Algorhythm Holdings, Inc. 10-K/A

ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report, we conducted an evaluation as required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness described below, our disclosure controls and procedures were not effective at a reasonable assurance level as of the end of the period covered by this Report. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures. (b) Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of Company management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Management has assessed the effectiveness of our internal control over financial reporting using the components established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A material weakness is any deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective as of the year covered by this Annual Report. Following the initial filing of our Form 10-K for the year ended March 31, 2020, our Forms 10-Q for the three months ended June 30, 2020 and the six months ended September 30, 2020, management identified a material weakness in our internal controls over financial reporting that existed as of the dates of those filings related to the design and implementation of control activities intended to mitigate the risk that transactions be incorrectly accounted for in accordance with generally accepted accounting principles. Specifically, we did not maintain effective internal controls over the accounting for costs related to our co-op promotion allowances, pursuant to ASC 606, Revenue from Contract with Customers, as we incorrectly recorded these allowances as selling expenses when they should be recorded as a reduction in net sales. This material weakness resulted in material misstatements to the consolidated statements of operations for the aforementioned periods. The consolidated balance sheets, statement of cash flows, statement of shareholders’ equity, net income or loss for the affected periods remained unaffected. Plan for Material Weakness in Internal Control over Financial Reporting The Company’s management has begun to design and implement certain remediation measures to address the above-described material weakness and enhance the Company’s internal control in order to remediate this material weakness. As part of our remediation measures, the Company has identified and will implement plans to enhance the Company’s process and controls including ensuring adequate resources and use of accounting experts for guidance in the application of new accounting standards. (c) Changes in Internal Controls Other than the material weakness identified above, there were no other changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2020, that materially affected, or were reasonably likely to materially affect the Company’s internal control over financial reporting. This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report. ITEM 9B. OTHER INFORMATION None. 21 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth certain information with respect to our executive officers, directors and significant employees as of March 31, 2020. Directors and Executive Officers For Fiscal Year Ended March 31, 2020 Name Age Position Gary Atkinson 38 CEO Bernardo Melo 43 VP Global Sales and Marketing Lionel Marquis 67 CFO Phillip Lau 72 Chairman Harvey Judkowitz 75 Director Joseph Kling 90 Director Peter Hon 79 Director Yat Tung Lau 41 Director Directors are elected or appointed to serve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve for one year until the meeting of the Board of Directors following the annual meeting of stockholders and until their successors have been elected and qualified. Any officer elected or appointed by the Board or appointed by an executive officer or by a committee may be removed by the Board either with or without cause, and in the case of an officer appointed by an executive officer or by a committee, by the officer or committee that appointed him or by the president. The following information sets forth the backgrounds and business experience of our directors and executive officers and has been provided to us by each respective individual: Gary Atkinson joined the Company in January 2008 and served as General Counsel and Corporate Secretary. In November 2009, Mr. Atkinson was appointed as Interim Chief Executive Officer and was promoted as the Company’s permanent Chief Executive Officer in May, 2012. Since taking over as Chief Executive Officer, Gary has led the Company to seven consecutive years of profitability and growth in sales. Mr. Atkinson is a licensed attorney in the State of Florida and Georgia. He graduated from the University of Rochester with a Bachelors Degree in Economics and has been awarded a dual-degree J.D./M.B.A. from Case Western Reserve University School of Law and Weatherhead School of Management. Bernardo Melo has been with the Company since February 2003 and has served as the Vice President of Global Sales and Marketing (“VP of Sales”) since 2008. During his tenure at the Singing Machine, Mr. Melo has overseen the sales and operations of the music division as well as managed the customer service department. Before taking over the responsibility of VP of Sales, Mr. Melo held dual roles with the Company managing the operations, licensing and sales of the music division while concentrating on hardware sales for the Latin America and Canada market as well as key U.S. accounts such as Walmart. Prior to joining the Company, Mr. Melo held a consulting role for Rewards Network formerly Idine. Mr. Melo’s assignment during his tenure was improving their operational procedures while increasing efficiencies and lowering operating cost. Mr. Melo also worked at Coverall North America as Director of Sales managing a startup initiative for the company covering 15 regional office and 40 sales reps across North America focusing on franchise sales. Overall Mr. Melo has over 15 years of sales, marketing and management experience. Lionel Marquis joined the Company in June 2008 as Controller and Principal Accounting Officer and was appointed as the Company’s Chief Financial Officer in May, 2012. For the past 25 years Mr. Marquis has served as Controller and or Chief Financial Officer for several manufacturing and distribution companies in the South Florida area. Some of these companies include Computer Products, Inc (Artesyn Technologies Inc), US Plastic Lumber Corp., Casi-Rusco, (division of Interlogix Inc.), DHF Industries, Inc and Ingear Fashions, Inc. Mr. Marquis graduated from Bryant University with a Bachelors Degree in Business Administration with a major in accounting. Mr. Marquis is a Certified Public Accountant in the state of Florida. Philip Lau joined the Company’s board of directors on February 15, 2015 and was appointed as Chairman of the Company’s Board of Directors. Mr. Lau served as Chairman and Managing Director of the Starlight Group of companies since September of 1989. Mr. Lau has over 48 years of management experience in the consumer electronics industry and is a director in a number of Starlight group companies. Harvey Judkowitz has served as a director of the Company since March 29, 2004 and is the chairman of the Audit Committee. He is licensed as a CPA in New York and Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own CPA practices. He has served as the Chairman and CEO of UniPro Financial Services, a diversified financial services company up until the company was sold in September of 2005. He was formerly the President and Chief Operating Officer of Photovoltaic Solar Cells, Inc. Peter Hon has served as a director of the Company since January 12, 2007. Mr. Hon has been a non-executive of the Starlight Group since 1998. Mr. Hon passed the College of Law qualifying examination in 1969 in the United Kingdom and began practicing law in Hong Kong in that year after being admitted to the High Court of Hong Kong. He has been the principal of Hon and Co, a law firm in Hong Kong for the past 40 plus years. 22 Yat Tung Lau has served as a director of the Company since January 12, 2007. Mr. Lau joined the Starlight Group in 2003 as assistant to the Chairman of the Board of Starlight International and is now head of corporate relations. He is also responsible for local sales in China and heads the computer information system department for the Starlight Group. From 2002 to 2003, he held a marketing executive position in Storage Technology Corporation. Mr. Lau received an MBA from the University of Minnesota and also holds a Bachelor of Arts degree in business marketing from Indiana University. Joseph Kling was appointed as a director of the Company on May 9, 2017. Mr. Kling has spent his entire career in the toy industry, most notably serving as CEO of View-Master, the iconic stereoscopic toy company, which later purchased Ideal Toy from CBS and later became View-Master Ideal, publicly traded on the Nasdaq. View-Master Ideal later acquired California Plush Toys and the entire group was later acquired by Tyco Toys in 1989. Kling later went into private M&A consulting and sat on the board of Russ Berrie & Co (currently known as Kids Brands, Inc.) for 21 years advising on the acquisition of several toy companies. Mr. Kling has also served on the Board of Crown Crafts, a large distributor of infant, toddler, and juvenile consumer products and on the board of Lancit Media Entertainment, a children’s and family media production company (formerly listed on the Nasdaq). Notably, Mr. Kling has been involved in many major toy company acquisitions of brands such as Melissa & Doug and Brio. BOARD COMMITTEES We have an audit committee, a compensation committee and a nominating committee. The audit committee consisted of Messrs. Judkowitz (Chairman) and Kling. The Board has determined that Mr. Judkowitz qualifies as an “audit committee financial expert,” as defined under Item 407 of Regulation S-K of the Exchange Act. The Board has determined that each of Messrs. Judkowitz and Kling were “independent directors” within the meaning of the listing standards of the major stock exchanges. The audit committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with our independent auditors, reviews our internal accounting controls, and approves services to be performed by our independent auditors. The compensation committee consisted of Messrs. Judkowitz, Kling and Philip Lau. The compensation committee considers and authorizes remuneration arrangements for senior management and grants options under, and administers our employee stock option plan. The nominating committee consisted of Messrs. Philip Lau and Yat Tung Lau. The nominating committee is responsible for reviewing the qualifications of potential nominees for election to the Board of Directors and recommending the nominees to the Board of Directors for such election. NOMINATION OF DIRECTORS As provided in our nominating committee charter and our Company’s corporate governance principles, the Nominating Committee is responsible for identifying individuals qualified to become directors. The Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (1) the Nominating Committee members, (2) our other directors, (3) our shareholders, (4) our Chief Executive Officer or Chairman, and (5) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating Committee considers the entirety of each candidate’s credentials. Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board of Directors. However, at a minimum, candidates for director must possess: ● high personal and professional ethics and integrity; ● the ability to exercise sound judgment; ● the ability to make independent analytical inquiries; ● a willingness and ability to devote adequate time and resources to diligently perform Board and committee duties; and ● the appropriate and relevant business experience and acumen. 