What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-02-21 compared with 2022-11-14 · 233 added, 265 removed, 98 unchanged (84% of the section changed)

61 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, Ault Lending, LLC (“Ault Lending ”)

beneficially owns and BitNile Holdings, Inc.

(“BitNile Holdings”) and Milton C.

Ault, III (“Ault,” and collectively

with Ault Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,787,200 shares of

our common stock or approximately 57.4% of our outstanding shares.

Ault 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.

and Security Agreement with Fifth Third Bank, National Association

October 14, 2022 the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Fifth Third Bank,

National Association, as Lender (“Fifth Third”) replacing the Company’s credit facilities with

Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022 .

Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased

to $7,500,000 during the period of January 1 through July 31 of each year.

The Credit Agreement matures on October 14, 2025.

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

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, 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 and adversely affect our operations.

Fiscal 2022, as consumer demand improved and economic activity increased, we experienced supply chain challenges, including increased

lead times, port closures in China and delays in Los Angeles, global container shortages, as well as inflation of logistics and labor

costs due to availability constraints and high demand.

We expect these inflationary trends to continue throughout the remainder of the

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

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

Due to these supply chain challenges, during

the fourth quarter of Fiscal 2022, we experienced late delivery of inventory that missed the holiday season 2021.

We note that this trend

was widespread throughout the consumer products and retail categories causing a significant stockpile of consumer product inventory throughout

retail channels.

As a result of this excess inventory stockpile, we might be expected to discount our inventory or help participate in

the funding of marking down our customers’ inventory which could result in 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,

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

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

or by us relating to the pandemic.

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

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

“Risk Factors”

in our 2022 Annual Report on Form 10-K.

INFLATION, RISING INTEREST RATES, 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, rising interest

rates, geopolitical events, health crises such as the COVID-19 pandemic, and other events that trigger economic volatility on a global

or regional basis.

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

the United States, 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 and higher consumer credit borrowing rates may negatively impact consumer

disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs.

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.

We are also impacted by our entire supply chain.

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 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 six months ended September 30, 2022 and 2021:

of net sales for the three and nine months ended December 31, 2022 and 2021:

Three Months Ended

the Six Months Ended

of Goods Sold

and administrative expenses

and amortization

the Nine Months Ended

Cost of Goods Sold

Operating Expenses

from Operations

(Expenses) Income

- related party

from extinguishment of PPP loan forgiveness

from settlement of accounts payable

Other (Expenses) Income, net

Before Income Tax Provision

Tax Provision

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

sales for the three months ended September 30, 2022 decreased to approximately $17,113,000 from approximately $17,369,000, a decrease

of approximately $256,000 as compared to the three months ended September 30, 2021.

While the net sales for the three months ended September

30, 2022 remained relatively flat compared to the same period in the prior year there was a significant increase in net sales to two

of our largest customers and a similar reduction in two other major customers who ended the prior holiday season with excess inventory

and reduced current year purchases.

profit for the three months ended September 30, 2022 increased to approximately $3,964,000 from approximately $3,327,000 an increase

of approximately $637,000 as compared to the three months ended September 30, 2021 primarily due to an increase in gross profit margin.

profit margin for the three months ended September 30, 2022 was 23.2% compared to 19.2% for the three months ended September 30, 2021.

There was a reduction in component costs in one major customer’s promotional item that contributed approximately 1.8 margin points

of the increase with the remaining margin increase primarily due to a decrease in landed product cost due to a significant decrease in

inbound container costs and price increases to customers.

the three months ended September 30, 2022, total operating expenses increased to approximately $3,379,000 compared to approximately $2,577,000

during the three months ended September 30, 2021.

This represents an increase in total operating expenses of approximately $802,000 from

the three months ended September 30, 2021 primarily due to an increase in general and administrative expenses of approximately $640,000

and an increase in selling expenses of approximately $166,000.

expenses increased to approximately $900,000 during the three months ended September 30, 2022 compared to approximately $734,000 during

the three months ended September 30, 2021, an increase of approximately $166,000.

There was an increase in commission and royalty expense

of approximately $76,000, an increase of approximately $49,000 in discretionary marketing expense with the remaining increase related

to freight costs.

and administrative expenses increased to approximately $2,417,000 during the three months ended September 30, 2022 compared to approximately

$1,777,000 during the three months ended September 30, 2021, an increase of approximately $640,000.

