Algorhythm Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2022 March 31, 2022 (unaudited) Assets Current Assets Cash $ 2,278,057 $ 2,290,483 Accounts receivable, net of allowances of $ 260,787 and $ 122,550 , respectively 9,648,788 2,785,038 Due from Crestmark Bank 441,632 100,822 Accounts receivable related party - Stingray Group, Inc. 242,255 152,212 Inventories, net 12,956,491 14,161,636 Prepaid expenses and other current assets 230,936 344,409 Deferred financing costs - 7,813 Total Current Assets 25,798,159 19,842,413 Property and equipment, net 528,828 565,094 Deferred tax assets 897,640 892,559 Operating Leases - right of use assets 1,072,576 1,279,347 Other non-current assets 83,409 86,441 Total Assets $ 28,380,612 $ 22,665,854 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 6,782,207 $ 5,391,265 Accrued expenses 2,179,921 1,732,355 Revolving line of credit - Iron Horse Credit 2,500,000 2,500,000 Refunds due to customers 114,002 97,968 Reserve for sales returns 881,659 990,000 Current portion of finance leases 7,794 7,605 Current portion of installment notes 75,873 74,300 Current portion of operating lease liabilities 897,956 876,259 Subordinated note payable - Starlight Marketing Development, Ltd. 352,659 352,659 Total Current Liabilities 13,792,071 12,022,411 Finance leases, net of current portion 8,599 10,620 Installment notes, net of current portion 119,081 138,649 Operating lease liabilities, net of current portion 226,369 457,750 Total Liabilities 14,146,120 12,629,430 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; 3,017,700 and 1,221,209 shares issued and outstanding, respectively 30,177 12,212 Additional paid-in capital 29,098,800 24,902,694 Accumulated deficit ( 14,894,485 ) ( 14,878,482 ) Total Shareholders’ Equity 14,234,492 10,036,424 Total Liabilities and Shareholders’ Equity $ 28,380,612 $ 22,665,854 See notes to the condensed consolidated financial statements 3 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) June 30, 2022 June 30, 2021 For the Three Months Ended June 30, 2022 June 30, 2021 Net Sales $ 11,692,054 $ 6,065,650 Cost of Goods Sold 8,511,524 4,487,780 Gross Profit 3,180,530 1,577,870 Operating Expenses Selling expenses 605,197 577,982 General and administrative expenses 2,370,424 1,421,352 Depreciation 58,067 68,271 Total Operating Expenses 3,033,688 2,067,605 Income (Loss) from Operations 146,842 ( 489,735 ) Other (Expenses) Income Gain from Payroll Protection Plan loan forgiveness - 448,242 Gain - related party - 11,236 Interest expense ( 160,113 ) ( 99,529 ) Finance costs ( 7,813 ) ( 16,922 ) Total Other (Expenses) Income , net ( 167,926 ) 343,027 Loss Before Income Tax Benefit ( 21,084 ) ( 146,708 ) Income Tax Benefit 5,081 28,095 Net Loss $ ( 16,003 ) $ ( 118,613 ) Net Loss per Common Share Basic and Diluted $ ( 0.01 ) $ ( 0.09 ) Weighted Average Common and Common Equivalent Shares: Basic and Diluted 1,911,485 1,301,688 See notes to the condensed consolidated financial statements 4 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) June 30, 2022 June 30, 2021 For the Three Months Ended June 30, 2022 June 30, 2021 Cash flows from operating activities Net Loss $ ( 16,003 ) $ ( 118,613 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 58,067 68,271 Amortization of deferred financing costs 7,813 16,922 Change in allowance for bad debts 138,237 ( 12,424 ) Stock based compensation 35,565 5,104 Change in net deferred tax assets ( 5,081 ) ( 28,095 ) Paycheck Protection Plan loan forgiveness - ( 448,242 ) Gain - related party - ( 11,236 ) Changes in operating assets and liabilities: Accounts receivable ( 7,001,987 ) ( 3,251,488 ) Due from Crestmark Bank ( 340,810 ) 4,214,414 Accounts receivable - related parties ( 90,043 ) - Inventories 1,205,145 ( 2,879,846 ) Prepaid expenses and other current assets 113,473 30,363 Other non-current assets 3,032 52,221 Accounts payable 1,390,942 3,812,788 Accrued expenses 447,566 ( 278,096 ) Customer deposits - ( 119,736 ) Refunds due to customers 16,034 ( 51,823 ) Reserve for sales returns ( 108,341 ) ( 210,309 ) Operating lease liabilities, net of operating leases - right of use assets ( 2,913 ) 3,807 Net cash (used in) provided by operating activities ( 4,149,304 ) 793,982 Cash flows from investing activities Purchase of property and equipment ( 21,801 ) ( 55,534 ) Net cash used in investing activities ( 21,801 ) ( 55,534 ) Cash flows from financing activities Proceeds from Issuance of stock - net of transaction expenses 3,362,750 - Net Proceeds from revolving lines of credit - 300,000 Payment of deferred financing charges - ( 37,501 ) Payments on installment notes ( 17,995 ) ( 16,550 ) Proceeds from exercise of stock options - 4,800 Proceeds from exercise of pre-funded warrants 168,334 - Proceeds from exercise of common stock warrants 647,422 - Payments on finance leases ( 1,832 ) ( 2,546 ) Net cash provided by financing activities 4,158,679 248,203 Net change in cash ( 12,426 ) 986,651 Cash at beginning of year 2,290,483 396,579 Cash at end of period $ 2,278,057 $ 1,383,230 Supplemental disclosures of cash flow information: Cash paid for interest $ 158,490 $ 125,456 Operating leases - right of use assets and lease liabilities at inception of lease $ - $ 16,364 See notes to the condensed consolidated financial statements 5 The Singing Machine Company, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the three months ended June 30, 2022 and 2021 (Unaudited) Shares Amount Capital Deficit Total Common Stock Additional Paid in Accumulated Shares Amount Capital Deficit Total Balance at March 31, 2022 1,221,209 $ 12,212 $ 24,902,694 $ ( 14,878,482 ) $ 10,036,424 Net loss - - - ( 16,003 ) ( 16,003 ) Issuance of common stock 1,000,000 10,000 3,990,000 - 4,000,000 Payment of stock issuance expenses - - ( 637,250 ) - ( 637,250 ) Exercise of pre-funded warrants 561,113 5,611 162,723 - 168,334 Exercise of common stock warrants 231,222 2,312 645,110 - 647,422 Issuance of common stock - directors 2,468 25 19,991 - 20,016 Employee compensation - stock option - - 15,549 - 15,549 Rounding of common stock issued due to reverse split 1,688 17 ( 17 ) - - Balance at June 30, 2022 3,017,700 $ 30,177 $ 29,098,800 $ ( 14,894,485 ) $ 14,234,492 Balance at March 31, 2021 1,301,358 $ 13,013 $ 20,150,716 $ ( 12,254,191 ) $ 7,909,538 Net loss - - - ( 118,613 ) ( 118,613 ) Employee compensation - stock option - - 5,104 - 5,104 Exercise of stock options 667 7 4,793 - 4,800 Balance at June 30, 2021 1,302,025 $ 13,020 $ 20,160,613 $ ( 12,372,804 ) $ 7,800,829 See notes to the condensed consolidated financial statements. 6 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) NOTE 1 – BASIS OF PRESENTATION OVERVIEW The Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMCL”), 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. NOTE 2 - RECENT DEVELOPMENTS Controlled Company 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, 52.8 % of the issued and outstanding shares of common stock, par value $ 0.01 per share (the “Common Stock”) of the Company, through open market purchases. Pursuant to the Schedule 13D and subsequent amended Schedule 13D filings and Section 16 filings, Digital Power Lending beneficially owns and BitNile Holdings and Ault may be deemed to beneficially own an aggregate of 1,683,000 shares of the Common Stock (the “Shares”), or approximately 54.4 % of the outstanding shares of Common Stock as of this filing. As these purchases were made in the open market, control of the Company was not assumed from a particular person or group of persons. Reverse Stock Split and Nasdaq Listing On May 23, 2022, the Company effected a reverse stock split of its shares of common stock in a ratio of 1:30. The reverse stock split was affected to meet The Nasdaq Capital Market’s minimum bid price requirement. All information in these consolidated financial statements have been retroactively adjusted to give effect to this 1-for-30 reverse stock split . Our common stock was approved for listing on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022. Public Offering On May 23, 2022, 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 pursuant to which the Company sold to the Underwriter 1,000,000 shares of its 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 . 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 % of the Shares sold in the 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 Company estimated the fair value of these warrants to be approximately $ 244,000 using the Black-Scholes Model based on the following input assumptions: common stock price of $ 2.90 , expected life of the warrants of 3 years ; stock price volatility of 176 %; dividend yield of 0 %; and the risk-free interest rate of 2.63 %. Stock Redemption Agreement 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 owned approximately 51 % of the Company and 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 who no longer have a stake in the Company. The Redeemed Shares were retired and returned to the unissued authorized capital of the Company. 7 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) NOTE 3 – LIQUIDITY The Company reported a net loss of approximately $ 16,000 and used cash in operating activities of approximately $ 4,149,000 for the three months ended June 30, 2022. The current 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 was renewed as of June 11, 2022. 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 7 –FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the date of this report. NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of the Company, its Macau Subsidiary, SMH, SMCL, and SMCM. All inter-company accounts and transactions have been eliminated in consolidation for all periods presented. The accompanying unaudited financial statements for the three months ended June 30, 2022 and 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of March 31, 2022 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022. The interim condensed consolidated financial statements should be read in conjunction with that report. USE OF ESTIMATES The Singing Machine makes estimates and assumptions in the ordinary course of business relating to sales returns and allowances, warranty reserves, inventory reserves and reserves for promotional incentives that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change which may alter future expectations. COLLECTABILITY OF ACCOUNTS RECEIVABLE The Singing Machine’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be in an amount sufficient to respond to normal business conditions. Management sets 100 % reserves for customers in bankruptcy and other allowances based upon historical collection experience. 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 more than the Federal Deposit Insurance Corporation insured amounts. The Company also maintains cash balances in foreign financial institutions. The amounts at foreign financial institutions at June 30, 2022 and March 31, 2022 are approximately $ 158,000 and $ 172,000 , respectively. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. 8 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) INVENTORY Inventories are comprised primarily of electronic karaoke equipment, microphones and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. Inventories also include an estimate for the net realizable value of expected future inventory returns due to warranty and allowance programs. As of June 30, 2022 and March 31, 2022 the estimated amounts for these future inventory returns were approximately $ 586,000 and $ 638,000 , respectively. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for such declines in value. As of both June 30, 2022 and March 31, 2022, the Company had inventory reserves of approximately $ 364,000 for estimated excess and obsolete inventory. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” No impairment was recorded as of June 30, 2022 and 2021. LEASES The Company follows FASB ASC 842, “Leases”. The ASC requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. (See Note 8– 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 financing interest rate for its finance leases. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using accelerated and straight-line methods. FAIR VALUE OF FINANCIAL INSTRUMENTS We follow FASB ASC 825, “Financial Instruments”, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, due from related parties, 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. 9 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) The Company selectively participates in a retailer’s co-op promotion incentives to maximize sales of the Company’s products on the retail floor or to assist in developing consumer awareness of new product launches, by providing marketing fund allowances to our customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers are recorded as a reduction to net sales. For the three months ended June 30, 2022 and 2021, co-op promotion incentives were approximately $ 296,000 and $ 272,000 , respectively. 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 condensed consolidated statements of operations 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 as of June 30, 2022 and March 31,2022 were approximately $ 882,000 and $ 990,000 , respectively. The Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke hardware and the Company has no other material business segments (See NOTE 13 – SEGMENT INFORMATION). Revenue is derived from four different major product lines. Disaggregated revenue from these product lines for the three months ended June 30, 2022 and 2021 consisted of the following: SCHEDULE OF DISAGGREGATION OF REVENUE March 31, 2022 March 31, 2021 Three Months Ended Product Line June 30, 2022 June 30, 2021 Classic Karaoke Machines $ 8,159,000 $ 4,448,000 Licensed Product 45,000 771,000 SMC Kids Toys 936,000 69,000 Microphones and Accessories 2,552,000 778,000 Total Net Sales $ 11,692,000 $ 6,066,000 SHIPPING AND HANDLING COSTS Shipping and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to fulfill the Company’s promise to transfer the goods. For the three months ended June 30, 2022 and 2021 shipping and handling expenses were approximately $ 46,000 and $ 151,000 , respectively. These expenses are classified as a component of selling expenses in the accompanying condensed consolidated statements of operations. STOCK BASED COMPENSATION The Company follows the provisions of the FASB ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. ASC 718-20 requires all share-based payments to employees including grants of employee stock options, be measured at fair value and expensed in the condensed consolidated statements of 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 for the three months ended June 30, 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 three months ended June 30, 2022 and 2021 the stock option expense was approximately $ 16,000 and $ 5,000 , respectively. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to results of operations as incurred. These expenses are shown as a component of general and administrative expenses in the condensed consolidated statements of operations. For the three months ended June 30, 2022 and 2021, these amounts totaled approximately $ 17,000 and $ 31,000 , respectively. 10 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) 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. As of both June 30, 2022 and March 31, 2022 the Company recorded a valuation allowance of approximately $ 78,000 . The Company analyzes its deferred tax assets and liabilities at the end of each interim period and, based on management’s best estimate of its full year effective tax rate, recognizes cumulative adjustments to its deferred tax assets and liabilities. For the three months ended June 30, 2022 and 2021, we estimated our effective tax rate to be approximately 24 % and 19 %, respectively. As of June 30, 2022 and March 31, 2022 the Singing Machine had net deferred tax assets of approximately $ 898,000 and $ 893,000 , respectively. The Company recorded an income tax benefit of approximately $ 5,000 and $ 28,000 , respectively for the three months ended June 30, 2022 and 2021. The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of June 30, 2022, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions. COMPUTATION OF EARNINGS PER SHARE Computation of dilutive shares for the three months ended June 30, 2022 and 2021 are as follows: SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE For the three months ended June 30, 2022 For the three months ended June 30, 2021 Basic weighted average common shares outstanding 1,911,485 1,301,688 Effect of dilutive stock options - - Diluted weighted average common shares outstanding 1,911,485 1,301,688 Basic net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share reflects the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period using the treasury stock method. For the three months ended June 30, 2022 options to purchase 50,007 shares of common stock and 924,334 common stock warrants were excluded in the calculation of diluted net income (loss) per as the result would have been anti-dilutive. For the three months ended June 30, 2021 options to purchase 33,667 were excluded in the calculation of diluted net income (loss) per 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 condensed consolidated financial statements and related disclosures. 11 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) NOTE 5 - INVENTORIES, NET Inventories are comprised of the following components: SCHEDULE OF INVENTORY June 30, March 31, 2022 2022 Finished Goods $ 11,598,000 $ 10,537,000 Inventory in Transit 1,136,000 3,306,000 Estimated Amount of Future Returns 586,000 683,000 Subtotal 13,320,000 14,526,000 Less:Inventory Reserve 364,000 364,000 Inventories, net $ 12,956,000 $ 14,162,000 NOTE 6 – PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: SUMMARY OF PROPERTY AND EQUIPMENT USEFUL June 30, March 31, LIFE 2022 2022 Computer and office equipment 5 - 7 years $ 462,000 $ 440,000 Furniture and fixtures 7 years 98,000 98,000 Warehouse equipment 7 years 210,000 210,000 Molds and tooling 3 - 5 years 1,986,000 1,986,000 2,756,000 2,734,000 Less: Accumulated depreciation 2,227,000 2,169,000 $ 529,000 $ 565,000 Depreciation expense for the three months ended June 30, 2022 and 2021 was approximately $ 58,000 and $ 68,000 , respectively. NOTE 7 – FINANCING Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit: On June 16, 2020, the Company entered into a two-year Credit and Security Agreement for a $ 2.5 million financing facility, with IronHorse Credit LLC (the “IHC Facility”) on eligible accounts receivable and inventory. Also, on June 16, 2020, the Company entered into a two-year Loan and Security Agreement for a $ 10.0 million financing facility with Crestmark , a division of MetaBanK, National Association (the “Crestmark Facility”) on eligible accounts receivable. Under the terms of the Crestmark Facility, 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 IHC and Crestmark facilities of approximately $ 74,000 were deferred and were amortized over one year. During the three months ended June 30, 2022 and 2021 the Company incurred amortization expense of approximately $ 8,000 and $ 17,000 , respectively associated with the amortization of deferred financing costs from the IHC and Crestmark facilities. Under the Crestmark Facility: ● Advance rate shall not exceed 70% of Eligible Accounts Receivable aged less than 90 days from invoice date. ● Crestmark shall maintain a base dilution reserve of 1% for each 1% of dilution over 15%. ● Crestmark will implement an availability block of 20% of amounts due on Iron Horse Credit (“IHC”) Intercreditor Revolving Credit Facility. 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 three months ended June 30, 2022 and 2021 the Company recorded interest expense under the Crestmark Facility of approximately $ 53,000 and $ 45,000 , 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 June 30, 2022 and March 31, 2022, the Company had no outstanding balance on the Crestmark Facility. 12 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) 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. The Company was not in compliance with this covenant as of May 31, 2022; however, a waiver from default was obtained from IHC for this month. As of June 30, 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 three months ended June 30, 2022 and 2021 was approximately $ 98,000 and $ 39,000 , respectively. The IHC Facility was to expire on June 11, 2022. However, absent a termination notice given to IHC by the Company, the IHC Facility 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 both June 30, 2022 and March 31, 2022, there was an outstanding balance $ 2,500,000 . Simultaneously with the Company’s entry into the IHC Facility and the Crestmark Facility, the Company entered into an Intercreditor Agreement with IronHorse and Crestmark which sets forth the respective rights of each of IronHorse and Crestmark as secured parties. As of this filing there was approximately $ 3,000,000 of available borrowings under the Crestmark and IHC facilities. 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, 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 three months ended June 30, 2022 and 2021, a gain of approximately $ 0 and $ 448,000 (including principal and interest), respectively from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of operations. Installment Notes Payable On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an entire ERP System project over a term of 60 months at a cost of approximately $ 365,000 . The Company executed three installment notes totaling approximately $ 365,000 for payments issued to the project vendor. The installment notes have 60-month terms with interest rates of 7.58 %, 8.55 % and 9.25 %, respectively. The installment notes are payable in monthly installments of $ 7,459 which include principal and interest. As of June 30, 2022 and March 31, 2022 there was an outstanding balance on the installment notes of approximately $ 195,000 and $ 213,000 , respectively. For the three months ended June 30, 2022 and 2021 the Company incurred interest expense of approximately $ 4,000 and $ 6,000 , respectively. Subordinated Debt/Note Payable In conjunction with the Crestmark Facility and IHC Facility, the parties entered into a subordination agreement on debt due to Starlight Marketing Development, Ltd. of approximately $ 803,000 . On June 1, 2020 the remaining amount due on the subordinated debt of approximately $ 803,000 was converted to a note payable (“subordinated note payable”) which bears interest at 6 %. As part of the agreement to convert the subordinated debt to a note payable it was agreed that interest expense would be accrued at the same 6 % interest rate on the unpaid principal retroactively from the date that previously scheduled payments had been missed. During the three months ended June 30, 2022 and 2021 interest expense was approximately $ 3,000 and $ 9,000 , respectively on the subordinated note payable. In connection with the Intercreditor Agreement, the Company was required to subordinate the note payable. Both the Crestmark Facility and IHC Facility agreements allow for the repayment of the subordinated note payable provided any amounts borrowed against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity to support on-going operations. As of June 30, 2022 the Company met repayment requirements of the Intercreditor Revolving Credit Facility has made cumulative principal payments totaling $ 450,000 . During the next twelve months the Company intends on making additional payments and pay off the remaining balance outstanding provided the Company meets all repayment requirements of the Crestmark Facility and IHC Facility agreements. 13 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) As of both June 30, 2022 and March 31, 2022, the remaining amount due on the note payable was approximately $ 353,000 . The remaining amount due on the subordinated note payable was classified as a current liability as of June 30, 2022 and March 31, 2022 on the condensed consolidated balance sheets. NOTE 8 - COMMITMENTS AND CONTINGENCIES COVID-19 In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. We continue to experience various degrees of manufacturing cost pressures due to raw material and electronic component shortages as well as inflationary price increases. Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, any financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products. Likewise, logistical supply chain issues may continue to cause delays in the delivery of finished goods. Any of these conditions could adversely affect our operations. 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 Bernardino County. The complaint alleges an employee of the Company committed employment practice violations against a former temporary employee not employed by us. Management has investigated the allegation and has engaged an employment attorney to defend the lawsuit. The case is still in discovery and no trial date has been set. 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. LEASES Operating Leases We have operating lease agreements for offices and a warehouse facility in Florida, California 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 $ 9,700 per month, subject to annual adjustments. We entered into an operating lease agreement, effective June 1, 2013 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 approximately $ 67,300 with a 3% increase every 12 months for the remaining term of the extension . 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 requires 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 June 30, 2022 and March 31, 2022, the remaining amounts due on this capital leasing arrangement was approximately $ 16,000 and $ 18,000 , respectively. For the three months ended June 30, 2022 and 2021 the Company incurred interest expense of $ 439 and $ 0 , respectively. 14 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) Supplemental balance sheet information related to leases as of June 30, 2022 is as follows: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES Assets: Operating lease - right-of-use assets $ 1,072,576 Finance leases as a component of Property and equipment, net of accumulated depreciation of $ 3,817 22,558 Liabilities Current Current portion of operating leases $ 897,956 Current portion of finance leases 7,794 Noncurrent Operating lease liabilities, net of current portion $ 226,369 Finance leases, net of current portion 8,599 Supplemental statement of operations information related to leases for the three months ended June 30, 2022 is as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE Three Months Ended June 30, 2022 Operating lease expense as a component of general and administrative expenses $ 229,249 Finance lease cost Depreciation of leased assets as a component of depreciation $ 6,817 Interest on lease liabilities as a component of interest expense $ 439 Supplemental cash flow information related to leases for the nine months ended June 30, 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 $ 235,765 Financing cash flow paid for finance leases $ 1,832 Lease term and Discount Rate Weighted average remaining lease term (months) Operating leases 15.2 Finance leases 25.0 Weighted average discount rate Operating leases 6.25 % Finance leases 9.86 % Scheduled maturities of operating and finance lease liabilities outstanding as of June 30, 2022 are as follows: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING AND FINANCE LEASES Year Operating Leases Finance Leases 2022 - for the remaining 9 months $ 708,120 $ 6,799 2023 467,552 9,065 2024 - 2,206 Total Minimum Future Payments 1,175,672 18,070 Less: Imputed Interest 51,347 1,677 Present Value of Lease Liabilities $ 1,124,325 $ 16,393 NOTE 9 - STOCK OPTIONS AND WARRANTS EQUITY INCENTIVE PLAN 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 2022 Plan authorized an aggregate of 233,333 shares of the Company’s common stock available to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. As of June 30, 2022 we had granted 99,751 under the 2022 Plan, none of which were vested leaving 133,582 shares available for issue. COMMON STOCK OPTIONS During the three months ended June 30, 2022 the Company issued 667 and 4,000 stock options, respectively, from the 2022 Plan at an exercise price of $ 2.35 and $ 8.11 per share, respectively to directors as compensation for their service. During the three months ended June 30, 2022 the Company issued 33,334 stock options from the 2022 Plan at an exercise price of $ 4.00 per share to the Company’s officers as incentive compensation for the successful up-listing of the Company’s common stock on the Nasdaq Capital Market. 15 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) On June 28, 2022 the Company issued 61,750 stock options from the 2022 Plan to all employees (excluding Company officers) who had one year or more of service to the Company under an Employee Incentive Plan at an exercise price of $ 8.11 per share. 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. The following inputs were used to value each option grant: ● For the three months ended June 30, 2022: expected dividend yield of 0 %, risk-free interest rate between 2.63 % and 3.21 %, respectively with volatility between 166.1 % and 176.27 % respectively with an expected term of three years . A summary of stock option activity for the three months ended June 30, 2022 is summarized below: SUMMARY OF STOCK OPTION ACTIVITY June 30, 2022 Number of Options Weighted Average Exercise Price Stock Options: Balance at beginning of period 56,343 $ 9.90 Granted 99,751 $ 6.70 Forfeited ( 2,668 ) $ 5.63 Balance at end of period 153,436 $ 7.87 Options exercisable at end of period 50,007 $ 10.23 The following table summarizes information about employee stock options outstanding at June 30, 2022: SCHEDULE OF EMPLOYEE STOCK OPTIONS OUTSTANDING Range of Exercise Price Number Outstanding at June 30, 2022 Weighted Average Remaining Contractural Life Weighted Average Exercise Price Number Exercisable at June 30, 2022 $ 2.35 - $ 7.20 57,335 4.0 $ 4.95 21,667 $ 8.10 - $ 9.60 74,419 9.4 $ 8.21 6,668 $ 11.40 - $ 16.50 21,672 4.8 $ 14.42 21,672 * 153,426 50,007 * Total number of options outstanding as of June 30, 2022 includes 22,009 options issued to four current and three former directors as compensation, and 69,667 options issued to Company officers as compensation and 61,750 issued to employees as part of an Employee Stock Incentive Plan . As of June 30, 2022, there was unrecognized expense of approximately $ 580,000 remaining on options currently vesting over time with an approximate average of nineteen months remaining until these options are fully vested. The intrinsic value of vested options as of June 30, 2022 was approximately $ 36,000 . WARRANTS In connection with the August 2021 Private Placement disclosed in Note 2 and Note 11, common warrants and pre-funded warrants issued and outstanding as of June 30, 2022 are as follows: SCHEDULE OF COMMON STOCK WARRANTS ISSUED AND OUTSTANDING June 30, 2022 Number of Common Warrants Weighted Average Exercise Price Number of Pre-Funded Warrants Weighted Average Exercise Price Warrants: Warrants outstanding at April 1, 2022 1,155,556 $ 2.80 561,111 $ 0.30 Warrants issued 100,000 $ 5.00 - N/A Warrants exercised ( 231,222 ) $ 2.80 ( 561,111 ) $ 0.30 Warrants outstanding at June 30, 2022 1,024,334 $ 3.01 - N/A Warrants exercisable at June 30, 2022 924,334 $ 2.80 - N/A 16 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) As of June 30, 2022, the Company’s outstanding warrants by expiration date were as follows: SCHEDULE OF WARRANTS EXPIRATION Number of CommonWarrants Exercise Price Expiration Date 924,334 $ 2.80 September 15, 2026 100,000 $ 5.00 May 23, 2027 1,024,334 NOTE 10 – 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. NOTE 11 – AUGUST 2021 PRIVATE PLACEMENT On August 5, 2021, the Company entered into a securities purchase agreement with large institutional investors and a strategic investor for a private placement offering of (i) 550,000 shares of its common stock together with Common Warrants to purchase up to 550,000 shares of common stock with an exercise price of $ 2.80 per share, and (ii) 561,111 Pre-Funded Warrants with each Pre-Funded Warrant exercisable for one share of common stock at an exercise price of $ 0.30 per share, together with Common Warrants to purchase up to 561,111 shares of common stock at an exercise price of $ 2.80 per share. 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. 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 10 – August 2021 Stock Redemption). Stingray Group Inc. (“Stingray”), a leading music, media and technology participated in the Private Placement and 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 1- 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 ($ 2.80 ) 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 %. 17 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) 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 12 – PUBLIC OFFERING AND NASDAQ UPLISTING 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 effected 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 May 23, 2022, the Company entered into the Underwriting Agreement with Aegis Capital Corp., who acted as the sole Underwriter, in a firm commitment underwritten public offering pursuant to which the Company sold to the Underwriter 1,000,000 shares of common stock, par value $0.01 per share 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. 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 Company estimated the fair value of these warrants to be approximately $ 244,000 using the Black-Scholes Model based on the following input assumptions: common stock price of $ 2.90 , expected life of the warrants of 3 years; stock price volatility of 176 %; dividend yield of 0 %; and the risk-free interest rate of 2.63 %. On 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. NOTE 13 - SEGMENT INFORMATION Sales to customers outside of the United States for the three months ended June 30, 2022 and 2021 were primarily made by the Macau Subsidiary in US dollars. Sales by geographic region for the periods presented are as follows: SCHEDULE OF REVENUE BY GEOGRAPHICAL REGION FOR THE THREE MONTHS ENDED June 30, 2022 2021 North America $ 11,692,000 $ 5,966,000 Australia - 100,000 Net sales $ 11,692,000 $ 6,066,000 The geographic area of sales was based on the location where the product is delivered. NOTE 14 – RELATED PARTY TRANSACTIONS Stingray is part of the group of investors who participated in the August 2021 Private Placement and have acquired a minority interest in the Company and has one Director on the Company’s Board (see Note 11 – August 2021 Private Placement ). DUE TO/FROM RELATED PARTIES On June 30, 2022 and March 31, 2022, the Company had amounts due from Stingray of approximately $ 242,000 and $ 152,000 , respectively for shared revenue from music content provided to our customers from their library of produced and licensed karaoke content. 18 THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 and 2021 (Unaudited) TRADE The Company has a music subscription sharing agreement with Stingray. For the three months ended June 30, 2022 and 2021 the Company received music subscription revenue of approximately $ 132,000 and $ 115,000 , respectively. These amounts were included as a component of net sales in the accompanying condensed consolidated statements of operations. NOTE 15 – RESERVE FOR SALES RETURNS A return program for defective goods is negotiated with each of our wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between 6 and 9 months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates. The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets. Changes in the Company’s reserve for sales returns are presented in the following table: SCHEDULE OF RESERVE FOR SALES RETURNS Three Months Ended June 30, June 30, 2022 2021 Reserve for sales returns at beginning of the year $ 990,000 $ 960,000 Provision for estimated sales returns 624,000 539,000 Sales returns received ( 732,000 ) ( 749,000 ) Reserve for sales returns at end of the period $ 882,000 $ 750,000 NOTE 16 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan for its employees to which the Company makes contributions at rates dependent on the level of each employee’s contributions. Contributions made by the Company are limited to the maximum allowable for federal income tax purposes. The amounts charged to operations for contributions to this plan and administrative costs during the three months ended June 30, 2022 and 2021 totaled approximately $ 15,000 and $ 18,000 , respectively. The amounts are included as a component of general and administrative expense in the accompanying condensed consolidated statements of operations. The Company does not provide any post-employment benefits to retirees. NOTE 17 - CONCENTRATIONS OF CREDIT AND SALES RISK The Company derives a majority of its revenues from retailers of products in the United States. The Company’s allowance for doubtful accounts is based upon management’s estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At June 30, 2022, approximately 83 % of accounts receivable were due from three customers in North America that individually owed over 10% of total accounts receivable. 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. The Company generates most of its revenue from retailers of products in the United States with a significant amount of sales concentrated with several large customers the loss of which could have an adverse impact on the financial position of the Company. For the three months ended June 30, 2022, there were two customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 50 % and 37 %, respectively. For the three months ended June 30, 2021, there were four customers who individually accounted for 10% or more of the Company’s net sales. Revenue derived from these customers as a percentage of net sales were 45 %, 18 %, 14 % and 14 %, respectively. 19