23 In addition to these minimum qualifications, the Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors: ● whether the person possesses specific industry expertise and familiarity with general issues affecting our business; ● whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K; ● whether the person would qualify as an “independent” director under the listing standards of the OTC; ● the importance of continuity of the existing composition of the Board of Directors to provide long term stability and experienced oversight; and ● the importance of diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise. There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s board of directors as set forth in the Company’s Proxy Statement on Schedule 14A filed with the SEC on February 5, 2019. FAMILY RELATIONSHIPS There are no family relationships among any of our officers or other directors, except for Chairman Philip Lau who is the father of Director Yat Tung Lau and the uncle of Gary Atkinson, the Company’s CEO. CODE OF ETHICS We have adopted a Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees of the Singing Machine, including our principal executive officer, our principal financial officer, and our principal accounting officer or controller or other persons performing similar functions. A copy of the Code of Ethics is posted on the Company’s website at www.singingmachine.com. We intend to post amendments to or waivers from our Code of Ethics (to the extent applicable to our chief executive officer, principal financial officer, principal accounting officer or controller or other persons performing similar functions) on our website. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires our officers, directors, and persons who own more than ten percent of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater-than-ten-percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant to Rule 16a-3 under the Exchange Act, we believe that all such forms required to be filed pursuant to Section 16(a) of the Exchange Act during the year ended March 31, 2020 were timely filed, as necessary, by the officers, directors, and security holders required to file such forms except for the following: Mr. Harvey Judkowitz filed a Form 5 in lieu of filing a timely Form 4 with respect to one transaction; Mr. Peter Hon filed a Form 5 in lieu of filing a timely Form 4 with respect to one transaction; Mr. Yat-Tung Lau filed a Form 5 in lieu of filing a timely Form 4 with respect to one transactions; Mr. Philip Lau filed a Form 5 in lieu of filing a timely Form 4 with respect to one transactions; Mr. Joseph Kling filed a Form 5 in lieu of filing a timely Form 4 with respect to one transactions. ITEM 11. EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and other named executive officers of our Company (collectively, the “named executive officers”) for Fiscal 2019. SUMMARY COMPENSATION TABLE Name and Principal Position Year Salary Bonus Stock Awards Option Awards Non- Equity Incentive Plan Comp Non-Qualified Deferred Compensation Earnings Other Comp TOTAL COMP Gary Atkinson 2020 $ 150,000 $ - $ - $ - $ - $ - $ - $ 150,000 Chief Executive Officer 2019 $ 150,000 $ - $ - $ - $ - $ - $ - $ 150,000 Lionel Marquis 2020 $ 149,153 $ - $ - $ - $ - $ - $ 149,153 Chief Financial Officer 2019 $ 142,952 $ - $ - $ - $ - $ - $ - $ 142,952 Bernardo Melo 2020 $ 157,200 $ 70,771 $ - $ - $ - $ - $ - $ 227,971 VP Global Sales & Marketing 2019 $ 157,200 $ 110,747 $ - $ - $ - $ - $ - $ 267,947 NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE Mr. Atkinson does not have an employment contract with the Company and had an annual salary of $150,000 for the fiscal year ended March 31, 2020 and 2019. Mr. Marquis does not have an employment contract with the Company and had an annual salary of $150,000 for the fiscal year ended March 31, 2020 and 2019. 24 Mr. Melo does not have an employment contract with the Company and had an annual salary of $157,200 for the fiscal years ended March 31, 2020 and 2019. As of June 28, 2020, the Company did not have any employment contracts with any of its employees. However, on January 3, 2014, the Company entered into agreements with the three executive officers named above that if an executive’s employment is terminated by the executive or the Company following a change in control, the executive will be entitled to the following within 10 days of termination: ● All accrued and unpaid compensation due to the executive as of the date of termination. ● A lump sum payment equal to one year’s executive base salary if the executive terminates employment. ● A lump sum of one and a half year’s executive base salary and targeted annual bonus if the Company terminates employment. ● All outstanding stock options shall be fully vested and exercisable for the remainder of their full term. ● All outstanding equity-based compensation awards (other than stock options) shall become fully vested with any restrictions removed. OPTION GRANTS IN FISCAL 2020 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table sets forth information with respect to outstanding grants of options to purchase our common stock under our Year 2001 Stock Option Plan as well as other stock option awards issued with Board of Directors approval to the named executive officers as of the fiscal year ended March 31, 2020: Name and Principal Position Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) Gary Atkinson, CEO - Year 2001 Stock Option Plan 120,000 - N/A 0.06 10/29/2020 N/A N/A N/A N/A - Other stock option awards 150,000 - N/A 0.21 7/1/2023 N/A N/A N/A N/A - Other stock option awards 50,000 - N/A 0.24 3/31/2026 N/A N/A N/A N/A - Other stock option awards 100,000 - N/A 0.47 5/3/2027 N/A N/A N/A N/A Lionel Marquis, CFO - Year 2001 Stock Option Plan 120,000 - N/A 0.06 10/29/2020 N/A N/A N/A N/A - Other stock option awards 100,000 - N/A 0.21 7/1/2023 N/A N/A N/A N/A - Other stock option awards 15,000 - N/A 0.24 3/31/2026 N/A N/A N/A N/A - Other stock option awards 50,000 - N/A 0.47 5/3/2027 N/A N/A N/A N/A Bernardo Melo, VP Sales - Year 2001 Stock Option Plan 200,000 - N/A 0.06 10/29/2020 N/A N/A N/A N/A - Other stock option awards 250,000 - N/A 0.21 7/1/2023 N/A N/A N/A N/A - Other stock option awards 25,000 - N/A 0.17 6/30/2025 N/A N/A N/A N/A - Other stock option awards 100,000 - N/A 0.32 8/10/2026 N/A N/A N/A N/A - Other stock option awards 200,000 - N/A 0.47 5/3/2027 N/A N/A N/A N/A CHIEF EXECUTIVE PAY RATIO DISCLOSURE The Securities and Exchange Commission adopted a rule requiring annual disclosure of the ratio of the total annual compensation of the chief executive officer to the median employee’s total annual compensation. Mr. Atkinson’s total compensation as reported in the Executive Summary Compensation Table is compared to the median employee’s total compensation as reflected in the ratio table below. The median employee was determined using the quarterly average number of active full-time employees and a subcontractor for the fiscal year ended March 31, 2020 excluding Mr. Atkinson. All wages, cash bonuses, contractor payments, and fair market value of stock option awards granted to each employee (excluding Mr. Atkinson) were included in determining the median employee’s total compensation. The table below presents the ratio of Mr. Atkinson’s total annual compensation to the median employee’s total annual compensation. Mr. Atkinson’s total annual compensation $ 150,000 Median employee’s total annual compensation $ 53,159 Ratio of Chief Executive Officer to median employee 2.4 : 1 25 The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in Fiscal 2020. DIRECTOR COMPENSATION Name Fees Earned or Paid in Cash Stock Awards (1) Option Awards (2) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Comepnsation Earnings All Other Compensation Total Peter Hon $ 500 $ 2,500 $ 4,002 $ - $ - $ - $ 7,002 Harvey Judkowitz $ 9,750 $ 2,500 $ 4,001 $ - $ - $ - $ 16,251 Phillip Lau $ 250 $ 2,500 $ 4,002 $ - $ - $ - $ 6,752 Yat Tung Lau $ - $ 2,500 $ 4,002 $ - $ - $ - $ 6,502 Joseph Kling $ 9,500 $ 2,500 $ 4,001 $ - $ - $ - $ 16,001 Refer to Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for the relevant assumptions used to determine the valuation of our option awards. 1) As of March 31, 2020 the aggregate number of stock awards held by Messrs. Judkowitz and Kling is 350,337 and 15,668, respectively. The aggregate stock awards held by Messrs. Hon, Yat Tung Lau and Philip Lau is 54,942, 44,525 and 15,668, respectively. (2) As of March 31, 2020 the aggregate number of Company stock options held by Messrs. Judkowitz and Kling is 160,000 and 60,000, respectively and Messrs. Hon, Yat Tung Lau and Philip Lau is 80,000, 60,000 and 60,000 respectively. During Fiscal 2020, our compensation package for our non-employee directors consisted of grants of stock options, cash payments, stock issuances and reimbursement of costs and expenses associated with attending our board meetings. Our five non-employee directors during Fiscal 2020 were Messrs. Judkowitz, Hon, Kling, Yat Tung Lau and Philip Lau. During Fiscal 2020, we have utilized the following compensation policy for our directors: ● An initial grant of 20,000 Singing Machine stock options with an exercise price determined as the closing price on the day of joining the board. The options will vest in one year and expire in ten years while they are board members or the lesser of five years or remaining life of the stock option once they are no longer board members. ● An annual cash payment of $7,500 will be made for each completed full year of service or prorated for a partial year. The payment will be made on or before March 31. ● An annual stock grant of stock equivalent in value to $2,500 for each completed full year of service or prorated for a partial year. The stock price at grant will be determined at the closing price on the day of the Annual Stockholder Meeting. The actual grant will be made on or before March 31. ● An annual grant of 20,000 Singing Machine stock options with an exercise price determined as the closing price on the day of the Annual Stockholder Meeting. If the Annual Meeting is held less than 6 months after the board member first joined the board he or she will not receive another option grant. ● Independent board members will receive a $500 fee for each board meeting and annual meeting they attend. Committee meetings and telephone board meetings will be compensated with a $250 fee. ● All expenses will be reimbursed for attending board, committee and annual meetings or when their presence at a location away from home is requested. YEAR 2001 PLAN On June 1, 2001, our Board of Directors approved the Year 2001 Plan and it was approved by our shareholders at our special meeting held September 6, 2001. The Year 2001 Plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. The Year 2001 Plan authorized an aggregate of 1,950,000 shares of the Company’s common stock with a maximum of 450,000 shares to any one individual in any one fiscal year. The shares of common stock available under the Year 2001 Plan were subject to adjustment for any stock split, declaration of a stock dividend or similar event. At March 31, 2020, we had granted 940,000 options under the Year 2001 Plan 200,000 of which had expired, 160,000 which had been exercised and 580,000 of which remained outstanding and fully vested. As of this date the Year 2001 Plan has expired and no further options can be issued thereunder. 26 Options granted under the Year 2001 Plan are not transferable except by will or applicable laws of descent and distribution. Except as expressly determined by the Compensation Committee, no option under the Year 2001 Plan is exercisable after thirty (30) days following an individual’s termination of employment with the Company or a subsidiary, unless such termination of employment occurs by reason of such individual’s disability, retirement or death. The obligations of the Company under the Year 2001 Plan are binding on (1) any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company or (2) any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company. In the event of any of the foregoing, the Compensation Committee may, at its discretion, prior to the consummation of the transaction, offer to purchase, cancel, exchange, adjust or modify any outstanding options, as such time and in such manner as the Compensation Committee deems appropriate. 