There was an increase in one-time

legal, professional, investor relations and stock transfer costs of approximately $303,000 primarily related to the public offering,

Nasdaq up-listing, change in control matters, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third.

There was an increase in compensation of approximately $239,000 primarily due to compensation for new members of the board of directors,

and officers’ and employee incentive compensation as well as merit increases.

There was an increase in pallet expenses, warehouse

supplies and expense and temporary labor at our California facility of approximately $98,000 due to inflation related cost increases

in pallets, temporary labor and supplies.

FROM OPERATIONS

was income from operations of approximately $585,000 for the three months ended September 30, 2022 compared to income from operations

of approximately $750,000 for the three months ended September 30, 2021.

Selling expenses

General and administrative

Depreciation and amortization

Total Operating Expenses

(Loss) Income from Operations

Other (Expenses) Income

Gain - related party

Gain from Payroll Protection

Plan loan forgiveness

Gain from settlement of

accounts payable

Loss from extinguishment

Interest expense

Finance costs

Total Other (Expenses) Income,

(Loss) Income Before Income

Tax (Benefit) Provision

Income Tax (Benefit) Provision

Net (Loss) Income

ENDED DECEMBER 31, 2022 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2021

sales for the three months ended December 31, 2022 decreased to approximately $7,111,000 from approximately $21,244,000, a decrease of

approximately $14,133,000 as compared to the three months ended December 31, 2021.

We experienced a decrease in net sales to all of our

major customers compared to the three months ended December 31, 2021.

The decrease in net sales was largely due to two main factors:

(1) our major customers began the holiday season with excess inventory that was held over from the previous year due to late delivery

of shipments caused by significant supply chain issues experienced during the end of calendar year 2021 and early 2022 and (2) the news

of economic recession, runaway inflation, and interest rate hikes dampened customers’ expectations

for the holiday season which resulted in customers taking a very risk-adverse approach to buying and carrying inventory.

customers either did not take some of the inventory they had committed to earlier in the year or required significant co-op promotion

incentives on goods sold during the three months ended December 31, 2022.

Co-op promotion incentives for the three months ended December

31, 2022 increased to approximately $1,138,000 or 16.0% of net sales as compared to approximately $795,000 or 3.7% of net sales for the

three months ended December 31, 2021.

profit for the three months ended December 31, 2022 decreased to approximately $1,291,000 from approximately $5,309,000 a decrease of

approximately $4,018,000 as compared to the three months ended December 31, 2021.

The decrease in net sales as explained in Net Sales

above accounted for approximately $3,532,000 of the decrease with the remaining decrease due to a decrease in gross profit margin.

profit margin for the three months ended December 31, 2022 was 18.1% compared to 25.0% for the three months ended December 31, 2021,

a decrease of 6.9 margin points.

Co-op promotion incentives, as explained in Net Sales above, accounted for approximately $342,000 or

4.8 margin points of the gross margin decrease and there was an increase in inventory reserves of approximately $246,000 or 3.5 points

of the gross margin decrease.

These decreases were offset by approximately $102,000 or 1.5 margin point increase primarily due to lower

landed product costs from decreased costs of shipping containers compared to the previous year.

the three months ended December 31, 2022, total operating expenses decreased to approximately $3,573,000 compared to approximately $3,616,000

during the three months ended December 31, 2021.

This represents a decrease in total operating expenses of approximately $43,000 from

the three months ended December 31, 2022.

There was a decrease in selling expenses of approximately $281,000 primarily due to the decrease

in sales as discussed in Net Sales offset by an increase of approximately $240,000 in general and administrative expenses.

and administrative expenses increased to approximately $2,395,000 during the three months ended December 31, 2022 compared to approximately

$2,155,000 during the three months ended December 31, 2021, an increase of approximately $240,000.

There was an increase in compensation

expense of $400,000 related to a change of control and employment continuation agreement with the Chief Financial Officer.

an increase in legal and professional expenses of approximately $164,000 which were primarily related to legal and professional costs

associated with the arbitration settlement of the alleged employment practice violation lawsuit against a former temporary employee and

other regulatory filings.

These increases were offset by decreases in bad debt and repair reserves of approximately $388,000 with the

remaining variance due to net reductions of other variable expenses.

INCOME FROM OPERATIONS

was a loss from operations of approximately $2,282,000 for the three months ended December 31, 2022 compared to income from operations

of approximately $1,694,000 for the three months ended December 31, 2021.

