Algorhythm Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2021 March 31, 2021 (unaudited) Assets Current Assets Cash $ 1,383,230 $ 396,579 Accounts receivable, net of allowances of $ 126,156 and $ 138,580 , respectively 5,562,834 2,298,922 Due from Crestmark Bank 342,706 4,557,120 Inventories, net 8,370,101 5,490,255 Prepaid expenses and other current assets 190,708 221,071 Deferred financing costs 35,938 15,359 Total Current Assets 15,885,517 12,979,306 Property and equipment, net 661,416 674,153 Deferred tax assets 915,259 887,164 Operating Leases - right of use assets 1,892,923 2,074,115 Other non-current assets 94,952 147,173 Total Assets $ 19,450,067 $ 16,761,911 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 6,262,655 $ 2,461,103 Accrued expenses 1,377,061 1,659,499 Due to related party - Starlight Consumer Electronics Co., Ltd. 14,400 14,400 Due to related party - Starlight R&D, Ltd. 48,650 48,650 Revolving line of credit - Iron Horse Credit 364,915 64,915 Customer deposits 19,328 139,064 Refunds due to customers 93,585 145,408 Reserve for sales returns 749,691 960,000 Current portion of finance leases - 2,546 Current portion of installment notes 69,777 68,332 Current portion of note payable - Paycheck Protection Program - 172,685 Current portion of operating lease liabilities 827,238 794,938 Subordinated related party debt - Starlight Marketing Development, Ltd. 502,659 502,659 Total Current Liabilities 10,329,959 7,034,199 Installment notes, net of current portion 194,954 212,949 Note payable - Payroll Protection Program, net of current portion - 271,215 Operating lease liabilities, net of current portion 1,124,325 1,334,010 Total Liabilities 11,649,238 8,852,373 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; 39,060,748 and 39,040,748 shares issued and outstanding, respectively 390,607 390,407 Additional paid-in capital 19,783,026 19,773,322 Accumulated deficit ( 12,372,804 ) ( 12,254,191 ) Total Shareholders’ Equity 7,800,829 7,909,538 Total Liabilities and Shareholders’ Equity $ 19,450,067 $ 16,761,911 See notes to the condensed consolidated financial statements 3 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS June 30, 2021 June 30, 2020 For the Three Months Ended June 30, 2021 June 30, 2020 Net Sales $ 6,065,650 $ 3,051,983 Cost of Goods Sold 4,487,780 2,089,531 Gross Profit 1,577,870 962,452 Operating Expenses Selling expenses 577,982 298,993 General and administrative expenses 1,421,352 1,363,290 Depreciation 68,271 71,107 Total Operating Expenses 2,067,605 1,733,390 Loss From Operations ( 489,735 ) ( 770,938 ) Other Income (Expenses) Gain from Payroll Protection Plan loan forgiveness 448,242 - Gain - related party 11,236 - Gain from damaged goods insurance claim - 131,292 Gain from extinguishment of accounts payable - 390,000 Interest expense ( 99,529 ) ( 29,590 ) Finance costs ( 16,922 ) ( 6,405 ) Total Other Income (Expenses), net 343,027 485,297 Loss Before Income Tax Benefit ( 146,708 ) ( 285,641 ) Income Tax Benefit 28,095 78,837 Net Loss $ ( 118,613 ) $ ( 206,804 ) Net Loss per Common Share Basic and Diluted $ ( 0.00 ) $ ( 0.01 ) Weighted Average Common and Common Equivalent Shares: Basic and Diluted 39,050,638 38,557,643 See notes to the condensed consolidated financial statements 4 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS June 30, 2021 June 30, 2020 For the Three Months Ended June 30, 2021 June 30, 2020 Cash flows from operating activities Net Loss $ ( 118,613 ) $ ( 206,804 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 68,271 71,107 Amortization of deferred financing costs 16,922 6,405 Change in inventory reserve - 32,696 Change in allowance for bad debts ( 12,424 ) ( 37,522 ) Stock based compensation 5,104 - Change in net deferred tax assets ( 28,095 ) ( 78,837 ) Payroll Protection Plan loan forgiveness ( 448,242 ) - Gain - related party ( 11,236 ) - Gain from extinguishment of accounts payable - ( 390,000 ) Changes in operating assets and liabilities: Accounts receivable ( 3,251,488 ) 124,722 Due from Crestmark Bank 4,214,414 2,120,774 Accounts receivable - related parties - 100,000 Insurance receivable - 1,268,463 Inventories ( 2,879,846 ) 698,361 Prepaid expenses and other current assets 30,363 38,316 Other non-current assets 52,221 36,087 Accounts payable 3,812,788 ( 2,133,123 ) Accrued expenses ( 278,096 ) ( 521,007 ) Due to related parties - ( 100,000 ) Customer deposits ( 119,736 ) - Refunds due to customers ( 51,823 ) ( 415,387 ) Reserve for sales returns ( 210,309 ) ( 843,817 ) Operating lease liabilities, net of operating leases - right of use assets 3,807 ( 14,460 ) Net cash provided by (used in) operating activities 793,982 ( 244,026 ) Cash flows from investing activities Purchase of property and equipment ( 55,534 ) ( 45,314 ) Net cash used in investing activities ( 55,534 ) ( 45,314 ) Cash flows from financing activities Net Proceeds from revolving lines of credit 300,000 1,400,000 Proceeds from note payable - Payroll Protection Program - 444,630 Payment of deferred financing charges ( 37,501 ) ( 73,725 ) Payments on