Algorhythm Holdings, Inc. 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark one) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31 , 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ___________ Commission file number 001-41405 THE SINGING MACHINE COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 95-3795478 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6301 NW 5 th Way , Suite 2900 , Fort Lauderdale , FL 33309 (Address of principal executive offices) (954) 596-1000 ( Registrant’s telephone number, including area code ) Securities registered pursuant to Section 12(b) of the Act: Title of Class Trading Symbol(s) Name of each exchange on which registered Common Stock, Par Value $0.01 MICS The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act). Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes ☐ No ☒ As of September 30, 2021, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock as quoted on the OTCQX of $10.435 was approximately $ 5,239,111 (based on 502,071) shares outstanding to non-affiliates). For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose. Number of shares of common stock outstanding as of July 14, 2022 was 3,017,700 DOCUMENTS INCORPORATED BY REFERENCE – None THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2022 PAGE PART I Item 1. Business 4 Item 1A. Risk Factors 7 Item 1B. Unresolved Staff Comments 14 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Mine Safety Disclosures 14 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15 Item 6. [Reserved] 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 21 Item 9A. Controls and Procedures 22 Item 9B. Other Information 23 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 23 PART III Item 10. Directors, Executive Officers and Corporate Governance 23 Item 11. Executive Compensation 27 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31 Item 13. Certain Relationships and Related Transactions and Director Independence 32 Item 14. Principal Accountant Fees and Services 34 PART IV Item 15. Exhibits and Financial Statement Schedules 34 Item 16. Form 10-K Summary 36 Signatures 37 2 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K (the “Annual Report”) contains “forward-looking statements” that represent our beliefs, projections and predictions about future events within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are ‘‘forward-looking statements’’, including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, ‘‘intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements. These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time and in relatively new and rapidly developing industries such as oil and gas. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation: ● our ability to attract and retain management; ● our growth strategies; ● anticipated trends in our business; ● our future results of operations; ● our ability to incorporate new and changing technologies; ● our willingness to develop technological innovation; ● our liquidity and ability to finance our acquisition and development activities; ● the impact of inflation and other pricing pressures ● the impact of government regulation; ● planned capital expenditures (including the amount and nature thereof); ● our financial position, business strategy and other plans and objectives for future operations; ● competition; ● the ability of our management team to execute its plans to meet our goals; ● general economic conditions, whether internationally, nationally or in the regional and local market areas in which we are doing business, that may be less favorable than expected; and ● other economic, competitive, governmental (including new tariffs), legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations and pricing. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings ‘‘Risk Factors’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, ‘‘Business’’ and elsewhere in this Annual Report. Except as otherwise specifically indicated, all information in this Annual Report on Form 10-K has been retroactively adjusted to give effect to a 1-for-30 reverse stock split that was effective on May 23, 2022. Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” and “our” refer to The Singing Machine Co. and its consolidated subsidiaries. 3 PART I ITEM 1. BUSINESS OVERVIEW We are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. We are the leading global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children. Our products are among the most widely available karaoke products in the world. Our mission is to “create joy through music.” In order to deliver on this mission, we are focused on the following multi-prong approach: ● In the short-term, improve profitability by optimizing operations and continue to expand gross margins. ● In the mid-to-long-term, continue to grow our global distribution and expand into new product categories that take advantage of our vast distribution relationships and sourcing abilities. Our Product Portfolio Our products are sold directly to distributors and retail customers. Our portfolio of owned and licensed brands and products are organized into the following categories: Karaoke — including our flagship brand Singing Machine, our karaoke line is driven by quality products at affordable price points that we believe deliver great value to our customers. All of our karaoke products are Bluetooth® enabled to allow access to digital music content via our mobile apps available on iOS and Android platforms. We believe our core karaoke line offers best-in-class innovative features that, including but not limited to enables customers to output video to a TV screen, correct singer’s pitch in real-time, stream karaoke content directly to the machine, sing duets, display scrolling lyrics in-time with the song, and play custom karaoke CD+G discs. The Company’s products are sold directly to consumers via its retail channels, ecommerce, its own website, and distributors worldwide. This product category accounted for approximately 82% of our net sales in our fiscal year ended March 31, 2022. Licensed Products — including brands such as Carpool Karaoke. In 2019, we entered into a 3-year license agreement with CBS® for its Carpool Karaoke brand, made popular by James Corden on The Late Show with James Corden. We launched an innovative Carpool Karaoke Microphone that works specifically in the car. This license agreement with CBS® expires on September 30, 2022. We are actively exploring renewing the license agreement and exploring new licensing opportunities. This product category accounted for approximately 3% of our net sales in our fiscal year ended March 31, 2022. Microphones and Accessories — we currently offer a line of traditional microphone accessories that are compatible with our karaoke machines. These microphones feature an assortment of colors, come wired or wireless, and may include new features like party lighting and voice changing effects. We are also seeing growth in portable Bluetooth® microphones which are marketed under our Party Machine brand. This product category accounted for approximately 9% of our net sales in our fiscal year ended March 31, 2022. Singing Machine Kids Youth Electronics — including the brand Singing Machine Kids. Our kids line of products offer fun music entertainment features designed specifically for children. Our kids’ products provide a high-quality introduction to singing and music entertainment for young singers and offer innovative features like voice changing effects, recording, Bluetooth® compatibility, and portability. This product category accounted for approximately 5% of our net sales in our fiscal year ended March 31, 2022. Music Subscriptions — in conjunction with our premium partner, Stingray Digital, we offer karaoke music subscription services for the iOS and Android platforms as well as a web-based download store and integrated streaming services for our hardware. We currently offer almost 20,000 licensed karaoke songs in the catalog. This product category accounted for approximately 1% of our net sales in our fiscal year ended March 31, 2022. Product Development and Design Product development is a key element of our strategic growth plan. We strive to deliver many new, exciting consumer products to market every single year to retain our presence as the market-leader in consumer karaoke products. Strategic product development is done in-house from our corporate headquarters in Fort Lauderdale, FL where we identify new potential categories, features, and price points. Products are created in conjunction with contract product designers and inventors in collaboration with our contract manufacturers in China to deliver products that represent tremendous value to our customers. In addition to new products, we always look for ways to improve existing products to hit more affordable price points or improve features based upon market feedback. Business Segments We operate in one principal industry segment across geographically diverse marketplaces, selling our products globally to large, national retailers as well as independent retailers, on our retailer’s websites, and our own direct to consumer website. In North America, our customers include Amazon, Costco, Sam’s Club, Target and Wal-Mart. Our largest international territories are the U.K. and Australia, where we sell through international distributors, representatives. We also sell to select international retail customers in geographic locations where we do not have a direct sales presence. 4 Suppliers and Manufacturing We source our products from a variety of contract manufacturers in southern China. We are not dependent on any one supplier as we use many manufacturers (currently over 5) to make our products. We maintain a Hong Kong office that provides us with factory management, sourcing, quality control, engineering, and product development. We buy finished goods from our suppliers and generally do not source raw materials for manufacturing, however in limited circumstances where we develop proprietary hardware and software, we will secure the proprietary circuits and provide to our contract manufacturers for assembly into the final product. While we are not responsible for sourcing raw materials, we rely on our contract manufacturers’ ability to secure injected plastic, wood cabinets, integrated circuits, display panels, speaker drivers, and other components that are necessary for assembly into our final products. Our goods are produced by our contract manufacturers and are either shipped via ocean vessels to our distribution center in Ontario, California or we utilize a direct import program where our retail customers coordinate to pick up the goods FOB China. The direct import program allows our customers to take advantage of better ocean container rates through bigger volume and allows us to bypass our California warehouse. We maintain a third-party logistics warehouse in Canada where we sell directly to retail customers and independent channels in Canada. Historically, most of our customers pick up goods from our warehouse (freight collect). Sales and Marketing Our products are marketed and sold through our direct sales team, working in conjunction with independent sales representatives that provide sales and customer support for our retail customers in North America. Sales are recognized upon transfer of title to our customers and are made utilizing standard credit terms of approximately 60-90 days. Our sales terms indicate that we only accept returns for defective merchandise, however we have accepted overstock returns from our retail partners in the past. Please see risk factor titled “ We are subject to the risk that some of our large customers may return karaoke products that they have purchased from us and if this happens, it would reduce our revenues and profitability” under “Risk Factors”. We seek to expand our direct-to-consumer sales, which we believe will increase overall gross margins and also increase brand awareness. Marketing, promotion and consumer engagement are key elements in the youth electronics, toy, and music categories. Historically, a significant percentage of our promotional spending has been structured as co-op promotion incentives with our large retail partners. We continue to focus our marketing efforts on growing brand awareness among our target consumer demographic, optimizing marketing investments, and executing an integrated marketing strategy. We believe an important component of our future growth is based on speaking to the right customer, with the right content, in the right channel, at the right time. We have implemented online marketing, social media, and digital analytics tools, which allow us to better measure the performance of our marketing activities, learn from our consumers, and receive valuable insights into industry and competitor activities. Customer service is a critical component of our marketing strategy. We maintain a U.S.-based internal customer service department within our corporate headquarters that responds to customer inquiries, investigates and resolves issues, and is available to assist customers and consumers during business hours. Competition The youth electronics, toy, and music industry has many participants, none of which has dominant market share, though certain companies may have disproportionate strength in specific product categories. We compete with a number of different companies in a variety of categories, although there is no single company that competes with us across all of our product categories. Our largest direct competitors are Singsation®, Singtrix®, eKids®, Bonaok, Karaoke USA™, and Ion® Audio. The primary method of competition in the industry consists of brand positioning, product innovation, quality, price, and timely distribution. Our competitive strengths include our ability to develop innovative new products, speed to market, our relationships with major retailers, and the quality and pricing of our products. Intellectual Property We rely on a combination of word and design mark trademarks and trade secrets to protect our intellectual property. In certain circumstances, we will partner with third parties to develop proprietary products, and, where appropriate, we have license agreements related to the use of third-party innovation in our products. The duration of our trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained. Customers Sales to our top five customers together comprised approximately 90% of our net sales in both fiscal years ended March 31, 2022 and March 31, 2021. In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales at a percentage of 37%, 18%, and 17% of total net sales. In our fiscal year ended March 31, 2021, revenues from four of these customers represented greater than 10% of net sales at a percentage of 36%, 20%, 13% and 12% of total net sales. We have no long-term contracts with these customers, and as a result, our success depends heavily on our customers’ willingness to purchase and provide shelf space for our products. 5 Seasonality We do experience heightened seasonal demand for our products in our second and third quarters of our fiscal year. In our fiscal year ended March 31, 2022 and our fiscal year ended March 31, 2021, approximately 81% and 86%, respectively, of our net sales shipped in our second and third quarters. However, we continually look for products and new categories to reduce our exposure to seasonality variances. Regulatory Matters Each of our products is designed to comply with all applicable mandatory and voluntary safety standards. In the United States, these safety standards are promulgated by federal, state and independent agencies such as the US Consumer Product Safety Commission, ASTM, the Federal Communications Commission, the Food and Drug Administration, the Federal Trade Commission, and various states Attorney Generals and state regulatory agencies. All of our products are independently tested by third party laboratories accepted by the Consumer Product Safety Commission to verify compliance to applicable safety standards. A similar approach is used to design and test products sold internationally. Insurance We carry product liability insurance that provides us with $10,000,000 coverage with a minimal deductible. We consult with our insurers to ascertain appropriate liability coverage for our product mix. We believe our current coverage is adequate for our existing business and will continue to evaluate our coverage in the future in line with our expanding sales and product breadth. Human Capital Resources We believe that the development, attraction and retention of employees is an important factor to our Company’s success. We offer our employees a wide range of benefits, including 100% paid health benefits for the employee, generous leave, vacation, and personal paid time-off, 12 paid company holidays a year, and flexible work hours to work-from-home. To support the advancement of our employees, we offer training and development programs encouraging advancement from within. As of the filing of this report, we had 32 employees, 17 of which are located at our corporate office and 15 at our logistics center in Ontario, California. During peak shipping season, (July through December), we rely heavily on temporary labor at our logistics warehouse to handle the increased shipment volume. Environmental Issues We may be subject to legal and financial obligations under environmental, health and safety laws in the United States and in other jurisdictions where we operate. We are not currently aware of any material environmental liabilities associated with any of our operations. Recent Developments Controlled Company Subsequent to March 31, 2022, and as of the date of this report, Digital Power Lending, LLC (“Digital Power Lending ”) beneficially owns and BitNile Holdings, Inc. (“BitNile Holdings”) and Milton C. Ault, III (“Ault,” and collectively with Digital Power Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,568,849 shares of our common stock or approximately 52.0% of our outstanding shares. Digital Power Lending is a wholly owned subsidiary of BitNile Holdings. Mr. Ault is the Executive Chairman of BitNile Holdings. As longs as BitNile continues to hold more than 50% of the voting power of our Company, we will be a “controlled company” as defined under Nasdaq Marketplace Rules. For so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely on certain exemptions from corporate governance rules, including: ● an exemption from the rule that a majority of our board of directors must be independent directors; ● an exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and ● an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. BitNile has indicated that it intends to appoint two directors to our Board of Directors. Upon the appointment of the BitNile nominees, our Board of Directors will increase in size to seven directors, of which less than a majority will be “independent” as defined under Nasdaq Marketplace Rules. 6 Reverse Stock Split and Nasdaq Listing On May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30. The reverse stock split was affected to meet The Nasdaq Capital Market’s minimum bid price requirement. All information in this Annual Report on Form 10-K has been retroactively adjusted to give effect to this 1-for-30 reverse stock split. Our common stock was approved for listing on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022. Public Offering On May 23, 2022, we consummated a public offering of 1,000,000 shares of our common stock for gross proceeds of $4.0 million prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $0.7 million. The offering closed on May 26, 2022. As compensation, we issued to the underwriter in the public offering warrants to purchase up to 100,000 shares of our common stock. The warrants are exercisable six months from the commencement of sales under the public offering, have an exercise price of $5.00 per share and expire five years from the date of issuance. Stock Redemption Agreement Prior to August 10, 2021, the Company was partially held by koncepts International Limited (“koncepts”) which was a major shareholder of the Company that owned approximately 49% of our shares of common stock outstanding on a fully diluted basis as of March 31, 2021. The Company was also partly held by Treasure Green Holdings Ltd. (“Treasure Green) which owned approximately 2% of our common stock. In total approximately 51% of the Company’s shares of common stock on a fully diluted basis as of March 31, 2021 were previously owned by koncepts and Treasure Green. koncepts and Treasure Green are owned by Fairy King Prawn Holdings Limited (“Fairy King”), an investment holding company incorporated in the British Virgin Islands, principally owned by the Company’s then Chairman, Philip Lau. On August 5, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with koncepts and Treasure Green, pursuant to which the Company redeemed 654,105 shares of common stock of the Company (the “Redeemed Shares”). The closing of the transaction 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 in consideration of a payment by the Company of approximately $7,162,000 to koncepts and Treasure Green. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company. Prior to August 10, 2021, we did 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. Pursuant to the Redemption Agreement, neither koncepts nor Treasure Green remained shareholders of the Company and SLRD, SCE, Cosmo, Winglight and SLE are no longer related parties. Available Information The Company is incorporated under the laws of the State of Delaware and was formed in 1994. Our common stock is traded on the NASDAQ Capital Market under the symbol “MICS”. Our principal executive offices are located at 6301 NW 5 th Way, Suite 2900, Fort Lauderdale, FL, and our telephone number is (954) 596-1000. We maintain our corporate website at www.singingmachine.com . Our website also includes corporate governance information, including our Code of Ethics and our Board committee charters. The information contained on our website does not constitute a part of this report. We file reports with the Securities and Exchange Commission (“SEC”), including an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with, or furnish to, the SEC. The SEC maintains an Internet website, www.sec.gov , that contains reports, proxy and information statements and other information that we file electronically with the SEC. ITEM 1A. RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-K and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report. 7 RISKS ASSOCIATED WITH OUR BUSINESS THE COVID-19 PANDEMIC HAS AFFECTED OUR BUSINESS IN MANY DIFFERENT WAYS, AND MAY AMPLIFY THE RISKS AND UNCERTAINTIES FACING OUR BUSINESS WHICH MAY IMPACT OUR BUSINESS AND FINANCIAL RESULTS. The COVID-19 pandemic has significantly affected U.S. consumer shopping patterns and caused the health of the U.S. and world economy to deteriorate in fiscal year 2022. During our fiscal year ended March 31, 2022, demand for consumer electronics products including home based entertainment and toys remained strong. However, late delivery of key products for the holiday season due to global logistics issues resulted in lost sales and an increase in inventory of approximately $5.5 million greater than planned at the end of our fiscal year ended March 31, 2022. While many of the restrictions and measures initially implemented in response to the pandemic have since been softened or lifted in varying degrees in different locations around the world, and the manufacture and distribution of COVID-19 vaccines during calendar year 2021 and 2022 helped to initiate a recovery from the pandemic, the uncertainty regarding existing and new potential variants of COVID-19 and the success of any vaccines in respect thereof, may in the future cause a reduction in global economic activity or prompt, the re-imposition of certain restrictions and measures. In addition, even if not required by governmental authorities, increases in COVID-19 cases, such as if a new variant emerges, may result in significantly reduced economic activity, which could impact our business and our financial results. OUR SUPPLY CHAIN MAY BE MATERIALLY ADVERSELY IMPACTED BY THE WORLDWIDE FINANCIAL MARKETS AND GLOBAL EVENTS We rely upon the facilities of our third-party manufacturers in China to manufacture our products and export our products throughout the world. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on manufacturing and the movement of employees in many regions of China during our fiscal year ended March 31, 2021 and continuing into fiscal 2022. In late calendar 2021, the increased demand for consumer electronics products and current economic recovery continued to increase worldwide demand for products using semiconductor “chip” components in the production of most consumer electronics which has resulted in an international shortage of chips available to fulfill demand. As a result, we have experienced longer delivery lead times and some unavailability of these components which have delayed delivery of some of our products. We have also experienced delays in delivery schedules due to new outbreaks of COVID-19 in Southern China that have forced temporary closures of some key shipping ports. The port closures have also led to a temporary shortage of shipping containers which have resulted in significant price increases due to increased demand. While we have seen the easing of COVID-19 restrictions and the impact on our business, we cannot predict the impact of the resurgence of variants of COVID-19 and other factors affecting local and global economies, specifically China. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED BY ANY NEGATIVE IMPACT ON THE GLOBAL ECONOMY AND CAPITAL MARKETS RESULTING FROM THE CONFLICT IN UKRAINE OR ANY OTHER GEOPOLITICAL TENSIONS. U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in credit and capital markets. Additionally, Russia’s military interventions in Ukraine have led to sanctions and other penalties being levied by the U.S., European Union and other countries against Russia. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets. In addition, the invasion of Ukraine and the resulting sanctions imposed on Russia have resulted in increased volatility in the financial markets and the markets for certain commodities including oil, which may significantly impact the manufacturers that we rely on, but is not expected to have any direct impact on us. While the Company has not experienced any direct impact from the conflict in the Ukraine, the extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial and could adversely affect our operating results as they impact the global economy in the future. CHANGES IN GOVERNMENT REGULATIONS RELATING TO INTERNATIONAL TARIFFS COULD SIGNIFICANTLY REDUCE OUR REVENUES, PRODUCT COST AND PROFITABILITY. U.S. government administration and members of the U.S. Congress have made public statements indicating possible significant changes in U.S. trade policy and have taken certain actions that may impact U.S. trade, including imposing tariffs on certain goods imported into the United States. Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in “trade wars,” and increased costs for goods imported into the United States. All of our products are manufactured and imported from China. However, only our microphone products are currently subject to 7.5% tariffs currently in place. Should the government decide to expand its list of products to include our karaoke products that would subject our products to tariffs in the future, there could be a significant increase in the landed cost of our products. If we are unable to mitigate these increased costs through price increases we could experience reductions in revenues, gross profit margin and results from operations. A SMALL NUMBER OF OUR CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, AND THE LOSS OF ONE OR MORE OF THESE KEY CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR REVENUES AND CASH FLOW. We rely on a few large customers to provide a substantial portion of our revenues. Sales to the Company’s top five customers together comprised approximately 90% of our net sales for both of our fiscal years ended March 31, 2022 and 2021. In our fiscal year ended March 31, 2022, revenues from three of these customers represented greater than 10% of net sales at a percentage of 37%, 18%, and 17% of total net sales. In our fiscal year ended March 31, 2021, revenues from four of these customers represented greater than 10% of net sales at a percentage of 36%, 20%, 13% and 12% of total net sales. We do not have long-term contractual arrangements with any of our customers and they can cancel their orders at any time prior to delivery. A substantial reduction in or termination of orders from any of our largest customers would decrease our revenues and cash flow. 8 WE ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY. In our fiscal years ended March 31, 2022 and 2021, a number of our customers and distributors returned karaoke products that they had purchased from us. Our customers returned goods valued at approximately $3.6 million or 7.5% of our net sales in our fiscal year ended March 31, 2022 and approximately $4.1 million or 9.1% of our net sales in our fiscal year ended March 31, 2021. The return of products is due to a variety of reasons including defective units, customers’ overstock and buyer’s remorse. The primary reason for the 1.6 percentage point decrease in returns was due to a decrease in overstock returns from our major customers. Our factories charge customary repair and freight costs which increase our expenses and reduce profitability. If any of our customers were to increase the volume of their returned karaoke products to us, it would reduce our revenues and profitability. WE ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTION AND FINANCIAL INCENTIVES AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY. Because there is intense competition in the karaoke industry, we are subject to pricing pressure from our customers. Many of our customers have demanded that we lower our prices and threatened to buy our competitor’s products. If we do not meet our customer’s demands to lower our regular prices, we will not sell as many karaoke products. We are also subject to pressure from our customers regarding certain financial incentives, such as return credits or large cooperative (“co-op”) promotion incentives, which effectively reduce our net sales and profit. We gave co-op promotion incentives of approximately $1.7 million during our fiscal year ended March 31, 2022 and $2.0 million during our fiscal year ended March 31, 2021. We have historically offered co-op promotion incentives to our customers because it is standard practice in the retail industry. WE EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS AND IF WE DO NOT ACCURATELY FORECAST DEMAND, OUR REVENUES, NET INCOME AND CASH FLOW MAY BE AFFECTED. Because of our reliance on manufacturers in China for our machine production, our production lead times range from one to four months. Therefore, we must commit to production in advance of customers’ orders. It is difficult to forecast customer demand because we do not have any scientific or quantitative method to predict this demand. Our forecasting is based on management’s general expectations about customer demand, the general strength of the retail market and management’s historical experiences. In past years we have overestimated demand for our products which led to excess inventory in some of our products and caused liquidity problems that adversely affected our revenues, net income and cash flow. WE ARE SUBJECT TO THE COSTS AND RISKS OF CARRYING INVENTORY FOR OUR CUSTOMERS AND IF WE HAVE TOO MUCH INVENTORY, IT WILL AFFECT OUR CASH FLOW FOR OPERATIONS. Many of our customers place orders with us several months prior to the holiday season, but they schedule delivery two or three weeks before the holiday season begins. As such, we are subject to the risks and costs of carrying inventory during the time period between the placement of the order and the delivery date, which reduces our cash flow. As of March 31, 2022 we had approximately $14.2 million in inventory as compared to $5.5 million in inventory as of March 31, 2021. The primary reasons for the increase in inventory is due to late delivery of key products for the holiday season due to global logistics issues resulting in lost sales and an increase in inventory as of March 31, 2022 of approximately $5.5 million with the remaining increase due to new product received and in-transit for a program with one major customer. If we are unable to sell this inventory during fiscal 2023 at historical or greater margins, our cash flow for operations will be negatively impacted. WE ARE SUBJECT TO INSURANCE RISK OF LOSS FOR GOODS DAMAGED WHILE IN TRANSIT FROM THE MANUFACTURER TO THE CUSTOMER AND OUR WAREHOUSE. All of our goods are manufactured in China and are transported to customers and our warehouse in California via ocean vessel. As such, we are subject to damages that may occur to these goods when they are in transit to customers or our warehouse. Should substantial damage incur while goods are in transit, we could experience a significant loss of revenue, inventory and incur significant out of pocket expenses associated with destruction of the damaged goods, which could cause a significant loss from operations and reduction in cash flow. During our fiscal year ended March 31, 2020, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped by the factory resulting in a loss of approximately $2.4 million. We recovered approximately $2.3 million from our cargo insurance coverage during our fiscal year ended March 31, 2021. During our fiscal years ended March 31, 2022 and 2021 we also secured vendor invoice credits of approximately $0.3 million and $0.4 million, respectively, from the factory and factory’s representative that caused the damage. While we have taken measures to prevent a similar incident in the future, there can be no guarantee that this type of damage or other types of damage could occur in the future. Due the size of the claim, we have obtained insurance coverage for goods that are shipped direct import to our customers whose shipping terms are FOB shipping point and for goods in transit to our California warehouse however, certain exclusions have been added that may prevent insurance coverage of this type of incident in the future. 9 OUR BUSINESS IS SEASONAL AND THEREFORE OUR ANNUAL OPERATING RESULTS WILL DEPEND, IN LARGE PART, ON OUR SALES DURING THE RELATIVELY BRIEF HOLIDAY SEASON. Sales of consumer electronics and toy products in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during our second fiscal quarter ending September 30 and our third fiscal quarter ending December 31. Sales in our second and third quarter, combined, accounted for approximately 81% and 86% of net sales in our fiscal years ended March 31, 2022 and, 2021, respectively. IF WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND NET PROFITABILITY WILL BE REDUCED. Our major competitors for karaoke machines and related products are Singsation®, Singtrix®, eKids®, Bonaok, Karaoke USA™, Ion® Audio, licensed property karaoke products and other consumer electronics companies. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. To the extent that we lower prices to attempt to enhance or retain market share, we may adversely impact our operating margins. Conversely, if we opt not to match competitor’s price reductions we may lose market share, resulting in decreased volume and revenue. To the extent our leading competitors reduce prices on their karaoke machines, we must remain flexible to reduce our prices. If we are forced to reduce our prices, it will result in lower margins and reduced profitability. Because of intense competition in the karaoke industry in the United States during our fiscal year ended March 31, 2022, we expect that the intense pricing pressure in the low end of the market will continue in the karaoke market in the United States in our fiscal year ending March 31, 2023. In addition, we must compete with all the other existing forms of entertainment including, but not limited to: motion pictures, video arcade games, home video games, theme parks, nightclubs, television, prerecorded tapes, CD’s, and DVD’s and streaming video. IF WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE TO GROW. The karaoke industry is characterized by rapid technological change, frequent new product introductions and enhancements and ongoing customer demands for greater performance. In addition, the average selling price of any karaoke machine has historically decreased over its life, and we expect that trend to continue. As a result, our products may not be competitive if we fail to introduce new products or product enhancements that meet evolving customer demands. The development of new products is complex, and we may not be able to complete development in a timely manner. To introduce products on a timely basis, we must: ● accurately define and design new products to meet market demand; ● design features that continue to differentiate our products from those of our competitors; ● transition our products to new manufacturing process technologies; ● identify emerging technological trends in our target markets; ● anticipate changes in end-user preferences with respect to our customers’ products; ● bring products to market on a timely basis at competitive prices; and ● respond effectively to technological changes or product announcements by others. We believe that we will need to continue to enhance our karaoke machines and develop new machines to keep pace with competitive and technological developments and to achieve market acceptance for our products. At the same time, we need to identify and develop other products which may be different from karaoke machines. OUR PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD PREVENT OR DELAY OUR CUSTOMERS’ RECEIPT OF INVENTORY. We rely principally on four contract ocean carriers to ship substantially all of the products that we import to our warehouse facility in Ontario, California. Retailers that take delivery of our products in China rely on a variety of carriers to import those products. Any disruptions in shipping, whether in California or China, caused by labor strikes, other labor disputes, terrorism, and international incidents may prevent or delay our customers’ receipt of inventory. If our customers do not receive their inventory on a timely basis, they may cancel their orders or return products to us. Consequently, our revenues and net income would be reduced and our results of operations adversely affected. OUR MANUFACTURING OPERATIONS ARE LOCATED IN THE PEOPLE’S REPUBLIC OF CHINA, SUBJECTING US TO RISKS COMMON IN INTERNATIONAL OPERATIONS. IF THERE IS ANY PROBLEM WITH THE MANUFACTURING PROCESS, OUR REVENUES AND NET PROFITABILITY MAY BE REDUCED. We currently use five factories in China to manufacture all of our karaoke products. Our arrangements with these factories are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, and foreign currency fluctuations, limitations on the repatriation of earnings and political instability, which could have an adverse impact on our business. Furthermore, we have limited control over the manufacturing processes. As a result, any difficulties encountered by our third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our revenues, profitability and cash flow. Also, since we do not have written agreements with any of these factories, we are subject to additional uncertainty if the factories do not deliver products to us on a timely basis. 10 WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE SEVERELY DAMAGED. Our growth and ability to meet customer demand depends in part on our capability to obtain timely deliveries of karaoke machines and our electronic products. We rely on third party suppliers to produce the parts and materials that are used to manufacture and produce these products. If our suppliers are unable to provide our factories with the parts and supplies, they we will be unable to produce our products. Currently there is a worldwide shortage of electronic chips due to the increased demand for semiconductors and we are currently competing with large companies to obtain these parts and could see production and shipment delays. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. If we are unable to anticipate any shortages of parts and materials in the future, we may experience severe production problems and delivery delays, which would impact our sales. WE DEPEND ON THE ABILITY OF OUR SUPPLIERS TO MANUFACTURE OUR PRODUCTS WITHOUT INFRINGING, MISAPPROPRIATING OF OTHERWISE VIOLATING THE INTELLECTUAL PROPERTY OF PROPRIETARY RIGHTS OF OTHERS IN MANUFACTURING OUR PRODUCTS. We source our products from a variety of contract manufacturers. We buy finished goods from our suppliers and generally do not source raw materials and parts for manufacturing and assembly into the final product. We rely on our contract manufacturers’ ability to secure injected plastic, wood cabinets, integrated circuits, display panels, speaker drivers, and other components that are necessary for assembly into our final products. While we are not responsible to source raw materials, we rely on these suppliers to have all required licenses or proprietary rights to the materials that are incorporated into the final product. In addition, we rely on the representations of our contract manufacturers that they are using materials and components that meet all necessary legal, safety, and compliance requirements. If our suppliers do not have the proper licenses or rights or are not in compliance with all regulatory requirements, we may be named a party or be subject to claims, including claims of infringement or violating the intellectual property or proprietary rights of third parties with respect to our products. CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES. Purchases of karaoke machines and music are considered discretionary for consumers. Our success will therefore be influenced by a number of economic factors affecting discretionary and consumer spending, such as employment levels, business, interest rates, and taxation rates, all of which are not under our control. Additionally, other extraordinary events such as terrorist attacks or military engagements, which adversely affect the retail environment may restrict consumer spending and thereby adversely affect our sales growth and profitability. HIGH INFLATION AND UNFAVORABLE ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT OUR OPERATIONS AND RESULTS. Unfavorable global or regional economic conditions may be triggered by numerous developments beyond our control, including inflation, geopolitical events, health crises such as the COVID-19 pandemic, and other events that trigger economic volatility on a global or regional basis. Those types of unfavorable economic conditions could adversely affect our business and financial results. In particular, a significant deterioration in economic conditions, including economic slowdowns or recessions, increased unemployment levels, inflationary pressures or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing consumer demand for our products. For example, in 2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 8.6%, which is now at a 40-year historic high. Such heightened inflationary levels may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs. WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS, WHO ARE EXPERIENCING FINANCIAL DIFFICULTIES, AND IF THESE CUSTOMERS ARE UNABLE TO PAY US, OUR REVENUES AND PROFITABILITY WILL BE REDUCED. We sell products to retailers, including national chains, warehouse clubs, department stores, lifestyle merchants, specialty stores, and direct mail catalogs and showrooms. Deterioration in the financial condition of our customers could result in bad debt expense to us and have a material adverse effect on our revenues and future profitability. A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTER IN CALIFORNIA COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR CUSTOMERS, WHICH COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. A significant amount of our merchandise is shipped to our customers from our warehouse located in Ontario, California. Events such as fire or other catastrophic events, any malfunction or disruption of our centralized information systems or shipping problems may result in delays or disruptions in the timely distribution of merchandise to our customers, which could substantially decrease our revenues and profitability. 11 WE MAY ENCOUNTER DIFFICULTIES ACCESSING CAPITAL We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022. However, absent any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. There can be no assurances that we can obtain any new financing or that we will be able to successfully enter into any arrangements upon terms that are acceptable to the Company in the future. Should there be a disruption in the current levels of these markets or a deterioration of our business, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations. OUR PRODUCTION COSTS MAY INCREASE IF WE ARE REQUIRED TO MAKE PURCHASES USING THE CHINESE YUAN INSTEAD OF THE U.S. DOLLAR. The majority of our products are currently manufactured in China. During the fiscal year ended March 31, 2022, the Chinese local currency had no material effect on the Company as all of our purchases are denominated in U.S. currency. However, in the event our purchases are required to be made in Chinese local currency, the Yuan, we will be subject to the risks involved in foreign exchange rates. In the future the value of the Yuan may depend to a large extent on the Chinese government’s policies and China’s domestic and international economic and political developments. As a result, our production costs may increase if we are required to make purchases using the Yuan instead of the U.S. dollar and the value of the Yuan increases over time. Any significant increase in the cost of manufacturing our products would have a material adverse effect on our business and results of operations. We sell our product to Canadian customers some of whom require us to invoice them in Canadian Dollars. We are subject to risks involved in the exchange rate between the Canadian and US dollar. However, the exchange rate has been stable during our fiscal year ended March 31, 2022 and the associated exchange rates did not have a material impact on our financial results. Should the exchange rate between the Canadian and US Dollar become more volatile and sales to Canadian customers increase, there could be a material adverse effect on our business. OUR PROFIT MARGIN MAY BE DECREASED DUE TO INCREASED PRICES OF RAW MATERIALS, SHIPPING COSTS AND COSTS ASSOCIATED WITH PRODUCTION. Fluctuation in the price of oil, electronic chip components and shipping costs have and will continue to affect the Company in connection with the sourcing and delivery of raw materials and services. We expect to see increased cost in our finished goods during fiscal year 2023 due to the significant increases in the price of oil, rising inflation, increased cost of trans-oceanic shipping, increased drayage costs, electronic component price increases and increases in the cost of labor related to regulations instituted in China which impact wages related to the cost of production. These issues are common to all companies in the same type of business and if the Company is not able to negotiate lower costs, reduce other expenses, or pass on some or all of these price increases to our customers, our profit margin may be decreased. OUR SUCCESS DEPENDS LARGELY ON THE CONTINUED SERVICES OF OUR SENIOR MANAGEMENT TEAM AND CERTAIN KEY EMPLOYEES. We rely on our executive officers and key employees in the areas of business strategy, marketing, sales, services, and general and administrative functions. From time to time, there may be changes in our executive management team or key employees resulting from the hiring or departure of executives or key employees, which could disrupt our business. We do not maintain key-man insurance for any member of our senior management team or any other employee. The loss of one or more of our executive officers or key employees could have a serious adverse effect on our business. WE PRIMARILY RELY ON TRADE SECRET PROTECTION AND NON-DISCLOSURE AGREEMENTS TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY NOT BE EFFECTIVE. We currently rely on trade secret protection and non-disclosure agreements with our employees, consultants and third-parties to protect our confidential and proprietary information. If we do not protect our intellectual property and other confidential information adequately, competitors may be able to use our proprietary technologies and information and thereby erode any competitive advantages they provide us. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent these rights are effectively maintained as confidential. We expect to rely primarily on trade secret and contractual protections for our confidential and proprietary information and we have taken security measures we believe are appropriate to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how or other confidential information. We seek to protect our proprietary information by, among other things, entering into confidentiality agreements with employees, consultants and other third parties. These confidentiality agreements may not sufficiently safeguard our trade secrets and other confidential information and may not provide adequate remedies in the event of unauthorized use or disclosure of this information. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret or other proprietary information could be difficult, expensive and time-consuming and the outcome could be unpredictable. In addition, trade secrets or other confidential information could otherwise become known or be independently developed by others in a manner that could prevent legal recourse by us. If any of our trade secrets or other confidential or proprietary information were disclosed or misappropriated or if any such information was independently developed by a competitor, our competitive position could be harmed and our business could suffer. 