What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-02-14 compared with 2021-11-22 · 191 added, 194 removed, 163 unchanged (70% of the section changed)

32 unchanged sentences

factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section

of our Annual Report on Form 10-K/A, this Quarterly Report on 10-Q/A, or in our other filings made with the SEC.

of our Annual Report on Form 10-K, this Quarterly Report on 10-Q, or in our other filings made with the SEC.

are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the

45 unchanged sentences

We expect these inflationary trends to continue throughout the remainder of the fiscal year.

We may also experience logistical issues with when we receive inventory and the timing of customer demand which could result in potential

future reductions in profit margins and/or the need for additional inventory reserves.

Fiscal 2021, we experienced growth in our karaoke, microphone, and toy categories as the pandemic increased demand for home entertainment.

1 unchanged sentence

product availability in the market.

maintain our commitment to protect the health and safety of our employees, customers, and suppliers by continuing our enhanced safety

protocols for those on-site at our warehouse facilities.

In addition, employees who do not need to be physically present at our corporate

office to perform their job responsibilities generally continue to work from home and essential business travel remains the main travel

The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on

future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate

of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by

governmental authorities or by us relating to the pandemic.

For more information regarding factors and events that may impact our business,

results of operations and financial condition as a result of the COVID-19 pandemic, see “Risk Factors” included in Item 1A.

“Risk Factors” in our 2021 Annual Report on Form 10-K.

extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments,

including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate of vaccinations, our

continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities

or by us relating to the pandemic.

For more information regarding factors and events that may impact our business, results of operations

and financial condition as a result of the COVID-19 pandemic, see “Risk Factors” included in Item 1A.

“Risk Factors”

in our 2021 Annual Report on Form 10-K.

OF OPERATIONS

following table sets forth, for the periods indicated, certain items related to our consolidated statements of income as a percentage

of net sales for the three and six months ended September 30, 2021 and 2020 as restated:

of net sales for the three and nine months ended December 31, 2021 and 2020:

Singing Machine Company, Inc.

2 unchanged sentences

Three Months Ended

the Six Months Ended

Cost of Goods Sold

the Nine Months Ended

of Goods Sold

and administrative expenses

and amortization

Operating Expenses

Selling expenses

General and administrative

Depreciation and amortization

Total Operating Expenses

Income from Operations

Other Income (Expenses)

Gain from damaged goods

insurance claim

Gain from extinguishment

of accounts payable

Interest expense

Financing costs

Total Other Income (expenses),

Income Before Income Tax

Income Tax Provision

ENDED SEPTEMBER 30, 2021 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2020

sales for the quarter ended September 30, 2021 decreased to approximately $17,369,000 from approximately $22,285,000 a decrease of approximately

$4,916,000 as compared to the same period ended September 30, 2020.

Sales of our Carpool Karaoke The Mic (“CPK”) product

decreased by approximately $2,306,000 during the three months ended September 30, 2021 compared to the same period ended September 30,

2020 as the company winds down it’s promotion of the original version of the product and recently launched a new version of the

product with several enhanced features for sale during the upcoming holiday season.

The remaining decrease in sales was primarily due

to delays in receiving goods from the Port of Los Angeles due to the disruption in the global supply chain.

profit for the quarter ended September 30, 2021 decreased to approximately $3,327,000 from approximately $5,823,000 a decrease

of approximately $2,496,000 as compared to the same period in the prior year.

The decrease in net sales contributed approximately

$1,284,000 to the decrease in gross profit.

The remaining decrease was primarily due to the decrease in gross profit margin of approximately

6.9 points on products sold.

profit margin for the three months ended September 30, 2021 was 19.2% compared to 26.1% for the three months ended September 30,

The decrease in CPK product sales which yield substantially more gross profit margin than our traditional product accounted for

approximately 4.0 margin points of the 6.9 gross profit margin point decrease with the remaining 2.9 point decrease primarily

due to product cost increases in raw materials and a significant increase in freight costs .

the quarter ended September 30, 2021, total operating expenses decreased to approximately $2,577,000 compared to approximately $3,384,000

(Loss) from Operations

Income (Expenses)

from Paycheck Protection Plan loan forgiveness

- related party

from damaged goods insurance claim

from extinguishment of accounts payable

Other Income (expenses), net

Before Income Tax Provision

Tax Provision

ENDED DECEMBER 31, 2021 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2020

sales for the quarter ended December 31, 2021 increased to approximately $21,244,000 from approximately $16,973,000 an increase of approximately

$4,271,000 as compared to the same period ended December 31, 2020.

