Algorhythm Holdings, Inc. 10-K

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