The Singing Machine pany(MICS) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, detailing balance sheets, operations, cash flows, equity, and accounting notes Condensed Consolidated Balance Sheets | Metric | June 30, 2020 | March 31, 2020 | | :-------------------------------- | :------------ | :------------- | | Total Assets | $15,843,636 | $16,601,137 | | Total Liabilities | $10,362,377 | $10,913,074 | | Total Shareholders' Equity | $5,481,259 | $5,688,063 | - Total assets decreased by $757,501 from March 31, 2020, to June 30, 2020, primarily due to reductions in current assets like accounts receivable and inventories[9] Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net Sales | $3,323,543 | $4,809,040 | | Cost of Goods Sold | $2,089,531 | $3,821,334 | | Gross Profit | $1,234,012 | $987,706 | | Loss from Operations | $(770,938) | $(1,102,104) | | Total Other Income (Expenses), net | $485,297 | $(6,208) | | Net Loss | $(206,804) | $(869,581) | | Net Loss per Common Share (Basic and Diluted) | $(0.01) | $(0.02) | - Net loss significantly improved to $(206,804) for the three months ended June 30, 2020, compared to $(869,581) in the prior year, driven by higher gross profit and substantial other income[12] Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash (used in) provided by operating activities | $(244,026) | $24,996 | | Net cash used in investing activities | $(45,314) | $(159,586) | | Net cash provided by financing activities | $1,748,733 | $500,658 | | Net change in cash | $1,459,393 | $366,068 | | Cash at end of period | $1,804,593 | $577,476 | - Cash at the end of the period increased significantly to $1,804,593, primarily due to $1,748,733 in cash provided by financing activities, including new revolving credit facilities and a PPP loan[14][132] Condensed Consolidated Statements of Shareholders' Equity | Metric | March 31, 2020 | June 30, 2020 | | :----------------------- | :------------- | :------------ | | Total Shareholders' Equity | $5,688,063 | $5,481,259 | | Accumulated Deficit | $(14,426,556) | $(14,633,360) | - Total shareholders' equity decreased by $206,804 from March 31, 2020, to June 30, 2020, directly reflecting the net loss incurred during the quarter[16] Notes to Condensed Consolidated Financial Statements NOTE 1 – BASIS OF PRESENTATION - 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[18] NOTE 2 – LIQUIDITY | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | | Net Loss | $(207,000) | $(870,000) | - The Company recovered approximately $2,245,000 from cargo insurance for water-damaged goods, including $1,268,000 in insurance claim receivable and $131,000 recognized as a gain in Q2 2020, with an additional $846,000 expected in Q3 2020[19][135] - Secured vendor invoice credits of $390,000 from the factory that caused the damage, recognized as a gain from extinguishment of accounts payable[19][135] - Executed new Intercreditor Revolving Credit Facility with Crestmark Bank ($10,000,000 on accounts receivable) and Iron Horse Credit ($2,500,000 in inventory financing), replacing the PNC Bank facility[19] - Received approximately $444,000 in loan proceeds under the Paycheck Protection Program (PPP), with management confident in meeting liquidity requirements for at least the next twelve months[19][137] NOTE 3 – SUMMARY OF ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - 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[20] USE OF ESTIMATES - The Company makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves, and promotional incentives[21] COLLECTIBILITY OF ACCOUNTS RECEIVABLE - The allowance for doubtful accounts is based on management's estimates of customer creditworthiness, current economic conditions, and historical information, with 100% reserves for customers in bankruptcy[24] - The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight, and handling charges[25] FOREIGN CURRENCY TRANSLATION - The functional currency of the Macau Subsidiary 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[26] CONCENTRATION OF CREDIT RISK - The Company maintains cash in United States bank accounts exceeding FDIC insured amounts and in foreign financial institutions (approximately $70,000 at June 30, 2020)[27] - Financial instruments, particularly accounts receivable, subject the Company to concentrations of credit risk[28] INVENTORY - Inventories, primarily electronic karaoke equipment, are stated at the lower of cost or net realizable value, determined using the first-in, first-out method[29] | Inventory Reserve | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- | | Estimated future inventory returns | $784,000 | $1,367,000 | | Estimated excess and obsolete inventory | $467,000 | $434,000 | DEFERRED FINANCING COSTS - Deferred financing costs incurred for revolving credit facilities are classified as assets and amortized over the term of the agreement[30] - Approximately $74,000 in deferred financing costs were incurred in June 2020 associated with the Crestmark Facility and IHC Facility[30] LONG-LIVED ASSETS - Long-lived assets are reviewed for impairment when circumstances indicate that carrying amounts may not be recoverable, with