The increase in net sales was primarily due to strong demand for products

and goods that shipped late in the season due to the late arrival of goods that were scheduled to ship in the previous quarter but were

significantly delayed at the Port of Los Angeles due to global logistics issues affecting all industries.

profit for the quarter ended December 31, 2021 increased to approximately $5,309,000 from approximately $4,974,000 an increase of approximately

$335,000 as compared to the same period in the prior year.

The increase in net sales contributed approximately $1,252,000 to the increase

in gross profit but was offset by a reduction in gross profit margin of approximately $917,000.

profit margin for the three months ended December 31, 2021 was 25.0% compared to 29.3% for the three months ended December 31, 2020.

There was a decrease in Carpool Karaoke (“CPK) product sales, of approximately $2,256,000, which accounted for approximately 2.9

margin points of the 4.3 gross profit margin point decrease with the remaining 1.4 point decrease primarily due to product cost increases

in raw materials and a significant increase in freight costs due to global logistics issues that were only partially passed on to customers.

the quarter ended December 31, 2021, total operating expenses increased to approximately $3,616,000 compared to approximately $3,481,000

from the same period in the prior year.

This represents a decrease in total operating expenses of approximately $807,000 from the quarter

ended September 30, 2020.

The decrease in operating expenses is primarily due to a decrease in selling expenses of $742,000.

a decrease in royalty expenses of approximately $321,000 associated with the decrease in CPK sales as explained in net sales.

expense decreased by approximately $286,000 due to the decrease in net sales and returns.

There was a decrease in in commissions of approximately

$83,000 commensurate with the decrease in net sales and discretionary marketing expenditures were down by approximately $52,000.

remaining decrease in operating expenses was due to variable general and administrative expenses.

This represents an increase in total operating expenses of approximately $135,000 from the quarter

ended December 31, 2020.

The increase in operating expenses is primarily due to an increase in general and administrative expenses of

approximately $229,000.

There was an increase in pallet expenses, warehouse supplies and expense and temporary labor at our California

facility of approximately $206,000 due to an increase in third party logistics business as well as price increases due to inflation and

supply chain shortages.

There was an increase in legal, accounting, consulting fees and investor relations expenses of approximately

$138,000 primarily related to the private placement transaction (see Note 10 - AUGUST 2021 PRIVATE PLACEMENT).

There was an increase

in bad debt reserve expense of approximately $165,000 related to the increase in net sales and accounts receivable.

These increases were

offset by a decrease in payroll expenses of approximately $295,000 primarily due to significant decrease in executive bonus accruals

during the three months ended December 31, 2021 compared to the three month period ended December 31, 2020.

FROM OPERATIONS

was income from operations of approximately $750,000 for the three months ended September 30, 2021 compared to income from operations

of approximately $2,439,000 for the three months ended September 30, 2020.

The decrease in income from operations of approximately $1,689,000

was primarily due to the decrease in gross profit offset by the reduction in operating expenses as explained above.

was income from operations of approximately $1,694,000 for the three months ended December 31, 2021 compared to income from operations

of approximately $1,493,000 for the three months ended December 31, 2020.

The increase in income from operations of approximately $201,000

was primarily due to the increase in gross profit offset by the increase in operating expenses as explained above.

INCOME (EXPENSES)

income and (expenses) decreased by approximately $674,000 to approximately $116,000 in other income, net for the three months ended September

30, 2021 compared to approximately $790,000 in other income, net for the same period ended September 30, 2020.

During the three months

ended September 30, 2021 there was accounts payable forgiveness of approximately $236,000 from one vendor on goods that were damaged

in the prior year compared to a recovery of approximately $937,000 in out-of-pocket expenses relating to a prior year damaged goods insurance

claim during the three months ended September 30, 2020.

The remaining variance in other income, net was primarily due to a decrease in

interest expense and amortization of deferred financing costs associated with the financing terms of the Crestmark Facility and IHC Facility

and decreased borrowings from the Crestmark Facility.

the three months ended September 30, 2021 and 2020 the Company recognized an income tax provision of approximately $174,000 and

$821,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately

20.1% and 25.2%, respectively.

the three months ended September 30, 2021 there was net income of approximately $692,000 compared to net income of approximately

expenses increased by approximately $103,000 to approximately $165,000 in other expenses, net for the three months ended December 31,

2021 compared to approximately $61,000 in other expenses, net for the same period ended December 31, 2020.