The decrease in income from operations of approximately $3,976,000

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 $302,000 to approximately $186,000 in other expenses for the three months ended September 30, 2022

compared to approximately $116,000 in other income, net for the three months ended September 30, 2021.

was primarily due to the decrease in net sales and gross profit as explained above.

expenses increased by approximately $55,000 to approximately $220,000 in other expenses for the three months ended December 31, 2022

compared to approximately $165,000 in other expenses, net for the three months ended December 31, 2021.

During the three months ended

September 30, 2022, there was an increase in interest expense of approximately $76,000 as the Company had outstanding borrowings of $2,500,000

on the IHC inventory financing facility during the three months ended September 30, 2022 compared to borrowings of approximately $365,000

outstanding during the three months ended September 30, 2021.

During the three months ended September 30, 2021 there was a gain from

the settlement of accounts payable with one of our factories of $236,000.

the three months ended September 30, 2022 and 2021, the Company recognized an income tax provision of approximately $102,000 and

$174,000, respectively, due to management’s best estimate of the Company’s full year effective U.S.

federal tax rate of

approximately 21.2% and 20.1%, respectively.

MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2021

sales for the six months ended September 30, 2022 increased to approximately $28,806,000 from $23,435,000 an increase of approximately

$5,371,000 as compared to the same period ended September 30, 2021.

There was an increase in net sales of approximately $6,100,000 primarily

due to a top-five customer that opted to receive product via direct import, accelerated their delivery schedule and increased their assortment

of product offerings.

This increase in net sales was offset by a decrease in net sales of approximately $2,316,000 to two major customers

who ended the prior holiday season with excess inventory and reduced current year purchases.

The remaining variance was primarily due

to an increase in net sales due to new product set in one major customer’s consumer electronics department.

profit for the six months ended September 30, 2022 increased to approximately $7,144,000 from approximately $4,905,000 an increase of

December 31, 2022, there was a fee of approximately $183,000 for exiting the Intercreditor Revolving

Credit Facility with Crestmark and IHC (See Note 7 – Financing) that was recorded as a loss from extinguishment of debt.

was offset by a decrease in interest expense of approximately $88,000 due to a more favorable interest rate with the new financing arrangement

and a gain of approximately $49,000 from the forgiveness of accounts payable by Starlight R&D, Ltd and Starlight Consumer Electronics

who were former related parties.

the three months ended December 31, 2022 and 2021, the Company recognized an income tax benefit of approximately $569,000 and an income

tax provision of approximately $103,000, respectively, due to management’s best estimate of the Company’s full year effective

tax rate of approximately 24% and 11%, respectively.

(LOSS) INCOME

the three months ended December 31, 2022 there was a net loss of approximately $1,653,000 compared to net income of approximately $1,426,000

for the three months ended December 31, 2021.

The decrease in net income was primarily due to the same reasons discussed in (Loss) Income

from Operations.

MONTHS ENDED DECEMBER 31, 2022 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2021

sales for the nine months ended December 31, 2022 decreased to approximately $35,916,000 from approximately $44,679,000, a decrease of

approximately $8,763,000 as compared to the nine months ended December 31, 2021.

We experienced a decrease in net sales to all of our

major customers compared to the nine months ended December 31, 2021.

The decrease in net sales was largely due to two main factors:

our major customers began the holiday season with excess inventory that was held over from the previous year due to late delivery of

shipments caused by significant supply chain issues experienced during the end of calendar year 2021 and early 2022 and (2) the news

of economic recession, runaway inflation, and interest rate hikes dampened customers’ expectations

for the holiday season which resulted in customers taking a very risk-adverse approach to buying and carrying inventory.

customers either did not take some of the inventory they had committed to earlier in the year or required significant co-op promotion

incentives on goods sold during the three months ended December 31, 2022.

Co-op promotion incentives for the nine months ended December

31, 2022 increased to approximately $2,158,000 or 6.0% of net sales as compared to approximately $1,805,000 or 4.0% of net sales for

the nine months ended December 31, 2021.

profit for the nine months ended December 31, 2022 decreased to approximately $8,435,000 from approximately $10,215,000 a decrease of

approximately $1,780,000 as compared to the same period in the prior year.

The increase in net sales as indicated in Net Sales contributed

approximately $1,123,000 to the increase in gross profit.