impairment losses recognized if undiscounted future cash flows are less than the carrying amount[31] LEASES - The Company follows FASB ASC 842, requiring lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with a term longer than twelve months[32] - Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement[32] 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[36] FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, related party balances, revolving lines of credit, and the PPP note, approximate fair value due to their short maturity or market interest rates[38] REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS - Revenue is recognized in accordance with FASB ASC 606 when goods are delivered and control is transferred to the customer, based on a five-step model[39] - The Company estimates variable consideration under return allowance programs and records a sales return reserve based on historic return amounts, specific events, and management estimates[43] | Product Line | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Classic Karaoke Machines | $2,275,000 | $4,156,000 | | Download Karaoke Machines | $323,000 | $141,000 | | SMC Kids Toys | $146,000 | $140,000 | | Music and Accessories | $579,000 | $372,000 | | Total Net Sales | $3,323,000 | $4,809,000 | SHIPPING AND HANDLING COSTS - Shipping and handling costs are classified as a component of selling expenses in the condensed consolidated statements of operations[48] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Shipping and handling expenses | $83,000 | $89,000 | STOCK BASED COMPENSATION - Stock-based payments to employees are measured at fair value using the Black-Scholes option valuation model and expensed over the service period[49] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Stock option expense | $0 | $5,000 | ADVERTISING - Advertising costs are charged to operations the first time the advertising takes place, and cooperative advertising allowances are provided upon proof of performance[50] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Advertising expense | $321,000 | $361,000 | RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged to results of operations as incurred and are a component of selling, general and administrative expenses[51] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | R&D costs | $13,000 | $5,000 | INCOME TAXES - The Company follows FASB ASC 740, recognizing deferred tax assets and liabilities for future tax consequences of temporary differences, with a valuation allowance of approximately $88,000 for net operating loss carryforwards[52][53] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Estimated Effective Tax Rate | 27.6% | 21.5% | | Income Tax Benefit | $79,000 | $239,000 | COMPUTATION OF LOSS PER COMMON SHARE - Loss per common share is computed by dividing the net loss by the weighted average of common shares outstanding; potential dilutive shares from stock options were anti-dilutive and excluded from diluted EPS[58] RECENT ACCOUNTING PRONOUNCEMENTS - The Company is evaluating ASU 2019-12 (Income Taxes), effective for fiscal years beginning after December 15, 2020, and ASU 2016-13 (Financial Instruments—Credit Losses), effective for smaller reporting companies after April 1, 2023[59][60] NOTE 4 - INVENTORIES, NET | Component | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- | | Finished Goods | $5,869,000 | $6,595,000 | | Inventory in Transit | $684,000 | $73,000 | | Estimated Cost of Future Returns | $784,000 | $1,367,000 | | Inventory Reserve | $467,000 | $434,000 | | Inventories, net | $6,870,000 | $7,601,000 | - Net inventories decreased by $731,000 to $6,870,000 at June 30, 2020, primarily due to reductions in finished goods and estimated cost of future returns, despite an increase in inventory in transit[61] NOTE 5 – PROPERTY AND EQUIPMENT | Component | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- | | Total Property and Equipment (Cost) | $2,464,000 | $2,418,000 | | Less: Accumulated depreciation | $1,718,000 | $1,647,000 | | Net Property and Equipment | $746,000 | $771,000 | - Net property and equipment decreased slightly by $25,000 to $746,000 at June 30, 2020, with depreciation expense for the quarter at approximately $71,000[63] NOTE 6 – BANK FINANCING Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit - On June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility with Crestmark Bank ($10.0 million on eligible accounts receivable) and Iron Horse Credit (IHC) ($2.5 million in inventory financing), replacing the previous PNC Bank facility[64] - Approximately $74,000 in deferred financing costs were incurred and are being amortized over the two-year term of the agreement[64] Under the Crestmark Facility - The Crestmark Facility provides up to $10.0 million during peak season (July 1-December 31) and $5.0 million during off-peak season (January 1-July 31) on eligible accounts receivable, secured by all assets[65] - The facility bears interest at the Wall Street Journal Prime Rate plus 5.50% with an 8.75% floor, calculated on the higher of actual average monthly loan balance or a minimum of $2,000,000[65] - There was no outstanding