401(K) PLAN Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at least one year of service are eligible to participate in our 401(k) plan. We make a matching contribution of 100% of salary deferral contributions up to 3% of pay, plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll period. The amounts charged to earnings for contributions to this plan and administrative costs during the years ended March 31, 2020 and 2019 totaled approximately $63,000 and $70,000, respectively. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth as of August 12, 2020 (the “record date”), certain information concerning beneficial ownership of our common stock by: ● all directors and former directors of the Singing Machine, ● all named executive officers of the Singing Machine; and ● persons known to own more than 5% of our common stock. Security ownership is based on 38,557,643 shares of our common stock issued and outstanding. In computing the number and percentage of shares beneficially owned by a person, shares of common stock subject to convertible securities and options currently convertible or exercisable, or convertible or exercisable within 60 days of August 12, 2020 are counted as outstanding, but these shares are not counted as outstanding for computing the percentage ownership of any other person. As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted below, and subject to applicable property laws, to our knowledge each person has sole investment and sole voting power over the shares shown as beneficially owned by them. Unless otherwise noted, the principal address of each of the directors and officers listed below is c/o The Singing Machine Company, Inc., 6301 NW 5th Way, Suite 2900, Fort Lauderdale, FL 33309. 27 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of August 12, 2020 Name and Address of Beneficial Owner Amount and Nature of Certain Beneficial Ownership of Common Stock Percentage of outstanding shares of common stock Security Ownership of Management : Gary Atkinson (1) 459,481 1.2 % Lionel Marquis (1) 285,000 * Bernardo Melo (1) 863,916 2.2 % Philip Lau (1) 75,668 * Harvey Judkowitz (1) 510,337 1.3 % Joseph Kling (1) 75,668 * Yat Tung Lau (1) 104,525 * Peter Hon (1) 134,942 * Officers & Directors as a Group (8 persons) 2,509,537 6.5 % Security Ownership of Certain Beneficial Owners : Fairy King (2) 19,623,155 51.0 % Arts Electronics Ltd. (3) 3,745,917 9.7 % Gentle Boss Investments Ltd (4) 2,100,000 5.5 % * Less than 1% Total Shares of Common Stock as of August 12, 2020 38,464,753 Stock Options Exercisable within 60 days of August, 2020 2,210,000 Total 40,674,753 (1) Includes as to the person indicated, the following outstanding stock options to purchase shares of the Company’s Common Stock issued under 2001 Stock Option Plan, which will be vested and exercisable within 60 days of the record date: 420,000 options held by Gary Atkinson, 775,000 options held by Bernardo Melo, 285,000 options held by Lionel Marquis, 160,000 options held by Harvey Judkowitz, 60,000 options held by Joseph Kling, 80,000 options held by Peter Hon, 60,000 held by Yat Tung Lau and 60,000 held by Philip Lau. (2) “Fairy King” is defined in Part I, Item 1 under “Business Overview.” Koncepts International Ltd. and Treasure Green Holdings, Ltd. own 18,682,679 and 940,476, respectively of the Company’s Common Stock and are wholly owned subsidiaries of Fairy King. The address for Fairy King is: 5/F Shing Dao Industrial Bldg., 232 Aberdeen Rd., Hong Kong. Fairy King is owned by Philip Lau, our Chairman of the Board. (3) The address for Arts Electronics Ltd. is Room 101, Fo Tan Ind CTR 1/F, 26-28 Au Pui Wan, Fo Tan, Shatin N.T. Hong Kong. (4) The address for Gentle Boss Investments Ltd. is Unit 6, 9/F, Tower B, 55 Hoi Yuen Road, Kwun Tong, Kowloon Hong Kong. ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE DUE TO/FROM RELATED PARTIES On March 31, 2020 the Company had approximately $0.5 million due to related parties for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by the parent company. On March 31, 2019, the Company had approximately $0.3 million due from related parties for goods and services sold to these companies. 28 Subordinated Related Party Debt and Note Payable In connection with the Revolving Credit Facility the Company was required to subordinate related party debt to Starlight Marketing Development, Ltd. (“subordinated debt”). The subordinated debt of approximately $924,000 bore interest at 6% and was scheduled to be paid in quarterly installments of $123,000 which include interest and commenced September 30, 2017 and ending on the debt maturity date of June 30, 2019. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter were not been made since September 2017; however a payment of $25,000 which includes principal and interest, was made during the Fiscal 2020. On June 1, 2020 the remaining amount due on the subordinated debt of approximately $803,000 was converted to a note payable which bears interest at 6%. As part of the agreement to convert the subordinated debt to a note payable it was agreed that interest expense would be accrued on the unpaid principal retroactively from the date that scheduled payments had been missed resulting in an incremental charge to interest expense of approximately $72,000 for the Fiscal 2020. During the years ended March 31, 2020 and 2019 interest expense was approximately $74,000 and $21,000, respectively on the related party subordinated debt. In connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the note payable (“subordinated note payable”) to Starlight Marketing Development, Ltd. Both agreements allow for the repayment of the subordinated note payable provided any amounts borrowed against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity to support on-going operations. There is no set schedule with regards to payment of the note and as such note has been classified as a non- current liability for the year ended March 31, 2020 on the consolidated balance sheets. As of March 31, 2019 the remaining amount due on the subordinated debt was approximately $815,000 and was classified as a current liability on the consolidated balance sheets. TRADE During both Fiscal 2020 and 2019 the Company paid approximately $0.4 million to Starlight Electronics Company, Ltd (“SLE”) as reimbursement for engineering, quality control and other administrative services performed on our behalf in China. These expense reimbursements were included in general and administrative expenses on our consolidated statements of operations. During Fiscal 2020 and 2019 the Company sold approximately $0.9 million and $1.2 million, respectively of product to Winglight Pacific, Ltd. (“Winglight”) a related company, for direct shipment to Cosmo Communications of Canada, Ltd (“Cosmo”), another related company, at discounted pricing granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for Fiscal 2020 and 2019 was 23.7% and 30.1%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of operations. During Fiscal 2020 and 2019 the Company sold approximately $0.3 million and $0.4 million, respectively of product to Cosmo from our California warehouse facility. These goods were sold at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Cosmo yielded 26.6% and 22.5%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of operations. On July 30, 2020 The Company and Cosmo reached agreement that Cosmo would no longer be the Company’s Canadian distributor and the Company became the sole and exclusive distributor of the Company’s products in Canada. As part of the agreement, the companies executed a Purchase and Sales agreement whereby the Company acquired all of Cosmo’s karaoke inventory for approximately $685,000. Review, Approval or Ratification of Transactions with Related Persons We believe that the terms of all of the above transactions are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our company in connection with related party transactions. While we do not maintain a written policy with respect to related party transactions, our board of directors routinely reviews potential transactions with those parties we have identified as related parties prior to the consummation of the transaction. Each transaction is reviewed to determine that a related party transaction is entered into by us with the related party pursuant to normal competitive negotiation. We also generally require that all related parties recuse themselves from negotiating and voting on behalf of the Company in connection with related party transactions. CORPORATE GOVERNANCE Board Determination of Independence The Board has determined that Messrs. Judkowitz and Kling are “independent directors” within the meaning of the listing standards of major stock exchanges. The audit committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with our independent auditors, reviews our internal accounting controls, and approves services to be performed by our independent auditors. 29 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following is a summary of the fees billed to the Singing Machine by our independent registered public accounting firms for professional services rendered for Fiscal 2020 and Fiscal 2019: Fee Category Fiscal 2020 Fiscal 2019 Audit Fees $ 122,199 $ 104,276 All Other Fees - 20,821 Total Fees $ 122,199 $ 125,097 Audit Fees - Consists of fees billed for professional services rendered for the audit of the Singing Machine’s consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that were provided by EisnerAmper, LLP, respectively. All Other Fees - Consists of fees for products and services other than the services reported above including review of proxy statements and services provided in connection with the audit of China Sinostar, our parent company. POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. The following financial statements for The Singing Machine Company, Inc. and Subsidiaries are filed as a part of this report: Consolidated Balance Sheets— March 31, 2020 and 2019. Consolidated Statements of Operations—Years ended March 31, 2020 and 2019, As Restated Consolidated Statements of Cash Flows—Years ended March 31, 2020 and 2019. Consolidated Statements of Shareholders’ Equity—Years ended March 31, 2020 and 2019. Notes to Consolidated Financial Statements As Restated Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto. 30 (b) Exhibits. Exhibit No. Description 3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 and amendments through April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.2 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.3 Certificates of Correction filed with the Delaware Secretary of State on March 29 and 30, 2001 correcting the Amendment to our Certificate of Incorporation dated April 20, 1998 (incorporated by reference to Exhibit 3.11 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on April 11, 2000). 3.4 Amended By-Laws of the Singing Machine Singing Machine (incorporated by reference to Exhibit 3.14 in the Singing Machine’s Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001). 4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by reference to Exhibit 3.3. of the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 7, 2000). File No. 333-57722) 10.1 Amended and Restated 1994 Management Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 28, 2001, File No. 333-59684). 10.2 Year 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Singing Machine’s registration statement on Form S- 8 filed with the SEC on September 13, 2002, File No. 333-99543). 10.3 Securities Purchase Agreement dated February 21, 2007, by and between The Singing Machine Company, Inc. and koncepts International Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007) 10.4 Registration Rights Agreement dated February 21, 2007, by and between The Singing Machine Company, Inc. and koncepts International Limited. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on February 27, 2007) 10.5 Lease for Lakeside Plaza executive offices dated July 31, 2011 by and between The Singing Machine Company, Inc. and Lakeside IV, LLC (incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 29, 2011). 10.6 Lease for Ontario, CA warehouse dated January 31, 2013 by and between The Singing Machine Company, Inc. and Majestic- CCCIV Partners (incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 28, 2013). 