During the three months ended

December 31, 2020 there was a gain from related party of approximately $188,000 from related party accounts receivable that had previously

been written off as uncollectible.

During the three months ended December 31, 2021 there was a reduction in interest expense and finance

amortization costs of approximately $85,000 compared to the three months ended December 31, 2020 which offset the gain from related party.

the three months ended December 31, 2021 and 2020 the Company recognized an income tax provision of approximately $103,000 and $264,000,

respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately 11.1% and

23.0%, respectively.

the three months ended December 31, 2021 there was net income of approximately $1,426,000 compared to net income of approximately $1,167,000

for the same period a year ago.

The decrease in net income was primarily due to the same reasons discussed in Income from

Operations, Other Income (Expenses) and Income Taxes.

MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2020

sales for the six months ended September 30, 2021 decreased to approximately $23,435,000 from $25,337,000 a decrease of approximately

$1,902,000 as compared to the same period ended September 30, 2020.

Sales of our CPK product decreased by approximately $1,488,000 during

the six months ended September 30, 2021 compared to the same period ended September 30, 2020 as the Company winds down it’s promotion

of the original version of the product and recently launched a new version of the product with several enhanced features for sale during

the upcoming holiday season.

The remaining decrease in sales was primarily due to delays in receiving goods from the Port of Los Angeles

due to the disruption in the global supply chain.

profit for the six months ended September 30, 2021 decreased to approximately $4,905,000 from approximately $6,785,000 a decrease

of approximately $1,880,000 as compared to the same period in the prior year.

The decrease in net sales as indicated in Net Sales

contributed approximately $509,000 to the decrease in gross profit margin.

The remaining decrease was primarily due to the decrease in

gross profit margin of approximately 5.9 points on products sold.

profit margin for the six months ended September 30, 2021 was 20.9% compared to 26.8% for the six months ended September 30, 2020.

The decrease in CPK product sales which yield substantially more gross profit margin than our traditional product accounted for approximately

2.3 margin points of the 5.9 gross profit margin point decrease.

There was a decrease of approximately 2.5 points of gross

margin primarily due to product cost increases in raw materials, a significant increase in freight costs with the remaining

variance due to the mix of products sold.

the six months ended September 30, 2021, total operating expenses decreased to approximately $4,645,000 compared to approximately $5,118,000

The decrease in net income was primarily due to the same reasons discussed in Income from Operations,

Other Income (Expenses) and Income Taxes.

MONTHS ENDED DECEMBER 31, 2021 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2020

sales for the nine months ended December 31, 2021 increased to approximately $44,679,000 from $42,310,000 an increase of approximately

$2,369,000 as compared to the same period ended December 31, 2020 primarily due to sales increases in two “club store” customers

that increased their assortment due to increased consumer demand and was offset by a decrease in CPK product sales.

profit for the nine months ended December 31, 2021 decreased to approximately $10,215,000 from approximately $11,759,000 a decrease of

approximately $1,544,000 as compared to the same period in the prior year.

Despite the increase in net sales, which contributed approximately

$658,000 increase in gross profit margin, this increase was offset by a decrease of approximately $2,202,000 in gross profit margin or

approximately 4.9 margin points on products sold.

profit margin for the nine months ended December 31, 2021 was 22.9% compared to 27.8% for the nine months ended December 31, 2020.

was a decrease in CPK product sales, (that yield a substantially higher gross profit margin than our traditional product) of approximately

$2,493,000, which accounted for approximately 2.5 margin points of the 4.9 gross profit margin point decrease.

The remaining decrease

of approximately 2.4 points of gross margin was primarily due to product cost increases in raw materials and a significant increase in

freight costs due to global logistics issues that were only partially passed on to customers.

the nine months ended December 31, 2021, total operating expenses decreased to approximately $8,261,000 compared to approximately $8,599,000

from the same period in the prior year.

This represents a decrease in total operating expenses of approximately $473,000 from the six

months ended September 30, 2020.

This represents a decrease in total operating expenses of approximately $338,000 from the nine

months ended December 31, 2020.

The decrease in operating expenses is primarily due to a decrease in selling expenses of $547,000.

was a decrease in royalty expenses of approximately $210,000 associated with the decrease in CPK sales as explained in net sales.

expense decreased by approximately $251,000 due to the decrease in net sales and returns.

There was a decrease in in commissions of approximately

$46,000 commensurate with the decrease in net sales.