balance on the Crestmark Facility as of June 30, 2020[65] Under the IHC Facility - The IHC Facility provides up to $2,500,000 in inventory financing, secured by the Company's inventory[66][69] - The facility bears interest at 1.292% per month (15.51% annually), calculated on the higher of the actual average monthly loan balance or a minimum of $1,000,000[69] - A mandatory pay-down of the loan to zero is required in January and February each year[67] | Metric | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- | | Outstanding balance on IHC Facility | $1,400,000 | $0 | Revolving Credit Facility PNC Bank - The PNC Revolving Credit Facility was terminated on June 16, 2020, after the Company defaulted on its fixed charge coverage ratio requirement in September 2019[71] - No amounts were due on the PNC Revolving Credit Facility as of June 30, 2020[71] Note Payable Payroll Protection Plan - The Company received approximately $444,000 in loan proceeds from Crestmark under the Paycheck Protection Program (PPP) on May 5, 2020[72] - The PPP loan and accrued interest may be forgivable if used for eligible purposes (payroll, benefits, rent, utilities) and payroll levels are maintained, with management expecting to apply for total forgiveness[72] Installment Notes Payable - The Company has installment notes totaling approximately $365,000 to finance an ERP System project, with 60-month terms and interest rates ranging from 7.58% to 9.25%[73] | Metric | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- |\ | Outstanding balance on installment notes | $328,000 | $346,000 | Subordinated Debt/Note Payable to Related Party - Subordinated related party debt of approximately $803,000 to Starlight Marketing Development, Ltd. was converted to a 6% interest-bearing note payable on June 1, 2020[74] - The subordinated note payable is classified as a non-current liability, with repayment contingent on full payment of other credit facilities and maintaining financial ratios[75] NOTE 7 - COMMITMENTS AND CONTINGENCIES LEGAL MATTERS - As of August 19, 2020, management is not aware of any legal proceedings other than matters that arise in the ordinary course of business[77] LEASES - The Company has operating lease agreements for offices and a warehouse facility in Florida, California, and Macau, expiring in various years through 2024[79][81] - A three-year lease extension for the 86,000 square feet warehouse in Ontario, California, was executed on June 15, 2020, with renewal base rent increasing to $65,300 per month[80] - Finance leases are for two used forklift vehicles, with remaining amounts due of approximately $14,000 as of June 30, 2020[83] | Lease Type | Weighted Average Remaining Lease Term (months) | Weighted Average Discount Rate | | :-------------------------------- | :------------------------------------------- | :----------------------------- | | Operating leases | 36.1 | 6.66% | | Finance leases | 11.0 | 3.68% | | Year | Operating Leases (Minimum Future Payments) | Finance Leases (Minimum Future Payments) | | :--- | :--------------------------------------- | :--------------------------------------- | | 2020 (remaining 6 months) | $413,620 | $7,673 | | 2021 | $911,204 | $6,394 | | 2022 | $931,949 | - | | 2023 | $674,488 | - | | 2024 | $30,739 | - | | Total Minimum Future Payments | $2,962,000 | $14,067 | NOTE 8 - STOCK OPTIONS | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Stock options issued | 0 | 100,000 | | Stock Options Activity | June 30, 2020 (Number of Options) | Weighted Average Exercise Price | | :------------------------ | :-------------------------------- | :------------------------------ | | Balance at beginning of period | 2,230,000 | $0.26 | | Balance at end of period | 2,230,000 | $0.26 | | Options exercisable at end of period | 2,230,000 | $0.26 | NOTE 9 - GEOGRAPHICAL INFORMATION | Geographic Region | June 30, 2020 | June 30, 2019 | | :---------------- | :------------ | :------------ | | North America | $3,087,707 | $4,613,772 | | Europe | $182,812 | $99,424 | | Australia | $53,024 | $95,844 | | Total Sales | $3,323,543 | $4,809,040 | - North America remains the dominant sales region, though its sales decreased significantly year-over-year by $1,526,065, while Europe saw an increase of $83,388[94] NOTE 10 – RELATED PARTY TRANSACTIONS DUE TO/FROM RELATED PARTIES | Metric | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- | | Amounts due to related parties | $402,000 | $502,000 | | Amounts due from related parties | $0 | $100,000 | - Amounts due to related parties decreased by $100,000 to $402,000, and amounts due from related parties decreased by $100,000 to $0 as of June 30, 2020[96] TRADE | Related Party Sales | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Sales to Winglight Pacific, Ltd. | $0 | $74,000 | | Sales to Cosmo Communications of Canada | $0 | $71,000 | - The Company became the sole and exclusive distributor of its products in Canada, acquiring all of Cosmo's karaoke inventory for approximately $685,000 on July 30, 2020[99] | Related Party Expenses | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Service expenses from Starlight Electronics Co, Ltd. | $91,000 | $101,000 | NOTE 11 – RESERVE FOR SALES RETURNS - The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur, based on historic return amounts and management estimates[101][102] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Reserve for sales returns at beginning of the year | $1,224,000 | $896,154 | | Provision for estimated sales returns | $284,362 | $415,234 | | Sales returns received | $(1,128,179) | $(863,711) | | Reserve for sales returns at end of the period | $380,183 | $447,677 | NOTE 12 – REFUNDS DUE TO CUSTOMERS | Metric | June 30, 2020 | March 31, 2020 | | :------------------------ | :------------ | :------------- | | Refunds due to customers | $391,000 | $807,000 | - Refunds due to customers decreased by $416,000, primarily because a major customer deducted approximately $1,381,000 of chargebacks from payment remittances[106] NOTE 13 - EMPLOYEE BENEFIT PLANS - The Company has a 401(k) plan for its employees, with contributions dependent on employee contributions[107] | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | | 401(k) contributions and administrative costs | $14,000 | $14,000 | NOTE 14 - CONCENTRATIONS OF CREDIT AND SALES RISK - At June 30, 2020, 74% of accounts receivable were due from three North American customers, each owing over 10% of total accounts receivable[108] - For the three months ended June 30, 2020, three customers individually accounted for 35%, 27%, and 15% of the company's net sales, totaling 77%[109] - The Company generates most of its revenue from retailers in the United States, with a significant amount of sales concentrated with several large customers, the loss of which could have an adverse impact on financial position[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 financial performance, liquidity, and capital resources, highlighting COVID-19 impact, sales, gross profit, and operating expenses FORWARD-LOOKING STATEMENTS - This report contains forward-looking statements based on current expectations, which are subject to known and unknown risks and uncertainties that could cause actual results to differ materially[110][111] - Important factors include changes in external factors, unanticipated cash requirements, shifts in business strategy, adverse economic conditions (including vendor price increases and competitive pricing), and other risk factors described in SEC filings[112] OVERVIEW - The Singing Machine Company and its subsidiaries primarily develop, market, and sell consumer karaoke audio systems, accessories, musical instruments, and musical recordings globally[114] - Products are sold through major mass merchandisers, warehouse clubs, and online retailers such as Amazon, Best Buy, Costco, Sam's Club, Target, JC Penney, and Wal-Mart[115][116] - The business is highly seasonal, with a majority of retail sales occurring during the second and third fiscal quarters (September through December), accounting for approximately 98% and 94% of net sales in fiscal 2020 and 2019, respectively[117][139] - The COVID-19 pandemic has significantly affected U.S. consumer shopping patterns and the economy, posing risks of prolonged disruptions in consumer spending, lack of demand, and forced retail store closures[118] RESULTS OF OPERATIONS | Metric (% of Net Sales) | June 30, 2020 | June 30, 2019 | | :-------------------------------- | :------------ | :------------ | | Net Sales | 100.0% | 100.0% | | Cost of Goods Sold | 62.9% | 79.5% | | Gross Profit | 37.1% | 20.5% | | Total Operating Expenses | 60.3% | 43.4% | | Loss from Operations | -23.2% | -22.9% | | Total Other Income (Expenses) | 14.6% | -0.2% | | Loss Before Income Tax Benefit | -8.6% | -23.1% | | Net Loss | -6.2% | -18.1% | QUARTER ENDED JUNE 30, 2020 COMPARED TO THE QUARTER ENDED JUNE 30, 2019 - This section provides a comparative analysis of the Company's financial performance for the three months ended June 30, 2020, versus the same period in 2019[121] NET SALES | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | | Net Sales | $3,324,000 | $4,809,000 | - Net sales decreased by $1,485,000, primarily due to a large Black Friday shipment in the prior year and customer delays caused by COVID-19, partially offset by a $1,670,000 increase in sales to two major customers due to increased pandemic demand[121] GROSS PROFIT | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | | Gross Profit | $1,234,000 | $988,000 | | Gross Profit Margin | 37.1% | 20.5% | - Gross profit increased by $246,000, with a 15.8 percentage point margin increase, driven by a higher-yielding mix of full-margin sales compared to lower-margin promotional goods in the prior year[123] OPERATING EXPENSES | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Total Operating Expenses | $2,005,000 | $2,090,000 | | Selling expenses | $570,553 | $659,293 | - Total operating expenses decreased by $85,000, with selling expenses down $89,000 due to a $142,000 decrease in discretionary marketing for the Carpool Karaoke product, partially offset by a $103,000 increase in co-op advertising[124] LOSS FROM OPERATIONS | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Loss from Operations | $(771,000) | $(1,102,000) | - Loss from operations decreased by $331,000, driven by a $246,000 increase in gross profit and an $85,000 decrease in operating expenses[125] INCOME TAXES | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | | Income Tax Benefit | $79,000 | $239,000 | | Estimated Effective Tax Rate | 27.6% | 21.5% | OTHER INCOME (EXPENSES) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Total Other Income (Expenses), net | $485,000 | $(6,000) | - Other income (expenses) increased by $491,000, primarily due to a $521,000 recovery from a damaged goods insurance claim and a $390,000 vendor credit for damaged goods[127] NET LOSS | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | | Net Loss | $(207,000) | $(870,000) | - Net loss decreased significantly to $207,000, a $663,000 improvement, resulting from the combined effects of improved operating loss, income tax benefit, and substantial other income[128] LIQUIDITY AND CAPITAL RESOURCES | Metric | June 30, 2020 | June 30, 2019 | | :------------------------ | :------------ | :------------ | | Cash on hand | $1,805,000 | $345,000 | | Working capital | $3,891,000 | N/A | - Net cash used in operating activities was $244,000 for Q2 2020, compared to $25,000 provided in Q2 2019, influenced by decreases in accounts payable, sales return reserves, and customer refunds[129] - Net cash provided by financing activities was $1,749,000 for Q2 2020, including $1,400,000 from the IHC Facility and $444,000 from the PPP loan[132] - The Company recovered approximately $2,245,000 from cargo insurance for damaged goods, with $1,268,000 in insurance claim receivable and $131,000 recognized as gain in Q2 2020, and an additional $846,000 received in July 2020[135] - Management believes the new Intercreditor Revolving Credit Facility, insurance claim settlements, and PPP loan proceeds will provide adequate liquidity for at least the next twelve months[137] INVENTORY SELL THROUGH - The Company monitors inventory levels and sell-through activity of major customers to properly anticipate defective returns and maintain appropriate inventory levels[138] - Management believes its warranty provision reflects the proper amount of reserves to cover potential defective sales returns based on historical return ratios and available customer information[138] SEASONAL AND QUARTERLY RESULTS - The Company's operations are highly seasonal, with the highest net sales occurring in the second and third fiscal quarters (September through December) due to the Christmas holiday season[139] - Sales in the second and third fiscal quarters combined accounted for approximately 98% and 94% of net sales in fiscal 2020 and 2019, respectively[139] INFLATION - Inflation has not had a significant impact on the Company's operations, as prices are generally adjusted to track changes in the Consumer Price Index[141] OFF-BALANCE SHEET ARRANGEMENTS - The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on its financial condition, revenues, results of operations, liquidity, or capital expenditures[142] CRITICAL ACCOUNTING POLICIES - The interim financial statements rely on management's subjective decisions, assessments, and estimates about matters that are inherently uncertain[143] - Critical accounting estimates and assumptions have not materially changed from those identified in the Company's 2020 Annual Report[143] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies - This item is not required for smaller reporting companies[144] Item 4. Controls and Procedures CEO and CFO confirm effective disclosure controls and procedures; no material changes in internal control over financial reporting were identified - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report[145] - No material changes in internal control over financial reporting were identified during the period covered by this report[146] PART II. OTHER INFORMATION Item 1. Legal Proceedings As of August 19, 2020, 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 as of August 19, 2020[148] Item 1A. Risk Factors This item is not applicable for smaller reporting companies - This item is not applicable for smaller reporting companies[149] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 to report[149] Item 3. Defaults Upon Senior Securities 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[149] Item 4. Mine Safety Disclosures There are no mine safety disclosures to report - There are no mine safety disclosures to report[150] Item 5. Other Information No other information is required to be disclosed in this section - No other information is required to be disclosed in this section[151] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO - Exhibits include certifications from Gary Atkinson (Chief Executive Officer) and Lionel Marquis (Chief Financial Officer) pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350[152] SIGNATURES SIGNATURES The report is duly signed by CEO Gary Atkinson and CFO Lionel Marquis on behalf of The Singing Machine Company, Inc. as of August 19, 2020 - The report is signed by Gary Atkinson (Chief Executive Officer) and Lionel Marquis (Chief Financial Officer) on August 19, 2020[156]