What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-22 compared with 2022-02-14 · 180 added, 256 removed, 98 unchanged (82% of the section changed)

1 unchanged sentence

FORWARD-LOOKING

objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to

view the Company from management’s perspective, considering items that would have a material impact on future operations.

following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere

33 unchanged sentences

Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”),

and its three wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc.

(“SMC-L”) and SMC-Music, Inc.(“SMC-M”) are primarily engaged in the development, marketing, and sale of consumer

karaoke audio systems, accessories, musical instruments and musical recordings.

The products are sold by SMC to retailers and distributors

for resale to consumers.

products are sold throughout North America, Europe and Australia primarily through major mass merchandisers and warehouse clubs, on-line

retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores,

and specialty stores.

and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc.

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

products are sold throughout North America, Europe and Australia primarily through major mass merchandisers and warehouse

clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and

record stores, and specialty stores.

Representative

13 unchanged sentences

quarter, combined, accounted for approximately 81% and 86% of net sales in fiscal 2022 and 2021, respectively.

of the date of this report, Digital Power Lending, LLC (“Digital Power Lending ”)

beneficially owns and BitNile Holdings, Inc.

(“BitNile Holdings”) and Milton C.

Ault, III (“Ault,” and collectively

with Digital Power Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,683,000 shares

of our common stock or approximately 54.4% of our outstanding shares.

Digital Power Lending is a wholly owned subsidiary of BitNile Holdings.

Ault is the Executive Chairman of BitNile Holdings.

longs as BitNile continues to hold more than 50% of the voting power of our Company, we

will be a “controlled company” as defined under Nasdaq Marketplace Rules.

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:

exemption from the rule that a majority of our board of directors must be independent directors;

exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors;

exemption from the rule that our director nominees must be selected or recommended solely by independent directors.

of New Directors

July 27, 2022, the Board of Directors (the “Board”) of the Company increased the number of directors to eight and appointed

Bernardo Melo, James Turner and Kenneth Cragun as directors.

Melo, Turner and Cragun will serve as members of the Board

until the next annual meeting of the Company’s stockholders, and until their successors are elected and qualified or until their

earlier death, resignation or removal.

Turner and Cragun were recommended for nomination by BitNile, the Company’s majority

stockholder, and evaluated and nominated by the Company’s Nominating and Corporate Governance Committee.

January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus

20 unchanged sentences

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

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

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

For the current fiscal year, demand from consumers and retailers continue to remain strong led by shortages of toys and home entertainment

product availability in the market.

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

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

6 unchanged sentences

in our 2022 Annual Report on Form 10-K.

INFLATION AND UNFAVORABLE ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT OUR OPERATIONS AND RESULTS.

global or regional economic conditions may be triggered by numerous developments beyond our control, including inflation, geopolitical

events, health crises such as the COVID-19 pandemic, and other events that trigger economic volatility on a global or regional basis.

Those types of unfavorable economic conditions could adversely affect our business and financial results.

In particular, a significant

deterioration in economic conditions, including economic slowdowns or recessions, increased unemployment levels, inflationary pressures

or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus

reducing consumer demand for our products.

For example, in 2021 and continuing into 2022, the United States has experienced a rapid increase

in inflation levels of over 9%, which is now at a 40-year historic high.

While we have experienced a significant decrease in container

costs for inbound containers due to decreased demand in general, we are continuing to see increases in drayage costs due to cost of fuel

increases as well as significant charges from the Port of Los Angeles such as “port congestion fees” and other surcharges

due to inflation.

The cost of labor, employee benefits, pallets and warehouse supplies and other logistics related costs continue to

increase at record rates.

Such heightened inflationary levels may negatively impact consumer disposable income and discretionary spending

and, in turn, reduce consumer demand for our products and increase our costs.

OF OPERATIONS

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

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

Singing Machine Company, Inc.

and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended

the Nine Months Ended

of Goods Sold

and administrative expenses

and amortization

of net sales for the three months ended June 30, 2022 and 2021:

CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS

For Three Months Ended

June 30, 2022

June 30, 2021

Cost of Goods Sold

Operating Expenses

(Loss) from Operations

Income (Expenses)

from Paycheck Protection Plan loan forgiveness

- related party

from damaged goods insurance claim

from extinguishment of accounts payable

Other Income (expenses), net

Before Income Tax Provision

Tax Provision

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

from the same period in the prior year.

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

ended December 31, 2020.

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

approximately $229,000.

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

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

supply chain shortages.

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

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

There was an increase

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

These increases were

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

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

FROM OPERATIONS

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

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

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

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

INCOME (EXPENSES)

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

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

During the three months ended

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

been written off as uncollectible.

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

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

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

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

23.0%, respectively.

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

for the same period a year ago.

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

Other Income (Expenses) and Income Taxes.

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

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

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

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

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

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

Despite the increase in net sales, which contributed approximately

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

approximately 4.9 margin points on products sold.

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

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

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

The remaining decrease

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

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

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

from the same period in the prior year.

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

months ended December 31, 2020.

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

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

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

due to a decrease in product returns.

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

in CPK sales as explained in net sales.

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

Selling expenses

General and administrative expenses

Depreciation and amortization

Total Operating Expenses

Income (Loss) from Operations

Other (Expenses) Income

Gain from Paycheck Protection Plan loan forgiveness

Gain - related party

Interest expense

Finance costs

Total Other (Expenses) Income, net

Loss Before Income Tax Benefit

Income Tax Benefit

ENDED JUNE 30, 2022 COMPARED TO THE QUARTER ENDED JUNE 30, 2021

sales for the three months ended June 30, 2022 increased to approximately $11,692,000 from approximately $6,066,000 an increase of approximately

$5,626,000 as compared to the three months ended June 30, 2021.

The increase in net sales was primarily due to an initial spring product

set in one major customer’s consumer electronics department which contributed approximately $3,140,000 of the increase with the

remaining increase primarily due to another major customer that opted to receive product via direct import and accelerated their delivery

profit for the three months ended June 30, 2022 increased to approximately $3,181,000 from approximately $1,578,000 an increase of approximately

$1,603,000 as compared to the three months ended June 30, 2021.

The increase in net sales contributed approximately $1,463,000 with the

remaining increase due to improvement of gross profit margin of approximately $140,000.

profit margin for the three months ended June 30, 2022 was 27.2% compared to 26.0% for the three months ended June 30, 2021.

reason for the increase in gross profit margin was due to the favorable product mix for one major customer’s initial product set

as indicated in net sales above which included several new products in their product assortment that yield higher margins.

the three months ended June 30, 2022, total operating expenses increased to approximately $3,034,000 compared to approximately $2,068,000

during the three months ended June 30, 2021.

This represents an increase in total operating expenses of approximately $966,000 from the

three months ended June 30, 2021.

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

of approximately $949,000.

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

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

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

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

facility of approximately $262,000 due to an increase in third party logistics business, a one-time project associated with the initial

product set in a major customer’s consumer electronics department (see NET SALES), as well as price increases due to inflation

and supply chain shortages.

There was an increase in legal, professional, investor relations and stock exchange listing fees of approximately

$222,000 primarily related to the public offering and Nasdaq up-listing in May 2022 (see NOTE 12 -PUBLIC OFFERING AND NASDAQ UPLISTING).

There was an increase in compensation of approximately $172,000 primarily due to compensation for new members of the board of directors

and officers’ incentive bonuses.

There was an increase in bad debt reserve expense of approximately $151,000 related to required

reserves commensurate with the increase in net sales and accounts receivable.

The remaining increase was primarily due to one-time ERP

system projects, increases in costs due to inflation and increases selling and administrative variable expenses commensurate with the

increase in net sales.

FROM OPERATIONS

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

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

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

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

INCOME (EXPENSES)

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

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

During the nine months ended December

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

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

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

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

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

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

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

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

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

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

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

11.1% and 23.0%, respectively.

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

for the same period a year ago.

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

Other Income (Expenses) and Income Taxes.

was income from operations of approximately $147,000 for the three months ended June 30, 2022 compared to a loss from operations of approximately

$490,000 for the three months ended June 30, 2021.

The increase in income from operations of approximately $637,000 was primarily due

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

(EXPENSES) INCOME

expenses increased by approximately $511,000 to approximately $168,000 in other expenses for the three months ended June 30, 2022 compared

to approximately $343,000 in other income, net for the three months ended June 30, 2021.

During the three months ended June 30, 2022,

there was an increase in interest expense of approximately $60,000 as the Company had outstanding borrowings of $2,500,000 on the IHC

inventory financing facility during the three months ended June 30, 2022 compared to borrowings of approximately $365,000 outstanding

borrowings during the three months ended June 30, 2021.

During the three months ended June 30, 2021 there was a one-time gain from the

forgiveness of the Payroll Protection Plan loan of approximately $448,000.

the three months ended June 30, 2022 and 2021, the Company recognized an income tax benefit of approximately $5,000 and $28,000, respectively,

due to management’s best estimate of the Company’s full year effective tax rate of approximately 24.1% and 19.1%, respectively.

the three months ended June 30, 2022 there was a net loss of approximately $16,000 compared to a net loss of approximately $119,000 for

the three months ended June 30, 2021.

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

Other (Expenses) and Income Taxes.

AND CAPITAL RESOURCES

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

on December 31, 2020.

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

Net cash used in operating activities

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

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

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

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

logistics issues.

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

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

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

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

There was a seasonal increase

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

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

During the nine months

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

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

from one vendor related to the damaged goods issue.

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

excess inventory left over from the prior fiscal year.

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

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

and royalties.

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

due to peak season sales.

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

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

There was a reduction in refunds due to customers of approximately

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

There was a decrease in accounts payable

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

to fulfill orders.

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

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

new products.

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

of June 30, 2022, the Company had cash on hand of approximately $2,278,000 as compared to cash on hand of approximately $1,383,000 on

June 30, 2021.

We had working capital of approximately $12,006,000 as of June 30, 2022.

Net cash used in operating activities was approximately

$4,149,000 for the three months ended June 30, 2022.

During the three months ended June 30, 2022 there was an increase in accounts receivable

of approximately $7,002,000 due to an increase in sales to two major customers as explained in net sales above.

This increase in net

cash used in operating activities was offset by an increase in in accounts payable and accrued expenses of approximately $1,839,000 primarily

due to payment of prior season’s inventory that arrived late due to global logistics issues.

There was a decrease in inventory

of approximately $1,205,000 primarily due to a decrease in-transit inventory from March 31, 2022 as new product for the initial spring

product set at one major customer was shipped during the three months ended June 30, 2022.

cash provided by operating activities was approximately $794,000 for the three months ended June 30, 2021.

During the three months ended

June 30, 2021 there was a decrease in amounts due from Crestmark Bank of approximately $4,214,000 as cash collected in excess of amounts

due on accounts receivable financing was transferred to operating cash.

There was an increase in accounts payable of approximately $3,813,000

primarily related to the purchase of inventory for the upcoming peak season.

These increases to cash provided by operating expenses were

offset by an increase in accounts receivable of approximately $3,251,000 due to the increase in sales to two major customers and an increase

in inventories of approximately $2,880,000 due to an earlier build-up of inventory for the upcoming peak season due to global logistics

issues and risks.

cash used in investing activities for the three months ended June 30, 2022 was approximately $22,000 as compared to approximately $56,000

used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for new products.

cash provided by financing activities for the three months ended June 30, 2022 was approximately $4,159,000 compared to cash provided

by financing activities of approximately $248,000 for the same period ended of the prior year.

We borrowed approximately $8,562,000 from

our Crestmark Facility and IHC Facility for working capital.

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

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

These financing activities

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

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

on installment notes and finance leases.

August 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with large institutional

investors and a strategic investor for private placement of (i) 16,500,001 shares of its common stock (the “Shares”) together

with common warrants to purchase up to 16,500,000 shares of common stock for an exercise price of $0.35 per share, and (ii) 16,833,333

pre-funded warrants (“Pre-Funded Warrants”) with each Pre-Funded Warrant exercisable for one share of common stock at an

exercise price of $0.01 per share, together with Common Warrants to purchase up to 16,833,333 shares of common stock at an exercise price

of $0.35 per share (the “Private Placement”).

Shares issuable upon the exercise of the Pre-Funded Warrants and Common Warrants

are hereinafter referred to as the “Warrant Shares”.

The closing of the Private Placement took place on August 10, 2021,

when the Shares, Common Warrants, and Pre-Funded Warrants were delivered to the purchasers and funds, in the amount of approximately

$9,800,000, were received by the Company.

Approximately $7,200,000 of the funds received were used to execute the Redemption Agreement

as explained in the next paragraph.

The Company received an increase in working capital of approximately $1,800,000 of working capital

after settlement of expenses associated with closing of these transactions.

August, 2021, the Company entered into a stock redemption agreement (the “Redemption Agreement”) with Koncepts International

Limited (“Koncepts”) and Treasure Green Holdings, Ltd.

(“Treasure Green”), pursuant to which the Company agreed

to redeem 19,623,155 shares of common stock of the Company (the “Redeemed Shares”).

The closing of the transactions set forth

in the Redemption Agreement took place on August 10, 2021, at which time the Redeemed Shares were assigned and transferred back to the

Company and the Company paid approximately $7,200,000 to Koncepts and Treasure Green.

The Redeemed Shares were retired and are available

for reissuance in the future.

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

We received loan proceeds

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

to repayments of installment and capital lease payments.

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

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

This increase in cash provided

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

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

and inventory which replaced the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020

(See Note 6 – Bank Financing).

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

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

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

As of this filing the Company has approximately

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

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

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

Program (“PPP”).

The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”),

which provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying

The loans and accrued interest may be forgivable to the extent the Company uses the loan proceeds for eligible purposes, including

payroll, benefits, rent and utilities, and maintains its payroll levels.

The amount of loan forgiveness may be reduced if the borrower

terminates employees or reduces salaries during the eligible period.

The unforgiven portion of the PPP loan is payable over two years

at an interest rate of 1%, with a deferral of payments until a forgiveness application has been accepted and reviewed by the Small Business

Administration (“SBA”), and the SBA 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.

For the nine months ended December 31, 2021, a gain of approximately

$448,000 (including principal and interest) from the forgiveness of the loan was included in other income and expenses in the accompanying

condensed consolidated statements of income.

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

by the factory.

As a result we incurred a loss in cash flow of approximately $1,559,000 in revenue and approximately $849,000 in additional

out of pocket expenses to retrieve, inspect, warehouse and properly destroy the goods in the prior fiscal year.

As of this filing we

have we recovered approximately $2,336,000 from our cargo insurance coverage which settled approximately $1,268,000 in insurance claim

receivable with the remaining proceeds reflected in other income and (expenses) as a gain from damaged goods insurance claim in the condensed

consolidated statement of income.

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

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

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

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

ended December 31, 2020.

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

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

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

As both the Crestmark Bank (“Crestmark

Facility”) and the Iron Horse Credit (“IHC”) Facility (“IHC Facility”) are set to expire on June 15, 2022,

the Company expects to negotiate a revision or extension of these debt facilities upon their maturity, however, there can be no assurance

that such revision or extension will occur or at what terms.

In May 2022, we received net proceeds

of approximately $3,363,000 from the public offering we executed in conjunction with our up-listing to Nasdaq as summarized in the next

two paragraphs.

In addition, during the three-months ended June 30, 2022, we received proceeds of approximately $816,000 from the exercise

of pre-funded and common stock warrants.

All proceeds were used for working capital.

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 $4,000,000 prior to deducting underwriting discounts and commissions and

other estimated offering expenses of approximately $637,000.

The price to the public in the Offering was $4.00 per Share, before underwriting

discounts and commissions.

The offering closed on May 26, 2022.

The Company received net proceeds of approximately $3,363,000 which was

used for working capital.

May 24, 2022, the Company’s 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.

currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million

in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company

and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11.

a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022.

However, absent any termination

notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject

to a termination fee if terminated by the Company prior to the twelve-month renewal date.

of this filing, we have borrowed approximately $2,500,000 on the IHC Facility, which is the maximum loan amount allowed on eligible inventory

and no borrowings on our Crestmark Facility which will make available up to $10.0 million of eligible accounts receivable as the next

twelve months progress as long as the loan is in place.

As of this filing the Company has approximately $3,000,000 currently available

from these two credit facilities based on eligible inventory with IHC and eligible accounts receivable with Crestmark.

believe 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 7 –FINANCING) will be adequate to meet the Company’s liquidity

requirements for at least twelve months from the filing of this report.

ACCOUNTING POLICIES

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What changed 10-Q

Item 2. Management’s Discussion and Analysis