10.7 Executive Change of Control Agreement dated January 3, 2014 by and between The Singing Machine Company, Inc. and Gary Atkinson, Bernardo Melo, and Lionel Marquis ((incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 30, 2014). 10.8 First Amendment to Standard Industrial Lease dated June 15, 2020 (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on August 13, 2020). 10.9 Intercreditor Agreement with Crestmark and Iron Horse, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.10 Loan and Security Agreement with Crestmark, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.11 Schedule to Loan and Security Agreement with Crestmark, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.12 Promissory Note with Crestmark, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.13 Loan and Security Agreement with Iron Horse, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.14 Subordination Agreement with Starlight Marketing, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.15 Promissory Note with Starlight Marketing, dated June 1, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 31.1 Certification of Gary Atkinson, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.* 31.2 Certification of Lionel Marquis, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.* 32.1 Certifying Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.* 32.2 Certifying Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.* 101 The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 formatted in XBRL: (i) Consolidated Balance Sheets as of March 31 2020 and 2019; (ii) Consolidated Statements of Operations for the two years ended March 31, 2020 and 2019; (iii) Consolidated Statements of Cash Flows for the two years ended March 31, 2020 and 2019; (iv) Consolidated Statements of Shareholders’ Equity for the two years ended March 31, 2020 and 2019 and (v) Notes to the Consolidated Financial Statements. * Filed herewith + Compensatory plan or arrangement. ITEM 16. FORM 10-K/A SUMMARY None. 31 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, The Singing Machine Company, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Date: February 19, 2021 By: /s/ Gary Atkinson Gary Atkinson Chief Executive Officer In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Singing Machine Company, Inc. and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE /s/ GARY ATKINSON Chief Executive Officer February 19, 2021 Gary Atkinson (Principal Executive Officer) /s/ LIONEL MARQUIS Chief Financial Officer February 19, 2021 Lionel Marquis (Principal Financial Officer) /s/ PHILIP LAU Chairman February 19, 2021 Philip Lau /s/ HARVEY JUDKOWITZ Director February 19, 2021 Harvey Judkowitz /s/ JOSEPH KLING Director February 19, 2021 Joseph Kling /s/ YAT TUNG LAU Director February 19, 2021 Yat Tung Lau /s/ PETER HON Director February 19, 2021 Peter Hon 32 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations (As Restated) F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Shareholders’ Equity F-6 Notes to Consolidated Financial Statements (As Restated) F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The Singing Machine Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Singing Machine Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2020 and 2019, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2020 and 2019, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 4 to the financial statements, the Company has changed its method of accounting for leases in fiscal year 2020 due to the adoption of Accounting Standards Codification Topic 842, Leases. Restatement As discussed in Note 2 to the financial statements, the 2020 and 2019 consolidated financial statements have been restated to correct a statement of operations accounting error. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ EisnerAmper LLP We have served as the Company’s auditor since 2016. Iselin, New Jersey August 13, 2020, except as to the restatement discussed in Note 2 and its related effects on the consolidated financial statements, as to which the date is February 19, 2021 F- 2 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, 2020 March 31, 2019 Assets Current Assets Cash $ 345,200 $ 211,408 Accounts receivable, net of allowances of $337,461 and $51,906, respectively 1,860,500 1,769,404 Due from PNC Bank 2,388,438 2,236,779 Accounts receivable related party - Winglight Pacific, Ltd 100,000 288,941 Insurance claim receivable 1,268,463 - Inventories, net 7,601,277 6,024,311 Prepaid expenses and other current assets 252,473 274,278 Deferred financing costs 3,333 13,333 Total Current Assets 13,819,684 10,818,454 Property and equipment, net 771,349 522,910 Deferred financing costs, net of current portion - 3,333 Deferred tax assets 1,285,721 758,366 Operating Leases - right of use assets 573,874 - Other non-current assets 150,509 90,082 Total Assets $ 16,601,137 $ 12,193,145 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 5,041,610 $ 842,708 Accrued expenses 1,529,168 950,773 Current portion of bank term note payable - 125,000 Due to related party - Starlight Consumer Electronics Co., Ltd. 14,400 - Due to related party - Starlight Electronics Co., Ltd 372,300 - Due to related party - Starlight R&D, Ltd. 115,016 - Refunds due to customers 806,475 31,075 Reserve for sales returns 1,224,000 896,154 Current portion of finance leases 14,953 14,414 Current portion of installment notes 63,098 - Current portion of operating lease liabilities 321,389 - Current portion of subordinated related party debt - Starlight Marketing Development, Ltd. - 815,367 Total Current Liabilities 9,502,409 3,675,491 Finance leases, net of current portion 2,550 17,499 Installment notes, net of current portion 283,193 - Operating lease liabilities, net of current portion 322,263 - Subordinated related party debt - Starlight Marketing Development, Ltd., net of current portion 802,659 - Total Liabilities 10,913,074 3,692,990 Commitments and Contingencies Shareholders’ Equity Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding - - Common stock, Class A, $0.01 par value; 100,000 shares authorized; no shares issued and outstanding - - Common stock, Class B, $0.01 par value; 100,000,000 shares authorized; 38,557,643 and 38,464,753 shares issued and outstanding, respectively 385,576 384,648 Additional paid-in capital 19,729,043 19,687,263 Subscriptions receivable - (2,200 ) Accumulated deficit (14,426,556 ) (11,569,556 ) Total Shareholders’ Equity 5,688,063 8,500,155 Total Liabilities and Shareholders’ Equity $ 16,601,137 $ 12,193,145 See notes to the consolidated financial statements F- 3 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended March 31, 2020 March 31, 2019 (as restated) (as restated) Net Sales $ 38,500,570 $ 44,198,168 Cost of Goods Sold 30,323,223 34,709,799 Gross Profit 8,177,347 9,488,369 Operating Expenses Selling expenses 4,286,257 2,832,405 General and administrative expenses 6,564,422 5,790,019 Bad debt expense (recovery) 302,333 (442,671 ) Depreciation 269,107 259,662 Total Operating Expenses 11,422,119 8,439,415 (Loss) Income from Operations (3,244,772 ) 1,048,954 Other Expenses Interest expense (240,709 ) (244,593 ) Finance costs (13,333 ) (13,334 ) Total Other Expenses (254,042 ) (257,927 ) (Loss) Income Before Income Tax Benefit (Provision) (3,498,814 ) 791,027 Income Tax Benefit (Provision) 641,814 (159,480 ) Net (Loss) Income $ (2,857,000 ) $ 631,547 Net (Loss) Income per Common Share Basic $ (0.07 ) $ 0.02 Diluted $ (0.07 ) $ 0.02 Weighted Average Common and Common Equivalent Shares: Basic 38,532,889 38,360,883 Diluted 38,532,889 39,244,250 See notes to the consolidated financial statements F- 4 The Singing Machine Company, Inc. and Subsidiaries CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 2020 March 31, 2019 Cash flows from operating activities Net (loss) Income $ (2,857,000 ) $ 631,547 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 269,107 259,662 Amortization of deferred financing costs 13,333 13,334 Change in inventory reserve 180,000 (26,000 ) Change in allowance for bad debts 286,365 (31,006 ) Stock based compensation 32,508 52,428 Change in net deferred tax assets (527,355 ) 178,771 Changes in operating assets and liabilities: Accounts receivable (377,461 ) (671,559 ) Due from PNC Bank (151,659 ) (2,230,567 ) Accounts receivable - related parties 188,941 868,217 Insurance receivable (1,268,463 ) - Inventories (1,756,966 ) 2,538,623 Prepaid expenses and other current assets 21,805 (136,308 ) Other non-current assets (60,427 ) (78,559 ) Accounts payable 4,198,902 (772,040 ) Accrued expenses 704,433 248,841 Due to related parties 501,716 (413,675 ) Refunds due to customers 775,400 (414,409 ) Reserve for sales returns 327,846 170,154 Operating lease liabilities, net of operating leases - right of use assets (56,260 ) - Net cash provided by operating activities 444,765 187,454 Cash flows from investing activities Purchase of property and equipment (517,546 ) (288,741 ) Net cash used in investing activities (517,546 ) (288,741 ) Cash flows from financing activities Payment of bank term note (125,000 ) (500,000 ) Proceeds from installment notes 365,340 - Payments on installment notes (19,049 ) - Proceeds from subscription receivable 2,200 - Proceeds from exercise of stock options 10,200 10,400 Payment on subordinated debt - related party (12,708 ) - Payments on finance leases (14,410 ) (11,613 ) Net cash provided by (used by) financing activities 206,573 (501,213 ) Net change in cash 133,792 (602,500 ) Cash at beginning of year 211,408 813,908 Cash at end of year $ 345,200 $ 211,408 Supplemental disclosures of cash flow information: Cash paid for interest $ 179,811 $ 230,242 Equipment purchased under capital lease $ - $ 43,526 Operating leases - right of use assets initial adoption $ 1,108,330 $ - Operating lease liabilities - initial adoption $ 1,234,368 $ - See notes to the consolidated financial statements F- 5 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended March 31, 2020 and March 31, 2019 Preferred Stock Common Stock Additional Paid Subscriptions Accumulated Shares Amount Shares Amount in Capital Receivable Deficit Total Balance at March 31, 2018 - $ - 38,282,028 $ 382,820 $ 19,624,063 $ - $ (12,201,103 ) $ 7,805,780 Net Income 631,547 631,547 Employee compensation- stock option 39,928 39,928 Exercise of stock options 160,000 1,600 11,000 (2,200 ) 10,400 Director fees 22,725 228 12,272 12,500 Balance at March 31, 2019 - - 38,464,753 384,648 19,687,263 (2,200 ) (11,569,556 ) 8,500,155 Net Loss (2,857,000 ) (2,857,000 ) Employee compensation- stock option 20,008 20,008 Collection of subscription receivable 2,200 2,200 Exercise of stock options 60,000 600 9,600 10,200 Issuance of common stock - directors 32,890 328 12,172 12,500 Balance at March 31, 2020 - $ - 38,557,643 $ 385,576 $ 19,729,043 $ - $ (14,426,556 ) $ 5,688,063 See notes to the consolidated financial statements. F- 6 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION OVERVIEW The Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”) and SMC-Music, Inc. (“SMC-M”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. The products are sold directly to distributors and retail customers. The Company is partially held by koncepts International Limited (“koncepts”) who is major shareholder of the Company, owning approximately 49% of our shares of common stock outstanding on a fully diluted basis as of March 31, 2020. The Company is also partly held by Treasure Green Holdings Ltd. (“Treasure Green) who owns approximately 2% of our common stock. In total approximately 51% of the Company’s shares of common stock on a fully diluted basis as of March 31, 2020 are owned by koncepts and Treasure Green. For most of the Fiscal Year, China Sinostar Group Company Limited (Sinostar and its subsidiaries collectively referred to herein as the “Sinostar Group” or “Sinostar”) held 100% of the common stock of koncepts and Treasure Green. Sinostar is a company whose principal activities include property development, property management, property investment, management of hydroelectric power stations, and design and sale of electronic products through its various subsidiaries. We do business with a number of entities that are indirectly wholly-owned or majority