The remaining increase was primarily due to an increase in gross profit margin

of approximately 3.9 points on products sold.

profit margin for the six months ended September 30, 2022 was 24.8% compared to 20.9% for the six months ended September 30, 2021.

There was a reduction in component costs in one major customer’s promotional item that contributed approximately 1.6

margin points of the increase with the remaining margin increase primarily due to a decrease in landed product cost due to a

significant decrease in inbound container costs and price increases to customers.

the six months ended September 30, 2022, total operating expenses increased to approximately $6,413,000 compared to approximately $4,645,000

during the six months ended September 30, 2021.

The decrease in net sales as explained in Net Sales above

accounted for approximately $2,003,000 of the decrease offset by an increase in gross profit margin contribution of approximately $223,000.

profit margin for the nine months ended December 31, 2022 was 23.5% compared to 22.9% for the nine months ended December 31, 2021, an

increase of 0.6 gross margin points.

There were increases in gross profit margin of approximately $1,234,000 or 3.4 margin points due

to price increases and decreased landed costs for products due to decreasing costs of shipping container costs.

These increases in gross

profit margin were offset by gross profit margin decreases of approximately $353,000 or 1.0 margin points due to co-op promotion incentives

as explained in Net Sales above and an increase in excess and obsolete inventory reserves of approximately $658,000 or 1.8 margin points

of the gross margin decrease.

the nine months ended December 31, 2022, total operating expenses increased to approximately $9,986,000 compared to approximately $8,261,000

during the nine months ended December 31, 2021.

This represents an increase in total operating expenses of approximately $1,725,000 from

the six months ended September 30, 2021 primarily due to an increase in general and administrative expenses of approximately $1,590,000

and an increase in selling expenses of approximately $194,000.

expenses increased to approximately $1,505,000 during the six months ended September 30, 2022 compared to approximately $1,311,000 during

the six months ended September 30, 2021, an increase of approximately $194,000.

There was an increase in commission expense of approximately

$104,000 commensurate with the increase in net sales and an increase of approximately $77,000 in discretionary marketing expense with

the remaining increase related to other variable selling expenses.

and administrative expenses increased to approximately $4,788,000 during the six months ended September 30, 2022 compared to approximately

$3,198,000 during the six months ended September 30, 2021, an increase of approximately $1,590,000.

the nine months ended December 31, 2021.

There was an increase of approximately $1,830,000 in general and administrative expenses offset

by a decrease in selling expenses of approximately $88,000 primarily due to the decrease in sales as discussed in Net Sales above.

and administrative expenses increased to approximately $7,183,000 during the nine months ended December 31, 2022 compared to approximately

$5,353,000 during the nine months ended December 31, 2021, an increase of approximately $1,830,000.

There was an increase in legal, professional,

investor relations and stock transfer costs of approximately $601,000 primarily related to the public offering, Nasdaq up-listing, change

in control issues, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third.

There was an increase

in compensation of approximately $394,000 primarily due to compensation for new members of the board of directors, and officers’

and employee incentive compensation, new hires as well as merit increases.

There was an increase in pallet expenses, warehouse supplies

and expense and temporary labor at our California facility of approximately $376,000 due to inflation related cost increases..

were increases of approximately $102,000 related to a firmware upgrade of one of our products, an increase in travel expenses of approximately

$87,000, expenses associated with ERP system projects of approximately $79,000 with the remaining increase due to other general variable

expenses that have increased due to inflation.

FROM OPERATIONS

was income from operations of approximately $731,000 for the six months ended September 30, 2022 compared to income from operations of

approximately $260,000 for the six months ended September 30, 2021.

The increase in income from operations of approximately $471,000

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

in control issues, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third and arbitration settlement

of the alleged employment practice violation lawsuit against a former temporary employee.

There was an increase in compensation of approximately

$517,000 primarily due to compensation for new members of the board of directors, and officers’ and employees’ incentive

compensation, new hires as well as merit increases.

There was an increase in compensation expense of $400,000 related to a change of

control and employment continuation agreement with the Chief Financial Officer.

There was an increase in travel expenses of approximately

$153,000 which includes the participation in the Consumer Electronics Show in Las Vegas which we had not attended since the beginning

There were inflationary expenses increases of approximately $112,000 in our California warehouse operations with the remaining

increase due to other expenses that have increased due to inflation.

INCOME FROM OPERATIONS

was a loss from operations of approximately $1,551,000 for the nine months ended December 31, 2022 compared to income from operations

of approximately $1,954,000 for the nine months ended December 31, 2021.