12 RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE FUTURE SECURITIES ISSUANCES COULD RESULT IN SIGNIFICANT DILUTION TO OUR STOCKHOLDERS AND IMPAIR THE MARKET PRICE OF OUR COMMON STOCK. Future issuances of shares of our common stock could depress the market price of our common stock and result in dilution to existing holders of our common stock. Also, to the extent outstanding options and warrants to purchase our shares of our common stock are exercised or options or other equity-based awards are issued or become vested, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuances or exercises. Furthermore, we may issue additional equity securities that could have rights senior to those of our common stock. BECAUSE CERTAIN OF OUR STOCKHOLDERS CONTROL A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK, THEY MAY HAVE EFFECTIVE CONTROL OVER ACTIONS REQUIRING STOCKHOLDER APPROVAL As of the date of this report, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1568,849 shares of our common stock or approximately 52.0% of our outstanding shares. As a result, these stockholders, acting together, have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by: ● delaying, deferring or preventing a change in corporate control; ● impeding a merger, consolidation, takeover or other business combination involving us; or ● discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. AS A “CONTROLLED COMPANY” UNDER THE RULES OF THE NASDAQ CAPITAL MARKET, WE MAY CHOOSE TO EXEMPT OUR COMPANY FROM CERTAIN CORPORATE GOVERNANCE REQUIREMENTS THAT COULD HAVE AN ADVERSE EFFECT ON OUR PUBLIC STOCKHOLDERS. Subsequent to March 31, 2022 and as of the date of this report, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1,568,849 shares of our common stock or approximately 52.0% of our outstanding shares. Digital Power Lending is a wholly owned subsidiary of BitNile Holdings. Mr. Ault is the Executive Chairman of Bitnile Holdings. As long as BitNile continues to hold more than 50% of the voting power of our Company, we will be a “controlled company” as defined under Nasdaq Marketplace Rules. For so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including: ● an exemption from the rule that a majority of our board of directors must be independent directors; ● an exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and ● an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. As a result, you may not have the same protection afforded to stockholders of companies that are subject to these corporate governance requirements. BitNile has indicated it intends to appoint two directors to our Board of Directors. Upon the appointment of the BitNile nominees, our Board of Directors will increase in size to seven directors, of which less than a majority will be “independent” as defined under Nasdaq Marketplace Rules. OUR CERTIFICATE OF INCORPORATION ALLOW FOR OUR BOARD OF DIRECTORS TO CREATE NEW SERIES OF PREFERRED STOCK WITHOUT FURTHER APPROVAL BY OUR STOCKHOLDERS, WHICH COULD ADVERSELY AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors has the authority to issue up to 1,000,000 shares of our preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders of preferred stock the right to our assets upon liquidation, or the right to receive dividend payments before dividends are distributed to the holders of common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Although we have no present intention to issue any shares of preferred stock or to create any series of preferred stock, we may create such series and issue such shares in the future. 13 THE MARKET PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY SEVERAL FACTORS. The market price of our common stock could fluctuate significantly in response to various factors and events, including: ○ our ability to execute our business plan; ○ operating results below expectations; ○ loss of any strategic relationship; ○ industry developments; ○ economic and other external factors; ○ changes in government regulations Including tariffs; and period-to-period fluctuations in its financial results. In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR STOCK. We have never paid cash dividends on our stock and do not anticipate paying cash dividends on our stock in the foreseeable future. The payment of cash dividends on our stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We entered into an operating lease agreement, effective October 1, 2017, for our 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 $9,700 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 base rent payment is approximately $67,300 per month with a 3% increase every 12 months for the remaining term of the extension. We believe that our facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases. ITEM 3. LEGAL PROCEEDINGS 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 Bernardino County. The complaint alleges an employee of the Company committed employment practice violations against a former temporary employee not employed by us. Management has investigated the allegation and has engaged an employment attorney to defend the lawsuit. The case is still in discovery and no trial date has been set. The complaint seeks damages estimated to be no less than $500,000 in a money judgment. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results. On April 29, 2022, a complaint was filed by Tunnel IP LLC against the Company in the U.S District Court for the Southern District of Florida. The Complaint alleges that one of the Company’s products, SDL2093, infringes on U.S. Patent No. 7,916,877. On June 24, 2022, Tunnel IP agreed to dismiss all claims against the Company with prejudice. As of this filing management is not aware of any other legal proceedings other than matters that arise in the ordinary course of business. ITEM 4. MINE SAFETY DISCLOSURES Not applicable 14 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Through May 23, 2022, our common stock traded on the OTC Markets, Inc.’s OTCQX under the symbol “SMDM.” Effective March 24, 2022, our common stock began trading on the Nasdaq Capital Markets under the symbol “MICS.” Prior to May 24, 2022, the Company’s common stock traded on the OTCQX under the symbol “SMDM”. As of this filing, based upon information received from our transfer agent, there were approximately 184 record holders of our outstanding common stock. This number does not include: ● any beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, or ● broker-dealers or other participants who hold or clear shares directly or indirectly through the Depository Trust Company, or its nominee, Cede & Co. DIVIDENDS We have never declared or paid cash dividends on our common stock. Our Board of Directors intends to continue its policy for the foreseeable future. Future dividend policy will depend upon our earnings, financial condition, contractual restrictions and other factors considered relevant by our Board of Directors and will be subject to limitations imposed under Delaware law. RECENT SALES OF UNREGISTERED SECURITIES COMMON STOCK ISSUANCES On May 17, 2021, the Company issued 667 shares of its common stock to a former member of the Board of Directors who exercised stock options at an average exercise price of $7.20 per share. On August 20, 2021, the Company issued an aggregate of 575 shares of its common stock to its non-employee directors at $8.70 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2022. On December 31, 2021, the Company issued an aggregate of 2,000 shares of its common stock to a member of the Board of Directors who exercised stock options at an average exercise price of $4.50 per share. All of the above issuances and sales were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Singing Machine or executive officers of the Singing Machine, and transfer was restricted by the Singing Machine in accordance with the requirement of the Securities Act. In addition to representations by the above-reference persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 6. [RESERVED] ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view the Company from management’s perspective, considering items that would have a material impact on future operations. The following discussion summarizes the significant factors affecting our results of operations and financial condition as of and during the years ended March 31, 2022 and 2021 and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section captioned “Risk Factors” included under Part I, Item 1A and elsewhere in this report. See also the section captioned “Disclosure on Forward-Looking Statements” in this report. 15 OVERVIEW Our primary objectives for the fiscal year ended March 31, 2022 (“Fiscal 2022”) were to: ● increase our revenues by expanding our product lines and customer base; ● maintain the general and administrative costs while increasing revenue; ● decrease ending inventory on hand; ● improve profitability; Revenues increased by approximately $1.7 million or approximately 3.7% primarily due to an increase in our two largest customers of approximately $4.2 million who increased the number of products offered offset by decreases in two of our top-five customers who experienced a decrease of approximately $2.5 million in sales of Carpool Karaoke (“CPK”) product. Gross profit margins decreased by approximately 4.0 margin points to 22.8% primarily due a decrease of approximately $3.1 million in sales of high margin yield CPK product which accounted for approximately 3.0 margin points of the decrease offset by reduction in co-op promotion incentives of approximately $0.2 million or approximately 0.7 points as several major customers did not offer their usual holiday campaigns due to supply issues caused by global logistics issues. The remaining decrease of approximately 1.7 points of gross margin was primarily due to unit cost increases to products from increases in raw materials and a significant increase in freight costs due to global logistics issues that were only partially passed on to customers. Operating expenses decreased approximately $0.1 million primarily due a decrease in royalties paid on CPK licensed product of approximately $0.3 million offset by an increase in general and administrative expenses of approximately $0.2 million primarily due to an increase consultation and professional services associated with guidance in investor relations and planning of contemplated one-time capital transactions. Inventory on hand increased by approximately $8.7 million of which approximately $5.4 million was for late delivery of seasonal product due to global logistics difficulties during peak season. The remaining increase in inventory was primarily due to new products purchased by one major customer that partially shipped during the first quarter ended June 30, 2022 with the remaining scheduled to ship during the second quarter ending September 30 2022. Net income decreased by approximately $1.9 million primarily due to an approximately $1.5 million reduction in gross profit margin with the remaining decrease primarily due to reduced net one-time gains. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company’s total revenues: For the Fiscal Years Ended March 31, 2022 March 31, 2021 Net Sales 100.0 % 100.0 % Cost of Sales 77.2 % 73.2 % Operating Expenses 22.6 % 23.7 % Operating Income 0.1 % 3.1 % Other Income, Net 0.4 % 2.5 % Income Before Income Tax (Provision) Benefit 5.0 % 5.6 % Income Tax (Provision) Benefit 0.1 % -1.0 % Net Income 0.4 % 4.6 % FISCAL YEAR ENDED MARCH 31, 2022 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2021 NET SALES Net sales for the year ended March 31, 2022 (“Fiscal 2022”) were approximately $47.5 million. This represents an increase of approximately $1.7 million as compared to approximately $45.8 million in the fiscal year ended March 31, 2021 (“Fiscal 2021”). This increase was primarily due an increase in sales to our two largest customers of approximately $4.2 million who increased the number of products offered to its customers and offset by decreases in two of our top-five customers that experienced a decrease of approximately $2.5 million in sales of CPK product. GROSS PROFIT Gross profit for Fiscal 2022 was approximately $10.8 million or 22.8% of total revenues compared to approximately $12.3 million or 26.8% of sales for Fiscal 2021, a decrease of approximately $1.5 million as compared to the same period in the prior year. There was a decrease in our gross profit margin of approximately 4.0 margin points which accounted for approximately $2.2 million gross profit margin. This decrease was offset by the gross profit contribution of approximately $0.5 million due to the increase in net sales as explained above and a decrease in co-op promotions of approximately $0.2 million. 16 Gross profit margin for Fiscal 2022 was 22.8% compared to 26.8% for Fiscal 2021, a decrease of 4.0 margin points. The decrease in CPK sales as discussed above contributed approximately 3.0 margin points of the decrease. There was a gross profit margin increase of approximately 0.7 margin points due to a decrease in promotion incentives of approximately $0.2 million. The remaining 1.7 gross margin point decrease 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. OPERATING EXPENSES During the fiscal year ended March 31, 2022, our operating expenses decreased from approximately $10.9 million to approximately $10.8 million, a decrease of approximately $0.2 million compared to the same period last year. Selling expenses decreased by approximately $0.4 primarily due to decreased royalty expense of approximately $0.3 million commensurate with the decrease in CPK product sales as explained above. There was an increase in discretionary marketing expense of approximately $0.4 million which included approximately $0.1 million to upgrade our website and develop direct-to consumer business. This increase was offset $0.4 million due to a decrease of approximately $0.3 million in outbound freight as we were able to move one major customer from shipping terms from freight prepaid to freight collect. The decrease in selling expenses of $0.4 million was offset by an increase in general and administrative expenses of approximately $0.2 million primarily due to an increase consultation and professional services associated with guidance in investor relations and planning of contemplated one-time capital transactions. OTHER INCOME (EXPENSES) Other income (expenses), net decreased by approximately $1.0 million to approximately $0.2 in other income, net for the fiscal year ended March 31, 2022 compared to approximately $1.2 million in other income, net for the same period ended March 31, 2021. For the fiscal year ended March 31, 2022 there were one-time gains of approximately $0.4 million for the forgiveness of the Paycheck Protection Program loan and a gain of approximately $0.4 million primarily from a vendor settling accounts payable related to a damaged goods incident that occurred in the fiscal year ended March 31, 2020. This compares to the fiscal year ended March 31, 2021 when there were one-time gains associated with the recovery of approximately $1.1 million in out-of-pocket expenses relating to a prior year damaged goods insurance claim and a vendor settling accounts payable of $0.4 million from the factory that caused the damage. There was an additional one-time gain of approximately $0.2 million from Cosmo, a related party, related to payment in fiscal 2021 of prior year sales which were reversed and the related receivable was initially deemed uncollectible and written off in the prior fiscal year. Interest and amortization expense associated with the financing terms of the Crestmark Bank financing facility and Ironhorse financing facility increased to approximately $0.6 million for the fiscal year ended March 31, 2022 from approximately $0.5 million for the year ended March 31, 2021, an increase of approximately $0.1 million. INCOME BEFORE INCOME TAX PROVISION We had income before income tax provision of approximately $0.3 million in Fiscal 2022 compared to income before income tax provision of approximately $2.6 million in Fiscal 2021 for a total decrease in income before income tax provision of approximately $2.3 million. Net income from operations contributed approximately $1.4 million of the decrease due primarily to the decrease in gross profit as explained above. The decrease in other income and expenses, net of $1.2 million as explained above accounted for the remaining decrease in income before income tax provision. INCOME TAX PROVISION Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized. On both March 31, 2022 and 2021, we had net deferred tax assets of approximately $0.9 million. The deferred tax assets on March 31, 2022 and 2021 were net of a valuation allowance of approximately $78,000 and approximately $23,000, respectively due to management’s belief that certain tax assets will more than likely expire prior to the Company’s these assets being realized. In Fiscal 2022 we recognized an income tax provision of approximately $0.1 million compared to an income tax provision of approximately $0.5 million in Fiscal 2021. The Company’s effective tax rate for the fiscal year ended March 31, 2022 was approximately 20.0% as compared to 17.4% for Fiscal 2021. We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve. In management’s opinion, adequate provisions for income taxes have been made. NET INCOME As a result of the foregoing, we had net income of approximately $0.2 million and $2.2 million for Fiscal 2022 and Fiscal 2021, respectively. 17 LIQUIDITY AND CAPITAL RESOURCES On March 31, 2022, we had cash on hand of approximately $2.3 million as compared to cash on hand of approximately $0.4 million on March 31, 2021. The increase of cash on hand of approximately $1.9 million was primarily due to approximately $4.0 million provided by financing activities and offset by approximately $2.0 million in net cash used in operating activities. As of March 31, 2022, our working capital was approximately $7.8 million. During the next twelve-month period, we plan on financing our working capital needs primarily from: 1) Vendor financing – All our key vendors in China have agreed to manufacture on behalf of the Company without advanced payments and have extended payment terms to the Company. The terms with the factories are sufficient to cover the factory direct import sales which are expected to account for approximately 60% of the total revenues in the fiscal year ending March 31, 2023. 2) Credit Facility - We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022. However, absent any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. Approximately $4.0 million of borrowings are available under all our credit facilities as of the date of this filing . 3) Equity Raise – On May 23, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering (the “Offering”) pursuant to which the Company sold to the Underwriter 1,000,000 shares (the “Shares”) of common stock, par value $0.01 per share (the “Common Stock”) for gross proceeds of $4.0 million prior to deducting underwriting discounts and commissions and other estimated offering expenses. After underwriter discounts, commissions and other estimated offering expenses of approximately $0.7 million we received approximately $3.3 million to be used as working capital. The offering closed on May 26, 2022. The Company believes that its cash on hand, working capital (net of cash), cash expected to be generated from its operating forecast, along with the availability of cash from its credit facilities, will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filing of this annual report . Cash used in operating activities in Fiscal 2022 was approximately $2.0 million. There was an increase in inventory of approximately $8.4 million of which approximately $3.7 million was additional inventory due to product that was delivered too late for seasonal shipments as a result of global logistics difficulties, approximately $3.3 million was new product purchased for one major customer that was in-transit with the remaining increase primarily due to CPK inventory to be re-launched during the upcoming fiscal year. There was an increase in accounts receivable of approximately $0.6 million due to later than usual shipments due to global logistics issues. These decreases in cash used in operations were offset by an increase in amounts due from banks of approximately $4.5 million due to cash required to pay vendors for the additional inventory and an increase in accounts payable of approximately $2.5 million primarily due to new seasonal goods in-transit. Cash provided by operating activities in Fiscal 2021 was approximately $0.2 million. There was net income of approximately $2.1 million. There was a decrease in inventory of approximately $2.1 million primarily due to increased demand for our CPK product through social media awareness and increased demand for our home-based entertainment products during the COVID pandemic which allowed us to sell through most of the excess inventory from the prior fiscal year. There was a decrease in insurance receivable of approximately $1.3 million associated with the recovery of a pending insurance claim associated with water damaged goods in the prior fiscal year. These increases in cash provided by operations were offset by a reduction in accounts payable of approximately $3.2 million primarily due to the payment of significant amounts held back from the factory that caused the damaged goods issue in the prior fiscal year upon receipt of the related insurance claim proceeds. There was an increase in amounts due from banks of approximately $2.2 million due to excess cash collected over amounts due on the lines of credit associated with the operating cash generated from the reduction in inventory. There was a decrease in refunds due to customers of approximately $0.7 million associated with the settlement of the unpaid portion of chargebacks for damaged goods due to one customer from the prior fiscal year. Cash used in investing activities for Fiscal 2022 and Fiscal 2021 was approximately $0.1 million and $0.2 million, respectively primarily for the purchase of molds and tooling for new karaoke models. Net cash provided by financing activities for Fiscal 2022 was approximately $4.0 million. We received loan proceeds from our inventory line of credit of approximately $2.4 million. In August 2021, the Company received net proceeds of approximately $1.8 million 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, with the remaining offset primarily due to payments made on scheduled installments on installment notes and finance leases. 18 In 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) 550,000 shares of its common stock (the “Shares”) together with common warrants to purchase up to 550,000 shares of common stock for an exercise price of $10.50 per share, and (ii) 561,111 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 561,111 shares of common stock at an exercise price of $10.50 per share (the “Private Placement”). 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 received by the Company. Approximately $7,200,000 of the funds received were used to repurchase shares of the Company pursuant to that certain Redemption Agreement discussed below. The Company received an increase in working capital of approximately $1,800,000 of working capital after settlement of expenses associated with closing of these transactions. In August, 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 654,105 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 in consideration of a payment of approximately $7,200,000 to koncepts and Treasure Green. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company Net cash provided by financing activities for Fiscal 2021 was approximately $0.1 million. We received loan proceeds from Crestmark in the amount of approximately $0.4 million under the Paycheck Protection Program. We received additional proceeds from our inventory line of credit of approximately $0.1 million. These proceeds were offset by principal payments made on subordinated related party debt of $0.3 million and payments on financed leases and installment notes of approximately $0.1 million. We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022. However, absent any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. As of this filing, we have borrowed approximately $2.5 million on the IHC Facility, which is the maximum loan amount allowed on eligible inventory and approximately $0.0 million on our Crestmark Facility which will make available up to $10.0 million of eligible accounts receivable as the next twelve months progress as long as the loan is in place. As of this filing the Company has approximately $1.0 million currently available from these two credit facilities based on eligible inventory with IHC and eligible accounts receivable with Crestmark. 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”). For the year ended March 31, 2021 the Company incurred interest expense of approximately $4,000. In June 2021 the Company received notification from the SBA that the loan had been forgiven in its entirety. For the fiscal year ended March 31, 2022, a gain of approximately $448,000 (including principal and interest) from the forgiveness of the loan was included in other income (expenses), net in the accompanying consolidated statements of income. In August 2019, a major customer received goods that were significantly water damaged due to excess moisture absorbed in pallets shipped by the factory. As a result, we incurred a loss in cash flow of approximately $1.6 million in lost revenue and approximately $0.8 million in additional out of pocket expenses to retrieve, inspect, warehouse and properly destroy the goods in the prior fiscal year. As of this filing we have we recovered approximately $2.3 million from our cargo insurance coverage which settled approximately $1.3 million in insurance claim receivable with the remaining proceeds reflected in other income and (expenses) as a gain from damaged goods insurance claim in the consolidated statement of income for the fiscal year ended March 31, 2021. For the fiscal year ended March 31, 2022 we secured vendor invoice credits of approximately $0.2 million from the manufacturer’s representative of the factory that caused the damage. For the fiscal year ended March 31, 2021 there was a gain from damaged goods insurance claim of approximately $1.1 and we secured vendor invoice credits of approximately $0.4 million from the factory that caused the damage which is reflected as gain from extinguishment of accounts payable in the consolidated statements of income. EXCHANGE RATES We sell most of our products in U.S. dollars with some sales to certain Canadian customers in Canadian Dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. We are subject to risks involved in the exchange rate between the Canadian and US dollar, however, even though the exchange rate has fluctuated between $1.23 to $1.29 CAD to the U.S. Dollar during peak selling and collection season in Fiscal 2022 sales volume sold in Canadian dollars was not significant and the associated exchange rates did not have a material impact on the Company’s financial results. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau Pataca (MOP). The exchange rate of the Hong Kong dollar to the U.S. dollar has been relatively stable at approximately HK $7.75 to U.S. $1.00 since 1983 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. The exchange rate of the MOP to the U.S. dollar is approximately MOP $8.00 to U.S. $1.00. While exchange rates have been stable for several years, we cannot assure you that the exchange rate between the United States, Macau, Hong Kong and Canadian currencies will continue to be stable and exchange rate fluctuations may have a material effect on our business, financial condition or results of operations. 19 SEASONAL AND QUARTERLY RESULTS Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in our fiscal second and third quarter, combined, accounted for approximately 81% and 86% of net sales in Fiscal 2022 and Fiscal 2021, respectively. Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers. We may experience quarter to quarter fluctuations in product landed cost as the cost of shipping containers, drayage port delay charges and other logistics related costs increase as peak shipping season arrives. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. During 2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 8.6%, which is now at a 40-year historic high. Such heightened inflationary levels may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs and could significantly affect results of operations on a quarter-to-quarter basis. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating our reported financial results included accounts receivable allowance for doubtful accounts, reserves on inventory, revenue recognition and reserve for sales returns and income taxes. ACCOUNTS RECEIVABLE AND COLLECTIBILITY The Singing Machine’s accounts receivable consist of amounts due from customers in the ordinary course of business. Accounts receivable are carried at cost, net of allowances for uncollectible amounts. Provisions for losses are charged to operations in amounts sufficient to maintain an allowance for losses at a level considered adequate to cover probable losses inherent in the Company’s 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 an amount sufficient to respond to normal business conditions. Management sets 100% reserves for customers in bankruptcy and other reserves 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 promotion incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. RESERVES ON INVENTORIES The Singing Machine establishes a reserve on inventory based on the expected net realizable value of inventory 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 due to excess supply on-hand, slow-moving product and end-of-life product. On March 31, 2022 and 2021 the Company had inventory reserves of approximately $0.4 million and $0.6 million, respectively. REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”. All revenue is generated from contracts with customers. The Company recognizes revenue when 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. 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 income as our underlying customer agreements are less than one year. 20 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 incentives 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 the fiscal years ended March 31, 2022 and 2021, co-op promotion incentives were approximately $1.7 million and $2.0 million, respectively. 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 12 – SEGMENT INFORMATION). While the Company generally does not contractually provide for overstock returns, 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 from the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates. For the fiscal years ended March 31, 2022 and 2021 the Company received sales returns of approximately $3.6 million and $4.1 million, respectively. The return of products is due to a variety of reasons including defective units, customers’ overstock and buyer’s remorse. The primary reason for the decrease of approximately $0.5 million in returns was primarily due a decrease in overstock returns from major customers. The Company’s reserve for sales returns were approximately $1.0 million as of March 31, 2022 and 2021 (See Note 16 – RESERVE FOR SALES RETURNS). INCOME TAXES We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve. In management’s opinion, adequate provisions for potential income taxes in the jurisdictions have been made. 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. 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. OTHER ESTIMATES We make other estimates in the ordinary course of business relating to sales returns and allowances, warranty reserves, and reserves for promotional incentives. Historically, past changes to these estimates have not had a material impact on our financial condition. However, circumstances could change which may alter future expectations. 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 are effective for our fiscal year beginning April 1, 2023 including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required pursuant to this Item 8 are included in this Annual Report, as a separate section, commencing on page F-1 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 21 ITEM 9A. CONTROLS AND PROCEDURES (a) Management’s Report on Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Principal Executive Officer (our Chief Executive Officer) and Principal Financial Officer (our Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022, the end of our fiscal year covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2022, that consider remediation efforts commenced by the Company as a result of the material weaknesses noted during the assessment of the effectiveness of the Company’s internal controls over financial reporting as of and for the year ended March 31, 2021, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective. (b) Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of Company management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Management has assessed the effectiveness of our internal control over financial reporting using the components established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A material weakness is any deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of the year covered by this Annual Report. Remediation of Prior Year Material Weakness in Internal Control over Financial Reporting For the year ended March 31, 2021, we identified a material weakness in the consolidated financial statements close process which failed to detect errors which could have been material in the accounting for inventory cutoff and the inventory valuation of estimated returns. Specifically, the Company had a deficient process to close the consolidated financial statements and prepare comprehensive and timely account analysis, due in part to a new accounting software system, which resulted in certain adjusting journal entries. We implemented a new Enterprise Resource Planning (“ERP”) software system during the fiscal year ended March 31, 2021 and during the closing process discovered that the system was not applying the First-In-First Out (“FIFO”) layering formula correctly to returned goods received. While we have identified the specific FIFO costing formula that the system must use for returning goods the curing of this defect in the accounting software system was still in progress as of March 31, 2021. In addition, due to significant personnel turnover in our California warehouse facility and the implementation of a new ERP software system there were some communication and training issues regarding the staging and receiving areas of the warehouse during the end of year physical inventory that caused a material weakness in properly observing inventory cutoff. We have remediated the FIFO calculation material weakness by manually calculating the FIFO cost of each item in the inventory (including returned product) at the end of each quarter, comparing the manually calculated inventory valuation to the perpetual inventory valuation from our accounting software system and recording any difference in cost of goods sold in the consolidated financial statements. We expect the returned goods valuation defect in the accounting software system to be remediated during the fiscal year ending March 31, 2023 and will continue to manually calculate the inventory valuation at the end of each quarter until such time that any differences between the manual calculation and accounting system calculation are deemed immaterial. We have remediated the inventory cutoff weakness with proper training of new personnel involved with the inventory and specifically addressed procedures prior to the physical inventory conducted for the fiscal year ended March 31, 2022. 22 (c) Changes in Internal Controls Other than the remediation of the prior year material weakness, there were no other changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2022, that materially affected, or were reasonably likely to materially affect the Company’s internal control over financial reporting. Auditor Attestation This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth certain information with respect to our executive officers, directors and significant employees as of March 31, 2022. Name Age Position Gary Atkinson 40 Chief Executive Officer, Director Bernardo Melo 45 Chief Revenue Officer Lionel Marquis 69 Chief Financial Officer Harvey Judkowitz 77 Director Joseph Kling 92 Director Mathieu Peloquin 51 Director Jay B. Foreman 60 Director The following information sets forth the backgrounds and business experience of our directors and executive officers: Gary Atkinson joined the Company in January 2008 and served as General Counsel and Corporate Secretary. In November 2009, Mr. Atkinson was appointed as Interim Chief Executive Officer and was promoted as the Company’s permanent Chief Executive Officer in May, 2012. Since taking over as Chief Executive Officer, Mr. Atkinson has led the Company to seven consecutive years of profitability and growth in sales. Mr. Atkinson is a licensed attorney in Florida and Georgia. He graduated from the University of Rochester with a Bachelor’s Degree in Economics and has been awarded a dual-degree J.D./M.B.A. from Case Western Reserve University School of Law and Weatherhead School of Management. Effective August 11, 2021, Mr. Atkinson was appointed to the Board of Directors. The Company believes that Mr. Atkinson is qualified to serve on the Board of Directors because of his 14+ years of karaoke industry experience and management experience. Bernardo Melo has been with the Company since February 2003. Mr. Melo was appointed as Chief Revenue Officer on April 22, 2022 and has served as the Vice President of Global Sales and Marketing (“VP of Sales”) since 2008. During his tenure at the Singing Machine, Mr. Melo has overseen the sales and operations of the music division as well as managed the customer service department. Before taking over the responsibility of VP of Sales, Mr. Melo held dual roles with the Company managing the operations, licensing and sales of the music division while concentrating on hardware sales for the Latin America and Canada market as well as key U.S. accounts such as Walmart. Prior to joining the Company, Mr. Melo held a consulting role for Rewards Network formerly Idine. Mr. Melo’s assignment during his tenure was improving their operational procedures while increasing efficiencies and lowering operating cost. Mr. Melo also worked at Coverall North America as Director of Sales managing a startup initiative for the company covering 15 regional office and 40 sales reps across North America focusing on franchise sales. Overall Mr. Melo has over 15 years of sales, marketing and management experience. Lionel Marquis joined the Company in June 2008 as Controller and Principal Accounting Officer and was appointed as the Company’s Chief Financial Officer in May 2012. For the past 26 years Mr. Marquis has served as Controller and or Chief Financial Officer for several manufacturing and distribution companies in the South Florida area. Some of these companies include Computer Products, Inc (Artesyn Technologies Inc), US Plastic Lumber Corp., Casi-Rusco, (division of Interlogix Inc.), DHF Industries, Inc and Ingear Fashions, Inc. Mr. Marquis graduated from Bryant University with a Bachelor’s Degree in Business Administration with a major in accounting. Mr. Marquis is a Certified Public Accountant in the state of Florida. 23 Harvey Judkowitz has served as a director of the Company since March 29, 2004 and is the chairman of the Audit Committee. He is licensed as a CPA in New York and Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own CPA practices. He has served as the Chairman and CEO of UniPro Financial Services, a diversified financial services company up until the company was sold in September of 2005. He was formerly the President and Chief Operating Officer of Photovoltaic Solar Cells, Inc. The Company believes that Mr. Judkowitz is qualified to serve on the Board of Directors because he is a qualified CPA with over 18+ years’ experience on the Board. Joseph Kling was appointed as a director of the Company on May 9, 2017. Mr. Kling has spent his entire career in the toy industry, most notably serving as CEO of View-Master, the iconic stereoscopic toy company, which later purchased Ideal Toy from CBS and later became View-Master Ideal, publicly traded on the Nasdaq. View-Master Ideal later acquired California Plush Toys and the entire group was later acquired by Tyco Toys in 1989. Mr. Kling later went into private M&A consulting and sat on the board of Russ Berrie & Co (currently known as Kids Brands, Inc.) for 21 years advising on the acquisition of several toy companies. Mr. Kling has also served on the Board of Crown Crafts, a large distributor of infant, toddler, and juvenile consumer products and on the board of Lancit Media Entertainment, a children’s and family media production company (formerly listed on the Nasdaq). Notably, Mr. Kling has been involved in many major toy company acquisitions of brands such as Melissa & Doug and Brio. The Company believes that Mr. Kling is qualified to serve on the Board of Directors because of his success and relationships in the toy industry and his deep understanding of consumer products and market awareness of mergers and acquisitions in the toy industry. Mathieu Peloquin was appointed as a director of the Company on December 1, 2021. Mr. Peloquin was appointed Senior Vice-President, Marketing and Communications at Stingray Group, Inc. (“Stingray”) in 2013 and oversees marketing, communication strategies, content and investor relations. Mr. Peloquin brings more than 20 years of experience as an expert marketer, strategist and inspiring leader. Prior to joining Stingray, Mr. Peloquin was Vice President of Marketing at Transcontinental Media Inc. and Vice President of Transcontinental Media Inc.’s Digital Marketing Solutions Group from 2010 to 2013. He also held several executive positions at Reader’s Digest Magazines Canada Limited and co-founded Equinox Marketing Services. Mr. Peloquin is a CPA, CMA and holds a Bachelor of Commerce from the School of Management of the Université du Québec à Montréal. The Company believes that Mr. Peloquin is qualified to serve as a member of the Board of Directors due to his extensive business experience. Jay B. Foreman was appointed as director of the Company on May 23, 2022. Mr. Foreman has been a veteran of the toy industry for over 30 years. Mr. Foreman started his career at Fable Toys as a territory sales rep for the Jersey Shore and within ten years became SVP for Galoob Toys, where he was primarily responsible for developing the direct import business. He has founded multiple toy companies over his career, including co-founding Play-By-Play Toy’s and Novelties and more recently Play Along Toys, a leading toy company, which was subsequently sold to Jakks Pacific in 2004. Mr. Foreman later went on to found his third start up which became Basic Fun!, now the makers of Tonka™ trucks, Carebears™, K’NEX™, Lincoln Logs™, Playhut™. Mr. Foreman serves as CEO of Basic Fun!, which role he has had since he founded the company in 2009. He has also served on the boards of directors of the Toy Association and Licensing Merchandisers association. He currently chairs the Toy Industry trade show committee which is responsible for the world famous NY Toy Fair. The Company believes that Mr. Foreman is qualified to serve as a member of the Board of Directors because of his extensive history and experience in the toy business, including his deep knowledge of licensing, operations, sales and marketing, M&A, and capital markets. NOMINATION OF DIRECTORS Our Nominating Committee is responsible for identifying individuals qualified to become directors. The Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (1) the Nominating Committee members, (2) our other directors, (3) our shareholders, (4) our Chief Executive Officer or Chairman, and (5) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating Committee considers the entirety of each candidate’s credentials. Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board of Directors. However, at a minimum, candidates for director must possess: ● high personal and professional ethics and integrity; ● the ability to exercise sound judgment; ● the ability to make independent analytical inquiries; ● a willingness and ability to devote adequate time and resources to diligently perform Board and committee duties; and ● the appropriate and relevant business experience and acumen. 24 In addition to these minimum qualifications, the Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors: ● whether the person possesses specific industry expertise and familiarity with general issues affecting our business; ● whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K; ● whether the person would qualify as an “independent director”, as such term is defined in the Nasdaq Stock Market Rules; ● the importance of continuity of the existing composition of the Board of Directors to provide long term stability and experienced oversight; and ● the importance of diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise. There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s board of directors as set forth in the Company’s Proxy Statement on Schedule 14A filed with the SEC on October 29, 2021. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee The members of our Audit Committee are Messrs. Judkowitz, Kling and Foreman, with Mr. Judkowitz serving as the Chairperson. Each of Messrs. Judkowitz, Kling and Foreman is independent under the rules and regulations of the SEC and the listing standards of the Nasdaq Stock Market applicable to audit committee members. Our board of directors has determined that Mr. Judkowitz qualifies as an audit committee financial expert within the meaning of SEC regulations and meet the financial sophistication requirements of the Nasdaq Stock Market. Our Audit Committee has the responsibility for, among other things, (i) selecting, retaining and overseeing our independent registered public accounting firm, (ii) obtaining and reviewing a report by independent auditors that describe the accounting firm’s internal quality control, and any materials issues or relationships that may impact the auditors, (iii) reviewing and discussing with the independent auditors standards and responsibilities, strategy, scope and timing of audits, any significant risks, and results, (iv) ensuring the integrity of the Company’s financial statements, (v) reviewing and discussing with the Company’s independent auditors any other matters required to be discussed by PCAOB Auditing Standard No. 1301, (vi) reviewing, approving and overseeing any transaction between the Company and any related person and any other potential conflict of interest situations, (vii) overseeing the Company’s internal audit department, (v) reviewing, approving and overseeing related party transactions, and (viii) establishing and overseeing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by Company employees of concerns regarding questionable accounting or auditing matters. Compensation Committee The members of our Compensation Committee are Messrs. Judkowitz, Kling and Foreman, with Mr. Kling serving as the Chairperson. Our Compensation Committee has the responsibility for, among other things, (i) reviewing and approving the chief executive officer’s compensation based on an evaluation in light of corporate goals and objectives, (ii) reviewing and recommending to the Board the compensation of all other executive officers, (iii) reviewing and recommending to the Board incentive compensation plans and equity plans, (iv) reviewing and discussing with management the Company’s Compensation Discussion and Analysis and related information to be included in the annual report on Form 10-K and proxy statements, and (v) reviewing and recommending to the Board for approval procedures relating to Say on Pay Votes. Nominating and Corporate Governance Committee The members of our Nominating and Corporate Governance Committee are Messrs. Judkowitz, Kling and Foreman, with Mr. Foreman serving as the Chairperson. Our Nominating and Corporate Governance Committee has the responsibility relating to assisting the Board in, among other things, (i) identifying and screening individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors, (ii) recommending to the Board the approval of nominees for director, (ii) developing and recommending to our board of directors a set of corporate governance guidelines, and (iv) overseeing the evaluation of our board of director. Controlled Company Subsequent to March 31, 2022 and as of the date of this report, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1568,849 shares of our common stock or approximately 52.0% of our outstanding shares. Digital Power Lending is a wholly owned subsidiary of BitNile Holdings. Mr. Ault is the Executive Chairman of BitNile Holdings. 25 As long as BitNile continues to hold more than 50% of the voting power of our Company, we will be a “controlled company” as defined under Nasdaq Marketplace Rules. For so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely on certain exemptions from corporate governance rules, including: ● an exemption from the rule that a majority of our board of directors must be independent directors; ● an exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and ● an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. BitNile has indicated it intends to appoint two directors to the Board of Directors. Upon the appointment of the BitNile nominees, our Board of Directors will increase in size to seven directors, of which less than a majority will be “independent” as defined under Nasdaq Marketplace Rules. No Family Relationships There is no family relationship between any director and executive officer or among any directors or executive officers. Involvement in Certain Legal Proceedings Our directors and executive officers have not been involved in any of the following events during the past ten years: 1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; 2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); 3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; 4. being found by a court of competent jurisdiction in a civil action, the SEC or the CFTC to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; 5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or 6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. Director Independence The Board evaluates the independence of each nominee for election as a director of our Company in accordance with the Listing Rules (the “Nasdaq Listing Rules”) of the Nasdaq Stock Market . Our board currently consists of five directors, Gary Atkinson, Harvey Judkowitz, Joseph Kling, Mathieu Peloquin and Jay B. Foreman. Messrs. Judkowitz, Kling and Foreman are “independent directors” within the meaning of the Nasdaq Listing Rules. Code of Ethics We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer. Our Code of Ethics is available on our website at https://singingmachine.com/pages/investors. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires our officers, directors, and persons who own more than ten percent of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater-than-ten-percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant to Rule 16a-3 under the Exchange Act, we believe that all such forms required to be filed pursuant to Section 16(a) of the Exchange Act during the year ended March 31, 2022 were timely filed, as necessary, by the officers, directors, and security holders required to file such forms except for as set forth in the Delinquent Section 16(a) section below. 26 Delinquent Section 16(a) Reports ● Mr. Harvey Judkowitz filed a late Form 4 on June 23, 2022 with respect to five transactions; and ● Mr. Joseph Kling filed a late Form 4 on June 23, 2022 with respect to two transactions. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION PHILOSPOPHY Our Compensation Committee believes that the Company must maintain short and long-term executive compensation plans that enable us to attract and retain well-qualified executives. Furthermore, we believe that our compensation plans must also provide a direct incentive for our executives to create shareholder value. A well-designed executive compensation plan will align the interests between the executives and the shareholders as well as creating a positive environment of goals, performances and rewards. We believe that our executive compensation should reflect the success of the management team, rather than the individual, in attaining the key operating objectives such as revenues growth, operation cost reduction, fund raising and the appreciation of the stock price. A clear measurement should be established to reward the performance. We will also evaluate our executive compensation package by comparison to similar companies to ensure the competitiveness of our compensation. In furtherance of this philosophy, the compensation of our executives generally consists of three components: base salary, annual cash incentives and long-term performance-based incentives. Base Salaries Annual base salaries for executive officers are initially determined by evaluating the responsibility of the position and the experience and the skill sets of the individual. Also taken into consideration is the competitiveness of the marketplace for executive talent, including a comparison of base annual salaries with comparable positions within similar companies. Incentive Cash Bonuses Generally, we award cash bonuses to our management employees and other employees, based on their personal performance in the past year and overall performance of our Company. The overall performance of our Company includes the revenue growth, reduction of the operation expenses, fund raising and the stock price appreciation. Long Term Compensation - Stock Option Grants We have utilized stock options to motivate and retain executive officers and other employees for the long-term. We believe that stock options closely align the interests of our executive officers and other employees with those of our stockholders and provide a major incentive to building stockholder value. Options are typically granted annually and are subject to vesting provisions to encourage officers and employees to remain employed with the Company. Our stock options are usually granted at a price equal to or above the fair market value of our common stock on the date of grant. As such, executive officers and employee only benefit from the grant of stock options if our stock price appreciates. Generally, we try to tie bonus payments to our financial performance. However, if an individual has made significant contributions to our Company, we will provide them with a bonus payment for their efforts even if our Company’s financial performance has not been strong. SUMMARY COMPENSATION TABLE The following table provides information regarding the compensation earned by or paid to our named executive officers with respect to the years ended March 31, 2022 and 2021. Name and Principal Position Year Salary Bonus Stock Awards Option Awards Non-Equity Incentive Plan Comp Non-Qualified Deferred Compensation Earnings Other Comp TOTAL COMP Gary Atkinson 2022 $ 156,075 $ - $ - $ - $ - $ - $ 5,339 $ 161,414 Chief Executive Officer 2021 $ 150,000 $ 100,000 $ - $ - $ - $ - $ 5,077 $ 255,077 Lionel Marquis 2022 $ 154,154 $ - $ - $ - $ - $ - $ 6,484 $ 160,638 Chief Financial Officer 2021 $ 150,518 $ 110,000 $ - $ - $ - $ - $ 10,448 $ 270,966 Bernardo Melo 2022 $ 163,004 $ 146,725 $ - $ 9,114 $ - $ - $ 12,389 $ 331,232 Chief Revenue Officer 2021 $ 157,200 $ 136,737 $ - $ - $ - $ - $ 11,575 $ 305,512 27 Narrative Disclosure to Summary Compensation Table (1) Mr. Atkinson earned an annual salary of $156,075 for the fiscal year ended March 31, 2022 and $150,000 for the fiscal year ended March 31, 2021. (2) Mr. Marquis earned an annual salary of $154,154 for the fiscal year ended March 31, 2022 and $150,518 for the fiscal year ended March 31, 2021. (3) Mr. Melo earned an annual salary of $163,004 for the fiscal year ended March 31, 2022 and $157,200 for the fiscal year ended March 31, 2021. OUTSTANDING OPTION AND STOCK AWARDS AT FISCAL YEAR-END The following table sets forth information with respect to outstanding grants of options to purchase our common stock under stock option awards issued with Board of Directors approval to the named executive officers as of the fiscal year ended March 31, 2022: Name and Principal Position Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) Gary Atkinson, CEO - Other stock option awards 5,000 - N/A 6.30 7/1/2023 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 7.20 3/31/2026 N/A N/A N/A N/A - Other stock option awards 3,333 - N/A 14.10 5/3/2027 N/A N/A N/A N/A Lionel Marquis, CFO - Other stock option awards 3,333 - N/A 6.30 7/1/2023 N/A N/A N/A N/A - Other stock option awards 500 - N/A 7.20 3/31/2026 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 14.10 5/3/2027 N/A N/A N/A N/A Bernardo Melo, VP Sales - Other stock option awards 8,333 - N/A 6.30 7/1/2023 N/A N/A N/A N/A - Other stock option awards 833 - N/A 5.10 6/30/2025 N/A N/A N/A N/A - Other stock option awards 3,333 - N/A 9.60 8/10/2026 N/A N/A N/A N/A - Other stock option awards 6,667 - N/A 14.10 5/3/2027 N/A N/A N/A N/A - Other stock option awards 1,667 - N/A 6.60 12/25/2031 N/A N/A N/A N/A EMPLOYMENT AGREEMENTS Effective April 22, 2022, we entered into employment agreements with each of our Chief Executive Officer, Chief Financial Officer and Chief Revenue Officer (the “Employment Agreements”). The Employment Agreements for Messrs. Atkinson and Melo are for a term of three years with automatic renewals for successive one-year terms, unless either party provides notice of its intention not to extend. Mr. Marquis’s Employment Agreement provides for a term of eighteen months with automatic renewals for successive one-year terms unless either party provides notice of its intention not to extend. Pursuant to the Employment Agreements, as compensation for their service as executives of the Company, the executives will receive: (1) a base salary per annum (the “Base Salary”), set forth below and commensurate benefits, as described in the Employment Agreement; (2) eligibility, subject to their continued employment with the Company, to earn an annual bonus (the “Annual Bonus”); (3) eligibility, also subject to their continued employment with the Company, to participate in the Company’s 2022 Equity Incentive Plan, or any successor plan, subject to the terms of such plan; and (4) entitlement, also subject to the executives’ continued employment with the Company, to reimbursement for all reasonable and necessary out-of-pocket business, entertainment, and travel expenses incurred by them in connection with the performance of their duties for the Company and the Company’s expense reimbursement policies and procedures. The executives’ base salaries are as follows: ● Gary Atkinson: $215,000, with an automatic increase to $225,000 on the first anniversary of the Employment Agreement; provided the Company remains profitable. ● Lionel Marquis: $175,000, with an automatic increase to $185,000 on the first anniversary of the Employment Agreement provided the Company remains profitable. ● Bernardo Melo: $215,000 with an automatic increase to $225,000 on the first anniversary of the Employment Agreement; provided the Company remains profitable. In addition to the payment of accrued amounts due to the executives, the Employment Agreements each provide for the payment of severance to the Executives in a lump sum payment equal to two times the sum of the executive’s base salary and annual bonus for the year in which the termination occurs, in the event of the termination of the Agreement by the Company without Cause (as defined in the Employment Agreement), or upon the Company’s election not to renew the Employment Agreement or by the executive for Good Reason (as defined in the Employment Agreement). The Employment Agreements provide for payments to the executive of certain amounts in the event of the executive’s death or disability (as defined in the Employment Agreement). 28 In the event the executive’s employment is terminated by the executive for Good Reason (as defined in the Employment Agreement) on account of its failure to renew the Employment Agreement or without Cause (as defined in the Employment Agreement”) within twelve months of a Change in Control (as defined in the Employment Agreement), the executive shall be entitled to receive a lump sum payment equal to two times the base salary and annual bonus for the year in which the termination takes place. Payment of severance under the Employment Agreement is conditioned upon the executive’s execution of a release in favor of the Company. The Employment Agreements superseded the change of control agreements previously entered into by the Company in January 2014 with each of its three executive officers. EXECUTIVE BONUS PLAN On April 22, 2022, our Board of Directors approved a Bonus Plan (the “Bonus Plan”) for our executive officers. The Bonus Plan offers a cash bonus, stock options, and stock grants to the executives based on the Company’s EBITDA at its fiscal year end. The value of the cash bonus and number of stock options and grants increases based on the Company’s percentage of net sales. The Bonus Plan also provides for a one-time option grant to the executives upon the successful listing of the Company’s shares of common stock on the Nasdaq Stock Market, LLC. The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in Fiscal 2022. DIRECTOR COMPENSATION Name Fees Earned or Paid in Cash Stock Awards (1) Option Awards (2) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings All Other Compensation Total Peter Hon (3) $ 2,500 $ - $ - $ - $ - $ - $ 2,500 Harvey Judkowitz $ 17,750 $ 2,500 $ 5,036 $ - $ - $ - $ 25,286 Phillip Lau (3) $ 2,500 $ - $ - $ - $ - $ - $ 2,500 Yat Tung Lau (3) $ 2,500 $ - $ - $ - $ - $ - $ 2,500 Joseph Kling $ 11,250 $ 2,500 $ 5,036 $ - $ - $ - $ 18,786 Mathieu Peloquin $ - $ - $ 4,461 $ - $ - $ - $ 4,461 Refer to Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for the relevant assumptions used to determine the valuation of our option awards. (1) As of March 31, 2022 the aggregate number of stock awards held by Messrs. Judkowitz and Kling is 11,678 and 523, respectively. The aggregate stock awards held by Messrs. Hon, Yat Tung Lau and Philip Lau is 1,832, 1,485 and 523, respectively. (2) As of March 31, 2022 the aggregate number of Company stock options held by Messrs. Judkowitz and Kling is 4,667 and 3,334, respectively and Messrs. Hon, Yat Tung Lau and Philip Lau is 3,334, 2,667 and 2,667 respectively. (3) Messrs. Hon, Yat Tung Lau, and Philip Lau resigned effective August 10, 2021. During our fiscal year ended March 31, 2022, our compensation package for our non-employee directors consisted of grants of stock options, cash payments, stock issuances and reimbursement of costs and expenses associated with attending our board meetings. 29 We compensate our directors as follows: ● An initial grant of 667 stock options with an exercise price determined as the closing price on the day of joining the board. The options vest in one year and expire in ten years while they are board members or the lesser of five years or remaining life of the stock option once they are no longer board members. ● An annual cash payment of $7,500 for each completed full year of service or prorated for a partial year. The payment will be made on or before March 31. ● An annual stock grant of stock equivalent in value to $2,500 for each completed full year of service or prorated for a partial year. The stock price at grant will be determined at the closing price on the day of the Annual Stockholder Meeting. The actual grant will be made on or before March 31. ● An annual grant of 667 stock options with an exercise price determined as the closing price on the day of the Annual Stockholder Meeting. If the Annual Meeting is held less than 6 months after the board member first joined the board he or she will not receive another option grant. ● A $500 fee for each board meeting and annual meeting attended. Committee meetings and telephone board meetings will be compensated with a $250 fee. ● All expenses are reimbursed for attending board, committee and annual meetings or when their presence at a location away from home is requested. 2022 EQUITY INCENTIVE PLAN On April 12, 2022, our Board of Directors adopted the 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. The maximum number of shares of common stock initially available for issuance under the 2022 Plan is 233,334 shares of common stock and thereafter an annual increase shall be added as of the first day of the Company’s fiscal year beginning in 2023, equal to the least of (i) 5% of the outstanding common stock on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, (ii) 33,334 shares, and (iii) a lesser amount as determined by the Board of Directors. The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled or are forfeited, shall again become available for issuance under the 2022 Plan. Shares subject to a stock award under the 2022 Plan shall not again be made available for issuance or delivery under the 2022 Plan if such shares are (i) shares tendered by a participant or retained by the Company as full or partial payment to the Company for the exercise or purchase price of an award or (ii) shares used to satisfy tax withholding obligations in connection with an award. Notwithstanding any other provision of the 2022 Plan to the contrary, unless the plan administrator determines otherwise with respect to a particular award, in the event of a change of control, if and to the extent an outstanding award is not converted, assumed, substituted for or replaced by the successor company, then such award will terminate upon effectiveness of the change of control. Prior to the change of control, the plan administrator may approve accelerated vesting and/or lapse of forfeiture or repurchase restrictions with respect to all or a portion of the unvested portions of such awards, any such determinations to be made by the plan administrator in its sole discretion. A change in control includes: ● certain acquisitions of beneficial ownership of more than 50% of our total voting power; ● a change in the composition of the board of directors during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the board of directors cease for any reason to constitute at least a majority of the board, as defined in the 2022 Plan; and ● the consummation of a company transaction, as defined in the 2022 Plan. The Board of Directors may amend, suspend or terminate the 2022 Plan or a portion of it at any time; however, to the extent required by applicable law, regulation or stock exchange rule, stockholder approval shall be required for any amendment to the 2022 Plan. The 2022 Plan is scheduled to terminate automatically in ten (10) years following the earlier of (a) the date the Board of Directors adopted the 2022 Plan and (b) the date the shareholders approved the 2022 Plan. 401(K) PLAN Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at least one year of service are eligible to participate in our 401(k) plan. We make a matching contribution of 100% of salary deferral contributions up to 3% of pay, plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll period. The amounts charged to earnings for contributions to this plan and administrative costs during the years ended March 31, 2022 and 2021 totaled approximately $70,000 and $74,000, respectively. 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of our common stock as of July 14, 2022, unless otherwise noted below, for the following: ● Each person or entity known to own beneficially more than 5% of our outstanding common stock as of the date indicated in the corresponding footnote; ● Each of the named executive officers: ● Each director; and ● All current directors and executive officers as a group. Security ownership is based on 3,017,700 shares of our common stock issued and outstanding. In computing the number and percentage of shares beneficially owned by a person, shares of common stock subject to convertible securities and options currently convertible or exercisable, or convertible or exercisable within 60 days of July 14, 2022 are counted as outstanding, but these shares are not counted as outstanding and to be beneficially owned by that person, for computing the percentage ownership of any other person. As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted below, and subject to applicable property laws, to our knowledge each person has sole investment and sole voting power over the shares shown as beneficially owned by them. Unless otherwise noted, the principal address of each of the directors and officers listed below is c/o The Singing Machine Company, Inc., 6301 NW 5 th Way, Suite 2900, Fort Lauderdale, FL 33309. Name of Beneficial Owner Common Stock Beneficially Owned Percentage of Common Stock Directors and Officers: Gary Atkinson (1) 15,317 * Lionel Marquis (1) 9,500 * Bernardo Melo (1) 30,099 * Harvey Judkowitz (1) 16,879 * Joseph Kling (1) 5,051 * Mathieu Peloquin 617 * Jay Foreman 31,867 1.06 % All Executive Officers and Directors as a Group (7 persons) 109,330 3.61 % Beneficial owners of more than 5%: BitNile Holdings. Inc. (2) 1,568,849 51.99 % Armistice Capital Master Fund Ltd. (3) 155,303 5.02 % Stingray Group Inc. (4) 322,223 10.68 % * Represents less than 1% (1) Includes as to the person indicated, the following outstanding stock options to purchase shares of the Company’s Common Stock issued under 2001 Stock Option Plan and other stock option awards, which will be vested and exercisable within 60 days of July 14, 2022: 10,000 options held by Gary Atkinson, 19,167 options held by Bernardo Melo, 5,500 options held by Lionel Marquis, 2,000 options held by Harvey Judkowitz, and 3,334 options held by Joseph Kling. (2) Based solely upon Schedule 13D/A jointly filed with the Securities and Exchange Commission on July 11, 2022 by BitNile Holdings, Inc. (“BitNile Holdings”), a Delaware corporation, Digital Power Lending, LLC (“Digital Power Lending”), a California limited liability company and subsidiary of BitNile Holdings, and Milton C. Ault, III (“Ault”), Founder and Executive Chairman of BitNile Holdings. Represents 1,568,849 shares of common stock, all of which are directly owned by Digital Power Lending and indirectly owned by BitNile Holdings and Ault. The address of BitNile is 11411 Southern Highlands Parkway, Suite 240, Las Vegas, NV 89141. 31 (3) Based solely upon Schedule 13G filed with the Securities and Exchange Commission on February 14, 2022 by Armistice Capital, LLC which reported that as of February 14, 2022 the security holder owned 82,303 shares of common stock and 555,556 shares of common stock issuable upon exercise of common warrants. The security holder may not exercise the common warrants to the extent such exercise would cause the security holder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of such securities which have not been so exercised. Armistice Capital, LLC (“Armistice Capital”) is the investment manager of Armistice Capital Master Fund Ltd. (the “Master Fund”), the direct holder of the shares, and pursuant to an Investment Management Agreement, Armistice Capital exercises voting and investment power over the securities of the Issuer held by the Master Fund and thus may be deemed to beneficially own the securities of the Issuer held by the Master Fund. Mr. Boyd, as the managing member of Armistice Capital, may be deemed to beneficially own the securities of the Issuer held by the Master Fund. The Master Fund specifically disclaims beneficial ownership of the securities of the Issuer directly held by it by virtue of its inability to vote or dispose of such securities as a result of its Investment Management Agreement with Armistice Capital. The address of Armistice Capital Master Fund Ltd. is 510 Madison Ave, 7th Floor, New York, NY 10022. (4) Based solely upon the Schedule 13D/A filed with the Securities and Exchange Commission on May 26, 2022 by Stingray Group Inc. (“Stingray”), a corporation incorporated under the laws of Canada, and Eric Boyko (“Mr. Boyko”). Pursuant to the Schedule 13D/A, as of May 1, 2022, Mr. Boyko indirectly controlled approximately 57.45% of the combined voting power of Stingray’s outstanding shares. As a result, Mr. Boyko may be deemed to share beneficial ownership of the shares of common stock and the warrants held by Stingray. Does not include 222,223 shares of common stock issuable upon exercise of common warrants. The security holder may not exercise the warrants to the extent such exercise would cause the security holder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of such securities which have not been so exercised. The address of Stingray Group Inc. is 730 Wellington Street, Montréal, Québec H3C 1T4. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS On April 12, 2022, our Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. The maximum number of shares of common stock initially available for issuance under the 2022 Plan is 233,333 shares of common stock and thereafter an annual increase shall be added as of the first day of the Company’s fiscal year beginning in 2023, equal to the least of (i) 5% of the outstanding common stock on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, (ii) 333,334 shares, and (iii) a lesser amount as determined by the Board of Directors. The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled or are forfeited, shall again become available for issuance under the 2022 Plan. The following table summarizes our equity compensation plan information as of March 31, 2022: Plan Category Number of Securities to be issued upon exercise of outstanding options, warrants and rights Weighted –average exercise price of outstanding option, warrants and rights Number of securities remaining available for future issuance under equity compensation Plans Equity compensation plans approved by security holders 56,334 $ 9.90 233,333 Equity compensation plans not approved by security holders Total 56,334 $ 9.90 233,333 ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE A transaction may be a related person transaction if any of our directors, executive officers, owners of more than 5% of our common stock, or their immediate family were involved in a transaction in which the Company was or is to be a participant, and the amount involved exceeds the lesser of $120,000 or 1% of the average of the Company’s total assets at year end for the last two completed fiscal years. The Company engaged in the following related persons transactions in the last two fiscal years or expects to engage in the following transactions since the end of that two-year period: DUE TO/FROM RELATED PARTIES During our fiscal year ended March 31, 2022 and 2021, the Company did business with entities owned by our former Chairman, Philip Lau. Those entities were: 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”). On March 31, 2022 and 2021 the Company had approximately $0.1 million due to related parties SLRD, SCE and SLE for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by them. Mr. Lau resigned as Chairman effective August 10, 2021. During our fiscal year ended March 31, 2022 and 2021, the Company did business with Stingray Group Inc (“Stingray”) who is part of a group of investors who participated in the Private Placement and have acquired a minority interest in the Company (see Note 10 – August 2021 Private Placement). On March 31, 2022 and 2021, the Company had approximately $0.2 million and $0.1 million, respectively due from Stingray for music subscription reimbursement. 32 Subordinated Related Party Debt and Note Payable In connection with the Revolving Credit Facility with PNC Bank, the Company was required to subordinate related party debt to Starlight Marketing Development, Ltd. (“Subordinated Debt”). The subordinated debt of approximately $924,000 bore interest at 6% and was scheduled to be paid in quarterly installments of $123,000 which included interest and commenced September 30, 2017 and ending on the debt maturity date of June 30, 2019. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter were not made since September 2017 however, a payment of $25,000 which included principal and interest, was made during Fiscal 2020. On June 1, 2020 the remaining amount due on the Subordinated Debt of approximately $803,000, which was classified as a non-current liability on the consolidated financial statements as of March 31, 2020, was converted to a note payable which bears interest at 6%. In connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the note payable (“Subordinated Note Payable”) to Starlight Marketing Development, Ltd. Both agreements allow for the repayment of the Subordinated Note Payable provided any amounts borrowed against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity to support on-going operations. There is no set schedule with regards to payment of the note however, during Fiscal 2021 the Company was able to make principal payments of $300,000 on the Subordinated Note Payable. As of March 31, 2022 and 2021 the remaining principal balance of approximately $352,000 and $503,000, respectfully is classified as a current liability on the accompanying consolidated balance sheets. During the fiscal years ended March 31, 2022 and 2021 interest expense was approximately $20,000 and $35,000, respectively on the Subordinated Note Payable. During the fiscal years ended March 31, 2022 and 2021 interest expense was approximately $0 and $12,000, respectively on the related party Subordinate Debt. TRADE During both Fiscal 2022 and 2021 the Company paid approximately $0.4 million to SLE as reimbursement for engineering, quality control and other administrative services performed on our behalf in China. These expense reimbursements were included in general and administrative expenses on our consolidated statements of income. 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 $0.7 million. During Fiscal 2022 and 2021 there was a gain of approximately $0.0 million $0.2 million, respectively from Cosmo related to payments received in Fiscal 2021 on prior year sales and the related receivable previously reversed and written off as they were initially deemed uncollectible. The Company has a music subscription sharing agreement with Stingray. For the fiscal years ended March 31, 2022 and 2021 the Company received music subscription revenue of approximately $0.5 million and $0.4 million, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income. Review, Approval or Ratification of Transactions with Related Persons We believe that the terms of all of the above transactions are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our Company in connection with related party transactions. While we do not maintain a written policy with respect to related party transactions, our board of directors routinely reviews potential transactions with those parties we have identified as related parties prior to the consummation of the transaction. Each transaction is reviewed to determine that a related party transaction is entered into by us with the related party pursuant to normal competitive negotiation. We also generally require that all related parties recuse themselves from negotiating and voting on behalf of the Company in connection with related party transactions. Board Determination of Independence The Board evaluates the independence of each nominee for election as a director of our Company in accordance with the Nasdaq Listing Rules. All directors who sit on our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee must also be independent directors. Our Board currently consists of five directors, Gary Atkinson, Harvey Judkowitz, Joseph Kling, Mathieu Peloquin, and Jay B. Foreman. The Board has determined that Messrs. Judkowitz, Kling, and Foreman are “independent directors” within the meaning of the Nasdaq Listing Rules. 33 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following is a summary of the fees billed to the Company by its independent registered public accounting firm, EisnerAmper LLP, for professional services rendered for Fiscal 2022 and Fiscal 2021. EisnerAmper LLP’s PCAOB firm ID is 274: Audit Fees $ 188,835 $ 160,028 All Other Fees 1,040 4,548 Total Fees $ 189,875 $ 164,576 Audit Fees - Consists of fees billed for professional services rendered for the audit of the Singing Machine’s consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that were provided by EisnerAmper, LLP, respectively. All Other Fees - Consists of fees for products and services other than the services reported above including review of proxy statements and services provided in connection with the audit of China Sinostar, our former parent company. POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES (a) 1. The following financial statements for The Singing Machine Company, Inc. and Subsidiaries are filed as a part of this report: Consolidated Balance Sheets— March 31, 2022 and 2021. Consolidated Statements of Income —Years ended March 31, 2022 and 2021. Consolidated Statements of Cash Flows—Years ended March 31, 2022 and 2021. Consolidated Statements of Shareholders’ Equity—Years ended March 31, 2022 and 2021. 2. Notes to Consolidated Financial Statements Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto. (b) Exhibits. Exhibit No. Description 3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 and amendments through April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.2 Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in the Singing Machine’s Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.3 Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on March 27, 2001 (incorporated by reference to Exhibit 3.13 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on April 11, 2001). 34 3.4 Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on April 4, 2001 (incorporated by referenced to Exhibit 3.12 in the Singing Machine’s registration statement on Form SB-2 filed with the SEC on April 11, 2001). 3.5* Certificate of Correction to Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on April 20, 2001. 3.6* Certificate of Amendment to the Certificate of Incorporation filed with the Delaware Secretary of State on January 27, 2006. 3.7* Certificate for Renewal and Revival of Charter filed with Delaware Secretary of State on September 25, 2012. 3.8 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 19, 2022 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 25, 2022). 3.9 Amended By-Laws of the Singing Machine (incorporated by reference to Exhibit 3.14 in the Singing Machine’s Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001). 4.1* Description of Registrant’s Securities. 10.1 Lease for Lakeside Plaza executive offices dated July 31, 2011 by and between The Singing Machine Company, Inc. and Lakeside IV, LLC (incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 29, 2011). 10.2 Lease for Ontario, CA warehouse dated January 31, 2013 by and between The Singing Machine Company, Inc. and Majestic-CCCIV Partners (incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 28, 2013). 10.3 Executive Change of Control Agreement dated January 3, 2014 by and between The Singing Machine Company, Inc. and Gary Atkinson, Bernardo Melo, and Lionel Marquis ((incorporated by reference to the Singing Machine’s Current Report on Form 10-K filed with the SEC on June 30, 2014). 10.4 First Amendment to Standard Industrial Lease dated June 15, 2020 (incorporated by reference to the Singing Machine’s Annual Report on Form 10-K filed with the SEC on August 13, 2020). 10.5 Intercreditor Agreement with Crestmark and Iron Horse, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.6 Loan and Security Agreement with Crestmark, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.7 Schedule to Loan and Security Agreement with Crestmark, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.8 Promissory Note with Crestmark, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.9 Loan and Security Agreement with Iron Horse, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.10 Subordination Agreement with Starlight Marketing, dated June 11, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.11 Promissory Note with Starlight Marketing, dated June 1, 2020 (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on June 16, 2020). 10.12 Stock Redemption Agreement, dated as of August 5, 2021, by and among The Singing Machine Company, Inc., Koncepts International, Ltd. and Treasure Green Holdings, Ltd. (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on August 12, 2021). 10.13+ The Singing Machine 2022 Equity Incentive Plan (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 18, 2022) 35 10.14+ Employment Agreement by and between The Singing Machine Company, Inc. and Gary Atkinson (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.15+ Employment Agreement by and between The Singing Machine Company, Inc. and Lionel Marquis (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.16+ Employment Agreement by and between The Singing Machine Company, Inc. and Bernardo Melo (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.17+ Form of Indemnification Agreement to be entered into with the Registrant and each of its officers and directors (incorporated by reference to the Singing Machine’s Current Report on Form 8-K filed with the SEC on May 27, 2022). 21 List of subsidiaries of The Singing Machine Company Inc. (incorporated by reference to The Singing Machine’s Registration Statement on Form S-1 filed with the SEC on April 13, 2022) 31.1* Certification of Gary Atkinson, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2* Certification of Lionel Marquis, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1** Certifying Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2* * Certifying Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Filed herewith ** Furnished herewith + Compensatory plan or arrangement. ITEM 16. FORM 10-K SUMMARY None. 36 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, The Singing Machine Company, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Date: July 14, 2022 By: /s/ Gary Atkinson Gary Atkinson Chief Executive Officer In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Singing Machine Company, Inc. and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE /s/ GARY ATKINSON Chief Executive Officer and Director July 14, 2022 Gary Atkinson (Principal Executive Officer) /s/ LIONEL MARQUIS Chief Financial Officer July 14, 2022 Lionel Marquis (Principal Financial Officer) /s/ Mathieu Peloquin Director July 14, 2022 Philip Lau /s/ HARVEY JUDKOWITZ Director July 14, 2022 Harvey Judkowitz /s/ Joseph KLING Director July 14, 2022 Joseph Kling /s/ Jay FOREMAN Director July 14, 2022 Jay Foreman 37 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm (PCAOB ID: 274 ) F-2 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Cash Flows F-6 Consolidated Statements of Shareholders’ Equity F-7 Notes to Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The Singing Machine Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Singing Machine Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2022 and 2021, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2022 and 2021, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. F- 2 Variable Consideration As described in Note 3 to the consolidated financial statements, the Company provides for variable consideration 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. Variable consideration primarily includes reserves for sales returns and accruals for promotional incentives. The Company estimates variable consideration under its return programs for goods returned from 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 selectively participates in retailer’s promotional 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 allowances to their customers. The Company’s reserve for sales returns were approximately $1.0 million as of March 31, 2022. The Company’s accrual for promotional incentives was approximately $0.5 million as of March 31, 2022. We identified management’s estimates for variable consideration as a critical audit matter due to the fact that there was significant judgment required by management with respect to measurement uncertainty, as the calculation of these reserves and allowances includes assumptions such as product sell through at retailers, as well historical product sales used to predict future sales in evaluating the net realizable value of inventory returns. This in turn led to a high degree of auditor judgment, subjectivity and effort in applying the procedures related to those assumptions. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls over the Company’s estimates for variable consideration. Our procedures also included, among others,(1) recalculating the sales return reserve based on our review of returns received subsequent to year end and the net realizable value of the returned goods based on historical margins and product sales projections; (2) recalculating the Company’s promotional incentive accrual based on specific customer arrangements and programs along with supporting documentation from those customers; (3) performing a sensitivity analysis of the Company’s variable consideration by recalculating using our independent assumptions; (4)evaluating the Company’s ability to accurately estimate the sales return reserve by comparing historically recorded reserves to the actual amount that was ultimately claimed by the retailers; and (5) analyzing year over year trends in the reserve and allowance in comparison with revenue trends to further evaluate reasonableness of the estimate and consistency with expectations. Inventory Valuation As described in Note 3 to the consolidated financial statements, the Company’s inventories are stated at the lower of cost or net realizable value. The Company maintains its inventory at the lower of cost or net realizable value based primarily on the age of the inventory, estimated required sell-through time and whether items are selling below cost. In determining appropriate inventory reserve percentages, the Company evaluates a number of factors including its historical write off experience, the specific products affected, its historic recovery percentages on various methods of liquidations, as well as forecasts of future sales. Inventories, net, and the inventory reserve at March 31, 2022, totaled $14.6 million and $0.4 million, respectively. We identified the valuation of inventory as a critical audit matter due to the significant judgments necessary to identify and record the inventory at the lower of cost or net realizable value timely. This in turn led to a high degree of auditor judgement, subjectivity and effort in, performing audit procedures to evaluate management’s estimates of the net realizable value for the inventory on-hand as of the reporting date. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. We obtained an understanding and evaluated the design of controls over the Company’s inventory valuation. Our procedures related to management’s estimates of the net realizable value of the inventory on-hand as of the reporting date included the following, among others, (1) evaluating of the appropriateness and consistency of management’s methodology and assumptions used in determining the inventory reserve; (2) obtaining the Company’s inventory at the lower of cost or net realizable value calculation and testing the mathematical accuracy; (3) testing the accuracy and completeness of the underlying data used in the calculation of the Company’s net realizable value; and (4) selecting a sample of inventory items, evaluating historical sales performance relative to management’s conclusions on the ability to sell through the inventory on-hand at the forecasted levels as well as testing sales subsequent to year-end to evaluate the Company’s ability to accurately estimate the inventory reserve relative to the net realizable value. /s/ Eisner Amper LLP We have served as the Company’s auditor since 2016. EISNERAMPER LLP Iselin, New Jersey July 14, 2022 F- 3 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, 2022 March 31, 2021 Assets Current Assets Cash $ 2,290,483 $ 396,579 Accounts receivable, net of allowances of $ 122,550 and $ 138,580 , respectively 2,785,038 2,210,881 Due from Crestmark Bank 100,822 4,557,120 Accounts receivable related party - Stingray Group, Inc. 152,212 88,041 Inventories, net 14,161,636 5,490,255 Prepaid expenses and other current assets 344,409 221,071 Deferred financing costs 7,813 15,359 Total Current Assets 19,842,413 12,979,306 Property and equipment, net 565,094 674,153 Deferred tax assets 892,559 887,164 Operating Leases - right of use assets 1,279,347 2,074,115 Other non-current assets 86,441 147,173 Total Assets $ 22,665,854 $ 16,761,911 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 5,328,215 $ 2,461,103 Accrued expenses 1,732,355 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 2,500,000 64,915 Customer deposits - 139,064 Refunds due to customers 97,968 145,408 Reserve for sales returns 990,000 960,000 Current portion of finance leases 7,605 2,546 Current portion of installment notes 74,300 68,332 Current portion of note payable - Paycheck Protection Program - 172,685 Current portion of operating lease liabilities 876,259 794,938 Current portion of related party subordinated note payable - Starlight Marketing Development, Ltd. 352,659 502,659 Total Current Liabilities 12,022,411 7,034,199 Finance leases, net of current portion 10,620 - Installment notes, net of current portion 138,649 212,949 Note payable - Payroll Protection Program, net of current portion - 271,215 Operating lease liabilities, net of current portion 457,750 1,334,010 Total Liabilities 12,629,430 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, $ 0.01 par value; 100,000,000 shares authorized; 1,221,209 and 1,301,358 shares issued and outstanding, respectively 12,212 13,014 Additional paid-in capital 24,902,694 20,150,715 Accumulated deficit ( 14,878,482 ) ( 12,254,191 ) Total Shareholders’ Equity 10,036,424 7,909,538 Total Liabilities and Shareholders’ Equity $ 22,665,854 $ 16,761,911 See notes to the consolidated financial statements F- 4 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS March 31, 2022 March 31, 2021 For the Twelve Months Ended March 31, 2022 March 31, 2021 Net Sales $ 47,512,161 $ 45,802,574 Cost of Goods Sold 36,697,383 33,505,356 Gross Profit 10,814,778 12,297,218 Operating Expenses Selling expenses 3,588,276 3,976,523 General and administrative expenses 6,911,377 6,596,987 Depreciation 245,890 298,357 Total Operating Expenses 10,745,543 10,871,867 Income from Operations 69,235 1,425,351 Other Income (Expense) Gain from Paycheck Protection Plan loan forgiveness 448,242 - Gain - related party 11,236 220,023 Gain from damaged goods insurance claim - 1,067,829 Gain from settlement of accounts payable 339,311 390,000 Interest expense ( 535,202 ) ( 412,270 ) Finance costs ( 45,047 ) ( 61,699 ) Total Other Income (Expense), net 218,540 1,203,883 Income Before Income Tax Provision 287,775 2,629,234 Income Tax Provision ( 57,304 ) ( 456,869 ) Net Income $ 230,471 $ 2,172,365 Net Income per Common Share Basic $ 0.14 $ 1.68 Diluted $ 0.14 $ 1.67 Weighted Average Common and Common Equivalent Shares: Basic 1,614,506 1,292,003 Diluted 1,623,397 1,304,288 See notes to the consolidated financial statements F- 5 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS March 31, 2022 March 31, 2021 For the Twelve Months Ended March 31, 2022 March 31, 2021 Cash flows from operating activities Net Income $ 230,471 $ 2,172,365 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation 245,890 298,357 Amortization of deferred financing costs 45,047 61,699 Change in inventory reserve ( 271,892 ) 202,339 Change in allowance for bad debts ( 16,030 ) ( 198,881 ) Loss from disposal of property and equipment 4,394 - Stock based compensation 44,287 22,710 Change in net deferred tax assets ( 5,395 ) 398,557 Paycheck Protection Plan loan forgiveness ( 448,242 ) - Gain - related party 11,236 220,023 Gain from extinguishment of accounts payable 339,311 390,000 Changes in operating assets and liabilities: Accounts receivable ( 558,127 ) ( 151,500 ) Due from banks 4,456,298 ( 2,168,682 ) Accounts receivable - related parties ( 64,171 ) 11,959 Insurance receivable - 1,268,463 Inventories ( 8,399,489 ) 1,908,683 Prepaid expenses and other current assets ( 123,338 ) 31,402 Other non-current assets 60,732 3,336 Accounts payable 2,516,565 ( 3,190,530 ) Accrued expenses 77,198 130,331 Due to related parties - ( 438,666 ) Customer deposits ( 139,064 ) 139,064 Refunds due to customers ( 47,440 ) ( 661,067 ) Reserve for sales returns 30,000 ( 264,000 ) Operating lease liabilities, net of operating leases - right of use assets ( 171 ) ( 14,945 ) Net cash (used in) provided by operating activities ( 2,011,930 ) 171,017 Cash flows from investing activities Purchase of property and equipment ( 117,573 ) ( 201,161 ) Net cash used in investing activities ( 117,573 ) ( 201,161 ) Cash flows from financing activities Proceeds from Issuance of stock - net of transaction expenses 9,000,579 - Payment of redemption and retirement of treasury stock ( 7,162,451 ) - Net Proceeds from revolving lines of credit 2,435,085 64,915 Proceeds from note payable - Payroll Protection Program - 443,900 Payment of deferred financing charges ( 37,501 ) ( 73,725 ) Payments on installment notes ( 68,332 ) ( 65,010 ) Proceeds from exercise of stock options 14,000 26,400 Payment on subordinated note payable - related party ( 150,000 ) ( 300,000 ) Payments on finance leases ( 7,973 ) ( 14,957 ) Net cash provided by financing activities 4,023,407 81,523 Net change in cash 1,893,904 51,379 Cash at beginning of year 396,579 345,200 Cash at end of year $ 2,290,483 $ 396,579 Supplemental disclosures of cash flow information: Cash paid for interest $ 546,545 $ 461,080 Equipment purchased under capital lease $ 23,651 $ - Issuance of common stock and warrants for stock issuance expenses $ 547,838 $ - Operating leases - right of use assets and lease liabilities at inception of lease $ 16,364 $ 2,184,105 See notes to the consolidated financial statements F- 6 The Singing Machine Company, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the twelve months ended March 31, 2021 and 2022 Shares Amount Capital Deficit Total Common Stock Additional Paid in Accumulated Shares Amount Capital Deficit Total Balance at March 31, 2020 1,285,255 $ 12,853 $ 20,101,766 $ ( 14,426,556 ) $ 5,688,063 Net income 2,172,365 2,172,365 Employee compensation-stock option 10,210 - 10,210 Exercise of stock options 14,667 147 26,253 - 26,400 Issuance of common stock - directors 1,437 14 12,486 - 12,500 Balance at March 31, 2021 1,301,358 13,014 20,150,715 ( 12,254,191 ) $ 7,909,538 Net income - - - 230,471 230,471 Issuance of stock 550,000 5,500 4,944,500 - 4,950,000 Issuance of pre-funded warrants - - 4,881,667 - 4,881,667 Payment of stock issuance expenses - - ( 831,088 ) - ( 831,088 ) Issuance of stock for stock issuance expenses 19,048 190 ( 190 ) - - Redemption and retirement of treasury shares ( 654,105 ) ( 6,542 ) ( 4,301,147 ) ( 2,854,762 ) ( 7,162,451 ) Issuance of common stock - directors 575 6 4,994 - 5,000 Issuance of common stock - non-employee 1,667 17 16,983 - 17,000 Employee compensation-stock option - - 22,287 - 22,287 Collection of subscription receivable - - - - - Exercise of stock options 2,667 27 13,973 - 14,000 Balance at March 31, 2022 1,221,209 $ 12,212 $ 24,902,694 $ ( 14,878,482 ) $ 10,036,424 See notes to the consolidated financial statements. F- 7 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 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”), SMC-Music, Inc. (“SMCM”) and SMC (HK) Limited (“SMH”), 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. RECENT EQUITY EVENTS On May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30. The reverse stock split was affected to meet The Nasdaq Capital Market’s minimum bid price requirement. All information in these consolidated financial statements have been retroactively adjusted to give effect to this 1-for-30 reverse stock split. 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”) (entities that are principally owned by the Company’s former Chairman, Philip Lau) pursuant to which the Company redeemed 654,105 shares of common stock of the Company (the “Redeemed Shares”). The closing of the transaction 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 in consideration of a payment by the Company of approximately $ 7,162,000 to koncepts and Treasure Green. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company. Prior to August 10, 2021, the Company was partially held by koncepts who was major shareholder of the Company that owned approximately 49 % of our shares of common stock outstanding on a fully diluted basis as of March 31, 2021. The Company was also partly held by Treasure Green who owned approximately 2 % of our common stock. In total approximately 51 % of the Company’s shares of common stock on a fully diluted basis as of March 31, 2021 were previously owned by koncepts and Treasure Green. koncepts and Treasure Green are owned by Fairy King Prawn Holdings Limited (“Fairy King”), an investment holding company incorporated in the British Virgin Islands, principally owned by the Company’s former Chairman, Philip Lau . Pursuant to the Redemption Agreement, neither koncepts nor Treasure Green remained shareholders of the Company and SLRD, SCE, Cosmo, Winglight and SLE are no longer related parties. Prior to August 10, 2021 we did 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. On May 23, 2022, the “Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering (the “Offering”) pursuant to which the Company sold to the Underwriter 1,000,000 shares (the “Shares”) of common stock, par value $ 0.01 per share (the “Common Stock”) for gross proceeds of $ 4.0 million prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $ 0.7 million. The price to the public in the Offering is $ 4.00 per Share, before underwriting discounts and commissions. The offering closed on May 26, 2022. Pursuant to the terms of the Underwriting Agreement, the Company agreed to issue to the Underwriter warrants to purchase up to 100,000 shares of Common Stock representing 10.0 % of the Shares sold in this Offering, excluding any Shares sold through the over-allotment option. The warrants are exercisable six months from the commencement of sales under the offering, have an exercise price of $ 5.00 per share and expire five years from the date of issuance. The Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022. The Shares were offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No. 333-264277), initially filed by the Company with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) on April 13, 2022 and declared effective by the SEC on May 23, 2022. F- 8 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 NOTE 2 – LIQUIDITY The Company reported net income of approximately $ 0.2 million and used cash in operating activities of approximately $ 2.0 million for the fiscal year ended March 31, 2022. The current Intercreditor Revolving Credit Facility with Crestmark Bank is under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. Our credit facility with Iron Horse Credit that was to expire on June 11, 2022, however absent any termination notice given by the Company to IHC, was automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. The Company believes that our cash on hand, working capital (net of cash), cash expected to be generated from our operating forecast, along with the availability of cash from our credit facilities (See Note 6 – BANK FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filing of this report. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its Macau Subsidiary, SMCL, and SMCM. All inter-company accounts and transactions have been eliminated in consolidation for all periods presented. USE OF ESTIMATES The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change which may alter future expectations. COLLECTIBILITY OF ACCOUNTS RECEIVABLE The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100 % reserves for customers in bankruptcy and other allowances based upon historical collection experience. The Company is subject to chargebacks from customers for co-op program incentives, defective returns, return freight and handling charges that are deducted from open invoices and reduce collectability of open invoices. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact on operations. 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 statements of income and translations would be recorded in a separate component of shareholders’ equity. Any such amounts were not material during the periods presented. Concentration of Credit Risk At times, the Company maintains cash in United States bank accounts that are in excess of the Federal Deposit Insurance Corporation insured amounts. The Company maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at March 31, 2022 and 2021 were approximately $ 0.1 million and $ 0.2 million, 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 March 31, 2022 and 2021 the estimated amounts for these future inventory returns were approximately $ 0.6 million and $ 0.7 million, respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of March 31, 2022 and 2021 the Company had inventory reserves of approximately and $ 0.4 million and $ 0.6 million, respectively for estimated excess and obsolete inventory. F- 9 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 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.” 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 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. Co-op promotion incentives were approximately $ 1.7 million during fiscal 2022 and $ 2.0 million during fiscal 2021. 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. 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 income as our underlying customer agreements are less than one year. While the Company has no overstock return privileges in its vendor agreements with its customers, 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 from the customer for various reasons, whereby a sales return reserve is recorded based on historic return amounts, specific events as identified and management estimates. The Company’s reserve for sales returns were approximately $ 1.0 million as of both March 31, 2022 and 2021. 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 13 – SEGMENT INFORMATION). F- 10 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 During fiscal 2022 and 2021 revenue was derived from five different major product lines. Disaggregated approximate revenue from these product lines consisted of the following: SCHEDULE OF DISAGGREGATION OF REVENUE March 31, 2022 March 31, 2021 Revenue by Product Line Fiscal Years Ended Product Line March 31, 2022 March 31, 2021 Karaoke Machines $ 38,900,000 $ 34,700,000 Microphones and Accessories 4,200,000 4,700,000 SMC Kids Toys 2,300,000 1,300,000 Licensed Products 1,600,000 4,700,000 Music Subscriptions 500,000 400,000 Total Net Sales $ 47,500,000 $ 45,800,000 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 Fiscal 2022 and 2021 shipping and handling expenses were approximately $ 0.9 million and $ 1.2 million, respectively. These expenses are classified as a component of selling expenses in the accompanying consolidated statements of income. STOCK-BASED COMPENSATION The Company follows the provisions of FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the consolidated statements of income over the service period (generally the vesting period). The Company uses the Black-Scholes option valuation model to value stock options. Employee stock option compensation expense in fiscal years ended March 31, 2022 and 2021 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 fiscal years ended March 31, 2022 and 2021, the stock option expense was approximately $ 22,000 and $ 10,000 , respectively. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the assumptions outlined below. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. ● For the year ended March 31, 2022: expected dividend yield of 0 % , risk-free interest rate between 0.43 % and 0.96 % , respectively with volatility between 149.5 % and 157.0 % , respectively with an expected term of three years . ● For the year ended March 31, 2021: expected dividend yield of 0 % , risk-free interest rate of .18% , volatility of 254.1 % and expected term of three years . The Company’s directors were issued shares of stock as compensation for their service. For the years ended March 31, 2022 and 2021, the stock compensation expense to directors was $ 5,000 and $ 12,500 , respectively. RESEARCH AND DEVELOPMENT COSTS All research and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative expenses in the consolidated statements of income. For both years ended March 31, 2022 and 2021, these amounts totaled approximately $ 0.1 million. INCOME TAXES The Company follows the provisions of FASB ASC 740 “Accounting for Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of March 31, 2022 and 2021 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. F- 11 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 COMPUTATION OF EARNINGS (LOSS) PER SHARE Computation of dilutive shares for fiscal years ended March 31, 2022 and 2021 are as follows: SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 Basic weighted average common shares outstanding 1,614,506 1,292,003 Effect of dilutive stock options 8,891 12,285 Diluted weighted average of common shares outstanding 1,623,397 1,304,288 Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period. Pre-funded warrants to purchase 561,111 shares of common stock are included in basic weighted average shares outstanding as deemed outstanding. Diluted net income 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 the Company’s common stock at the average market price during the period using the treasury stock method. For the fiscal years ended March 31, 2022 and 2021, options to purchase approximately 9,000 and 12,000 shares of common stock, respectively, have been included in the calculation of diluted net income per share For the fiscal years ended March 31, 2022 and 2021 options and warrants to purchase approximately 56,000 and 25,000 shares of common stock respectively, have been excluded in the calculation of diluted net income per share as the result would have been anti-dilutive. 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 the Company beginning April 1, 2023, including interim periods within that fiscal year. Early adoption is permitted. We are currently evaluating the potential effects of this updated guidance on our consolidated financial statements and related disclosures. NOTE 4 – INVENTORIES, NET Inventories are comprised of the following components: SCHEDULE OF INVENTORY March 31, March 31, 2022 2021 Finished Goods $ 10,600,000 $ 5,400,000 Inventory in Transit 3,300,000 200,000 Estimated Amount of Future Returns 700,000 500,000 Subtotal 14,600,000 6,100,000 Less: Inventory Reserve 400,000 600,000 Total Inventories $ 14,200,000 $ 5,500,000 F- 12 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 NOTE 5 - PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: SUMMARY OF PROPERTY AND EQUIPMENT USEFUL MARCH 31, MARCH 31, LIFE 2022 2021 Computer and office equipment 5 - 7 years $ 400,000 $ 400,000 Furniture and fixtures 7 years 100,000 100,000 Warehouse equipment 7 years 200,000 200,000 Molds and tooling 3 - 5 years 2,000,000 1,900,000 2,700,000 2,600,000 Less: Accumulated depreciation 2,100,000 1,900,000 $ 600,000 $ 700,000 Depreciation expense for fiscal years ended 2022 and 2021 was approximately $ 0.2 million and $ 0.2 million, respectively. NOTE 6 – 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 under the 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 with the ability to exceed when required. Costs associated with closing of the Intercreditor Revolving Credit Facility of approximately $ 74,000 were deferred and were amortized over one year. During the fiscal years ended March 31, 2022 and 2021 the Company incurred amortization expense of approximately $ 45,000 and $ 62,000 , respectively associated with the amortization of deferred financing costs from the Intercreditor Revolving Credit Facility. 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. See below. 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 $ 2.0 million. For the fiscal years ended March 31, 2022 and 2021 the Company recorded interest expense under the Crestmark Facility of approximately $ 0.3 million and $ 0.4 million, respectively. The Crestmark Facility is under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. As of March 31, 2022 and 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 $ 2.5 million 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 March 31, 2022, 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 . Interest expense under the IHC Facility for the fiscal years ended March 31, 2022and 2021 was approximately $ 0.2 million and $ 0.1 million, respectively. The IHC Facility was to expire on June 11, 2022, however, absent any termination notice given to IHC by the Company, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. As of March 31, 2022 and 2021, there was an outstanding balance of approximately $ 2.5 million and $ 0.1 million, respectively. As of March 31, 2022 there was approximately $ 2.0 million of available borrowings under these facilities. F- 13 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 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 (the “PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which provided 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 was payable over two years at an interest rate of 1%, with a deferral of payments until a forgiveness application was accepted and reviewed by the Small Business Administration (“SBA”), and the SBA 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 fiscal year ended March 31, 2022, 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 consolidated statements of income. Installment Notes Payable On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an ERP System project over a term of 60 months at a cost of approximately $ 365,000 . As of March 31, 2021, the Company executed three installment notes totaling approximately $ 0.4 million 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. For the fiscal years ended March 31, 2022 and 2021 there was an outstanding balance on the installment notes of approximately $ 0.2 million and $ 0.3 million, respectively. For the fiscal years March 31, 2022 and 2021 the Company incurred interest expense of approximately $ 21,000 and $ 26,000 , 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. On June 1, 2020, the remaining amount due on the subordinated debt of approximately $ 0.8 million 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 fiscal years ended March 31, 2022 and 2021 interest expense was approximately $ 20,000 and $ 47,000 , respectively, on the Subordinated Note Payable and the related party subordinated debt. 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 March 31, 2022, the Company met repayment requirements of the Intercreditor Revolving Credit Facility and has made cumulative principal payments totaling approximately $ 0.4 million. During the next twelve months the Company intends on making additional payments and pay off of the remaining balance outstanding provided the Company meets all repayment requirements of the financing facility in place. As of March 31, 2022 and 2021 the remaining amount due on the Subordinated Note Payable was approximately $ 0.3 million and $ 0.5 million, respectively. The remaining amount due on the Subordinated Note Payable was classified as a current liability as of March 31, 2022 and 2021 on the 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 the Company committed employment practice violations against a former temporary employee not employed by us. Management has investigated the allegation and has engaged an employment attorney to defend the lawsuit. The case is still in discovery and no trial date has been set. Management does not believe the claims have merit and does not believe the lawsuit will have a material adverse effect on our financial results. On April 29, 2022, a complaint was filed by Tunnel IP LLC against the Company in the U.S District Court for the Southern District of Florida. The Complaint alleges that one of the Company’s products, SDL2093, infringes on U.S. Patent No. 7,916,877. On June 24, 2022, Tunnel IP agreed to dismiss all claims against the Company with prejudice. Other than as disclosed above, we are not a party to, and our property is not the subject of, any material legal proceedings. F- 14 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 LEASES The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases. Operating Leases We have operating lease agreements for offices and a warehouse facility in Florida, California and Macau expiring in various years through 2024. We entered into an operating lease agreement, effective October 1, 2017, for the corporate headquarters located in Fort Lauderdale, Florida . 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 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 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 expired on April 30, 2022 . The lease provides for a renewal option to extend the lease. Rent expense on the new lease was fixed at approximately $ 1,700 per month for the duration of the lease term. We elected not renew our lease of our office space in Macau and all administrative duties previously performed in this office are now performed by our administrative team in Hong Kong. Our administrative team in Hong Kong are subcontractors who work in office space provided and owned by Starlight Electronics Limited (“SEL”). We pay SEL approximately $ 30,000 per month for our subcontracted Hong Kong staff which includes the use of office space. Lease expense for our operating leases is recognized on a straight-line basis over the lease terms. Finance Leases On July 1, 2021, we entered into a long-term capital leasing arrangement with Union Credit Corporation to finance the leasing of a used forklift in the amount of approximately $ 24,000 . The lease require monthly payments in the amount of approximately $ 755 per month over a total lease term of 36 months which commenced on July 1, 2021. The agreement has an effective interest rate of 9.9 % and the Company has the option to purchase the equipment at the end of the lease term for one dollar. As of March 31, 2022 and March 31, 2021, the remaining amounts due on this capital leasing arrangement was approximately $ 18,000 and $ 20,000 , respectively. For the fiscal years ended March 31, 2022 and 2021 the Company incurred interest expense of $ 1,160 and $ 0 , respectively. Supplemental balance sheet information related to leases as of March 31, 2022 is as follows: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES Assets: Operating lease - right-of-use assets $ 1,279,347 Finance leases as a component of property and equipment, net of accumulated depreciation of $ 2,776 15,449 Liabilities Current Current portion of operating leases $ 876,259 Current portion of finance leases 7,605 Noncurrent Operating lease liabilities, net of current portion $ 457,750 Finance leases, net of current portion 10,620 Supplemental statement of operations information related to leases for the fiscal year ended March 31, 2022 is as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE Fiscal Year Ended March 31, 2022 Operating lease expense as a component of general and administrative expenses $ 813,292 Finance lease cost Depreciation of leased assets as a component of depreciation $ 2,776 Interest on finance lease liabilities as a component of interest expense $ 1,547 Supplemental cash flow information related to leases for the nine months ended March 31, 2022 is as follows: SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow paid for operating leases $ 928,640 Financing cash flow paid for finance leases $ 7,973 Lease term and Discount Rate Weighted average remaining lease term (months) Operating leases 18.2 Finance leases 28.0 Weighted average discount rate Operating leases 6.25 % Finance leases 9.86 % F- 15 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 Scheduled maturities of operating and finance lease liabilities outstanding as of March 31, 2022 are as follows: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING AND FINANCE LEASES Fiscal Year Operating Leases Finance Leases 2023 $ 940,282 $ 9,065 2024 467,552 9,065 2025 2,267 Total Minimum Future Payments 1,407,834 20,397 Less: Imputed Interest 128,487 2,172 Present Value of Lease Liabilities $ 1,279,347 $ 18,225 NOTE 8 – SHAREHOLDERS’ EQUITY COMMON STOCK ISSUANCES During the years ended March 31, 2022 and 2021 the Company issued the following common stock shares: Fiscal 2022: On May 17, 2021 the Company issued 667 shares of its common stock to a former member of the Board of Directors who exercised stock options at an average exercise price of $ 7.20 per share. On August 20, 2021 the Company issued 575 shares of its common stock to our Board of Directors at $ 8.70 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2022. On December 31, 2021 the Company issued 2,000 shares of its common stock to a member of the Board of Directors who exercised stock options at an average exercise price of $ 4.50 per share. Fiscal 2021: On October 30, 2020 the Company issued 14,667 shares of its common stock to three executive officers who exercised stock options at an average exercise price of $ 1.80 per share. On November 6, 2020, the Company issued 1,437 shares of its common stock to our Board of Directors at $ 8.70 per share, pursuant to our annual director compensation plan for the fiscal year ending March 31, 2021. STOCK OPTIONS During the years ended March 31, 2022 and 2021 the Company issued the following stock options: Fiscal 2022: On August 23, 2021, the Company issued 1,334 stock options to two members of our Board of Directors at an exercise price of $ 8.70 per share pursuant to our annual director compensation plan for the fiscal year ended March 31, 2022. On December 1, 2021, the Company issued 667 stock options to a new member of our Board of Directors at an exercise price of $ 8.10 per share pursuant to our annual director compensation plan for the fiscal year ended March 31, 2022. On December 22, 2021 the Company issued 1,667 stock options to our Chief Revenue Officer at an exercise price of $ 8.10 per share pursuant to his compensation plan for the fiscal year ended March 31, 2021. ● For the year ended March 31, 2022: expected dividend yield of 0 %, risk-free interest rate between 0.43 % and 0.96 %, respectively with volatility between 149.5 % and 157.0 % respectively with an expected term of three years . Fiscal 2021: On November 4, 2020, the Company issued 3,334 stock options to five members of our Board of Directors at an exercise price of $ 8.70 per share pursuant to our annual director compensation plan for the fiscal year ended March 31, 2021. ● For the year ended March 31, 2021: expected dividend yield of 0 %, risk-free interest rate of .18 %, volatility of 254.1 % and expected term of three years . F- 16 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 A summary of stock option activity for each of the years presented is summarized below. SUMMARY OF STOCK OPTION ACTIVITY Fiscal 2022 Fiscal 2021 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Stock Options: Balance at beginning of year 56,000 $ 9.60 74,333 $ 7.80 Granted 3,667 $ 7.80 3,333 $ 8.70 Exercised ( 2,667 ) $ 5.40 ( 14,667 ) $ 1.80 Forfeited ( 667 ) $ 3.60 ( 7,000 ) $ 5.10 Balance at end of year * 56,333 $ 9.90 56,000 $ 9.60 Options exercisable at end of year 52,667 $ 9.90 52,667 $ 9.90 The following table summarizes information about employee stock options outstanding at March 31, 2022: SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING Range of Exercise Price Number Outstanding at March 31, 2022 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable at March 31, 2022 Weighted Average Exercise Price $ 3.60 . - $ 11.40 38,000 3.7 $ 7.50 34,333 $ 7.20 $ 14.10 - $ 16.50 18,333 4.9 $ 15.00 18,333 $ 15.00 * 56,333 52,667 * Total number of options outstanding as of March 31, 2022 includes 20,000 options issued to three current and four former directors as compensation and 36,333 options issued to key employees as compensation. As of March 31, 2022, there was unrecognized expense of approximately $ 12,000 remaining on options currently vesting over time with approximately six months remaining until these options are fully vested. The vested options as of March 31, 2022 had no intrinsic value . As per the execution of the August 2021 private placement as disclosed in Note 2 and Note 10, common warrants and pre-funded warrants issued and outstanding as of March 31, 2022 are as follows: SCHEDULE OF COMMON STOCK WARRANTS ISSUED AND OUTSTANDING Number of Shares Warrants outstanding at March 31, 2021 - Common warrants issued 1,155,556 Pre-funded warrants issued 561,111 Warrants outstanding at March 31, 2022 1,716,667 As of March 31, 2022, the Company’s warrants by expiration date were as follows: SCHEDULE OF WARRANTS EXPIRATION Number of CommonWarrants Number of Pre-funded Warrants Exercise Price Expiration Date 1,155,556 - * $ 2.80 9/15/2026 - 561,111 $ 0.30 N/A * 1,155,556 561,111 * Effective with the opening of trading on the Nasdaq Stock Market on May 24, 2022, the exercise price of certain warrants issued by the Company pursuant to the terms of that certain Securities Purchase Agreement dated August 5, 2021, was adjusted so that the exercise price is $ 2.80 . The warrants are not subject to further adjustment except for customary adjustments for stock dividends and splits, subsequent rights offerings, prorata distributions and fundamental transactions, as set forth in the warrants. On April 12, 2022, the Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 Plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. F- 17 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 The maximum number of shares of common stock initially available for issuance under the 2022 Plan is 233,334 shares of common stock and thereafter an annual increase shall be added as of the first day of the Company’s fiscal year beginning in 2023, equal to the least of (i) 5% of the outstanding common stock on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, (ii) 33,334 shares, and (iii) a lesser amount as determined by the Board of Directors. The shares of common stock subject to stock awards granted under the 2022 Plan that lapse, terminate, expire prior to exercise, are canceled or are forfeited, shall again become available for issuance under the 2022 Plan . Shares subject to a stock award under the 2022 Plan shall not again be made available for issuance or delivery under the 2022 Plan if such shares are (i) shares tendered by a participant or retained by the Company as full or partial payment to the Company for the exercise or purchase price of an award or (ii) shares used to satisfy tax withholding obligations in connection with an award. Notwithstanding any other provision of the 2022 Plan to the contrary, unless the plan administrator determines otherwise with respect to a particular award, in the event of a change of control, if and to the extent an outstanding award is not converted, assumed, substituted for or replaced by the successor company, then such award will terminate upon effectiveness of the change of control. Prior to the change of control, the plan administrator may approve accelerated vesting and/or lapse of forfeiture or repurchase restrictions with respect to all or a portion of the unvested portions of such awards, any such determinations to be made by the plan administrator in its sole discretion. A change in control includes: ● certain acquisitions of beneficial ownership of more than 50 % of our total voting power; ● a change in the composition of the board of directors during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the board of directors cease for any reason to constitute at least a majority of the board, as defined in the 2022 Plan; and ● the consummation of a company transaction, as defined in the 2022 Plan. The Board of Directors may amend, suspend or terminate the 2022 Plan or a portion of it at any time; however, to the extent required by applicable law, regulation or stock exchange rule, stockholder approval shall be required for any amendment to the 2022 Plan. The 2022 Plan is scheduled to terminate automatically in ten (10) years following the earlier of (a) the date the Board of Directors adopted the 2022 Plan and (b) the date the shareholders approved the 2022 Plan. NOTE 9 – AUGUST 2021 STOCK REDEMPTION On August 5, 2021, the Company entered into the Redemption Agreement with koncepts and Treasure Green, pursuant to which the Company redeemed 654,105 shares of common stock of the Company. The closing of the transaction 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 in consideration of a payment by the Company of approximately $ 7,162,000 to koncepts and Treasure Green. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company. Pursuant to the Redemption Agreement, neither koncepts nor Treasure Green remained shareholders of the Company. NOTE 10 – AUGUST 2021 PRIVATE PLACEMENT On August 5, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional investors and the strategic investor for private placement of (i) 550,000 shares of its common stock (the “Shares”) together with Common Warrants to purchase up to 550,000 shares of common stock with an exercise price of $ 10.50 per share, and (ii) 561,111 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 561,111 shares of common stock at an exercise price of $ 10.50 per share (the “Private Placement”). The Common Warrants and Pre-Funded Warrants are collectively referred to as (the “Warrants”). The Warrants are exercisable at any time at the option of the holder, have a term of 5 years from the issuance date and provide for cashless exercise under certain conditions. The Company determined that the Warrants meet the conditions for equity classification. Shares issuable upon exercise of the Warrants are hereinafter referred to as the “Warrant Shares”. The exercise price and number of the Warrant Shares are subject to anti-dilution and other adjustments for certain stock dividends, stock splits, subsequent rights offerings, pro rata distributions or certain equity structure changes. Pursuant to the terms of the Purchase Agreement, on September 3, 2021, the Company filed a registration statement providing for the resale by the purchasers of the Shares and Warrant Shares sold in the Private Placement, which registration statement became effective on September 15, 2021. Additionally, under the terms of the Purchase Agreement, the Company was 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. As indicated, the Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022. F- 18 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 The closing of the Private Placement took place on August 10, 2021, when the Shares and Warrants were delivered to the purchasers and funds, in the amount of approximately $ 9,832,000 , were received by the Company. Approximately $ 7,162,000 of the funds was used to execute the Redemption Agreement (See Note 9 – August 2021 Stock Redemption). Stingray Group Inc. (“Stingray” or the “strategic investor”), 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 and is now a related party (see Note 15- Related Party Transactions). In connection with the Private Placement, on July 6, 2021, the Company entered into a Placement Agency Agreement with A.G.P./Alliance Global Partners (“AGP”), which provided for AGP to serve as the exclusive placement agent, advisor or underwriter (the “placement agent services”). Pursuant to the Placement Agency Agreement, upon closing of the Private Placement, the Company paid AGP placement fees of $ 630,000 (representing 7% of the gross proceeds raised in the Private Placement excluding proceeds raised from the strategic investor, plus 3.5% of the aggregate gross proceeds raised from the strategic investor) , and issued AGP warrants to purchase 44,445 shares of the Company’s common stock (the “Advisor Warrants”) (representing 5 % of the aggregate number of Shares and Pre-Funded Warrants sold in the Private Placement, excluding the Shares sold to the strategic investor). The Advisor Warrants have the same exercise price ($ 10.50 ) and terms as the Common Warrants issued in the Private Placement. The Company estimated the fair value of the Advisor Warrants to be approximately $ 359,000 using the Black-Scholes Model based on the following input assumptions: common stock price of $ 9.90 , expected life of the warrants of 2.5 years; stock price volatility of 168 %; dividend yield of 0 %; and the risk-free interest rate of 2.65 %. In addition to the placement fees paid to AGP, the Company incurred additional offering costs for direct incremental legal, consulting, accounting and filing fees related to the Private Placement of approximately $ 390,000 , of which one consultant was issued 1,905 shares of restricted common stock with an aggregate fair value of approximately $ 189,000 and a cash payment of $ 100,000 . Total offering costs related to the Private Placement amounted approximately $ 831,000 of which was payment of stock issuance expenses, which is recorded as an offset to additional paid in capital in the accompanying consolidated statements of stockholders’ equity. NOTE 11 - INCOME TAXES The Company files separate tax returns in the United States and in Macau. The Macau Subsidiary has received approval from the Macau government to operate its business as a Macau Offshore Company (MOC), and is exempt from the Macau income tax. For the fiscal years ended March 31, 2022 and 2021, the Macau Subsidiary recorded no tax provision. The U.S. Federal net operating loss carryforward is subject to an IRS Section 382 limitation. As of both March 31, 2022 and 2021, the Company had net deferred tax assets of approximately $ 0.9 million. For the fiscal year ended March 31, 2022 we determined our effective tax rate to be approximately 20.0 % and we recorded a tax provision of approximately $ 0.1 million which was net of a valuation reserve of approximately $ 78,000 for deferred tax assets that will most likely expire prior to being realized. For the fiscal year ended March 31, 2021 we determined our effective tax rate to be approximately 17.4 % and we recorded a tax provision of approximately $ 0.5 million which was net of a valuation reserve of approximately $ 23,000 for deferred tax assets that will most likely expire prior to being realized. The Company also recorded an income tax receivable of approximately $ 13,000 due to the availability of net operating loss carrybacks and alternative minimum tax credits that were realized for the year ended March 31, 2022. The income tax receivable was included as a component of prepaid expenses and other current assets on the accompanying consolidated balance sheet as of March 31, 2022. The income tax provision (benefit) for federal, foreign, and state income taxes in the consolidated statements of income consisted of the following components for 2022 and 2021: SCHEDULE OF PROVISION FOR INCOME TAXES 2022 2021 Income tax provision: Current: Federal $ 62,699 $ 54,487 State - 3,825 Total current Federal and State tax provision $ 62,699 $ 58,312 Deferred: Federal $ ( 59,434 ) $ 417,477 State 54,039 ( 18,920 ) Total Deferred Federal and State ( 5,395 ) 398,557 Total income tax provision $ 57,304 $ 456,869 F- 19 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS March 31, 2022 and 2021 The United States and foreign components of income (loss) before income taxes are as follows: SCHEDULE OF INCOME LOSS BEFORE INCOME TAX 2022 2021 United States $ ( 260,911 ) $ 1,922,947 Foreign 548,686 706,287 total $ 287,775 $ 2,629,234 The actual tax provision differs from the “expected” tax for the years ended March 31, 2022 and 2021 (computed by applying the U.S. Federal Corporate tax rate of 21 percent to income before taxes) as follows: SCHEDULE OF TAX PROVISION 2022 2021 Expected tax provision $ 60,324 $ 551,982 State income taxes, net of Federal income tax provision 13,816 128,699 Permanent differences 10,290 ( 6,578 ) Tax rate differential on foreign earnings ( 83,954 ) ( 108,690 ) Change in valuation allowance 55,375 ( 65,193 ) Other 1,453 ( 43,351 ) Tax provision $ 57,304 $ 456,869 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and (liabilities) are as follows: SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES 2022 2021 NOL Federal Carryforward $ 238,955 $ 246,769 State NOL Carryforward 181,943 194,388 Inventory differences 415,404 348,921 Stock option compensation expense 117,159 115,730 Section 163(j) 62,801 - Allowance for doubtful accounts 31,619 35,877 Reserve for estimated returns 79,109 111,887 Accrued vacation 10,143 13,186 Total 1,137,133 1,066,758 Less: valuation allowance ( 78,024 ) ( 22,649 ) Net deferred tax asset 1,059,109 1,044,109 Depreciable and amortizable assets ( 117,595 ) ( 119,242 ) Prepaid expenses ( 48,955 ) ( 37,703 ) Net deferred tax liability ( 166,550 ) ( 156,945 ) Total $ 892,559 $ 887,164 The Company performed an analysis in accordance with the provisions of ASC 740, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. The analysis performed to assess the realizability of the deferred tax assets included an evaluation of the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable federal and state laws; and the amount and timing of future taxable income. At March 31, 2022, the Company evaluated the realizability of its deferred tax assets in accordance with accounting principles generally accepted in the United States of America and concluded that a $ 78,024 valuation allowance against deferred tax assets was necessary. The recognition of the remaining net deferred tax asset and corresponding tax benefit is based upon the Company’s conclusions regarding, among other considerations, the Company’s history of earnings and projected earnings for fiscal year 2023 and in the future. At March 31, 2022, the Company has federal tax net operating loss carryforwards in the amount of approximately $ 1.1 million that begin to expire in the year 2025. The net operating loss carryforward is subject to an IRS Section 382 limitation that limited the amount available to use beginning in Fiscal 2020 to approximately $ 0.15 million per year. In addition, the Company has state tax net operating loss carryforwards of approximately $ 3.4 million that will begin to expire beginning in 2024. These tax net operating loss carryforwards may be subject to adjustment based on future changes in control (See Note 19 – Subsequent Events). F- 20 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 NOTE 12 - SEGMENT INFORMATION The Company operates in one segment. Sales by geographic region for the period presented are as follows: SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION 2022 2021 FOR THE FISCAL YEARS ENDED March 31, March 31, 2022 2021 North America $ 46,400,000 $ 44,200,000 Europe 700,000 1,200,000 Australia 400,000 400,000 Net sales $ 47,500,000 $ 45,800,000 The geographic area of sales is based primarily on where the product was delivered. 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 fiscal years ended March 31, 2022 and 2021 totaled approximately $ 70,000 and $ 74,000 , respectively. The amounts are included as a component of general and administrative expense in the accompanying consolidated statements of income. The Company does not provide any post-employment benefits to retirees. NOTE 14 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, AND SUPPLIERS The Company derives a majority of its revenues from retailers in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At March 31, 2022, 53 % of accounts receivable were due from four customers in North America that individually owed over 10 % of total accounts receivable. At March 31, 2021, 79 % of accounts receivable were due from four customers in North America that individually owed over 10 % of total accounts receivable. Revenues derived from our top three customers in 2022 and 2021 were 72 % and 69 % of total revenue, respectively. Revenues from customers representing greater than 10 % of total net sales were derived from top three customers in Fiscal 2022 and top four customers in Fiscal 2021 as percentage of the net sales were 37 %, 18 %, 17 % and 12 %, and 36 %, 20 %, 13 % and 12 %, , respectively. The loss of any of these customers could have an adverse impact on the Company. The Macau Subsidiary recorded net sales of approximately $ 3.4 million and $ 4.4 million in fiscal 2022 and 2021, respectively. The Company is dependent upon foreign companies for the manufacture of all its electronic products. The Company’s arrangements with manufacturers are subject to the risk of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. During fiscal years 2022 and 2021, manufacturers in the People’s Republic of China accounted for 100 % of the Company’s total product purchases, including all of the Company’s hardware purchases. In 2018 the U.S. government-imposed tariffs of up to 25% on certain goods imported from China. All of our products are manufactured and imported from China however, only our microphones are currently subject to a 7.5% tariff currently in place . Should the government decide to expand its list of products to include our karaoke products that would subject our products to tariffs in the future, there could be a significant increase in the landed cost of our products. If we are unable to mitigate these increased costs through price increases, we could experience reductions in revenues, gross profit margin and results from operations. The COVID-19 pandemic has significantly affected U.S. consumer shopping patterns and caused the health of the U.S. and world economy to deteriorate in fiscal year 2022. While many of the restrictions and measures initially implemented in response to the pandemic have since been softened or lifted in varying degrees in different locations around the world, the uncertainty regarding existing and new potential variants of COVID-19 and the success of any vaccines in respect thereof, may in the future cause a reduction in global economic activity or prompt, the re-imposition of certain restrictions and measures. The Company is dependent upon foreign companies for the manufacture of all its electronic F- 21 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 products. The Company’s arrangements with manufacturers are subject to the risk of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. Additionally, in late calendar 2021, the increased demand for consumer electronics products and current economic recovery continued to increase worldwide demand for products using semiconductor “chip” components in the production of most consumer electronics which has resulted in an international shortage of chips available to fulfill demand. As a result, the Company has experienced longer delivery lead times and some unavailability of these components which have delayed delivery of some of our products. The Company has also experienced delays in delivery schedules due to new outbreaks of COVID-19 in Southern China that have forced temporary closures of some key shipping ports. The port closures have also led to a temporary shortage of shipping containers which have resulted in significant price increases due to increased demand. While we have seen the easing of COVID-19 restrictions and the impact on our business, we cannot predict the impact of the resurgence of variants of COVID-19 and other factors affecting local and global economies, specifically China. NOTE 15 – RELATED PARTY TRANSACTIONS DUE TO/FROM RELATED PARTIES On both March 31, 2022 and 2021 the Company had approximately $ 0.1 million due to related parties SLRD, SCE and SLE for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by them. During our fiscal year ended March 31, 2022 and 2021, the Company did business with entities owned by our former Chairman, Philip Lau. Those entities were: 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”). On March 31, 2022 and 2021 the Company had approximately $ 0.1 million due to related parties SLRD, SCE and SLE for services provided by these companies and licensing fees for use of pedestal model molds and tools owned by them. Mr. Lau resigned as Chairman effective August 10, 2021. During our fiscal year ended March 31, 2022 and 2021, the Company did business with Stingray Group Inc (“Stingray”) who is part of a group of investors who participated in the Private Placement and have acquired a minority interest in the Company (see Note 10 – August 2021 Private Placement ). On March 31, 2022 and 2021, the Company had approximately $ 0.2 million and $ 0.1 million, respectively due from Stingray for music subscription reimbursement. TRADE During both Fiscal 2022 and 2021 the Company paid approximately $ 0.4 million to SLE as reimbursement for engineering, quality control and other administrative services performed on our behalf in China. These expense reimbursements were included in general and administrative expenses on our consolidated statements of income. 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 $ 0.7 million. During Fiscal 2022 and 2021 there was a gain of approximately $ 0.0 million $ 0.2 million, respectively from Cosmo related to payments received in Fiscal 2021 on prior year sales and the related receivable previously reversed and written off as they were initially deemed uncollectible. The Company has a music subscription sharing agreement with Stingray. For the fiscal years ended March 31, 2022 and 2021 the Company received music subscription revenue of approximately $ 0.5 million and $ 0.4 million, respectively. These amounts were included as a component of net sales in the accompanying consolidated statements of income. NOTE 16 – RESERVE FOR SALES RETURNS A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are either allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months) or granted a “defective allowance” consisting of a fixed percentage (between 1% and 5%) off of invoice price in lieu of returning defective products. The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates. The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the consolidated balance sheets. F- 22 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 and 2021 Changes in the Company’s reserve for sales returns are presented in the following table: SCHEDULE OF RESERVE FOR SALES RETURNS Fiscal Year Ended March 31, March 31, 2022 2021 Reserve for sales returns at beginning of the fiscal year $ 960,000 $ 1,224,000 Provision for estimated sales returns 3,643,000 3,881,000 Sales returns received ( 3,613,000 ) ( 4,145,000 ) Reserve for sales returns at end of the year $ 990,000 $ 960,000 NOTE 17 – DAMAGED GOODS INCIDENT RECOVERY For the fiscal year ended March 31, 2022 we recognized a one-time gain of approximately $ 0.3 million as other income on the accompanying consolidated statements of income due settlement of accounts payable by a manufacturer’s representative of a factory that caused a damaged goods incident in Fiscal 2020. During Fiscal 2021, we recovered approximately $ 2.3 million in proceeds from the damaged goods insurance claim which consisted of $ 1.6 million of lost sales, approximately $ 0.1 million in freight costs and approximately $ 0.6 million in out-of-pocket expenses associated with the incident. We recognized a one-time gain from the damaged goods claim settlement of approximately $ 1.1 million (net of the insurance claim receivable) as other income for the fiscal year ended March 31, 2021 on the accompanying statements of income. In addition, we recognized an additional one-time gain of approximately $ 0.4 million as other income for the fiscal year ended March 31, 2021 on the accompanying consolidated statements of income due settlement of accounts payable by the factory that caused the damage. NOTE 18 – RESERVES Asset reserves and allowances for years ended March 31, 2022 and 2021 are presented in the following table : SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS Description Balance at Beginning of Year Charged to Costs and Expenses Reduction to Allowance for Write off Credited to Costs and Expenses Balance at End of Year Year ended March 31, 2021 Reserves deducted from assets to which they apply: Allowance for doubtful accounts $ 138,580 $ ( 5,086 ) $ ( 10,944 ) $ - $ 122,550 Inventory reserve $ 636,339 $ 351,661 $ ( 623,553 ) $ - $ 364,447 Year ended March 31, 2020 Reserves deducted from assets to which they apply: Allowance for doubtful accounts $ 337,461 $ 16,086 $ ( 227,184 ) $ 12,217 $ 138,580 Inventory reserve $ 434,000 $ 688,200 $ ( 485,861 ) $ - $ 636,339 Note 19 - Subsequent Events Exercise of Pre-Funded Warrants Immediately subsequent to the Company’s listing on Nasdaq, the Company received exercises notices on 561,311 pre-funded warrants. These pre-funded warrants were previously issued as part of a capital raise completed in August 2021. As of the date of this filing, all pre-funded warrants have been exercised and converted to common stock. Change of Control On June 13, 2022, BitNile Holdings, Inc. (“BitNile Holdings”), a Delaware corporation, Digital Power Lending, LLC (“Digital Power Lending”), a California limited liability company and subsidiary of BitNile Holdings, and Milton C. Ault, III (“Ault”), Founder and Executive Chairman of BitNile Holdings (collectively the “Reporting Persons”) filed a joint Schedule 13D filing (the “Schedule 13D”) reporting that the Reporting Persons acquired, in the aggregate, 52.0 % of the issued and outstanding shares of common stock, par value $ 0.01 per share (the “Common Stock”) of The Singing Machine the Company, through open market purchases. Pursuant to the Schedule 13D and subsequent amended Schedule 13D filings, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1,568,849 shares of the Common Stock (the “Shares”), or approximately 52.0 % of the outstanding shares of Common Stock. As these purchases were made in the open market, control of the Company was not assumed from a particular person or group of persons. The Schedule 13D reported “Mr. Ault expresses an interest in adding one or more shareholder representatives to the Issuer’s board of directors.” Other than the foregoing, the Company is not aware of any arrangement or understanding between or among BitNile Holdings, Digital Power Lending and Ault or any of their respective associates with respect to election of directors of the Company or other matters. F- 23