installment notes ( 16,550 ) ( 18,481 ) Proceeds from exercise of stock options 4,800 - Payments on finance leases ( 2,546 ) ( 3,691 ) Net cash provided by financing activities 248,203 1,748,733 Net change in cash 986,651 1,459,393 Cash at beginning of year 396,579 345,200 Cash at end of period $ 1,383,230 $ 1,804,593 Supplemental disclosures of cash flow information: Cash paid for interest $ 125,456 $ 12,971 Operating leases - right of use assets and lease liabilities at inception of lease $ 16,364 $ 2,184,105 See notes to the condensed consolidated financial statements 5 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the three months ended June 30, 2021 and 2020 Shares Amount Shares Amount Capital Deficit Total Preferred Stock Common Stock Additional Paid in Accumulated Shares Amount Shares Amount Capital Deficit Total Balance at March 31, 2021 - $ - 39,040,748 $ 390,407 $ 19,773,322 $ ( 12,254,191 ) $ 7,909,538 Net loss ( 118,613 ) ( 118,613 ) Employee compensation-stock option - - 5,104 - 5,104 Exercise of stock options - 20,000 200 4,600 4,800 Balance at June 30, 2021 - $ - 39,060,748 $ 390,607 $ 19,783,026 $ ( 12,372,804 ) $ 7,800,829 Balance - $ - 38,557,643 $ 385,576 $ 19,729,043 $ ( 14,426,556 ) $ 5,688,063 Balance at March 31, 2020 - $ - 38,557,643 $ 385,576 $ 19,729,043 $ ( 14,426,556 ) $ 5,688,063 Net loss - - - - ( 206,804 ) ( 206,804 ) Balance at June 30, 2020 - $ - 38,557,643 $ 385,576 $ 19,729,043 $ ( 14,633,360 ) $ 5,481,259 Balance - $ - 38,557,643 $ 385,576 $ 19,729,043 $ ( 14,633,360 ) $ 5,481,259 See notes to the condensed consolidated financial statements 6 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) 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. (“SMCL”) and SMC-Music, Inc. (“SMCM”), 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. We do business with a number of entities that are principally owned by the Company’s former Chairman, Philip Lau , including Starlight R&D Ltd (“SLRD”), Starlight Consumer Electronics USA, Inc., (“SCE”), Cosmo Communications Corporation of Canada, Inc. (“Cosmo”), Winglight Pacific, Ltd (“Winglight”) and Starlight Electronics Company Ltd (“SLE”), among others. NOTE 2 – LIQUIDITY The Company reported a net loss of approximately $ 119 ,000 for the three months ended June 30, 2021 as compared to a net loss of approximately $ 207 ,000 for the three months ended June 30, 2020. In May, 2020, the Company received loan proceeds from Crestmark Bank in the amount of approximately $ 444,000 under the Paycheck Protection Program (“PPP”) established by the government to assist companies with financial relief due to COVID-19. The Company used the loan proceeds for loan forgiveness eligible purposes, including payroll, benefits, rent and utilities, and maintained its existing payroll levels during the forgiveness eligible period. In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety. For the three months ended June 30, 2021, a gain of approximately $448,000 (including principal and interest) from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of operations. On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts International Limited (“Koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to which the Company agreed to redeem approximately 19,623,155 shares of common stock of the Company (the “Redeemed Shares”). The closing of the transactions set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the Company and the Company wired approximately $ 7,162,000 to Koncepts and Treasure Green. The Redeemed Shares shall be retired to treasury and shall become available for reissuance in the future. On August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and a strategic investor for private placement of (i) 16,500,000 shares of its common stock (the “Shares”) together with common warrants to purchase up to 16,500,000 shares of common stock for an exercise price of $ 0.35 per share, and (ii) 16,833,333 pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $ 0.01 per share, together with Common Warrants to purchase up to 16,833,333 shares of common stock at an exercise price of $ 0.35 per share (the “Private Placement”). Shares issuable upon the exercise of the Pre-Funded Warrants and Common Warrants are hereinafter referred to as the “Warrant Shares”. The closing of the Private Placement took place on August 10, 2021, when the Shares, Common Warrants, and Pre-Funded Warrants were delivered to the purchasers and funds, in the amount of approximately $ 9,800,000 , were wired to the Company. Approximately $ 7,200,000 of the funds received were used to execute the Redemption Agreement. The Company expects an increase in working capital of approximately $ 1,800,000 of working capital after settlement of expenses associated with closing of these transactions. We believe that current working capital, the availability of cash from our Intercreditor Revolving Credit Facility (See Note 6 – Bank Financing), additional working capital generated by the private placement and cash generated from our operating forecast will be adequate to meet the Company’s liquidity requirements for at least the next twelve months. We believe the Intercreditor Revolving Credit Facility will be adequate to maintain and grow our business during the remaining term of the agreement. As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms. NOTE 3 - SUMMARY OF ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements. The accompanying unaudited financial statements for the three months ended June 30, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. 7 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) The condensed consolidated balance sheet information as of March 31, 2021 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2021. The interim condensed consolidated financial statements should be read in conjunction with that report. 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. However, 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. 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. The Company is subject to chargebacks from customers for co-op program incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. 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 condensed consolidated statement of operations and translations are 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 more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at June 30, 2021 and March 31, 2021 are approximately $ 109,000 and $ 225,000 , respectively. 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 June 30, 2021 and March 31, 2021 the estimated amounts for these future inventory returns were approximately $ 501,000 and $ 528,000 , 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 June 30, 2021 and March 31, 2021 the Company had inventory reserves of approximately $ 636,000 for estimated excess and obsolete inventory. DEFERRED FINANCING COSTS The Company classifies deferred financing costs incurred when obtaining or renewing revolving credit facilities as assets in the accompanying condensed consolidated balance sheets as it is likely that during certain periods during non-peak season there will be no balance due on these credit facilities to offset the deferred financing costs. In June 2021, the Company incurred approximately $ 38,000 in deferred financing costs associated with the one-year renewal of the Iron Horse Credit facility (IHC Facility) which are being amortized over twelve months and were classified as current assets on the accompanying condensed consolidated balance sheets. 8 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” No impairment was recorded as of June 30, 2021 and 2020. LEASES The Company follows FASB ASC 842, “Leases”. The ASC requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The 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 are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. (See Note 7– 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. 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, customer deposits, refunds due to customers, and due to related parties approximates fair value due to the relatively short period to maturity for these instruments. The carrying amounts on the notes payable, finance leases and installment notes 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 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. 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. The Company selectively participates in a retailer’s co-op promotion incentives 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. For both three-month periods ended June 30, 2021 and 2020, co-op promotion incentives were approximately $ 272,000 . 9 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) 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 9 – GEOGRAPHICAL INFORMATION). 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 was approximately $ 750,000 and $ 960,000 as of June 30, 2021 and March 31, 2021, respectively. Revenue was derived from four different major product lines. Disaggregated revenue from these product lines for the three months ended June 30, 2021 and 2020 consisted of the following: SCHEDULE OF DISAGGREGATION OF REVENUE Product Line June 30, 2021 June 30, 2020 Three Months Ended Product Line June 30, 2021 June 30, 2020 Classic Karaoke Machines $ 4,448,000 $ 2,341,000 Licensed Product 771,000 - Music and Accessories 778,000 588,000 SMC Kids Toys 69,000 123,000 Total Net Sales $ 6,066,000 $ 3,052,000 SHIPPING AND HANDLING COSTS 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 the three months ended June 30, 2021 and 2020 shipping and handling expenses were approximately $ 151,000 and $ 83,000 , respectively. These expenses are classified as a component of selling expenses in the accompanying condensed 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 condensed consolidated statements 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 for the three months ended June 30, 2021 and 2020 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 three months ended June 30, 2021 and 2020, the stock option expense was approximately $ 5,000 and $ 0 , respectively. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. For the three months ended June 30, 2021 and 2020, these amounts totaled approximately $ 31,000 and $ 13,000 , respectively. 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. 10 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) 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 June 30, 2021 and 2020 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. COMPUTATION OF (LOSS) EARNINGS PER SHARE Basic net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share reflects the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of Company common stock at the average market price during the period using the treasury stock method. For the three months ended June 30, 2021 and 2020, options to purchase 1,660,000 shares and 2,230,000 shares of common stock, respectively have been excluded from diluted earnings per share as the result would have been anti-dilutive. ADOPTION OF NEW ACCOUNTING STANDARDS In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes” (Topic 740). Among several issues addressed in this ASU, there was one area potentially affecting 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. The Company adopted the standard for the interim period ended June 30, 2021. The adoption of this standard did not have a material effect on our condensed consolidated financial statements. RECENT ACCOUNTING PRONOUNCEMENTS 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 condensed consolidated financial statements and related disclosures. NOTE 4 - INVENTORIES, NET SCHEDULE OF INVENTORY June 30, March 31, 2021 2021 Finished Goods $ 6,288,000 $ 5,348,000 Inventory in Transit 2,217,000 250,000 Estimated Amount of Future Returns 501,000 528,000 Subtotal 9,006,000 6,126,000 Less:Inventory Reserve 636,000 636,000 Inventories, net $ 8,370 ,000 $ 5,490 ,000 Inventories are comprised of the following components: NOTE 5 – PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: SUMMARY OF PROPERTY AND EQUIPMENT USEFUL June 30, March 31, LIFE 2021 2021 Computer and office equipment 5 - 7 years $ 445,000 $ 445,000 Furniture and fixtures 7 years 98,000 98,000 Warehouse equipment 7 years 199,000 199,000 Molds and tooling 3 - 5 years 1,933,000 1,878,000 Property and equipment, gross 2,675,000 2,620,000 Less: Accumulated depreciation 2,014,000 1,946,000 Property and equipment, net $ 661 ,000 $ 674 ,000 11 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) Depreciation expense for the three months ended June 30, 2021 and 2020 was approximately $ 68,000 and $ 71,000 , respectively. NOTE 6 – BANK FINANCING Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit On June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility on eligible accounts receivable and inventory which replaced the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020. The Company signed a two-year Loan and Security Agreement for a $ 10.0 million financing facility (decreasing to $ 5.0 million in off-peak season) with Crestmark Bank (“Crestmark Facility”) on eligible accounts receivable. The outstanding loan balance cannot exceed $ 10.0 million during peak selling season between July 1 and December 31 and is reduced to a maximum of $ 5.0 million between January 1 and July 31. Costs associated with the closing of the Intercreditor Revolving Credit Facility of approximately $ 74,000 were deferred and were amortized over one year. During the three months ended June 30, 2021 and 2020 the Company incurred amortization expense of approximately $ 17,000 and $ 3,000 , respectively associated with the amortization of deferred financing costs from the Intercreditor Revolving Credit Facility. As of June 30, 2021 there was approximately $1,500,000 of available borrowings under these facilities. Under the Crestmark Facility: ● 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 Credit (“IHC”) Intercreditor Revolving Credit Facility. ● Mandatory pay-down of the loan to zero in January and February each year. The Crestmark 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 IHC as agreed between all parties. The Crestmark 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 . For the three months ended June 30, 2021 and 2020, the Company recorded interest expense of approximately $ 45,000 and $ 0 , respectively. The Crestmark Facility expires on June 15, 2022 . As of June 30, 2021 and March 31, 2021 the Company had no outstanding balance on the Crestmark Facility. In addition, the Company executed a two-year Loan and Security Agreement with Iron Horse Credit (“IHC Facility”) for up to $ 2,500,000 in inventory financing. Under the IHC Facility: ● 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 IHC. ● The Company must maintain a fixed charge coverage ratio test of 1:1 times measured on a rolling 12-month basis, defined as earnings before interest, taxes, depreciation and amortization (“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 was waived for the first six months of the IHC Facility. As of June 30, 2021, the Company was in compliance with this covenant. The IHC Facility is secured by a perfected security interest in the Company’s inventory. The IHC 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 . Costs associated with the renewal of the IHC Facility of approximately $38,000 were deferred and are being amortized over one year. Interest expense under the IHC Facility for the three months ended June 30, 2021 and 2020 was approximately $ 39,000 and $ 8,000 , respectively. The IHC Facility expires on June 15, 2022 . As of June 30, 2021 and March 31, 2021, there was an outstanding balance of approximately $ 365,000 and $ 65,000 , respectively. As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022, the Company expects to negotiate a revision or extension of these debt facilities upon their maturity however, there can be no assurance that such revision or extension will occur or at what terms. Note Payable Payroll Protection Plan On May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $ 444,000 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 until a forgiveness application has been accepted and reviewed by the Small Business Administration (“SBA”), and the SBA has provided Crestmark with the loan forgiveness amount. In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety and we were notified by Crestmark that the debt was discharged. For the three months ended June 30, 2021, a gain of approximately $ 448,000 (including principal and interest) from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of operations. 12 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) Installment Notes Payable On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an entire ERP System project over a term of 60 months at a cost of approximately $ 365,000 . As of June 30, 2021, the Company executed three installment notes totaling approximately $ 365,000 for payments issued to the project vendor. The installment notes have 60-month terms with interest rates of 7.58 % , 8.55 % and 9.25 % , respectively. The installment notes are payable in monthly installments of $ 7,459 which include principal and interest. As of June 30, 2021 and March 31, 2021 there was an outstanding balance on the installment notes of approximately $ 265,000 and approximately $ 281,000 , respectively. For the three months ended June 30, 2021 and 2020 the Company incurred interest expense of approximately $ 6,000 and $ 7,000 , respectively. Subordinated Debt/Note Payable to Related Party In conjunction with the Crestmark Facility and IHC Facility there is a subordination agreement on related party debt due to Starlight Marketing Development, Ltd. of approximately $ 803,000 . On June 1, 2020 the remaining amount due on the subordinated debt of approximately $ 803,000 was converted to a note payable (“subordinated 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 at the same 6 % interest rate on the unpaid principal retroactively from the date that previously scheduled payments had been missed. During the three months ended June 30, 2021 and 2020 interest expense was approximately $ 9,000 and $ 12,000 , respectively on the subordinated note payable and the related party subordinated debt. In connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the subordinated note payable. Both the Crestmark Facility and IHC Facility 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. As of June 30, 2021 the Company met repayment requirements of the Intercreditor Revolving Credit Facility to make principal payments totaling $300,000. During the next twelve months the Company intends on making additional payments and pay off the remaining balance outstanding provided the Company meets all repayment requirements of the Crestmark Facility and IHC Facility agreements. As of June 30, 2021 and March 31, 2021, the remaining amount due on the note payable was approximately $ 503,000 . The remaining amount due on the subordinated note payable was classified as a current liability as of June 30, 2021 and March 31, 2021 on the condensed consolidated balance sheets. NOTE 7 - COMMITMENTS AND CONTINGENCIES LEGAL MATTERS On September 11, 2020 a Complaint was filed against the Company’s SMCL subsidiary and various staffing agencies used by SMCL in a Superior Court of San Bernadino County. The complaint alleges an employee of SMCL committed employment practice violations against a former temporary employee not employed by SMC Logistics. Management has investigated the allegation and has engaged with an employment attorney to defend the lawsuit. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results. 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. 13 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) 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 $ 9,400 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. On June 15, 2020 we executed a three-year lease extension which will expire on August 31, 2023 . The renewal base rent payment is $ 65,300 per month with a 3% increase every 12 months for the remaining term of the extension. 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 expired on April 30, 2021 . In May 2021 we executed a one-year lease extension which will expire on April 30, 2022 . The lease provides for a renewal option to extend the lease. Rent expense on the new lease is fixed at approximately $ 1,700 per month for the duration of the lease term. Lease expense for our operating leases is recognized on a straight-line basis over the lease terms. SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES Supplemental balance sheet information related to leases as of June 30, 2021 is as follows: Assets: Operating lease - right-of-use assets $ 1,892,923 Liabilities Current Current portion of operating leases $ 827,238 Noncurrent Operating lease liabilities, net of current portion $ 1,124,325 SCHEDULE OF LEASE TERM AND DISCOUNT RATE Supplemental statement of operations information related to leases for the three months ended June 30, 2021 is as follows: Three Months Ended June 30, 2021 Operating lease expense as a component of general and administrative expenses $ 232,262 Supplemental cash flow information related to leases for the three months ended June 30, 2021 is as follows: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow paid for operating leases $ 228,454 Financing cash flow paid for finance leases $ 2,546 Lease term and Discount Rate Weighted average remaining lease term (months) Operating leases 27.0 Weighted average discount rate Operating leases 6.25 % Scheduled maturities of operating lease liabilities outstanding as of June 30, 2021 are as follows: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING AND FINANCE LEASES Year Operating Leases 2021, for the remaining 6 months $ 466,342 2022 938,348 2023 674,488 2024 30,739 Total Minimum Future Payments 2,109,917 Less: Imputed Interest 158,354 Present Value of Lease Liabilities $ 1,951,563 NOTE 8 - STOCK OPTIONS During the three months ended June 30, 2021 and 2020 the Company did not issue any stock options. 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. 14 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) A summary of stock option activity for the three months ended June 30, 2021 is summarized below: SUMMARY OF STOCK OPTION ACTIVITY June 30, 2021 Number of Options Weighted Average Exercise Price Stock Options: Balance at beginning of period 1,680,000 $ 0.32 Granted - - Exercised ( 20,000 ) $ 0.24 Balance at end of period 1,660,000 $ 0.32 Options exercisable at end of period 1,560,000 $ 0.33 The following table summarizes information about employee stock options outstanding at June 30, 2021: SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING Range of Exercise Price Number Outstanding at June 30, 2021 Weighted Average Remaining Contractural Life Weighted Average Exercise Price Number Exercisable at June 30, 2021 Weighted Average Exercise Price $ .12 - $ .38 1,110,000 2.6 $ 0.24 1,010,000 $ 0.23 $ .47 - $ .55 550,000 6.2 $ 0.50 550,000 $ 0.50 * 1,660,000 1,560,000 * Total number of options outstanding as of June 30, 2021 includes 580,000 options issued to five current directors and one former director as compensation and 1,040,000 options issued to key employees that were not issued from the Plan. As of June 30, 2021, there was unrecognized expense of approximately $ 5,000 remaining on options currently vesting over time with approximately four months remaining until these options are fully vested. The intrinsic value of vested options as of June 30, 2021 was approximately $ 180,000 . NOTE 9 - GEOGRAPHICAL INFORMATION Sales to customers outside of the United States for the three months ended June 30, 2021 and 2020 were primarily made by the Macau Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows: SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION 2021 2020 FOR THE THREE MONTHS ENDED June 30, 2021 2020 North America $ 5,966,000 $ 2,816,000 Europe - 183,000 Australia 100,000 53,000 Net sales $ 6,066,000 $ 3,052,000 The geographic area of sales was based on the location where the product is delivered. NOTE 10 – RELATED PARTY TRANSACTIONS All transactions listed below are related to the Company as they are all with affiliates of our former Chairman of the Board, Mr. Phillip Lau. DUE TO RELATED PARTIES On June 30, 2021 and March 31, 2021, the Company had amounts due to related parties in the amounts of approximately $ 63,000 for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by them. 15 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) TRADE 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 . During the three months ended June 30, 2021, there was a gain of approximately $ 11,000 from Cosmo related to payments received in Fiscal 2022 on prior year sales and the related receivable previously reversed and written off as initially deemed uncollectible. The Company incurred service expenses from Starlight Electronics Co, Ltd, (“SLE”) a related party. The services from SLE were approximately $ 91,000 for both of the three months ended June 30, 2021 and 2020. These amounts were included as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations. NOTE 11 – 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 allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months). 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 condensed consolidated balance sheets. Changes in the Company’s reserve for sales returns are presented in the following table: SCHEDULE OF RESERVE FOR SALES RETURNS Six Months Ended June 30, June 30, 2021 2020 Reserve for sales returns at beginning of the fiscal year $ 960,000 $ 1,224,000 Provision for estimated sales returns 539,000 284,000 Sales returns received ( 749,000 ) ( 1,128,000 ) Reserve for sales returns at end of the period $ 750,000 $ 380,000 NOTE 12 – REFUNDS DUE TO CUSTOMERS As of June 30, 2021 and March 31, 2021 the amount of refunds due to customers was approximately $ 94,000 and $ 145,000 , respectively, primarily due to one customer for overstock returns. NOTE 13 - 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 three months ended June 30, 2021 and 2020 totaled approximately $ 18,000 and $ 14,000 , respectively. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of operations. The Company does not provide any post-employment benefits to retirees. NOTE 14 - CONCENTRATIONS OF CREDIT AND SALES RISK 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 June 30, 2021, 78 % of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable. At March 31, 2021, 70 % of accounts receivable were due from four customers in North America that individually owed over 10% of total accounts receivable. For the three months ended June 30, 2021, there were four customers who individually accounted for 10% or more of the Company’s net sales. Revenue from these customers as a percentage of net sales were 45 %, 18 %, 14 % and 14 %, respectively. For the three months ended June 30, 2020, there were three customers who individually accounted for 10% or more of the Company’s net sales. Revenues from these customers as a percentage of net sales were 43 %, 18 % and 11 %. 16 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 and 2020 (Unaudited) NOTE 15 – SUBSEQUENT EVENTS On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts International Limited (“Koncepts”) and Treasure Green Holdings, Ltd. (“Treasure Green”), pursuant to which the Company agreed to redeem approximately 19,623,155 shares of common stock of the Company (the “Redeemed Shares”). The closing of the transactions set forth in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the Company and the Company wired approximately $ 7,162,000 to Koncepts and Treasure Green. The Redeemed Shares shall be retired to treasury and shall become available for reissuance in the future. Pursuant to the Redemption Agreement, neither Koncepts nor Treasure Green will remain shareholders of the Company. On August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and a strategic investor for private placement of (i) 16,500,000 shares of its common stock (the “Shares”) together with common warrants to purchase up to 16,500,000 shares of common stock for an exercise price of $ 0.35 per share, and (ii) 16,833,333 pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $ 0.01 per share, together with Common Warrants to purchase up to 16,833,333 shares of common stock at an exercise price of $ 0.35 per share (the “Private Placement”). Shares issuable upon the exercise of the Pre-Funded Warrants and Common Warrants are hereinafter referred to as the “Warrant Shares”. Pursuant to the terms of the Purchase Agreement the Company is obligated to use commercially reasonable best efforts to file a registration statement providing for the resale by the purchasers of the Shares and Warrant Shares being sold in the Private Placement, as soon as practicable (and in any event within 30 days of the closing of the Private Placement). Under the Purchase Agreement the Company is also obligated to use its reasonable best efforts to submit an application to have the Company’s common stock listed on a national exchange by December 31, 2021, and to use its reasonable best efforts to have the Shares and Warrant Shares listed on such national exchange as soon as practicable following the submission of such application. The closing of the Private Placement took place on August 10, 2021, when the Shares, Common Warrants, and Pre-Funded Warrants were delivered to the purchasers and funds, in the amount of approximately $ 9,800,000 , were wired to the Company. Approximately $ 7,200,000 of the funds received were used to execute the Redemption Agreement. The Company expects an increase in working capital of approximately $ 1,800,000 of working capital after settlement of expenses of approximately $ 800,000 associated with closing of these transactions . Stingray Group Inc. (TSX: RAY.A; RAY.B) “(Stingray”), a leading music, media and technology is part of the group of investors who participated in the Private Placement and have acquired a minority interest in the Company. Stingray is a long-standing business partner with the Company that provides our customers with music content from their extensive library of expertly produced and licensed karaoke content. 17