The decrease in income from operations of approximately $3,505,000

was primarily due to the decrease in net sales and gross profit and increase in general and administrative expenses as explained above.

(EXPENSES) INCOME

expenses increased by approximately $813,000 to approximately $354,000 in other expense for the six months ended September 30, 2022 compared

to approximately $459,000 in other income, net for the same period ended September 30, 2021.

During the six months ended September 30,

2022, there was an increase in interest expense of approximately $136,000 as the Company had outstanding borrowings of $2,500,000 on

the IHC inventory financing facility during the three months ended September 30, 2022 compared to borrowings of approximately $2,000,000

outstanding during the six months ended September 30, 2021.

Interest rates on the Crestmark Credit Facility increased commensurate with

federal interest rate hikes.

During the six months ended September 30, 2021 there was a gain from the forgiveness of the Payroll Protection

Plan loan of approximately $448,000 and a gain from the settlement of accounts payable with one of our factories of $236,000.

the six months ended September 30, 2022 and 2021 the Company recorded an income tax provision of approximately $97,000 and an income

tax provision of approximately $146,000, respectively, due to management’s best estimate of the Company’s full year effective

federal tax rate of approximately 21.2% and 20.1%, respectively.

expenses, net increased by approximately $868,000 to approximately $574,000 in other expenses, net for the nine months ended December

31, 2022 compared to approximately $294,000 in other income, net for the same period ended December 31, 2021.

During the nine months

ended December 31, 2022, there was a fee of approximately $183,000 for exiting the Intercreditor

Revolving Credit Facility with Crestmark and IHC (See Note 7 – Financing) that was recorded as a loss from extinguishment of debt.

During the nine months ended December 31, 2022 there was a gain of approximately $49,000 from the forgiveness of accounts payable by

Starlight R&D, Ltd and Starlight Consumer Electronics Co.

who were former related parties.

During the nine months ended

December 31, 2022, there was an increase in interest expense of approximately $48,000.

During the nine months ended December 31, 2021

there was a one-time gain from the forgiveness of the Payroll Protection Plan loan of approximately $448,000 and a gain from the settlement

of accounts payable with one of our factories of $236,000 for a previous year’s damaged goods

the nine months ended December 31, 2022 and 2021 the Company recorded an income tax benefit of approximately $472,000 and an income tax

provision of approximately $249,000, respectively, due to management’s best estimate of the Company’s full year effective

tax rate of approximately 24% and 11%, respectively.

(LOSS) INCOME

the nine months ended December 31, 2022 there was a net loss of approximately $1,653,000 compared to net income of approximately $2,000,000

for the same period a year ago.

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

Other (Expense) Income and Income Taxes.

AND CAPITAL RESOURCES

of September 30, 2022, the Company had cash on hand of approximately $2,979,000 as compared to cash on hand of approximately $3,338,000

on September 30, 2021.

We had working capital of approximately $12,709,000 as of September 30, 2022.

of December 31, 2022, the Company had cash on hand of approximately $2,795,000 as compared to cash on hand of approximately $7,375,000

on December 31, 2021.

We had working capital of approximately $10,473,000 as of December 31, 2022.

Net cash used in operating activities

was approximately $3,580,000 for the six months ended September 30, 2022.

During the six months ended September 30, 2022 there was an

increase in accounts receivable of approximately $8,011,000 due to a seasonal increase in net sales and a seasonal increase in inventories

of approximately $1,767,000.

There was an increase in cash due from Crestmark Bank of approximately $976,000 held in anticipation of

the imminent closing of the new Credit Agreement with Fifth Third Bank.

These decreases in net cash used in operating activities were

offset by an increase in accounts payable and accrued expenses of approximately $5,554,000 due to seasonal purchases of product for the

There was a seasonal increase in reserves for sales returns of approximately $701,000.

cash used in operating activities was approximately $576,000 for the six months ended September 30, 2021.

There was an increase in accounts

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

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

These increases in net cashed used in operating activities were offset by

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

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

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

There was a seasonal increase in reserve for sales returns

of approximately $904,000.

cash used in investing activities for the six months ended September 30, 2022 was approximately $88,000 as compared to approximately

was approximately $2,264,000 for the nine months ended December 31, 2022.

During the nine months ended December 31, 2022 there was an

increase in accounts receivable of approximately $4,255,000 due to a seasonal increase in net sales and a seasonal decrease in accounts

payable of approximately $3,258,000 primarily due to payment of factory invoices.