owned subsidiaries of Sinostar, including Starlight R&D Ltd (“Starlight R&D”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc. (“Cosmo”) and Star Light Electronics Company Ltd (Starlite), among others. On December 12, 2019, Sinostar transferred the assets of its consumer electronics division (including all of it’s shares of koncepts and Treasure Green to Fairy King Prawn Holdings Limited (“Fairy King”), an investment holding company incorporated in the British Virgin Islands, principally owned by the Company’s Chairman, Philip Lau. NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS The Company has determined that in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contract with Customers , the Company incorrectly accounted for the cost of its co-op promotion allowances (previously referred to as “cooperative advertising”) with its customers as selling expenses instead of a reduction in net sales for each of the years ended March 31, 2020 and 2019, as these co-op promotion allowances are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements. The effects of this accounting error do not impact the consolidated balance sheets, statements of cash flows and statements of shareholders’ equity for any current or past reporting period. The effects are confined to the consolidated statements of operations, and these notes to consolidated financial statements. The tables below set forth the consolidated statements of operations, including the balances as originally reported, adjustments and the as restated balances for each of the years affected: The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Originally Reported As Restated For the Year Ended For the Year Ended March 31, 2020 Adjustment March 31, 2020 Net Sales $ 41,418,304 $ (2,917,734 ) $ 38,500,570 Cost of Goods Sold 30,323,223 - 30,323,223 Gross Profit 11,095,081 (2,917,734 ) 8,177,347 Operating Expenses Selling expenses 7,203,991 (2,917,734 ) 4,286,257 General and administrative expenses 6,564,422 - 6,564,422 Bad debt expense (recovery) 302,333 - 302,333 Depreciation 269,107 - 269,107 Total Operating Expenses 14,339,853 (2,917,734 ) 11,422,119 Loss from Operations (3,244,772 ) - (3,244,772 ) Other Expenses Interest expense (240,709 ) - (240,709 ) Finance costs (13,333 ) - (13,333 ) Total Other Expenses (254,042 ) - (254,042 ) Loss Before Income Tax Benefit (3,498,814 ) - (3,498,814 ) Income Tax Benefit 641,814 - 641,814 Net Loss $ (2,857,000 ) $ - $ (2,857,000 ) F- 7 Originally Reported As Restated For the Year Ended For the Year Ended March 31, 2019 Adjustment March 31, 2019 Net Sales $ 46,482,998 $ (2,284,830 ) $ 44,198,168 Cost of Goods Sold 34,709,799 - 34,709,799 Gross Profit 11,773,199 (2,284,830 ) 9,488,369 Operating Expenses Selling expenses 5,117,235 (2,284,830 ) 2,832,405 General and administrative expenses 5,790,019 - 5,790,019 Bad debt expense (recovery) (442,671 ) - (442,671 ) Depreciation 259,662 - 259,662 Total Operating Expenses 10,724,245 (2,284,830 ) 8,439,415 Income from Operations 1,048,954 - 1,048,954 Other Expenses Interest expense (244,593 ) - (244,593 ) Finance costs (13,334 ) - (13,334 ) Total Other Expenses (257,927 ) - (257,927 ) Income Before Income Tax Provision 791,027 - 791,027 Income Tax Provision (159,480 ) - (159,480 ) Net Income $ 631,547 $ - $ 631,547 NOTE 3 - LIQUIDITY The Company reported net loss of approximately $2.9 million for the fiscal year ended March 31, 2020 as compared to net income of approximately $0.6 million for the fiscal year ended March 31, 2019. In August 2019, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped by the factory. As a result we incurred a loss in cash flow of approximately $1.6 million in revenue and approximately $0.8 million in additional out of pocket expenses to retrieve, inspect, warehouse and properly destroy the goods. As of July 10, 2020 we have recovered approximately $2.3 million from our cargo insurance coverage and secured vendor invoice credits of $0.4 million from the factory that caused the damage. The Company’s inventory also increased by approximately $1.5 million due to overstock returns as well as excess inventory of the new Carpool Karaoke product. On June 16, 2020, the Company executed the Intercreditor Revolving Credit Facility on eligible accounts receivable and inventory. The Company signed a two-year Loan and Security Agreement for a $10,000,000 financing facility with Crestmark on eligible accounts receivable. Further, the Company also executed a two-year Loan and Security Agreement with Iron Horse for up to $2,500,000 in inventory financing. The Intercreditor Revolving Loan Facility expire on June 15, 2022. The Company has adequate cash on hand and cash available on its Intecreditor Revolving Credit Facility, approximately $1.4 million as of the date of this filing, to meet all obligations during this off-peak season. Management is confident that the availability of cash from our Intercreditor Revolving Credit Facility and our projections to reduce excess inventory during the next year will be adequate to meet the Company’s liquidity requirements for at least the next twelve months. NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its Macau Subsidiary, SMC-L, and SMC-M. All inter- company accounts and transactions have been eliminated in consolidation for all periods presented. USE OF ESTIMATES The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. Howeve circumstances could change which may alter future expectations. COLLECTABILITY OF ACCOUNTS RECEIVABLE The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100% reserves for customers in bankruptcy and other allowances based upon historical collection experience. The Company is subject to chargebacks from customers for cooperative marketing programs, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations. F- 8 FOREIGN CURRENCY TRANSLATION The functional currency of the Macau Subsidiary is the Hong Kong dollar. The financial statements of the subsidiary are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are recorded in the consolidated statement of operations and translations would be recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented. CONCENTRATION OF CREDIT RISK At times, the Company maintains cash in United States bank accounts that are in excess of the Federal Deposit Insurance Corporation insured amounts. The Company maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at March 31, 2020 and 2019 were approximately $0.2 million. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. INVENTORY Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs. As of March 31, 2020 and March 31, 2019 the estimated amounts for these future inventory returns were approximately $1.4 million and $0.6 million, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of March 31, 2020 and 2019 the Company had inventory reserves of approximately and $0.4 million and $0.3 million, respectively for estimated excess and obsolete inventory. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with FASBASC 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods. FAIR VALUE OF FINANCIAL INSTRUMENTS We follow FASB ASC 825, Financial Instruments, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, refunds due to customers, and due to/from related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the bank term note payable, the subordinated debt to Starlight Marketing Development, Ltd. (related party) and finance leases approximate fair value either due to the relatively short period to maturity or the related interest is accrued at a rate similar to market rates. The carrying amounts on the revolving line of credit approximates fair value due the relatively short period to maturity and related interest accrued at market rates. REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS The Company recognizes revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers. The Company recognizes revenue when the goods are delivered and control of the goods sold is transferred to the customer, in an amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods at a point in time. The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation. The Company’s contracts with customers consist of one performance obligation (the sale of the Company’s products). The Company’s contracts have no financing elements, payment terms are less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods. F- 9 The Company selectively participates in a retailer’s co-op promotion initiatives to maximize sales of the Company’s products on the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded as a reduction to net sales. Co-op promotion allowances were approximately $2.9 million during fiscal 2020 and $2.3 million during fiscal 2019. Costs incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods are included in general and administrative expenses, in-bound freight costs are included in the cost of goods sold and accrued sales representative commissions are included in selling expenses in the accompanying consolidated statements of operations as our underlying customer agreements are less than one year. The Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments (See NOTE 11). While the Company generally does not allow products to be returned, the Company does provide for variable consideration contingent upon the occurrence of uncertain future events. Variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company estimates variable consideration under our return allowance programs for goods returned to the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates. The Company’s reserve for sales returns were approximately $1.2 million and $0.9 million as of March 31, 2020 and March 31, 2019, respectively. During fiscal 2020 and 2019 revenue was derived from five different major product lines. Disaggregated approximate revenue from these product lines consisted of the following: Fiscal Years Ended March 31, 2020 March 31, 2019 (as restated) (as restated) Product Line Classic Karaoke Machines $ 27,200,000 $ 23,900,000 Download Karaoke Machines 5,400,000 12,400,000 SMC Kids Toys 900,000 4,000,000 Licensed products 2,000,000 - Music and Accessories 3,000,000 3,900,000 Total Net Sales $ 38,500,000 $ 44,200,000 SHIPPING AND HANDLING COSTS Shipping and handling costs are performed by both the Company and third party logistics companies. Shipping and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to fulfill the Company’s promise to transfer the goods. For Fiscal 2020 and 2019 shipping and handling expenses were approximately $1.2 million and $0.9 million. These expenses are classified as a component of selling expenses in the accompanying consolidated statements of operations. STOCK-BASED COMPENSATION The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense in fiscal years 2020 and 2019 includes the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the years ended March 31, 2020 and 2019, the stock option expense was approximately $20,000 and $52,000, respectively. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. ● For the year ended March 31, 2020: expected dividend yield 0%, risk-free interest rate of 2.08% , volatility of 194.50% and expected term of three years. ● For the year ended March 31, 2019: expected dividend yield 0%, risk-free interest rate of 2.08% , volatility of 216.33% and expected term of three years. The Company’s directors were issued shares of stock as compensation for their service. For the years ended March 31, 2020 and 2019, the stock compensation expense to directors was $12,500. F- 10 RESEARCH AND DEVELOPMENT COSTS All research and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative expenses in the consolidated statements of operations. For the years ended March 31, 2020 and 2019, these amounts totaled approximately $0.1 million. INCOME TAXES The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of March 31, 2020 and 2019, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions. ADOPTION OF NEW ACCOUNTING STANDARDS In February 2016, the FASB issued ASU 2016-02, Topic 842, as amended, “Leases”. The ASU requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. On April 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its disclosures for the comparative periods. (See Note 8– COMMITMENTS AND CONTINGENCIES - LEASES). The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right- of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases. RECENT ACCOUNTING PRONOUNCEMENTS: In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740). Among several issues addressed in this ASU, there was one area that may potentially affect the Company’s calculations of interim income tax provision or benefit. The guidance specifies that an entity should apply the annual effective tax rate to the year-to date income or loss as long as the tax benefits for any losses are expected to be realized during the year or would be recognizable as a deferred tax asset at the end of the year eliminating the requirement of a valuation allowance for that interim period. There is specific guidance for circumstances in which an entity incurs a loss on a year-to-date basis that exceeds the anticipated ordinary loss for the year, which is an exception to the general guidance in Subtopic 740-270. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures. F- 11 In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses” (Topic 326) . This ASU represents a significant change in the current accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which delayed recognition of expected losses that might not yet have met the threshold of being probable. The amendments in ASU 2016-03 for smaller reporting companies are effective for fiscal years beginning after April 1, 2023 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures. NOTE 5 – INVENTORIES, NET Inventories are comprised of the following components: March 31, 2020 March 31, 2019 Finished Goods $ 6,595,980 $ 5,679,245 Inventory in Transit 72,607 - Estimated Amount of Future Returns 1,366,690 599,066 Subtotal 8,035,277 6,278,311 Less: Inventory Reserve 434,000 254,000 Total Inventories $ 7,601,277 $ 6,024,311 NOTE 6 - PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: USEFUL LIFE MARCH 31, 2020 MARCH 31, 2019 Computer and office equipment 5-7 years $ 444,935 $ 140,575 Furniture and fixtures 7 years 98,410 98,410 Warehouse equipment 7 years 195,401 209,419 Molds and tooling 3-5 years 1,680,023 1,466,837 2,418,769 1,915,241 Less: Accumulated depreciation 1,647,420 1,392,331 $ 771,349 $ 522,910 Depreciation expense for fiscal years ended 2020 and 2019 was approximately $0.3 million. NOTE 7 – BANK FINANCING Revolving Credit Facility PNC Bank On June 22, 2017, the Company renewed the existing revolving credit facility (the “Revolving Credit Facility”) with PNC Bank, National Association (“PNC”) for an additional three years which was terminated on June 16, 2020. The outstanding loan balance could not exceed $15.0 million during peak selling season between August 1 and December 31 and was reduced to a maximum of $7.5 million between January 1 and July 31. At March 31, 2020 there was no amount due on the Revolving Credit Facility. Usage under the Revolving Credit Facility could not exceed the sum of the following (the “Borrowing Base”): ● Up to 70% of the Company’s eligible domestic and Canadian accounts receivable aged less than 90 days past due as defined plus ● Up to the lesser of (a) 60% of the cost of eligible inventory or (b) 85% of net orderly liquidation value percentage of eligible inventory (annual inventory appraisals required); minus ● Applicable reserves including a dilution reserve equal to 100% of the Company’s co-op promotion expense and return accrual reserves. ● Dilution reserve not to exceed availability generated from eligible accounts receivable. The Revolving Credit Facility included the following sub-limits: ● Letters of Credit to be issued limited to $3.0 million. ● Inventory availability limited to $5.0 million. ● $0.5 million eligible in-transit inventory sublimit within the $5.0 million total inventory. ● Mandatory pay-down to $1.0 million (excluding letters of credit) for any 30 consecutive days between February 1 and April 30. The Revolving Credit Facility had to comply with the following quarterly financial covenants to avoid default: ● Fixed charge coverage ratio test as defined. ● Capital expenditures limited to approximately $0.4 million per year. F- 12 As of September 30, 2019 the Company defaulted on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and expenses associated with the damaged goods discussed above. In November 2019, the Company entered into a Forbearance Agreement with PNC Bank National Association (“PNC”) whereby PNC delayed taking action it would have been be entitled to under a default through March 31, 2020. The Forbearance Agreement required, among other matters, the Company to comply with certain conditions and covenants including the following: ● PNC implemented a $1,000,000 loan availability block. ● PNC required EBITDA hurdles of greater than or equal to $400,000 for the third quarter ending December 31, 2019, of $0 for the six months ending March 31, 2020 and $(83,000) for the twelve months ending March 31, 2020. ● PNC charged a loan pricing increase of .5% until March 31, 2020 which continued until termination of Revolving Credit Facility. The Company remained in default of the forbearance agreement up until termination of the Revolving Credit Facility on June 16, 2020 at which time the Company entered into the Intercreditor Revolving Credit Facility with Crestmark and Iron Horse. Prior to the Forbearance Agreement interest on the Revolving Line of Credit was accrued at .75% per annum over PNC’s announced prime rate with an option for the Company to elect the 1, 2 or 3 month fully absorbed PNC LIBOR Rate plus 2.75% per annum with a default rate of 2% over the applicable rate. Upon execution of the Forbearance Agreement there was a pricing rate increase of .5% on the .75% per annum rate and the PNC LIBOR Rate plus 2.75%. There was an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which was calculated on the basis of a 360 day year for the actual number of days elapsed and will be payable quarterly in arrears. During the twelve months ended March 31, 2020 and 2019 the Company incurred interest expense of approximately $0.1 million and $0.2 million, respectively, on amounts borrowed against the Revolving Credit Facility. During the twelve months ended March 31, 2020 and 2019, the Company incurred an unused facility fee of approximately $46,000 and $30,000, respectively on the unused portion of the Revolving Credit Facility. The Revolving Line of Credit was secured by first priority security interests in all of the named borrowers’ tangible and intangible assets as well as first priority security interests of 100% of member or ownership interests of any of its domestic existing or newly formed subsidiaries and first priority lien on up to 65% of the borrowers’ foreign subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility was also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $803,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and were amortized over the term of the agreement. During the fiscal years ended March 31, 2020 and 2019 the Company incurred amortization expense of approximately $13,000 associated with the amortization of deferred financing costs from the Revolving Credit Facility. Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit On June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility on eligible accounts receivable and inventory. The Company signed a two-year Loan and Security Agreement for a $10.0 million financing facility with Crestmark on eligible accounts receivable. The outstanding loan balance cannot exceed $10.0 million during peak selling season between July 1 and December 31and is reduced to a maximum of $5.0 million between January 1 and July 31. Under the Crestmark Bank Intercreditor Revolving Credit Line: ● Advance rate shall not exceed 70% of Eligible Accounts Receivable aged less than 90 days from invoice date. ● Crestmark shall maintain a base dilution reserve of 1% for each 1% of dilution over 15%. ● Crestmark will implement an availability block of 20% of amounts due on Iron Horse Intercreditor Revolving Line of Credit. ● Mandatory pay-down of the loan to zero in January and February each year. ● All financial covenants are waived throughout the agreement. The Crestmark Intercreditor Revolving Credit Facility is secured by a perfected security interest in all assets including a first security interest in Accounts Receivable and Inventory. Notwithstanding the foregoing, Crestmark shall subordinate its first security interest in inventory to Iron Horse as agreed between all parties. The Crestmark Intercreditor Revolving Credit Facility bears interest at the Wall Street Journal Prime Rate plus 5.50% with a floor of 8.75%. Interest and Maintenance Fees shall be calculated on the higher of the actual average monthly loan balance from the prior month or a minimum average loan balance of $2,000,000. The Crestmark Intercreditor Revolving Credit Facility expires on June 15, 2022. In addition, the Company also executed a two-year Loan and Security Agreement with Iron Horse for up to $2,500,000 in inventory financing. Under the Iron Horse Intercreditor Revolving Credit Line: ● Advance rate shall not exceed the lower of (a) 70% of the inventory cost or (b) 85% of Net Orderly Liquidation Value (NOLV) as determined by an independent third-party appraiser engaged by Iron Horse. ● The Company must maintain a fixed charge coverage ratio test of 1:1 times measured on a rolling 12-month basis, defined as EBITDA less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness. This financial covenant has been waived for the first six months of the Intercreditor Revolving Credit Line. F- 13 The Iron Horse Intercreditor Revolving Credit Facility is secured by a perfected security interest in the Company’s inventory. The Iron Horse Intercreditor Revolving Credit Facility bears interest at 1.292% per month or 15.51% annually. Interest shall be calculated on the higher of the actual average monthly loan balance from the prior month or a minimum average loan balance of $1,000,000. The Iron Horse Intercreditor Revolving Credit Facility expires on June 15, 2022. Term Note Payable In connection with the PNC Revolving Line of Credit, the agreement also included a two-year term note (“Term Note”) in the amount of $1.0 million. The Term Note bore interest at 1.75% per annum over PNC’s announced prime rate or 1, 2, or 3 month PNC LIBOR Rate plus 3.75%. The Term Note was payable in quarterly installments of $125,000 plus accrued interest with the first installment paid on August 1, 2017. At March 31, 2020 and 2019, the outstanding balance on the Term Note was approximately $0.0 million and $0.1 million, respectively. During the years ended March 31, 2020 and 2019 the Company incurred interest expense of approximately $0 and $22,000, respectively. Installment Notes Payable On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance a new ERP System project over a term of 60 months at a cost of approximately $0.4 million. Upon approval by Company management, Dimension released progress payments directly to the project vendor as specific project milestones were met. Progress payments were made to the vendor over a period of approximately nine months and the Company was charged financing costs only on the amounts released to the vendor. At the end of each quarter, progress payments made to the vendor were converted to installment notes. As of March 31, 2020 the Company executed two installment notes totaling approximately $0.3 million for payments issued to the project vendor. The installment notes have 60 month terms with interest rates of 7.58% and 9.25%, respectively. The installment notes are payable in monthly installments of $5,785 which include principal and interest. As of March 31, 2020 there was an outstanding balance on the installment notes of approximately $0.3 million. For the year ended March 31, 2020 the Company incurred interest expense of approximately $23,000. In April 2020 the Company executed a third installment note in the amount of approximately $0.1 million for the remaining amounts payable to the project vendor. The third installment has 60 month payment terms and bears interest at 8.55%. Initial monthly payments of $1,674 commenced on April 1, 2020. Subordinated Debt/Note Payable to Related Party The subordination agreement was previously amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision was also made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum commencing September 30, 2017 and ending on the debt maturity date of June 30, 2019. Payments of $123,000 were only permitted upon receipt of the Company’s quarterly compliance certificate; the Company having met the mandatory pay-down of the Revolving Credit Facility to $1,000,000 and average excess availability for the prior 30 days (after subtraction of third party trade payables 30 days or more past due) of no less than $1,000,000 after giving effect to the payment. As part of the Conditions to Installment Payment of the subordinated debt, payments not made under this note that could be made as a result of the foregoing prohibition, including payments after the scheduled maturity date, were not be deemed an Event of Default and could made as soon as the Company was able to demonstrate that it met the liquidity requirements defined above. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter have not been made since September 2017 due to the Company not meeting these requirements. A payment of $25,000 was made in August 2019 with approximately $12,500 paying down the principal and approximately $12,500 paying interest due. On June 1, 2020 the remaining amount due on the subordinated debt of approximately $803,000 was converted to a note payable which bears interest at 6%. As part of the agreement to convert the subordinated debt to a note payable it was agreed that interest expense would be accrued on the unpaid principal retroactively from the date that scheduled payments had been missed resulting in an incremental charge to interest expense of approximately $72,000 for the Fiscal 2020. During the fiscal years ended March 31, 2020 and 2019 interest expense was approximately $74,000 and $21,000, respectively on the related party subordinated debt. In connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the note payable (“subordinated note payable”) to Starlight Marketing Development, Ltd. Both Crestmark and Iron Horse agreements allow for the repayment of the subordinated note payable provided any amounts borrowed against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity to support on-going operations. There is no set schedule with regards to repayment of the note and as such the subordinated note payable has been classified a non-current liability for the year ended March 31, 2020 on the consolidated balance sheets. As of March 31, 2019 the remaining amount due on the subordinated debt was approximately $815,000 and was classified as a current liability on the consolidated balance sheets. NOTE 8 - COMMITMENTS AND CONTINGENCIES LEGAL MATTERS On or about February 4, 2020 Singing Machine was named in a product liability complaint alongside Target and Energizer Brands in the state of Missouri. It is alleged by the Plaintiff, an individual, that one of Singing Machine’s karaoke products injured the plaintiff while she was operating the product from battery power. Plaintiff alleges her injury occurred when battery acid leaked from the karaoke product. The plaintiff purchased the karaoke machine at Target and operated the karaoke machine with Energizer batteries. Plaintiff is suing both Singing Machine and Energizer because she is unsure whether the karaoke product or the batteries caused the battery acid leak. F- 14 The plaintiff alleges four counts of action against Singing Machine including strict product liability, negligence, breach of warranty, and failure to warn. Singing Machine has product liability insurance and the matter has been turned over the matter to insurance company’s counsel in defending the matter. The Company does not believe that the resolution of this matter is likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. As of August 12, 2020 management is not aware of any other legal proceedings other than matters that arise in the ordinary course of business. LEASES The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right- of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases. Operating Leases We have operating lease agreements for offices and a warehouse facility in Florida, California and Macau expiring in various years through 2024. We entered into an operating lease agreement, effective October 1, 2017, for the corporate headquarters located in Fort Lauderdale, Florida where we lease approximately 6,500 square feet of office space. The lease expires on March 31, 2024. The base rent payment is approximately $8,800 per month, subject to annual adjustments. We entered into an operating lease agreement, effective June 1, 2013, for 86,000 square feet of warehouse space in Ontario, California for our logistics operations. The lease expires on August 31, 2020 (original lease term of 87 months). The base rent payment is approximately $43,700 per month for the remaining term of the lease. On June 15, 2020 we executed a three-year lease extension which will expire on August 31, 2023. We entered into an operating lease agreement, effective May 1, 2018, for 424 square feet of office space in Macau. The rent is fixed at approximately $1,600 per month for the duration of the lease which expires on April 30, 2021. The lease provides for a renewal option to extend the lease. Lease expense for our operating leases is recognized on a straight-line basis over the lease terms. Finance Leases On May 25, 2018 and June 4, 2018, we entered into two long-term capital leasing arrangements with Wells Fargo Equipment Finance (“Wells Fargo”) to finance the leasing of two used forklift vehicles in the amount of approximately $44,000. The leases require monthly payments in the amount of $1,279 per month over a total lease term of 36 months which commenced on June 1, 2018. The agreement has an effective interest rate of 4.5% and the Company has the option to purchase the equipment at the end of the lease term for one dollar. As of March 31, 2020 and 2019 the remaining amounts due on these capital leasing arrangements was $18,000 and $32,000, respectively. For the fiscal years ended March 31, 2020 and 2019 the Company incurred interest expense of $894 and $1,155, respectively. F- 15 Supplemental balance sheet information related to leases as of March 31, 2020 is as follows: Assets: Operating lease - right-of-use assets $ 573,874 Finance leases as a component of property and equipment, net of accumulated depreciation of $11,918 31,608 Liabilities Current Current portion of operating leases $ 321,389 Current portion of finance leases 14,953 Noncurrent Operating lease liabilities, net of current portion $ 322,263 Finance leases, net of current portion 2,550 Supplemental statement of operations information related to leases for the fiscal year ended March 31, 2020 is as follows: Fiscal Year Ended March 31, 2020 Operating lease expense as a component of general and administrative expenses $ 534,456 Finance lease cost Depreciation of leased assets as a component of depreciation $ 6,218 Interest on lease liabilities as a component of interest expense $ 894 Supplemental cash flow information related to leases for the nine months ended March 31, 2020 is as follows: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow paid for operating leases $ 651,158 Financing cash flow paid for finance leases $ 14,410 Lease term and Discount Rate Weighted average remaining lease term (months) 29.6 Operating leases 14.0 Finance leases Weighted average discount rate Operating leases 6.25 % Finance leases 3.68 % Scheduled maturities of operating and finance lease liabilities outstanding as of March 31, 2020 are as follows: Fiscal Year Operating Leases Finance Leases 2021 $ 479,599 $ 15,347 2022 180,300 2,558 2023 179,117 - Total Minimum Future Payments 839,016 17,905 Less: Imputed Interest 195,364 402 Present Value of Lease Liabilities $ 643,652 $ 17,503 NOTE 9 – SHAREHOLDERS’ EQUITY COMMON STOCK ISSUANCES During the years ended March 31, 2020 and 2019 the Company issued the following common stock shares: Fiscal 2020: On August 30, 2019 the Company issued 60,000 shares of its common stock to a former director who exercised stock options at an average exercise price of $0.17 per share. On June 12, 2019, the Company issued 32,890 shares of its common stock to our Board of Directors at $0.38 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2020. Fiscal 2019: On March 31, 2019, the Company accrued a subscription receivable for 20,000 shares of its common stock to a former director who exercised stock options at an exercise price of $0.11 per share. The Company received payment of $2,200 in May 2019. On January 24, 2019, the Company issued 60,000 shares of its common stock to a current director who exercised stock options at an average exercise price of $.07 per share. The Company received payment of $4,000 in January 2019. F- 16 On August 3, 2018 the Company issued 80,000 shares of its common stock to a former director who exercised stock options at an average exercise price of $.08 per share. The Company received payment of $6,400 in January 2019. On August 1, 2018, the Company issued 22,725 shares of its common stock to our Board of Directors at $0.55 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2019. The value of this issuance was $12,500. EARNINGS PER SHARE In accordance with FASB ASC 210, “Earnings per Share”, basic earnings per share are computed by dividing the net earnings for the year by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing earnings for the year by the weighted average number of common shares outstanding including the effect of common stock equivalents. As of March 31, 2020 there were common stock equivalents to purchase 2,230,000 shares of common stock, none of which were included in the computation of diluted earnings per share because their effect on earnings per share would be anti-dilutive. For the fiscal year ended March 31, 2019 there were common stock equivalents to purchase 2,210,000 shares of common stock of which 1,630,000 were included in the computation of diluted earnings per share. STOCK OPTIONS On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan (“Plan”), as amended. The Plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. As of March 31, 2020, the Plan had expired and no shares were available to be issued nor were any additional shares issued from the plan in Fiscal 2020 or 2019. A summary of stock option activity for each of the years presented is summarized below. The following table summarizes information about employee stock options outstanding at March 31, 2020: Fiscal 2020 Fiscal 2019 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Stock Options: Balance at beginning of year 2,210,000 $ 0.25 2,330,000 $ 0.22 Granted 100,000 $ 0.38 100,000 $ 0.55 Exercised (60,000 ) $ 0.17 (160,000 ) $ 0.08 Forfeited (20,000 ) $ 0.03 (60,000 ) $ 0.11 Balance at end of year * 2,230,000 $ 0.26 2,210,000 $ 0.25 Options exercisable at end of year 2,130,000 $ 0.25 2,110,000 $ 0.15 The following table summarizes information about employee stock options outstanding at March 31, 2020: Range of Exercise Price Number Outstanding at March 31, 2020 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable at March 31, 2020 Weighted Average Exercise Price $0.04 - $0.38 1,650,000 4.3 $ 0.13 1,550,000 $ 0.16 $0.47 - $0.55 580,000 7.4 $ 0.50 580,000 $ 0.50 * 2,230,000 2,130,000 * Total number of options outstanding as of March 31, 2020 includes 1,080,000 options issued to five current and two former directors as compensation and 1,150,000 options issue to key employees that were not issued from the Plan. NOTE 10 - INCOME TAXES The Company files separate tax returns in the United States and in Macau. The Macau Subsidiary has received approval from the Macau government to operate its business as a Macau Offshore Company (MOC), and is exempt from the Macau income tax. For the fiscal years ended March 31, 2020 and 2019, the Macau Subsidiary recorded no tax provision. The U.S. Federal net operating loss carryforward is subject to an IRS Section 382 limitation. As of March 31, 2020 and 2019, the Company had net deferred tax assets of approximately $1.3 million and $0.8 million, respectively. For the fiscal year ended March 31, 2020 we determined our effective tax rate to be approximately 18.1% and we recorded a tax benefit of approximately $0.6 million which was net of a valuation reserve of approximately $0.1 million for deferred tax assets that will most likely expire prior to the Company’s ability to realize them. For the fiscal year ended March 31, 2019 we determined our effective tax rate to be approximately 20.1% and we recorded a tax provision of approximately $0.2 million. The Company also recorded an income tax receivable of approximately $0.1 million due to the availability of net operating loss carrybacks and alternative minimum tax credits that were realized for the year ended March 31, 2020. The income tax receivable was included as a component of prepaid expenses and other current assets on the accompanying consolidated balance sheet as of March 31, 2020. F- 17 The income tax(benefit) provision for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components for 2020 and 2019: 2020 2019 Income tax benefit: Current: Federal $ (104,437 ) $ (19,289 ) State - - Total current Federal and State tax benefit $ (104,437 ) $ (19,289 ) Deferred: Federal $ (521,776 ) $ 159,881 State $ (15,601 ) $ 18,888 Total Deferred Federal and State $ (537,377 ) $ 178,769 Total income tax (benefit) provision $ (641,814 ) $ 159,480 The United States and foreign components of income (loss) before income taxes are as follows: 2020 2019 United States $ (3,765,272 ) $ 607,652 Foreign 266,458 183,375 $ (3,498,814 ) $ 791,027 The actual tax provision differs from the “expected” tax expense for the years ended March 31, 2020 and 2019 (computed by applying the U.S. Federal Corporate tax rate of 21 percent to income before taxes) as follows: 2020 2019 Expected tax (benefit) expense $ (734,751 ) $ 166,506 State income taxes, net of Federal income tax (benefit) provision (175,245 ) 13,478 Permanent differences 9,977 8,282 Deemed dividend from foreign subsidiary - 20,813 Tax rate differential on foreign earnings - (20,813 ) Change in valuation allowance 87,842 - Effect of IRC §382 on NOL 100,966 - Tax rate differential on NOL carryback 16,263 - Correction of state rate 83,803 - Other (30,669 ) (28,786 ) Actual tax (benefit) provision $ (641,814 ) $ 159,480 F- 18 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows: 2020 2019 NOL Federal Carryforward $ 312,430 $ 236,476 State NOL Carryforward 157,967 272,758 AMT credit carryforward - 19,289 General business credit 14,196 - Inventory differences 303,529 176,967 Stock option compensation expense 128,220 109,464 Stock warrants - 23,018 Allowance for doubtful accounts 143,748 11,599 Insurance contingency 220,425 - Reserve for estimated returns 112,537 67,439 Accrued vacation 42,928 7,945 Business interest deduction 55,978 - 1,491,958 924,955 Less: valuation allowance (87,842 ) - $ 1,404,116 $ 924,955 Depreciable and amortizable assets (82,512 ) (108,707 ) Prepaid expenses (35,883 ) (57,882 ) Net deferred tax liability (118,395 ) (166,589 ) Net deferred tax asset $ 1,285,721 $ 758,366 The Company performed an analysis in accordance with the provisions of ASC 740, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. The analysis performed to assess the realizability of the deferred tax assets included an evaluation of the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable federal and state laws; and the amount and timing of future taxable income. At March 31, 2020, the Company evaluated the realizability of its deferred tax assets in accordance with GAAP and concluded that a $87,842 valuation allowance against deferred tax assets was necessary. The recognition of the remaining net deferred tax asset and corresponding tax benefit is based upon the Company’s conclusions regarding, among other considerations, the Company’s history of earnings and projected earnings for fiscal year 2021 and in the future. At March 31, 2020, the Company has federal tax net operating loss carryforwards in the amount of approximately $1.7 million that begin to expire in the year 2025. $1.1 million of the net operating loss carryforward is subject to an IRS Section 382 limitation that limits the amount available to use beginning in Fiscal 2020 to approximately $0.15 million per year. In addition the Company has state tax net operating loss carryforwards of approximately $2.0 million that will begin to expire beginning in 2024. The Company is no longer subject to income tax examinations for fiscal years before 2017. NOTE 11 - SEGMENT INFORMATION The Company operates in one segment. Sales by geographic region for the period presented are as follows: FOR THE FISCAL YEARS ENDED March 31, 2020 March 31, 2019 (as restated) (as restated) North America $ 36,001,200 $ 40,134,521 Europe 1,653,127 3,723,913 Asia 336,000 - Australia 510,243 286,979 South Africa - 44,201 Others - 8,554 Total Net Sales $ 38,500,570 $ 44,198,168 The geographic area of sales is based primarily on where the product was delivered. NOTE 12 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the fiscal years ended March 31, 2020 and 2019 totaled approximately $63,000 and $70,000, respectively. The amounts are included as a component of general and administrative expense in the accompanying Consolidated Statements of Operations. The Company does not provide any post-employment benefits to retirees. F- 19 NOTE 13 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, AND SUPPLIERS The Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At March 31, 2020, 82% of accounts receivable were due from four customers in North America that individually owed over 10% of total accounts receivable. At March 31, 2019, 62% of accounts receivable were due from two customers in North America. Revenues derived from three customers in 2020 and 2019 were 64% and 65% of net sales, respectively. Revenues from customers representing greater than 10% of net sales were derived from our top three customers in 2020 and 2019 as percentage of net sales were 41%, 13% and 10% and 40%, 13% and 12%, respectively. The loss of any of these customers could have an adverse impact on the Company. Net sales derived from the Macau Subsidiary aggregated approximately $5.1 million and $7.6 million in fiscal 2020 and 2019, respectively. The Company is dependent upon foreign companies for the manufacture of all of its electronic products. The Company’s arrangements with manufacturers are subject to the risk of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. During fiscal years 2020 and 2019, manufacturers in the People’s Republic of China accounted for 100% of the Company’s total product purchases, including all of the Company’s hardware purchases. In 2018 the U.S. government imposed tariffs of up to 25% on certain goods imported from China. All of our products are manufactured and imported from China however, only our microphones are currently subject to a 7.5% tariff currently in place. Should the government decide to expand its list of products to include our karaoke products that would subject our products to tariffs in the future, there could be a significant increase in the landed cost of our products. If we are unable to mitigate these increased costs through price increases, we could experience reductions in revenues, gross profit margin and results from operations. NOTE 14 – RELATED PARTY TRANSACTIONS DUE TO/FROM RELATED PARTIES On March 31, 2020 the Company had approximately $0.5 million due to related parties for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by the parent company. On March 31, 2019, the Company had approximately $0.3 million due from related parties for goods and services sold these companies. TRADE During Fiscal 2020 and 2019 the Company paid approximately $0.4 million to Starlight Electronics Company, Ltd (“SLE”) as reimbursement for engineering, quality control and other administrative services performed on our behalf in China. These expense reimbursements were included in general and administrative expenses on our consolidated statements of operations. During Fiscal 2020 and 2019 the Company sold approximately $0.9 million and $1.2 million, respectively of product to Winglight Pacific, Ltd. (“Winglight”) a related company, for direct shipment to Cosmo Communications of Canada, Ltd (“Cosmo”), another related company, at discounted pricing granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Winglight for Fiscal 2020 and 2019 was 23.7% and 30.1%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of operations. During Fiscal 2020 and 2019 the Company sold approximately $0.3 million and $0.4 million, respectively of product to Cosmo from our California warehouse facility. These goods were sold at a discounted price, similar to prices granted to major direct import customers shipped internationally with freight prepaid. The average gross profit margin on sales to Cosmo yielded 26.6% and 22.5%, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of operations. On July 30, 2020 the Company and Cosmo reached agreement that Cosmo would no longer be the Company’s Canadian distributor and the Company became the sole and exclusive distributor of the Company’s products in Canada. As part of the agreement, the companies executed a Purchase and Sale agreement whereby the Company acquired all of Cosmo’s karaoke inventory for approximately $0.7 million. F- 20 NOTE 15– RESERVE FOR SALES RETURNS A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are either allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months) or granted a “defective allowance” consisting of a fixed percentage (between 1% and 5%) off of invoice price in lieu of returning defective products. The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates. The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the consolidated balance sheets. Changes in the Company’s reserve for sales returns are presented in the following table: Fiscal Year Ended March 31, 2020 March 31, 2019 Reserve for sales returns at beginning of the fiscal year $ 896,154 $ 726,000 Provision for estimated sales returns 5,770,436 3,997,946 Sales returns received (5,442,590 ) (3,827,792 ) Reserve for sales returns at end of the year $ 1,224,000 $ 896,154 NOTE 16 – REFUNDS DUE TO CUSTOMERS As of March 31, 2020 and 2019 the amount of refunds due to customers was approximately $807,000 and $31,000, respectively Refunds due to customers at March 31, 2020 were primarily due to one major customer which reflects approximately $1,691,000 of chargebacks less approximately $1,181,000 that the customer had deducted on payment remittances to the Company as of March 31, 2020. The remaining $297,000 is primarily due to amounts due to two major customers for overstock returns. (See Note 3 – LIQUIDITY). NOTE 17 – RESERVES Asset reserves and allowances for years ended March 31, 2020 and 2019 are presented in the following table: Description Balance at Beginning of Year Charged to Costs and Expenses Reduction to Allowance for Write off Credited to Costs and Expenses Balance at End of Year Year ended March 31, 2020 Reserves deducted from assets to which they apply: Allowance for doubtful accounts $ 51,096 $ 303,843 $ (15,303 ) $ (2,175 ) $ 337,461 Inventory reserve $ 254,000 $ 398,730 $ (218,730 ) $ - $ 434,000 Year ended March 31, 2019 Reserves deducted from assets to which they apply: Allowance for doubtful accounts $ 82,102 $ 411,862 $ (31,200 ) $ (411,668 ) $ 51,096 Inventory reserve $ 280,000 $ 100,000 $ (44,220 ) $ (81,780 ) $ 254,000 NOTE 18 – SUBSEQUENT EVENT On May 5, 2020, the Company received loan proceeds from Crestmark Bank in the amount of approximately $0.4 million under the Paycheck Protection Program (“PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable to the extent the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness may be reduced if the borrower terminates employees or reduces salaries during the eligible period. The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company currently expects to apply for forgiveness of the entire loan balance. F- 21