These decreases in selling expenses were offset by an increase in discretionary

marketing expenditures of approximately $45,000 with the remaining variance primarily due to variable general and administrative expenses.

was a decrease in freight expenses of approximately $460,000 associated with a decrease in outbound freight as two major club accounts

did not have special projects requiring the company to ship freight prepaid instead of collect as well as inbound freight expense reduction

due to a decrease in product returns.

There was a reduction in royalty expense of approximately $325,000 primarily due to the reduction

in CPK sales as explained in net sales.

These decreases in selling expenses were offset by an increase in discretionary marketing expense

of approximately $284,000.

decreases in selling expenses of approximately $547,000 were offset by an increase in general and administrative expenses of approximately

$223,000 primarily due to an increase in legal, accounting, consulting fees and investor relations expenses primarily related to the

private placement transaction (see Note 10 - AUGUST 2021 PRIVATE PLACEMENT).

FROM OPERATIONS

was income from operations of approximately $261,000 for the six months ended September 30, 2021 compared to income from operations

of approximately $1,668,000 for the six months ended September 30, 2020.

was income from operations of approximately $1,954,000 for the nine months ended December 31, 2021 compared to income from operations

of approximately $3,160,000 for the nine months ended December 31, 2020.

The decrease in income from operations of approximately $1,206,000

was primarily due to the decrease in gross profit offset by a reduction in operating expenses as explained above.

was primarily due to the reduction in operating expenses offset by the decrease in gross profit as explained above.

INCOME (EXPENSES)

income and (expenses) decreased by approximately $817,000 to approximately $459,000 in other income, net for the six months ended September

30, 2021 compared to approximately $1,276,000 in other income, net for the same period ended September 30, 2020.

During the six months

ended September 30, 2021 there were one-time gains of approximately $684,000 primarily due to forgiveness of the loan under the Paycheck

Protection Program of approximately $448,000 which included principal and interest and there was an accounts payable forgiveness of approximately

$236,000 from one vendor on goods that were damaged in the prior year compared to a recovery of approximately $1,067,000 in out-of-pocket

expenses relating to a prior year damaged goods insurance claim during the six months ended September 30, 2020 and accounts payable forgiveness

income decreased by approximately $920,000 to approximately $294,000 in other income, net for the nine months ended December 31, 2021

compared to approximately $1,214,000 in other income, net for the same period ended December 31, 2020.

During the nine months ended December

31, 2021 there were one-time gains of approximately $696,000 primarily due to forgiveness of the loan under the Paycheck Protection Program

of approximately $448,000 which included principal and interest and there was an accounts payable forgiveness of approximately $236,000

from one vendor on goods that were damaged in the prior year compared to a recovery of approximately $1,068,000 in out-of-pocket expenses

relating to a prior year damaged goods insurance claim during the nine months ended December 31 2020 and accounts payable forgiveness

of $390,000 from the vendor who caused the damaged goods problem.

The remaining variance in other income, net was primarily due to an

increase in interest expense and amortization of deferred financing costs associated with the financing terms of the Crestmark Facility

and IHC Facility.

the six months ended September 30, 2021 and 2020 the Company recorded an income tax provision of approximately $146,000 and an

income tax provision of approximately $742,000, respectively, due to management’s best estimate of the Company’s full year

effective tax rate of approximately 20.1% and 25.2%, respectively.

the six months ended September 30, 2021 there was net income of approximately $574,000 compared to net income of approximately

During the nine months ended December 31, 2020 there was a gain from

related party of approximately $188,000 from related party accounts receivable that had previously been written off as uncollectible.

The remaining variance in other income, net was primarily due to a decrease in interest expense and amortization of deferred financing

costs associated with the financing terms of the Crestmark Facility and IHC Facility.

the nine months ended December 31, 2021 and 2020 the Company recorded an income tax provision of approximately $249,000 and an approximately

$1,006,000, respectively, due to management’s best estimate of the Company’s full year effective tax rate of approximately

11.1% and 23.0%, respectively.

the nine months ended December 31, 2021 there was net income of approximately $2,000,000 compared to net income of approximately $3,368,000

for the same period a year ago.

The decrease in net income was primarily due to the same reasons discussed in Income from

Operations, Other Income (Expenses) and Income Taxes.

The decrease in net income was primarily due to the same reasons discussed in Income from Operations,

Other Income (Expenses) and Income Taxes.

AND CAPITAL RESOURCES

of September 30, 2021, Singing Machine had cash on hand of approximately $3,338,000 as compared to cash on hand of approximately $1,071,000

on September 30, 2020.