These increases in net cash used in operating activities

were offset by a seasonal decrease in inventory of approximately $2,780,000 and an increase in accrued expenses of approximately $1,502,000

primarily due to the increase in co-op promotion incentives granted to customers during the third quarter ended December 31, 2022.

was an increase in reserve for sales returns of approximately $1,945,000 which included an additional reserve of approximately $1,300,000

for anticipated overstock returns from one customer.

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 issues.

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 used in investing activities for the nine months ended December 31, 2022 was approximately $149,000 as compared to approximately

$78,000 used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for

new products.

cash provided by financing activities for the six months ended September 30, 2022 was approximately $4,321,000 compared to cash provided

by financing activities of approximately $3,595,000 for the same period ended of the prior year.

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 six-months ended September 30, 2022, we received proceeds of approximately $1,034,000 from the

exercise of pre-funded and common stock warrants.

cash provided by financing activities for the nine months ended December 31, 2022 was approximately $3,101,000 compared to cash

provided by financing activities of approximately $10,170,000 for the same period ended of the prior year.

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 nine months ended December 31, 2022, we received proceeds of

approximately $1,144,000 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”)

October 2022, we exited our financing facility with Crestmark and IHC and entered into a new financing arrangement with Fifth Third

We incurred an exit fee of approximately $183,000 for early termination of the financing facility with Crestmark and IHC.

used net proceeds of approximately $1,345,000 from the new financing agreement to pay the subordinated debt to a former related

party of approximately $353,000, closing costs of approximately $254,000, the remaining used to settle amounts due on the prior

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

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and began trading on the Nasdaq Capital Market on May 24, 2022.

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

We borrowed approximately

$1,977,000 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.

These financing activities were offset by a payment

of $150,000 on the subordinated note payable, 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

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.

October 14, 2022 the Company entered into the Credit Agreement with Fifth Third, as Lender replacing the Company’s credit facilities

with Crestmark Bank and Iron Horse Credit that were

terminated by the Company on October 13, 2022 .

The Credit Agreement provides for a three-year secured

revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January

1 through July 31 of each year.

October 14, 2022 the Company entered into the Credit Agreement with Fifth Third, as Lender replacing the existing credit facilities

with Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022 .

The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000

decreased to $7,500,000 during the period of January 1 through July 31 of each year.

The Credit Agreement matures on October 14, 2025.

of the date of this filing, there are no amounts due on the new Credit Agreement and we have approximately $4,000,000 currently available

from this credit facility based on eligible accounts receivable and inventory.

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.

of December 31, 2022 the Company was in default under the Credit agreement due to non-compliance with the fixed charge ratio

covenant primarily due to the decrease in revenue for the three months ended December 31, 2022 and increased general and

administrative expenses.

To date, Fifth Third has not taken action to accelerate the Company’s obligations under the Credit

Agreement and the Company is currently in negotiations with Fifth Third to obtain a waiver and renegotiate the fixed charge coverage

ratio covenant.

There can be no assurance that the negotiations will be successful and that Fifth Third will grant the Company a

waiver or renegotiate the covenant.

of this filing there was no outstanding balance on the Credit Agreement.

Company expects cash flows from operations as well as other financing resources to be adequate to satisfy working capital requirements

for at least the next twelve months from the date the accompanying condensed consolidated financial statements are issued.

plans to supplement cash flows from operations from several activities and resources including the following:

to negotiate remediation of the existing default on the Revolving Credit Facility with Fifth

additional cash through equity offering.

“dynamic discount” programs offered by several of the Company’s major customers

which allow for accelerated payment of invoices in exchange for an early pay discount.

Company believes that our cash on hand, working capital (net of cash), cash expected to be generated from our operating forecast, cash

expected to be raised with our ATM offering along with the availability of cash from our Credit Agreement with Fifth Third (See Note

7 –FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the date of this

While the Company is optimistic that it will be successful in these efforts to achieve our plan, there can be no assurances that

we will be successful in doing so.

As such, the Company has a continued support letter from its parent company, Ault Alliance, through

March 31, 2024.

ACCOUNTING POLICIES

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believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated.

and assumptions have not materially changed from those identified in the Company’s 2022 Annual Report.

accounting estimates and assumptions have not materially changed from those identified in the Company’s 2022 Annual Report.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis