) Details the company's various bank financing arrangements, including revolving credit facilities and notes payable [Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit](index=18&type=section&id=Intercreditor%20Revolving%20Credit%20Facility%20Crestmark%20Bank%20and%20Iron%20Horse%20Credit) Describes the terms and availability of the company's revolving credit facilities - The Company has a **$10.0 million** (decreasing to **$5.0 million** off-peak) Crestmark Facility for accounts receivable and a **$2.5 million** IHC Facility for inventory financing, both expiring on June 15, 2022[69](index=69&type=chunk)[71](index=71&type=chunk)[73](index=73&type=chunk) - As of June 30, 2021, approximately **$1,500,000** of borrowings were available under these facilities[69](index=69&type=chunk) - Interest expense for the three months ended June 30, 2021, was approximately **$45,000** for Crestmark (0 in 2020) and **$39,000** for IHC (up from **$8,000** in 2020)[70](index=70&type=chunk)[72](index=72&type=chunk) - The IHC Facility requires a fixed charge coverage ratio of **1:1 times**, which the Company was in compliance with as of June 30, 2021[76](index=76&type=chunk) [Note Payable Payroll Protection Plan](index=18&type=section&id=Note%20Payable%20Payroll%20Protection%20Plan) Details the PPP loan received and its subsequent forgiveness - The Company received approximately **$444,000** from the PPP in May 2020, which was fully forgiven in June 2021, resulting in a **$448,000** gain (including principal and interest) recognized in other income[77](index=77&type=chunk) [Installment Notes Payable](index=20&type=section&id=Installment%20Notes%20Payable) Provides information on the company's installment notes for an ERP system project - The Company has installment notes totaling approximately **$365,000** for an ERP System project, with **60-month terms** and interest rates ranging from **7.58% to 9.25%**[80](index=80&type=chunk) - The outstanding balance was approximately **$265,000** at June 30, 2021, down from **$281,000** at March 31, 2021[80](index=80&type=chunk) [Subordinated Debt/Note Payable to Related Party](index=20&type=section&id=Subordinated%20Debt%2FNote%20Payable%20to%20Related%20Party) Discusses the conversion and outstanding balance of subordinated related party debt - Subordinated related party debt of approximately **$803,000** was converted to a **6%** note payable on June 1, 2020, with an outstanding balance of approximately **$503,000** at June 30, 2021[81](index=81&type=chunk)[83](index=83&type=chunk) - The Company intends to make additional payments and pay off the remaining balance within the next twelve months, provided it meets repayment requirements of the Crestmark and IHC Facilities[82](index=82&type=chunk) [NOTE 7 - COMMITMENTS AND CONTINGENCIES](index=20&type=section&id=NOTE%207%20-%20COMMITMENTS%20AND%20CONTINGENCIES) Discloses the company's legal matters, lease obligations, and other potential liabilities [LEGAL MATTERS](index=20&type=section&id=LEGAL%20MATTERS) Reports on legal proceedings and management's assessment of their potential financial impact - A complaint was filed against the SMCL subsidiary in September 2020 alleging employment practice violations; management believes the claims lack merit and will not materially affect financial results[84](index=84&type=chunk) [LEASES](index=20&type=section&id=LEASES) Provides details on the company's operating lease agreements and future minimum payments - The Company has operating lease agreements for offices and a warehouse in Florida, California, and Macau, with terms expiring through 2024[87](index=87&type=chunk) Operating Lease Liabilities (June 30, 2021) | Year | Operating Leases ($) | | :------------------------ | :--------------- | | 2021 (remaining 6 months) | $466,342 | | 2022 | $938,348 | | 2023 | $674,488 | | 2024 | $30,739 | | **Total Minimum Future Payments** | **$2,109,917** | | Less: Imputed Interest | $158,354 | | **Present Value of Lease Liabilities** | **$1,951,563** | - Operating lease expense was **$232,262** for the three months ended June 30, 2021, with a weighted average remaining lease term of **27.0 months** and a weighted average discount rate of **6.25%**[95](index=95&type=chunk) [NOTE 8 - STOCK OPTIONS](index=22&type=section&id=NOTE%208%20-%20STOCK%20OPTIONS) Summarizes the activity and status of the company's stock option plans Stock Option Activity (Three Months Ended June 30, 2021) | Metric | Number of Options | Weighted Average Exercise Price ($) | | :-------------------------- | :---------------- | :------------------------------ | | Balance at beginning of period | 1,680,000 | $0.32 | | Granted | - | - | | Exercised | (20,000) | $0.24 | | **Balance at end of period** | **1,660,000** | **$0.32** | | Options exercisable at end of period | 1,560,000 | $0.33 | - No stock options were issued during the three months ended June 30, 2021 or 2020[97](index=97&type=chunk) - As of June 30, 2021, there was approximately **$5,000** of unrecognized expense remaining on currently vesting options, with approximately **four months** until full vesting[100](index=100&type=chunk) [NOTE 9 - GEOGRAPHICAL INFORMATION](index=24&type=section&id=NOTE%209%20-%20GEOGRAPHICAL%20INFORMATION) Presents a breakdown of sales by geographic region Sales by Geographic Region (Three Months Ended June 30, 2021 vs. 2020) | Region | June 30, 2021 ($) | June 30, 2020 ($) | | :------------ | :------------ | :------------ | | North America | $5,966,000 | $2,816,000 | | Europe | $- | $183,000 | | Australia | $100,000 | $53,000 | | **Total** | **$6,066,000** | **$3,052,000** | - Sales to customers outside the United States were primarily made by the Macau Subsidiary in US dollars[102](index=102&type=chunk) - North America accounted for the vast majority of sales, increasing from **$2,816,000** in 2020 to **$5,966,000** in 2021[102](index=102&type=chunk) [NOTE 10 –RELATED PARTY TRANSACTIONS](index=24&type=section&id=NOTE%2010%20%E2%80%93RELATED%20PARTY%20TRANSACTIONS) Details transactions and balances with related parties [DUE TO RELATED PARTIES](index=24&type=section&id=DUE%20TO%20RELATED%20PARTIES) Reports on amounts owed to related parties for services and licensing fees - Amounts due to related parties for services and licensing fees were approximately **$63,000** at June 30, 2021, and March 31, 2021[104](index=104&type=chunk) [TRADE](index=26&type=section&id=TRADE) Describes trade-related transactions with affiliated entities - In July 2020, the Company became the sole Canadian distributor after acquiring Cosmo's karaoke inventory for approximately **$685,000**[107](index=107&type=chunk) - A gain of approximately **$11,000** from Cosmo was recognized in Q1 2022 related to payments on prior year sales previously deemed uncollectible[107](index=107&type=chunk) - Service expenses from Starlight Electronics Co, Ltd (SLE), a related party, were approximately **$91,000** for both three-month periods ended June 30, 2021 and 2020[108](index=108&type=chunk) [NOTE 11 – RESERVE FOR SALES RETURNS](index=26&type=section&id=NOTE%2011%20%E2%80%93%20RESERVE%20FOR%20SALES%20RETURNS) Explains the company's policy and changes in the reserve for estimated sales returns - The Company records a sales return reserve at the time of sale for estimated defective goods returns, based on historical amounts and management estimates[109](index=109&type=chunk)[110](index=110&type=chunk) Changes in Reserve for Sales Returns (Six Months Ended June 30, 2021 vs. 2020) | Metric | June 30, 2021 ($) | June 30, 2020 ($) | | :------------------------------------ | :------------ | :------------ | | Reserve for sales returns at beginning of fiscal year | $960,000 | $1,224,000 | | Provision for estimated sales returns | $539,000 | $284,000 | | Sales returns received | $(749,000) | $(1,128,000) | | **Reserve for sales returns at end of period** | **$750,000** | **$380,000** | [NOTE 12 – REFUNDS DUE TO CUSTOMERS](index=26&type=section&id=NOTE%2012%20%E2%80%93%20REFUNDS%20DUE%20TO%20CUSTOMERS) Reports on the amounts owed to customers for product returns - Refunds due to customers were approximately **$94,000** at June 30, 2021, primarily for overstock returns from one customer, down from **$145,000** at March 31, 2021[112](index=112&type=chunk) [NOTE 13 - EMPLOYEE BENEFIT PLANS](index=26&type=section&id=NOTE%2013%20-%20EMPLOYEE%20BENEFIT%20PLANS) Provides information on the company's 401(k) plan and related contributions - The Company contributes to a 401(k) plan for employees; contributions and administrative costs totaled approximately **$18,000** for the three months ended June 30, 2021, up from **$14,000** in the prior year[113](index=113&type=chunk) [NOTE 14 - CONCENTRATIONS OF CREDIT AND SALES RISK](index=26&type=section&id=NOTE%2014%20-%20CONCENTRATIONS%20OF%20CREDIT%20AND%20SALES%20RISK) Addresses the company's exposure to credit and sales risk due to customer concentration - A majority of revenues are derived from U.S. retailers, with accounts receivable concentrated among several large customers[114](index=114&type=chunk) - At June 30, 2021, **78%** of accounts receivable were due from three customers, and for the three months ended June 30, 2021, four customers individually accounted for **10% or more** of net sales (**45%**, **18%**, **14%**, and **14%** respectively)[114](index=114&type=chunk)[115](index=115&type=chunk) [NOTE 15 – SUBSEQUENT EVENTS](index=28&type=section&id=NOTE%2015%20%E2%80%93%20SUBSEQUENT%20EVENTS) Discloses significant events that occurred after the reporting period, including stock redemption and private placement - On August 10, 2021, the Company completed a stock redemption of **19,623,155 common shares** for approximately **$7,162,000**, with the shares to be retired to treasury[117](index=117&type=chunk) - Also on August 10, 2021, a private placement closed, raising approximately **$9,800,000** through the sale of common stock and warrants to institutional and strategic investors, including Stingray Group Inc[119](index=119&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk) - Approximately **$7,200,000** of the private placement funds were used for the stock redemption, with an expected increase in working capital of approximately **$1,800,000** after expenses[121](index=121&type=chunk) - In connection with these transactions, Phillip Lau, Peter Hon, and Yat Tung Lau resigned from the Board of Directors[157](index=157&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on the company's financial performance, liquidity, and capital resources for the quarter [FORWARD-LOOKING STATEMENTS](index=29&type=section&id=FORWARD-LOOKING%20STATEMENTS) Warns readers about the inherent uncertainties and risks associated with forward-looking information - The discussion contains forward-looking statements based on current expectations, subject to risks and uncertainties that could cause actual results to differ materially[123](index=123&type=chunk)[124](index=124&type=chunk) - Key factors to consider include changes in external factors, unanticipated cash requirements, shifts in business strategy, adverse economic conditions, vendor price increases, competitive market factors, and other risks detailed in SEC filings[125](index=125&type=chunk) [OVERVIEW](index=30&type=section&id=OVERVIEW) Provides a general description of the company's business, products, and market presence - The Singing Machine Company, Inc. and its subsidiaries develop, market, and sell consumer karaoke audio systems, accessories, musical instruments, and recordings, primarily to retailers and distributors in North America, Europe, and Australia[128](index=128&type=chunk)[129](index=129&type=chunk) - The business is highly seasonal, with a majority of retail sales occurring from September through December (holiday season), accounting for approximately **86%** and **85%** of net sales in fiscal 2021 and 2020, respectively[131](index=131&type=chunk) [COVID-19 UPDATE](index=30&type=section&id=COVID-19%20UPDATE) Discusses the ongoing impact of the pandemic on the company's operations, supply chain, and market demand - The COVID-19 pandemic continues to be unpredictable, causing manufacturing cost pressures due to raw material and electronic component shortages, as well as inflationary price increases[132](index=132&type=chunk) - The Company experienced supply chain challenges, including increased lead times, port closures, global container shortages, and rising logistics and labor costs, which are expected to continue throughout the fiscal year[133](index=133&type=chunk) - Demand for home entertainment products, including karaoke, microphones, and toys, grew during the pandemic and remains strong due to market shortages[134](index=134&type=chunk) [RESULTS OF OPERATIONS](index=31&type=section&id=RESULTS%20OF%20OPERATIONS) Analyzes the company's financial performance, including revenue, expenses, and net income, for the reporting period [NET SALES](index=31&type=section&id=NET%20SALES) Explains the drivers behind changes in net sales for the reporting period - Net sales for the quarter ended June 30, 2021, increased by approximately **$3,014,000** (**98.7%**) to **$6,066,000**, compared to **$3,052,000** in the prior year[137](index=137&type=chunk) - The increase was primarily due to **$2,444,000** in holiday promotion goods shipped earlier to one major customer and year-round product offerings by another major customer[137](index=137&type=chunk) [GROSS PROFIT](index=31&type=section&id=GROSS%20PROFIT) Analyzes the changes in gross profit and gross profit margin - Gross profit increased by approximately **$616,000** to **$1,578,000**, but the gross profit margin decreased from **31.5%** to **26.0%** (a **5.5 percentage point** decrease)[138](index=138&type=chunk)[139](index=139&type=chunk) - The margin decrease was mainly due to the higher proportion of lower-margin holiday promotion goods (accounting for **4.4 margin points** of the decrease) and the mix of returned products[139](index=139&type=chunk) [OPERATING EXPENSES](index=31&type=section&id=OPERATING%20EXPENSES) Details the changes in selling, general, and administrative expenses - Total operating expenses increased by approximately **$335,000** to **$2,068,000** for the quarter ended June 30, 2021[141](index=141&type=chunk) - Selling expenses rose by **$279,000**, driven by variable expenses (commissions, freight, royalties) commensurate with increased sales and **$97,000** in increased online media marketing[141](index=141&type=chunk) - General and administrative expenses increased by **$58,000** due to higher logistics costs[141](index=141&type=chunk) - As a percentage of net sales, total operating expenses decreased significantly from **56.8%** to **34.0%** (a **22.8 percentage point** decrease), primarily due to lower selling and administrative expenses for direct import holiday promotion goods[142](index=142&type=chunk) [LOSS FROM OPERATIONS](index=33&type=section&id=LOSS%20FROM%20OPERATIONS) Discusses the factors contributing to the company's operating loss - Loss from operations decreased by approximately **$281,000** to **$(490,000)** for the three months ended June 30, 2021, compared to **$(771,000)** in the prior year, driven by increased gross profit offset by higher operating expenses[143](index=143&type=chunk) [OTHER INCOME (EXPENSES)](index=33&type=section&id=OTHER%20INCOME%20%28EXPENSES%29) Explains the components of other income and expenses, including one-time gains - Net other income decreased by approximately **$142,000** to **$343,000** for the three months ended June 30, 2021[144](index=144&type=chunk) - Q1 2021 included one-time gains of approximately **$459,000**, primarily from **$448,000** in PPP loan forgiveness, offset by **$116,000** in interest expenses[144](index=144&type=chunk) - Q1 2020 included one-time gains of approximately **$521,000** from a **$131,000** damaged goods insurance claim and **$390,000** from extinguishment of accounts payable, offset by **$36,000** in interest expenses[144](index=144&type=chunk) [INCOME TAXES](index=33&type=section&id=INCOME%20TAXES) Reports on the income tax provision or benefit and the effective tax rate - The Company recognized an income tax benefit of approximately **$28,000** for Q1 2021 (effective tax rate of **19.1%**) compared to **$79,000** for Q1 2020 (effective tax rate of **27.6%**)[145](index=145&type=chunk) [NET INCOME](index=33&type=section&id=NET%20INCOME) Summarizes the overall net income or loss and its primary drivers - Net loss improved to approximately **$(119,000)** for the three months ended June 30, 2021, from **$(207,000)** in the prior year, primarily due to improved operating loss and the PPP loan forgiveness[146](index=146&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=33&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Assesses the company's cash position, working capital, and ability to fund operations and investments - Cash on hand was approximately **$1,383,000** at June 30, 2021, compared to **$1,805,000** at June 30, 2020, with working capital of approximately **$5,556,000**[147](index=147&type=chunk) - Net cash provided by operating activities was approximately **$794,000** for Q1 2021, a significant improvement from **$244,000** used in Q1 2020[147](index=147&type=chunk) - Operating cash flow was positively impacted by a **$4,214,000** decrease in amounts due from Crestmark Bank and a **$3,790,000** increase in accounts payable, offset by increases in accounts receivable (**$3,251,000**) and inventories (**$2,880,000**) for peak season build-up[147](index=147&type=chunk) - Net cash provided by financing activities was approximately **$248,000** for Q1 2021, including **$300,000** borrowed from the Intercreditor Revolving Credit Facility, compared to **$1,749,000** in Q1 2020 which included **$1,400,000** from IHC and **$444,000** from PPP[150](index=150&type=chunk)[151](index=151&type=chunk) - The Company expects current working capital, available credit facilities, and proceeds from the recent private placement to be adequate for liquidity for at least the next twelve months[158](index=158&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=36&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) Identifies the accounting policies that require significant judgment and estimates - The interim financial statements rely on management's subjective decisions, assessments, and estimates, which are inherently uncertain[159](index=159&type=chunk) - Critical accounting estimates and assumptions have not materially changed from those identified in the Company's 2021 Annual Report[159](index=159&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) States that this item is not required for smaller reporting companies - Not required for small reporting companies[160](index=160&type=chunk) [Item 4. Controls and Procedures](index=36&type=section&id=Item%204.%20Controls%20and%20Procedures) Addresses the effectiveness of the company's disclosure controls and internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=36&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Reports on the CEO and CFO's assessment of the effectiveness of disclosure controls - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to a material weakness in the consolidated financial statements close process[161](index=161&type=chunk)[162](index=162&type=chunk) - The material weakness was primarily related to errors in inventory cutoff and valuation of estimated returns, partly due to a new accounting software system[162](index=162&type=chunk) [Plan for material Weakness in Internal Control over Financial Reporting](index=36&type=section&id=Plan%20for%20material%20Weakness%20in%20Internal%20Control%20over%20Financial%20Reporting) Outlines the company's strategy to address identified material weaknesses in internal controls - Remediation measures include correcting system processing errors in the new ERP system related to returned goods recognition and costing[163](index=163&type=chunk)[164](index=164&type=chunk) - Management plans to strengthen ERP system training for finance and warehouse personnel on inventory cutoff and valuation procedures[164](index=164&type=chunk) - The Company will assess resource adequacy and explore additional third-party assistance for proper inventory controls[164](index=164&type=chunk) [Changes in Internal Controls](index=36&type=section&id=Changes%20in%20Internal%20Controls) Reports on any changes in internal control over financial reporting during the quarter - There were no changes in the Company's internal controls over financial reporting during the quarter ended June 30, 2021, that materially affected, or were reasonably likely to materially affect, internal control over financial reporting[164](index=164&type=chunk) [PART II. OTHER INFORMATION](index=37&type=section&id=PART%20II.%20OTHER%20INFORMATION) Contains additional information not covered in the financial statements, including legal proceedings and exhibits [Item 1. Legal Proceedings](index=37&type=section&id=Item%201.%20Legal%20Proceedings) Discloses any material legal actions involving the company - A complaint was filed on September 11, 2020, against SMCL alleging employment practice violations; management believes the claims lack merit and will not have a material adverse effect on financial results[166](index=166&type=chunk) - Management is not aware of any other legal proceedings outside the ordinary course of business[167](index=167&type=chunk) [Item 1A. Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) States that this item is not applicable for smaller reporting companies - Not applicable for smaller reporting companies[168](index=168&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Reports on any unregistered sales of equity securities and the application of their proceeds - No unregistered sales of equity securities or use of proceeds were reported[168](index=168&type=chunk) [Item 3. Defaults Upon Senior Securities](index=37&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) Confirms whether the company is in default on any of its senior securities - The Company is not currently in default upon any of its senior securities[168](index=168&type=chunk) [Item 4. Mine Safety Disclosures](index=37&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Reports on any mine safety disclosures, if applicable - No mine safety disclosures were reported[169](index=169&type=chunk) [Item 5. Other Information](index=37&type=section&id=Item%205.%20Other%20Information) Includes any other material information not disclosed elsewhere in the report - No other information was reported[170](index=170&type=chunk) [Item 6. Exhibits](index=37&type=section&id=Item%206.%20Exhibits) Lists all documents filed as exhibits to the quarterly report - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350[171](index=171&type=chunk) [SIGNATURES](index=38&type=section&id=SIGNATURES) Provides the official signatures of the company's authorized officers, certifying the report - The report was signed on August 16, 2021, by Gary Atkinson, Chief Executive Officer, and Lionel Marquis, Chief Financial Officer[174](index=174&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2021 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ___________ Commission file number 000-24968 THE SINGING MACHINE COMPANY, INC. (Exact name of registrant as specified in its charter) (State or other ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended December 31, 2020 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ______. Commission File Number 0-24968 THE SINGING MACHINE COMPANY, INC. (Exact Name of Registrant as Specified in its Charter) | DELAWARE | 95-3795478 | | --- ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, with detailed notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets show a significant increase in total assets and liabilities from March 31, 2020, to September 30, 2020, primarily driven by a substantial rise in accounts receivable and accounts payable, alongside an increase in operating lease right-of-use assets and corresponding liabilities | Metric | Sep 30, 2020 (Unaudited) ($) | Mar 31, 2020 ($) | | :-------------------------------- | :----------------------- | :----------- | | **Assets** | | | | Cash | $1,071,242 | $345,200 | | Accounts receivable, net | $18,172,977 | $1,860,500 | | Inventories, net | $8,201,752 | $7,601,277 | | Total Current Assets | $27,613,810 | $13,819,684 | | Operating Leases - right of use assets | $2,460,942 | $573,874 | | Total Assets | $31,567,252 | $16,601,137 | | **Liabilities** | | | | Accounts payable | $14,929,143 | $5,041,610 | | Total Current Liabilities | $20,614,631 | $9,502,409 | | Total Liabilities | $23,678,119 | $10,913,074 | | **Shareholders' Equity** | | | | Total Shareholders' Equity | $7,889,133 | $5,688,063 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported significant improvements in net sales, gross profit, and net income for both the three and six months ended September 30, 2020, compared to the same periods in 2019, driven by increased sales and a gain from an insurance claim | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Sales | $23,187,519 | $20,081,842 | $26,511,062 | $24,890,882 | | Gross Profit | $6,725,284 | $5,642,320 | $7,959,296 | $6,630,026 | | Income (Loss) from Operations | $2,438,539 | $859,334 | $1,667,601 | $(242,770) | | Gain from damaged goods insurance claim | $936,537 | $- | $1,067,829 | $- | | Net Income (Loss) | $2,407,874 | $624,222 | $2,201,070 | $(245,359) | | Net Income (Loss) per Common Share (Basic and Diluted) | $0.06 | $0.02 | $0.06 | $(0.01) | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended September 30, 2020, net cash used in operating activities decreased significantly compared to the prior year, while net cash provided by financing activities also saw a decrease | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net Income (loss) | $2,201,070 | $(245,359) | | Net cash used in operating activities | $(673,980) | $(2,215,634) | | Net cash used in investing activities | $(84,975) | $(213,186) | | Net cash provided by financing activities | $1,484,997 | $4,471,984 | | Net change in cash | $726,042 | $2,043,164 | | Cash at end of period | $1,071,242 | $2,254,572 | [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) Shareholders' equity increased from March 31, 2020, to September 30, 2020, primarily due to net income | Metric | Sep 30, 2020 ($) | Mar 31, 2020 ($) | | :----------------------- | :----------- | :----------- | | Total Shareholders' Equity | $7,889,133 | $5,688,063 | | Accumulated Deficit | $(12,225,486) | $(14,426,556) | | Common Stock Shares Outstanding | 38,557,643 | 38,557,643 | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the company's financial reporting, including its business overview, significant accounting policies, specific financial instrument details, commitments, contingencies, and related party transactions, offering crucial context to the condensed financial statements [NOTE 1 – BASIS OF PRESENTATION](index=9&type=section&id=NOTE%201%20%E2%80%93%20BASIS%20OF%20PRESENTATION) The Singing Machine Company, Inc. and its wholly-owned subsidiaries are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments, and musical recordings to retailers and distributors - The Singing Machine Company, Inc. (SMC) and its subsidiaries (Macau Subsidiary, SMC Logistics, Inc., SMC-Music, Inc.) focus on developing, marketing, and selling consumer karaoke audio systems, accessories, musical instruments, and musical recordings[22](index=22&type=chunk) - Products are sold by SMC to retailers and distributors for resale to consumers[22](index=22&type=chunk) [NOTE 2 - SUMMARY OF ACCOUNTING POLICIES](index=9&type=section&id=NOTE%202%20-%20SUMMARY%20OF%20ACCOUNTING%20POLICIES) This section outlines the key accounting policies used in preparing the condensed consolidated financial statements, including principles of consolidation, use of estimates, revenue recognition, and recent accounting pronouncements, emphasizing compliance with GAAP and SEC requirements for interim reporting [PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION](index=9&type=section&id=PRINCIPLES%20OF%20CONSOLIDATION%20AND%20BASIS%20OF%20PRESENTATION) The condensed consolidated financial statements include all wholly-owned subsidiaries, with inter-company transactions eliminated, and are prepared in accordance with GAAP for interim information and SEC Form 10-Q requirements - The financial statements consolidate the Company and its wholly-owned subsidiaries, eliminating all inter-company accounts and transactions[23](index=23&type=chunk) - Statements are prepared in accordance with GAAP for interim financial information and SEC Form 10-Q requirements, and do not include all disclosures required for complete annual statements[23](index=23&type=chunk) [USE OF ESTIMATES](index=9&type=section&id=USE%20OF%20ESTIMATES) Management makes estimates and assumptions for items like sales returns, warranty reserves, and inventory reserves, which are based on judgment and historical data, and have not materially impacted financial condition historically - Estimates and assumptions are made for sales returns and allowances, warranty reserves, inventory reserves, and promotional incentives[24](index=24&type=chunk) - Historically, changes to these estimates have not had a material impact on the Company's financial condition[24](index=24&type=chunk) [COLLECTIBILITY OF ACCOUNTS RECEIVABLE](index=9&type=section&id=COLLECTIBILITY%20OF%20ACCOUNTS%20RECEIVABLE) The allowance for doubtful accounts is based on management's estimates of customer creditworthiness, economic conditions, and historical data, with 100% reserves for bankrupt customers and other reserves based on collection experience - Allowance for doubtful accounts is based on management's estimates of customer creditworthiness, current economic conditions, and historical information[25](index=25&type=chunk) - **100%** reserves are set for customers in bankruptcy, with other reserves based on historical collection experience[25](index=25&type=chunk) - The Company is subject to chargebacks from customers for cooperative marketing, defective returns, and freight, which reduce collectability of open invoices[26](index=26&type=chunk) [FOREIGN CURRENCY TRANSLATION](index=9&type=section&id=FOREIGN%20CURRENCY%20TRANSLATION) 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 recorded in operations and translations in shareholders' equity, none of which were material - The Macau Subsidiary's functional currency is the Hong Kong dollar[27](index=27&type=chunk) - Financial statements are translated to U.S. dollars using period-end rates for assets/liabilities and average rates for revenues/expenses[27](index=27&type=chunk) - Net gains and losses from foreign exchange transactions are recorded in the statement of operations, and translations in shareholders' equity, with no material amounts during the periods presented[27](index=27&type=chunk) [CONCENTRATION OF CREDIT RISK](index=9&type=section&id=CONCENTRATION%20OF%20CREDIT%20RISK) The Company faces credit risk primarily from accounts receivable and maintains cash balances in U.S. bank accounts exceeding FDIC insured limits, as well as in foreign financial institutions - The Company maintains cash in U.S. bank accounts exceeding FDIC insured amounts and in foreign financial institutions[29](index=29&type=chunk) - Financial instruments, particularly accounts receivable, subject the Company to concentrations of credit risk[30](index=30&type=chunk) | Metric | Sep 30, 2020 ($) | Mar 31, 2020 ($) | | :-------------------------------- | :----------- | :----------- | | Cash balances in foreign financial institutions | ~$896,000 | ~$217,000 | [INVENTORY](index=10&type=section&id=INVENTORY) Inventories, primarily electronic karaoke equipment and accessories, are valued at the lower of cost or net realizable value using the FIFO method, including estimates for future returns and reserves for excess/obsolete items - Inventories consist mainly of electronic karaoke equipment, microphones, and accessories, valued at the lower of cost or net realizable value using the FIFO method[31](index=31&type=chunk) - Estimated amounts for future inventory returns due to warranty and allowance programs were approximately **$1,114,000** as of September 30, 2020, and **$1,367,000** as of March 31, 2020[31](index=31&type=chunk) - Inventory reserves for estimated excess and obsolete inventory were approximately **$905,000** as of September 30, 2020, and **$434,000** as of March 31, 2020[31](index=31&type=chunk) [DEFERRED FINANCING COSTS](index=11&type=section&id=DEFERRED%20FINANCING%20COSTS) Deferred financing costs, incurred for revolving credit facilities, are classified as current assets and amortized over twelve months, with approximately $74,000 incurred in June 2020 for the Crestmark and IHC Facilities - Deferred financing costs for revolving credit facilities are classified as current assets[34](index=34&type=chunk) - Approximately **$74,000** in deferred financing costs were incurred in June 2020 for the Crestmark Facility and IHC Facility, amortized over twelve months[34](index=34&type=chunk) [LONG-LIVED ASSETS](index=11&type=section&id=LONG-LIVED%20ASSETS) Long-lived assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable, with impairment losses recognized if undiscounted future cash flows are less than the carrying amount - Long-lived assets are reviewed for impairment when circumstances suggest carrying amounts may not be recoverable[35](index=35&type=chunk) - Impairment losses are recognized if undiscounted future cash flows are less than the carrying amount, reducing carrying amounts to fair value[35](index=35&type=chunk) [LEASES](index=11&type=section&id=LEASES) The Company follows FASB ASC 842, recognizing right-of-use assets and lease liabilities on the balance sheet for leases over twelve months, classifying them as finance or operating leases, and using the incremental borrowing rate for operating leases - The Company applies FASB ASC 842, 'Leases', requiring recognition of right-of-use (ROU) assets and lease liabilities for leases exceeding twelve months[36](index=36&type=chunk) - Leases are classified as finance or operating, impacting expense recognition in the income statement[36](index=36&type=chunk) - The incremental borrowing rate is used to discount operating lease payments, as the implicit interest rate is not readily determinable[37](index=37&type=chunk) [PROPERTY AND EQUIPMENT](index=11&type=section&id=PROPERTY%20AND%20EQUIPMENT) Property and equipment are recorded at cost, net of accumulated depreciation, with depreciation calculated using accelerated and straight-line methods over estimated useful lives - Property and equipment are stated at cost, less accumulated depreciation[38](index=38&type=chunk) - Depreciation is provided using accelerated and straight-line methods over estimated useful lives[38](index=38&type=chunk) [FAIR VALUE OF FINANCIAL INSTRUMENTS](index=11&type=section&id=FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) The carrying amounts of the Company's short-term financial instruments, including accounts receivable, accounts payable, and revolving lines of credit, approximate fair value due to their short maturity periods and market-rate interest accruals - The carrying amounts of short-term financial instruments (accounts receivable, accounts payable, accrued expenses, refunds due to customers, due to/from related parties) approximate fair value due to their short maturity[40](index=40&type=chunk) - The carrying amounts of subordinated debt, finance leases, installment notes, and revolving lines of credit also approximate fair value due to short maturity and market-rate interest[40](index=40&type=chunk) - The Payroll Protection Program note payable's carrying amount approximates fair value, as management intends to apply for total forgiveness[40](index=40&type=chunk) [REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS](index=11&type=section&id=REVENUE%20RECOGNITION%20AND%20RESERVE%20FOR%20SALES%20RETURNS) Revenue is recognized when goods are delivered and control is transferred to the customer, based on FASB ASC 606, with a single performance obligation for product sales - Revenue is recognized in accordance with FASB ASC 606 when goods are delivered and control is transferred to the customer[41](index=41&type=chunk)[42](index=42&type=chunk) - Contracts with customers typically consist of one performance obligation: the sale of products, with payment terms less than 120 days and no financing elements[44](index=44&type=chunk) - A sales return reserve is recorded based on historic return amounts, specific events, and management estimates for variable consideration under return allowance programs[47](index=47&type=chunk) | Product Line | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :----------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Classic Karaoke Machines | $16,045,445 | $11,737,193 | $18,432,258 | $15,893,233 | | Download Karaoke Machines | $3,214,493 | $4,005,488 | $3,187,553 | $4,146,488 | | SMC Kids Toys | $213,144 | $418,716 | $359,933 | $558,716 | | Music and Accessories | $3,714,437 | $3,920,445 | $4,531,318 | $4,292,445 | | Total Net Sales | $23,187,519 | $20,081,842 | $26,511,062 | $24,890,882 | [SHIPPING AND HANDLING COSTS](index=13&type=section&id=SHIPPING%20AND%20HANDLING%20COSTS) Shipping and handling costs, incurred by the Company and third-party logistics, are classified as selling expenses and increased for both the three and six months ended September 30, 2020, compared to the prior year - Shipping and handling costs are performed by the Company and third-party logistics companies[49](index=49&type=chunk) - These costs are classified as a component of selling expenses in the condensed consolidated statements of operations[49](index=49&type=chunk) | Period | Shipping and Handling Expenses ($) | | :----------------------- | :----------------------------- | | 3 Months Ended Sep 30, 2020 | ~$305,000 | | 3 Months Ended Sep 30, 2019 | ~$225,000 | | 6 Months Ended Sep 30, 2020 | ~$388,000 | | 6 Months Ended Sep 30, 2019 | ~$314,000 | [STOCK BASED COMPENSATION](index=13&type=section&id=STOCK%20BASED%20COMPENSATION) Stock-based compensation for employees is measured at fair value using the Black-Scholes model and expensed over the service period - Stock-based payments to employees are measured at fair value using the Black-Scholes option valuation model and expensed over the service period[50](index=50&type=chunk) | Period | Stock Option Expense ($) | | :----------------------- | :------------------- | | 3 Months Ended Sep 30, 2020 | $0 | | 3 Months Ended Sep 30, 2019 | ~$5,000 | | 6 Months Ended Sep 30, 2020 | $0 | | 6 Months Ended Sep 30, 2019 | ~$10,000 | [ADVERTISING](index=13&type=section&id=ADVERTISING) Advertising costs are expensed when incurred, and cooperative advertising agreements with major customers require proof of performance - Costs for producing and publishing advertising are charged to operations when first incurred[52](index=52&type=chunk) - Cooperative advertising agreements with major customers require proof of performance, with allowances ranging from **1%** to **13%** of purchase[52](index=52&type=chunk) | Period | Advertising Expense ($) | | :----------------------- | :------------------ | | 3 Months Ended Sep 30, 2020 | ~$1,094,000 | | 3 Months Ended Sep 30, 2019 | ~$1,419,000 | | 6 Months Ended Sep 30, 2020 | ~$1,415,000 | | 6 Months Ended Sep 30, 2019 | ~$1,780,000 | [RESEARCH AND DEVELOPMENT COSTS](index=15&type=section&id=RESEARCH%20AND%20DEVELOPMENT%20COSTS) Research and development costs are expensed as incurred and included in selling, general, and administrative expenses, showing a decrease for both the three and six months ended September 30, 2020, compared to the prior year - Research and development costs are charged to results of operations as incurred and are a component of selling, general and administrative expenses[55](index=55&type=chunk) | Period | R&D Costs ($) | | :----------------------- | :-------- | | 3 Months Ended Sep 30, 2020 | ~$2,000 | | 3 Months Ended Sep 30, 2019 | ~$18,000 | | 6 Months Ended Sep 30, 2020 | ~$15,000 | | 6 Months Ended Sep 30, 2019 | ~$23,000 | [INCOME TAXES](index=15&type=section&id=INCOME%20TAXES) The Company follows FASB ASC 740 for income taxes, recognizing deferred tax assets and liabilities and a valuation allowance for unrealizable deferred tax assets - The Company follows FASB ASC 740, recognizing deferred tax assets and liabilities for temporary differences between financial statement and tax carrying amounts[56](index=56&type=chunk) - A valuation reserve of approximately **$88,000** was recognized for deferred tax assets related to net operating loss carryforwards as of September 30, 2020, and March 31, 2020[56](index=56&type=chunk) | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income Tax (Provision) Benefit | $(821,040) | $(184,140) | $(742,203) | $54,591 | | Estimated Effective Tax Rate (%) | ~25.2% | ~18.3% | ~25.2% | ~18.3% | | Net Deferred Tax Assets ($) | ~$677,000 (Sep 30, 2020) | ~$1,286,000 (Mar 31, 2020) | | | [COMPUTATION OF EARNINGS PER SHARE](index=15&type=section&id=COMPUTATION%20OF%20EARNINGS%20PER%20SHARE) Earnings per common share are calculated by dividing net income by the weighted average common shares outstanding - Income per common share is computed by dividing net income by the weighted average of common shares outstanding[59](index=59&type=chunk) - Total potential dilutive shares from common stock options were approximately **2,230,000** as of September 30, 2020, and **2,250,000** as of September 30, 2019[59](index=59&type=chunk) - These shares were included in diluted EPS computation for the three and six months ended September 30, 2020, and the three months ended September 30, 2019, but excluded for the six months ended September 30, 2019, due to their anti-dilutive effect[59](index=59&type=chunk) [RECENT ACCOUNTING PRONOUNCEMENTS](index=15&type=section&id=RECENT%20ACCOUNTING%20PRONOUNCEMENTS) The Company is evaluating the potential effects of ASU 2019-12, 'Income Taxes,' effective after December 15, 2020, which modifies interim income tax provision calculations, and ASU 2016-13, 'Financial Instruments—Credit Losses,' effective after April 1, 2023, requiring immediate recognition of expected credit losses - The Company is evaluating ASU 2019-12, 'Income Taxes' (Topic 740), effective for fiscal years beginning after December 15, 2020, which may affect interim income tax provision calculations[60](index=60&type=chunk) - The Company is also evaluating ASU 2016-13, 'Financial Instruments—Credit Losses' (Topic 326), effective for smaller reporting companies for fiscal years beginning after April 1, 2023, which requires immediate recognition of expected credit losses[62](index=62&type=chunk) [NOTE 3 - INVENTORIES, NET](index=16&type=section&id=NOTE%203%20-%20INVENTORIES,%20NET) Inventories, net, increased from March 31, 2020, to September 30, 2020, primarily due to an increase in finished goods and inventory in transit, partially offset by an increase in inventory reserves | Component | Sep 30, 2020 ($) | Mar 31, 2020 ($) | | :-------------------------- | :----------- | :----------- | | Finished Goods | $6,872,000 | $6,595,000 | | Inventory in Transit | $1,121,000 | $73,000 | | Estimated Amount of Future Returns | $1,114,000 | $1,367,000 | | Subtotal | $9,107,000 | $8,035,000 | | Less: Inventory Reserve | $905,000 | $434,000 | | **Inventories, net** | **$8,202,000** | **$7,601,000** | [NOTE 4 – PROPERTY AND EQUIPMENT](index=16&type=section&id=NOTE%204%20%E2%80%93%20PROPERTY%20AND%20EQUIPMENT) Property and equipment, net, slightly decreased from March 31, 2020, to September 30, 2020, due to increased accumulated depreciation, despite an increase in molds and tooling | Component | Sep 30, 2020 ($) | Mar 31, 2020 ($) | | :-------------------------- | :----------- | :----------- | | Computer and office equipment | $445,000 | $445,000 | | Furniture and fixtures | $98,000 | $98,000 | | Warehouse equipment | $195,000 | $195,000 | | Molds and tooling | $1,765,000 | $1,680,000 | | Total | $2,503,000 | $2,418,000 | | Less: Accumulated depreciation | $1,786,000 | $1,647,000 | | **Property and equipment, net** | **$717,000** | **$771,000** | | Period | Depreciation Expense ($) | | :----------------------- | :------------------- | | 3 Months Ended Sep 30, 2020 | ~$68,000 | | 3 Months Ended Sep 30, 2019 | ~$60,000 | | 6 Months Ended Sep 30, 2020 | ~$139,000 | | 6 Months Ended Sep 30, 2019 | ~$119,000 | [NOTE 5 – BANK FINANCING](index=16&type=section&id=NOTE%205%20%E2%80%93%20BANK%20FINANCING) This note details the Company's various financing arrangements, including a new Intercreditor Revolving Credit Facility with Crestmark and IHC replacing the previous PNC Bank facility, a Paycheck Protection Program loan, installment notes for an ERP system, and a subordinated related party debt [Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit](index=16&type=section&id=Intercreditor%20Revolving%20Credit%20Facility%20Crestmark%20Bank%20and%20Iron%20Horse%20Credit) The Company entered into a new two-year Intercreditor Revolving Credit Facility on June 16, 2020, with Crestmark Bank ($10.0M on receivables) and Iron Horse Credit ($2.5M on inventory), replacing the PNC Bank facility - On June 16, 2020, the Company executed a two-year Intercreditor Revolving Credit Facility with Crestmark Bank (**$10.0 million** on eligible accounts receivable) and Iron Horse Credit (up to **$2,500,000** in inventory financing), replacing the PNC Bank facility[65](index=65&type=chunk)[70](index=70&type=chunk) - The Crestmark Facility bears interest at the Wall Street Journal Prime Rate plus **5.50%** with a floor of **8.75%**, and requires a mandatory pay-down to zero in January and February each year[67](index=67&type=chunk)[68](index=68&type=chunk) - The IHC Facility bears interest at **1.292%** per month or **15.51%** annually and requires maintaining a fixed charge coverage ratio test (waived for the first six months)[71](index=71&type=chunk)[75](index=75&type=chunk) | Facility | Outstanding Balance (Sep 30, 2020) ($) | Interest Expense (3 Months Ended Sep 30, 2020) ($) | Interest Expense (6 Months Ended Sep 30, 2020) ($) | | :----------------------- | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Crestmark Facility | ~$134,000 | ~$51,000 | ~$51,000 | | IHC Facility | $1,022,000 | ~$54,000 | ~$62,000 | [Revolving Credit Facility PNC Bank](index=18&type=section&id=Revolving%20Credit%20Facility%20PNC%20Bank) The PNC Revolving Credit Facility, renewed in 2017, was terminated on June 16, 2020, after the Company defaulted on its fixed charge coverage ratio in September 2019 and remained in default until termination - The PNC Revolving Credit Facility was terminated on June 16, 2020, and replaced by the Intercreditor Revolving Credit Facility[72](index=72&type=chunk) - The Company defaulted on the PNC facility in September 2019 due to non-compliance with the fixed charge coverage ratio requirement[72](index=72&type=chunk) - No amounts were due on the PNC Revolving Credit Facility as of September 30, 2020, and March 31, 2020[72](index=72&type=chunk) [Note Payable Payroll Protection Plan](index=18&type=section&id=Note%20Payable%20Payroll%20Protection%20Plan) The Company received a $444,000 loan under the Paycheck Protection Program (PPP) on May 5, 2020, with a 1% interest rate, and expects to apply for total forgiveness of the loan, which is payable over two years if unforgiven - On May 5, 2020, the Company received approximately **$444,000** under the Paycheck Protection Program (PPP) loan[73](index=73&type=chunk) - The loan and accrued interest may be forgivable if proceeds are used for eligible purposes (payroll, benefits, rent, utilities) and payroll levels are maintained[73](index=73&type=chunk) - The unforgiven portion is payable over two years at a **1%** interest rate, with payments deferred until a forgiveness application is processed[73](index=73&type=chunk) | Metric | Outstanding Balance (Sep 30, 2020) ($) | Interest Expense (3 Months Ended Sep 30, 2020) ($) | Interest Expense (6 Months Ended Sep 30, 2020) ($) | | :----------------------- | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | PPP Note Payable | ~$444,000 | ~$1,000 | ~$2,000 | [Installment Notes Payable](index=18&type=section&id=Installment%20Notes%20Payable) The Company entered into a financing arrangement with Dimension Funding in June 2019 to finance an ERP system, resulting in three installment notes totaling approximately $365,000, with 60-month terms and interest rates ranging from 7.58% to 9.25% - In June 2019, the Company financed an ERP System project through Dimension Funding, LLC, with three installment notes totaling approximately **$365,000**[74](index=74&type=chunk) - The notes have 60-month terms with interest rates of **7.58%**, **8.55%**, and **9.25%**, payable in monthly installments of **$7,459**[74](index=74&type=chunk) | Metric | Outstanding Balance (Sep 30, 2020) ($) | Outstanding Balance (Mar 31, 2020) ($) | Interest Expense (3 Months Ended Sep 30, 2020) ($) | Interest Expense (6 Months Ended Sep 30, 2020) ($) | | :----------------------- | :------------------------------- | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Installment Notes | ~$312,000 | ~$346,000 | ~$7,000 | ~$14,000 | [Subordinated Debt/Note Payable to Related Party](index=20&type=section&id=Subordinated%20Debt%2FNote%20Payable%20to%20Related%20Party) Approximately $803,000 of related party debt to Starlight Marketing Development, Ltd. was converted to a 6% subordinated note payable on June 1, 2020, as part of the Intercreditor Revolving Credit Facility agreement - Approximately **$803,000** of related party debt to Starlight Marketing Development, Ltd. was converted to a **6%** subordinated note payable on June 1, 2020[78](index=78&type=chunk) - Repayment of the subordinated note payable is allowed only if amounts borrowed against the Crestmark and IHC facilities are paid in full, the Company maintains a **1:1** debt coverage ratio, and exhibits sufficient cash liquidity[79](index=79&type=chunk) | Metric | Outstanding Balance (Sep 30, 2020) ($) | Outstanding Balance (Mar 31, 2020) ($) | Interest Expense (3 Months Ended Sep 30, 2020) ($) | Interest Expense (6 Months Ended Sep 30, 2020) ($) | | :----------------------- | :------------------------------- | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Subordinated Note Payable | ~$803,000 | ~$803,000 | ~$12,000 | ~$24,000 | [NOTE 6 - COMMITMENTS AND CONTINGENCIES](index=20&type=section&id=NOTE%206%20-%20COMMITMENTS%20AND%20CONTINGENCIES) This section details the Company's commitments and contingencies, including a significant insurance claim settlement for damaged goods, ongoing legal matters in the ordinary course of business, and various operating and finance lease agreements for facilities and equipment [INSURANCE CLAIM SETTLEMENT – DAMAGED GOODS INCIDENT](index=20&type=section&id=INSURANCE%20CLAIM%20SETTLEMENT%20%E2%80%93%20DAMAGED%20GOODS%20INCIDENT) The Company recovered approximately $2,336,000 from cargo insurance for a prior year damaged goods incident, settling a $1,268,000 insurance claim receivable and recognizing a gain of approximately $937,000 for the three months and $1,068,000 for the six months ended September 30, 2020 - The Company recovered approximately **$2,336,000** from cargo insurance coverage for a damaged goods incident[80](index=80&type=chunk) - This settlement resolved approximately **$1,268,000** in insurance claim receivable[80](index=80&type=chunk) | Period | Gain from damaged goods insurance claim ($) | | :----------------------- | :------------------------------------ | | 3 Months Ended Sep 30, 2020 | ~$937,000 | | 6 Months Ended Sep 30, 2020 | ~$1,068,000 | [LEGAL MATTERS](index=20&type=section&id=LEGAL%20MATTERS) Management is not aware of any legal proceedings beyond those arising in the ordinary course of business - Management is not aware of any legal proceedings other than matters that arise in the ordinary course of business[81](index=81&type=chunk) [LEASES](index=20&type=section&id=LEASES) The Company has operating lease agreements for offices and a warehouse in Florida, California, and Hong Kong, expiring through 2024, and finance leases for forklift vehicles - The Company has operating lease agreements for offices and a warehouse facility in Florida, California, and Hong Kong, with various expiration dates through **2024**[82](index=82&type=chunk)[83](index=83&type=chunk)[84](index=84&type=chunk) - Finance leases for two forklift vehicles were entered into in May/June 2018, with monthly payments over **36 months** and an effective interest rate of **4.5%**[86](index=86&type=chunk) | Metric (Sep 30, 2020) | Amount ($) | | :-------------------------------- | :----------- | | Operating lease - right-of-use assets | $2,460,942 | | Finance leases (Property and equipment, net) | $28,499 | | Current portion of operating leases | $765,125 | | Current portion of finance leases | $10,091 | | Operating lease liabilities, net of current portion | $1,743,033 | | Finance leases, net of current portion | $- | | Weighted average remaining lease term (Operating leases) (months) | 35.8 months | | Weighted average remaining lease term (Finance leases) (months) | 9.0 months | | Weighted average discount rate (Operating leases) (%) | 6.25% | | Weighted average discount rate (Finance leases) (%) | 3.68% | | Period (Sep 30, 2020) | Operating Lease Expense ($) | Finance Lease Depreciation ($) | Finance Lease Interest ($) | | :----------------------- | :---------------------- | :------------------------- | :--------------------- | | 3 Months Ended | $176,698 | $1,554 | $109 | | 6 Months Ended | $325,423 | $3,109 | $263 | [NOTE 7 - STOCK OPTIONS](index=22&type=section&id=NOTE%207%20-%20STOCK%20OPTIONS) No stock options were granted during the six months ended September 30, 2020, compared to 100,000 options granted in the prior year - No stock options were issued during the six months ended September 30, 2020[92](index=92&type=chunk) - **100,000** stock options were issued to directors during the six months ended September 30, 2019, at an exercise price of **$0.38**[92](index=92&type=chunk) | Metric (Sep 30, 2020) | Number of Options | Weighted Average Exercise Price ($) | | :-------------------------- | :---------------- | :------------------------------ | | Balance at beginning of period | 2,230,000 | $0.26 | | Granted | - | - | | Exercised | - | - | | Balance at end of period | 2,230,000 | $0.26 | | Options exercisable at end of period | 2,230,000 | $0.26 | [NOTE 8 - GEOGRAPHICAL INFORMATION](index=24&type=section&id=NOTE%208%20-%20GEOGRAPHICAL%20INFORMATION) Sales to customers outside the United States are primarily made by the Macau Subsidiary in US dollars - Sales to customers outside the United States are primarily conducted by the Macau Subsidiary in US dollars[97](index=97&type=chunk) | Geographic Region | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | North America | $22,476,856 | $16,263,563 | $25,564,563 | $20,877,336 | | Europe | $710,663 | $3,439,976 | $893,475 | $3,539,400 | | Australia | $- | $378,303 | $53,024 | $474,146 | | Total Net Sales | $23,187,519 | $20,081,842 | $26,511,062 | $24,890,882 | [NOTE 9 –RELATED PARTY TRANSACTIONS](index=24&type=section&id=NOTE%209%20%E2%80%93RELATED%20PARTY%20TRANSACTIONS) This note details transactions with affiliates of the Chairman of the Board, Mr. Phillip Lau, including amounts due to/from related parties and trade activities [DUE TO/FROM RELATED PARTIES](index=24&type=section&id=DUE%20TO%2FFROM%20RELATED%20PARTIES) As of September 30, 2020, the Company had approximately $244,000 due to related parties for services and licensing fees, a decrease from $502,000 at March 31, 2020 | Metric | Sep 30, 2020 ($) | Mar 31, 2020 ($) | | :----------------------- | :----------- | :----------- | | Amounts due to related parties | ~$244,000 | ~$502,000 | | Amounts due from related parties | $0 | $100,000 | [TRADE](index=24&type=section&id=TRADE) Sales to related parties Winglight Pacific, Ltd. and Cosmo Communications of Canada ceased in the three and six months ended September 30, 2020 - Sales to Winglight Pacific, Ltd. (related party) were **$0** for the three and six months ended September 30, 2020, compared to **$778,000** and **$852,000** respectively in 2019[100](index=100&type=chunk)[103](index=103&type=chunk) - Sales directly to Cosmo Communications of Canada (related party) were **$0** for the three and six months ended September 30, 2020, compared to **$168,000** and **$239,000** respectively in 2019[101](index=101&type=chunk)[105](index=105&type=chunk) - On July 30, 2020, the Company acquired all of Cosmo's karaoke inventory for approximately **$685,000** and became the sole and exclusive distributor of its products in Canada[102](index=102&type=chunk) | Period | Service Expenses from Starlight Electronics Co, Ltd. ($) | | :----------------------- | :------------------------------------------------- | | 3 Months Ended Sep 30, 2020 | ~$90,000 | | 3 Months Ended Sep 30, 2019 | ~$90,000 | | 6 Months Ended Sep 30, 2020 | ~$181,000 | | 6 Months Ended Sep 30, 2019 | ~$191,000 | [NOTE 10 – RESERVE FOR SALES RETURNS](index=26&type=section&id=NOTE%2010%20%E2%80%93%20RESERVE%20FOR%20SALES%20RETURNS) The Company records a sales return reserve for defective goods at the time of sale, based on historical return amounts and management estimates - A sales reserve for defective goods is recorded at the time of sale, based on historic return amounts, specific exceptions, and management estimates[108](index=108&type=chunk) | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Reserve for sales returns at beginning of the year | $1,224,000 | $896,154 | | Provision for estimated sales returns | $2,306,668 | $3,543,813 | | Sales returns received | $(1,807,613) | $(1,209,322) | | **Reserve for sales returns at end of the period** | **$1,723,055** | **$3,230,645** | [NOTE 11 – REFUNDS DUE TO CUSTOMERS](index=26&type=section&id=NOTE%2011%20%E2%80%93%20REFUNDS%20DUE%20TO%20CUSTOMERS) Refunds due to customers significantly decreased from March 31, 2020, to September 30, 2020, primarily due to the resolution of overstock returns and chargebacks from a major customer related to prior year damaged goods | Metric | Sep 30, 2020 ($) | Mar 31, 2020 ($) | | :----------------------- | :----------- | :----------- | | Refunds due to customers | ~$121,000 | ~$807,000 | - Refunds due to customers at September 30, 2020, were primarily due to one major customer for overstock returns[110](index=110&type=chunk) - Refunds due at March 31, 2020, included approximately **$1,691,000** in chargebacks from a major customer for damaged goods, partially offset by deductions on payment remittances[110](index=110&type=chunk) [NOTE 12 - EMPLOYEE BENEFIT PLANS](index=26&type=section&id=NOTE%2012%20-%20EMPLOYEE%20BENEFIT%20PLANS) The Company contributes to a 401(k) plan for employees, with contributions and administrative costs charged to operations - The Company has a 401(k) plan for employees, with contributions dependent on employee contributions and limited to federal income tax maximums[111](index=111&type=chunk) | Period | Contributions and Administrative Costs ($) | | :----------------------- | :------------------------------------- | | 3 Months Ended Sep 30, 2020 | ~$20,000 | | 3 Months Ended Sep 30, 2019 | ~$18,000 | | 6 Months Ended Sep 30, 2020 | ~$34,000 | | 6 Months Ended Sep 30, 2019 | ~$32,000 | [NOTE 13 - CONCENTRATIONS OF CREDIT AND SALES RISK](index=26&type=section&id=NOTE%2013%20-%20CONCENTRATIONS%20OF%20CREDIT%20AND%20SALES%20RISK) The Company's revenue and accounts receivable are highly concentrated with a few large North American customers - A majority of the Company's revenues are derived from retailers in the United States[112](index=112&type=chunk) - Accounts receivable are concentrated with several large customers; at September 30, 2020, **93%** of accounts receivable were due from four customers[112](index=112&type=chunk) - For the three months ended September 30, 2020, three customers individually accounted for **44%**, **21%**, and **12%** of the Company's gross sales[114](index=114&type=chunk) - For the six months ended September 30, 2020, three customers individually accounted for **40%**, **20%**, and **15%** of the Company's gross sales[115](index=115&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition and results of operations, highlighting forward-looking statements, business overview, seasonal fluctuations, the impact of COVID-19, and detailed analysis of financial performance for the three and six months ended September 30, 2020, compared to the prior year, along with discussions on liquidity and capital resources [FORWARD-LOOKING STATEMENTS](index=28&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section contains forward-looking statements regarding anticipated financial trends, business strategy, and potential impacts of external factors, which are subject to risks and uncertainties and should not be considered guarantees of future performance - The report contains forward-looking statements about financial condition, results of operations, and business strategy, which are subject to known and unknown risks and uncertainties[117](index=117&type=chunk)[118](index=118&type=chunk) - Important factors influencing these statements include changes in external factors, unanticipated cash requirements, shifts in business strategy, adverse economic conditions, vendor price increases, competitive market factors, and other risks detailed in SEC filings[119](index=119&type=chunk) - Readers are cautioned not to place undue reliance on these statements, and the Company undertakes no obligation to revise or publicly release revisions[120](index=120&type=chunk) [OVERVIEW](index=28&type=section&id=OVERVIEW) The Singing Machine Company, Inc. develops, markets, and sells consumer karaoke audio systems and related products globally, primarily through mass merchandisers and online retailers - The Singing Machine Company, Inc. and its subsidiaries are primarily engaged in the development, marketing, and sale of consumer karaoke audio systems, accessories, musical instruments, and musical recordings[121](index=121&type=chunk) - Products are sold throughout North America, Europe, and Australia, mainly through major mass merchandisers, warehouse clubs, and online retailers, including Amazon, Best Buy, Costco, Target, and Wal-Mart[122](index=122&type=chunk)[123](index=123&type=chunk) - The business is highly seasonal, with a majority of retail sales occurring from September through December (Q2 and Q3), accounting for approximately **98%** and **94%** of net sales in fiscal 2020 and 2019, respectively[125](index=125&type=chunk) - The COVID-19 pandemic has significantly affected U.S. consumer shopping patterns, and its severity and duration could materially and adversely affect business operations, financial condition, and liquidity[126](index=126&type=chunk) [RESULTS OF OPERATIONS](index=29&type=section&id=RESULTS%20OF%20OPERATIONS) The Company's results of operations for the three and six months ended September 30, 2020, show significant improvements in net sales, gross profit, and net income compared to the prior year, driven by increased demand for Carpool Karaoke products, recovery from a prior-year damaged goods incident, and reduced operating expenses | Metric (% of Net Sales) | 3 Months Ended Sep 30, 2020 (%) | 3 Months Ended Sep 30, 2019 (%) | 6 Months Ended Sep 30, 2020 (%) | 6 Months Ended Sep 30, 2019 (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Sales | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of Goods Sold | 71.0% | 71.9% | 70.0% | 73.4% | | Gross Profit | 29.0% | 28.1% | 30.0% | 26.6% | | Total Operating Expenses | 18.5% | 23.8% | 23.8% | 27.6% | | Income (Loss) from Operations | 10.5% | 4.3% | 6.3% | -1.0% | | Total Other Income (expenses), net | 3.4% | -0.2% | 4.8% | -0.2% | | Income (Loss) Before Income Tax (Provision) Benefit | 13.9% | 4.1% | 11.1% | -1.2% | | Income Tax (Provision) Benefit | -3.5% | -0.9% | -2.8% | 0.2% | | Net Income (Loss) | 10.4% | 3.2% | 8.3% | -1.0% | [QUARTER ENDED SEPTEMBER 30, 2020 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2019](index=29&type=section&id=QUARTER%20ENDED%20SEPTEMBER%2030,%202020%20COMPARED%20TO%20THE%20QUARTER%20ENDED%20SEPTEMBER%2030,%202019) For the three months ended September 30, 2020, the Company experienced a substantial increase in net sales, gross profit, and net income, primarily driven by higher Carpool Karaoke product sales, recovery from a prior-year damaged goods incident, and reduced operating expenses [NET SALES](index=29&type=section&id=NET%20SALES) Net sales increased by approximately $3.1 million, or 15.5%, to $23.2 million for the three months ended September 30, 2020, compared to the prior year, primarily due to a $1.1 million increase in Carpool Karaoke product sales and the absence of a $1.5 million sales reduction from a prior-year damaged goods incident | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Net Sales | ~$23,188,000 | ~$20,082,000 | +$3,106,000 | | CPK product sales increase | ~$1,098,000 | - | - | | Sales reduction from damaged goods (prior year) | - | ~$1,534,000 | - | | Remaining increase from internet demand | ~$474,000 | - | - | [GROSS PROFIT](index=30&type=section&id=GROSS%20PROFIT) Gross profit increased by approximately $1.1 million, or 19.2%, to $6.7 million, and gross profit margin improved to 29.0% for the three months ended September 30, 2020, driven by higher-margin Carpool Karaoke product sales and the impact of the prior-year damaged goods incident | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Gross Profit | ~$6,725,000 | ~$5,642,000 | +$1,083,000 | | Gross Profit Margin (%) | 29.0% | 28.1% | +0.9 pts | | CPK product sales contribution to gross profit | ~$638,000 | - | - | | Damaged goods incident contribution to gross profit variance | ~$286,000 | - | - | [OPERATING EXPENSES](index=31&type=section&id=OPERATING%20EXPENSES) Total operating expenses decreased by approximately $496,000, or 10.4%, to $4.3 million for the three months ended September 30, 2020, primarily due to reduced discretionary marketing and one-time expenses from the prior year, partially offset by increased royalty expenses on Carpool Karaoke products | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Total Operating Expenses | ~$4,287,000 | ~$4,783,000 | -~$496,000 | | Selling expenses decrease | ~$111,000 | - | - | | Reduced discretionary marketing expenses | ~$200,000 | - | - | | Increased royalty expense on CPK product | ~$148,000 | - | - | | General and administrative expenses decrease | ~$393,000 | - | - | | One-time expenses (prior year) | - | ~$219,000 (damaged goods), ~$135,000 (J C Penney insurance) | - | [INCOME FROM OPERATIONS](index=31&type=section&id=INCOME%20FROM%20OPERATIONS) Income from operations significantly increased by approximately $1.6 million, or 183.8%, to $2.4 million for the three months ended September 30, 2020, primarily due to the increase in gross profit and reduction in operating expenses | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Income from Operations | ~$2,439,000 | ~$859,000 | +~$1,580,000 | [OTHER INCOME (EXPENSES)](index=31&type=section&id=OTHER%20INCOME%20(EXPENSES)) Other income (expenses) increased by approximately $841,000 to $790,000 in net other income for the three months ended September 30, 2020, primarily due to a $937,000 recovery from a damaged goods insurance claim, partially offset by increased interest and financing costs | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Total Other Income (Expenses), net | ~$790,000 | ~$(51,000) | +~$841,000 | | Recovery from damaged goods insurance claim | ~$937,000 | - | - | | Increase in interest expense and amortization of deferred financing costs | ~$96,000 | - | - | [INCOME TAXES](index=31&type=section&id=INCOME%20TAXES) The Company recognized an income tax provision of approximately $821,000 for the three months ended September 30, 2020, based on an estimated full-year effective tax rate of 25.2%, compared to a $184,000 provision in the prior year | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | | :----------------------- | :-------------------------- | :-------------------------- | | Income Tax Provision | ~$821,000 | ~$184,000 | | Estimated Effective Tax Rate (%) | ~25.2% | ~18.3% | [NET INCOME](index=31&type=section&id=NET%20INCOME) Net income for the three months ended September 30, 2020, increased significantly to $2.4 million, up from $624,000 in the prior year, reflecting improvements across operations, other income, and tax provisions | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | | :----------------------- | :-------------------------- | :-------------------------- | | Net Income | ~$2,408,000 | ~$624,000 | [SIX MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2019](index=31&type=section&id=SIX%20MONTHS%20ENDED%20SEPTEMBER%2030,%202020%20COMPARED%20TO%20THE%20SIX%20MONTHS%20ENDED%20SEPTEMBER%2030,%202019) For the six months ended September 30, 2020, the Company transitioned from a net loss to a significant net income, driven by increased net sales, improved gross profit margins, reduced operating expenses, and substantial other income from insurance claims and vendor credits [NET SALES](index=31&type=section&id=NET%20SALES) Net sales increased by approximately $1.6 million, or 6.5%, to $26.5 million for the six months ended September 30, 2020, primarily due to a $939,000 increase in Carpool Karaoke product sales and the absence of a $1.5 million sales reduction from a prior-year damaged goods incident, partially offset by an $826,000 reduction in sales to J C Penney | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Net Sales | ~$26,511,000 | ~$24,891,000 | +~$1,620,000 | | CPK product sales increase | ~$939,000 | - | - | | Sales reduction from damaged goods (prior year) | - | ~$1,534,000 | - | | Reduction in sales to J C Penney | -~$826,000 | - | - | [GROSS PROFIT](index=31&type=section&id=GROSS%20PROFIT) Gross profit increased by approximately $1.3 million, or 20.0%, to $8.0 million, and gross profit margin improved to 30.0% for the six months ended September 30, 2020, driven by higher-margin Carpool Karaoke product sales and the impact of the prior-year damaged goods incident | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Gross Profit | ~$7,959,000 | ~$6,630,000 | +~$1,329,000 | | Gross Profit Margin (%) | 30.0% | 26.6% | +3.4 pts | | CPK product sales contribution to gross profit | ~$542,000 | - | - | | Damaged goods incident contribution to gross profit variance | ~$296,000 | - | - | [OPERATING EXPENSES](index=33&type=section&id=OPERATING%20EXPENSES) Total operating expenses decreased by approximately $581,000, or 8.5%, to $6.3 million for the six months ended September 30, 2020, primarily due to reduced discretionary marketing, one-time prior-year expenses, and decreased travel, partially offset by increased royalty expenses and computer services | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Total Operating Expenses | ~$6,292,000 | ~$6,873,000 | -~$581,000 | | Selling expenses decrease | ~$200,000 | - | - | | Reduced discretionary marketing expense | ~$343,000 | - | - | | Increase in royalty expenses | ~$130,000 | - | - | | General and administrative expenses decrease | ~$401,000 | - | - | | One-time expenses (prior year) | - | ~$219,000 (damaged goods), ~$135,000 (J C Penney insurance) | - | | Decrease in travel and entertainment | ~$153,000 | - | - | [INCOME (LOSS) FROM OPERATIONS](index=33&type=section&id=INCOME%20(LOSS)%20FROM%20OPERATIONS) The Company reported income from operations of approximately $1.7 million for the six months ended September 30, 2020, a significant improvement from a loss of $243,000 in the prior year, driven by increased gross profit and reduced operating expenses | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | Change ($) | | :----------------------- | :-------------------------- | :-------------------------- | :------- | | Income (Loss) from Operations | ~$1,668,000 | ~$(243,000) | +~$1,911,000 | [OTHER INCOME (EXPENSES)](index=33&type=section&id=OTHER%20INCOME%20(EXPENSES)) Other income (expenses) increased by approximately $1.3 million to $1.3 million in net other income for the six months ended September 30, 2020, primarily due to a $1.1 million recovery from a damaged goods insurance claim and a $390,000 gain from extinguishment of accounts payable, partially offset by increased interest and financing costs | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | Change ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | | Total Other Income (Expenses), net | ~$1,276,000 | ~$(57,000) | +~$1,333,000 | | Recovery from damaged goods insurance claim | ~$1,068,000 | - | - | | Gain from extinguishment of accounts payable | ~$390,000 | - | - | | Increase in interest expense and amortization of deferred financing costs | ~$125,000 | - | - | [INCOME TAXES](index=33&type=section&id=INCOME%20TAXES) The Company recorded an income tax provision of approximately $742,000 for the six months ended September 30, 2020, based on an estimated full-year effective tax rate of 25.2%, a shift from an income tax benefit of $55,000 in the prior year | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :----------------------- | :-------------------------- | :-------------------------- | | Income Tax (Provision) Benefit | ~$742,000 | ~$55,000 | | Estimated Effective Tax Rate (%) | ~25.2% | ~18.3% | [NET INCOME (LOSS)](index=33&type=section&id=NET%20INCOME%20(LOSS)) Net income for the six months ended September 30, 2020, was approximately $2.2 million, a significant improvement from a net loss of $245,000 in the prior year, reflecting positive changes across operations, other income, and tax provisions | Metric | 6 Months Ended Sep 30, 2020 ($) | 6 Months Ended Sep 30, 2019 ($) | | :----------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) | ~$2,201,000 | ~$(245,000) | [LIQUIDITY AND CAPITAL RESOURCES](index=33&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The Company's liquidity improved with $1.1 million cash on hand and $7.0 million in working capital as of September 30, 2020 | Metric | Sep 30, 2020 ($) | Sep 30, 2019 ($) | | :-------------------------------- | :----------- | :----------- | | Cash on hand | ~$1,071,000 | ~$2,255,000 | | Working capital | ~$6,999,000 | - | | Net cash used in operating activities (6 months) | ~$674,000 | ~$2,216,000 | | Net cash provided by financing activities (6 months) | ~$1,485,000 | ~$4,472,000 | - The Company executed an Intercreditor Revolving Credit Facility with Crestmark and IHC, providing up to **$10.0 million** on eligible accounts receivable and **$2.5 million** on eligible inventory, replacing the PNC Bank facility[156](index=156&type=chunk) - The Company received approximately **$444,000** from the Paycheck Protection Program (PPP) loan and expects to apply for total forgiveness[158](index=158&type=chunk) - Management believes current cash, available credit facilities, projected inventory reduction, and operating cash flow will be adequate for liquidity requirements for at least the next twelve months[159](index=159&type=chunk) [INVENTORY SELL THROUGH](index=35&type=section&id=INVENTORY%20SELL%20THROUGH) The Company actively monitors customer inventory levels and sell-through activity to forecast defective returns and maintain optimal inventory - The Company monitors inventory levels and sell-through activity of major customers to anticipate defective returns and maintain appropriate inventory levels[160](index=160&type=chunk) - The warranty provision is believed to reflect proper reserves for potential defective sales returns based on historical return ratios and customer information[160](index=160&type=chunk) [SEASONAL AND QUARTERLY RESULTS](index=35&type=section&id=SEASONAL%20AND%20QUARTERLY%20RESULTS) The Company's operations are highly seasonal, with the majority of net sales occurring in the second and third fiscal quarters due to the Christmas holiday season, leading to fluctuations in quarterly results based on order timing and fulfillment - Operations are historically seasonal, with the highest net sales in the second and third fiscal quarters (September-December) due to the Christmas holiday season[161](index=161&type=chunk) - Sales in the second and third fiscal quarters combined accounted for approximately **98%** and **94%** of net sales in fiscal 2020 and 2019, respectively[161](index=161&type=chunk) - Quarterly results can fluctuate significantly based on the amount and timing of customer orders and shipments[162](index=162&type=chunk) [INFLATION](index=37&type=section&id=INFLATION) Inflation has not significantly impacted the Company's operations, as prices are generally adjusted to reflect changes in the Consumer Price Index - Inflation has not had a significant impact on the Company's operations[163](index=163&type=chunk) - Prices are generally adjusted to track changes in the Consumer Price Index, as they are not fixed by long-term contracts[163](index=163&type=chunk) [OFF-BALANCE SHEET ARRANGEMENTS](index=37&type=section&id=OFF-BALANCE%20SHEET%20ARRANGEMENTS) The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on its financial condition, revenues, results of operations, liquidity, or capital expenditures - The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on its financial condition, revenues, results of operations, liquidity, or capital expenditures[164](index=164&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=37&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) The Company's interim financial statements rely on management's subjective decisions, assessments, and estimates, which have not materially changed from those identified in the 2020 Annual Report - Interim financial statements are prepared in accordance with GAAP, requiring subjective decisions, assessments, and estimates[165](index=165&type=chunk) - Critical accounting estimates and assumptions have not materially changed from those identified in the Company's 2020 Annual Report[165](index=165&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not required for smaller reporting companies - This disclosure is not required for small reporting companies[166](index=166&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2020, ensuring timely and accurate reporting - The CEO and CFO evaluated disclosure controls and procedures and concluded they were effective as of September 30, 2020[167](index=167&type=chunk) - Disclosure controls ensure information required for Exchange Act reports is recorded, processed, summarized, and reported timely[167](index=167&type=chunk) - No material changes in internal control over financial reporting occurred during the period covered by the report[168](index=168&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) Management is not aware of any legal proceedings other than those arising 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[171](index=171&type=chunk) [Item 1A. Risk Factors](index=38&type=section&id=Item%201A.%20Risk%20Factors) This item is not applicable for smaller reporting companies - This item is not applicable for smaller reporting companies[172](index=172&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=38&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities and use of proceeds[173](index=173&type=chunk) [Item 3. Defaults Upon Senior Securities](index=38&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The Company is not currently in default upon any of its senior securities - The Company is not currently in default upon any of its senior securities[173](index=173&type=chunk) [Item 4. Mine Safety Disclosures](index=38&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) There are no mine safety disclosures to report - There are no mine safety disclosures[174](index=174&type=chunk) [Item 5. Other Information](index=38&type=section&id=Item%205.%20Other%20Information) There is no other information to report under this item - There is no other information to report[175](index=175&type=chunk) [Item 6. Exhibits](index=39&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer as required by the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act - Exhibits include certifications from the CEO (Gary Atkinson) and CFO (Lionel Marquis) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934[177](index=177&type=chunk) - Certifying statements from the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted under Section 906 of the Sarbanes-Oxley Act, are also filed[177](index=177&type=chunk) [SIGNATURES](index=40&type=section&id=SIGNATURES) The report is duly signed on November 16, 2020, by Gary Atkinson, Chief Executive Officer, and Lionel Marquis, Chief Financial Officer, on behalf of The Singing Machine Company, Inc - The report was signed on November 16, 2020[181](index=181&type=chunk) - Signatories include Gary Atkinson, Chief Executive Officer, and Lionel Marquis, Chief Financial Officer[181](index=181&type=chunk)