We had working capital of approximately $8,295,000 as of September 30, 2021.

Net cash used in operating

activities was approximately $576,000 for the six months ended September 30, 2021, as compared to approximately $674,000 used in operating

activities for the same period a year ago.

During the six months ended September 30, 2021 there was an increase in accounts receivable

of approximately $9,410,000 due to a seasonal increase in sales and a seasonal increase in inventories of approximately $13,722,000

due to in-transit and receipt of inventory for peak season.

These increases in net cashed used in operating activities were offset

by an increase in in accounts payable of approximately $16,409,000 due to seasonal purchases of product for the peak season.

a decrease in amounts due from Crestmark Bank of approximately $4,557,000 as cash collected in excess of amounts due on the revolving

credit during the first quarter was used to pay for the seasonal increase in inventory.

There was a seasonal increase in reserve for

sales returns of approximately $904,000.

cash used in operating activities was approximately $674,000 for the six months ended September 30, 2020.

During the six months ended

September 30, 2020 there was an increase in accounts receivable of approximately $16,576,000 due to a seasonal increase in sales and

a seasonal increase in inventories of approximately $1,072,000 due to receipt of inventory for peak season, and a decrease in refunds

due to customers of approximately $686,000 as most of the refunds due to the damaged goods incident from the prior year were refunded

to the customer.

These increases in cash used in operating activities were offset by an increase in accounts payable of approximately

$9,498,000 due to seasonal purchases of product for the peak season and a decrease in insurance receivable of approximately $1,268,000

as we received proceeds for the one-time damaged goods incident that occurred in the prior fiscal year.

There was a decrease in amounts

due from banks of approximately $2,388,000 due to excess cash collected in excess of amounts due on the revolving credit facilities with

PNC Bank and Crestmark Bank and a seasonal increase in reserve for sales returns of approximately $499,000.

cash used in investing activities for the six months ended September 30, 2021 was approximately $78,000 as compared to approximately

of December 31, 2021, Singing Machine had cash on hand of approximately $7,375,000 as compared to cash on hand of approximately $823,000

on December 31, 2020.

We had working capital of approximately $9,811,000 as of December 31, 2021.

Net cash used in operating activities

was approximately $3,113,000 for the nine months ended December 31, 2021.

During the nine months ended December 31, 2021 there was an

increase in accounts receivable of approximately $10,124,000 due to a seasonal increase in sales and an increase in inventories of approximately

$5,933,000 due to in-transit and receipt of inventory intended for peak season shipments but were received too late to ship due to global

logistics issues.

These increases in net cash used in operating activities were offset by an increase in in accounts payable and accrued

expenses of approximately $4,531,000 due to delayed receipt of seasonal purchases of product for the peak season due to global logistics

There was a decrease in amounts due from Crestmark Bank of approximately $4,557,000 as cash collected in excess of amounts due

on the revolving credit during the first quarter was used to pay for the seasonal increase in inventory.

There was a seasonal increase

in reserve for sales returns of approximately $1,962,000.

cash provided by operating activities was approximately $165,000 for the nine months ended December 31, 2020.

During the nine months

ended December 31, 2020 there was a decrease in insurance receivable of approximately $1,268,000 as we received proceeds for the one-time

damaged goods incident that occurred in the prior fiscal year as well as a gain from the extinguishment of accounts payable of $390,000

from one vendor related to the damaged goods issue.

There was a decrease in inventory of approximately $1,781,000 as the Company sold

excess inventory left over from the prior fiscal year.

There was a seasonal increase in reserves for sales returns of approximately $1,742,000.

There was an increase in accrued expenses of approximately $580,000 primarily due to seasonal co-op promotion allowances, commissions

and royalties.

These increases in cash provided by operations were offset by an increase in accounts receivable of approximately $7,056,000

due to peak season sales.

There was an increase in amounts due from banks of approximately $1,172,000 due to cash collected in excess

of amounts due on the revolving credit facilities with Crestmark Bank.

There was a reduction in refunds due to customers of approximately

$705,000 primarily due to settlement of prior year damaged goods claims with one major customer.

There was a decrease in accounts payable

of approximately $1,470,000 as the Company sold off excess inventory from the prior year and did not need to purchase as much new inventory

to fulfill orders.

cash used in investing activities for the nine months ended December 31, 2021 was approximately $78,000 as compared to approximately

$89,000 used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for

new products.

cash provided by financing activities for the six months ended September 30, 2021 was approximately $3,595,000 compared to cash provided

cash provided by financing activities for the nine months ended December 31, 2021 was approximately $6,979,000 compared to cash provided

by financing activities of approximately $402,000 for the same period ended of the prior year.

We borrowed approximately $1,977,000

from our Crestmark Facility and IHC Facility for working capital.

We borrowed approximately $8,562,000 from

our Crestmark Facility and IHC Facility for working capital.

In August 2021, the Company received net proceeds of approximately $1,838,000

from the execution of private placement and stock redemption agreements as summarized in the next two paragraphs.

These financing

activities were offset by a payment of $150,000 on the subordinated related party debt, payment of deferred finance charges associated

with the closing of the Crestmark and IHC Facilities of approximately $38,000 with the remaining difference used to pay scheduled installments

These financing activities

were offset by a payment of $150,000 on the subordinated related party debt, payment of deferred finance charges associated with the

closing of the Crestmark and IHC Facilities of approximately $38,000 with the remaining difference used to pay scheduled installments

on installment notes and finance leases.

August 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) 16,500,001 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”.

investors and a strategic investor for private placement of (i) 16,500,001 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,

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for reissuance in the future.

cash provided by financing activities for the six months ended September 30, 2020 was approximately $1,485,000 compared to cash provided

by financing activities of approximately $4,472,000 for the same period ended of the prior year.

We borrowed approximately $1,156,000

from our Crestmark Facility and IHC Facility for working capital and received loan proceeds from Crestmark in the amount of approximately

$444,000 under the Paycheck Protection Program.

These financing activities were offset by payments made on deferred finance charges associated

with the closing of the Crestmark and IHC Facilities of approximately $74,000 with the remaining difference used to pay scheduled installments

on installment notes and finance leases.

cash provided by financing activities for the nine months ended December 31, 2020 was approximately $402,000.

We received loan proceeds

from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program with the remaining variance primarily due

to repayments of installment and capital lease payments.

In the prior fiscal year we received approximately $284,000 from a financing

arrangement with Dimension Funding to finance implementation of a new Enterprise Resource Planning system.

This increase in cash provided

by financing activities were offset by payments of finance leases and the bank term note of approximately $136,000.

June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility with Crestmark and IHC on eligible accounts receivable

1 unchanged sentence

(See Note 6 – Bank Financing).

As of this filing, we have borrowed approximately $990,000 on the IHC Facility, which provides for

a maximum loan amount of $2,500,000 on eligible inventory and borrowed approximately $5,600,000 on our Crestmark Facility which will

As of this filing, we have borrowed approximately $2,500,000 on the IHC Facility, is the maximum

loan amount on eligible inventory allowed by this facility and borrowed approximately $1,000,000 on our Crestmark Facility which will

make available up to $10,000,000 of eligible accounts receivable as the fiscal year progresses.

As of this filing the Company has approximately

$5,900,000 currently available from these two credit facilities.

no additional borrowings currently available from the Crestmark facility until the end of February as per the facility agreement at which

time the Company will have approximately $1,000,000 available on the facility.

May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection

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notification from the SBA that the loan had been forgiven in its entirety.

For the three and six months ended September 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 income.

For the nine months ended December 31, 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 income.

August 2019, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped

6 unchanged sentences

consolidated statement of income.

For the three and six months ended September 30, 2020 the gain from damaged goods insurance claim was

For the three and nine months ended December 31, 2020 the gain from damaged goods insurance claim was

approximately $0 and $1,068,000, respectively.

We also secured vendor invoice credits of $390,000 from the factory that caused

the damage which is reflected as gain from extinguishment of accounts payable in the condensed consolidated statement of income for the

six months ended September 30, 2020.

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.

If we are unable to comply with

the financial covenants defined in the financing agreement and default on the credit facility, it may have a material adverse effect

on our ability to meet our financial obligations.

As both the Crestmark Facility and the IHC Facility are set to expire on June 15, 2022,

We also secured vendor invoice credits of $390,000 from the factory that caused the damage

which is reflected as gain from extinguishment of accounts payable in the condensed consolidated statement of income for the nine months

ended December 31, 2020.

believe that current working capital, cash expected to be generated from our operating forecast, along with the availability of cash

from our credit facilities (See Note 6 – BANK FINANCING) assuming that they are revised and or extended, will be adequate to meet

the Company’s liquidity requirements for at least twelve months from the filing of this report.

As both the Crestmark Bank (“Crestmark

Facility”) and the Iron Horse Credit (“IHC”) Facility (“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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis